Exhibit 99.1
LACLEDE GAS COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
(Thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Operating Revenues:
Utility $114,207 $87,284 $688,828 $527,297
Other 622 684 1,925 1,887
------------------------------------------------------
Total Operating Revenues 114,829 87,968 690,753 529,184
------------------------------------------------------
Operating Expenses:
Utility
Natural and propane gas 60,293 41,565 442,054 313,274
Other operation expenses 27,097 25,497 88,084 80,577
Maintenance 4,583 4,547 13,977 13,179
Depreciation and amortization 5,579 6,106 16,668 18,741
Taxes, other than income taxes 11,553 9,752 48,260 41,088
------------------------------------------------------
Total utility operating expenses 109,105 87,467 609,043 466,859
Other 600 713 1,873 1,892
------------------------------------------------------
Total Operating Expenses 109,705 88,180 610,916 468,751
------------------------------------------------------
Operating Income (Loss) 5,124 (212) 79,837 60,433
Other Income and (Income Deductions) - Net (154) (108) 802 608
------------------------------------------------------
Income (Loss) Before Interest and Income Taxes 4,970 (320) 80,639 61,041
------------------------------------------------------
Interest Charges:
Interest on long-term debt 4,945 5,205 15,355 15,615
Other interest charges 799 841 2,867 3,451
------------------------------------------------------
Total Interest Charges 5,744 6,046 18,222 19,066
------------------------------------------------------
Income (Loss) Before Income Taxes (774) (6,366) 62,417 41,975
Income Tax Expense (Benefit) (827) (2,987) 22,868 14,893
------------------------------------------------------
Net Income (Loss) 53 (3,379) 39,549 27,082
Dividends on Redeemable Preferred Stock 16 16 47 52
------------------------------------------------------
Earnings (Loss) Applicable to Common Stock $ 37 $(3,395) $ 39,502 $ 27,030
======================================================
See notes to financial statements.
1
LACLEDE GAS COMPANY
BALANCE SHEETS
June 30 Sept. 30
2003 2002
------- --------
(Thousands)
(UNAUDITED)
ASSETS
Utility Plant $1,018,482 $988,747
Less: Accumulated depreciation and amortization 406,482 394,371
------------------------------
Net Utility Plant 612,000 594,376
------------------------------
Other Property and Investments 26,660 27,132
------------------------------
Current Assets:
Cash and cash equivalents 1,786 1,317
Accounts receivable 86,042 65,258
Allowances for doubtful accounts (5,121) (3,718)
Materials, supplies, and merchandise at avg. cost 4,305 4,326
Natural gas stored underground at LIFO cost 51,853 77,087
Propane gas at FIFO cost 12,473 14,712
Delayed customer billings 16,778 -
Deferred income taxes 6,332 12,305
Prepayments and other 5,858 2,515
------------------------------
Total Current Assets 180,306 173,802
------------------------------
Deferred Charges:
Prepaid pension cost 110,662 114,313
Regulatory assets 72,266 72,484
Other 4,272 3,714
------------------------------
Total deferred charges 187,200 190,511
------------------------------
Total Assets $1,006,166 $985,821
==============================
See notes to financial statements.
2
LACLEDE GAS COMPANY
BALANCE SHEETS (Continued)
June 30 Sept. 30
2003 2002
------- --------
(Thousands, except share amounts)
(UNAUDITED)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock and Paid-in capital (100 shares issued and
outstanding) $ 82,580 $ 82,579
Retained earnings 201,122 180,719
Accumulated other comprehensive loss (339) (339)
-----------------------------
Total common stock equity 283,363 262,959
Redeemable preferred stock 1,258 1,266
Long-term debt (less sinking fund requirements) 259,607 259,545
-----------------------------
Total Capitalization 544,228 523,770
-----------------------------
Current Liabilities:
Notes payable 143,863 118,870
Accounts payable 51,246 30,838
Advance customer billings - 24,832
Current portion of long-term debt - 25,000
Taxes accrued 27,718 9,495
Unamortized purchased gas adjustment 1,898 22,976
Other 30,226 32,597
-----------------------------
Total Current Liabilities 254,951 264,608
-----------------------------
Deferred Credits and Other Liabilities:
Deferred income taxes 154,809 156,924
Unamortized investment tax credits 5,394 5,629
Pension and postretirement benefit costs 20,489 14,658
Other 26,295 20,232
-----------------------------
Total Deferred Credits and Other Liabilities 206,987 197,443
-----------------------------
Total Capitalization and Liabilities $1,006,166 $985,821
=============================
See notes to financial statements.
