SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Exact Name of Registrant as State of I.R.S.
Number Specified in its Charter and Incorporation Employer
Principal Office Address and Identification Number
Telephone Number
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1-16681 The Laclede Group, Inc. Missouri 74-2976504
720 Olive Street
St. Louis, MO 63101 314-342-0500
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1-1822 Laclede Gas Company Missouri 43-0368139
720 Olive Street
St. Louis, MO 63101 314-342-0500
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Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such report),
The Laclede Group, Inc.: Yes X No
--- ---
Laclede Gas Company: Yes X No
--- ---
and (2) has been subject to such filing requirements for the past 90 days:
The Laclede Group, Inc.: Yes X No
--- ---
Laclede Gas Company: Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
The Laclede Group, Inc. Yes X No
--- ---
Laclede Gas Company: Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Shares Outstanding At
Registrant Description of Common Stock April 30, 2004
- ---------- --------------------------- --------------
The Laclede Group, Inc. Common Stock ($1.00 Par Value) 19,216,842
Laclede Gas Company Common Stock ($1.00 Par Value) 100*
<FN>
*100% owned by The Laclede Group, Inc.
TABLE OF CONTENTS Page No.
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
The Laclede Group, Inc.:
Statements of Consolidated Income 4
Statements of Consolidated Comprehensive Income 5
Consolidated Balance Sheets 6-7
Statements of Consolidated Cash Flows 8
Notes to Consolidated Financial Statements 9-17
Laclede Gas Company:
Statements of Income Ex. 99.1, p. 1
Balance Sheets Ex. 99.1, p. 2-3
Statements of Cash Flows Ex. 99.1, p. 4
Notes to Financial Statements Ex. 99.1, p. 5-10
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (The Laclede Group, Inc.) 18-28
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Laclede Gas Company) Ex. 99.1, p. 11-19
Item 3 Quantitative and Qualitative Disclosures About Market Risk 29
Item 4 Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 30
Item 4 Submission of Matters to a Vote of Security Holders 30
Item 6 Exhibits and Other Reports on Form 8-K 31
SIGNATURES - The Laclede Group, Inc. 32
SIGNATURES - Laclede Gas Company 33
INDEX TO EXHIBITS 34
Filing Format
- -------------
This Quarterly Report on Form 10-Q is a combined report being filed by two
separate registrants: The Laclede Group, Inc. (Laclede Group or the Company)
and Laclede Gas Company (Laclede Gas or the Utility).
2
PART I
FINANCIAL INFORMATION
The interim financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. These financial statements should be
read in conjunction with the financial statements and the notes thereto
included in the Company's Form 10-K for the fiscal year ended September 30,
2003.
3
Item 1. Financial Statements
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
March 31, March 31,
----------------------------- ------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Operating Revenues:
Regulated
Gas distribution $396,898 $357,456 $658,248 $574,621
Non-Regulated
Services 15,250 17,315 34,798 48,138
Gas marketing 61,480 45,874 112,463 77,141
Other 1,327 1,534 2,083 2,450
----------------------------- ------------------------------
Total Operating Revenues 474,955 422,179 807,592 702,350
----------------------------- ------------------------------
Operating Expenses:
Regulated
Natural and propane gas 288,284 247,918 463,559 381,761
Other operation expenses 32,808 29,663 62,291 60,987
Maintenance 4,641 4,950 9,070 9,394
Depreciation and amortization 5,711 5,596 11,369 11,089
Taxes, other than income taxes 24,897 22,579 39,729 36,707
----------------------------- ------------------------------
Total regulated operating expenses 356,341 310,706 586,018 499,938
Non-Regulated
Services 19,538 23,301 39,849 53,945
Gas marketing 59,813 44,744 110,101 74,848
Other 804 1,106 1,771 2,083
----------------------------- ------------------------------
Total Operating Expenses 436,496 379,857 737,739 630,814
----------------------------- ------------------------------
Operating Income 38,459 42,322 69,853 71,536
----------------------------- ------------------------------
Other Income and (Income Deductions) - Net 1,905 (25) 3,337 1,042
----------------------------- ------------------------------
Interest Charges:
Interest on long-term debt 4,815 5,205 9,629 10,410
Interest on long-term debt to unconsolidated
affiliate trust 867 867 1,733 1,011
Other interest charges 999 953 2,084 2,302
----------------------------- ------------------------------
Total Interest Charges 6,681 7,025 13,446 13,723
----------------------------- ------------------------------
Income Before Income Taxes 33,683 35,272 59,744 58,855
Income Tax Expense 12,128 13,687 21,582 22,159
----------------------------- ------------------------------
Net Income 21,555 21,585 38,162 36,696
Dividends on Redeemable Preferred Stock -
Laclede Gas 15 15 31 31
----------------------------- ------------------------------
Net Income Applicable to Common Stock $ 21,540 $ 21,570 $ 38,131 $ 36,665
============================= ==============================
Average Number of Common Shares
Outstanding 19,167 19,002 19,142 18,981
Basic Earnings Per Share of Common Stock $1.12 $1.14 $1.99 $1.93
Diluted Earnings Per Share of Common Stock $1.12 $1.14 $1.99 $1.93
Dividends Declared Per Share of Common
Stock $.340 $.335 $.675 $.670
See notes to consolidated financial statements.
4
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
(Thousands)
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- ---------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net Income Applicable to Common Stock $ 21,540 $ 21,570 $ 38,131 $ 36,665
---------------------------- ---------------------------
Other Comprehensive Income:
Net gain (loss) on cash flow hedging
derivative instruments:
Net hedging gain (loss) arising during
period (1,626) 260 (2,143) 260
Reclassification adjustment for
(gains) losses included in net income 294 - (943) -
---------------------------- ---------------------------
Net unrealized gain (loss) on cash flow
hedging derivative instruments (1,332) 260 (3,086) 260
---------------------------- ---------------------------
Other Comprehensive Income (Loss),
Before Tax (1,332) 260 (3,086) 260
Income Tax (Benefit) Expense Related to
Items of Other Comprehensive Income
(Loss) (515) 101 (1,192) 101
---------------------------- ---------------------------
Other Comprehensive Income (Loss), Net
of Tax (817) 159 (1,894) 159
---------------------------- ---------------------------
Comprehensive Income $ 20,723 $ 21,729 $ 36,237 $ 36,824
============================ ===========================
See notes to consolidated financial statements.
5
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Mar. 31, Sept. 30, Mar. 31,
2004 2003 2003
---- ---- ----
(Thousands)
ASSETS
Utility Plant $1,050,823 $1,030,665 $1,007,958
Less: Accumulated depreciation and amortization 416,767 409,418 402,357
-------------- -------------- ---------------
Net Utility Plant 634,056 621,247 605,601
-------------- -------------- ---------------
Goodwill 28,124 28,124 28,124
-------------- -------------- ---------------
Other Property and Investments 45,805 45,998 46,259
-------------- -------------- ---------------
Current Assets:
Cash and cash equivalents 25,173 7,291 34,527
Accounts receivable:
Gas Customers - billed and unbilled 127,261 70,217 115,568
Other 75,710 41,298 46,665
Allowances for doubtful accounts (8,117) (7,181) (5,728)
Delayed customer billings 36,141 - 33,682
Inventories:
Natural gas stored underground at LIFO cost 29,422 117,231 24,469
Propane gas at FIFO cost 12,914 17,132 10,128
Materials, supplies, and merchandise at avg. cost 4,686 4,071 4,263
Derivative instrument assets 7,841 12,643 6,017
Deferred income taxes 5,694 7,631 8,417
Prepayments and other 7,375 17,557 11,038
-------------- -------------- ---------------
Total Current Assets 324,100 287,890 289,046
-------------- -------------- ---------------
Deferred Charges:
Prepaid pension cost 104,790 109,445 111,879
Regulatory assets 98,313 103,807 74,929
Other 9,389 6,287 5,649
-------------- -------------- ---------------
Total Deferred Charges 212,492 219,539 192,457
-------------- -------------- ---------------
Total Assets $1,244,577 $1,202,798 $1,161,487
============== ============== ===============
See notes to consolidated financial statements.
