Business context and reporting period
Issuer discrepancy: The request identifies Spire Inc., but the supplied filing is The Laclede Group, Inc.’s Form 10-Q. This summary covers Laclede Group’s fiscal first quarter, the three months ended December 31, 2012, compared with the same period in 2011. The interim financial statements are unaudited. The regulated natural-gas utility is the principal business; results are seasonal, with earnings generally concentrated in the November–April heating season.
Key financial results
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Operating revenues | $307.0 million | $410.9 million |
| Operating income | $42.1 million | $43.1 million |
| Net income | $25.6 million | $25.2 million |
| Diluted EPS | $1.14 | $1.12 |
| Dividends declared per share | $0.425 | $0.415 |
| Cash from operating activities | $3.9 million | $(50.1) million |
| Cash used in investing activities | $(28.7) million | $(18.6) million |
| Cash from financing activities | $43.9 million | $70.0 million |
Reported revenue fell 25.3%, largely because certain Gas Marketing transactions were recorded net rather than gross; management said this presentation change did not affect operating income or net income. The resulting consolidated revenue-based operating margin is not directly comparable between periods. Net economic earnings, a company-defined non-GAAP measure, were $28.2 million ($1.25 per share), versus $24.9 million ($1.11 per share); they exclude energy-transaction timing effects and specified acquisition-related costs.
Balance sheet, debt and liquidity
At December 31, 2012, total assets were $1.942 billion, cash and cash equivalents were $46.6 million, and total common equity was $620.8 million. Long-term debt was $364.4 million and short-term notes payable were $83.1 million. The company reported consolidated capitalization of 63% common equity and 37% long-term debt. Laclede Gas had a $300 million bank credit facility; Laclede Group had a separate $50 million facility. Commercial paper outstanding at quarter end was $83.1 million. Management said it believed the company had adequate access to capital and resources for foreseeable needs.
Operating cash flow improved year over year mainly because of timing of collections under the Purchased Gas Adjustment (PGA) mechanism, lower cash margin-deposit payments on derivatives, and lower pension funding payments. Capital expenditures were $27.7 million, up from $18.3 million. Cash flow remains subject to seasonal working-capital swings.
Changes and management commentary
- Gas Utility net income and net economic earnings each increased $4.2 million, principally reflecting $3.2 million lower operation and maintenance expenses, $1.3 million higher infrastructure surcharge revenue, and $1.1 million higher sales margins associated with colder weather; higher depreciation partly offset the gains.
- Gas Marketing GAAP earnings declined $0.8 million to $2.9 million, affected by higher unrealized derivative losses. Net economic earnings decreased slightly to $3.3 million.
- Utility revenues declined $0.8 million. Temperatures were 16% colder than the prior-year quarter but 8.9% warmer than normal. Utility system volumes rose, while off-system sales volumes fell.
- Interest expense decreased $0.3 million, reflecting the maturity of $25 million of 6.5% bonds and issuance of $25 million of 3.31% unsecured notes.
Outlook, transactions and risks
Laclede Group agreed to acquire substantially all assets and liabilities of Missouri Gas Energy and New England Gas Company for a stated purchase price of $1.035 billion, including $1.015 billion cash and nearly $20 million assumed debt. A committed $1.020 billion bridge facility was arranged; permanent financing was expected to combine long-term debt and equity. Closing was expected before fiscal year-end 2013, subject to regulatory and other conditions. Management expected the deal to be neutral to EPS in the first full year after closing and accretive thereafter, and immediately accretive to cash flow; these were preliminary expectations, not guarantees. The company recorded $2.2 million after tax of transaction costs in the quarter. Failure to obtain financing could trigger a $73.1 million reverse break-up fee under specified circumstances.
A new utility rate case sought a $48.4 million, or 6.7%, revenue increase; the commission suspended proposed rates and scheduled an August 2013 hearing. A separate infrastructure surcharge filing sought $5.6 million in annual revenue, pending approval. Key risks include regulatory approval and conditions for the acquisitions, financing cost and dilution, integration execution, weather and gas-price volatility, counterparty credit exposure, environmental liabilities, and pending regulatory disputes. The company disclosed proposed purchased-gas cost disallowances and affiliate-transaction proceedings; it disputes the claims and recorded no amount for the proposed disallowances. Management stated that it did not expect the described legal matters to materially affect consolidated results or financial position.
The company reported effective disclosure controls. It implemented a significant suite of financial-reporting applications during the quarter but had not completed testing of the operating effectiveness of all related controls.
Important facts for investors to verify
- Confirm the correct issuer: the supplied filing is for The Laclede Group, Inc., not Spire Inc.
- Track Missouri and Massachusetts regulatory approvals, closing timing, final purchase adjustments, and the ultimate financing mix and cost for the MGE/NEG acquisitions.
- Assess whether acquisition EPS, cash-flow and accretion expectations remain achievable after financing, integration costs and any regulatory conditions.
- Review the pending rate case and infrastructure surcharge applications, and developments in purchased-gas and affiliate-transaction proceedings.
- Monitor seasonal cash needs, short-term borrowing, pension and postretirement contributions, and the effect of derivative margin requirements.
- Evaluate potential environmental remediation exposure; the filing cites a historical estimated range of $5.8 million to $36.3 million for identified manufactured-gas-plant sites, while noting that actual costs could vary.