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 March 31, 2005
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
--- ---
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
--- ---
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
--- ---
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 April 29, 2005
---------- --------------------------- --------------
The Laclede Group, Inc. Common Stock ($1.00 Par Value) 21,113,155
Laclede Gas Company Common Stock ($1.00 Par Value) 10,031*
*100% owned by The Laclede Group, Inc.
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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.) 19-31
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Laclede Gas Company) Ex. 99.1, pp. 11-21
Item 3 Quantitative and Qualitative Disclosures About Market Risk 32
Item 4 Controls and Procedures 32
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 33
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 4 Submission of Matters to a Vote of Security Holders 33
Item 6 Exhibits 33
SIGNATURES - The Laclede Group, Inc. 34
SIGNATURES - Laclede Gas Company 35
INDEX TO EXHIBITS 36
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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, 2004.
Item 1. Financial Statements
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- ------------------------------
2005 2004 2005 2004
---- ---- ---- ----
Operating Revenues:
Regulated
Gas distribution $ 434,996 $ 396,898 $ 726,249 $ 658,248
Non-Regulated
Services 23,806 15,250 51,792 34,798
Gas marketing 116,607 61,480 234,786 112,463
Other 1,146 1,327 6,213 2,083
---------------------------- ------------------------------
Total Operating Revenues 576,555 474,955 1,019,040 807,592
---------------------------- ------------------------------
Operating Expenses:
Regulated
Natural and propane gas 321,228 288,284 527,652 463,559
Other operation expenses 34,675 32,808 65,600 62,291
Maintenance 4,680 4,641 8,894 9,070
Depreciation and amortization 5,667 5,711 10,972 11,369
Taxes, other than income taxes 26,477 24,897 42,300 39,729
---------------------------- ------------------------------
Total regulated operating expenses 392,727 356,341 655,418 586,018
Non-Regulated
Services 26,303 19,538 53,175 39,849
Gas marketing 113,705 59,813 229,491 110,101
Other 846 804 6,017 1,771
---------------------------- ------------------------------
Total Operating Expenses 533,581 436,496 944,101 737,739
---------------------------- ------------------------------
Operating Income 42,974 38,459 74,939 69,853
---------------------------- ------------------------------
Other Income and (Income Deductions) - Net (94) 1,931 1,480 3,390
---------------------------- ------------------------------
Interest Charges:
Interest on long-term debt 5,643 4,815 11,551 9,629
Interest on long-term debt to unconsolidated
affiliate trust 893 893 1,786 1,786
Other interest charges 1,318 999 2,288 2,084
---------------------------- ------------------------------
Total Interest Charges 7,854 6,707 15,625 13,499
---------------------------- ------------------------------
Income Before Income Taxes 35,026 33,683 60,794 59,744
Income Tax Expense 12,568 12,128 21,704 21,582
---------------------------- ------------------------------
Net Income 22,458 21,555 39,090 38,162
Dividends on Redeemable Preferred Stock -
Laclede Gas 15 15 30 31
---------------------------- ------------------------------
Net Income Applicable to Common Stock $ 22,443 $ 21,540 $ 39,060 $ 38,131
============================ ==============================
Average Number of Common Shares
Outstanding 21,060 19,167 21,038 19,142
Basic Earnings Per Share of Common Stock $1.07 $1.12 $1.86 $1.99
Diluted Earnings Per Share of Common Stock $1.06 $1.12 $1.85 $1.99
Dividends Declared Per Share of Common
Stock $.345 $.340 $.685 $.675
See notes to consolidated financial statements.
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THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
(Thousands)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2005 2004 2005 2004
---- ---- ---- ----
Net Income Applicable to Common Stock $ 22,443 $ 21,540 $ 39,060 $ 38,131
--------------------------- ---------------------------
Other Comprehensive Loss, Before Tax:
Net losses on cash flow hedging derivative
instruments:
Net hedging loss arising during period (3,938) (1,626) (3,182) (2,143)
Reclassification adjustment for (gains) losses
included in net income (439) 294 2,012 (943)
--------------------------- ---------------------------
Net unrealized losses on cash flow hedging
derivative instruments (4,377) (1,332) (1,170) (3,086)
--------------------------- ---------------------------
Other Comprehensive Loss, Before Tax (4,377) (1,332) (1,170) (3,086)
Income Tax Benefit Related to Items of Other
Comprehensive Loss (1,691) (515) (452) (1,192)
--------------------------- ---------------------------
Other Comprehensive Loss, Net of Tax (2,686) (817) (718) (1,894)
--------------------------- ---------------------------
Comprehensive Income $ 19,757 $ 20,723 $ 38,342 $ 36,237
=========================== ===========================
See notes to consolidated financial statements.
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THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Mar. 31, Sept. 30, Mar. 31,
2005 2004 2004
---- ---- ----
(Thousands)
ASSETS
Utility Plant $1,093,093 $1,070,522 $1,050,823
Less: Accumulated depreciation and amortization 431,568 423,647 416,767
-------------- -------------- -------------
Net Utility Plant 661,525 646,875 634,056
-------------- -------------- -------------
Goodwill 28,124 28,124 28,124
-------------- -------------- -------------
Other Property and Investments 47,865 46,082 45,805
-------------- -------------- -------------
Current Assets:
Cash and cash equivalents 17,812 13,854 25,173
Accounts receivable:
Gas Customers - billed and unbilled 148,776 76,223 127,261
Other 107,644 51,822 75,710
Allowances for doubtful accounts (11,309) (10,362) (8,117)
Delayed customer billings 26,867 - 36,141
Inventories:
Natural gas stored underground at LIFO cost 32,691 131,773 29,422
Propane gas at FIFO cost 19,982 15,808 12,914
Materials, supplies, and merchandise at avg. cost 4,874 4,714 4,686
Derivative instrument assets 9,048 16,857 7,841
Unamortized purchased gas adjustments 7,724 19,618 -
Deferred income taxes 6,897 1,321 5,694
Prepayments and other 13,032 16,008 7,375
-------------- -------------- -------------
Total Current Assets 384,038 337,636 324,100
-------------- -------------- -------------
Deferred Charges:
Prepaid pension cost 87,292 92,026 104,790
Regulatory assets 104,293 104,703 98,313
Other 7,037 9,849 9,389
-------------- -------------- -------------
Total Deferred Charges 198,622 206,578 212,492
-------------- -------------- -------------
Total Assets $1,320,174 $1,265,295 $1,244,577
============== ============== =============
See notes to consolidated financial statements.
6
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THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
Mar. 31, Sept. 30, Mar. 31,
2005 2004 2004
---- ---- ----
(Thousands, except share amounts)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (70,000,000 shares authorized, 21,082,442,
20,981,165 and 19,187,777 shares issued, respectively) $ 21,082 $ 20,981 $ 19,188
Paid-in capital 118,755 116,058 71,157
Retained earnings 245,121 220,483 236,814
Accumulated other comprehensive loss (2,325) (1,607) (1,974)
------------- -------------- -------------
Total common stock equity 382,633 355,915 325,185
Redeemable preferred stock (less current sinking fund
requirements) - Laclede Gas 948 1,108 1,108
Long-term debt to unconsolidated affiliate trust 46,400 46,400 46,400
Long-term debt (less current portion) - Laclede Gas 333,985 333,936 234,661
------------- -------------- -------------
Total Capitalization 763,966 737,359 607,354
------------- -------------- -------------
Current Liabilities:
Notes payable 86,230 71,380 191,415
Accounts payable 128,529 68,366 88,541
Advance customer billings - 23,620 -
Current portion of long-term debt and preferred stock 95 25,145 25,150
Wages and compensation accrued 15,727 15,596 14,558
Dividends payable 7,367 7,214 6,601
Customer deposits 11,220 10,661 7,799
Interest accrued 10,133 10,920 7,350
Taxes accrued 32,840 16,725 29,103
Unamortized purchased gas adjustment - - 1,458
Other 12,485 13,003 13,035
------------- -------------- -------------
Total Current Liabilities 304,626 262,630 385,010
------------- -------------- -------------
Deferred Credits and Other Liabilities:
Deferred income taxes 190,228 189,626 185,748
Unamortized investment tax credits 4,844 5,010 5,163
Pension and postretirement benefit costs 20,242 20,484 24,635
Regulatory liabilities 14,544 28,210 13,878
Other 21,724 21,976 22,789
------------- -------------- -------------
Total Deferred Credits and Other Liabilities 251,582 265,306 252,213
------------- -------------- -------------
Total Capitalization and Liabilities $1,320,174 $1,265,295 $1,244,577
============= ============== =============
See notes to consolidated financial statements.
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THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
Six Months Ended
March 31,
------------------------------------
2005 2004
---- ----
(Thousands)
Operating Activities:
Net Income $ 39,090 $ 38,162
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 12,684 13,174
Deferred income taxes and investment
tax credits (1,336) 2,506
Other - net 421 110
Changes in assets and liabilities:
Accounts receivable - net (127,428) (90,520)
Unamortized purchased gas adjustments 11,894 (4,407)
Deferred purchased gas costs (14,690) 26,911
Delayed customer billings - net (50,487) (51,502)
Accounts payable 60,163 22,540
Taxes accrued 16,115 15,892
Natural gas stored underground 99,082 87,809
Other assets and liabilities 8,962 19,984
---------------- ----------------
Net cash provided by operating activities $ 54,470 $ 80,659
---------------- ----------------
Investing Activities:
Construction expenditures (28,454) (25,133)
Net investment in trusts (1,149) (1,702)
Other investments 966 858
---------------- ----------------
Net cash used in investing activities $(28,637) $ (25,977)
---------------- ----------------
Financing Activities:
Maturity of first mortgage bonds (25,000) -
Issuance (repayment) of short-term debt - net 14,850 (26,785)
Dividends paid (14,312) (12,818)
Issuance of common stock 2,797 2,803
Preferred stock reacquired (210) -
---------------- ----------------
Net cash used in financing activities $(21,875) $ (36,800)
---------------- ----------------
Net Increase in Cash and Cash Equivalents $ 3,958 $ 17,882
Cash and Cash Equivalents at Beginning of Period 13,854 7,291
---------------- ----------------
Cash and Cash Equivalents at End of Period $ 17,812 $ 25,173
================ ================
Supplemental Disclosure of Cash Paid During the Period for:
Interest $ 16,021 $ 13,163
Income taxes 4,213 274
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 2004 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 quarters 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.
The consolidated financial statements include the accounts of
Laclede Group and its subsidiary companies. All subsidiaries are wholly
owned. Laclede Gas and other subsidiaries of Laclede Group may engage in
related party transactions during the ordinary course of business. All
significant intercompany balances have been eliminated from the consolidated
financial statements of Laclede Group except that certain intercompany
transactions with Laclede Gas are not eliminated in accordance with the
provisions of Statement of Financial Accounting Standard (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." Those types of
transactions include sales of natural gas from Laclede Gas to Laclede Energy
Resources, Inc. (LER), services performed by SM&P to locate and mark
underground facilities for Laclede Gas, sales of natural gas from LER to
Laclede Gas, and sales of propane by Laclede Pipeline Company to Laclede
Gas. These revenues are shown on the Intersegment revenues lines in the
table included in Note 7 under Regulated Gas Distribution, Non-Regulated
Services, Non-Regulated Gas Marketing, and Non-Regulated Other columns
respectively.
Investment in Unconsolidated Affiliate Trust -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. The sole assets of the Trust are debentures of
Laclede Group.
UTILITY PLANT, DEPRECIATION AND AMORTIZATION - In January 2005, the
Missouri Public Service Commission (MoPSC or Commission) issued an Order
effective January 21, 2005 in the Utility's 1999 rate case relative to the
calculation of its depreciation rates. In accordance with the provisions of
the Order, Laclede Gas increased certain of its depreciation rates effective
February 1, 2005 resulting in higher annual depreciation expense totaling
$2.3 million. That same Order also required that operating expenses related
to actual removal costs, which the Utility began expensing as incurred
during fiscal 2002 pursuant to a previous Commission Order, be reduced by
$2.3 million annually. As such, the Order had no immediate effect on income
or the recovery of depreciation expenses.
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 revenues at March
31, 2005 and 2004, for the Utility, were $26.2 million and $22.3 million,
respectively. After accrual of related gas cost expense, the accrued pre-tax
net revenues at March 31, 2005 and 2004 were $7.9 million and $6.9 million,
respectively. The amount of accrued unbilled revenue at September 30, 2004
was $8.8 million.
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
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 six months ended March 31, 2005, the Company granted
234,000 non-qualified stock options to employees at an exercise price of
$30.95 per share (none of these options were granted during the quarter
ended March 31, 2005). The stock options vest one-fourth each year for four
years after the date of the grant beginning November 4, 2005. 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 March 31, 2005 is presented below:
Weighted Average
Shares Exercise Price
------------ --------------------
Outstanding at December 31, 2004 616,000 $28.17
Granted - -
Exercised 24,125 $25.09
Forfeited - -
Outstanding at March 31, 2005 591,875 $28.29
Exercisable at March 31, 2005 89,875 $26.01
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Exercise prices of options outstanding at March 31, 2005 range from
$23.27 to $30.95. The weighted-average contractual life of these options is
8.8 years. The closing price of the Company's common stock was $29.20 at
March 31, 2005.
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 six months ended
March 31, 2005 is $6.73 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 Six Months Ended
March 31, March 31,
--------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
(Thousands, Except Per Share Amounts)
Net income applicable to
common stock, as reported $22,443 $ 21,540 $39,060 $ 38,131
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of tax effects 144 84 266 176
--------------------------- --------------------------
Pro forma net income applicable
to common stock $22,299 $ 21,456 $38,794 $ 37,955
=========================== ==========================
Earnings per share:
Basic - as reported $1.07 $1.12 $1.86 $1.99
Diluted - as reported $1.06 $1.12 $1.85 $1.99
Basic - pro forma $1.06 $1.12 $1.84 $1.98
Diluted - pro forma $1.06 $1.12 $1.84 $1.98
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The fair value of the options granted during the six months ended March 31, 2005 was estimated at the date of grant using a binomial option pricing model with the following assumptions:
Six Months Ended
March 31, 2005
---------------------
Risk free interest rate 4.10%
Expected dividend yield of stock 4.40%
Expected volatility of stock 25.00%
Expected life of option 96 months
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NEW ACCOUNTING STANDARDS - In November 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 151, "Inventory Costs." This Statement amends the
guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. The provisions of
this statement shall be effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The Company does not expect adoption of
this statement to have a material effect on the financial position or
results of operations of the Company.
In December 2004, the FASB issued SFAS No. 123 (revised 2004)
(123(R)), "Accounting for Stock-Based Compensation." This Statement is a
revision to SFAS No. 123, and establishes standards for the accounting for
transactions in which an entity obtains employee services in share-based
payment transactions. This Statement supersedes Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and its
related implementation guidance. The Company currently accounts for its
Equity Incentive Plan in accordance with APB Opinion No. 25, and provides
pro forma disclosures in the Notes to Consolidated Financial Statements
regarding the effect on net income and earnings as if compensation expense
had been determined based on the fair value recognition provisions of SFAS
No. 123. SFAS No. 123(R) was to be effective for public entities that do not
file as small business issuers as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005. However, in April
2005, the Securities and Exchange Commission (SEC) amended the compliance
date to allow companies to implement SFAS No. 123(R) at the beginning of
their next fiscal year. The Company is currently evaluating the provisions
of this Statement, which it plans to adopt effective October 1, 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets." This Statement is an amendment of APB Opinion No. 29,
"Accounting for Nonmonetary Transactions." The guidance in APB Opinion No.
29 is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. This statement
amends APB Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. The provisions of this Statement will be effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The Company does not expect adoption of this Statement to have a
material effect on the financial position or results of operations of the
Company.
In March 2005, the FASB issued Interpretation No. 47 (FIN 47),
"Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies
the manner in which uncertainties concerning the timing and method of
settlement of an asset retirement obligation, as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations," should be accounted for. This
Interpretation also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005. The Company is currently evaluating the provisions
of this Interpretation.
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 plans and the vesting of non-vested stock awards at the beginning of each respective period. For the quarter ended March 31, 2005, 234,000 shares attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive.
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
(Thousands, Except Per Share Amounts) 2005 2004 2005 2004
---- ---- ---- ----
Basic EPS:
Net Income Applicable to Common Stock $ 22,443 $ 21,540 $ 39,060 $ 38,131
Weighted-Average Shares Outstanding 21,060 19,167 21,038 19,142
Earnings Per Share of Common Stock $1.07 $1.12 $1.86 $1.99
Diluted EPS:
Net Income Applicable to Common Stock $ 22,443 $ 21,540 $ 39,060 $ 38,131
Weighted-Average Shares Outstanding 21,060 19,167 21,038 19,142
Dilutive Effect of Stock Options, Restricted Stock 36 30 36 27
------------------------ ------------------------
Weighted-Average Diluted Shares 21,096 19,197 21,074 19,169
======================== ========================
Earnings Per Share of Common Stock $1.06 $1.12 $1.85 $1.99
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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. Plan
assets consist primarily of corporate and U.S. government obligations and
pooled equity funds.
Pension costs for the quarters ending March 31, 2005 and 2004 were
$1.1 million. Pension costs for the six months ended March 31, 2005 were
$2.3 million compared with $2.2 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 Six Months Ended
March 31, March 31,
----------------------- ------------------------
(Thousands) 2005 2004 2005 2004
---- ---- ---- ----
Service cost - benefits earned
during the period $ 2,799 $ 2,777 $ 5,598 $ 5,554
Interest cost on projected
benefit obligation 3,994 4,058 7,988 8,115
Expected return on plan assets (5,291) (5,625) (10,582) (11,249)
Amortization of prior service cost 308 331 617 662
Amortization of actuarial loss 730 951 1,460 1,901
Regulatory adjustment (1,408) (1,368) (2,817) (2,737)
----------------------- ------------------------
Net pension cost $ 1,132 $ 1,124 $ 2,264 $ 2,246
======================= ========================
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Pursuant to the Commission's 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 gains or losses exceed 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 six months ended March 31, 2005 or the
six months ended March 31, 2004.
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.
Postretirement benefit costs for quarters ending March 31, 2005 and
2004 were $2.0 million. Postretirement benefit costs for the six months
ended March 31, 2005 and 2004 were $4.0 million. These costs include amounts
capitalized with construction activities.
Net periodic postretirement benefit costs consisted of the following components:
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ---------------------
(Thousands) 2005 2004 2005 2004
---- ---- ---- ----
Service cost - benefits earned
during the period $ 844 $ 794 $ 1,689 $ 1,587
Interest cost on accumulated
postretirement benefit obligation 826 801 1,652 1,601
Expected return on plan assets (318) (209) (637) (418)
Amortization of transition obligation 144 265 289 530
Amortization of prior service cost (8) (8) (16) (16)
Amortization of actuarial loss 217 174 434 349
Regulatory adjustment 295 164 590 329
------------------------ ---------------------
Net postretirement benefit cost $ 2,000 $ 1,981 $ 4,001 $ 3,962
======================== =====================
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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 gains or losses exceed 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, Laclede Energy Resources (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 March 31, 2005, LER's open positions were not material to Laclede Group's financial position or results of operations.
