10-K 1 spire10k-20170930.htm 10-K Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-K
(Mark One)
[ X ]
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2017
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number
 
Name of Registrant, Address of Principal Executive Offices and Telephone Number
 
State of Incorporation
 
I.R.S. Employer Identification Number
1-16681
 
Spire Inc.
700 Market Street
St. Louis, MO 63101
314-342-0500
 
Missouri
 
74-2976504
1-1822
 
Spire Missouri Inc.
700 Market Street
St. Louis, MO 63101
314-342-0500
 
Missouri
 
43-0368139
2-38960
 
Spire Alabama Inc.
2101 6th Avenue North
Birmingham, AL 35203
205-326-8100
 
Alabama
 
63-0022000
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”):
 
Title of each class
Name of each exchange on which registered
Spire Inc.
Common Stock $1.00 par value
New York Stock Exchange
Spire Missouri Inc.
None
Not applicable
Spire Alabama Inc.
None
Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Spire Inc.
Yes [ ]    
No [ X ]
 
Spire Missouri Inc.
Yes [ ]    
No [ X ]
 
Spire Alabama Inc.
Yes [ ]    
No [ X ]
 
Indicate by check mark whether each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, as amended.
Spire Inc.
Yes [ X ]
No [ ]
 
Spire Missouri Inc.
Yes [ ]    
No [ X ]
 
Spire Alabama Inc.
Yes [ ]    
No [ X ]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Spire Inc.
Yes [ ]    
No [ X ]
 
Spire Missouri Inc.
Yes [ ]    
No [ X ]
 
Spire Alabama Inc.
Yes [ ]    
No [ X ]
 
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days.
Spire Inc.
Yes [ X ]
No [ ]
 
Spire Missouri Inc.
Yes [ X ]
No [ ]
 
Spire Alabama Inc.
Yes [ X ]
No [ ]
 
Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Spire Inc.
Yes [ X ]
No [ ]
 
Spire Missouri Inc.
Yes [ X ]
No [ ]
 
Spire Alabama Inc.
Yes [ X ]
No [ ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Spire Inc.
[ X ]
 
 
Spire Missouri Inc.
[ X ]
 
 
Spire Alabama Inc.
[ X ]
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large
accelerated filer
 
Accelerated
filer
 
Non-
accelerated filer
 
Smaller
reporting company
 
Emerging growth company
Spire Inc.
X
 
 
 
 
 
 
 
 
Spire Missouri Inc.
 
 
 
 
X
 
 
 
 
Spire Alabama Inc.
 
 
 
 
X
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Spire Inc.
[ ]
 
 
Spire Missouri Inc.
[ ]
 
 
Spire Alabama Inc.
[ ]
 
 
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Spire Inc.
Yes [ ]    
No [ X ]
 
Spire Missouri Inc.
Yes [ ]    
No [ X ]
 
Spire Alabama Inc.
Yes [ ]    
No [ X ]
 
The aggregate market value of the voting stock held by non-affiliates of Spire Inc. amounted to $2,989,327,838 as of March 31, 2017. All of Spire Missouri Inc.’s and Spire Alabama Inc.’s equity securities are owned by Spire Inc., their parent company and a reporting company under the Exchange Act.
The number of shares outstanding of each registrant’s common stock as of November 10, 2017 was as follows:
Spire Inc.
 
Common Stock, par value $1.00 per share
 
48,266,858

Spire Missouri Inc.
 
Common Stock, par value $1.00 per share (all owned by Spire Inc.)
 
24,577

Spire Alabama Inc.
 
Common Stock, par value $0.01 per share (all owned by Spire Inc.)
 
1,972,052

This combined Form 10-K represents separate filings by Spire Inc., Spire Missouri Inc., and Spire Alabama Inc. Information contained herein relating to an individual registrant is filed by that registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrant, except that information relating to Spire Missouri Inc. and Spire Alabama Inc. is also attributed to Spire Inc.
Spire Missouri Inc. and Spire Alabama Inc. meet the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K and are therefore filing this Form 10-K with the reduced disclosure format specified in General Instructions I(2) to Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of proxy statement for Spire Inc. to be filed on or about December 13, 2017 — Part III.
Certain exhibits as indicated in Part IV.
 
 
 
 
 



TABLE OF CONTENTS
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


GLOSSARY OF KEY TERMS AND ABBREVIATIONS
Alabama Utilities
Spire Alabama and Spire Gulf
 
MMBtu
Million British thermal units
AOCI
Accumulated other comprehensive income or loss
 
MoPSC
Missouri Public Service Commission
APSC
Alabama Public Service Commission
 
MSPSC
Mississippi Public Service Commission
ASC
Accounting Standards Codification
 
NYSE
New York Stock Exchange
ASU
Accounting Standards Update
 
NYMEX
New York Mercantile Exchange, Inc.
Bcf
Billion cubic feet
 
O&M
Operation and maintenance expense
BVCP
Brownfields/Voluntary Cleanup Program
 
OCI
Other comprehensive income or loss
CCM
Cost Control Measure
 
OPC
Missouri Office of the Public Counsel
Degree days
The average of a day’s high and low temperature below 65, subtracted from 65, multiplied by the number of days impacted
 
OTCBB
Over-the-Counter Bulletin Board
EPA
US Environmental Protection Agency
 
PGA
Purchased Gas Adjustment
EPS
Earnings per share
 
PRP
Potential Responsible Party
ESR
Enhanced Stability Reserve
 
RSE
Rate Stabilization and Equalization
FASB
Financial Accounting Standards Board
 
SEC
US Securities and Exchange Commission
FERC
Federal Energy Regulatory Commission
 
Spire Alabama
Spire Alabama Inc. (formerly Alabama Gas Corporation)
GAAP
Accounting principles generally accepted in the United States of America
 
Spire EnergySouth
Spire EnergySouth Inc. (formerly EnergySouth, Inc.), parent of Spire Gulf and Spire Mississippi
Gas Marketing
Segment including Spire Marketing, a subsidiary engaged in the non-regulated marketing of natural gas and related activities
 
Spire Gulf
Spire Gulf Inc. (formerly Mobile Gas Service Corporation)
Gas Utility
Segment including the regulated operations
of the Utilities
 
Spire Marketing
Spire Marketing Inc. (formerly Laclede Energy Resources, Inc.)
GSA
Gas Supply Adjustment
 
Spire Mississippi
Spire Mississippi Inc. (formerly Willmut Gas & Oil Company)
ICE
Intercontinental Exchange
 
Spire Missouri
Spire Missouri Inc. (formerly Laclede Gas Company)
ISRS
Infrastructure System Replacement Surcharge
 
Spire Missouri East
Spire Missouri’s eastern service territory
LIBOR
London Inter-Bank Offered Rate
 
Spire Missouri West
Spire Missouri’s western service territory (formerly Missouri Gas Energy, or MGE)
LNG
Liquefied natural gas
 
TSR
Total shareholder return
MDNR
Missouri Department of Natural Resources
 
US
United States
MGP
Manufactured gas plant
 
Utilities
Spire Missouri, Spire Alabama and the subsidiaries of Spire EnergySouth
Missouri Utilities
Spire Missouri, including Spire Missouri East and Spire Missouri West, the utilities serving the Missouri region
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I

FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, excluding historical information, include forward-looking statements. Certain words, such as “may,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” and similar words and expressions identify forward-looking statements that involve uncertainties and risks. Future developments may not be in accordance with our current expectations or beliefs and the effect of future developments may not be those anticipated. Among the factors that may cause results to differ materially from those contemplated in any forward-looking statement are:
Weather conditions and catastrophic events, particularly severe weather in the natural gas producing areas of the country;
Volatility in gas prices, particularly sudden and sustained changes in natural gas prices, including the related impact on margin deposits associated with the use of natural gas derivative instruments;
The impact of changes and volatility in natural gas prices on our competitive position in relation to suppliers of alternative heating sources, such as electricity;
Changes in gas supply and pipeline availability, including decisions by natural gas producers to reduce production or shut in producing natural gas wells, expiration of existing supply and transportation arrangements that are not replaced with contracts with similar terms and pricing, as well as other changes that impact supply for and access to the markets in which our subsidiaries transact business;
The recent acquisitions may not achieve their intended results, including anticipated cost savings;
The Spire STL Pipeline project may be hindered or halted by regulatory, legal, or other obstacles;
Legislative, regulatory and judicial mandates and decisions, some of which may be retroactive, including those affecting:
allowed rates of return,
incentive regulation,
industry structure,
purchased gas adjustment provisions,
rate design structure and implementation,
regulatory assets,
non-regulated and affiliate transactions,
franchise renewals,
environmental or safety matters, including the potential impact of legislative and regulatory actions related to climate change and pipeline safety,
taxes,
pension and other postretirement benefit liabilities and funding obligations, or
accounting standards;
The results of litigation;
The availability of and access to, in general, funds to meet our debt obligations prior to or when they become due and to fund our operations and necessary capital expenditures, either through (i) cash on hand, (ii) operating cash flow, or (iii) access to the capital markets;
Retention of, ability to attract, ability to collect from, and conservation efforts of, customers;
Our ability to comply with all covenants in our indentures and credit facilities any violations of which, if not cured in a timely manner, could trigger a default of our obligation;
Capital and energy commodity market conditions, including the ability to obtain funds with reasonable terms for necessary capital expenditures and general operations and the terms and conditions imposed for obtaining sufficient gas supply;
Discovery of material weakness in internal controls; and
Employee workforce issues, including but not limited to labor disputes and future wage and employee benefit costs, including changes in discount rates and returns on benefit plan assets.
Readers are urged to consider the risks, uncertainties, and other factors that could affect our business as described in this report. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement in light of future events.

3


Item 1. Business
OVERVIEW
Spire Inc. (Spire or the Company) was formerly The Laclede Group, Inc., an entity formed in 2000 that, effective October 1, 2001, became the public utility holding company for Spire Missouri Inc. (Spire Missouri or the Missouri Utilities). Spire Missouri was founded in 1857 as The Laclede Gas Light Company, and it was listed on the New York Stock Exchange (NYSE) in 1889, making the Company successor to the eighth longest listed stock on the NYSE. The Laclede Gas Light Company was renamed Laclede Gas Company in 1950 and then Spire Missouri Inc. on August 30, 2017. Effective August 31, 2014, the Company purchased 100% of the common shares of Alabama Gas Corporation, which was renamed Spire Alabama Inc. (Spire Alabama) on September 1, 2017. On September 12, 2016, the Company purchased 100% of the common shares of EnergySouth, Inc., along with its wholly owned subsidiaries, Mobile Gas Service Corporation and Willmut Gas & Oil Company, and on or about August 30, 2017, those companies were renamed Spire EnergySouth Inc. (Spire EnergySouth), Spire Gulf Inc. (Spire Gulf), and Spire Mississippi Inc. (Spire Mississippi), respectively.
Spire is committed to transforming its business and pursuing growth through 1) growing organically, 2) investing in infrastructure, 3) acquiring and integrating, and 4) innovation and technology.
The Company has two key business segments: Gas Utility and Gas Marketing.
The Gas Utility segment includes the regulated operations of Spire Missouri, Spire Alabama, Spire Gulf and Spire Mississippi (collectively, the Utilities). The business of the Utilities is subject to seasonal fluctuations with the peak period occurring in the winter heating season, typically November through April of each fiscal year. Spire Missouri is a public utility engaged in the purchase, retail distribution and sale of natural gas, with primary offices located in St. Louis, Missouri. Spire Missouri is the largest natural gas distribution utility system in Missouri, serving more than 1.1 million residential, commercial and industrial customers. For utility regulatory purposes Spire Missouri has two regions, one serving St. Louis and eastern Missouri (Spire Missouri East) and the other serving Kansas City and western Missouri (Spire Missouri West, formerly Missouri Gas Energy, or MGE). Spire Alabama is a public utility engaged in the purchase, retail distribution and sale of natural gas principally in central and northern Alabama, serving more than 0.4 million residential, commercial and industrial customers with primary offices located in Birmingham, Alabama. Spire Gulf and Spire Mississippi are utilities engaged in the purchase, retail distribution and sale of natural gas to 0.1 million customers in southern Alabama and south central Mississippi.
The Gas Marketing segment includes Spire Marketing Inc. (Spire Marketing, formerly known as Laclede Energy Resources, Inc.), a wholly owned subsidiary engaged in the marketing of natural gas and related activities on a non-regulated basis.
As of September 30, 2017, Spire had 3,279 employees, including 2,271 for Spire Missouri and 819 for Spire Alabama.
Consolidated operating revenues contributed by each segment for the last three fiscal years are presented below. For more detailed financial information regarding the segments, see Note 14, Information by Operating Segment, of the Notes to Financial Statements in Item 8.
(In millions)
2017
 
2016*
 
2015
Gas Utility
$
1,660.0

 
$
1,457.2

 
$
1,891.8

Gas Marketing and other
80.7

 
80.1

 
84.6

Total Operating Revenues
$
1,740.7

 
$
1,537.3

 
$
1,976.4

* 2016 Gas Utility operating results include Spire EnergySouth revenues since the September 12, 2016 acquisition date.

