Washington, D. C. 20549
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:
* 100% owned by The Laclede Group, Inc.
This Quarterly Report on Form 10-Q is a combined report being filed by two separate registrants: The Laclede Group, Inc. (Laclede Group or the Company) and Laclede Gas Company (Laclede Gas or the Utility).
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, 2007.2008.
THE LACLEDE GROUP, INC.
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. This Form 10-Q should be read in conjunction with the Notes to Consolidated Financial Statements contained in the Company’s Fiscal Year 20072008 Form 10-K.
The amounts of compensation cost recognized for share-based compensation arrangements for the quarters ended December 31, 2008 and 2007 are presented below:
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” As discussed in Note 2 to the Consolidated Financial Statements included in the Company’s Fiscal Year 2007 Form 10-K, Laclede Group adopted the recognition and disclosure provisions of this Statement effective September 30, 2007. The Statement also requires that plan assets and benefit obligations be measured as of the date of the employer’s fiscal year-end statement of financial position. This requirement is effective for the Company as of the end of fiscal year 2009. In conjunction with adoption of this provision of SFAS No. 158, the Company will be required to change its valuation date for its pension and other postretirement plans from June 30 to September 30. The Company is currently evaluatingwill adopt this provision on September 30, 2009. Adoption will require certain adjustments to retained earnings and other comprehensive income, the impacttotal amounts of adoptionwhich will not be known until the September 30, 2009 actuarial valuation of the change in measurement date on its consolidated financial statements.plans is complete. However, the majority of these adjustments, attributable to the Company’s qualified pension plans and other postretirement benefit plans, are expected to be deferred with entries to regulatory assets.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” The Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. Upon adoption of SFAS No. 159, entities are permitted to choose, at specified election dates, to measure eligible items at fair value (fair value option). Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each reporting date. The decision about whether to elect the fair value option is applied instrument by instrument with few exceptions. The decision is also irrevocable (unless a new election date occurs) and must be applied to entire instruments and not to portions of instruments. SFAS No. 159 requires that cash flows related to items measured at fair value be classified in the statement of cash flows according to their nature and purpose as required by SFAS No. 95, “Statement of Cash Flows” (as amended). The Company adopted SFAS No. 159 is effective for the Company as of the beginning of fiscal year 2009.on October 1, 2008. The Company isdid not elect the fair value option for any instruments not currently evaluatingreported at fair value. Therefore, the provisionsadoption of this Statement.Statement had no effect on the Company’s financial position or results of operations.
In June 2007, the FASB ratified the consensus reached in Emerging Issues Task Force (EITF) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” This Issue addresses how an entity should recognize the tax benefit received on dividends that are (a) paid to employees holding equity-classified nonvested shares, equity-classified nonvested share units, or equity-classified outstanding share options and (b) charged to retained earnings under SFAS No. 123(R). The Task Force reached a consensus that such tax benefits should be recognized as an increase in additional paid-in capital. This EITF Issue also addresses how the accounting for these tax benefits is affected if an entity’s estimate of forfeitures changes in subsequent periods. This EITF Issue is effective for Laclede Group as ofWith the beginning of fiscal year 2009. The Company is currently evaluating the provisionsadoption of this EITF Issue.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” by requiring enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement will be effective for the Company’s interim and annual financial statements beginning in the second quarter of fiscal year 2009. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently evaluating the provisions of this Statement.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with generally accepted accounting principles. This statement will be effective 60 days after the Securities and Exchange Commission approves the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company does not anticipate that theadopted this Statement effective November 15, 2008. The adoption of SFAS No. 162 willdid not have any effect on its consolidated financial statements.
In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method described by SFAS No. 128, “Earnings per Share.” The guidance in this FSP states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This FSP is effective for Laclede Group as of the beginning of fiscal year 2010. The FSP requires that the guidance be applied retrospectively to all prior-period EPS data presented. The Company is currently assessing the potential impact of this FSP on its EPS calculations.
On March 31, 2008, the Company completed the sale of 100% of its interest in its wholly-owned subsidiary, SM&P Utility Resources, Inc. (SM&P), to Stripe Acquisition, Inc. (an affiliate of Kohlberg Management VI, LLC) for $85 million in cash, subject to certain closing and post-closing adjustments. SM&P is an underground facilities locating and marking business that previously comprised Laclede Group’s Non-Regulated Services operating segment. The sales agreement included representations, warranties, and indemnification provisions customary for such transactions and was filed as an exhibit to the March 31, 2008 Form 10-Q. For information concerning Laclede Group’s obligations under these provisions, see Note 10,9, Commitments and Contingencies.
In accordance with generally accepted accounting principles, the operating results of SM&P have been aggregated and reported on the Statements of Consolidated Income as IncomeLoss from Discontinued Operations, Net of Income Tax. The Company has reported in discontinued operations interest expense based on amounts previously recorded by SM&P. For the quarter ended June 30,December 31, 2007, discontinued operations includes pre-tax interest expense of $0.9$0.8 million. For the nine months ended June 30, 2008 and 2007, discontinued operations includes pre-tax interest expense of $1.6 million and $2.5 million, respectively. Discontinued operations does not include general corporate overheads. Incomeoverhead expense. Loss from Discontinued Operations reported in the Statements of Consolidated Income consists of the following:
The assets and liabilities of SM&P have been segregated from continuing operations and have been reported as assets or liabilities of discontinued operations on the Consolidated Balance Sheets. Assets and liabilities of SM&P reported in the Consolidated Balance Sheets as discontinued operations consist of the following:
SFAS No. 128 “Earnings Per Share,” requires dual presentation of basic and diluted EPS. Basic EPS does not include potentially dilutive securities and is computed by dividing net income 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 at the beginning of each respective period, or at the date of grant or award, if later. Shares attributable to stock options and time-vested restricted stock are excluded from the calculation of diluted earnings per share if the effect would be antidilutive. For both the quarter and nine months ended June 30,December 31, 2008, there were no shares attributable to antidilutive outstanding stock options or time-vested restricted stockwere excluded from the calculation of diluted earnings per share. For the quarter and nine months ended June 30,December 31, 2007, there105,500 shares attributable to antidilutive outstanding stock options were 207,500 and 114,500 antidilutive shares, respectively.excluded from the calculation of diluted earnings per share. Performance-contingent restricted stock awards are only included in the calculation of diluted earnings per share to the extent the underlying performance conditions are satisfied (a) prior to the end of the reporting period or (b) would be satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive. For both the quarterquarters ended December 31, 2008 and nine months ended June 30, 2008, 149,0002007, 193,050 and 191,100 shares and share units, respectively, of nonvested performance-contingent restricted stock were excluded from the calculation of diluted earnings per share. For both the quarter and nine months ended June 30, 2007, 110,000 shares were excluded.
Laclede Gas has non-contributory defined benefit, trusteed forms of pension plans covering substantially all employees. Benefits are based on years of service and the participant’s compensation during the highest three years of the last ten years of employment. Plan assets consist primarily of corporate and U.S. government obligations and pooled equity funds.
Pursuant to the provisions of the Laclede Gas pension plans, pension obligations may be satisfied by lump-sum cash payments. Pursuant to a Missouri Public Service Commission (MoPSC or Commission) 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 sumlump-sum payments were recognized as settlements during the ninethree months ended June 30, 2008. Lump sum payments recognized as settlements during the nine months ended June 30, 2007 were $2.8 million.December 31, 2008 and December 31, 2007.
Pursuant to a MoPSC Order, the return on plan assets is based on the market-related value of plan assets implemented prospectively over a four-year period. Gains or losses not yet includible in pension cost are amortized only to the extent that such gain or loss exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. The recovery in rates for the Utility’s qualified pension plans is based on an allowance of $4.1 million annually effective October 1, 2005 and $4.8 million annually effective August 1, 2007. The difference between this amount and pension expense as calculated pursuant to the above and that otherwise would be included in the Statements of Consolidated Income and Consolidated Comprehensive Income is deferred as a regulatory asset or regulatory liability.
Laclede Gas provides certain life insurance benefits at retirement. Medical insurance is available after early retirement until age 65. The transition obligation not yet includible in postretirement benefit cost is being amortized over 20 years. Postretirement benefit costs for both the quarters ended June 30,December 31, 2008 and 2007 were $1.9 million, and $2.0 million, respectively, including amounts charged to construction. Postretirement benefit costs for the nine months ended June 30, 2008 and 2007 were $5.7 million and $5.9 million, respectively, including amounts charged to construction.
Missouri state law provides for the recovery in rates of SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” accrued costs provided that such costs are funded through an independent, external funding mechanism. Laclede Gas established 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.
Pursuant to a MoPSC Order, the return on plan assets is based on the market-related value of plan assets implemented prospectively over a four-year period. Gains and losses not yet includible in postretirement benefit cost are amortized only to the extent that such gain or loss exceeds 10% of the greater of the accumulated postretirement benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. Previously, the recovery in rates for the postretirement benefit costs was based on an alternative methodology for amortization of unrecognized gains and losses as ordered by the MoPSC. The Commission ordered that the recovery in rates be based on an annual allowance of $7.6 million, effective August 1, 2007. The difference between this amount and postretirement benefit cost based on the above and that otherwise would be included in the Statements of Consolidated Income and Consolidated Comprehensive Income is deferred as a regulatory asset or regulatory liability.
In the course of its business, Laclede Group’s non-regulated gas marketing affiliate, Laclede Energy Resources, Inc. (LER), enters into fixed-price commitments associated with the purchase or sale of natural gas. LER manages the price risk associated with these commitments by either closely matching the offsetting physical purchase or sale of natural gas at fixed prices or through the use of exchange-traded futures contracts to lock in margins. At June 30,December 31, 2008, LER’s unmatched positions were not material to Laclede Group’s financial position or results of operations.
