SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission Exact Name of Registrant as States of I.R.S.
File Number Specified in its Charter and Incorporation Employer
Principal Office Address and Identification
Telephone Number Number
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1-16681 The Laclede Group, Inc. Missouri 74-2976504
720 Olive Street
St. Louis, MO 63101
314-342-0500
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1-1822 Laclede Gas Company Missouri 43-0368139
720 Olive Street
St. Louis, MO 63101
314-342-0500
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Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such report),
The Laclede Group, Inc.: Yes X No
---- ----
Laclede Gas Company: Yes X No
---- ----
and (2) has been subject to such filing requirements for the past 90 days:
The Laclede Group, Inc.: Yes X No
---- ----
Laclede Gas Company: Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Shares Outstanding At
Registrant Description of Common Stock July 26, 2002
- ---------- --------------------------- -------------
The Laclede Group, Inc. Common Stock ($1.00 Par Value) 18,917,068
Laclede Gas Company Common Stock ($1.00 Par Value) 100 (100% owned by
Laclede Group)
1
TABLE OF CONTENTS Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Laclede Group, Inc.:
Statements of Consolidated Income 4
Consolidated Balance Sheets 5-6
Statements of Consolidated Cash Flows 7
Laclede Gas Company:
Statements of Consolidated Income 8
Consolidated Balance Sheets 9-10
Statements of Consolidated Cash Flows 11
Notes to Consolidated Financial Statements
(The Laclede Group and Laclede Gas Company - Combined) 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Other Reports on Form 8-K 26
SIGNATURES 27
INDEX TO EXHIBITS 28
Filing Format
- -------------
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).
Effective October 1, 2001, Laclede Gas and its subsidiaries became
subsidiaries of The Laclede Group. At that time stock certificates
previously representing shares of Laclede Gas common stock were deemed to
represent the same number of shares of The Laclede Group common stock. All
of the former subsidiaries of Laclede Gas (Laclede Investment LLC, Laclede
Energy Resources, Inc., Laclede Gas Family Services, Inc., Laclede
Development Company, Laclede Venture Corp. and Laclede Pipeline Company) are
now subsidiaries of Laclede Group.
2
PART I.
FINANCIAL INFORMATION
This Quarterly Report on Form 10-Q includes separate consolidated financial
statements (i.e. balance sheets, statements of income and statements of cash
flows) for Laclede Group and Laclede Gas. The Laclede Group financial
statements (pages 4 through 7) present the consolidated financial position,
results of operations and cash flows of Laclede Group after the October 1,
2001 restructuring, as well as the consolidated financial position, results
of operations and cash flows of Laclede Gas prior to the restructuring
(i.e., the highest level of consolidation). The consolidated financial
position, results of operations and cash flows of Laclede Gas immediately
before the restructuring are essentially identical to the consolidated
financial position, results of operations and cash flows of Laclede Group
immediately after the restructuring (i.e. legal entity results).
The consolidated financial statements for Laclede Gas (pages 8 through 11)
present the consolidated financial position, results of operations and cash
flows of Laclede Gas throughout the reported periods, as well as the
consolidated financial position, results of operations and cash flows of
Laclede Gas' former subsidiaries prior to the October 1, 2001 restructuring.
A single set of Notes to the Consolidated Financial Statements begins on
page 12 that applies equally to Laclede Group and Laclede Gas, except where
otherwise noted.
This report includes a single Management's Discussion and Analysis of
Financial Condition and Results of Operations for Laclede Group as well as
Laclede Gas, due to the similarity of the operating results of the two
entities.
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 year ended September 30, 2001.
3
Item 1. Financial Statements
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(In Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Operating Revenues:
Utility operating revenues $ 87,284 $104,195 $527,297 $844,143
Non-utility operating revenues 59,997 18,706 102,091 66,525
----------------------------------------------------
Total Operating Revenues 147,281 122,901 629,388 910,668
----------------------------------------------------
Operating Expenses:
Utility operating expenses
Natural and propane gas 41,565 57,611 313,274 600,524
Other operation expenses 25,497 24,784 80,577 78,617
Maintenance 4,547 4,827 13,179 14,373
Depreciation and amortization 6,106 6,560 18,741 19,603
Taxes, other than income taxes 9,752 11,553 41,088 56,831
----------------------------------------------------
Total utility operating expenses 87,467 105,335 466,859 769,948
Non-utility operating expenses 55,830 18,316 100,770 64,751
----------------------------------------------------
Total Operating Expenses 143,297 123,651 567,629 834,699
----------------------------------------------------
Operating Income (Loss) 3,984 (750) 61,759 75,969
Other Income and Income Deductions - Net (76) (100) 673 1,456
----------------------------------------------------
Income (Loss) Before Interest and Income
Taxes 3,908 (850) 62,432 77,425
----------------------------------------------------
Interest Charges:
Interest on long-term debt 5,205 4,414 15,615 13,168
Other interest charges 1,129 2,361 3,868 9,080
----------------------------------------------------
Total Interest Charges 6,334 6,775 19,483 22,248
----------------------------------------------------
Dividends on Preferred Stock - Laclede Gas 16 22 52 66
----------------------------------------------------
Income (Loss) Before Income Taxes (2,442) (7,647) 42,897 55,111
Income Tax Expense (Benefit) (1,532) (3,952) 15,350 19,626
----------------------------------------------------
Net Income (Loss) Applicable to Common Stock $ (910) $ (3,695) $ 27,547 $ 35,485
====================================================
Average Number of Common Shares Outstanding 18,878 18,878 18,878 18,878
Earnings (Loss) Per Share of Common Stock $(.05) $(.20) $1.46 $1.88
Dividends Declared Per Share of Common Stock $.335 $.335 $1.005 $1.005
See notes to consolidated financial statements.
4
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
June 30 Sept. 30
2002 2001
---- ----
(Thousands of Dollars)
(UNAUDITED)
ASSETS
Utility Plant $ 977,734 $ 949,775
Less: Accumulated depreciation and amortization 392,644 380,135
--------------------------
Net Utility Plant 585,090 569,640
--------------------------
Other Property and Investments 71,259 32,893
--------------------------
Current Assets:
Cash and cash equivalents 14,601 3,223
Accounts receivable 95,573 87,707
Less: Allowances for doubtful accounts (5,592) (9,216)
Materials, supplies, and merchandise at avg. cost 5,038 5,393
Natural gas stored underground for current use at LIFO cost 32,001 76,661
Propane gas for current use at FIFO cost 14,723 14,213
Prepayments 4,551 3,999
Deferred income taxes 6,063 8,556
--------------------------
Total Current Assets 166,958 190,536
--------------------------
Deferred Charges:
Prepaid pension cost 117,633 110,475
Regulatory assets 72,424 68,599
Other 4,651 3,767
--------------------------
Total deferred charges 194,708 182,841
--------------------------
Total Assets $1,018,015 $ 975,910
==========================
See notes to consolidated financial statements.
5
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
June 30 Sept. 30
2002 2001
---- ----
(Thousands of Dollars)
(UNAUDITED)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (June 30, 2002, 18,877,987 and
Sept. 30, 2001, 20,743,625 shares issued) $ 18,878 $ 20,744
Paid-in capital 63,701 85,846
Retained earnings 214,087 205,512
Treasury stock, at cost (1,865,638 shares held Sept. 30, 2001) - (24,017)
--------------------------
Total common stock equity 296,666 288,085
Redeemable preferred stock - Laclede Gas 1,266 1,588
Long-term debt (less sinking fund requirements) - Laclede Gas 259,524 284,459
--------------------------
Total Capitalization 557,456 574,132
--------------------------
Current Liabilities:
Notes payable 113,310 117,050
Accounts payable 42,532 32,087
Advance customer billings 3,183 11,679
Current portion of long-term debt and preferred stock 25,000 79
Taxes accrued 22,677 14,912
Unamortized purchased gas adjustment 1,720 9,026
Other 40,867 32,863
--------------------------
Total Current Liabilities 249,289 217,696
--------------------------
Deferred Credits and Other Liabilities:
Deferred income taxes 139,293 142,515
Unamortized investment tax credits 5,709 5,948
Pension and postretirement benefit costs 23,904 15,847
Regulatory liabilities 22,377 304
Other 19,987 19,468
--------------------------
Total Deferred Credits and Other Liabilities 211,270 184,082
--------------------------
Total Capitalization and Liabilities $1,018,015 $975,910
==========================
See notes to consolidated financial statements.