Settled and open futures positions were as follows at March 31, 2005:
Average
MMBtu Price per
Position Month (millions) MMBtu
-------------- ---------- -----
Settled net long and short futures positions April 2005 1.04 $6.17
Open short futures positions May 2005 1.16 $6.30
June 2005 .04 $6.57
July 2005 .13 $7.15
August 2005 .22 $6.87
September 2005 .04 $6.60
October 2005 .37 $6.88
December 2005 .20 $7.35
January 2006 .25 $7.26
February 2006 .04 $7.23
Open long futures positions May 2005 .04 $6.24
September 2005 .14 $5.05
October 2005 .30 $6.39
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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 $2.5 million of pre-tax net unrealized losses on cash flow hedging derivative instruments at March 31, 2005 will be reclassified into the Consolidated Statement of Income during fiscal 2005. The remainder, approximately $0.7 million pre-tax net unrealized losses, will be reclassified during fiscal 2006. The ineffective portions of these hedge instruments were not material 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 Six Months Ended
March 31, March 31,
----------------------- -------------------------
(Thousands) 2005 2004 2005 2004
---- ---- ---- ----
Federal
Current $10,969 $ 9,441 $19,795 $16,373
Deferred (291) 1,025 (1,221) 2,186
State and Local
Current 1,756 1,515 3,245 2,703
Deferred 134 147 (115) 320
----------------------- -------------------------
Total $12,568 $12,128 $21,704 $21,582
======================= =========================
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6. OTHER INCOME AND INCOME DEDUCTIONS - NET
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- ---------------------
(Thousands) 2005 2004 2005 2004
---- ---- ---- ----
Investment gains $ - $ 1,947 $ - $ 1,947
Allowance for funds used during construction (24) (29) (49) (61)
Other income 528 335 1,093 891
Other income deductions (598) (322) 436 613
----------------------- ---------------------
Other income and (income deductions) - net $ (94) $ 1,931 $ 1,480 $ 3,390
======================= =====================
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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 represented an initial distribution relating to certain policies held by the Utility. Subsequent distributions 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 underground facility locating industry 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 and, as such, SM&P's results are influenced by construction seasonality and trends. 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, 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." Those types of transactions include sales of natural gas from Laclede Gas to LER, services performed by SM&P to locate and mark underground facilities for Laclede Gas, sales of natural gas from LER to Laclede Gas, and sales of propane by Laclede Pipeline Company to Laclede Gas. These revenues are shown on the Intersegment revenues lines in the table under Regulated Gas Distribution, Non-Regulated Services, Non-Regulated Gas Marketing, and Non-Regulated Other columns respectively.
Non-
Regulated Non- Regulated Non-
Gas Regulated Gas Regulated
(Thousands) Distribution Services Marketing Other Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, 2005
--------------
Revenues from external
customers $ 426,583 $ 23,732 $ 110,807 $ 733 $ - $ 561,855
Intersegment revenues 8,413 74 5,800 413 - 14,700
------------------------------------------------------------------------------------
Total operating revenues 434,996 23,806 116,607 1,146 - 576,555
Net income (loss) applicable to
common stock 22,529 (2,062) 1,786 190 - 22,443
Total assets 1,195,499 54,693 55,969 42,684 (28,671) 1,320,174
Six Months Ended
March 31, 2005
--------------
Revenues from external
customers $ 714,880 $ 51,655 $ 220,805 $ 1,437 $ - $ 988,777
Intersegment revenues 11,369 137 13,981 4,776 - 30,263
------------------------------------------------------------------------------------
Total operating revenues 726,249 51,792 234,786 6,213 - 1,019,040
Net income (loss) applicable to
common stock 37,616 (1,919) 3,220 143 - 39,060
Total assets 1,195,499 54,693 55,969 42,684 (28,671) 1,320,174
Three Months Ended
March 31, 2004
--------------
Revenues from external
customers $ 396,465 $ 15,183 $ 56,023 $ 935 $ - $ 468,606
Intersegment revenues 433 67 5,457 392 - 6,349
------------------------------------------------------------------------------------
Total operating revenues 396,898 15,250 61,480 1,327 - 474,955
Net income (loss) applicable to
common stock 23,359 (3,173) 1,016 338 - 21,540
Total assets 1,137,824 48,456 40,946 36,699 (19,348) 1,244,577
Six Months Ended
March 31, 2004
--------------
Revenues from external
customers $ 657,007 $ 34,666 $ 102,503 $ 1,744 $ - $ 795,920
Intersegment revenues 1,241 132 9,960 339 - 11,672
------------------------------------------------------------------------------------
Total operating revenues 658,248 34,798 112,463 2,083 - 807,592
Net income (loss) applicable to
common stock 40,683 (4,198) 1,427 219 - 38,131
Total assets 1,137,824 48,456 40,946 36,699 (19,348) 1,244,577
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8. COMMITMENTS AND CONTINGENCIES
Laclede Gas owns and operates natural gas distribution,
transmission and storage facilities, the operations of which are subject to
various environmental laws, regulations and interpretations. While
environmental issues resulting from such operations arise in the ordinary
course of business, such issues have not materially affected the Company's
or Laclede Gas' financial position and results of operations. As
environmental laws, regulations, and their interpretations evolve, however,
Laclede Gas may be required to incur additional costs.
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 remedial 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 March 31, 2005,
Laclede Gas has paid or reserved for these actions. If regulators require
additional remedial 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. Laclede Gas
continues to evaluate options concerning this site, including, but not
limited to, the submission of its own Remedial Action Plan (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 $190,000. 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 to the extent practicable.
Laclede Gas has been advised that a third former manufactured gas
plant site may require remediation. Laclede Gas does not own, and for many
years has not owned, this site. At this time, it is not known whether
Laclede Gas will incur any costs in connection with environmental
investigations of or remediation at the site, and if it does incur any such
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 actions Laclede Gas has taken at the Shrewsbury site
pursuant to the current agreement with state and federal regulators may not
be significant, the scope of costs relative to future remedial actions
regulators may require at the Shrewsbury site and to the other sites is
unknown and may be material.
Laclede Gas has notified its insurers of past and future claims
associated with investigation of and remediation 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 pursue claims against them. With regard to costs incurred under
current agreement regarding the Shrewsbury site, denials of coverage are not
expected to have a material impact on the financial position and results of
operations of Laclede Gas or the Company. With regard to the other two sites
and with regard to any future actions that might be required at the
Shrewsbury site, 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 or the Company. Such
costs, if incurred, have typically been subject to recovery in rates.
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 Circuit Court of Cole County, Missouri.
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
customers. Pursuant to the Stay Order, Laclede Gas paid $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 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. On March 1, 2005, the Court of Appeals affirmed the
decision of the Cole County Circuit Court, finding that the plain language
of the Company's tariff permitted Laclede Gas to retain the pre-tax gains.
The Court of Appeals remanded the case to the Cole County Circuit Court,
with instructions to remand the case to the MoPSC for further proceedings
consistent with the Court of Appeals' opinion. The MoPSC did not file for
rehearing or an appeal of the Court of Appeals' opinion. On April 4, 2005,
the Cole County Circuit Court remitted to Laclede Gas the $4.9 million
previously paid into the Court's registry. On April 7, 2005, the Commission
issued its Order on Remand in which it reversed its April 29, 2003 decision
and directed that Laclede Gas be permitted to retain the $4.9 million
consistent with the Court of Appeals opinion. The Commission's Order on
Remand is now final and unappealable. The return of the pre-tax gains,
however, was previously recorded as income in the 2002 fiscal year, so the
decision will have no effect on the future financial position or results of
operations of the Company.
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, 966 joined this lawsuit within the opt-in deadline
established by the court. The substantial majority of the plaintiffs are
former employees. A limited number of individuals have attempted to opt-in
after the court's deadline, while simultaneously, a limited number of
plaintiffs have withdrawn from participation after having opted into the
lawsuit. 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 March 11, 2005, Laclede Gas Company signed a 15-year service
agreement with Cellnet Technology, Inc., to install and operate an automated
meter reading (AMR) system. Upon implementation, the Utility will pay
Cellnet monthly for successful billing reads. AMR is designed to eliminate
the need for Laclede, which has nearly 40 percent of its approximately
650,000 meters indoors, to gain physical access to meters in order to obtain
monthly meter readings. Under the terms of the agreement, Cellnet will
install and own the system as well as handle data collection, meter data
delivery, and network operation and maintenance services. Installation of
equipment on customer meters is scheduled to begin in July 2005 and will
take approximately two years to complete. The Cellnet AMR system employs a
wireless fixed network with read devices that will be attached to existing
Laclede Gas customer meters. Reads from each meter are transmitted to local
network receivers and transferred to Laclede's customer billing system,
resulting in the production of a timely, accurate bill.
Laclede Group had guarantees totaling $11 million for performance
and payment of certain wholesale gas supply purchases by Laclede Energy
Resources, Inc. (the Company's non-utility marketing affiliate), as of March
31, 2005.
SM&P has several operating leases, the aggregate annual cost of
which is approximately $6 million, consisting primarily of 12-month
operating leases, with renewal options, for vehicles used in its business.
Laclede Group has parental guarantees of certain of those vehicle leases and
anticipates that the maximum guarantees, including renewals and new leases,
will not exceed $20 million. 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
The Laclede Group, Inc.
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 or Commission) 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 primarily by the sale of heating energy, which historically has been heavily influenced by the weather. However, 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 stabilizes the Utility's earnings by recovering fixed costs more evenly during the heating season. The weather mitigation rate design minimizes the impact of weather volatility during the peak cold months of December through March and reduces the impact of weather volatility, to a lesser extent, during the months of November and April. 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 quarters 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 continues to include efforts to stabilize and improve the 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 continues to be 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 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. The Utility's income from off-system sales remains subject to fluctuations in market conditions. Some of the factors impacting the level of off-system sales include the availability and cost of its natural gas supply, the weather in the Utility's service area, and the weather in other markets. When Laclede Gas' service area experiences warmer-than-normal weather while other markets experience colder weather or supply constraints, some of the Utility's natural gas supply is available for off-system sales and there may be a demand for such supply in other markets.
Laclede Group continues to develop its non-regulated subsidiaries. SM&P is working to further the logical expansion of its geographic footprint into new markets, having already made notable gains by adding business in several key markets. LER continues to focus on growing its markets on a long-term and sustainable basis by providing both on-system Utility 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 is subject to fluctuations in market conditions.
Quarter Ended March 31, 2005
------------------------------------------
Overview - Net Income (Loss) by Operating Segment Quarter Ended
March 31,
-------------------------
(millions, after-tax) 2005 2004
---- ----
Regulated Gas Distribution $22.5 $23.4
Non-Regulated Services (2.1) (3.2)
Non-Regulated Gas Marketing 1.8 1.0
Non-Regulated Other .2 .3
---------- -----------
Net Income Applicable to Common Stock $22.4 $21.5
========== ===========
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Laclede Group's net income applicable to common stock was $22.4 million for the quarter ended March 31, 2005, compared with $21.5 million for the quarter ended March 31, 2004. Basic and diluted earnings per share were $1.07 and $1.06, respectively, for the quarter ended March 31, 2005, compared with basic and diluted earnings per share of $1.12 reported for the same quarter last year. The decrease in earnings per share was due to an increase in the number of average shares outstanding this year, primarily due to the sale of 1.725 million shares of common stock in May 2004. Variations in net income were primarily attributable to the factors described below.
Utility earnings decreased by $0.9 million for the quarter ended March 31, 2005 compared with the quarter ended March 31, 2004. The decrease in the Utility's earnings for the quarter was primarily attributable to the following factors, quantified on a pre-tax basis:
o non-operating income that decreased $1.9 million, primarily due to the
proceeds recorded during the quarter ended March 31, 2004 related to
the Company's interest, as a policyholder, in the sale of a mutual
insurance company totaling $1.9 million;
o higher interest charges totaling $1.1 million, primarily due to the
issuance of additional long-term debt;
o increases in operation and maintenance expenses of $1.0 million; and,
o a higher provision for uncollectible accounts totaling $0.9 million.
These factors were partially offset by:
o higher income this year from off-system sales and capacity release
totaling $2.5 million; and,
o the recovery of eligible costs incurred to build and maintain the
Utility's distribution system through the implementation of
Infrastructure System Replacement Surcharges effective June 10, 2004
and January 20, 2005 totaling $1.2 million.
SM&P recorded a loss of $2.1 million during the quarter ended March 31, 2005 compared with a loss for the same period last year totaling $3.2 million. SM&P's improved results were primarily due to the return of a substantial portion of business from two large customers and the attainment of additional business in both new and existing markets. SM&P's improvement over the same period last year was also attributable in part to charges recorded last year associated with the employment-related litigation described in Note 8 to the Consolidated Financial Statements.
LER's income increased $0.8 million primarily due to higher sales volumes.
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 income.
Regulated operating revenues for the quarter ended March 31, 2005 were $435.0 million, or $38.1 million greater than the same period last year. Temperatures experienced in the Utility's service area during the quarter were 10% warmer than normal and 3% warmer than the same period last year. Total therms sold and transported were 510.7 million, an increase of 2.7 million, or 0.5%, above the quarter ended March 31, 2004. The increase in regulated operating revenues was primarily attributable to the following factors:
Millions
-------------
Higher wholesale gas costs (passed on to Utility customers subject to
prudence review by the MoPSC) $ 29.4
Lower system sales volumes resulting from warmer weather and other variations (21.7)
Higher off-system sales volumes, reflecting more favorable market
conditions as described in greater detail in the Results of Operations 18.5
Higher prices charged for off-system sales 10.7
Partial-year effect of the Infrastructure System Replacement Surcharges (ISRS) 1.2
-------------
Total Variation $ 38.1
=============
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Regulated operating expenses for the quarter ended March 31, 2005 increased $36.4 million from the same quarter last year. Natural and propane gas expense increased $32.9 million from 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 $1.9 million, or 5.1%, primarily due to a higher provision for uncollectible accounts, increased insurance premiums and higher wage rates. These factors were partially offset by decreased distribution charges, lower pension costs and decreased group insurance charges. Taxes, other than income, increased $1.6 million, or 6.3%, primarily due to higher gross receipts taxes (reflecting increased revenues).
Non-Regulated Services Operating Revenues and Operating Expenses
Laclede Group's non-regulated services operating revenue for this quarter increased $8.6 million reflecting the return to SM&P of a substantial portion of business from two large customers and the attainment of additional business in both new and existing markets. The increase in non-regulated services operating expenses, totaling $6.8 million, was primarily attributable to charges associated with the new business, partially offset by charges recorded during the same quarter last year attributable to the employment-related litigation, described in Note 8 to the Consolidated Financial Statements on page 17 of this report. 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 and, as such SM&P's results are influenced by construction seasonality and trends.
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-regulated gas marketing operating revenues increased $55.1 million primarily due to increased sales volumes and higher sales prices by LER. The increase in non-regulated gas marketing operating expenses, totaling $53.9 million, was primarily associated with increased gas expense related to increased volumes purchased and higher prices.
Other Income and (Income Deductions) - Net
The $2.0 million decrease in other income and income deductions - net was primarily attributable to the Utility's recognition of the receipt of proceeds totaling $1.9 million related to its interest, as a policyholder, in the sale of a mutual insurance company during the quarter ended March 31, 2004.
Interest Charges
The $1.1 million increase in interest charges was primarily due to higher interest on long-term debt due to the April 2004 issuance of $50 million principal amount of 5 1/2% First Mortgage Bonds and $100 million principal amount of 6% First Mortgage Bonds, partially offset by the early redemption in June 2004 of $50 million principal amount of 6 5/8% First Mortgage Bonds and the November 2004 maturity of $25 million principal amount of 8 1/2% First Mortgage Bonds.
Income Taxes
The increase in income taxes was primarily attributable to higher pre-tax income.
Six Months Ended March 31, 2005
------------------------------------------
Overview - Net Income (Loss) by Operating Segment Six Months Ended
March 31,
-------------------------
(millions, after-tax) 2005 2004
---- ----
Regulated Gas Distribution $37.6 $40.7
Non-Regulated Services (1.9) (4.2)
Non-Regulated Gas Marketing 3.2 1.4
Non-Regulated Other .2 .2
---------- -----------
Net Income Applicable to Common Stock $39.1 $38.1
========== ===========
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Laclede Group's net income applicable to common stock was $39.1 million for the six months ended March 31, 2005, compared with $38.1 million for the six months ended March 31, 2004. Basic and diluted earnings per share were $1.86 and $1.85, respectively, for the six months ended March 31, 2005, compared with basic and diluted earnings per
share of $1.99 reported for the same period last year. The decrease in earnings per share was due to the aforementioned increase in the number of average shares outstanding this year. Variations in net income were primarily attributable to the factors described below.
Utility earnings decreased by $3.1 million for the six months ended March 31, 2005 compared with the same period last year. The decrease in the Utility's earnings for the six-month period were primarily attributable to the following factors, quantified on a pre-tax basis:
o higher interest charges totaling $2.1 million, primarily due to the
issuance of additional long-term debt;
o non-operating income that decreased $1.9 million, primarily due to the
proceeds recorded during the quarter ended March 31, 2004 related to
the Company's interest, as a policyholder, in the sale of a mutual
insurance company totaling $1.9 million;
o the net effect of lower system gas sales volumes totaling $1.8 million,
primarily due to an unseasonably warm weather pattern in November;
o increases in operation and maintenance expenses totaling $1.7 million;
and,
o a higher provision for uncollectible accounts totaling $1.4 million.
These factors were partially offset by:
o the recovery of eligible costs incurred to build and maintain the
Utility's distribution system through the implementation of
Infrastructure System Replacement Surcharges effective June 10, 2004
and January 20, 2005 totaling $2.1 million; and
o higher income this year from off-system sales and capacity release
totaling $1.2 million.
SM&P recorded a loss of $1.9 million during the six months ended March 31, 2005 compared with a loss for the same period last year totaling $4.2 million. SM&P's improved results were primarily due to the return of a substantial portion of business from two large customers and the attainment of additional business in both new and existing markets. SM&P's improvement over the same period last year was also attributable in part to charges recorded last year associated with the employment-related litigation described in Note 8 to the Consolidated Financial Statements.
LER's income increased $1.8 million primarily due to higher sales volumes and increased margins.
Regulated Operating Revenues and Operating Expenses
Regulated operating revenues for the six months ended March 31, 2005 were $726.2 million, or $68.0 million greater than the same period last year. Temperatures experienced in the Utility's service area during the six months ended March 31, 2005 were 12% warmer than normal and essentially equal to the same period last year. Total therms sold and transported were 834.3 million, a decrease of 27.8 million, or 3.2%, below the six months ended March 31, 2004. The increase in regulated operating revenues was primarily attributable to the following factors:
Millions
-------------
Higher wholesale gas costs (passed on to Utility customers subject to
prudence review by the MoPSC) $ 67.2
Lower system sales volumes resulting from warmer weather and other variations (25.0)
Higher prices charged for off-system sales 18.3
Higher off-system sales volumes, reflecting more favorable market
conditions as described in greater detail in the Results of Operations 5.4
Partial-year effect of the ISRS 2.1
-------------
Total Variation $ 68.0
=============
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Regulated operating expenses for the six months ended March 31, 2005 increased $69.4 million from the same period last year. Natural and propane gas expense increased $64.1 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 $3.1 million, or 4.4%, primarily due to a higher provision for uncollectible accounts, increased insurance premiums, and higher wage rates. These factors were partially offset by lower pension costs and decreased group insurance charges. Taxes, other than income, increased $2.6 million, or 6.5%, primarily due to higher gross receipts taxes (attributable to the increased revenues).
Non-Regulated Services Operating Revenues and Operating Expenses
Laclede Group's non-regulated services operating revenue for the six months ended March 31, 2005 increased $17.0 million primarily due to SM&P's attainment of new business in both new and existing markets. The increase in non-regulated services operating expenses totaling $13.3 million was primarily attributable to charges associated with the new business, partially offset by charges recorded during the same period last year 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 increased $122.3 million primarily due to higher volumes and increased sales prices by LER. The increase in non-regulated gas marketing operating expenses was primarily associated with increased gas expense related to higher volumes purchased and increased prices totaling $119.4 million.
Non-Regulated Other Operating Revenues and Operating Expenses
Non-regulated other operating revenues increased $4.1 million primarily due to higher sales levels recorded by Laclede Pipeline Company. Non-regulated other operating expenses increased $4.2 million primarily due to higher expenses associated with increased sales levels recorded by Laclede Pipeline Company.
Other Income and (Income Deductions) - Net
The $1.9 million decrease in other income and income deductions - net was primarily attributable to the Utility's recognition of the receipt of proceeds totaling $1.9 million related to its interest, as a policyholder, in the sale of a mutual insurance company last year.
Interest Charges
The $2.1 million increase in interest charges was primarily due to higher interest on long-term debt due to the April 2004 issuance of $50 million principal amount of 5 1/2% First Mortgage Bonds and $100 million principal amount of 6% First Mortgage Bonds, partially offset by the early redemption in June 2004 of $50 million principal amount of 6 5/8% First Mortgage Bonds and the November 2004 maturity of $25 million principal amount of 8 1/2% First Mortgage Bonds.
