8-KOther Events

Arthur J. Gallagher & Co. 8-K Report, Corporate Update (Jun 14, 2006)

Filed June 14, 2006For Securities:AJG

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.

Frequently Asked Questions

The primary concern is the potential phase-out of tax credits and related revenues from AJG's IRC Section 29-related Syn/Coal investments. This phase-out is directly linked to the average crude oil price (NYMEX Price) for the calendar year 2006. Higher oil prices, while potentially increasing some revenues, could trigger a reduction in these tax credits.

If the average NYMEX crude oil price for calendar year 2006 reaches approximately $62.00 per barrel, a partial phase-out of the IRC Section 29 tax credits will begin. A complete phase-out would occur if the average price reaches approximately $78.00 per barrel. The current average price through June 12, 2006, suggests a partial phase-out is probable.

AJG has implemented a financial hedge by entering into a call spread arrangement on oil futures. This hedge, for which the company paid $8.5 million upfront, is designed to generate gains that can offset some of the negative impacts of increased oil prices and the resulting phase-out of tax credits. This arrangement is marked to market and expires on December 31, 2006.

Effective for the second quarter of 2006, AJG will no longer allocate Section 29 tax credits among its different segments. All tax credits generated, including those from the Syn/Coal facilities, will be reported under the Financial Services Segment. Historical financial results will be reclassified to reflect this new reporting structure.