6
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30,
2002 2001
---- ----
(Thousands of Dollars)
Operating Activities:
Net Income $ 27,547 $ 35,485
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 18,879 19,795
Deferred income taxes and investment
tax credits (7,834) (3,672)
Dividends on preferred stock - Laclede Gas 52 66
Other - net 685 (1,061)
Changes in assets and liabilities:
Accounts receivable - net 3,192 (38,465)
Unamortized purchased gas adjustments (7,306) 15,159
Deferred purchased gas costs 24,244 2,826
Advance customer billings - net (8,496) (40,497)
Accounts payable 7,563 619
Taxes accrued 8,674 12,291
Natural gas stored underground 44,660 59,766
Other assets and liabilities (2,230) (20,827)
---------------------------
Net cash provided by operating activities $109,630 $ 41,485
---------------------------
Investing Activities:
Construction expenditures (34,317) (33,649)
Investments - non-utility (40,839) (318)
Employee benefit trusts 32 (1,242)
Other 31 (2,000)
---------------------------
Net cash used in investing activities $(75,093) $(37,209)
---------------------------
Financing Activities:
Issuance of first mortgage bonds - 50,000
Issuance (Repayment) of short-term debt - net (3,740) (36,800)
Dividends paid (19,024) (19,038)
Preferred stock reacquired and other (395) (135)
---------------------------
Net cash (used in) financing activities $(23,159) $ (5,973)
---------------------------
Net Increase/(Decrease) in Cash and Cash Equivalents $ 11,378 $ (1,697)
Cash and Cash Equivalents at Beg. of Period 3,223 4,215
---------------------------
Cash and Cash Equivalents at End of Period $ 14,601 $ 2,518
===========================
Supplemental Disclosure of Cash Paid
During the Period for:
Interest $ 19,565 $ 24,242
Income taxes 10,777 11,857
See notes to consolidated financial statements.
7
LACLEDE GAS COMPANY
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(In Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Operating Revenues:
Utility operating revenues $ 87,284 $104,195 $527,297 $844,143
Other operating revenues 684 18,706 1,887 66,525
----------------------------------------------------
Total Operating Revenues 87,968 122,901 529,184 910,668
----------------------------------------------------
Operating Expenses:
Utility operating expenses
Natural and propane gas 41,565 57,611 313,274 600,524
Other operation expenses 25,497 24,784 80,577 78,617
Maintenance 4,547 4,827 13,179 14,373
Depreciation and amortization 6,106 6,560 18,741 19,603
Taxes, other than income taxes 9,752 11,553 41,088 56,831
----------------------------------------------------
Total utility operating expenses 87,467 105,335 466,859 769,948
Other operating expenses 713 18,316 1,892 64,751
----------------------------------------------------
Total Operating Expenses 88,180 123,651 468,751 834,699
----------------------------------------------------
Operating Income (Loss) (212) (750) 60,433 75,969
Other Income and Income Deductions - Net (108) (100) 608 1,456
----------------------------------------------------
Income (Loss) Before Interest and Income Taxes (320) (850) 61,041 77,425
----------------------------------------------------
Interest Charges:
Interest on long-term debt 5,205 4,414 15,615 13,168
Other interest charges 841 2,361 3,451 9,080
----------------------------------------------------
Total Interest Charges 6,046 6,775 19,066 22,248
----------------------------------------------------
Income (Loss) Before Income Taxes (6,366) (7,625) 41,975 55,177
Income Tax Expense (Benefit) (2,987) (3,952) 14,893 19,626
----------------------------------------------------
Net Income (Loss) (3,379) (3,673) 27,082 35,551
Dividends on Preferred Stock - Laclede Gas 16 22 52 66
----------------------------------------------------
Earnings (Loss) Applicable to Common Stock $ (3,395) $ (3,695) $ 27,030 $ 35,485
====================================================
See notes to consolidated financial statements.
8
LACLEDE GAS COMPANY
CONSOLIDATED BALANCE SHEETS
June 30 Sept. 30
2002 2001
---- ----
(Thousands of Dollars)
(UNAUDITED)
ASSETS
Utility Plant $977,734 $949,775
Less: Accumulated depreciation and amortization 392,644 380,135
-------------------------
Net Utility Plant 585,090 569,640
-------------------------
Other Property and Investments 25,535 32,893
-------------------------
Current Assets:
Cash and cash equivalents 1,829 3,223
Accounts receivable 64,637 87,707
Less: Allowances for doubtful accounts (4,889) (9,216)
Materials, supplies, and merchandise at avg. cost 5,000 5,393
Natural gas stored underground for current use at LIFO cost 31,985 76,661
Propane gas for current use at FIFO cost 14,723 14,213
Prepayments and other 2,928 3,999
Deferred income taxes 6,063 8,556
-------------------------
Total Current Assets 122,276 190,536
-------------------------
Deferred Charges:
Prepaid pension cost 117,633 110,475
Regulatory assets 72,424 68,599
Other 4,583 3,767
-------------------------
Total deferred charges 194,640 182,841
-------------------------
Total Assets $927,541 $975,910
=========================
See notes to consolidated financial statements.
9
LACLEDE GAS COMPANY
CONSOLIDATED BALANCE SHEETS (Continued)
June 30 Sept. 30
2002 2001
---- ----
(Thousands of Dollars)
(UNAUDITED)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock and Paid-in capital (June 30, 2002, 100 and
Sept. 30, 2001, 20,743,625 shares issued) $ 82,579 $106,590
Retained earnings 193,826 205,512
Treasury stock, at cost (1,865,638 shares held Sept. 30, 2001) - (24,017)
----------------------------
Total common stock equity 276,405 288,085
Redeemable preferred stock - Laclede Gas 1,266 1,588
Long-term debt (less sinking fund requirements) - Laclede Gas 259,524 284,459
----------------------------
Total Capitalization 537,195 574,132
----------------------------
Current Liabilities:
Notes payable 70,510 117,050
Accounts payable 28,210 32,087
Advance customer billings 3,183 11,679
Current portion of long-term debt and preferred stock 25,000 79
Taxes accrued 23,541 14,912
Unamortized purchased gas adjustment 1,720 9,026
Other 28,577 32,863
----------------------------
Total Current Liabilities 180,741 217,696
----------------------------
Deferred Credits and Other Liabilities:
Deferred income taxes 138,161 142,515
Unamortized investment tax credits 5,709 5,948
Pension and postretirement benefit costs 23,904 15,847
Regulatory liabilities 22,377 304
Other 19,454 19,468
----------------------------
Total Deferred Credits and Other Liabilities 209,605 184,082
----------------------------
Total Capitalization and Liabilities $927,541 $975,910
============================
See notes to consolidated financial statements.
