SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Exact Name of Registrant as State of I.R.S.
Number Specified in its Charter and Incorporation Employer
Principal Office Address and Identification Number
Telephone Number
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1-16681 The Laclede Group, Inc. Missouri 74-2976504
720 Olive Street
St. Louis, MO 63101
314-342-0500
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1-1822 Laclede Gas Company Missouri 43-0368139
720 Olive Street
St. Louis, MO 63101
314-342-0500
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Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report),
The Laclede Group, Inc.: Yes X No
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Laclede Gas Company: Yes X No
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and (2) has been subject to such filing requirements for the past 90 days:
The Laclede Group, Inc.: Yes X No
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Laclede Gas Company: Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
The Laclede Group, Inc. Yes X No
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Laclede Gas Company: Yes No X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Shares Outstanding At
Registrant Description of Common Stock July 30, 2004
---------- --------------------------- -------------
The Laclede Group, Inc. Common Stock ($1.00 Par Value) 20,978,823
Laclede Gas Company Common Stock ($1.00 Par Value) 100*
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*100% owned by The Laclede Group, Inc.
TABLE OF CONTENTS Page No.
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
The Laclede Group, Inc.:
Statements of Consolidated Income 4
Statements of Consolidated Comprehensive Income 5
Consolidated Balance Sheets 6-7
Statements of Consolidated Cash Flows 8
Notes to Consolidated Financial Statements 9-18
Laclede Gas Company:
Statements of Income Ex. 99.1, p. 1
Balance Sheets Ex. 99.1, pp. 2-3
Statements of Cash Flows Ex. 99.1, p. 4
Notes to Financial Statements Ex. 99.1, pp. 5-10
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (The Laclede Group, Inc.) 19-29
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Laclede Gas Company) Ex. 99.1, pp. 11-19
Item 3 Quantitative and Qualitative Disclosures About Market Risk 30
Item 4 Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 31
Item 6 Exhibits and Other Reports on Form 8-K 31
SIGNATURES - The Laclede Group, Inc. 32
SIGNATURES - Laclede Gas Company 33
INDEX TO EXHIBITS 34
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PART I
FINANCIAL INFORMATION
The interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Form 10-K for the fiscal year ended September 30, 2003.
Item 1. Financial Statements
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- ----------------------------
2004 2003 2004 2003
---- ---- ---- ----
Operating Revenues:
Regulated
Gas distribution $125,870 $114,207 $784,118 $688,828
Non-Regulated
Services 34,973 27,276 69,771 75,414
Gas marketing 80,475 41,762 192,938 118,903
Other 3,742 3,350 5,825 5,800
--------------------------- ----------------------------
Total Operating Revenues 245,060 186,595 1,052,652 888,945
--------------------------- ----------------------------
Operating Expenses:
Regulated
Natural and propane gas 68,855 60,293 532,414 442,054
Other operation expenses 28,411 27,097 90,702 88,084
Maintenance 4,599 4,583 13,669 13,977
Depreciation and amortization 5,746 5,579 17,115 16,668
Taxes, other than income taxes 12,018 11,553 51,747 48,260
--------------------------- -----------------------------
Total regulated operating expenses 119,629 109,105 705,647 609,043
Non-Regulated
Services 29,619 24,721 69,468 78,666
Gas marketing 78,567 40,381 188,668 115,228
Other 3,690 3,185 5,461 5,269
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Total Operating Expenses 231,505 177,392 969,244 808,206
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Operating Income 13,555 9,203 83,408 80,739
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Other Income and (Income Deductions) - Net 65 (68) 3,402 974
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Interest Charges:
Interest on long-term debt 6,207 4,945 15,836 15,355
Interest on long-term debt to unconsolidated
affiliate trust 893 866 2,626 1,877
Other interest charges 565 810 2,649 3,112
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Total Interest Charges 7,665 6,621 21,111 20,344
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Income Before Income Taxes 5,955 2,514 65,699 61,369
Income Tax Expense 2,192 476 23,774 22,635
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Net Income 3,763 2,038 41,925 38,734
Dividends on Redeemable Preferred Stock -
Laclede Gas 16 16 47 47
--------------------------- -----------------------------
Net Income Applicable to Common Stock $ 3,747 $ 2,022 $ 41,878 $ 38,687
=========================== =============================
Average Number of Common Shares Outstanding 19,863 19,044 19,381 19,002
Basic Earnings Per Share of Common Stock $.19 $.11 $2.16 $2.04
Diluted Earnings Per Share of Common Stock $.19 $.11 $2.16 $2.04
Dividends Declared Per Share of Common Stock $.340 $.335 $1.015 $1.005
See notes to consolidated financial statements.
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THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
(Thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ---------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net Income Applicable to Common Stock $3,747 $2,022 $41,878 $38,687
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Other Comprehensive Income:
Net gain (loss) on cash flow hedging
derivative instruments:
Net hedging gain (loss) arising during
period (727) 259 (2,870) 519
Reclassification adjustment for
(gains) losses included in net income 2,693 (229) 1,750 (229)
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Net unrealized gain (loss) on cash flow
hedging derivative instruments 1,966 30 (1,120) 290
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Other Comprehensive Income (Loss), 30 (1,120) 290
Before Tax 1,966
Income Tax (Benefit) Expense Related to
Items of Other Comprehensive Income (Loss) 760 11 (432) 112
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Other Comprehensive Income (Loss), Net
of Tax 1,206 19 (688) 178
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Comprehensive Income $4,953 $2,041 $41,190 $38,865
========================= ===========================
See notes to consolidated financial statements.
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THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, Sept. 30, June 30,
2004 2003 2003
---- ---- ----
(Thousands)
ASSETS
Utility Plant $1,060,868 $1,030,665 $1,018,482
Less: Accumulated depreciation and amortization 420,994 409,418 406,482
-------------- -------------- -------------
Net Utility Plant 639,874 621,247 612,000
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Goodwill 28,124 28,124 28,124
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Other Property and Investments 45,785 45,998 45,691
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Current Assets:
Cash and cash equivalents 11,877 7,291 7,274
Accounts receivable:
Gas Customers - billed and unbilled 78,633 70,217 70,444
Other 64,858 41,298 39,401
Allowances for doubtful accounts (7,935) (7,181) (5,415)
Delayed customer billings 11,211 - 16,778
Inventories:
Natural gas stored underground at LIFO cost 56,173 117,231 51,870
Propane gas at FIFO cost 15,808 17,132 12,473
Materials, supplies, and merchandise at avg. cost 4,920 4,071 4,342
Derivative instrument assets 7,141 12,643 11,521
Deferred income taxes 5,579 7,631 6,332
Prepayments and other 15,052 17,557 8,698
-------------- -------------- -------------
Total Current Assets 263,317 287,890 223,718
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Deferred Charges:
Prepaid pension cost 102,463 109,445 110,662
Regulatory assets 102,200 103,807 72,266
Other 9,901 6,287 6,052
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Total Deferred Charges 214,564 219,539 188,980
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Total Assets $1,191,664 $1,202,798 $1,098,513
============== ============== =============
See notes to consolidated financial statements.
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THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
June 30, Sept. 30, June 30,
2004 2003 2003
---- ---- ----
(Thousands, except share amounts)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (70,000,000 shares authorized, 20,946,171,
19,082,402 and 19,046,235 shares issued, respectively) $ 20,946 $ 19,082 $ 19,046
Paid-in capital 115,138 68,460 67,521
Retained earnings 233,439 211,610 222,105
Accumulated other comprehensive loss (768) (80) (161)
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Total common stock equity 368,755 299,072 308,511
Redeemable preferred stock (less current sinking fund
requirements) - Laclede Gas 1,108 1,258 1,258
Long-term debt to unconsolidated affiliate trust 46,400 46,400 46,400
Long-term debt (less current portion) - Laclede Gas 333,911 259,625 259,607
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Total Capitalization 750,174 606,355 615,776
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Current Liabilities:
Notes payable 3,625 218,200 128,860
Accounts payable 91,565 66,001 63,226
Advance customer billings - 15,361 -
Current portion of long-term debt and preferred stock 25,145 - -
Taxes accrued 24,111 13,211 25,110
Unamortized purchased gas adjustment 1,149 5,865 1,898
Other 51,830 47,638 43,866
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Total Current Liabilities 197,425 366,276 262,960
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Deferred Credits and Other Liabilities:
Deferred income taxes 194,185 180,598 155,481
Unamortized investment tax credits 5,087 5,316 5,394
Pension and postretirement benefit costs 21,164 20,973 20,489
Regulatory liabilities 927 582 16,137
Other 22,702 22,698 22,276
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Total Deferred Credits and Other Liabilities 244,065 230,167 219,777
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Total Capitalization and Liabilities $1,191,664 $1,202,798 $1,098,513
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See notes to consolidated financial statements.
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THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30,
-------------------------------
2004 2003
---- ----
(Thousands)
Operating Activities:
Net Income $ 41,925 $ 38,734
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 19,834 18,901
Deferred income taxes and investment
tax credits 10,553 4,899
Other - net 174 450
Changes in assets and liabilities:
Accounts receivable - net (31,222) (14,952)
Unamortized purchased gas adjustments (4,716) (21,078)
Deferred purchased gas costs 12,321 6,278
Delayed customer billings - net (26,572) (41,610)
Accounts payable 25,564 17,519
Taxes accrued 10,900 15,295
Natural gas stored underground 61,058 25,251
Other assets and liabilities 10,772 9,079
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Net cash provided by operating activities $ 130,591 $ 58,766
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Investing Activities:
Construction expenditures (37,609) (35,824)
Employee benefit trusts (2,041) (151)
Other investments 1,127 (844)
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Net cash used in investing activities $ (38,523) $(36,819)
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Financing Activities:
Issuance of first mortgage bonds 150,000 -
Maturity/Redemption of first mortgage bonds (50,000) (25,000)
Repayment of short-term debt - net (214,575) (32,810)
Dividends paid (19,357) (19,104)
Issuance of common stock 48,542 2,979
Issuance of long-term debt to unconsolidated affiliate trust - 46,400
Preferred stock reacquired (5) (8)
Other (2,087) -
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Net cash used in financing activities $ (87,482) $(27,543)
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Net Increase (Decrease) in Cash and Cash Equivalents $ 4,586 $ (5,596)
Cash and Cash Equivalents at Beginning of Period 7,291 12,870
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Cash and Cash Equivalents at End of Period $ 11,877 $ 7,274
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Supplemental Disclosure of Cash Paid During the Period for:
Interest $ 21,821 $ 22,120
Income taxes 422 473
See notes to consolidated financial statements.
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THE LACLEDE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These notes are an integral part of the accompanying consolidated financial statements of The Laclede Group, Inc. (Laclede Group or the Company) and its subsidiaries. In the opinion of Laclede Group, this interim report includes all adjustments (consisting of only normal recurring accruals) necessary for the fair presentation of the results of operations for the periods presented. Certain prior-period amounts have been reclassified to conform to current-period presentation. This Form 10-Q should be read in conjunction with the Notes to Consolidated Financial Statements contained in the Company's Fiscal Year 2003 Form 10-K.
The consolidated financial position, results of operations and cash flows of Laclede Group are comprised primarily from the consolidated financial position, results of operations and cash flows of Laclede Gas Company (Laclede Gas or the Utility). Laclede Gas is a regulated natural gas distribution utility having a material seasonal cycle. As a result, these interim statements of income for Laclede Group are not necessarily indicative of annual results or representative of the succeeding quarter of the fiscal year. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the November through April period, which generally corresponds with the heating season. The Utility typically experiences losses during the non-heating season. The seasonal effect of the Utility's earnings on Laclede Group is generally expected to be tempered somewhat by the results of SM&P Utility Resources, Inc. (SM&P), a non-regulated underground facility locating and marking service business, whose operations tend to be counter-seasonal to those of Laclede Gas.
REVENUE RECOGNITION - Laclede Gas reads meters and bills its customers on a monthly cycle billing basis. The Utility records its regulated gas distribution revenues from gas sales and transportation service on an accrual basis that includes estimated amounts for gas delivered, but not yet billed. The accruals for unbilled revenues are reversed in the subsequent accounting period when meters are actually read and customers are billed. The amount of accrued unbilled revenue at June 30, 2004 and 2003, for the Utility, was $7.1 million and $6.5 million, respectively. After accrual of related gas cost expense, the accrued pre-tax net revenues at June 30, 2004 and 2003 were $3.3 million and $2.7 million, respectively. The amount of accrued unbilled revenue at September 30, 2003 was $8.9 million.
SM&P, Laclede Energy Resources, Inc. (LER) and Laclede Group's other non-regulated subsidiaries record revenues when earned, either when the product is delivered or when services are performed.
In the course of its business, Laclede Group's non-regulated marketing affiliate, LER, enters into fixed price commitments associated with the purchase or sale of natural gas. LER's fixed price energy contracts are designated as normal purchases and normal sales, as defined in accordance with the Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." As such, those contracts are accounted for as executory contracts and recorded on an accrual basis. Revenues are recorded using a gross presentation.
STOCK-BASED COMPENSATION - The Laclede Group Equity Incentive Plan was approved at the annual meeting of shareholders of Laclede Group on January 30, 2003. The purpose of the Equity Incentive Plan is to provide a more competitive compensation program and to attract and retain those executive and other key employees essential to achieve the Company's strategic objectives. To accomplish this purpose, the compensation committee of the board of directors may grant awards under the Equity Incentive Plan that may be earned by achieving performance objectives and/or other criteria as determined by the compensation committee. Under the terms of the Equity Incentive Plan, key employees of the Company and its subsidiaries, as determined at the sole discretion of the administrator, will be eligible to receive (a) restricted shares of common stock, (b) performance awards, (c) stock options exercisable into shares of common stock, (d) stock appreciation rights, and (e) stock units, as well as any other stock-based awards not inconsistent with the Equity Incentive Plan. Each award under the Equity Incentive Plan shall have a minimum vesting period of at least one year. The total number of shares that may be issued pursuant to awards under the Equity Incentive Plan may not exceed 1,250,000.
During the nine months ended June 30, 2004, the Company granted 1,500 shares of restricted stock at a weighted average fair value of $28.85 per share. These shares have restrictions on vesting, sale and transferability. The restrictions lapse with the passage of time. The Company holds the certificates for restricted stock until the shares fully vest in November 2005. In the interim, a participant receives full dividends and voting rights. Restricted stock awards are recorded at the market value on the date of the grant. Compensation cost charged against income for the nine months ended June 30, 2004 was approximately $9,000, net of tax effects.
During the nine months ended June 30, 2004, the Company granted 224,000 non-qualified stock options to employees at an exercise price of $28.85 per share (none of these options were granted during the quarter ended June 30, 2004). These options may not be exercised before November 6, 2004. The stock options vest one-fourth each year for four years after the date of the grant and expire on the tenth anniversary of the grant date. The Company accounts for the Equity Incentive Plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No compensation
expense has been recognized in net income, as all options granted under the Equity Incentive Plan had an exercise price equal to the market value of the Company's stock on the date of the grant.
Stock option activity for the quarter ended June 30, 2004 is presented below.
Weighted Average
Shares Exercise Price
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Outstanding at March 31, 2004 394,950 $26.43
Granted - -
Exercised - -
Forfeited - -
Outstanding at June 30, 2004 394,950 $26.43
Exercisable at June 30, 2004 17,200 $23.27
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The closing price of the Company's common stock was $27.41 at June 30, 2004.
If compensation expense had been determined based on the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the amounts shown in the following table. The weighted-average fair value of options granted during the nine months ended June 30, 2004 is $6.22 per option. The estimated fair value of options would be amortized to expense over the options' vesting period and restricted stock would be expensed on the grant date.
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
(Thousands, Except Per Share Amounts)
Net income applicable to
common stock, as reported $3,747 $2,022 $41,878 $38,687
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of tax effects 85 33 261 58
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Pro forma net income applicable
to common stock $3,662 $1,989 $41,617 $38,629
========================= ========================
Earnings per share:
Basic - as reported $.19 $.11 $2.16 $2.04
Diluted - as reported $.19 $.11 $2.16 $2.04
Basic - pro forma $.18 $.10 $2.15 $2.03
Diluted - pro forma $.18 $.10 $2.15 $2.03
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The fair value of the options granted during the nine months ended June 30, 2004 was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:
Nine Months Ended
June 30,
----------------------------
2004 2003
---- ----
Risk free interest rate 4.30% 4.00%
Expected dividend yield of stock 4.60% 5.70%
Expected volatility of stock 25.00% 25.00%
Expected life of option 96 months 96 months
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NEW ACCOUNTING STANDARDS - Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised December 2003) (FIN 46R), "Consolidation of Variable Interest Entities," addresses consolidation of business enterprises of variable interest entities. Public entities shall apply this Interpretation to their interests in
special purpose entities as of the first interim period ending after December 15, 2003. Application by public entities for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004.
