REGULATORY MATTERS

As discussed below for Spire Missouri and Spire Alabama, the Purchased Gas Adjustment (“PGA”) clauses and Gas Supply Adjustment (“GSA”) riders allow the Utilities to pass through to customers the cost of purchased gas supplies. Regulatory assets and regulatory liabilities related to the PGA clauses and the GSA rider are both labeled Unamortized Purchased Gas Adjustments herein.

The following regulatory assets and regulatory liabilities were reflected in the Balance Sheets as of September 30, 2018 and 2017. Unamortized Purchased Gas Adjustments are also included below, which are reported separately in the current assets and liabilities sections of each balance sheet.



	Spire				Spire Missouri				Spire Alabama
September 30	2018		2017		2018		2017		2018		2017
Regulatory Assets:
Current:
Pension and postretirement benefit costs	$	30.2	$	42.2	$	21.9	$	34.9	$	7.3	$	7.2
Unamortized purchased gas adjustments	8.2		102.6		1.0		57.4		6.4		45.2
Other	34.4		30.7		7.8		3.3		12.5		12.2
Total Current Regulatory Assets	72.8		175.5		30.7		95.6		26.2		64.6
Noncurrent:
Future income taxes due from customers	96.3		170.5		94.4		170.5		—		—
Pension and postretirement benefit costs	364.9		404.7		292.5		322.7		64.8		72.6
Cost of removal	133.4		123.3		—		—		133.4		123.3
Unamortized purchased gas adjustments	—		9.9		—		9.9		—		—
Energy efficiency	32.8		29.0		32.8		29.0		—		—
Other	42.4		53.7		21.4		25.7		3.3		1.1
Total Noncurrent Regulatory Assets	669.8		791.1		441.1		557.8		201.5		197.0
Total Regulatory Assets	$	742.6	$	966.6	$	471.8	$	653.4	$	227.7	$	261.6

Regulatory Liabilities:
Current:
Rate Stabilization and Equalization (“RSE”) adjustment	$	—	$	1.4	$	—	$	—	$	—	$	1.4
Refundable negative salvage	5.2		8.2		—		—		5.2		8.2
Unamortized purchased gas adjustments	2.9		1.0		1.9		—		—		—
Other	27.6		12.0		14.8		2.7		2.4		2.4
Total Current Regulatory Liabilities	35.7		22.6		16.7		2.7		7.6		12.0
Noncurrent:
Deferred taxes due to customers	178.3		—		161.1		—		—		—
Pension and postretirement benefit costs	27.8		32.2		—		—		27.8		32.2
Refundable negative salvage	—		4.1		—		—		—		4.1
Accrued cost of removal	63.6		83.8		39.8		54.5		—		—
Unamortized purchased gas adjustments	4.7		1.9		4.7		1.9		—		—
Other	80.2		35.2		69.3		24.8		3.5		3.3
Total Noncurrent Regulatory Liabilities	354.6		157.2		274.9		81.2		31.3		39.6
Total Regulatory Liabilities	$	390.3	$	179.8	$	291.6	$	83.9	$	38.9	$	51.6

A portion of the Company’s regulatory assets are not earning a return and are shown in the schedule below:



	Spire				Spire Missouri
September 30	2018		2017		2018		2017
Pension and postretirement benefit costs	$	148.4	$	170.5	$	148.4	$	170.5
Future income taxes due from customers	96.3		198.5		94.4		198.5
Other	15.1		11.3		15.1		11.3
Total Regulatory Assets Not Earning a Return	$	259.8	$	380.3	$	257.9	$	380.3

Like all the Company’s regulatory assets, these regulatory assets are expected to be recovered from customers in future rates. The recovery period for the future income taxes due from customers and pension and other postretirement benefit costs could be as long as 20 years or longer, based on current Internal Revenue Service guidelines and average remaining service life of active participants, respectively. The other items not earning a return are expected to be recovered over a period not to exceed 15 years, consistent with precedent set by the MoPSC. Spire Alabama does not have any regulatory assets that are not earning a return.

