SPIRE INC quarterly report, Q2 FY2014

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Business context and reporting period

Filing identity: The supplied filing is a combined Form 10-Q for The Laclede Group, Inc., Laclede Gas Company and Alabama Gas Corporation, for the quarter and six months ended March 31, 2015. It does not identify the registrant as SPIRE INC or cover 2014 Q2, as the request metadata indicates.

Laclede Group is a natural-gas utility holding company with regulated gas utility operations in Missouri and Alabama and a non-regulated gas marketing business. The August 2014 acquisition of Alagasco materially affects comparisons: its results are included in 2015 but not in the prior-year consolidated periods. Utility earnings are seasonal and generally concentrated in the November–April heating season. Amounts below are in millions of dollars unless noted.

Financial performance and condition

  • Second quarter: Revenue was $877.4, up from $694.5; operating income was $157.7, versus $87.2; and net income was $94.4, versus $52.2. Diluted EPS was $2.18, compared with $1.59. Net economic earnings, a non-GAAP measure, were $97.6, versus $51.7; non-GAAP net economic EPS was $2.25, versus $1.58.
  • First six months: Revenue was $1,497.0, up from $1,163.1; operating income was $245.0, versus $150.1; and net income was $141.5, versus $87.8. Diluted EPS was $3.26, compared with $2.68. Net economic earnings were $143.3, versus $88.0; non-GAAP net economic EPS was $3.31, versus $2.68.
  • Operating margin: Consolidated non-GAAP operating margin was $308.4 for the quarter, versus $192.2, and $539.7 for six months, versus $349.0. Management defines this measure to exclude natural-gas costs and gross receipts taxes passed through to customers; it is not a GAAP margin.
  • Cash flow and investment: Six-month operating cash flow was $279.9, versus $142.8. Capital expenditures were $129.5, versus $68.2; investing cash outflow was $138.5. Financing cash outflow was $110.6. Cash increased by $30.8 to $46.9.
  • Debt and liquidity: At March 31, long-term debt, including the current portion, was $1,816.3 and short-term borrowings were $247.6; cash was $46.9. Total debt carrying value was therefore about $2.06 billion. The company reported $80.0 of long-term debt due within a year. The group, Laclede Gas and Alagasco had credit lines of $150.0, $450.0 and $150.0, respectively, and reported compliance with debt-to-capital covenants. Group capitalization was 47.8% common equity and 52.2% long-term debt.
  • Dividends: Laclede Group declared $0.46 per share for the quarter and $0.92 for the six months, compared with $0.44 and $0.88, respectively, in the prior-year periods.

Material changes versus the prior comparable period

  • The Alagasco acquisition drove much of the increase in consolidated revenue, operating margin and earnings. Management attributed the quarterly Gas Utility net-income increase principally to Alagasco’s $46.3 contribution and $5.8 growth at the Missouri Utilities; the six-month comparison included $56.9 from Alagasco and $9.4 growth at the Missouri Utilities. Comparisons are not like-for-like because Alagasco was not consolidated in the prior-year periods.
  • Gas Marketing results weakened: quarterly GAAP net income declined $9.1 to $0.3, and six-month net income declined $7.4 to $2.5. Management cited unusually favorable prior-year cold-weather market conditions and lower volatility and basis differentials in the current period.
  • Missouri service-area temperatures were 11.6% warmer than the prior-year quarter and 9.9% warmer over six months, reducing usage. Rate increases, infrastructure replacement surcharges and MGE’s variable-rate design partly offset the effect.
  • Consolidated interest charges rose $9.8 for the quarter and $18.5 for six months, primarily reflecting acquisition financing, including $625.0 of debt issued in August 2014, and the addition of Alagasco debt and interest costs. The weighted-average share count also rose from 32.6 million to 43.1 million, reflecting equity issued in connection with financing and the acquisition period.
  • Alagasco’s six-month net income decreased to $56.9 from $62.9, in part because the prior-year period included a gain related to sale of its Metro Operations Center and because of lower gas costs and usage. Thus, the acquisition increased consolidated results even as Alagasco’s own six-month earnings declined.

Outlook, commentary, risks and contingencies

  • No specific earnings or EPS guidance is provided in the supplied filing text. Management stated that it expects adequate access to capital markets and sufficient internal and external resources for anticipated requirements, including capital spending, debt service, seasonal funding and dividends.
  • Key stated risks include weather and catastrophic events, gas-price volatility and related margin deposits, gas supply and pipeline access, regulatory and legislative decisions, litigation, access to financing, customer retention and collections, covenant compliance, environmental and pipeline-safety requirements, and pension costs and funding.
  • Natural-gas purchase, storage and transportation commitments were estimated at $1,595.0 for the group, including $750.4 for Laclede Gas and $521.5 for Alagasco. The utilities generally seek recovery of gas costs through regulatory adjustment mechanisms, subject to regulatory review.
  • Laclede Gas reported a Missouri regulatory staff proposal for an approximately $1.0 contingent disallowance of fiscal 2013 purchased-gas costs; the company opposed it. Alagasco recorded estimated revenue reductions of $8.5 for the quarter and $12.7 for six months under its rate stabilization mechanism.
  • Environmental matters include Missouri manufactured-gas-plant sites with modeled potential future investigation, monitoring and remediation costs of $8.1–$39.3 across 19 sites; management did not expect these matters to materially affect future financial position or results. Alagasco’s potential liability at the 35th Avenue Superfund Site remained unclear to the company. Alagasco also faced lawsuits following a 2013 apartment-complex incident involving a fatality, injuries and property damage; management said pending and threatened litigation was not considered material based on information then available.
  • Alagasco’s 2015 results were included following the acquisition; the company also reported continued integration of some Alagasco controls, while excluding Alagasco’s internal controls from the group’s effectiveness evaluation during the permitted first-year period. The registrants reported effective disclosure controls.

Important facts for investors to verify

  1. Confirm the intended issuer and period: this filing is for Laclede Group and subsidiaries, quarter ended March 31, 2015—not a 2014 Q2 SPIRE INC filing.
  2. Assess the Alagasco acquisition’s impact on year-over-year comparability, purchase accounting, financing costs and the resulting share-count increase.
  3. Review the full debt maturity schedule, credit-line availability, covenant headroom and refinancing needs, including Alagasco’s $80.0 maturity due December 2015.
  4. Track Gas Marketing profitability and exposure to commodity-price, derivative valuation and counterparty-credit changes.
  5. Follow the Missouri purchased-gas disallowance proposal, Alagasco regulatory adjustments, Superfund matters and litigation as estimates and proceedings develop.
  6. Distinguish GAAP earnings and operating income from management’s non-GAAP net economic earnings and operating margin measures.