In December 2002, Laclede Group formed a wholly owned trust, Laclede Capital Trust I (Trust), for the sole purpose of issuing preferred securities and lending the gross proceeds to its parent, Laclede Group. As of June 30, 2004, the Trust has $45 million of Trust Preferred Securities outstanding. The sole assets of the Trust are debentures of Laclede Group, totaling $46.4 million, with the same economic terms as the Trust Preferred Securities. Prior to the application of FIN 46R, the Trust was consolidated in the financial statements of Laclede Group. The Company evaluated the effect of this pronouncement on this consolidation. In accordance with the provisions of FIN 46R, Laclede Group has determined that the Trust is a variable interest entity because its common securities investment is considered not at risk, and Laclede Group is not the primary beneficiary of the Trust. Accordingly, the Trust was deconsolidated during the quarter ended March 31, 2004. The Consolidated Balance Sheets have been modified to include Investments in Unconsolidated Subsidiaries of $1.4 million representing Laclede Group's common securities investment in the Trust and to reflect Laclede Group's obligations related to the debentures. The common securities investment is included on the Other Property and Investments line on the Consolidated Balance Sheets. As permitted under FIN 46R, the Trust has been deconsolidated for prior periods and presented to be consistent with the current presentation. The adoption of FIN 46R did not result in a cumulative effect of an accounting change adjustment and did not have a material effect on the financial position or results of operations of Laclede Group.
In December 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 132 (revised 2003) (SFAS No. 132(R)), "Employers' Disclosures about Pensions and Other Postretirement Benefits." The provisions of this Statement do not change the measurement and recognition provisions of SFAS No. 87, "Employers' Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132(R) replaces SFAS No. 132, and requires certain additional disclosures that became effective for fiscal years ending after and interim periods beginning after December 15, 2003. The required disclosures are included in Note 3 to the Consolidated Financial Statements on page 12 of this report.
The Emerging Issues Task Force (EITF) deliberated Issue 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." The Issue was intended to address the meaning of other-than-temporary impairment and its application to certain investments held at cost. A consensus was reached regarding disclosure requirements concerning unrealized losses on available-for-sale debt and equity securities accounted for under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and SFAS No. 124, "Accounting for Certain Investments Held for Not-for-Profit Organizations." The guidance for evaluating whether an investment is other-than-temporarily impaired should be applied in reporting periods beginning after June 15, 2004. The disclosures are effective in annual financial statements for fiscal years ended after December 15, 2003, for investments accounted for under SFAS Nos. 115 and 124. For all other investments within the scope of this Issue, the disclosures are effective in annual financial statements for fiscal years ending after June 15, 2004. Additional disclosures for cost method investments are effective for fiscal years ending after June 15, 2004. Laclede Group is currently evaluating the effect of this pronouncement on its financial statements.
2. EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires dual presentation of basic and diluted earnings per share (EPS). Basic EPS does not include potentially dilutive securities and is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted EPS assumes the issuance of common shares pursuant to the Company's stock-based compensation plan and the vesting of non-vested stock awards at the beginning of each respective period. There were 224,000 stock options outstanding that were anti-dilutive at June 30, 2004.
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
(Thousands, Except Per Share Amounts) 2004 2003 2004 2003
---- ---- ---- ----
Basic EPS:
Net Income Applicable to Common Stock $ 3,747 $ 2,022 $41,878 $38,687
Weighted-Average Shares Outstanding 19,863 19,044 19,381 19,002
Earnings Per Share of Common
Stock $.19 $.11 $2.16 $2.04
Diluted EPS:
Net Income Applicable to Common Stock $ 3,747 $ 2,022 $41,878 $38,687
Weighted-Average Shares Outstanding 19,863 19,044 19,381 19,002
Dilutive Effect of Employee Stock Options 18 10 24 3
----------------------- -----------------------
Weighted-Average Diluted Shares 19,881 19,054 19,405 19,005
======================= =======================
Earnings Per Share of Common
Stock $.19 $.11 $2.16 $2.04
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3. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Laclede Gas has non-contributory defined benefit, trusteed forms of pension plans covering substantially all employees over the age of twenty-one. Benefits are based on years of service and the employee's compensation during the last three years of employment.
The funding policy of Laclede Gas is to contribute an amount not less than the minimum required by government funding standards, nor more than the maximum deductible amount for federal income tax purposes. The Utility has contributed $.2 million to the pension funds during the nine months ended June 30, 2004, and expects to contribute a total of $.3 million during fiscal year 2004. Plan assets consist primarily of corporate and U.S. government obligations and indexed equity funds.
Pension cost amounted to $1.1 million for the quarter ended June 30, 2004 and $.3 million for the same quarter last year. Pension costs for the nine months ended June 30, 2004 were $3.4 million compared with $.8 million for the same period last year. These costs include amounts capitalized with construction activities.
The net periodic pension costs include the following components:
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Service cost - benefits earned
during the period $ 2,776 $ 2,265 $ 8,330 $ 6,795
Interest cost on projected
benefit obligation 4,058 4,150 12,173 12,450
Expected return on plan assets (5,625) (5,650) (16,874) (16,950)
Amortization of transition obligation - (59) - (177)
Amortization of prior service cost 331 348 993 1,044
Amortization of actuarial loss 951 334 2,852 1,003
Regulatory adjustment (1,368) (1,108) (4,105) (3,324)
----------------------- -----------------------
Net pension cost $ 1,123 $ 280 $ 3,369 $ 841
======================= =======================
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Pursuant to the Missouri Public Service Commission's (MoPSC or Commission) order in Laclede Gas' 2002 rate case, the return on plan assets is based on market-related value of plan assets implemented prospectively over a four-year period. Unrecognized gains or losses are amortized only to the extent that such gain or loss exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. Also in the 2002 rate case, the Commission ordered that the recovery in rates for the Utility's qualified pension plans is based on the ERISA minimum contribution of zero effective October 1, 2002, and on the ERISA minimum contribution of zero plus $3.4 million annually effective July 1, 2003. The difference between this amount on a pro-rata basis and pension expense as calculated pursuant to the
above and included in the Statements of Consolidated Income and Consolidated Comprehensive Income is deferred as a regulatory asset or liability.
Pursuant to the provisions of the Laclede Gas pension plans, pension obligations may be satisfied by lump sum cash payments. Pursuant to MoPSC order, lump sum payments are recognized as settlements (which can result in gains or losses) only if the total of such payments exceeds 100% of the sum of service and interest costs. No lump sum payments were recognized as settlements during the nine months ended June 30, 2004 or the nine months ended June 30, 2003.
SM&P maintains a defined benefit plan for selected employees. The plan is a non-qualified plan and therefore has no assets held in trust. Net pension cost related to the plan is not material.
Laclede Gas also provides certain life insurance benefits at retirement. Medical insurance is available after early retirement until age 65.
Missouri state law provides for the recovery in rates of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (OPEB), accrued costs provided that such costs are funded through an independent, external funding mechanism. Laclede Gas established the Voluntary Employees' Beneficiary Association (VEBA) and Rabbi trusts as its external funding mechanisms. VEBA and Rabbi trusts assets consist primarily of money market securities and mutual funds invested in stocks and bonds. Laclede Gas has contributed $5.5 million to the plans during the nine months ended June 30, 2004, and expects to contribute a total of $7.4 million during fiscal 2004. The unrecognized transition obligation is being amortized over 20 years.
Postretirement benefit costs were $2.0 million in the quarter ended June 30, 2004 compared with $1.9 million in the quarter ended June 30, 2003. Postretirement benefit costs were $5.9 million for the nine months ended June 30, 2004 compared with $5.8 million for the nine months ended June 30, 2003. These costs include amounts capitalized with construction activities.
Net periodic postretirement benefit costs consisted of the following components:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ -----------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Service cost - benefits earned
during the period $ 794 $ 690 $2,381 $2,069
Interest cost on accumulated
postretirement benefit obligation 801 916 2,402 2,746
Expected return on plan assets (209) (234) (627) (703)
Amortization of transition
obligation 264 316 794 950
Amortization of prior service cost (8) 82 (24) 246
Amortization of actuarial loss 174 103 523 311
Regulatory adjustment 165 75 494 226
------------------------ -----------------------
Net postretirement benefit cost $1,981 $1,948 $5,943 $5,845
======================== =======================
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Pursuant to the Commission's order in the Utility's 2002 rate case, the return on plan assets is based on market related value of plan assets implemented prospectively over a four-year period. Unrecognized gains and losses are amortized only to the extent that such gain or loss exceeds 10% of the greater of the accumulated postretirement benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. Also in the 2002 rate case, the Commission ordered that the recovery in rates for the postretirement benefit costs be based on the accounting methodology as ordered in the 1999 rate case. The difference between this amount and postretirement benefit expense as calculated pursuant to the above is deferred as a regulatory asset or liability.
4. FINANCIAL INSTRUMENTS
In the course of its business, LER enters into fixed price commitments associated with the purchase or sale of natural gas. LER manages the price risk associated with these commitments by either closely matching the offsetting physical purchase or sale of natural gas at fixed prices or through the use of exchange-traded futures contracts to lock in margins. At June 30, 2004, LER's open positions were not material to Laclede Group's financial position or results of operations.
Settled and open future positions were as follows at June 30, 2004:
Average
MMBtu Price per
Position Month (millions) MMBtu
-------------- ---------- -----
Settled net long and short futures positions July 04 .26 5.85
Open short futures positions August 04 .38 5.84
November 04 .30 4.90
December 04 .30 6.10
February 05 .14 5.90
Open long futures positions October 04 .30 4.73
September 05 .14 5.05
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The above futures contracts are derivative instruments and management has designated these items as cash flow hedges of forecasted transactions. The fair values of the instruments are recognized on the Consolidated Balance Sheets. The change in the fair value of the effective portion of these hedge instruments is recorded, net of tax, in Other Comprehensive Income, a component of Common Stock Equity. These amounts will reduce or be charged to Non-Regulated Gas Marketing Operating Revenues or Expenses in the Statements of Consolidated Income as the transactions occur. It is expected that approximately $.1 million of pre-tax net unrealized losses on cash flow hedging derivative instruments at June 30, 2004 will be reclassified into the Consolidated Statement of Income during fiscal 2004. The remainder, approximately $.2 million of pre-tax net unrealized losses, will be reclassified during fiscal 2005. The ineffective portions of these hedge instruments were immaterial for the periods presented, and such amounts are charged to Non-Regulated Gas Marketing Operating Revenues or Expenses. Cash flows from hedging transactions are classified in the same category as the cash flows from the items that are being hedged in the Statements of Consolidated Cash Flows.
5. INCOME TAXES
Net provision for income taxes was as follows during the periods set forth below:
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Federal
Current $(5,059) $(1,774) $11,314 $14,790
Deferred 6,905 1,782 9,091 4,090
State and Local
Current (796) 135 1,907 2,946
Deferred 1,142 333 1,462 809
----------------------- -----------------------
Total $ 2,192 $ 476 $23,774 $22,635
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6. OTHER INCOME AND INCOME DEDUCTIONS - NET
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ------------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Investment gains $ - $ - $1,947 $ -
Allowance for funds used during
construction (33) (26) (94) (77)
Other income 309 237 1,147 759
Other income deductions (211) (279) 402 292
------------------------ ------------------------
Other income and income
deductions - net $ 65 $ (68) $3,402 $974
======================== ========================
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Laclede Gas recorded the receipt of proceeds totaling $1.9 million during the quarter ended March 31, 2004 related to its interest, as a policyholder, in the sale of a mutual insurance company. This represents an initial distribution relating to certain policies held by the Utility. Subsequent distributions, if any, are not expected to have a material impact on the consolidated financial position or results of operations of the Company.
7. INFORMATION BY OPERATING SEGMENT
The Regulated Gas Distribution segment consists of the regulated operations of Laclede Gas and is the core business segment of Laclede Group. The Non-Regulated Services segment includes the results of SM&P, an underground facility locating and marking business operating in the midwestern states, a wholly owned subsidiary of Laclede Group. The Non-Regulated Gas Marketing segment includes the results of LER, a wholly owned subsidiary of Laclede Group. Non-Regulated Other includes the transportation of liquid propane, real estate development, the compression of natural gas, the sale of insurance-related products, and financial investments in other enterprises. These operations are conducted through five wholly owned subsidiaries. Certain intersegment revenues with Laclede Gas are not eliminated in accordance with the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation."
Regulated Non-Regulated
Gas Non-Regulated Gas Non-Regulated
(Thousands) Distribution Services Marketing Other Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended
June 30, 2004
-------------
Revenues from external
Customers $ 125,477 $34,858 $ 76,757 $ 804 $ - $ 237,896
Intersegment revenues 393 115 3,718 2,938 - 7,164
---------------------------------------------------------------------------------------
Total operating revenues 125,870 34,973 80,475 3,742 - 245,060
Net income (loss) applicable to
common stock (149) 2,686 1,171 39 - 3,747
Total assets 1,071,350 59,393 46,578 35,663 (21,320) 1,191,664
Nine Months Ended
June 30, 2004
-------------
Revenues from external
customers $ 782,484 $69,524 $179,260 $ 2,548 $ - $1,033,816
Intersegment revenues 1,634 247 13,678 3,277 - 18,836
---------------------------------------------------------------------------------------
Total operating revenues 784,118 69,771 192,938 5,825 - 1,052,652
Net income (loss) applicable to
common stock 40,534 (1,512) 2,598 258 - 41,878
Total assets 1,071,350 59,393 46,578 35,663 (21,320) 1,191,664
Three Months Ended
June 30, 2003
-------------
Revenues from external
customers $ 114,120 $27,163 $ 37,385 $ 1,004 $ - $ 179,672
Intersegment revenues 87 113 4,377 2,335 11 6,923
---------------------------------------------------------------------------------------
Total operating revenues 114,207 27,276 41,762 3,339 11 186,595
Net income applicable to
common stock 23 995 888 116 - 2,022
Total assets 1,015,887 57,720 32,841 53,314 (61,249) 1,098,513
Nine Months Ended
June 30, 2003
-------------
Revenues from external
customers $ 687,901 $75,176 $104,554 $ 3,178 $ - $ 870,809
Intersegment revenues 927 238 14,349 2,701 (79) 18,136
---------------------------------------------------------------------------------------
Total operating revenues 688,828 75,414 118,903 5,879 (79) 888,945
Net income (loss) applicable to
common stock 39,470 (3,438) 2,221 434 - 38,687
Total assets 1,015,887 57,720 32,841 53,314 (61,249) 1,098,513
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In November 2002, two customers notified SM&P that, due to actions they had taken to address workforce management issues, they did not intend to continue to outsource certain functions, which included locating services provided by SM&P, after February and March 2003. One of these customers notified SM&P in January 2003 that it would continue to outsource a portion of its locating services provided by SM&P beyond that timeframe. In connection with the reduction in work from these customers, SM&P made reductions in the required levels of personnel, facilities and equipment, for which the Company recorded an after-tax charge of approximately $1.0 million, all of which was expensed during the quarter ended March 31, 2003. Revenue from these customers totaled approximately $29 million and $45 million for fiscal 2003 and fiscal 2002, respectively. Revenue from these customers for the quarter ended June 30, 2004 was $9.5 million, compared with $3.5 million for the same period last year. Revenue from these customers for the nine months ended June 30, 2004 was $18.1 million, compared with $25.4 for the same period last year. SM&P has regained a portion of the previously withdrawn work and has gained new business with these customers. The underground facility locating industry, however, remains competitive with many contracts subject to termination on as little as 30-days notice. Also, SM&P's customers are primarily in the utility and telecommunication sector with their workload influenced by construction trends.
8. COMMITMENTS AND CONTINGENCIES
Laclede Gas is subject to various environmental laws and regulations that, to date, have not materially affected the Company's financial position and results of operations. As these laws, regulations, and their interpretation evolve, however, additional costs may be incurred.
With regard to a former manufactured gas plant site located in Shrewsbury, Missouri, Laclede Gas and state and federal environmental regulators have agreed upon certain actions and those actions are essentially complete. Laclede Gas currently estimates the overall costs of these actions will be approximately $2.4 million. As of June 30, 2004, Laclede Gas has paid or reserved for these actions. If regulators require additional actions or assert additional claims, Laclede Gas will incur additional costs.
