Business context and reporting period
The supplied filing is The Laclede Group, Inc.’s Form 10-K for the fiscal year ended September 30, 2013—not a Spire Inc. filing or a 2012 Q4 report. Spire is not identified as the registrant in the text; investors should verify the company and period before relying on this summary. Laclede operated regulated gas utilities in eastern Missouri and, following its September 1, 2013 acquisition of Missouri Gas Energy (MGE), western Missouri, as well as a nonregulated gas-marketing business.
Financial and operating results
| Metric | FY2013 | FY2012 |
|---|---|---|
| Operating revenue | $1,017.0 million | $1,125.5 million |
| Operating income | $96.5 million | $110.6 million |
| Net income | $52.8 million | $62.6 million |
| Diluted EPS | $2.02 | $2.79 |
| Net economic earnings, non-GAAP | $65.0 million | $62.6 million |
| Diluted net economic EPS, non-GAAP | $2.87 | $2.79 |
| Operating cash flow | $163.9 million | $128.1 million |
| Cash and cash equivalents at year-end | $53.0 million | $27.5 million |
| Long-term debt, net of current portion | $912.7 million | $339.4 million |
Revenue fell about 10%, operating income about 13%, and GAAP net income about 16%. The filing attributes the revenue decline in part to net rather than gross presentation of certain Gas Marketing transactions; this accounting presentation does not affect operating income or net income. GAAP earnings also included $10.8 million after tax of acquisition, divestiture and restructuring costs. Net economic earnings are a management-defined non-GAAP measure and exclude specified timing and transaction effects.
Gas Utility operating margin, a non-GAAP measure, increased to $348.5 million from $314.4 million, reflecting colder weather and MGE’s partial-year contribution. Service-area temperatures were 35.8% colder than in FY2012. Gas Marketing operating margin declined to $17.7 million from $25.0 million, with management citing low volatility and narrow regional price spreads, an expired favorable supply contract, and inventory adjustments. The filing does not provide a single consolidated gross-margin percentage.
Investing cash outflow was $1,108.3 million, including $975.0 million for MGE; financing cash inflow was $969.9 million, supported by a $428 million net common-stock offering and debt issuance. Year-end commercial-paper borrowings were $74 million. The Utility had a $450 million committed credit line and Laclede Group a $150 million line, both expiring in 2018. Consolidated capitalization was 53.4% common equity and 46.6% long-term debt, compared with 63.9% and 36.1% in FY2012. The company reported investment-grade ratings, though S&P and Fitch each lowered Laclede Group’s rating one notch during Q4.
Material changes, outlook and risks
- MGE acquisition: Purchased for $975 million and financed with equity, $450 million of Utility bonds, short-term borrowings and cash. MGE contributed $22.0 million of revenue and $1.8 million of net income for September 2013. The acquisition added $247.1 million of preliminary goodwill; purchase accounting remained subject to finalization.
- Management outlook: Management expected the MGE acquisition to be accretive to Utility net economic earnings in FY2014 and thereafter, but stated that estimates were preliminary and synergies, integration costs and results were uncertain. No formal consolidated earnings guidance is provided in the supplied text.
- Regulation and rates: A rate-case agreement generally restricts general rate cases for non-gas costs before October 1, 2015, subject to exceptions. MGE’s rate case sought a $23.4 million revenue increase, less $6.3 million of annualized ISRS revenue; a hearing was set for April 2014. Purchased-gas recovery remains subject to regulatory prudence review.
- Other transaction: The planned New England Gas asset sale to an Algonquin subsidiary was pending Massachusetts regulatory approval at the filing date; Laclede’s purchase agreement remained in effect if the sale did not close.
- Costs and investment: FY2014 capital expenditures were estimated at approximately $175 million for the Utility and $10 million for nonregulated subsidiaries. The company anticipated FY2014 pension contributions of $24.0 million to qualified plans and postretirement contributions of $19.2 million to qualified trusts.
- Key risks and contingencies: Higher debt and refinancing or ratings pressure; integration and realization of MGE benefits; regulatory decisions and delayed cost recovery; weather, gas supply and price volatility; counterparty and market risks in Gas Marketing; pipeline safety, environmental remediation and litigation; and technology and cybersecurity. Management said identified environmental matters had not materially affected results, but future remediation costs could be material. A fatal MGE gas-line explosion generated lawsuits; management did not consider exposure material at that time, while discovery was ongoing.
- Unusual quarterly item: FY2013 fourth-quarter net loss was $9.6 million. The filing says transaction costs, one month of MGE operations and acquisition-debt interest together reduced quarterly net income by $5.5 million.
Important facts for investors to verify
- Confirm the intended issuer and period: the provided document is Laclede Group FY2013, not Spire Inc. or 2012 Q4.
- Review the final MGE purchase-price allocation, goodwill and integration costs, and whether expected accretion and synergies were achieved.
- Check subsequent decisions and outcomes for the pending New England Gas transaction and MGE rate case.
- Assess debt, credit ratings, refinancing needs, credit-line availability and the effect of increased interest costs.
- Track Gas Marketing margins and the distinction between reported revenue changes from net presentation and underlying profitability.
- Review subsequent developments in pipeline-incident litigation, environmental remediation, pension funding and regulatory cost recovery.