News Column

LACLEDE GROUP INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 7, 2014

($ in millions, except for per share amounts) This section analyzes the financial condition and results of operations of The Laclede Group, Inc. (Laclede Group or the Company) and Laclede Gas Company (Laclede Gas or the Utility), a 100% owned subsidiary of the Company. It includes management's view of factors that affect its business, explanations of past financial results including changes in earnings and costs from the prior year periods, and their effects on the Company's and the Utility's overall financial condition and liquidity. Certain matters discussed in this report, excluding historical information, include forward-looking statements. Certain words, such as "may," "anticipate," "believe," "estimate," "expect," "intend," "plan," "seek," and similar words and expressions identify forward-looking statements that involve uncertainties and risks. Future developments may not be in accordance with our current expectations or beliefs and the effect of future developments may not be those anticipated. Among the factors that may cause results to differ materially from those contemplated in any forward-looking statement are: weather conditions and catastrophic events, particularly severe weather in



the natural gas producing areas of the country;

volatility in gas prices, particularly sudden and sustained changes in

natural gas prices, including the related impact on margin deposits

associated with the use of natural gas derivative instruments;

the impact of changes and volatility in natural gas prices on our

competitive position in relation to suppliers of alternative heating

sources, such as electricity;

changes in gas supply and pipeline availability, including decisions by

natural gas producers to reduce production or shut in producing natural gas wells, expiration of existing supply and transportation arrangements that are not replaced with contracts with similar terms and pricing, as well as other changes that impact supply for and access to the markets in which our subsidiaries transact business;



legislative, regulatory and judicial mandates and decisions, some of which

may be retroactive, including those affecting

allowed rates of return incentive regulation industry structure



purchased gas adjustment provisions

rate design structure and implementation

regulatory assets

non-regulated and affiliate transactions

franchise renewals

environmental or safety matters, including the potential impact of legislative and regulatory actions related to climate change and pipeline safety taxes



pension and other postretirement benefit liabilities and funding obligations

accounting standards;

the results of litigation;

retention of, ability to attract, ability to collect from, and conservation

efforts of, customers;

capital and energy commodity market conditions, including the ability to

obtain funds with reasonable terms for necessary capital expenditures and general operations and the terms and conditions imposed for obtaining sufficient gas supply;



discovery of material weakness in internal controls; and

employee workforce issues.

In addition, actual results may differ materially from those contemplated in any forward-looking statement if the purchase of 100 percent of the common stock of Alabama Gas Corporation (Alagasco) from Energen Corporation (Energen) occurs before September 30, 2014. Refer to Acquisition Agreement on the following page for additional information. The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's and the Utility's Condensed Consolidated Financial Statements and Financial Statements, respectively, and the Notes thereto.

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ACQUISITION AGREEMENT On April 5, 2014, Laclede Group entered into an agreement (the Alagasco Transaction) with Energen to acquire 100 percent of the common stock of Alagasco. The strategic rationale for the Company is described below: The acquisition fits our growth strategy and supports the Company's commitment to long-term shareholder value creation. The acquisition is anticipated to add to net economic earnings (NEE) per share beginning in fiscal 2015, support long-term NEE per share growth, and generate additional cash flow. The acquisition is anticipated to support the Company's commitment to a growing dividend at a sustainable payout ratio. The addition of Alagasco provides geographic and regulatory diversity, along with adding a progressive and highly rated regulatory environment.



On April 14, 2014, Laclede Group, Energen and Alagasco jointly filed with the Alabama Public Service Commission (APSC) to request approval of the Alagasco Transaction. On May 7, 2014, Laclede Group received confirmation of the early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended. On July 22, 2014 the APSC unanimously voted to approve the Alagasco Transaction and subsequently issued a written order reflecting their decision effective July 24, 2014. Pursuant to Alabama law, a party has 30 days to appeal an order of the APSC. No party to the proceeding before the APSC formally opposed the application for approval. The stated purchase price of the Alagasco Transaction is $1,600.0, subject to customary closing adjustments, which includes approximately $1,350.0 in cash and the assumption of nearly $250.0 of Alagasco long-term debt. The Alagasco Transaction was originally supported by a fully committed $1,350.0 bridge loan facility with Credit Suisse AG and Wells Fargo Bank, National Association, which as of April 28th has been syndicated to a group of eleven additional banks (collectively, together with Credit Suisse AG and Wells Fargo Bank, National Association, the "Bridge Lenders"). The permanent financing is anticipated to be a combination of common stock, mandatory convertible securities, and long-term debt, as well as the use of corporate cash and short-term credit facilities. On June 11, 2014, Laclede Group completed public offerings and sales of its common stock and equity units generating net proceeds in the aggregate of approximately $600.0, which are to be used to fund a portion of the purchase price for the Alagasco Transaction, or other general corporate purposes if the Alagasco Transaction is not consummated. The proceeds from such offerings automatically reduced the commitments of the Bridge Lenders by an equal amount. On June 16, 2014, Laclede Group and the Bridge Lenders entered into a first amendment to the bridge loan facility to further reduce the aggregate commitments of the Bridge Lenders to $700.0.

