MISSOURI PUBLIC SERVICE COMMISSION STAFF REPORT COST OF SERVICE SPIRE MISSOURI, INC., d/b/a SPIRE LACLEDE GAS COMPANY and MISSOURI GAS ENERGY GENERAL RATE CASE CASE NOS. GR-2017-0215 and GR-2017-0216 Jefferson City, Missouri September 2017 ** Denotes Confidential Information ** 1 TABLE OF CONTENTS OF 2 COST OF SERVICE REPORT OF 3 SPIRE MISSOURI, INC., d/b/a SPIRE 4 LACLEDE GAS COMPANY and MISSOURI GAS ENERGY 5 GENERAL RATE CASE 6 Case Nos. GR-2017-0215 & GR-2017-0216 7 I. Executive Summary .................................................................................................. 1 8 II. Background ............................................................................................................... 1 9 III. Test Year/True-Up Period ......................................................................................... 3 10 IV. Staff’s Revenue Requirement Recommendation ...................................................... 5 11 V. General Ledger Recording Issues ............................................................................. 5 12 VI. Surveillance Reporting .............................................................................................. 6 13 VII. Rate of Return (ROE, Cost of Capital, Capital Structure) ........................................ 7 14 A. Summary ................................................................................................................... 7 15 B. Introduction ............................................................................................................... 7 16 C. Analytical Parameters ............................................................................................... 9 17 D. Current Economic and Capital Market Conditions ................................................. 10 18 E. Operations of Spire, Inc. and Spire Missouri .......................................................... 17 19 F. Credit Ratings of Spire, Inc. and Spire Missouri .................................................... 19 20 G. Cost of Capital ......................................................................................................... 21 21 H. Cost of Long-Term Debt and Short-Term Debt ...................................................... 28 22 I. Cost of Common Equity .......................................................................................... 28 23 J. Tests of Reasonableness .......................................................................................... 42 24 K. Conclusion ............................................................................................................... 45 25 VIII. Rate Base ................................................................................................................. 46 26 A. Plant in Service and Depreciation Reserve ............................................................. 46 27 B. Forest Park District Service Center Facilities Sale and Subsequent 5311 28 Manchester Ave. Service Center Replacement Facility .......................................... 48 29 C. Propane Investment ................................................................................................. 52 30 D. Cash Working Capital (CWC) ................................................................................ 54 Page i 1 E. Stored Gas Inventory ............................................................................................... 60 2 1. Natural Gas and Propane Inventories ......................................................... 60 3 2. LAC Storage Field ...................................................................................... 62 4 F. Prepayments; Materials and Supplies ..................................................................... 63 5 1. Prepayments ............................................................................................... 63 6 2. Materials and Supplies ............................................................................... 63 7 G. Pensions Asset Liability .......................................................................................... 64 8 1. Pension Expense ......................................................................................... 64 9 H. Other Post-Employment Benefits (“OPEBS”) ........................................................ 69 10 I. Customer Deposits and Interest ............................................................................... 71 11 J. Customer Advances ................................................................................................. 71 12 K. Accumulated Deferred Income Taxes (ADIT) ........................................................ 72 13 L. Rate Base Offset GM-2013-0254 – MGE’s ADIT ................................................. 73 14 M. Insulation Financing and Energy Wise Loan Balances ........................................... 73 15 IX. Synergies/Allocations .............................................................................................. 74 16 A. Synergies ................................................................................................................. 74 17 B. Transition Costs ....................................................................................................... 79 18 C. Transaction Costs .................................................................................................... 84 19 D. Allocations/Allocated Directors Fees ...................................................................... 84 20 X. Income Statement .................................................................................................... 86 21 A. Revenues ................................................................................................................. 86 22 1. Introduction ................................................................................................ 86 23 2. Definitions .................................................................................................. 86 24 3. The Development of Revenue in this Case ................................................ 87 25 4. Customer Growth ....................................................................................... 88 26 B. Other Revenue Adjustments .................................................................................... 89 27 1. Revenue - Weather Normal Variables Used for Weather Normalization .. 90 28 2. Revenue – Weather Normalization ............................................................ 93 29 3. Weather Sensitivity of Large Customer Classes ........................................ 96 30 4. Large Volume Customer Adjustments ....................................................... 97 31 C. Other Revenues ....................................................................................................... 99 32 1. Propane Cavern Revenues .......................................................................... 99 Page ii 1 2. Interest Income Energy Wise/Insulation Financing ................................. 100 2 D. Payroll and Benefits .............................................................................................. 100 3 1. Payroll, Payroll Taxes, 401(k), and Other Employee Benefits ................ 100 4 2. Incentive Compensation ........................................................................... 101 5 3. SERP and Directors’ Dividends ............................................................... 105 6 4. Severance Expense ................................................................................... 106 7 E. Other Expenses ...................................................................................................... 106 8 1. Advertising Expense ................................................................................. 106 9 2. Rebranding ............................................................................................... 108 10 3. Rate Case Expenses .................................................................................. 109 11 4. Spire, Inc. Corporate Office Lease Hold Improvements .......................... 118 12 5. Lease-Hold Improvements ....................................................................... 118 13 6. Lease Expense .......................................................................................... 118 14 7. Spire, Inc. Corporate Office Lease ........................................................... 118 15 8. LAC Call Center ....................................................................................... 119 16 9. Software Amortization ............................................................................. 119 17 10. IT Costs/New Blue ................................................................................... 120 18 11. Lobbying and MEDA Activities .............................................................. 120 19 12. Outside Services ....................................................................................... 121 20 13. Insurance Expense .................................................................................... 121 21 14. Injuries and Damages ............................................................................... 122 22 15. Treatment of Certain Expenses – JJ’s (Incident) – MGE Specific ........... 123 23 16. Environmental Costs ................................................................................ 124 24 17. Credit Card Processing Fees ..................................................................... 126 25 18. Dues and