Spire’s common stock is listed on the NYSE and trades under the ticker symbol “SR.” The following table reflects Spire shares issued during the two most recent fiscal years:
 
2017
 
2016
Common Stock Issuance
2,504,684

 
2,185,000

Dividend Reinvestment and Stock Purchase Plan (DRIP)
23,731

 
22,878

Equity Incentive Plan
84,186

 
107,752

Total Shares Issued
2,612,601

 
2,315,630


4


Shares were issued during 2017 in conjunction with the conversion of equity units that were issued in 2014 to help fund the Spire Alabama acquisition. Shares were issued during 2016 to partially fund the Spire EnergySouth acquisition. During fiscal 2017 and 2016, shares were issued at historically consistent levels for Spire’s DRIP and Equity Incentive Plan.
During fiscal 2017 and 2016, neither Spire Missouri nor Spire Alabama issued shares to Spire. For more detailed common stock information of Spire, Spire Missouri and Spire Alabama, see Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
The information Spire, Spire Missouri and Spire Alabama file or furnish to the Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and their amendments, and proxy statements are available free of charge under “Filings and Annual Reports” in the Investors section of Spire’s website, SpireEnergy.com, as soon as reasonably practical after the information is filed with or furnished to the SEC. Information contained on Spire’s website is not incorporated by reference in this report.
GAS UTILITY
Natural Gas Supply
The Utilities’ fundamental gas supply strategy is to meet the two-fold objective of 1) ensuring a dependable gas supply is available for delivery when needed and 2) insofar as is compatible with that dependability, purchasing gas that is economically priced. In structuring their natural gas supply portfolio, the Utilities focus on natural gas assets that are strategically positioned to meet the Utilities’ primary objectives.
Spire Missouri focuses its gas supply portfolio around a number of large natural gas suppliers with equity ownership or control of assets strategically situated to complement its regionally diverse firm transportation arrangements. Spire Missouri East utilizes both Mid-Continent and Gulf Coast gas sources to provide a level of supply diversity that facilitates the optimization of pricing differentials as well as protecting against the potential of regional supply disruptions. Spire Missouri West utilizes both Mid-Continent and Rocky Mountain gas sources to provide a level of supply diversity that accesses low cost supplies.
In fiscal year 2017, Spire Missouri purchased natural gas from 40 different suppliers to meet its total service area current gas sales and storage injection requirements. Spire Missouri entered into firm agreements with suppliers including major producers and marketers providing flexibility to meet the temperature sensitive needs of its customers. Natural gas purchased by Spire Missouri for delivery to its service area through the Enable Mississippi River Transmission LLC (MRT) system totaled 45.9 billion cubic feet (Bcf). Spire Missouri also holds firm transportation on several other interstate pipeline systems that provide access to gas supplies upstream of MRT. In addition to natural gas deliveries from MRT, 49.7 Bcf was purchased on the Southern Star Central Gas Pipeline, Inc. (Southern Star), 3.9 Bcf was purchased on the Tallgrass Interstate Gas Transmission, LLC (TGIT) system, 8.4 Bcf was purchased on the Panhandle Eastern Pipe Line Company, LP (PEPL) system, and 1.4 Bcf was purchased on the Rockies Express Pipeline, LLC (REX) system. Some of Spire Missouri’s commercial and industrial customers purchased their own gas with Spire Missouri transporting 44.8 Bcf to them through its distribution system.
The fiscal year 2017 peak day send out of natural gas to Spire Missouri customers, including transportation customers, occurred on December 18, 2016. The average temperature was 8 degrees Fahrenheit in St. Louis and -3 degrees Fahrenheit in Kansas City. On that day, the Missouri Utilities’ customers consumed 1.65 Bcf of natural gas. For eastern Missouri, this peak day demand was met with natural gas transported to St. Louis through the MRT, MoGas Pipeline LLC, and Southern Star transportation systems, and from Spire Missouri’s on-system storage and peak shaving resources. For western Missouri, this peak day demand was met with natural gas transported to Kansas City through the Southern Star, PEPL, TGIT, and REX transportation systems.
Spire Alabama’s distribution system is connected to two major interstate natural gas pipeline systems, Southern Natural Gas Company, L.L.C. (Southern Natural Gas) and Transcontinental Gas Pipe Line Company, LLC (Transco). It is also connected to two intrastate natural gas pipeline systems.
Spire Alabama purchases natural gas from various natural gas producers and marketers. Certain volumes are purchased under firm contractual commitments with other volumes purchased on a spot market basis. The purchased volumes are delivered to Spire Alabama’s system using a variety of firm transportation, interruptible transportation and storage capacity arrangements designed to meet the system’s varying levels of demand.

5


In fiscal 2017, Spire Alabama purchased natural gas from 14 different suppliers to meet current gas sales, storage injection, and liquefied natural gas (LNG) liquefaction requirements, of which seven are under long-term supply agreements. Approximately 58.0 Bcf was transported by Southern Natural Gas, 4.4 Bcf by Transco, and 5.6 Bcf through intrastate pipelines to the Spire Alabama delivery points for its residential, commercial, and industrial customers.
The fiscal 2017 peak day send out for Spire Alabama was 0.6 Bcf on January 7, 2017, when the average temperature was 31 degrees Fahrenheit in Birmingham, of which 100% was met with supplies transported through Southern Natural Gas, Transco, intrastate facilities, and one of the four LNG peak shaving facilities.
Spire Gulf’s distribution system is directly connected to interstate pipelines, natural gas processing plants and gas storage facilities. Spire Gulf buys from a variety of producers and marketers, with BP Energy Company being the primary supplier.
Natural Gas Storage
Spire Missouri has a contractual right to store 21.6 Bcf of gas in MRT’s storage facility located in Unionville, Louisiana, 16.3 Bcf of gas storage in Southern Star’s system storage facilities located in Kansas and Oklahoma, and 1.4 Bcf of firm storage on PEPL’s system storage. MRT’s tariffs allow injections into storage from May 16 through November 15 and require the withdrawal from storage of all but 2.1 Bcf from November 16 through May 15. Southern Star tariffs allow both injections and withdrawals into storage year round with ratchets that restrict the associated flows dependent upon the underlying inventory level per the contracts.
In addition, Spire Missouri East supplements pipeline gas with natural gas withdrawn from its own underground storage field located in St. Louis and St. Charles Counties in Missouri. The field is designed to provide approximately 0.3 Bcf of natural gas withdrawals on a peak day and maximum annual net withdrawals of approximately 4.0 Bcf of natural gas based on the inventory level that Spire Missouri plans to maintain.
Spire Alabama has a contractual right to store 12.5 Bcf of gas with Southern Natural Gas, 0.2 Bcf of gas with Transco and 0.2 Bcf of gas with Tennessee Gas Pipeline. In addition, Spire Alabama has 1.8 Bcf of LNG storage that can provide the system with up to an additional 0.2 Bcf of natural gas daily to meet peak day demand.
Spire Gulf obtains adequate storage capacity through South Pipeline Company, LP, and Sempra’s Bay Gas Storage.
Regulatory Matters
For details on regulatory matters, see Note 15, Regulatory Matters, of the Notes to Financial Statements in Item 8.
Other Pertinent Matters
Spire Missouri is the only distributor of natural gas within its franchised service areas, while Spire Alabama is the main distributor of natural gas in its service areas. The principal competition for the Utilities comes from the local electric companies. Other competitors in the service areas include suppliers of fuel oil, coal, and propane, as well as natural gas pipelines that can directly connect to large volume customers. For the Missouri Utilities, competition also comes from district steam systems in the downtown areas of both St. Louis and Kansas City, and for Spire Alabama, from municipally or publicly owned gas distributors located adjacent to its service territory. Coal is price competitive as a fuel source for very large boiler plant loads, but environmental requirements for coal have shifted the economic advantage to natural gas. Oil and propane can be used to fuel boiler loads and certain direct-fired process applications, but these fuels require on-site storage, thus limiting their competitiveness. In certain cases, district steam has been competitive with gas for downtown St. Louis and Kansas City area heating users.
Residential, commercial, and industrial markets represented approximately 91% and 82% of fiscal 2017 operating revenues for Spire Missouri and Spire Alabama, respectively. Given the current level of natural gas supply and market conditions, the Utilities believe that the relative comparison of natural gas equipment and operating costs with those of competitive fuels will not change significantly in the foreseeable future, and that these markets will continue to be supplied by natural gas. In new multi-family and commercial rental markets, the Utilities’ competitive exposures are presently limited to space and water heating applications.
Spire Missouri offers gas transportation service to its large-user industrial and commercial customers. The tariff approved for that type of service produces a margin similar to that which the Missouri Utilities would have received under their regular sales rates. Spire Alabama’s transportation tariff allows it to transport gas for large commercial and industrial customers rather than buying and reselling it to them and is based on Spire Alabama’s sales profit margin so that operating margins are unaffected. During fiscal 2017, substantially all of Spire Alabama’s large commercial and industrial customer deliveries involved the transportation of customer-owned gas.

6


The Utilities are subject to various environmental laws and regulations that, to date, have not materially affected the Utilities’ or the Company’s financial position and results of operations. For a detailed discussion of environmental matters, see Note 16, Commitment and Contingencies, of the Notes to Financial Statements in Item 8.
Union Agreements
The Company believes labor relations with its employees are good. Should that condition change, the Company could experience labor disputes, work stoppages or other disruptions in production that could negatively impact the Company’s results of operations and cash flows.
The following table presents the Company’s various labor agreements as of September 30, 2017:
Union
Local
Employees Covered
Contract Start Date
Contract End Date
Spire Missouri
 
 
 
 
United Steel, Paper and Forestry, Rubber Manufacturing, Allied-Industrial and Service Workers International Union (USW)
884
64
August 1, 2015
July 31, 2018
USW
11-6
932
August 1, 2015
July 31, 2018
USW
11-194
85
August 1, 2015
July 31, 2018
USW
12561
130
August 16, 2016
July 31, 2019
USW
14228
41
August 16, 2016
July 31, 2019
USW
11-267
27
August 16, 2016
July 31, 2019
Gas Workers Metal Trades locals of the United Association of Journeyman and Apprentices of the Plumbing and Pipefitting Industry of the United States and Canada
781-Kansas City
189
August 16, 2016
July 31, 2019
Gas Workers Metal Trades locals of the United Association of Journeyman and Apprentices of the Plumbing and Pipefitting Industry of the United States and Canada
781-Monett
56
August 16, 2016
July 31, 2019
Total Spire Missouri
 
1,524
 
 
 
 
 
 
 
Spire Alabama
 
 
 
USW
12030
200
May 1, 2017
April 30, 2020
USW
12030-A
53
May 1, 2017
April 30, 2020
United Association of Gas Fitters
548
122
July 1, 2016
April 30, 2019
Total Spire Alabama
 
375
 
 
 
 
 
 
 
Spire Gulf
 
 
 
 
USW
3-541
65
December 1, 2013
November 30, 2017
 
 
 
 
 
Total Spire
 
1,964
 
 


7


Operating Revenues and Customer Information
The following information about revenues and therms sold and transported (before intersegment eliminations), and annual average numbers of customers, includes data of acquired utilities for only the period of ownership (beginning September 12, 2016 for the utilities of Spire EnergySouth).
Gas Utility Operating Revenues
 
 
 
 
 
(In millions)
2017
 
2016
 
2015
Residential
$
1,084.5

 
$
979.0

 
$
1,263.1

Commercial & Industrial
389.2

 
331.3

 
462.3

Interruptible
5.1

 
2.0

 
2.3

Transportation
99.8

 
93.1

 
92.2

Off-System and Other Incentive
67.9

 
50.7

 
76.2

Provisions for Refunds and Other
21.4

 
3.3

 
(0.3
)
Total Gas Utility Operating Revenues
$
1,667.9

 
$
1,459.4

 
$
1,895.8

 
 
 
 
 
 
Gas Utility Therms Sold and Transported
 
 

 
 
(In millions)
2017
 
2016
 
2015
Residential
866.2

 
867.5

 
1,065.1

Commercial & Industrial
446.7

 
420.4

 
491.6

Interruptible
12.6

 
4.6

 
3.6

Transportation
1,467.5

 
1,089.8

 
989.0

System Therms Sold and Transported
2,793.0

 
2,382.3

 
2,549.3

Off-System
175.6

 
183.3

 
193.5

Total Gas Utility Therms Sold and Transported
2,968.6

 
2,565.6

 
2,742.8

 
 
 
 
 
 
 
Gas Utility Customers
2017
 
2016
 
2015
Residential
1,550,777

 
1,540,366

 
1,434,584

Commercial & Industrial
133,864

 
137,450

 
132,388

Interruptible
64

 
42

 
18

Transportation
827

 
824

 
796

Total Gas Utility Customers
1,685,532

 
1,678,682

 
1,567,786

Total annual average number of customers for Spire Missouri and Spire Alabama for fiscal 2017 was 1,161,051 and 420,816, respectively.
Spire Missouri has franchises in nearly all the communities where it provides service with terms varying from five years to an indefinite duration. Generally, a franchise is essentially a municipal permit to install pipes and construct other facilities in the community. All of the franchises are free from unduly burdensome restrictions and are adequate for the conduct of Spire Missouri’s current public utility businesses in the state of Missouri. In recent years, although certain franchise agreements have expired, Spire Missouri has continued to provide service in those communities without formal franchises.
Spire Alabama has franchises in nearly all the communities where it provides service with terms varying from five years to an indefinite duration. Generally, a franchise is essentially a municipal permit to install pipes and construct other facilities in the community. All of the franchises are free from unduly burdensome restrictions and are adequate for the conduct of Spire Alabama’s public utility business in the state of Alabama.

8


GAS MARKETING
Spire Marketing is engaged in the marketing of natural gas and providing energy services to both on-system utility transportation customers and customers outside of the Utilities’ traditional service areas. During fiscal 2017, Gas Marketing utilized over 20 interstate and intrastate pipelines and over 100 suppliers to market natural gas to more than 200 retail customers and 100 wholesale customers, primarily in the central United States (US). Through its retail operations, Spire Marketing offers natural gas marketing services to large commercial and industrial customers, while its wholesale business consists of producers, pipelines, power generators, municipalities, storage operators, and utility companies. Wholesale activities currently represent a majority of the total Gas Marketing business.
In the course of its business, Spire Marketing enters into agreements to purchase natural gas at a future date in order to lock up supply to cover future sales commitments to its customers. To secure access to the markets it serves, Spire Marketing contracts for transportation capacity on various pipelines from both pipeline companies and through the secondary capacity market from third parties. Throughout fiscal 2017, Spire Marketing held approximately 0.68 Bcf per day of firm transportation capacity. In addition, to ensure reliability of service and to provide operational flexibility, Spire Marketing enters into firm storage contracts and interruptible park and loan transactions with various companies, where it is able to buy and retain gas to be delivered at a future date, at which time it sells the natural gas to third parties. As of September 30, 2017, Gas Marketing has contracted for approximately 7.2 Bcf of such storage and park and loan capacity for the 2017-2018 winter season.
The Gas Marketing strategy is to leverage its market expertise and risk management skills to manage and optimize the value of its portfolio of commodity, transportation, park and loan, and storage contracts while controlling costs and acting on new marketplace opportunities. Overall, Gas Marketing saw significant growth in volumes in fiscal 2017 primarily as a result of increased business with producers and power generators and adding a sizable amount of day-to-day trading volumes by taking advantage of the flexibility that its overall portfolio of assets provided.
OTHER
The principal drivers of the Other results in recent years has been interest expense on corporate debt and other expenses attributable to acquisition transactions and integration. Additionally, Other includes Spire STL Pipeline LLC, Spire NGL LLC, and subsidiaries engaged in compression of natural gas and risk management, among other activities.
Spire STL Pipeline LLC is a wholly owned subsidiary of Spire that is planning construction and operation of a 65-mile pipeline to connect to the Rockies Express Pipeline in Scott County, Illinois and end in St. Louis County, Missouri. The proposed pipeline will operate under Federal Energy Regulatory Commission (FERC) jurisdiction and will be capable of delivering up to 400,000 dekatherms per day of natural gas into eastern Missouri. Spire Missouri will be the foundational shipper with a contractual commitment of 350,000 dekatherms per day.
Spire NGL LLC (formerly Laclede Pipeline Company) is a wholly owned subsidiary of Spire that operates a propane pipeline under FERC jurisdiction. This pipeline allows Spire Missouri to receive propane that may be used to supplement its natural gas supply and meet peak demands on its distribution system. Spire NGL LLC also provides propane transportation services to third parties.