6
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
Mar. 31, Sept. 30, Mar. 31,
2004 2003 2003
---- ---- ----
(Thousands, except share amounts)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (70,000,000 shares authorized, 19,187,777,
19,082,402 and 19,003,633 shares issued, respectively) $ 19,188 $ 19,082 $ 19,004
Paid-in capital 71,157 68,460 66,558
Retained earnings 236,814 211,610 226,463
Accumulated other comprehensive loss (1,974) (80) (180)
------------- -------------- --------------
Total common stock equity 325,185 299,072 311,845
Redeemable preferred stock (less current sinking fund
requirements) - Laclede Gas 1,108 1,258 1,258
Long-term debt to unconsolidated affiliate trust 46,400 46,400 46,400
Long-term debt (less current portion) - Laclede Gas 234,661 259,625 259,588
------------- -------------- --------------
Total Capitalization 607,354 606,355 619,091
------------- -------------- --------------
Current Liabilities:
Notes payable 191,415 218,200 122,390
Accounts payable 88,541 66,001 98,934
Advance customer billings - 15,361 -
Current portion of long-term debt and preferred stock 25,150 - 25,000
Taxes accrued 29,103 13,211 25,667
Unamortized purchased gas adjustment 1,458 5,865 9,524
Other 49,343 47,638 46,509
------------- -------------- --------------
Total Current Liabilities 385,010 366,276 328,024
------------- -------------- --------------
Deferred Credits and Other Liabilities:
Deferred income taxes 185,748 180,598 159,148
Unamortized investment tax credits 5,163 5,316 5,472
Pension and postretirement benefit costs 24,635 20,973 18,511
Regulatory liabilities 13,878 582 9,830
Other 22,789 22,698 21,411
------------- -------------- --------------
Total Deferred Credits and Other Liabilities 252,213 230,167 214,372
------------- -------------- --------------
Total Capitalization and Liabilities $1,244,577 $1,202,798 $1,161,487
============= ============== ==============
See notes to consolidated financial statements.
7
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
Six Months Ended
March 31,
--------------------------------
2004 2003
---- ----
(Thousands)
Operating Activities:
Net Income $ 38,162 $ 36,696
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 13,174 12,794
Deferred income taxes and investment
tax credits 2,506 2,783
Other - net 110 184
Changes in assets and liabilities:
Accounts receivable - net (90,520) (67,027)
Unamortized purchased gas adjustments (4,407) (13,452)
Deferred purchased gas costs 26,911 117
Advance customer billings - net (51,502) (58,514)
Accounts payable 22,540 53,227
Taxes accrued 15,892 15,852
Natural gas stored underground 87,809 52,652
Other assets and liabilities 19,984 14,349
-------------- -------------
Net cash provided by operating activities $ 80,659 $ 49,661
-------------- -------------
Investing Activities:
Construction expenditures (25,133) (22,859)
Employee benefit trusts (1,702) (507)
Other investments 858 (1,002)
-------------- -------------
Net cash used in investing activities $(25,977) $(24,368)
-------------- -------------
Financing Activities:
Repayment of short-term debt - net (26,785) (39,280)
Dividends paid (12,818) (12,722)
Issuance of common stock 2,803 1,974
Issuance of long-term debt to unconsolidated affiliate trust - 46,400
Preferred stock reacquired and other - (8)
-------------- -------------
Net cash used in financing activities $(36,800) $ (3,636)
-------------- -------------
Net Increase in Cash and Cash Equivalents $ 17,882 $ 21,657
Cash and Cash Equivalents at Beginning of Period 7,291 12,870
-------------- -------------
Cash and Cash Equivalents at End of Period $ 25,173 $ 34,527
============== =============
Supplemental Disclosure of Cash Paid During the Period for:
Interest $ 13,163 $ 13,766
Income taxes 274 246
See notes to consolidated financial statements.
8
THE LACLEDE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These notes are an integral part of the accompanying consolidated
financial statements of The Laclede Group, Inc. (Laclede Group or the
Company) and its subsidiaries. In the opinion of Laclede Group, this interim
report includes all adjustments (consisting of only normal recurring
accruals) necessary for the fair presentation of the results of operations
for the periods presented. Certain prior-period amounts have been
reclassified to conform to current-period presentation. This Form 10-Q
should be read in conjunction with the Notes to Consolidated Financial
Statements contained in the Company's Fiscal Year 2003 Form 10-K.
The consolidated financial position, results of operations and cash
flows of Laclede Group are comprised primarily from the consolidated
financial position, results of operations and cash flows of Laclede Gas
Company (Laclede Gas or the Utility). Laclede Gas is a regulated natural gas
distribution utility having a material seasonal cycle. As a result, these
interim statements of income for Laclede Group are not necessarily
indicative of annual results or representative of succeeding quarters of the
fiscal year. Due to the seasonal nature of the business of Laclede Gas,
earnings are typically concentrated in the November through April period,
which generally corresponds with the heating season. The Utility typically
experiences losses during the non-heating season. The seasonal effect of the
Utility's earnings on Laclede Group is generally expected to be tempered
somewhat by the results of SM&P Utility Resources, Inc. (SM&P), a
non-regulated underground facility locating and marking service business,
whose operations tend to be counter-seasonal to those of Laclede Gas.
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 March
31, 2004 and 2003, for the Utility, was $22.3 million and $13.1 million,
respectively. After accrual of related gas cost expense, the accrued pre-tax
net revenues at March 31, 2004 and 2003 were $6.9 million and $8.1 million,
respectively. The amount of accrued unbilled revenue at September 30, 2003
was $8.9 million.
SM&P, Laclede Energy Resources, Inc. (LER) and Laclede Group's
other non-regulated subsidiaries record revenues when earned, either when
the product is delivered or when services are performed.
In the course of its business, Laclede Group's non-regulated
marketing affiliate, LER, enters into fixed price commitments associated
with the purchase or sale of natural gas. LER's fixed price energy contracts
are designated as normal purchases and normal sales, as defined in
accordance with the Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities." As
such, those contracts are accounted for as executory contracts and recorded
on an accrual basis. Revenues are recorded using a gross presentation.
