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 period ended March 31, 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 Utility Resources (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 | Three Months Ended Mar 31, 2006 | Six Months Ended Mar 31, 2006 |
|---|---|---|
| Total Operating Revenues | $708.8 million | $1,398.0 million |
| Net Income Applicable to Common Stock | $20.9 million | $47.1 million |
| Diluted Earnings Per Share (EPS) | $0.98 | $2.22 |
| Operating Income | $41.2 million | $87.3 million |
| Cash and Cash Equivalents | $47.5 million | $47.5 million (Balance Sheet) |
| Short-Term Debt (Notes Payable) | $201.6 million | $201.6 million (Balance Sheet) |
| Long-Term Debt | $294.1 million | $294.1 million (Balance Sheet) |
| Net Cash Used in Operating Activities | N/A | ($40.7 million) |
Note: Operating cash flow for the six-month period was negative primarily due to the timing of gas cost payments versus customer collections and higher wholesale gas prices.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 22.9% for the quarter and 37.2% for the six months compared to the prior year. This was driven primarily by higher wholesale gas costs passed through to customers ($93.3 million increase in the quarter) and higher prices for off-system sales.
- Net Income: Net income applicable to common stock decreased 6.7% for the quarter ($20.9M vs. $22.4M) but increased 20.6% for the six months ($47.1M vs. $39.1M).
- Segment Performance:
- Regulated Gas Distribution: Net income decreased $3.5 million for the quarter due to higher depreciation ($2.5M), increased O&M expenses ($2.0M), and lower system sales volumes due to warmer weather. However, it increased $1.6 million for the six months, aided by a general rate increase and higher off-system sales income.
- Non-Regulated Gas Marketing: Reported record earnings, increasing $3.7 million for the quarter and $7.7 million for the six months, driven by higher margins from price volatility and supply/demand imbalances caused by Gulf Coast hurricanes.
- Non-Regulated Services: Reported a loss of $3.8 million for the quarter, widening from $2.1 million last year, largely due to a $2.5 million pre-tax charge for employment-related litigation settlement.
- Depreciation: Depreciation and amortization expense increased 44.3% for the quarter due to new rates effective January 1, 2006, and additional depreciable property.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- Employment Litigation: SM&P recorded a $2.5 million pre-tax charge in the quarter to settle a collective action regarding wage and hour claims. The company is pursuing indemnification from the prior owner, NiSource, via binding arbitration.
- Regulatory Disallowance: The Missouri Public Service Commission (MoPSC) Staff proposed a $3.3 million disallowance of purchased gas costs for fiscal 2004. Laclede Gas is vigorously opposing this.
- AMR Implementation: The MoPSC Staff filed a complaint regarding the implementation of the Automated Meter Reading (AMR) system, alleging failures in obtaining actual meter readings. Laclede Gas denies the allegations.
- Outlook and Risks:
- Weather Sensitivity: Earnings remain highly sensitive to weather conditions. The quarter was 17.3% warmer than normal, reducing system sales volumes.
- Gas Prices: Wholesale natural gas prices remain at historically high levels, impacting cash flows due to the timing of payments versus collections, though costs are passed through to customers via the Purchased Gas Adjustment (PGA) Clause.
- Liquidity: Short-term borrowing requirements peak during colder months. As of March 31, 2006, short-term commercial paper borrowings were $201.6 million. The company maintains $340 million in lines of credit.
- Environmental: Potential costs for remediating three former Manufactured Gas Plant (MGP) sites range from $5.8 million to $36.3 million, though the company expects to recover these costs through rates.
Investor Verification Checklist
- Regulatory Resolution: Monitor the outcome of the MoPSC Staff's $3.3 million disallowance proposal and the AMR system complaint.
- Indemnification Arbitration: Track the binding arbitration decision (expected by September 15, 2006) regarding the $2.5 million SM&P litigation settlement and potential reimbursement from NiSource.
- Gas Price Volatility: Assess the impact of sustained high wholesale gas prices on short-term liquidity and the effectiveness of the PGA Clause in maintaining margins.
- Environmental Liabilities: Review updates on the remediation costs for the three MGP sites and the status of insurance recoveries.
- Seasonal Cash Flow: Verify the company's ability to manage short-term debt levels as the heating season progresses and gas purchase costs fluctuate.