Business Context and Reporting Period
This Form 10-Q is a combined quarterly report for The Laclede Group, Inc. (Laclede Group) and its primary subsidiary, Laclede Gas Company (Laclede Gas), for the quarter and nine months ended June 30, 2005. Laclede Gas is a regulated natural gas distribution utility serving the St. Louis metropolitan area and eastern Missouri. The Group also operates non-regulated segments, including SM&P (underground facility locating) and Laclede Energy Resources (gas marketing). The utility's earnings are highly seasonal, typically concentrated in the November-April heating season.
Key Financial Metrics
| Metric (in thousands) | Q2 2005 | Q2 2004 | 9M 2005 | 9M 2004 |
|---|---|---|---|---|
| Total Operating Revenues | $311,327 | $245,060 | $1,330,367 | $1,052,652 |
| Net Income Applicable to Common Stock | $6,098 | $3,747 | $45,158 | $41,878 |
| Diluted EPS | $0.29 | $0.19 | $2.14 | $2.16 |
| Operating Cash Flow (9M) | $102,873 (2005) vs $130,591 (2004) | |||
| Capital Expenditures (9M) | $44,520 (2005) vs $37,609 (2004) | |||
| Total Assets | $1,239,974 (as of June 30, 2005) | |||
| Long-Term Debt | $335,009 (Laclede Gas) + $46,400 (Trust) | |||
| Debt to Capitalization | 52% (as of June 30, 2005) |
Material Changes vs. Prior Period
- Quarterly Performance: Net income increased 63% to $6.1 million (from $3.7 million) and EPS rose to $0.29 (from $0.19). This was driven by improved results in the Regulated Gas Distribution segment (turning a $0.2M loss into a $1.5M profit) and Non-Regulated Services (SM&P), which grew income to $3.6 million.
- Revenue Drivers: Regulated revenues rose $36.5 million due to higher wholesale gas costs passed to customers ($13.7M), increased off-system sales volumes ($13.0M), and higher off-system prices ($6.2M). Non-regulated gas marketing revenues surged $22.5 million due to higher volumes and prices.
- Nine-Month Performance: Net income increased 8% to $45.2 million. However, EPS decreased slightly to $2.14 (from $2.16) due to an increase in the weighted average number of shares outstanding following a stock sale in May 2004.
- Utility Earnings: For the nine-month period, Utility earnings decreased $1.3 million primarily due to lower system gas sales volumes (warm weather in November), higher interest charges, and increased operation/maintenance expenses.
Guidance, Outlook, Risks, and Unusual Items
- Regulatory Matters:
- Rate Case: Laclede Gas filed a general rate increase request of approximately $34 million in February 2005. The Missouri Public Service Commission (MoPSC) suspended implementation until January 2006, with hearings scheduled for October 2005.
- Depreciation Rates: The MoPSC issued a final order in January 2005 ruling in favor of Laclede Gas on depreciation rate calculations, resulting in higher annual depreciation expense of $2.3 million offset by reduced operating expenses, with no immediate net income impact but expected future cash flow benefits.
- Price Stabilization Program: The MoPSC reversed a prior decision to disallow $4.9 million in pre-tax gains, allowing Laclede Gas to retain them. This had no financial impact as the gains were recorded in fiscal 2002.
- Environmental Contingencies: Three former Manufactured Gas Plant (MGP) sites may require remediation. Costs for two sites are estimated at $2.4 million and $0.65 million, respectively, and have been reserved. A third site's costs are unknown. A consultant estimated a potential range of future expenditures for all three sites between $5.8 million and $36.3 million. The Company expects to recover these costs through rates.
- Legal Proceedings: SM&P is defending a collective action lawsuit regarding overtime compensation for field employees. Management believes the outcome will not have a material adverse effect.
- Market Risk: The Company uses futures and options to hedge natural gas price risk. As of June 30, 2005, Laclede Gas held approximately 6.9 million MMBtu in futures contracts. Laclede Energy Resources (LER) manages price risk through matching physical purchases/sales or futures.
- Accounting Changes: The Company plans to adopt SFAS No. 123(R) regarding stock-based compensation effective October 1, 2005.
Investor Verification Checklist
- Weather Sensitivity: Verify the impact of the "unseasonably warm" weather in November 2004 on the nine-month utility earnings decline versus the strong quarterly performance.
- Rate Case Outcome: Monitor the October 2005 hearings and the January 2006 effective date for the $34 million rate increase request.
- Environmental Liabilities: Track the status of the third MGP site and potential insurance recoveries, given the wide cost estimate range ($5.8M - $36.3M).
- Non-Regulated Growth: Assess the sustainability of the revenue growth in the Non-Regulated Gas Marketing and Services segments, which are subject to market volatility and contract terminations.
- Debt Covenants: Confirm continued compliance with the 70% debt-to-capitalization and 2.25x EBITDA-to-interest covenants, currently standing at 52% and 3.49x respectively.