STOCK-BASED COMPENSATION - The Laclede Group Equity Incentive Plan
was approved at the annual meeting of shareholders of Laclede Group on
January 30, 2003. The purpose of the Equity Incentive Plan is to provide a
more competitive compensation program and to attract and retain those
executive and other key employees essential to achieve the Company's
strategic objectives. To accomplish this purpose, the compensation committee
of the board of directors may grant awards under the Equity Incentive Plan
that may be earned by achieving performance objectives and/or other criteria
as determined by the compensation committee. Under the terms of the Equity
Incentive Plan, key employees of the Company and its subsidiaries, as
determined at the sole discretion of the administrator, will be eligible to
receive (a) restricted shares of common stock, (b) performance awards, (c)
stock options exercisable into shares of common stock, (d) stock
appreciation rights, and (e) stock units, as well as any other stock-based
awards not inconsistent with the Equity Incentive Plan. Each award under the
Equity Incentive Plan shall have a minimum vesting period of at least one
year. The total number of shares that may be issued pursuant to awards under
the Equity Incentive Plan may not exceed 1,250,000.
During the six months ended March 31, 2004, the Company granted
1,500 shares of restricted stock at a weighted average fair value of $28.85
per share. These shares have restrictions on vesting, sale and
transferability. The restrictions lapse with the passage of time. The
Company holds the certificates for restricted stock until the shares fully
vest in November 2005. In the interim, a participant receives full dividends
and voting rights. Restricted stock awards are recorded at the market value
on the date of the grant. Compensation cost charged against income for the
six months ended March 31, 2004 was approximately $6,000, net of tax
effects.
During the six months ended March 31, 2004, the Company granted
224,000 non-qualified stock options to employees at an exercise price of
$28.85 per share (none of these options were granted during the quarter
ended March 31, 2004). These options may not be exercised before November 6,
2004. The stock options vest one-fourth each year for four years after the
date of the grant and expire on the tenth anniversary of the grant date. The
Company accounts for the Equity Incentive Plan under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
9
No compensation expense has been recognized in net income, as all options
granted under the Equity Incentive Plan had an exercise price equal to the
market value of the Company's stock on the date of the grant.
Stock option activity for the quarter ended March 31, 2004 is
presented below.
Weighted Average
Shares Exercise Price
------------ --------------------
Outstanding at December 31, 2003 429,000 $26.18
Granted - -
Exercised (34,050) $23.27
Forfeited - -
Outstanding at March 31, 2004 394,950 $26.43
Exercisable at March 31, 2004 17,200 $23.27
The closing price of the Company's common stock was $30.30 at March 31,
2004.
If compensation expense had been determined based on the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have
been reduced to the amounts shown in the following table. The
weighted-average fair value of options granted during the six months ended
March 31, 2004 is $6.22 per option. The estimated fair value of options
would be amortized to expense over the options' vesting period and
restricted stock would be expensed on the grant date.
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------ -----------------------------
2004 2003 2004 2003
---- ---- ---- ----
(Thousands, Except Per Share Amounts)
Net income applicable to
common stock, as reported $21,540 $21,570 $38,131 $36,665
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of tax effects 84 25 176 25
------------------------------ -----------------------------
Pro forma net income applicable
to common stock $21,456 $21,545 $37,955 $36,640
============================== =============================
Earnings per share:
Basic - as reported $1.12 $1.14 $1.99 $1.93
Diluted - as reported $1.12 $1.14 $1.99 $1.93
Basic - pro forma $1.12 $1.13 $1.98 $1.93
Diluted - pro forma $1.12 $1.13 $1.98 $1.93
The fair value of the options granted during the six months ended
March 31, 2004 was estimated at the date of grant using the Black-Scholes
option pricing model with the following assumptions:
Six Months Ended
March 31,
-----------------------------
2004 2003
---- ----
Risk free interest rate 4.30% 4.00%
Expected dividend yield of stock 4.60% 5.70%
Expected volatility of stock 25.00% 25.00%
Expected life of option 96 months 96 months
NEW ACCOUNTING STANDARDS - Financial Accounting Standards Board
(FASB) Interpretation No. 46 (Revised December 2003) (FIN 46R),
"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
10
for all other types of variable interest entities is required in financial
statements for periods ending after March 15, 2004.
In December 2002, Laclede Group formed a wholly owned trust,
Laclede Capital Trust I (Trust), for the sole purpose of issuing preferred
securities and lending the gross proceeds to its parent, Laclede Group. As
of March 31, 2004, the Trust has $45 million of Trust Preferred Securities
outstanding. The sole assets of the Trust are debentures of Laclede Group,
totaling $46.4 million, with the same economic terms as the Trust Preferred
Securities. Prior to the application of FIN 46R, the Trust was consolidated
in the financial statements of Laclede Group. The Company evaluated the
effect of this pronouncement on this consolidation. In accordance with the
provisions of FIN 46R, Laclede Group has determined that the Trust is a
variable interest entity because its common securities investment is
considered not at risk, and Laclede Group is not the primary beneficiary of
the Trust. Accordingly, the Trust was deconsolidated during the quarter
ended March 31, 2004. The Consolidated Balance Sheets have been modified to
include Investments in Unconsolidated Subsidiaries of $1.4 million
representing Laclede Group's common securities investment in the Trust and
to reflect Laclede Group's obligations related to the debentures. The common
securities investment is included on the Other Property and Investments line
on the Consolidated Balance Sheets. As permitted under FIN 46R, the Trust
has been deconsolidated for prior periods and presented to be consistent
with the current presentation. The adoption of FIN 46R did not result in a
cumulative effect of an accounting change adjustment and did not have a
material effect on the financial position or results of operations of
Laclede Group.
In December 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 132 (revised 2003) (SFAS No. 132(R)), "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
became effective for fiscal years ending after and interim periods beginning
after December 15, 2003. The required disclosures are included in Note 3 to
the Consolidated Financial Statements on page 12 of this report.
2. EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires dual presentation of
basic and diluted earnings per share (EPS). Basic EPS does not include
potentially dilutive securities and is computed by dividing net income
applicable to common stock by the weighted-average number of common shares
outstanding during the period. Diluted EPS assumes the issuance of common
shares pursuant to the Company's stock-based compensation plan and the
vesting of non-vested stock awards at the beginning of each respective
period. There were no stock options that were anti-dilutive.
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- -----------------------
(Thousands, Except Per Share Amounts) 2004 2003 2004 2003
---- ---- ---- ----
Basic EPS:
Net Income Applicable to Common Stock $21,540 $21,570 $38,131 $36,665
Weighted-Average Shares Outstanding 19,167 19,002 19,142 18,981
Earnings Per Share of Common
Stock $1.12 $1.14 $1.99 $1.93
Diluted EPS:
Net Income Applicable to Common Stock $21,540 $21,570 $38,131 $36,665
Weighted-Average Shares Outstanding 19,167 19,002 19,142 18,981
Dilutive Effect of Employee Stock Options 30 - 27 -
----------------------- -----------------------
Weighted-Average Diluted Shares 19,197 19,002 19,169 18,981
======================= =======================
Earnings Per Share of Common
Stock $1.12 $1.14 $1.99 $1.93
11
3. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Laclede Gas has non-contributory defined benefit, trusteed forms of
pension plans covering substantially all employees over the age of
twenty-one. Benefits are based on years of service and the employee's
compensation during the last three years of employment.