3
LACLEDE GAS COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30,
2003 2002
---- ----
(Thousands)
Operating Activities:
Net Income $ 39,549 $ 27,082
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 16,382 18,692
Deferred income taxes and investment
tax credits 4,794 (7,772)
Other - net 618 685
Changes in assets and liabilities:
Accounts receivable - net (19,381) 16,983
Unamortized purchased gas adjustments (21,078) (7,306)
Deferred purchased gas costs 6,257 24,244
Delayed customer billings - net (41,610) (8,496)
Accounts payable 20,408 (4,583)
Taxes accrued 18,223 7,979
Natural gas stored underground 25,234 44,645
Other assets and liabilities 4,618 (13,174)
-----------------------------
Net cash provided by operating activities $ 54,014 $ 98,979
-----------------------------
Investing Activities:
Construction expenditures (34,670) (33,863)
Employee benefit trusts (151) 76
Other investments 395 (627)
-----------------------------
Net cash used in investing activities $(34,426) $(34,414)
-----------------------------
Financing Activities:
Maturity of first mortgage bonds (25,000) -
Issuance (repayment) of short-term debt - net 24,993 (46,540)
Dividends paid (19,104) (19,024)
Preferred stock reacquired (8) (395)
-----------------------------
Net cash used in financing activities $(19,119) $(65,959)
-----------------------------
Net Increase (Decrease) in Cash and Cash Equivalents $ 469 $ (1,394)
Cash and Cash Equivalents at Beg of Period 1,317 3,223
-----------------------------
Cash and Cash Equivalents at End of Period $ 1,786 $ 1,829
=============================
Supplemental Disclosure of Cash Paid (Refunded)
During the Period for:
Interest $ 20,301 $ 19,264
Income taxes (4,299) 10,376
See notes to financial statements.
4
LACLEDE GAS COMPANY
NOTES TO 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, 2002 for additional details on this restructuring.
These notes are an integral part of the accompanying financial
statements of Laclede Gas. In the opinion of Laclede Gas, this
interim report includes all adjustments (consisting of only normal
recurring accruals) necessary for the fair presentation of the
results of operations for the periods presented. Certain
prior-period amounts have been reclassified to conform to
current-period presentation. This Form 10-Q should be read in
conjunction with the Notes to Financial Statements contained in the
Company's Fiscal Year 2002 Form 10-K.
2.) On October 3, 2002, the Missouri Public Service Commission (MoPSC or
the Commission) approved a settlement reached among the parties to
the 2002 rate case, filed by the Utility on January 25, 2002. The
terms of the settlement included (1) an annual rate increase of
$14 million effective on November 9, 2002; (2) a moratorium on
additional rate filings until March 1, 2004; and (3) an innovative
rate design that is expected to provide the Utility with the
ability to recover its distribution costs, which are essentially
fixed, in a manner that is significantly less sensitive to
weather. The settlement also provided for, among other things,
changes resulting in negative amortization of the depreciation
reserve of $3.4 million annually effective from July 1, 2002 until
the Utility's next rate case proceeding, minor changes in
depreciation rates effective January 1, 2003, and changes in the
regulatory treatment of pension costs primarily designed to
stabilize such costs, effective during fiscal 2003. Also approved
was an incentive program beginning in fiscal 2003 under which the
Utility may achieve, under specific conditions, income related to
management of its gas supply commodity costs. Previously deferred
costs of $.3 million 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.
3.) Laclede Gas is a natural gas distribution utility having a material
seasonal cycle. As a result, these interim statements of income for
Laclede Gas are not necessarily indicative of annual results or
representative of succeeding quarters of the fiscal year. Due to
the seasonal nature of the business of Laclede Gas, earnings are
typically concentrated in the November through April period, which
generally corresponds with the heating season. The Utility
typically experiences losses during the non-heating season. The
seasonal effect is expected to be tempered somewhat by the impact
of the weather mitigation rate design implemented in November 2002.
4.) Net provisions (benefit) for income taxes was as follows during the
periods set forth below:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
(Thousands)
Federal
Current $(2,875) $(8,250) $15,105 $19,382
Deferred 1,757 5,596 4,000 (6,767)
State and Local
Current (39) (1,324) 2,969 3,283
Deferred 330 991 794 (1,005)
-------------------------------------------------
Total $ (827) $(2,987) $22,868 $14,893
=================================================
In the quarter ended June 30, 2003, Laclede Gas filed an election
with the Internal Revenue Service to change its income tax method
of accounting for the net costs of removal for certain
straight-line
5
vintage property, effective with fiscal year 2002. The Utility
changed its method of accounting for tax purposes to expense such
costs of removal, and take any related salvage proceeds into
income; instead of charging removal costs, net of salvage
proceeds, to the depreciation reserve. Deductible cost of removal
resulting from this change in method of accounting decreased
income tax expense by approximately $.3 million for the quarter
ended June 30, 2003.
5.) 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, which
were denied. The Utility then sought a stay of the decision, which
was denied, and then sought a judicial review of the MoPSC's
decision. On April 3, 2003, the Cole County Circuit Court issued
its Order and Judgment affirming the MoPSC's decision to terminate
the GSIP. The Company has determined that it will not seek further
judicial review of the MoPSC's decision. However, in the 2002 rate
case, the Commission approved a new Gas Supply Incentive Plan
applicable only to the Company's gas supply commodity costs. In
addition, 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,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
(Thousands)
Pre-Tax Income - Capacity Release $1,523 $428 $2,838 $1,008
Pre-Tax Income - Off System Sales 408 512 7,123 3,615
------------------------ ------------------------
Total Pre-Tax Income $1,931 $940 $9,961 $4,623
======================== ========================
6.) In compliance with generally accepted accounting principles,
transactions between Laclede Gas and its affiliates as well as
intercompany balances on Laclede Gas' balance sheet have not been
eliminated from the Laclede Gas financial statements. These amounts
are not disclosed on the face of the Laclede Gas financial
statements, since they are not material.
