Business context and reporting period
Filing identity differs from the request metadata: the supplied filing is a combined Form 10-Q for The Laclede Group, Inc. and Laclede Gas Company, not Spire Inc. It covers the quarter and nine months ended June 30, 2010 (fiscal 2010), with comparable 2009 periods. The interim financial statements are unaudited.
Laclede Group’s main business is regulated natural-gas distribution in eastern Missouri; its nonregulated gas-marketing subsidiary is Laclede Energy Resources (LER). Earnings are seasonal and generally concentrated in the November–April heating season.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Operating revenue | $324.5 million, versus $309.9 million | $1,451.0 million, versus $1,643.3 million |
| Operating income | $12.9 million, versus $16.2 million | $103.8 million, versus $128.1 million |
| Net income | $4.7 million, versus $6.9 million | $55.6 million, versus $69.0 million |
| Diluted EPS | $0.21, versus $0.31 | $2.50, versus $3.11 |
| Net economic earnings (non-GAAP) | $4.4 million, versus $6.8 million | $57.5 million, versus $66.7 million |
Quarterly operating margin was approximately 4.0%, compared with 5.2% a year earlier; nine-month operating margin was approximately 7.2%, compared with 7.8%. The filing reports no company-wide guidance for future earnings.
- Cash flow: Nine-month operating cash flow was $157.8 million, down from $219.8 million. Capital expenditures were $40.3 million; cash dividends paid were $26.1 million. Cash increased $34.7 million to $109.3 million.
- Debt and liquidity: At June 30, cash was $109.3 million and current assets/current liabilities were $387.1 million/$285.8 million. Short-term borrowings were $76.2 million; long-term debt including its current portion was approximately $389.3 million. Laclede Gas had a $320 million credit facility, expiring December 2011. Management said capital resources and market access were adequate.
- Capital structure: Consolidated capitalization was reported as 60% common equity and 40% Laclede Gas long-term debt. Total debt was 52% of capitalization under the utility covenant calculation; covenant EBITDA/interest was 4.33x.
Material changes versus comparable periods
- Quarterly net income declined mainly because of lower regulated-distribution earnings: warmer weather reduced system sales volumes, and off-system sales income and investment results were lower. Higher infrastructure surcharge revenue partly offset these effects. The service area was 57.6% warmer than the prior-year quarter and 54.9% warmer than normal.
- For the nine-month period, lower LER margins were the main earnings headwind, driven by narrower regional gas-price differentials versus favorable market conditions in 2009. LER net economic earnings fell to $12.5 million from $25.2 million.
- Revenue declines in regulated distribution largely reflected lower gas costs passed through to customers and reduced off-system sales; gas-cost pass-through changes generally do not directly affect utility net income.
- Nine-month results included a $3.7 million after-tax gain ($0.16 per share) from a wholesale propane sale following an inventory exchange settled in cash. This increased “Other” earnings and is an unusual item.
- Short-term debt repayments were lower year over year; short-term debt outstanding at period end was below September 30, 2009. The company also reported higher cash than at that fiscal year-end.
Outlook, risks and contingencies
- A proposed settlement in the utility’s general rate case was reached in principle, with a partial stipulation filed July 23, 2010; final terms and Commission approval were pending. The original filing sought approximately $52.6 million of annual revenue increases. Separately, an ISRS rate increase of $2.8 million annually took effect March 31, 2010.
- Management cited weather, gas-price volatility, gas supply and pipeline availability, regulation, customer conservation and collections, credit-market access, counterparty credit, pension obligations, litigation, and environmental and safety requirements as risks. The PGA clause permits recovery of utility gas costs subject to prudence review, but timing differences can affect cash requirements.
- Natural-gas purchase, storage, and transportation commitments were approximately $961.5 million in the contractual-obligations table. Laclede Group had $94.3 million of guarantees supporting LER gas purchases; management considered payment under them unlikely. Vehicle residual-value guarantees had a $1.6 million maximum and a $0.4 million recorded liability.
- Three former manufactured-gas plant sites have estimated potential remediation costs of $5.8 million to $36.3 million based on an earlier assessment; actual costs remain uncertain. The company expects qualifying costs to be recoverable through rates, subject to approval.
- Missouri regulators had proposed gas-cost disallowances totaling $6.0 million for fiscal 2005–2007 affiliate purchases. The utility disputed the proposals and recorded no liability. A July 2010 MoPSC complaint concerning affiliate documents was also disputed. FERC had closed its related investigation without further action.
- The filing provides no specific earnings forecast. Management stated it believed gas supply and capital resources were sufficient for foreseeable needs. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts to verify
- Confirm the issuer and period: the supplied document is Laclede Group/Laclede Gas for fiscal Q3 2010, not Spire Inc. or 2009 Q3.
- Check the final terms and regulatory approval of the general rate-case settlement, which were pending when the report was issued.
- Assess whether weaker LER margins and the unusually large propane-sale gain affect the sustainability of reported earnings.
- Review seasonal working-capital needs, debt maturities, credit-facility availability, and cash-flow volatility tied to gas costs and derivative margin requirements.
- Track the disputed gas-cost disallowances, MoPSC complaint, environmental remediation exposure, and LER guarantee obligations.