Filing summary
Period and entity: The supplied filing is The Laclede Group, Inc.’s Form 10-K for the fiscal year ended September 30, 2011—not a Spire Inc. filing or a 2010 Q4 report. The filing says the company and its utility subsidiary began filing separate SEC reports in fiscal 2011. Laclede Group operated a regulated Missouri gas utility serving about 625,000 customers and a non-regulated gas marketing business.
Key financial results
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Operating revenue | $1,603.3 million | $1,735.0 million |
| Operating income | $118.2 million | $104.9 million |
| Net income | $63.8 million | $54.0 million |
| Diluted EPS | $2.86 | $2.43 |
| Operating cash flow | $167.2 million | $106.9 million |
| Investing cash flow | $(67.0) million | $(60.8) million |
| Financing cash flow | $(143.8) million | $(33.8) million |
Operating margin was approximately 7.4%, compared with 6.0% in FY 2010. Net economic earnings, a company-defined non-GAAP measure excluding after-tax unrealized energy-derivative gains and losses, were $62.4 million, or $2.79 per diluted share, versus $56.2 million, or $2.52, in FY 2010. The filing cautions that these measures are not substitutes for GAAP results.
Balance sheet, debt and liquidity
- At September 30, 2011, cash and cash equivalents were $43.3 million; total assets were $1.783 billion; common equity was $573.3 million.
- Utility long-term debt was $364.4 million net of discount, representing $365 million principal. Short-term borrowings were $46 million. The utility’s debt was 52% of total capitalization; consolidated Laclede Group’s debt-to-capitalization ratio was 42%.
- Laclede Gas had a $300 million committed bank facility and Laclede Group had a separate $50 million facility, both scheduled to expire in July 2016. Management said it believed capital-market access and resources were adequate for foreseeable needs.
- Common dividends declared were $1.62 per share for FY 2011, up from $1.58 in FY 2010. The filing reports no off-balance-sheet arrangements.
Changes versus FY 2010
- Revenue declined about 7.6%, while operating income increased about 12.8%, net income about 18.1%, and operating cash flow about 56.4%.
- Regulated Gas Distribution earnings improved by about $10.9 million, principally reflecting the $28 million annualized benefit of a general rate increase effective September 1, 2010 and lower operating and maintenance costs, partly offset by higher pension and insurance costs, lower infrastructure surcharge revenue, and other items.
- Non-Regulated Gas Marketing net income fell $3.3 million to $10.4 million; its net economic earnings fell $6.7 million. Management attributed the decline to 16% lower sales volumes and reduced margins amid narrow regional price differentials and limited price volatility.
- Other earnings benefited from a $6.1 million after-tax propane inventory sale in FY 2011; the comparable FY 2010 propane transaction generated $3.7 million after tax.
- Cash-flow improvement reflected lower derivative margin-deposit payments, timing of gas-cost collections, and stronger utility earnings. Financing cash use rose with short-term debt repayments and a $25 million bond maturity.
Outlook, risks and unusual items
- Capital spending: Utility capital expenditures were $67.3 million in FY 2011; management estimated approximately $104 million for FY 2012, largely for distribution plant and information technology. A multi-year replacement of work-management, financial, and supply-chain software had approximately $6 million of contractual commitments at year-end.
- Regulation and recovery: Utility rates, cost recovery, and permitted returns depend on Missouri regulators. Purchased gas costs generally flow through the Purchased Gas Adjustment, subject to prudence review; delays or disallowances can pressure liquidity or earnings. Two infrastructure surcharge filings were approved in FY 2011, while a further filing seeking about $2.0 million of annual revenue remained pending after year-end.
- Pending matters: Missouri regulators proposed purchased-gas-cost disallowances of $1.7 million, $2.8 million, and $1.5 million for specified prior years. The company disputed them and recorded no liability. Affiliate-transaction proceedings included an appealed commission order authorizing a penalty action, which was held in abeyance pending appeal, and other counts still pending. Management said it considered the matters without merit; outcomes remain uncertain.
- Environmental exposure: Three former manufactured-gas plant sites were identified. A prior consultant estimated a broad $5.8 million to $36.3 million range for potential investigation and remediation based on information available in 2005. Management expected eligible future costs, net of recoveries, to be deferred and recovered through rates, but actual costs are uncertain.
- Counterparty and market risks: LER faces volatile margins, competition, pipeline-capacity costs, and concentrated counterparty exposures. Laclede Group had issued $95.3 million in guarantees for LER gas transactions at year-end ($96.3 million by November 18, 2011); no amount was recorded and management considered payment unlikely.
- MF Global event: After MF Global affiliates filed for Chapter 11 on October 31, 2011, $2.7 million of company margin deposits remained frozen as of November 17. Management did not consider the exposure material but could not predict recovery timing or amount.
- Other risks and governance: Weather, gas supply and prices, pipeline safety, environmental rules, pension funding, credit access, technology implementation and cybersecurity could affect results. CEO Douglas Yaeger planned to retire effective February 1, 2012, with President Suzanne Sitherwood expected to succeed him. Independent auditors gave unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Most important facts for investors to verify
- Confirm issuer and period: this is Laclede Group’s FY 2011 10-K, not a Spire Inc. FY 2010 Q4 filing.
- Review segment earnings and margins, especially whether LER’s weak pricing and volume environment persisted.
- Check subsequent regulatory decisions on disputed gas-cost disallowances, affiliate transactions, and the pending surcharge filing.
- Assess funding for the forecast FY 2012 utility capital expenditures and planned pension and postretirement contributions.
- Track recovery of the frozen MF Global deposits and any change in guarantees, counterparty exposures, or environmental estimates.