Spire Missouri

As authorized by the MoPSC, the PGA clause allows Spire Missouri to flow through to customers, subject to prudence review by the MoPSC, the cost of purchased gas supplies. To better match customer billings with market natural gas prices, Spire Missouri is allowed to file to modify, on a periodic basis, the level of gas costs in its PGA. Certain provisions of the PGA clause are included below:

•

Spire Missouri has a risk management policy that allows for the purchase of natural gas derivative instruments with the goal of managing price risk associated with purchasing natural gas on behalf of its customers. The MoPSC clarified that costs, cost reductions, and carrying costs associated with the Utility’s use of natural gas derivative instruments are gas costs recoverable through the PGA mechanism.


•	The tariffs allow Spire Missouri 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 authorized to apply carrying costs to all over- or under-recoveries of gas costs, including costs and cost reductions associated with the use of derivative instruments, including cash payments for margin deposits.

•

The MoPSC approved a plan applicable to Spire Missouri’s gas supply commodity costs under which it retains a portion of cost savings associated with the acquisition of natural gas below an established benchmark level. This gas supply cost management program allows Spire Missouri to retain 10% of cost savings, up to a maximum of $3.0 annually. Spire Missouri did not record any such incentive compensation under the plan during the three fiscal years reported. Incentives recorded under the plan, if any, are included in Gas Utility Operating Revenues on the Consolidated Statements of Income and under Operating Revenues on Spire Missouri’s Statements of Comprehensive Income.

Pursuant to the provisions of the PGA clause, the difference between actual costs incurred and costs recovered through the application of the PGA clause are reflected as a deferred charge or credit at the end of the fiscal year. At that time, the balance is classified as a current asset or current liability and recovered from, or credited to, customers over an annual period commencing in November. The balance in the current account is amortized as amounts are reflected in customer billings.

The PGA clause also provides for the treatment of income from off-system sales and capacity release revenues. Pre-tax income from off-system sales and capacity release revenues is shared with customers, with an estimated amount assumed in PGA rates. The difference between the actual amount allocated to customers for each fiscal year and the estimated amount assumed in PGA rates is recovered from, or credited to, customers over an annual period commencing in the subsequent November. Before April 19, 2018, the customer share of such income was determined in accordance with the following tables, shown for each service territory for which the PGA clauses were approved by the MoPSC.



	Customer Share	Company Share
Spire Missouri East
First $2.0 of pre-tax income*	85%	15%
Next $2.0 of pre-tax income	80%	20%
Next $2.0 of pre-tax income	75%	25%
Amounts of pre-tax income exceeding $6.0	70%	30%
* Customer share was set to 85% and company share set to 15% in fiscal 2017. For fiscal 2016, the customer share was 100%.
Spire Missouri West
First $1.2 of pre-tax income	85%	15%
Next $1.2 of pre-tax income	80%	20%
Next $1.2 of pre-tax income	75%	25%
Amounts of pre-tax income exceeding $3.6	70%	30%

In the latest rate cases (discussed in the following paragraphs), the multiple sharing tiers and percentages were eliminated in favor of a single sharing percentage under which customers receive 75% (and Spire Missouri East and Spire Missouri West receive 25%) of the net margins achieved as a result of such off-system sales and capacity releases.

On March 7, 2018, the MoPSC issued an Amended Report and Order (the “Order”) in two general rate cases (docketed as GR-2017-0215 and GR-2017-0216) approving a base rate revenue requirement increase of $18.0 for Spire Missouri East and $15.2 for Spire Missouri West. The annualized Infrastructure System Replacement Surcharge (“ISRS”) amounts of $32.6 for Spire Missouri East and $16.4 for Spire Missouri West were reset to zero, resulting in a net decrease in revenues of $14.6 and $1.2, respectively. These net amounts reflect decreases totaling approximately $33.0 resulting from the TCJA’s federal income tax rate reduction and a related allowance to return excess accumulated deferred income taxes to customers in accordance with Internal Revenue Service normalization requirements. Tariffs reflecting the Order went into effect on April 19, 2018.

Included in the Order were updates to the treatment of pension and other postretirement benefits. Effective April 19, 2018, the pension cost for Spire Missouri West included in customer rates was reduced from $9.9 to $5.5 per year, the pension cost included in the Spire Missouri East customer rates was increased from $15.5 to $29.0 per year, and the annual allowance for health care postretirement plans for Spire Missouri East was reduced from $9.5 to $8.6. Over a period of eight years, Spire Missouri East rates will also include the amortization of $173.0 of assets for pension and other postretirement benefits, and Spire Missouri West rates were reduced by the amortization of a $26.2 net liability for pension and other postretirement benefits.