Laclede Gas provides administrative and general support to
affiliates. All such costs, which are not material, are billed to
the appropriate affiliates and are reflected in accounts receivable
on Laclede Gas' Balance Sheet. Laclede Gas may also, on occasion,
borrow funds from, or lend funds to, affiliated companies. At
June 30, 2003, the Laclede Gas Balance Sheet reflected a total of
$8.6 million of intercompany receivables and $23.8 million of
intercompany payables.
6
7.) The Regulated Gas Distribution segment consists of the regulated
operations of Laclede Gas. 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. The Non-Regulated Other segment includes the
retail sales of gas appliances. There are no material intersegment
revenues.
Regulated
Gas Non-Regulated
(Thousands) Distribution Other Eliminations Consolidated
------------------------------------------------------------------------------------------
Three Months Ended
June 30, 2003
-------------
Operating revenues $ 114,207 $ 622 $ - $ 114,829
Earnings (loss)
applicable to common
stock 23 14 - 37
Total assets 1,004,537 1,629 - 1,006,166
Nine Months Ended
June 30, 2003
-------------
Operating revenues $ 688,828 $1,925 $ - $ 690,753
Earnings (loss)
applicable to common
stock 39,470 32 - 39,502
Total assets 1,004,537 1,629 - 1,006,166
Three Months Ended
June 30, 2002
-------------
Operating revenues $ 87,284 $ 684 $ - $ 87,968
Earnings (loss)
applicable to common
stock (3,376) (19) - (3,395)
Total assets 926,018 1,523 - 927,541
Nine Months Ended
June 30, 2002
-------------
Operating revenues $ 527,297 $1,887 $ - $ 529,184
Earnings (loss)
applicable to common
stock 27,034 (4) - 27,030
Total assets 926,018 1,523 - 927,541
8.) Laclede Gas is subject to various environmental laws and
regulations that, to date, have not materially affected the
Company's financial position and results of operations. As these
laws, regulations, and their interpretation evolve, however,
additional costs may be incurred.
With regard to a former manufactured gas plant site located in
Shrewsbury, Missouri, Laclede Gas and state and federal
environmental regulators have agreed upon certain actions and those
actions are nearing completion. Laclede Gas currently estimates the
overall costs of these actions will be approximately $2.3 million.
As of June 30, 2003, Laclede Gas has paid or reserved for these
actions. If regulators require additional actions or assert
additional claims, Laclede Gas will incur additional costs.
7
Laclede Gas enrolled a second former manufactured gas plant site
into the Missouri Voluntary Cleanup Program (VCP). The VCP provides
opportunities to minimize the scope and cost of site cleanup while
maximizing possibilities for site development. This site is located
in and is presently owned by the City of St. Louis, Missouri. The
City of St. Louis has separately authorized a developer to prepare
both a Remedial Action Plan (RAP), for submission to the VCP, and a
site development plan. Laclede Gas continues to explore with the
developer what role, if any, it might play in these efforts.
Laclede Gas continues to evaluate other options as well, including,
but not limited to, the submission of its own RAP to the VCP.
Laclede Gas currently estimates that the cost of site
investigations, agency oversight and related legal and engineering
consulting may be approximately $629,000. Currently, Laclede Gas
has paid or reserved for these actions. Laclede has requested that
other former site owners and operators share in these costs and one
party has agreed to participate and has reimbursed Laclede Gas to
date for $173,000. Laclede Gas anticipates additional reimbursement
from this party. Laclede Gas plans to seek proportionate
reimbursement of all costs relative to this site from other
potentially responsible parties if practicable.
Costs incurred are charged to expense or capitalized in accordance
with generally accepted accounting principles. A predetermined
level of expense is recovered through Laclede Gas' rates.
Laclede Gas has been advised that a third former manufactured gas
plant site previously operated but no longer owned by Laclede Gas
may contain gas plant waste that may require remediation. Laclede
Gas is working to determine the nature and extent of such waste, if
any, and its 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 is
unknown and may be material. Laclede Gas has notified its insurers
that it seeks reimbursement of its costs at these three
manufactured gas plant sites. In response, the majority of insurers
have reserved their rights. While some of the insurers have denied
coverage, Laclede Gas continues to seek reimbursement from them.
With regard to the Shrewsbury site, denials of coverage are not
expected to have any material impact on the financial position and
results of operations of Laclede Gas. With regard to the other two
sites, since the scope of costs are unknown and may be significant,
denials of coverage may have a material impact on the financial
position and results of operations of Laclede Gas. Such costs, if
incurred, have typically been subject to recovery in rates.
9.) 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
has vigorously opposed the adjustment in proceedings before the
MoPSC, including a formal hearing that was held on this matter in
February 2003. Nevertheless, on April 29, 2003, the MoPSC decided
by a 3-2 vote to disallow the $4.9 million in pre-tax gains
achieved by Laclede Gas, and directed Laclede Gas to flow through
such amount to its ratepayers in its November 2003 PGA filing. On
June 19, 2003, Laclede Gas appealed the MoPSC's decision to the
Cole County Circuit Court. Laclede Gas continues to believe in the
merit of its position and intends to vigorously pursue its appeal.