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 January 11, 2005, the Commission issued an Order ruling in favor of Laclede Gas on the depreciation issue. As a direct result of the Commission's Order ruling in favor of the Utility's position, Laclede Gas increased certain of its depreciation rates effective February 1, 2005 resulting in higher annual depreciation expense totaling $2.3 million, as it originally requested. That same Order also required that operating expenses related to actual removal costs, which the Utility began expensing as incurred during fiscal 2002 pursuant to a previous Commission Order, be reduced by $2.3 million annually. As such, there was no effect on net income, and the Commission's decision had no immediate effect on the Utility's recovery of depreciation expenses. However, the Utility expects that the Commission's confirmation of Laclede Gas' position on the proper method for calculating depreciation rates will result in increased cash flows from capital recovery in future rate cases.
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 Circuit Court of Cole County, Missouri. 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 customers. Pursuant to the Stay Order, Laclede Gas paid $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 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. On March 1, 2005, the Court of Appeals affirmed the decision of the Cole County Circuit Court, finding that the plain language of the Company's tariff permitted Laclede Gas to retain the pre-tax gains. The Court of Appeals remanded the case to the Cole County Circuit Court, with instructions to remand the case to the MoPSC for further proceedings consistent with the Court of Appeals' opinion. The MoPSC did not file for rehearing or an appeal of the Court of Appeals' opinion. On April 4, 2005, the Cole County Circuit Court remitted to Laclede Gas the $4.9 million previously paid into the Court's registry. On April 7, 2005, the Commission issued its Order on Remand in which it reversed its April 29, 2003 decision and directed that Laclede Gas be permitted to retain the $4.9 million consistent with the Court of Appeals opinion. The Commission's Order on Remand is now final and unappealable. The return of the pre-tax gains, however, was previously recorded as income in the 2002 fiscal year, so the decision will have no effect on the future financial position or results of operations of the Company.
Laclede Gas filed its first Infrastructure System Replacement Surcharge (ISRS) filing with the MoPSC on March 1, 2004 to increase revenues by approximately $3.86 million annually. The 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 June 1, 2004, the MoPSC approved a Stipulation and Agreement ("S&A") between Laclede Gas and the Staff of the Commission that provided for a $3.56 million annual surcharge effective June 10, 2004. Laclede Gas made its second ISRS filing on October 28, 2004 to increase revenues by approximately an additional $1.6 million annually. On January 4, 2005, the MoPSC approved a S&A between Laclede Gas and the Staff of the Commission that provided for a $1.42 million annual increase in ISRS revenues effective January 20, 2005. Laclede Gas made its third ISRS filing on April 4, 2005 to increase revenues by approximately an additional $1.3 million annually. The MoPSC has not yet acted on the Company's latest request.
On February 18, 2005, Laclede Gas filed tariff sheets with the MoPSC requesting a general rate increase of approximately $34 million. If granted, customers' bills would increase by an average of 4.1%. Although the filing requests an annual increase of $39.0 million, $5.0 million of that amount is already being billed to customers through the current ISRS, which would cease upon the effective date of new rate schedules approved by the MoPSC. The Company's filing also includes a proposal to modify the Company's gas supply incentive plan. On February 28, 2005, the MoPSC suspended implementation of the Company's proposed rates until January 2006. Historically, the MoPSC has not granted Laclede Gas' rate increase requests in full.
Our discussion and analysis of our financial condition, results of operations, liquidity and capital resources is based upon our consolidated 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 (PGA) Clause 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, 2004.
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs." This Statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. The provisions of this statement shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect adoption of this statement to have a material effect on the financial position or results of operations of the Company.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) (123(R)), "Accounting for Stock-Based Compensation." This Statement is a revision to SFAS No. 123, and establishes standards for the accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement supersedes Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. The Company currently accounts for its Equity Incentive Plan in accordance with APB Opinion No. 25, and provides pro forma disclosures in the Notes to Consolidated Financial Statements regarding the effect on net income and earnings as if compensation expense had been determined based on the fair value recognition provisions of SFAS No. 123. SFAS No. 123(R) was to be effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, in April 2005, the Securities and Exchange Commission (SEC) amended the compliance date to allow companies to implement SFAS No. 123(R) at the beginning of their next fiscal year. The Company is currently evaluating the provisions of this Statement, which it plans to adopt effective October 1, 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets." This Statement is an amendment of APB Opinion No. 29, "Accounting for Nonmonetary Transactions." The guidance in APB Opinion No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The provisions of this Statement will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect adoption of this Statement to have a material effect on the financial position or results of operations of the Company.
In March 2005, the FASB issued Interpretation No. 47 (FIN 47), "Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies the manner in which uncertainties concerning the timing and method of settlement of an asset retirement obligation, as used in SFAS No. 143, "Accounting for Asset Retirement Obligations," should be accounted for. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is currently evaluating the provisions of this Interpretation.
FINANCIAL CONDITION
As of March 31, 2005, 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 has investment grade ratings, and believes that it will have 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 six months ended March 31, 2005 was $54.5 million, a $26.2 million decrease, compared with the same period last year. The decrease in cash provided by operating activities was
primarily attributable to the net effects of changes in wholesale gas prices, increased sales volumes by LER and higher Utility off-system sales on accounts receivable, accounts payable, and deferred purchased gas costs.
Net cash used in investing activities for the six months ended March 31, 2005 was $28.6 million compared with $26.0 million for the six months ended March 31, 2004. Cash used in investing activities primarily reflected Utility construction expenditures in both periods.
Net cash used in financing activities was $21.9 million for the six months ended March 31, 2005 compared with $36.8 million for the six months ended March 31, 2004. The variation primarily reflects the issuance of additional short-term debt this year, partially offset by the November 2004 maturity of $25 million principal amount of 8 1/2% First Mortgage Bonds.
As indicated above, the Company's short-term borrowing requirements typically peak during colder months. These 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 $300 million, with $15 million expiring in April 2006 and $285 million expiring in September 2009. Short-term commercial paper borrowings outstanding at March 31, 2005 were $86.2 million at a weighted average interest rate of 2.8% per annum. Based on short-term borrowings at March 31, 2005, a change in interest rates of 100 basis points would increase or decrease Laclede Gas' pre-tax earnings and cash flows by approximately $.9 million on an annual basis.
Most of Laclede Gas' lines of credit include covenants limiting total debt, including short-term debt, to no more than 70% of total capitalization and requiring earnings before interest, taxes, depreciation and amortization (EBITDA) for a trailing twelve-month period to be at least 2.25 times interest expense. On March 31, 2005, total debt was 54% of total capitalization. For the twelve-months ending March 31, 2005, EBITDA was 3.4 times interest expense.
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 March 31, 2005. The original MoPSC authorization for issuing securities registered on this Form S-3 expired in September 2003. In response to an application filed by the Utility, the MoPSC extended this authorization to issue debt and equity securities and receive capital contributions through October 31, 2006. The remaining MoPSC authorization is $64.4 million, reflecting capital contributions that have been made by Laclede Group to Laclede Gas under this authority through March 2005. The amount, timing and type of additional financing to be issued under this shelf registration will depend on cash requirements and market conditions.
In April 2004, Laclede Gas issued $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 approximately $147.9 million from this issuance were used to repay short-term debt and to call at par the $50 million principal amount of 6 5/8% Series First Mortgage Bonds in June 2004. The proceeds were also used to pay at maturity $25 million principal amount of 8 1/2% First Mortgage Bonds in November 2004. At March 31, 2005, Laclede Gas had fixed-rate long-term debt totaling $335 million. 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 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, $362.4 million remain registered and unissued as of March 31, 2005. Laclede Group issued 1.725 million shares of common stock in May 2004 under this registration. The net proceeds of approximately $44.7 million from this sale were used to make a capital contribution to Laclede Gas. Laclede Gas used the contribution to reduce short-term borrowings and for general corporate purposes. The amount, timing and type of additional financing to be issued under this shelf registration will depend on cash requirements and market conditions.
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 obtained from U.S. Bank National Association, expiring in June 2005, to meet the 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 54% on March 31, 2005). This line has been used to provide letters of credit of $1.5 million on behalf of SM&P, which have not been drawn, and to provide for seasonal funding needs of the various subsidiaries from time to time. There were no borrowings under this line in the quarter ending March 31, 2005.
SM&P has several operating leases, the aggregate annual cost of which is approximately $6 million, consisting primarily of 12-month operating leases, with renewal options, for vehicles used in its business. Laclede Group has parental guarantees of certain of those vehicle leases and anticipates that the maximum guarantees, including renewals and new leases, will not exceed $20 million. No amounts have been recorded for these guarantees in the financial statements.
Laclede Group had guarantees totaling $11 million for performance and payment of certain wholesale gas supply purchases by LER, as of March 31, 2005.
Utility construction expenditures were $25.6 million for the six months ended March 31, 2005, compared with $24.7 million for the same period last year. Non-utility construction expenditures were $2.8 million for the six months ended March 31, 2005, compared with $0.4 million for the same period last year.
Consolidated capitalization at March 31, 2005, excluding current obligations of preferred stock, consisted of 50.1% Laclede Group common stock equity, 0.1% Laclede Gas preferred stock equity, 6.1% long-term debt to unconsolidated affiliate trust and 43.7% 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 March 31, 2005 and at September 30, 2004, 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 March 31, 2004 is presented to facilitate comparison of these items with the corresponding interim period of the preceding fiscal year.
As of March 31, 2005, Laclede Group had contractual obligations with payments due as summarized below (in millions):
Payments due by period
------------------------------------------------------------
Remaining Fiscal Fiscal Fiscal Years
Fiscal Year Years Years 2010 and
Contractual Obligations Total 2005 2006-2007 2008-2009 thereafter
----------------------------------------------------------------------------------------------------------------
Long-Term Debt (a) $ 837.7 $ 13.1 $ 88.9 $ 80.9 $654.8
Capital Leases - - - - -
Operating Leases (b) 18.6 5.1 7.1 4.0 2.4
Purchase Obligations - Natural Gas (c) 433.9 282.4 138.3 6.9 6.3
Purchase Obligations - Other (d) 130.0 4.1 16.3 18.4 91.2
Other Long-Term Liabilities - - - - -
-------------------------------------------------------------------------
Total (e) $1,420.2 $304.7 $250.6 $110.2 $754.7
=========================================================================
(a) Long-term debt obligations reflect principal maturities and
interest payments.
(b) Operating lease obligations are primarily for office space,
vehicles, and power operated equipment in the gas distribution and
non-regulated services segments. Additional payments will be
incurred if renewal options are exercised under the provisions of
certain agreements.
(c) These purchase obligations represent the minimum payments required
under existing natural gas transportation and storage contracts and
natural gas supply agreements in the utility gas distribution and
non-regulated gas marketing segments. These amounts reflect fixed
obligations as well as obligations to purchase natural gas at
future market prices, calculated using March 31, 2005 NYMEX futures
prices. Laclede Gas recovers the costs related to its purchases,
transportation, and storage of natural gas through the operation of
its Purchased Gas Adjustment Clause, subject to prudence review;
however, variations in the timing of collections of gas costs from
customers affect short-term cash requirements. Additional
contractual commitments may be entered into during the heating
season.
29
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(d) These purchase obligations reflect miscellaneous agreements for the
purchase of materials and the procurement of services necessary for
normal operations.
(e) Commitments related to pension and postretirement benefit plans
have been excluded from the table above. The Company does not
expect to make any contributions to its qualified, trusteed pension
plans in fiscal 2005. It anticipates Laclede Gas will make a $0.1
million contribution relative to its non-qualified pension plans
during the remainder of fiscal 2005. With regard to the
postretirement benefits, the Company anticipates Laclede Gas will
contribute $3.8 million to the qualified trusts and $0.2 million
directly to participants from Laclede Gas' funds during the rest of
fiscal 2005. For further discussion of the Company's pension and
postretirement benefit plans, refer to Note 3, Pensions and Other
PostRetirement Benefits, of the Notes to Consolidated Financial
Statements.
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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 March 31, 2005, the Utility held approximately 5.9 million MMBtu of futures contracts at an average price of $7.68 per MMBtu. Additionally, approximately 9.5 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 2006.
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 March 31, 2005, LER's open positions were not material to Laclede Group's financial position or results of operations.
Laclede Gas owns and operates natural gas distribution, transmission and storage facilities, the operations of which are subject to various environmental laws, regulations and interpretations. While environmental issues resulting from such operations arise in the ordinary course of business, such issues have not materially affected the Company's or Laclede Gas' financial position and results of operations. As environmental laws, regulations, and their interpretations evolve, however, Laclede Gas may be required to incur additional costs.
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 remedial 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 March 31, 2005, Laclede Gas has paid or reserved for these actions. If regulators require additional remedial 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. Laclede Gas continues to evaluate options concerning this site, including, but not limited to, the submission of its own Remedial Action Plan (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 $190,000. 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 to the extent practicable.
Laclede Gas has been advised that a third former manufactured gas plant site may require remediation. Laclede Gas does not own, and for many years has not owned, this site. At this time, it is not known whether Laclede Gas will incur any costs in connection with environmental investigations of or remediation at the site, and if it does incur any such 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 actions Laclede Gas has taken at the Shrewsbury site pursuant to the current agreement with state and federal regulators may not be significant, the scope of costs relative to future remedial actions regulators may require at the Shrewsbury site and to the other sites is unknown and may be material.
Laclede Gas has notified its insurers of past and future claims associated with investigation of and remediation 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 pursue claims against them. With regard to costs incurred under current agreement regarding the Shrewsbury site, denials of coverage are not expected to have a material impact on the financial position and results of operations of Laclede Gas or the Company. With regard to the other two sites and with regard to any future actions that might be required at the Shrewsbury site, 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 or the Company. 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 30 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 second fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal 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 16. For a description of SM&P's employment-related litigation, 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
In January 2005, the Board of Directors of Laclede Gas desired to sell shares to its sole shareholder, Laclede Group, at a price per share equal to book value. However, Laclede Gas is prohibited from issuing fractional shares, so the Board first authorized a stock dividend of ninety-nine shares of its common stock, par value $1.00 per share, on each outstanding share of its common stock to be paid on January 21, 2005 to increase its outstanding shares from 100 to 10,000. The retroactive effect of this stock dividend has been presented in the Balance Sheet. As such, $9,900 was transferred to common stock and paid-in capital from retained earnings, representing the aggregate par value of the shares issued under the stock dividend. All references to the number of shares have been restated from 100 shares to 10,000 shares to give retroactive effect to the stock dividend for all periods presented.
The Board also approved, subsequent to the stock dividend, the sale of 31 shares of Laclede Gas common stock to Laclede Group at a price per share equal to the book value at December 31, 2004, as adjusted for the effect of the stock dividend described above. The proceeds from the sale, totaling approximately $1.1 million, were used to reduce short-term borrowings. Exemption from registration was claimed under Section 4(2) of the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders:
The annual meeting of shareholders of The Laclede Group was held on January 27, 2005, for the purpose of electing three directors to the board of directors and ratifying the appointment of independent auditors. Management's three nominees for directors listed in the proxy statement were unopposed and were elected upon the following votes:
DIRECTOR NOMINEE FOR WITHHELD ---------------- ---- -------- Edward L. Glotzbach 17,293,859 234,080 W. Stephen Maritz 17,298,940 228,999 John P. Stupp, Jr. 17,319,551 208,388 |
The proposal to ratify the appointment of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, to audit the accounts of the Company for the fiscal year ending September 30, 2005 was passed upon the following vote:
FOR AGAINST ABSTAIN
--- ------- -------
17,310,919 127,241 89,779
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Item 6. Exhibits
(a) See Exhibit Index
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: April 26, 2005 Barry C. Cooper
--------------------- Chief Financial Officer
(Authorized Signatory and
Chief Financial Officer)
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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: April 26, 2005 Barry C. Cooper
--------------------- Chief Financial Officer
(Authorized Signatory and
Chief Financial Officer)
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Exhibit
No.
-------
10.1 - Automated Meter Reading Services Agreement executed March 11,
2005. Confidential portions of this exhibit have been omitted
and filed separately with the SEC pursuant to a request for
confidential treatment.
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.
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Exhibit 10.1
AUTOMATED METER READING SERVICES AGREEMENT
This Automated Meter Reading Services Agreement ("Agreement") is entered into this 11th day of March, 2005, and is by and between Cellnet Technology, Inc., a Delaware corporation ("Cellnet"), and Laclede Gas Company, a Missouri corporation ("Laclede"). All capitalized terms not otherwise defined herein have the respective meaning set forth in Appendix A hereto.
RECITALS
WHEREAS, Laclede desires to introduce new automated gas meter reading, data acquisition and data management services to its service area that efficiently provide accurate information for billing, distribution, operations, customer care and customer marketing purposes;
WHEREAS, Laclede has selected a radio frequency fixed network application as the system that can best provide basic services while permitting maximum flexibility of information for expansion into other functional uses;
WHEREAS, Laclede desires Cellnet to establish, where it has not already been established, and maintain a Fixed Network consisting of MIUs installed on Laclede Gas Meters, MCC sites on towers and/or other appropriate structures, the network operations center ("NOC"), the communication link between the MCCs and the NOC, all other equipment necessary for Cellnet to provide automated gas meter reading, data acquisition and data management services to Laclede and the operation, care and maintenance of all installed equipment;
WHEREAS, Laclede desires for Cellnet to provide all of the equipment and labor and take all of the actions necessary to perform automated reads of Laclede Gas Meters within St. Louis City, St. Louis County and St. Charles County and selected portions of other counties in Laclede's service area as set forth on Exhibit 1 (collectively, "Fixed Network Area") and to make available such readings to Laclede (i.e., Laclede desires to acquire from Cellnet turnkey meter readings) and for Cellnet to provide data acquisition and management services; and
WHEREAS, Cellnet has the expertise, experience and skill to provide such turnkey automated meter reading, data acquisition and data management services and desires to provide the same to Laclede on the terms and conditions set forth herein.
NOW, THEREFORE, the Parties agree as follows:
ARTICLE 1
INITIAL FIXED NETWORK DEPLOYMENT PHASE
Based on the results of the study, Cellnet will provide, install and maintain all equipment, supplies and services necessary to establish and operate the Fixed Network that collects automated daily meter reads and provides meter readings in accordance with this Agreement. Cellnet shall provide, and install new, or enable existing, Fixed Network infrastructure required to support the Fixed Network Area, including, without limitation, software, hardware and peripherals for the NOC. Additionally, Cellnet shall establish Laclede as a customer in Cellnet's data management network.
(i) Work environment;
(ii) Safety;
(iii) Degree and sophistication of automation; and
(iv) Quality control.
Cellnet shall investigate any such concerns, and (1) explain why the issue is not reasonably likely, in Cellnet's reasonable discretion, to have a material adverse impact on the AMR Services, or (2) provide a reasonable plan and timeline to address these concerns or issues in a manner reasonably acceptable to Parties.
(i) Project Management;
(ii) Integration Support Services
(iii) Data Acquisition and Delivery;
(iv) Operations and Maintenance;
(v) Customer Service;
(vi) Technology; and
(vii) Data Center Operations.
At any time during the Initial Fixed Network Deployment Phase, Laclede may notify Cellnet in writing that Laclede has concerns regarding any of the foregoing areas, and
Cellnet shall investigate any such concerns, and (1) explain why the concerns are not reasonably likely, in Cellnet's reasonable discretion, to have a material adverse impact on the AMR Services, or (2) provide a reasonable plan and timeline to address these concerns in a manner reasonably acceptable to the Parties.
(i) Fixed Network reading does not correlate with visual index reading. This deviation will take into account rounding errors and time differences. Cellnet must correct programming errors on a MIU.
(ii) Fixed Network reading was not available through the network during the scheduled reading period. This failure takes into account MIUs that fail to communicate to the Fixed Network due to device problems.
(iii) MIU is found to be in an alarm state and the appropriate flag was not returned.
(iv) MIU is found to be sending inconsistent readings when other MIUs in the area are responding correctly.
(v) The meter installation data and the Laclede Gas Data transferred between Laclede and Cellnet shall be validated and consistent with the Standard Interface Specifications for use within the respective Parties' systems. In the event that the data is not in the correct format, the non-complying Party shall make the correction at its own expense.