Certain provisions of the Order allow less future recovery of certain deferred or capitalized costs than estimated based upon previous rate proceedings. The Order denied recovery of $28.8 regulatory asset related to certain pension costs incurred prior to 1997. The Order also excluded from rate base certain incentive compensation costs totaling $6.9, along with $1.8 of assets related to real estate sold in 2014. Rate case expenses totaling $0.9 were also disallowed. On April 25, 2018, Spire Missouri filed an appeal of the MoPSC’s decisions on the pension asset, the real estate sale, and rate case expense to Missouri’s Southern District Court of Appeals. Spire Missouri filed its initial brief in that court on October 17, 2018. Though the appeal is pending on these issues, management determined that the related assets, along with the incentive compensation exclusion, should be written down or off in connection with the preparation of the financial statements for the second quarter of 2018. For both Spire and Spire Missouri, the charges totaled $38.4 for the year ended September 30, 2018, and are included primarily in operation and maintenance expense on the statements of income and in other cash flows from operating activities on the statements of cash flows. The after-tax reduction to net income and earnings per share was $23.6 and $0.49, respectively. The charges related to the long-standing pension and real estate assets, totaling $30.6, are excluded in the determination of net economic earnings, as shown in Note 13, Information by Operating Segment.

On September 30, 2016, Spire Missouri filed ISRS cases for both Spire Missouri East and Spire Missouri West (the “2016 ISRS Cases”) and rates of $4.5 and $3.2, respectively, became effective January 28, 2017. The Missouri Office of the Public Counsel (“OPC”) appealed the MoPSC’s decisions on the 2016 ISRS Cases to Missouri’s Western District Court of Appeals, arguing that a portion of these costs were ineligible because some plastic pipe was replaced along with the cast iron and bare steel. On February 3, 2017, Spire Missouri filed to increase its ISRS revenues in both its East and West service territories (the “2017 ISRS Cases”). The parties agreed to apply the outcome of the appeal in the 2016 ISRS Cases to the 2017 ISRS Cases, and $3.0 in rates for each of the two service territories became effective June 1, 2017. On November 21, 2017, the court reversed the MoPSC’s decision in the 2016 ISRS Cases to the extent costs were incurred to replace ISRS-ineligible plastic pipe and remanded the case to the MoPSC for further proceedings.

On June 7, 2018, Spire Missouri filed to establish new ISRS rates in both its East and West divisions (the “2018 ISRS Cases”), requesting a $4.8 and $7.1 increase, respectively. On August 27, 2018, the MoPSC held a hearing on the plastics issue related to all of the above noted ISRS cases. On September 20, 2018, the MoPSC issued orders finding that Spire Missouri’s ISRS petitions in all three ISRS cases included ineligible costs related to the replacement of plastic pipe components. However, the MoPSC found that it lacked statutory authority to refund ineligible costs in the 2016 and 2017 ISRS Cases. On September 28, 2018 the MoPSC approved rates in the 2018 ISRS Cases of $2.6 for Spire Missouri East and $5.4 for Spire Missouri West, which became effective October 8, 2018. Spire Missouri and the OPC have both filed applications for rehearing in all of these ISRS cases. The MoPSC denied the rehearing for the 2016 and 2017 ISRS Cases on October 17, 2018, which OPC has appealed to the Western District Court. The MoPSC has not yet made a determination in the 2018 ISRS Cases.

On September 20, 2018, the MoPSC approved financing authority for Spire Missouri in the amount of $500.0, effective October 1, 2018, through September 30, 2021.

Spire Alabama

Spire Alabama’s rate schedules for natural gas distribution charges contain a GSA rider, established by the APSC 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 rider, which 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.

