Business Context and Reporting Period
This Form 10-K covers the fiscal year ended September 30, 2006, for The Laclede Group, Inc. (Laclede Group) and its primary subsidiary, Laclede Gas Company (Laclede Gas). Laclede Group is a public utility holding company headquartered in St. Louis, Missouri. Its operations are divided into three primary segments: Regulated Gas Distribution (Laclede Gas, serving over 630,000 customers in eastern Missouri), Non-Regulated Services (SM&P Utility Resources, an underground locating business), and Non-Regulated Gas Marketing (Laclede Energy Resources, Inc., or LER).
Key Financial Metrics
| Metric | Fiscal 2006 | Fiscal 2005 |
|---|---|---|
| Total Operating Revenues | $1,997.6 million | $1,597.0 million |
| Net Income Applicable to Common Stock | $49.0 million | $40.1 million |
| Diluted Earnings Per Share | $2.30 | $1.90 |
| Operating Income | $103.3 million | $89.8 million |
| Net Cash Used in Operating Activities | ($8.2 million) | $103.1 million (provided) |
| Total Assets | $1,570.2 million | $1,434.1 million |
| Long-Term Debt | $349.0 million | $294.0 million |
| Short-Term Debt (Notes Payable) | $207.3 million | $70.6 million |
| Debt to Total Capitalization | 62% | Not explicitly stated (implied lower) |
Material Changes Versus Prior Period
- Revenue Growth: Total operating revenues increased 25.1% to $1,997.6 million. This was driven primarily by a 46.6% increase in Non-Regulated Gas Marketing revenues ($689.6 million) and a 16.6% increase in Regulated Gas Distribution revenues ($1,141.0 million).
- Profitability: Net income applicable to common stock rose 22.2% to $49.0 million. The increase was largely due to record earnings in the Non-Regulated Gas Marketing segment ($17.1 million vs. $4.4 million in 2005), which benefited from high margins caused by price volatility and hurricane-related supply imbalances. This gain was partially offset by a decline in Regulated Gas Distribution net income ($28.8 million vs. $30.6 million) and Non-Regulated Services net income ($2.4 million vs. $5.0 million).
- Operating Expenses: Regulated operating expenses increased 18.3% to $1.073 billion, primarily due to a $144.8 million increase in natural and propane gas costs passed through to customers. Non-regulated gas marketing expenses also rose significantly ($200.0 million) due to higher volumes and prices.
- Cash Flow: Net cash used in operating activities turned negative ($8.2 million) compared to a positive $103.1 million in 2005. This shift was attributed to the timing of cash receipts and payments related to accounts payable, receivables, and deferred purchased gas costs, driven by year-to-year changes in wholesale natural gas prices.
- Debt Levels: Short-term borrowings increased significantly to $207.3 million at year-end (up from $70.6 million) to finance gas inventory and purchased gas costs. Long-term debt increased to $349.0 million following the issuance of $55 million in First Mortgage Bonds in June 2006.
Guidance, Outlook, Risks, and Unusual Items
- Capital Expenditures: Utility capital expenditures for fiscal 2007 are estimated at approximately $57 million, with non-utility expenditures estimated at $4 million.
- Regulatory Matters: Laclede Gas anticipates filing for a general rate increase with the Missouri Public Service Commission (MoPSC) in early December 2006. The company is also navigating regulatory issues regarding the implementation of an automated meter reading (AMR) system and the recovery of costs associated with the "Cold Weather Rule."
- Gas Price Volatility: Wholesale natural gas prices remain high relative to historical levels. While the Purchased Gas Adjustment (PGA) clause allows for cost recovery, higher prices may lead to customer conservation efforts, potentially reducing sales volumes.
- Legal and Contingencies:
- SM&P Litigation: A collective action lawsuit regarding wage and hour claims was settled. An arbitration panel awarded Laclede Group a portion of the settlement costs from the prior owner (NiSource), though NiSource requested a reconsideration which reduced the award slightly. Management does not expect a material adverse effect.
- Environmental: Laclede Gas is addressing remediation at former manufactured gas plant (MGP) sites. Estimated costs for known actions are reserved, but future costs could be material depending on regulatory requirements.
- Unusual Items: The Non-Regulated Gas Marketing segment reported record earnings due to specific market conditions (hurricane-related supply/demand imbalances) which may not be sustainable. The Non-Regulated Services segment saw reduced earnings due to higher-than-anticipated growth expenses and the resolution of the aforementioned litigation.
Important Facts for Investor Verification
- Regulatory Rate Case: Verify the outcome of the general rate increase filing expected in December 2006, as this impacts future revenue stability for the core utility segment.
- Gas Cost Recovery: Monitor the MoPSC's prudence review of purchased gas costs and the potential for disallowances, which could impact earnings if costs are not fully recovered.
- Non-Regulated Volatility: Assess the sustainability of the Non-Regulated Gas Marketing segment's record earnings, which were driven by temporary market volatility and supply constraints.
- Liquidity Position: Review the company's ability to manage short-term borrowing requirements, which peaked at $289.9 million during the heating season, and the impact of rising interest rates on short-term debt costs.
- Environmental Liabilities: Track the status of remediation costs at former MGP sites and the potential for additional regulatory requirements that could exceed current estimates.