SPIRE INC quarterly report, Q1 FY2013

Business context and reporting period

The supplied filing is The Laclede Group, Inc.’s unaudited Form 10-Q for the quarter ended December 31, 2013 (fiscal 2014 first quarter), not a filing identified as Spire Inc. The company’s core business is regulated natural gas distribution in eastern and western Missouri; it also operates a non-regulated gas-marketing business. MGE, acquired effective September 1, 2013, is included in the current quarter, materially limiting year-over-year comparability.

Key financial results

Amounts below are in millions of dollars, except per-share amounts. Income and cash-flow comparisons are for the three months ended December 31.

Operating margin, a company-defined non-GAAP measure, was $156.8 million versus $104.6 million. The reported operating-income margin was approximately 13.4% of revenue, versus 13.7%; acquisition and business-mix effects affect comparability. Net economic earnings, also non-GAAP, were $36.3 million ($1.11 per share), compared with $28.2 million ($1.25 per share).

Material changes, balance sheet and liquidity

• Net income increased $10.0 million, principally reflecting a full quarter of MGE operations, which contributed $12.7 million to net income. Gas Marketing earnings declined $2.4 million, and the weighted-average basic share count rose from 22.4 million to 32.6 million; diluted EPS consequently fell despite higher net income.
• At December 31, 2013, cash was $34.5 million; short-term borrowings were $93.5 million; long-term debt, including the $80 million current portion, was approximately $912.8 million. Current assets were $570.7 million and current liabilities $477.7 million.
• Consolidated capitalization was 56.2% common equity and 43.8% long-term debt. The company reported $450 million of Utility credit capacity and a separate $150 million consolidated credit line, both scheduled to expire in September 2018; no borrowings were outstanding under the parent line. Debt-to-capitalization covenant ratios were 51% for the Utility and 49% consolidated, below the 70% limits.
• Operating cash flow was negative, primarily reflecting seasonal receivables and MGE’s inclusion. Investing cash outflow was $24.3 million, including $34.6 million of capital spending and $11.0 million proceeds from the NEG sale; financing provided $21.6 million. Cash declined $18.5 million during the quarter.
• The $80 million of 6.35% bonds due 2038 was classified as current at quarter-end and redeemed for cash on January 6, 2014.

Outlook, management commentary, risks and unusual items

Management said it expects adequate access to capital and sufficient internal and external resources for anticipated capital requirements, seasonal funding needs, debt maturities and dividends. No specific earnings or revenue guidance was provided. Earnings are seasonal and generally concentrated in the November–April heating season; weather mitigation and MGE’s rate design partly reduce weather-related volatility.

• The MGE acquisition had a purchase price of $975 million, effectively reduced to $964 million after the $11 million NEG-sale proceeds. The final purchase-price adjustment remained under negotiation with the seller; management expected settlement in fiscal Q2. Goodwill was $235.8 million after a preliminary $11 million reduction associated with the NEG sale.
• The Massachusetts Attorney General sought reconsideration of regulatory approval for the NEG transfer; the MDPU had not acted on the motion. The filing does not quantify a likely financial effect.
• MGE had a pending general rate case designed to increase annual revenues by $23.4 million, less $6.3 million of existing annualized surcharge revenue; hearings were set for April 2014. MGE also sought a $1.6 million infrastructure surcharge increase. Laclede Gas subsequently filed for a $7.4 million surcharge increase, with rates expected to take effect by May 17, 2014.
• Natural-gas supply, transportation and storage commitments totaled an estimated $1.127 billion. Environmental remediation at former manufactured-gas sites could entail additional costs; historical estimates for Laclede Gas sites ranged from $5.8 million to $36.3 million, but were based on a 2005 analysis and actual costs could be materially higher or lower. Management expected recovery of qualifying future remediation costs through rates.
• Lawsuits followed a 2013 MGE gas-line explosion that caused one death, injuries and property damage. Management said exposure was not considered material at the time and intended to defend the claims. Other disclosed risks include weather, gas-price and margin-call volatility, regulation, litigation, counterparty credit, pension funding and integration of MGE.
• Disclosure controls were deemed effective, but the assessment excluded MGE, and the company was still evaluating and implementing MGE-related internal-control processes.

Important facts for investors to verify

• Confirm the issuer: the supplied filing is for The Laclede Group, Inc., notwithstanding the request metadata naming SPIRE INC.
• Track the MGE purchase-price true-up, goodwill adjustments and post-acquisition integration and controls.
• Monitor outcomes and timing of the MGE rate case, infrastructure surcharge requests and Massachusetts reconsideration motion.
• Assess seasonal working-capital needs, short-term borrowing, debt redemption and planned capital and benefit-plan contributions.
• Review the non-GAAP reconciliations and distinguish acquisition-driven growth from underlying operating performance; the filing provides no company-wide earnings guidance.