Filing and reporting period
Important identification discrepancy: The supplied filing is The Laclede Group, Inc.’s Form 10-Q, not a filing identified as SPIRE INC. It covers the fiscal quarter and six months ended March 31, 2013 (the second fiscal quarter of 2013), with an unaudited balance sheet as of that date.
Laclede Group’s principal business was regulated natural-gas distribution in eastern Missouri, alongside non-regulated gas marketing. The utility is seasonal, with earnings typically concentrated in the November–April heating season.
Financial results and condition
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Operating revenue | $397.6 million, up from $358.2 million | $704.6 million, down from $769.1 million |
| Operating income | $51.8 million, versus $50.6 million | $93.9 million, versus $93.7 million |
| Net income | $30.2 million, versus $29.7 million | $55.8 million, versus $54.9 million |
| Diluted EPS | $1.34, versus $1.32 | $2.47, versus $2.45 |
| Dividends declared per share | $0.425, versus $0.415 | $0.850, versus $0.830 |
Six-month net economic earnings, a company-defined non-GAAP measure, were $60.7 million ($2.69 per share), compared with $53.3 million ($2.38 per share). The filing explains that this measure excludes certain energy-derivative timing effects and acquisition-related costs; it is not a substitute for GAAP results.
For the six months, cash provided by operating activities was $142.4 million, compared with $71.5 million; capital expenditures were $62.7 million, versus $40.7 million; and cash used in investing was $64.8 million, versus $42.1 million. Financing provided $41.9 million, compared with $63.3 million used in the prior-year period. Cash and cash equivalents were $146.9 million at March 31, 2013, versus $27.5 million at September 30, 2012.
At March 31, 2013, total assets were $2.009 billion, common equity was $640.0 million, and long-term debt including current portion was approximately $464.4 million. There were no short-term borrowings at quarter-end. Consolidated capitalization was 57.9% equity and 42.1% long-term debt. The company reported $300 million of Laclede Gas bank credit lines and a separate $50 million Laclede Group line; none of the latter was drawn during the six-month period.
Material changes versus the prior comparable period
- Quarterly utility revenue increased $55.5 million, primarily reflecting higher system sales volumes as temperatures were 45.7% colder than the prior-year quarter; prior-year temperatures were the warmest on record. Utility net income rose $4.4 million for the quarter and $8.5 million for the six months.
- Utility results also benefited from lower employee-benefit costs and higher Infrastructure System Replacement Surcharge revenue; higher depreciation partly offset these benefits.
- Gas Marketing earnings declined: GAAP earnings were $1.8 million for the quarter and $4.7 million for the six months. Management cited weaker margins, low market price volatility and basis differentials, and expiration of a favorable supply contract. Higher volumes and seasonal storage spreads partly offset the effects.
- Six-month consolidated revenue declined despite improved utility revenue, largely reflecting lower Gas Marketing reported revenue. The filing says certain transactions were reported net rather than gross, reducing both marketing revenue and expense without affecting earnings.
- Acquisition-related costs were $1.7 million after tax for the quarter and $3.9 million after tax for the six months. These costs reduced GAAP earnings and were excluded from net economic earnings.
- Long-term debt increased following $125 million of debt issuance, partly offset by repayment of $25 million of mortgage bonds. Capital expenditures increased, principally for distribution infrastructure and information-technology investments.
Outlook, risks and contingencies
Management expected the MGE acquisition to be EPS-neutral in the first full year after closing and accretive thereafter, and immediately accretive to cash flow; these expectations were preliminary and subject to execution, financing, regulatory and integration risks. Laclede Group had agreed to acquire MGE for $975 million and NEG for $60 million, including approximately $19.5 million of assumed NEG debt. It later agreed to allow an Algonquin subsidiary to acquire its NEG purchase rights; Laclede Group would receive $11 million at closing. The company remained obligated to acquire NEG if that arrangement did not satisfy its conditions by October 14, 2013.
Regulatory approval was pending for the acquisitions. A $1.020 billion committed bridge facility was arranged, with permanent financing expected to combine debt and equity. Failure to obtain financing for MGE could trigger a $73.1 million reverse break-up fee. The company had entered into $355 million of interest-rate swaps related to anticipated acquisition financing. Management said it believed it had adequate access to capital, but identified risks of higher leverage, financing costs, dilution, credit-rating pressure and integration expenses.
Laclede Gas filed a rate case designed to increase annual revenue by $43.6 million, net of current annualized surcharge revenue; a hearing was set for August 2013. A separate $4.8 million surcharge increase took effect March 15, 2013.
Other risks include weather and gas-price volatility, supply and pipeline availability, regulatory decisions and recovery of purchased-gas costs, counterparty credit exposure in gas marketing, environmental liabilities, pension funding, and litigation. Environmental remediation costs at former manufactured-gas sites were uncertain; management said any future costs were expected to be recoverable through rates, but acknowledged costs could be material. A Missouri regulatory dispute included proposed $6.0 million purchased-gas disallowances, which the company contested; management did not expect a material outcome. The company also reported that some MF Global deposits remained unavailable, but management considered the exposure immaterial.
For the six months, contractual obligations totaled $1.439 billion, including $410.1 million of natural-gas purchase obligations and $465.0 million of long-term-debt principal. The table excluded the potential reverse break-up fee, acquisition financing and pension/postretirement commitments.
Key facts for investors to verify
- Confirm the issuer and reporting period: the source is The Laclede Group, Inc., quarter ended March 31, 2013—not a SPIRE INC filing or 2012 Q2 report.
- Check acquisition status, regulatory approvals, the proposed NEG transfer to Algonquin, financing terms and any potential break-up fee.
- Assess the sustainability of utility earnings gains given weather comparisons, and the sensitivity of Gas Marketing earnings to margins, volatility and contract renewals.
- Reconcile reported revenue changes with the change to net reporting for certain marketing transactions; distinguish GAAP net income/EPS from non-GAAP net economic earnings.
- Monitor the rate case, purchased-gas regulatory dispute, environmental investigations, and remaining unavailable MF Global deposits.
- Review post-quarter developments and verify all figures against the complete filed financial statements and notes.