Business Context and Reporting Period
This Form 10-Q is a combined quarterly report for The Laclede Group, Inc. (the holding company) and its primary subsidiary, Laclede Gas Company (the regulated utility), for the quarter ended December 31, 2002. Laclede Gas is Missouri's largest natural gas distribution company, serving approximately 2.0 million people in eastern Missouri. The Group's earnings are heavily influenced by weather conditions due to the seasonal nature of gas heating demand. The quarter included the impact of the acquisition of SM&P Utility Resources, Inc., a non-regulated underground locating business, completed in January 2002.
Key Financial Metrics
| Metric (Laclede Group) | Q1 2003 (Ended Dec 31, 2002) | Q1 2002 (Ended Dec 31, 2001) |
|---|---|---|
| Total Operating Revenues | $280.2 million | $194.6 million |
| Net Income (Common Stock) | $15.1 million | $7.7 million |
| Earnings Per Share (EPS) | $0.80 | $0.41 |
| Operating Income | $29.2 million | $17.3 million |
| Net Cash from Operating Activities | $(38.1) million | $6.6 million |
| Total Assets | $1,166.1 million | $1,038.3 million (Year-end 2001) |
| Total Debt (Short + Long Term) | $452.6 million | N/A |
| Debt-to-Capitalization Ratio | 63.0% | N/A |
Note: Cash flow from operations was negative primarily due to seasonal timing differences between gas purchases and customer billings.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 44% to $280.2 million. Regulated gas distribution revenues rose $34.0 million (18.5%) driven by a 20.8% increase in system therms sold due to temperatures being 32% colder than the prior year. Non-regulated revenues of $30.8 million were contributed by the SM&P acquisition.
- Profitability: Net income applicable to common stock nearly doubled to $15.1 million ($0.80 EPS) from $7.7 million ($0.41 EPS). This was driven by higher gas sales volumes, rate increases implemented in late 2001 and 2002, and increased off-system sales.
- Expenses: Total operating expenses increased to $250.9 million. Natural and propane gas expenses rose $18.3 million due to higher volumes purchased for sendout. Other operating expenses increased $5.2 million due to higher provisions for uncollectible accounts, pension costs, and wage rates.
- Capital Structure: On December 16, 2002, the company issued $45 million of 7.70% Trust Preferred Securities. Proceeds were used to repay a $42.8 million bank note used to fund the SM&P acquisition.
Outlook, Risks, and Management Commentary
Management Commentary
Management attributes the strong earnings performance primarily to colder weather and rate increases. The acquisition of SM&P is expected to diversify earnings and provide counter-seasonal revenue streams to offset the utility's seasonal volatility. The company maintains a risk management policy for natural gas purchases to mitigate price risk, with no speculation allowed.
Risks and Contingencies
- Customer Concentration (SM&P): Two major SM&P customers notified the company they would reduce outsourcing of locating services in early 2003. Revenue from these customers is expected to drop from $45 million (FY2002) to $27 million (FY2003). SM&P anticipates an after-tax charge of approximately $1 million in fiscal 2003 for workforce and facility reductions.
- Regulatory Proceedings: The Missouri Public Service Commission (MoPSC) Staff recommended disallowing approximately $4.9 million in pre-tax gains from the Price Stabilization Program. Laclede Gas is vigorously opposing this, with a hearing scheduled for February 2003. A final decision could materially affect future financial results.
- Environmental Liabilities: The company is addressing remediation at three former manufactured gas plant sites. Costs for the Shrewsbury site are estimated at $2.3 million (reserved). Costs for two other sites are unknown and could be material; insurance coverage for these sites is currently disputed.
- Seasonality: Earnings are typically concentrated in the first half of the fiscal year (heating season), with losses often experienced in the second half.
Investor Verification Checklist
- Weather Sensitivity: Verify the correlation between heating degree days and quarterly revenue volatility.
- SM&P Revenue Retention: Monitor the actual revenue impact from the two customers reducing outsourcing and the associated $1 million restructuring charge.
- Regulatory Outcome: Track the MoPSC decision regarding the $4.9 million disallowance of Price Stabilization Program gains.
- Environmental Costs: Review updates on the scope of remediation costs for the two non-Shrewsbury gas plant sites and insurance reimbursement status.
- Liquidity Management: Confirm the company's ability to manage short-term borrowing needs (currently $168 million in commercial paper) during peak winter months.