10
LACLEDE GAS COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30,
2002 2001
---- ----
(Thousands of Dollars)
Operating Activities:
Net Income $ 27,082 $ 35,551
Adjustments to reconcile net income
To net cash provided by (used in) operating activities:
Depreciation and amortization 18,692 19,795
Deferred income taxes and investment
tax credits (7,772) (3,672)
Other - net 685 (1,061)
Changes in assets and liabilities:
Accounts receivable - net 16,983 (38,465)
Unamortized purchased gas adjustments (7,306) 15,159
Deferred purchased gas costs 24,244 2,826
Advance customer billings - net (8,496) (40,497)
Accounts payable (4,583) 619
Taxes accrued 7,979 12,291
Natural gas stored underground 44,645 59,766
Other assets and liabilities (13,174) (20,827)
---------------------------
Net cash provided by (used in) operating activities $ 98,979 $ 41,485
---------------------------
Investing Activities:
Construction expenditures (33,863) (33,649)
Investments - non-utility (219) (318)
Employee benefit trusts 76 (1,242)
Other (408) (2,000)
---------------------------
Net cash used in investing activities $(34,414) $(37,209)
---------------------------
Financing Activities:
Issuance of first mortgage bonds - 50,000
Issuance (Repayment) of short-term debt - net (46,540) (36,800)
Dividends paid (19,024) (19,038)
Preferred stock reacquired and other (395) (135)
---------------------------
Net cash provided by (used in) financing activities $(65,959) $ (5,973)
---------------------------
Net Increase in Cash and Cash Equivalents $ (1,394) $ (1,697)
Cash and Cash Equivalents at Beg. of Period 3,223 4,215
---------------------------
Cash and Cash Equivalents at End of Period $ 1,829 $ 2,518
===========================
Supplemental Disclosure of Cash Paid
During the Period for:
Interest $ 19,264 $ 24,242
Income taxes 10,376 11,857
See notes to consolidated financial statements.
11
THE LACLEDE GROUP, INC. AND LACLEDE GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.) Effective October 1, 2001, Laclede Gas Company (Laclede Gas or the
Utility) and its subsidiaries became subsidiaries of The Laclede
Group, Inc. (Laclede Group or the Company), an exempt holding
company under the Public Utility Holding Company Act of 1935. See
the Company's Annual Report on Form 10-K for the year ended
September 30, 2001 for additional details on this restructuring.
This Quarterly Report on Form 10-Q is a combined report of Laclede
Group and Laclede Gas. Consolidated Financial Statements included
in this report are presented as follows:
Laclede Group - Presents the consolidated financial
position, results of operations and cash flows of Laclede
Group after the October 1, 2001 restructuring, as well as
the consolidated financial position, results of operations
and cash flows of Laclede Gas prior to restructuring. The
consolidated financial position, results of operations and
cash flows of Laclede Gas Company immediately before the
restructuring are essentially identical to the
consolidated financial position, results of operations and
cash flows of Laclede Group immediately after the
restructuring.
Laclede Gas - Presents the consolidated financial
position, results of operations and cash flows of Laclede
Gas throughout the reported periods, as well as the
consolidated financial position, results of operations and
cash flows of Laclede Gas' former subsidiaries prior to
the October 1, 2001 restructuring. In conjunction with the
October 1, 2001 restructuring, Laclede Gas dividended its
equity in its subsidiaries of $19.7 million to Laclede
Group. Also as of that same date, Laclede Gas cancelled
its treasury stock of $24.0 million.
These notes are an integral part of the accompanying consolidated
financial statements of Laclede Group and its subsidiaries,
including Laclede Gas. Except where otherwise noted, these Notes to
Consolidated Financial Statements apply equally to Laclede Group
and Laclede Gas. In the opinion of Laclede Group and Laclede Gas,
this interim report includes all adjustments (consisting of normal
recurring accruals) necessary for the fair presentation of the
results of operations for the periods presented. Certain
prior-period amounts have been reclassified to conform to
current-period presentation. This Form 10-Q should be read in
conjunction with the Notes to Financial Statements contained in the
Company's Fiscal 2001 Form 10-K.
2.) On January 28, 2002, Laclede Group completed its acquisition from
NiSource, Inc. of 100% of the stock of SM&P Utility Resources, Inc.
(SM&P), one of the nation's largest underground locating and
marking service businesses. SM&P, a Carmel, Indiana-based company,
performs over 10 million locates a year and currently generates
approximately $130 million in revenues annually from the $1.3
billion facility-locating industry. Its 2,000 employees operate
across 10 centrally located states - Illinois, Indiana, Kansas,
Michigan, Minnesota, Missouri, Ohio, Oklahoma, Texas and Wisconsin.
Locators mark the placement of underground facilities for major
providers of telephone, natural gas, electric, water, cable TV and
fiber optic services so that construction work can be performed
without damaging buried facilities. As a result of the acquisition,
SM&P's earnings flow will not only diversify Laclede Group's
earnings but also will be counter-seasonal to those of Laclede Gas.
This acquisition was financed initially with conventional bank debt
totaling $42.8 million. SM&P is a subsidiary of Laclede Group and
will remain headquartered in Indiana.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of acquisition.
The allocation of the purchase price included in the consolidated
statement of financial position is preliminary and may be revised
up to one year from the date of acquisition due to refinements in
the estimated fair value of the assets acquired and liabilities
assumed. The goodwill recognized in this transaction is expected to
be fully deductible for tax purposes.
12
At January 28, 2002
-------------------
(Thousands of Dollars)
Current assets $21,034
Property, plant, and equipment 7,157
Goodwill 27,997
-------
Total assets acquired $56,188
-------
Current liabilities $13,067
-------
Total liabilities assumed $13,067
-------
Net assets acquired $43,121
=======
The results of SM&P's operations since January 28, 2002 have been
included in Laclede Group's consolidated financial statements.
Goodwill has been included in Other Property and Investments on
Laclede Group's consolidated balance sheets. SM&P's earnings are
impacted by trends in the construction industry.
3.) In June 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations," which requires all business combinations
in the scope of the Statement to be accounted for using the
purchase method. The provisions of this Statement apply to all
business combinations initiated after June 30, 2001. The Company
has adopted the provisions of SFAS No. 141 with the acquisition of
SM&P. As required by SFAS No. 141, the goodwill for SM&P is being
accounted for consistent with the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets."
4.) The consolidated financial position, results of operations and cash
flows of Laclede Group are comprised primarily from the
consolidated financial position, results of operations and cash
flows of Laclede Gas. Laclede Gas is a natural gas distribution
utility having a material seasonal cycle. As a result, these
interim statements of income for Laclede Group and Laclede Gas are
not necessarily indicative of annual results or representative of
succeeding quarters of the fiscal year. Due to the seasonal nature
of the business of Laclede Gas, earnings are typically concentrated
in the first six months of the fiscal year, which generally
corresponds with the heating season. The Utility typically
experiences losses over the last half of its fiscal year. This
seasonal effect on Laclede Group is expected to be tempered
somewhat by the addition of SM&P, whose operations tend to be
counter-seasonal to those of Laclede Gas.
5.) Settlement of Laclede Gas' 2001 rate case resulted in
implementation of a general rate increase effective December 1,
2001, as approved by the Missouri Public Service Commission (MoPSC
or the Commission). The settlement provided for an annual increase
of about $12 million as well as an additional $3 million annually
to cover the cost of initiating service to customers. The MoPSC
also authorized the cost of removing retired utility plant to be
recovered as an expense when incurred rather than being included in
depreciation rates. Prior to December 1, 2001, the Utility's
removal costs, less salvage, were charged to accumulated
depreciation. Pursuant to the settlement, Laclede Gas instituted
lower depreciation rates effective December 1, 2001 and began
expensing all removal costs, net of salvage, as incurred. These
costs are included in the Other Operation Expenses line on the
income statement. The settlement also provided for the continued
deferral of certain costs related to the Laclede Gas pipe
replacement program as well as authorizing the recovery of costs
previously deferred under that program. Previously deferred costs
of $2,756,000 are being recovered and amortized on a straight-line
basis over a ten-year period, without return on investment,
effective with implementation of the new rates, in addition to
certain amounts authorized previously.
