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, 2006. 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 through April heating season, while non-regulated operations often exhibit counter-seasonal trends.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2006 |
Three Months Ended June 30, 2005 |
Nine Months Ended June 30, 2006 |
Nine Months Ended June 30, 2005 |
|---|---|---|---|---|
| Total Operating Revenues | $330,542 | $311,327 | $1,728,557 | $1,330,367 |
| Operating Income | $11,281 | $15,496 | $98,629 | $90,435 |
| Net Income Applicable to Common Stock | $2,728 | $6,098 | $49,825 | $45,158 |
| Diluted EPS | $0.13 | $0.29 | $2.34 | $2.14 |
| Net Cash Provided by Operating Activities | N/A | N/A | $28,022 | $102,873 |
| Capital Expenditures | N/A | N/A | $(46,706) | $(44,520) |
| Total Assets | $1,447,809 | $1,289,824 | $1,447,809 | $1,289,824 |
| Total Debt (Long-term + Current) | $472,380 | $374,100 | $472,380 | $374,100 |
Note: Debt figures calculated as Long-term debt ($349,021) + Notes payable ($123,200) + Current portion of long-term debt ($159) as of June 30, 2006. Prior year debt calculated similarly from June 30, 2005 balance sheet.
Material Changes vs. Prior Period
- Quarterly Earnings Decline: Net income applicable to common stock dropped 55% to $2.7 million for the quarter ended June 30, 2006, compared to $6.1 million in the prior year. This was primarily driven by a loss of $4.1 million in the Regulated Gas Distribution segment due to warmer weather (35.2% warmer than normal), lower system sales volumes, and increased operating expenses.
- Year-to-Date Growth: Conversely, for the nine months ended June 30, 2006, net income increased 10% to $49.8 million. This growth was fueled by record-high earnings in the Non-Regulated Gas Marketing segment ($14.7 million vs. $4.2 million), driven by high margins from price volatility following the 2005 Gulf Coast hurricanes.
- Revenue Volatility: Regulated operating revenues decreased $13.7 million in the quarter due to lower volumes and off-system sales, but increased $160.8 million year-to-date due to higher wholesale gas costs passed through to customers via the Purchased Gas Adjustment (PGA) Clause.
- Cash Flow Variance: Net cash provided by operating activities decreased significantly year-to-date to $28.0 million from $102.9 million, primarily due to the timing of payments for higher natural gas costs and changes in deferred purchased gas costs.
Guidance, Outlook, Risks, and Unusual Items
- Regulatory Matters: The Missouri Public Service Commission (MoPSC) Staff proposed a disallowance of approximately $3.3 million related to fiscal 2004 purchased gas costs; Laclede Gas is vigorously opposing this. Additionally, complaints were filed regarding the implementation of the Automated Meter Reading (AMR) system, alleging billing inaccuracies and safety issues.
- Legal Contingencies: SM&P settled a collective action lawsuit regarding wage and hour claims, recording a $2.5 million pre-tax charge in the prior quarter. Laclede Group is pursuing indemnification from the prior owner, NiSource, through binding arbitration expected by September 15, 2006.
- Environmental Liabilities: Laclede Gas is addressing remediation at three former Manufactured Gas Plant (MGP) sites. Estimated costs range from $5.8 million to $36.3 million, though the company believes these will be recovered through rates or insurance.
- Market Risk: The company utilizes financial instruments to hedge natural gas price risk. While wholesale prices remain high, the PGA Clause allows for the flow-through of these costs to customers, mitigating direct earnings impact on the utility segment.
- Capital Structure: On June 9, 2006, Laclede Gas issued $55 million in First Mortgage Bonds to reduce short-term debt and fund general corporate purposes. Total debt remains well within credit covenants (57% of capitalization vs. 70% limit).
Investor Verification Checklist
- Weather Sensitivity: Verify the impact of the unusually warm second quarter on the utility's seasonal earnings recovery in the upcoming heating season.
- Regulatory Resolution: Monitor the outcome of the MoPSC Staff's $3.3 million disallowance proposal and the AMR system billing complaints.
- Arbitration Outcome: Track the September 2006 arbitration decision regarding the SM&P wage and hour settlement indemnification from NiSource.
- Gas Marketing Margins: Assess the sustainability of the Non-Regulated Gas Marketing segment's record earnings, which were driven by specific post-hurricane price volatility.
- Environmental Costs: Review updates on the MGP site remediation costs and the status of insurance recoveries.