SPIRE INC quarterly report, Q3 FY2012

Filing identity and reporting period

The supplied filing is The Laclede Group, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2013 (fiscal Q3 2013), not a Spire Inc. filing for 2012 Q3. The filing text identifies the company as Laclede Group; the request metadata does not match it.

Laclede Group’s principal business was regulated natural gas distribution in eastern Missouri. Results are seasonal, with earnings typically concentrated in the November–April heating season.

Key financial results

Quarterly revenue and net income declined year over year, while nine-month net income was slightly lower. The nine-month diluted EPS comparison also reflects the larger share count following the May 2013 stock offering. Dividends declared were $0.425 per share for the quarter and $1.275 for the nine-month period.

For the nine months, operating cash flow was $167.0M, capital expenditures were $96.8M, investing cash outflow was $99.4M, and financing cash inflow was $461.4M. Cash ended at $556.5M, versus $27.5M at September 30, 2012. The increase primarily reflected the equity offering and debt financing.

At June 30, 2013, long-term debt, less current portion, was $464.4M; there was no short-term debt outstanding. The company reported capitalization of 70% common equity and 30% long-term debt. Cash and temporary investments were substantial, but a significant portion was held pending the acquisition.

Changes and drivers versus prior periods

• Quarterly Gas Utility operating margin rose $7.8M, supported by colder weather, higher Infrastructure System Replacement Surcharge revenue, and other items. Service-area temperatures were 22.2% colder than normal for the quarter.
• Quarterly Gas Marketing operating margin fell $3.3M, primarily due to weaker sales margins, low market volatility and basis differentials, an expired favorable supply contract, and inventory valuation adjustments. Lower reported marketing revenue and expense also reflected certain transactions being recorded net rather than gross, with no earnings effect.
• For the nine months, Gas Utility operating margin increased $15.7M, while Gas Marketing operating margin decreased $7.4M. Management cited colder weather as a utility benefit and weaker marketing conditions and contract expirations as marketing headwinds.
• Acquisition-related costs were $1.4M after tax in the quarter and $5.3M after tax for nine months. These costs reduced GAAP results and were excluded from management’s non-GAAP net economic earnings.
• Quarterly net economic earnings were $8.2M versus $8.9M; nine-month net economic earnings were $68.9M versus $62.2M. These are non-GAAP measures and exclude specified timing, fair-value, and transaction effects.

Outlook, financing, and risks

• Management expected LER net economic earnings to be approximately 40% lower in fiscal 2014 than fiscal 2013, principally due to expiration of favorable long-term gas supply contracts, partly offset by lower fixed costs.
• Management expected the MGE acquisition to be accretive to Gas Utility net economic earnings in fiscal 2014 and thereafter, and immediately accretive to cash flow. These were preliminary expectations, not guarantees.
• The company agreed to acquire MGE for $975M. Missouri regulatory approval was obtained July 17, 2013, after quarter-end; Massachusetts regulatory approval remained pending. The proposed NEG purchase was $60M, including about $19.5M of assumed debt; an agreement would allow an Algonquin subsidiary to acquire the rights to purchase NEG, subject to approvals and conditions.
• The company raised $428M net from issuing 10,005,000 shares in May 2013. The acquisition bridge facility commitment was reduced from $1.020B to $525M; management anticipated permanent financing using debt and equity. Interest-rate swaps covered approximately 79% of expected long-term debt issuance.
• If financing failure caused termination of the MGE agreement, a reverse break-up fee of up to $73.1M could apply. The filing also identifies risks from acquisition approvals, integration costs, financing availability and rates, credit ratings, and possible dilution or increased debt.
• Other risks include seasonal cash needs, natural-gas price and supply volatility, counterparty credit exposure in Gas Marketing, regulatory decisions, and environmental obligations. Natural-gas supply, storage, and transportation commitments were estimated at approximately $321M. Management said identified environmental matters and other litigation were not expected to have a material effect, while noting future remediation costs could be materially higher or lower than the historical $5.8M–$36.3M estimate for former manufactured-gas sites.
• The company reported effective disclosure controls. Testing of operating effectiveness for certain controls related to a significant system implementation was continuing.

Investor verification points

1. Confirm the entity and period: this source is Laclede Group’s June 30, 2013 Form 10-Q, not the requested Spire Inc. 2012 Q3 filing.
2. Check subsequent closing and financing outcomes for MGE and the proposed NEG/APUC arrangement, including the status of Massachusetts approvals and transaction conditions.
3. Track whether LER’s expected fiscal 2014 earnings decline and management’s MGE accretion expectations were realized.
4. Review the final acquisition funding mix, resulting leverage and credit ratings, and any effects on dividends or share count.
5. Monitor pending regulatory and environmental matters, including the affiliate-transaction stipulation and potential remediation costs.