ARTICLE 2
OBLIGATIONS OF THE PARTIES
(i) collect automated meter readings from Activated Meters within the Fixed Network Area; and
(ii) make available to Laclede, via the Cellnet Standard Interface, meter readings.
(i) MIUs installed on each Accessible Meter within the Fixed Network Area;
(ii) MCCs to be installed on structures, poles and/or towers;
(iii) The NOC to collect Fixed Network Data;
(iv) The disaster recovery NOC, which is described in
Section 2.2(g), shall be located in a separate
facility from the NOC as specified in Section
2.2(g); and
(v) The software to manage the Fixed Network Data.
If the MIU Installer is not able to
install a MIU on the second or
subsequent appointment made by Laclede,
then Laclede shall reimburse Cellnet for
its actual direct expenses without
mark-up for the visit, not to exceed
Twenty-Five Dollars ($25.00).
(B) During the Deployment Period, Cellnet shall, at no additional charge to Laclede, make MIUs available to Laclede's meter manufacturers in the manner described above in this Section for installation on new meters that Laclede will use to replace certain of the meters within its system that cannot be retrofitted with a MIU.
(C) In addition to the foregoing MIUs, Cellnet shall from time to time, upon the request of Laclede, make available to Laclede MIUs for installation by Laclede on meters that Laclede has removed from customers' premises and is reconditioning in preparation for re-installation at customers' premises. The MIUs described in Subsection (B) above and this Subsection (C) are included in the approximately 650,000 MIUs to be provided by Cellnet during the Deployment Period.
(D) Notwithstanding the foregoing, Cellnet is not required to provide a MIU to a manufacturer or to Laclede directly unless Cellnet has an integrated MIU available for the meter on which the MIU is to be installed. At no additional cost to Laclede, Cellnet and Laclede shall work together in good faith to develop a MIU for the National meters of the types listed on Exhibit 5-B in Laclede's meter population that Cellnet cannot currently retrofit with a MIU.
removal, Laclede shall provide any necessary training to Cellnet regarding device removal, including, without limitation, training regarding handling of wires and cables. After device removal, any attached wires and/or cables shall not be removed, but trimmed back to be unobtrusive. Any existing component on the exterior of the premise shall be left in place. One particular device, the American Meter TRACE unit, is both salvageable and redeployable. The MIU Installer will take reasonable care to return each TRACE device to Laclede in the same state it was in immediately prior to its removal. At Laclede's expense, Laclede will provide the proper containers and their transportation to and from the MIU Installer for packaging the returned devices. Any hazardous material component of the meter or module removed from the field by Cellnet or the MIU Installer during the installation of MIUs shall be deposited in a container provided by Laclede located at such MIU Installer's dock for proper disposal by Laclede.
maintaining or otherwise working with the MIUs. The training program shall consist of both classroom and field training on the procedures and documentation for the MIU installation. During the Term, Cellnet shall train, or cause the MIU Installer to be trained in all of the technical and procedural aspects of the installation of the MIUs, including the professional and courteous manner in which they shall conduct themselves with regard to Laclede's customers. Only individuals (including Laclede employees) who successfully complete the training program shall install, replace, repair, maintain or otherwise work with the MIUs. An audit program shall be implemented by Cellnet to evaluate fieldwork performed. At a minimum, the training program must address:
(A) Meter safety and personal protective
equipment issued to field personnel;
(B) Proper procedures for dealing with
Laclede's customers in the field;
(C) Meter configurations present in the
service territory;
(D) Meter reading;
(E) Use of handheld work order routing devices;
(F) Data to be recorded from each installation;
(G) How to handle dog encounters and attacks;
(H) Emergency procedures (gas leaks,
medical, etc.); and
(I) Recognizing and reporting obvious "theft
of service" cases.
Part 40 - Procedures for Transportation Workplace
Drug and Alcohol Testing Programs.
MIU Installer. Additionally, the vehicles used by such individuals shall display the MIU Installer's name and logo. If Laclede elects to have its name or logo displayed on the MIUs Installer's uniforms, identification badges and/or vehicles, and Cellnet consents to such proposal, such consent not to be unreasonably withheld or delayed, Laclede and Cellnet shall, at Laclede's sole cost and expense, work together to coordinate the same. In all events, the MIU Installer's uniforms, identification badges and vehicles shall not display Laclede's name or logo without Laclede's written consent.
activated. Cellnet shall not be required to provide manual readings for any meters on which Laclede instructed Cellnet not to install a MIU.
The information below marked by * and [] has been omitted pursuant to a request for confidential treatment. The omitted portion has been separately filed with the Commission.
(i) If Cellnet is not able to achieve the respective
required average monthly reliability percentages
for daily reads set forth in Section 2.2(b) above
for any month during the Term, then Cellnet shall
owe to Laclede a penalty (the "Daily Reliability
Penalty") equal to [***************] Dollars
($[******]) for each [********] percent
([***]%) or portion thereof that Cellnet is
below the applicable threshold. Furthermore, if
Cellnet is not able to achieve the required daily
minimum percentages set forth in Section 2.2(b)
above on any day during the Term, then Cellnet
shall owe to Laclede a penalty ("Minimum Daily
Reliability Penalty") equal to [************]
Dollars ($[*****]) for each [********] percent
([***]%) or portion thereof that Cellnet is
below the applicable minimum. For purposes of
calculating the Daily Reliability Penalty and the
Minimum Daily Reliability Penalty, only Activated
Meters on Routes that have been activated as
described in Section 2.1(g)(i) above for ninety
(90) days or more shall be considered. Anything
herein to the contrary notwithstanding, except
for any rights that
The information below marked by * and [] has been omitted pursuant to a request for confidential treatment. The omitted portion has been separately filed with the Commission.
may exist pursuant to Article 11 hereof, Laclede's sole remedy for Cellnet's failure to meet or exceed the foregoing performance metrics is set forth in this Section 2.2(d)(i).
(ii) The daily reliability performance percentages shall be equal to the sum of each day's number of successful automated daily meter readings which Cellnet makes available to Laclede during the calendar month, divided by the sum of each day's number of daily Activated Meters. This reliability rate implies that the required percentage of the meters are read electronically through the Fixed Network.
(iii) Commencing the first calendar month ninety (90)
days after the Deployment Deadline, if Cellnet
fails to provide to Laclede monthly meter reads
in accordance with the reliability percentages
described in Section 2.2(c) above, during any
month, then Cellnet shall owe to Laclede a
penalty (the "Monthly Reliability Penalty") equal
to [****************] Dollars ($[******]) for each
[********] percent ([***]%), or portion
thereof, by which Cellnet is below such
[**]% threshold. For example, if Cellnet is
able to provide reads for only [**]% of the
Activated Meters during a month, then the Monthly
Reliability Penalty shall equal [***************]
Dollars ($[******]). Additionally, Cellnet
shall owe to Laclede a penalty ("Minimum Monthly
Reliability Penalty") of [************] Dollars
($[*****]) for each [********] percent
([***]%) or portion thereof by which Cellnet
is below the [**]% minimum on any billing
day. Anything herein to the contrary
notwithstanding except for any rights that may
exist pursuant to Article 11 hereof, Laclede's
sole remedy for Cellnet's failure to meet or
exceed the foregoing performance metrics is set
forth in this Section 2.2(d)(iii).
(iv) The monthly reliability performance shall be equal to the sum of each day's number of successful monthly meter readings which Cellnet makes available to Laclede during the calendar month, divided by the sum of each day's number of monthly Activated Meters.
(v) The Daily Reliability Penalty, Minimum Daily Reliability Penalty, Monthly Reliability Penalty and Minimum Monthly Reliability Penalty shall be referred to herein collectively as the "Reliability Penalty." Laclede shall have the right to deduct the Reliability Penalty amount from the Fee for each such month during which the daily and/or monthly reliability failures occur, or any subsequent month.
The information below marked by * and [] has been omitted pursuant to a request for confidential treatment. The omitted portion has been separately filed with the Commission.
(i) Within five (5) Business Days after the end of each calendar month, Cellnet shall submit to Laclede (directed to the Laclede AMR program manager or such other individual or department specified by Laclede in writing) an invoice specifying the Fee due from Laclede for such calendar month. The invoice shall include (A) the number of automated Actual Reads received via the Fixed Network during such calendar month, (B) the number of Cellnet Manual Reads (categorized by reading method) during such calendar month, (C) the amount due and owing for the meter data provided from the Fixed Network during that month, (D) any reduction for the Reliability Penalty calculated pursuant to Section 2.2(d), and (E) the Asset Fees for such calendar month. The invoice shall include any such other documentation as Laclede may reasonably request.
(ii) Within thirty (30) calendar days after receipt of an invoice submitted by Cellnet in accordance with this Agreement, Laclede shall pay Cellnet the amount invoiced. If Laclede disputes any invoiced amount, Laclede shall so notify Cellnet in writing within fifteen (15) calendar days after receipt of the invoice and give full reasons for the dispute. The Parties shall act in good faith to settle such dispute within five (5) Business Days after Laclede provides such notice of dispute to Cellnet. If the Parties are not able to resolve such dispute prior to the due date of the invoice, then
The information below marked by * and [] has been omitted pursuant to a request for confidential treatment. The omitted portion has been separately filed with the Commission.
Laclede shall be entitled to withhold one-half (1/2) of the disputed sum and shall pay the other one-half (1/2) to Cellnet at the time the undisputed portion of the invoice is due.
(iii) If Laclede disputes any invoiced amount, the
provisions of Article 19 shall apply. Following
resolution of the dispute: (A) any amount
withheld by Laclede and agreed or determined to
be payable shall be paid by Laclede within ten
(10) Business Days after such agreement or
determination; and (B) any amount paid by Laclede
and agreed or determined not to be payable shall
be deducted by Laclede from the amount of the
monthly invoice next due after such agreement or
determination.
(iv) Should Laclede fail to make payment on or before the due date of any sum due and owing (other than any sum which is the subject of a bona fide dispute and any Reliability Penalty), interest on the amount unpaid shall accrue from the date such amount was due until the date of payment at a rate per annum during such period equal to the prime rate set forth in the Wall Street Journal most recently published on the date such payment was due plus one percent (1%). Interest shall also accrue at such rate on the amount withheld pursuant to Section 2.3(a)(ii) (or paid by Laclede pending resolution of the dispute) until the time of payment if it is ultimately determined that such amount was due and payable to Cellnet (or, in the case of payment of an amount pursuant to Section 2.3(a)(ii) which was not ultimately payable to Cellnet, refund of such amount to Laclede).
inability to access a meter or premises; provided Cellnet or the MIU Installer has attempted to gain access to the meter on six (6) separate occasions as more specifically described in Section 2.1(c)(ii)(A) hereof. Nothing herein shall prohibit Laclede from establishing reasonable restrictions on such access and rendering of services.
of any Activated Meters and the installation of all such newly installed Laclede Gas Meters. Under no circumstance shall Cellnet be responsible or have any liability related to (x) Laclede's failure to properly remove any Activated Meter, (y) Laclede's failure to properly install a new Laclede Gas Meter, or (z) Laclede's failure to provide Cellnet with accurate Laclede Gas Data or information related to the new Laclede Gas Meter.
ARTICLE 3
MAINTENANCE, GROWTH AND REPAIR
OF THE FIXED NETWORK
(a) Subject to this Section 3.1 and Section 3.4 hereof, Cellnet shall be responsible for all costs of repairing or replacing non-working or failed MIUs. Cellnet shall provide all support and maintenance required on the MIUs. Cellnet shall provide service visits free of charge to meters where the NOC fails to receive data from a Fixed Network Meter unless such failure clearly indicates a problem other than with the MIU or the Fixed Network. Notwithstanding the foregoing, if the Parties
determine that a MIU is damaged by anyone other than Cellnet or the MIU Installer or is vandalized such that it cannot reasonably be made to function properly, the MIU will be considered to be a retired MIU and so treated pursuant to the mechanism set forth in Section 2.1(c)(iii)(E).
(b) Cellnet shall provide service visits free of charge to any Activated Meter upon the reasonable request of Laclede when Laclede deems a MIU to be stopped, programmed incorrectly by Cellnet or its subcontractor or reset and has provided documented history of such readings. If, upon such service visit, Cellnet discovers and documents that the MIU was programmed correctly and is operating properly, or if a MIU malfunction or incorrect programming by Laclede or its third party vendor or subcontractor was caused by (i) the Laclede Gas Meter, (ii) any Laclede personnel, or (iii) vandalism, and such findings are confirmed by Laclede, Cellnet shall deliver an invoice to Laclede, and Laclede shall reimburse Cellnet's reasonable expenses for such service visit not to exceed Fifty Dollars ($50), payable within thirty (30) calendar days of receipt of the invoice from Cellnet.
(c) If Laclede investigates a stopped meter report and determines that there has been a MIU failure, has replaced the MIU or battery, and delivered the MIU or battery to Cellnet, and the failure is confirmed by Cellnet, Laclede shall deliver an invoice to Cellnet, and Cellnet shall reimburse Laclede for its reasonable expenses for such a service visit not to exceed Fifty Dollars ($50), payable within thirty (30) calendar days of receipt of the invoice from Laclede.
(d) Notwithstanding the foregoing, if Cellnet cannot gain access to a MIU to verify whether it is functioning properly after making at least three (3) reasonable attempts to access the MIU, Cellnet's obligations under this Section 3.1 with respect to such MIU shall be suspended until such time as Cellnet gains access on its own or with the assistance of Laclede. During the period that Cellnet is not able to gain access to such MIU, the meter shall be deemed to be an Unavailable Meter, and Cellnet shall provide Laclede (directed to the attention of the Laclede AMR program manager at the address provided hereafter in this Agreement) prompt written notice of any MIU that appears to be malfunctioning to which Cellnet cannot gain access. Upon receipt of such notice, Laclede shall make reasonable efforts to assist Cellnet to gain access to the MIU in question.
ARTICLE 4
INTELLECTUAL PROPERTY, LICENSES AND USE OF
INTELLECTUAL PROPERTY
termination of this Agreement and provided that Cellnet continues to support such software, Laclede shall have the right to enter into an appropriate license with Cellnet for such software in exchange for payment of a commercially reasonable royalty by Laclede.
ARTICLE 5
OWNERSHIP OF INFORMATION
for the purpose of promoting the sale of its services to others as long as such extracts or summaries do not contain any information identifiable to Laclede or to any particular customer of Laclede.
ARTICLE 6
TRAINING
ARTICLE 7
CHANGE ORDERS
(a) To request a Material Change, a Party (the "Requesting Party") shall submit to the other Party (the "Responding Party") a written request describing the change that such Party desires ("Change Order"). The Responding Party shall respond to the Change Order within fifteen (15) Business Days of receipt with a written statement (i) offering to perform the AMR Services in a manner consistent with the Change Order, (ii) offering to perform the Change Order but proposing modifications to it, or (iii) rejecting the Change Order. If the Responding Party responds in accordance with either (i) or (ii) in the preceding sentence, the Responding Party shall include detailed information as to the availability of the Responding Party's personnel and resources to perform the Change Order and the impact, if any, on timing of the completion of the affected AMR Services or the additional or reduced cost of the AMR Services. The Responding Party will use commercially reasonable efforts to minimize any adverse impact on the AMR Services created by the Change Order or any increase in cost or expense that is to be imposed on the Requesting Party. This process will continue until the Parties agree in writing upon the changes to be made, the impact on the timing of the
completion of the affected AMR Services and any additional costs or expenses associated therewith. If the Requesting Party desires to implement the Change Order, it will notify the Responding Party so in writing and the Responding Party will promptly proceed with the implementation of the applicable changes, as mutually agreed upon by the Parties.
(b) For any Change Order, Laclede shall pay Cellnet the additional charges, costs and expense agreed upon by the Parties pursuant to the terms of Section 2.3(a). If the Change Order results in a reduction in the anticipated charges, costs or expenses, Laclede shall receive a credit for such reduction against the fees otherwise owed by Laclede under this Agreement.
ARTICLE 8
SUBCONTRACTS
ARTICLE 9
CONFIDENTIALITY
Agreement; (b) restrict disclosure of the Confidential Information to employees and advisors of the Recipient and its Affiliates who need to know the information in order for Recipient to perform its obligations under this Agreement; (c) not disclose it to any other person or entity without the prior written consent of the Disclosing Party; (d) advise those employees who access the Confidential Information of their obligations with respect thereto; and (e) copy the Confidential Information only as necessary for those employees who are entitled to receive it, and ensure that all confidentiality notices are reproduced in full on such copies.
immediate injunctive relief prohibiting such violation, in addition to any other rights and remedies available to it.
ARTICLE 10
REPRESENTATIONS AND WARRANTIES
10.1 Representations and Warranties of Cellnet. Cellnet hereby
-----------------------------------------
represents and warrants the following to Laclede:
(a) Duly Authorized. Cellnet is a corporation duly organized
---------------
and existing and is in good standing under the laws of
Delaware. Cellnet's execution, delivery and performance of
this Agreement has been duly authorized by all appropriate
action on the part of Cellnet, and this Agreement
constitutes the valid and binding obligation of Cellnet
and is enforceable against Cellnet in accordance with its
terms.
(b) No Conflict. Neither the execution and delivery of this
-----------
Agreement, nor any assignments or licenses made hereunder,
will conflict with or violate any other license,
instrument, contract, agreement, or other commitment or
arrangement to which Cellnet is bound.
(c) Consents. No approval, authorization, consent, permission,
--------
waiver, notice, filing or recording is necessary for
Cellnet's execution of this Agreement.
(d) Professional Standards. The AMR Services shall be
----------------------
performed in a professional manner in accordance with the
prevailing standards of the industry.
(e) Ownership. Cellnet has or will obtain the ownership of, or
---------
a leasehold, license or other interest in all elements of,
the Fixed Network so as to perform its obligations
hereunder.
(f) Non-Encumberance and Non-Infringement. To the best of
-------------------------------------
Cellnet's knowledge and belief, (i) neither the AMR
Services, nor any deliverables provided by Cellnet to
Laclede hereunder, have been or will be encumbered, except
as provided in the financing arrangements entered into by
Cellnet in connection with this Agreement and approved by
Laclede, and any subsequent renewals, extensions,
restructurings, modifications, or replacements of such
financing arrangements, in whole or in part (either as a
stand-alone financing in connection with this Agreement or
as part of Cellnet's general financing facilities), which
shall not require approval by Laclede but shall require
notice to Laclede thereof, and (ii) neither the AMR
Services, nor any deliverables provided by Cellnet to
Laclede hereunder, nor any system, apparatus, equipment,
components, method,
26
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process, information, data or design provided by Cellnet
to Laclede hereunder or used by Cellnet in providing the
AMR Services hereunder infringe any patents, copyrights,
trade secrets, or other proprietary rights of any third
party. Cellnet makes no representation or warranty with
respect to infringement claims arising from any system,
apparatus, equipment, component, method, process,
information, data or design provided by Laclede hereunder.
(g) Compliance with Laws. Cellnet shall comply with all
--------------------
applicable federal, state and local laws, regulations,
ordinances, and governmental restrictions in performing
the AMR Services under this Agreement.
(h) Services and Supplies. Cellnet warrants that the supplies
---------------------
and services furnished under this Agreement will be free
from defects in material and workmanship and will conform,
in all material respects, to all requirements of this
Agreement.
(i) Required FCC and Regulatory Licenses. Cellnet shall obtain
------------------------------------
and maintain during the Term, at Cellnet's expense, any
licenses and/or permits needed from the FCC, state or
local regulatory agencies, or any licenses from other
entities required to operate the Fixed Network in
Laclede's service area.
(j) Fixed Network Security. Cellnet shall keep in place
----------------------
network security that will monitor and protect against
unauthorized access to Laclede Gas Data while such data
are on or within the Fixed Network. The Laclede Gas Data
will be stored in a separate partitioned area of the Meter
Database.
10.2 Representations and Warranties of Laclede. Laclede hereby
-----------------------------------------
represents and warrants to Cellnet:
(a) Duly Authorized. Laclede is a corporation duly
---------------
incorporated and existing in good standing under the laws
of Missouri. Laclede's execution, delivery and performance
of this Agreement has been duly authorized by all
appropriate corporate action on the part of Laclede, and
this Agreement constitutes the valid and binding
obligation of Laclede and is enforceable against Laclede
in accordance with its terms.
