SPIRE INC annual report, FY2013

Filing scope and business context

Important filing-identity and period mismatch: The supplied text is The Laclede Group, Inc. and Laclede Gas Company’s combined Form 10-K for the fiscal year ended September 30, 2014—not a filing identified as Spire Inc. or a 2013 Q4 report. The text mentions “Spire” only as a natural-gas compression business. The comparison below therefore summarizes Laclede Group’s FY2014 filing; its fiscal fourth quarter ended September 30, 2014.

Laclede Group operates regulated gas utilities in Missouri and Alabama, non-regulated gas marketer Laclede Energy Resources (LER), and other businesses. The year’s results include a full year of Missouri Gas Energy (MGE), acquired September 1, 2013, but only one month of Alagasco, acquired effective August 31, 2014. This makes year-over-year comparisons materially acquisition-affected.

Key financial results

Management attributed higher earnings chiefly to the full-year contribution from MGE, colder weather, and stronger gas-marketing results; these benefits were partly offset by acquisition and integration costs, higher depreciation, and increased interest expense. FY2014 consolidated operating margin, a non-GAAP measure, was $599.8 million versus $370.4 million. LER benefited from unusually high winter price volatility and regional gas-price differentials.

Fiscal Q4: Revenue was $222.3 million, operating loss was $8.4 million, net loss was $14.9 million, and diluted loss per share was $0.35. The filing attributes the quarter’s results in part to seasonality and acquisition-related costs, integration expenses, and acquisition financing costs; it reports an $11.3 million net loss impact from those items. FY2013 Q4 net loss was $9.6 million, or $0.30 per diluted share.

Balance sheet, debt, and liquidity

At September 30, 2014, consolidated total assets were $5,074.0 million, common equity was $1,508.4 million, long-term debt was $1,851.0 million, and short-term borrowings were $287.1 million. Total debt was therefore $2,138.1 million, up substantially from the prior year following the acquisitions. Current assets were $604.9 million and current liabilities were $782.8 million. The company reported $16.1 million of cash; short-term liquidity also relied on bank credit facilities and commercial paper.

Operating cash flow declined year over year, reflecting working-capital movements, gas-cost collection timing, and increased gas stored underground, despite higher net income and noncash depreciation. Investing cash outflow was $1,437.6 million, including $1,305.2 million for Alagasco net of acquired cash; financing cash inflow was $1,278.1 million, supported by equity and debt issuance. Capital expenditures were $171.0 million.

The company had $450 million of Laclede Gas credit capacity, $150 million for Laclede Group, and a new $150 million Alagasco facility. Debt-to-capitalization ratios under the relevant credit agreements were within the stated 70% limits: 51% for Laclede Gas, 59% for Laclede Group, and 24% for Alagasco. Management stated it believed capital-market access and resources were adequate for foreseeable obligations.

Material changes, outlook, risks, and unusual items

• Acquisitions and financing: Alagasco was acquired for approximately $1.6 billion, funded with equity, equity units, $625 million of senior notes, and other funds. MGE was acquired in 2013; its FY2014 contribution is not comparable with its one-month contribution in FY2013. Goodwill at year-end included $727.6 million for Alagasco and $210.2 million for MGE.
• Weather and marketing: Temperatures in Laclede Gas’s service area were 13.3% colder than the prior year and 11.4% colder than normal. LER’s unusually strong FY2014 performance reflected extreme winter volatility and pipeline constraints. Management expected less favorable gas-marketing conditions in FY2015, citing expectations for more normal weather and higher national production.
• Regulation: Missouri’s MGE rate case produced a $7.8 million annual base-rate increase effective May 1, 2014. Alagasco’s RSE framework permits a 10.5%–10.95% return on average common equity, subject to regulatory reviews and rate adjustments. Missouri rate-case timing restrictions and regulatory prudence reviews remain relevant.
• Capital plans: Estimated FY2015 capital expenditures were approximately $318.3 million, including $205.6 million for Laclede Gas and $85.0 million for Alagasco. The filing does not provide a specific consolidated earnings or EPS forecast.
• Key risks and contingencies: Risks include acquisition integration and anticipated-synergy execution, increased debt and interest-rate exposure, regulatory cost recovery, gas supply and pipeline availability, weather, commodity volatility, safety and environmental obligations, cybersecurity, and counterparty credit. The filing identifies environmental remediation uncertainty at former manufactured-gas sites, including an estimated possible future cost range of $8.1 million to $39.3 million for 19 Missouri sites; the ultimate costs depend on remediation requirements, other responsible parties, and insurance. Alagasco’s potential liability at the 35th Avenue Superfund site was not estimable from available information and no amount was accrued. Management did not expect pending litigation to materially affect financial results.
• Non-GAAP qualifications: Net economic earnings exclude specified energy-transaction timing and fair-value items and acquisition, divestiture, and restructuring costs; FY2014 adjusted results also exclude the effect of acquisition equity offerings from the per-share calculation. These measures supplement, rather than replace, GAAP results.

Most important facts for investors to verify

1. Confirm the intended issuer and reporting period: the supplied filing is Laclede Group’s FY2014 10-K, not a Spire Inc. 2013 Q4 filing.
2. Assess the underlying earnings contribution and integration progress of MGE and Alagasco, separating acquired operations, unusual weather, and acquisition-related expenses from recurring performance.
3. Review debt maturities, variable-rate exposure, credit-facility availability, and the effect of acquisition financing on future interest costs and cash flow.
4. Check FY2015 capital spending, rate-case and surcharge outcomes, and the timing and regulatory recoverability of utility costs.
5. Monitor LER’s exposure to less volatile market conditions and the environmental, safety, litigation, and integration contingencies described in the filing.