SPIRE INC (SR) FY 2024 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, Spire Missouri, and Spire Alabama. Refer to Item 1, Business, for descriptions of the businesses and the Company’s reportable segments. This Item 7 includes management’s discussion and analysis of financial results including changes in earnings and costs from the prior periods, as well as their 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 “Forward-Looking Statements” and Item 1A, Risk Factors, in Part I, 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.

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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 adjusted earnings, adjusted 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.

Adjusted Earnings and Adjusted Earnings Per Share

“Adjusted earnings” and “adjusted earnings per share” were formerly known as “net economic earnings” and “net economic earnings per share.” Adjusted earnings and adjusted earnings per share are non-GAAP measures that exclude from net income, as applicable, 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, adjusted 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 adjusted 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:

These adjustments eliminate the impact of timing differences and the impact of current changes in the fair value of financial and physical transactions prior to their completion and settlement. Unrealized gains or losses are recorded in each period until being replaced with the actual gains or losses realized when the associated physical transactions occur. Management believes that excluding the earnings volatility caused by recognizing changes in fair value prior to settlement and other timing differences associated with related purchase and sale transactions provides a useful representation of the economic effects of only the actual settled transactions and their effects on results of operations. While management uses these non-GAAP measures to evaluate all of its businesses, the net effect of these fair value and timing adjustments on the Utilities’ earnings is minimal because gains or losses on their natural gas derivative instruments are deferred pursuant to state regulation.

Contribution Margin

In addition to operating revenues and operating expenses, management also uses the non-GAAP measure of contribution margin when evaluating results of operations. Contribution margin is defined as operating revenues less natural gas costs and gross receipts tax expense. The Utilities pass to their customers (subject to prudence review by, as applicable, the MoPSC, APSC or MSPSC) increases and decreases in the wholesale cost of natural gas in accordance with their PGA clauses or GSA riders. The volatility of the wholesale natural gas market results in fluctuations from period to period in the recorded levels of, among other items, revenues and natural gas cost expense. Nevertheless, increases and decreases in the cost of gas associated with system gas sales volumes and gross receipts tax expense (which are calculated as a percentage of revenues), with the same amount (excluding immaterial timing differences) included in revenues, have no direct effect on operating income. Therefore, management believes that contribution margin is a useful supplemental measure, along with the remaining operating expenses, for assessing the Company’s and the Utilities’ performance.

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EARNINGS

This section contains discussion and analysis of the results for the year ended September 30, 2024 compared to the results for the year ended September 30, 2023. The discussion and analysis of the results for the year ended September 30, 2023 compared to the results of the year ended September 30, 2022 can be found in Part II, Item 7 of Spire Inc.’s fiscal 2023 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (SEC) on November 16, 2023.

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

Spire

The following tables reconcile the Company’s adjusted 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, 2023 to the year ended September 30, 2024 are summarized in the following table and discussed below.

The increase in interest expense was principally the result of higher interest expenses on short-term borrowings, reflecting both higher short-term interest rates and higher average borrowing levels in the current year. Interest on long-term debt was marginally higher, reflecting higher average debt levels and slightly higher rates. Weighted-average short-term interest rates were 5.7% in the current year versus 5.0% in the prior year, while weighted average interest rate on long-term debt increased from 4.2% in the prior year to 4.3% in the current year.

Other income decreased $1.0. Removing the impact of the Postretirement Non-Service Cost Transfer (NSC Transfer) of $7.5, the increase was $6.5. Of this increase, $8.2 was the result of a gain realized on an interest rate swap contract after management determined the anticipated issuance of certain debt was no longer probable of occurring, resulting in the discontinuation of hedge accounting. This gain, combined with favorable mark-to-market valuations on unqualified retirement and investment trusts was only partly offset by lower gas carrying cost credits at Spire Missouri.

Income tax expense increased $19.9, the result of higher pre-tax income in the current year and the prior year benefiting from a one-time tax credit study.