To the extent that a final decision in the Courts sustains the
Commission's disallowance, the proceeding's outcome could have a
material effect on the future financial position and results of
operations of Laclede Gas.
10.) In June 2001, the FASB issued SFAS No. 141, "Business
Combinations", which requires all business combinations in the
scope of this 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 FASB also issued
SFAS No. 142, "Goodwill and Other Intangible Assets", which
addresses how acquired goodwill and other intangible assets that
are acquired individually or with a group of other assets should be
accounted for in financial statements upon acquisition and after
they have been initially recognized in the financial statements.
The adoption of SFAS Nos. 141 and 142 on October 1, 2002 did not
have a material effect on the financial position and results of
operations of Laclede Gas.
8
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which addresses financial accounting and reporting
for obligations associated with the retirement of tangible
long-lived assets and associated asset retirement costs. It applies
to legal obligations associated with the retirement of long-lived
assets that result from acquisition, construction, development
and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. The provisions of the Statement
provide for rate-regulated entities that meet the criteria for
application of SFAS No. 71, such as Laclede Gas, to recognize
regulatory assets or liabilities for differences in the timing of
recognition of the period costs associated with asset retirement
obligations for financial reporting pursuant to this Statement and
rate-making purposes. The adoption of this Statement on October 1,
2002 did not affect the financial position and results of
operations of Laclede Gas. There are legal obligations related to
final abandonment of the Utility's gas distribution system.
However, these obligations related to mass property and other
distribution system assets generally continue in perpetuity and can
not be measured under SFAS No. 143 because of indeterminate
settlement dates and cash flow estimates.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure", provides alternative methods for a voluntary
change to the fair value based method of accounting for stock-based
compensation. In addition, this statement requires prominent
disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and
the method used on reported results. The disclosure provisions are
effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002.
The required disclosures are included in Laclede Group's Note 9,
page 11.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities", amends and clarifies financial accounting
and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. This Statement is effective for
contracts entered into or modified after June 30, 2003, with
certain exceptions, and for all hedging relationships designated
after June 30, 2003. Laclede Gas does not expect a material effect
on its financial position and results of operation.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", establishes
standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously
classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. Laclede Gas is currently reviewing
the classification of its redeemable preferred stock on the
Consolidated Balance Sheets. This item is currently classified
between equity and liabilities. Laclede Gas does not expect any
material effect on its financial position and results of
operations.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", requires an entity to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. This requirement is
to be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. This Interpretation also requires
disclosures in interim and annual financial statements about
obligations under certain guarantees that the entity has issued.
These disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15,
2002. This Interpretation did not have a material effect on the
financial position and results of operations of Laclede Gas.
FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities", addresses consolidation of business enterprises of
variable interest entities. This Interpretation applies immediately
to variable interest entities created after January 31, 2003, and
to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or
interim period beginning after
9
June 15, 2003, to variable interest entities in which an enterprise
holds a variable interest acquired before February 1, 2003. Laclede
Gas does not expect a material effect on its financial position and
results of operations.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LACLEDE GAS COMPANY
- -------------------
This management's discussion analyzes the financial condition and results of
operations of Laclede Gas Company (Laclede Gas or the Utility). It includes
management's view of factors that affect its business, explanations of past
financial results including changes in earnings and costs from the prior
year, and their effects on overall financial condition and liquidity.
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Certain words, such as "anticipate,"
"believe," "estimate," "expect," "intend," "plan," "seek," and similar words
and expressions identify forward-looking statements that involve
uncertainties and risks. Future developments may not be in accordance with
our expectations or beliefs and the effect of future developments may not be
those anticipated. Among the factors that may cause results to differ
materially from those contemplated in any forward-looking statement are:
o weather conditions and catastrophic events;
o economic, competitive, political and regulatory conditions;
o legislative, regulatory and judicial mandates and decisions, some of
which may be retroactive, including those affecting
o allowed rates of return
o incentive regulation
o industry 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 Utility's Financial
Statements and the combined notes thereto.
11
LACLEDE GAS COMPANY
RESULTS OF OPERATIONS
Laclede Gas' earnings are generated by the sale of heating energy, which has
historically been heavily influenced by the weather. Due to the seasonal
nature of the business of Laclede Gas, earnings are typically concentrated
in the November through April period, which generally corresponds with the
heating season. The Utility typically experiences losses during the
non-heating season. This seasonal effect on Laclede Gas was tempered
somewhat by the impact of the weather mitigation rate design implemented in
November 2002.
Quarter Ended June 30, 2003
- ---------------------------
Net income was effectively breakeven for Laclede Gas for the quarter ended
June 30, 2003 compared with a loss of $3.4 million for the quarter ended
June 30, 2002. The improved results reflect the November 9, 2002
implementation of the new rate design and a general rate increase, and
higher income from capacity release. These factors were partially offset by
higher costs of doing business. Temperatures in Laclede Gas' service area
during the quarter were 11% warmer than normal and 4% warmer than the same
quarter last year. Seasonal losses typically experienced by the Utility were
mitigated this year by the implementation of a new rate design that lessens
the impact of weather on the Utility's earnings and recovers fixed costs
more evenly during the heating season. This resulting shift in the interim
margin revenue pattern resulted in higher margin revenue for the quarter
ended June 30, 2003 compared with the same period last year.
