CFA Institute Research Challenge Hosted in St. Louis Team B

Date:1/25/2017CurrentPrice:$64.65 Recommendation:HOLD Ticker:NYSE:SRHeadquarters:St.Louis,MO PriceTarget:$65.96(2%upside)

ExecutiveSummary WeinitiatecoverageonSpireInc.(SR)withaHOLDratingbasedona12-monthpricetargetof$65.96pershare,2%abovecurrentmarketvalue.Thisrecommendationisdrivenbyanalysisof: CompanyStrategies Spire’sprimarystrategyoverthepastfiveyearshasbeentoacquiregasutilitiesinordertoachievegrowth.Afterthreelargedeals,managementhassignaledthattheacquisitionstrategywillslowdown.Thiswillforcethecompanytorelyonotherdriversincludingorganicgrowth,infrastructureupgrades,andrecentinitiativeswithcompressednaturalgas(CNG)fuelingandtheSTLPipeline. CompetitivePositioning Thetwokeysuccessdriversinthisindustryare:(1)beingabletogrowacompany’sratebasebyaddingcustomersand(2)therateofreturnautilityisallowedtoearnbyitsregulator.ComparedwithothergasutilitiesintheUS,Spire’scompaniesoperateundermorefavorableregulatoryjurisdictions.However,theyalsohavefeweropportunitiestoachievecustomergrowthwithpoordemographicandeconomicgrowthinthestatesthattheyoperatein.Additionally,whileSpiredoesnotdirectlyfacecompetitionfromothergasutilitiesduetoregulatoryprotection,itdoesencounterminorcompetitivepressurefromelectricityandotheralternativeheatsources. Valuation Ourpricetargetwasderivedusingdividenddiscountmodel(DDM),relativePEmultiple,andhistoricalPEmultiplemethodologieswithequalweights.DuetothefactthatSpireboastspowerfuldividendgrowth,alowcostofcapital,andfavorablecomparisontopeercompanies,theDDMandrelativevaluationsresultedinbullishpricetargets.However,theutilitysectorasawholeistradingathistoricallyexpensivemultiples,causingustocreateamorecautioushistoricalvaluation.Withjust2%upside,ourpricetargetof$65.96doesnotprovideasufficientmarginofsafetytojustifyanattractiveentrypoint. FinancialAnalysis Spirehasenjoyedrobustearningsgrowththroughacquisitionsandhaslargelyusedittorewardshareholderswithincreaseddividendpayments.Theseacquisitionshaveresultedinmoreleverage,butSpireappearswell-positionedtohandlethatdebtloadwithanextremelylowcostofdebtandstrongcreditmetrics.Lookingforward,pooropportunitiesfororganicgrowthareaconcerntothecompanythatleadstoslowingearningsgrowthinourproformamodels.WealsoprojectinourmodelingthatanotheracquisitionbySpirecouldleadtotighteningcreditmetrics. InvestmentRisks Spireisexposedtoanumberofmaterialrisks.TheprimarydangerpresentisthenegativeimpactthatrisingratescouldhaveonSpire’scostofcapitalandprofitability.Otherkeyrisksinclude:thepossibilityofpayingalargepremiumonafutureacquisitionthatcouldoverleverthecompany,expansionintonon-regulatedbusinessesthatcouldincreaseearningsvolatility,andhighinstitutionalownershipthatcouldleadtoamajorstockpricedeclineifasignificantshareholderdecidestosell.

BusinessDescription

SpireInc.,formerlyknownasLacledeGroup,wasfoundedin1857andisanaturalgas(NG)distributioncompanywith53,200milesofpipelineand1.7millioncustomers.Spire’smarketcapofnearly$3billionmakesitthe5thlargestpubliclytradedgasutilityintheUS.Spire’ssubsidiariesinclude:LacledeGasandMissouriGasEnergy(MGE)inMissouri,AlagascoandMobileGasinAlabama,andWillmutGasinMississippi. Initsregulatedgasutilitybusiness,whichaccountsfor95%ofoverallcompanyrevenue,Spireservesresidential,commercial,andindustrialcustomers.Theresidentialsegmentmakesup92%ofSpire’scustomers,butthecommercialandindustrialcustomersarelargerclientsandaccountfor25%ofutilityrevenue. Thecompanyalsoengagesinunregulatedgasmarketingwhichhasgraduallybecomeasmallerportionofthebusinessasmanagementhasfocusedongrowthinotherareas.GasmarketingismoresuccessfulinanenvironmentofvolatileNGpricesandwidebasisdifferentials,butthesefactorshavenotbeenpresentconsistentlyoverthepastfiveyears.Asoftoday,gasmarketinghaslittleimpactonSpire’sperformancewhencomparedtothemuch-largergasutilitysegment. CompanyStrategies GrowthThroughAcquisition Management’sgrowthstrategyoverthepastfewyearshasreliedongasutilityacquisitionsofMGEin2013,Alagascoin2014,andEnergySouthin2016.ThisapproachhaslargelybeenmadepossiblebyM&Aexperienceamonghigh-rankingSpireofficials.CFOStevenRaschehasspentover30yearscreatingdealsinawiderangeofindustriesandChairmanoftheBoardEdwardGlotzbachisalsoaformerM&Aexecutive(Appx1).CompanyexecutiveshaveindicatedasrecentlyasOctober20161thattheactivepurchasingstrategywillslowdownandthatfurtheracquisitionscouldoverleveroroverextendthecompany(Appx2).Althoughsmallerdealsremainafuturepossibility,webelieveSpirewillbeprimarilyfocusedandreliantonorganicgrowthincomingyears. OrganicGrowthinGasUtilities Spireisabletostimulateorganicgrowththroughacquisitionofnewcustomersandimprovementofcurrentcustomerretentioninitsresidential,commercial,andindustrialsegments.OnerecenttechniquetoacquirecustomershasbeentoconvinceindustrialclientstoswitchtoNGasafuelsourcefromcoalorothermethods.WeseetighteningorganicgrowthopportunitiesforSpireandwillexpandupontheminthefinancialanalysissection. AcceleratingInfrastructureUpgradeInvestment OneofSpire’scorestrategiestosupplementrevenueistorapidlyupgradetheirpipelinesystemsthroughaprocesscalledInfrastructureSystemReplacementSurcharge(ISRS)forMissouriutilitiesandtheRateStabilizationandEqualization(RSE)systemforAlabamautilities(seeAppx4).Theseregulatorymechanismsallowthecompanytorecoveraportionoftheirinfrastructureexpendituresasrevenue.Thereasonregulatorsallowthisistoincentivizeutilitiestoreplaceagingcast-ironpipeswithsaferandmoreefficientplasticpipeline,whichbenefitscustomersinthelong-run.ThisstrategyhasbeenespeciallyeffectiveincombinationwithrecentacquisitionsasSpirehasacceleratedpipelinereplacementatMGEandAlagascotomatchthemorerapidrateofLacledeGas.ISRSrevenuehasincreased536%since2012withtotal2016revenueof$40.1million.ThissystemhasbeenausefultoolforincrementalrevenueandSpirewillcontinuetopursuepipelinereplacementwithnewlyacquiredMobileandWillmutGas.However,futurerevenuegrowthinthisareawillbelimitedasSpire’sinfrastructurebecomesmoreandmoremodernizedandtheystarttorunoutofcast-ironpipestoreplace.

InitiativestoDiversifyBusiness Spirehasmadeadvancestodiversifyoutsideofthegasutilitybusinessanddriveadditionalgrowth.In2013,thecompanyannouncedtheintenttoenterthecompressednaturalgas(CNG)fuelingbusinessandhassincebuilttwostationsthatprovidefuelforcommercialNGvehicles.Thesegmenthasnotyetturnedaprofitbutremainsaspeculativegrowthopportunity.Additionally,thecompanylaunchedtheSTLPipelineprojectin2016.ThepipelineisaninfrastructureinitiativetoconnectcustomersinEasternMissouritolow-costNGproductionfromtheMarcellusandUticashalefields.ItisdesignedtofurtherdiversifySpire’ssupplyportfolio,increasereliability,andimprovegaspricingforcustomers.TheSTLPipeline,whichwillbefullyownedbySpire,involvestotalinvestmentbetween$190-200millionandwillbeoperationalin2019.Accordingtocompanyreleases,LacledeGasisexpectedtobethepipeline’sprimarycustomer2.Itisimportanttonotethatnon-regulatedearningsinvolvemoreriskandvolatilitythanregulatedgasutilityearnings. IndustryOverviewandCompetitivePositioning DemandDrivers Regulation Inexchangeforgrantingtheexclusiverighttodistributeinagivenserviceterritory,regulatorsdeterminetherateautilityisallowedtoearn.Thegeneralequation,presentedontheleft,demonstratesthatonlytwomainfactorsdriveautility’sprofitability:allowedrateofreturnandratebase.Operatingexpense,depreciation,andtaxareallessentiallypasseddowntocustomersintermsofwhattheutilityisallowedtochargethem,andtheremainingprofittotheutilityisequaltoratebasetimesallowedreturn.Therefore,thekeysuccessdriversinthisindustryare:(A)beingabletogrowratebasebyaddingcustomersandincreasingthesizeofthecompanyand(B)therateofreturnutilitiesareallowedtoearnbytheirregulatoryjurisdiction.Ofthesetwofactors,onlythefirstisunderthecontrolofutilitycompanies.Thus,thecentralobjectiveofSpire’scorestrategiesistogrowtheirratebase.SeeAppx3forfurtherdetailsonregulation. GrowthinPopulationandHousing Spire’sresidentialsegmentisdirectlyaffectedbypopulationgrowthandhomeconstruction.Between1991and1999,66%ofnewhomesand57%ofmultifamilybuildingsconstructedusedNGheating(accordingtotheEIA)3.Additionally,theU.S.CensusBureaureported4anincreaseofover13millionresidentialgascustomers--potentially32milliongas-firedappliances--overthepasttwodecades.However,thestatesthatSpireoperatesinallhaveslower5-yearannualpopulationgrowththanthenationalaverageof0.74%.Thisindicatesthattherearefewerpotentialcustomersavailableinthosestatesthanelsewhereinthenation.Accountingfor92%ofSpire’scustomersin2016and67%ofoperatingrevenue,theresidentialsectorisheavilyinfluentialinSpire’sbusinessmix,sodemographicgrowthisquiteimportanttothecompany.

EconomicGrowth Whereasdemographicsdrivetheresidentialsegment,economicgrowthisthekeyfactorbehindSpire’scommercialandindustrialbusinesses.Asmorebuildingsriseandmoreenergyisutilizedduringperiodsofeconomicexpansion,itcreatesnewgasutilitycustomersinthosesegments.Onceagain,Missouri(0.68%),Alabama(1.05%),andMississippi(0.47%)alltrailthenationalaverageof2.25%intermsofannualgrowthinrealGDPsince2010,providingheadwindstofutureexpansionforSpire.SeeAppx4forfurtherdetail.