(b) No Conflict. Neither the execution and delivery of this
-----------
Agreement nor any assignments or licenses made hereunder
will conflict with or violate any other license,
instrument, contract, agreement, or other commitment or
arrangement to which Laclede is bound.
(c) Ownership. Laclede has and will continue to have: (i) good
---------
and clear title or (ii) valid and enforceable rights or
licenses to the Laclede Gas Meters and the Laclede gas
systems. Laclede will not subject any MIUs installed on
Laclede Gas Meters to any encumbrances, liens, mortgages,
securities or other defects in title.
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(d) Consents. Except as specifically provided otherwise
--------
herein, no approval, authorization, consent, permission,
waiver, notice, filing or recording is necessary for
Laclede's execution of this Agreement.
(e) Non-Infringement. To the best of Laclede's knowledge and
----------------
belief, neither Laclede's gas system nor any information,
data, data processes or designs supplied by Laclede that
will be integrated with the AMR Services infringes any
patents, copyrights, trade secrets or other proprietary
rights of any third party to the extent that said
infringement is based solely on said Laclede's gas system,
information, data, processes or designs, and Laclede has
no reason to believe that any such infringement or claims
thereof could be made by third parties. Laclede makes no
representation or warranty with respect to infringement
claims arising from AMR Services, or any system,
apparatus, equipment, component, method, process,
information, data or design provided by Cellnet hereunder.
(f) Compliance with Laws. Laclede shall comply with all
--------------------
applicable federal, state and local laws, regulations,
ordinances, and governmental restrictions in performing
its obligations under this Agreement.
10.3 DISCLAIMER OF WARRANTY. EXCEPT FOR THE WARRANTIES SET FORTH IN THIS
----------------------
AGREEMENT, NEITHER PARTY MAKES ANY OTHER WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE.
ARTICLE 11
TERMINATION AND REMEDIES
11.1 Termination.
-----------
(a) Termination by Either Party for Breach. Either Party may
--------------------------------------
terminate this Agreement in the event of a material breach
of this Agreement by the other Party, provided that the
breaching Party has not cured such material breach within
forty-five (45) Business Days after the date that the
Party seeking termination provides written notice of such
material breach to the breaching Party. Such notice shall
set forth the full details of the breach and state that
the failure to cure such breach may result in termination.
Either Party may terminate this Agreement if there exists
a series of non-material or persistent breaches by the
other Party, that, in the aggregate, have a material and
significant adverse impact on the non-breaching Party;
provided that the non-breaching Party provides the
breaching Party with prior written notice of its belief
that such series of non-material breaches have had, are
having, or are reasonably likely to have a material and
significant adverse impact on the non-breaching Party and
further provided that the non-breaching Party provides the
breaching Party with forty-five (45) Business Days, during
which such non-material breaches must be cured.
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The information below marked by * and [] has been omitted pursuant to a request for confidential treatment. The omitted portion has been separately filed with the Commission.
(b) Termination by Cellnet for Nonpayment. Cellnet may
-------------------------------------
terminate this Agreement in the event that Laclede, during
two (2) consecutive months or three (3) or more times
during any Contract Year, fails to pay any invoice for the
Fees when due, provided that Laclede has not cured any
such payment default within twenty (20) Business Days
after the date that Cellnet provides written notice to
Laclede of such payment default.
(c) Termination for MIU System Failure. It shall be deemed to
----------------------------------
be a material breach of this Agreement by Cellnet, for
purposes of Section 11.1(a), if more than [***]
percent ([*]%) of either the first [*****] or
[******] MIUs installed on Activated Meters fail to
provide daily automated meter reads on an average basis
over the total number of calendar days of the first full
calendar month following the installation of such
[*****] or [******] MIUs, respectively, and such
failure is not cured during the following forty five (45)
Business Days. In the event of such a material breach by
Cellnet, Laclede may avail itself of the remedies
contained in this Article 11.
(d) Termination for Insolvency. Either Party may terminate
--------------------------
this Agreement on written notice to the other if the other
Party becomes an Insolvent Entity. In the event of the
bankruptcy of Cellnet pursuant to the Bankruptcy Code and
an attendant rejection of this Agreement or any license or
assignment granted hereunder pursuant to Section 365
thereof, the Parties intend that the provisions of the
Bankruptcy Code shall apply.
(e) Suspension of Performance. In addition to the foregoing,
-------------------------
after expiration of the applicable cure period described
in Section 11.1(a) or 11.1(b) above, a non-defaulting
Party may, without terminating this Agreement, suspend
performance of its obligations under this Agreement for
such period of time as the non-defaulting Party deems
appropriate in its sole discretion to give the defaulting
Party an additional opportunity to cure. The
non-defaulting Party may terminate this Agreement at any
time during such suspension by providing thirty (30)
Business Days written notice to the other Party.
11.2 Impaired Performance. If either Party fails to materially perform
--------------------
or observe any of its obligations set forth in this Agreement and
fails to take corrective action within forty-five (45) Business
Days after written notice by the other, the non-breaching Party
may, as an alternative to its right to terminate this Agreement,
accept such Party's impaired performance and recover its actual
damages.
11.3 Effect of Termination.
---------------------
(a) Removal of MIUs. Unless otherwise agreed by the Parties,
---------------
if this Agreement is terminated as a result of breach,
then in the event of a Laclede breach, Laclede shall be
responsible for the cost of removal of the MIUs installed
on Laclede property. In the event of a Cellnet breach,
Cellnet shall be responsible for the commercially
reasonable cost of removal of the MIUs; provided that if
the removal occurs in connection with deployment of any
replacement system, then
29
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Cellnet shall be responsible only for the commercially
reasonable incremental cost of removing the MIUs; and
further provided that if Laclede is not deploying a
replacement system and the removal is at the discretion of
Laclede and not required by any regulatory or governmental
authority, applicable law or the superior rights of a
third party, then Laclede shall be responsible for the
commercially reasonable cost of removal of the MIUs. If
this Agreement is terminated as a result of the default of
Laclede, then any removal of the MIUs shall have no impact
on Laclede's obligation to pay any Asset Fees (as
specified in Exhibit 8 hereto) related to such
---------
MIUs unless and to the extent that any such MIUs are
returned to Cellnet by Laclede and redeployed by Cellnet.
If this Agreement is terminated as a result of the default
of Cellnet and Laclede does not continue to utilize the
Fixed Network, then Laclede's obligation to pay any Asset
Fees related to the MIUs shall cease; provided, that if
Laclede continues to utilize the Fixed Network, Laclede's
obligation to pay the Asset Fee shall continue only for
those MIUs that continue to function properly and deliver
automated meter reads to Laclede. In all events, Laclede's
obligation to pay any Asset Fee shall cease on the
fifteenth (15th) anniversary of the Effective Date. Upon
expiration of the Term or earlier termination of this
Agreement for breach by Laclede, Cellnet may, but shall
not be obligated to, remove the MIUs installed on Laclede
Gas Meters, at Cellnet's sole cost and expense.
Notwithstanding the foregoing, if Cellnet desires to
remove the MIUs installed on the Laclede Gas Meters upon
the termination of this Agreement, Cellnet shall notify
Laclede in writing within thirty (30) days after such
termination, and Cellnet and Laclede shall devise a
schedule and methodology for such removal that is
reasonably acceptable to both Parties.
(b) Return of Confidential Information, Trade Secrets and
-----------------------------------------------------
Cellnet Property. Upon the termination of this Agreement
----------------
by either Party for any reason, each Party shall return to
the other any Confidential Information of the other Party
in its possession or, with the consent of the Disclosing
Party, shall destroy the same and certify such destruction
to the Disclosing Party. Additionally, upon the
termination of this Agreement, Laclede shall return to
Cellnet the handheld units provided during the Initial
Fixed Network Deployment Phase.
(c) Survival of Rights and Licenses. Upon termination of this
-------------------------------
Agreement by either Party, all rights and licenses granted
hereunder, except for those necessary to perform
Transition Services as specified in Section 11.3(d) below
or as specified elsewhere in this Agreement, shall
terminate.
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The information below marked by * and [] has been omitted pursuant to a request for confidential treatment. The omitted portion has been separately filed with the Commission.
respective agents, contractors and consultants, as necessary, with the AMR Services contracted for hereunder, for a maximum of eighteen (18) months after such termination or expiration (the "Transition Period"). Such Transition Services shall be provided pursuant to the terms and conditions of this Agreement; provided that to the extent such Transition Services are provided after the expiration of the Term, then Laclede and Cellnet shall work together in good faith to amend the performance standards for the AMR Services and such other operational matters as may be relevant to the winding down of operations pursuant to the Transition Services, as appropriate.
ARTICLE 12
INDEMNIFICATION AND LIMITATION OF LIABILITY
At any time after Cellnet becomes aware of any such claim, Cellnet may, at its option and expense, (1) procure the right to furnish to Laclede the Cellnet Materials as provided in this Agreement, (2) modify the infringing Cellnet Materials without impairing in any material respect the functionality or performance of the AMR Services or any other services provided hereunder so that they are non-infringing, or (3) replace the Cellnet Materials with an equally suitable, non-infringing replacement that does not impair in any material respect the functionality or performance of the AMR Services or any other services provided hereunder. If Cellnet is not able to accomplish (1), (2) or (3) above within a reasonable period of time, Cellnet shall have the option to terminate this Agreement upon written notice to Laclede and Cellnet shall be deemed to be in breach under this Agreement, and Laclede shall have the right to avail itself of any remedies available to it under this Agreement or otherwise.
arising out of any act, omission, or negligence on the part of Cellnet or its agents, subcontractors or employees in the performance or failure to perform any obligation under this Agreement.
(iii) Cellnet, at its own expense, shall indemnify, defend and hold Laclede harmless from and against any assessment, penalty or fee charged to or assessed against Laclede by the PSC or a court of competent jurisdiction to the extent that such assessment penalty or fee is a result of Cellnet's failure to provide AMR Services in accordance with the terms and conditions of this Agreement, and Laclede may setoff any such amount against amounts owed by Laclede to Cellnet under this Agreement.
The information below marked by * and [] has been omitted pursuant to a request for confidential treatment. The omitted portion has been separately filed with the Commission.
ARTICLE 13
LIABILITY
13.1 Liability. EXCEPT FOR LIABILITY ARISING UNDER ARTICLE 9 OR ARTICLE
---------
12, IN NO EVENT WILL EITHER PARTY'S LIABILITY TO THE OTHER PARTY
EXCEED [************************************] DOLLARS ($[**********])
["LIABILITY CAP"]. ON THE FIRST DAY OF EACH CONTRACT YEAR (EXCLUDING
THE FIRST CONTRACT YEAR) DURING THE TERM, THE LIABILITY CAP SHALL
AUTOMATICALLY INCREASE BY A PERCENTAGE THAT IS EQUAL TO THE PERCENTAGE
INCREASE, IF ANY, IN THE CONSUMER PRICE INDEX (AS HEREINAFTER DEFINED)
FROM THAT LAST PUBLISHED ON THE FIRST DAY OF THE IMMEDIATELY PRECEDING
CONTRACT YEAR TO THAT LAST PUBLISHED ON THE FIRST DAY OF THE THEN-
CURRENT CONTRACT YEAR. THE CONSUMER PRICE INDEX MEANS THE CONSUMER
PRICE INDEX FOR ALL URBAN CONSUMERS-ST. LOUIS, MO-IL-ALL ITEMS
(1982-84=100), PUBLISHED BY THE BUREAU OF LABOR STATISTICS OF THE
UNITED STATES DEPARTMENT OF LABOR, OR IN THE EVENT OF
DISCONTINUANCE OF THAT INDEX OR SUBSTANTIAL CHANGE IN THE FORMULA
BY WHICH THAT INDEX IS DETERMINED, THEN THE PUBLISHED INDEX MOST
CLOSELY APPROXIMATING THAT INDEX AS THAT INDEX IS DETERMINED AS OF
THE DATE OF THIS AGREEMENT. IN NO EVENT SHALL THE AMOUNT OF THE
LIABILITY CAP FOR ANY CONTRACT YEAR BE LESS THAN THE AMOUNT OF THE
LIABILITY CAP FOR THE PREVIOUS CONTRACT YEAR.
13.2 Damages. EXCEPT FOR LIABILITY ARISING UNDER ARTICLE 9, THE PARTIES
-------
AGREE THAT IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY
INDIRECT, SPECIAL, INCIDENTAL, EXEMPLARY, CONSEQUENTIAL OR
PUNITIVE DAMAGES (INCLUDING LOST PROFITS), DIRECTLY OR INDIRECTLY,
RELATING TO OR ARISING OUT OF THIS AGREEMENT REGARDLESS OF THE FORM
OF ACTION, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT
LIABILITY OR OTHERWISE, AND WHETHER OR NOT SUCH DAMAGES WERE
FORESEEN OR UNFORESEEN.
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ARTICLE 14
FINANCING
ARTICLE 15
INDEPENDENT CONTRACTOR
15.1 Independent Contractor. Each Party to this Agreement is an
----------------------
independent contractor; nothing in this Agreement shall be
construed to create a partnership, joint venture or agency
relationship between the Parties. Nothing in this Agreement shall
be interpreted
34
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or construed as creating or establishing the relationship of
employer and employee between Laclede and either Cellnet or any
employee, agent, subcontractor or consultant of Cellnet nor between
Cellnet and either Laclede or any employee, agent, subcontractor or
consultant of Laclede. Each Party will be solely responsible for
payment of all compensation owed to its employees, as well as
federal and state income tax withholding, Social Security taxes,
and unemployment insurance applicable to such personnel as
employees of the applicable Party.
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ARTICLE 16
ASSIGNMENT
16.1 Assignment. This Agreement will be binding on the Parties and their
----------
respective successors and permitted assigns. Except as provided in
this Section 16.1, neither Party may, or will have the power to,
assign this Agreement without the prior written consent of the
other, which consent shall not be unreasonably withheld or delayed,
except that either Party may assign its rights and obligations
under this Agreement to an Affiliate that expressly assumes such
Party's obligations and responsibilities hereunder, without the
approval of the other Party. Anything herein to the contrary
notwithstanding, Cellnet may assign this Agreement and its rights
hereunder as collateral security to lenders to Cellnet or their
successors and assigns. The assigning Party shall remain fully
liable for, and shall not be relieved from the full performance of,
all obligations under this Agreement. Any attempted assignment that
does not comply with the terms of this Section 16.1 shall be null
and void. If a Party assigns its rights or obligations to an
Affiliate in accordance with this Agreement, such Party shall
promptly provide written notice thereof to the other Party.
ARTICLE 17
AUDIT RIGHTS
17.1 Books and Records. Each Party shall have the right to inspect and
-----------------
audit or have audited the books and records of the other Party
relating to the amounts invoiced hereunder and the monies owed
hereunder for the purpose of verifying the amounts due and payable
hereunder, upon at least ten (10) Business Days notice to the
audited Party. Such audit may cover up to, but no more than, the
two (2) calendar years immediately preceding the date of the audit.
The cost of such audit shall normally be at the requesting Party's
expense; provided, however, that the audited Party will bear the
cost of the audit if the audit reveals, in the case of Laclede, any
overpayment, and in the case of Cellnet, any underpayment, greater
than two percent (2%) of the amount that was actually due for any
twelve-month period. Such audit shall be conducted with a minimum
of disruption to the audited Party's daily operations and during
normal business hours. The requesting Party shall not audit the
audited Party more than once during any twelve-month period during
the Term.
17.2 Subcontracting, Training and Safety. Laclede shall have the right
-----------------------------------
to audit Cellnet's compliance with the obligations set forth in
Section 2.1(d) of this Agreement for the purpose of verifying that
Cellnet is fully complying with all of its obligations with regard
35
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to subcontracting, training and safety. Cellnet shall cooperate
with Laclede during the course of such an audit and make all
applicable documentation and materials available to Laclede within
ten (10) Business Days of Laclede's request. Cellnet shall allow
Laclede to perform field audits to the extent Laclede deems
reasonably necessary to confirm Cellnet's compliance with Section
2.1(d). Provided Laclede has not found Cellnet to be out of
compliance with the obligations of Section 2.1(d) during the
immediately preceding twenty-four (24) months, Laclede shall not
audit Cellnet's compliance regarding subcontracting, training or
safety more than once during any twelve-month period during the
Term.
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ARTICLE 18
INSURANCE
18.1 Insurance. Prior to the commencement of any work under this
---------
Agreement, Cellnet will obtain, and maintain during the entire
Term, insurance in the following minimum amounts and types:
(a) Commercial or Comprehensive General Liability Insurance
for bodily injury and property damage of not less than
Five Million Dollars ($5,000,000) for each occurrence and
Fifteen Million Dollars ($15,000,000) in the aggregate.
(b) Workers' Compensation Insurance that in all respects
complies with all applicable federal and state laws and
regulations. Cellnet covenants and agrees with Laclede
that Cellnet will carry workers' compensation insurance in
such amount and in such form, and containing such
provisions, as shall protect both Laclede and Cellnet from
all claims, demands, suits, actions, causes of action and
judgments of any actual or alleged agents or employees of
Cellnet resulting from or arising out of any work
performed under or by virtue of this Agreement.
(c) Employer Liability Insurance with limits of not less than
Five Million Dollars ($5,000,000) per occurrence.
(d) Business automobile liability insurance that applies to
all owned, non-owned, hired and leased vehicles used by
Cellnet and/or its employees, subcontractors or agents in
connection with this Agreement. Business automobile
liability insurance shall be provided with a minimum of
Three Million Dollars ($3,000,000) combined single limit
per occurrence.
(e) The policy limits set forth above may be met through an
umbrella liability insurance policy.
18.2 Intentionally Omitted.
---------------------
18.3 Subcontractors' Insurance. Cellnet shall cause each of its
-------------------------
subcontractors to obtain, and maintain at all times while
performing work under this Agreement, insurance in the following
|
minimum amounts and types:
(a) Commercial or Comprehensive General Liability Insurance
for bodily injury and property damage of not less than
Five Million Dollars ($5,000,000) for each occurrence and
Fifteen Million Dollars ($15,000,000) in the aggregate.
(b) Workers' Compensation Insurance that in all respects
complies with all applicable federal and state laws and
regulations in such amount and in such form, and
containing such provisions, as shall protect Laclede,
Cellnet and Cellnet's subcontractor from all claims,
demands, suits, actions, causes of action and judgments of
any actual or alleged agents or employees of Cellnet's
subcontractor resulting from or arising out of any work
performed under or by virtue of this Agreement.
(c) Employer Liability Insurance with limits of not less than
Five Million Dollars ($5,000,000) per occurrence.
(d) Business automobile liability insurance that applies to
all owned, non-owned, hired and leased vehicles used by
Cellnet's subcontractor and/or its employees,
subcontractors or agents in connection with this
Agreement. Business automobile liability insurance shall
be provided with a minimum of Three Million Dollars
($3,000,000) combined single limit per occurrence.
(e) The policy limits set forth above may be met through an
umbrella liability insurance policy.
18.4 Policy Provisions. All of the aforesaid insurance shall include
-----------------
Laclede as an additional insured (excluding the coverage described
in Section 18.2), be endorsed to be primary and without right of
contribution from any insurance that Laclede may have in effect and
be written by one or more insurance companies that is or are (i)
licensed and authorized to do business in the State of Missouri,
and (ii) rated A - VIII or higher by A.M. Best Company. All
policies shall contain a provision that the insurance company will
provide Laclede with written notice of any cancellation of, or
modification to, the policy. The consent of Laclede to the amount
of insurance specified shall not be considered as a limitation of
Cellnet's liability under this Agreement nor an agreement by
Laclede to assume liability in excess of said amount or for risks
not insured against. Cellnet shall provide proof of the
above-described insurance to Laclede annually on or before the
first day of each Contract Year.