Operating revenues for the quarter ended June 30, 2003 were $114.8 million,
or $26.9 million more than the same period last year. The increase was
primarily attributable to higher Purchased Gas Adjustment (PGA) Clause rates
that are passed on to Utility customers (subject to prudence review), and to
a lesser extent, to the effect of the general rate increase. These factors
were partially offset by lower off-system sales revenues. System therms sold
and transported were essentially the same as the quarter ended June 30,
2002.
Regulated operating expenses for the quarter ended June 30, 2003 increased
$21.6 million from the same quarter last year. Natural and propane gas
expense increased $18.7 million above last year's level primarily
attributable to higher rates charged by our suppliers, partially offset by
lower off-system gas expense. Other operation and maintenance expenses
increased $1.6 million, or 5.4%, primarily due to higher pension costs and
higher group insurance charges, partially offset by a lower provision for
uncollectible accounts and reduced distribution charges. Depreciation and
amortization expense decreased $.5 million primarily due to the effect of
negative amortization of a portion of the depreciation reserve effective
July 1, 2002, as authorized by the Missouri Public Service Commission
(MoPSC). This effect was partially offset by increased depreciable property.
Taxes, other than income, increased $1.8 million, or 18.5%, primarily due to
higher gross receipts taxes (reflecting the increased revenues).
The $.3 million decrease in interest charges is primarily due to lower
interest on long-term debt reflecting the May 2003 maturity of $25 million
of 6 1/4% First Mortgage Bonds.
The increase in income taxes is primarily due to higher pre-tax income.
Nine Months Ended June 30, 2003
- -------------------------------
Laclede Gas' earnings applicable to common stock were $39.5 million for the
nine months ended June 30, 2003 compared with $27.0 million for the same
period last year. The earnings of Laclede Gas were favorably affected by
higher gas sales arising from temperatures in its service area that were
colder than last year, the benefit of the general rate increases put into
effect by Laclede Gas on December 1, 2001 and November 9, 2002 and higher
income from off-system sales and capacity release. Temperatures for the
nine-month period ended June 30, 2003 were 1% colder than normal and 20%
colder than the same period last year. These
12
benefits were partially offset by the effect of income recorded in the same
period last year produced by the Utility's Price Stabilization Program and
higher costs of doing business.
Operating revenues for the nine months ended June 30, 2003 were
$690.8 million, or $161.6 million more than the same period last year. The
increase was primarily attributable to higher gas sales levels resulting
from colder weather, higher PGA rates that are passed on to Utility
customers (subject to prudence review), increased off-system and capacity
release revenues, and the general rate increases. System therms sold and
transported increased by 111.0 million therms, or 13.4%, above the nine
months ended June 30, 2002.
Operating expenses for the nine months ended June 30, 2003 increased
$142.2 million from the same period last year. Natural and propane gas
expense increased $128.8 million above last year's level primarily
attributable to higher volumes purchased for sendout due to the colder
weather, higher rates charged by our suppliers and higher off system gas
expense. Other operation and maintenance expenses increased $8.3 million, or
8.9%, primarily due to increased pension costs, higher wage rates, higher
group insurance charges, increased insurance premiums, and a higher
provision for uncollectible accounts. These factors were partially offset by
reduced distribution charges. Depreciation and amortization expense
decreased $2.1 million primarily due to the effect of negative amortization
of a portion of the depreciation reserve effective July 1, 2002, as
authorized by the Missouri Public Service Commission (MoPSC). This effect
was partially offset by increased depreciable property. Taxes, other than
income, increased $7.2 million, or 17.5%, primarily due to higher gross
receipts taxes (reflecting the increased revenues).
The $.8 million decrease in interest expense was primarily due to a
reduction in short-term interest charges (reflecting reduced rates) and
lower interest on long-term debt due to the May 2003 maturity of $25 million
of 6 1/4% First Mortgage Bonds.
The increase in income taxes is mainly due to higher pre-tax income.
Regulatory Matters
- ------------------
Laclede Gas previously appealed the MoPSC's decision in its 1999 rate case
relative to the calculation of its depreciation rates. The Circuit Court
remanded the decision to the MoPSC based on inadequate findings of fact. The
MoPSC upheld its previous order and Laclede Gas appealed this second order
to the Circuit Court. In 2002, the Circuit Court ruled that the MoPSC's
second order was lawful and reasonable, and Laclede Gas appealed the Circuit
Court's decision to the Missouri Western District Court of Appeals. On
March 4, 2003 the Court of Appeals issued an opinion remanding the decision
to the MoPSC based on the MoPSC's failure to support and explain its
decision with adequate findings of fact. In May 2003, the Court of Appeals
rejected the MoPSC's request that the Court reconsider its opinion or
transfer this matter to the Missouri Supreme Court.