The APSC established the RSE rate-setting process in 1983. Effective January 1, 2014, Spire Alabama’s allowed range of return on average common equity was 10.5% to 10.95% with an adjusting point of 10.8%. Spire Alabama was eligible to receive a performance-based adjustment of 5 basis points to the return on equity adjusting point, based on meeting certain customer satisfaction criteria. Under RSE, the APSC conducts quarterly reviews to determine whether Spire Alabama’s return on average common equity at the end of the rate year will be within the allowed range of return. Reductions in rates can be made quarterly to bring the projected return within the allowed range; increases, however, are allowed only once each rate year, effective December 1, and cannot exceed 4% of prior-year revenues. In October 2018, the APSC approved the renewal of RSE through September 30, 2022, with several modifications. Effective October 1, 2018, Spire Alabama’s allowed range of return on average common equity is 10.15% to 10.65% with an adjusting point of 10.4%. Spire Alabama is eligible to receive a performance-based adjustment of +/- 10 basis point to the return on equity adjusting point, based upon the terms of the newly approved Accelerated Infrastructure Modernization Program tariff. The 5-basis point adjustment for certain customer satisfaction criteria has been removed. Other modifications include an equity limitation as a percent of total capitalization from 56.5% to 55.5% and adjustments to the Cost Control Measure (“CCM”) as noted below.

The RSE reduction for the September 30, 2017 quarterly point of test was $2.7 to bring the expected rate of return on average common equity at the end of the year to within the allowed range of return, effective December 1, 2017. As part of the annual update for RSE, on November 30, 2017, Spire Alabama filed an increase for rate year 2018 of $8.5, which also became effective December 1, 2017. There was no RSE reduction in 2018 for the January 31, April 30, July 31 or September 30 quarterly points of test. Effective February 1, 2018, Spire Alabama rates were reduced by $12.8 to reflect the impact of tax reform under the TCJA on current income taxes.

The inflation-based CCM, established by the APSC, allows for annual increases to operation and maintenance (“O&M”) expense. For the three years ended September 30, 2018, the CCM range was Spire Alabama’s 2007 actual rate year O&M expense inflation-adjusted using an index range based on the June Consumer Price Index For All Urban Consumers (“CPI-U”) each rate year plus or minus 1.75%. If rate year O&M expense falls within the index range, no adjustment is required. If rate year O&M expense exceeds the index range, three-quarters of the difference is returned to customers through future rate adjustments. To the extent rate year O&M is less than the index range, Spire Alabama benefits by one-half of the difference through future rate adjustments. Certain items that fluctuate based on situations demonstrated to be beyond Spire Alabama’s control may be excluded from the CCM calculation. As of September 30, 2018, Spire Alabama recorded a CCM benefit of $9.7 for rate year 2018, which will be reflected in rates effective December 1, 2018. The CCM benefit was $10.7 for rate year 2017 and $7.8 for rate year 2016. Effective October 1, 2018, the CCM will be calculated based upon O&M expense per customer and the O&M base year will be Spire Alabama’s actual 2018 O&M expense with an adjustment to that base in 2019 of 2/3 of the 2018 CCM differential (amount below the CCM range in 2018) and an adjustment in 2020 of 1/3 of the 2018 CCM differential, with no adjustment to the base in 2021 and 2022. Spire Alabama’s 2018 actual rate year O&M expense will be inflation adjusted using a new index range based on the June CPI-U each rate year plus or minus 1.50%.

On June 28, 2010, the APSC approved a reduction in depreciation rates, effective June 1, 2010, and a regulatory liability to be recorded for Spire Alabama. Refunds from such negative salvage liability are being passed back to eligible customers on a declining basis through lower tariff rates through rate year 2019 pursuant to the terms of the Negative Salvage Rebalancing (“NSR”) rider. The total amount refundable to customers is subject to adjustments over the remaining period for charges made to the Enhanced Stability Reserve (“ESR”) and other APSC-approved charges. The refunds are due to a re-estimation of future removal costs provided for through the prior depreciation rates. For fiscal 2018, 2017, and 2016, NSR amounts returned to customers were approximately $7.2, $6.3, and $8.3, respectively. As of September 30, 2018, $5.2 remains to be refunded through rate reductions effective December 1, 2018, through March 31, 2019.