Laclede Gas enrolled a second former manufactured gas plant site into the Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to minimize the scope and cost of site cleanup while maximizing possibilities for site development. This site is located in, and is presently owned by, the City of St. Louis, Missouri. The City of St. Louis has separately authorized a developer to prepare both a Remedial Action Plan (RAP), for submission to the VCP, and a site development plan. Laclede Gas has met with the developer to explore what role, if any, it might play in these efforts. Laclede Gas continues to evaluate other options as well, including, but not limited to, the submission of its own RAP to the VCP. Laclede Gas currently estimates that the cost of site investigations, agency oversight and related legal and engineering consulting may be approximately $650,000. Currently, Laclede Gas has paid or reserved for these actions. Laclede Gas has requested that other former site owners and operators share in these costs and one party has agreed to participate and has reimbursed Laclede Gas to date for $173,000. Laclede Gas anticipates additional reimbursement from this party. Laclede Gas plans to seek proportionate reimbursement of all costs relative to this site from other potentially responsible parties if practicable.
Laclede Gas has been advised that a third former manufactured gas plant site may require remediation. Laclede Gas does not, and for many years has not, owned this site. At this time it is not clear whether Laclede Gas will incur any costs in connection with environmental investigations or remediation at the site, and if it does incur any costs, what the amount of those costs would be.
Costs incurred are charged to expense or capitalized in accordance with generally accepted accounting principles. A predetermined level of expense is recovered through Laclede Gas' rates.
While the scope of future costs relative to the Shrewsbury site may not be significant, the scope of costs relative to the other sites is unknown and may be material. Laclede Gas has notified its insurers that it seeks reimbursement of its costs at these three manufactured gas plant sites. In response, the majority of insurers have reserved their rights. While some of the insurers have denied coverage, Laclede Gas continues to seek reimbursement from them. With regard to the Shrewsbury site, denials of coverage are not expected to have any material impact on the financial position and results of operations of Laclede Gas. With regard to the other two sites, since the scope of costs are unknown and may be significant, denials of coverage may have a material impact on the financial position and results of operations of Laclede Gas. Such costs, if incurred, have typically been subject to recovery in rates.
SM&P has been the subject of certain employment-related claims arising out of a practice of SM&P that predated Laclede Group's acquisition. The claims involve whether certain pre- and post-work activities and commuting time for non-supervisory field employees constitute hours worked for purposes of federal and state wage and hour laws. These claims have been asserted in various proceedings, including one "opt-in" collective action filed in March 2003 in Federal District Court for the Eastern District of Texas. As a result of a ruling on February 27, 2004 in that proceeding, approximately 3,500 present and former field employees who worked for SM&P at times since February 27, 2001, were given notice of the lawsuit and the opportunity, until June 7, 2004, to join the lawsuit and assert claims for additional overtime compensation for the three-year period immediately preceding the date that they joined the lawsuit. Of the employees to whom notice was sent, 933 have joined this lawsuit to date, the substantial majority of whom are former employees. Eighteen more individuals have attempted to opt-in after the court's deadline. SM&P is vigorously contesting these claims, including opposition to this case ultimately proceeding as a collective action. While the results of the claims cannot be predicted with certainty, management, after discussion with counsel, believes that the final outcome will not have a material adverse effect on the consolidated financial position and results of operations of the Company.
Laclede Group and its subsidiaries are involved in other litigation, claims and investigations arising in the normal course of business. While the results of such litigation cannot be predicted with certainty, management, after discussion with counsel, believes that the final outcome will not have a material adverse effect on the consolidated financial position or results of operations of the Company.
On June 28, 2002, the Staff of the MoPSC filed its recommendation in a proceeding established to review Laclede Gas' gas costs for fiscal 2001. In its recommendation, the Staff proposed to disallow approximately $4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based Price Stabilization Program. This Program was discontinued at the end of the 2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in proceedings before the MoPSC, including a formal hearing that was held on this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved by Laclede Gas, and directed Laclede Gas to flow through such amount to its customers in its November
2003 PGA filing. On June 19, 2003, Laclede Gas appealed the MoPSC's decision to the Cole County Circuit Court. On October 10, 2003, the Circuit Court issued an order staying the MoPSC's decision requiring Laclede Gas to flow through the $4.9 million to its customers. Pursuant to the Stay Order, Laclede Gas is paying the $4.9 million into the Court's registry pending a final judicial determination of Laclede Gas' entitlement to such amounts. On November 5, 2003, the Circuit Court of Cole County, Missouri, issued its Order and Judgment vacating and setting aside the Commission's decision on the grounds that it was unlawful and not supported by competent and substantial evidence on the record. On December 5, 2003 the MoPSC appealed the Circuit Court's decision to the Missouri Court of Appeals for the Western District. Oral arguments are currently scheduled in the Missouri Court of Appeals for the Western District for August 17, 2004. The Company continues to believe in the merit of its position and intends to vigorously assert its position in the appeal. To the extent that a final decision in the courts results in disallowance of the $4.9 million in pre-tax gains, it could have a material effect on the future financial position and results of operation of the Company.
SM&P has several operating leases, the aggregate annual cost of which is approximately $5 million, consisting primarily of 12-month operating leases, with renewal options, for vehicles used in its business. Upon acquisition of SM&P, Laclede Group assumed parental guarantees of certain of those vehicle leases. Laclede Group anticipates that the maximum guarantees related to existing leases will not exceed $12 million. No amounts have been recorded for these guarantees in the financial statements.
Laclede Group had guarantees totaling $8.5 million for performance and payment of certain wholesale gas supply purchases by LER, as of June 30, 2004. No amounts have been recorded for these guarantees in the financial statements.
Laclede Gas Company's Financial Statements and Notes to Financial Statements are included in Exhibit 99.1 to this report.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This management's discussion analyzes the financial condition and results of operations of The Laclede Group, Inc. (Laclede Group or the Company) and its subsidiaries. It includes management's view of factors that affect its business, explanations of past financial results including changes in earnings and costs from the prior year periods, and their effects on overall financial condition and liquidity.
Certain matters discussed in this report, excluding historical information, include forward-looking statements. Certain words, such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "seek," and similar words and expressions identify forward-looking statements that involve uncertainties and risks. Future developments may not be in accordance with our expectations or beliefs and the effect of future developments may not be those anticipated. Among the factors that may cause results to differ materially from those contemplated in any forward-looking statement are:
o weather conditions and catastrophic events;
o economic, competitive, political and regulatory conditions;
o legislative, regulatory and judicial mandates and decisions, some of
which may be retroactive, including those affecting
o allowed rates of return
o incentive regulation
o industry structure
o purchased gas adjustment provisions
o rate design structure and implementation
o franchise renewals
o environmental or safety matters
o taxes
o accounting standards;
o the results of litigation;
o retention, ability to attract, ability to collect from and conservation
efforts of customers;
o capital and energy commodity market conditions including the ability to
obtain funds for necessary capital expenditures and the terms and
conditions imposed for obtaining sufficient gas supply;
o discovery of material weakness in internal controls; and
o employee workforce issues.
Readers are urged to consider the risks, uncertainties and other factors that could affect our business as described in this report. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement in light of future events.
The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto.
THE LACLEDE GROUP, INC.
RESULTS OF OPERATIONS
The Laclede Group, Inc.'s (Laclede Group or the Company) earnings are primarily derived from the regulated activities of its largest subsidiary, Laclede Gas Company (Laclede Gas or the Utility), Missouri's largest natural gas distribution company. Laclede Gas is regulated by the Missouri Public Service Commission (MoPSC) and serves the metropolitan St. Louis area and several other counties in eastern Missouri. Laclede Gas delivers natural gas to retail customers at rates, and in accordance with tariffs, authorized by the MoPSC. The Utility's earnings are generated by the sale of heating energy, which was historically heavily influenced by the weather. As part of the 2002 rate case settlement, the Utility initiated, effective November 9, 2002, an innovative weather mitigation rate design that lessens the impact of weather volatility on Laclede Gas customers during cold winters and is expected to stabilize the Utility's earnings in the future by recovering fixed costs more evenly during the heating season. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the November through April period, which generally corresponds with the heating season. The Utility typically experiences losses during the non-heating season. Due to the material seasonal cycle of Laclede Gas, the accompanying interim statements of income for Laclede Group are not necessarily indicative of annual results or representative of the succeeding quarter of the fiscal year. The seasonal effect of the Utility's earnings on Laclede Group is generally expected to be tempered somewhat by the results of SM&P Utility Resources, Inc. (SM&P), a non-regulated underground facility locating and marking service business wholly owned by Laclede Group, whose operations tend to be counter-seasonal to those of Laclede Gas. Laclede Energy Resources, Inc. (LER), a wholly owned subsidiary, is engaged in non-regulated efforts to market natural gas and related activities. Other non-regulated subsidiaries provide less than 10% of consolidated revenues.
Laclede Group's strategy includes efforts to stabilize and improve performance of its core Utility, while developing non-regulated businesses and taking a measured approach in the pursuit of additional growth opportunities that complement the Utility business.
As for the Utility, mitigating the impact of weather fluctuations on Laclede Gas customers while improving the ability to recover its authorized distribution costs and return has been a fundamental component of the Laclede Group strategy. The Utility's distribution costs are the essential, primarily fixed expenditures it must incur to operate and maintain a more than 15,000-mile natural gas distribution system and related storage facilities. In fiscal 2003, when the weather mitigation rate design first went into effect, the weather was essentially normal; therefore, its impact was minimal. However, it has shown its value during the first nine months of fiscal 2004, as the downward pressure on revenues and earnings has been significantly mitigated despite temperatures that were 13% warmer than normal. In addition, Laclede Gas is working to continually improve its ability to provide reliable natural gas service at a reasonable cost, while maintaining and building a secure and dependable infrastructure.
Laclede Group continues to develop its non-regulated subsidiaries. SM&P is working toward expanding its geographic footprint into new markets, and has made notable gains in adding business in several key markets after experiencing setbacks in fiscal 2003. LER continues to focus on growing its markets on a long-term and sustainable basis by providing both on-system transportation customers and customers outside of Laclede Gas' traditional service area with another choice in unregulated natural gas suppliers. Nevertheless, income from LER's operations, similar to the Utility's income from off-system sales, is subject to fluctuations in market conditions.
Overview - Net Income by Operating Segment Quarter Ended
June 30,
-------------------------
(millions, after-tax) 2004 2003
---- ----
Regulated Gas Distribution $(.2) $ -
Non-Regulated Services 2.7 1.0
Non-Regulated Gas Marketing 1.2 .9
Other Non-Regulated Subsidiaries .1 .1
--------- ---------
Net Income Applicable to Common Stock $3.8 $2.0
========= =========
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Laclede Group's basic and diluted earnings per share were $.19 for the quarter ended June 30, 2004, compared with $.11 per share reported for the same quarter last year. The year-to-year increase in consolidated net income of $1.8 million was primarily attributable to improved results reported by SM&P and LER. SM&P's improvement over the prior year was primarily due to attainment of new business. LER's earnings were higher compared with the same quarter last year primarily due to higher sales levels. Utility results decreased slightly primarily due to increased operating costs and higher interest expense, largely offset by higher income from off-system sales and capacity release.
Regulated Operating Revenues and Operating Expenses
Laclede Gas passes on to Utility customers (subject to prudence review) increases and decreases in the wholesale cost of natural gas in accordance with its Purchased Gas Adjustment (PGA) clause. The volatility of the wholesale natural gas market results in fluctuations from period to period in the recorded levels of, among other items, revenues and natural gas cost expense. Nevertheless, increases and decreases in the cost of gas associated with system gas sales volumes have no direct effect on net revenues and net income.
Regulated operating revenues for the quarter ended June 30, 2004 were $125.9 million, or $11.7 million greater than the same period last year. The increase was primarily attributable to increased off-system sales revenues totaling $17.1 million. This factor was partially offset by lower PGA rates totaling $5.3 million and lower system gas sales levels resulting from warmer weather and other variations totaling $.1 million. Temperatures were 24% warmer than normal and 18% warmer than the same quarter last year. System therms sold and transported decreased by 7.2 million therms, or 5.3%, below the quarter ended June 30, 2003.
Regulated operating expenses for the quarter ended June 30, 2004 increased $10.5 million from the same quarter last year. Natural and propane gas expense increased $8.6 million from last year's level primarily attributable to increased off-system gas expense, partially offset by lower rates charged by our suppliers and lower volumes purchased for sendout. Other operation and maintenance expenses increased $1.3 million, or 4.2%, primarily due to a higher provision for uncollectible accounts, increased insurance premiums and higher wage rates, partially offset by lower group insurance charges. Taxes, other than income, increased $.5 million, or 4.0%, due to higher real estate and personal property taxes and other variations.
Non-Regulated Services Operating Revenues and Operating Expenses
Laclede Group's non-regulated services operating revenue for this quarter increased $7.7 million reflecting attainment of new business. The increase in non-regulated services operating expenses, totaling $4.9 million, was primarily attributable to charges associated with the new business. The underground facility locating industry remains competitive with many contracts subject to termination on as little as 30-days notice. SM&P's customers are primarily in the utility and telecommunication sector with their workload influenced by construction trends.
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-regulated gas marketing operating revenues increased $38.7 million primarily due to increased sales volumes and higher sales prices by LER. The increase in non-regulated gas marketing operating expenses, totaling $38.2 million, was primarily associated with increased gas expense related to increased volumes purchased and higher prices.
Interest Charges
The $1.0 million increase in interest charges was primarily due to higher interest on long-term debt due to the April 2004 issuance of $50 million of 5 1/2% First Mortgage Bonds and $100 million of 6% First Mortgage Bonds, partially offset by the early redemption in June 2004 of $50 million of 6 5/8% First Mortgage Bonds. This increase in interest on long-term debt was partially offset by reduced interest on short-term debt, mainly attributable to lower borrowings.
Income Taxes
The increase in income taxes is primarily attributable to higher pre-tax income.
Overview - Net Income by Operating Segment Nine Months Ended
June 30,
-----------------------
(millions, after-tax) 2004 2003
---- ----
Regulated Gas Distribution $40.5 $39.5
Non-Regulated Services (1.5) (3.4)
Non-Regulated Gas Marketing 2.6 2.2
Other Non-Regulated Subsidiaries .3 .4
--------- --------
Net Income Applicable to Common Stock $41.9 $38.7
========= ========
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Laclede Group's basic and diluted earnings per share were $2.16 for the nine months ended June 30, 2004, an increase of $.12 per share, compared with $2.04 per share reported for the same period last year. The year-to-year increase in consolidated net income of $3.2 million was primarily attributable to the following factors, quantified on a pre-tax basis.
Utility earnings increased primarily due to the following factors:
o non-operating income recorded this year increased $2.4 million primarily reflecting the receipt of proceeds totaling $1.9 million related to the Company's interest, as a policyholder, in the sale of a mutual insurance company;
o the fully-implemented general rate increase effective November 9, 2002 totaling $.9 million, and;
o income from off-system sales and capacity release increased $1.4 million from the nine months ended June 30, 2003.
These factors were partially offset by pension costs that increased $1.6 million over the same period last year.
SM&P's improvement over the prior year primarily reflects the attainment of new business, partially offset by a reduced level of business from two customers. LER reported minor improvements in earnings results compared with the same period last year.
Regulated Operating Revenues and Operating Expenses
Regulated operating revenues for the nine months ended June 30, 2004 were $784.1 million, or $95.3 million greater than the same period last year. The increase was primarily attributable to higher PGA rates totaling approximately $90.3 million, increased off-system sales revenues totaling $41.1 million and, to a lesser extent, the effect of the general rate increase totaling $.9 million. These factors were partially offset by lower system gas sales levels resulting from warmer weather and other variations totaling $37.0 million. Temperatures were 13% warmer than normal and 14% warmer than last year. System therms sold and transported decreased by 80.5 million therms, or 8.6%, below the nine months ended June 30, 2003.
Regulated operating expenses for the nine months ended June 30, 2004 increased $96.6 million from the same period last year. Natural and propane gas expense increased $90.4 million above last year's level primarily attributable to higher rates charged by our suppliers and increased off-system gas expense, partially offset by lower volumes purchased for sendout. Other operation and maintenance expenses increased $2.3 million, or 2.3%, primarily due to
increased pension costs, a higher provision for uncollectible accounts, and increased injuries and damages premiums, partially offset by lower group insurance charges and reduced maintenance charges. Taxes, other than income, increased $3.5 million, or 7.2%, primarily due to higher gross receipts taxes (related to the increased revenues).