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Item 1A. Risk Factors
Spire’s and the Utilities’ business and financial results are subject to a number of risks and uncertainties, including those set forth below. The risks described below are those the Company and the Utilities consider to be material. When considering any investment in Spire or the Utilities’ securities, investors should carefully consider the following information, as well as information contained in the caption “Forward-Looking Statements,” Item 7A, and other documents Spire, Spire Missouri, and Spire Alabama file with the SEC. This list is not exhaustive, and Spire’s and the Utilities’ respective management places no priority or likelihood based on the risk descriptions, order of presentation or grouping by subsidiary. All references to dollar amounts are in millions.
RISKS AND UNCERTAINTIES THAT RELATE TO THE BUSINESS AND FINANCIAL RESULTS OF SPIRE AND ITS SUBSIDIARIES
As a holding company, Spire depends on its operating subsidiaries to meet its financial obligations.
Spire is a holding company with no significant assets other than the stock of its operating subsidiaries and cash investments. Spire, and Spire Missouri prior to the holding company’s formation in 2000, have paid dividends continuously since 1946. Spire’s ability to pay dividends to its shareholders is dependent on the ability of its subsidiaries to generate sufficient net income and cash flows to pay upstream dividends and make loans or loan repayments. In addition, because it is a holding company and the substantial portion of its assets are represented by its holdings in the Utilities, the risks faced by the Utilities as described below under RISKS THAT RELATE TO THE GAS UTILITY SEGMENT may also adversely affect Spire’s cash flows, liquidity, financial condition and results of operations.
A downgrade in Spire’s and/or its subsidiaries’ credit ratings may negatively affect its ability to access capital.
Currently, Spire and its utility subsidiaries have investment grade credit ratings, which are subject to review and change by the rating agencies. Standard & Poor’s has rated Spire’s debt at BBB+, one notch lower than its issuer rating of A-, and Moody’s (which does not use issuer ratings) rated Spire’s debt at Baa2. There is no assurance that such credit ratings for any of the Spire companies will remain in effect for any given period of time or that such ratings will not be lowered, suspended or withdrawn entirely by the rating agencies, if, in each rating agency’s judgment, circumstances so warrant. Spire has a working capital line of credit to meet its short-term liquidity needs. Spire’s line of credit may be used to meet the liquidity needs of any of its subsidiaries, subject to sublimits. If the rating agencies lowered the credit rating at any of these entities, particularly below investment grade, it might significantly limit such entity’s ability to secure new or additional credit facilities and would increase its costs of borrowing. Spire’s or the Utilities’ ability to borrow under current or new credit facilities and costs of that borrowing have a direct impact on their ability to execute their operating strategies.
Unexpected losses may adversely affect Spire’s or its subsidiaries’ financial condition and results of operations.
As with most businesses, there are operations and business risks inherent in the activities of Spire’s subsidiaries. If, in the normal course of business, Spire or any of its subsidiaries becomes a party to litigation, such litigation could result in substantial monetary judgments, fines, or penalties or be resolved on unfavorable terms. In accordance with customary practice, Spire and its subsidiaries maintain insurance against a significant portion of, but not all, risks and losses. In addition, in the normal course of its operations, Spire and its subsidiaries may be exposed to loss from other sources, such as bad debt expense or the failure of a counterparty to meet its financial obligations. Spire and its operating companies employ many strategies to gain assurance that such risks are appropriately managed, mitigated, or insured, as appropriate. To the extent a loss is not fully covered by insurance or other risk mitigation strategies, that loss could adversely affect the Company’s and/or its subsidiaries’ financial condition and results of operations.

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Increased inter-dependence on technology may hinder Spire’s and its subsidiaries’ business operations and adversely affect their financial condition and results of operations if such technologies fail.
Over the last several years, Spire and its subsidiaries have implemented or acquired a variety of technological tools including both Company-owned information technology and technological services provided by outside parties. These tools and systems support critical functions including Spire and its subsidiaries’ integrated planning, scheduling and dispatching of field resources, its automated meter reading system, customer care and billing, procurement and accounts payable, operational plant logistics, management reporting, and external financial reporting. The failure of these or other similarly important technologies, or the Company’s or its subsidiaries’ inability to have these technologies supported, updated, expanded, or integrated into other technologies, could hinder their business operations and adversely impact their financial condition and results of operations.
Although the Company and its subsidiaries have, when possible, developed alternative sources of technology and built redundancy into their computer networks and tools, there can be no assurance that these efforts to date would protect against all potential issues related to the loss of any such technologies or the Utilities’ use of such technologies.
A cyber-attack may disrupt Spire’s operations or lead to a loss or misuse of confidential and proprietary information or potential liability.
The Company and its subsidiaries are subject to cyber-security risks primarily related to breaches of security pertaining to sensitive customer, employee, and vendor information maintained by the Company, its subsidiaries, or its third-party vendors in the normal course of business, as well as breaches in the technology that manages natural gas distribution operations and other business processes. A loss of confidential or proprietary data or security breaches of other technology business tools could adversely affect the Company’s and its subsidiaries’ reputation, diminish customer confidence, disrupt operations, and subject the Company and its subsidiaries to possible financial liability, any of which could have a material effect on the Company’s and its subsidiaries’ financial condition and results of operations. The Company and its subsidiaries closely monitor both preventive and detective measures to manage these risks and maintain cyber risk insurance to mitigate a significant portion, but not all, of these risks and losses. To the extent that the occurrence of any of these cyber events is not fully covered by insurance, it could adversely affect the Company’s and its subsidiaries’ financial condition and results of operations.
Resources expended to pursue business acquisitions, investments or other business arrangements may adversely affect Spire’s financial position and results of operations and return on investments made may not meet expectations.
From time to time, Spire may seek to grow through strategic acquisitions, investments or other business arrangements. Attractive acquisition and investment opportunities may be difficult to complete on economically acceptable terms. It is possible for Spire to expend considerable resources pursuing acquisitions and investments but, for a variety of reasons, decide not to move forward. Similarly, investment opportunities may be hindered or halted by regulatory or legal actions. To the extent that acquisitions or investments are made, such transactions involve a number of risks, including but not limited to, the assumption of material liabilities, the diversion of management’s attention from daily operations, difficulties in assimilation and retention of employees, securing adequate capital to support the transaction, and regulatory approval. Uncertainties exist in assessing the value, risks, profitability, and liabilities associated with certain businesses or assets and there is a possibility that anticipated operating and financial efficiencies expected to result from an acquisition or investment do not develop. The failure to complete an acquisition successfully or to integrate future acquisitions or investments that it may undertake could have an adverse effect on the Company’s financial condition and results of operations and the market’s perception of the Company’s execution of its strategy. To the extent Spire engages in any of the above activities together with or through one or more of its subsidiaries, including the Utilities, such subsidiaries may face the same risks.

11


Failure to obtain required approvals and land rights or significant issues during the construction of the STL Pipeline could adversely impact Spire’s investment in the project.
The STL Pipeline is under jurisdiction of the FERC. Accordingly, the development, construction and operation of the project is subject to extensive regulatory oversight and requires various regulatory approvals, including federal and state environmental permits and licenses. Such projects are often subject to legal and political uncertainties which can be difficult to predict or control. These projects also require the acquisition of land rights, mostly from private landowners. Although FERC approval confers federal eminent domain authority, there is some risk and uncertainty associated with the cost of acquiring land rights, including potential condemnation costs. Spire may be unable to obtain required regulatory approvals or acquire necessary land rights, or may experience higher costs or delays in doing so. 
Construction of such assets are subject to various risks and uncertainties, including supply chain and labor disruptions, weather conditions during construction, potential interconnection issues with other pipelines, equipment failures and construction quality issues. Any of these adverse events regarding regulatory approvals, land rights or construction risks could result in an impairment of Spire’s investment in the project, and such impairment could have a materially adverse effect on Spire’s financial condition and results of operations.
Workforce risks may affect the Company’s financial results.
The Company and its subsidiaries are subject to various workforce risks, including, but not limited to, the risk that it will be unable to attract and retain qualified personnel; that it will be unable to effectively transfer the knowledge and expertise of an aging workforce to new personnel as those workers retire; and that it will be unable to reach collective bargaining arrangements with the unions that represent certain of its workers, which could result in work stoppages.
The Company and its subsidiaries have substantial indebtedness which could adversely affect their financial condition.
Spire’s total consolidated indebtedness as of September 30, 2017 was $2,572.3 (comprising $477.3 of short-term borrowings and $2,095.0 of long-term debt, including current portion). Spire Missouri’s total indebtedness as of September 30, 2017 was $1,176.9 (comprising $203.0 of short-term borrowings, including borrowings from affiliates, and $973.9 of long-term debt, including current portion). Spire Alabama’s total indebtedness as of September 30, 2017 was $417.7 (comprising $169.9 of short-term borrowings, including borrowings from affiliates, and $247.8 of long-term debt).
The indebtedness of the Company and its subsidiaries could have important consequences. For example, it could:
make it difficult to pay or refinance their debts as they become due during adverse economic and industry conditions;
limit flexibility to pursue strategic opportunities or react to changes in its business and the industry in which they operate and, consequently, place them at a competitive disadvantage to competitors with less debt;
require a significant portion of cash flows from operations of their respective subsidiaries to be used for debt service payments, thereby reducing the availability of their cash flows to fund working capital, capital expenditures, dividend payments and other general corporate activities;
result in a downgrade in the credit rating of Spire’s or the Utilities’ indebtedness, which could limit the ability to borrow additional funds or increase the applicable interest rates;
result in higher interest expense in the event of an increase in market interest rates for both short-term commercial paper or bank loans;
reduce the amount of credit available to support hedging activities; and
require that additional terms, conditions or covenants be placed on Spire or the Utilities.
Based upon current levels of operations, Spire and its subsidiaries expect to be able to generate sufficient cash through earnings on a consolidated basis or through refinancing to make all the principal and interest payments when such payments are due under their existing credit agreements, indentures and other instruments governing outstanding indebtedness; but there can be no assurance that Spire or its subsidiaries will be able to repay or refinance such borrowings and obligations in future periods.

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In addition, in order to maintain investment-grade credit ratings, Spire and its subsidiaries may consider it appropriate to reduce the amount of indebtedness outstanding following acquisitions. This may be accomplished in several ways, including, in the case of Spire, issuing additional shares of common stock or securities convertible into shares of common stock, or in the case of Spire or its subsidiaries, reducing discretionary uses of cash or a combination of these and other measures. Issuances of additional shares of common stock or securities convertible into shares of common stock would have the effect of diluting the ownership percentage that shareholders hold in the Company, increasing the Company’s dividend payment obligations and perhaps reducing the reported earnings per share.
Recent acquisitions may not achieve their intended results, including anticipated efficiencies and cost savings.
Although the Company and its subsidiaries expect that the recent acquisitions will result in various benefits, including a significant cost savings and other financial and operational benefits, there can be no assurance regarding when or the extent to which the Company and its subsidiaries will be able to realize or retain these benefits. Achieving and retaining the anticipated benefits, including cost savings, is subject to a number of uncertainties, including whether the assets acquired can be operated in the manner the Company and its subsidiaries intended. Events outside of the control of the Company and its subsidiaries, including but not limited to regulatory changes or developments, could also adversely affect their ability to realize the anticipated benefits from the acquisitions.
Thus, the integration of acquired businesses may be unpredictable, subject to delays or changed circumstances, and the Company and its subsidiaries can give no assurance that the acquisitions will perform in accordance with their expectations or that their expectations with respect to integration or cost savings as a result of the acquisitions will materialize. In addition, the anticipated costs to the Company and its subsidiaries to achieve the integration of the acquired businesses may differ significantly from current estimates. The integration may place an additional burden on management and internal resources, and the diversion of management’s attention during the integration process could have an adverse effect on the Company’s and its subsidiaries’ business, financial condition and expected operating results.
In connection with acquisitions, Spire Missouri and Spire recorded goodwill and long-lived assets that could become impaired and adversely affect its financial condition and results of operations.
Spire and Spire Missouri assess goodwill for impairment annually or more frequently if events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company and Spire Missouri assess their long-lived assets for impairment whenever events or circumstances indicate that an asset’s carrying amount may not be recoverable. To the extent the value of goodwill or long-lived assets becomes impaired, the Company and Spire Missouri may be required to incur impairment charges that could have a material impact on their results of operations.
Since interest rates are a key component, among other assumptions, in the models used to estimate the fair values of the Company’s reporting units, as interest rates rise, the calculated fair values decrease and future impairments may occur. Due to the subjectivity of the assumptions and estimates underlying the impairment analysis, Spire and Spire Missouri cannot provide assurance that future analyses will not result in impairment. These assumptions and estimates include projected cash flows, current and future rates for contracted capacity, growth rates, weighted average cost of capital and market multiples. For additional information, see Item 7, Critical Accounting Estimates.
Changes in accounting standards may adversely impact the Utilities’ financial condition and results of operations.
Spire and its subsidiaries are subject to changes in US generally accepted accounting principles (GAAP), SEC regulations and other interpretations of financial reporting requirements for public utilities. Neither the Company nor any of its subsidiaries have any control over the impact these changes may have on their financial condition or results of operations nor the timing of such changes. The potential issues associated with rate-regulated accounting, along with other potential changes to GAAP that the US Financial Accounting Standards Board (FASB) continues to consider may be significant.

13


Climate change and regulatory and legislative developments in the energy industry related to climate change may in the future adversely affect operations and financial results. 
Climate change, and the extent regulatory or legislative changes occur to address the potential for climate change, could adversely affect operations and financial results of the Company. Management believes it is likely that any such resulting impacts would occur very gradually over a long period of time and thus would be difficult to quantify with any degree of specificity. To the extent climate change results in warmer temperatures, financial results could be adversely affected through lower gas volumes and revenues and lack of marketing opportunities. Another possible impact of climate change may be more frequent and more severe weather events, such as hurricanes and tornadoes, which could increase costs to repair damaged facilities and restore service to customers. If the Company were unable to deliver natural gas to customers, financial results would be impacted by lost revenues, and the Utilities generally would have to seek approval from regulators to recover restoration costs. To the extent the Utilities would be unable to recover those costs, or if higher rates resulting from recovery of such costs would result in reduced demand for the Company’s services, the Company’s and the Utilities’ future business, financial condition or financial results could be adversely impacted. In addition, there have been a number of federal and state legislative and regulatory initiatives proposed in recent years in an attempt to control or limit the effects of global warming and overall climate change, including greenhouse gas emissions, such as methane and carbon dioxide. The adoption of this type of legislation by Congress or similar legislation by states or the adoption of related regulations by federal or state governments mandating a substantial reduction in greenhouse gas emissions in the future could have far-reaching and significant impacts on the energy industry. Such new legislation or regulations could result in increased compliance costs or additional operating restrictions, affect the demand for natural gas or impact the prices charged to customers. At this time, we cannot predict the potential impact of such laws or regulations that may be adopted on the Company’s and the Utilities’ future business, financial condition or financial results.
Changes to income tax policy, certain tax elections, tax regulations and future taxable income could adversely impact the Company’s financial condition and results of operations.
The Company has significantly reduced its federal and state income tax obligations over the past few years through tax planning strategies and the extension of bonus depreciation deductions for certain expenditures for property. As a result, the Company has generated large annual taxable losses that have resulted in significant federal and state net operating losses. The Company plans to utilize these net operating losses in the future to reduce income tax obligations. The value of these net operating losses could be reduced if the Company cannot generate enough taxable income in the future to utilize all of the net operating losses before they expire due to lower than expected financial performance or if the Internal Revenue Service does not agree with the filing positions of the Company.
Changes to income tax policy, laws and regulations, including but not limited to changes in tax rates, the deductibility of certain expenses including interest and state and local income taxes and/or changes in the deductibility of certain expenditures for property, could adversely impact the Company. If enacted, those impacts could include reducing the value of its net operating losses and could result in material charges to earnings. Further, the Company’s financial condition and results of operations may be adversely impacted.
Spire’s pension and other postretirement benefits plans are subject to investment and interest rate risk that could negatively impact its financial condition.
The Company and its subsidiaries have pension and other postretirement benefits plans that provide benefits to many of their employees and retirees. Costs of providing benefits and related funding requirements of these plans are subject to changes in the market value of the assets that fund the plans. The funded status of the plans and the related costs reflected in our financial statements are affected by various factors, which are subject to an inherent degree of uncertainty, including economic conditions, financial market performance, interest rates, life expectancies and demographics. Recessions and volatility in the domestic and international financial markets have negatively affected the asset values of Spire’s pension plans at various times in the past. Poor investment returns or lower interest rates may necessitate accelerated funding of the plans to meet minimum federal government requirements, which could have an adverse impact on the Company’s and its subsidiaries’ financial condition and results of operations.