18.5 Periodic Review of Policy Limits. On or about the fifth (5th) and
--------------------------------
tenth (10th) anniversaries of the Effective Date, Cellnet and
Laclede shall review and discuss the continuing adequacy of the
limits of the various insurance policies required by this Article
18. In connection with this review, the parties shall consider,
among other things, whether the policy limits are adequate in light
of actual loss experience and/or whether the limits are equal to,
or greater than, limits that are ordinary and customary in the
automated meter reading industry. To the extent the limits are
determined to be inadequate based on either of these factors, or
any other factors deemed relevant in the reasonable judgment of the
parties, Cellnet shall increase such policy limits accordingly;
provided that Cellnet shall be required to obtain such increased
coverage only to the
37
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extent it is available on commercially reasonable terms. In no
event shall the limits of the policies be reduced.
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ARTICLE 19
DISPUTE RESOLUTION
(a) Any dispute between the Parties either with respect to the interpretation of any provision of this Agreement or with respect to the performance by Cellnet or by Laclede hereunder shall be resolved as specified in this Section 19.1.
(b) Upon the written request of either Party to the other Party ("Written Request"), a dispute shall be discussed by the Parties. The Parties shall meet as often as necessary to gather and furnish to each Party all information with respect to the matter at issue that is appropriate and germane in connection with its resolution. The Parties shall discuss the problem and negotiate in good faith in an effort to resolve the dispute without the necessity of any formal proceeding relating thereto.
(c) If the dispute is not resolved within thirty (30) days after the date of the Written Request, then the dispute shall be escalated to a Vice President of Laclede and the Chief Operating Officer of Cellnet for their review within forty-five (45) days after the date of the Written Request.
(d) If the dispute is not resolved as described in (c) above within sixty (60) days after the date of the Written Request, the dispute will be referred to mandatory mediation with the American Arbitration Association ("AAA") or other organization mutually agreeable to the Parties, at a mutually agreed location in St. Louis, Missouri. The Parties will agree upon the selection of a particular mediator as soon as reasonably practical, but failing such agreement within thirty (30) days after the issue is referred for mediation, the mediator will be selected by AAA. Any mediator so selected shall have substantial experience in the area of information technology infrastructure outsourcing and the energy industry.
(e) With the exception of applications to courts of competent jurisdiction for injunctive relief or any dispute relating to intellectual property rights, the Parties stipulate that the submission of disputes to mediation as provided in this Section 19.1, and mediation pursuant thereto, shall be a condition precedent to any suit, action or proceeding instituted in any court or before any administrative tribunal with respect to such dispute. The mediation provisions hereof shall, with respect to any dispute arising out of this Agreement, survive the termination or expiration of this Agreement.
(f) The Parties shall use reasonable effort to set the date of the mediation within sixty (60) days after selection of the mediator but in no event shall the mediation be set
more than ninety (90) days after selection of the
mediator. Each Party shall bear its own mediation costs
and expenses and all other costs and expenses of the
mediation shall be divided equally between the Parties.
(g) Notwithstanding any other provision of this Section 19.1,
either Party may resort to court action for injunctive
relief at any time if the dispute relates to intellectual
property rights or the dispute resolution processes set
forth in this Section 19.1 would permit or cause
irreparable injury to such Party or any third party
claiming against such Party, due to delay arising out of
the dispute resolution process.
19.2 Continued Performance. So long as Laclede continues to pay Cellnet
---------------------
the Fees for the AMR Services in accordance with the terms of this
Agreement, the Parties agree to continue performing their
respective obligations under this Agreement while the dispute is
being resolved, unless and until such obligations are terminated or
expire in accordance with the provisions of this Agreement.
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ARTICLE 20
GENERAL PROVISIONS
20.1 Cooperation by Cellnet and Laclede. Both Cellnet and Laclede shall
----------------------------------
cooperate with each other to facilitate performance of the AMR
Services and Laclede's operations affected by Cellnet and shall
each timely provide information to the other as required for each
to perform its responsibilities regarding the AMR Services.
20.2 Meetings and Presentations. Cellnet shall, at Laclede's request, at
--------------------------
no additional charge: (a) accompany Laclede to any meetings with
the PSC and/or Office of Public Counsel (OPC), or other regulatory
agencies to explain the technology that is the subject of this
Agreement and provide any written information that may be requested
by these agencies in connection with these meetings or otherwise;
and (b) demonstrate the technology that is the subject of this
Agreement to the PSC and/or OPC or other regulatory agency;
provided, however, that after the Deployment Deadline, Cellnet
shall not, without its consent, be required to spend more than
twenty (20) hours per annum performing these services.
20.3 No Solicitation of Employees. During the Term and for 12 months
----------------------------
after the expiration or earlier termination of this Agreement,
neither Party to this Agreement shall solicit or otherwise seek to
hire, whether as an employee or consultant, any persons employed by
the other Party. Notwithstanding the foregoing, either Party shall
have the right to hire as an employee or consultant any such person
who approaches such Party for employment or who responds to a
general advertisement soliciting employees.
20.4 Governing Law. This Agreement and any and all claims and disputes
-------------
arising out of or in connection with or related to the
relationships and arrangements between Laclede and Cellnet
described in this Agreement shall be governed by and construed in
accordance with the laws of the State of Missouri, without regard
to its conflict of law principles. The prevailing Party in any suit
brought to enforce or interpret this Agreement shall be
39
|
entitled to recover its reasonable attorney's fees and related
disbursements in addition to any other relief awarded.
20.5 Publicity. Within four (4) days after the Effective Date, the
---------
Parties shall prepare and release a mutually acceptable press
release announcing this Agreement and/or the Parties' contemplated
business relationship. As an obligation of this Agreement, each
Party agrees that it will not, without the prior written consent of
the other in each instance: (i) use the name, trade name,
trademark, trade device, service mark, logo, symbol or any
abbreviation, contraction or simulation thereof, owned by the other
Party (the "Marks") in any advertising, marketing, promotional
materials, publicity, press release, references, internet posting
or otherwise, or (ii) represent, directly or indirectly, that any
product or service offered by any Party has been approved or
endorsed by the other. These obligations will survive the
expiration or other termination of this Agreement.
20.6 Entire Agreement. This Agreement and the Exhibits referenced herein
----------------
constitute the entire agreement of the Parties with regard to the
services and matters addressed therein, and all prior agreements,
letters, proposals, discussions and other documents regarding the
services and the matters addressed in the Agreement are superseded
and merged into this Agreement. Amendments and modifications to
this Agreement may not be made orally, but shall only be made by a
written document signed by an authorized representative of each
Party. Any terms and conditions varying from this Agreement on
any order or written notification from either Party shall not be
effective or binding on the other Party.
20.7 Force Majeure. Neither Party shall be liable for any default or
-------------
delay in the performance of its obligations hereunder if and to the
extent and while such default or delay is caused, directly or
indirectly, by a Force Majeure Event. If a Force Majeure Event
occurs, the non-performing Party will be excused from any further
performance or observance of the obligation(s) so affected for as
long as such circumstances prevail and such Party continues to use
commercially reasonable efforts to recommence performance or
observance whenever and to whatever extent possible without delay.
Any Party so delayed in its performance will immediately notify the
other by telephone and describe at a reasonable level of detail the
circumstances causing such delay (to be confirmed in writing within
twenty-four (24) hours after the inception of such delay). If any
delay on the part of either Party resulting from a Force Majeure
Event exceeds sixty (60) days, the other Party shall have the right
to terminate this Agreement on notice to the delayed Party.
20.8 Waiver. No waiver of any breach of any provision of this Agreement
------
shall constitute a waiver of any prior, concurrent or subsequent
breach of the same or any other provisions hereof.
20.9 Severability. If any provision of this Agreement shall be held to
------------
be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be
affected or impaired thereby, and such provision shall be deemed to
be restated to reflect the Parties' original intentions as nearly
as possible in accordance with applicable law(s).
40
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20.10 Counterparts. This Agreement may be executed in counterparts. Each
------------
such counterpart shall be an original and together shall constitute
but one and the same document.
20.11 Notices. All notices required to be sent under this Agreement,
-------
including notices of address changes, shall be sent by registered
or certified mail, return receipt requested, by nationally
recognized overnight delivery service or courier, or by facsimile.
Notice to each Party shall be sent to the contacts listed below or
as otherwise identified by the Parties in writing pursuant to this
Section:
If to Laclede: Laclede Gas Company
Attn: Laclede AMR Program Manager
720 Olive Street
12th Floor
St. Louis, MO 63101
Phone: (314) 342-0620
Fax: (314) 241-2296
With a Copy to: Laclede Gas Company
Attn: Vice President - Finance
720 Olive Street
Suite 1301
St. Louis, MO 63101
Phone: (314) 342-0755
Fax: (314) 241-2278
With a Copy to: Laclede Gas Company
Attn: General Counsel
720 Olive Street
Suite 1500
St. Louis, MO 63101
Phone: (314) 342-0520
Fax: (314) 421-1979
If to Cellnet: Cellnet Technology, Inc.
Attn: Program Manager
1918 Innerbelt Business Center Drive
Overland, Missouri 63114
Phone: (314) 264-2633
Fax: (314) 264-2601
|
With a Copy to: Cellnet Technology, Inc.
Attn: General Counsel
30000 Mill Creek Avenue
Suite 100
Alpharetta, Georgia 30022
Phone: (678) 258-1608
Fax: (678) 258-1686
20.12 No Third Party Beneficiaries. Except as expressly provided herein,
----------------------------
the Parties do not intend, nor will any Section hereof be
interpreted, to create any third party beneficiary rights with
respect to either of the Parties.
20.13 Consents and Approvals. The Parties agree that in any instance
----------------------
where a consent, approval, acceptance or agreement is required or
contemplated of a Party under this Agreement in order for the other
Party to perform under or comply with the terms and conditions of
this Agreement, then such Party will, unless otherwise provided,
not unreasonably withhold or delay such consent, approval,
acceptance or agreement and where consent, approval or agreement
cannot be provided, the Party shall notify the other Party in a
timely manner. In addition, each Party agrees to act reasonably and
in good faith in respect to all other matters relating to or
arising out of this Agreement.
20.14 Taxes. Cellnet shall be solely responsible for all federal, state
-----
and local income taxes assessed in connection with the provision of
the services described in this Agreement.
Cellnet shall be responsible for all sales and use taxes imposed in
connection with the use or provision of the AMR Services, as well
as personal property or similar taxes imposed in connection with
the MIUs.
20.15 Headings. All headings herein and the table of contents are not to
--------
be considered in the construction or interpretation of any
provision of this Agreement. This Agreement was drafted with the
joint participation of both Parties and shall be construed neither
against nor in favor of either, but rather in accordance with the
fair meaning thereof.
20.16 Survival. All provisions of this Agreement relating to liability,
--------
warranties, indemnities, confidentiality, or non-disclosure, and
the provisions of Articles 5, 19 and 20 and Section 11.3 of this
Agreement, shall survive the expiration or termination of this
Agreement.
20.17 Time is of the Essence. Time is of the essence in this Agreement.
----------------------
Both parties shall work diligently to perform their respective
obligations under this Agreement in a timely and expedient manner.
Subject to the occurrence of a Force Majeure Event and any
applicable cure period specified herein, in cases in which time
deadlines are established for the performance of specific
activities, these deadlines shall be treated as outer time limits
for the parties' performance and not as target dates for
performance. In all cases, the parties shall use reasonable effort
to complete activities as soon as practicable.
42
|
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement
|
to be executed and delivered by their duly authorized representatives, as of the date first written above.
LACLEDE GAS COMPANY CELLNET TECHNOLOGY, INC. By: /s/ Barry C. Cooper By: /s/ Mike Zito Name: Barry C. Cooper Name: Mike Zito Title: Chief Financial Officer Title: CEO Date: March 11, 2005 Date: March 2, 2005 |
APPENDIX A
INDEX OF DEFINITIONS
The terms used herein shall have the following meanings.
obligations under this Agreement, including, without limitation, an act of God, judicial or regulatory action or inaction, strike or lockout, war (declared or undeclared), threat of war, terrorist act, blockade, revolution, riot, insurrection, sabotage, vandalism, fire, storm, flood, earthquake, hurricane, tornado, explosion or failure of communications or power systems, or radio frequency interference caused by third parties. Lack of funds shall not be interpreted as an event beyond a Party's reasonable control. Nothing contained herein shall be construed to require either Party to avoid or settle a strike against its will or to avoid picketing at any location.
EXHIBIT 6
ADJUSTMENT TO MONTHLY MIU FEE
The Monthly MIU Fee shall be adjusted in accordance with this Exhibit 6.
(a) For purposes of this Exhibit 6, the following capitalized terms have the respective meanings set forth below:
The information below marked by * and [] has been omitted pursuant to a request for confidential treatment. The omitted portion has been separately filed with the Commission.
(b) If the Cumulative Annual Cost Differential is greater than $[*******], the Monthly MIU Fee shall be increased or decreased (as applicable) in accordance with the procedures set forth below. If the Cumulative Annual Cost Differential is less than or equal to $[*******], there shall be no increase or decrease in the Monthly MIU Fee pursuant to this Exhibit 6.
(c) If the Cumulative Actual Annual Cost exceeds the Cumulative Projected Annual Cost by more than $[*******], or if the Cumulative Projected Annual Cost exceeds the Cumulative Actual Annual Cost by more than $[*******], the Monthly MIU Fee for future reads shall be increased or decreased, as applicable, as follows:
The information below marked by * and [] has been omitted pursuant to a request for confidential treatment. The omitted portion has been separately filed with the Commission.
(iv) Fourth,
(A) If the Cumulative Actual Annual Cost exceeds the Cumulative Projected Annual Cost by more than $[*******], the Monthly MIU Fee for future reads shall be increased by an amount equal to the Read Cost Differential, or
(B) If the Cumulative Projected Annual Cost exceeds the Cumulative Actual Annual Cost by more than $[*******], the Monthly MIU Fee for future reads shall be decreased by an amount equal to the Read Cost Differential.
(C) In the event the Monthly MIU Fee is increased or decreased as described above in this subsection (c)(iv), then the cumulative cost calculation described in this Exhibit 6 is started over at zero for the next Contract Year.
(d) There shall be no adjustment under this Exhibit 6 for the first, second, or third Contract Year. The first adjustment to the Monthly MIU Fee described in this Exhibit 6 shall be calculated at the beginning of the fourth Contract Year (which will commence during 2008) using the third Contract Year as the Base Year and then again for every Contract Year thereafter, and if applicable, the Monthly MIU Fee for the next Contract Year will be increased or decreased, as applicable, from the Monthly MIU Fee for the Base Year, as such Monthly MIU Fee has been previously adjusted, if applicable, in accordance with this Exhibit 6.
(e) Notwithstanding anything contained in this Exhibit 6 or the Agreement to the contrary, if the Cumulative Annual Cost Differential is greater than $[*******], the Read Cost Differential shall be calculated assuming a Cumulative Annual Cost Differential of $[*******]. The excess Cumulative Annual Cost Differential over $[*******] shall be paid by Laclede to Cellnet (if the Cumulative Actual Annual Cost exceeds the Cumulative Projected Annual Cost),
or by Cellnet to Laclede (if the Cumulative Projected Annual Cost exceeds the Cumulative Actual Annual Cost) within 30 days after the final determination of the Cumulative Annual Cost Differential.
(f) During the term of the Agreement, not later than 30 days after the end of each month, Laclede shall send a statement to Cellnet showing the Number of MIUs Condemned in the previous month. Laclede shall, at its own cost and expense, ship all Reconditionable MIUs to Cellnet's facility in Laclede's service area.
(h) Notwithstanding the adjustments provide for in this Exhibit 6, the parties shall use commercially reasonable efforts to maximize the use of reconditioned MIUs.
The information below marked by * and [] has been omitted pursuant to a request for confidential treatment. The omitted portion has been separately filed with the Commission.
APPENDIX A
PROJECTED COST OF STARTUP AND RETIREMENT ACTIVITY
YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 YEAR 8 YEAR 9
------ ------ ------ ------ ------ ------ ------
NET MIUS RECONDITIONED [***] [***] [***] [***] [***] [***] [***]
MIU RECONDITIONING UNIT COST $ [*] $ [*] $ [*] $ [*] $ [*] $ [*] $ [*]
MIU RECONDITIONING ANNUAL COST $ [*****] $ [*****] $ [*****] $ [*****] $ [*****] $ [*****] $ [*****]
NET MIUS RETIRED [*****] [*****] [*****] [*****] [*****] [*****] [*****]
MIU RETIREMENT UNIT COST $ [*****] $ [*****] $ [*****] $ [*****] $ [*****] $ [*****] $ [*****]
MIU RETIREMENT ANNUAL COST $ [*******] $ [*******] $ [*******] $ [*******] $ [******] $ [******] $ [******]
MIU STARTUP UNITS [*****] [*****] [*****] [*****] [*****] [*****] [*****]
MIU STARTUP UNIT COST $ [****] $ [****] $ [****] $ [*****] $ [*****] $ [*****] $ [*****]
MIU STARTUP ANNUAL COST $ [*] $ [*] $ [*] $ [*******] $ [*******] $ [*******] $ [*******]
----------------------------------------------------------------------------------------------
TOTAL PROJECTED COST $ [*******] $ [*******] $ [*******] $ [*******] $ [******] $ [******] $ [******]
==============================================================================================
YEAR 10 YEAR 11 YEAR 12 YEAR 13 YEAR 14 YEAR 15
------- ------- ------- ------- ------- -------
NET MIUS RECONDITIONED [***] [***] [***] [***] [***] [***]
MIU RECONDITIONING UNIT COST $ [*] $ [*] $ [*] $ [*] $ [*] $ [*]
MIU RECONDITIONING ANNUAL COST $ [*****] $ [*****] $ [*****] $ [*****] $ [*****] $ [*****]
NET MIUS RETIRED [*****] [*****] [*****] [*****] [*****] [*****]
MIU RETIREMENT UNIT COST $ [*****] $ [****] $ [****] $ [****] $ [****] $ [****]
MIU RETIREMENT ANNUAL COST $ [******] $ [*] $ [*] $ [*] $ [*] $ [*]
MIU STARTUP UNITS [*****] [*****] [*****] [*****] [*****] [*****]
MIU STARTUP UNIT COST $ [*****] $ [*****] $ [*****] $ [*****] $ [*****] $ [*****]
MIU STARTUP ANNUAL COST $ [*******] $ [*******] $ [*******] $ [*******] $ [*******] $ [*******]
--------------------------------------------------------------------------------
TOTAL PROJECTED COST $ [*******] $ [*******] $ [*******] $ [*******] $ [*******] $ [*******]
================================================================================
|
The information below marked by * and [] has been omitted pursuant to a request for confidential treatment. The omitted portion has been separately filed with the Commission.
EXHIBIT 8
PER READ FEE COMPONENTS
Monthly MIU Asset Fee $[*****]/meter
Base Cost Fee $[*****]/meter
TOTAL MONTHLY MIU FEE $[*****]/METER
Monthly Service Fee $[*****]/meter
TOTAL MONTHLY FEE $[*****]/METER
|
Exhibit 12
THE LACLEDE GROUP, INC. AND SUBSIDIARY COMPANIES
SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-----------------------------------------------------------------
Twelve Months Ended
---------------------------------------------------------------------------------
March 31, September 30,
---------------- -------------------------------------------------------------
(Thousands of Dollars) 2005 2004 2003 2002 2001 2000
---- ---- ---- ---- ---- ----
Income before interest
charges and income taxes $87,371 $84,196 $80,270 $60,440 $73,742 $64,078
Add: One third of
applicable rentals
charged to operating
expense (which
approximates the
interest factor) 2,765 2,333 2,873 2,662 313 310
---------------- -------------------------------------------------------------
Total Earnings $90,136 $86,529 $83,143 $63,102 $74,055 $64,388
================ =============================================================
Interest on long-term debt -
Laclede Gas $23,932 $22,010 $20,169 $20,820 $18,372 $15,164
Other interest 7,008 6,804 6,802 4,989 10,067 8,844
Add: One third of
applicable rentals
charged to operating
expense (which
approximates the
interest factor) 2,765 2,333 2,873 2,662 313 310
---------------- -------------------------------------------------------------
Total Fixed Charges $33,705 $31,147 $29,844 $28,471 $28,752 $24,318
================ =============================================================
Ratio of Earnings to Fixed
Charges 2.67 2.78 2.79 2.22 2.58 2.65
|
LACLEDE GAS COMPANY
SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-----------------------------------------------------------------
Twelve Months Ended
---------------------------------------------------------------------------------
March 31, September 30,
---------------- -------------------------------------------------------------
(Thousands of Dollars) 2005 2004 2003 2002 2001 2000
---- ---- ---- ---- ---- ----
Income before interest
charges and income taxes $70,623 $73,956 $76,274 $56,154 $73,742 $64,078
Add: One third of
applicable rentals
charged to operating
expense (which
approximates the
interest factor) 769 538 457 315 313 310
---------------- -------------------------------------------------------------
Total Earnings $71,392 $74,494 $76,731 $56,469 $74,055 $64,388
================ =============================================================
Interest on long-term debt $23,932 $22,010 $20,169 $20,820 $18,372 $15,164
Other interest 3,382 3,192 3,752 4,285 10,067 8,844
Add: One third of
applicable rentals
charged to operating
expense (which
approximates the
interest factor) 769 538 457 315 313 310
---------------- -------------------------------------------------------------
Total Fixed Charges $28,083 $25,740 $24,378 $25,420 $28,752 $24,318
================ =============================================================
Ratio of Earnings to Fixed
Charges 2.54 2.89 3.15 2.22 2.58 2.65
|
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: April 26, 2005 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: April 26, 2005 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: April 26, 2005 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: April 26, 2005 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 March 31, 2005 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 March 31, 2005 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 March 31, 2005 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 March 31, 2005 fairly presents, in all material respects, the financial condition and results of operations of The Laclede Group, Inc.