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. Accumulated Other Comprehensive Income is a component of Total 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 hedged transactions occur. As of June 30,Based on market prices at December 31, 2008, it is expected that approximately $10.0$3.3 million of pre-tax unrealized lossesgains will be reclassified into the Consolidated Statement of Income during the next twelve months. The ineffective portions of these hedge instruments are charged or credited to Non-Regulated Gas Marketing Operating Revenues or Expenses. The net amount of pre-tax losses recognized in earnings for the ineffective portion of cash flow hedges was $0.9 million for the quarter ended June 30, 2008 and $1.3 million for the nine months ended June 30, 2008. The net amount of pre-tax gains recognized in earnings for the ineffective portion of cash flow hedges was $0.5$2.2 million for the quarter ended June 30, 2007. The net amount of ineffectiveness recognizedDecember 31, 2008 and $0.3 million for the nine monthsquarter ended June 30, 2007 was not material.December 31, 2007. 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.
6. | LONG-TERM DEBT TO UNCONSOLIDATED AFFILIATE TRUSTFAIR VALUE MEASUREMENTS |
In fiscal year 2003, Laclede Group formed Laclede Capital Trust I (Trust), its affiliated, nonconsolidated trust,As discussed in the New Accounting Standards section of Note 1, effective October 1, 2008, the Company partially adopted the provisions of SFAS No. 157. This Statement establishes a three-level hierarchy for fair value measurements that prioritizes the sole purpose of issuing trust securities and investing the gross proceedsinputs used to measure fair value. Assessment of the salesignificance of a particular input to the fair value measurements may require judgment and may affect the valuation of the trustasset or liability and its placement within the fair value hierarchy.
The following table categorizes the assets and liabilities in the Consolidated Balance Sheets that are accounted for at fair value on a recurring basis in periods subsequent to initial recognition.
| | | As of December 31, 2008 | |
| (Thousands) | | Total | | Quoted Prices in Active Markets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
| Assets | | | | | | | | | | | | | |
| Marketable securities | | $ | 8,918 | | $ | 8,918 | | $ | — | | $ | — | |
| Derivative instruments | | | 25,381 | | | 24,997 | | | 384 | | | — | |
| Total | | $ | 34,299 | | $ | 33,915 | | $ | 384 | | $ | — | |
| | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | |
| Derivative instruments | | $ | 7 | | $ | — | | $ | 7 | | $ | — | |
Marketable securities included in debtLevel 1 are mutual funds valued based on quoted market prices of identical securities that are provided by the trustees of Laclede Group. Allthese securities. Derivative instruments included in Level 1 are valued using quoted market prices on the New York Mercantile Exchange. Derivative instruments included in Level 2 are non-exchange traded derivatives and are valued using broker or dealer quotation services or by using observable market inputs. Marketable securities are included in the Other investments line of the Trust securities had a liquidation value of $25 per share and a dividend rate of 7.70%, with all of its common securities being owned by Laclede Group and all of its preferred securities being sold to the public. The Trust’s sole asset was the Company’s $46.4 million aggregate principal amount of 7.70% debentures due December 1, 2032, which had the same economic terms as the Trust securities and were reflected as Long-term debt to unconsolidated affiliate trust on the Consolidated Balance Sheets. The Company’s investment in the Trust common securities was included on the Other investments line on the Consolidated Balance Sheets.
On May 5, 2008, Laclede Group redeemed in full its $46.4 million subordinated debentures, which also triggered the redemption of all of the Trust common and preferred securities on the same date. Interest on the debentures and distributions on the Trust securities ceased on and after the redemption date. Upon redemption, Laclede Group recognized a pre-tax loss of $1.4 million, primarily attributable to unamortized issuance costs. A portion of the proceeds received from the sale of SM&P was used to fund the redemption. The Trust was dissolved on June 16, 2008.
The Company adopted the provisions of FIN 48, “AccountingLiabilities for Uncertainty in Income Taxes,” as of October 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” Pursuant to FIN 48, the Company may recognize the tax benefit from a tax position only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
Upon adoption of FIN 48, the Company recognized a reduction to beginning retained earnings as a cumulative-effect adjustment totaling $1.1 million, reclassified $2.5 million of income tax liabilities from current to non-current liabilities, and increased its liabilities for accrued interest and penalties. Total unrecognized tax benefits as of October 1, 2007 were $2.1 million, all of which would have favorably impacted the effective tax rate, if recognized. The Company recognizes potential accrued interest and penalties related to its uncertain tax positions as interest expense and other income deductions, respectively. Potential interest and penalties accrued (net of income tax benefit) associated with the Company’s uncertain tax positions were $1.5 million at October 1, 2007. Unrecognized tax benefits, accrued interest payable, and accrued penalties payablederivative instruments are included in the Other line of the Deferred Credits and OtherCurrent Liabilities section of the Consolidated Balance Sheets.
The Company is subject to U.S. federal income tax as well as income tax of state and local jurisdictions. The Company is no longer subject to examination for fiscal years prior to 2005. The federal statute of limitations remains open until June 15, 2009 and 2010 for fiscal years 2005 and 2006, respectively. However, during the quarter ended March 31, 2008, the Company effectively settled an audit with the Internal Revenue Service for those periods. Completion of the audit represents an event requiring the Company to re-evaluate its uncertain tax positions. As a result, the Company recognized fiscal years 2005 and 2006 unrecognized tax benefits of $1.0 million, which favorably impacted the effective tax rate, and reversed $1.6 million of accrued interest and penalties (net of income tax benefit). During the quarter ended June 30, 2008, the statute of limitations for the Company’s fiscal year 2004 expired. As a result, previously unrecognized tax benefits of $0.3 million were recognized by the Company, which favorably impacted the effective tax rate, and $0.1 million of related accrued interest and penalties were reversed (net of income tax benefit).
Total FIN 48 unrecognized tax benefits at June 30, 2008 were $0.9 million, all of which would favorably impact the effective tax rate, if recognized. Potential interest and penalties associated with these liabilities were immaterial. The Company does not expect to make any significant tax payment related to any of the above obligations within the next twelve months.
8.7. | OTHER INCOME AND (INCOME DEDUCTIONS) – NET |
| | | Three Months Ended | | Nine Months Ended | |
| | | June 30, | | June 30, | |
| (Thousands) | | 2008 | | 2007 | | 2008 | | 2007 | |
| | | | | | | | | | | | | | |
| Allowance for funds used during construction | | $ | (21 | ) | $ | (2 | ) | $ | (46 | ) | $ | (18 | ) |
| Interest income | | | 738 | | | 835 | | | 3,558 | | | 4,072 | |
| Other income | | | 472 | | | 376 | | | 1,192 | | | 922 | |
| Other income deductions | | | (2,025 | ) | | (182 | ) | | (1,815 | ) | | 427 | |
| Other Income and (Income Deductions) – Net | | $ | (836 | ) | $ | 1,027 | | $ | 2,889 | | $ | 5,403 | |
| | | Three Months Ended | |
| | | December 31, | |
| (Thousands) | | 2008 | | 2007 | |
| | | | | | | | |
| Interest income | | $ | 1,139 | | $ | 1,772 | |
| Other income | | | 411 | | | 537 | |
| Other income deductions | | | (811 | ) | | 340 | |
| Other Income and (Income Deductions) – Net | | $ | 739 | | $ | 2,649 | |
The decrease in Other Income and (Income Deductions) – Net for the nine monthsquarter ended June 30,December 31, 2008, compared with the nine monthsquarter ended June 30,December 31, 2007, was primarily due to higher investment losses a loss on the redemption of long-term debt (primarily unamortized issuance costs),and lower income associated with carrying costs applied to under-recoveries of gas costs, and reduced income associated with changes in the cash surrender value of life insurance policies. These factors were partially offset by a reversal of tax-related expenses and additional proceeds related to the Company’s interest as a policyholder, in the sale of a mutual insurance company. Carrying costs on under-recoveries of gas costs are recovered through the Utility’s Purchased Gas Adjustment (PGA) Clause.income.
9.8. | INFORMATION BY OPERATING SEGMENT |
All of Laclede Group’s subsidiaries are wholly owned. The Regulated Gas Distribution segment consists of the regulated operations of Laclede Gas and is the core business segment of Laclede Group. Laclede Gas is a public utility engaged in the retail distribution and sale of natural gas serving an area in eastern Missouri, with a population of approximately 2.1 million, including the City of St. Louis and parts of ten other counties in eastern Missouri. The Non-Regulated Gas Marketing segment includes the results of LER, a subsidiary engaged in the non-regulated marketing of natural gas and related activities. Other includes Laclede Pipeline Company’s transportation of liquid propane regulated by the Federal Energy Regulatory Commission (FERC) as well as non-regulated activities, including real estate development, the compression of natural gas, and financial investments in other enterprises. These operations are conducted through five subsidiaries. Other also includes Laclede Gas’ non-regulated merchandise sales business. 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, sales of natural gas from LER to Laclede Gas, and transportation services provided 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 Gas Marketing, and Other columns, respectively.