The funding policy of Laclede Gas is to contribute an amount not
less than the minimum required by government funding standards, nor more
than the maximum deductible amount for federal income tax purposes. The
Utility has contributed $.2 million to the pension funds during the six
months ended March 31, 2004, and expects to contribute a total of $.3
million during fiscal year 2004. Plan assets consist primarily of corporate
and U.S. government obligations and indexed equity funds.
Pension cost amounted to $1.1 million for the quarter ended March
31, 2004 and $.3 million for the same quarter last year. Pension costs for
the six months ended March 31, 2004 were $2.2 million compared with $.6
million for the same period last year. These costs include amounts
capitalized with construction activities.
The net periodic pension costs include the following components:
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- -----------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Service cost - benefits earned
during the period $ 2,777 $ 2,265 $ 5,554 $ 4,530
Interest cost on projected
benefit obligation 4,058 4,150 8,115 8,300
Expected return on plan assets (5,625) (5,650) (11,249) (11,300)
Amortization of transition obligation - (59) - (118)
Amortization of prior service cost 331 348 662 696
Amortization of actuarial loss 951 334 1,901 669
Regulatory adjustment (1,368) (1,108) (2,737) (2,216)
----------------------- -----------------------
Net pension cost $ 1,124 $ 280 $ 2,246 $ 561
======================= =======================
Pursuant to the Missouri Public Service Commission's (MoPSC or
Commission) order in Laclede Gas' 2002 rate case, the return on plan assets
is based on market-related value of plan assets implemented prospectively
over a four-year period. Unrecognized gains or losses are amortized only to
the extent that such gain or loss exceeds 10% of the greater of the
projected benefit obligation or the market-related value of plan assets.
Such excess is amortized over the average remaining service life of active
participants. Also in the 2002 rate case, the Commission ordered that the
recovery in rates for the Utility's qualified pension plans is based on the
ERISA minimum contribution of zero effective October 1, 2002, and on the
ERISA minimum contribution of zero plus $3.4 million annually effective July
1, 2003. The difference between this amount on a pro-rata basis and pension
expense as calculated pursuant to the above and included in the Statement of
Consolidated Income and Statement of Consolidated Comprehensive Income is
deferred as a regulatory asset or liability.
Pursuant to the provisions of the Laclede Gas pension plans,
pension obligations may be satisfied by lump sum cash payments. Pursuant to
MoPSC order, lump sum payments are recognized as settlements (which can
result in gains or losses) only if the total of such payments exceeds 100%
of the sum of service and interest costs. No lump sum payments were
recognized as settlements during the six months ended March 31, 2004 or the
six months ended March 31, 2003.
SM&P maintains a defined benefit plan for selected employees. The
plan is a non-qualified plan and therefore has no assets held in trust. Net
pension cost related to the plan is not material.
Laclede Gas also provides certain life insurance benefits at
retirement. Medical insurance is available after early retirement until
age 65.
Missouri state law provides for the recovery in rates of
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (OPEB), accrued costs provided that such costs are funded through
an independent, external funding mechanism. Laclede Gas established the
Voluntary Employees' Beneficiary Association (VEBA) and Rabbi trusts as its
external funding mechanisms. VEBA and Rabbi trusts assets consist primarily
of money market securities and mutual funds invested in stocks and bonds.
Laclede Gas has contributed $.1 million to the plans during the six months
ended March 31, 2004, and expects to contribute a total of $7.6 million
during fiscal 2004. The unrecognized transition obligation is being
amortized over 20 years.
Postretirement benefit costs were $2.0 million in the quarter ended
March 31, 2004 compared with $1.9 million in the quarter ended March 31,
2003. Postretirement benefit costs were $4.0 million for the six months
ended
12
March 31, 2004 compared with $3.9 million for the six months ended March 31,
2003. These costs include amounts capitalized with construction activities.
Net periodic postretirement benefit costs consisted of the
following components:
Three Months Ended Six Months Ended
March 31, March 31,
--------------------- ----------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Service cost - benefits earned
during the period $ 794 $ 689 $1,587 $1,379
Interest cost on accumulated
postretirement benefit obligation 801 915 1,601 1,830
Expected return on plan assets (209) (234) (418) (469)
Amortization of transition
obligation 265 317 530 634
Amortization of prior service cost (8) 82 (16) 164
Amortization of actuarial loss 174 104 349 208
Regulatory adjustment 164 75 329 151
--------------------- ----------------------
Net postretirement benefit cost $1,981 $1,948 $3,962 $3,897
===================== ======================
Pursuant to the Commission's order in the Utility's 2002 rate case,
the return on plan assets is based on market related value of plan assets
implemented prospectively over a four-year period. Unrecognized gains and
losses are amortized only to the extent that such gain or loss exceeds 10%
of the greater of the accumulated postretirement benefit obligation or the
market-related value of plan assets. Such excess is amortized over the
average remaining service life of active participants. Also in the 2002 rate
case, the Commission ordered that the recovery in rates for the
postretirement benefit costs be based on the accounting methodology as
ordered in the 1999 rate case. The difference between this amount and
postretirement benefit expense as calculated pursuant to the above is
deferred as a regulatory asset or liability.
4. FINANCIAL INSTRUMENTS
In the course of its business, LER enters into fixed price
commitments associated with the purchase or sale of natural gas. LER manages
the price risk associated with these commitments by either closely matching
the offsetting physical purchase or sale of natural gas at fixed prices or
through the use of exchange-traded futures contracts to lock in margins. At
March 31, 2004, LER's open positions were not material to Laclede Group's
financial position or results of operations. At that same date, LER had
settled net long and short futures positions of 0.22 million MmBtu of
natural gas for April 2004 and open short futures positions of 1.23 million
MmBtu for May 2004, 1.02 million MmBtu for June 2004, 0.30 million MmBtu for
November 2004, 0.25 million MmBtu for December 2004, and 0.14 million MmBtu
for February 2005 at average prices of $5.07 per MmBtu, $4.97 per MmBtu,
$4.90 per MmBtu, $5.92 per MmBtu, and $5.90 per MmBtu, respectively. Also,
LER had open long futures positions of 0.30 million MmBtu for October 2004
and 0.14 million MmBtu for September 2005 at average prices of $4.73 per
MmBtu and $5.05 per MmBtu, respectively. These futures contracts are
derivative instruments and management has designated these items as cash
flow hedges of forecasted transactions. The fair values of the instruments
are recognized on the Consolidated Balance Sheets. The change in the fair
value of the effective portion of these hedge instruments is recorded, net
of tax, in Other Comprehensive Income, a component of Common Stock Equity.
These amounts will reduce or be charged to Non-Regulated Gas Marketing
Operating Revenues or Expenses in the Statements of Consolidated Income as
the transactions occur. It is expected that approximately $2.1 million of
pre-tax net unrealized losses on cash flow hedging derivative instruments at
March 31, 2004 will be reclassified into the Consolidated Statement of
Income during fiscal 2004. The remainder, approximately $.2 million of
pre-tax net unrealized losses, will be reclassified during fiscal 2005. The
ineffective portions of these hedge instruments were immaterial for the
periods presented, and such amounts are charged to Non-Regulated Gas
Marketing Operating Revenues or Expenses. Cash flows from hedging
transactions are classified in the same category as the cash flows from the
items that are being hedged in the Statements of Consolidated Cash Flows.
