SPIRE INC quarterly report, Q3 FY2011

Business context and reporting period

Filing mismatch: The supplied filing is The Laclede Group, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2012, not a Spire Inc. filing for 2011 Q3. The figures below summarize the filing provided. Laclede Group’s core business is regulated natural-gas distribution in eastern Missouri; it also operates a non-regulated gas-marketing business. Results are seasonal, with earnings generally concentrated in the November–April heating season.

Financial performance

Amounts are in millions of dollars except per-share data. The filing compares the three and nine months ended June 30, 2012 with the corresponding 2011 periods.

• Margins: Operating margin was about 8.1% for the quarter versus 7.5% a year earlier, and 11.4% for the nine months versus 8.7%. Net margin was about 4.5% for the quarter and 6.6% year to date, compared with about 4.5% and 5.0%, respectively, in 2011.
• Cash flow: Nine-month operating cash flow was $128.2 million, down from $201.3 million. Investing used $78.2 million, mainly reflecting increased capital spending; financing used $71.8 million. Cash declined by $21.8 million to $21.5 million.
• Debt and liquidity: Long-term debt, including its current portion, was about $364.4 million; $25 million was classified as current. There were no short-term borrowings at June 30. Current assets were $261.7 million and current liabilities $179.3 million (about 1.46 current ratio). Laclede Gas had a $300 million credit facility and Laclede Group a separate $50 million facility, both scheduled to expire in July 2016.
• Capital spending: Utility capital expenditures were $75.0 million for the nine months, versus $46.8 million in 2011, principally for distribution infrastructure and information technology.

Material changes versus the prior comparable period

• Quarterly revenue fell 45.7% and net income fell 45.2%; nine-month revenue fell 28.2% and net income fell 5.0%. Revenue declines chiefly reflect lower gas prices and volumes, warmer weather, and a change to net presentation for certain gas-marketing transactions. The net presentation reduces reported revenue and expense but does not affect operating income or net income.
• The company said quarterly earnings were also lower because the prior-year quarter included a non-recurring propane inventory sale that generated $6.1 million of after-tax income, and because of lower results in regulated distribution and gas marketing.
• For the nine months, regulated distribution earnings declined $1.6 million, primarily due to exceptionally warm weather and higher pension and insurance expenses, partly offset by lower operating and maintenance costs and increased infrastructure surcharge revenue. Non-regulated gas-marketing earnings improved, helped by higher volumes and margins, including reduced transportation costs.
• Management reported the warmest nine-month period in the Utility’s more-than-100-year weather record. System therms sold and transported fell to 640.8 million from 808.8 million.

Outlook, risks, contingencies, and unusual items

• Outlook and financing: The filing gives no specific earnings forecast. Management said it expected adequate access to capital and sufficient resources for anticipated needs. It was pursuing $125 million of private-placement debt: $100 million of Utility first-mortgage bonds and $25 million of parent-company notes, with anticipated rates of 3.0%–3.5%, subject to due diligence and definitive documentation.
• Regulation and recovery: Purchased-gas costs are generally passed through to customers under the Utility’s Purchased Gas Adjustment clause, subject to regulatory prudence review. A $3.2 million annual infrastructure surcharge increase was approved effective July 9, 2012.
• Risks: Key exposures include weather, gas-price and supply volatility, margin-collateral cash needs, regulatory decisions, competition and pipeline capacity for the non-regulated marketer, counterparty credit risk, pension obligations, and environmental liabilities.
• Contingencies: Gas-supply cost disallowances proposed by Missouri regulators total $6.0 million for fiscal 2005–2007; the Utility disputes them and recorded no liability. Affiliate-transaction proceedings and an employment-compliance matter remained pending; management did not expect a material effect. Estimated future costs for three former manufactured-gas sites ranged from $5.8 million to $36.3 million based on a 2005 analysis; future costs are uncertain, and management expected recovery through rates for qualifying costs. Some funds held at MF Global remained unavailable: $1.5 million for Laclede Gas and $0.4 million for LER as of July 26, 2012.
• Other items: Laclede Group guaranteed $79.8 million of LER gas-supply obligations at June 30, rising to $81.8 million by July 27; no amount was recorded, and management assessed the probability of payment as low. Natural-gas storage, transportation, and supply contracts carried estimated minimum payments of about $368 million. The company also had about $6 million in commitments for its multi-year systems-replacement project.

Important facts for investors to verify

• Confirm the requested issuer and period: the source is Laclede Group’s June 30, 2012 10-Q, not Spire Inc.’s 2011 Q3 filing.
• Review whether the sharp revenue decline is understood in context: lower commodity prices and net reporting of certain trading transactions affect revenue comparisons without the same effect on earnings.
• Assess how persistent unusually warm weather, lower system volumes, and the timing of gas-cost recovery may affect future cash flow and earnings.
• Check completion and final terms of the proposed $125 million debt placements, and monitor liquidity, capital spending, and seasonal borrowing needs.
• Monitor outcomes of regulatory disputes, environmental remediation, and the recovery of funds held at MF Global.