Previously, SM&P comprised the Non-Regulated Services segment and its financial information was presented separately. As discussed in Note 2, Discontinued Operations, the Company sold SM&P on March 31, 2008. Accordingly, financial information for this segment has been reclassified and reported as discontinued operations in the Consolidated Financial Statements. Under generally accepted accounting principles, general corporate overhead expenses may not be reported in discontinued operations. Amounts of such expenses that were previously reported by SM&P but that are required to be reported in continuing operations are reflected in the Unallocated & Eliminations column of the table below. Prior periods reported in the table below have been reclassified to conform to the current-period presentation of segment information.
| | | | Non- | | | | | | | | | | | Non- | | | | | | | |
| | Regulated | | Regulated | | | | Unallocated | | | | | Regulated | | Regulated | | | | Unallocated | | | |
| | Gas | | Gas | | | | & | | | | | Gas | | Gas | | | | & | | | |
(Thousands) | | Distribution | | Marketing | | Other | | Eliminations | | Consolidated | | | Distribution | | Marketing | | Other | | Eliminations | | Consolidated | |
Three Months Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2008 | | | | | | | | | | | | | | | | | |
December 31, 2008 | | | | | | | | | | | | | | | | | |
Revenues from external | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
customers | | $ | 189,597 | | $ | 311,609 | | $ | 984 | | $ | — | | $ | 502,190 | | | $ | 356,623 | | $ | 305,133 | | $ | 855 | | $ | — | | $ | 662,611 | |
Intersegment revenues | | | 1 | | | 3,037 | | | 260 | | | — | | | 3,298 | | | | 1,478 | | | 9,907 | | | 260 | | | — | | | 11,645 | |
Total operating revenues | | | 189,598 | | | 314,646 | | | 1,244 | | | — | | | 505,488 | | |
Income (loss) from continuing | | | | | | | | | | | | | | | | | |
operations | | 5,501 | | | 4,267 | | | (667 | ) | | — | | | 9,101 | | |
Total assets of continuing | | | | | | | | | | | | | | | | | |
operations | | | 1,382,002 | | | 177,893 | | | 113,369 | | | (112,078 | ) | | 1,561,186 | | |
| | | | | | | | | | | | | | | | |
Nine Months Ended | | | | | | | | | | | | | | | | | |
June 30, 2008 | | | | | | | | | | | | | | | | | |
Revenues from external | | | | | | | | | | | | | | | | | |
customers | | $ | 1,016,302 | | $ | 728,017 | | $ | 2,995 | | $ | — | | $ | 1,747,314 | | |
Intersegment revenues | | | 1,277 | | | 7,814 | | | 779 | | | — | | | 9,870 | | |
Total operating revenues | | | 1,017,579 | | | 735,831 | | | 3,774 | | | — | | | 1,757,184 | | |
Income (loss) from continuing | | | | | | | | | | | | | | | | | |
Total Operating Revenues | | | | 358,101 | | | 315,040 | | | 1,115 | | | — | | | 674,256 | |
Income from continuing | | | | | | | | | | | | | | | | | |
operations | | 46,579 | | | 14,782 | | | (400 | ) | | (264 | ) | | 60,697 | | | 16,148 | | 14,701 | | 457 | | — | | | 31,306 | |
Total assets of continuing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
operations | | 1,382,002 | | | 177,893 | | | 113,369 | | | (112,078 | ) | | 1,561,186 | | | 1,712,374 | | 195,707 | | 114,492 | | (146,927 | ) | | 1,875,646 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2007 | | | | | | | | | | | | | | | | |
December 31, 2007 | | | | | | | | | | | | | | | | | |
Revenues from external | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
customers | | $ | 168,673 | | $ | 213,036 | | $ | 1,493 | | $ | — | | $ | 383,202 | | | $ | 319,674 | | $ | 178,660 | | $ | 1,040 | | $ | — | | $ | 499,374 | |
Intersegment revenues | | | 17,023 | | | 5,735 | | | 260 | | | — | | | 23,018 | | | | 1,218 | | | 3,138 | | | 260 | | | — | | | 4,616 | |
Total operating revenues | | | 185,696 | | | 218,771 | | | 1,753 | | | — | | | 406,220 | | |
Income (loss) from continuing | | | | | | | | | | | | | | | | |
Total Operating Revenues | | | | 320,892 | | | 181,798 | | | 1,300 | | | — | | | 503,990 | |
Income (Loss) from continuing | | | | | | | | | | | | | | | | | |
operations | | 846 | | | 3,854 | | | 292 | | | (229 | ) | | 4,763 | | | 15,747 | | 5,654 | | 229 | | (94 | ) | | 21,536 | |
Total assets of continuing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
operations | | 1,288,098 | | | 130,417 | | | 78,208 | | | (68,428 | ) | | 1,428,295 | | | 1,529,861 | | 123,363 | | 97,021 | | (64,314 | ) | | 1,685,931 | |
| | | | | | | | | | | | | | | | |
Nine Months Ended | | | | | | | | | | | | | | | | |
June 30, 2007 | | | | | | | | | | | | | | | | |
Revenues from external | | | | | | | | | | | | | | | | |
customers | | $ | 992,383 | | $ | 508,561 | | $ | 3,408 | | $ | — | | $ | 1,504,352 | | |
Intersegment revenues | | | 35,394 | | | 39,527 | | | 779 | | | — | | | 75,700 | | |
Total operating revenues | | | 1,027,777 | | | 548,088 | | | 4,187 | | | — | | | 1,580,052 | | |
Income (loss) from continuing | | | | | | | | | | | | | | | | |
operations | | 37,214 | | | 10,971 | | | 580 | | | (585 | ) | | 48,180 | | |
Total assets of continuing | | | | | | | | | | | | | | | | |
operations | | 1,288,098 | | | 130,417 | | | 78,208 | | | (68,428 | ) | | 1,428,295 | | |
10.9. | COMMITMENTS AND CONTINGENCIES |
Commitments
Laclede Gas and LER have entered into various contracts, expiring on dates through 2017, for the storage, transportation, and supply of natural gas. Minimum payments required under the contracts in place at December 31, 2008 are estimated at approximately $2.1 billion. Additional contracts are generally entered into prior to or during the heating season. Laclede Gas recovers its costs from customers in accordance with the PGA Clause.
Leases and Guarantees
Laclede Gas has several operating leases for the rental of vehicles that contain provisions requiring Laclede Gas to guarantee certain amounts related to the residual value of the leased property. These leases have various terms, the longest of which extends through 2014. At December 31, 2008, the maximum guarantees under these leases are $1.8 million. As of December 31, 2008, the Utility believes that it is unlikely that it will be subject to the maximum payment amount because it estimates that the residual value of the leased vehicles will be adequate to satisfy most of the guaranteed amounts. At December 31, 2008, the carrying value of the liability recognized for these guarantees was $0.3 million.
Laclede Group had guarantees totaling $72 million for performance and payment of certain wholesale gas supply purchases by LER, as of December 31, 2008. No amounts have been recorded for these guarantees in the financial statements. As of December 31, 2008, management believes the probability is low that Laclede Group will be required to make payments under these guarantees.
Contingencies and Indemnifications
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 change, however, Laclede Gas may be required to incur additional costs. See Note 1415 to the Consolidated Financial Statements included in the Company’s Fiscal Year 20072008 Form 10-K for information relative to environmental matters generally. There have been no significant changes relative to environmental matters duringin the nine months ended June 30, 2008.first quarter of 2009.
On December 28, 2006, the MoPSC Staff proposed a disallowance of $7.2 million related to Laclede Gas’ recovery of its purchased gas costs applicable to fiscal 2005. On September 14, 2007, the Staff withdrew its pursuit of $5.5 million of the disallowance it had originally proposed. Laclede Gas believes that the remaining $1.7 million of the MoPSC Staff’s proposed disallowance lacks merit and intends tois vigorously opposeopposing the adjustment in proceedings before the MoPSC.
On December 31, 2007, the MoPSC Staff filed a memorandum with the Commission proposingproposed a disallowance of $2.8 million related to Laclede Gas’ recovery of its purchased gas costs applicable to fiscal 2006. Laclede Gas believes that the MoPSC Staff’s position lacks merit and intends to vigorously oppose the adjustment in proceedings before the MoPSC. In addition, the MoPSC’s Staff’s memorandumStaff raised questions regarding whether certain sales and capacity release transactions subject to the FERC’s oversight were consistent with the FERC’s regulations and policies regarding capacity release. The Company commenced an internal review of the questions raised by the MoPSC Staff and notified the FERC Staff that it took this action. Subsequently, as a result of the internal review, the Company has provided the FERC Staff with a report regarding compliance of sales and capacity release activities with the FERC’s regulations and policies. On July 23, 2008, the FERC Staff requested additional information which will bethe Company provided byon August 22, 2008 and September 2, 2008.
On December 31, 2008, the Company.MoPSC Staff proposed a disallowance of $1.5 million related to Laclede Gas’ recovery of its purchased gas costs applicable to fiscal 2007. Laclede Gas believes that the MoPSC Staff’s position lacks merit and intends to vigorously oppose the adjustment in proceedings before the MoPSC.
As reported in Note 2, Discontinued Operations, during the quarter ended March 31, 2008, the Company sold 100% of its interest in its wholly-owned subsidiary SM&P. The sales agreement (Agreement) includes representations and warranties customary for such transactions, including, among others, representations and warranties of the parties as to brokers’ fees; of SM&P as to its financial status, contracts, title to and condition of personal and real property, taxes, legal compliance, environmental matters, employee benefits, and intellectual property. The Agreement also includes customary indemnification provisions under which Laclede’s aggregate indemnification obligations are limited to a maximum of $7.0 million for most claims. Obligations subject to this maximum apply only in the event claims exceed a stated deductible, both individually and in the aggregate. However, this maximum limitation and deductible do not apply to obligations associated with taxes, employee benefits, title to personal property, and certain other fundamental representations and warranties. A maximum potential future payment amount cannot be estimated for these obligations. The terms of the indemnifications in the Agreement are generally dependent upon the statute of limitations applicable to the particular representations and warranties made by the Company, although certain representations and warranties have an indefinite life under the Agreement. As of June 30,December 31, 2008, the carrying amount of the liability recognized for these indemnification obligations was $0.2 million, based on the Company’s assessment of risk.risk, which is believed to be low.
Laclede Group 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 consolidated financial position or results of operations of the Company.
Laclede Gas has several operating leases for the rental of vehicles that contain provisions requiring Laclede Gas to guarantee certain amounts related to the residual value of the leased property. These leases have various terms, the longest of which extends through 2014. At June 30, 2008, the maximum guarantees under these leases were $1.7 million. However, the Utility estimates that the residual value of the leased vehicles will be adequate to satisfy most of the guaranteed amounts. At June 30, 2008, the carrying value of the liability recognized for these guarantees was $0.3 million.
Laclede Gas and LER have entered into various contracts, expiring on dates through 2017, for the storage, transportation, and supply of natural gas. Minimum payments required under the contracts in place at June 30, 2008 are estimated at approximately $2.7 billion. Additional contracts are generally entered into prior to or during the heating season.
