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), covering the three and six months ended March 31, 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 Utility Resources (underground facility locating) and Laclede Energy Resources (gas marketing). The business is highly seasonal, with earnings concentrated in the heating season (November through April).
Key Financial Metrics
| Metric (in thousands) | Q1 2005 | Q1 2004 | 6 Months 2005 | 6 Months 2004 |
|---|---|---|---|---|
| Total Operating Revenues | $576,555 | $474,955 | $1,019,040 | $807,592 |
| Net Income Applicable to Common Stock | $22,443 | $21,540 | $39,060 | $38,131 |
| Diluted Earnings Per Share | $1.06 | $1.12 | $1.85 | $1.99 |
| Operating Cash Flow (6 Months) | $54,470 (2005) vs $80,659 (2004) | |||
| Total Assets | $1,320,174 (Mar 31, 2005) | |||
| Long-Term Debt | $333,985 (Laclede Gas) + $46,400 (Trust) | |||
| Debt-to-Capitalization | 54% (Mar 31, 2005) |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 21.4% year-over-year for the quarter ($576.6M vs $475.0M) and 26.2% for the six-month period. This was driven primarily by higher wholesale gas costs passed through to customers ($29.4M increase in Q1) and significantly higher off-system sales volumes and prices.
- Earnings Per Share Decline: Despite higher net income, diluted EPS decreased from $1.12 to $1.06 for the quarter and from $1.99 to $1.85 for the six months. This was caused by a 10% increase in the weighted average number of shares outstanding following a common stock issuance in May 2004.
- Utility Segment Performance: Regulated Gas Distribution earnings decreased slightly ($22.5M vs $23.4M in Q1) due to higher interest charges ($1.1M increase), higher operating expenses, and a $1.9M decrease in non-operating income (related to a one-time insurance company sale proceeds in 2004). These were partially offset by $2.5M in higher off-system sales income.
- Non-Regulated Segments: SM&P (Non-Regulated Services) improved its loss position ($2.1M loss vs $3.2M loss in Q1) due to the return of business from large customers. Laclede Energy Resources (Gas Marketing) saw income rise to $1.8M from $1.0M due to higher sales volumes.
- Cash Flow: Net cash provided by operating activities decreased $26.2M to $54.5M for the six months ended March 31, 2005, primarily due to changes in working capital related to wholesale gas prices and increased receivables from higher sales volumes.
Guidance, Outlook, and Risks
- Regulatory Matters:
- Rate Case: Laclede Gas filed a general rate increase request of approximately $34 million (4.1% average bill increase) in February 2005. The Missouri Public Service Commission (MoPSC) suspended implementation until January 2006.
- Depreciation Rates: The MoPSC issued an order in January 2005 ruling in favor of Laclede Gas on depreciation rate calculations, effective February 1, 2005. This increased annual depreciation expense by $2.3M but reduced operating expenses by the same amount, resulting in no immediate net income impact but expected future cash flow benefits.
- Price Stabilization Program: A legal dispute regarding $4.9M in pre-tax gains was resolved in the Company's favor in April 2005. The gains were previously recorded in fiscal 2002, so the decision has no future financial impact.
- Capital Projects: On March 11, 2005, Laclede Gas signed a 15-year agreement with Cellnet Technology to install an automated meter reading (AMR) system, with installation scheduled to begin in July 2005.
- Environmental Contingencies: The Company faces potential costs related to three former manufactured gas plant sites. Costs for the Shrewsbury site are estimated at $2.4M (reserved). A second site in St. Louis has estimated investigation costs of $650,000. A third site's potential costs are unknown. Insurance coverage for these sites is disputed.
- 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: Laclede Gas uses financial instruments to hedge natural gas price risk. As of March 31, 2005, the Utility held approximately 5.9 million MMBtu of futures contracts. Laclede Energy Resources (LER) also uses futures to lock in margins on fixed-price commitments.
Investor Verification Checklist
- Share Count Impact: Verify the dilution effect of the May 2004 stock issuance on future EPS calculations.
- Rate Case Outcome: Monitor the MoPSC's decision on the $34 million rate increase request filed in February 2005, as historically requests are not granted in full.
- Environmental Liabilities: Track the status of insurance claims and potential cost escalations for the three former manufactured gas plant sites, particularly the St. Louis site and the third unidentified site.
- SM&P Litigation: Review updates on the collective action lawsuit regarding employee overtime, as a large settlement could impact non-regulated segment profitability.
- Weather Sensitivity: Assess the impact of weather patterns on the next heating season, as the utility's earnings remain heavily influenced by temperature variations despite weather mitigation rate designs.