Exhibit 99.1
LACLEDE GAS COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
December 31,
(Thousands) 2003 2002
------ ------
Operating Revenues:
Utility $ 261,350 $ 217,165
Other 632 650
---------------------------
Total Operating Revenues 261,982 217,815
---------------------------
Operating Expenses:
Utility
Natural and propane gas 175,275 133,843
Other operation expenses 29,483 31,324
Maintenance 4,429 4,444
Depreciation and amortization 5,658 5,493
Taxes, other than income taxes 14,832 14,128
---------------------------
Total utility operating expenses 229,677 189,232
Other 605 635
---------------------------
Total Operating Expenses 230,282 189,867
---------------------------
Operating Income 31,700 27,948
---------------------------
Other Income and (Income Deductions) - Net 1,420 1,043
---------------------------
Interest Charges:
Interest on long-term debt 4,814 5,205
Other interest charges 1,082 1,124
---------------------------
Total Interest Charges 5,896 6,329
---------------------------
Income Before Income Taxes 27,224 22,662
Income Tax Expense 9,868 8,064
---------------------------
Net Income 17,356 14,598
Dividends on Redeemable Preferred Stock 16 16
---------------------------
Earnings Applicable to Common Stock $ 17,340 $ 14,582
===========================
See notes to financial statements.
1
LACLEDE GAS COMPANY
BALANCE SHEETS
(UNAUDITED)
Dec. 31, Sept. 30,
2003 2003
-------- ---------
(Thousands)
ASSETS
Utility Plant $1,039,469 $1,030,665
Less: Accumulated depreciation and amortization 412,923 409,418
-------------------------------
Net Utility Plant 626,546 621,247
-------------------------------
Other Property and Investments 29,282 27,898
-------------------------------
Current Assets:
Cash and cash equivalents 3,301 2,907
Accounts receivable:
Gas customers - billed and unbilled 144,286 70,217
Associated companies 10,096 8,957
Other 25,951 9,196
Allowances for doubtful accounts (5,490) (6,839)
Natural gas stored underground at LIFO cost 112,579 117,182
Propane gas at FIFO cost 17,027 17,132
Materials, supplies, and merchandise at avg. cost 4,842 3,995
Derivative instrument assets 11,259 10,838
Deferred income taxes 6,307 7,631
Prepayments and other 4,081 4,881
-------------------------------
Total Current Assets 334,239 246,097
-------------------------------
Deferred Charges:
Prepaid pension cost 107,117 109,445
Regulatory assets 93,225 103,807
Other 5,578 4,515
-------------------------------
Total deferred charges 205,920 217,767
-------------------------------
Total Assets $1,195,987 $1,113,009
===============================
See notes to financial statements.
2
LACLEDE GAS COMPANY
BALANCE SHEETS (Continued)
(UNAUDITED)
Dec. 31, Sept. 30,
2003 2003
-------- ---------
(Thousands, except share amounts)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock and Paid-in capital (100 shares issued and
outstanding) $ 82,579 $ 82,579
Retained earnings 200,443 189,507
Accumulated other comprehensive loss (582) (582)
-----------------------------
Total common stock equity 282,440 271,504
Redeemable preferred stock 1,258 1,258
Long-term debt (less sinking fund requirements) 234,643 259,625
-----------------------------
Total Capitalization 518,341 532,387
-----------------------------
Current Liabilities:
Notes payable 265,585 218,200
Notes payable - associated companies - 11,540
Accounts payable 72,674 41,938
Accounts payable - associated companies 9,206 10,303
Advance customer billings 12,287 15,361
Current portion of long-term debt 25,000 -
Taxes accrued 18,072 16,287
Unamortized purchased gas adjustment 3,017 5,865
Other 34,230 34,344
-----------------------------
Total Current Liabilities 440,071 353,838
-----------------------------
Deferred Credits and Other Liabilities:
Deferred income taxes 180,268 177,957
Unamortized investment tax credits 5,240 5,316
Pension and postretirement benefit costs 22,814 20,973
Regulatory liabilities 6,375 582
Other 22,878 21,956
-----------------------------
Total Deferred Credits and Other Liabilities 237,575 226,784
-----------------------------
Total Capitalization and Liabilities $1,195,987 $1,113,009
=============================
See notes to financial statements.
