Business Context and Reporting Period
This Form 10-K covers the fiscal year ended September 30, 2009, for The Laclede Group, Inc. (Laclede Group) and its primary subsidiary, Laclede Gas Company (Laclede Gas). Laclede Group is a public utility holding company operating in Missouri. Its core business is the regulated distribution of natural gas by Laclede Gas, serving approximately 630,000 customers in St. Louis and ten surrounding counties. The Group also operates a non-regulated gas marketing segment through Laclede Energy Resources, Inc. (LER). In March 2008, the company sold its Non-Regulated Services segment (SM&P), which is now reported as discontinued operations.
Key Financial Metrics
| Metric (in thousands, except per share) | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Total Operating Revenues | $1,895,198 | $2,208,973 |
| Net Income | $64,247 | $77,922 |
| Income from Continuing Operations | $64,247 | $57,526 |
| Diluted EPS (Continuing Ops) | $2.92 | $2.64 |
| Operating Cash Flow | $228,753 | ($36,532) |
| Long-Term Debt | $389,240 | $389,181 |
| Short-Term Debt | $129,800 | $215,900 |
| Total Assets | $1,762,018 | $1,772,655 |
Segment Performance (Net Income from Continuing Operations):
- Regulated Gas Distribution: $33.2 million (2009) vs. $39.1 million (2008).
- Non-Regulated Gas Marketing: $31.4 million (2009) vs. $19.3 million (2008).
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by approximately 14% ($313.8 million) compared to 2008. This was driven by lower wholesale natural gas prices passed through to customers and lower prices for off-system sales, partially offset by higher sales volumes in the non-regulated segment.
- Net Income vs. Continuing Operations: While total Net Income decreased by 17.6% to $64.2 million, this decline is largely due to the absence of the one-time gain from the sale of SM&P in 2008 ($20.4 million after-tax). Conversely, Income from Continuing Operations increased by 11.7% to $64.2 million, reflecting improved performance in the non-regulated marketing segment.
- Cash Flow Improvement: Net cash provided by operating activities improved significantly from a use of $36.5 million in 2008 to a provision of $228.8 million in 2009. This was primarily due to reduced payments for natural gas storage inventories and timing variations in gas cost collections.
- Debt Reduction: Short-term debt decreased by $86.1 million as the company repaid borrowings, while long-term debt remained relatively stable.
Guidance, Outlook, and Risks
Outlook and Capital Expenditures: Management expects utility capital expenditures to be approximately $67 million in fiscal 2010, an increase from $51.4 million in 2009, driven by software enhancements and storage facility improvements. The company maintains investment-grade credit ratings (A by S&P, A- by Fitch) and believes it has adequate access to capital markets.
Key Risks and Contingencies:
- Regulatory Disallowances: The Missouri Public Service Commission (MoPSC) Staff has proposed disallowances totaling $6.0 million regarding gas costs purchased from the affiliate LER for fiscal years 2005, 2006, and 2007. Laclede Gas is vigorously opposing these and has not recorded a liability.
- Environmental Liabilities: The company faces potential remediation costs at three former manufactured gas plant (MGP) sites. Estimated costs range from $5.8 million to $36.3 million, though the company expects to recover these costs through rates.
- Weather and Commodity Prices: Earnings are sensitive to weather conditions (warmer winters reduce heating demand) and volatility in natural gas prices. The company uses a Purchased Gas Adjustment (PGA) clause to pass costs to customers, subject to prudence review.
- Counterparty Credit Risk: The non-regulated marketing segment (LER) has significant exposure to energy producers and pipelines, though it utilizes netting arrangements and credit monitoring to mitigate risk.
Investor Verification Checklist
- Regulatory Status: Verify the status of the MoPSC Staff's proposed disallowances regarding affiliate gas purchases ($6.0 million total) and the outcome of the FERC inquiry into capacity release transactions.
- Environmental Exposure: Monitor the progress of remediation agreements for the three former MGP sites and the potential for insurance recoveries.
- Non-Regulated Segment Margins: Assess the sustainability of the Non-Regulated Gas Marketing segment's earnings growth, which was driven by increased volumes but lower per-unit prices.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically the requirement that total debt not exceed 70% of total capitalization (currently at 56%) and EBITDA coverage of interest expense (currently 3.76x).
- Dividend Sustainability: Review the company's ability to maintain its dividend policy, which relies on dividends from subsidiaries and intercompany loans, given the seasonal nature of cash flows.