Laclede Group had guarantees totaling $57.5 million for performance and payment of certain wholesale gas supply purchases by LER, as of June 30, 2008. Since that date, total guarantees issued by Laclede Group on behalf of LER increased by $1.0 million bringing the total to $58.5 million in guarantees outstanding at August 4, 2008. 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 “may,” “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:
• | weather conditions and catastrophic events, particularly severe weather in the natural gas producing areas of the country; |
• | volatility in gas prices, particularly sudden and sustained spikeschanges in natural gas prices;prices, including the related impact on margin deposits associated with the use of natural gas financial instruments; |
• | the impact of higher natural gas prices on our competitive position in relation to suppliers of alternative heating sources, such as electricity; |
• | changes in gas supply and pipeline availability; particularly those changes that impact supply for and access to our market area; |
• | legislative, regulatory and judicial mandates and decisions, some of which may be retroactive, including those affecting |
| • | allowed rates of return |
| • | incentive regulation |
| • | industry structure |
| • | purchased gas adjustment provisions |
| • | rate design structure and implementation |
| • | franchise renewals |
| • | environmental or safety matters |
| • | taxes |
| • | pension and other postretirement benefit liabilities and funding obligations |
| • | accounting standards; |
• | the results of litigation; |
• | retention of, ability to attract, ability to collect from, and conservation efforts of, customers; |
• | capital and energy commodity market conditions, including the ability to obtain funds with reasonable terms for necessary capital expenditures and general operations and the terms and conditions imposed for obtaining sufficient gas supply; |
• | discovery of material weakness in internal controls; and |
• | 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
Laclede Group’s 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 City of St. Louis and parts of ten 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. The Utility’s innovative weather mitigation rate design 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. Due to the seasonal nature of the business of Laclede Gas, Laclede Group’s earnings are seasonal in nature and are typically concentrated in the November through April period, which generally corresponds with the heating season.
On March 31, 2008, the Company completed the sale of 100% of its interest in its wholly-owned subsidiary SM&P Utility Resources, Inc. (SM&P) to Stripe Acquisition, Inc. (an affiliate of Kohlberg Management VI, LLC) for $85 million in cash, subject to certain closing and post-closing adjustments. SM&P is an underground facilities locating and marking business that formerly comprised Laclede Group’s Non-Regulated Services operating segment. The sales agreement included representations, warranties, and indemnification provisions customary for such transactions and was filed as an exhibit to the March 31, 2008 Form 10-Q. In accordance with generally accepted accounting principles, the results of operations for SM&P are reported as discontinued operations in the Consolidated Statements of Income and its associated assets and liabilities are classified separately in the Consolidated Balance Sheets.
Laclede Energy Resources, Inc. (LER) is engaged in the non-regulated marketing of natural gas and related activities.activities on a non-regulated basis. LER markets natural gas to both on-system Utility transportation customers and customers outside of Laclede Gas’ traditional service territory, including large retail and wholesale customers. As such, LER’s operations and customer base are subject to fluctuations in market conditions.
Other 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 Laclede Group’s strategy. The Utility’s distribution costs are the essential, primarily fixed expenditures it must incur to operate and maintain a more than 16,000 mile natural gas distribution system and related storage facilities. With regard to the storage facilities owned by Laclede Gas, management is currently undertaking an evaluation of the Utility’s natural gas storage field, which was developed more than 50 years ago, to assess the field’s current and future capabilities. In addition, Laclede Gas is working continually 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 settlement of the Utility’s 2007 rate case resulted in enhancements to the Utility’s weather mitigation rate design that better ensure the recovery of its fixed costs and margins despite variations in sales volumes due to the impacts of weather and other factors that affect customer usage. The Utility’s income from off-system sales remains subject to fluctuations in market conditions. In conjunction with the settlement of the 2005 rate case, effective October 1, 2005, the Utility retained all pre-tax income from off-system sales and capacity release revenues up to $12 million annually. Pre-tax amounts in excess of $12 million were shared with customers, with the Utility retaining 50% of amounts exceeding that threshold. The Stipulation & Agreement approved by the MoPSC in the Utility’s 2007 rate case increases the portion of pre-tax income from off-system sales and capacity release revenues that is shared with customers. Effective October 1, 2007, the Utility is allowed to retain 15% to 25% of the first $6 million in annual income earned (depending on the level of income earned) and 30% of income exceeding $6 million annually. Some of the factors impacting the level of off-system sales include the availability and cost of the Utility’s natural gas supply, the weather in its 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 Gas continues to work actively to reduce the impact of higher costs associated with wholesale natural gas prices by strategically structuring its natural gas supply portfolio and through the use of financial instruments. Nevertheless, the overall cost of purchased gas remains high, relativesubject to historical levels.fluctuations in market conditions. 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 costs, cost reductions, and related carrying costs associated with the use of financial instruments to hedge the purchase price of natural gas, as well as gas inventory carrying costs. The Utility believes it will continue to be able to obtain sufficient gas supply. The generally higher price levelsHigh natural gas prices and other economic conditions may continue to affect sales volumes (due to the conservation efforts of customers) and cash flows (associated with the timing of collection of gas costs and related accounts receivable from customers).
Laclede Group continues to develop its other subsidiaries. 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 non-regulated natural gas suppliers. LER is working to assemble the team, technology, and resources necessary to expand its geographic service area and the range of services that it now provides. Nevertheless, income from LER’s operations is subject to fluctuations in market conditions.
Quarter Ended June 30,December 31, 2008
Earnings
Overview – Net Income (Loss) by Operating Segment | | Quarter Ended | |
| | June 30, | |
(Millions, After-tax) | | | 2008 | | | | | 2007 | |
| | | | | | | | | |
Regulated Gas Distribution | | $ | 5.5 | | | | $ | 0.9 | |
Non-Regulated Gas Marketing | | | 4.3 | | | | | 3.9 | |
Other | | | (0.7 | ) | | | | — | |
Income from Continuing Operations | | | 9.1 | | | | | 4.8 | |
Income from Discontinued Operations | | | 0.2 | | | | | 4.5 | |
Net Income | | $ | 9.3 | | | | $ | 9.3 | |
Overview – Net Income (Loss) by Operating Segment | | | | Quarter Ended | |
| | | | December 31, | |
(Millions, after-tax) | | | | | 2008 | | | | | 2007 | |
| | | | | | | | | | | |
Regulated Gas Distribution | | | | $ | 16.1 | | | | $ | 15.8 | |
Non-Regulated Gas Marketing | | | | | 14.7 | | | | | 5.6 | |
Other | | | | | 0.5 | | | | | 0.1 | |
Income from Continuing Operations | | | | | 31.3 | | | | | 21.5 | |
Loss from Discontinued Operations | | | | | — | | | | | (0.6 | ) |
Net Income | | | | $ | 31.3 | | | | $ | 20.9 | |
Laclede Group’s consolidated net income was $9.3$31.3 million for both the quartersquarter ended June 30,December 31, 2008, and June 30,compared with $20.9 million for the quarter ended December 31, 2007. Basic and diluted earnings per share were $0.43 and $0.42, respectively, for the quarter ended June 30,December 31, 2008 were $1.43 and $1.42, respectively, compared with basic and diluted earnings per share of $0.43$0.97 reported for the same quarter ended June 30, 2007.last year. Results for the quarter ended June 30,December 31, 2007 included the effect of SM&P’s seasonal operating income,loss, reported as discontinued operations this year as a result of the sale of SM&P on March 31, 2008. Consolidated net income was unchanged from the same periodearnings per share increased compared to last year despite the absence of earnings this year from SM&P, the impact of which was offset by higher incomeprimarily due to strong performance reported by both Laclede Group’s regulated gas distribution and non-regulated gas marketing segments.Non-Regulated Gas Marketing segment.
Income from Continuing Operations
Laclede Group’s income from continuing operations was $9.1$31.3 million for the quarter ended June 30,December 31, 2008, compared with $4.8$21.5 million for the quarter ended June 30,December 31, 2007. Basic and diluted earnings per share from continuing operations were $0.42$1.43 and $0.41,$1.42, respectively, for the quarter ended June 30,December 31, 2008, compared with basic and diluted earnings per share of $0.22$1.00 for the quarter ended June 30,December 31, 2007. Earnings results reported by both Laclede Group’s regulated gas distributionNon-Regulated Gas Marketing segment and non-regulated gas marketing segmentsits Regulated Gas Distribution segment increased over the quarter ended June 30,December 31, 2007. Variations in income from continuing operations were primarily attributable to the factors described below.
Regulated Gas Distribution net income increased by $4.6$0.3 million for the quarter ended June 30,December 31, 2008, compared with the quarter ended June 30,December 31, 2007. The increase in net income was primarily due to the following factors, quantified on a pre-tax basis:
• | the benefiteffect of the general rate increase, effective August 1, 2007,higher system gas sales volumes, primarily due to colder weather, and other variations totaling $8.7$2.7 million; and, |
• | interim benefits of a rate design change, effective August 1, 2007, and other variationshigher Infrastructure System Replacement Surcharge (ISRS) revenues totaling $5.1$0.9 million. |
These factors were partially offset by:
• | an increase in investment losses totaling $1.6 million; and, |
• | increases in operation and maintenance expenses excluding the provision for uncollectible accounts, totaling $3.1$1.4 million; |
• | an increase in the provision for uncollectible accounts, totaling $2.6 million; and, |
• | lower income from off-system sales and capacity release, totaling $2.0 million, primarily due to a reduction in the Utility’s share of such income (pursuant to the 2007 rate case). |
The Non-Regulated Gas Marketing segment reported an increase in earnings of $0.4$9.1 million compared with the same quarterperiod last year,year. This increase was primarily due to LER’s increased sales volumes attributable to the contracting for additional pipeline capacity and higher margins on sales of natural gas by LER and slightly higher sales volumes.due to depressed supply pricing in the Midwest from increased shale supply production.
Regulated Gas Distribution 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 PGA Clause. The volatility of the wholesale natural gas market results in fluctuations from period to period in the recorded levels of, among other items, revenues and natural gas cost expense. Nevertheless, increases and decreases in the cost of gas associated with system gas sales volumes have no direct effect on net revenues and net income.
