SPIRE INC quarterly report, Q3 FY2014

Filing identity and business context

Important mismatch: The supplied filing is a combined Form 10-Q for The Laclede Group, Inc., Laclede Gas Company, and Alabama Gas Corporation (Alagasco), for the quarter and nine months ended June 30, 2015. It is not a Spire Inc. filing and does not cover 2014 Q3. “Spire” appears as a Laclede Group natural-gas-fueling-solutions business. Financial figures below refer primarily to Laclede Group unless otherwise stated. Amounts are in millions of dollars except per-share data.

Laclede Group is a utility holding company with regulated natural-gas distribution businesses in Missouri and Alabama and a nonregulated gas-marketing business. The utilities’ earnings are typically concentrated in the November–April heating season, so interim results are not necessarily indicative of full-year performance. Alagasco was acquired in August 2014; its inclusion affects year-over-year comparability.

Financial performance

• Margins: Management-reported operating margin, a non-GAAP measure, was $176.6 for the quarter and $716.3 for nine months, versus $130.3 and $479.2, respectively. Consolidated GAAP operating margin percentage is not stated in the filing.
• Cash flow: Nine-month operating cash flow was $366.3, capital expenditures were $202.9, and investing cash outflow was $211.9. Financing used $164.8. Cash declined $10.4 from $16.1 at September 30, 2014 to $5.7 at June 30, 2015.
• Debt and liquidity: At June 30, long-term debt, including current maturities, was $1,816.4 and short-term borrowings were $211.4. Cash was $5.7; current assets were $483.0 and current liabilities $720.4. The company cited available bank lines and capital-market access as funding sources. Consolidated debt-to-capitalization under its credit-line definition was 56%, against a 70% covenant limit.
• Dividends: Declared dividends were $0.46 per share for the quarter and $1.38 for nine months, compared with $0.44 and $1.32 a year earlier.

Changes versus prior period

• Nine-month revenue and net income rose substantially, chiefly because the results now include Alagasco; the filing attributes $57.6 of nine-month net income to Alagasco. The acquisition therefore limits like-for-like comparison.
• Quarterly net income increased, but diluted EPS declined to $0.32 from $0.33, reflecting, among other factors, the 10.4 million shares issued in 2014 to help fund the Alagasco acquisition. Quarterly non-GAAP net economic earnings also fell to $11.1 from $14.5.
• For nine months, net economic earnings increased to $154.4 from $102.5. Gas Utility results improved, while Gas Marketing earnings declined and losses in Other increased.
• Interest expense rose, largely due to acquisition-related debt and Alagasco’s inclusion. Nine-month consolidated interest charges increased $24.9 year over year.
• Capital expenditures increased materially, including spending on utility infrastructure. Management cited pipeline upgrades, facilities improvements, MGE integration, and a new Alagasco service center.

Outlook, commentary, and risks

• The filing provides no specific consolidated earnings or revenue guidance. Management said it expects adequate capital resources to meet anticipated needs, including capital spending, debt service, maturities, seasonal borrowing, and dividends.
• Weather materially affected demand: Missouri service-area temperatures were 11.1% warmer year over year for the nine-month period, while Alagasco’s were 7.8% warmer. Management identifies weather, gas-price volatility, supply and pipeline availability, regulation, financing access, customer behavior, and litigation as risks.
• Utilities generally pass purchased-gas costs through to customers under Missouri PGA clauses and Alabama’s GSA rider, subject to regulatory provisions and review. These mechanisms reduce direct commodity-price earnings exposure but can affect cash timing.
• Regulatory matters include Missouri ISRS rate increases approved in May 2015 and further ISRS requests filed in August 2015. Laclede Gas disputes a proposed approximately $1.0 disallowance related to fiscal 2013 gas costs.
• Environmental contingencies include Missouri manufactured-gas-plant sites. A consultant’s estimated possible future expenditures across 19 sites ranged from $8.1 to $39.3; management said it did not expect the potential liabilities to materially affect financial position or results, but actual costs remain uncertain. Alagasco’s potential responsibility for the 35th Avenue Superfund Site was not yet determinable.
• Alagasco faces lawsuits arising from a December 2013 apartment-complex incident involving a fatality, injuries, and property damage. Management considered pending and threatened litigation liabilities not material based on information then available, while noting uncertainty in claims and outcomes.
• Management reported effective disclosure controls. Its evaluation of Laclede Group’s controls excluded Alagasco’s internal control over financial reporting during the first year after acquisition.

Key facts for investors to verify

• Confirm the intended issuer and reporting period: the source is Laclede Group’s June 30, 2015 10-Q, not a Spire Inc. 2014 Q3 filing.
• Assess the acquisition’s contribution to reported growth and compare organic Missouri utility results separately from acquired Alagasco results.
• Review the drivers of EPS and non-GAAP net economic earnings, including share dilution, the $7.6 pretax property-sale gain, and acquisition-related interest costs.
• Check debt maturities, refinancing execution, credit-line covenant headroom, low reported cash, and seasonal working-capital needs.
• Monitor regulatory rate recovery and the unresolved Missouri gas-cost disallowance, environmental exposures, and Alagasco litigation.
• Evaluate the definition and reconciliation of management’s non-GAAP measures against GAAP results and the sustainability of capital spending and dividends.