Gas Utility

For the twelve months ended September 30, 2024, Gas Utility adjusted earnings in the current year was $20.3 higher than the prior-year period with higher earnings across both Missouri and Alabama. Net income in the current year was $16.5 higher than the prior year, reflecting the current-year’s $3.8 (after-tax) expense relating to the Company’s customer affordability initiative (an initiative implemented in the second quarter of fiscal 2024 to improve long-term customer affordability targeted at lowering our overall cost structure and improving operational efficiency) that is excluded from adjusted earnings. These results are described in further detail below.

The decrease in Gas Utility operating revenues for fiscal 2024 was attributable to the following factors:

Warmer weather across our utility footprint in the current year negatively impacted both gas cost recoveries and customer usage, particularly for Spire Missouri. Spire Missouri realized $65.7 lower gas cost recoveries in the current year, as the current-year lower volumes more than offset the higher PGA rates being charged to customers. Spire Missouri also experienced lower volumetric usage totaling $10.1 in the current year.

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These warmer weather impacts more than offset the $23.3 incremental revenues resulting from the reset of the Spire Alabama per customer usage charge (net of weather adjustment), $22.9 increase from Spire Missouri reflecting the full year impact of implementing the 2022 rate order, favorable Spire Alabama RSE adjustments totaling $9.8, and increases in ISRS and off-system sales of $19.2 and $8.9, respectively, at Spire Missouri.

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

Contribution margin increased $63.4 versus the prior year. Favorable drivers included the $22.9 increase attributable to the implementation of the 2022 Missouri rate case order, increase in ISRS of $19.2, $11.8 growth resulting from the reset of the Spire Alabama per customer usage charge (net of weather adjustment), and $9.9 favorable RSE adjustment at Spire Alabama. These factors were partially offset by the $11.2 negative volume usage impact (net of weather mitigation) experienced by Spire Missouri in the current year.

Reported O&M expenses for the twelve months ended September 30, 2024 were $9.0 lower than the prior year. After excluding the impact of the NSC Transfer of $7.5 expenses declined $1.5. Excluding the $5.0 expenses in the current year relating to the Company’s customer affordability initiative, the Gas Utility segment O&M decreased $6.5. This reduction reflected lower operations expense, lower employee-related costs and reductions in outside service costs, partially offset by increases in insurance costs and bad debt expense.

Taxes, other than income taxes, decreased $0.1, as lower gross receipts taxes totaling $3.5 offset increases in property and real estate taxes. Depreciation and amortization expenses for the twelve months ended September 30, 2024 were $19.2 higher than the same period in the prior year primarily driven by continued infrastructure capital expenditures across all the Utilities. Interest expense increased $7.4 to $147.3 reflecting higher average net debt levels and higher short-term interest rates. Other income decreased $10.5. in the current year ($3.0 after removing the $7.5 NSC Transfer impact), primarily the result of lower gas carrying credits at Spire Missouri that were only partly offset by favorable mark-to-market valuations on unqualified retirement trusts.

Gas Marketing

The $24.2 year-over-year decline in adjusted earnings primarily reflects very favorable market conditions in the prior year that did not recur this year. The smaller decline in net income reflects the inclusion of $17.8 (after-tax) favorable mark-to-market activity.

Revenues in the current year decreased $79.9 and contribution margin decreased $32.8 (after removing the $23.8 pre-tax favorable mark-to-market activity) versus the prior-year period, reflecting the lower current-year asset optimization opportunities versus the market conditions in the prior year. Operating expenses decreased by $1.2 year-over-year, primarily due to lower employee-related costs.

Midstream

Adjusted earnings and net income for the Company’s Midstream segment increased $19.4 and $19.7, respectively from the prior year. The increase was driven by higher storage earnings, reflecting additional capacity and contract renewals at higher rates at Spire Storage West and higher contracted rates at Spire Storage Salt Plains effective during the third quarter of fiscal 2024.

Revenues in the current year increased $34.6 versus the prior-year period, due primarily to the acquisitions of Spire Storage Salt Plains and MoGas and increased Spire Storage West revenues attributable primarily to the previously mentioned new capacity and rates in the third quarter of the current year. O&M expenses increased by $4.2 year-over-year, due primarily to operating expenses associated with the before-mentioned acquisitions, combined with increased activity at Spire Storage West.