Regulated gas distribution operating revenuesGas Distribution Operating Revenues for the quarter ended June 30,December 31, 2008 were $189.6$358.1 million, or $3.9$37.2 million more than the same quarterperiod last year. Temperatures experienced in the Utility’s service area during the quarter were 16.1%12.6% colder than the same quarter last year and 28.4%4.6% colder than normal. Total system therms sold and transported were 0.130.31 billion for the quarter ended June 30,December 31, 2008 compared with 0.140.27 billion for the same quarterperiod last year. Total off-system therms sold and transported were 0.030.04 billion for the quarter ended June 30,December 31, 2008 compared with 0.05 billion for the same quarterperiod last year. The increase in regulated operating revenuesRegulated Gas Distribution Operating Revenues was primarily attributable to the following factors:
| Quarter Ended |
(Millions) | June 30, 2008 |
Lower off-system sales volumes | | $ | (15.4 | ) |
Higher prices charged for off-system sales | | | 11.2 | |
General rate increase, effective August 1, 2007 | | | 8.7 | |
Higher charges for system gas sales and other variations | | | 4.0 | |
Lower wholesale gas costs passed on to Utility customers (subject to prudence review by the MoPSC) | | | (4.0 | ) |
Lower Infrastructure System Replacement Surcharge (ISRS) revenues | | | (0.6 | ) |
Total Variation | | $ | 3.9 | |
| |
(Millions) | |
Higher system sales volumes and other variations | | $ | 37.9 | |
Higher wholesale gas costs passed on to Utility customers (subject to prudence review by the MoPSC) | | | 8.3 | |
Lower off-system sales volumes | | | (7.8 | ) |
Lower prices charged for off-system sales | | | (2.1 | ) |
Higher ISRS revenues | | | 0.9 | |
Total Variation | | $ | 37.2 | |
Regulated operating expensesGas Distribution Operating Expenses
Regulated Gas Distribution Operating Expenses for the quarter ended June 30,December 31, 2008 decreased $1.4increased $35.5 million from the same quarter last year. Natural and propane gas expense decreased $8.6increased $32.1 million, or 7.1%14.4%, from last year’s level, primarily attributable to lowerincreased system volumes purchased for sendout and higher rates charged by our suppliers, partially offset by lower off-system gas expense, and lower system volumes purchased for sendout.expense. Other operation and maintenance expenses increased $5.7$1.4 million, or 16.3%, primarily due to a higher provision for uncollectible accounts, increased maintenance and distribution charges, higher legal fees, and increased group insurance charges. These factors were partially offset by decreased injuries and damages expenses. Taxes, other than income, increased $1.2 million, or 8.9%3.3%, primarily due to higher wage rates, increased charges for outside services, and increased group insurance charges, partially offset by a decrease in injuries and damages expense. Taxes, other than income taxes, increased $1.7 million, or 10.1%, primarily due to increased gross receipts taxes (attributable to the increased revenues).
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-regulated gas marketing operating revenuesNon-Regulated Gas Marketing Operating Revenues increased $95.9$133.2 million primarily due to increased86% higher sales volumes, partially offset by decreased per unit gas sales prices charged by LER and increased sales volumes.LER. The increase in non-regulated gas marketing operating expensesNon-Regulated Gas Marketing Operating Expenses totaling $95.1$118.7 million was primarily associated with higherincreased volumes purchased, partially offset by lower prices charged by supplierssuppliers.
Other Income and increased volumes purchased.(Income Deductions) - Net
Other Income and (Income Deductions) – Net
The decreased $1.9 million decrease in other income and (income deductions) – net was primarily due to a loss on the redemption of long-term debt (primarily unamortized issuance costs), higher investment losses and lower income associated with carrying costs applied to under-recoveries of gas costs. Carrying costs on under-recoveries of gas costs are recovered through the Utility’s PGA Clause.interest income.
Interest Charges
The $1.1$0.6 million decrease in interest charges was primarily due to a reductionlower interest on short-term debt, partially offset by an increase in interest on long-term debt, resulting fromprimarily attributable to the November 2007 maturityissuance of $40$80.0 million principal amount of 7 1/2% First Mortgage Bonds.Bonds on September 23, 2008. Average short-term interest rates were 3.0% for the quarter ended December 31, 2008 compared with 5.1% for the quarter ended December 31, 2007. Average short-term borrowings were $262.6 million for the quarter ended December 31, 2008 compared with $255.2 million for the quarter ended December 31, 2007.
Income Taxes
The $1.0$5.4 million increase in income taxes was primarily due to higher pre-tax income, partially offset by the recognition of previously unrecognized tax benefits recorded pursuant to Financial Accounting Standards Board Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” and the net effect of various property-related deductions.income.
IncomeLoss from Discontinued Operations
Laclede Group closed on the sale of 100% of its interest in SM&P on March 31, 2008. IncomeLoss from discontinued operationsDiscontinued Operations for the quarter ended June 30,December 31, 2007 was $4.5$0.6 million, attributable to SM&P’s seasonal operating income.loss. Basic and diluted earningsloss per share from discontinued operations for the quarter ended June 30,December 31, 2007 were $0.21.
Nine Months Ended June 30, 2008
Earnings
Overview – Net Income (Loss) by Operating Segment | | Nine Months Ended | �� |
| | June 30, | |
(Millions, After-tax) | | | 2008 | | | | | 2007 | |
| | | | | | | | | |
Regulated Gas Distribution | | $ | 46.6 | | | | $ | 37.2 | |
Non-Regulated Gas Marketing | | | 14.8 | | | | | 11.0 | |
Other | | | (0.7 | ) | | | | — | |
Income from Continuing Operations | | | 60.7 | | | | | 48.2 | |
Income from Discontinued Operations | | | 20.8 | | | | | 1.0 | |
Net Income | | $ | 81.5 | | | | $ | 49.2 | |
Laclede Group’s consolidated net income was $81.5 million for the nine months ended June 30, 2008, compared with $49.2 million for the nine months ended June 30, 2007. Basic and diluted earnings per share were $3.77 and $3.76, respectively, for the nine months ended June 30, 2008, compared with basic and diluted earnings per share of $2.29 for the nine months ended June 30, 2007. Earnings per share increased compared to last year largely due to the one-time gain realized on the sale of Laclede Group’s wholly-owned subsidiary, SM&P. Earnings results reported by both Laclede Group’s regulated gas distribution segment and its non-regulated gas marketing segment also increased over the nine months ended June 30, 2007.
Income from Continuing Operations
Laclede Group’s income from continuing operations was $60.7 million for the nine months ended June 30, 2008, compared with $48.2 million for the nine months ended June 30, 2007. Basic and diluted earnings per share from continuing operations were $2.81 and $2.80, respectively, for the nine months ended June 30, 2008, compared with basic and diluted earnings per share of $2.24 for the nine months ended June 30, 2007. Earnings results reported by both Laclede Group’s regulated gas distribution segment and its non-regulated gas marketing segment increased over the same period last year. Variations in income from continuing operations were primarily attributable to the factors described below.
Regulated Gas Distribution net income increased by $9.4 million for the nine months ended June 30, 2008, compared with the nine months ended June 30, 2007. The increase in net income was primarily due to the following factors, quantified on a pre-tax basis:
• | the benefit of the general rate increase, effective August 1, 2007, totaling $30.4 million; |
• | the effect of higher system gas sales volumes and other variations totaling $2.3 million; and, |
• | the recognition of previously unrecognized tax benefits and the reversal of related expenses, totaling $1.5 million. |
These factors were partially offset by:
• | lower income from off-system sales and capacity release, totaling $9.5 million, primarily due to a reduction in the Utility’s share of such income (pursuant to the 2007 rate case); |
• | an increase in the provision for uncollectible accounts, totaling $4.9 million; and, |
• | increases in operation and maintenance expenses, excluding the provision for uncollectible accounts, totaling $4.9 million. |
The Non-Regulated Gas Marketing segment reported an increase in earnings of $3.8 million for the nine months ended June 30, 2008, compared with the same period last year, primarily due to higher margins on sales of natural gas by LER, increased sales volumes, and the reversal of tax-related expenses.
Regulated Operating Revenues and Operating Expenses
Regulated gas distribution operating revenues for the nine months ended June 30, 2008 were $1.0 billion, or $10.2 million less than the same period last year. Temperatures experienced in the Utility’s service area during the nine months ended June 30, 2008 were 6.8% colder than the same period last year, but 0.6% warmer than normal. Total system therms sold and transported were 0.85 billion for the nine months ended June 30, 2008, compared with 0.82 billion for the same period last year. Total off-system therms sold and transported were 0.14 billion for the nine months ended June 30, 2008, compared with 0.21 billion for the same period last year. Increases and decreases in the cost of gas associated with system gas sales volumes have no direct effect on net revenues and net income. The decrease in regulated operating revenues was primarily attributable to the following factors:
| Nine Months |
| Ended |
(Millions) | June 30, 2008 |
Lower off-system sales volumes | | $ | (48.6 | ) |
Lower wholesale gas costs passed on to Utility customers (subject to prudence review by the MoPSC) | | | (47.2 | ) |
Higher system sales volumes, primarily due to colder weather, and other variations | | | 34.0 | |
General rate increase, effective August 1, 2007 | | | 30.4 | |
Higher prices charged for off-system sales | | | 22.8 | |
Lower ISRS revenues | | | (1.6 | ) |
Total Variation | | $ | (10.2 | ) |
Regulated operating expenses for the nine months ended June 30, 2008 decreased $22.8 million from the same period last year. Natural and propane gas expense decreased $33.3 million, or 4.5%, from last year’s level, primarily attributable to lower rates charged by our suppliers and lower off-system gas expense, partially offset by increased system volumes purchased for sendout. Other operation and maintenance expenses increased $9.8 million, or 8.4%, primarily due to a higher provision for uncollectible accounts, increased maintenance and distribution expenses, higher legal fees, increased pension costs, the effect of a gain on the disposal of assets recorded last year, and higher wage rates. Depreciation and amortization expense increased $0.7 million, or 2.6%, primarily due to additional depreciable property.
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-regulated gas marketing operating revenues increased $187.7 million, primarily due to higher per unit gas sales prices charged by LER and increased sales volumes. The increase in non-regulated gas marketing operating expenses totaling $183.4 million was primarily associated higher prices charged by suppliers and increased volumes purchased.
