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, 2007. 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). Earnings are highly seasonal, typically concentrated in the November through April heating season.
Key Financial Metrics
| Metric (in thousands) | Q2 2007 | Q2 2006 | 9M 2007 | 9M 2006 |
|---|---|---|---|---|
| Total Operating Revenues | $457,927 | $330,542 | $1,698,322 | $1,728,557 |
| Operating Income | $21,340 | $11,281 | $98,474 | $98,629 |
| Net Income Applicable to Common Stock | $9,262 | $2,728 | $49,168 | $49,825 |
| Diluted EPS | $0.43 | $0.13 | $2.29 | $2.34 |
| Operating Cash Flow (9M) | $152,025 (2007) vs $28,022 (2006) | |||
| Capital Expenditures (9M) | $43,020 (2007) vs $46,706 (2006) | |||
| Long-Term Debt (excl. current) | $309,101 (as of June 30, 2007) | |||
| Debt to Capitalization | 56% (as of June 30, 2007) |
Material Changes vs. Prior Period
- Quarterly Performance: Net income applicable to common stock surged 240% to $9.3 million from $2.7 million year-over-year. This was driven by a $5.0 million improvement in the Regulated Gas Distribution segment due to colder weather (64.3% colder than the prior year quarter), lower provisions for uncollectible accounts, and higher off-system sales income.
- Nine-Month Performance: Consolidated net income remained relatively flat at $49.2 million compared to $49.8 million in the prior year. While the Regulated Gas Distribution segment improved by $2.1 million, the Non-Regulated Gas Marketing segment declined by $3.6 million as Gulf Coast market volatility stabilized, reducing margins despite higher sales volumes.
- Revenue Drivers: Regulated revenues increased $37.0 million in Q2 due to higher system sales volumes and off-system sales, partially offset by lower wholesale gas costs passed through to customers. For the nine months, regulated revenues decreased $21.6 million primarily due to lower wholesale gas costs passed through, despite higher sales volumes.
- Cash Flow: Operating cash flow for the nine months ended June 30, 2007, was $152.0 million, a significant increase from $28.0 million in the prior year, largely due to timing differences in the collection of gas costs under the Purchased Gas Adjustment (PGA) Clause.
Guidance, Outlook, and Risks
- Regulatory Settlement: On July 19, 2007, the Missouri Public Service Commission (MoPSC) approved a Stipulation & Agreement resolving a rate case. Key terms include a $38.6 million increase in non-gas revenues effective August 1, 2007, and enhancements to the weather mitigation rate design to stabilize earnings. The agreement also modifies the earnings sharing mechanism for off-system sales.
- Market Risk: The Company manages natural gas price risk using financial instruments (futures and options) designated as cash flow hedges. At June 30, 2007, Laclede Gas held 22.3 million MMBtu of futures contracts. The Company does not speculate.
- Legal and Environmental:
- Environmental: 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 costs will be recoverable in rates or reimbursable via insurance.
- Litigation: A dispute regarding an arbitration award related to SM&P employment litigation was resolved by a court order in July 2007 denying Laclede Group's request to confirm the original award. Management is considering legal options but does not expect a material adverse effect.
- Liquidity: The Company maintains investment-grade credit ratings (A/A-). It has $320 million in lines of credit for Laclede Gas and $50 million for the Group. Short-term borrowing needs are met via commercial paper, with $102.1 million outstanding at quarter-end.
Investor Verification Checklist
- Weather Sensitivity: Verify the impact of the "unseasonably cold" April 2007 weather on Q2 earnings versus the "warmer than normal" nine-month period to understand the volatility of the core utility segment.
- Gas Marketing Margins: Monitor the Non-Regulated Gas Marketing segment's margins, which declined in the nine-month period as Gulf Coast volatility normalized, contrasting with record earnings in the prior fiscal year.
- Regulatory Recovery: Confirm the implementation of the July 2007 rate settlement, specifically the $38.6 million revenue increase and the new earnings sharing mechanism for off-system sales effective October 2007.
- Environmental Liabilities: Track the status of the three MGP sites and the potential for insurance recoveries or cost-sharing with other responsible parties, as actual remediation costs could vary significantly from estimates.
- Debt Covenants: Note that Laclede Gas is well within its debt-to-capitalization covenant (56% vs. 70% limit) and interest coverage ratio (3.38x vs. 2.25x requirement).