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, 2003. Laclede Gas is a regulated natural gas distribution utility serving eastern Missouri, including the St. Louis metropolitan area. The Group also operates non-regulated segments, including SM&P Utility Resources (underground facility locating) and Laclede Energy Resources (gas marketing). Due to the seasonal nature of the utility business, earnings are concentrated in the heating season (November through April).
Key Financial Metrics
| Metric | Q1 2004 (Dec 31, 2003) | Q1 2003 (Dec 31, 2002) |
|---|---|---|
| Total Operating Revenues | $332.6 million | $280.2 million |
| Net Income Applicable to Common Stock | $16.6 million | $15.1 million |
| Basic Earnings Per Share (EPS) | $0.87 | $0.80 |
| Operating Income | $31.3 million | $29.2 million |
| Net Cash Used in Operating Activities | $(14.4) million | $(38.1) million |
| Cash and Cash Equivalents (End of Period) | $22.2 million | $8.8 million |
| Total Assets | $1,285.4 million | $1,172.1 million |
| Short-Term Debt (Notes Payable) | $265.6 million | $218.2 million |
| Long-Term Debt | $234.6 million | $259.6 million |
Segment Performance (Net Income Applicable to Common Stock):
- Regulated Gas Distribution: $17.3 million (vs. $14.6 million prior year)
- Non-Regulated Services: $(1.0) million (vs. $(0.2) million prior year)
- Non-Regulated Gas Marketing: $0.4 million (vs. $0.7 million prior year)
Material Changes vs. Prior Period
Revenue Growth: Total operating revenues increased by $52.5 million (18.7%). Regulated gas distribution revenues rose $44.2 million, driven primarily by higher Purchased Gas Adjustment (PGA) rates ($41.2 million) and increased off-system sales/capacity release ($19.8 million). These gains were partially offset by lower system gas sales volumes due to warmer weather (18% warmer than normal).
Profitability: Net income increased by $1.5 million. The improvement was driven by higher utility earnings from off-system sales, lower operation and maintenance expenses (specifically a reduced provision for uncollectible accounts), and a fully implemented general rate increase. These were partially offset by a loss in the non-regulated services segment and slightly lower earnings from gas marketing.
Cash Flow: Cash used in operating activities decreased significantly to $14.4 million from $38.1 million in the prior year, attributed to variations in the timing of PGA collections and changes in natural gas storage costs. Financing activities provided $42.0 million, primarily through increased short-term borrowings to meet seasonal liquidity needs.
Guidance, Outlook, Risks, and Contingencies
Regulatory Litigation: A significant contingency involves a $4.9 million pre-tax gain from a discontinued Price Stabilization Program. The Missouri Public Service Commission (MoPSC) ordered the gain disallowed and refunded to customers. Laclede Gas appealed to the Cole County Circuit Court, which vacated the MoPSC decision in November 2003. The MoPSC has appealed this ruling. If the courts ultimately disallow the $4.9 million, it could have a material effect on future financial results.
Environmental Matters: Laclede Gas is addressing remediation at three former manufactured gas plant sites. Costs for the Shrewsbury site are estimated at $2.4 million (reserved). A second site in St. Louis has estimated investigation costs of $650,000. A third site's costs are unknown but could be material. Insurers have largely reserved rights or denied coverage for these sites.
Non-Regulated Services Risk: SM&P continues to face revenue pressure after losing significant contracts from two major customers in the prior year. While new business has been secured, the industry remains competitive with short-term contract terminations possible.
Liquidity: The company maintains investment-grade credit ratings (A/A3/A+). Short-term borrowings peaked at $272.2 million during the quarter. Total debt was 65% of total capitalization, well within the 70% covenant limit.
Investor Verification Checklist
- Regulatory Outcome: Monitor the status of the appeal regarding the $4.9 million Price Stabilization Program disallowance.
- Weather Sensitivity: Verify the impact of the "weather mitigation rate design" on stabilizing earnings against future temperature fluctuations.
- Environmental Liabilities: Track potential cost escalations for the two former manufactured gas plant sites where costs are currently unknown or disputed with insurers.
- Non-Regulated Segment Turnaround: Assess SM&P's ability to fully replace lost revenue from the two major customers that reduced outsourcing.
- Debt Covenants: Confirm continued compliance with the 70% debt-to-capitalization ratio given seasonal borrowing patterns.