Other Income and (Income Deductions) – Net
The $2.5 million decrease in other income and (income deductions) – net was primarily due to higher investment losses, a loss on the redemption of long-term debt (primarily unamortized issuance costs), lower income associated with carrying costs applied to under-recoveries of gas costs, and reduced income associated with changes in the cash surrender value of life insurance policies. These factors were partially offset by a reversal of tax-related expenses and additional proceeds related to the Company’s interest, as a policyholder, in the sale of a mutual insurance company. Carrying costs on under-recoveries of gas costs are recovered through the Utility’s PGA Clause.
Interest Charges
The $2.5 million decrease in interest charges was primarily due to a reduction in interest on long-term debt resulting from the November 2007 maturity of $40 million principal amount of 7 1/2% First Mortgage Bonds and the reversal of tax-related expenses.
Income Taxes
The $4.6 million increase in income taxes was primarily due to higher pre-tax income, partially offset by the recognition of previously unrecognized tax benefits recorded pursuant to FIN 48.
Income from Discontinued Operations
The sale of SM&P on March 31, 2008 resulted in after-tax earnings of approximately $26 million, net of associated costs of disposal. Income from discontinued operations for the nine months ended June 30, 2008 was $20.8 million, consisting of the net effect of the sale and SM&P’s seasonal operating loss through the March 31 sale date. Income from discontinued operations was $1.0 million for the same period last year, reflecting SM&P’s operating income for the period. Basic and diluted earnings per share from discontinued operations were $0.96 for the nine months ended June 30, 2008, compared with basic and diluted earnings per share of $0.05 for the same period last year.
Labor Agreement
Laclede Gas’ labor agreement with Locals 11-6 and 11-194 of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial and Service Workers International Union (Union), which represents approximately 65% of Laclede Gas’ employees, expired at midnight, July 31, 2008. On August 4, 2008, Laclede Gas and Union representatives reached a new four-year labor agreement replacing the prior agreement. The new contract will expire at midnight on July 31, 2012.$0.03.
REGULATORY MATTERS
During fiscal 2006, the MoPSC approved permanent modifications to the Cold Weather Rule affecting the disconnection and reconnection practices of utilities during the winter heating season. Those modifications included provisions to allow the Utility to obtain accounting authorizations and defer for future recovery certain costs incurred with the modifications. During fiscal 2007, the Utility deferred for future recovery $2.7 million of costs associated with the fiscal 2007 heating season. On October 31, 2007, the Utility filed for determination and subsequent recovery of the deferred amount. On November 16, 2007, the MoPSC directed the MoPSC Staff and the Missouri Office of Public Counsel (Public Counsel) to submit their positions regarding the Utility’s filing by February 28, 2008. On February 28, 2008, the Utility and the MoPSC Staff filed a Non-unanimousNon-Unanimous Stipulation & Agreement in which these parties agreed to a recovery of $2.5 million of costs. The Non-unanimousNon-Unanimous Stipulation & Agreement was opposed by Public Counsel, and a hearing in this matter was held before the Commission on March 31, 2008. On April 17, 2008, the Commission issued its Report and Order approving the $2.5 million cost recovery recommended by the Utility and the MoPSC Staff. Consistent with the approved amount, the Utility recorded a reduction in its deferral totaling $0.2 million during the quarter ended March 31, 2008. On May 29, 2008, Public Counsel appealed the MoPSC’s April 17 Order to the Cole County, Missouri Circuit Court. Laclede Gas believesOn January 6, 2009, the Court issued its judgment affirming the Commission’s order approving the Cold Weather Rule compliance cost amount that the Utility and Staff had recommended over Public Counsel’s appeal is without merit and intends to vigorously oppose the appeal.
On November 9, 2007, the Utility made an ISRS filing with the Commission designed to increase revenues by $1.6 million annually. On January 15, 2008, the Commission approved implementation of the surcharge to be effective January 18, 2008. On April 25, 2008, the Utility made an ISRS filing with the Commission designed to increase revenues by $1.9 million annually. On June 24, 2008, the Commission approved implementation of the surcharge in the full amount requested, effective June 30, 2008.objection.
On December 28, 2006, the MoPSC Staff proposed a disallowance of $7.2 million related to Laclede Gas’ recovery of its purchased gas costs applicable to fiscal 2005. On September 14, 2007, the Staff withdrew its pursuit of $5.5 million of the disallowance it had originally proposed. Laclede Gas believes that the remaining $1.7 million of the MoPSC Staff’s proposed disallowance lacks merit and intends tois vigorously opposeopposing the adjustment in proceedings before the MoPSC.
On December 31, 2007, the MoPSC Staff filed a memorandum with the Commission proposingproposed a disallowance of $2.8 million related to Laclede Gas’ recovery of its purchased gas costs applicable to fiscal 2006. Laclede Gas believes that the MoPSC Staff’s position lacks merit and intends tois vigorously opposeopposing the adjustment in proceedings before the MoPSC. In addition, the MoPSC’s Staff’s memorandumStaff raised questions regarding whether certain sales and capacity release transactions, subject to the Federal Energy Regulatory Commission (FERC)’s oversight, were consistent with the FERC’s regulations and policies regarding capacity release. The Company commenced an internal review of the questions raised by the MoPSC Staff and notified the FERC Staff that it took this action. Subsequently, as a result of the internal review, the Company has provided the FERC Staff with a report regarding compliance of sales and capacity release activities with the FERC’s regulations and policies. On July 23, 2008, the FERC Staff requested additional information, which will bethe Company provided by the Company.on August 22, 2008 and September 2, 2008.
On July 9, 2008, Laclede Gas made a tariff filing with the MoPSC that would make the payment provisions for the restoration of gas service under the Utility’s Cold Weather Rule available to customers in the summer of 2008 and enable the Utility to increase or decrease its PGA rates to correct for any shortfall or surplus created by the difference between the gas cost portion of the Utility’s actual net bad debt write-offs and the amount of such cost that is embedded in its existing rates. SuchThe MoPSC suspended the tariff on August 5, 2008 and established a procedural schedule to consider the Utility’s filing. As a result, the Cold Weather Rule portion of the filing is now moot. A formal hearing pertaining to the bad debt portion of the filing was held on January 5, 2009. The matter is currently pending before the MoPSC.
On November 21, 2008, the Utility made an ISRS filing with the Commission designed to increase revenues by $1.9 million annually. The filing is pending Commission approval.
On December 31, 2008, the MoPSC Staff proposed a disallowance of $1.5 million related to Laclede Gas’ recovery of its purchased gas costs applicable to fiscal 2007. Laclede Gas believes that the MoPSC Staff’s position lacks merit and intends to vigorously oppose the adjustment in proceedings before the MoPSC.
CRITICAL ACCOUNTING POLICIES
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 accountsDoubtful 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. The Utility’s provision for uncollectible accounts is dependent on the regulatory treatment provided for such costs. As approved by the MoPSC, the Utility is allowed to defer for future recovery certain costs associated with amendments to the Cold Weather Rule. |
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| Employee benefitsBenefits and postretirement obligationsPostretirement Obligations – Pension and postretirement obligations are calculated by actuarial consultants that utilize several statistical factors and other assumptions provided by Management related to future events, such as discount rates, returns on plan assets, compensation increases, and mortality rates. For the Utility, the amount of expense recognized and the amounts reflected in other comprehensive income are dependent upon the regulatory treatment provided for such costs, as discussed further below. 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. |
Regulated Operations – 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 regulatory liabilities are recoverable or refundable through the regulatory process. Management believes the following represent the more significant items recorded through the application of SFAS No. 71:
| The Utility’s 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 regulatory liabilities that are recovered or refunded in a subsequent period. The PGA Clause also authorizes the Utility to recover costs it incurs to finance its investment in gas supplies that are purchased during the storage injection season for sale during the heating season. The PGA Clause also permits the application of carrying costs to all over- or under-recoveries of gas costs, including costs and cost reductions associated with the use of financial instruments. Effective October 1, 2007, the PGA Clause also provides for a portion of income from off-system sales and capacity release revenues to be flowed through to customers. |
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| 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 regulatory liability accounts for regulated companies, and will be reflected as income or loss for non-regulated companies. 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. Laclede Gas’ provision for income tax expense also records the income tax effect associated with the difference between overheads capitalized to construction for financial reporting purposes and those recognized for tax purposes without recording an offsetting deferred income tax expense. These two methods are consistent with the regulatory treatment prescribed by the MoPSC. |
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| Asset retirement obligations are recorded in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations” and FINFinancial Accounting Standards Board Interpretation No. (FIN) 47, “Accounting for Conditional Asset Retirement Obligations.” Asset retirement obligations are calculated using various assumptions related to the timing, method of settlement, inflation, and profit margins that third parties would demand to settle the future obligations. These assumptions require the use of judgment and estimates and may change in future periods as circumstances dictate. As authorized by the MoPSC, Laclede Gas accrues future removal costs associated with its property, plant and equipment through its depreciation rates, even if a legal obligation does not exist as defined by SFAS No. 143 and FIN 47. The difference between removal costs recognized in depreciation rates and the accretion expense and depreciation expense recognizable under SFAS No. 143 and FIN 47 is a timing difference between the recovery of these costs in rates and their recognition for financial reporting purposes. Accordingly, consistent with SFAS No. 71, these differences are deferred as regulatory liabilities. |
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| The amount of net periodic pension and other postretirement benefit cost recognized in the financial statements related to the Utility’s qualified pension plans and other postretirement benefit plans is based upon allowances, as approved by the MoPSC, which have been established in the rate-making process for the recovery of these costs from customers. The differences between these amounts and actual pension and other postretirement benefit costs incurred for financial reporting purposes are deferred as regulatory assets or regulatory liabilities. SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” requires that changes that affect the funded status of pension and other postretirement benefit plans, but that are not yet required to be recognized as components of pension and other postretirement benefit cost, be reflected in other comprehensive income. For the Utility’s qualified pension plans and other postretirement benefit plans, amounts that would otherwise be reflected in other comprehensive income are deferred with entries to regulatory assets or regulatory liabilities. |
For further discussion of significant accounting policies, see Note 1 to the Consolidated Financial Statements included in the Company’s Form 10-K for the fiscal year ended September 30, 2007.2008.