Weather Naturalgasdemandfluctuatesbasedonweather,andtemperatureisespeciallyimportantforSpireduringthewinterheatingseason.Acolderwinterthannormalcauseshigherdemandfor

heatinggas,whichimprovesSpire’sgrossmarginandoff-systemsales.However,operatingexpensesalsoincreaseasthecompanyincurshighercoststohandlegreaterdemand.Thisactsasanatural“hedge”onthebusiness,becauseinmoremildwintersloweroperatingexpensescancountermostofthenegativeimpactoflightdemand.Withthatbeingsaid,itisnotaperfecthedge--Spireperformsbetterfinanciallyincoldwintersandworseinmildones. RetirementofCoal-firedGeneratingCapacity MuchoftheexistingcoalcapacityintheUnitedStateswasbuiltduringa40-yearperiodfrom1950to1990.Acombinationofenvironmentalregulation,lowerdemand,andlossoffacultiesovertimehaspromptedtheretirementofcoal-firedgeneratorsinrecentyears.Coalgeneratorsthatfacedretirementin2015weremainlybuiltbetween1950and1970,withanaveragelifespanof54yearsuponretirement.Asthenewergenerators(thosebuiltafter1970)continuetoage,theywilllikelyfacesimilarshutdowns.In2015alone,theEIAfoundthat80%ofretiredelectricitygeneratingcapacitycamefromconventionalcoalmethods5.Spirefacesfavorableconditionsunderindustrychangebecauseascoalgenerationisretired,moreindustrialcustomerswillbeavailabletoconverttoNGasafuel. CompetitivePositioning StrongMarketShareinOperationalStates Spire’sMissouriutilitiesLacledeGasandMGEdominatethestate’sNGdistributionmarketwith73%ofcustomersand87%ofrevenue.SpirepostsanotherstrongshowinginAlabamawith48%ofcustomersand51%ofrevenue.Asthemarketleaderinbothstates,thecompanyenjoyseconomiesofscaleininfrastructureandoverheadcosts.Spiresharestheirstateswithacollectionofpublicandmunicipalutilities,butregulationdictatesuniqueserviceterritoriesforeachcompany.Withnooverlapindistributionregions,thereislittlecompetitiverivalrybetweengasutilities(seeAppx5). SubstitutesforGasHeating ThemainsubstituteforNGasaheatingsourceiselectricity;nearlyhalfofUShomesin2015usedgasasopposedto39%usingelectricity.Gassystemsarecurrentlythecheapestmethodofheatingandcanalsoheathomesfasterthanelectricunits,akeyadvantageforcomfort-seekingconsumers.Asevidentinthechartontheleft,NGisbyfarthemostpopularfuelchoiceintheMidwest,whereLacledeGasandMGEoperate.However,electricityhasgreateruseintheSouthwithAlagascoandEnergySouth.Thisreflectstheregion’swarmertemperatures,loweraggregateheatingbills,andlessneedforrapidheating.SignificantswitchingcostsofinstallinganewheatingsystemdecreasethelikelihoodofSpirelosingcustomerstootherheatingmethods.SeeAppx5forfurtherdetail. RegulatoryJurisdictions RegulationisakeydriverofsuccessinthegasutilityindustrybecausecompaniesrelyonapprovalfromPublicUtilityCommissionsinordertoraiseretaildistributionrates.AccordingtotheRegulatoryResearchAssociates(RRA),theaverageROEforgasutilitiesin2015was9.60%6.Incomparison,Spire’sMissouriutilitieswereallowedtoearn10.45%in2015andtheirAlabamautilitiesearned10.8%;bothwellabovethenationalaverage.Additionally,PacificResearch7ratedbothMissouriandAlabamaastop-quintilestatesintermsofenergyregulatoryenvironments.StrongregulatorytermsmeanthatSpirewillconsistentlybeabletoout-earnpeersthatoperateinlessfavorablejurisdictions.TheacquisitionofAlagascowasparticularlyadvantageousforSpireasitprovidedthecompanywithadditionalgeographicandregulatorydiversificationthattheyhadbeenlacking.

M&AClimate Slowingorganicgrowthhascausedcompaniesintheutilityindustrytolookoutwardinseekingexpansion.Therehasbeenmajorconsolidationfueledbyutilities’abilitytoissuedebtatextremelylowcosttofinanceacquisitions.Since2014,sixmajorgasutilitycompanieshaveclosedonbilliondollardeals.Themajorityofthedealshavebeenstrategicinnature,coordinatedbetweentwoutilitycompaniesseekingtoobtainsynergiesfromtheircombination.Onenotetoconsideristhefactthatcompanieshavebeenpayinglargepremiumsintheseacquisitions--theaveragedealsince2014waspricedataPEmultiple18%higherthantheutilitysectoraverage(seeAppx6fordetails).Webelievethisindicatessomewhatofasenseofurgencyonthepartofindustrymanagementteamstoachievegrowthandsatisfytheirinvestors.

CorporateGovernance Thecompany’scorporategovernanceishighlyratedoverall,withalargelyindependentboard,strongauditprocedures,andcloselymonitoredinternalcontrols.Twoareasofpotentialconcernweidentifiedlookingforwardare(A)shareholderdilutionfromequityfinancingand(B)lowinsiderownershipthatmayindicateamisalignmentofinterestsbetweenmanagementandshareholders.SeeAppx1forafulldescriptionofSpire’sgovernance. ● GovernanceCommittees-Establishedfivecommittees:audit,corporategovernance,compensation,investmentreview,andstrategy ● ShareholderRights-Onevotepersharepolicy;righttodividends,nodividendreinvestmentplan,onlinevoting ● Oversight-BoardofDirectorsconductsanannualself-evaluationreportedtotheCorporateGovernanceCommittee. ● Compensation-CompensationCommitteereviewsdirectorcompensationannually

InvestmentSummary WeissueaHOLDrecommendationonSpirewithapricetargetof$65.96derivedfromadividenddiscountmodel,relativemultiplevaluation,andhistoricalmultiplevaluation.Thevaluationsaresupportedbyacombinationofseveralbullishandbearishfactors:

Bullish StableGasUtilityBusiness AfteracquisitionsofMGE,Alagasco,andEnergySouth,SpirehasbecomethedominantgasdistributorinMissouriandAlabamaandcurrentlyhasover1.6millioncustomersintheirgasutilitysegment.BecauseofregulationthatallowsSpiretoearnasetROEupontheirratebase,thisportionofthebusinessisprotectedfromvolatilityinNGpricesandprovidesarelativelyconsistentandlow-risksourceofcashflow. RobustDividendGrowth Spire’sgrowingdividend,currentlyatayieldof3.02%,isoneofthecompany’smostpromisingareas.14yearsofconsecutivedividendincreaseshaveescalatedintoa3.39%CAGRoverthepastsixyearsandawhopping7.14%hikeannouncedfor2017.Spirestillhasroomtoexpandtheirdividendwhileremainingwithintheindustrynormforpayoutratio,andthereforeweseethepossibilityoffurthergrowthahead.ThispotentialtranslatesintoabullishDDMvaluationof$73.49pershare. FavorableRegulatoryEnvironments Regulationisakeyfactorofsuccessinthegasutilityindustry,andSpireispositionedintwoofthenation’sstrongerjurisdictionsinMissouriandAlabama.ThismeansthatSpireisallowedtoearnahigherROEthantheirpeers,givingthecompanyalong-termcompetitiveadvantagein

termsofprofitability.ThisedgeshouldalsotranslateintoSpiremeritingahighermarketmultiplethanpeersthatoperateunderunderlessfavorableregulatoryconditions.Wereflectstrongregulatoryjurisdictionsinourrelativevaluationof$71.05pershare. Bearish HistoricallyHighIndustryValuations Aflighttoyieldhascausedtheutilitysectorasawholetotradeata36%premiumtoitshistoricalaverage(accordingtoNYUdata)8.NomatterhowfavorableSpiremaylookcomparedtoitsindustry,wemustkeepabroadscopeofanalysisandacknowledgetherisksassociatedwithbuyingintosuchanexpensivesector.Ifutilitiesasawholetakea20%haircutontheirmultiple(stillleavingthemtradingsignificantlyhigherthantheirhistoricalaverage),Spirewillnotbeimmuneandcouldfaceamajorselloff.

SignificantInterestRateRiskforUtilities InDecember,thefedfundsrateroseforthesecondtimeintwoyears,andthelatestFeddotplot9indicatesthatmorehikesareexpectedahead.Besidestheirdirectimpactoncostofcapital,risingrateshurtutilities’profitabilitybecauseofaregulatorylag(seeAppx7fordetails).Webelievethatmanyinvestorshaveenteredutilitystocksinresponsetolowbondyieldsandthatifbondyieldscontinuetorise,wecouldseemanyofthoseinvestorsrotateoutofthesectorandautilityselloff.Ourviewisthatwithutilitiestradingatloftyvaluationsthemarkethasclearlynotpricedinthenegativeimpactthatrisingrateswouldhaveonutilityprofitsandcapitalcosts. NarrowMarginofSafety WhileourpricetargetforSpireisabovecurrentmarketlevel,itprovidesonlyarazor-thinmarginofsafetyforinvestment.Wedonotbelievea2%marginprovidesenoughroomforerrorinourcalculationstoissueabuyrecommendation.Ahighermarginofsafetyinthevicinityofatleast15-20%isneededtoprovidesufficientprotectionfromthedownsideriskdescribedabove. Insummary,Spirecompareswelltoitspeersandmayshowupsidewithcontinueddividendgrowthpotential.However,wecannotoverlookoverallloftyvaluationsintheutilitysectordespitetheobviousmacroeconomicheadwindofrisinginterestrates.RelativelyevenbalancebetweenthesepositivesandnegativesjustifiesaHOLDrating. Valuation Methodology WevaluedSpireusingthreeequally-weightedmodels.BecauseSpirehasastronghistoryofreturningcashtoshareholders(payingadividendeveryyearsince1946)andbecauseofthevitalroledividendsplayuponinvestingintheutilitysector,wedecidedtouseadividenddiscountmodel.Then,giventhefactthatregulationleadstolittledifferenceinoperationalperformancebetweenmostNGutilitycompanies,weappliedarelativePEmultiplevaluationcomparingSpirewithninepeers,adjustingfortheregulatoryandgrowth-orientedqualityofenvironmentsinwhichSpireoperates.Finally,weaddedahistoricalPEmultiplevaluationtoexaminewhereSpireandotherutilitieshavetradedoverthepast20yearsandtoestimatewhatmultiplethecompanymeritstoday.TherelativemodelcriticallyexamineswhereSpireshouldtraderelativetoitspeers,whilethehistoricalvaluationisamorebig-picturemodelthatprotectsourvaluationinthecasethattheentireutilitysectoristradingaboveorbelowitsvalue.Eachareequallyimportantfordeterminingpricetarget. DiscountedCashFlowValuation Wealsocompletedafreecashflowtofirm(FCFF)valuationofSpirethatwedidnotchoosetoincludewhenformingourpricetarget.TheprimaryreasonforthisisbecauseSpirecanrecoversignificantportionsoftheircapitalexpenditure,theybenefitfromincreasedspendingthatcauses