13
5. INCOME TAXES
Net provision for income taxes was as follows during the periods
set forth below:
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- -----------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Federal
Current $ 9,441 $11,462 $16,373 $16,565
Deferred 1,025 161 2,186 2,308
State and Local
Current 1,515 1,990 2,703 2,811
Deferred 147 74 320 475
----------------------- -----------------------
Total $12,128 $13,687 $21,582 $22,159
======================= =======================
6. OTHER INCOME AND INCOME DEDUCTIONS - NET
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- --------------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Investment gains $1,947 $ - $1,947 $ -
Allowance for funds used during
construction (29) (26) (61) (51)
Other income 310 340 838 522
Other income deductions (323) (339) 613 571
------------------------- --------------------------
Other income and income
deductions - net $1,905 $ (25) $3,337 $1,042
========================= ==========================
Laclede Gas recorded the receipt of proceeds totaling $1.9 million
during the quarter ended March 31, 2004 related to its interest, as a
policyholder, in the sale of a mutual insurance company. This represents an
initial distribution relating to certain policies held by the Utility.
Subsequent distributions, if any, are not expected to have a material impact
on the consolidated financial position or results of operations of the
Company.
7. INFORMATION BY OPERATING SEGMENT
The Regulated Gas Distribution segment consists of the regulated
operations of Laclede Gas and is the core business segment of Laclede Group.
The Non-Regulated Services segment includes the results of SM&P, an
underground facility locating and marking business operating in the
midwestern states, a wholly owned subsidiary of Laclede Group. The
Non-Regulated Gas Marketing segment includes the results of LER, a wholly
owned subsidiary of Laclede Group. Non-Regulated Other includes the
transportation of liquid propane, real estate development, the compression
of natural gas, the sale of insurance-related products, and financial
investments in other enterprises. These operations are conducted through
five wholly owned subsidiaries. Certain intersegment revenues with Laclede
Gas are not eliminated in accordance with the provisions of SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation."
14
Regulated Non-Regulated
Gas Non-Regulated Gas Non-Regulated
(Thousands) Distribution Services Marketing Other Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, 2004
- --------------
Revenues from external
customers $ 396,468 $ 15,183 $ 56,026 $ 935 $ - $ 468,612
Intersegment revenues 430 67 5,454 392 - 6,343
-------------------------------------------------------------------------------------
Total operating revenues 396,898 15,250 61,480 1,327 - 474,955
Net income (loss) applicable to
common stock 23,359 (3,173) 1,016 338 - 21,540
Total assets 1,137,824 48,456 40,946 36,699 (19,348) 1,244,577
Six Months Ended
March 31, 2004
- --------------
Revenues from external
customers $ 657,007 $ 34,666 $102,503 $ 1,744 $ - $ 795,920
Intersegment revenues 1,241 132 9,960 339 - 11,672
-------------------------------------------------------------------------------------
Total operating revenues 658,248 34,798 112,463 2,083 - 807,592
Net income (loss) applicable to
common stock 40,683 (4,198) 1,427 219 - 38,131
Total assets 1,137,824 48,456 40,946 36,699 (19,348) 1,244,577
Three Months Ended
March 31, 2003
- --------------
Revenues from external
customers $ 356,616 $ 17,259 $ 39,740 $ 1,263 $ - $ 414,878
Intersegment revenues 840 56 6,134 316 (45) 7,301
-------------------------------------------------------------------------------------
Total operating revenues 357,456 17,315 45,874 1,579 (45) 422,179
Net income (loss) applicable to
common stock 24,874 (4,264) 650 310 - 21,570
Total assets 1,062,799 54,200 35,860 44,290 (35,662) 1,161,487
Six Months Ended
March 31, 2003
- --------------
Revenues from external
customers $ 573,781 $ 48,013 $ 67,169 $ 2,174 $ - $ 691,137
Intersegment revenues 840 125 9,972 366 (90) 11,213
-------------------------------------------------------------------------------------
Total operating revenues 574,621 48,138 77,141 2,540 (90) 702,350
Net income (loss) applicable to
common stock 39,447 (4,433) 1,333 318 - 36,665
Total assets 1,062,799 54,200 35,860 44,290 (35,662) 1,161,487
In November 2002, two customers notified SM&P that, due to actions
they had taken to address workforce management issues, they did not intend
to continue to outsource certain functions, which included locating services
provided by SM&P, after February and March 2003. One of these customers
notified SM&P in January 2003 that it would continue to outsource a portion
of its locating services provided by SM&P beyond that timeframe. Revenue
from these customers totaled approximately $29 million and $45 million for
fiscal 2003 and fiscal 2002, respectively. Revenue from these customers for
the quarter ended March 31, 2004 was $4.7 million, compared with $7.2
million for the same period last year. Revenue from these customers for the
six months ended March 31, 2004 was $8.6 million, compared with $21.9 for
the same period last year. In connection with the reduction in work from
these customers, SM&P made reductions in the required levels of personnel,
facilities and equipment, for which the Company recorded an after-tax charge
of approximately $1.0 million, all of which was expensed during the quarter
ended March 31, 2003. SM&P continues to pursue, and has obtained, new
business to partially offset the business lost in fiscal year 2003. The
underground facility locating industry, however, remains competitive with
many contracts subject to termination on as little as 30-days notice. Also,
SM&P's customers are primarily in the utility and telecommunication sector
with their workload influenced by construction trends.
15
8. 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 March 31, 2004,
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.
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.
Costs incurred are charged to expense or capitalized in accordance
with generally accepted accounting principles. A predetermined level of
expense is recovered through Laclede Gas' rates.
While the scope of future costs relative to the 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.
SM&P has been the subject of certain employment-related claims
arising out of a practice of SM&P that predated Laclede Group's acquisition.
The claims involve whether certain pre- and post-work activities and
commuting time for non-supervisory field employees constitute hours worked
for purposes of federal and state wage and hour laws. These claims have been
asserted in various proceedings, including one "opt-in" collective action
filed in March 2003 in Federal District Court for the Eastern District of
Texas. As a result of a ruling on February 27, 2004 in that proceeding,
approximately 3,500 present and former field employees who worked for SM&P
at times since February 27, 2001 were given notice of the lawsuit and the
opportunity, until June 7, 2004, to join the lawsuit and assert claims for
additional overtime compensation for the three-year period immediately
preceding the date that they joined the lawsuit. Approximately 600 of the
employees to whom notice was sent have joined this lawsuit to date, the vast
majority of whom are former employees. SM&P is unable to predict the number
that ultimately will opt-in. SM&P is vigorously contesting these claims,
including opposition to this case ultimately proceeding as a collective
action. While the results of the claims cannot be predicted with certainty,
management, after discussion with counsel, believes that the final outcome
will not have a material adverse effect on the consolidated financial
position and results of operations of the Company.
Laclede Group and its subsidiaries are involved in other
litigation, claims and investigations arising in the normal course of
business. While the results of such litigation cannot be predicted with
certainty, management, after discussion with counsel, believes that the
final outcome will not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
On 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
16
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 Court of Appeals for the Western District. The Company 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 Company.
SM&P has several operating leases, the aggregate annual cost of
which is approximately $5 million, consisting primarily of 12-month
operating leases, with renewal options, for vehicles used in its business.