On 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, 2002 Laclede Gas
responded, pointing out that it had not transferred its gas supply functions
to LES but had instead delegated five employees to LES with responsibility
for performing various gas supply administrative duties, many of which had
been performed in prior years by an outside party. Laclede Gas remained
primarily responsible for the gas supply function. Laclede Gas urged the
Commission to deny Staff's Motion on this and other grounds. The Commission
concluded that a case should be established to investigate the issues raised
by the Staff. The Commission also ordered the Staff to file a status report
regarding progress of the investigation and Laclede Gas to file any
responses to the Staff's status report. On March 28, 2003, Laclede Gas filed
a Motion with the Commission indicating that LES would be dissolved and that
in light of such action the parties had agreed that the investigation could
be terminated and the case closed. On April 14, 2003, LES ceased to exist as
a corporation. On April 22, 2003, the Commission ordered that the
investigation be dismissed and the case closed. The dissolution of LES had
no material effect on the financial position and results of operations of
Laclede Gas.
13
On July 29, 2002, Laclede Gas filed a proposed Catch-Up/Keep-Up Program with
the MoPSC that would permit the Company to use a portion of the savings from
its negotiated pipeline discounts to fund a low-income energy assistance
program. Pursuant to, and among revisions to the Program filed by the
Utility on September 23, 2002, the amount of discount savings that could be
used for this purpose would be limited to $6 million per year. In response
to certain objections filed by the MoPSC Staff and Missouri Office of the
Public Counsel, the Commission suspended the tariffs implementing the
Program and scheduled a prehearing conference that occurred on October 23,
2002. On January 16, 2003, the Commission, by a 3 to 2 vote, issued an order
rejecting the proposed plan. On January 23, 2003, the Utility filed a Motion
for Reconsideration seeking to identify whether the Commission would approve
the Program at a reduced funding level of $3 million per year. On
February 13, 2003 the Commission convened a hearing for oral argument. On
March 6, 2003 the Commission denied the Company's Motion for
Reconsideration.
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 has vigorously opposed the adjustment in proceedings before the
MoPSC, including a formal hearing that was held on this matter in February
2003. Nevertheless, on April 29, 2003, the MoPSC decided by a 3-2 vote to
disallow the $4.9 million in pre-tax gains achieved by Laclede Gas, and
directed Laclede Gas to flow through such amount to its ratepayers in its
November 2003 PGA filing. On June 19, 2003, Laclede Gas appealed the MoPSC's
decision to the Cole County Circuit Court. Laclede Gas continues to believe
in the merit of its position and intends to vigorously pursue its appeal. To
the extent that a final decision in the Courts sustains the Commission's
disallowance, the proceeding's outcome could have a material effect on the
future financial position and results of operations of Laclede Gas.
On July 10, 2003, a bill was signed into Missouri law that, among other
things, allows gas utilities to adjust their rates twice a year to recover
the depreciation, property taxes, and rate of return on facility-related
expenditures that are made to comply with state and federal safety
requirements or to relocate facilities in connection with public improvement
projects. This bill is expected to become effective late this summer. The
Utility does not expect any impact during fiscal year 2003 due to the new
law, and is currently evaluating the impact it may have on future periods.
Critical Accounting Policies
- ----------------------------
Our discussion and analysis of our financial condition, results of
operations, liquidity and capital resources is based upon our financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. Generally
accepted accounting principles require that we make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
evaluate our estimates on an ongoing basis. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates. We believe the following represent the more significant
items requiring the use of judgment and estimates in preparing our
consolidated financial statements:
Allowances for doubtful accounts - Estimates of the collectibility
of trade accounts receivable are based on historical trends, age of
receivables, economic conditions, credit risk of specific
customers, and other factors.
Employee benefits and postretirement obligations - Pension and
postretirement obligations are calculated by actuarial consultants
that utilize several statistical factors and other assumptions
related to future events, such as discount rates, returns on plan
assets, compensation increases, and mortality rates. The amount of
expense recognized by the Utility is dependent on the regulatory
treatment provided for such costs. Certain liabilities related to
group medical benefits and workers'
14
compensation claims, portions of which are self-insured and/or
contain stop/loss coverage with third-party insurers to limit
exposure, are established based on historical trends.
Laclede Gas accounts for its regulated operations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." This statement sets forth the
application of accounting principles generally accepted in the United States
of America for those companies whose rates are established by or are subject
to approval by an independent third-party regulator. The provisions of SFAS
No. 71 require, among other things, that financial statements of a regulated
enterprise reflect the actions of regulators, where appropriate. These
actions may result in the recognition of revenues and expenses in time
periods that are different than non-regulated enterprises. When this occurs,
costs are deferred as assets in the balance sheet (regulatory assets) and
recorded as expenses when those amounts are reflected in rates. Also,
regulators can impose liabilities upon a regulated company for amounts
previously collected from customers and for recovery of costs that are
expected to be incurred in the future (regulatory liabilities). Management
believes that the current regulatory environment supports the continued use
of SFAS No. 71 and that all regulatory assets and liabilities are
recoverable or refundable through the regulatory process. We believe the
following represent the more significant items recorded through the
application of SFAS No. 71:
The Utility's Purchased Gas Adjustment (PGA) Clause allows Laclede
Gas to flow through to customers, subject to prudence review, the
cost of purchased gas supplies, including the costs, cost
reductions and related carrying costs associated with the Utility's
use of natural gas financial instruments to hedge the purchase
price of natural gas. The difference between actual costs incurred
and costs recovered through the application of the PGA are recorded
as regulatory assets and liabilities that are recovered or refunded
in a subsequent period.