ACCOUNTING PRONOUNCEMENTS
The Company has evaluated or is in the process of evaluating the impact that recently issued accounting standards will have on the Company’s financial position or results of operations upon adoption. For disclosures related to the adoption of new accounting standards, see the New Accounting Standards section of Note 1 to the Consolidated Financial Statements.
FINANCIAL CONDITION
CREDIT RATINGS
As of June 30,December 31, 2008, 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 CorporateIssuer Rating | A | | A- |
Laclede Gas First Mortgage Bonds | A | A3 | A+ |
Laclede Gas Commercial Paper | A-1 | P-2 | F1 |
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.
CASH FLOWS
The Company’s short-term borrowing requirements typically peak during colder months when Laclede Gas borrows money to cover the lag between when it purchases its natural gas and when its customers pay for that gas. Changes in the wholesale cost of natural gas (including cash payments for margin deposits associated with the Utility’s use of natural gas financial instruments), 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 from year to year, and can cause significant variations in the Utility’s cash provided by or used in operating activities.
Net cash provided byused in operating activities for the ninethree months ended June 30,December 31, 2008 was $193.3$17.2 million, compared with $152.0$7.7 million for the same period last year. The variationdifference is primarily attributable to differences invariations associated with the timing of the collections of gas cost under the Utility’s PGA Clause, including the effects of this year’s reductionincrease in net cash payments for margin deposits associated with the Utility’s use of natural gas financial instruments, and higher operating income this year. These variations are partially offset by an increaseinstruments.
Net cash used in cash paidinvesting activities for income taxes.the three months ended December 31, 2008 was $15.2 million compared with $14.6 million for the three months ended December 31, 2007. Cash used in investing activities primarily reflected capital expenditures in both periods.
Net cash provided by investingfinancing activities for the nine months ended June 30, 2008 was $43.4 million, compared with net cash used in investing activities of $43.2$47.6 million for the ninethree months ended June 30, 2007. The variation is primarily attributable to the proceeds from the sale of SM&P recorded this year.
Net cash used in financing activities was $256.4December 31, 2008 compared with $36.5 million for the ninethree months ended June 30, 2008, compared with $123.3 million for the nine months ended June 30,December 31, 2007. The variation isincrease primarily attributable to increased repaymentsreflects the effect of short-term debt, the redemption of the Company’s long-term debt to an unconsolidated affiliate trust, and the maturity of long-term debt last year, partially offset by the reduced issuance of short-term debt this year. The Company used a portion of the proceeds from the aforementioned sale of SM&P to fund the redemption of the long-term debt to the unconsolidated affiliate trust.
LIQUIDITY AND CAPITAL RESOURCES
Short-term Debt
As indicated above, the Company’s short-term borrowing requirements typically peak during the colder months. These short-term cash requirements have traditionally beencan be met through the sale of commercial paper supported by lines of credit with banks.banks or through direct use of the lines of credit. Laclede Gas has a line of credit in place of $320 million. Duringmillion from 10 banks, with the second quarter, the expiration of thislargest portion provided by a single bank being 17.5%. This line was extended one year toexpires in December 2011 from December 2010.2011. In November 2007,2008, the Utility established a seasonal line of credit of $40$75 million, which expiredexpires in March 2008. The Utility had short-term borrowings aggregating to2009. Including both lines of credit, the largest portion provided by a maximumsingle bank is 26.8%. During the quarter ending December 31, 2008, Laclede Gas utilized both its line of $304.5 million at any one time during the nine months ended June 30, 2008. Short-termcredit and commercial paper borrowingsfor short-term funding. Commercial paper outstanding at June 30,December 31, 2008 was $73.5 million, while outstanding bank line advances were $58.6$190.0 million. The weighted average interest rate on these short-term borrowings was 3.0%1.8% per annum at June 30,December 31, 2008. Based on total short-term borrowings at June 30,December 31, 2008, a change in interest ratesrate of 100 basis points would increase or decrease pre-tax earnings and cash flows of Laclede Group by approximately $0.6$2.6 million on an annual basis. Portions of such increases or decreases may be offset through the application of PGA carrying costs. In addition, Laclede Gas had borrowings from Laclede Group totaling $44.4$52.6 million at June 30,December 31, 2008. The Utility had short-term borrowings (including borrowings from Laclede Group) aggregating to a maximum of $386.4 million at any one time during the quarter. Excluding borrowings from Laclede Group, the Utility’s maximum borrowings for the quarter were $309.9 million.
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) to be at least 2.25 times interest expense. On June 30,December 31, 2008, total debt was 53%63% of total capitalization. capitalization. For the twelve months ended June 30,December 31, 2008, EBITDA was 3.97 times interest expense.
Short-term cash requirements outside of Laclede Gas have generally been met with internally-generated funds. However, Laclede Group has on file with the Securities and Exchange Commission (SEC) an effective shelf registration on Form S-3 for issuance$50 million in working capital lines of $350credit, $40 million of securities. The full amountwhich expires in August 2009 and $10 million of this shelf registration remains availablewhich expires in October 2009, to Laclede Gas at this time. The Utility has authority from the MoPSC to issue up to $500 million in First Mortgage Bonds, unsecured debt, and equity securities. In May 2008, pursuant to this authority, the Utility sold 26 sharesmeet short-term liquidity needs of its common stock tosubsidiaries. These lines of credit have covenants limiting the total debt of the consolidated Laclede Group for $0.9 million, leaving $493.3 million remaining under this authorization asto no more than 70% of the dateCompany’s total capitalization. This ratio stood at 56% on December 31, 2008. These lines have been used to provide for seasonal funding needs of this filing. The amount, timing, and type of additional financingvarious subsidiaries from time to be issued will depend on cash requirements and market conditions.time. There were no borrowings under Laclede Group’s lines during the quarter.
On November 1, 2007, Laclede Gas paid at maturity $40 million principal amount of 7 1/2% First Mortgage Bonds. This maturity was funded through short-term borrowings. Long-term Debt
At June 30,December 31, 2008, Laclede Gas had fixed-rate long-term debt totaling $310$390 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.
On May 5,Equity and Shelf Registrations
Laclede Gas has on file with the Securities and Exchange Commission (SEC) an effective shelf registration on Form S-3 for issuance of $350 million of First Mortgage Bonds, unsecured debt, and preferred stock, of which $270 million remains available to Laclede Gas at this time. The Utility has authority from the MoPSC to issue up to $500 million in First Mortgage Bonds, unsecured debt, and equity securities, of which $371.5 million remained available under this authorization as of December 31, 2008. During the quarter ending December 31, 2008, pursuant to this authority, the Utility sold 1,187 shares of its common stock to Laclede Group redeemed in full its $46.4 million subordinated debentures, which also triggered the redemptionfor $40.9 million. The amount, timing, and type of all of the Laclede Capital Trust I (Trust) commonadditional financing to be issued will depend on cash requirements and preferred securities on the same date. Interest on the debentures and distributions on the Trust securities ceased on and after the redemption date. Upon redemption, Laclede Group recognized a pre-tax loss of $1.4 million, primarily attributable to unamortized issuance costs. A portion of the proceeds received from the sale of SM&P was used to fund the redemption. The Trust was dissolved on June 16, 2008.market conditions.
Laclede Group has on file aan automatic shelf registration on Form S-3 with the SEC that allows for the issuance of equity securities other than preferred stock, and debt securities. Of the $500 million ofNo securities originally registeredhave been issued under this Form S-3, $362.4 million remain registered and unissued as of June 30, 2008.registration statement, which expires November 26, 2011. The amount, timing, and type of additional financing to be issued under this shelf registration will depend on cash requirements and market conditions. In addition, Laclede Group has a registration statement on file on Form S-3 for the issuance and sale of up to 400,000 shares of its common stock under its Dividend Reinvestment and Stock Purchase Program. At December 31, 2008, 399,868 shares remain available for issuance under this Form S-3.
Short-term cash requirements outsideAt December 31, 2008, Laclede Gas had outstanding preferred stock totaling $0.6 million, including current maturities. On January 15, 2009, the Board of Directors of Laclede Gas have generally been met with internally-generated funds. However, Laclede Group has $50 million in working capital linesapproved the final redemption of credit, $40 million of which expires in August 2009 and $10 million of which expires in October 2008, to meet short-term liquidity needsall of its subsidiaries. These linesoutstanding 5% Series B and 4.56% Series C preferred stock on March 31, 2009. The redemption price shall be its par value of credit have covenants limiting the total debt of the consolidated Laclede Group to no more than 70% of the Company’s total capitalization. This ratio stood at 43% on June 30, 2008. These lines were previously used to provide letters of credit on behalf of SM&P, and have been used to provide for seasonal funding needs of the various other subsidiaries from time to time. Just prior$25 per share, in addition to the SM&P sale, the letters of credit provideddividend payable on behalf of SM&P totaled $2.8 million. Such letters have been released and extinguished. There were no borrowings under Laclede Group’s lines during the quarter.March 31, 2009.
Guarantees
Laclede Gas has several operating leases for the rental of vehicles that contain provisions requiring Laclede Gas to guarantee certain amounts related to the residual value of the leased property. These leases have various terms, the longest of which extends through 2014. At June 30,December 31, 2008, the maximum guarantees under these leases were $1.7$1.8 million. However, the Utility estimates that the residual value of the leased vehicles will be adequate to satisfy most of the guaranteed amounts. At June 30,December 31, 2008, the carrying value of the liability recognized for these guarantees was $0.3 million.
Laclede Group had guarantees totaling $57.5$72 million for performance and payment of certain wholesale gas supply purchases by LER, as of June 30, 2008. Since that date, total guarantees issued by Laclede Group on behalf of LER increased by $1.0 million bringing the total to $58.5 million in guarantees outstanding at August 4,December 31, 2008. No amounts have been recorded for these guarantees in the financial statements.
Other
Utility capital expenditures were $40.2$14.0 million for the ninethree months ended June 30,December 31, 2008, compared with $41.5$13.0 million for the same period last year. Non-utility capital expenditures were $1.3$0.3 million for the ninethree months ended June 30,December 31, 2008, compared with $1.5$0.4 million for the same period last year.three months ended December 31, 2007.