3
LACLEDE GAS COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
December 31,
2003 2002
------- -------
(Thousands)
Operating Activities:
Net Income $ 17,356 $ 14,598
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 5,661 5,502
Deferred income taxes and investment
tax credits 1,547 2,541
Other - net 107 151
Changes in assets and liabilities:
Accounts receivable - net (93,312) (81,143)
Unamortized purchased gas adjustments (2,848) (6,097)
Deferred purchased gas costs 19,588 (2,035)
Advance customer billings - net (3,074) (13,473)
Accounts payable 29,639 37,283
Taxes accrued 1,785 2,419
Natural gas stored underground 4,603 (1,491)
Other assets and liabilities 2,335 (437)
-----------------------------
Net cash used in operating activities $(16,613) $(42,182)
-----------------------------
Investing Activities:
Construction expenditures (11,212) (11,426)
Employee benefit trusts (1,439) (530)
Other investments 221 232
-----------------------------
Net cash used in investing activities $(12,430) $(11,724)
-----------------------------
Financing Activities:
Issuance of short-term debt - net 35,845 62,171
Dividends paid (6,408) (6,354)
-----------------------------
Net cash provided by financing activities $ 29,437 $ 55,817
-----------------------------
Net Increase in Cash and Cash Equivalents $ 394 $ 1,911
Cash and Cash Equivalents at Beginning of Period 2,907 1,317
-----------------------------
Cash and Cash Equivalents at End of Period $ 3,301 $ 3,228
=============================
Supplemental Disclosure of Cash Paid (Refunded)
During the Period for:
Interest $ 8,465 $ 8,802
Income taxes (20) (4,371)
See notes to financial statements.
4
LACLEDE GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These notes are an integral part of the accompanying financial
statements of Laclede Gas. 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 Laclede Gas' Fiscal Year 2003 Form 10-K.
Laclede Gas is a regulated natural gas distribution utility having
a material seasonal cycle. As a result, these interim statements of income
for Laclede Gas are not necessarily indicative of annual results or
representative of 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.
REVENUE RECOGNITION - Laclede Gas reads meters and bills its
customers on a monthly cycle billing basis. The Utility records its
regulated gas distribution revenues from gas sales and transportation
service on an accrual basis that includes estimated amounts for gas
delivered, but not yet billed. The accruals for unbilled revenues are
reversed in the subsequent accounting period when meters are actually read
and customers are billed. The amount of accrued unbilled revenue at December
31, 2003 and 2002, for the Utility, was $38.3 million and $27.0 million,
respectively. After accrual of related gas cost expense, the accrued net
pre-tax revenues at December 31, 2003 and 2002 were $8.8 million and $10.3
million, respectively. The amount of accrued unbilled revenue at September
30, 2003 was $8.9 million.
BASIS OF CONSOLIDATION - In compliance with generally accepted
accounting principles, transactions between Laclede Gas and its affiliates
as well as intercompany balances on Laclede Gas' balance sheet have not been
eliminated from the Laclede Gas financial statements.
Laclede Gas provides administrative and general support to
affiliates. All such costs, which are not material, are billed to the
appropriate affiliates and are reflected in accounts receivable on Laclede
Gas' Balance Sheet. Laclede Gas may also, on occasion, borrow funds from, or
lend funds to, affiliated companies. At December 31, 2003, the Laclede Gas
Balance Sheet reflected a total of $10.1 million of intercompany receivables
and $9.2 million of intercompany payables.
NEW ACCOUNTING STANDARDS - Financial Accounting Standards Board
(FASB) Interpretation No. 46 (Revised December 2003), "Consolidation of
Variable Interest Entities," addresses consolidation of business enterprises
of variable interest entities. Public entities shall apply this
Interpretation to their interests in special purpose entities as of the
first interim period ending after December 15, 2003. Application by public
entities for all other types of variable interest entities is required in
financial statements for periods ending after March 15, 2004. Laclede Gas
does not expect a material effect on its financial position or results of
operations.
In December 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 132 (revised 2003), "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The provisions of this
Statement do not change the measurement and recognition provisions of SFAS
No. 87, "Employers' Accounting for Pensions," No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 132(R) replaces SFAS
No. 132, and requires certain additional disclosures that become effective
for fiscal years ending after and interim periods beginning after December
15, 2003.
5
2. INCOME TAXES
Net provisions for income taxes were as follows during the periods
set forth below:
Three Months Ended
December 31,
2003 2002
---- ----
(Thousands)
Federal
Current $ 7,128 $ 4,764
Deferred 1,342 2,141
State and Local
Current 1,194 759
Deferred 204 400
-----------------------
Total $ 9,868 $ 8,064
=======================
3. INFORMATION BY OPERATING SEGMENT
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 sale of gas appliances. There are no material
intersegment revenues.