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Other

The Company’s other activities generated a $30.3 adjusted loss in the twelve months ended September 30, 2024, $3.8 lower than the prior-year period. The improved results were driven by the current-year $8.2 gain realized on an interest rate swap contract after management determined the anticipated issuance of certain debt was no longer probable of occurring considering changes in debt issuance strategy due to the interest rate environment, resulting in the discontinuation of hedge accounting. This gain, combined with lower corporate costs in the current year more than offset higher interest expense.

Spire Missouri

Operating revenues for the twelve months ended September 30, 2024 were $25.5 lower than the comparable prior-year period. A key driver was a decrease in gas recovery (PGA) totaling $65.7 that was only partially offset by higher new rates of $42.1. New rates reflect an increase of $22.9 attributable to the impact of the 2022 rate order (new rates became effective the last week of December 2022) and $19.2 higher ISRS in the current year. The new rates, combined with higher off-system sales were more than offset by lower volume impacts (net of weather mitigation) totaling $10.1.

Temperatures in Spire Missouri’s service areas during fiscal 2024 were 10.0% warmer than during fiscal 2023 and 19.1% warmer than normal. The Spire Missouri total system volume sold and transported was 1,469.2 million centum of cubic feet (CCF) for the year ended September 30, 2024, compared with 1,592.0 million CCF last year. Total off-system volume sold and transported was 38.2 million CCF for fiscal 2024, compared with 14.5 million for fiscal 2023.

Contribution margin for the fiscal year ended September 30, 2024 increased $35.3 from the same period in the prior year. The previously mentioned timing of the 2022 rate case implementation generated $22.9 incremental contribution combined with $19.2 higher ISRS more than offset the $11.2 impact of lower volumes.

Reported O&M expenses for the twelve months ended September 30, 2024 decreased $8.8 versus the prior year, or $0.5 after removing the $8.3 impact of the NSC Transfer. Excluding the $3.6 of charges in the current year relating to the Company’s customer affordability initiative, O&M expenses are $4.1 lower than the comparable prior-year period. This reduction of current year O&M was driven by non-payroll operations expense, lower employee-related costs and lower outside services costs, partially offset by higher insurance and bad debt expenses.

Depreciation and amortization expenses were up $15.3, the result of continued investment in infrastructure upgrades. Taxes, other than income taxes, increased $0.2, as higher real estate/property taxes were not totally offset by $3.6 lower pass-through gross receipts taxes in the current year.

Reported other income decreased $11.0, or $2.7 after removing the $8.3 impact of the NSC Transfer.  Lower gas carrying cost credits were not totally offset by favorable mark-to-market valuations on unqualified retirement trusts. Interest expense increased $9.0, reflecting higher short-term interest rates in the current year, and higher average long-term interest rates that more than offset the benefit of slightly lower average long-term debt balances in the current year.

Resulting net income for the twelve months ended September 30, 2024 was $0.9 favorable versus the prior-year comparable period. Adjusted earnings increased $3.7 after removing expenses primarily related to the current year customer affordability initiative.

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Spire Alabama

Operating revenues for the twelve months ended September 30, 2024 increased $7.8 from the same period in the prior year. The increase in operating revenue was principally due to the $23.3 impact of the current year customer usage charge reset net of weather adjustments, combined with favorable RSE adjustments of $9.8. These favorable impacts were only partly offset by a $23.5 decrease in gas cost recovery and a $1.7 reduction in Off System Sales.

Temperatures in Spire Alabama’s service area during fiscal 2024 were 12.8% colder than during fiscal 2023 and 9.0% warmer than normal. Spire Alabama’s total system volume sold and transported was 1,036.7 million CCF during the year ended September 30, 2024, compared with 1,026.2 million CCF during the prior year. Off-system sales volume for fiscal 2024 totaled 90.9 million CCF compared with 98.8 million CCF for fiscal 2023.

Contribution margin was $20.8 higher versus the prior-year comparable period, primarily driven higher by $11.8 relating to the customer usage charge reset (net of weather adjustments) and $9.9 favorable net rate adjustments under the RSE mechanism, slightly offset by a $0.6 decrease attributable to lower off-system sales.

