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, 2004. Laclede Gas is a regulated natural gas distribution utility serving the St. Louis metropolitan area and eastern Missouri. The Group also operates non-regulated businesses, including SM&P Utility Resources (underground facility locating) and Laclede Energy Resources (gas marketing). The filing notes that earnings are highly seasonal, with the majority generated during the November-April heating season.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Mar 31, 2004 | 3 Months Ended Mar 31, 2003 | 6 Months Ended Mar 31, 2004 | 6 Months Ended Mar 31, 2003 |
|---|---|---|---|---|
| Total Operating Revenues | $474,955 | $422,179 | $807,592 | $702,350 |
| Net Income Applicable to Common Stock | $21,540 | $21,570 | $38,131 | $36,665 |
| Diluted Earnings Per Share | $1.12 | $1.14 | $1.99 | $1.93 |
| Operating Cash Flow (6 Months) | $80,659 (2004) vs $49,661 (2003) | |||
| Total Assets | $1,244,577 (Mar 31, 2004) | |||
| Short-Term Debt (Notes Payable) | $191,415 (Mar 31, 2004) | |||
| Long-Term Debt | $234,661 (Mar 31, 2004) | |||
| Cash and Cash Equivalents | $25,173 (Mar 31, 2004) |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated operating revenues increased 12.5% year-over-year for the quarter ($474.9M vs $422.2M) and 15.0% for the six-month period. This was driven primarily by higher Purchased Gas Adjustment (PGA) rates and increased off-system sales, partially offset by lower system gas sales volumes due to warmer weather (8% warmer than normal for the quarter).
- Net Income: Net income applicable to common stock remained relatively flat for the quarter ($21.5M vs $21.6M) but increased 4.0% for the six-month period ($38.1M vs $36.7M). The quarterly decline in EPS ($1.12 vs $1.14) was primarily due to an increase in common shares outstanding.
- Segment Performance:
- Regulated Gas: Earnings decreased slightly due to lower off-system sales and higher operating expenses (uncollectible accounts, pension costs), offset by a $1.9M gain from the sale of a mutual insurance company.
- Non-Regulated Services (SM&P): Revenues declined due to the loss of business from two major customers, though expenses were reduced via right-sizing actions taken in the prior year.
- Gas Marketing (LER): Revenues and earnings increased due to higher sales volumes and prices.
- Cash Flow: Operating cash flow for the six months ended March 31, 2004, surged to $80.7M from $49.7M the prior year, largely due to changes in natural gas storage costs and timing of PGA collections.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items: The Company recognized $1.9 million in other income from the sale of a mutual insurance company policy. Additionally, the Company deconsolidated Laclede Capital Trust I during the quarter due to the adoption of FIN 46R, though this had no material effect on financial position.
- Regulatory Risks: A significant contingency involves a $4.9 million pre-tax gain from a 2001 Price Stabilization Program. The Missouri Public Service Commission (MoPSC) ordered the gain disallowed and flowed through to customers. Laclede Gas appealed; a Circuit Court vacated the MoPSC decision, but the MoPSC has appealed to the Court of Appeals. A final disallowance could materially affect future financial results.
- Legal Contingencies: SM&P faces an "opt-in" collective action lawsuit regarding overtime compensation for field employees. Approximately 600 employees have joined to date. Management believes the outcome will not be materially adverse.
- Environmental Matters: Costs for remediation of former manufactured gas plant sites are estimated at $2.4 million (Shrewsbury) and $650,000 (St. Louis site), with potential for additional unknown costs at a third site. Insurance coverage for these costs is disputed.
- Capital Markets: The Company plans to issue approximately 1.5 million shares of common stock in the quarter ending June 30, 2004, to reduce short-term borrowings. Laclede Gas recently sold $150 million in First Mortgage Bonds to refinance maturing debt and reduce short-term borrowings.
Investor Verification Checklist
- Regulatory Appeal Outcome: Monitor the status of the Missouri Court of Appeals regarding the $4.9 million Price Stabilization Program gain disallowance.
- Weather Sensitivity: Verify the impact of the "weather mitigation rate design" on stabilizing earnings during non-normal weather conditions.
- SM&P Customer Concentration: Assess the progress of SM&P in replacing revenue lost from the two major customers who reduced outsourcing.
- Debt Refinancing: Confirm the execution of the planned common stock issuance and the use of proceeds to reduce the $191.4 million in short-term notes payable.
- Environmental Liabilities: Track potential cost escalations for the St. Louis and third-party manufactured gas plant sites, particularly regarding insurance reimbursement denials.