Regulated
Gas Non-Regulated
(Thousands) Distribution Other Eliminations Consolidated
-------------------------------------------------------------------------------------------
Three Months Ended
December 31, 2003
-----------------
Operating revenues $ 261,350 $ 632 $ - $ 261,982
Net income 17,340 16 - 17,356
Total assets 1,194,498 1,489 - 1,195,987
Three Months Ended
December 31, 2002
-----------------
Operating revenues $ 217,165 $ 650 $ - $ 217,815
Net income 14,589 9 - 14,598
Total assets 1,084,036 1,544 - 1,085,580
4. COMMITMENTS AND CONTINGENCIES
Laclede Gas is subject to various environmental laws and
regulations that, to date, have not materially affected the Company's
financial position and results of operations. As these laws, regulations,
and their interpretation evolve, however, additional costs may be incurred.
With regard to a former manufactured gas plant site located in
Shrewsbury, Missouri, Laclede Gas and state and federal environmental
regulators have agreed upon certain actions and those actions are
essentially complete. Laclede Gas currently estimates the overall costs of
these actions will be approximately $2.4 million. As of December 31, 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.
6
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
is engaged in ongoing meetings with the developer to determine what role, if
any, it might play in these efforts. Laclede Gas continues to evaluate other
options as well, including, but not limited to, the submission of its own
RAP to the VCP. Laclede Gas currently estimates that the cost of site
investigations, agency oversight and related legal and engineering
consulting may be approximately $650,000. Currently, Laclede Gas has paid or
reserved for these actions. Laclede Gas has requested that other former site
owners and operators share in these costs and one party has agreed to
participate and has reimbursed Laclede Gas to date for $173,000. Laclede Gas
anticipates additional reimbursement from this party. Laclede Gas plans to
seek proportionate reimbursement of all costs relative to this site from
other potentially responsible parties if practicable.
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 may require remediation. Laclede Gas does not, and for many years
has not, owned this site. At this time it is not clear whether Laclede Gas
will incur any costs in connection with environmental investigations or
remediation at the site, and if it does incur any costs, what the amount of
those costs would be.
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.
On June 28, 2002, the Staff of the MoPSC filed its recommendation
in a proceeding established to review Laclede Gas' gas costs for fiscal
2001. In its recommendation, the Staff proposed to disallow approximately
$4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based
Price Stabilization Program. This Program was discontinued at the end of the
2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in
proceedings before the MoPSC, including a formal hearing that was held on
this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC
decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved
by Laclede Gas, and directed Laclede Gas to flow through such amount to its
customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas
appealed the MoPSC's decision to the Cole County Circuit Court. On October
10, 2003, the Circuit Court issued an order staying the MoPSC's decision
requiring Laclede Gas to flow through the $4.9 million to customers.
Pursuant to the Stay Order, Laclede Gas is paying the $4.9 million into the
Court's registry pending a final judicial determination of Laclede Gas'
entitlement to such amounts. On November 5, 2003, the Circuit Court of Cole
County, Missouri, issued its Order and Judgment vacating and setting aside
the Commission's decision on the grounds that it was unlawful and not
supported by competent and substantial evidence on the record. On December
5, 2003 the MoPSC appealed the Circuit Court's decision to the Missouri
Western District Court of Appeals. Laclede Gas continues to believe in the
merit of its position and intends to vigorously assert its position in the
appeal. To the extent that a final decision in the Courts results in
disallowance of the $4.9 million in pre-tax gains, it could have a material
effect on the future financial position and results of operation of Laclede
Gas.
7
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.
8
LACLEDE GAS COMPANY
RESULTS OF OPERATIONS
Laclede Gas Company (Laclede Gas or the Utility) is regulated by the
Missouri Public Service Commission (MoPSC) and serves the metropolitan St.
Louis area and several other counties in eastern Missouri. Laclede Gas
delivers natural gas to retail customers at rates and in accordance with
tariffs authorized by the MoPSC. The Utility's earnings are primarily
generated by the sale of heating energy, which was historically heavily
influenced by the weather. As part of the 2002 rate case settlement, the
Utility initiated, effective November 9, 2002, an innovative weather
mitigation rate design that lessens the impact of weather volatility on
Laclede Gas customers during cold winters and is expected to stabilize the
Utility's earnings in the future by recovering fixed costs more evenly
during the heating season. Due to the seasonal nature of the business of
Laclede Gas, earnings are typically concentrated in the November through
April period, which generally corresponds with the heating season. The
Utility typically experiences losses during the non-heating season. Due to
the material seasonal cycle of Laclede Gas, the accompanying interim
statements of income for Laclede Gas are not necessarily indicative of
annual results or representative of succeeding quarters of the fiscal year.