6.) Prior to the restructuring on October 1, 2001, Laclede Gas'
consolidated financial statements included subsidiary tax
obligations. Subsequent to the restructuring on October 1, 2001,
Laclede Group's
13
consolidated financial statements include the tax obligations of
Laclede Gas and its other subsidiaries. Net provisions for income
taxes were charged (credited) as follows during the periods set
forth below:
Laclede Group Laclede Gas
----------------------------------------------- ----------------------------------------------
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
----------------------- --------------------- ---------------------- ---------------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
(Thousands of Dollars) (Thousands of Dollars)
Federal
Current $(6,793) $(2,865) $19,819 $22,369 $(8,250) $(2,865) $19,382 $22,369
Deferred 5,554 (591) (6,793) (5,658) 5,596 (591) (6,767) (5,658)
State and Local
Current (1,277) (433) 3,334 3,736 (1,324) (433) 3,283 3,736
Deferred 984 (63) (1,010) (821) 991 (63) (1,005) (821)
----------------------------------------------------------------------------------------------
Total $(1,532) $(3,952) $15,350 $19,626 $(2,987) $(3,952) $14,893 $19,626
==============================================================================================
7.) Under the Gas Supply Incentive Plan (GSIP) of Laclede Gas, the
Utility shared with its customers certain gains and losses related
to the acquisition and management of its gas supply assets. The
provisions of the GSIP extended through September 30, 2001. In
September 2001, the MoPSC ruled that the GSIP should be allowed to
expire. The Utility requested clarification and rehearing. On
February 19, 2002, the MoPSC denied the Utility's application for
rehearing. Laclede Gas filed a petition for judicial review of the
MoPSC's decision with the Cole County Circuit Court, together with
a motion requesting that the MoPSC's decision be stayed. The
request for stay was denied on May 13, 2002. The petition for
judicial review is still pending. However, pursuant to the 2001
rate case settlement, the MoPSC authorized Laclede Gas to retain
all income from releases of pipeline capacity effective December 1,
2001. Income from releases of pipeline capacity was previously
shared with customers under the terms of the GSIP. Laclede Gas will
continue to retain all income resulting from sales outside of its
traditional service area, as previously authorized by the
Commission. Income related to releases of pipeline capacity and
sales made outside its traditional service area are volatile in
nature and subject to market conditions.
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -------------------
2002 2001 2002 2001
---- ---- ---- ----
(Thousands of Dollars)
Pre-Tax Income - GSIP/Capacity Release $428 $3,055 $1,008 $6,867
Pre-Tax Income - Off System Sales 512 124 3,615 899
-------------------------- ----------------------------
Total Pre-Tax Income $940 $3,179 $4,623 $7,766
========================== ============================
8.) Laclede Gas and other subsidiaries of Laclede Group may engage in
related party transactions during the ordinary course of business.
All significant intercompany balances have been eliminated from the
consolidated financial statements of Laclede Group. In addition,
all such significant transactions between Laclede Gas and its
affiliates that occurred prior to the October 1, 2001 restructuring
have similarly been eliminated from the consolidated financial
statements of Laclede Gas.
In compliance with generally accepted accounting principles,
transactions between Laclede Gas and its affiliates that occurred
after the October 1, 2001 restructuring, as well as intercompany
balances remaining on Laclede Gas' balance sheet on June 30, 2002,
have not been eliminated from the Laclede Gas consolidated
financial statements. These amounts are not disclosed on the face
of the Laclede Gas consolidated financial statements, since they
are not material.
Laclede Gas provides administrative and general support to
affiliates and has filed consolidated tax returns, which include
affiliated company tax obligations. All such costs, which are not
material, are
14
billed to the appropriate affiliates and are reflected in accounts
receivable on Laclede Gas' Consolidated Balance Sheet. Laclede Gas
may also, on occasion, borrow funds from, or lend funds to,
affiliated companies. At June 30, 2002, the Laclede Gas
Consolidated Balance Sheet reflected a total of $2.9 million of
intercompany receivables and $.1 million intercompany payables.
9.) The regulated utility 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
of natural gas serving an area in eastern Missouri, with a
population of approximately 2.0 million, including the City of
St. Louis, St. Louis County, and parts of eight other counties.
Non-regulated operations include the transportation of liquid
propane, gas marketing, the sale of insurance related products,
real estate development, the compression of natural gas, and
financial investments in other enterprises. These operations are
conducted through six wholly-owned subsidiaries that became
subsidiaries of Laclede Group as a result of the restructuring on
October 1, 2001. This segment also includes the results of Laclede
Energy Services, Inc. (LES), a wholly-owned subsidiary of Laclede
Group which became operational on May 1, 2002, that performs
administrative gas supply and risk management services. The Utility
Services segment includes the results of SM&P, an underground
locating and marking business operating in 10 Midwestern states,
and a wholly-owned subsidiary of Laclede Group acquired on
January 28, 2002. The results of SM&P's operations since
January 28, 2002 and the results of LES' operations since
May 1, 2002 are included in Laclede Group's consolidated financial
statements.
Regulated Utility
Gas Services All Other
(Thousands of Dollars) Utility (Non-Regulated) (Non-Regulated) Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------
Three Months Ended
June 30, 2002
Operating revenues $ 87,284 $ 39,482 $ 20,515 $ - $ 147,281
Net income (loss) (3,376) 2,096 370 - (910)
Total assets 926,018 60,478 38,237 (6,718) 1,018,015
Nine Months Ended
June 30, 2002
Operating revenues $527,297 $ 54,756 $ 47,335 $ - $ 629,388
Net income (loss) 27,034 63 450 - 27,547
Total assets 926,018 60,478 38,237 (6,718) 1,018,015
Three Months Ended
June 30, 2001
Operating revenues $104,195 $ - $ 18,706 $ - $ 122,901
Net income (loss) (3,944) - 249 - (3,695)
Total assets 959,728 - 34,301 (27,294) 966,735
Nine Months Ended
June 30, 2001
Operating revenues $844,143 $ - $ 66,525 $ - $ 910,668
Net income (loss) 34,480 - 1,005 - 35,485
Total assets 959,728 - 34,301 (27,294) 966,735
10.) As previously reported, Laclede Gas is subject to various
environmental laws and regulations that, to date, have not
materially affected its financial position and results of
operations. Laclede Gas is presently involved in the clean up or
formal assessment of two former manufactured gas plant sites, the
Shrewsbury site and the Carondelet City of St. Louis site.
With regard to the Shrewsbury site, Laclede Gas and state and
federal environmental regulators have agreed upon certain actions
and those actions are nearing completion. Laclede Gas currently
estimates the
15
overall costs of these actions will be approximately $2,307,000. As
of June 30, 2002, Laclede Gas has paid $2,214,000 and reserved
$93,000 for these actions. If regulators require additional
actions, Laclede Gas will incur additional costs.
The Carondelet City of St. Louis site was placed into the Missouri
Voluntary Cleanup Program (VCP). The VCP provides opportunities to
minimize the scope and cost of site cleanup while maximizing
possibilities for site development. Laclede Gas currently estimates
that the cost of the site investigations, agency oversight and
related legal and engineering consulting may be approximately
$609,000. Currently, Laclede Gas has paid $512,000 and reserved an
additional $97,000. Laclede has requested that other former site
owners and operators participate in the cost of any site
investigation. One former owner and operator agreed to participate
in these costs and has reimbursed Laclede Gas to date for $159,000.
Laclede Gas anticipates additional reimbursement from this party of
approximately $69,000. Laclede Gas plans to seek proportionate
reimbursement of all costs relative to this site from other
potentially responsible parties if practicable. Laclede Gas and the
participating former owner and operator are currently having
discussions with the City of St. Louis, the present owner of the
site, regarding remediation and development possibilities.
Costs incurred are charged to expense or capitalized in accordance
with generally accepted accounting principles. A predetermined
level of expense is included in Laclede Gas' rates.