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RISKS THAT RELATE TO THE GAS UTILITY SEGMENT
Regulation of the Utilities’ businesses may impact rates they are able to charge, costs, and profitability.
The Utilities are subject to regulation by federal, state and local authorities. At the state level, the Utilities are regulated in Missouri by the Missouri Public Service Commission (MoPSC), in Alabama by the Alabama Public Service Commission (APSC), and in Mississippi by the Mississippi Public Service Commission (MSPSC). These state public service commissions regulate many aspects of the Utilities’ distribution operations, including construction and maintenance of facilities, operations, safety, the rates the Utilities may charge customers, the terms of service to their customers, transactions with their affiliates, the rate of return they are allowed to realize, and the accounting treatment for certain aspects of their operations. For further discussion of these accounting matters, see Item 7, Critical Accounting Estimates pertaining to the Utilities’ operations.
The Utilities’ ability to obtain and timely implement rate increases and rate supplements to maintain the current rate of return is subject to regulatory review and approval. There can be no assurance that they will be able to obtain rate increases or rate supplements or continue earning the current authorized rates of return. Spire Alabama’s and Spire Gulf’s rate setting process, Rate Stabilization and Equalization (RSE), is subject to regulation by the APSC and is implemented pursuant to an APSC order that will continue beyond September 30, 2018 and September 30, 2021, respectively, unless the APSC enters an order to the contrary in a manner consistent with the law. Spire Mississippi is subject to regulation by the MSPSC and utilizes the Rate Stabilization Adjustment (RSA) Rider. For further details, see Regulatory and Other Matters in Item 7.
The Utilities could incur additional costs if required to adjust to new laws or regulations, revisions to existing laws or regulations or changes in interpretations of existing laws or regulations such as the Dodd-Frank Act. In addition, as the regulatory environment for the natural gas industry increases in complexity, the risk of inadvertent noncompliance could also increase. If the Utilities fail to comply with applicable laws and regulations, whether existing or new, they could be subject to fines, penalties or other enforcement action by the authorities that regulate the Utilities’ operations.
The Utilities are involved in legal or administrative proceedings before various courts and governmental bodies that could adversely affect their results of operations, cash flows and financial condition.
The Utilities are involved in legal or administrative proceedings before various courts and governmental bodies with respect to general claims, rates, environmental issues, gas cost prudence reviews and other matters. For further details, see Contingencies in Note 15 to the financial statements in Item 8. Adverse decisions regarding these matters, to the extent they require the Utilities to make payments in excess of amounts provided for in their financial statements, or to the extent they are not covered by insurance, could adversely affect the Utilities’ results of operations, cash flows and financial condition.
The Utilities’ liquidity may be adversely affected by delays in recovery of their costs, due to regulation.
In the normal course of business, there is a lag between when the Utilities incur increases in certain of their costs and the time in which those costs are considered for recovery in the ratemaking process. Cash requirements for increased operating costs, increased funding levels of defined benefit pension and postretirement costs, capital expenditures, and other increases in the costs of doing business can require outlays of cash prior to the authorization of increases in rates charged to customers, as approved by the MoPSC, APSC, and MSPSC. Accordingly, the Utilities’ liquidity can be adversely impacted to the extent higher costs are not timely recovered from their customers.
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.
In order to meet their customers’ annual and seasonal natural gas demands, the Utilities must obtain sufficient supplies, interstate pipeline capacity, and storage capacity. If they are unable to obtain these, either from their suppliers’ inability to deliver the contracted commodity or the inability to secure replacement quantities, the Utilities’ financial condition and results of operations may be adversely impacted. If a substantial disruption in interstate natural gas pipelines’ transmission and storage capacity were to occur during periods of heavy demand, the Utilities’ financial results could be adversely impacted.

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The Utilities’ liquidity and, in certain circumstances, the Utilities’ results of operations may be adversely affected by the cost of purchasing natural gas during periods in which natural gas prices are rising significantly.
The tariff rate schedules of the Missouri Utilities, Spire Gulf and Spire Mississippi contain Purchased Gas Adjustment (PGA) clauses and Spire Alabama’s tariff rate schedule contains a Gas Supply Adjustment (GSA) rider that permit the Utilities to file for rate adjustments to recover the cost of purchased gas. Changes in the cost of purchased gas are flowed through to customers and may affect uncollectible amounts and cash flows and can therefore impact the amount of capital resources.
Currently, the Missouri Utilities are allowed to adjust the gas cost component of rates up to four times each year while Spire Alabama and Spire Gulf (collectively, the Alabama Utilities) and Spire Mississippi may adjust the gas cost component of their rates on a monthly basis. The Missouri Utilities must make a mandatory gas cost adjustment at the beginning of the winter, in November, and during the next twelve months may make up to three additional discretionary gas cost adjustments, so long as each of these adjustments is separated by at least two months.
The MoPSC typically approves the Missouri Utilities’ PGA changes on an interim basis, subject to refund and the outcome of a subsequent audit and prudence review. Due to such review process, there is a risk of a disallowance of full recovery of these costs. Any material disallowance of purchased gas costs would adversely affect revenues. The Alabama Utilities’ gas supply charges are submitted for APSC review on a monthly basis, regardless of whether there is a request for a change, so prudence review occurs on an ongoing basis. Spire Mississippi’s PGA is adjusted on a monthly basis for the most recent charges, and is filed at the MSPSC on a monthly basis.
Increases in the prices the Utilities charge for gas may also adversely affect revenues because they could lead customers to reduce usage and cause some customers to have trouble paying the resulting higher bills. These higher prices may increase bad debt expenses and ultimately reduce earnings. Rapid increases in the price of purchased gas may result in an increase in short-term debt.
To lower financial exposure to commodity price fluctuations, Spire Missouri enters into contracts to hedge the forward commodity price of its natural gas supplies. As part of this strategy, Spire Missouri may use fixed-price, forward, physical purchase contracts, swaps, futures, and option contracts. However, Spire Missouri does not hedge the entire exposure of energy assets or positions to market price volatility, and the coverage will vary over time. Any costs, gains, or losses experienced through hedging procedures, including carrying costs, generally flow through the PGA clause, thereby limiting the Missouri Utilities’ exposure to earnings volatility. However, variations in the timing of collections of such gas costs under the PGA clause and the effect of cash payments for margin deposits associated with the Missouri Utilities’ use of natural gas derivative instruments may cause short-term cash requirements to vary. These procedures remain subject to prudence review by the MoPSC.
Spire Alabama currently does not utilize risk mitigation strategies that incorporate commodity hedge instruments, but has the ability to do so through its GSA. Spire Gulf hedges gas supply for up to 30 months in advance, and Spire Mississippi utilizes hedging for the upcoming heating season.
The Utilities’ business activities are concentrated in three states.
The Utilities provide natural gas distribution services to customers in Alabama, Mississippi, and Missouri. Changes in the regional economies, politics, regulations and weather patterns of these states could negatively impact the Utilities’ growth opportunities and the usage patterns and financial condition of customers and could adversely affect the Utilities’ earnings, cash flow, and financial position.
The Utilities may be adversely affected by economic conditions.
Periods of slowed economic activity generally result in decreased energy consumption, particularly by industrial and large commercial companies, a loss of existing customers, fewer new customers especially in newly constructed buildings. As a consequence, national or regional recessions or other downturns in economic activity could adversely affect the Utilities’ revenues and cash flows or restrict their future growth. Economic conditions in the Utilities’ service territories may also adversely impact the Utilities’ ability to collect accounts receivable, resulting in an increase in bad debt expense.

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Environmental laws and regulations may require significant expenditures or increase operating costs.
The Utilities are subject to federal, state and local environmental laws and regulations affecting many aspects of their present and future operations. These laws and regulations require the Utilities to obtain and comply with a wide variety of environmental licenses, permits, inspections, and approvals. Failure to comply with these laws and regulations and failure to obtain any required permits and licenses may result in costs to the Utilities in the form of fines, penalties or business interruptions, which may be material. In addition, existing environmental laws and regulations could be revised or reinterpreted and/or new laws and regulations could be adopted or become applicable to the Utilities or their facilities, thereby impacting the Utilities’ cost of compliance. The discovery of presently unknown environmental conditions, including former manufactured gas plant sites, and claims against the Utilities under environmental laws and regulations may result in expenditures and liabilities, which could be material. To the extent environmental compliance costs are not fully covered by insurance or recovered in rates from customers, those costs may have an adverse effect on the Utilities’ financial condition and results of operations.
The Utilities are subject to pipeline safety and system integrity laws and regulations that may require significant expenditures or significant increases in operating costs.
Such laws and regulations affect various aspects of the Utilities’ present and future operations. These laws and regulations require the Utilities to maintain pipeline safety and system integrity by identifying and reducing pipeline risks. Compliance with these laws and regulations, or future changes in these laws and regulations, may result in increased capital, operating and other costs which may not be recoverable in a timely manner from customers in rates.
Failure to comply may result in fines, penalties, or injunctive measures that would not be recoverable from customers in rates and could result in a material effect on the Utilities’ financial condition and results of operations.
Transporting, distributing, and storing natural gas and propane involves numerous risks that may result in accidents and other operating risks and costs.
Gas distribution activities inherently involve a variety of hazards and operations risks, such as leaks, accidental explosions, damage caused by third parties, and mechanical problems, which could cause substantial financial losses. In addition, these risks could result in serious injury to employees and non-employees, loss of human life, significant damage to property, environmental pollution, impairment of operations, and substantial losses to the Utilities. The location of pipelines and storage facilities near populated areas, including residential areas, commercial business centers, and industrial sites, could increase the level of damages resulting from these risks. Similar risks also exist for Spire Missouri’s propane storage, transmission and minor distribution operations. These activities may subject the Utilities to litigation or administrative proceedings. Such litigation or proceedings could result in substantial monetary judgments, fines, or penalties against the Utilities or be resolved on unfavorable terms. The Utilities are subject to federal and state laws and regulations requiring the Utilities to maintain certain safety and system integrity measures by identifying and managing storage and pipeline risks. Compliance with these laws and regulations, or future changes in these laws and regulations, may result in increased capital, operating and other costs which may not be recoverable in a timely manner from customers in rates. In accordance with customary industry practices, the Utilities maintain insurance against a significant portion, but not all, of these risks and losses. To the extent that the occurrence of any of these events is not fully covered by insurance, it could adversely affect the Utilities’ financial condition and results of operations.
Because of the highly competitive nature of its business, the Utilities may not be able to retain existing customers or acquire new customers, which could have an adverse impact on their business, operating results and financial condition.
The Utilities face the risk that customers may bypass gas distribution services by gaining distribution directly from interstate pipelines or, in the case of Spire Alabama and Spire Gulf, also from municipally or publicly owned gas distributors located adjacent to its service territory. The Utilities cannot provide any assurance that increased competition or other changes in legislation, regulation or policies will not have a material adverse effect on their business, financial condition or results of operations.

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The Utilities compete with distributors offering a broad range of services and prices, from full-service distributors to those offering delivery only. The Utilities also compete for retail customers with suppliers of alternative energy products, principally propane and electricity. If they are unable to compete effectively, the Utilities may lose existing customers and/or fail to acquire new customers, which could have a material adverse effect on their business, operating results and financial condition.
Changes in the wholesale costs of purchased natural gas supplies may adversely impact the Utilities’ competitive position compared with alternative energy sources.
Changes in wholesale natural gas prices compared with prices for electricity, fuel oil, coal, propane, or other energy sources may affect the Utilities’ retention of natural gas customers and may adversely impact their financial condition and results of operations.
Significantly warmer-than-normal weather conditions, the effects of climate change, legislative and regulatory initiatives in response to climate change or in support of increased energy efficiency, and other factors that influence customer usage may affect the Utilities’ sale of heating energy and adversely impact their financial position and results of operations.
The Utilities’ earnings are primarily generated by the sale of heating energy. The Missouri Utilities have weather mitigation rate designs and the Alabama Utilities have Temperature Adjustment Riders (TARs), each of which is approved by the respective state regulatory body, which provide better assurance of the recovery of fixed costs and margins during winter months despite variations in sales volumes due to the impacts of weather and other factors that affect customer usage. However, significantly warmer-than-normal weather conditions in the Utilities’ service areas and other factors, such as climate change, alternative energy sources and increased efficiency of gas furnaces and other appliances, may result in reduced profitability and decreased cash flows attributable to lower gas sales. Furthermore, continuation of the weather mitigation rate design at Spire Missouri East, the rate design whereby distribution costs are recovered predominantly through fixed monthly charges at Spire Missouri West, or the RSE at Spire Alabama and Spire Gulf, are subject to regulatory discretion.
In addition, the promulgation of regulations by the U. S. Environmental Protection Agency (EPA), particularly those regulating the emissions of greenhouse gases, and by the U. S. Department of Energy supporting higher efficiency for residential gas furnaces and other gas appliances or the potential enactment of congressional legislation addressing global warming and climate change may decrease customer usage, encourage fuel switching from gas to other energy forms, and may result in future additional compliance costs that could impact the Utilities’ financial conditions and results of operations.
Regional supply/demand fluctuations and changes in national infrastructure, as well as regulatory discretion, may adversely affect the Missouri Utilities’ ability to profit from off-system sales and capacity release.
The Missouri Utilities’ income from off-system sales and capacity release is subject to fluctuations in market conditions and changing supply and demand conditions in areas the Missouri Utilities hold pipeline capacity rights. Specific factors impacting the Missouri Utilities’ income from off-system sales and capacity release include the availability of attractively-priced natural gas supply, availability of pipeline capacity, and market demand. Income from off-system sales and capacity release is shared with customers. The Missouri Utilities are allowed to retain 15% to 25% of the first $6.0 in annual income earned (depending on the level of income earned) and 30% of income exceeding $6.0 annually. In accordance with an agreement approved by the MoPSC, Spire Missouri East deferred, until fiscal 2017, its ability to retain 15% of the first $2.0. Spire Missouri West is allowed to retain 15% to 25% of the first $3.6 in annual income earned (depending on the level of income earned) and 30% of income exceeding $3.6 annually. The Missouri Utilities’ ability to retain such income in the future is subject to regulatory discretion in a base rate proceeding.
Catastrophic events may adversely affect the Utilities’ facilities and operations.
Catastrophic events such as fires, earthquakes, explosions, floods, tornadoes, hurricanes, tropical storms, terrorist acts, acts of civil unrest, pandemic illnesses or other similar occurrences could adversely affect the Utilities’ facilities and operations. The Utilities have emergency planning and training programs in place to respond to events that could cause business interruptions. However, unanticipated events or a combination of events, failure in resources needed to respond to events, or slow or inadequate response to events may have an adverse impact on the Utilities’ operations, financial condition, and results of operations. The availability of insurance covering catastrophic events may be limited or may result in higher deductibles, higher premiums, and more restrictive policy terms.