Quarter Ended December 31, 2003
- -------------------------------
Laclede Gas' net income for the quarter ended December 31, 2003 was $17.4
million, compared with $14.6 million reported for the same quarter last
year. The year-to-year improvement in net income of $2.8 million was
primarily attributable to the following factors, quantified on a pre-tax
basis.
Increased Utility earnings were primarily due to:
o higher income from off-system sales and capacity release totaling
$2.4 million resulting from favorable market conditions;
o lower operation and maintenance expenses totaling $1.9 million,
primarily due to a lower provision for uncollectible accounts; and,
o the fully-implemented general rate increase totaling $.9 million
effective November 9, 2002.
These factors were partially offset by the net effect totaling $1.3 million
of lower system gas sales volumes (resulting from temperatures in Laclede
Gas' service area that were 18% warmer than normal and 19% warmer than the
same period last year) and the beneficial effect this year of the
fully-implemented weather mitigation rate design. The magnitude of the
effect of lower sales was smaller than would have previously been the case
due to the impact of the fully-implemented weather mitigation rate design
that produced higher margin revenue for the quarter ended December 31, 2003,
compared with the same period last year.
Regulated Operating Revenues and Operating Expenses
Laclede Gas passes on to Utility customers (subject to prudence review)
increases and decreases in the wholesale cost of natural gas in accordance
with its Purchased Gas Adjustment (PGA) clause. The volatility of the
wholesale natural gas market results in fluctuations from period to period
in the recorded levels of, among other items, revenues and natural gas cost
expense. Nevertheless, increases and decreases in the cost of gas associated
with system gas sales volumes have no direct effect on net revenues and net
income.
Regulated operating revenues for the quarter ended December 31, 2003 were
$261.4 million, or $44.2 million greater than the same period last year. The
increase was primarily attributable to higher PGA rates totaling
approximately $41.2 million. Regulated operating revenues also increased, to
a lesser extent, due to higher off-system sales and capacity release
revenues amounting to $19.8 million and the effect of the general rate
increase totaling $.9 million. These factors were partially offset by lower
gas sales levels resulting from the warmer weather and other variations
totaling $17.7 million. System therms sold and transported decreased by 37.3
million therms, or 11.4%, below the quarter ended December 31, 2002.
9
Regulated operating expenses for the quarter ended December 31, 2003
increased $40.4 million from the same quarter last year. Natural and propane
gas expense increased $41.4 million above last year's level primarily
attributable to higher rates charged by our suppliers and increased
off-system gas expense, partially offset by lower volumes purchased for
sendout. Other operation and maintenance expenses decreased $1.9 million, or
5.2%, primarily due to a lower provision for uncollectible accounts totaling
$1.8 million, principally resulting from variations in write-offs
experienced. Minor reductions in group insurance and distribution charges
were partially offset by higher pension costs and increased charges for
injuries and damages. Depreciation and amortization expense increased $.2
million primarily due to increased depreciable property. Taxes, other than
income, increased $.7 million, or 5.0%, primarily due to higher gross
receipts taxes (attributable to the increased revenues).
Interest Charges and Income Taxes
The $.4 million decrease in interest charges is primarily due to 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 primarily 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 June 28, 2002, the Staff of the MoPSC filed its recommendation in a
proceeding established to review Laclede Gas' gas costs for fiscal 2001. In
its recommendation, the Staff proposed to disallow approximately $4.9
million in pre-tax gains achieved by Laclede Gas in its incentive-based
Price Stabilization Program. This Program was discontinued at the end of the
2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in
proceedings before the MoPSC, including a formal hearing that was held on
this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC
decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved
by Laclede Gas, and directed Laclede Gas to flow through such amount to its
customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas
appealed the MoPSC's decision to the Cole County Circuit Court. On October
10, 2003, the Circuit Court issued an order staying the MoPSC's decision
requiring Laclede Gas to flow through the $4.9 million to customers.
