Business context and reporting period
This is The Laclede Group, Inc.’s unaudited Form 10-Q for the three months ended December 31, 2010, its fiscal first quarter. The filing says the Company and its utility subsidiary, Laclede Gas, began filing separate periodic reports with this quarter. The supplied request names SPIRE INC, but the filing identifies the registrant as The Laclede Group, Inc.; verify the issuer before relying on this summary. Laclede Group’s core business is regulated natural-gas distribution in eastern Missouri, supplemented by non-regulated gas marketing. Results are seasonal, with earnings generally concentrated in the November–April heating season.
Financial performance and position
Amounts below are in millions unless noted. Revenue decreased 9.6% to $444.2 from $491.2. Operating income was nearly unchanged at $40.8 versus $40.7; net income rose 2.1% to $23.4 from $22.9. Diluted EPS was $1.05 versus $1.03, and dividends declared per share were $0.405 versus $0.395. Operating margin was approximately 9.2% versus 8.3%, and net margin approximately 5.3% versus 4.7%.
- Regulated gas distribution revenue was $277.4, down $5.5. Segment net economic earnings rose to $21.4 from $17.4, supported mainly by a $7.6 rate increase effective September 1, 2010, and lower operating and maintenance expense.
- Non-regulated gas marketing revenue declined to $166.4 from $197.5. Segment net economic earnings fell to $1.9 from $4.6, reflecting narrower regional price differentials and 8% lower sales volumes. GAAP segment earnings were $1.9 versus $1.8.
- Other segment net economic earnings fell to approximately zero from $3.8, primarily because the prior-year quarter included a $3.7 after-tax gain from a wholesale propane inventory exchange settled in cash.
- Consolidated net economic earnings, a non-GAAP measure excluding after-tax unrealized energy-derivative gains and losses, were $23.4 versus $25.8. The prior period included a $2.9 after-tax unrealized derivative loss; the current-period adjustment was negligible.
Operating cash flow was $5.8, compared with essentially zero in the prior-year quarter. Capital expenditures were $15.6 versus $11.2. Investing cash outflow was $14.6; financing cash outflow was $53.0, mainly reflecting $32.2 of net short-term debt repayment and maturity of $25.0 of long-term debt. Cash declined $61.8 to $25.1. Current assets were $437.7 and current liabilities $315.3 at December 31, 2010.
Balance-sheet debt comprised $97.5 of short-term notes payable and $364.3 of long-term debt; the $25.0 current portion shown at September 30 had matured. Management reported debt at 56% of total capitalization for Laclede Gas and 46% for consolidated Laclede Group, both below the 70% covenant limit. Laclede Gas’s EBITDA-to-interest covenant ratio was 4.57x against a 2.25x minimum. Its $320 million credit facility expires in December 2011; Laclede Group also had $50 million of working-capital lines expiring in September 2011.
Material changes and management commentary
Lower wholesale gas costs passed through to utility customers reduced reported revenue, as did lower non-regulated gas prices and the absence of the prior-year propane transaction. These revenue movements largely reflect commodity costs and mix rather than equivalent changes in earnings. Utility system therms sold and transported were 285.9 million versus 288.0 million; temperatures were 1.8% warmer than normal. Off-system therms rose to 53.7 million from 28.5 million.
Management said it believes the Company has adequate access to capital markets and sufficient resources for anticipated needs, including capital spending, debt maturities, seasonal funding and dividends. No specific earnings or revenue guidance was provided. The utility’s 2010 rate-case settlement retained its weather-mitigation rate design. An ISRS filing approved $2.5 million of annual revenue effective January 7, 2011, from a request for $2.6 million.
Risks, contingencies and unusual items
- Seasonal working-capital demands, timing of customer collections under the Purchased Gas Adjustment (PGA) mechanism, gas-price volatility and derivative margin requirements can materially affect interim cash flows. The utility generally passes eligible gas costs through to customers, subject to prudence review.
- LER is exposed to competition, commodity-price and counterparty-credit risks. Its five largest counterparties represented 41.5% of its total accounts receivable before netting; management said those counterparties were investment grade.
- Natural-gas storage, transportation and supply contracts carried estimated minimum payments of $841.7 million. Total disclosed contractual obligations were $1.794 billion, including long-term debt principal and interest.
- Group guarantees supporting LER gas purchases were $107.6 million at quarter-end and $110.6 million on January 28, 2011; no liability was recorded, and management assessed payment probability as low.
- Three former manufactured-gas plant sites may require remediation. A 2005 consultant estimate put possible costs at $5.8–$36.3 million; actual costs remain uncertain. The Company expects eligible future costs, net of recoveries, to be recoverable through rates, but insurer coverage is disputed in part.
- Missouri regulators have proposed gas-cost disallowances totaling $6.0 million for fiscal 2005–2007 (after reducing the fiscal 2005 proposal); the Company disputes them and recorded no liability. Related affiliate-transaction complaints and other regulatory proceedings remained pending. Management said it believes these matters will not have a material adverse effect.
- A 100-basis-point increase in average short-term borrowing rates would raise annual pretax interest expense by approximately $1.3 million, before possible PGA carrying-cost offsets. Management also cited weather, supply availability, regulation, environmental and safety requirements, pension costs, litigation and credit-market access as risks.
Most important facts to verify
- Confirm that the intended issuer is The Laclede Group, Inc., not SPIRE INC, and that the relevant period is the quarter ended December 31, 2010.
- Review the separate Laclede Gas filing and the prior Form 10-K for utility-level detail, rate-case terms and seasonal comparability.
- Track cash and seasonal borrowing needs, particularly as the $320 million utility credit facility approached its December 2011 expiration.
- Monitor LER margins, receivable concentration and the amount and timing of derivative losses expected to be reclassified into earnings; the filing estimated $8.7 million pretax over the following 12 months.
- Follow developments in the disputed gas-cost disallowances, affiliate-transaction cases and environmental remediation exposures.