O&M expenses for the twelve months ended September 30, 2024 were $0.8 lower versus the comparable prior-year period. Lower employee-related costs and lower non-employee operating expenses were mostly offset by the current year $1.0 charge relating to the Company’s customer affordability initiative combined with higher bad debt expense.

Depreciation and amortization expenses were up $3.5, the result of continued investment in infrastructure upgrades. Interest expense for the current-year period decreased $1.8 versus the prior-year period, as lower average levels of short-term debt more than offset higher short-term interest rates.

For the twelve months ended September 30, 2024, resulting net income increased $14.1 versus the prior-year period. Adjusted earnings, which removes the customer affordability initiative charge in the current year, increased $14.9.

LIQUIDITY AND CAPITAL RESOURCES

Recent Cash Flows

Net cash provided by operating activities increased $472.2 from 2023 to 2024 after increasing $385.2 from 2022 to 2023. In addition to the changes in net income between the respective periods (discussed in the “Earnings” section above), the remaining changes were related to regulatory timing and fluctuations in working capital items, as discussed below in the Future Cash Requirements section. Specifically, the timing and amounts of regulatory adjustments for purchased gas costs resulted in a large change in deferred recovery in 2022 and 2024, greatly reducing net cash provided by operating activities in 2022 and increasing it in 2024.

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In 2024, the Company's net cash used in investing activities was $331.7 more than in 2023, primarily driven by a $198.8 increase in capital expenditures and a $138.9 increase in business acquisitions (MoGas in 2024 relative to Spire Storage Salt Plains in 2023). Capital expenditures increased $102.5 in the Gas Utility segment (primarily due to continued meter and other infrastructure upgrades) and $97.7 in the Midstream segment (primarily due to the ongoing Wyoming storage facility expansion).

In 2023, the Company used $148.8 more cash in investing activities than in 2022, primarily driven by a $110.3 increase in capital expenditures and the $37.0 acquisition of Spire Storage Salt Plains. Capital expenditures increased $60.0 in the Gas Utility segment (primarily due to ramp up of meter and other infrastructure upgrades) and $51.0 in the Midstream segment (primarily due to the start of the Wyoming storage facility expansion).

Net cash provided by financing activities was down $136.7 in 2024 compared to 2023 as a result of lower net debt issuances and higher dividends, partially offset by higher common stock issuances.

Net cash provided by financing activities was down $240.3 in 2023 compared to 2022 as a result of lower net debt issuances, lower common stock issuances, and higher dividends. Although the net increase in long-term debt was $473.8 in fiscal 2023 compared to only $244.2 in fiscal 2022, Spire reduced short-term debt by $82.0 in fiscal 2023 after increasing short-term borrowings $365.5 in 2022.

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 stored 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, 2024, are related to capital expenditures, principal and interest payments on long-term debt, natural gas purchase obligations, and common and preferred stock dividends.

Total Company capital expenditures are planned to be $790 for fiscal 2025 (as the accelerated meter replacement program and storage facility expansion projects come to a close), though Spire had purchase commitments for only a fraction of these as of September 30, 2024.

As detailed in Note 6, Long-Term Debt, of the Notes to Financial Statements in Item 8, $42.0 of the total $3,771.1 principal amount is due in fiscal 2025. Using each long-term debt instrument’s stated maturity and fixed rates or variable rates as of September 30, 2024, interest payments are projected to total $1,853.3, of which $165.1 is due in fiscal 2025.

Spire’s natural gas purchase obligations totaled $1,529.5, including $567.0 for fiscal 2025, 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, 2024. 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, 2024, totaled $48.1, while annualized dividends based on the shares outstanding and regular quarterly amounts declared on November 14, 2024 are estimated at $196.1.

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Source of Funds

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. 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.

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 not only on current conditions in the credit and capital markets but also 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, 2024, the debt ratings of the Company, Spire Missouri and Spire Alabama (shown in the following table) remain at investment grade with a stable outlook.