Non-Regulated Services Operating Revenues and Operating Expenses
Laclede Group's non-regulated services operating revenue for the nine months ended June 30, 2004 decreased $5.6 million primarily due to a reduced level of business from two customers. Revenue from these two customers for the nine months ended June 30, 2004 was $18.1 million, compared with $25.4 million for the same period last year. The reduction in non-regulated services operating expenses totaling $9.2 million was primarily attributable to a reduction in personnel and related expenses and a non-recurring $1.0 million after-tax charge recorded during the quarter ending March 31, 2003. This reduction was partially offset by charges attributable to the employment-related litigation described in Note 8 to the Consolidated Financial Statements on page 17 of this report.
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-regulated gas marketing operating revenues for the nine months ended June 30, 2004 increased $74.0 million primarily due to higher volumes and increased sales prices by LER. The increase in non-regulated gas marketing operating expenses, totaling $73.4 million, was primarily associated with increased gas expense related to higher volumes purchased and increased prices.
Other Income and Income Deductions - Net
The $2.4 million increase in other income and income deductions - net was primarily attributable to the Utility's recognition this year of the receipt of proceeds totaling $1.9 million related to its interest, as a policyholder, in the sale of a mutual insurance company. This represents an initial distribution relating to certain policies held by the Utility. Subsequent distributions, if any, are not expected to have a material impact on the consolidated financial position or results of operations of the Company.
Interest Charges
The $.8 million increase in interest charges was primarily due to higher interest on long-term debt due to the April 2004 issuance of $50 million of 5 1/2% First Mortgage Bonds and $100 million of 6% First Mortgage Bonds and the issuance of long-term debt to an unconsolidated affiliate trust in December 2002 totaling $46.4 million, partially offset by the early redemption in June 2004 of $50 million of 6 5/8% First Mortgage Bonds and the May 2003 maturity of $25 million of 6 1/4% First Mortgage Bonds.
Income Taxes
The increase in income taxes is primarily attributable to higher pre-tax income.
The basic term of Laclede Gas' labor agreement with Locals 5-6 and 5-194 (the union) of the Paper, Allied-Industrial , Chemical & Energy Workers International Union (formerly known as the Oil, Chemical and Atomic Workers International Union) expires at midnight, July 31, 2004. An offer of settlement will be presented to the union for a vote on August 1, 2004.
Laclede Gas previously appealed the MoPSC's decision in its 1999 rate case relative to the calculation of its depreciation rates. The Circuit Court remanded the decision to the MoPSC based on inadequate findings of fact. The MoPSC upheld its previous order and Laclede Gas appealed this second order to the Circuit Court. In 2002, the Circuit Court ruled that the MoPSC's second order was lawful and reasonable, and Laclede Gas appealed the Circuit Court's decision to the Missouri Court of Appeals for the Western District. On March 4, 2003 the Court of Appeals issued an opinion remanding the decision to the MoPSC based on the MoPSC's failure to support and explain its decision with adequate findings of fact. In May 2003, the Court of Appeals rejected the MoPSC's request that the Court reconsider its opinion or transfer this matter to the Missouri Supreme Court. On March 29, 2004, the MoPSC Staff and Laclede Gas responded to a MoPSC order directing interested parties to submit new proposed findings of fact on this issue for its consideration. By Order dated May 4, 2004, the MoPSC determined that it was necessary to take additional evidence on this issue and subsequently scheduled evidentiary hearings for that purpose for late September 2004.
On June 28, 2002, the Staff of the MoPSC filed its recommendation in a proceeding established to review Laclede Gas' gas costs for fiscal 2001. In its recommendation, the Staff proposed to disallow approximately $4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based Price Stabilization Program. This Program was discontinued at the end of the 2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in proceedings before the MoPSC, including a formal hearing that was held on this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved by Laclede Gas, and directed Laclede Gas to flow through such amount to its customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas appealed the MoPSC's decision to the Cole County Circuit Court. On October 10, 2003, the Circuit Court issued an order staying the MoPSC's decision requiring Laclede Gas to flow through the $4.9 million to its customers. Pursuant to the Stay Order, Laclede Gas is paying the $4.9 million into the Court's registry pending a final judicial determination of Laclede Gas' entitlement to such amounts. On November 5, 2003, the Circuit Court of Cole County, Missouri, issued its Order and Judgment vacating and setting aside the Commission's decision on the grounds that it was unlawful and not supported by competent and substantial evidence on the record. On December 5, 2003 the MoPSC appealed the Circuit Court's decision to the Missouri Court of Appeals for the Western District. Oral arguments are currently scheduled in the Missouri Court of Appeals for the Western District for August 17, 2004. The Company continues to believe in the merit of its position and intends to vigorously assert its position in the appeal. To the extent that a final decision in the courts results in disallowance of the $4.9 million in pre-tax gains, it could have a material effect on the future financial position and results of operations of the Company.
On March 1, 2004, the Utility made an Infrastructure System Replacement Surcharge (ISRS) filing with the MoPSC that was designed to increase revenues by approximately $3.86 million annually. Such filing was made pursuant to a Missouri law, enacted in 2003, that allows gas utilities to adjust their rates up to twice a year to recover certain facility-related expenditures that are made to comply with state and federal safety requirements or to relocate facilities in connection with public improvement projects. On March 12, 2004, the MoPSC suspended the proposed surcharge until June 29, 2004. On May 27, 2004 the Company and the Staff of the MoPSC filed a stipulation and agreement ("S&A") that provided for a $3.56 million annual surcharge effective June 10, 2004. On June 1, 2004 the MoPSC approved the S&A.
Our Discussion and Analysis of our financial condition, results of operations, liquidity and capital resources is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Generally accepted accounting principles require that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following represent the more significant items requiring the use of judgment and estimates in preparing our consolidated financial statements:
Allowances for doubtful accounts - Estimates of the collectibility of trade accounts receivable are based on historical trends, age of receivables, economic conditions, credit risk of specific customers, and other factors.
Employee benefits and postretirement obligations - Pension and postretirement obligations are calculated by actuarial consultants that utilize several statistical factors and other assumptions related to future events, such as discount rates, returns on plan assets, compensation increases, and mortality rates. The amount of expense recognized by the Utility is dependent on the regulatory treatment provided for such costs. Certain liabilities related to group medical benefits and workers' compensation claims, portions of which are self-insured and/or contain stop/loss coverage with third-party insurers to limit exposure, are established based on historical trends.
Goodwill valuation - In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill is required to be tested for impairment annually or whenever events or circumstances occur that may reduce the value of goodwill. In performing impairment tests, valuation techniques require the use of estimates with regard to discounted future cash flows of operations, involving judgments based on a broad range of information and historical results. If the test indicates impairment has occurred, goodwill would be reduced adversely impacting earnings.
Laclede Gas accounts for its regulated operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." This statement sets forth the application of accounting principles generally accepted in the United States of America for those companies whose rates are established by or are subject to approval by an independent third-party regulator. The provisions of SFAS No. 71 require, among other things, that financial statements of a regulated enterprise reflect the actions of regulators, where appropriate. These actions may result in the recognition of revenues and expenses in time periods that are different than non-regulated enterprises. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses when those amounts are reflected in rates. Also, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for recovery of costs that are expected to be incurred in the future (regulatory liabilities). Management believes that the current regulatory environment supports the continued use of SFAS No. 71 and that all regulatory assets and liabilities are recoverable or refundable through the regulatory process. We believe the following represent the more significant items recorded through the application of SFAS No. 71:
The Utility's Purchased Gas Adjustment Clause (PGA) allows Laclede Gas to flow through to customers, subject to prudence review, the cost of purchased gas supplies, including the costs, cost reductions and related carrying costs associated with the Utility's use of natural gas financial instruments to hedge the purchase price of natural gas. The difference between actual costs incurred and costs recovered through the application of the PGA are recorded as regulatory assets and liabilities that are recovered or refunded in a subsequent period.
The Company records deferred tax liabilities and assets measured by enacted tax rates for the net tax effect of all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes. Changes in enacted tax rates, if any, and certain property basis differences will be reflected by entries to regulatory asset or liability accounts for regulated companies, and will be reflected as income or loss for non-regulated companies. Also, pursuant to the direction of the MoPSC, Laclede Gas' provision for income tax expense for financial reporting purposes reflects an open-ended method of tax depreciation. This method is consistent with the regulatory treatment prescribed by the MoPSC to depreciate the Utility's assets.
For further discussion of significant accounting policies, see the Notes to the Consolidated Financial Statements included in the Company's Form 10-K for the fiscal year ended September 30, 2003.
Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised December 2003) (FIN 46R), "Consolidation of Variable Interest Entities," addresses consolidation of business enterprises of variable interest entities. Public entities shall apply this Interpretation to their interests in special purpose entities as of the first interim period ending after December 15, 2003. Application by public entities for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004.
In December 2002, Laclede Group formed a wholly owned trust, Laclede Capital Trust I (Trust), for the sole purpose of issuing preferred securities and lending the gross proceeds to its parent, Laclede Group. As of March 31, 2004, the
Trust has $45 million of Trust Preferred Securities outstanding. The sole assets of the Trust are debentures of Laclede Group, totaling $46.4 million, with the same economic terms as the Trust Preferred Securities. Prior to the application of FIN 46R, the Trust was consolidated in the financial statements of Laclede Group. The Company evaluated the effect of this pronouncement on this consolidation. In accordance with the provisions of FIN 46R, Laclede Group has determined that the Trust is a variable interest entity because its common securities investment is considered not at risk, and Laclede Group is not the primary beneficiary of the Trust. Accordingly, the Trust was deconsolidated during the quarter ended March 31, 2004. The Consolidated Balance Sheets have been modified to include Investments in Unconsolidated Subsidiaries of $1.4 million representing Laclede Group's common securities investment in the Trust and to reflect Laclede Group's obligations related to the debentures. The common securities investment is included on the Other Property and Investments line on the Consolidated Balance Sheets. As permitted under FIN 46R, the Trust has been deconsolidated for prior periods and presented to be consistent with the current presentation. The adoption of FIN 46R did not result in a cumulative effect of an accounting change adjustment and did not have a material effect on the financial position or results of operations of Laclede Group.
In December 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 132 (revised 2003) (SFAS No. 132(R)), "Employers' Disclosures about Pensions and Other Postretirement Benefits." The provisions of this Statement do not change the measurement and recognition provisions of SFAS No. 87, "Employers' Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132(R) replaces SFAS No. 132, and requires certain additional disclosures that became effective for fiscal years ending after and interim periods beginning after December 15, 2003. The required disclosures are included in Note 3 to the Consolidated Financial Statements on page 12 of this report.
The Emerging Issues Task Force (EITF) deliberated Issue 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." The Issue was intended to address the meaning of other-than-temporary impairment and its application to certain investments held at cost. A consensus was reached regarding disclosure requirements concerning unrealized losses on available-for-sale debt and equity securities accounted for under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and SFAS No. 124, "Accounting for Certain Investments Held for Not-for-Profit Organizations." The guidance for evaluating whether an investment is other-than-temporarily impaired should be applied in reporting periods beginning after June 15, 2004. The disclosures are effective in annual financial statements for fiscal years ended after December 15, 2003, for investments accounted for under SFAS Nos. 115 and 124. For all other investments within the scope of this Issue, the disclosures are effective in annual financial statements for fiscal years ending after June 15, 2004. Additional disclosures for cost method investments are effective for fiscal years ending after June 15, 2004. Laclede Group is currently evaluating the effect of this pronouncement on its financial statements.
FINANCIAL CONDITION
As of June 30, 2004, credit ratings for outstanding securities for Laclede Group and Laclede Gas issues were as follows:
Type of Facility S&P Moody's Fitch ----------------------------------------------------------------------------- Laclede Group Corporate Rating A Laclede Gas First Mortgage Bonds A A3 A+ Laclede Gas Commercial Paper A-1 P-2 Trust Preferred Securities A- Baa3 BBB+ |
The Company's ratings are investment grade, and the Company believes that it has adequate access to the financial markets to meet its capital requirements. These ratings remain subject to review and change by the rating agencies.
The Company's short-term borrowing requirements typically peak during colder months when Laclede Gas borrows money to cover the gap between when it purchases its natural gas and when its customers pay for that gas. Changes in the wholesale cost of natural gas, variations in the timing of collections of gas cost under the Utility's PGA Clause, the seasonality of accounts receivable balances, and the utilization of storage gas inventories cause short-term cash requirements to vary during the year, and can cause significant variations in the Utility's cash provided by or used in operating activities.
Net cash provided by operating activities for the nine months ended June 30, 2004 was $130.6 million, a $71.8 million increase, compared with the same period last year. The increase in cash provided by operating activities was primarily attributable to changes in the cost of natural gas in storage and favorable variations in the timing of collections of gas cost under the PGA clause.
Net cash used in investing activities for the nine months ended June 30, 2004 was $38.5 million compared with $36.8 million for the nine months ended June 30, 2003. Cash used in investing activities primarily reflected Utility construction expenditures in both periods.
Net cash used in financing activities was $87.5 for the nine months ended June 30, 2004 compared with $27.5 million for the nine months ended June 30, 2003. The variation primarily reflects the repayment of short-term debt this year, partially offset by the issuance of additional long-term debt and common stock.
Maximum consolidated short-term borrowings at any one time during the quarter ended June 30, 2004 were $191.7 million.
Short-term cash requirements have traditionally been met through the sale of commercial paper supported by lines of credit with banks. Laclede Gas currently has lines of credit in place of up to $265 million, after the expiration of a seasonal line of $25 million on February 13, 2004. Short-term borrowings outstanding at June 30, 2004 were $3.6 million at a weighted average interest rate of 1.6%. Based on short-term borrowings at June 30, 2004, a change in interest rates of 100 basis points would increase or decrease pre-tax earnings and cash flows by approximately $36,000 on an annual basis.
Most of Laclede Gas' lines of credit include a covenant limiting total debt, including short-term debt, to no more than 70% of total capitalization. On June 30, 2004, total debt was 51% of total capitalization.
Short-term cash requirements outside of Laclede Gas have generally been met with internally-generated funds. However, Laclede Group has a $20 million working capital line of credit expiring in June 2005, with interest rates indexed to LIBOR or Prime, to meet short-term liquidity needs of its subsidiaries. This line of credit has a covenant limiting the total debt of Laclede Gas Company to no more than 70% of the utility's total capitalization (as noted above, this ratio stood at 51% on June 30, 2004). This line has been used to provide a letter of credit of $1.2 million on behalf of SM&P as of July 2004, which has not been drawn, and to provide for seasonal funding needs of the various subsidiaries from time to time. There were no borrowings outstanding as of June 30, 2004.
Laclede Group has on file a shelf registration on Form S-3, which allows for the issuance of equity securities, other than preferred stock, and debt securities. Of the $500 million of securities originally registered under this Form S-3, $362.37 million remain registered and unissued as of June 30, 2004. The Company issued 1.725 million shares of common stock in May 2004. The proceeds from the sale of approximately $44.7 million were utilized to reduce short-terms borrowings and for general corporate purposes.
At June 30, 2004, Laclede Gas had fixed-rate long-term debt totaling $360 million, including a current portion of $25 million scheduled to mature in November 2004. While these long-term debt issues are fixed-rate, they are subject to changes in fair value as market interest rates change. However, increases or decreases in fair value would impact earnings and cash flows only if Laclede Gas were to reacquire any of these issues in the open market prior to maturity.
Laclede Gas has on file a shelf registration on Form S-3. Of the $350 million of securities originally registered under this S-3, $120 million of debt securities remained registered and unissued as of June 30, 2004. On April 28, 2004, Laclede Gas sold $50 million principal amount of First Mortgage Bonds, 5 1/2% Series due May 1, 2019 and $100 million principal amount of First Mortgage Bonds, 6% Series due May 1, 2034. The net proceeds of $147.9 million from this sale were used to reduce short-term debt, to redeem at par $50 million principal amount of Laclede Gas' 6 5/8% First Mortgage Bonds on June 15, 2004, and for general corporate purposes. The proceeds will also be used to pay at maturity $25 million principal amount of Laclede Gas' 8 1/2% First Mortgage Bonds in November 2004.