Date: April 26, 2005
------------------------
/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 March 31, 2005 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 March 31, 2005 fairly presents, in all material respects, the financial condition and results of operations of Laclede Gas Company.
Date April 26, 2005
------------------------
/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 March 31, 2005 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 March 31, 2005 fairly presents, in all material respects, the financial condition and results of operations of Laclede Gas Company.
Date: April 26, 2005
-----------------------
/s/ Barry C. Cooper
---------------------------------
Barry C. Cooper
Chief Financial Officer
|
Exhibit 99.1
LACLEDE GAS COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
(Thousands)
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- -------------------------
2005 2004 2005 2004
---- ---- ---- ----
Operating Revenues:
Utility $ 434,996 $ 396,898 $ 726,249 $ 658,248
Other 574 628 1,154 1,260
------------------------- -------------------------
Total Operating Revenues 435,570 397,526 727,403 659,508
------------------------- -------------------------
Operating Expenses:
Utility
Natural and propane gas 321,228 288,284 527,652 463,559
Other operation expenses 34,675 32,808 65,600 62,291
Maintenance 4,680 4,641 8,894 9,070
Depreciation and amortization 5,667 5,711 10,972 11,369
Taxes, other than income taxes 26,477 24,897 42,300 39,729
------------------------- -------------------------
Total utility operating expenses 392,727 356,341 655,418 586,018
Other 618 619 1,198 1,224
------------------------- -------------------------
Total Operating Expenses 393,345 356,960 656,616 587,242
------------------------- -------------------------
Operating Income 42,225 40,566 70,787 72,266
------------------------- -------------------------
Other Income and (Income Deductions) - Net (87) 1,857 1,423 3,277
------------------------- -------------------------
Interest Charges:
Interest on long-term debt 5,643 4,815 11,551 9,629
Other interest charges 1,302 987 2,259 2,069
------------------------- -------------------------
Total Interest Charges 6,945 5,802 13,810 11,698
------------------------- -------------------------
Income Before Income Taxes 35,193 36,621 58,400 63,845
Income Tax Expense 12,676 13,241 20,781 23,109
------------------------- -------------------------
Net Income 22,517 23,380 37,619 40,736
Dividends on Redeemable Preferred Stock 15 15 30 31
------------------------- -------------------------
Earnings Applicable to Common Stock $ 22,502 $ 23,365 $ 37,589 $ 40,705
========================= =========================
See notes to financial statements.
|
LACLEDE GAS COMPANY
BALANCE SHEETS
(UNAUDITED)
Mar. 31, Sept. 30, Mar. 31,
2005 2004 2004
---- ---- ----
(Thousands)
ASSETS
Utility Plant $1,093,093 $1,070,522 $1,050,823
Less: Accumulated depreciation and amortization 431,568 423,647 416,767
--------------- -------------- ---------------
Net Utility Plant 661,525 646,875 634,056
--------------- -------------- ---------------
Other Property and Investments 30,497 29,664 29,190
--------------- -------------- ---------------
Current Assets:
Cash and cash equivalents 4,907 2,340 7,997
Accounts receivable:
Gas customers - billed and unbilled 148,776 76,223 127,261
Associated companies 439 300 2,679
Other 53,671 11,231 35,466
Allowances for doubtful accounts (10,921) (9,975) (7,775)
Delayed customer billings 26,867 - 36,141
Inventories:
Natural gas stored underground at LIFO cost 32,682 131,725 29,417
Propane gas at FIFO cost 19,982 15,808 12,914
Materials, supplies, and merchandise at avg. cost 4,748 4,588 4,560
Derivative instrument assets 8,034 15,196 7,098
Unamortized purchased gas adjustments 7,724 19,618 -
Deferred income taxes 6,897 1,321 5,694
Prepayments and other 4,293 6,211 3,845
--------------- -------------- ---------------
Total Current Assets 308,099 274,586 265,297
--------------- -------------- ---------------
Deferred Charges:
Prepaid pension cost 87,292 92,026 104,790
Regulatory assets 104,293 104,703 98,313
Other 5,347 8,127 7,643
--------------- -------------- ---------------
Total Deferred Charges 196,932 204,856 210,746
--------------- -------------- ---------------
Total Assets $1,197,053 $1,155,981 $1,139,289
=============== ============== ===============
See notes to financial statements.
2
|
LACLEDE GAS COMPANY
BALANCE SHEETS (Continued)
(UNAUDITED)
Mar. 31, Sept. 30, Mar. 31,
2005 2004 2004
---- ---- ----
(Thousands, except share amounts)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock and Paid-in capital (10,031, 10,000 and
10,000 shares issued, respectively) $ 138,117 $ 136,052 $ 89,539
Retained earnings 217,618 194,451 217,275
Accumulated other comprehensive loss (371) (371) (582)
-------------- -------------- --------------
Total common stock equity 355,364 330,132 306,232
Redeemable preferred stock (less current sinking fund
requirements) 948 1,108 1,108
Long-term debt (less current portion) 333,985 333,936 234,661
-------------- -------------- --------------
Total Capitalization 690,297 665,176 542,001
-------------- -------------- --------------
Current Liabilities:
Notes payable 86,230 71,380 191,415
Accounts payable 83,920 44,505 55,906
Accounts payable - associated companies 2,710 834 2,891
Advance customer billings - 23,620 -
Current portion of long-term debt and preferred stock 95 25,145 25,150
Wages and compensation accrued 13,338 13,256 12,636
Dividends payable 7,366 7,214 6,601
Customer deposits 11,220 10,661 7,799
Interest accrued 9,835 10,623 7,059
Taxes accrued 37,872 17,669 31,193
Unamortized purchased gas adjustment - - 1,458
Other 5,013 3,232 5,191
-------------- -------------- --------------
Total Current Liabilities 257,599 228,139 347,299
-------------- -------------- --------------
Deferred Credits and Other Liabilities:
Deferred income taxes 188,889 187,831 184,335
Unamortized investment tax credits 4,844 5,010 5,163
Pension and postretirement benefit costs 20,242 20,484 24,635
Regulatory liabilities 14,544 28,210 13,878
Other 20,638 21,131 21,978
-------------- -------------- --------------
Total Deferred Credits and Other Liabilities 249,157 262,666 249,989
-------------- -------------- --------------
Total Capitalization and Liabilities $1,197,053 $1,155,981 $1,139,289
============== ============== ==============
See notes to financial statements.
|
LACLEDE GAS COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
March 31,
--------------------------------
2005 2004
---- ----
(Thousands)
Operating Activities:
Net Income $ 37,619 $ 40,736
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 10,972 11,369
Deferred income taxes and investment
tax credits (1,328) 2,528
Other - net 263 215
Changes in assets and liabilities:
Accounts receivable - net (114,186) (76,100)
Unamortized purchased gas adjustments 11,894 (4,407)
Deferred purchased gas costs (14,690) 26,911
Delayed customer billings - net (50,487) (51,502)
Accounts payable 41,291 6,556
Taxes accrued 20,203 14,906
Natural gas stored underground 99,043 87,765
Other assets and liabilities 11,035 15,968
-------------- -------------
Net cash provided by operating activities $ 51,629 $ 74,945
-------------- -------------
Investing Activities:
Construction expenditures (25,645) (24,719)
Net investment in trusts (1,149) (1,702)
Other investments 339 759
-------------- -------------
Net cash used in investing activities $ (26,455) $(25,662)
-------------- -------------
Financing Activities:
Maturity of first mortgage bonds (25,000) -
Issuance (repayment) of short-term debt - net 14,850 (38,325)
Dividends paid (14,312) (12,818)
Paid-in capital contributions from Laclede Group 1,014 6,950
Issuance of common stock to Laclede Group 1,051 -
Preferred stock reacquired (210) -
-------------- -------------
Net cash used in financing activities $ (22,607) $(44,193)
-------------- -------------
Net Increase in Cash and Cash Equivalents $ 2,567 $ 5,090
Cash and Cash Equivalents at Beginning of Period 2,340 2,907
-------------- -------------
Cash and Cash Equivalents at End of Period $ 4,907 $ 7,997
============== =============
Supplemental Disclosure of Cash Paid (Refunded) During the Period
for:
Interest $ 14,289 $ 11,431
Income taxes (1,574) 2,077
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 2004 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 revenues at March
31, 2005 and 2004, for the Utility, were $26.2 million and $22.3 million,
respectively. After accrual of related gas cost expense, the accrued pre-tax
net revenues at March 31, 2005 and 2004 were $7.9 million and $6.9 million,
respectively. The amount of accrued unbilled revenue at September 30, 2004
was $8.8 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. At March 31, 2005, the Laclede Gas Balance Sheet
reflected a total of $0.4 million of intercompany receivables and $1.8
million of intercompany payables. Laclede Gas may also, on occasion, borrow
funds from, or lend funds to, affiliated companies as well as charge or
reimburse certain tax obligations.
UTILITY PLANT, DEPRECIATION AND AMORTIZATION - In January 2005, the
Missouri Public Service Commission (MoPSC or Commission) issued an Order
effective January 21, 2005 in the Utility's 1999 rate case relative to the
calculation of its depreciation rates. In accordance with the provisions of
the Order, Laclede Gas increased certain of its depreciation rates effective
February 1, 2005 resulting in higher annual depreciation expense totaling
$2.3 million. That same Order also required that operating expenses related
to actual removal costs, which the Utility began expensing as incurred
during fiscal 2002 pursuant to a previous Commission Order, be reduced by
$2.3 million annually. As such, the Order had no immediate effect on income
or the recovery of depreciation expenses.
NEW ACCOUNTING STANDARDS - In November 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 151, "Inventory Costs." This Statement amends the
guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. The provisions of
this statement shall be effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. Laclede Gas does not expect adoption of
this Statement to have a material effect on its financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004)
(123(R)), "Accounting for Stock-Based Compensation." This Statement is a
revision to SFAS No. 123, and establishes standards for the accounting for
transactions in which an entity obtains employee services in share-based
payment transactions. This Statement supersedes Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and its
related implementation guidance. Laclede Group currently accounts for its
Equity Incentive Plan in accordance with APB Opinion No. 25, and provides
pro forma disclosures in its Notes to Consolidated Financial Statements
regarding the effect on net income and earnings as if compensation expense
had been determined based on the fair value recognition provisions of SFAS
No. 123. SFAS No. 123(R) was to be effective for public entities that do not
file as small business issuers as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005. However, in April
2005, the Securities and
Exchange Commission (SEC) amended the compliance date to allow companies to
implement SFAS No. 123(R) at the beginning of their next fiscal year.
Laclede Gas is currently evaluating the provisions of this Statement, and
its effect resulting from Laclede Group's planned adoption of this Statement
effective October 1, 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets." This Statement is an amendment of APB Opinion No. 29,
"Accounting for Nonmonetary Transactions." The guidance in APB Opinion No.
29 is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. This statement
amends APB Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. The provisions of this Statement will be effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. Laclede Gas does not expect adoption of this Statement to have a
material effect on its financial position or results of operations.
In March 2005, the FASB issued Interpretation No. 47 (FIN 47),
"Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies
the manner in which uncertainties concerning the timing and method of
settlement of an asset retirement obligation, as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations," should be accounted for. This
Interpretation also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005. Laclede Gas is currently evaluating the provisions
of this Interpretation.
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. Plan
assets consist primarily of corporate and U.S. government obligations and
pooled equity funds.
Pension costs for the quarters ending March 31, 2005 and 2004 were
$1.1 million. Pension costs for the six months ended March 31, 2005 were
$2.3 million compared with $2.2 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 Six Months Ended
March 31, March 31,
----------------------- ------------------------
(Thousands) 2005 2004 2005 2004
---- ---- ---- ----
Service cost - benefits earned
during the period $ 2,799 $ 2,777 $ 5,598 $ 5,554
Interest cost on projected
benefit obligation 3,994 4,058 7,988 8,115
Expected return on plan assets (5,291) (5,625) (10,582) (11,249)
Amortization of prior service cost 308 331 617 662
Amortization of actuarial loss 730 951 1,460 1,901
Regulatory adjustment (1,408) (1,368) (2,817) (2,737)
----------------------- ------------------------
Net pension cost $ 1,132 $ 1,124 $ 2,264 $ 2,246
======================= ========================
|
Pursuant to the Commission's 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 gains or losses exceed 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 Income and 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 six months ended March 31, 2005 or the
six months ended March 31, 2004.
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.
Postretirement benefit costs for quarters ending March 31, 2005 and
2004 were $2.0 million. Postretirement benefit costs for the six months
ended March 31, 2005 and 2004 were $4.0 million. These costs include amounts
capitalized with construction activities.
Net periodic postretirement benefit costs consisted of the following components:
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
(Thousands) 2005 2004 2005 2004
---- ---- ---- ----
Service cost - benefits earned
during the period $ 844 $ 794 $ 1,689 $ 1,587
Interest cost on accumulated
postretirement benefit obligation 826 801 1,652 1,601
Expected return on plan assets (318) (209) (637) (418)
Amortization of transition obligation 144 265 289 530
Amortization of prior service cost (8) (8) (16) (16)
Amortization of actuarial loss 217 174 434 349
Regulatory adjustment 295 164 590 329
------------------------ ------------------------
Net postretirement benefit cost $ 2,000 $ 1,981 $ 4,001 $ 3,962
======================== ========================
|
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 gains or losses exceed 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.
3. INCOME TAXES
Net provision (benefit) for income taxes was as follows during the periods set forth below:
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- ------------------------
2005 2004 2005 2004
---- ---- ---- ----
(Thousands)
Federal
Current $11,076 $ 10,561 $19,032 $ 17,689
Deferred (301) 863 (1,214) 2,205
State and Local
Current 1,769 1,698 3,077 2,892
Deferred 132 119 (114) 323
----------------------- ------------------------
Total $12,676 $ 13,241 $20,781 $ 23,109
======================= ========================
|
4. OTHER INCOME AND INCOME DEDUCTIONS - NET
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- -----------------------
(Thousands) 2005 2004 2005 2004
---- ---- ---- ----
Investment gains $ - $ 1,947 $ - $ 1,947
Allowance for funds used during construction (24) (29) (49) (61)
Other income 393 262 894 778
Other income deductions (456) (323) 578 613
------------------------- -----------------------
Other income and income deductions - net $ (87) $ 1,857 $1,423 $ 3,277
============= =========== =========== ===========
|
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 represented an initial distribution relating to certain policies held by the Utility. Subsequent distributions are not expected to have a material impact on the consolidated financial position or results of operations of the Company.
5. 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 Non-
Gas Regulated
(Thousands) Distribution Other Eliminations Total
----------------------------------------------------------------------------------------
Three Months Ended
March 31, 2005
--------------
Operating revenues $ 434,996 $ 574 $ - $ 435,570
Net income 22,544 (27) - 22,517
Total assets 1,195,499 1,554 - 1,197,053
Six Months Ended
March 31, 2005
--------------
Operating revenues $ 726,249 $ 1,154 $ - $ 727,403
Net income 37,646 (27) - 37,619
Total assets 1,195,499 1,554 - 1,197,053
Three Months Ended
March 31, 2004
--------------
Operating revenues $ 396,898 $ 628 $ - $ 397,526
Net income 23,374 6 - 23,380
Total assets 1,137,824 1,465 - 1,139,289
Six Months Ended
March 31, 2004
--------------
Operating revenues $ 658,248 $ 1,260 $ - $ 659,508
Net income 40,714 22 - 40,736
Total assets 1,137,824 1,465 - 1,139,289
|
6. COMMITMENTS AND CONTINGENCIES
Laclede Gas owns and operates natural gas distribution,
transmission and storage facilities, the operations of which are subject to
various environmental laws, regulations and interpretations. While
environmental issues resulting from such operations arise in the ordinary
course of business, such issues have not materially affected Laclede Gas'
financial position and results of operations. As environmental laws,
regulations, and their interpretations evolve, however, Laclede Gas may be
required to incur additional costs.
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 remedial 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 March 31, 2005,
Laclede Gas has paid or reserved for these actions. If regulators require
additional remedial 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. Laclede Gas
continues to evaluate options concerning this site, including, but not
limited to, the submission of its own Remedial Action Plan (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 $190,000. 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 to the extent practicable.
Laclede Gas has been advised that a third former manufactured gas
plant site may require remediation. Laclede Gas does not own, and for many
years has not owned, this site. At this time, it is not known whether
Laclede Gas will incur any costs in connection with environmental
investigations of or remediation at the site, and if it does incur any such
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 actions Laclede Gas has taken at the Shrewsbury site
pursuant to the current agreement with state and federal regulators may not
be significant, the scope of costs relative to future remedial actions
regulators may require at the Shrewsbury site and to the other sites is
unknown and may be material.
Laclede Gas has notified its insurers of past and future claims
associated with investigation of and remediation 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 pursue claims against them. With regard to costs incurred under
current agreement regarding the Shrewsbury site, denials of coverage are not
expected to have a material impact on the financial position and results of
operations of Laclede Gas. With regard to the other two sites and with
regard to any future actions that might be required at the Shrewsbury site,
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.
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 Circuit Court of Cole County, Missouri.
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
customers. Pursuant to the Stay Order, Laclede Gas paid $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 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. On March 1, 2005, the Court of Appeals affirmed the
decision of the Cole County Circuit Court, finding that the plain language
of the Utility's tariff permitted Laclede Gas to retain the pre-tax gains.
The Court of Appeals remanded the case to the Cole County Circuit Court,
with instructions to remand the case to the MoPSC for further proceedings
consistent with the Court of Appeals' opinion. The MoPSC did not file for
rehearing or an appeal of the Court of Appeals' opinion. On April 4, 2005,
the Cole County Circuit Court remitted to Laclede Gas the $4.9 million
previously paid into the Court's registry. On April 7, 2005, the Commission
issued its Order on Remand in which it reversed its April 29, 2003 decision
and directed that Laclede Gas be permitted to retain the $4.9 million
consistent with the Court of Appeals opinion. The Commission's Order on
Remand is now final and unappealable. The return of the pre-tax gains,
however, was previously recorded as income in the 2002 fiscal year, so the
decision will have no effect on the future financial position or results of
operations of Laclede Gas.
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 operation of
the Utility.
On March 11, 2005, Laclede Gas Company signed a 15-year service
agreement with Cellnet Technology, Inc., to install and operate an automated
meter reading (AMR) system. Upon implementation, the Utility will pay
Cellnet monthly for successful billing reads. AMR is designed to eliminate
the need for Laclede, which has nearly 40 percent of its approximately
650,000 meters indoors, to gain physical access to meters in order to obtain
monthly meter readings. Under the terms of the agreement, Cellnet will
install and own the system as well as handle data collection, meter data
delivery, and network operation and maintenance services. Installation of
equipment on customer meters is scheduled to begin in July 2005 and will
take approximately two years to complete. The Cellnet AMR system employs a
wireless fixed network with read devices that will be attached to existing
Laclede Gas customer meters. Reads from each meter are transmitted to local
network receivers and transferred to Laclede's customer billing system,
resulting in the production of a timely, accurate bill.