freecashflowtobelower.ThisleadstoFCFFvaluationsystematicallyundervaluingthecompany.Weactuallyprojectinourmodelthatthecompany’smassivefive-yearinvestmentplanforinfrastructureupgradesandtheSTLPipelinewillleadtonegativefreecashflowoverthenextfewyears(seeAppx10)andthisfactorsimplymakesDCFvaluationapoormethodologyatthispointintime.Also,Spirehassporadicbutextremeshiftsinnetworkingcapitalthatmakeitdifficulttoprojectfreecashflowforfutureyears.BothofthesefactorsledustoadecisionthatthemodelwasunfitforinclusionandthatDDMandmultiplesvaluationswouldprovideabetterpictureofSpire’struevalue. DividendDiscountModel Applyinga3.5%highdividendgrowthratefor5yearsand1.15%terminally,thepresentvalueofSpire’sfuturedividendpaymentsdiscountedata3.97%costofequityis$73.49pershare.Teamassumptionsandrationaleareprovidedbelow: CostofEquity Forriskfreerate,weutilizedtheUS10-yeartreasuryyieldof2.53%.MRPof4.50%isbaseduponanimpliedERPcalculationusingdataprovidedbyNYU10.Tocalculatebeta,wetooktheregression-derivedbetas,taxrates,anddebt/equityratiosofthetengasutilitiesthatformSpire’speergroupandfoundeachoftheirunleveredbetasusingHamada’sformula11.Fromtheaverageofthoseunleveredbetas,wereleveredSpire’sbetabasedonits2016taxrateandD/Eandreachedafinalvalueof0.32(seeAppx10forthiscalculation).Whilethebetamayseemlow,theregulatedutilitysectorhasalwaysbeenrecognizedaslowriskbyinvestorsandthereforeenjoyedlowerbetas;0.32isnotatalloutoftheordinaryinthisindustry. HighGrowthRate Spire’srecentexpansionhaspropelledstrongincreasesindividends,withpaymentsgrowingataCAGRof3.6%overthepastfiveyears.Managementrecentlyacceleratedthisrateevenfurtherbyannouncinga7.14%increasefor2017.Thecurrenttempoofdividendhikesismuchmorerapidthanithasbeenhistorically;since1996,dividendgrowthhasbeenamoremodest2.0%compoundedannually.Managementmaybereluctanttoslowdownthecurrentpace,asitcouldsuggesttheirgrowthstrategyforthecompanywasstartingtolosemomentum.Forthisreason,wemodela3.5%highgrowthrateforfiveyears,nearlycontinuingthetrajectorythatdividendshavebeenfollowingoverthepastfive.Evenifearningsgrowthislowerthanthatrate,managementhasroomtoexpandthepayoutratio(currentlyat60.9%)whilestillstayingintheirnormalhistoricalpayoutrangeofabout50-75%. TerminalGrowthRate Atthefive-yearpoint,weprojectthatdividendgrowthwillstabilize.Spire’sorganicgrowthisdependentbothuponthegrowthdemographicallyandeconomicallythatdrivestheirresidentialandcommercial/industrialsegmentsrespectively.Wetookaweighted-averagecalculationof5-yearpopulationgrowthineachofthestatesSpireoperatesweightedbynumberofcustomersthecompanyhasineachstateanddeterminedarateof0.30%.Weaveragedthatwithlong-runUSGDPgrowthof2%(assumingthatlong-runeconomicgrowthinMissouriandAlabamawillreverttothenationalmean)toachievethe1.15%terminalrate. RelativeMultipleValuation TheinitialstepindevelopingarelativemodelwasforminganinecompanypeergrouptoanalyzeincomparisonwithSpire.Wesearchedforcompaniesthatoperateinthesamenaturalgasregulatedutilitybusiness,havesimilarsmalltomid-sizemarketcapitalizations,havesimilarregressionbetasanddividendyields,and(ifpossible)operateinthesamestatesasSpire.SeeAppx9foralistofthecompaniesandtheirkeydata. Oncethegroupwasselected,wetooktheiraverageforwardPEandreachedanindustrymultipleof20.1.Fromthatvalue,wemadeindividualPEadjustmentsforMissouriandAlabama(the

CAGR of

statesthathold99%ofSpire’scustomers).Whentheresultwasmultipliedbythecompany’sprojected2017earningsof$3.55,wereachedavalueof$71.05pershare.

● MissouriWeassignedMissouriaPEmultipleof19.1x,a5%discounttotheindustry.ThisdesignationrepresentsMissouri’saverageregulatoryatmosphereandslightlybelow-averagerateofpopulationandeconomicgrowth.SeeAppx4foramorecompletedescriptionofthisrationale. ● AlabamaForAlabamaweappliedaPEmultipleof22.1x,whichis10%abovetheindustryaverage.ThisreflectsAlabama’sstatusasoneofthebestregulatoryjurisdictionsinthenationandsolidstateeconomicgrowth.Limitingourupsideonthemultipleisbelow-averagepopulationgrowth.SeeAppx4forfurtherdetail. (Fortheremaining1%ofthecompany,weassignedthemarketmultipleof20.1xearnings.) HistoricalMultipleValuation Overthepast20years,utilitieshaveonaveragetradedatjust14.8timesearnings12.Spire,withabitmoregrowthandexcitementthanmostutilities,hasaverageda16.05multipleoverthepast20years13.TheutilitysectortodayistradingataP/Eof20.2andSpireisat20.0,representing44%and25%premiumstohistoricalaverage. Duringthe30-yearbullmarketinbonds,yield-seekinginvestorshavemigratedtodividend-payingequitysectorslikeutilities,consumerstaples,andtelecomtoreplaceanemicyieldsinfixedincome.Thishasledtotherun-upinvaluationsofthosesectors.OneconcerningmeasureofvaluationforSpireisdividendyield;despitecontinualincreasesinpayments,theiryieldintermsofpercentagehascomedownsignificantlyoverthepast20years.Thepriceofthestockhasrisenmorerapidlythandividendshavebeenincreased. Wedonotseeanyreasonforutilitiestocontinuetobe36%moreexpensivethanhistoricallevels.Whilebondyieldsandinterestratesremainlowfornow,thereissignificantriskofcontinuedratehikesfromtheFedthatwillmaketheyieldondividend-payingequitieslessattractiveincomparisontobonds.Ifthependulumswingsback,therecouldbemajorlossesinutilitystocksandinSpire.Withthatriskinmind,wechoosetobeconservativeinourhistoricalmodel,valuingSpireattheaverageofthe20-yearSpirePEandthe20-yearutilityPEresultinginamultipleof15.03.Thistranslatesintoabearishvaluationat$53.34pershare. FinancialAnalysis EarningsGrowthTrendingUpfromAcquisitions SinceSpirebeganmakingacquisitionsin2012,netincomehasgrownata17.61%compoundannualrate--wellabovemanagement’sstated4-6%targetrateforearningsgrowth.ThisislargelyaresultofearningsfromMGEandAlagascoaccruingtoSpire’sbottomlinein2014-2015.Adjustedforsharedilutionandone-offitems,growthintermsofneteconomicearnings*hasbeenarobust5.22%annuallysince2010.Inthelongrun,theperformanceSpirehasenjoyedoverthepastthreeyearsisunsustainableunlessthecompanycontinuestomakelargeacquisitions(whichmanagementisnotsignalingandwedonotanticipate).FutureearningsperformancewillbereliantprimarilyonorganicgrowthwithinSpire’ssegments. *In2010,thecompanybeganreportingintermsofnon-GAAP“NetEconomicEarnings”tomeasureperformance(seegraphonleft).Forourlong-runhistoricalanalysis,wegaugeintermsofnetincomeforthesakeofconsistency. WeakOrganicGrowth Addingcustomersandincreasingratebasearethekeydriversoforganicgrowthinthegasutilityindustry.WhileSpire’stotalutilitycustomershaveincreasedby167%since2012,themajorityofthoseaddedcustomerswerepurchasedthroughSpire’sthreemajoracquisitions.Whenweexcludecustomersaddedthroughacquisition,adjustedgrowthbecomesamere1.37%annually