Laclede Gas records deferred tax liabilities and assets measured by
enacted tax rates for the net tax effect of all temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes, and the amounts used for income
tax purposes. Changes in enacted tax rates, if any, will be
reflected by entries to regulatory asset or liability accounts for
regulated operations. Also, pursuant to the direction of the MoPSC,
Laclede Gas' provision for income tax expense for financial
reporting purposes reflects an open-ended method of tax
depreciation. This method is consistent with the regulatory
treatment prescribed by the MoPSC to depreciate the Utility's
assets.
For further discussion of significant accounting policies, see the Notes to
the Consolidated Financial Statements included in the Company's 10-K for the
year ended September 30, 2002.
Accounting Pronouncements
- -------------------------
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", which
requires all business combinations in the scope of this 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 FASB
also issued SFAS No. 142, "Goodwill and Other Intangible Assets", which
addresses how acquired goodwill and other intangible assets that are
acquired individually or with a group of other assets should be accounted
for in financial statements upon acquisition and after they have been
initially recognized in the financial statements. The adoption of
SFAS Nos. 141 and 142 on October 1, 2002 did not have a material effect on
the financial position and results of operations of Laclede Gas.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations",
which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and associated
asset retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. The provisions of the Statement provide for
rate-regulated entities that meet the criteria for application of SFAS No.
71, such as Laclede Gas, to recognize regulatory assets or liabilities for
differences in the timing of recognition of the period costs associated with
asset retirement obligations for financial reporting pursuant to this
Statement and rate-making purposes. The adoption of this
15
Statement on October 1, 2002 did not affect the financial position and
results of operations of Laclede Gas. There are legal obligations related to
final abandonment of the Utility's gas distribution system. However, these
obligations related to mass property and other distribution system assets
generally continue in perpetuity and can not be measured under SFAS No. 143
because of indeterminate settlement dates and cash flow estimates.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", provides alternative methods for a voluntary change to the fair
value based method of accounting for stock-based compensation. In addition,
this statement requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the method used on reported results. The disclosure
provisions are effective for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002.
The required disclosures are included in Laclede Group's Note 9, page 11.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities", amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133.
This Statement is effective for contracts entered into or modified after
June 30, 2003, with certain exceptions, and for all hedging relationships
designated after June 30, 2003. Laclede Gas does not expect a material
effect on its financial position and results of operation.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or
an asset in some circumstances). Many of those instruments were previously
classified as equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003.
Laclede Gas is currently reviewing the classification of its redeemable
preferred stock on the Consolidated Balance Sheets. This item is currently
classified between equity and liabilities. Laclede Gas does not expect any
material effect on its financial position and results of operations.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others", requires an entity to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This requirement is to be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. This
Interpretation also requires disclosures in interim and annual financial
statements about obligations under certain guarantees that the entity has
issued. These disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. This
Interpretation did not have a material effect on the financial position and
results of operations of Laclede Gas.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities",
addresses consolidation of business enterprises of variable interest
entities. This Interpretation applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities
in which an enterprise obtains an interest after that date. It applies in
the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest
acquired before February 1, 2003. Laclede Gas does not expect a material
effect on its financial position and results of operations.
16
Credit Ratings
- --------------
As of June 30, 2003, credit ratings for outstanding securities for Laclede
Gas issues were as follows:
Type of Facility S&P Moody's Fitch
- ------------------------------------------------------------------------------
Laclede Gas First Mortgage Bonds A A3 A+
Laclede Gas Commercial Paper A-1 P-2
On May 5, 2003, Standard & Poor's (S&P) downgraded the long-term corporate
credit rating for Laclede Gas' First Mortgage Bonds from A+ to A. 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. S&P ratings outlook is currently stable.
The Utility's ratings remain investment grade, and the Utility believes that
it will have adequate access to the markets to meet its capital
requirements. These ratings remain subject to review and change by the
rating agencies.
Liquidity and Capital Resources
- -------------------------------
The Utility'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 sale of
commercial paper supported by lines of credit with banks.
Laclede Gas currently has a primary line of credit in place of up to
$215 million, expiring September 15, 2003, and supplemental credit lines of
$15 million expiring January 31, 2004. During the quarter ending June 30, 2003,
Laclede Gas sold commercial paper aggregating to a maximum of $148.1 million
at any one time, but did not borrow from the banks under the aforementioned
agreements. At this writing, Laclede Gas has aggregate lines of credit
totaling $230 million. Short-term commercial paper borrowings outstanding at
June 30, 2003 were $128.9 million at a weighted average interest rate of
1.22%. In addition, Laclede Gas has a short-term loan with Laclede Group of
$15 million at June 30, 2003. Based on short-term borrowings at June 30,
2003, a change in interest rates of 100 basis points would increase or
decrease pre-tax earnings and cash flows by approximately $1.4 million on an
annual basis.