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;
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 stabilizes the Utility's earnings by recovering fixed costs more evenly during the heating season. The weather mitigation rate design minimizes the impact of weather volatility during the peak cold months of December through March and reduces the impact of weather volatility, to a lesser extent, during the months of November and April. 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 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. The Utility's income from off-system sales remains subject to fluctuations in market conditions. Some of the factors impacting the level of off-system sales include the availability and cost of its natural gas supply, the weather in the Utility's service area, and the weather in other markets. When Laclede Gas' service area experiences warmer-than-normal weather while other markets experience colder weather or supply constraints, some of the Utility's natural gas supply is available for off-system sales and there may be a demand for such supply in other markets. 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 quarters of the fiscal year.
Laclede Gas' net income applicable to common stock for the quarter ended March 31, 2005 was $22.5 million, compared with net income of $23.4 million for the same quarter last year. The decrease in net income of $0.9 million is primarily attributable to the following factors, quantified on a pre-tax basis:
o non-operating income that decreased $1.9 million, primarily due to the
proceeds recorded during the quarter ended March 31, 2004 related to
the Company's interest, as a policyholder, in the sale of a mutual
insurance company totaling $1.9 million;
o higher interest charges totaling $1.1 million, primarily due to the
issuance of additional long-term debt;
o increases in operation and maintenance expenses of $1.0 million; and,
o a higher provision for uncollectible accounts totaling $0.9 million.
These factors were partially offset by:
o higher income this year from off-system sales and capacity release
totaling $2.5 million; and,
o the recovery of eligible costs incurred to build and maintain the
Utility's distribution system through the implementation of
Infrastructure System Replacement Surcharges effective June 10, 2004
and January 20, 2005 totaling $1.2 million.
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 income.
Regulated operating revenues for the quarter ended March 31, 2005 were $435.0 million, or $38.1 million greater than the same period last year. Temperatures experienced in the Utility's service area during the quarter were 10% warmer than normal and 3% warmer than the same period last year. Total therms sold and transported were 510.7 million, an increase of 2.7 million, or 0.5%, above the quarter ended March 31, 2004. The increase in regulated operating revenues was primarily attributable to the following factors:
Millions
-------------
Higher wholesale gas costs (passed on to Utility customers subject to
prudence review by the MoPSC) $ 29.4
Lower system sales volumes resulting from warmer weather and other variations (21.7)
Higher off-system sales volumes, reflecting more favorable market
conditions as described in greater detail in the Results of Operations 18.5
Higher prices charged for off-system sales 10.7
Partial-year effect of the Infrastructure System Replacement Surcharges (ISRS) 1.2
-------------
Total Variation $ 38.1
=============
|
Regulated operating expenses for the quarter ended March 31, 2005 increased $36.4 million from the same quarter last year. Natural and propane gas expense increased $32.9 million from 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 $1.9 million, or 5.1%, primarily due to a higher provision for uncollectible accounts, increased insurance premiums and higher wage rates. These factors were partially offset by decreased distribution charges, lower pension costs and decreased group insurance charges. Taxes, other than income, increased $1.6 million, or 6.3%, primarily due to higher gross receipts taxes (reflecting increased revenues).
Other Income and (Income Deductions) - Net
The $1.9 million decrease in other income and income deductions - net was primarily attributable to the Utility's recognition of the receipt of proceeds totaling $1.9 million related to its interest, as a policyholder, in the sale of a mutual insurance company during the quarter ended March 31, 2004.
Interest Charges
The $1.1 million increase in interest charges was primarily due to higher interest on long-term debt due to the April 2004 issuance of $50 million principal amount of 5 1/2% First Mortgage Bonds and $100 million principal amount of 6% First Mortgage Bonds, partially offset by the early redemption in June 2004 of $50 million principal amount of 6 5/8% First Mortgage Bonds and the November 2004 maturity of $25 million principal amount of 8 1/2% First Mortgage Bonds.
Income Taxes
The decrease in income taxes was primarily attributable to lower pre-tax income.
Laclede Gas' net income for the six months ended March 31, 2005 was $37.6 million, compared with $40.7 million reported for the same period last year. The year-to-year decrease net income of $3.1 million was primarily attributable to the following factors, quantified on a pre-tax basis.
o higher interest charges totaling $2.1 million, primarily due to the
issuance of additional long-term debt;
o non-operating income decreased $1.9 million, essentially due to the
proceeds recorded during the quarter ended March 31, 2004 related to
the Company's interest, as a policyholder, in the sale of a mutual
insurance company totaling $1.9 million;
o the net effect of lower system gas sales volumes totaling $1.8 million
primarily due to an unseasonably warm weather pattern in November;
o other increases in operation and maintenance expenses totaling $1.7
million; and,
o a higher provision for uncollectible accounts totaling $1.4 million.
These factors were partially offset by:
o the recovery of eligible costs incurred to build and maintain the
Utility's distribution system through the implementation of
Infrastructure System Replacement Surcharges effective June 10, 2004
and January 20, 2005 totaling $2.1 million; and,
o higher income this year from off-system sales and capacity release
totaling $1.2 million.
Regulated Operating Revenues and Operating Expenses
Regulated operating revenues for the six months ended March 31, 2005 were $726.2 million, or $68.0 million greater than the same period last year. Temperatures experienced in the Utility's service area during the six months ended March 31, 2005 were 12% warmer than normal and essentially equal to the same period last year. Total therms sold and transported were 834.3 million, a decrease of 27.8 million, or 3.2%, below the six months ended March 31, 2004. The increase in regulated operating revenues was primarily attributable to the following factors:
Millions
-------------
Higher wholesale gas costs (passed on to Utility customers subject to
prudence review by the MoPSC) $ 67.2
Lower system sales volumes resulting from warmer weather and other variations (25.0)
Higher prices charged for off-system sales 18.3
Higher off-system sales volumes, reflecting more favorable market
conditions as described in greater detail in the Results of Operations 5.4
Partial-year effect of the ISRS 2.1
-------------
Total Variation $ 68.0
=============
|
Regulated operating expenses for the six months ended March 31, 2005 increased $69.4 million from the same period last year. Natural and propane gas expense increased $64.1 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 $3.1 million, or 4.4%, primarily due to a higher provision for uncollectible accounts, increased insurance premiums, and higher wage rates. These factors were partially offset by lower pension costs and decreased group insurance charges. Taxes, other than income, increased $2.6 million, or 6.5%, primarily due to higher gross receipts taxes (attributable to the increased revenues).
Other Income and (Income Deductions) - Net
The $1.9 million decrease in other income and income deductions - net was primarily attributable to the Utility's recognition of the receipt of proceeds totaling $1.9 million related to its interest, as a policyholder, in the sale of a mutual insurance company last year.
Interest Charges
The $2.1 million increase in interest charges was primarily due to higher interest on long-term debt due to the April 2004 issuance of $50 million principal amount of 5 1/2% First Mortgage Bonds and $100 million principal amount of 6% First Mortgage Bonds, partially offset by the early redemption in June 2004 of $50 million principal amount of 6 5/8% First Mortgage Bonds and the November 2004 maturity of $25 million principal amount of 8 1/2% First Mortgage Bonds.
Income Taxes
The decrease in income taxes was primarily attributable to lower pre-tax income.
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 January 11, 2005, the Commission issued an Order ruling in favor of Laclede Gas on the depreciation issue. As a direct result of the Commission's Order ruling in favor of the Utility's position, Laclede Gas increased certain of its depreciation rates effective February 1, 2005 resulting in higher annual depreciation expense totaling $2.3 million, as it originally requested. That same Order also required that operating expenses related to actual removal costs, which the Utility began expensing as incurred during fiscal 2002 pursuant to a previous Commission Order be reduced by $2.3 million annually. As such, there was no effect on net income, and the Commission's decision had no immediate effect on the Utility's recovery of depreciation expenses. However, the Utility expects that the Commission's confirmation of Laclede Gas' position on the proper method for calculating depreciation rates will result in increased cash flows from capital recovery in future rate cases.
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 Circuit Court of Cole County, Missouri. 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 customers. Pursuant to the Stay Order, Laclede Gas paid $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 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. On March 1, 2005, the Court of Appeals affirmed the decision of the Cole County Circuit Court, finding that the plain language of the Utility's tariff permitted Laclede Gas to retain the pre-tax gains. The Court of Appeals remanded the case to the Cole County Circuit Court, with instructions to remand the case to the MoPSC for further proceedings consistent with the Court of Appeals' opinion. The MoPSC did not file for rehearing or an appeal of the Court of Appeals' opinion. On April 4, 2005, the Cole County Circuit Court remitted to Laclede Gas the $4.9 million previously paid into the Court's registry. On April 7, 2005, the Commission issued its Order on Remand in which it reversed its April 29, 2003 decision and directed that Laclede Gas be permitted to retain the $4.9 million consistent with the Court of Appeals opinion. The Commission's Order on Remand is now final and unappealable. The return of the pre-tax gains, however, was previously recorded as income in the 2002 fiscal year, so the decision will have no effect on the future financial position or results of operations of Laclede Gas.
Laclede Gas filed its first Infrastructure System Replacement Surcharge (ISRS) filing with the MoPSC on March 1, 2004 to increase revenues by approximately $3.86 million annually. The 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 June 1, 2004, the MoPSC approved a Stipulation and Agreement ("S&A") between Laclede Gas and the Staff of the Commission that provided for a $3.56 million annual surcharge effective June 10, 2004. Laclede Gas made its second ISRS filing on October 28, 2004 to increase revenues by approximately an additional $1.6 million annually. On
January 4, 2005, the MoPSC approved a S&A between Laclede Gas and the Staff of the Commission that provided for a $1.42 million annual increase in ISRS revenues effective January 20, 2005. Laclede Gas made its third ISRS filing on April 4, 2005 to increase revenues by approximately an additional $1.3 million annually. The MoPSC has not yet acted on the Company's latest request.
On February 18, 2005, Laclede Gas filed tariff sheets with the MoPSC requesting a general rate increase of approximately $34 million. If granted, customers' bills would increase by an average of 4.1%. Although the filing requests an annual increase of $39.0 million, $5.0 million of that amount is already being billed to customers through the current ISRS, which would cease upon the effective date of new rate schedules approved by the MoPSC. The Utility's filing also includes a proposal to modify the Utility's gas supply incentive plan. On February 28, 2005, the MoPSC suspended implementation of the Utility's proposed rates until January 2006. Historically, the MoPSC has not granted Laclede Gas' rate increase requests in full.
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 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 (PGA) Clause 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. 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 Exhibit 99.1 of the Laclede Group's Form 10-K for the fiscal year ended September 30, 2004.
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs." This Statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. The provisions of this statement shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Laclede Gas does not expect adoption of this Statement to have a material effect on its financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) (123(R)), "Accounting for Stock-Based Compensation." This Statement is a revision to SFAS No. 123, and establishes standards for the accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement supersedes Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. Laclede Group currently accounts for its Equity Incentive Plan in accordance with APB Opinion No. 25, and provides pro forma disclosures in its Notes to Consolidated Financial Statements regarding the effect on net income and earnings as if compensation expense had been determined based on the fair value recognition provisions of SFAS No. 123. SFAS No. 123(R) was to be effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, in April 2005, the Securities and Exchange Commission (SEC) amended the compliance date to allow companies to implement SFAS No. 123(R) at the beginning of their next fiscal year. Laclede Gas is currently evaluating the provisions of this Statement, and its effect resulting from Laclede Group's planned adoption of this Statement effective October 1, 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets." This Statement is an amendment of APB Opinion No. 29, "Accounting for Nonmonetary Transactions." The guidance in APB Opinion No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The provisions of this Statement will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Laclede Gas does not expect adoption of this statement to have a material effect on its financial position or results of operations.
In March 2005, the FASB issued Interpretation No. 47 (FIN 47), "Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies the manner in which uncertainties concerning the timing and method of settlement of an asset retirement obligation, as used in SFAS No. 143, "Accounting for Asset Retirement Obligations," should be accounted for. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is
effective no later than the end of fiscal years ending after December 15, 2005. Laclede Gas is currently evaluating the provisions of this Interpretation.
FINANCIAL CONDITION
As of March 31, 2005, 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 has investment grade ratings, and believes that it will have 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 six months ended March 31, 2005 was $51.6 million, a $23.3 million decrease, compared with the same period last year. The decrease in cash provided by operating activities was primarily attributable to the net effects of changes in wholesale gas prices and higher off-system sales on accounts receivable, accounts payable, and deferred purchased gas costs.
Net cash used in investing activities for the six months ended March 31, 2005 was $26.5 million compared with $25.7 million for the six months ended March 31, 2004. Cash used in investing activities primarily reflected Utility construction expenditures in both periods.
Net cash used in financing activities was $22.6 million for the six months ended March 31, 2005 compared with $44.2 million for the six months ended March 31, 2004. The variation primarily reflects the issuance of additional short-term debt this year, partially offset by the November 2004 maturity of $25 million principal amount of 8 1/2% First Mortgage Bonds.
As indicated above, the Utility's short-term borrowing requirements typically peak during colder months. These 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 $300 million, with $15 million expiring in April 2006 and $285 million expiring in September 2009. Short-term commercial paper borrowings outstanding at March 31, 2005 were $86.2 million at a weighted average interest rate of 2.8% per annum. Based on short-term borrowings at March 31, 2005, a change in interest rates of 100 basis points would increase or decrease Laclede Gas pre-tax earnings and cash flows by approximately $0.9 million on an annual basis.
Most of Laclede Gas' lines of credit include covenants limiting total debt, including short-term debt, to no more than 70% of total capitalization and requiring earnings before interest, taxes, depreciation and amortization (EBITDA) for a trailing twelve-month period to be at least 2.25 times interest expense. On March 31, 2005, total debt was 54% of total capitalization. For the twelve months ending March 31, 2005, EBITDA was 3.4 times interest expense.
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 March 31, 2005. The original MoPSC authorization for issuing securities registered on this Form S-3 expired in September 2003. In response to an application filed by the Utility, the MoPSC extended this authorization to issue debt and equity securities and receive capital contributions through October 31, 2006. The remaining MoPSC authorization is $64.4 million, reflecting capital contributions that have been made by Laclede Group to Laclede Gas under this authority through March 2005. The amount, timing and type of additional financing to be issued under this shelf registration will depend on cash requirements and market conditions.
In April 2004, Laclede Gas issued $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 approximately $147.9 million from this issuance were used to repay short-term debt and to call at par the $50 million principal amount of 6 5/8% Series First Mortgage Bonds in June 2004. The proceeds were also used to pay at maturity $25 million principal amount of 8 1/2% First Mortgage Bonds in November 2004. At March 31, 2005, Laclede Gas had fixed-rate long-term debt totaling $335 million. 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.
In January 2005, the Board of Directors of Laclede Gas desired to sell shares to its sole shareholder, Laclede Group, at a price per share equal to book value. However, Laclede Gas is prohibited from issuing fractional shares, so the Board first authorized a stock dividend of ninety-nine shares of its common stock on each outstanding share of its common stock to be paid on January 21, 2005 to increase its outstanding shares from 100 to 10,000. The Board subsequently approved the sale of 31 shares of Laclede Gas common stock to Laclede Group at a price per share equal to book value during the quarter ended March 31, 2005. The proceeds from this sale, totaling $1.1 million were used to reduce short-term borrowings.
Utility construction expenditures were $25.5 million for the six months ended March 31, 2005, compared with $24.7 million for the same period last year.
Capitalization at March 31, 2005, excluding current obligations of preferred stock, consisted of 51.5% common stock equity, 0.1% preferred stock equity and 48.4% long-term debt.
It is management's view that Laclede Gas 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 March 31, 2005 and at September 30, 2004, 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 March 31, 2004 is presented to facilitate comparison of these items with the corresponding interim period of the preceding fiscal year.
As of March 31, 2005, Laclede Gas had contractual obligations with payments due as summarized below (in millions):
Payments due by period
---------------------------------------------------------------
Remaining Fiscal Fiscal Fiscal Years
Fiscal Year Years Years 2010 and
Contractual Obligations Total 2005 2006-2007 2008-2009 thereafter
-----------------------------------------------------------------------------------------------------------------
Long-Term Debt (a) $ 692.1 $ 11.3 $ 81.7 $ 73.7 $525.4
Capital Leases - - - - -
Operating Leases (b) 10.2 1.5 5.1 3.2 .4
Purchase Obligations - Natural Gas (c) 368.7 235.1 121.0 6.6 6.0
Purchase Obligations - Other (d) 130.0 4.1 16.3 18.4 91.2
Other Long-Term Liabilities - - - - -
----------------------------------------------------------------------------
Total (e) $1,201.0 $252.0 $224.1 $101.9 $623.0
============================================================================
(a) Long-term debt obligations reflect principal maturities and
interest payments.
(b) Operating lease obligations are primarily for office space,
vehicles, and power operated equipment. Additional payments will be
incurred if renewal options are exercised under the provisions of
certain agreements.
(c) These purchase obligations represent the minimum payments required
under existing natural gas transportation and storage contracts and
natural gas supply agreements. These amounts reflect fixed
obligations as well as obligations to purchase natural gas at
future market prices, calculated using March 31, 2005 NYMEX futures
prices. Laclede Gas recovers the costs related to its purchases,
transportation, and storage of natural gas through the operation of
its Purchased Gas Adjustment Clause, subject to prudence review;
however, variations in the timing of collections of gas costs from
customers affect short-term cash requirements. Additional
contractual commitments may be entered into during the heating
season.
(d) These purchase obligations reflect miscellaneous agreements for the
purchase of materials and the procurement of services necessary for
normal operations.
(e) Commitments related to pension and postretirement benefit plans
have been excluded from the table above. Laclede Gas does not
expect to make any contributions to its qualified, trusteed pension
plans in fiscal 2005. Laclede Gas anticipates it will make a $0.1
million contribution relative to its non-qualified pension plans
during the remainder of fiscal 2005. With regard to the
postretirement benefits, the Utility anticipates it will contribute
$3.8 million to the qualified trusts and $0.2 million directly to
participants from Laclede Gas' funds during the rest of fiscal
2005. For further discussion of the Utility's pension and
postretirement benefit plans, refer to Note 2, Pensions and Other
PostRetirement Benefits.
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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 March 31, 2005, the Utility held approximately 5.9 million MMBtu of futures contracts at an average price of $7.68 per MMBtu. Additionally, approximately 9.5 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 2006.
Laclede Gas owns and operates natural gas distribution, transmission and storage facilities, the operations of which are subject to various environmental laws, regulations and interpretations. While environmental issues resulting from such operations arise in the ordinary course of business, such issues have not materially affected Laclede Gas' financial position and results of operations. As environmental laws, regulations, and their interpretations evolve, however, Laclede Gas may be required to incur additional costs.
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 remedial 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 March 31, 2005, Laclede Gas has paid or reserved for these actions. If regulators require additional remedial 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. Laclede Gas continues to evaluate options concerning this site, including, but not limited to, the submission of its own Remedial Action Plan (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 $190,000. 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 to the extent practicable.
Laclede Gas has been advised that a third former manufactured gas plant site may require remediation. Laclede Gas does not own, and for many years has not owned, this site. At this time, it is not known whether Laclede Gas will incur any costs in connection with environmental investigations of or remediation at the site, and if it does incur any such 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 actions Laclede Gas has taken at the Shrewsbury site pursuant to the current agreement with state and federal regulators may not be significant, the scope of costs relative to future remedial actions regulators may require at the Shrewsbury site and to the other sites is unknown and may be material.
Laclede Gas has notified its insurers of past and future claims associated with investigation of and remediation 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 pursue claims against them. With regard to costs incurred under current agreement regarding the Shrewsbury site, denials of coverage are not expected to have a material impact on the financial position and results of operations of Laclede Gas. With regard to the other two sites and with regard to any future actions that might be required at the Shrewsbury site, 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.