since2012.ThisisnotsurprisingconsideringthatthecompanyhasWAdemographicgrowthof0.30%intheirstatesandWAeconomicgrowthof0.79%inthem(seeAppx4).RatingagencyFitchalsoseesslowcustomergrowthaheadforSpire,projecting0.5%growthannuallythrough202014intheirmodels. ProFormaIncomeStatement Spire’smanagementhasbeenvigorouslypursuingotherearningsdriverssuchasinfrastructureupgrades,CNGfueling,andtheSTLpipelineinordertofindalternativewaystomeettheir4-6%growthtarget.However,wedonotanticipatethattheseprojectswillbeenough.Thefuelingstationshaveyettoproveanylevelofprofitability,andtheSTLpipelinewillbeamajorcashdrawinthenextcoupleofyearsbeforecontributingtoearningsin2019.UpgradinginfrastructurehasworkedforSpire,butthecompanycannotrelyonthatalonebecausetheyhaveafiniteamountofpipelineinthegroundandrecognizablerevenueislimitedtotheamountofpipelineSpirecanjustifiablyreplace.Inourproformaincomestatement(seeAppx10),weprojectthatoperatingincomewillbe2.5%in2017and1.4%in2018toreflectsloworganicgrowth.In2019-2021,wepredictthatmanagementwilllooktosparkgrowthwithanotherminoracquisition.Wemodel5.15%CAGRinoperatingincomeforthosethreeyears. AcquisitionsLeadtoMoreDebtinCapitalStructure Spire’sthreemajoracquisitionshavebeenfinancedwithanaggregatemixof52%debtand48%equity.TherecentdebtissuancesinvolvedhavedrivenSpiretoholdingahigherlevelofdebtthanthecompanyhashistoricallycarriedatadebt/equityof1.03.Inspiteofthis,over-leveragingdoesnotappeartobeaconcernwithSpire’sinterestcoverageandfinancialleverageratioslittlechangedfromtheirhistoricalaverages.Moody’sdowngradedSpire’screditin2014attheparentleveltoBaa215inresponsetoincreasedconsolidateddebt,butnowhasastableoutlookatthatlevel.Spire’sissuanceofparent-leveldebtatextremelylowinterestratesandintherangeof2-4%alsoaidsinmakinginterestexpensemoremanageable. ProFormaKeyRatios ThedownsideofpursuinganotheracquisitionisthatSpirewouldbeforcedtoissueadditionaldebtand/orequityfinancing,tighteningtheircreditratios.Weprojectedthecompany’skeyratiosfiveyearsoutbasedonourproformaincomestatementandbalancesheet,andthemostproblematicyearis2019duetoouranticipationofaminoracquisition.Weprojectthatbecauseofacquisitioncostsandanincreaseddebtload,Spire’sinterestcoverageratiowillfallfrom3.65xfrom3.38xin2019.Thiscouldbealargeenoughdropforcreditagenciestotakenoticeandissueanotherdowngrade(seeInvestmentRisksfortheimpactthiscouldhave).Otherkeyratiosremainfairlystableinourmodelthroughfiveyears. DecreasingAllowedReturnsTiedtoLowerInterestRates Spire’sROEhasbeenfallingoverthepasttenyears;however,thisisnotaconcernforthecompany.ThereasonfortheROEdowntrendisthatregulatorsacrossthenationhavebeendecreasingtheirallowedreturnstoreflectlowercostsofcapitalforutilities.Therefore,whileSpire’sprofitabilityintermsofROAandROElookstobedeterioratingonthesurface,thecompanyisearningsimilarrealreturnswhenadjustedforcostofcapital. InvestmentRisks RisingInterestRates HigherinterestrateshaveadirectimpactonSpire’sfinancialperformance.Anincreasedcostofcapitalresultingfromrateincreasesmightweighonthecompany’scapital-intensivestrategies,especiallyinfrastructureupgradesandtheSTLPipelinedevelopment.ItcouldalsobeaburdenuponSpire’shigherdebtloadandmakefutureacquisitionfinancingmoredifficult.Besidestheirdirectimpactoncostofcapital,risingrateshurtutilitiesbecausewhileregulatorsattemptto

Missouri Market

Alabama Market

lowerallowedratesofreturninlinewithfallinginterestrates,theyarenotperfectlyefficientandtypicallylagbehindreality.Thiscauseslowerprofitsforutilitieswhenratesarerising(seeAppx7). PotentialReturntoM&AMarket Withmodestorganicgrowthopportunities,aconsolidatingindustry,andamanagementteamwithahistoryofM&Atransactions,Spiremaybetemptedtomakeanother$1billion+acquisition.GivenexpensiverecentM&Avaluations(seeAppx6),thiscouldoccuratasteeppremiumandwouldlikelyinvolvebothdebtandequityfinancingtokeepSpirearoundtheirtargetlong-termcapitalization.HigherdebtlevelsassociatedwithanotheracquisitioncouldleadtoacreditdowngradeortoSpire’smanagementandresourcesbecomingoverextended.Management’spatienceinconferencecallsandpressreleasesisafactortowatchclosely. CreditDowngrade Asdiscussedinpriorsectionsofthereport,Spirecarriesriskofreceivingacreditdowngradeiftheygothroughwithanotheracquisition.Adowngradewouldincreasecostofdebt,meaningthatwhenSpirehastorefinanceorissuenewdebt,theywillbeforcedtodosoatahigherrate.Higherinterestexpensecouldbeadragoncompanyprofitability,asitisnoteligibletobepasseddowntocustomersintheregulatorysystem.AninvestmentgradecreditratingisimportantforaregulatedutilitytomaintainandwedonotexpectSpiretotakeonenoughleveragetofallbelowthatthreshold. ExpansionintoNon-RegulatedBusinesses WhileSpire’sregulatedgasutilitybusinessiscurrentlygenerating95%ofcompanyrevenue,thecompanyhasannounced16anintenttobemoreinnovationalandexpandintonon-regulatedbusinesses.ThefirstexampleofthishasbeentheirCNGfuelinginitiative.Whilenon-regulatedoperationshavethepotentialtoimprovegrowth,theyalsocarryahigherlevelofriskthantheregulatedbusinessandcouldincreasethevolatilityoffuturecompanyperformance. STLPipelineBacklash Otherrecentpipelinedevelopmentprojects,particularlytheDakotaAccesspipelineinSouthDakota17,havefacedprotestsfromenvironmentalistsandfrompeoplewhoinhabitlandthatthepipelinesaretravelingthrough.ItisariskworthconsideringthattheSTLPipelinemayfacesomesimilarbacklashthatcouldleadtodelaysinitsdevelopment.However,inanattempttomitigatethisrisk,SpiremanagementhasbeenworkingwithandengagingcommunitiesthatthepipelinewilltraverseinadditiontoextensiveworkwithMissouriregulatorstoensureassmoothaprocessaspossible. HighInstitutionalOwnership Approximately80.9%ofSpire’ssharesareownedbyinstitutions,including27.8%ownershipbythetopfiveinstitutionalholders.TheriskwithhighinstitutionalownershipisthatifanymajorownersdecidetoexitSpire,itcouldtriggeramajorselloffinthestock.Atotalof4.6millionsharesweresoldbyfundsinQ42016against3.3millionacquiredinthequarter,whichindicatesdownwardmomentum.SeeAppx11.LackofAccesstoShaleGasResources ThepastdecadehasseenaboominNGproductionfromunconventionalshalegasresources,whichprovidershavebeenabletoreachduetotechnologicaladvancementsindrillingandhydraulicfracturing.In2013,shalegasproductionaccountedfornearly40%oftotalgasproductioninthecontinentalUS.Currently,Spirelacksthenecessaryinfrastructureandtechnologytotapintoshalegas.However,theSTLPipelineaimstogiveSpireaccesstoshalegasfieldsinOhio,Pennsylvania,andWestVirginiathrougha60mileconnectiontotheexistingRockiesExpressandPanhandleEasternPipeline.

Appendix1:ManagementandCorporateGovernance KeyManagementProfiles

Name Title CareerwithSpire OtherExperience

SusanneSitherwood PresidentandCEOofSpire

-PresidentandCEOsinceFebruary2012 -PresidentsinceSeptember2011

-PriortoSpirecareer,waspresidentofthreeutilitiesatAGLresourcesservingover1.6millioncustomers. -Over30yearsofexperienceinthenaturalgasindustrywithexecutivepositionsingassupply,storageandtransportation,construction,engineering,andratesandregulatoryaffairs.

SteveLindsey ExecutiveVPandCOOofDistributionOperationsofSpire,CEOofLacledeGasandAlagasco

-ExecutiveVPandCOOofDistributionOperationssinceOctober2012

-BeforejoiningSpire,spent23yearsinthenaturalgasutilitybusinessatAGLresources,workingprimarilyasanexecutiveinoperations. -Bachelor’sinmechanicalengineeringfromGeorgiaInstituteofTechnology.

StevenRasche ExecutiveVPandCFOofSpire

-ExecutiveVPandCFOsinceNovember2013 -WorkedwithSpiresince2009

-BeforejoiningSpire,spentnearly30yearsatTLCVisionCorporation,adiversifiedeyecareservicescompany,wherehewasCFOandoversawnumerousM&Adeals. -WaspreviouslyCFOofPublicSafetyEquipmentInc.,amanufacturerofwarningandspeeddetectionsystems.

Source:Spirewebsite,CompanyFilings

BoardofDirectors

Director Independent Tenure CareerBackground

EdwardGlotzbach,68(Chairman)

Yes 12years FormerViceChairman,MergersandAcquisitions,ofInformationServicesGroup.

SuzanneSitherwood,56

No 6years SeeKeyManagementProfiles.

MarkBorer,62 Yes 3years FormerPresidentandCEOofDCPMidstreamPartnersLP.

MariaFogarty,57 Yes 3years FormerSeniorVPofInternalAuditandComplianceatNexteraEnergy.

RobJones,58 Yes 1year Formerco-headofBankofAmericaMerrillLynchCommodities.20yearsofinvestmentbankingexperienceworkingwithnaturalgasandutilitycompanies.

BrendaNewberry,63

Yes 10years FormerChairmanoftheBoardofTheNewberryGroup,aproviderofITconsultingservices.Co-foundedthecompanywithherhusband.

JohnStupp,Jr.,66 Yes 12years CurrentPresidentofStuppBros.,Inc.,aprivatelyownedcompany

thatprovidesinfrastructureintheUnitedStatesandservestheSt.Louismarketasaprogressivecommunitybank.

MaryAnnVanLokeren,69

Yes 17years FormerChairmanandCEOofKreyDistributingCo.,anAnheuserBuschwholesaler.CurrentlyservesontheboardofMascoCorporation.

Sources:Morningstar,SpireWebsite CorporateGovernance

WeexaminedtheInstitutionalShareholderService(ISS)GovernanceQuickScoreinordertoanalyzeSpire’scorporategovernancepractices.Thescoresarebasedonadecilerankfrom1-10ofothercompaniesintherelativeindexorregion,with1beinglowergovernancerisk.AsofJanuary2017,Spire’sratingsare:

Source:ISS

OurevaluationofSpire’sgovernanceisinlinewiththeISSratings.Teamanalysisofeachcategoryisprovidedbelow: Audit Spire’sindependentauditorisDeloitteandTouche,thelargestaccountingfirmintheUS.DeloittefoundthatSpiremaintainedeffectiveinternalcontrolsasofSeptember30th,2016.Spirealsohasanauditcommitteeconsistingoffiveboardmembersthatseektopreservetheintegrityofcompanyfinancialstatementsandmonitortheperformanceofthecompany’sinternalcontroldepartment.GivenSpire’sstatusasaregulatedutility,regulatorsarealsokeepingacloseeyeonthecompany’sfinancialsinordertosetafairrateofreturn.Thislowersthelikelihoodofanymisreporting. Board WiththeexceptionofCEOSuzanneSitherwood,theentiretyofSpire’sboardismadeupofindependentmembers.Thereisavarietyoftenuresontheboard,withfourmembersat1-6yearsofexperienceandfourmembersatamoreextensive10-17years.Wefeelthisprovidesagoodmixoftheindependenceandfreshoutlookprovidedbynewdirectorsandthestabilityandexperienceoflonger-tenureddirectors.Additionally,nodirectorisovertheageof70.Theboardhasmostlynewly-retiredexecutiveswhoshouldstillpossesstheenergyandexpertisetooverseeacompany.WedonotanticipateissuesorconflictsofinterestwithSpire’sboardofdirectors. ShareholderRights Spirehasapoorshareholderrightsscore,whichwebelieveisattributabletotwomainfactors.Thefirstisthatstockholdershaveseenafairamountofdilutionoverthepastfiveyearsasaresultofmanagement’saggressiveacquisitionstrategy.Sharesoutstandinghavedoubledfrom22millionin2012to44millionin2016.WhileSpire’sacquisitionshavegonesmoothlysofar,equitydilutionisundesirabletoshareholdersandfurthershareissuancesarearisktothem.Second,managementpossesseslowinsiderownershipofthecompanyatonly1.4%ofshares.Thiscouldcreateamisalignmentbetweenmanagementandshareholderinterests. Compensation Afour-personcompensationcommitteeconsistingofonlyindependentdirectorsisinchargeofexecutiveanddirectorcompensation.Spireutilizesashareholder-approvedequityincentiveplanunderwhichtheboardofdirectorscanawardstockcompensationtomanagersformeetingperformanceobjectives,withawardstypicallyvestingoverathree-yearperiod.Thecompanydoesnotawardstockoptions.WeseenoconcernswithSpire’scompensationsystem.