18


RISKS THAT RELATE TO THE GAS MARKETING SEGMENT
Increased competition, fluctuations in natural gas commodity prices, expiration of supply and transportation arrangements, and infrastructure projects may adversely impact the future profitability of Gas Marketing.
Competition in the marketplace and fluctuations in natural gas commodity prices have a direct impact on the Gas Marketing business. Changing market conditions and prices, the narrowing of regional and seasonal price differentials and limited future price volatility may adversely impact its sales margins or affect its ability to procure gas supplies and/or to serve certain customers, which may reduce sales profitability and/or increase certain credit requirements caused by reductions in netting capability. Also, Gas Marketing profitability may be impacted by the effects of the expiration, in the normal course of business, of certain of its natural gas supply contracts if those contracts cannot be replaced and/or renewed with arrangements with similar terms and pricing. Although the FERC regulates the interstate transportation of natural gas and establishes the general terms and conditions under which Spire Marketing may use interstate gas pipeline capacity to purchase and transport natural gas, it must occasionally renegotiate its transportation agreements with a concentrated group of pipeline companies. Renegotiated terms of new agreements, or increases in FERC-authorized rates of existing agreements, may impact Gas Marketing’s future profitability. Profitability may also be adversely impacted if pipeline capacity or future storage capacity secured is not fully utilized and/or its costs are not fully recovered.
Reduced access to credit and/or capital markets may prevent the Gas Marketing business from executing operating strategies.
The Gas Marketing segment relies on its cash flows, ability to effect net settlements with counterparties, parental guarantees, and access to Spire’s liquidity resources to satisfy its credit and working capital requirements. Spire Marketing’s ability to rely on parental guarantees is dependent upon Spire’s financial condition and credit ratings. If Spire’s credit ratings were lowered, particularly below investment grade, counterparty acceptance of parental guarantees may diminish, resulting in decreased availability of credit. Additionally, under such circumstances, certain counterparties may require Spire Marketing to provide prepayments or cash deposits, amounts of which would be dependent upon natural gas market conditions. Reduced access to credit or increased credit requirements, which may also be caused by factors such as higher overall natural gas prices, may limit Spire Marketing’s ability to enter into certain transactions. In addition, Spire Marketing has concentrations of counterparty credit risk in that a significant portion of its transactions are with (or are associated 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 in certain individually significant counterparties. 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.
Risk management policies, including the use of derivative instruments, may not fully protect Gas Marketing’s sales and results of operations from volatility and may result in financial losses.
In the course of its business, Spire Marketing enters into contracts to purchase and sell natural gas at fixed prices and 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.
Spire Marketing currently manages the commodity price risk associated with fixed-price commitments for the purchase or sale of natural gas by either 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, Inc. (NYMEX) and the Intercontinental Exchange (ICE) to lock in margins. These exchange-traded/cleared contracts may be designated as cash flow hedges of forecasted transactions. However, market conditions and regional price changes may cause ineffective portions of matched positions to result in financial losses. Additionally, to the extent that Spire Marketing’s natural gas contracts are classified as trading activities or do not otherwise qualify for the normal purchases or normal sales designation (or the designation is not elected), the contracts are recorded as derivatives at fair value each period. Accordingly, the associated gains and losses are reported directly in earnings and may cause volatility in results of operations. Gains or losses (realized and unrealized) on certain wholesale purchase and sale contracts, consisting of those classified as trading activities, are required to be presented on a net basis (instead of a gross basis) in the statements of consolidated income. Such presentation could result in volatility in the Company’s operating revenues.

19


Spire Marketing’s ability to meet its customers’ natural gas requirements may be impaired if contracted gas supplies and interstate pipeline services are not available or delivered in a timely manner.
Spire Marketing’s ability to deliver natural gas to its customers is contingent upon the ability of natural gas producers, other gas marketers, and interstate pipelines to fulfill delivery obligations to Spire Marketing under firm contracts. If these counterparties fail to perform, they have a contractual obligation to reimburse Spire Marketing for adverse consequences. Spire Marketing will attempt to use such reimbursements to obtain the necessary supplies so that it may fulfill its customer obligations. To the extent that it is unable to obtain the necessary supplies, Spire Marketing’s financial position and results of operations may be adversely impacted.
Regulatory and legislative developments pertaining to the energy industry may adversely impact Spire Marketing’s results of operations, financial condition and cash flows.
The Spire Marketing business is non-regulated, in that the rates it charges its customers are not established by or subject to approval by any regulatory body with jurisdiction over utilities. However, it is subject to various laws and regulations affecting the energy industry. New regulatory and legislative actions may adversely impact Spire Marketing’s results of operations, financial condition, and cash flows by potentially reducing customer growth opportunities and/or increasing the costs of doing business.
For example, Spire Marketing incurs additional costs to comply with new laws and regulations, such as the Dodd-Frank Act amendments to the Commodity Exchange Act, which authorizes the Commodity Futures Trading Commission (the CFTC) to regulate futures contracts, options and swaps. These derivative transactions include instruments and bilateral contracts that Spire Marketing uses to hedge or mitigate ongoing commercial risks. The Dodd-Frank Act contemplates that most standardized swaps will be required to be cleared through a registered clearing facility and traded on a designated exchange or swap execution facility, subject to certain exceptions. In addition, the CFTC’s rules require companies, include Spire Marketing, to maintain regulatory records of swap transactions, and to report swaps to centralized swap data repositories (SDRs), among other new compliance obligations. Although Spire Marketing may qualify for exceptions to certain of the new CFTC rules, its derivatives counterparties will be subject to new capital, margin, documentation and business conduct requirements imposed as a result of the Dodd-Frank Act. Such new rules will increase transaction costs, and may make it more difficult for Spire Marketing to enter into hedging transactions on favorable terms or affect the number and/or creditworthiness of available swap counterparties. The full impact of the new CFTC requirements will not be known definitively until all of the Dodd-Frank Act regulations have been finalized and fully implemented. Spire Marketing’s inability to enter into derivatives instruments or other commercial risk hedging transactions on favorable terms, or at all, could increase operating expenses and expose it to unhedged commercial risks, including potential adverse changes in commodity prices.
In addition, as the regulatory environment for the natural gas industry increases in complexity, the risk of inadvertent noncompliance could also increase. If the business fails to comply with applicable laws and regulations, whether existing or new ones, it could be subject to fines, penalties or other enforcement action by the authorities that regulate its operations.

Item 1B. Unresolved Staff Comments
None.


20


Item 2. Properties
Spire
Refer to the information below about the principal properties of Spire Missouri and Spire Alabama. The Spire EnergySouth utilities own approximately 5,500 miles of pipelines. Other properties of Spire and its subsidiaries, including Spire Marketing and Spire EnergySouth, do not constitute a significant portion of its properties. The current leases for office space in downtown St. Louis commenced in early 2015, with terms ranging from 10 to 20 years, with multiple renewal options. For further information on leases see Note 16, Commitments and Contingencies, of the Notes to Financial Statements in Item 8.
Spire Missouri
The principal properties of Spire Missouri consist of its gas distribution system, which includes more than 30,000 miles of main and related service lines, odorization and regulation facilities, and customer meters. The mains and service lines are located in municipal streets or alleys, public streets or highways, or on lands of others for which we have obtained the necessary legal rights to place and operate our facilities on such property. Spire Missouri has an underground natural gas storage facility, several operating centers, and other related properties. Substantially all of Spire Missouri’s utility plant is subject to the liens of its mortgage. All the properties of Spire Missouri are held in fee, or by easement, or under lease agreements. The principal lease agreements include underground storage rights that are of indefinite duration.
Spire Alabama
The properties of Spire Alabama consist primarily of its gas distribution system, which includes approximately 23,000 miles of main and related service lines, odorization and regulation facilities, and customer meters. The mains and service lines are located in municipal streets or alleys, public streets or highways, or on lands of others for which we have obtained the necessary legal rights to place and operate our facilities on such property. Spire Alabama also has four LNG facilities, several operating centers, and other related properties. All of the properties of Spire Alabama are held in fee, or by easement, or under lease agreements.

Item 3. Legal Proceedings
For a description of pending regulatory matters of Spire, see Note 15, Regulatory Matters, of the Notes to Financial Statements in Item 8. For a description of environmental matters, see Note 16, Commitments and Contingencies, of the Notes to Financial Statements in Item 8.
Spire and its subsidiaries are involved in litigation, claims, and investigations arising in the normal course of business. Management, after discussion with counsel, believes the final outcome will not have a material effect on the consolidated financial position or results of operations reflected in the consolidated financial statements presented herein.


21


EXECUTIVE OFFICERS OF THE REGISTRANT – Listed below are executive officers as defined by the SEC for Spire, Spire Missouri and Spire Alabama. Their ages, at September 30, 2017, and positions are listed below along with their business experience during the past five years.
Name
Age
 
Position with Company (1)
Appointed (2)
 
 
 
 
 
S. Sitherwood
57
 
Spire
 
 
 
 
President and Chief Executive Officer
February 2012
 
 
 
 
 
 
 
 
Spire Missouri
 
 
 
 
Chairman of the Board
January 2015
 
 
 
Chairman of the Board and Chief Executive Officer
October 2012
 
 
 
Chairman of the Board, Chief Executive Officer and President
February 2012
 
 
 
 
 
 
 
 
Spire Alabama
 
 
 
 
Chairman of the Board
September 2014
 
 
 
 
 
S. L. Lindsey (3)
51
 
Spire
 
 
 
 
Executive Vice President, Chief Operating Officer, Distribution Operations
October 2012
 
 
 
 
 
 
 
 
Spire Missouri
 
 
 
 
Chief Executive Officer and President
January 2015
 
 
 
President
October 2012
 
 
 
 
 
 
 
 
Spire Alabama
 
 
 
 
Chief Executive Officer
September 2014
 
 
 
 
 
S. P. Rasche
57
 
Spire
 
 
 
 
Executive Vice President and Chief Financial Officer
November 2013
 
 
 
Senior Vice President, Chief Financial Officer
October 2013
 
 
 
Senior Vice President, Finance and Accounting
May 2012
 
 
 
 
 
 
 
 
Spire Missouri
 
 
 
 
Chief Financial Officer
May 2012
 
 
 
 
 
 
 
 
Spire Alabama
 
 
 
 
Chief Financial Officer
September 2014
 
 
 
 
 
M. C. Darrell
59
 
Spire
 
 
 
 
Senior Vice President, General Counsel and Chief Compliance Officer
May 2012
 
 
 
 
 
M. C. Geiselhart
58
 
Spire
 
 
 
 
Senior Vice President, Strategic Planning and Corporate Development
January 2015
 
 
 
Vice President, Strategic Planning and Corporate Development
February 2014
 
 
 
Vice President, Strategic Development and Planning
August 2006
 
 
 
 
 
K. A. Smith
59
 
Spire Alabama
 
 
 
 
President
April 2015
 
 
 
Vice President, System Integrity
August 2011
(1) 
The information provided relates to the Company and its principal subsidiaries. Many of the executive officers have served or currently serve as officers or directors for other subsidiaries of the Company.
(2) 
Officers of Spire are normally reappointed by the Board of Directors in November of each year. Officers of Spire Missouri and Spire Alabama are normally reappointed by their boards of directors in January of each year.
(3) 
Mr. Lindsey served as Senior Vice President, Southern Operations of AGL Resources, Inc. and President of its Atlanta Gas Light, Chattanooga Gas and Florida City Gas subsidiaries from December 2011 to October 2012.

22


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Spire
Spire’s common stock trades on The New York Stock Exchange (NYSE) under the symbol “SR.” The high and the low sales price for the common stock for each quarter in the two most recent fiscal years were:
 
2017
 
2016
 
High
 
Low
 
High
 
Low
1st Quarter
$
66.65

 
$
59.54

 
$
61.04

 
$
53.86

2nd Quarter
68.30

 
62.33

 
68.79

 
57.10

3rd Quarter
72.83

 
63.84

 
70.87

 
61.00

4th Quarter
78.00

 
68.30

 
71.21

 
61.96

The number of holders of record as of November 10, 2017 was 3,224.
Dividends declared on common stock for the two most recent fiscal years were:
 
2017
 
2016
1st Quarter
$
0.525

 
$
0.49

2nd Quarter
0.525

 
0.49

3rd Quarter
0.525

 
0.49

4th Quarter
0.525

 
0.49

We have continuously paid a cash dividend to our common shareholders since 1946, with 2017 marking the 14th consecutive year of increasing the dividend on an annualized basis. Dividends are payable at the discretion of our Board of Directors. Future payment of dividends, and the amount of these dividends, will depend on our financial condition, results of operations, capital requirements, and other factors. We declared quarterly cash dividends on our common stock in 2017 and 2016, totaling $2.10 per share and $1.96 per share, respectively.
For disclosures related to securities authorized for issuance under equity compensation plans, see Item 12.
During the three months ended September 30, 2017, the only repurchases of our common stock was pursuant to elections by employees to have shares of stock withheld to cover employee tax withholding obligations upon the vesting of performance-based and time-vested restricted stock and stock units. The following table provides information on those repurchases:
Period
(a)
Total Number of Shares Purchased
(b)
Average Price Paid Per Share
(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(d)
Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
July 1, 2017 -
July 31, 2017
347
$69.55
August 1, 2017 -
August 31, 2017
September 1, 2017 -
September 30, 2017
Total
347
$69.55


23


Performance Graph
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
chart-8c798ac8e44ddcc55f0.jpg
September 30,
2012

 
2013

 
2014

 
2015

 
2016

 
2017

Spire Inc.
$
100.00

 
$
108.90

 
$
116.61

 
$
142.06

 
$
171.23

 
$
206.75

S&P 500 Index
100.00

 
119.34

 
142.89

 
142.02

 
163.93

 
194.44

S&P Utilities Index
100.00

 
106.99

 
125.32

 
133.55

 
156.74

 
175.60

* Cumulative total return is based on a $100 investment on September 30, 2012, assuming reinvestment of dividends.