SM&P has several operating leases, the aggregate annual cost of which is approximately $5 million, consisting primarily of 12-month operating leases, with renewal options, for vehicles used in its business. Upon acquisition of SM&P, Laclede Group assumed parental guarantees of certain of those vehicle leases. Laclede Group anticipates that the maximum guarantees related to existing leases will not exceed $12 million. No amounts have been recorded for these guarantees in the financial statements.
Laclede Group had guarantees totaling $8.5 million for performance and payment of certain wholesale gas supply purchases by LER, as of June 30, 2004. No amounts have been recorded for these guarantees in the financial statements.
Utility construction expenditures were $36.6 million for the nine months ended June 30, 2004, compared with $34.7 million for the same period last year. Non-utility construction expenditures were $1.0 million for the nine months ended June 30, 2004, compared with $1.1 million for the same period last year.
Consolidated capitalization at June 30, 2004, excluding current obligations of long-term debt and preferred stock, increased $143.8 million since September 30, 2003 as a result of the long-term debt and stock issuance discussed above. Capital consisted of 49.2% Laclede Group common stock equity, .1% Laclede Gas preferred stock equity, 6.2% long-term debt to unconsolidated affiliate trust and 44.5% Laclede Gas long-term debt.
It is management's view that the Company has adequate access to capital markets and will have sufficient capital resources, both internal and external, to meet anticipated capital requirements.
The seasonal nature of Laclede Gas' sales affects the comparison of certain balance sheet items at June 30, 2004 and at September 30, 2003, such as Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts Payable, Regulatory Assets and Liabilities, and Delayed and Advance Customer Billings. The Consolidated Balance Sheet at June 30, 2003 is presented to facilitate comparison of these items with the corresponding interim period of the preceding fiscal year.
Laclede Gas adopted a risk management policy that provides for the purchase of natural gas financial instruments with the goal of managing price risk associated with purchasing natural gas on behalf of its customers. This policy prohibits speculation. Costs and cost reductions, including carrying costs, associated with the Utility's use of natural gas financial instruments are allowed to be passed on to the Utility's customers through the operation of its Purchased Gas Adjustment Clause, through which the MoPSC allows the Utility to recover gas supply costs. Accordingly, Laclede Gas does not expect any adverse earnings impact as a result of the use of these financial instruments. At June 30, 2004, the Utility held approximately 12.8 million MMBtu of futures contracts at an average price of $6.08 per MMBtu. Additionally, approximately 4.9 million MMBtu of other price risk mitigation was in place through the use of option-based strategies. These positions have various expiration dates, the longest of which extends through March 2005.
In the course of its business, Laclede Group's non-regulated marketing affiliate, Laclede Energy Resources, Inc. (LER), enters into fixed price commitments associated with the purchase or sale of natural gas. LER manages the price risk associated with these commitments by either closely matching the offsetting physical purchase or sale of natural gas at fixed prices or through the use of exchange-traded futures contracts to lock in margins. At June 30, 2004, LER's open positions were not material to Laclede Group's financial position or results of operations.
Laclede Gas is subject to various environmental laws and regulations that, to date, have not materially affected the Company's financial position and results of operations. As these laws, regulations, and their interpretation evolve, however, additional costs may be incurred.
With regard to a former manufactured gas plant site located in Shrewsbury, Missouri, Laclede Gas and state and federal environmental regulators have agreed upon certain actions and those actions are essentially complete. Laclede Gas currently estimates the overall costs of these actions will be approximately $2.4 million. As of June 30, 2004, Laclede Gas has paid or reserved for these actions. If regulators require additional actions or assert additional claims, Laclede Gas will incur additional costs.
Laclede Gas enrolled a second former manufactured gas plant site into the Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to minimize the scope and cost of site cleanup while maximizing possibilities for site development. This site is located in, and is presently owned by, the City of St. Louis, Missouri. The City of St. Louis has separately authorized a developer to prepare both a Remedial Action Plan (RAP), for submission to the VCP, and a site development plan. Laclede Gas has met with the developer to explore what role, if any, it might play in these efforts. Laclede Gas continues to evaluate other options as well, including, but not limited to, the submission of its own RAP to the VCP. Laclede Gas currently estimates that the cost of site investigations, agency oversight and related legal and engineering consulting may be approximately $650,000. Currently, Laclede Gas has paid or reserved for these actions. Laclede Gas has requested that other former site owners and operators share in these costs and one party has agreed to participate and has reimbursed Laclede Gas to date for $173,000. Laclede Gas anticipates additional reimbursement from this party. Laclede Gas plans to seek proportionate reimbursement of all costs relative to this site from other potentially responsible parties if practicable.
Laclede Gas has been advised that a third former manufactured gas plant site may require remediation. Laclede Gas does not, and for many years has not, owned this site. At this time it is not clear whether Laclede Gas will incur any costs in connection with environmental investigations or remediation at the site, and if it does incur any costs, what the amount of those costs would be.
Costs incurred are charged to expense or capitalized in accordance with generally accepted accounting principles. A predetermined level of expense is recovered through Laclede Gas' rates.
While the scope of future costs relative to the Shrewsbury site may not be significant, the scope of costs relative to the other sites is unknown and may be material. Laclede Gas has notified its insurers that it seeks reimbursement of its costs at these three manufactured gas plant sites. In response, the majority of insurers have reserved their rights. While some of the insurers have denied coverage, Laclede Gas continues to seek reimbursement from them. With regard to the Shrewsbury site, denials of coverage are not expected to have any material impact on the financial position and results of operations of Laclede Gas. With regard to the other two sites, since the scope of costs are unknown and may be significant, denials of coverage may have a material impact on the financial position and results of operations of Laclede Gas. Such costs, if incurred, have typically been subject to recovery in rates.
OFF-BALANCE SHEET ARRANGEMENTS
Laclede Group has no off-balance sheet arrangements.
Laclede Gas Company's Management's Discussion and Analysis of Financial Condition is included in Exhibit 99.1 of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For this discussion, see the "Market Risk" subsection in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, page 28 of this report.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15e and Rule 15d-15e under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
There have been no changes in our internal control over financial reporting that occurred during our third fiscal quarter that have materially affected, or are reasonably likely to materially affect, our control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of environmental matters and legal proceedings, see Note 8 to the Consolidated Financial Statements on page 17. For a description of pending regulatory matters of Laclede Gas, see Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Matters, page 24 of this report.
Laclede Group and its subsidiaries are involved in other litigation, claims and investigations arising in the normal course of business. While the results of such litigation cannot be predicted with certainty, management, after discussion with counsel, believes that the final outcome will not have a material adverse effect on the consolidated financial position or results of operations of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index
(b) Reports on Form 8-K
During the quarter, Laclede Group had three reports on Form 8-K:
1. Form 8-K dated April 21, 2004 filed by Laclede Gas Company reporting under Item 5 the sale of $150 million in principal amount of first mortgage bonds.
2. Form 8-K dated April 29, 2004 filed by The Laclede Group furnishing under Items 9 and 12 the results of operations and financial condition for the quarter ended March 31, 2004.
3. Form 8-K dated May 25, 2004 filed by The Laclede Group reporting under Item 5 the offering of 1,725,000 shares of common stock of The Laclede Group.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
The Laclede Group, Inc.
By: /s/ Barry C. Cooper
-------------------------
Dated: July 27, 2004 Barry C. Cooper
------------- Chief Financial Officer
(Authorized Signatory and
Chief Financial Officer)
|
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
Laclede Gas Company
By: /s/ Barry C. Cooper
-------------------------
Dated: July 27, 2004 Barry C. Cooper
------------- Chief Financial Officer
(Authorized Signatory and
Chief Financial Officer)
|
INDEX TO EXHIBITS
Exhibit
No.
-------
10.1 - Third Amendment to Revolving Credit Agreement dated as of
June 11, 2004.
10.2 - Amendment to Terms of Retirement Plan for Non-Employee
Directors.
10.3 - Amendment to the 2002 Restricted Stock Plan for Non-Employee
Directors.
12 - Ratio of Earnings to Fixed Charges.
31 - Certificates under Rule 13a-14(a) of the CEO and CFO of The
Laclede Group, Inc. and Laclede Gas Company.
32 - Section 1350 Certifications under Rule 13a-14(b) of the CEO and
CFO of The Laclede Group, Inc. and Laclede Gas Company.
99.1 - Laclede Gas Company - Management's Discussion and Analysis of
Financial Condition and Results of Operations, Financial
Statements and Notes to Financial Statements.
|
Exhibit 10.1
B. Borrower and Lender desire to further amend the Agreement, in the manner hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender hereby agree as follows:
(a) the execution, delivery and performance by Borrower of this Amendment are within the corporate powers of Borrower, have been duly authorized by all necessary corporate action and require no
action by or in respect of, consent of or filing or recording with, any governmental or regulatory body, instrumentality, authority, agency or official or any other Person;
(b) the execution, delivery and performance by Borrower of this Amendment do not conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under or result in any violation of, the terms of the Articles of Incorporation or Bylaws of Borrower, any applicable law, rule, regulation, order, writ, judgment or decree of any court or governmental or regulatory body, instrumentality authority, agency or official or any agreement, document or instrument to which Borrower is a party or by which Borrower or any of its property is bound or to which Borrower or any of its property is subject;
(c) this Amendment has been duly executed and delivered by Borrower and constitutes the legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law);
(d) all of the representations and warranties made by Borrower in the Agreement and/or in any of the other Transaction Documents are true and correct in all material respects on and as of the date of this Amendment as if made on and as of the date of this Amendment; and
(e) as of the date of this Amendment, no Default or Event of Default under or within the meaning of the Agreement has occurred and is continuing.
(a) this Amendment, duly executed by Borrower;
(b) a Consent of Guarantor duly executed by SM&P;
(c) a copy of resolutions of the Board of Directors of Borrower, duly adopted, which authorize the execution, delivery and performance of this Amendment;
(d) an incumbency certificate, executed by the Secretary of Borrower, which shall identify by name and title and bear the signatures of all of the officers of Borrower executing this Amendment;
(e) a certificate of corporate good standing of Borrower issued by the Secretary of State of the State of Missouri, or other evidence of good standing satisfactory to Lender;
(f) a copy of resolutions of the Board of Directors of SM&P, duly adopted, which authorize the execution, delivery and performance of the Consent of Guarantor;
(g) an incumbency certificate, executed by the Secretary of SM&P, which shall identify by name and title and bear the signatures of all of the officers of Borrower executing the Consent of Guarantor;
(h) a certificate of corporate good standing of SM&P issued by the Secretary of State of the State of Indiana, or other evidence of good standing satisfactory to Lender; and
(i) such other documents and information as reasonably requested by Lender.
IN WITNESS WHEREOF, Borrower and Lender have executed this Amendment as of the day and year first above written.
(SIGNATURES ON FOLLOWING PAGE)
SIGNATURE PAGE-
THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT
Borrower:
THE LACLEDE GROUP, INC.
Lender:
U.S. BANK NATIONAL ASSOCIATION,
formerly known as Firstar Bank, N.A.
Exhibit 10.2
RESOLUTIONS TO AMEND
RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS
RESOLVED, That the first sentence of Section 2 of the Terms of Retirement Plan for Non-Employee Directors of Laclede Gas Company is amended effective October 1, 2004 by replacing the phrase "at the time of retirement (or death in the case referred to in subclause (c)(ii) of the first sentence of Paragraph 1 above" with "on November 1, 2002" so the first sentence shall read as follows:
Benefits shall, following the Entitlement Date (as hereinafter defined), be payable to each Eligible Director annually, and each annual payment shall be based on the Eligible Director's annual Board retainer (but excluding fees for serving as a chairman or member of any committees of the Board, or for attending meetings of the Board or any committees thereof) in effect on November 1, 2002.
RESOLVED, That management is authorized and directed to execute such documents and take such actions as are necessary to implement the intent of these resolutions.
Exhibit 10.3
AMENDMENT TO THE
2002 RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
The 2002 Restricted Stock Plan for Non-Employee Directors is
amended effective October 1, 2004 by replacing in Article II, Section 2(a)
the number "200" with the number "300" and by replacing in Article II,
Section 2(b) the number "350" with the number "450".
Exhibit 12
THE LACLEDE GROUP, INC. AND SUBSIDIARY COMPANIES
SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------------------
Twelve Months Ended
------------------------------------------------------------------------------
June 30, September 30,
----------- --------------------------------------------------------------
(Thousands of Dollars) 2004 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ----
Income before interest
charges and income taxes $85,281 $80,185 $60,440 $73,742 $64,078 $61,016
Add: One third of
applicable rentals
charged to operating
expense (which
approximates the
interest factor) 2,128 2,873 2,662 313 310 301
--------------------------------------------------------------------------------
Total Earnings $87,409 $83,058 $63,102 $74,055 $64,388 $61,317
================================================================================
Interest on long-term debt -
Laclede Gas $20,651 $20,169 $20,820 $18,372 $15,164 $13,966
Other interest 7,002 6,717 4,989 10,067 8,844 6,627
Add: One third of
applicable rentals
charged to operating
expense (which
approximates the
interest factor) 2,254 2,873 2,662 313 310 301
--------------------------------------------------------------------------------
Total Fixed Charges $29,907 $29,759 $28,471 $28,752 $24,318 $20,894
================================================================================
Ratio of Earnings to Fixed
Charges 2.92 2.79 2.22 2.58 2.65 2.93
|
LACLEDE GAS COMPANY
SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------------------
Twelve Months Ended
------------------------------------------------------------------------------
June 30, September 30,
----------- --------------------------------------------------------------
(Thousands of Dollars) 2004 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ----
Income before interest
charges and income taxes $77,458 $76,274 $56,154 $73,742 $64,078 $61,016
Add: One third of
applicable rentals
charged to operating
expense (which
approximates the
interest factor) 404 457 315 313 310 301
--------------------------------------------------------------------------------
Total Earnings $77,862 $76,731 $56,469 $74,055 $64,388 $61,317
================================================================================
Interest on long-term debt $20,651 $20,169 $20,820 $18,372 $15,164 $13,966
Other interest 3,505 3,752 4,285 10,067 8,844 6,627
Add: One third of
applicable rentals
charged to operating
expense (which
approximates the
interest factor) 529 457 315 313 310 301
--------------------------------------------------------------------------------
Total Fixed Charges $24,685 $24,378 $25,420 $28,752 $24,318 $20,894
================================================================================
Ratio of Earnings to Fixed
Charges 3.15 3.15 2.22 2.58 2.65 2.93
|
Exhibit 31
I, Douglas H. Yaeger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Laclede Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) THIS PARAGRAPH INTENTIONALLY OMITTED AS PERMITTED IN RELEASE NO. 34-47986.
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material
weaknesses in the design or operation of internal
control over financial reporting which are
reasonably likely to adversely affect the
registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a
significant role in the registrant's internal
control over financial reporting.
Date: July 27, 2004 Signature: /s/ Douglas H. Yaeger
------------- -------------------------
Douglas H. Yaeger
Chairman of the Board,
President and Chief
Executive Officer
|
I, Barry C. Cooper, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Laclede Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) THIS PARAGRAPH INTENTIONALLY OMITTED AS PERMITTED IN RELEASE NO. 34-47986.
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material
weaknesses in the design or operation of internal
control over financial reporting which are
reasonably likely to adversely affect the
registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a
significant role in the registrant's internal
control over financial reporting.
Date: July 27, 2004 Signature: /s/ Barry C. Cooper
------------- -------------------------
Barry C. Cooper
Chief Financial Officer
|
I, Douglas H. Yaeger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Laclede Gas Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) THIS PARAGRAPH INTENTIONALLY OMITTED AS PERMITTED IN RELEASE NO. 34-47986.
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material
weaknesses in the design or operation of internal
control over financial reporting which are
reasonably likely to adversely affect the
registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a
significant role in the registrant's internal
control over financial reporting.
Date: July 27, 2004 Signature: /s/ Douglas H. Yaeger
------------- -------------------------
Douglas H. Yaeger
Chairman of the Board,
President and Chief
Executive Officer
|
I, Barry C. Cooper, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Laclede Gas Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) THIS PARAGRAPH INTENTIONALLY OMITTED AS PERMITTED IN RELEASE NO. 34-47986.
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material
weaknesses in the design or operation of internal
control over financial reporting which are
reasonably likely to adversely affect the
registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a
significant role in the registrant's internal
control over financial reporting.