Management focuses on maintaining a strong balance sheet and believes the Company, Spire Missouri and Spire Alabama have adequate access to credit and capital markets and will have sufficient liquidity and capital resources, both internal and external, to meet anticipated requirements.

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, 2024 or 2023.

Short-term Debt

The Company’s short-term cash requirements can be met through the sale of up to $1,500.0 of commercial paper or through the use of Spire's $1,500.0 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

Factoring in the current portion of long-term debt, the Company’s long-term consolidated capitalization consisted of 46% equity at September 30, 2024 and 44% equity at September 30, 2023. At September 30, 2024, Spire had outstanding principal of long-term debt totaling $3,771.1, of which $1,818.0 was issued by Spire Missouri, $750.0 was issued by Spire Alabama, and $223.1 was issued by other subsidiaries. Effective October 27, 2024, 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 not to exceed $850.0 any time from that date through December 31, 2027. Spire Alabama has no standing authority to issue long-term debt and must petition the APSC for each planned issuance.

On August 13, 2024, Spire Missouri issued $320.0 aggregate principal amount of its 5.150% Series First Mortgage Bonds due 2034. Interest is payable semi-annually. The bonds senior secured indebtedness of Spire Missouri and rank equally with all other existing and future senior secured indebtedness issued by Spire Missouri under its mortgage and deed of trust. The bonds are secured by a first mortgage lien on substantially all of the real properties of Spire Missouri, subject to limited exceptions. Spire Missouri used most of the proceeds to redeem its First Mortgage Bonds, Floating Rate Series due December 2, 2024, in the aggregate principal amount of $300.0, on August 14, 2024.

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In February 2021, Spire issued 3.5 million equity units, initially in the form of Corporate Units. Each Corporate Unit was comprised of (i) a purchase contract for a certain number of shares of the Company's common stock and (ii) an interest in the Company's 2021 Series A 0.75% Remarketable Senior Notes due 2026 with an aggregate principal amount of $175.0. In February 2024, Spire successfully remarketed those notes on behalf of the selling securityholders. As a result, the interest rate on that original $175.0 obligation was reset to 5.300%. Also in February 2024, Spire sold an additional $175.0 aggregate principal amount of the 5.300% Senior Notes due March 1, 2026, with interest payable semiannually, and Spire received net proceeds of $173.5 from this offering. The Corporate Unit holders purchased an aggregate of 2,745,733 shares of common stock (net of fractional shares) for $175.0, settled on March 5, 2024.

Under Spire’s “at-the-market” (ATM) equity distribution agreement and as authorized by its board of directors, the Company may offer and sell, from time to time, shares of its common stock (including shares of common stock that may be sold pursuant to forward sale agreements entered into in connection with the ATM equity distribution agreement). Settled sales under this ATM program are included in “Common stock issued” in the Consolidated Statements of Shareholders’ Equity. Specifically in the first quarter of fiscal 2024, on December 11, 2023, 1,744,549 shares were settled, generating $112.2 of net proceeds. In the second, third and fourth quarters of fiscal 2024, Spire executed forward sale agreements for 204,405 shares, 338,110 shares and 663,619 shares, respectively, set to be settled on or before December 31, 2024, March 10, 2025 and March 31, 2025, respectively, but no shares of common stock have been settled under these forward sale agreements. Had all shares under these forward agreements been settled as of September 30, 2024
, it would have generated net proceeds of $75.0. As of September 30, 2024
, under the ATM program, Spire may sell additional shares with an aggregate offering price of up to $123.6 through January 2027.

For more information about equity, including the ATM program and the equity units, see
Note 5 of the Notes to Financial Statements in Item 8. 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” later in this Item 7.

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

For discussions of 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.

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:

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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, 2024, 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.

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, 2024 and 2023, Spire Marketing’s unmatched fixed-price positions were not material to Spire’s financial position or results of operations.

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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, 2024 and 2023, 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 2025:

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.

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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 2024, 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 $9.2 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, 2024, Spire had fixed-rate long-term debt totaling $3,771.1, of which $1,818.0 was issued by Spire Missouri, $750.0 was issued by Spire Alabama, and $1,203.1 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 details on the Company’s interest rate swap transactions.