Laclede Gas has been advised that a third former manufactured gas
plant site previously operated, but no longer owned by Laclede Gas,
is believed to contain gas plant waste that may require
remediation. Laclede Gas is working to determine the nature and
extent of such waste, if any, and Laclede Gas' responsibility, if
any, for any remediation costs.
While the scope of costs relative to the Shrewsbury site will not
be significant, the scope of costs relative to the other sites are
unknown and may be material. Laclede Gas has notified its insurers
that it intends to seek reimbursement of its costs at the sites.
The majority of insurers have reserved their rights. While some of
the insurers have denied coverage, Laclede Gas continues to seek
reimbursement from them. With regard to the Shrewsbury site,
denials of coverage will not have any significant impact on the
financial position and results of operations of Laclede Gas. With
regard to the other sites, since the scope of costs relative to
these sites are unknown and may be material, denials of coverage
may have a material impact on the financial position and results of
operations of Laclede Gas. Such costs, if incurred, have typically
been subject to recovery in rates.
11.) The legal proceedings item for the Form 10-K for the year ended
September 30, 2001 included disclosure of a class action lawsuit
filed in August 2001 against Laclede Gas. Laclede Gas filed a
motion to dismiss the lawsuit that was granted by the Court on
February 22, 2002. The plaintiff did not file an amended petition
within the time granted by the Court but filed an appeal on April
3, 2002. On May 13, 2002, the plaintiff dismissed the appeal.
12.) On March 15, 2002, the Staff of the MoPSC filed its recommendation
in the proceeding established to review Laclede Gas' gas costs for
fiscal 2000. In its recommendation, the Staff proposed to disallow
the recovery of approximately $2.6 million in gas costs on the
alleged grounds that Laclede Gas had slightly more transportation
capacity than necessary to serve its customers. On May 9, 2002, the
Staff revised its recommendation to withdraw the $2.6 million
proposed disallowance.
On June 28, 2002, the Staff of the MoPSC filed its recommendation
in a proceeding established to review Laclede Gas' gas costs for
fiscal 2001. In its recommendation, the Staff proposed to disallow
approximately $4.9 million in pre-tax gains achieved by Laclede Gas
in its incentive-based Price Stabilization Program. This Program
was discontinued at the end of the 2001-2002 heating season.
Laclede Gas believes that Staff's position lacks merit and intends
to vigorously oppose the adjustment in a proceeding before the
MoPSC, which is currently scheduled to occur in February 2003.
Regulatory proceeding results are, however, inherently uncertain,
and to the extent that a final Commission decision sustains Staff's
recommended disallowance, the proceeding's outcome could have a
material effect on the future financial position and results of
operations of Laclede Gas. Missouri statute provides an opportunity
for court review of Commission decisions.
16
13.) On May 31, 2002, the Staff of the Commission filed a Motion to
Investigate Laclede Gas Company's alleged transfer of its gas
supply function to Laclede Energy Services, Inc. (LES), a
subsidiary of Laclede Group, and such action's ramifications,
including whether such alleged transfer required Commission
approval or was otherwise lawful. On June 10, Laclede Gas
responded, pointing out that it had not transferred its gas supply
functions to LES but had instead delegated six employees to LES
with responsibility for performing various administrative duties,
many of which had been performed in prior years by an outside
party. Laclede Gas remains primarily responsible for the gas supply
function. Laclede urged the Commission to deny Staff's Motion on
this and other grounds. By its order granting Motion to Establish
Case issued July 16, 2002, the Commission concluded that a case
should be established to investigate the issues raised by the
Staff; ordered the Staff to file a status report regarding progress
of the investigation not later than November 13, 2002; and
authorized any responses to Staff's status report to be filed not
later than ten days after the status report filing. Laclede Gas
believes its action complies with applicable law and intends to
participate in the case and vigorously defend its delegation of
administrative services in connection with the gas supply function.
The outcome of any regulatory proceeding is often uncertain.
However, Laclede Gas does not believe that the eventual outcome of
the case will have any material effect on the financial results of
Laclede Gas.
14.) SM&P has several operating leases, the aggregate annual cost of
which is approximately $11 million, consisting primarily of
revolving operating leases for vehicles used in its business. Upon
acquisition of SM&P, Laclede Group assumed parental guarantees of
certain of those vehicle leases. Laclede Group anticipates that the
maximum guarantees will not exceed $15 million.
Laclede Group has issued a $5.0 million guarantee of performance
and payment of certain gas supply purchases by Laclede Energy
Resources, Inc. (the Company's non-utility marketing affiliate)
starting in July 2002.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Certain words, such as "anticipate,"
"believe," "estimate," "expect," "intend," "plan," "seek," and similar words
and expressions identify forward-looking statements that involve
uncertainties and risks. Future developments may not be in accordance with
our expectations or beliefs and the effect of future developments may not be
those anticipated. Among the factors that may cause results to differ
materially from those contemplated in any forward-looking statement are:
o weather conditions and catastrophic events;
o economic, competitive, political and regulatory conditions;
o legislative, regulatory and judicial mandates and decisions,
some of which may be retroactive, including those affecting
o allowed rates of return
o incentive regulation
o industry and rate structures
o purchased gas adjustment provisions
o franchise renewals
o environmental or safety matters
o taxes
o accounting standards;
o the results of litigation;
o retention, ability to attract, ability to collect from and
conservation efforts of customers;
o capital and energy commodity market conditions including the
ability to obtain funds for necessary capital expenditures
and the terms and conditions imposed for obtaining sufficient
gas supply; and
o 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 combined notes thereto.
18
THE LACLEDE GROUP, INC.
RESULTS OF OPERATIONS
Quarter Ended June 30, 2002
Laclede Group's results for the quarter ended June 30, 2002 were primarily
impacted by the regulated activities of its largest subsidiary, Laclede Gas
Company, Missouri's largest natural gas distribution company. Since those
utility earnings are generated by the sale of heating energy, which is
heavily influenced by the weather, the Utility typically experiences losses
over the last half of its fiscal year. The seasonal effect of the Utility
was tempered somewhat by the addition of SM&P Utility Resources, Inc.
(SM&P), whose operations tend to be counter-seasonal to those of Laclede
Gas.
Laclede Group recorded a loss of $.05 per share for the quarter ended
June 30, 2002 compared with a loss of $.20 per share reported for the
quarter ended June 30, 2001. The improvement in Laclede Group's results was
primarily attributable to income recorded this quarter from the operations
of its newly-acquired subsidiary, SM&P, a wholly owned facility locating and
marking business acquired on January 28, 2002. The results of Laclede Gas
improved slightly over the same quarter last year primarily due to the
impact of: higher gas sales resulting from cooler weather experienced this
year during the quarter, and a $15 million annual general rate increase
(implemented December 1, 2001). These factors were partially offset by the
adverse effect of the Missouri Public Service Commission's (MoPSC's)
decision allowing the Utility's highly successful Gas Supply Incentive Plan
(GSIP) to expire on September 30, 2001 despite the significant benefits
derived for customers and shareholders during the past five years the
program was in effect.
Utility operating revenues for the quarter ended June 30, 2002 were $87.3
million, or $16.9 million less than the same period last year. The decrease
was primarily attributable to reduced wholesale natural gas prices that are
passed on to Utility customers, subject to prudence review, under the
Purchased Gas Adjustment (PGA) Clause. This decrease was partially offset by
higher gas sales levels resulting from the cooler weather during the quarter
and the general rate increase. System therms sold and transported increased
by 18.1 million therms, or 15.5%, above the quarter ended June 30, 2001.
Laclede Group's non-utility operating revenues for this quarter were $60.0
million, or $41.3 million, above those revenues for the same quarter last
year mainly due to additional revenues recorded this year resulting from the
recent acquisition of SM&P and increased gas marketing sales by Laclede
Energy Resources, Inc. Laclede Gas' other operating revenues decreased $18.0
million reflecting exclusion of subsidiary revenues in the presentation of
this year's amounts subsequent to the October 1, 2001 restructuring.