The APSC approved an ESR in 1998, which was subsequently modified and expanded in 2010. As currently approved, the ESR provides deferred treatment and recovery for the following: (1) extraordinary O&M expenses related to environmental response costs; (2) extraordinary O&M expenses related to self-insurance costs that exceed $1.0 per occurrence; (3) extraordinary O&M expenses, other than environmental response costs and self-insurance costs, resulting from a single force majeure event or multiple force majeure events greater than $0.3 and $0.4, respectively, during a rate year; and (4) negative individual large commercial and industrial customer budget revenue variances that exceed $0.4 during a rate year. Charges to the ESR are subject to certain limitations which may disallow deferred treatment and which prescribe the timing of recovery. Funding to the ESR is provided as a reduction to the refundable negative salvage balance over its nine-year term beginning December 1, 2010. Subsequent to the nine-year period and subject to APSC authorization, Spire Alabama expects to be able to recover underfunded ESR balances over a five-year amortization period with an annual limitation of $0.7. Amounts in excess of this limitation are deferred for recovery in future years.

Spire Alabama has APSC approval for an intercompany revolving credit agreement allowing Spire Alabama to borrow from Spire in a principal amount not to exceed $200.0 at any time outstanding in combination with its bank line of credit, and to loan to Spire in a principal amount not to exceed $25.0 at any time outstanding. Borrowings may be used for the following purposes: (a) meeting increased working capital requirements; (b) financing construction requirements related to additions, extensions, and replacements of the distribution systems; and (c) financing other expenditures that may arise from time to time in the normal course of business. On October 2, 2018, the APSC approved an application for up to $90.0 of long-term debt financing.

Spire

In addition to those discussed above for Spire Missouri and Spire Alabama, Spire is affected by the following regulatory matters.

Spire Gulf has similar rate regulation to Spire Alabama. The RSE allowed range of return on average common equity is 10.45% to 10.95% with an adjusting point of 10.7%. The CCM has the same return and similar recovery provisions when expenses exceed or are under a band of +/- 1.50% around the CPI-U inflated O&M per customer expense level from September 30, 2017, excluding expenses for pensions and gas bad debt. Additionally, it has a Cast Iron Main Replacement factor that provides an enhanced return on the pro-rata costs associated with cast iron main replacement for miles over 10 miles per year based on a 75% weighting for the equity content. Spire Gulf also has an ESR for negative revenue variances over $0.1 or a force majeure event expense of $0.1 (or two events that exceed $0.15), a Self Insurance Reserve for general liability coverage, and an Environmental Cost Recovery Factor that recovers 90% of prudently incurred costs for compliance with environmental laws, rules and regulations. It also has an APSC-approved intercompany revolving credit agreement with Spire to borrow in a principal amount not to exceed $50.0, and to loan up to $25.0.

Spire Gulf’s rates were reduced $1.9 effective February 1, 2018, to reflect lower income taxes resulting from the TCJA.

Spire Mississippi utilizes a formula rate-making process under the Rate Stabilization Adjustment (“RSA”) Rider. It is based on a formulaically derived return on equity (currently 9.34%), and is updated on an annual basis if the equity return on an end of period rate base is beyond the allowed return on equity by 1.0%, with 75% of any shortfall back to the midpoint being put into a rate increase and 50% of any excess back to the midpoint resulting in a rate decrease. Updates may include known and measurable adjustments to historic costs from the 12 months ended June 30, submitted September 15 for an effective date of November 1, unless disputed by the Mississippi Public Utilities Staff, with any disputes to be resolved by the MSPSC by January 15 of the following year. In December 2015, a Supplemental Growth Rider (“SGR”) was approved for a 3-year period to provide recovery of certain system expansion projects. On September 4, 2018, the SGR was extended to October 15, 2021.

On April 10, 2018, the MSPSC approved an agreement between Spire Mississippi and the Mississippi Public Utility Staff settling its Rates Stabilization and Adjustments filing that was made on September 15, 2017, and included adjusting the federal income tax rate for the TCJA resulting in a $0.2 reduction in the annualized revenue requirement. New rates were effective May 1, 2018.

In August 2018, FERC approved an order issuing a Certificate of Public Convenience and Necessity for the Spire STL Pipeline, and in November 2018, FERC issued a Notice to Proceed, allowing construction to begin.

In fiscal 2018, the Company acquired and began integrating two neighboring natural gas storage facilities in Wyoming. Both storage facilities fall under FERC jurisdiction, and on July 9, 2018, the Company submitted an application with the FERC to abandon the cost-based tariff of the second facility and combine the operations under one FERC certificate with the market-based tariff of the first facility.