Most of Laclede Gas' lines of credit include a covenant limiting total debt,
including short-term debt, to no more than 70% of total capitalization. On
June 30, 2003, total debt was 59% of total capitalization.
Laclede Gas has filed a shelf registration on Form S-3. Of the $350 million
of securities originally registered under this S-3, $270 million of debt
securities remained registered and unissued as of June 30, 2003. The MoPSC
authorization for issuing securities registered on Form S-3 expires in
September 2003. On July 9, 2003, the Utility filed a request with the MoPSC
to extend their authorization through September 1, 2006. The amount, timing
and type of additional financing to be issued under this shelf registration
will depend on cash requirements and market conditions.
On May 1, 2003, $25 million of 6 1/4% Series First Mortgage Bonds matured
and was funded with the sale of commercial paper.
Utility construction expenditures were $34.7 million for the nine months
ended June 30, 2003, compared with $33.9 million for the same period last
year.
17
Capitalization at June 30, 2003, excluding current obligations of long-term
debt, increased $20.5 million since September 30, 2002 and consisted of
52.1% common stock equity, .2% preferred stock and 47.7% long-term debt.
The seasonal nature of Laclede Gas' sales affects the comparison of certain
balance sheet items at June 30, 2003 and at September 30, 2002, such as
Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts
Payable, Regulatory Liabilities, and Advance and Delayed Customer Billings.
Market Risk
- -----------
Laclede Gas adopted a risk management policy that provides for the purchase
of natural gas financial instruments with the goal of managing price risk
associated with purchasing natural gas on behalf of its customers. This
policy prohibits speculation. Costs and cost reductions, including carrying
costs, associated with the Utility's use of natural gas financial
instruments are allowed to be passed on to the Utility's customers through
the operation of its Purchased Gas Adjustment Clause, through which the
MoPSC allows the Utility to recover gas supply costs. Accordingly, Laclede
Gas does not expect any adverse earnings impact as a result of the use of
these financial instruments. At June 30, 2003, the Utility held
approximately 8.7 million MmBtu of futures contracts at an average price of
$5.94 per MmBtu. Additionally, approximately 23.4 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 September 2004.
Environmental Matters
- ---------------------
Laclede Gas is subject to various environmental laws and regulations that,
to date, have not materially affected the Company's financial position and
results of operations. As these laws, regulations, and their interpretation
evolve, however, additional costs may be incurred.
With regard to a former manufactured gas plant site located in Shrewsbury,
Missouri, Laclede Gas and state and federal environmental regulators have
agreed upon certain actions and those actions are nearing completion.
Laclede Gas currently estimates the overall costs of these actions will be
approximately $2.3 million. As of June 30, 2003, Laclede Gas has paid or
reserved for these actions. If regulators require additional actions or
assert additional claims, Laclede Gas will incur additional costs.
Laclede Gas enrolled a second former manufactured gas plant site into the
Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to
minimize the scope and cost of site cleanup while maximizing possibilities
for site development. This site is located in and is presently owned by the
City of St. Louis, Missouri. The City of St. Louis has separately authorized
a developer to prepare both a Remedial Action Plan (RAP), for submission to
the VCP, and a site development plan. Laclede Gas continues to explore with
the developer what role, if any, it might play in these efforts. Laclede Gas
continues to evaluate other options as well, including, but not limited to,
the submission of its own RAP to the VCP. Laclede Gas currently estimates
that the cost of site investigations, agency oversight and related legal and
engineering consulting may be approximately $629,000. Currently, Laclede Gas
has paid or reserved for these actions. Laclede has requested that other
former site owners and operators share in these costs and one party has
agreed to participate and has reimbursed Laclede Gas to date for $173,000.
Laclede Gas anticipates additional reimbursement from this party. Laclede
Gas plans to seek proportionate reimbursement of all costs relative to this
site from other potentially responsible parties if practicable.
Costs incurred are charged to expense or capitalized in accordance with
generally accepted accounting principles. A predetermined level of expense
is recovered through Laclede Gas' rates.
Laclede Gas has been advised that a third former manufactured gas plant site
previously operated but no longer owned by Laclede Gas may contain gas plant
waste that may require remediation. Laclede Gas is working to determine the
nature and extent of such waste, if any, and its responsibility, if any, for
any remediation costs.
18
While the scope of costs relative to the Shrewsbury site will not be
significant, the scope of costs relative to the other sites is unknown and
may be material. Laclede Gas has notified its insurers that it seeks
reimbursement of its costs at these three manufactured gas plant sites. In
response, the majority of insurers have reserved their rights. While some of
the insurers have denied coverage, Laclede Gas continues to seek
reimbursement from them. With regard to the Shrewsbury site, denials of
coverage are not expected to have any material impact on the financial
position and results of operations of Laclede Gas. With regard to the other
two sites, since the scope of costs are unknown and may be significant,
denials of coverage may have a material impact on the financial position and
results of operations of Laclede Gas. Such costs, if incurred, have
typically been subject to recovery in rates.
19