Business context and reporting period
The supplied filing is The Laclede Group, Inc.’s unaudited Form 10-Q for the fiscal quarter ended March 31, 2011, covering the three and six months ended that date. It is not a SPIRE Inc. filing or a 2010 Q2 filing as stated in the request metadata. Laclede Group’s core business is regulated natural-gas distribution in eastern Missouri; its non-regulated gas-marketing subsidiary is exposed to market and counterparty conditions. Earnings are seasonal and generally concentrated in the November–April heating season.
Financial performance and position
Amounts below are in millions of dollars except per-share data; figures may not sum due to rounding.
| Metric | Quarter ended Mar. 31, 2011 | Prior-year quarter | Six months ended Mar. 31, 2011 | Prior-year six months |
|---|---|---|---|---|
| Operating revenue | $543.8 | $635.3 | $988.0 | $1,126.5 |
| Operating income | $49.9 | $50.3 | $90.7 | $90.9 |
| Net income | $27.9 | $28.0 | $51.3 | $50.9 |
| Diluted EPS | $1.25 | $1.26 | $2.30 | $2.29 |
| Dividends declared per share | $0.405 | $0.395 | $0.810 | $0.790 |
Six-month operating cash flow was $140.0 million, versus $69.8 million; investing cash use was $31.3 million, including $29.7 million of capital expenditures; financing cash use was $172.7 million. Cash declined $63.9 million from fiscal year-end to $23.0 million, largely reflecting $129.7 million of short-term debt repayment and a $25.0 million bond maturity.
At March 31, 2011, total assets were $1.734 billion, common equity $569.2 million, and long-term debt $364.3 million; no short-term borrowings were outstanding. Current assets were $351.1 million and current liabilities $189.1 million. The Utility had a $320 million bank credit facility expiring December 2011; covenant headroom was reported, with debt at 50% of capitalization versus a 70% limit and EBITDA at 4.82 times interest versus a 2.25-times minimum. Consolidated capitalization was 61% equity and 39% long-term debt.
Material changes versus prior period
- Quarterly revenue fell $91.5 million, mainly as non-regulated gas-marketing revenue declined with 25% lower sales volumes and lower gas prices. Quarterly net income was nearly flat: lower marketing earnings were largely offset by improved regulated-distribution results.
- For the six-month period, revenue declined $138.5 million, while net income increased $0.4 million. Regulated distribution benefited from the September 2010 rate increase; lower non-regulated marketing earnings and the absence of a prior-year propane transaction reduced comparative earnings.
- Six-month net economic earnings, a company-defined non-GAAP measure excluding after-tax unrealized energy-derivative gains and losses, were $50.9 million versus $53.1 million; economic EPS was $2.28 versus $2.39.
- Quarterly regulated revenue increased $14.9 million, including $35.8 million from higher off-system sales volumes and $7.2 million from the rate increase, partly offset by lower system volumes, gas costs, off-system prices, and infrastructure surcharge revenue.
Outlook, commentary, risks and unusual items
Management said it expects adequate access to capital markets and sufficient resources for anticipated needs; the filing provides no specific earnings or revenue guidance. Management cited weather, natural-gas price and supply volatility, regulatory decisions, competition, credit and counterparty exposure, pension obligations, and environmental matters as risks. The regulated Utility generally passes purchased-gas costs through to customers under its Purchased Gas Adjustment clause, subject to prudence review; derivative margin calls can nevertheless affect short-term cash needs.
LER’s five largest counterparties represented 51.2% of its accounts receivable exposure before netting. The company had $101.3 million of guarantees outstanding for LER at April 29, 2011; management considered payment under them remote. Natural-gas purchase obligations were approximately $723.7 million. Environmental remediation costs at former manufactured-gas sites were estimated in a historical 2005 analysis at $5.8 million to $36.3 million; ultimate costs remain uncertain. Regulatory disputes include proposed gas-cost disallowances and MoPSC affiliate-transaction proceedings; the company contests the claims and recorded no provision for the proposed disallowances.
As a subsequent event, in April 2011 the Utility sold 320,000 barrels of propane for $17.9 million in revenue and $6.1 million of net income, to be recognized in fiscal third-quarter results. It also renegotiated a propane exchange arrangement to include market-based storage services. The Utility’s $25 million first-mortgage bond matured in November 2010.
Important facts for investors to verify
- Confirm the intended issuer and period: this source is Laclede Group’s March 31, 2011 Form 10-Q, not a SPIRE Inc. 2010 Q2 filing.
- Review the sustainability of regulated earnings gains from the rate increase and the continued weakness in LER margins, volumes, and economic earnings.
- Assess seasonal liquidity after the cash decline, the December 2011 Utility credit-facility expiration, and planned pension and postretirement contributions.
- Track outcomes and potential financial exposure from MoPSC gas-cost and affiliate-transaction proceedings, environmental remediation, and LER guarantees and counterparty concentrations.
- Separate GAAP net income from non-GAAP net economic earnings and review derivative-related unrealized results and expected reclassification of approximately $8.9 million of pre-tax unrealized losses over the next 12 months.