Business context and reporting period
Issuer discrepancy: The request identifies Spire Inc., but the supplied Form 10-Q is filed by The Laclede Group, Inc. It reports the fiscal first quarter ended December 31, 2011, compared with the quarter ended December 31, 2010. The filing says the business is seasonal, with regulated gas earnings generally concentrated in the November–April heating season.
Laclede Group’s principal business is regulated natural-gas distribution in eastern Missouri; it also operates a non-regulated gas marketing business. The interim financial statements are unaudited.
Key financial metrics
| Metric | Three months ended Dec. 31, 2011 | Prior-year quarter |
|---|---|---|
| Operating revenue | $410.9 million | $444.2 million |
| Operating income | $43.1 million | $40.8 million |
| Net income | $25.2 million | $23.4 million |
| Diluted EPS | $1.12 | $1.05 |
| Dividends declared per share | $0.415 | $0.405 |
| Operating cash flow | $(50.1) million | $5.8 million |
| Capital expenditures | $18.3 million | $15.6 million |
Operating margin was approximately 10.5% versus 9.2%; net margin was approximately 6.1% versus 5.3%. Revenue declined 7.5%, while operating income rose 5.8% and net income rose 7.7% year over year.
At December 31, cash and cash equivalents were $44.6 million; current assets were $415.5 million and current liabilities $323.2 million. Debt comprised $113.0 million of short-term notes payable and $364.4 million of long-term debt including current maturities. The Utility had a $300 million bank credit line, scheduled to expire in July 2016; the filing reports $113.0 million of period-end short-term borrowings. Consolidated debt was 45% of capitalization, and Utility debt was 55% of capitalization.
Material changes and management commentary
- Regulated distribution revenue fell $26.5 million, primarily reflecting lower system sales volumes, lower gas costs passed through to customers, and lower off-system prices, partly offset by increased off-system sales and higher infrastructure surcharge revenue. Service-area temperatures were 20.8% warmer than the prior-year quarter and 22.1% warmer than normal.
- Regulated segment net economic earnings decreased $0.4 million, chiefly due to $1.8 million of higher pension expense, partly offset by $1.2 million of higher infrastructure surcharge revenue.
- Non-regulated gas marketing net economic earnings increased $1.5 million, primarily from improved margins following transportation contract renegotiations. Segment revenue declined as per-unit gas prices fell; sales volumes were essentially unchanged.
- Operating cash flow swung to a $50.1 million use from $5.8 million provided. Management attributed the change mainly to margin-deposit payments on gas derivatives, timing of gas-cost collections under the purchased gas adjustment clause, and increased pension funding. Financing provided $70.0 million, largely reflecting $67.0 million of net short-term borrowing.
- Management said it believes the Company has adequate access to capital markets and sufficient resources for foreseeable needs. No quantified earnings guidance is provided. A $2.0 million annual revenue increase from an infrastructure surcharge filing was essentially approved, effective January 13, 2012.
Risks, contingencies and unusual items
- LER faces competition, regional gas-price and basis volatility, pipeline and storage capacity risks, and counterparty credit exposure. Its five largest counterparties represented 35.4% of LER’s accounts receivable exposure at quarter-end.
- Natural-gas supply, transportation and storage contracts carried estimated minimum payments of approximately $496 million. These commitments include market-priced obligations and are not equivalent to fixed-price debt obligations.
- Environmental matters include three former manufactured-gas plant sites. A historical consultant estimate put potential site costs at $5.8 million–$36.3 million; actual future costs could be materially higher or lower. The company expects eligible costs to be deferred and recovered in rates, subject to regulatory approval.
- Missouri regulatory disputes include proposed purchased-gas-cost disallowances totaling $6.0 million for fiscal 2005–2007; none was accrued. A related circuit court ruling reversed two MoPSC orders in December 2011, while another affiliate-transaction complaint remained pending.
- Following MF Global’s bankruptcy, $1.5 million of Laclede Gas funds and $0.5 million of LER funds remained unavailable in segregated accounts as of January 26, 2012. Management could not predict when or how much would be returned and considered total exposure not material.
- Laclede Group had $96.3 million of guarantees for LER at quarter-end, rising to $97.3 million by January 27, 2012; no liability was recorded and management considered payment unlikely. The filing also identifies pension funding needs and sensitivity to short-term interest rates.
- The board announced leadership changes effective February 1, 2012: Suzanne Sitherwood was appointed CEO, and William E. Nasser was named chairman. LER Storage Services was not operational at quarter-end; it later contracted for storage capacity beginning January 2012.
Most important facts to verify
- Confirm the intended issuer: the supplied filing is for The Laclede Group, Inc., not an issuer named Spire Inc.
- Review the drivers and sustainability of improved earnings, especially LER’s transportation-cost savings and the regulated utility’s weather-adjusted performance.
- Assess seasonal liquidity and the cash impact of derivative margin requirements, gas-cost recovery timing, and planned pension contributions.
- Track the status and potential financial impact of environmental remediation, regulatory disputes, and recovery of the MF Global deposits.
- Confirm the terms, utilization, and renewal status of credit facilities and the substantial gas-supply and transportation commitments.