Consolidated capitalization at June 30,December 31, 2008, excluding current obligations of preferred stock, consisted of 60.9%56.6% Laclede Group common stock equity, 0.1% Laclede Gas preferred stock equity, and 39.0%43.3% Laclede Gas long-term debt.
It is management’s view that the Company has adequate access to capital markets and will have sufficient capital resources, both internal and external, to meet anticipated capital requirements.
The seasonal nature of Laclede Gas’ sales affects the comparison of certain balance sheet items at June 30,December 31, 2008 and at September 30, 2007,2008, such as Accounts Receivablereceivable - Net,net, Gas Stored Underground,stored underground, Notes Payable,payable, Accounts Payable,payable, Regulatory Assetsassets and Regulatory Liabilities, and Delayedliabilities, and Advance Customer Billings.customer billings. The Consolidated Balance Sheet at June 30,December 31, 2007 is presented to facilitate comparison of these items with the corresponding interim period of the preceding fiscal year.
CONTRACTUAL OBLIGATIONS
As of June 30,December 31, 2008, Laclede Group had contractual obligations with payments due as summarized below (in millions):
| | Payments due by period | |
| | | | Remaining | | | | | | Fiscal Years | |
Contractual Obligations | | Total | | Fiscal Year 2008 | | Fiscal Years 2009-2010 | | Fiscal Years 2011-2012 | | 2013 and thereafter | |
Principal Payments on Long-Term Debt | | $ | 310.0 | | $ | — | | $ | — | | $ | 25.0 | | $ | 285.0 | |
Interest Payments on Long-Term Debt | | | 382.4 | | | 1.2 | | | 39.0 | | | 36.5 | | | 305.7 | |
Operating Leases (a) | | | 11.1 | | | 1.3 | | | 7.6 | | | 2.2 | | | — | |
Purchase Obligations – Natural Gas (b) | | | 2,706.3 | | | 375.7 | | | 1,621.9 | | | 590.6 | | | 118.1 | |
Purchase Obligations – Other (c) | | | 119.1 | | | 6.4 | | | 25.9 | | | 19.2 | | | 67.6 | |
Total (d) | | $ | 3,528.9 | | $ | 384.6 | | $ | 1,694.4 | | $ | 673.5 | | $ | 776.4 | |
| | Payments due by period | |
| | | | Remaining | | | | | | Fiscal Years | |
Contractual Obligations | | Total | | Fiscal Year 2009 | | Fiscal Years 2010-2011 | | Fiscal Years 2012-2013 | | 2014 and thereafter | |
Principal Payments on Long-Term Debt | | $ | 390.0 | | $ | — | | $ | 25.0 | | $ | 25.0 | | $ | 340.0 | |
Interest Payments on Long-Term Debt | | | 524.2 | | | 14.7 | | | 48.4 | | | 45.1 | | | 416.0 | |
Operating Leases (a) | | | 16.4 | | | 3.9 | | | 7.7 | | | 3.4 | | | 1.4 | |
Purchase Obligations – Natural Gas (b) | | | 2,118.6 | | | 640.1 | | | 931.1 | | | 503.3 | | | 44.1 | |
Purchase Obligations – Other (c) | | | 111.6 | | | 13.7 | | | 25.4 | | | 17.5 | | | 55.0 | |
Total (d) | | $ | 3,160.8 | | $ | 672.4 | | $ | 1,037.6 | | $ | 594.3 | | $ | 856.5 | |
(a) | Operating lease obligations are primarily for office space, vehicles, and power operated equipment in the gas distribution segment. Additional payments will be incurred if renewal options are exercised under the provisions of certain agreements. |
(b) | 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 June 30,December 31, 2008 New York Mercantile Exchange futures prices. Laclede Gas recovers the costs related to its purchases, transportation, and storage of natural gas through the operation of its PGA 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 are generally entered into prior to or during the heating season. |
(c) | These purchase obligations reflect miscellaneous agreements for the purchase of materials and the procurement of services necessary for normal operations. |
(d) | The categories of Capital Leases and Other Long-Term liabilities have been excluded from the table above because there are no applicable amounts of contractual obligations under these categories. Also, commitments related to pension and postretirement benefit plans have been excluded from the table above. The Company does not expectexpects to make any contributions to its qualified, trusteed pension plans totaling $2.0 million during the remainder of fiscal year 2008.2009. Laclede Gas anticipates a $0.1$1.1 million contribution relative to its non-qualified pension plans during the remainder of fiscal year 2008.2009. With regard to the postretirement benefits, the Company anticipates Laclede Gas will contribute $4.1$10.0 million to the qualified trusts and $0.1$0.3 million directly to participants from Laclede Gas’ funds during the remainder of fiscal year 2008.2009. For further discussion of the Company’s pension and postretirement benefit plans, refer to Note 4, Pension Plans and Other Postretirement Benefits, of the Notes to Consolidated Financial Statements. |
MARKET RISK
Laclede Gas adoptedhas a risk management policy that providesallows 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 PGA 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. However, the timing of recovery for cash payments related to margin requirements may cause short-term cash requirements to vary. Nevertheless, carrying costs associated with such requirements are recovered through the PGA Clause. At June 30,December 31, 2008, the Utility held 7.435.7 million MMBtu of futures contracts at an average price of $9.03$8.78 per MMBtu. Additionally, 13.810.1 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 2009.October 2011.
In the course of its business, Laclede Group’s non-regulated gas marketing affiliate, LER, enters into fixed price commitments associated with the purchase or sale of natural gas. As part of LER’s risk management policy, LER manages the price risk associated with these commitments by either closely matching the offsetting physical purchase or sale of natural gas at fixed pricesfixed-prices or through the use of exchange-traded futures contracts to lock in margins. At June 30,December 31, 2008, LER’s unmatched positions are not material to Laclede Group’s financial position or results of operations. For details related to LER’s exchange-traded futures contracts at December 31, 2008, see Note 5 to the Consolidated Financial Statements.
ENVIRONMENTAL MATTERS
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 change, however, Laclede Gas may be required to incur additional costs. For information relative to environmental matters, see Note 1415 to the Consolidated Financial Statements included in the Company’s Form 10-K for the fiscal year ended September 30, 2007.2008. There have been no significant changes relative to environmental matters duringin the nine months ended June 30, 2008.first quarter of fiscal year 2009.
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 – Market Risk, on page 3531 of this report.
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 thirdfirst fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
For a description of environmental matters and legal proceedings, see Note 1415 to the Consolidated Financial Statements included in the Company’s Form 10-K for the fiscal year ended September 30, 2007.2008. 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, on page 2925 of this report.
Laclede Group and its subsidiaries are involved in 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
On May 12,November 20, 2008 and December 18, 2008, the Board of Directors of Laclede Gas approved the sale of 1,161 shares and 26 shares, respectively, of Laclede Gas common stock to Laclede Group. The proceeds from the sale, totaling $40.0 million and $0.9 million, respectively, were used to reduce short-term borrowings. Exemption from registration was claimed under Section 4(2) of the Securities Act of 1933.
Item 5. Other InformationDuring the quarter ended December 31, 2008, the only repurchases of our common stock were pursuant to elections by employees to have shares of stock withheld to cover employee tax withholding obligations upon the vesting of performance-based restricted stock on November 2, 2008. The following table provides information on those repurchases.
(a) | On August 1, 2008, Laclede Group executed an amendment to its $40 million line of credit with U.S. Bank, National Association to extend its term for an additional year, expiring on August 3, 2009. In addition, the parties amended certain terms related to rates and fees. The amendment is filed with this Form 10-Q as exhibit 10.1.
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Period | Total No. of Shares Purchased | Average Price Paid Per Share | Total No. of Shares Purchased as Part of Publicly Announced Plans | Maximum No. of Shares that May Yet be Purchased Under the Plans |
October 1, 2008 – October 31, 2008 | - | - | - | - |
November 1, 2008 – November 30, 2008 | 12,615 | $53.48 | - | - |
December 1, 2008 – December 31, 2008 | - | - | - | - |
Total | 12,615 | | - | - |
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. |
| | | |
Dated: | | August 4, 2008January 28, 2009 | | By: | /s/ Mark D. Waltermire |
| | | | | Mark D. Waltermire |
| | | | | Chief Financial Officer |
| | | | | (Authorized Signatory and Chief Financial Officer) |
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 |
| | | |
Dated: | | August 4, 2008January 28, 2009 | | By: | /s/ Mark D. Waltermire |
| | | | | Mark D. Waltermire |
| | | | | Senior Vice President and |
| | | | | Chief Financial Officer |
| | | | | (Authorized Signatory and Chief Financial Officer) |
Exhibit No. | | |
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| - | Second Amendment to AmendedSalient Features of Laclede Gas Company Deferred Income Plan II for Directors and Restated Revolving Credit Agreement between the CompanySelected Executives (as amended and U.S. Bank, National Association executed on Augustrestated effective as of January 1, 2008.2005). |
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| - | Salient Features of The Laclede Group, Inc. Deferred Income Plan for Directors and Selected Executives (effective as of January 1, 2005). |
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| - | Laclede Gas Company Incentive Compensation Plan (amended and restated effective as of January 1, 2005). |
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| - | Laclede Gas Company Incentive Compensation Plan II (effective as of January 1, 2005). |
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| - | The Laclede Group Management Continuity Protection Plan (effective as of January 1, 2005). |
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| - | Form of Management Continuity Protection Agreement. |
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| - | Restated Laclede Gas Company Supplemental Retirement Benefit Plan (as amended and restated as of January 1, 2005). |
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| - | Laclede Gas Company Supplemental Retirement Benefit Plan II (effective as of January 1, 2005). |
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| - | Form of Restricted Stock Award Agreement. |
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| - | Form of Performance Contingent Restricted Stock Award Agreement. |
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| - | Ratio of Earnings to Fixed Charges. |
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| - | CEO and CFO Certifications under Exchange Act Rule 13a – 14(a). |
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| - | CEO and CFO Section 1350 Certifications. |
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| - | Laclede Gas Company - Financial Statements, Notes to Financial Statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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