Upon acquisition of SM&P, Laclede Group assumed parental guarantees of
certain of those vehicle leases. Laclede Group anticipates that the maximum
guarantees related to existing leases will not exceed $12 million. No
amounts have been recorded for these guarantees in the financial statements.
Laclede Group had guarantees totaling $5.5 million for performance
and payment of certain wholesale gas supply purchases by LER, as of March
31, 2004. No amounts have been recorded for these guarantees in the
financial statements.
Laclede Gas Company's Financial Statements and Notes to Financial
Statements are included in Exhibit 99.1 to this report.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THE LACLEDE GROUP, INC.
- -----------------------
This management's discussion analyzes the financial condition and results of
operations of The Laclede Group, Inc. (Laclede Group or the Company) and its
subsidiaries. It includes management's view of factors that affect its
business, explanations of past financial results including changes in
earnings and costs from the prior year periods, and their effects on overall
financial condition and liquidity.
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Certain words, such as "anticipate,"
"believe," "estimate," "expect," "intend," "plan," "seek," and similar words
and expressions identify forward-looking statements that involve
uncertainties and risks. Future developments may not be in accordance with
our expectations or beliefs and the effect of future developments may not be
those anticipated. Among the factors that may cause results to differ
materially from those contemplated in any forward-looking statement are:
o weather conditions and catastrophic events;
o economic, competitive, political and regulatory conditions;
o legislative, regulatory and judicial mandates and decisions, some
of which may be retroactive, including those affecting
o allowed rates of return
o incentive regulation
o industry structure
o purchased gas adjustment provisions
o rate design structure and implementation
o franchise renewals
o environmental or safety matters
o taxes
o accounting standards;
o the results of litigation;
o retention, ability to attract, ability to collect from and conservation
efforts of customers;
o capital and energy commodity market conditions including the ability
to obtain funds for necessary capital expenditures and the terms and
conditions imposed for obtaining sufficient gas supply;
o discovery of material weakness in internal controls; and
o employee workforce issues.
Readers are urged to consider the risks, uncertainties and other factors
that could affect our business as described in this report. All
forward-looking statements made in this report rely upon the safe harbor
protections provided under the Private Securities Litigation Reform Act of
1995. We do not, by including this statement, assume any obligation to
review or revise any particular forward-looking statement in light of future
events.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto.
18
THE LACLEDE GROUP, INC.
RESULTS OF OPERATIONS
The Laclede Group, Inc.'s (Laclede Group or the Company) earnings are
primarily derived from the regulated activities of its largest subsidiary,
Laclede Gas Company (Laclede Gas or the Utility), Missouri's largest natural
gas distribution company. Laclede Gas is regulated by the Missouri Public
Service Commission (MoPSC) and serves the metropolitan St. Louis area and
several other counties in eastern Missouri. Laclede Gas delivers natural gas
to retail customers at rates, and in accordance with tariffs, authorized by
the MoPSC. The Utility's earnings are generated 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 Group are not
necessarily indicative of annual results or representative of succeeding
quarters of the fiscal year. The seasonal effect of the Utility's earnings
on Laclede Group is generally expected to be tempered somewhat by the
results of SM&P Utility Resources, Inc. (SM&P), a non-regulated underground
facility locating and marking service business wholly owned by Laclede
Group, whose operations tend to be counter-seasonal to those of Laclede Gas.
Laclede Energy Resources, Inc. (LER), a wholly owned subsidiary, is engaged
in non-regulated efforts to market natural gas and related activities. Other
non-regulated subsidiaries provide less than 10% of consolidated revenues.
Laclede Group's strategy includes efforts to stabilize and improve
performance of its core Utility, while developing non-regulated businesses
and taking a measured approach in the pursuit of additional growth
opportunities that complement the Utility business.
As for the Utility, mitigating the impact of weather fluctuations on Laclede
Gas customers while improving the ability to recover its authorized
distribution costs and return has been a fundamental component of the
Laclede Group strategy. The Utility's distribution costs are the essential,
primarily fixed expenditures it must incur to operate and maintain a more
than 15,000-mile natural gas distribution system and related storage
facilities. In fiscal 2003, when the weather mitigation rate design first
went into effect, the weather was essentially normal; therefore, its impact
was minimal. However, it has shown its value during the first six months of
fiscal 2004, as the downward pressure on revenues and earnings has been
significantly mitigated despite temperatures that were 14% warmer than
normal. In addition, Laclede Gas is working to continually improve its
ability to provide reliable natural gas service at a reasonable cost, while
maintaining and building a secure and dependable infrastructure.
Laclede Group continues to develop its non-regulated subsidiaries. SM&P is
working toward expanding its geographic footprint into new markets, and has
made notable gains in adding business in several key markets after
experiencing setbacks in fiscal 2003. LER continues to focus on growing its
markets on a long-term and sustainable basis by providing both on-system
transportation customers and customers outside of Laclede Gas' traditional
service area with another choice in unregulated natural gas suppliers.
Nevertheless, income from LER's operations, similar to the Utility's income
from off-system sales, is subject to fluctuations in market conditions.
19
Quarter Ended March 31, 2004
- -------------------------------
Overview - Net Income by Operating Segment Quarter Ended
March 31,
-------------------------
(millions, after-tax) 2004 2003
---- ----
Regulated Gas Distribution $23.4 $24.9
Non-Regulated Services (3.2) (4.3)
Non-Regulated Gas Marketing 1.0 .7
Other Non-Regulated Subsidiaries .3 .3
---------- -----------
Net Income Applicable to Common Stock $21.5 $21.6
========== ===========
Laclede Group's basic and diluted earnings per share were $1.12 for the
quarter ended March 31, 2004, compared with $1.14 per share reported for the
same quarter last year. The $.02 per share decrease is primarily the result
of the increase in common shares outstanding. The year-to-year decrease in
consolidated net income of $.1 million was primarily attributable to the
following factors, quantified on a pre-tax basis.
Utility earnings decreased primarily due to the following factors:
o income from off-system sales and capacity release decreased $2.3
million from the quarter ended March 31, 2003, resulting from less
favorable market conditions; and,
o operating expenses increased, compared with the same quarter last year,
primarily attributable to a higher provision for uncollectible accounts
and increased pension costs.
These factors were largely offset by higher non-operating income recorded
this year, resulting from the receipt of proceeds totaling $1.9 million
related to the Utility's interest, as a policyholder, in the sale of a
mutual insurance company. This represents an initial distribution relating
to certain policies held by the Utility. Subsequent distributions, if any,
are not expected to have a material impact on the consolidated financial
position or results of operations of the Company.
The decrease in Utility earnings was essentially offset on a consolidated
basis by improved results reported by SM&P and LER. SM&P's improvement over
the prior year primarily reflects the right-sizing costs recorded during the
quarter ended March 31, 2003 related to the loss of revenue from two
customers (discussed below). LER's earnings were slightly higher compared
with the same quarter 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 March 31, 2004 were
$396.9 million, or $39.4 million greater than the same period last year. The
increase was primarily attributable to higher PGA rates totaling
approximately $54.7 million and increased off-system sales revenues totaling
$4.2 million. Regulated operating revenues were partially offset by lower
system gas sales levels resulting from warmer weather and other variations
totaling $19.5 million. Temperatures were 8% warmer than normal and 10%
warmer than the same quarter last year. System therms sold and transported
decreased by 36.0 million therms, or 7.6%, below the quarter ended March 31,
2003.