24


Spire Missouri
Spire Missouri common stock is owned by its parent, Spire Inc., and is not traded on any stock exchange. Dividends declared on common stock for the two most recent fiscal years were:
 
2017
 
2016
1st Quarter
$
600.15

 
$
864.30

2nd Quarter

 
866.20

3rd Quarter

 
909.86

4th Quarter

 
569.64

Spire Missouri’s mortgage contains restrictions on its ability to pay cash dividends on its common stock, as described in further detail in Note 5, Shareholders’ Equity, of the Notes to Financial Statements in Item 8. As of September 30, 2017 and 2016, the amount under the mortgage’s formula that was available to pay dividends was $1,010.8 and $916.8, respectively.
Spire periodically purchases common stock of Spire Missouri with the price set at the book value of Spire Missouri common stock as of the most recently completed fiscal quarter. There were no sales of Spire Missouri common stock during the three most recent fiscal years.
Spire Alabama
Spire Alabama common stock is owned by its parent, Spire Inc., and is not traded on any stock exchange.
Dividends declared on common stock for the two most recent fiscal years were:
 
2017
 
2016
1st Quarter
$
3.42

 
$
3.80

2nd Quarter
1.90

 
4.06

3rd Quarter
3.42

 
4.06

4th Quarter
4.94

 
4.06



25


Item 6. Selected Financial Data
Spire
Fiscal Years Ended September 30
(Dollars in millions, except per share amounts)
2017
 
  2016(1)
 
2015
 
2014(2)
 
2013(3)
Statements of Income data
 
 
 
 
 
 
 
 
 
Total Operating Revenues
$
1,740.7

 
$
1,537.3

 
$
1,976.4

 
$
1,627.2

 
$
1,017.0

Net Income
161.6

 
144.2

 
136.9

 
84.6

 
52.8

Common Stock data
 
 
 
 
 
 
 
 
 
Diluted Earnings Per Share of Common Stock
$
3.43

 
$
3.24

 
$
3.16

 
$
2.35

 
$
2.02

Dividends Declared Per Share of Common Stock
2.10

 
1.96

 
1.84

 
1.76

 
1.70

Balance Sheet data (4)
 
 
 
 
 
 
 
 
 
Total Assets
$
6,546.7

 
$
6,064.4

 
$
5,277.6

 
$
5,059.3

 
$
3,117.3

Long-Term Debt (less current portion)
1,995.0

 
1,820.7

 
1,758.9

 
1,836.3

 
904.6

Net Economic Earnings data (5)
 
 
 
 
 
 
 
 
 
Net Income (GAAP)
$
161.6

 
$
144.2

 
$
136.9

 
$
84.6

 
$
52.8

Unrealized loss (gain) on energy-related derivatives
6.0

 
(0.1
)
 
(2.8
)
 
(1.6
)
 
1.0

Lower of cost or market inventory adjustments

 
0.2

 
0.4

 
(1.1
)
 
1.4

Realized (gain) loss on economic hedges prior to the sale of the physical commodity
(0.3
)
 
(1.6
)
 
2.4

 
(0.4
)
 

Acquisition, divestiture and restructuring activities
4.0

 
9.2

 
9.8

 
29.5

 
17.3

Gain on sale of property

 

 
(7.6
)
 

 

Income tax effect of adjustments
(3.7
)
 
(2.8
)
 
(0.8
)
 
(10.9
)
 
(7.6
)
Net Economic Earnings (Non-GAAP)
$
167.6

 
$
149.1

 
$
138.3

 
$
100.1

 
$
64.9

Diluted Earnings per Share of Common Stock:
 
 
 
 
 
 
 
 
 
Net Income (GAAP)
$
3.43

 
$
3.24

 
$
3.16

 
$
2.35

 
$
2.02

Unrealized loss (gain) on energy-related derivatives
0.13

 

 
(0.07
)
 
(0.04
)
 
0.04

Lower of cost or market inventory adjustments

 
0.01

 
0.01

 
(0.03
)
 
0.05

Realized (gain) loss on economic hedges prior to the sale of the physical commodity
(0.01
)
 
(0.04
)
 
0.06

 
(0.01
)
 

Acquisition, divestiture and restructuring activities
0.09

 
0.21

 
0.23

 
0.82

 
0.67

Gain on sale of property

 

 
(0.18
)
 

 

Income tax effect of adjustments
(0.08
)
 
(0.06
)
 
(0.02
)
 
(0.31
)
 
(0.29
)
Weighted average shares adjustment

 
0.06

 

 
0.27

 
0.38

Net Economic Earnings (Non-GAAP)
$
3.56

 
$
3.42

 
$
3.19

 
$
3.05

 
$
2.87

(1)
Effective September 12, 2016, Spire completed the purchase of 100% of the outstanding common stock of Spire EnergySouth for $344 (including assumed debt of $67.0). Spire funded the purchase price with a combination of the issuance of approximately 2.2 million shares of common stock on May 17, 2016, the issuance of $165.0 aggregate principal amount of senior notes on September 9, 2016, and cash on hand.
(2)
Effective August 31, 2014, Spire completed the purchase of 100% of the outstanding common stock of Spire Alabama for $1,590.3 (including assumed debt of $264.8), funded with a combination of the issuance of 10.35 million shares of common stock and 2.875 million equity units completed on June 11, 2014, the issuance of $625.0 aggregate principal amount of senior notes on August 19, 2014, and cash on hand.
(3)
Effective September 1, 2013, Spire Missouri completed the purchase of substantially all of the assets and liabilities of Missouri Gas Energy (now Spire Missouri West) for $940.2, supported by a combination of the issuance of approximately 10.0 million shares of common stock completed on May 29, 2013 and the issuance by Spire Missouri of $450.0 of first mortgage bonds on August 13, 2013.
(4)
Balance Sheet data for fiscal years 2013-2016 has been restated to retrospectively reflect the impact of implementing Accounting Standards Update (ASU) No. 2015-03, Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, during fiscal 2017.
(5)
This section contains the non-GAAP financial measures of net economic earnings (NEE) and net economic earnings per share (NEEPS). NEEPS are calculated by replacing consolidated net income with consolidated NEE in the GAAP diluted earnings per share calculation. Each reconciling item between NEE and net income is shown pre-tax, with total related income taxes calculated by applying effective federal, state, and local income tax rates applicable to ordinary income to those amounts. 2016 NEEPS excludes the impact of the May 2016 equity offering to fund the acquisition of Spire EnergySouth. 2014 NEEPS excludes the impact of the June 2014 equity offerings to fund the acquisition of Spire Alabama. 2013 NEEPS excludes the impact of the May 2013 equity offering to fund the Spire Missouri West acquisition. The weighted-average diluted shares used in the NEEPS calculation for fiscal years 2016, 2014, and 2013 were 43.5, 32.7, and 22.5, respectively, compared to 44.3, 35.9, and 26.0, respectively, used in the GAAP EPS calculations for those years. For more information on net economic earnings data, refer to the Earnings section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

26


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. (Spire or the Company), Spire Missouri Inc. (Spire Missouri or the Missouri Utilities), and Spire Alabama Inc. (Spire Alabama). Spire Missouri, Spire Alabama, and Spire EnergySouth Inc. (Spire EnergySouth) are wholly owned subsidiaries of the Company. Spire Missouri changed its name from Laclede Gas Company on August 30, 2017, and Spire Alabama changed its name from Alabama Gas Corporation on September 1, 2017. Spire Missouri, Spire Alabama and the subsidiaries of Spire EnergySouth Inc. (formerly known as EnergySouth, Inc.) are collectively referred to as the Utilities. The subsidiaries of Spire EnergySouth are Spire Gulf Inc. (Spire Gulf, formerly known as Mobile Gas Service Corporation) and Spire Mississippi Inc. (Spire Mississippi, formerly known as Willmut Gas & Oil Company). 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.
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.”

RESULTS OF OPERATIONS
Overview
The Company has two key business segments: Gas Utility and Gas Marketing. Spire’s earnings are primarily derived from its Gas Utility segment, which reflects the regulated activities of the Utilities. Due to the seasonal nature of the Utilities’ business, earnings of Spire, Spire Missouri and Spire Alabama 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 Missouri Public Service Commission (MoPSC). Spire Missouri serves St. Louis and eastern Missouri through Spire Missouri East (formerly Laclede Gas Company) and serves Kansas City and western Missouri through Spire Missouri West (formerly Missouri Gas Energy, or MGE). Spire Missouri delivers natural gas to retail 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. The rate design for each service territory serves to lessen the impact of weather volatility on its customers during cold winters and stabilize Spire Missouri’s earnings.
Gas Utility - Spire Alabama
Spire Alabama is the largest natural gas distribution utility in the state of Alabama. 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 is regulated by the Alabama Public Service Commission (APSC). 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 provides transportation services to large industrial and commercial customers located on its distribution system. These transportation customers, using Spire Alabama as their agent or acting on their own, purchase gas directly from marketers or suppliers and arrange for delivery of the gas into the Spire Alabama distribution system. Spire Alabama charges a fee to transport such customer-owned gas through its distribution system to the customers’ facilities.

27


Gas Marketing
Spire Marketing Inc. (Spire Marketing) is engaged in the marketing of natural gas and related activities on a non-regulated basis and is reported in the Gas Marketing segment. Spire Marketing markets natural gas across the country with the core of its footprint located in and around the central United States (US). It holds firm transportation and storage contracts in order to effectively manage its customer base, which consists of producers, pipelines, power generators, storage operators, municipalities, utility companies, and large commercial and industrial customers.
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 the following key variables in evaluating the financial condition and results of operations and managing the business.
Gas Utility segment:
the Utilities’ ability to recover the costs of purchasing and distributing natural gas from their customers;
the impact of weather and other factors, such as customer conservation, on revenues and expenses;
changes in the regulatory environment at the federal, state, and local levels, as well as decisions by regulators, that impact the Utilities’ ability to earn its authorized rate of return in all service territories they serve;
the Utilities’ ability to access credit markets and maintain working capital sufficient to meet operating requirements;
the effect of natural gas price volatility on the business; and
the ability to integrate the operations of all acquisitions.
Gas Marketing segment:
the risks of competition;
fluctuations in natural gas prices;
new national infrastructure projects;
the ability to procure firm transportation and storage services at reasonable rates;
credit and/or capital market access;
counterparty risks; and
the effect of natural gas price volatility on the business.
Further information regarding how management seeks to manage these key variables is discussed below.
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 it must incur to operate and maintain more than 58,000 miles of mains and services comprising the natural gas distribution systems and related storage facilities for Spire Missouri, Spire Alabama and the subsidiaries of Spire EnergySouth.
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. The subsidiaries of Spire EnergySouth, Spire Gulf and Spire Mississippi, have tariff rates that are approved by the APSC and Mississippi Public Service Commission (MSPSC), respectively. Spire Missouri also has an off-system sales and capacity release income stream that is regulated by tariff.

28


Spire Missouri’s income from off-system sales and capacity release remains subject to fluctuations in market conditions. Spire Missouri is allowed to retain the following portions of annual income (shown by service territory):
 
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 and 2015, the customer share and company share were 100% and 0%, respectively.
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%
Some of the factors impacting the level of off-system sales include the availability and cost of Spire Missouri’s natural gas supply, the weather in its service area, and the weather in other markets. When Spire Missouri’s service area experiences warmer-than-normal weather while other markets experience colder weather or supply constraints, some of Spire Missouri’s natural gas supply is available for off-system sales.
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 Spire Alabama’s Gas Supply Adjustment (GSA) rider 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 well as gas inventory carrying costs. As of September 30, 2017, Spire Missouri had active derivative positions, but Spire Alabama has had no gas supply derivative instrument activity since 2010. 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’ ability to issue commercial paper, access their lines of credit, issue long-term bonds, or obtain new lines of credit is dependent on current conditions in the credit and capital markets. Management focuses on maintaining a strong balance sheet and believes it currently has adequate access to credit and capital markets and will have sufficient capital resources to meet their foreseeable obligations. See the Liquidity and Capital Resources section for additional information.
Gas Marketing
Spire Marketing is engaged in the marketing of natural gas and providing energy services to both on-system utility transportation customers and customers outside of the Utilities’ traditional service areas. Spire Marketing utilizes its natural gas supply agreements, transportation agreements, park and loan agreements, storage agreements, and other executory contracts to support a variety of services to its customers at competitive prices. It closely monitors and manages the natural gas commodity price and volatility risks associated with providing such services to its customers through the use of a variety of risk management activities, including the use of exchange-traded/cleared derivative instruments and other contractual arrangements. Spire Marketing is committed to managing commodity price risk while it seeks to expand the services that it now provides. Nevertheless, income from the Gas Marketing operations is subject to more fluctuations in market conditions than the Utilities’ operations.
The Gas Marketing business is directly impacted by the effects of competition in the marketplace, the impacts of new infrastructure, surplus natural gas supplies, and the addition of new demand from exports, power generation and industrial load. Spire Marketing’s management expects a growing need for marketing services across the country as customers manage seasonal variability and marketplace volatility.

29


In addition to its operating cash flows, Spire Marketing relies on Spire’s parental guarantees 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. 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 Gas Marketing’s liquidity and results of operations.
Spire Marketing carefully monitors the creditworthiness of counterparties to its transactions. It performs in-house credit reviews of potential customers and may require credit assurances such as prepayments, letters of credit, or parental guarantees when appropriate. Credit limits for customers are established and monitored.
As a result of infrastructure optimization activities and an abundance of natural gas supply, Spire Marketing cannot be certain that all of its wholesale purchase and sale transactions will settle physically. As such, certain 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 Gas Marketing operating revenues (or expenses, if negative), which may cause volatility in the Company’s operating revenues, but have no effect on operating income or net income.
In the course of its business, Spire Marketing enters into commitments associated with the purchase or sale of natural gas. In accordance with US generally accepted accounting principles (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 below.
Other
In addition to the Gas Utility and Gas Marketing segments, other non-utility activities of the Company include:
unallocated corporate items, including certain debt and associated interest costs;
Spire STL Pipeline, a subsidiary of Spire planning construction and operation of a proposed 65-mile Federal Energy Regulatory Commission (FERC) regulated pipeline to deliver natural gas into eastern Missouri; and
Spire’s subsidiaries engaged in the operation of a propane pipeline, compression of natural gas and risk management, among other activities.

EARNINGS
Net income reported by Spire, Spire Missouri and Spire Alabama is determined in accordance with GAAP. Management also uses the non-GAAP financial measures of net economic earnings, net economic earnings per share and contribution margin when internally evaluating and reporting results of operations. These non-GAAP operating metrics should not be considered as alternatives to, or more meaningful than, GAAP measures such as net income, earnings per share and operating income. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are provided on the following pages.
Non-GAAP Measures - 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 after-tax impacts of fair value accounting and timing adjustments associated with energy-related transactions as well as acquisition, divestiture, and restructuring activities. These fair value and timing adjustments are made in instances where the accounting treatment differs from what management considers the economic substance of the underlying transaction, including the following:
Net unrealized gains and losses on energy-related derivatives that are required by GAAP fair value accounting associated with current changes in the fair value of financial and physical transactions prior to their completion and settlement. These unrealized gains and losses result primarily from two sources:
1)
changes in the fair values of physical and/or financial derivatives prior to the period of settlement; and,
2)
ineffective portions of accounting hedges, required to be recorded in earnings prior to settlement, due to differences in commodity price changes between the locations of the forecasted physical purchase or sale transactions and the locations of the underlying hedge instruments;

30


Lower of cost or market adjustments to the carrying value of commodity inventories resulting when the market price of the commodity falls below its original cost, to the extent that those commodities are economically hedged; and
Realized gains and losses resulting from the settlement of economic hedges prior to the sale of the physical commodity.
These adjustments eliminate the impact of timing differences and the impact of current changes in the fair value of financial and physical transactions prior to their completion and settlement. Unrealized gains or losses are recorded in each period until being replaced with the actual gains or losses realized when the associated physical transactions occur. While management uses these non-GAAP measures to evaluate both the Utilities and non-utility businesses, the net effect of adjustments on the Utilities’ earnings is minimal because gains or losses on their natural gas derivative instruments are deferred pursuant to state regulation.
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. In addition, management excludes the impact related to certain acquisition, divestiture, and restructuring activities when evaluating on-going performance, and therefore excludes these impacts from net economic earnings. Similarly, in fiscal years 2016, 2014 and 2013, net economic earnings per share excludes the impact of shares issued in those years to finance acquisitions that closed late in each fiscal year. Management believes that this presentation provides a useful representation of operating performance by facilitating comparisons of year-over-year results. The definition and measurement of net economic earnings provided above is consistent with that used by management and the Board of Directors in assessing the Company’s, Spire Missouri’s and Spire Alabama’s performance as well as determining performance under the Company’s, Spire Missouri’s and Spire Alabama’s incentive compensation plans. Further, the Company believes this better enables an investor to view the Company’s, Spire Missouri’s and Spire Alabama’s performance in that period on a basis that would be comparable to prior periods.
Reconciliations of net economic earnings and net economic earnings per share to the Company’s most directly comparable GAAP measures are provided on the following pages.
Non-GAAP Measure - 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. 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 rider. 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, has no direct effect on operating income. Contribution margin is defined as operating revenues less natural and propane gas costs and gross receipts tax expense. As these items are reflected in both operating revenue and operating expenses and management has little control over these amounts for the Utilities, management believes that contribution margin is a useful supplemental measure. In addition, it is management’s belief that contribution margin and the remaining operating expenses that calculate operating income are useful in assessing the Company’s and the Utilities’ performance as management has more ability to influence control over these revenues and expenses.