RESULTS OF OPERATIONS Overview Laclede Group's earnings are primarily derived from its Gas Utility segment, which reflects the regulated activities of the Utility, Missouri's largest natural gas distribution company. The Utility is regulated by the Missouri Public Service Commission (MoPSC) and serves the City of St. Louis and eastern Missouri through Laclede Gas and Kansas City and western Missouri through Missouri Gas Energy (MGE). The Utility delivers natural gas to retail customers at rates and in accordance with tariffs authorized by the MoPSC. The Utility's earnings are primarily generated by the sale of heating energy. Laclede Gas' weather mitigation rate design and MGE's rate design lessen the impact of weather volatility on its customers during cold winters and stabilizes the Utility's earnings. Due to the seasonal nature of the Utility, Laclede Group's earnings are typically concentrated during the heating season of November through April each fiscal year, although earnings for MGE are less seasonal than earnings from Laclede Gas due to MGE's rate design, which recovers fixed costs more evenly throughout the year. Effective September 1, 2013, the Utility completed the purchase of substantially all of the assets and liabilities of MGE, a utility engaged in the distribution of natural gas on a regulated basis in western Missouri, from Southern Union Company (SUG), an affiliate of Energy Transfer Equity, L.P. (ETE) and Energy Transfer Partners, L.P. The purchase was completed pursuant to the Purchase and Sale Agreement (MGE PSA) dated December 14, 2012. Under the terms of the MGE PSA, the Utility acquired MGE for a purchase price of $975.0. In accordance with Section 3.2 of the MGE PSA, Laclede Gas provided to SUG a reconciliation of certain balance sheet accounts from the amounts at September 30, 2012 to August 31, 2013, indicating the difference due to changes in the actual net assets transferred to the Company at closing from the level at September 30, 2012. Laclede Gas and SUG agreed to the final reconciliation amount of $23.9 that was paid by ETE to Laclede Gas on February 14, 2014. Also, on December 12, 2012, a subsidiary of Laclede Group, Plaza Massachusetts Acquisition Inc. (Plaza Mass), agreed to purchase New England Gas Company (NEG) from SUG. Subsequently, on February 11, 2013, the Company agreed to sell Plaza Mass to Algonquin Power & Utilities Corp. (APUC). On December 13, 2013, the Massachusetts Department of Public Utilities 36



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(MDPU) approved the transfer of NEG to an APUC subsidiary. Consistent with the February 11, 2013 agreements, on December 20, 2013, the Company closed the sale of Plaza Mass to an APUC subsidiary and received $11.0 from APUC. On December 24, 2013, the Massachusetts Attorney General filed a Motion for Clarification/Reconsideration with the MDPU which, among other things, claims that legislative approval is required for a transfer of utility assets. On March 26, 2014, the MDPU signed an order denying the Attorney General's motion, so the MDPU's order approving the sale of NEG is now final. These receipts of funds and other working capital adjustments in the third quarter of 2014 effectively reduced the Utility's purchase price of MGE to $940.1 and reduced goodwill related to the transaction to $210.0. The acquisition was accounted for in accordance with ASC 805 ("Topic 805"), "Business Combinations." Accordingly, goodwill was measured as the excess of the acquisition-date fair value of the consideration transferred over the amount of acquisition-date identifiable assets acquired net of assumed liabilities. As part of the MGE acquisition, Laclede Gas has estimated the asset retirement obligation of MGE's long-lived assets as of the acquisition date. This allocation of asset retirement obligations is preliminary and will be finalized upon completion of a detailed fair value analysis that is being performed by the Company, which will be finalized prior to September 1, 2014. Laclede Energy Resources, Inc. (LER) is engaged in the marketing of natural gas and related activities on a non-regulated basis and is reported in the Gas Marketing segment. LER markets natural gas to both on-system Utility transportation customers and customers outside of the Utility's traditional service territory, including large retail and wholesale customers. LER's operations and customer base are more subject to fluctuations in market conditions than the Utility. LER entered into a 10 year contract for 1 Bcf of natural gas storage effective August 1, 2013 and has an additional 1 Bcf storage contracted through January 2016.