Pursuant to the Stay Order, Laclede Gas is paying the $4.9 million into the
Court's registry pending a final judicial determination of Laclede Gas'
entitlement to such amounts. On November 5, 2003, the Circuit Court of Cole
County, Missouri, issued its Order and Judgment vacating and setting aside
the Commission's decision on the grounds that it was unlawful and not
supported by competent and substantial evidence on the record. On December
5, 2003 the MoPSC appealed the Circuit Court's decision to the Missouri
Western District Court of Appeals. Laclede Gas continues to believe in the
merit of its position and intends to vigorously assert its position in the
appeal. To the extent that a final decision in the Courts results in
disallowance of the $4.9 million in pre-tax gains, it could have a material
effect on the future financial position and results of operation of the
Laclede Gas.
10
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' compensation claims, portions
of which are self-insured and/or contain stop/loss coverage with
third-party insurers to limit exposure, are established based on
historical trends.
Laclede Gas accounts for its regulated operations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." This statement sets forth the
application of accounting principles generally accepted in the United States
of America for those companies whose rates are established by or are subject
to approval by an independent third-party regulator. The provisions of SFAS
No. 71 require, among other things, that financial statements of a regulated
enterprise reflect the actions of regulators, where appropriate. These
actions may result in the recognition of revenues and expenses in time
periods that are different than non-regulated enterprises. When this occurs,
costs are deferred as assets in the balance sheet (regulatory assets) and
recorded as expenses when those amounts are reflected in rates. Also,
regulators can impose liabilities upon a regulated company for amounts
previously collected from customers and for recovery of costs that are
expected to be incurred in the future (regulatory liabilities). Management
believes that the current regulatory environment supports the continued use
of SFAS No. 71 and that all regulatory assets and liabilities are
recoverable or refundable through the regulatory process. We believe the
following represent the more significant items recorded through the
application of SFAS No. 71:
The Utility's Purchased Gas Adjustment (PGA) Clause allows Laclede
Gas to flow through to customers, subject to prudence review, the
cost of purchased gas supplies, including the costs, cost
reductions and related carrying costs associated with the Utility's
use of natural gas financial instruments to hedge the purchase
price of natural gas. The difference between actual costs incurred
and costs recovered through the application of the PGA are recorded
as regulatory assets and liabilities that are recovered or refunded
in a subsequent period.
Laclede Gas records deferred tax liabilities and assets measured by
enacted tax rates for the net tax effect of all temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes, and the amounts used for income
tax purposes. Changes in enacted tax rates, if any, and certain
property basis differences will be reflected by entries to
regulatory asset or liability accounts for regulated companies, and
will be reflected as income or loss for non-regulated companies.
Also, pursuant to the direction of the MoPSC, Laclede Gas'
provision for income tax expense for financial reporting purposes
reflects an open-ended method of tax depreciation. This method is
consistent with the regulatory treatment prescribed by the MoPSC to
depreciate the Utility's assets.
11
For further discussion of significant accounting policies, see the Notes to
the Consolidated Financial Statements included in Laclede Gas' 10-K for the
year ended September 30, 2003.
Accounting Pronouncements
- -------------------------
Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised
December 2003), "Consolidation of Variable Interest Entities," addresses
consolidation of business enterprises of variable interest entities. Public
entities shall apply this Interpretation to their interests in special
purpose entities as of the first interim period ending after December 15,
2003. Application by public entities for all other types of variable
interest entities is required in financial statements for periods ending
after March 15, 2004. Laclede Gas does not expect a material effect on its
financial position or results of operations.
In December 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 132 (revised 2003), "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The provisions of this
Statement do not change the measurement and recognition provisions of SFAS
No. 87, "Employers' Accounting for Pensions," No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 132(R) replaces SFAS
No. 132, and requires certain additional disclosures that become effective
for fiscal years ending after and interim periods beginning after December
15, 2003.
FINANCIAL CONDITION
Credit Ratings
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As of December 31, 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
The Utility's ratings are investment grade, and the Utility believes that it
has adequate access to the financial markets to meet its capital
requirements. These ratings remain subject to review and change by the
rating agencies.
Cash Flows
- ----------
Laclede Gas' short-term borrowing requirements typically peak during colder
months when Laclede Gas borrows money to cover the gap between when it
purchases its natural gas and when its customers pay for that gas. Changes
in the wholesale cost of natural gas, variations in the timing of
collections of gas cost under the Utility's PGA Clause, the seasonality of
accounts receivable balances, and the utilization of storage gas inventories
cause short-term cash requirements to vary during the year, and can cause
significant variations in the Utility's cash provided by or used in
operating activities.