Appendix2:DebtAnalysis

Spirechosetoissuemuchoftheiracquisitiondebtattheparentlevelbecausetheyhavebeenabletoissueitatalowercost(aWAofonly3.33%).However,theresponsetomoredebtwasaparent-levelcreditdowngrade18in2014toBaa2fromMoody’sandBBB+fromFitch,leavingSpirewithalowerratingthansubsidiariesLacledeGasandAlagasco.Thecompany’sdebtretainsinvestmentgradestatusandcreditratingsarenowstablefrombothagencies.

Appendix3:NaturalGasUtilityRegulation Inexchangeforgrantingtheexclusiverighttodistributeinagivenserviceterritory,PUCs(PublicUtilityCommissions)determinehowmuchanaturalgasutilityisallowedtoinvestandinwhat,howmuchitcancharge,andwhatitsprofitmargincanbe.Thegeneralequation19isasfollows:

R=B•r+E+d+T

R:revenuerequirementB:ratebase,ortheamountofcapitalorassetsautilitydedicatestoprovidingservicer:allowedrateofreturnE:operatingexpenses,includingsuppliesandlabord:annualdepreciationT:taxes Asevidentfromthisequation,twomainfactorsdriveautility’sprofitability:allowedrateofreturnandratebase.Operatingexpense,depreciation,andtaxareallessentiallypasseddowntocustomersintermsofwhattheutilityisallowedtochargethem,andtheremainingprofittotheutilitycompanyisequaltotheproductoftheratebaseandtheallowedreturn.Therefore,thekeysuccessdriversinthisindustryare:(A)beingabletogrowautility’sratebasebyaddingcustomersandincreasingthesizeofthecompanyand(B)theregulatoryjurisdictionoftheutilityandwhatreturntheyallowthecompanytoachieve.Ofthesetwofactors,onlythefirstisunderthecontrolofutilitycompanies. Theprincipaladvantageofrateofreturnregulationisthatservicepricescanbeadjustedtoeachcompany’schangingconditions,creatingamorestableandpredictableprofitstream.Thisstabilitylowersrisktoinvestorsandcreditors,resultinginalowcostofcapital.Utilitiesarenotoriouslysought-afterbyinvestorsforpredictable,safereturns. Thereareacoupleofdownsidestorateofreturnregulationaswell.Thefirstofthesecanbeobservedthroughthestructureofregulationincentivizingcompaniestooverinvestincapital,whichincreasestheirratebaseandcoincidentallytheirprofits.ThisconceptisknownastheAverch-Johnsoneffect20,andpunishescustomerswhenitoccurswithhigherutilitybills.Anotherdisadvantageisthefactthatbecauseoperatingcostsarepasseddowntoconsumers,therearefewincentivesformanagerstooperateefficiently.Athirdproblemisthatwheninflationishigh,ratecaseshavetobeadministeredfrequentlyinordertokeepupwithchangingprices.Theprocesscanbecostlyandtime-consuming.Thismaybepertinenttodaywithsomeexpectationsofhigherinflationinyearstocome(seeAppx7). InAppendix4,wewillexamineinmoredetailtheregulatoryjurisdictionsofeachstatethatSpirehasmajoroperationsintodeterminetheirfavorability.

Missouri Market

Appendix4:StateProfiles A. Missouri StateIndustryData(asof2015)

Source:AmericanGasAssociation GrowthMetrics Population Overthepastfiveyears,Missouri’spopulationhasgrownatacompoundedannualrateof0.31%,wellbelowthe0.74%CAGRoftheUSasawhole. GrossDomesticProduct Between2010and2015,MissourirealGDPgrewatanannualrateof0.68%,alsomuchlowerthanthe2.25%CAGRoftheUS. CompetitiveClimate: Spire’scompetitioninMissouriconsistsofseveralutilitycompaniesthat,similarlytoSpire,eachhaveoperationsinmultiplestates. AmerenMissouri Amerenisapubliclytradedpowercompanywith130,000naturalgascustomersinEasternandCentralMissouri.TheyhaveamuchlargerelectricitybusinessinMissouri,with1.2millioncustomersinthestate21. EmpireDistrict/LibertyUtilities EmpireDistrictElectricCompanywasofficiallyacquiredbyLibertyUtilitiesonJanuary1st,2017.Empirehasatotalof218,000customersinMissouri,Kansas,Oklahoma,andArkansas,whichincludesbothelectricandgascustomers22. SummitNaturalGas Summitwasfoundedin1995andservesover40,000naturalgascustomersinColorado,Missouri,andMaine23. RegulatoryEnvironment Summary TheregulatorybodyinMissouriistheMissouriPublicServiceCommission(MoPSC).TheMoPSCregulatesconstructionandmaintenanceoffacilities,operations,safety,theratesthatutilitiesmaychargecustomers,thetermsofservicetotheircustomers,andtherateofreturntheyareallowedtorealize,aswellastheaccountingtreatmentforcertainaspectsoftheiroperations24.Officially,Missouriutilitiesareallowedtoretain15%to25%ofthefirst$6.0millioninannualincomeearned(dependingonthelevelofincomeearned)and30%ofincomeexceeding$6.0millionannually25.

ThroughMissouri’sInfrastructureSystemReplacementSurcharge(ISRS)program26,LacledeandMGEareallowedacceleratedcostrecoveryoninfrastructureinvestmentwithminimalregulatorylag.TheMissouriutilitieshavePurchasedGasAdjustment(PGA)clauses27thatpermitthemtofileforrateadjustmentstorecoverthecostofpurchasedgas.Changesinthiscostarethereforepassedontocustomers,asLacledeandMGEareallowedtoadjustthegascostcomponentofratesuptofourtimeseachyearinresponsetochangingprices.AccordingtotheJanuary14,2016editionofRegulatoryResearchAssociates(RRA)’sRegulatoryFocus,theaverageROEforgasutilitiesin2015was9.60%26.Anothersource,ConcentricEnergyAdvisors,calculatedthattheaverageofallratecasesdecidedintheUSin2015(theirmostrecentdatarelease)wasa9.48%ROEandthemedianwasa9.28%ROE28.Basedontheir2015SECfilings29,Spire’sLacledeandMGEsegmentswereabletoearna10.45%ROE.Therefore,wedeemMissouri’senvironmenttobemorefavorablethanthenationalaverageintermsofallowingutilitiestoprofitfromtheirratebase.PacificResearch30alsoratesMissouriinthetopquintileforenergyregulatoryenvironments,furtherindicatingfavorability. MissouriSummaryandFavorabilityRating RatingMethodology InordertocompareSpire’soperatingenvironmentinMissouriandAlabamatothatofotherstates,weareapplyingananalyticalratingsystembasedupontwoequal-weightedcriteria:demographic/economicgrowthandregulatoryenvironment.Populationandeconomicgrowthareextremelyimportantforthenaturalgasdistributionbusinessbecausethesefactorsallowcompaniestoobtainnewcustomers.Alargerpopulationmeansmorepotentialresidentialcustomers,andrapidGDPgrowthfuelsincreasesinbusinessforthecommercialandindustrialsegments.Regulatoryenvironmentisalsovitalforautilitytohavesuccess,asithasdirectimpactontheamountofreturnacompanyisallowedtoearnfromitscustomers.ScoresarebasedcomparativelytootherstatesintheUS.Ascoreof1isverypoor,5

isaverage,and10isoutstanding. Source:TeamEstimates

● MissourihasbothpopulationgrowthandGDPgrowthwellbelowthenationalaverage.ThismakesitanunfavorablestateforacompanylikeSpirethatreliesongrowthtogeneratenewcustomers.Becauseofthisweakness,weassignedMissouria2.5/10scoreforgrowth.

● However,thestatedoeshaveabetterthanaverageROEallowedforutilities,andSpirebenefitsstronglyfrombeingabletorecognizerevenueunderISRS.Therefore,weassignanabove-average7/10forregulatoryenvironment.

● Overall,Missourimeritsascoreof4.75/10,whichis5%belowanaveragescore. B. Alabama StateIndustryData(asof2015) WiththeacquisitionofEnergySouth,SpirenowholdstwoAlabamautilities:AlagascoandMobileGas.WhileSpiredoesnothavethemarketdominancetheyhaveinMissouri,theyremainthenumberonegasutilityinAlabamaintermsofbothcustomersandrevenue.ThemarketsharegraphicsprovidedbelowonlyaccountforAlagasco’scustomersandrevenue,asEnergySouthwasnotacquireduntil2016.TheadditionofMobileGaswillmakeSpire’spercentagesincrementallyhigher.