31


Spire
Overview – Net Income (Loss)
 
 
Gas Utility
 
 Gas Marketing
 
Other
 
Consol-idated
 
Per Diluted Share**
Year Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
Net Income (Loss) (GAAP)
$
180.5

 
$
3.4

 
$
(22.3
)
 
$
161.6

 
$
3.43

 
Adjustments, pre-tax:
 
 
 
 
 
 
 
 
 
 
Unrealized loss on energy-related derivatives
0.1

 
5.9

 

 
6.0

 
0.13

 
Realized gain on economic hedges prior
     to the sale of the physical commodity

 
(0.3
)
 

 
(0.3
)
 
(0.01
)
 
Acquisition, divestiture and restructuring activities
1.5

 

 
2.5

 
4.0

 
0.09

 
Income tax effect of adjustments*
(0.6
)
 
(2.2
)
 
(0.9
)
 
(3.7
)
 
(0.08
)
 
Net Economic Earnings (Loss) (Non-GAAP)
$
181.5

 
$
6.8

 
$
(20.7
)
 
$
167.6

 
$
3.56

 
 
 
 
 
 
 
 
 
 
 
Year Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
Net Income (Loss) (GAAP)
$
159.0

 
$
7.1

 
$
(21.9
)
 
$
144.2

 
$
3.24

 
Adjustments, pre-tax:
 
 
 
 
 
 
 
 
 
 
Unrealized (gain) loss on energy-related derivatives
(0.3
)
 
0.2

 

 
(0.1
)
 

 
Lower of cost or market inventory adjustments

 
0.2

 

 
0.2

 
0.01

 
Realized gain on economic hedges prior
   to the sale of the physical commodity

 
(1.6
)
 

 
(1.6
)
 
(0.04
)
 
Acquisition, divestiture and restructuring activities
2.3

 

 
6.9

 
9.2

 
0.21

 
Income tax effect of adjustments*
(0.7
)
 
0.5

 
(2.6
)
 
(2.8
)
 
(0.06
)
 
Weighted average shares adjustment **

 

 

 

 
0.06

 
Net Economic Earnings (Loss) (Non-GAAP)
$
160.3

 
$
6.4

 
$
(17.6
)
 
$
149.1

 
$
3.42

 
 
 
 
 
 
 
 
 
 
 
Year Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
Net Income (Loss) (GAAP)
$
153.3

 
$
4.1

 
$
(20.5
)
 
$
136.9

 
$
3.16

 
Adjustments, pre-tax:
 
 
 
 
 
 
 
 
 
 
Unrealized gain on energy-related derivatives
(0.1
)
 
(2.7
)
 

 
(2.8
)
 
(0.07
)
 
Lower of cost or market inventory adjustments

 
0.4

 

 
0.4

 
0.01

 
Realized loss on economic hedges prior
     to the sale of the physical commodity

 
2.4

 

 
2.4

 
0.06

 
Acquisition, divestiture and restructuring activities
3.1

 

 
6.7

 
9.8

 
0.23

 
Gain on sale of property
(7.6
)
 

 

 
(7.6
)
 
(0.18
)
 
Income tax effect of adjustments*
1.7

 

 
(2.5
)
 
(0.8
)
 
(0.02
)
 
Net Economic Earnings (Loss) (Non-GAAP)
$
150.4

 
$
4.2

 
$
(16.3
)
 
$
138.3

 
$
3.19

*
Income tax effect is calculated by applying federal, state, and local income tax rates applicable to ordinary income to the amounts of the pre-tax reconciling items.
**
Fiscal 2016 net economic earnings per share excludes the impact of the May 2016 equity issuance to fund a portion of the acquisition of Spire EnergySouth. The weighted average diluted shares used in the net economic earnings per share calculation for the fiscal year ended September 30, 2016 was 43.5 compared to 44.3 in the GAAP diluted earnings per share (EPS) calculation. For fiscal years 2017 and 2015, net economic earnings per share is calculated by replacing consolidated net income with consolidated net economic earnings in the GAAP diluted EPS calculation.


32


2017 vs. 2016
Consolidated
Spire’s net income was $161.6 in fiscal 2017, compared with $144.2 in fiscal 2016. Basic and diluted earnings per share were $3.44 and $3.43, respectively, for fiscal 2017 compared with basic and diluted earnings per share of $3.26 and $3.24, respectively, for fiscal 2016. Net economic earnings were $167.6 (or $3.56 per share) in fiscal 2017, compared with $149.1 (or $3.42 per share) in fiscal 2016, an increase of $18.5. Net income increased in fiscal 2017 compared to fiscal 2016 primarily due to $21.5 income growth in the Gas Utility segment, partly offset by a $3.7 income decline in the Gas Marketing segment and a $0.4 larger loss from other activities.
Gas Utility
Gas Utility net income and net economic earnings increased by $21.5 and $21.2, respectively, in fiscal 2017, compared to fiscal 2016. The increases to net income and net economic earnings were driven by the $9.6 income growth generated by the Spire EnergySouth acquisition, margin growth and combined lower O&M expenses at Spire Missouri and Spire Alabama. The margin growth was driven by higher Infrastructure System Replacement Surcharge (ISRS) charges at the Missouri Utilities and net favorable regulatory adjustments at Spire Alabama, partly offset by weather impacts resulting from warmer winter temperatures. These impacts were partly offset by increases in depreciation and amortization expenses. Additionally, interest expense was higher due to the Spire EnergySouth acquisition and higher interest charges experienced by Spire Missouri. Income taxes were also higher due to the Spire EnergySouth acquisition and higher pre-tax income for both Spire Missouri and Spire Alabama. Further details are discussed in the Gas Utility, Spire Missouri, and Spire Alabama sections below.
Gas Marketing
Gas Marketing reported net income totaling $3.4, a decrease of $3.7 compared with the same period last year. Net economic earnings for fiscal 2017 increased $0.4 from fiscal 2016. The decrease in net income was primarily attributable to unfavorable mark-to-market (MTM) activity in the current year. Net economic earnings benefited from increased value from spreads and asset optimization in the current year versus the prior year. Further details are discussed in the Gas Marketing section below.
Other
The combined increase in net loss and net economic loss for the Company’s other non-utility activities were $0.4 and $3.1, respectively, for fiscal 2017 compared to the same period last year. The increased loss was primarily the result of higher current year interest charges associated with the September 2016 acquisition of Spire EnergySouth.
Operating Revenues and Operating Expenses
Reconciliations of contribution margin to the most directly comparable GAAP measure are shown below.
 
Gas
Utility
 
Gas Marketing
 
Other
 
Eliminations
 
Consolidated
Year Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
Operating Income (Loss)
$
321.6

 
$
5.2

 
$
(5.1
)
 
$

 
$
321.7

 
Operation and maintenance expenses
409.1

 
5.9

 
11.8

 
(5.5
)
 
421.3

 
Depreciation and amortization
153.5

 
0.1

 
0.5

 

 
154.1

 
Taxes, other than income taxes
137.8

 
0.5

 
0.2

 

 
138.5

 
Less: Gross receipts tax expense
(83.0
)
 
(0.1
)
 

 

 
(83.1
)
 
Contribution Margin (Non-GAAP)
939.0

 
11.6

 
7.4

 
(5.5
)
 
952.5

 
Natural and propane gas costs
645.9

 
67.6

 
0.3

 
(8.7
)
 
705.1

 
Gross receipts tax expense
83.0

 
0.1

 

 

 
83.1

 
Operating Revenues
$
1,667.9

 
$
79.3

 
$
7.7

 
$
(14.2
)
 
$
1,740.7


33


 
Gas
Utility
 
Gas Marketing
 
Other
 
Eliminations
 
Consolidated
Year Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
Operating Income (Loss)
$
278.3

 
$
11.8

 
$
(7.8
)
 
$

 
$
282.3

 
Operation and maintenance expenses
379.3

 
5.6

 
12.1

 
(2.4
)
 
394.6

 
Depreciation and amortization
136.9

 
0.1

 
0.5

 
 
 
137.5

 
Taxes, other than income taxes
125.2

 
0.3

 
(0.2
)
 
 
 
125.3

 
Less: Gross receipts tax expense
(75.3
)
 
(0.1
)
 

 

 
(75.4
)
 
Contribution Margin (Non-GAAP)
844.4

 
17.7

 
4.6

 
(2.4
)
 
864.3

 
Natural and propane gas costs
539.7

 
60.7

 
0.2

 
(3.0
)
 
597.6

 
Gross receipts tax expense
75.3

 
0.1

 

 

 
75.4

 
Operating Revenues
$
1,459.4

 
$
78.5

 
$
4.8

 
$
(5.4
)
 
$
1,537.3

 
Gas
Utility
 
Gas Marketing
 
Other
 
Eliminations
 
Consolidated
Year Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
Operating Income (Loss)
$
274.6

 
$
6.8

 
$
(8.9
)
 
$

 
$
272.5

 
Operation and maintenance expenses
391.5

 
5.4

 
11.7

 
(1.0
)
 
407.6

 
Depreciation and amortization
129.9

 
0.3

 
0.6

 

 
130.8

 
Taxes, other than income taxes
142.2

 
0.4

 

 

 
142.6

 
Less: Gross receipts tax expense
(96.1
)
 
(0.2
)
 

 

 
(96.3
)
 
Contribution Margin (Non-GAAP)
842.1

 
12.7

 
3.4

 
(1.0
)
 
857.2

 
Natural and propane gas costs
957.6

 
140.5

 
0.3

 
(75.5
)
 
1,022.9

 
Gross receipts tax expense
96.1

 
0.2

 

 

 
96.3

 
Operating Revenues
$
1,895.8

 
$
153.4

 
$
3.7

 
$
(76.5
)
 
$
1,976.4

Consolidated
Spire reported operating revenues of $1,740.7 for the year ended September 30, 2017 compared with for $1,537.3 the same period last year. The increase was driven primarily by the Utilities, the result of the Spire EnergySouth acquisition, higher ISRS charges at Spire Missouri, favorable regulatory adjustments at Spire Alabama, and higher gas costs passed on to customers in both Missouri and Alabama. These positive drivers were partly offset by lower demand as a result of warmer weather. Spire’s contribution margin increased $88.2 for the twelve months ended September 30, 2017, compared to the same period last year. The increase was primarily due to higher contribution margin of $94.6 for the Gas Utility segment, slightly offset by the lower contribution margin reported in Gas Marketing. Operation and maintenance (O&M) expenses increased $26.7 for the twelve months ended September 30, 2017 as compared to the same period last year, as discussed below. Depreciation and amortization expenses increased $16.6, driven principally by the Spire EnergySouth acquisition and continued infrastructure investment at Spire Missouri and Spire Alabama in fiscal 2017.
Gas Utility
Operating RevenuesGas Utility operating revenues for fiscal 2017 increased $208.5 compared to fiscal 2016, and was attributable to the following factors:
New customer revenue from Spire EnergySouth acquisition
$
92.1

Higher wholesale gas costs passed on to customers
87.2

Spire Alabama – Lower Rate Stabilization and Equalization (RSE) revenue reduction and higher Cost Control Measure (CCM) benefit
19.2

Spire Missouri - Higher off-system sales and capacity release
17.9

Spire Missouri - Higher ISRS charges
14.2

Higher gross receipts tax
4.9

Weather / temperature adjustment impact
(27.3
)
All other
0.3

Total Variation
$
208.5


34


Contribution Margin – Gas Utility contribution margin was $939.0 for fiscal 2017, a $94.6 increase over the same period last year. The increase was attributable to the following factors:
Contribution margin from Spire EnergySouth acquisition
$
66.6

Spire Alabama – Lower RSE revenue reduction and higher CCM benefit
19.2

Spire Missouri - Higher ISRS charges
14.2

Spire Missouri - Higher off-system sales and capacity release
1.4

Weather / temperature adjustment impact
(8.6
)
All other
1.8

Total Variation
$
94.6

The increase was primarily attributable to the $66.6 of operating margin resulting from the Spire EnergySouth acquisition, lower RSE revenue adjustments, beneficial CCM and return on capital impacts totaling $19.2 for Spire Alabama, and benefits of higher ISRS charges for the Missouri Utilities in 2017 of $14.2. These positive impacts offset the negative impact of weather and temperature adjustments. Temperatures in the Spire Missouri territory experienced degree days that were 1% warmer than last year and 20% warmer than normal. Degree days in the Spire Alabama service areas in fiscal 2017 were 15% warmer than the prior year, and 35% warmer than normal. Temperatures are a significant part of the Utilities’ rate cases, contributing to the constrained margins experienced in the current year.
Operating ExpensesDepreciation and amortization expenses for the twelve months ended September 30, 2017 increased $16.6 from the same period last year, $10.0 the result of the Spire EnergySouth acquisition, $4.5 due to Spire Missouri and $2.1 relating to Spire Alabama, principally the result of continued infrastructure capital spending in fiscal 2017. O&M expenses increased $29.8 for the twelve months ended September 30, 2017 compared to the same period in the prior year. Excluding the impact of the $33.5 increase relating to the Spire EnergySouth acquisition, O&M expenses were $3.7 below prior year levels due primarily to lower employee-related costs that were only partly offset by higher professional services. The employee labor-costs were favorably impacted by the warmer weather experienced in both the Spire Missouri and Spire Alabama service territories. Taxes other than income taxes were $12.6 higher in the current year, with $7.6 of the increase attributable to the Spire EnergySouth acquisition. $4.2 of the increase was related to the higher gross receipt taxes due to the higher revenues, with the remainder of the variance related to property tax expense at Spire Missouri.
Gas Marketing
Operating Revenues Gas Marketing operating revenue for the twelve months ended September 30, 2017 increased $0.8 from the same period last year. The variance in revenues reflects the impact of higher total volumes and higher commodity pricing levels offset by the effect of increased trading activities, and unfavorable mark-to-market adjustments on derivatives. Under GAAP, revenues associated with trading activities are presented net of related costs. Average pricing for the twelve months ended September 30, 2017 was approximately $2.897/MMBtu versus approximately $2.286/MMBtu for fiscal 2016, an increase of $0.611/MMBtu.
Contribution Margin – Gas Marketing contribution margin was $11.6 for fiscal 2017, a $6.1 decrease compared to the same period last year, with that variance significantly impacted by unfavorable fair value adjustments on derivative holdings in the current year, and favorable adjustments in the prior year. Removing these fair value adjustments from both periods, contribution margin is $0.7 higher than last year, reflecting favorable wholesale trading volumes and storage optimization.
Other
Other operating revenue increased $2.9 for the twelve months ended September 30, 2017 compared to the same period in 2016, driven by higher reinsurance premiums. Other operating expenses were essentially flat with the prior year, as an increase in costs related to the reinsurance premiums was offset by a decrease in corporate-level integration expenses.