Cash used in operating activities for the quarter ended December 31, 2003
was $16.6 million, a $25.6 million decrease compared with the same period
last year. The decrease in cash used in operating activities was primarily
attributable to variations in the timing of collections of gas cost under
the PGA Clause and changes in the cost of natural gas in storage.
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Cash used in investing activities for the quarter ended December 31, 2003
was $12.4 million compared with $11.7 million for the quarter ended December
31, 2002. Cash used in investing activities primarily reflected Utility
construction expenditures in both periods.
Cash provided by financing activities was $29.4 for the quarter ended
December 31, 2003 compared with $55.8 million for the quarter ended December
31, 2002. Cash provided by financing activities was primarily due to
additional short-term borrowings in both periods.
Liquidity and Capital Resources
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Short-term cash requirements have traditionally been met through the sale of
commercial paper supported by lines of credit with banks. Laclede Gas
currently has lines of credit in place of up to $290 million, including a
seasonal line of $25 million expiring February 13, 2004. Including borrowing
from Laclede Group, Laclede Gas' short-term borrowing during the quarter
peaked at $274.7 million. Short-term borrowings outstanding at December 31,
2003 were $265.6 million at a weighted average interest rate of 1.25%. Based
on short-term borrowings at December 31, 2003, a change in interest rates of
100 basis points would increase or decrease pre-tax earnings and cash flows
by approximately $2.7 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
December 31, 2003, total debt was 65% of total capitalization.
Laclede Gas has on file 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 December 31, 2003.
The MoPSC authorization for issuing securities registered on this Form S-3
expires October 31, 2006. The amount, timing and type of additional
financing to be issued under this shelf registration will depend on cash
requirements and market conditions.
At December 31, 2003, Laclede Gas had fixed-rate long-term debt totaling
$260 million, including a $50 million 6 5/8% issue callable in June 2004 and
a current portion of $25 million scheduled to mature in November 2004. While
these long-term debt issues are fixed-rate, they are subject to changes in
fair value as market interest rates change. However, increases or decreases
in fair value would impact earnings and cash flows only if Laclede Gas were
to reacquire any of these issues in the open market prior to maturity.
Utility construction expenditures were $11.2 million for the three months
ended December 31, 2003, compared with $11.4 million for the same period
last year.
Capitalization at December 31, 2003, excluding current obligations of
long-term debt, decreased $14.0 million since September 30, 2003 and
consisted of 54.5% common stock equity, .2% preferred stock and 45.3%
long-term debt.
It is management's view that the Company has adequate access to capital
markets and will have sufficient capital resources, both internal and
external, to meet anticipated capital requirements.
The seasonal nature of Laclede Gas' sales affects the comparison of certain
balance sheet items at December 31, 2003 and at September 30, 2003, such as
Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts
Payable, Regulatory Liabilities, and Advance 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
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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 December 31, 2003, the Utility held approximately 10.9
million MmBtu of futures contracts at an average price of $5.33 per MmBtu.
Additionally, approximately 8.1 million MmBtu of other price risk mitigation
was in place through the use of option-based strategies. These positions
have various expiration dates, the longest of which extends through October
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 essentially complete.
Laclede Gas currently estimates the overall costs of these actions will be
approximately $2.4 million. As of December 31, 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 is engaged in ongoing
meetings with the developer to determine what role, if any, it might play in
these efforts. Laclede Gas continues to evaluate other options as well,
including, but not limited to, the submission of its own RAP to the VCP.
Laclede Gas currently estimates that the cost of site investigations, agency
oversight and related legal and engineering consulting may be approximately
$650,000. Currently, Laclede Gas has paid or reserved for these actions.
Laclede Gas has requested that other former site owners and operators share
in these costs and one party has agreed to participate and has reimbursed
Laclede Gas to date for $173,000. Laclede Gas anticipates additional
reimbursement from this party. Laclede Gas plans to seek proportionate
reimbursement of all costs relative to this site from other potentially
responsible parties if practicable.
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
may require remediation. Laclede Gas does not, and for many years has not,
owned this site. At this time it is not clear whether Laclede Gas will incur
any costs in connection with environmental investigations or remediation at
the site, and if it does incur any costs, what the amount of those costs
would be.
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.
OFF-BALANCE SHEET ARRANGEMENTS
Laclede Gas has no off-balance sheet arrangements.
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