EARNINGS

Net income reported by Laclede Group and the Utility and earnings per share reported by Laclede Group are determined in accordance with accounting principles generally accepted in the United States of America (GAAP). Management also uses the non-GAAP measures of net economic earnings, net economic earnings per share and operating margin when internally evaluating results of operations. These internal non-GAAP operating metrics should not be considered as an alternative to, or more meaningful than, GAAP measures such as net income. Non-GAAP Measures - Net Economic Earnings and Net Economic Earnings Per Share Net Economic Earnings and Net Economic Earnings Per Share are non-GAAP measures that exclude from net income the after-tax impacts of fair value accounting and timing adjustments associated with energy-related transactions as well as acquisition, divestiture, and restructuring activities. These fair value and timing adjustments are made in instances where the accounting treatment differs from the economic substance of the underlying transaction, including the following: Net unrealized gains and losses on energy-related derivatives that are required by GAAP fair value accounting associated with current changes in the fair value of financial and physical transactions prior to their completion and settlement. These unrealized gains and losses result primarily from two sources: 1) changes in the fair values of physical and/or financial derivatives prior to the period of settlement; and, 2) ineffective portions of accounting hedges, required to be recorded in earnings prior to settlement, due to differences in commodity price changes between the locations of the forecasted physical purchase or sale transactions and the locations of the underlying hedge instruments; Lower of cost or market adjustments to the carrying value of commodity inventories resulting when the market price of the commodity falls below its original cost, to the extent that those commodities are economically hedged; and Realized gains and losses resulting from the settlement of economic hedges prior to the sale of the physical commodity. Additionally, management excludes acquisition, divestiture, and restructuring activities when evaluating on-going performance. These adjustments eliminate the impact of timing differences and the impact of current changes in the fair value of financial and physical transactions prior to their completion and settlement. Unrealized gains or losses are recorded in each period until being replaced with the actual gains or losses realized when the associated physical transaction(s) occur. While management uses these non-GAAP measures to evaluate both the Utility and LER, the net effect of adjustments on the Utility's earnings is minimal because gains or losses on its natural gas derivative instruments are deferred pursuant to its PGA Clause, as authorized by the MoPSC. Management believes that excluding the earnings volatility caused by recognizing changes in fair value prior to settlement and other timing differences associated with related purchase and sale transactions provides a useful representation of the economic effects of only the actual settled transactions and their effects on results of operations. In addition, management excludes the impact related to unique acquisition, divestiture, and restructuring activities when evaluating on-going performance, and therefore excludes these impacts from net economic earnings. Net economic earnings per share also excludes the impact of the May 2013 and June 2014 equity offerings to fund the acquisition of MGE and the Alagasco 37



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Transaction. Management believes that this presentation provides a useful representation of operating performance by facilitating comparisons of year-over-year results. The definition and measurement of net economic earnings provided above is consistent with that used by management and the Board of Directors in assessing the Company's and the Utility's performance as well as for determining performance under the Company's and the Utility's incentive compensation plans. Further, the Company believes this better enables an investor to view the Company's and the Utility's performance in that period on a basis that would be comparative to prior periods. Reconciliations of net economic earnings and net economic earnings per share to the Company's most directly comparable GAAP measures are provided below and on the following pages. Non-GAAP Measure - Operating Margin In addition to operating revenues and operating expenses, management also uses the non-GAAP measure of operating margin when evaluating result of operations. The Utility passes on to its customers (subject to prudence review by the MoPSC) increases and decreases in the wholesale cost of natural gas in accordance with its PGA Clause. The volatility of the wholesale natural gas market results in fluctuations from period to period in the recorded levels of, among other items, revenues and natural gas cost expense. Nevertheless, increases and decreases in the cost of gas associated with system gas sales volumes and gross receipts tax expense, which are calculated as a percentage of revenues, with the same amount, excluding immaterial timing differences, included in revenues, has no direct effect on operating income. As these costs are included in revenue and operating expenses and management does not have any control over these amounts for the Utility, management believes that beginning with operating margin is a more useful measure. In addition, it is management's belief that operating margin and the remaining operating expenses that calculate operating income is a more useful measure assessing the Company's and the Utility's performance as management has more ability to influence control over these revenues and expenses.


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