Date: July 27, 2004 Signature: /s/ Barry C. Cooper
------------- -------------------------
Barry C. Cooper
Chief Financial Officer
|
Exhibit 32
Section 1350 Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Douglas H. Yaeger, Chairman of the Board, President and Chief Executive Officer of The Laclede Group, Inc., hereby certify that
(a) To the best of my knowledge, the accompanying report on Form 10-Q for the quarter ended June 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(b) To the best of my knowledge, the information contained in the accompanying report on Form 10-Q for the quarter ended June 30, 2004 fairly presents, in all material respects, the financial condition and results of operations of The Laclede Group, Inc.
/s/ Douglas H. Yaeger -------------------------------- Douglas H. Yaeger Chairman of the Board, President and Chief Executive Officer |
Section 1350 Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Barry C. Cooper, Chief Financial Officer of The Laclede Group, Inc. hereby certify that
(a) To the best of my knowledge, the accompanying report on Form 10-Q for the quarter ended June 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(b) To the best of my knowledge, the information contained in the accompanying report on Form 10-Q for the quarter ended June 30, 2004 fairly presents, in all material respects, the financial condition and results of operations of The Laclede Group, Inc.
/s/ Barry C. Cooper ----------------------- Barry C. Cooper Chief Financial Officer |
Section 1350 Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Douglas H. Yaeger, Chairman of the Board, President and Chief Executive Officer of Laclede Gas Company, hereby certify that
(a) To the best of my knowledge, the accompanying report on Form 10-Q for the quarter ended June 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(b) To the best of my knowledge, the information contained in the accompanying report on Form 10-Q for the quarter ended June 30, 2004 fairly presents, in all material respects, the financial condition and results of operations of Laclede Gas Company.
/s/ Douglas H. Yaeger -------------------------------- Douglas H. Yaeger Chairman of the Board, President and Chief Executive Officer |
Section 1350 Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Barry C. Cooper, Chief Financial Officer of Laclede Gas Company, hereby certify that
(a) To the best of my knowledge, the accompanying report on Form 10-Q for the quarter ended June 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(b) To the best of my knowledge, the information contained in the accompanying report on Form 10-Q for the quarter ended June 30, 2004 fairly presents, in all material respects, the financial condition and results of operations of Laclede Gas Company.
/s/ Barry C. Cooper ----------------------- Barry C. Cooper Chief Financial Officer |
Exhibit 99.1
LACLEDE GAS COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
(Thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Operating Revenues:
Utility $125,870 $114,207 $784,118 $688,828
Other 643 622 1,903 1,925
------------------------- --------------------------
Total Operating Revenues 126,513 114,829 786,021 690,753
------------------------- --------------------------
Operating Expenses:
Utility
Natural and propane gas 68,855 60,293 532,414 442,054
Other operation expenses 28,411 27,097 90,702 88,084
Maintenance 4,599 4,583 13,669 13,977
Depreciation and amortization 5,746 5,579 17,115 16,668
Taxes, other than income taxes 12,018 11,553 51,747 48,260
------------------------- --------------------------
Total utility operating expenses 119,629 109,105 705,647 609,043
Other 614 600 1,838 1,873
------------------------- --------------------------
Total Operating Expenses 120,243 109,705 707,485 610,916
------------------------- --------------------------
Operating Income 6,270 5,124 78,536 79,837
------------------------- --------------------------
Other Income and (Income Deductions) - Net 11 (154) 3,288 802
------------------------- --------------------------
Interest Charges:
Interest on long-term debt 6,207 4,945 15,836 15,355
Other interest charges 552 799 2,621 2,867
------------------------- --------------------------
Total Interest Charges 6,759 5,744 18,457 18,222
------------------------- --------------------------
Income (Loss) Before Income Taxes (478) (774) 63,367 62,417
Income Tax Expense (Benefit) (363) (827) 22,746 22,868
------------------------- --------------------------
Net Income (Loss) (115) 53 40,621 39,549
Dividends on Redeemable Preferred Stock 16 16 47 47
------------------------- --------------------------
Earnings Applicable to Common Stock $ (131) $ 37 $ 40,574 $ 39,502
========================= ==========================
See notes to financial statements.
|
LACLEDE GAS COMPANY
BALANCE SHEETS
(UNAUDITED)
June 30, Sept. 30, June 30,
2004 2003 2003
---- ---- ----
(Thousands)
ASSETS
Utility Plant $1,060,868 $1,030,665 $1,018,482
Less: Accumulated depreciation and amortization 420,994 409,418 406,482
-------------- -------------- --------------
Net Utility Plant 639,874 621,247 612,000
-------------- -------------- --------------
Other Property and Investments 29,474 27,898 26,660
-------------- -------------- --------------
Current Assets:
Cash and cash equivalents 2,092 2,907 1,786
Accounts receivable:
Gas customers - billed and unbilled 78,633 70,217 70,444
Associated companies 3,005 8,957 8,562
Other 8,064 9,196 7,036
Allowances for doubtful accounts (7,547) (6,839) (5,121)
Delayed customer billings 11,211 - 16,778
Natural gas stored underground at LIFO cost 56,157 117,182 51,853
Propane gas at FIFO cost 15,808 17,132 12,473
Materials, supplies, and merchandise at avg. cost 4,794 3,995 4,305
Derivative instrument assets 6,225 10,838 11,350
Deferred income taxes 5,579 7,631 6,332
Prepayments and other 6,744 4,881 5,858
-------------- -------------- --------------
Total Current Assets 190,765 246,097 191,656
-------------- -------------- --------------
Deferred Charges:
Prepaid pension cost 102,463 109,445 110,662
Regulatory assets 102,200 103,807 72,266
Other 8,167 4,515 4,272
-------------- -------------- --------------
Total Deferred Charges 212,830 217,767 187,200
-------------- -------------- --------------
Total Assets $1,072,943 $1,113,009 $1,017,516
============== ============== ==============
See notes to financial statements.
|
LACLEDE GAS COMPANY
BALANCE SHEETS (Continued)
(UNAUDITED)
June 30, Sept. 30, June 30,
2004 2003 2003
---- ---- ----
(Thousands, except share amounts)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock and Paid-in capital (100 shares issued and
outstanding) $ 135,090 $ 82,579 $ 82,580
Retained earnings 210,032 189,507 201,122
Accumulated other comprehensive loss (582) (582) (339)
-------------- -------------- --------------
Total common stock equity 344,540 271,504 283,363
Redeemable preferred stock (less current sinking fund
requirements) 1,108 1,258 1,258
Long-term debt (less current portion) 333,911 259,625 259,607
-------------- -------------- --------------
Total Capitalization 679,559 532,387 544,228
-------------- -------------- --------------
Current Liabilities:
Notes payable 3,625 218,200 128,860
Notes payable - associated companies - 11,540 15,003
Accounts payable 55,393 41,938 42,498
Accounts payable - associated companies 1,321 10,303 8,748
Advance customer billings - 15,361 -
Current portion of long-term debt and preferred stock 25,145 - -
Taxes accrued 26,397 16,287 27,718
Unamortized purchased gas adjustment 1,149 5,865 1,898
Other 39,266 34,344 30,226
-------------- -------------- --------------
Total Current Liabilities 152,296 353,838 254,951
-------------- -------------- --------------
Deferred Credits and Other Liabilities:
Deferred income taxes 192,003 177,957 154,809
Unamortized investment tax credits 5,087 5,316 5,394
Pension and postretirement benefit costs 21,164 20,973 20,489
Regulatory liabilities 927 582 16,137
Other 21,907 21,956 21,508
-------------- -------------- --------------
Total Deferred Credits and Other Liabilities 241,088 226,784 218,337
-------------- -------------- --------------
Total Capitalization and Liabilities $1,072,943 $1,113,009 $1,017,516
============== ============== ==============
See notes to financial statements.
|
LACLEDE GAS COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30,
-------------------------------
2004 2003
---- ----
(Thousands)
Operating Activities:
Net Income $ 40,621 $ 39,549
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 17,118 16,382
Deferred income taxes and investment
tax credits 10,567 4,794
Other - net 368 618
Changes in assets and liabilities:
Accounts receivable - net (624) (19,381)
Unamortized purchased gas adjustments (4,716) (21,078)
Deferred purchased gas costs 12,321 6,278
Delayed customer billings - net (26,572) (41,610)
Accounts payable 4,473 20,408
Taxes accrued 10,110 18,223
Natural gas stored underground 61,025 25,234
Other assets and liabilities 7,148 4,597
------------- ------------
Net cash provided by operating activities $ 131,839 $ 54,014
------------- ------------
Investing Activities:
Construction expenditures (36,597) (34,670)
Employee benefit trusts (2,041) (151)
Other investments 1,037 395
------------- ------------
Net cash used in investing activities $ (37,601) $(34,426)
------------- ------------
Financing Activities:
Issuance of first mortgage bonds 150,000 -
Maturity/Redemption of first mortgage bonds (50,000) (25,000)
Issuance (Repayment) of short-term debt - net (226,115) 24,993
Dividends paid (19,357) (19,104)
Paid-in capital contribution from Laclede Group 52,511 -
Preferred stock reacquired (5) (8)
Other (2,087) -
------------- ------------
Net cash used in financing activities $ (95,053) $(19,119)
------------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents (815) $ 469
Cash and Cash Equivalents at Beginning of Period 2,907 1,317
------------- ------------
Cash and Cash Equivalents at End of Period $ 2,092 $ 1,786
============= ============
Supplemental Disclosure of Cash Paid (Refunded)
During the Period for:
Interest $ 19,222 $ 20,301
Income taxes 2,799 (4,299)
See notes to financial statements.
|
LACLEDE GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These notes are an integral part of the accompanying financial statements of Laclede Gas Company (Laclede Gas or the Utility). In the opinion of Laclede Gas, this interim report includes all adjustments (consisting of only normal recurring accruals) necessary for the fair presentation of the results of operations for the periods presented. Certain prior-period amounts have been reclassified to conform to current-period presentation. This Form 10-Q should be read in conjunction with the Notes to Financial Statements contained in Laclede Gas' Fiscal Year 2003 Form 10-K.
Laclede Gas is a regulated natural gas distribution utility having a material seasonal cycle. As a result, these interim statements of income for Laclede Gas are not necessarily indicative of annual results or representative of the succeeding quarter of the fiscal year. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the November through April period, which generally corresponds with the heating season. The Utility typically experiences losses during the non-heating season.
REVENUE RECOGNITION - Laclede Gas reads meters and bills its customers on a monthly cycle billing basis. The Utility records its regulated gas distribution revenues from gas sales and transportation service on an accrual basis that includes estimated amounts for gas delivered, but not yet billed. The accruals for unbilled revenues are reversed in the subsequent accounting period when meters are actually read and customers are billed. The amount of accrued unbilled revenue at June 30, 2004 and 2003, for the Utility, was $7.1 million and $6.5 million, respectively. After accrual of related gas cost expense, the accrued net pre-tax revenues at June 30, 2004 and 2003 were $3.3 million and 2.7 million, respectively. The amount of accrued unbilled revenue at September 30, 2003 was $8.9 million.
BASIS OF CONSOLIDATION - In compliance with generally accepted accounting principles, transactions between Laclede Gas and its affiliates as well as intercompany balances on Laclede Gas' balance sheet have not been eliminated from the Laclede Gas financial statements.
Laclede Gas provides administrative and general support to affiliates. All such costs, which are not material, are billed to the appropriate affiliates and are reflected in accounts receivable on Laclede Gas' Balance Sheet. Laclede Gas may also, on occasion, borrow funds from, or lend funds to, affiliated companies. At June 30, 2004, the Laclede Gas Balance Sheet reflected a total of $3.0 million of intercompany receivables and $1.3 million of intercompany payables.
NEW ACCOUNTING STANDARDS - Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised December 2003) (FIN 46R), "Consolidation of Variable Interest Entities," addresses consolidation of business enterprises of variable interest entities. Public entities shall apply this Interpretation to their interests in special purpose entities as of the first interim period ending after December 15, 2003. Application by public entities for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004. There was no effect on the financial position or results of operations of Laclede Gas upon adoption.
In December 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 132 (revised 2003) (SFAS No. 132(R)), "Employers' Disclosures about Pensions and Other Postretirement Benefits." The provisions of this Statement do not change the measurement and recognition provisions of SFAS No. 87, "Employers' Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132(R) replaces SFAS No. 132, and requires certain additional disclosures that became effective for fiscal years ending after and interim periods beginning after December 15, 2003. The required disclosures are included in Note 2 to the Financial Statements on page 6 of this report.
The Emerging Issues Task Force (EITF) deliberated Issue 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." The Issue was intended to address the meaning of other-than-temporary impairment and its application to certain investments held at cost. A consensus was reached regarding disclosure requirements concerning unrealized losses on available-for-sale debt and equity securities accounted for under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and SFAS No. 124, "Accounting for Certain Investments Held for Not-for-Profit Organizations." The guidance for evaluating whether an investment is other-than-temporarily impaired should be applied in reporting periods beginning after June 15, 2004. The disclosures are effective in annual financial statements for fiscal years ended after December 15, 2003, for investments accounted for under SFAS Nos. 115 and 124. For all other investments within the scope of this Issue, the disclosures are effective in annual
financial statements for fiscal years ending after June 15, 2004. Additional disclosures for cost method investments are effective for fiscal years ending after June 15, 2004. Laclede Gas is currently evaluating the effect of this pronouncement on its financial statements.
2. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Laclede Gas has non-contributory defined benefit, trusteed forms of pension plans covering substantially all employees over the age of twenty-one. Benefits are based on years of service and the employee's compensation during the last three years of employment.
The funding policy of Laclede Gas is to contribute an amount not less than the minimum required by government funding standards, nor more than the maximum deductible amount for federal income tax purposes. The Utility has contributed $.2 million to the pension funds during the nine months ended June 30, 2004, and expects to contribute a total of $.3 million during fiscal year 2004. Plan assets consist primarily of corporate and U.S. government obligations and indexed equity funds.
Pension cost amounted to $1.1 million for the quarter ended June 30, 2004 and $.3 million for the same quarter last year. Pension costs for the nine months ended June 30, 2004 were $3.4 million compared with $.8 million for the same period last year. These costs include amounts capitalized with construction activities.
The net periodic pension costs include the following components:
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Service cost - benefits earned $ 2,776 $ 2,265 $ 8,330 $ 6,795
during the period
Interest cost on projected
benefit obligation 4,058 4,150 12,173 12,450
Expected return on plan assets (5,625) (5,650) (16,874) (16,950)
Amortization of transition obligation - (59) - (177)
Amortization of prior service cost 331 348 993 1,044
Amortization of actuarial loss 951 334 2,852 1,003
Regulatory adjustment (1,368) (1,108) (4,105) (3,324)
----------------------- -----------------------
Net pension cost $ 1,123 $ 280 $ 3,369 $ 841
======================= =======================
|
Pursuant to the Missouri Public Service Commission's (MoPSC or Commission) order in Laclede Gas' 2002 rate case, the return on plan assets is based on market-related value of plan assets implemented prospectively over a four-year period. Unrecognized gains or losses are amortized only to the extent that such gain or loss exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. Also in the 2002 rate case, the Commission ordered that the recovery in rates for the Utility's qualified pension plans is based on the ERISA minimum contribution of zero effective October 1, 2002, and on the ERISA minimum contribution of zero plus $3.4 million annually effective July 1, 2003. The difference between this amount on a pro-rata basis and pension expense as calculated pursuant to the above and included in the Statements of Consolidated Income and Consolidated Comprehensive Income is deferred as a regulatory asset or liability.
Pursuant to the provisions of the Laclede Gas pension plans, pension obligations may be satisfied by lump sum cash payments. Pursuant to MoPSC order, lump sum payments are recognized as settlements (which can result in gains or losses) only if the total of such payments exceeds 100% of the sum of service and interest costs. No lump sum payments were recognized as settlements during the nine months ended June 30, 2004 or the nine months ended June 30, 2003.
Laclede Gas also provides certain life insurance benefits at retirement. Medical insurance is available after early retirement until age 65.
Missouri state law provides for the recovery in rates of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (OPEB), accrued costs provided that such costs are funded through an independent, external funding mechanism. Laclede Gas established the Voluntary Employees' Beneficiary Association (VEBA) and Rabbi trusts as its external funding mechanisms. VEBA and Rabbi trusts
assets consist primarily of money market securities and mutual funds invested in stocks and bonds. Laclede Gas has contributed $5.5 million to the plans during the nine months ended June 30, 2004, and expects to contribute a total of $7.4 million during fiscal 2004. The unrecognized transition obligation is being amortized over 20 years.