Utility operating expenses for the quarter ended June 30, 2002 decreased
$17.9 million from the same quarter last year. Natural and propane gas
expense decreased $16.0 million below last year's level primarily due to
decreased rates charged by suppliers, partially offset by higher volumes
purchased for sendout arising from cooler weather. Other operation and
maintenance expenses increased $.4 million, or 1.4%, primarily due to higher
group insurance charges, lower net pension credits, higher wage rates,
increased insurance premiums and costs to remove retired utility plant,
partially offset by lower maintenance expenses. Depreciation and
amortization expense decreased $.5 million primarily due to the net effect
of lower depreciation rates instituted December 1, 2001 (reflecting
elimination of a provision for removal costs), as authorized by the MoPSC,
partially offset by additional depreciable property. Taxes, other than
income, decreased $1.8 million, or 15.6%, primarily due to lower gross
receipts taxes (reflecting the decreased revenues).
Laclede Group's non-utility operating expenses increased $37.5 million this
quarter mainly due to the operating expenses of recently-acquired SM&P and
increased gas expense associated with gas marketing sales by Laclede Energy
Resources, Inc. Laclede Gas' other operating expenses decreased $17.6
million reflecting exclusion of subsidiary expenses in the presentation of
this year's amounts subsequent to the October 1, 2001 restructuring.
The $.4 million decrease in Laclede Group's interest expense was primarily
due to decreased short-term interest expense (reflecting lower rates and
reduced average borrowings) partially offset by higher interest on long-term
debt resulting from the issuance of $50 million of 6 5/8% first mortgage
bonds in June 2001 and interest charges
19
related to the bank note used to finance the acquisition of SM&P. The $.7
million decrease in Laclede Gas' interest expense was primarily due to the
aforementioned reduction in short-term interest charges, partially offset by
higher interest on long-term debt.
The decrease in income taxes is mainly due to lower pre-tax income.
Nine Months Ended June 30, 2002
Laclede Group's earnings were $1.46 per share for the nine months ended
June 30, 2002 compared with $1.88 per share for the same period last year.
Earnings were primarily comprised of those of Laclede Gas, which were
adversely affected by lower gas sales arising from temperatures in its
service area that were significantly warmer than last year and the
expiration of the GSIP. Temperatures for the nine-month period ended
June 30, 2002 were 15% warmer than normal and 22% warmer than the same period
last year. Earnings during the period were positively impacted, but to a
lesser extent, by the benefit of the general rate increase put into effect
by Laclede Gas on December 1, 2001, nearly $4.9 million of pre-tax income
produced by the Utility's Price Stabilization Program (PSP) recorded this
year and higher income from off system sales. Laclede Gas had previously
offered to include the aforementioned PSP revenues in a continuation of the
program, but the program was allowed to expire on March 31, 2002. The PSP is
discussed further in the Regulatory Matters section below. The impact of the
operating income recorded by SM&P since its acquisition on January 28, 2002
on Laclede Group's earnings has not been material to date; however, the
acquisition is expected to be accretive to earnings for the entire fiscal
year.
Utility operating revenues for the nine months ended June 30, 2002 were
$527.3 million, or $316.8 million less than the same period last year. The
decrease was primarily attributable to reduced wholesale natural gas prices
that are passed on to Utility customers, subject to prudence review, under
the PGA Clause and lower gas sales levels resulting from the warmer weather.
These factors were partially offset by higher off system sales and the
general rate increase. System therms sold and transported decreased by 155.6
million therms, or 15.8%, below the nine months ended June 30, 2001.
Laclede Group's non-utility operating revenues for this period were $102.1
million, an increase of $35.6 million, from those revenues for the same
period last year mainly attributable to revenues recorded this year due to
the recent acquisition of SM&P partially offset by lower gas marketing sales
by Laclede Energy Resources, Inc. Laclede Gas' other operating revenues
decreased $64.6 million reflecting exclusion of subsidiary revenues in the
presentation of this year's amounts subsequent to the October 1, 2001
restructuring.
Utility operating expenses for the nine months ended June 30, 2002 decreased
$303.1 million from the same period last year. Natural and propane gas
expense decreased $287.3 million below last year's level primarily
attributable to decreased rates charged by suppliers and lower volumes
purchased for sendout due to the warmer weather, partially offset by higher
off system gas expense. Other operation and maintenance expenses increased
$.8 million, or .8%, primarily due to higher group insurance charges,
higher wage rates, increased insurance premiums, lower net pension credits,
and costs to remove retired utility plant, largely offset by a lower
provision for uncollectible accounts and reduced distribution and
maintenance charges. Depreciation and amortization expense decreased $.9
million primarily due to the net effect of lower depreciation rates
instituted December 1, 2001 (reflecting elimination of a provision for
removal costs), as authorized by the MoPSC and increased depreciable
property. Taxes, other than income, decreased $15.7 million, or 27.7%,
primarily due to lower gross receipts taxes (reflecting the decreased
revenues).
Laclede Group's non-utility operating expenses increased $36.0 million for
the nine months ended June 30, 2002 mainly due to higher operating expenses
of the newly-acquired SM&P partially offset by lower gas expense associated
with gas marketing sales by Laclede Energy Resources, Inc. Laclede Gas'
other operating expenses decreased $62.9 million reflecting exclusion of
subsidiary expenses in the presentation of this year's amounts subsequent to
the October 1, 2001 restructuring.
The $2.8 million decrease in Laclede Group's interest expense was primarily
due to decreased short-term interest expense (reflecting lower rates and
reduced average borrowings) partially offset by higher interest on long-term
debt resulting from the issuance of $50 million of 6 5/8% first mortgage
bonds in June 2001 and interest charges related to the bank note used to
finance the acquisition of SM&P. The $3.2 million decrease in Laclede Gas'
20
interest expense was primarily due to the aforementioned reduction in
short-term interest charges, partially offset by higher interest on
long-term debt.
The decrease in income taxes is mainly due to lower pre-tax income.
Regulatory Matters
- ------------------
On January 25, 2002, Laclede filed a request with the Missouri Public
Service Commission (MoPSC or Commission) for a general rate increase to
recover costs related to the operation of its gas distribution system.
Laclede does not anticipate higher rate levels during the current fiscal
year. As part of this rate increase filing, the Utility is proposing a
Weather Mitigation Plan (Plan) that would protect its customers from
weather-related fluctuations in their bills and help stabilize its annual
revenues in that regard. Currently, revenues of Laclede Gas increase or
decrease depending on colder- or warmer-than-normal weather. The objective
of the Plan is to mitigate the volatile effects of weather on the
distribution costs of Laclede Gas, that portion of a customer's bill that
covers the cost of operating and maintaining the distribution system and
storage facilities. It would not affect increases and decreases in wholesale
gas costs that are passed on to customers in accordance with the Purchased
Gas Adjustment (PGA) Clause. By stabilizing weather-related revenues, the
Plan would allow Laclede Gas to cover what are primarily fixed costs that do
not fluctuate with the weather while still providing a fair return on
investment. On January 31, 2002, the Commission issued an order suspending
the general rate increase until it has reviewed and audited the filing, held
hearings and reached its determination whether and to what extent the rate
increase request should be granted. By statute, the MoPSC process may take
no longer than eleven months. Laclede's request is for a rate adjustment
that would increase its annual revenues by $36.1 million and increase a
typical residential heating customer's bill by an average of about $4.40 a
month. The Commission Staff and Office of Public Counsel generally opposed
the rate increase. Hearings will be held during the last week in August
2002, and a decision is expected by December 25, 2002. Historically, the
MoPSC has not granted Laclede's rate increase requests in full.
