Filing summary
Entity and period: The supplied filing is The Laclede Group, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2011, not a Spire Inc. filing for 2010 Q3. It reports the third quarter and first nine months of fiscal 2011; amounts below are in millions unless stated otherwise.
Business context and results
Laclede Group’s results are driven mainly by its regulated Missouri natural-gas utility, Laclede Gas, and its non-regulated gas marketer, Laclede Energy Resources (LER). Utility earnings are seasonal, usually concentrated in the November–April heating season. The June quarter is therefore not necessarily indicative of a full year.
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Nine months ended June 30, 2011 | Nine months ended June 30, 2010 |
|---|---|---|---|---|
| Operating revenue | $344.3 | $324.5 | $1,332.3 | $1,451.0 |
| Operating income | $25.8 | $12.9 | $116.4 | $103.8 |
| Net income | $15.4 | $4.7 | $66.7 | $55.6 |
| Diluted EPS | $0.69 | $0.21 | $2.98 | $2.50 |
| Operating margin | 7.5% | 4.0% | 8.7% | 7.2% |
| Dividends declared per share | $0.405 | $0.395 | $1.215 | $1.185 |
Cash flow, liquidity and debt
- For the nine-month period, operating cash flow was $201.3 million, versus $157.8 million a year earlier; capital expenditures were $47.1 million, versus $40.3 million. Financing used $180.3 million, including short-term debt repayments and a $25 million bond maturity.
- Cash and cash equivalents were $60.9 million at June 30, 2011, down from $86.9 million at September 30, 2010. The filing separately reports $20.3 million of short-term investments included in cash and cash equivalents.
- Long-term debt was $364.3 million, with no short-term borrowings outstanding at quarter-end. Laclede Gas had a $320 million credit line then; on July 18, 2011, it was replaced by a $300 million facility expiring in July 2016. Laclede Group also replaced its $50 million working-capital facility with a new $50 million facility expiring in July 2016.
- At June 30, debt was 47% of Laclede Gas capitalization and 39% of consolidated Laclede Group capitalization. Consolidated capitalization comprised 61.4% common equity and 38.6% long-term debt.
Changes and management commentary
- Quarterly revenue increased 6.1% year over year, while nine-month revenue fell 8.2%, chiefly reflecting lower LER gas-marketing revenues and prices. The nine-month decline in revenue did not prevent higher operating income and net income.
- Quarterly net income rose mainly because of improved regulated utility results and an unusual propane inventory sale; lower LER earnings partly offset those gains. The propane sale involved 320,000 barrels no longer needed for utility customers and generated $6.1 million of after-tax income. For nine months, the transaction was partly offset by a prior-year propane transaction.
- Regulated gas distribution net income improved by $5.4 million for the quarter and $12.2 million for nine months. The principal benefit was the general rate increase effective September 1, 2010; lower infrastructure surcharge revenue and higher operating costs partly offset it.
- LER’s nine-month net economic earnings declined $6.4 million, reflecting 16% lower sales volumes and narrower regional price differentials and limited price volatility. Management describes these market conditions as having persisted through the year.
- Management estimated fiscal 2011 Utility capital expenditures of approximately $72 million, including a multi-year software replacement project. It said it expected adequate access to capital markets and sufficient resources for anticipated obligations; no earnings guidance was provided in the supplied filing text.
Risks, contingencies and unusual items
- Key risks include weather and catastrophic events, gas-price volatility and related margin deposits, gas supply and pipeline availability, regulatory decisions and rate recovery, competition, counterparty credit, capital-market access, environmental matters, pensions, and litigation.
- Natural-gas purchase, storage and transportation contracts carried estimated minimum payments of approximately $676 million. Laclede Group guaranteed $99.3 million of LER gas-supply transactions at June 30; guarantees rose to $104.3 million by July 29. Management considered payment under those guarantees remote.
- Environmental matters include three former manufactured-gas-plant sites. A historical consultant estimate for possible investigation, monitoring and remediation ranged from $5.8 million to $36.3 million; actual costs could differ materially. The company said future eligible costs were expected to be recoverable through rates, subject to regulatory approval.
- Pending Missouri regulatory disputes concern gas-cost disallowances and affiliate-transaction allegations. No provision was recorded for proposed gas-cost disallowances; management said it was contesting the matters. A court held a penalty case in abeyance while an appeal proceeds.
- The utility’s PGA mechanism generally passes eligible gas costs and related derivative costs to customers, subject to prudence review. LER’s fair-value derivative changes can affect reported earnings before related transactions settle; management also presents non-GAAP “net economic earnings” excluding those unrealized effects.
Important facts for investors to verify
- Confirm the issuer and reporting period: the source is Laclede Group, Q3 fiscal 2011, despite the request metadata identifying Spire Inc. and 2010 Q3.
- Review the persistence of LER’s lower volumes and margins, and distinguish GAAP earnings from management’s non-GAAP net economic earnings.
- Assess the contribution and repeatability of the propane sale and the utility’s rate increase to reported earnings.
- Track regulatory proceedings, possible environmental remediation costs and insurance recoveries, and the treatment of gas-cost disallowances.
- Review seasonal liquidity, gas-price-related collateral needs, credit-facility covenants, planned capital spending, and the guarantees supporting LER.