Postretirement benefit costs were $2.0 million in the quarter ended June 30, 2004 compared with $1.9 million in the quarter ended June 30, 2003. Postretirement benefit costs were $5.9 million for the nine months ended June 30, 2004 compared with $5.8 million for the nine months ended June 30, 2003. These costs include amounts capitalized with construction activities.
Net periodic postretirement benefit costs consisted of the following components:
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- ----------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Service cost - benefits earned
during the period $ 794 $ 690 $2,381 $2,069
Interest cost on accumulated
postretirement benefit obligation 801 916 2,402 2,746
Expected return on plan assets (209) (234) (627) (703)
Amortization of transition
obligation 264 316 794 950
Amortization of prior service cost (8) 82 (24) 246
Amortization of actuarial loss 174 103 523 311
Regulatory adjustment 165 75 494 226
---------------------- ----------------------
Net postretirement benefit cost $1,981 $1,948 $5,943 $5,845
====================== ======================
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Pursuant to the Commission's order in the Utility's 2002 rate case, the return on plan assets is based on market related value of plan assets implemented prospectively over a four-year period. Unrecognized gains and losses are amortized only to the extent that such gain or loss exceeds 10% of the greater of the accumulated postretirement benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. Also in the 2002 rate case, the Commission ordered that the recovery in rates for the postretirement benefit costs be based on the accounting methodology as ordered in the 1999 rate case. The difference between this amount and postretirement benefit expense as calculated pursuant to the above is deferred as a regulatory asset or liability.
2. INCOME TAXES
Net provision (benefit) for income taxes was as follows during the periods set forth below:
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Federal
Current $(7,195) $(2,875) $10,494 $15,105
Deferred 6,898 1,757 9,103 4,000
State and Local
Current (1,207) (39) 1,685 2,969
Deferred 1,141 330 1,464 794
----------------------- -----------------------
Total $ (363) $ (827) $22,746 $22,868
======================= =======================
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3. OTHER INCOME AND INCOME DEDUCTIONS - NET
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- ------------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Investment gains $ - $ - $1,947 $ -
Allowance for funds used during
construction (33) (26) (94) (77)
Other income 255 151 1,033 579
Other income deductions (211) (279) 402 300
--------------------- ------------------------
Other income and income
deductions - net $ 11 $(154) $3,288 $802
===================== ========================
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Laclede Gas recorded the receipt of proceeds totaling $1.9 million during the quarter ended March 31, 2004 related to its interest, as a policyholder, in the sale of a mutual insurance company. This represents an initial distribution relating to certain policies held by the Utility. Subsequent distributions, if any, are not expected to have a material impact on the consolidated financial position or results of operations of the Utility.
4. INFORMATION BY OPERATING SEGMENT
The Regulated Gas Distribution segment consists of the regulated operations of Laclede Gas. The Non-Regulated Other segment includes the retail sale of gas appliances. There are no material intersegment revenues.
Regulated
Gas Non-Regulated
(Thousands) Distribution Other Eliminations Consolidated
-------------------------------------------------------------------------------------------
Three Months Ended
June 30, 2004
-------------
Operating revenues $ 125,870 $ 643 $ - $ 126,513
Net income (Loss) (133) 18 - (115)
Total assets 1,071,350 1,593 - 1,072,943
Nine Months Ended
June 30, 2004
-------------
Operating revenues $ 784,118 $1,903 $ - $ 786,021
Net income 40,581 40 - 40,621
Total assets 1,071,350 1,593 - 1,072,943
Three Months Ended
June 30, 2003
-------------
Operating revenues $ 114,207 $ 622 $ - $ 114,829
Net income 39 14 - 53
Total assets 1,015,887 1,629 - 1,017,516
Nine Months Ended
June 30, 2003
-------------
Operating revenues $ 688,828 $1,925 $ - $ 690,753
Net income 39,517 32 - 39,549
Total assets 1,015,887 1,629 - 1,017,516
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6. COMMITMENTS AND CONTINGENCIES
Laclede Gas is subject to various environmental laws and regulations that, to date, have not materially affected its financial position and results of operations. As these laws, regulations, and their interpretation evolve, however, additional costs may be incurred.
With regard to a former manufactured gas plant site located in Shrewsbury, Missouri, Laclede Gas and state and federal environmental regulators have agreed upon certain actions and those actions are essentially complete. Laclede Gas currently estimates the overall costs of these actions will be approximately $2.4 million. As of June 30, 2004, Laclede Gas has paid or reserved for these actions. If regulators require additional actions or assert additional claims, Laclede Gas will incur additional costs.
Laclede Gas enrolled a second former manufactured gas plant site into the Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to minimize the scope and cost of site cleanup while maximizing possibilities for site development. This site is located in, and is presently owned by, the City of St. Louis, Missouri. The City of St. Louis has separately authorized a developer to prepare both a Remedial Action Plan (RAP), for submission to the VCP, and a site development plan. Laclede Gas has met with the developer to explore what role, if any, it might play in these efforts. Laclede Gas continues to evaluate other options as well, including, but not limited to, the submission of its own RAP to the VCP. Laclede Gas currently estimates that the cost of site investigations, agency oversight and related legal and engineering consulting may be approximately $650,000. Currently, Laclede Gas has paid or reserved for these actions. Laclede Gas has requested that other former site owners and operators share in these costs and one party has agreed to participate and has reimbursed Laclede Gas to date for $173,000. Laclede Gas anticipates additional reimbursement from this party. Laclede Gas plans to seek proportionate reimbursement of all costs relative to this site from other potentially responsible parties if practicable.
Laclede Gas has been advised that a third former manufactured gas plant site may require remediation. Laclede Gas does not, and for many years has not, owned this site. At this time it is not clear whether Laclede Gas will incur any costs in connection with environmental investigations or remediation at the site, and if it does incur any costs, what the amount of those costs would be.
Costs incurred are charged to expense or capitalized in accordance with generally accepted accounting principles. A predetermined level of expense is recovered through Laclede Gas' rates.
While the scope of future costs relative to the Shrewsbury site may not be significant, the scope of costs relative to the other sites is unknown and may be material. Laclede Gas has notified its insurers that it seeks reimbursement of its costs at these three manufactured gas plant sites. In response, the majority of insurers have reserved their rights. While some of the insurers have denied coverage, Laclede Gas continues to seek reimbursement from them. With regard to the Shrewsbury site, denials of coverage are not expected to have any material impact on the financial position and results of operations of Laclede Gas. With regard to the other two sites, since the scope of costs are unknown and may be significant, denials of coverage may have a material impact on the financial position and results of operations of Laclede Gas. Such costs, if incurred, have typically been subject to recovery in rates.
Laclede Gas is involved in other litigation, claims and investigations arising in the normal course of business. While the results of such litigation cannot be predicted with certainty, management, after discussion with counsel, believes that the final outcome will not have a material adverse effect on the financial position or results of operations of Laclede Gas.
On June 28, 2002, the Staff of the MoPSC filed its recommendation in a proceeding established to review Laclede Gas' gas costs for fiscal 2001. In its recommendation, the Staff proposed to disallow approximately $4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based Price Stabilization Program. This Program was discontinued at the end of the 2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in proceedings before the MoPSC, including a formal hearing that was held on this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved by Laclede Gas, and directed Laclede Gas to flow through such amount to its customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas appealed the MoPSC's decision to the Cole County Circuit Court. On October 10, 2003, the Circuit Court issued an order staying the MoPSC's decision requiring Laclede Gas to flow through the $4.9 million to its customers. Pursuant to the Stay Order, Laclede Gas is paying the $4.9 million into the Court's registry pending a final judicial determination of Laclede Gas' entitlement to such amounts. On November 5, 2003, the Circuit Court of Cole County, Missouri, issued its Order and Judgment vacating and setting aside the Commission's decision on the grounds that it was unlawful and not supported by competent and substantial evidence on the record. On December 5, 2003 the MoPSC appealed the Circuit Court's decision to the Missouri Court of Appeals for the Western District. Oral arguments are currently scheduled in the Missouri Court of Appeals for the Western
District for August 17, 2004. Laclede Gas continues to believe in the merit of its position and intends to vigorously assert its position in the appeal. To the extent that a final decision in the courts results in disallowance of the $4.9 million in pre-tax gains, it could have a material effect on the future financial position and results of operation of Laclede Gas.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This management's discussion analyzes the financial condition and results of operations of Laclede Gas Company (Laclede Gas or the Utility). It includes management's view of factors that affect its business, explanations of past financial results including changes in earnings and costs from the prior year periods, and their effects on overall financial condition and liquidity.
Certain matters discussed in this report, excluding historical information, include forward-looking statements. Certain words, such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "seek," and similar words and expressions identify forward-looking statements that involve uncertainties and risks. Future developments may not be in accordance with our expectations or beliefs and the effect of future developments may not be those anticipated. Among the factors that may cause results to differ materially from those contemplated in any forward-looking statement are:
o weather conditions and catastrophic events;
o economic, competitive, political and regulatory conditions;
o legislative, regulatory and judicial mandates and decisions, some of which
may be retroactive, including those affecting
o allowed rates of return
o incentive regulation
o industry structure
o purchased gas adjustment provisions
o rate design structure and implementation
o franchise renewals
o environmental or safety matters
o taxes
o accounting standards;
o the results of litigation;
o retention, ability to attract, ability to collect from and conservation
efforts of customers;
o capital and energy commodity market conditions including the ability to
obtain funds for necessary capital expenditures and the terms and
conditions imposed for obtaining sufficient gas supply; and
o discovery of material weakness in internal controls; and
o employee workforce issues.
Readers are urged to consider the risks, uncertainties and other factors that could affect our business as described in this report. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement in light of future events.
The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Utility's Financial Statements and the notes thereto.
LACLEDE GAS COMPANY
RESULTS OF OPERATIONS
Laclede Gas Company (Laclede Gas or the Utility) is regulated by the Missouri Public Service Commission (MoPSC) and serves the metropolitan St. Louis area and several other counties in eastern Missouri. Laclede Gas delivers natural gas to retail customers at rates, and in accordance with tariffs, authorized by the MoPSC. The Utility's earnings are primarily generated by the sale of heating energy, which was historically heavily influenced by the weather. As part of the 2002 rate case settlement, the Utility initiated, effective November 9, 2002, an innovative weather mitigation rate design that lessens the impact of weather volatility on Laclede Gas customers during cold winters and is expected to stabilize the Utility's earnings in the future by recovering fixed costs more evenly during the heating season. Mitigating the impact of weather fluctuations on Laclede Gas customers while improving the ability to recover its authorized distribution costs and return has been a fundamental component of the Laclede Gas strategy. The Utility's distribution costs are the essential, primarily fixed expenditures it must incur to operate and maintain a more than 15,000-mile natural gas distribution system and related storage facilities. In fiscal 2003, when the weather mitigation rate design first went into effect, the weather was essentially normal; therefore, its impact was minimal. However, it has shown its value during the first nine months of fiscal 2004, as the downward pressure on revenues and earnings has been significantly mitigated despite temperatures that were 13% warmer than normal. In addition, Laclede Gas is working to continually improve its ability to provide reliable natural gas service at a reasonable cost, while maintaining and building a secure and dependable infrastructure. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the November through April period, which generally corresponds with the heating season. The Utility typically experiences losses during the non-heating season. Due to the material seasonal cycle of Laclede Gas, the accompanying interim statements of income for Laclede Gas are not necessarily indicative of annual results or representative of the succeeding quarter of the fiscal year.
Laclede Gas recorded a loss of $.1 million for the quarter ended June 30, 2004 compared with net income that was essentially break-even during the same quarter last year. The slight variation was primarily attributable to increased operating costs and higher interest expense, largely offset by higher income from off-system sales and capacity release.
Regulated Operating Revenues and Operating Expenses
Laclede Gas passes on to Utility customers (subject to prudence review) increases and decreases in the wholesale cost of natural gas in accordance with its Purchased Gas Adjustment (PGA) clause. The volatility of the wholesale natural gas market results in fluctuations from period to period in the recorded levels of, among other items, revenues and natural gas cost expense. Nevertheless, increases and decreases in the cost of gas associated with system gas sales volumes have no direct effect on net revenues and net income.
Regulated operating revenues for the quarter ended June 30, 2004 were $125.9 million, or $11.7 million greater than the same period last year. The increase was primarily attributable to increased off-system sales revenues totaling $17.1 million. This factor was partially offset by lower PGA rates totaling $5.3 million and lower system gas sales levels resulting from warmer weather and other variations totaling $.1 million. Temperatures were 24% warmer than normal and 18% warmer than the same quarter last year. System therms sold and transported decreased by 7.2 million therms, or 5.3%, below the quarter ended June 30, 2003.
Regulated operating expenses for the quarter ended June 30, 2004 increased $10.5 million from the same quarter last year. Natural and propane gas expense increased $8.6 million above last year's level primarily attributable to increased off-system gas expense, partially offset by lower rates charged by our suppliers and lower volumes purchased for sendout. Other operation and maintenance expenses increased $1.3 million, or 4.2%, primarily due to a higher provision for uncollectible accounts, increased insurance premiums and higher wage rates, partially offset by lower group insurance charges. Taxes, other than income, increased $.5 million, or 4.0%, due to higher real estate and personal property taxes and other variations.
Interest Charges
The $1.0 million increase in interest charges was primarily due to higher interest on long-term debt due to the April 2004 issuance of $50 million of 5 1/2% First Mortgage Bonds and $100 million of 6% First Mortgage Bonds, partially offset by the early redemption in June 2004 of $50 million of 6 5/8% First Mortgage Bonds. This increase in interest in long-term debt was partially offset by reduced interest on short-term debt reflecting lower borrowings.
Laclede Gas' net income for the nine months ended June 30, 2004 was $40.6 million, compared with $39.5 million reported for the same period last year. The year-to-year improvement in net income of $1.1 million was primarily attributable to the following factors, quantified on a pre-tax basis.
Utility earnings increased primarily due to the following factors:
o non-operating income recorded this year increased $2.5 million primarily reflecting the receipt of proceeds totaling $1.9 million related to the Utility's interest, as a policyholder, in the sale of a mutual insurance company,
o the fully-implemented general rate increase effective November 9, 2002 totaling $.9 million, and;
o income from off-system sales and capacity release increased $1.4 million from the nine months ended June 30, 2003.
These factors were partially offset by pension costs that increased $1.6 million over the same period last year.
Regulated Operating Revenues and Operating Expenses
Regulated operating revenues for the nine months ended June 30, 2004 were $784.1 million, or $95.3 million greater than the same period last year. The increase was primarily attributable to higher PGA rates totaling approximately $90.3 million, increased off-system sales revenues totaling $41.1 million and, to a lesser extent, the effect of the general rate increase totaling $.9 million. These factors were partially offset by lower system gas sales levels resulting from warmer weather and other variations totaling $37.0 million. Temperatures were 13% warmer than normal and 14% warmer than last year. System therms sold and transported decreased by 80.5 million therms, or 8.6%, below the nine months ended June 30, 2003.
Regulated operating expenses for the nine months ended June 30, 2004 increased $96.6 million from the same period last year. Natural and propane gas expense increased $90.4 million above last year's level primarily attributable to higher rates charged by our suppliers and increased off-system gas expense, partially offset by lower volumes purchased for sendout. Other operation and maintenance expenses increased $2.3 million, or 2.3%, primarily due to increased pension costs, a higher provision for uncollectible accounts, and increased injuries and damages premiums, partially offset by lower group insurance charges and reduced maintenance charges. Taxes, other than income, increased $3.5 million, or 7.2%, primarily due to higher gross receipts taxes (related to the increased revenues).
Other Income and Income Deductions - Net
The $2.5 million increase in other income and income deductions - net was primarily attributable to the Utility's recognition this year of the receipt of proceeds totaling $1.9 million related to its interest, as a policyholder, in the sale of a mutual insurance company. This represents an initial distribution relating to certain policies held by the Utility. Subsequent distributions, if any, are not expected to have a material impact on the consolidated financial position or results of operations of the Utility.
Interest Charges
The $.2 million increase in interest charges was primarily due to higher interest on long-term debt due to the April 2004 issuance of $50 million of 5 1/2% First Mortgage Bonds and $100 million of 6% First Mortgage Bonds, partially offset by the early redemption in June 2004 of $50 million of 6 5/8% First Mortgage Bonds and the May 2003 maturity of $25 million of 6 1/4% First Mortgage Bonds. The higher interest on long-term debt was partially offset by lower short-term interest reflecting reduced borrowings.