In late February, the MoPSC approved Laclede Gas' filing that was made to
revise its PGA Clause to permit the adjustment of the gas cost component of
its rates more frequently to recover its costs. Under the new tariffs
approved by the MoPSC, scheduled gas cost adjustments will be implemented in
November, January, March and June, thereby enabling Laclede Gas to more
closely recover its costs of gas, especially during the high-volume winter
months. As part of the same ruling, the MoPSC also clarified that costs and
cost reductions associated with the Utility's use of natural gas financial
instruments (except as provided for previously under the PSP) are gas costs
and are recoverable through the PGA mechanism, including carrying costs.
Under the GSIP of Laclede Gas, the Utility shared with its customers certain
gains and losses related to the acquisition and management of its gas supply
assets. The provisions of the GSIP extended through September 30, 2001. In
September, 2001, the MoPSC ruled that the GSIP should be allowed to expire.
On February 19, 2002, the MoPSC denied Laclede Gas' application for
rehearing. Laclede Gas filed a petition for judicial review of the MoPSC's
decision with the Cole County Circuit Court, together with a motion
requesting that the MoPSC's decision be stayed. The request for stay was
denied on May 13, 2002. The petition for judicial review is still pending.
However, pursuant to the rate case settlement approved by the MoPSC in
November 2001, the MoPSC authorized Laclede Gas to retain all income from
releases of pipeline capacity effective December 1, 2001. Income from
releases of pipeline capacity was previously shared with customers under the
GSIP. Laclede Gas continues to retain all income resulting from sales
outside of its traditional service area, as previously authorized by the
MoPSC. Income related to releases of pipeline capacity and sales made
outside its traditional service area are volatile in nature and subject to
market conditions.
On March 8, 2002, Laclede Gas filed an application requesting that the MoPSC
issue an Accounting Authority Order (AAO) that would allow Laclede to defer
for future recovery consideration unrecovered costs due solely to the
negative impact of the extraordinarily warm weather experienced in the
Utility's service area this past winter. The MoPSC Staff and Office of
Public Counsel have opposed the AAO request. The Commission has not yet
ruled on the matter, but a hearing is scheduled during the week of
August 19, 2002. There were no costs relative to this request deferred on
the Utility's books at June 30, 2002.
21
On March 15, 2002, the Staff of the MoPSC filed its recommendation in the
proceeding established to review Laclede Gas' gas costs for fiscal 2000. In
its recommendation, the Staff proposed to disallow the recovery of
approximately $2.6 million in gas costs on the alleged grounds that Laclede
Gas had slightly more transportation capacity than necessary to serve its
customers. On May 9, 2002, the Staff revised its recommendation to withdraw
the $2.6 million proposed disallowance.
On June 28, 2002, the Staff of the MoPSC filed its recommendation in a
proceeding established to review Laclede Gas' gas costs for fiscal 2001. In
its recommendation, the Staff proposed to disallow approximately $4.9
million in pre-tax gains achieved by Laclede Gas in its incentive-based
Price Stabilization Program. This Program was discontinued at the end of the
2001-2002 heating season. Laclede Gas believes that Staff's position lacks
merit and intends to vigorously oppose the adjustment in a proceeding before
the MoPSC, which is currently scheduled to occur in February 2003.
Regulatory proceeding results are, however, inherently uncertain, and to the
extent that a final Commission decision sustains Staff's recommended
disallowance, the proceeding's outcome could have a material effect on the
future financial position and results of operations of Laclede Gas. Missouri
statute provides an opportunity for court review of Commission decisions.
Laclede Gas previously appealed the MoPSC's decision in its 1999 rate case
relative to the calculation of its depreciation rates. The Circuit Court
remanded the decision to the MoPSC based on inadequate findings of fact. The
MoPSC upheld its previous order and Laclede Gas appealed this second order
to the Court. On April 29, 2002, the Court ruled that the MoPSC's second
order was lawful and reasonable. On June 7, 2002, Laclede Gas appealed the
Circuit Court's decision to the Missouri Western District Court of Appeals.
On May 31, 2002, the Staff of the Commission filed a Motion to Investigate
Laclede Gas Company's alleged transfer of its gas supply function to Laclede
Energy Services, Inc. (LES), a subsidiary of Laclede Group, and such
action's ramifications, including whether such alleged transfer required
Commission approval or was otherwise lawful. On June 10, Laclede Gas
responded, pointing out that it had not transferred its gas supply functions
to LES but had instead delegated six employees to LES with responsibility
for performing various administrative duties, many of which had been
performed in prior years by an outside party. Laclede Gas remains primarily
responsible for the gas supply function. Laclede urged the Commission to
deny Staff's Motion on this and other grounds. By its order granting Motion
to Establish Case issued July 16, 2002, the Commission concluded that a case
should be established to investigate the issues raised by the Staff; ordered
the Staff to file a status report regarding progress of the investigation
not later than November 13, 2002; and authorized any responses to Staff
status report to be filed not later than ten days after the status report
filing. Laclede Gas believes its action complies with applicable law and
intends to participate in the case and vigorously defend its delegation of
administrative services in connection with the gas supply function. The
outcome of any regulatory proceeding is often uncertain. However, Laclede
Gas does not believe that the eventual outcome of the case will have any
material effect on the financial results of Laclede Gas.
Critical Accounting Policies
- ----------------------------
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).
Accounting Pronouncements
- -------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," which requires all business combinations in the scope of the
22
Statement to be accounted for using the purchase method. The provisions of
this Statement apply to all business combinations initiated after June 30,
2001. The Company has adopted the provisions of SFAS No. 141 with the
acquisition of SM&P. As required by SFAS No. 141, the goodwill for SM&P is
being accounted for consistent with the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets."
Credit Ratings
- --------------
As of June 30, 2002, credit ratings of the Company were as follows:
Type of Facility Moody's S&P Fitch
- ----------------- ------- --- -----
Laclede Gas Commercial Paper P-1 A-1
Laclede Group Corporate A+
Laclede Gas First Mortgage Bonds A1 A+ A+
On April 24, 2002, Standard & Poors (S&P) downgraded the rating for Laclede
Gas' First Mortgage Bonds from AA- to A+, and also downgraded the commercial
paper rating from A-1+ to A-1. S&P cited bondholder protection parameters
that have eroded due to several successive warmer-than-normal winters and
increasing debt leverage as reasons for the downgrade. On May 2, 2002,
Moody's downgraded Laclede Gas' First Mortgage Bonds from Aa3 to A1. Moody's
cited concerns regarding Laclede's weakened credit measures due to increased
earnings pressure and near-term regulatory risk. Moody's outlook remains
negative due to regulatory risk.
Despite these recent downgrades, the Company's ratings remain investment
grade, and the Company believes that it will have adequate access to the
markets to meet its capital requirements. These ratings however, remain
subject to review and change by the rating agencies.
Liquidity and Capital Resources
- -------------------------------
The Company's short-term borrowing requirements typically peak during colder
months when Laclede Gas borrows money to cover the gap between when it
purchases its natural gas and when its customers pay for that gas. These
short-term cash requirements have traditionally been met through the
Utility's sale of commercial paper supported by lines of credit with banks.
Laclede Gas currently has a primary line of credit for $135 million
extending through September 30, 2002. Laclede Gas also has supplemental
lines of credit expiring in January 2003 that bring the total credit lines
to $150 million currently. During fiscal 2002 to date, the Utility sold
commercial paper aggregating to a maximum of $139.7 million at any one time,
but did not borrow from the banks under the aforementioned lines of credit.
Commercial paper amounted to $70.5 million at June 30, 2002.
Short-term cash requirements outside of Laclede Gas have been met thus far
with internally-generated funds. However, Laclede Group has put into place a
working capital line of credit for $20 million, expiring in June 2003, to
meet short-term funding needs of its non-utility subsidiaries. While this
line has not been used to date, it is expected to be used for seasonal needs
of the various subsidiaries from time to time throughout the year.