Alabama Market

Source:AmericanGasAssociation GrowthMetrics Population SimilarlytoMissouri,Alabama’spopulationgrowthhastrailedthatoftheUSoverthelastfiveyearsat0.20%annuallyversusthenational0.74%rate. GrossDomesticProduct From2010to2015,Alabamahasseen1.05%annualgrowthinrealGDP.ThisisaboveMissouri’sgrowthbutstillwellshortofoverallgrowthintheUS. CompetitiveClimate AlabamahasasignificantlydifferentcompetitiveenvironmentthanMissouri.Spire’sAlagascoandMobileGasaretheonlypublicutilitiesinAlabamathataremonitoredbytheAlabamaPublicServicesCommission31.Theircompetitioninthestateconsistsofalargenumberofmunicipalgasutilitiesthatservetheirlocaldistricts,eachcateringtoaround10,000customersorfewer.Mostofthesecompanieshavebeeninoperationforanextendedperiodoftimeandhavelong-runningtraditionsofservingtheircommunities,whichwillposeachallengeforSpiretoconvertcustomersfromthesecompetitors.Whilemunicipalfirmsarenoteligibletobeownedbyacorporation,furtherAlabamaacquisitionscouldoccurintheformofSpirebuyinggassegmentsfrommunicipalutilities. RegulatoryEnvironment Summary TheregulatorybodyinAlabamaistheAlabamaPublicServiceCommission(APSC).Itsdutiesencompass rate,accounting,service,legal,andtechnicalissuesregardingthepurchase,sale,transportation,andstorageofnaturalgasbyalljurisdictionalcompaniesinAlabama32.Utilitiesinthestatearecurrentlyallowedtoearnareturnonaveragecommonequitybetween10.5%and10.95%33. Alabama’srate-settingprocessistheRateStabilizationandEqualization(RSE),anannualprocesswithquarterlyreviewsforpotentialratereductions.RSEallowsAlagascotoreceivecurrentrecoveryforplannedcapitalspending34.Alagasco’stariffrateschedulecontainsaGasSupplyAdjustment(GSA)rider,andMobile’shasaPGAclausethatallowsthemtofiletorecoverthecostofpurchasedgassimilartowhathappensinMissouri.However,theAlabamautilitiescanadjustonamonthlybasis,whereasinMissouritheycanonlyfilefourtimesperyear35.TheAPSCalsoestablishedaCostControlMechanism(CCM)asanincentiveforutilitiestomanageO&Mcosts.ItallowscompaniestorecognizeabenefitforkeepingO&Mexpensebelowaninflation-tiedIndexRange,effectivelyrewardingAlagascoandMobileiftheydoagood

Mississippi Market

jobmanagingtheircosts.Alagascorecognizeda$7.8millionbenefitin2016anda$4.7millionbenefitin2015underthisprogram36. AlabamawasratedthebestregulatoryjurisdictioninthenationbyRRA37,andPacificResearchalsogavethestateitsbestratingintermsofenergyregulation38.TheROEearnedbyAlagascoandMobileGasisaround10.8%,whichisevenfurtherabovetheaveragereturnallowedtoLacledeandMGE.Alabamaisanextremelyfavorableregulatoryenvironmentfornaturalgasutilities. AlabamaSummaryandFavorabilityRating ScoresarebasedcomparativelytootherstatesintheUS.Ascoreof1isverypoor,5isaverage,and10isoutstanding.

Source:TeamEstimates

● Alabama,likeMissouri,hasbelow-averagedemographicandeconomicgrowthcomparedtotheUS.WedeemthetwostatestobeequallypooronthiscriteriaandassignAlabamaa2.5/10.

● However,Alabama’sregulatoryenvironmentisextremelyfavorableandratedasoneofthetopjurisdictionsinthenation.Therefore,wedesignateanexcellent9/10score.

● TheseaverageouttogiveAlabamaa5.75/10,whichis15%betterthananaverageoverallscore.

C. Mississippi Spire’sonlyutilityinMississippirightnowisWillmutGas.SinceWillmutonlyaccountsfor18,500(1%)ofSpire’scustomers,itdoesnotmakesensetodoacompleteanalysisofMississippiinthisreport.However,wehaveincludedasummarybelowbecausethestatecouldbealogicalareaforSpiretoexpandintowithafootholdalreadyestablishedinWillmut.

Dataasof2015.Source:AmericanGasAssociation MississippiKeyFacts:

● Fiveyearannualpopulationgrowthof0.09%,andfiveyearrealGDPgrowthof0.47%annually.● Second-quintileregulatoryrankingaccordingtoPacificResearch39.● ThethreemajorlocalgasdistributioncompaniesinMississippiareAtmosEnergy,CenterpointEnergy,and

Spire’sWillmut.○ Atmosisthenation’slargestgas-onlydistributor,servingover3millioncustomersin12states40.○ Centerpointhas3.2millionnaturalgascustomersinArkansas,Louisiana,Minnesota,Mississippi,

OklahomaandTexas.Theyalsoprovideelectricutilityservices41.

Source: Team

Appendix5:Porter’sFiveForcesAnalysis BargainingPowerofSuppliers:Low(1) EachofSpire’ssegmentsobtainsitsnaturalgasfromacollectionofmajorsuppliersineachoftheirrespectiveregions.Becauseoftheriskofsupplydisruptionsthatwouldimpededeliverytocustomers,itisnecessaryforthecompanytohaveadiversifiedsupplyportfolio.In2016,LacledeGasandMGEpurchasednaturalgasfromacombined35suppliers42,andAlagascoutilizedanother15companies.Additionally,Spireutilizeslong-termcontractsinitssupplyagreementsthatwouldgivethecompanytimetofindnewsources,shouldonesupplierwishtostopprovidingtothem.Andwhiledistributionisonlyoneofnumerousbusinessesthatusesnaturalgas,theindustry’sconsistentcustomerbase,combinedwithSpire’smonopoliesornear-monopoliesineachofitsoperatingregions,makeitastableandattractivecustomer.Therefore,asupplierwouldnotwanttorisklosingSpireasaclient.Forallofthesereasons,webelievethatsuppliersinthisindustryhavealowlevelofbargainingpower.Furthermore,sinceSpireisaregulatedutilityandeffectivelypassesdownnaturalgasexpensetotheircustomersthroughrateadjustments,theyhavelittleincentivetoengageincutthroatsupplypricingnegotiations.WeseelittletonoriskofSpirestrugglingtonegotiatesupplyagreements. BargainingPowerofConsumers:LowtoModerate(2) GiventheregulatednatureofSpire’soperations,customersareprice-takers.Assuch,theymusteithertakethesetratetheyareofferedorwalkaway.Whileconsumerscertainlywatchtheirmonthlygasbill,theyhaveverylimitedoptionstofindanotherdistributorintheirarea.Customersdohavetheoptiontoswitchtoanalternativefuel,suchaselectricityorpropane,buttheswitchingcostofbuyinganewsystemmakesthisoptionunattractive.Giventhefewchoicesconsumershave,wejudgetheretobelowtomoderatebargainingpowerforcustomers. ThreatofSubstitutes:Moderate(3) Themainsubstitutefornaturalgasasaheatingsourceiselectricity.EIAdatashowsthatnearlyhalfofUShomesin2015usedgasasopposedto39%usingelectricity43.Thekeyadvantageofgasoverothersystemsisthatitiscurrentlythecheapestmethodofheating;accordingtoDiffen.com,gasheatingcostsabout$18permillionBTUversuselectricity’s$32permillionBTU44.Additionally,gassystemscangenerallyheathomesfasterthanelectricunits,whichisakeyfactorforcomfort-seekingconsumers.Oneadvantageofelectricheatingisthefactthatinitialinvestmentforanelectricsystemisusuallylowerthantheamountneededforagasfurnace.Also,theelectricunitstypicallyhavealongerlifeandneedlessmaintenancethangasfurnaces.Thethirdmost-utilizedoptioninSpire’soperatingregionsispropane,at5%marketshare.Manyconsumersusepropanesimplybecausetheyhavenootherchoicetoobtainheating.PercentagesofUSandregionalheatingmarketshareforeachfuelchoiceareprovidedbelow:

Asevidentinthechartabove,naturalgasisbyfarthelargestfuelchoiceintheMidwest,whereLacledeGasandMGEoperate.However,electricityhasgreateruseintheSouthwithAlagascoandEnergySouth,areflectionofwarmertemperatures,loweraggregateheatingbills,andlessneedforrapidheating.Thereissomelevelofriskthatnaturalgascouldlosemarketsharetootherheatingmethods,especiallyifnaturalgaspricesweretoriseandmaketheothersystemsmoreeconomicincomparison.However,fairlysignificantswitchingcostsdissuadeconsumersfrommakingaswitch.Therefore,weratethethreatofsubstitutesnohigherthanmoderate. ThreatofNewMarketEntrants:Low(1) Asidefromacquisition,thereislittlerealisticwaytobreakintothenaturalgasutilitybusiness.Anewentrantwouldfirstneedtobuildupamassiveamountofinfrastructure(Spirehasnearly60,000milesofpipeline45)beforeobtainingregulatoryapprovalandattemptingtodirectlytakecustomersfromtheexistingdistributorinaregion.Everyonethatwantsgasheatinglikelyalreadyhasit,thereforeanycustomersforthenewentrantwouldhavetobeconvincedtomakeaproviderswitch.Therearehugebarrierstoentryintheindustryandthereisverylowthreatofnewmarketentrants. CompetitiveRivalry:Moderate(3) LacledeGasandMGEaccountforthevastmajorityofnaturalgasdistributioninMissouri,with73%ofcustomersand87%ofrevenuein2015(Appx11).AlagascoandMobileGasshareAlabamawithalargenumberofmunicipalgasutilities.AlagascoremainsthemarketleaderinAlabama,with51.4%ofthestate’sgasutilitymarketshareasof2015(Appx12).Becauseregulatorsdictateuniqueserviceareasforeachutility,thereisnocompetitionbetweencompaniesandtheyeachhavetostaywithintheirrespectiveregion.Withelectricandpropaneheatingcompaniesattemptingtoconvincecustomerstoswitchfuels,werateindustrycompetitiverivalryatamoderatelevel.

Appendix6:IndustryM&AClimate

NorthAmericaPowerandUtilityM&ADealValueandVolume

Since2010,therehasbeenatrendtowardconsolidationintheutilityindustrywithanincreasingnumberandsizeofdeals.Mostofthesetransactionshavebeenstrategicdealsbetweenindustryplayers46,asopposedtoacquisitionsbyprivateequityfirmsandotherpurelyfinancialentities.Oneofthecommonreasonsformanyofthesedealsisadesireforgrowth.Asthechartbelowillustrates,organicgrowthforutilitieshasbeenslowing,puttingmanagementteamsunderpressurefrominvestorstofindalternativemeanstogrowtheirbusinesses.M&Aisoneofthemainmethodscompanieshaveturnedto,helpedbythefactthatmostutilitieshavehadtheabilitytoissuedebtatextremelylowcosttofinanceacquisitions.

Source:ScottMaddenManagementConsultants

Anotherrationalefordealswastoachievediversificationingeographyorbusinessmix.Firmsobtainingoperationsinmultipleregionscanmitigatesomerisksrelatedtolocaleconomies,regulatoryentities,customerbases,andweather.Numerouscompaniesalsoseevalueindiversifyingtomultiplepartsofthewide-spreadutilitybusiness(iegas,electric,midstream,marketing,etc).Additionally,certainfirmsusedcostsynergiesasreasoningfortheirdeals. Onenotetomakeisthatsince2014,theaverageacquisitionEV/EBITDAmultiplepaidwas11.78xandtheaverageP/Emultiplepaidwas22.83x47(baseduponEYdata).AccordingtoNYUdata,thecurrentP/Eoftheutilitysectoris19.348--companiesarepayingpremiumsfortheseacquisitions.