The basic term of Laclede Gas' labor agreement with Locals 5-6 and 5-194 (the union) of the Paper, Allied-Industrial, Chemical & Energy Workers International Union (formerly known as the Oil, Chemical and Atomic Workers International Union) expires at midnight, July 31, 2004. An offer of settlement will be presented to the union for a vote on August 1, 2004.
Laclede Gas previously appealed the MoPSC's decision in its 1999 rate case relative to the calculation of its depreciation rates. The Circuit Court remanded the decision to the MoPSC based on inadequate findings of fact. The MoPSC upheld its previous order and Laclede Gas appealed this second order to the Circuit Court. In 2002, the Circuit Court ruled that the MoPSC's second order was lawful and reasonable, and Laclede Gas appealed the Circuit Court's decision to the Missouri Court of Appeals for the Western District. On March 4, 2003 the Court of Appeals issued an opinion remanding the decision to the MoPSC based on the MoPSC's failure to support and explain its decision with adequate findings of fact. In May 2003, the Court of Appeals rejected the MoPSC's request that the Court reconsider its opinion or transfer this matter to the Missouri Supreme Court. On March 29, 2004, the MoPSC Staff and Laclede Gas responded to a MoPSC order directing interested parties to submit new proposed findings of fact on this issue for its consideration. By Order dated May 4, 2004, the MoPSC determined that it was necessary to take additional evidence on this issue and subsequently scheduled evidentiary hearings for that purpose for late September 2004.
On June 28, 2002, the Staff of the MoPSC filed its recommendation in a proceeding established to review Laclede Gas' gas costs for fiscal 2001. In its recommendation, the Staff proposed to disallow approximately $4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based Price Stabilization Program. This Program was discontinued at the end of the 2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in proceedings before the MoPSC, including a formal hearing that was held on this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved by Laclede Gas, and directed Laclede Gas to flow through such amount to its customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas appealed the MoPSC's decision to the Cole County Circuit Court. On October 10, 2003, the Circuit Court issued an order staying the MoPSC's decision requiring Laclede Gas to flow through the $4.9 million to its customers. Pursuant to the Stay Order, Laclede Gas is paying the $4.9 million into the Court's registry pending a final judicial determination of Laclede Gas' entitlement to such amounts. On November 5, 2003, the Circuit Court of Cole County, Missouri, issued its Order and Judgment vacating and setting aside the Commission's decision on the grounds that it was unlawful and not supported by competent and substantial evidence on the record. On December 5, 2003 the MoPSC appealed the Circuit Court's decision to the Missouri Court of Appeals for the Western District. Oral arguments are currently scheduled in the Missouri Court of Appeals for the Western District for August 17, 2004. Laclede Gas continues to believe in the merit of its position and intends to vigorously assert its position in the appeal. To the extent that a final decision in the courts results in disallowance of the $4.9 million in pre-tax gains, it could have a material effect on the future financial position and results of operations of Laclede Gas.
On March 1, 2004, the Utility made an Infrastructure System Replacement Surcharge (ISRS) filing with the MoPSC that was designed to increase revenues by approximately $3.86 million annually. Such filing was made pursuant to a Missouri law, enacted in 2003, that allows gas utilities to adjust their rates up to twice a
year to recover certain facility-related expenditures that are made to comply with state and federal safety requirements or to relocate facilities in connection with public improvement projects. On March 12, 2004, the MoPSC suspended the proposed surcharge until June 29, 2004. On May 27, 2004 the Company and the Staff of the MoPSC filed a stipulation and agreement ("S&A") that provided for a $3.56 million annual surcharge effective June 10, 2004. On June 1, 2004 the MoPSC approved the S&A.
Our Discussion and Analysis of our financial condition, results of operations, liquidity and capital resources is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Generally accepted accounting principles require that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following represent the more significant items requiring the use of judgment and estimates in preparing our consolidated financial statements:
Allowances for doubtful accounts - Estimates of the collectibility of trade accounts receivable are based on historical trends, age of receivables, economic conditions, credit risk of specific customers, and other factors.
Employee benefits and postretirement obligations - Pension and postretirement obligations are calculated by actuarial consultants that utilize several statistical factors and other assumptions related to future events, such as discount rates, returns on plan assets, compensation increases, and mortality rates. The amount of expense recognized by the Utility is dependent on the regulatory treatment provided for such costs. Certain liabilities related to group medical benefits and workers' compensation claims, portions of which are self-insured and/or contain stop/loss coverage with third-party insurers to limit exposure, are established based on historical trends.
Laclede Gas accounts for its regulated operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." This statement sets forth the application of accounting principles generally accepted in the United States of America for those companies whose rates are established by or are subject to approval by an independent third-party regulator. The provisions of SFAS No. 71 require, among other things, that financial statements of a regulated enterprise reflect the actions of regulators, where appropriate. These actions may result in the recognition of revenues and expenses in time periods that are different than non-regulated enterprises. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses when those amounts are reflected in rates. Also, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for recovery of costs that are expected to be incurred in the future (regulatory liabilities). Management believes that the current regulatory environment supports the continued use of SFAS No. 71 and that all regulatory assets and liabilities are recoverable or refundable through the regulatory process. We believe the following represent the more significant items recorded through the application of SFAS No. 71:
The Utility's Purchased Gas Adjustment Clause (PGA) allows Laclede Gas to flow through to customers, subject to prudence review, the cost of purchased gas supplies, including the costs, cost reductions and related carrying costs associated with the Utility's use of natural gas financial instruments to hedge the purchase price of natural gas. The difference between actual costs incurred and costs recovered through the application of the PGA are recorded as regulatory assets and liabilities that are recovered or refunded in a subsequent period.
Laclede Gas records deferred tax liabilities and assets measured by enacted tax rates for the net tax effect of all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes. Changes in enacted tax rates, if any, and certain property basis differences will be reflected by entries to regulatory asset or liability
accounts for regulated companies, and will be reflected as income or loss for non-regulated companies. Also, pursuant to the direction of the MoPSC, Laclede Gas' provision for income tax expense for financial reporting purposes reflects an open-ended method of tax depreciation. This method is consistent with the regulatory treatment prescribed by the MoPSC to depreciate the Utility's assets.
For further discussion of significant accounting policies, see the Notes to the Financial Statements included in Laclede Gas' 10-K for the fiscal year ended September 30, 2003.
Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised December 2003) (FIN 46R), "Consolidation of Variable Interest Entities," addresses consolidation of business enterprises of variable interest entities. Public entities shall apply this Interpretation to their interests in special purpose entities as of the first interim period ending after December 15, 2003. Application by public entities for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004. There was no effect on the financial position or results of operations of Laclede Gas upon adoption.
In December 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 132 (revised 2003) (SFAS No. 132 (R)), "Employers' Disclosures about Pensions and Other Postretirement Benefits." The provisions of this Statement do not change the measurement and recognition provisions of SFAS No. 87, "Employers' Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132(R) replaces SFAS No. 132, and requires certain additional disclosures that became effective for fiscal years ending after and interim periods beginning after December 15, 2003. The required disclosures are included in Note 2 to the Financial Statements on page 6 of this report.
The Emerging Issues Task Force (EITF) deliberated Issue 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." The Issue was intended to address the meaning of other-than-temporary impairment and its application to certain investments held at cost. A consensus was reached regarding disclosure requirements concerning unrealized losses on available-for-sale debt and equity securities accounted for under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and SFAS No. 124, "Accounting for Certain Investments Held for Not-for-Profit Organizations." The guidance for evaluating whether an investment is other-than-temporarily impaired should be applied in reporting periods beginning after June 15, 2004. The disclosures are effective in annual financial statements for fiscal years ended after December 15, 2003, for investments accounted for under SFAS Nos. 115 and 124. For all other investments within the scope of this Issue, the disclosures are effective in annual financial statements for fiscal years ending after June 15, 2004. Additional disclosures for cost method investments are effective for fiscal years ending after June 15, 2004. Laclede Gas is currently evaluating the effect of this pronouncement on its financial statements.
FINANCIAL CONDITION
As of June 30, 2004, credit ratings for outstanding securities for Laclede Gas issues were as follows:
Type of Facility S&P Moody's Fitch ----------------------------------------------------------------------------- Laclede Gas First Mortgage Bonds A A3 A+ Laclede Gas Commercial Paper A-1 P-2 |
The Utility's ratings are investment grade, and the Utility believes that it has adequate access to the financial markets to meet its capital requirements. These ratings remain subject to review and change by the rating agencies.
Laclede Gas' short-term borrowing requirements typically peak during colder months when Laclede Gas borrows money to cover the gap between when it purchases its natural gas and when its customers pay for that gas. Changes in the wholesale cost of natural gas, variations in the timing of collections of gas cost under the Utility's PGA Clause, the seasonality of accounts receivable balances, and the utilization of storage gas inventories cause short-term cash requirements to vary during the year, and can cause significant variations in the Utility's cash provided by or used in operating activities.
Net cash provided by operating activities for the nine months ended June 30, 2004 was $131.8 million, a $77.8 million increase, compared with the same period last year. The increase in cash provided by operating activities was primarily attributable to changes in the cost of natural gas in storage and favorable variations in the timing of collections of gas cost under the PGA clause.
Net cash used in investing activities for the nine months ended June 30, 2004 was $37.6 million compared with $34.4 million for the nine months ended June 30, 2003. Cash used in investing activities primarily reflected Utility construction expenditures in both periods.
Net cash used in financing activities was $95.1 for the nine months ended June 30, 2004 compared with $19.1 million for the nine months ended June 30, 2003. The variation primarily reflects the repayment of short-term debt this year, partially offset by the issuance of additional long-term debt and paid-in capital contributions from Laclede Group.
Short-term cash requirements have traditionally been met through the sale of commercial paper supported by lines of credit with banks. Laclede Gas currently has lines of credit in place of up to $265 million, after the expiration of a seasonal line of $25 million on February 13, 2004. Laclede Gas' short-term borrowing during the quarter peaked at $191.7 million. Short-term borrowings outstanding at June 30, 2004 were $3.6 million at a weighted average interest rate of 1.6%. Based on short-term borrowings at June 30, 2004, a change in interest rates of 100 basis points would increase or decrease pre-tax earnings and cash flows by approximately $36,000 on an annual basis.
Most of Laclede Gas' lines of credit include a covenant limiting total debt, including short-term debt, to no more than 70% of total capitalization. On June 30, 2004, total debt was 51% of total capitalization.
At June 30, 2004, Laclede Gas had fixed-rate long-term debt totaling $360 million, including a current portion of $25 million scheduled to mature in November 2004. While these long-term debt issues are fixed-rate, they are subject to changes in fair value as market interest rates change. However, increases or decreases in fair value would impact earnings and cash flows only if Laclede Gas were to reacquire any of these issues in the open market prior to maturity.
Laclede Gas has on file a shelf registration on Form S-3. Of the $350 million of securities originally registered under this Form S-3, $120 million of debt securities remained registered and unissued as of June 30, 2004. On April 28, 2004, Laclede Gas sold $50 million principal amount of First Mortgage Bonds, 5 1/2% Series due May 1, 2019 and $100 million principal amount of First Mortgage Bonds, 6% Series due May 1, 2034. The net proceeds of $147.9 million from this sale were used to reduce short-term debt, to redeem at par $50 million principal amount of Laclede Gas' 6 5/8% First Mortgage Bonds on June 15, 2004, and for general corporate purposes. The proceeds will also be used to pay at maturity $25 million principal amount of Laclede Gas' 8 1/2% First Mortgage Bonds in November 2004.
Laclede Group has on file a shelf registration on Form S-3, which allows for the issuance of equity securities, other than preferred stock, and debt securities. Of the $500 million of securities originally registered under this S-3, $362.37 million remain registered and unissued as of June 30, 2004. The Company issued 1.725 million shares of common stock in May 2004. The proceeds from the sale of approximately $44.7 million were utilized to make a capital contribution to Laclede Gas. Laclede Gas used the contribution to reduce short-term borrowings and for general corporate purposes.
Utility construction expenditures were $36.6 million for the nine months ended June 30, 2004, compared with $34.7 million for the same period last year.
Capitalization at June 30, 2004, excluding current obligations of long-term debt and preferred stock, increased $147.2 million since September 30, 2003 as a result of the long-term debt issuance and capital contributions from Laclede Group. Capital consisted of 50.7% common stock equity, .2% preferred stock and 49.1% long-term debt.
It is management's view that the Company has adequate access to capital markets and will have sufficient capital resources, both internal and external, to meet anticipated capital requirements.
The seasonal nature of Laclede Gas' sales affects the comparison of certain balance sheet items at June 30, 2004 and at September 30, 2003, such as Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts Payable, Regulatory Assets and Liabilities, and Delayed and Advance Customer Billings. The Balance Sheet at June 30, 2003 is presented to facilitate comparison of these items with the corresponding interim period of the preceding fiscal year.
Laclede Gas adopted a risk management policy that provides for the purchase of natural gas financial instruments with the goal of managing price risk associated with purchasing natural gas on behalf of its customers. This policy prohibits speculation. Costs and cost reductions, including carrying costs, associated with the Utility's use of natural gas financial instruments are allowed to be passed on to the Utility's customers through the operation of its Purchased Gas Adjustment Clause, through which the MoPSC allows the Utility to recover gas supply costs. Accordingly, Laclede Gas does not expect any adverse earnings impact as a result of the use of these financial instruments. At June 30, 2004, the Utility held approximately 12.8 million MMBtu of futures contracts at an average price of $6.08 per MMBtu. Additionally, approximately 4.9 million MMBtu of other price risk mitigation was in place through the use of option-based strategies. These positions have various expiration dates, the longest of which extends through March 2005.
Laclede Gas is subject to various environmental laws and regulations that, to date, have not materially affected its financial position and results of operations. As these laws, regulations, and their interpretation evolve, however, additional costs may be incurred.
With regard to a former manufactured gas plant site located in Shrewsbury, Missouri, Laclede Gas and state and federal environmental regulators have agreed upon certain actions and those actions are essentially complete. Laclede Gas currently estimates the overall costs of these actions will be approximately $2.4 million. As of June 30, 2004, Laclede Gas has paid or reserved for these actions. If regulators require additional actions or assert additional claims, Laclede Gas will incur additional costs.
Laclede Gas enrolled a second former manufactured gas plant site into the Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to minimize the scope and cost of site cleanup while maximizing possibilities for site development. This site is located in, and is presently owned by, the City of St. Louis, Missouri. The City of St. Louis has separately authorized a developer to prepare both a Remedial Action Plan (RAP), for submission to the VCP, and a site development plan. Laclede Gas has met with the
developer to explore what role, if any, it might play in these efforts. Laclede Gas continues to evaluate other options as well, including, but not limited to, the submission of its own RAP to the VCP. Laclede Gas currently estimates that the cost of site investigations, agency oversight and related legal and engineering consulting may be approximately $650,000. Currently, Laclede Gas has paid or reserved for these actions. Laclede Gas has requested that other former site owners and operators share in these costs and one party has agreed to participate and has reimbursed Laclede Gas to date for $173,000. Laclede Gas anticipates additional reimbursement from this party. Laclede Gas plans to seek proportionate reimbursement of all costs relative to this site from other potentially responsible parties if practicable.
Laclede Gas has been advised that a third former manufactured gas plant site may require remediation. Laclede Gas does not, and for many years has not, owned this site. At this time it is not clear whether Laclede Gas will incur any costs in connection with environmental investigations or remediation at the site, and if it does incur any costs, what the amount of those costs would be.
Costs incurred are charged to expense or capitalized in accordance with generally accepted accounting principles. A predetermined level of expense is recovered through Laclede Gas' rates.
While the scope of future costs relative to the Shrewsbury site may not be significant, the scope of costs relative to the other sites is unknown and may be material. Laclede Gas has notified its insurers that it seeks reimbursement of its costs at these three manufactured gas plant sites. In response, the majority of insurers have reserved their rights. While some of the insurers have denied coverage, Laclede Gas continues to seek reimbursement from them. With regard to the Shrewsbury site, denials of coverage are not expected to have any material impact on the financial position and results of operations of Laclede Gas. With regard to the other two sites, since the scope of costs are unknown and may be significant, denials of coverage may have a material impact on the financial position and results of operations of Laclede Gas. Such costs, if incurred, have typically been subject to recovery in rates.
OFF-BALANCE SHEET ARRANGEMENTS
Laclede Gas has no off-balance sheet arrangements.