Regulated operating expenses for the quarter ended March 31, 2004 increased
$45.6 million from the same quarter last year. Natural and propane gas
expense increased $40.4 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 increased $2.8 million, or
8.2%, primarily due to a higher provision for uncollectible accounts,
increased pension costs, and higher wage rates. Depreciation and
amortization expense increased $.1 million primarily due to increased
depreciable property. Taxes, other than income, increased $2.3 million, or
10.3%, primarily due to higher gross receipts taxes (attributable to the
increased revenues).
20
Non-Regulated Services Operating Revenues and Operating Expenses
Laclede Group's non-regulated services operating revenue for this quarter
decreased $2.1 million primarily due to a reduced level of business from two
customers, which was partially offset by the addition of new business in
other markets. Revenue from these two customers for the quarter ended March
31, 2004 was $4.7 million, compared with $7.2 million for the same period
last year. The reduction in non-regulated services operating expenses
totaling $3.8 million was primarily attributable to a reduction in personnel
and related expenses and a non-recurring $1.0 million after-tax charge
recorded during the quarter ending March 31, 2003. This reduction was
partially offset by charges attributable to the employment-related
litigation described in Note 8 to the Consolidated Financial Statements on
page 16 of this report. The underground facility locating industry remains
competitive with many contracts subject to termination on as little as
30-days notice. SM&P's customers are primarily in the utility and
telecommunication sector with their workload influenced by construction
trends.
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-regulated gas marketing operating revenues increased $15.6 million
primarily due to higher sales volumes by LER. The increase in non-regulated
gas marketing operating expenses was primarily associated with increased gas
expense related to higher volumes purchased.
Other Income and (Income Deductions) - Net
The $1.9 million increase in other income and income deductions - net was
primarily attributable to the Utility's recognition during the quarter ended
March 31, 2004 of the receipt of proceeds totaling $1.9 million related to
its interest, as a policyholder, in the sale of a mutual insurance company.
This represents an initial distribution relating to certain policies held by
the Utility. Subsequent distributions, if any, are not expected to have a
material impact on the consolidated financial position or results of
operations of the Company.
Consolidated Interest Charges
The $.3 million decrease in interest charges was 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.
Six Months Ended March 31, 2004
- -------------------------------
Overview - Net Income by Operating Segment Six Months Ended
March 31,
--------------------------
(millions, after-tax) 2004 2003
---- ----
Regulated Gas Distribution $40.7 $39.5
Non-Regulated Services (4.2) (4.4)
Non-Regulated Gas Marketing 1.4 1.3
Other Non-Regulated Subsidiaries .2 .3
---------- ------------
Net Income Applicable to Common Stock $38.1 $36.7
========== ============
Laclede Group's basic and diluted earnings per share were $1.99 for the six
months ended March 31, 2004, an increase of $.06 per share, compared with
$1.93 per share reported for the same period last year. The year-to-year
increase in consolidated net income of $1.4 million was primarily
attributable to the following factors, quantified on a pre-tax basis.
21
Utility earnings increased primarily due to the following factors:
o non-operating income recorded this year increased $2.3 million (primarily
reflecting the receipt of proceeds discussed above); and,
o the fully-implemented general rate increase effective November 9, 2002
totaling $.9 million.
These factors were partially offset by:
o pension costs that increased $1.4 million over the same period last year;
and,
o the net effect totaling $1.9 million of lower system gas sales volumes
(resulting from temperatures in Laclede Gas' service area that were 12%
warmer than normal and 14% 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 six months ended March 31, 2004, compared
with the same period last year.
SM&P and LER reported minor improvements in earnings results compared with
the same period last year.
Regulated Operating Revenues and Operating Expenses
Regulated operating revenues for the six months ended March 31, 2004 were
$658.2 million, or $83.6 million greater than the same period last year. The
increase was primarily attributable to higher PGA rates totaling
approximately $96.0 million, increased off-system sales revenues totaling
$24.0 million and, to a lesser extent, the effect of the general rate
increase totaling $.9 million. These factors were partially offset by lower
system gas sales levels resulting from warmer weather and other variations
totaling $37.3 million. Temperatures were 12% warmer than normal and 14%
warmer than last year. System therms sold and transported decreased by 73.3
million therms, or 9.1%, below the six months ended March 31, 2003.
Regulated operating expenses for the six months ended March 31, 2004
increased $86.1 million from the same period last year. Natural and propane
gas expense increased $81.8 million above last year's level primarily
attributable to higher rates charged by our suppliers and increased
off-system gas expense, partially offset by lower volumes purchased for
sendout. Other operation and maintenance expenses increased $1.0 million, or
1.4%, primarily due to increased pension costs and higher wage rates,
partially offset by lower group insurance charges and reduced charges to
maintenance expense. Depreciation and amortization expense increased $.3
million primarily due to increased depreciable property. Taxes, other than
income, increased $3.0 million, or 8.2%, primarily due to higher gross
receipts taxes (attributable to the increased revenues).
Non-Regulated Services Operating Revenues and Operating Expenses
Laclede Group's non-regulated services operating revenue for the six months
ended March 31, 2004 decreased $13.3 million primarily due to a reduced
level of business from two customers. Revenue from these two customers for
the six months ended March 31, 2004 was $8.6 million, compared with $21.9
million for the same period last year. The reduction in non-regulated
services operating expenses totaling $14.1 million was primarily
attributable to a reduction in personnel and related expenses and a
non-recurring $1.0 million after-tax charge recorded during the six months
ending March 31, 2003. This reduction was partially offset by charges
attributable to the employment-related litigation described in Note 8 to the
Consolidated Financial Statements on page 16 of this report.
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-regulated gas marketing operating revenues increased $35.3 million
primarily due to higher volumes and increased sales prices by LER. The
increase in non-regulated gas marketing operating expenses was primarily
associated with increased gas expense related to higher volumes purchased
and increased prices.
Other Income and (Income Deductions) - Net
The $2.3 million increase in other income and income deductions - net was
primarily attributable to the Utility's recognition this year of the receipt
of proceeds totaling $1.9 million related to its interest, as a
policyholder, in the sale of a mutual insurance company. This represents an
initial distribution relating to certain policies held by the Utility.
22
Subsequent distributions, if any, are not expected to have a material impact
on the consolidated financial position or results of operations of the
Company.
Consolidated Interest Charges
The $.3 million decrease in interest charges was 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, partially offset by the issuance of long-term
debt to an unconsolidated affiliate trust in December 2002.
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 Court of Appeals for the Western District.
On March 4, 2003 the Court of Appeals issued an opinion remanding the
decision to the MoPSC based on the MoPSC's failure to support and explain
its decision with adequate findings of fact. In May 2003, the Court of
Appeals rejected the MoPSC's request that the Court reconsider its opinion
or transfer this matter to the Missouri Supreme Court. On March 29, 2004,
the MoPSC Staff and Laclede Gas responded to a MoPSC order directing
interested parties to submit new proposed findings of fact on this issue for
its consideration.
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
Court of Appeals for the Western District. The Company 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 operations of the
Company.
