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 ended December 31, 2006. Laclede Gas is a regulated natural gas distribution utility serving eastern Missouri, including St. Louis. The Group also operates non-regulated segments: SM&P (underground facility locating) and Laclede Energy Resources (gas marketing). The business is highly seasonal, with earnings concentrated in the November through April heating season.
Key Financial Metrics
| Metric (in thousands, except per share) | Q4 2006 | Q4 2005 |
|---|---|---|
| Total Operating Revenues | $539,561 | $689,235 |
| Operating Income | $36,398 | $46,137 |
| Net Income Applicable to Common Stock | $19,087 | $26,168 |
| Diluted Earnings Per Share | $0.89 | $1.23 |
| Dividends Declared Per Share | $0.365 | $0.345 |
| Net Cash Used in Operating Activities | $(31,679) | $(156,451) |
| Cash and Cash Equivalents (End of Period) | $51,918 | $23,811 |
| Total Assets | $1,681,151 | $1,676,229 |
| Total Debt (Long-term + Current Portion) | $349,221 | $334,118 |
Note: Debt figures include long-term debt less current portion plus current portion of long-term debt. Short-term notes payable of $257.1 million are also outstanding.
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by $149.7 million (21.7%) year-over-year. This was driven primarily by a $87.9 million drop in non-regulated gas marketing revenues due to lower per-unit sales prices, and a $62.9 million decrease in regulated gas distribution revenues.
- Profitability: Net income applicable to common stock fell by $7.1 million (27.1%). Earnings per share dropped from $1.23 to $0.89.
- Segment Performance:
- Regulated Gas Distribution: Net income decreased $4.5 million due to lower off-system sales income ($4.2 million), higher depreciation ($2.4 million), and increased O&M expenses ($1.2 million). Warmer weather (8.4% above normal) reduced system sales volumes.
- Non-Regulated Gas Marketing: Earnings decreased $1.6 million due to significantly lower margins compared to the prior year, which benefited from hurricane-related supply/demand imbalances.
- Non-Regulated Services: Reported a loss of $0.5 million compared to a $0.4 million profit last year, despite higher revenues, due to increased operating expenses from growth and expansion.
- Cash Flow: Net cash used in operating activities improved significantly to $(31.7) million from $(156.5) million, primarily due to timing differences in accounts payable, receivable, and gas inventory costs.
Guidance, Outlook, Risks, and Contingencies
- Regulatory Matters:
- Rate Case: Laclede Gas filed a tariff on December 1, 2006, requesting a 5.6% revenue increase ($52.9 million annually). The Missouri Public Service Commission (MoPSC) suspended implementation until November 1, 2007, with hearings set for summer 2007.
- Purchased Gas Adjustment (PGA): The MoPSC Staff proposed disallowances of approximately $2.1 million (fiscal 2004) and $7.2 million (fiscal 2005) related to gas cost recovery. The Company vigorously opposes these adjustments.
- Automated Meter Reading (AMR): Implementation is nearing completion. A stipulation was reached regarding billing adjustments, requiring the utility to provide $0.5 million in bill credits to customers.
- Legal and Environmental:
- Environmental Remediation: Costs for three former Manufactured Gas Plant (MGP) sites are estimated between $5.8 million and $36.3 million. The Company has reserved for known costs but notes future costs could be material.
- Employment Litigation: A wage and hour collective action involving SM&P was settled. An arbitration award regarding indemnification from the prior owner (NiSource) was reduced on appeal; the Company has filed a complaint to confirm the original award.
- Liquidity and Capital: The Company maintains investment-grade credit ratings (S&P A, Moody's A-). Short-term borrowing needs peak in winter months; commercial paper outstanding was $257.1 million at period end. The Company believes it has adequate access to capital markets.
- Market Risk: The Company uses financial instruments to hedge natural gas price risk. At period end, Laclede Gas held futures contracts for approximately 19.4 million MMBtu. Unmatched positions for the non-regulated affiliate were not material.
Investor Verification Checklist
- Weather Sensitivity: Verify the impact of the 8.4% warmer-than-normal weather on Q4 sales volumes and the effectiveness of the weather mitigation rate design.
- Regulatory Outcomes: Monitor the status of the MoPSC rate case (suspended until Nov 2007) and the outcome of the PGA disallowance hearings scheduled for January 2007.
- Non-Regulated Margins: Assess the sustainability of margins in the gas marketing segment, which declined significantly from the anomalous high margins of the prior year.
- Environmental Liabilities: Review the potential for additional costs related to MGP site remediation beyond current reserves.
- Debt Covenants: Confirm continued compliance with debt covenants (Total debt < 70% of capitalization; EBITDA > 2.25x interest expense), which were met at 64% and 3.01x respectively.