On April 22, 2002, Laclede Group filed a registration statement on Form S-3
with the Securities and Exchange Commission (SEC) in connection with the
sale of up to $500 million of equity securities, other than preferred stock,
and debt securities. This registration statement became effective on May 6,
2002. The amount, timing and type of financing to be issued under this shelf
registration will depend on cash requirements and market conditions.
Certain of the Company's credit facilities include rating triggers which
would trigger default in the event that the Company's ratings fall below a
specified level. These triggers apply specifically to the $42.8 million
outstanding bank loan which was used to acquire SM&P and the $20 million
working capital line of credit (none of which has been employed at this
writing). Both the bank loan and the line of credit were obtained from U.S.
Bank, N.A., and include interest rates at the lower of a rate indexed to
LIBOR, or Prime. The applicable rating triggers are a rating on Laclede Gas
Company's senior secured debt of no lower than A3 (Moody's) or A- (S&P).
Therefore, these triggers would only take effect in the event of a downgrade
of three notches from the current levels.
23
SM&P has several operating leases, the aggregate annual cost of which is
approximately $11 million, consisting primarily of revolving operating
leases for vehicles used in its business. Upon acquisition of SM&P, Laclede
Group assumed parental guarantees of certain of those vehicle leases.
Laclede Group anticipates that the maximum guarantees will not exceed $15
million.
Laclede Group has issued a $5.0 million guarantee of performance and payment
of certain gas supply purchases by Laclede Energy Resources, Inc. (the
Company's non-utility marketing affiliate) starting in July 2002.
Utility construction expenditures were $33.9 million for the nine months
ended June 30, 2002, compared with $33.6 million for the same period last
year. Non-utility construction expenditures were $.4 million for the same
period this year.
Consolidated capitalization at June 30, 2002, excluding current obligations
of long-term debt and preferred stock, decreased $16.7 million since
September 30, 2001 and consisted of 53.2% Laclede Group common stock equity,
..2% Laclede Gas preferred stock equity and 46.6% Laclede Gas long-term debt.
The seasonal nature of Laclede Gas' sales affects the comparison of certain
balance sheet items at June 30, 2002 and at September 30, 2001 such as
Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts
Payable, Regulatory Liabilities, and Advance and Delayed Customer Billings.
Market Risk
- -----------
The management of Laclede Gas has adopted a risk management policy that
provides for the purchase of natural gas financial instruments with the goal
of managing price risk associated with purchasing natural gas on behalf of
its customers. This policy prohibits speculation. Costs and cost reductions,
including carrying costs, associated with the Utility's use of natural gas
financial instruments (except as provided for previously under the PSP) are
allowed to be passed on to the Utility's customers through the operation of
its Purchased Gas Adjustment Clause, through which the MoPSC provides for
the Utility to recover gas supply costs. Accordingly, Laclede Gas does not
expect any earnings impact as a result of the use of these financial
instruments. At June 30, 2002, the Utility held futures contracts and
options extending through March 2003 under the policy.
Environmental Matters
- ---------------------
As previously reported, Laclede Gas is subject to various environmental laws
and regulations that, to date, have not materially affected its financial
position and results of operations. Laclede Gas is presently involved in the
clean up or formal assessment of two former manufactured gas plant sites,
the Shrewsbury site and the Carondelet City of St. Louis site.
With regard to the Shrewsbury site, Laclede Gas and state and federal
environmental regulators have agreed upon certain actions and those actions
are nearing completion. Laclede Gas currently estimates the overall costs of
these actions will be approximately $2,307,000. As of June 30, 2002, Laclede
Gas has paid $2,214,000 and reserved $93,000 for these actions. If
regulators require additional actions, Laclede Gas will incur additional
costs.
The Carondelet City of St. Louis site was placed into the Missouri Voluntary
Cleanup Program (VCP). The VCP provides opportunities to minimize the scope
and cost of site cleanup while maximizing possibilities for site
development. Laclede Gas currently estimates that the cost of the site
investigations, agency oversight and related legal and engineering
consulting may be approximately $609,000. Currently, Laclede Gas has paid
$512,000 and reserved an additional $97,000. Laclede has requested that
other former site owners and operators participate in the cost of any site
investigation. One former owner and operator agreed to participate in these
costs and has reimbursed Laclede Gas to date for $159,000. Laclede Gas
anticipates additional reimbursement from this party of approximately
$69,000. Laclede Gas plans to seek proportionate reimbursement of all costs
relative to this site from other potentially responsible parties if
practicable. Laclede Gas and the participating former owner and
24
operator are currently having discussions with the City of St. Louis, the
present owner of the site, regarding remediation and development
possibilities.
Costs incurred are charged to expense or capitalized in accordance with
generally accepted accounting principles. A predetermined level of expense
is included in Laclede Gas' rates.
Laclede Gas has been advised that a third former manufactured gas plant site
previously operated, but no longer owned by Laclede Gas, is believed to
contain gas plant waste that may require remediation. Laclede Gas is working
to determine the nature and extent of such waste, if any, and Laclede Gas'
responsibility, if any, for any remediation costs.
While the scope of costs relative to the Shrewsbury site will not be
significant, the scope of costs relative to the other sites are unknown and
may be material. Laclede Gas has notified its insurers that it intends to
seek reimbursement of its costs at the sites. The majority of insurers have
reserved their rights. While some of the insurers have denied coverage,
Laclede Gas continues to seek reimbursement from them. With regard to the
Shrewsbury site, denials of coverage will not have any significant impact on
the financial position and results of operations of Laclede Gas. With regard
to the other sites, since the scope of costs relative to these sites are
unknown and may be material, denials of coverage may have a material impact
on the financial position and results of operations of Laclede Gas. Such
costs, if incurred, have typically been subject to recovery in rates.
25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of environmental matters and Laclede Gas' pending
regulatory matters, see the Management's Discussion and Analysis,
Environmental Matter, page 24 and Regulatory Matters, page 21.
The legal proceedings item for the Form 10-K for the year ended
September 30, 2001 included disclosure of a class action lawsuit filed in
August 2001 against Laclede Gas. Laclede Gas filed a motion to dismiss the
lawsuit that was granted by the Court on February 22, 2002. The plaintiff
did not file an amended petition within the time granted by the Court but
filed an appeal on April 3, 2002. On May 13, 2002, the plaintiff dismissed
the appeal.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index
(b) Reports on Form 8-K
During the quarter, Laclede Group filed two reports on Form 8-K:
1. Form 8-K with report date of May 6, 2002, reporting under Item 9 a
slide presentation made by Laclede Group, Inc. management at the
American Gas Association's Financial Analysts Conference.
2. Form 8-K with report date of May 29, 2002 reporting under Item 5
updates to several regulatory and legal matters.
26
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
The Laclede Group, Inc.
Laclede Gas Company
(Co-Registrants)
By: /s/ Gerald T. McNeive Jr.
-------------------------
Dated: July 26, 2002 Gerald T. McNeive Jr.
---------------- Senior Vice President
(Authorized Signatory and
Chief Financial Officer)
27
Index to Exhibits
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ------------
10.1 Transportation Service Agreement For Rate Schedule FSS contract #3147
between Laclede Gas Company and Mississippi River Transmission
Corporation effective May 1, 2002. 29
10.2 Transportation Service Agreement For Rate Schedule FTS contract #3310
between Laclede Gas Company and Mississippi River Transmission
Corporation effective May 1, 2002. 33
10.3 Transportation Service Agreement For Rate Schedule FTS contract #3311
between Laclede Gas Company and Mississippi River Transmission
Corporation effective May 1, 2002. 43
10.4 Revolving Credit Agreement between The Laclede Group, Inc. and U.S.
Bank National Association dated June 13, 2002. 49
28