ImplicationsforSpire Gasutilitiesinestablishedoperatingstatesarethesimplestadditionsforthecompanytomakebecausetheyalreadyhavesetuprelationswiththoseregulatoryboardsandexperiencedoingbusinessinthosestates.ThiscouldmeantheMissourigassegmentsofAmeren,LibertyUtilities,orSummitGasandtheMississippisegmentsofAtmosorCenterpointarepotentialtargets.ThereisaprecedentofSpirebuyingupsegmentsfromlargeutilitycompanieswiththepurchaseofAlagascofromEnergenandtheacquisitionofEnergySouthfromSempra.Anotherpossibilityisthatmunicipalutilitiesinmultiplebusinesses(iegas,electric,andwater)couldselltheirgassegmentsofftoSpireinordertohavegreaterspecializationintheirothersegments. AnacquisitionfromadifferentstateorofanythingbutaregulatedgasutilitywouldbemoredifficultforSpiretointegrateintothecompanyandislesslikelyinouropinion.WhenSpireacquiredMGE,theyalsoobtainedautilitycalledNewEnglandGasCompany(NEGasCo),buttheyrapidlyresolditbecauseitwassofarsplitgeographicallyfromtherestofSpire’soperations.Followingthatexample,itisunlikelySpirewouldexpandfarbeyondtheircurrentterritoryintheMidwestandSoutheastunlessitwasalargedealthatmeritedalotofeffortfromthecompanytointegrate.

CompanyAcquired

DateCompleted

DealValue EV/EBITDAMultiplePaid

DealRationale

MGE Sept2013 $975million 12.5x -Targetof$25-34millioninsynergies -Abilitytoacceleratepipelinereplacement -MakesSpireMissouri’slargestgasdistributor

Alagasco Aug2014 $1.6billion 9.6x -Geographicandregulatorydiversification -GrowthstrategytoexpandnaturalgasLDCs,Spire’sareaofexpertise

EnergySouth Sept2016 $344million 11.3x -ExpansionintoMississippi,ahighlyratedregulatoryenvironment -Furthergrowthingasutilitybusiness

Source:TeamAnalysis AtanEV/EBITDAmultipleof9.6x,SpiregotacheapervaluationontheirAlagascoacquisition--thatmultipleisbelowwherealotofutilityacquisitionshavebeenaswesawinAppendix14.GivenouroverallfavorableanalysisofAlabama(seeAppendix12)andnomajorissuesinAlagasco’soperations,webelievethatitwasashrewdpurchaseonSpire’sbehalf.Theothertwobuyoutsrepresentsteepervaluations. ThemainrationaleforSpireacquisitionshasbeenparalleltothosefortherestoftheindustry:asearchforgrowthandgeographic/regulatorydiversification.Sincethesethreeacquisitions,thecompanyhasmovedfromoperatinginonestatetothreeandincreasedtheirutilitycustomersby167%. OneofthekeyvaluedriversforSpireinthesedealshasbeentheintegrationofinformationtechnology49.Runningonecentralizedfinance,supplychain,andhumanresourcessystemisalotcheaperthanhavingseparateonesforeachcompanyandithasresultedincuttingoutalotofoverhead.SpirerealizesvaluethroughpipelinereplacementandcoincidentallygainingincrementalbenefitunderISRSandRSE.

Appendix7:ImpactofInterestRates InterestRates OnDecember14th,2016,theUSFedincreasedthefederalfundsrateforthesecondtimeintwoyears,liftingit25basispointsto0.5%.ThehikecameinresponsetoaperceptionofconsiderableeconomicprogressintheUStowardsfullemploymentand2%inflation.AccordingtotheDecemberFeddotplot,whichindicateswhereeachmeetingparticipantthinksthefedfundsrateshouldbeattheendoftheyearforthenextthreeyearsandthelongerrun,moreratehikesarelikelytobeahead.

Source:BusinessInsider

Asindicatedinthedotplot,theconsensusexpectationisthatthefedfundsratewillincrease75-100bpsin2017,followedbyfurtherhikesuntilalong-runrateof3%isreached.AddingtothelikelihoodthatrateswillbeincreasedistherecentelectionofPresidentTrump,whoannounced50planstoinvestupto$1trillionforspendingoninfrastructureandjobcreation.Thisisaninflationarypolicythatwouldleadtoamorerapidtempoofhikes. Risinginterestratesnegativelyaffectutilities.Whileregulatorsattempttolowerallowedratesofreturninlinewithfallinginterestrates,theyarenotperfectlyefficientandtypicallylagbehindreality.Thiscauseshigherprofitsforutilitieswhenratesarefallingbutalsolowerprofitwhenratesrise.Additionally,higherratesmeanhighercostofcapital,whichisespeciallyharmfultoleveredfirms.WithSpire’sincreasedborrowingtofundacquisitions,highercostofdebtcouldimpactthecompanyinfutureyears.Furthermore,manyinvestorshavecometoutilitystocksinresponsetolowbondyields;ifbondyieldsstarttocomebackup,wecouldseemanyofthoseinvestorsrotateoutofthesectorandaresultingutilityselloff.ThespreadbetweendividendyieldontheS&Putilitysectorand10yeartreasuryyield(shownonnextpage)isonemeasureofthecomparativeattractivenessbetweenutilitystocksandbonds.

Source:Invesco

Historically,thereissomeevidenceofutilitystocksunderperformingduringperiodsofrisinginterestrates,althoughwehavetolookbackalongwaybecauserateshavebeenfallingforthepast30years.Thechartbelowshowsutilityperformancefrom1970-1982,aperiodofrisingratesandoneduringwhichtheprice/bookratiooftheaverageutilitycompanyfellby50%(accordingtoseventhwave.org51):

Source:Seventhwave

Insummary,weseerisinginterestratesasamajorriskforinvestinginSpirestockmovingforward.Withutilitiestradingatalargepremiumtohistoricalaverages,themarkethasnotpricedintheimpactthatrisingrateswouldhaveonprofitsandcapitalcosts.Continuedratehikesandtheirimpactoncompanieswouldthereforebeashockthatcouldresultinasellofffortheentiresector.

Appendix8:DCFValuation

Assumptions

- SeeAppx2forcostofdebtcalculation.- 50-50weightsofdebtandequityarebaseduponmanagement

statementsoftargetlong-termcapitalization.- OtherassumptionsarethesameusedinourDDMvaluation.

Source:TeamEstimates

BetaCalculation

Company RegressionBeta(YahooFinance) Debt/Equity UnleveredBeta

SpireReleveredBeta

SR 0.22 1.03 0.13 0.32 AEE 0.25 0.92 0.16 ATO 0.1 0.63 0.07 CNP 0.47 2.23 0.19 NJR 0.24 0.91 0.14 NWN 0.34 0.68 0.24 SWX 0.38 0.98 0.23 WGL 0.6 1.05 0.36 SJI 0.71 0.64 0.47 CPK -0.14 0.33 -0.12 Averages 0.32 0.94 0.19 Source:TeamAnalysis

Thesearemanagement’sprojectionsofCapExoverthenextfiveyearsaccountingfortheSTLPipelineandcontinuingpipelinereplacement.TheextensiveexpendituredrivesSpireintonegativeFCFin2017-2020.

Spireiscurrentlyatanegativenetworkingcapitalandthereforeweareprojectingthattheyneedtoutilizecashtoexpanditinupcomingyears.

Appendix9:SpirePeerGroupSelection ForuseincomparingSpiretoitsindustry,wechoseninesimilarcompaniestoformapeergroup.Inthisselectionprocess,weidentifiedcompaniesthatoperatedinthesamenaturalgasregulatedutilitybusinessasSpire,hadsimilarsmalltomid-sizemarketcapitalizations,hadsimilarreportedbetasanddividendyields,and(ifpossible)operatedinthesameregionsasSpire.Spire’smostdirectcompetitorsareAmereninMissouriandAtmosandCenterpointinMississippi;allthreeareincludedinthepeergroup.Unfortunately,thereisnotroominanyonestateformanynaturalgasdistributorstocompete--theoperationregionisthecategorywithalotofvariationinthepeergroup.MuchoftheadjustmentsthatwemakeforrelativevaluationtodifferentiateSpirefromitspeersarereflectionsofregionaldifferences,inparticulareachstate’sregulatoryenvironmentandeconomicclimate.

Source:TeamAnalysis

Ineachcategory,Spireiscomparableorfavorablewhencomparedtotheindustryaverage.Theirvaluationmetrics,inparticulartheP/EandP/B,illustratethatthecompanyiscurrentlytradingatadiscounttotheirpeers.

Appendix10:ProFormaStatements IncomeStatement NOTE:Foraregulatednaturalgasutility,revenueisnotanimportantfinancialmetrictogaugecompanyperformance.Thereasonforthisisthatutilitiesareallowedtopasstheirnaturalgasexpense(costofgoodssoldforthisindustry)throughtocustomers.Therefore,whengaspriceishigher,SpirehashigherutilityrevenueANDnaturalgasexpenseinproportiontothepricechange.Thismeansthatwhennaturalgaspriceisvolatile,therearemajorswingsinrevenueforSpirewithoutanyrealchangeincompanyperformance.Becauseofthis,wedonotincludeanyprojectionsofrevenueandwillinsteadbeginourmodelwithgrossmargin.Inthecommon-sizestatement,allitemsarelistedasapercentageofgrossmargin.

Source:TeamEstimates

1. GrossMargin In2017and2018,weexpectthatmanagementwillnotpursueanymajoracquisitionsandthattheywillinsteadrelymainlyonorganicgrowthopportunities.Asanalyzedinthefinancialanalysissectionofthepaper,thereislittleorganicgrowthpotentialintheutilityindustry,andrelianceuponitwillcausegrowthinSpire’sgrossmargintodescend.Asevidenceforthis,observeSpire’sfollowingfive-yearannualizedmetrics:1.37%organiccustomergrowth(page8),0.30%WApopulationgrowthinthestatesthecompanyoperatesin(page6),and0.79%WAgrowthinrealGDPinthosestates(page3).Withoutacquisitions,companygrowthcouldslowdownintothe0.5-1.5%range.However,wepredictthatdecelerationwilltakesometime--benefitsfromintegratingEnergySouth,potentialminoracquisitions,andcontinuedinfrastructureimprovementstrategieswillpreventanimmediatestallingrowth.Ourestimateisamoredeliberatedeclineto2.4%grossmargingrowthin2017and1.4%in2018. Atacertainpoint,weanticipatethatmanagementwillbeunsatisfiedwithslowinggrowthanddecidetotakeaction.Thereisnocertaintyastowhattimethatwillbe,butweexpectoneortwoyearswilllikelybeenoughtoconvincethem

toact.Whentheydomakeamove,weexpectthecompanytomakeanacquisitionlargeenoughtobringthembackwithintheirtarget4-6%annualgrowthinearnings.Inourmodel,weestimategrowthingrossmargintoaverage4.5%annuallyfrom2019-2021basedonthisrationale.AnotherfactoristhattheSTLpipelinewillbeoperationalin2019,bringinginsomeadditionalearningpotential.

