Summary
This 8-K filing from Arthur J. Gallagher & Co. (AJG) on June 14, 2006, primarily addresses the potential phase-out of tax credits and related revenues from its IRC Section 29-related Syn/Coal investments due to rising crude oil prices. The company estimates that an average NYMEX crude oil price of around $62.00 per barrel for calendar year 2006 would initiate a phase-out, with a complete phase-out occurring if the average reaches approximately $78.00 per barrel. Given the current average price through June 12, 2006, of $66.54, a partial phase-out is anticipated. To mitigate the financial impact of this potential phase-out, Gallagher has entered into a call spread arrangement on oil futures as a financial hedge, for which it made an upfront payment of $8.5 million. The company is also providing updated guidance on its expected tax rates and the financial performance of its Financial Services Segment under various oil price scenarios. Segmental reporting of tax credits is also being revised.
Key Highlights
- 1Potential phase-out of IRC Section 29 tax credits and related revenues from Syn/Coal investments is contingent on average calendar year 2006 crude oil prices.
- 2Phase-out begins if average NYMEX price reaches $62.00/barrel; complete phase-out at $78.00/barrel.
- 3Current average NYMEX price through June 12, 2006, is $66.54, suggesting a partial phase-out is likely.
- 4Gallagher has entered into an $8.5 million call spread hedge arrangement to mitigate financial risks associated with oil price volatility.
- 5Updated guidance indicates expected effective tax rates of 39%-41% for Brokerage and Risk Management Segments.
- 6Financial Services Segment guidance shows a wide range of potential pretax earnings/losses depending on average oil prices ($66-$72/barrel).
- 7Reporting of Section 29 tax credits will be consolidated into the Financial Services Segment, with historical results being reclassified.