35


Interest Charges
Consolidated interest charges during the twelve months ended September 30, 2017 increased $11.9 versus the same period last year. The increase was primarily driven by the debt incurred and assumed as a result of the Spire EnergySouth acquisition generating interest expense of $8.5, combined with marginally higher interest rates on floating rate debt in the first six months of the year and higher interest rates on the senior notes issued in March of this year that were used to retire the $250.0 of floating rate debt. Also, for the twelve months ended September 30, 2017 and 2016, average short-term borrowings were $485.8 and $273.9, respectively, and the average interest rates on these borrowings were 1.2% and 0.9%, respectively.
Income Taxes
Consolidated income tax expense increased $8.1 in fiscal 2017 from fiscal 2016 primarily due to higher pre-tax income. The current year effective tax rate of 32.4% was essentially flat versus fiscal 2016’s effective rate of 32.5%.
Spire Missouri
Summary Operating Results
Year ended September 30,
2017
 
2016
   Operating Income
$
196.9

 
$
186.9

   Operation and maintenance expenses
243.8

 
244.4

   Depreciation and amortization
93.1

 
88.6

   Taxes, other than income taxes
99.8

 
96.3

   Less: Gross receipts tax expense
(60.0
)
 
(57.4
)
   Contribution Margin (non-GAAP)
573.6

 
558.8

   Natural and propane gas costs
538.3

 
471.3

   Gross receipts tax expense
60.0

 
57.4

   Operating Revenues
$
1,171.9

 
$
1,087.5

Operating revenues during the twelve months ended September 30, 2017 increased $84.4 from the same period last year. Revenues were impacted primarily by higher gas costs of $50.9 passed on to customers, $17.9 higher off- system and capacity release sales, higher ISRS charges of $14.2, and higher gross receipts taxes of $3.3. These impacts were slightly offset by negative weather impacts.
Contribution margin for the twelve months ended September 30, 2017 increased $14.8 from the same period last year. Higher ISRS charges of $14.2 were only partly offset by a negative $2.6 weather impact attributable to the 1% warmer weather experienced in the current year.
O&M for the twelve months ended September 30, 2017 were $0.6 lower than the prior year. Lower employment-related costs were almost completely offset by higher professional services. Depreciation and amortization increased $4.5, reflecting continued infrastructure investments throughout Missouri. Interest expense in the current year was $1.7 greater than prior year, the result of a combination of higher short-term borrowings and higher average effective interest rates. Income taxes were $2.1 higher for the twelve months ended September 30, 2017 versus the comparable prior year period due to higher pre-tax book income, mitigated by a slightly lower effective tax rate.
Temperatures experienced in the Missouri Utilities’ service area during fiscal 2017 were 1% warmer than the same period last year and 20% warmer than normal. Normal temperatures are part of Spire Missouri’s rate case design, meaning the warmer than normal temperatures continued to constrain margins. Total system therms sold and transported were 1,482.1 million for fiscal 2017 compared with 1,479.3 million for fiscal 2016. Total off-system therms sold and transported outside of Spire Missouri’s service area were 175.6 million for fiscal 2017 compared with 183.3 million for fiscal 2016.

36


Spire Alabama
Summary Operating Results
Year ended September 30,
2017
 
2016
   Operating Income
$
105.8

 
$
91.5

   Operation and maintenance expenses
130.4

 
133.5

   Depreciation and amortization
49.9

 
47.8

   Taxes, other than income taxes
29.9

 
28.4

   Less: Gross receipts tax expense
(19.5
)
 
(17.9
)
   Contribution Margin (Non-GAAP)
296.5

 
283.3

   Natural and propane gas costs
84.5

 
67.3

   Gross receipts tax expense
19.5

 
17.9

   Operating Revenues
$
400.5

 
$
368.5

Operating revenues for the twelve months ended September 30, 2017 increased $32.0 versus the comparable period ended September 30, 2016. Of the increase, $19.2 of the increase related to lower RSE return on equity revenue adjustments and higher CCM benefits in the current year, $11.2 resulted from weather/temperature adjustments, along with slightly higher gross receipts taxes of $1.6.
Contribution margin increased $13.2 versus prior year, as $19.2 in favorable RSE, CCM adjustments and return on capital more than offset negative weather and usage impacts of $6.0. Contributing to the favorable current year RSE return on equity adjustment impact was a fiscal 2016 reduction in revenues relating to a legal settlement of $6.0. There was no impact to net income, as this revenue adjustment offset a corresponding $6.0 gain recorded in other income.
O&M expenses for the twelve months ended September 30, 2017 decreased $3.1 versus the year ended September 30, 2016. The decrease in other operating expenses was driven primarily by lower employee-related costs, which were favorably impacted by the warmer weather in the current year. Depreciation and amortization was $2.1 higher versus the same period last year, the result of continued infrastructure investment throughout Spire Alabama’s service territory. Income tax expense increased $3.4, primarily due to the higher pre-tax book income earned in the current year.
Temperatures in Spire Alabama’s service area during the twelve months ended September 30, 2017 were 35% warmer than normal and 15% warmer than the same period a year earlier. Spire Alabama’s total therms sold and transported were 900.6 million for the twelve months ended September 30, 2017, compared with 878.1 million for the same period last year.
For further information on the GSA, RSE and CCM mechanisms, please see Note 1, Summary of Significant Accounting Policies, and Note 15, Regulatory Matters, in the Notes to Financial Statements.
2016 vs. 2015
Spire
Consolidated
Spire’s net income was $144.2 in fiscal 2016, compared with $136.9 in fiscal 2015. Basic and diluted earnings per share were $3.26 and $3.24, respectively, for fiscal 2016 compared with basic and diluted earnings per share of $3.16 for fiscal 2015. Net economic earnings were $149.1 (or $3.42 per share) in fiscal 2016, compared with $138.3 (or $3.19 per share) in fiscal 2015. Net income increased in fiscal 2016 compared to fiscal 2015 primarily due to $5.7 income growth in the Gas Utility segment and $3.0 income growth in the Gas Marketing segment, partly offset by a $1.4 larger loss from other activities.

37


Gas Utility
Gas Utility net income and net economic earnings increased by $5.7 and $9.9, respectively, in fiscal 2016, compared to 2015. The increases to net income and net economic earnings were driven by higher ISRS charges at Spire Missouri and net favorable regulatory adjustments at Spire Alabama, partly offset by lower volumes resulting from warmer winter temperatures. The segment also benefited from a decrease in O&M, which includes effects of the warmer weather. These impacts were partly offset by an increase in depreciation and amortization expenses. Additionally, interest expense was higher due to the increase experienced by Spire Missouri. Income taxes were also higher due to higher pre-tax income for both the Spire Missouri and Spire Alabama.
Gas Marketing
Gas Marketing reported net income totaling $7.1 in fiscal 2016, an increase of $3.0 compared to fiscal 2015. Net economic earnings for fiscal 2016 increased $2.2 from fiscal 2015. The increases in net income and net economic earnings were primarily attributable to increases in contribution margin, with the impact to net economic earnings being partly offset by mark-to-market activity as discussed in the Gas Marketing section below.
Other
The combined increase in net loss and net economic loss for the Company’s other non-utility activities were $1.4 and $1.3, respectively, for fiscal 2016 compared to the prior year. The increase was primarily the result of higher interest charges.
Operating Revenues and Operating Expenses
Reconciliations of the Company’s contribution margin to the most directly comparable GAAP measure are shown above.
Consolidated
Spire reported operating revenues of $1,537.3 for the fiscal year ended September 30, 2016 compared with $1,976.4 for the same prior year period. The decrease was driven primarily by the Utilities, the result of lower volumes and lower gas costs passed on to customers. Spire’s contribution margin increased $7.1 for the twelve months ended September 30, 2016, compared to the same prior year period. The increase was primarily due to higher contribution margin of $5.0 and $2.3 for the Gas Marketing and Gas Utility segments, respectively, slightly offset by the lower contribution margin reported in Other. O&M expenses decreased $9.4 for the twelve months ended September 30, 2016 as compared to fiscal 2015, as discussed below. The decrease in O&M expenses was partially offset by $6.7 higher depreciation and amortization expense, driven principally by continued infrastructure investment at the Utilities in fiscal 2016.
Gas Utility
Operating RevenuesGas Utility Operating Revenues for fiscal 2016 decreased $436.4 compared to fiscal 2015, and was primarily attributable to the following factors:
Lower wholesale gas costs passed on to customers
$
(262.8
)
Lower system sales volumes
(147.4
)
Spire Missouri - Lower off-system sales and capacity release
(25.3
)
Lower gross receipts tax
(21.8
)
Spire Missouri - Higher ISRS charges
13.8

Spire Alabama - Lower RSE revenue adjustments
4.5

New customer revenue from Spire EnergySouth acquisition
3.3

All other
(0.7
)
Total Variation
$
(436.4
)

38


Contribution Margin – Gas Utility contribution margin was $844.4 for fiscal 2016, a $2.3 increase over the same period of fiscal 2015. The increase was attributable to the following factors:
Lower system sales volume
$
(18.0
)
Spire Missouri - Higher ISRS charges
13.8

Spire Alabama - Lower RSE revenue adjustments
4.5

Contribution margin from Spire EnergySouth acquisition
2.2

All other
(0.2
)
Total Variation
$
2.3

The increase was primarily attributable to benefits of higher ISRS charges for Spire Missouri in 2016 of $13.8, lower RSE revenue adjustments, beneficial CCM and return on capital impacts totaling $4.5 for Spire Alabama, and $2.2 of contribution margin resulting from the Spire EnergySouth acquisition, which were mostly offset by the negative impact of lower sales volume. A $6.0 gain related to a legal settlement was recorded in other income, but contribution margin was reduced by a revenue adjustment corresponding to the $6.0 gain, resulting in no impact on net income. Temperatures in the Spire Missouri and Spire Alabama service areas in fiscal 2016 were 19.7% and 30% warmer than in the same period in the prior year, respectively, significantly contributing to the $18.0 negative volume impact on contribution margin in fiscal 2016.
Operating ExpensesDepreciation and amortization expenses for the twelve months ended September 30, 2016 increased $7.0 from the twelve months ended September 30, 2015, due principally to continued infrastructure capital spending in fiscal 2016. O&M expenses decreased $8.4 for the twelve months ended September 30, 2016 compared to the same period in the prior year. Excluding the impact of a $7.6 gain on the sale of property in 2015, O&M expenses were $16.0 below 2015 levels due primarily to lower bad debt expense (reflecting the impact of warmer weather experienced during the heating season) and employee-related costs.
Gas Marketing
Operating Revenues – Gas Marketing operating revenue for the twelve months ended September 30, 2016 decreased $74.9 from the same prior year period. The decrease in revenues reflects the impact of higher total volumes being more than offset by lower commodity pricing levels, the effect of increased trading activities, and favorable mark-to-market adjustments on derivatives. Average pricing for the twelve months ended September 30, 2016 was approximately $2.286/MMBtu versus approximately $3.066/MMBtu for 2015, a $0.781 decline.
Contribution Margin – Gas Marketing contribution margin was $17.7 for fiscal 2016, a $5.0 increase compared to fiscal 2015. Favorable wholesale trading volumes and storage optimization resulted in an $11.7 increase more than offsetting $7.9 of negative pricing impacts. Fair value adjustments accounted for an additional $1.2 favorable impact in fiscal 2016.
Other
Operating Revenue and Operating Expenses Other operating revenue increased $1.1 for the twelve months ended September 30, 2016 compared to the same period in fiscal 2015, reflecting higher insurance revenues. Other O&M expenses were essentially flat with the prior year.
Interest Charges
Interest charges during the twelve months ended September 30, 2016 increased $2.6 from fiscal 2015. Interest expense reductions from the refinancing of $115.0 in Spire Alabama long-term debt in September and December of 2015, along with lower average short-term borrowings, have been offset by higher rates on short-term borrowings, interest on debt issued to finance the Spire EnergySouth acquisition, interest on acquired debt, and charges related to a temporary bridge facility commitment obtained and terminated during the third quarter of fiscal 2016 related to the Spire EnergySouth acquisition. For the twelve months ended September 30, 2016 and 2015, average short-term borrowings were $273.9 and $300.6, respectively, and the average interest rates on those borrowings were 0.9% and 0.7%, respectively.

39


Income Taxes
Consolidated income tax expense increased $7.3 in fiscal 2016 from fiscal 2015 primarily due to higher pre-tax income and a higher effective tax rate. The fiscal 2016 effective tax rate of 32.5% is approximately 1.3 percentage points higher than the rate for fiscal 2015. The higher fiscal 2016 rate includes tax expense associated with a valuation allowance on deferred tax assets.

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 Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 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 the Missouri Utilities 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 Missouri Utilities’ 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. Spire Missouri’s PGA clauses also authorizes it to recover costs it incurs to finance its investment in gas supplies that are purchased during the storage injection season for sale during the heating season.
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.

40


Goodwill – Goodwill is measured as the excess of the acquisition-date fair value of the consideration transferred over the amount of acquisition-date identifiable assets acquired net of assumed liabilities, and adjustments are recorded during the measurement period to finalize the allocation of purchase price. Spire Missouri has recorded goodwill related to the 2013 acquisition of Spire Missouri West, and Spire also has recorded goodwill related to the 2016 and 2014 acquisitions of Spire EnergySouth and Spire Alabama, respectively. Neither Spire EnergySouth nor Spire Alabama have goodwill on their balance sheets as push down accounting was not applied. Spire and Spire Missouri evaluate goodwill for impairment as of July 1 of each year, or more frequently if events and circumstances indicate that goodwill might be impaired. The goodwill impairment test compares the fair value of each reporting unit to its carrying amount, including goodwill. At July 1, 2017, 2016 and 2015, Spire and Spire Missouri each applied a quantitative goodwill evaluation model to their reporting units and concluded goodwill was not impaired because the fair value exceeded the carrying amounts.
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.
The tables below reflect the sensitivity of Spire’s plans to potential changes in key assumptions:
Pension Plan Benefits:

Actuarial Assumptions
 
Increase/ (Decrease)
 
Estimated Increase/ (Decrease) to Projected Benefit Obligation
 
Estimated Increase/ (Decrease) to Annual Net Pension Cost*
Discount Rate
 
 
0.25
 %
 
 
 
$
(17.9
)
 
 
 
$
0.6

 
 
 
 
(0.25
)%
 
 
 
18.7

 
 
 
(0.6
)
 
Expected Return on Plan Assets
 
 
0.25
 %
 
 
 

 
 
 
(1.1
)
 
 
 
 
(0.25
)%
 
 
 

 
 
 
1.3

 
Rate of Future Compensation Increase
 
 
0.25
 %
 
 
 
4.9

 
 
 
0.6

 
 
 
 
(0.25
)%
 
 
 
(4.7
)
 
 
 
(0.5
)
 
Postretirement Benefits:


Actuarial Assumptions
 
Increase/ (Decrease)
 
Estimated Increase/ (Decrease) to Projected Postretirement Benefit Obligation
 
Estimated Increase/ (Decrease) to Annual Net Postretirement Benefit Cost*
Discount Rate