ThereisalsothepossibilitythatSpiremakesanotherhugeacquisition,alongthelinesofMGEorAlagasco,whichwouldresultinmuchmorerapidgrowth.However,managementhasmadenostatementsinsupportofanotherlargedealhappening.Therefore,wedonotbelieveitissoundtomakethatexplicitpredictionwithinthenextfiveyears.

2. O&MExpense WeexpectO&Mexpensetoincreaseinlinewithgrossmarginin2017and2018beforealargerincreasein2019toreflectthepotentialcostsofanacquisition.After2019,expenseswillreturntoanormalizedrate. 3. InterestExpense Asevidentonthehistoricalcommon-sizestatement,Spirehashadanextremelyconsistentamountofinterestexpensewhencomparedtogrossmargin.Wedonotseeanydeleveragingoccurringandourmodelincludesacontinuanceofthistrend. BalanceSheet Wealsocompletedapro-formabalancesheetandthekeyratiosprovidedbelowsummarizeouranalysis:

Source:TeamEstimates

*TraditionalprofitabilitymetricssuchasEBITDAmarginandoperatingmarginarenoteffectivewhenanalyzingaregulatedutility,astheyaremeasuredasa%ofrevenueandthereforeareprimarilytiedtoNGexpensesthatutilitiespassalongtocustomers.WeviewROAandROEasbettermeasuresofthereturnsSpireisabletoachieve.

1. Profitability LowerROAandROEin2017-2018isdrivenbyourprojectionsthatnetincomewillgrowmoreslowlythanSpire’sassetandequitybases.Expected2019ROEdropsagaininresponsetoa6%declineinnetincomeduetoanticipatedacquisitioncostsbeforerecoveringin2020-2021.Inreality,thekeydriverofROAandROEwillbetheratesthatSpire’sregulatorsallowthemtoearn.Theseratesaredifficulttoanticipate,andtherefore,thereisasignificantdegreeofuncertaintyinthisportionofourmodel. 2. Liquidity WeseenoliquidityconcernsforSpireinthenextfiveyearsasweexpectratiostoremainstablearoundcurrentlevels. 3. FinancialLeverage Ourprojecteddebt/equityandfinancialleverageratiosremainstableoverthenextfiveyears.Theitemofgreatestconcernisinterestcoverage,whichweprojecttodropto3.38xin2019.Thisreflectsthelowernetincomeinthatyearandhigherinterestexpensethatweprojectedassociatedwithapossibleacquisitionintheyear.Aninterestcoveragedropofthatmagnitudecouldbeenoughtocauseacreditdowngrade.RatehikesandhighercostofdebtcouldresultinevenmoretroublewithinterestcoverageastheywouldincreaseSpire’sinterestexpense--thisisaratiotowatchcloselyoverthenextfiveyears.

Appendix11:SpireOwnership Spirehasasolidpercentageofinstitutionalownershipat80.9%ofoutstandingshares,indicatingthatbuyingorsellingfrominstitutionalownersmaybeamajorcatalysttofuturestockpricemovement.AlthoughmorepositionswereinitiatedthanwereclosedinQ42016,totalsharecountisasignofmovementtowardaselloffwithatotalof4.6million

sharessoldbyfundsagainst3.3millionacquiredinthequarter. Source:NASDAQ Only1.4%ofSpiresharesareheldbyinsiders,meaningthatthecompany’smanagementmayhavelessalignmentofinterestswithequityshareholders.However,insiderpurchaseswithinthepastquarter,includingbuy-insfromCEOSusanneSitherwoodandCFOStevenRasche,couldshowavoteofconfidenceinthecompanyfromtopmanagement(SeeAppendix6forkeyexecutiveprofiles).

Source:NASDAQ

Endnotes ¹ FQ4 2016 Earnings Summary, <http://seekingalpha.com/article/4023595-spires-sr-ceo-suzanne-sitherwood-q4-2016-results-earnings-call-transcript?part=single>. ² Barker, Jacob, “New Laclede pipeline would access Eastern U.S. shale gas,” 3 Feb 2016, St. Louis Post Dispatch, 20 Jan 2017, <www.stltoday.com/business/local/new-laclede-pipeline-would-access-eastern-u-s-shale-gas/article_ecf14f11-b294-5a5d-b024-fcaafcb8661b.html>. ³ Naturalgas.org, “Natural Gas Demand,” 20 January 2017, <http://naturalgas.org/business/demand/>. ⁴ American Gas Association, “Got Growth?: Defining US Gas Utility Growth in an Era of Efficiency and Natural Gas Resource Abundance,” 18 Sept 2015. ⁵ U.S. Energy Information Administration, “Coal made up more than 80% of retired electricity generating capacity in 2015,” 8 March 2016, <www.eia.gov/todayinenergy/detail.php?id=25272>. ⁶ <themissouritimes.com/wp-content/uploads/2016/10/laclede-gas-complaint-4-26-16.pdf>. ⁷ Winegarden, Wayne and Mark Miles, “50 State Index Of Energy Regulation,” 7 August 2014, Pacific Research. 8 Damodaran, Aswath, “PE Ratio by Sector (US),” January 2017, Damodaran Online, <http://pages.stern.nyu.edu/~adamodar/>. 9 Andy Kiersz, “Here's the new Fed dot plot,” 14 Dec 2016, Business Insider, Jan 20 2017, <http://www.businessinsider.com/fed-dot-plot-december-2016-2016-12>. 10 Damodaran, Aswath, “Damodaran Online,” Jan 2017, Damodaran Online, <http://pages.stern.nyu.edu/~adamodar/>. 11 “Hamada Equation,” <http://www.investopedia.com/terms/h/hamadaequation.asp>. 12 Koesterich, Russ, “What Stretched Utility Sector Valuation Means,” 15 Jan 2015, Market Realist, Jan 20 2017 <http://marketrealist.com/2015/01/stretched-utility-sector-valuation-means/>. 13 Morning Star, <www.morningstar.com/>. 14 “Fitch Affirms Spire Inc. and Subsidiaries' Ratings; Outlook Stable,” 15 Dec 2016, Fitch Ratings, <www.fitchratings.com/site/pr/1016532>. 15 Global Credit Research, “Moody's Downgrades Laclede Group to (P) Baa2, affirms Laclede Gas at (P) A3; outlooks stable,” 22 Jul 2014, Moody’s, <www.moodys.com/research/Moodys-Downgrades-Laclede-Group-to-P-Baa2-affirms-Laclede-Gas--PR_303548>. 16 FQ4 2016 Earnings Summary, op. cit. 17 “Dakota Pipeline Protests,” NBC News, <http://www.nbcnews.com/storyline/dakota-pipeline-protests>. 18 Moody’s, op. cit. 19 Jamison, Mark A., “Rate of Return: Regulation,” 2005, <http://warrington.ufl.edu/centers/purc/purcdocs/papers/0528_Jamison_Rate_of_Return.pdf>. 20 Averch, H.A., “Averch-Johnson Effect,” 2008, The New Palgrave Dictionary of Economics <http://www.dictionaryofeconomics.com/article?id=pde2008_A000186>. 21 Ameren Missouri, <www.ameren.com/missouri>. 22 Liberty Utilities, <www.libertyutilities.com>. 23 Summit Natural Gas, <http://summitnaturalgas.com/>. 24 “About the PSC,” Missouri Public Service Commission, <psc.mo.gov/General/About_The_PSC>. 25 Spire, “Form 10-K 2016,” 2016, SEC EDGAR, <www.sec.gov/edgar.shtml>. 26 Ibid. 27 Ibid. 28 “Authorized Return on Equity for Canadian and U.S. Gas and Electric Utilities,” 1 May 2015, <http://ceadvisors.com/wp-content/uploads/2015/10/ROENewsletterVolumeIII.pdf>. 29 Spire, “Form 10-K 2015,” 2015, SEC EDGAR, <www.sec.gov/edgar.shtml>. 30 Pacific Research, op. cit. 31 Alabama Public Service Commission, <psc.alabama.gov/>. 32 Ibid. 33 Form 10-K 2016, op. cit. 34 Ibid. 35 Ibid. 36 Ibid. 37 Investor Presentation, Dec 2016, <http://www.spireenergy.com/~/media/Files/S/Spire-Energy/Spire%20Investor%20Presentation%20-%20December%202016.pdf>. 38 Pacific Research, op. cit. 39 Ibid. 40 Atmos Energy, <www.atmosenergy.com/>. 41 CenterPoint Energy, <www.centerpointenergy.com/en-us/>. 42 Form 10-K 2016, op. cit. 43 U.S. Energy Information Administration, “Winter Heating Fuels,” 13 Oct 2016, <http://www.eia.gov/special/heatingfuels/#/US-MO:propane:week>. 44 “Electric Heating vs. Gas Heating,” Diffen, <http://www.diffen.com/difference/Electric_Heating_vs_Gas_Heating>. 45 Investor Presentation, op. cit. 46 “North American Power & Utilities Deals Insights Q3 2016,” 2016, PwC Deals, <http://www.pwc.com/us/en/power-and-utilities/publications/assets/pwc-na-power-and-utilities-deals-q3-2016.pdf>. 47 Rennie, Matt, “Deal intentions remain strong as utilities seek growth,” Ernst and Young, <http://www.ey.com/gl/en/industries/power---utilities/ey-power-transactions-and-trends-q1-2016-americas>. 48 Damodaran Online, op. cit. 49 FQ4 2016 Earnings Summary, op. cit. 50 Wolfgang, Ben, “‘Off of welfare and back to work rebuilding our country’: Trump vows massive infrastructure spending,” 20 Jan 2017, The Washington Times, <http://www.washingtontimes.com/news/2017/jan/20/trump-vows-massive-infrastructure-spending/>. 51 Kihm, Steve, Andrew Satchwell, and Peter Cappers, “The Effects of Rising Interest Rates on Electric Utility Stock Prices: Regulatory Considerations and Approaches,” Dec 2015, Berkeley Lab, <https://www.seventhwave.org/sites/default/files/effect-interest-rates-utility-stock-prices.pdf>.

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