On March 1, 2004, the Utility made an Infrastructure System Replacement
Surcharge (ISRS) filing with the MoPSC that is designed to increase revenues
by approximately $3.9 million annually. Such filing was made pursuant to a
Missouri law, enacted in 2003, that allows gas utilities to adjust their
rates up to twice a year to recover certain facility-related expenditures
that are made to comply with state and federal safety requirements or to
relocate facilities in connection with public improvement projects. On March
12, 2004, the MoPSC suspended the proposed surcharge until June 29, 2004.
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
23
experience and on various other assumptions that we believe are reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates. We believe the following represent the more significant items
requiring the use of judgment and estimates in preparing our consolidated
financial statements:
Allowances for doubtful accounts - Estimates of the collectibility
of trade accounts receivable are based on historical trends, age of
receivables, economic conditions, credit risk of specific
customers, and other factors.
Employee benefits and postretirement obligations - Pension and
postretirement obligations are calculated by actuarial consultants
that utilize several statistical factors and other assumptions
related to future events, such as discount rates, returns on plan
assets, compensation increases, and mortality rates. The amount of
expense recognized by the Utility is dependent on the regulatory
treatment provided for such costs. Certain liabilities related to
group medical benefits and workers' compensation claims, portions
of which are self-insured and/or contain stop/loss coverage with
third-party insurers to limit exposure, are established based on
historical trends.
Goodwill valuation - In accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets," goodwill is required to be tested for
impairment annually or whenever events or circumstances occur that
may reduce the value of goodwill. In performing impairment tests,
valuation techniques require the use of estimates with regard to
discounted future cash flows of operations, involving judgments
based on a broad range of information and historical results. If
the test indicates impairment has occurred, goodwill would be
reduced which would adversely impact earnings.
Laclede Gas accounts for its regulated operations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." This statement sets forth the
application of accounting principles generally accepted in the United States
of America for those companies whose rates are established by or are subject
to approval by an independent third-party regulator. The provisions of SFAS
No. 71 require, among other things, that financial statements of a regulated
enterprise reflect the actions of regulators, where appropriate. These
actions may result in the recognition of revenues and expenses in time
periods that are different than non-regulated enterprises. When this occurs,
costs are deferred as assets in the balance sheet (regulatory assets) and
recorded as expenses when those amounts are reflected in rates. Also,
regulators can impose liabilities upon a regulated company for amounts
previously collected from customers and for recovery of costs that are
expected to be incurred in the future (regulatory liabilities). Management
believes that the current regulatory environment supports the continued use
of SFAS No. 71 and that all regulatory assets and liabilities are
recoverable or refundable through the regulatory process. We believe the
following represent the more significant items recorded through the
application of SFAS No. 71:
The Utility's Purchased Gas Adjustment Clause (PGA) allows Laclede
Gas to flow through to customers, subject to prudence review, the
cost of purchased gas supplies, including the costs, cost
reductions and related carrying costs associated with the Utility's
use of natural gas financial instruments to hedge the purchase
price of natural gas. The difference between actual costs incurred
and costs recovered through the application of the PGA are recorded
as regulatory assets and liabilities that are recovered or refunded
in a subsequent period.
The Company records deferred tax liabilities and assets measured by
enacted tax rates for the net tax effect of all temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes, and the amounts used for income
tax purposes. Changes in enacted tax rates, if any, and certain
property basis differences will be reflected by entries to
regulatory asset or liability accounts for regulated companies, and
will be reflected as income or loss for non-regulated companies.
Also, pursuant to the direction of the MoPSC, Laclede Gas'
provision for income tax expense for financial reporting purposes
reflects an open-ended method of tax depreciation. This method is
consistent with the regulatory treatment prescribed by the MoPSC to
depreciate the Utility's assets.
For further discussion of significant accounting policies, see the Notes to
the Consolidated Financial Statements included in the Company's Form 10-K
for the fiscal year ended September 30, 2003.
24
Accounting Pronouncements
- -------------------------
Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised
December 2003) (FIN 46R), "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.
In December 2002, Laclede Group formed a wholly owned trust, Laclede Capital
Trust I (Trust), for the sole purpose of issuing preferred securities and
lending the gross proceeds to its parent, Laclede Group. As of March 31,
2004, the Trust has $45 million of Trust Preferred Securities outstanding.
The sole assets of the Trust are debentures of Laclede Group, totaling $46.4
million, with the same economic terms as the Trust Preferred Securities.
Prior to the application of FIN 46R, the Trust was consolidated in the
financial statements of Laclede Group. The Company evaluated the effect of
this pronouncement on this consolidation. In accordance with the provisions
of FIN 46R, Laclede Group has determined that the Trust is a variable
interest entity because its common securities investment is considered not
at risk, and Laclede Group is not the primary beneficiary of the Trust.
Accordingly, the Trust was deconsolidated during the quarter ended March 31,
2004. The Consolidated Balance Sheets have been modified to include
Investments in Unconsolidated Subsidiaries of $1.4 million representing
Laclede Group's common securities investment in the Trust and to reflect
Laclede Group's obligations related to the debentures. The common securities
investment is included on the Other Property and Investments line on the
Consolidated Balance Sheets. As permitted under FIN 46R, the Trust has been
deconsolidated for prior periods and presented to be consistent with the
current presentation. The adoption of FIN 46R did not result in a cumulative
effect of an accounting change adjustment and did not have a material effect
on the financial position or results of operations of Laclede Group.
In December 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 132 (revised 2003) (SFAS No. 132(R)), "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
became effective for fiscal years ending after and interim periods beginning
after December 15, 2003. The required disclosures are included in Note 3 to
the Consolidated Financial Statements on page 12 of this report.
FINANCIAL CONDITION
Credit Ratings
- --------------
As of March 31, 2004, credit ratings for outstanding securities for Laclede
Group and Laclede Gas issues were as follows:
Type of Facility S&P Moody's Fitch
- -----------------------------------------------------------------------------
Laclede Group Corporate Rating A
Laclede Gas First Mortgage Bonds A A3 A+
Laclede Gas Commercial Paper A-1 P-2
Trust Preferred Securities A- Baa3 BBB+
The Company's ratings are investment grade, and the Company 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
- ----------
The Company's short-term borrowing requirements typically peak during colder
months when Laclede Gas borrows money to cover the gap between when it
purchases its natural gas and when its customers pay for that gas. Changes
in the wholesale cost of natural gas, variations in the timing of
collections of gas cost under the Utility's PGA Clause,
25
the seasonality of accounts receivable balances, and the utilization of
storage gas inventories cause short-term cash requirements to vary during
the year, and can cause significant variations in the Utility's cash
provided by or used in operating activities.
Net cash provided by operating activities for the six months ended March 31,
2004 was $80.7 million, a $31.0 million increase, compared with the same
period last year. The increase in cash provided by operating activities was
primarily attributable to changes in the cost of natural gas in storage and
favorable variations in the timing of collections of gas cost under the PGA
clause. Cash flows were adversely impacted by variations in accounts
payable, primarily associated with the cost of natural gas.
Net cash used in investing activities for the six months ended March 31,
2004 was $26.0 million compared with $24.4 million for the six months ended
March 31, 2003. Cash used in investing activities primarily reflected
Utility construction expenditures in both periods.
Net cash used in financing activities was $36.8 for the six months ended
March 31, 2004 compared with $3.6 million for the six months ended March 31,
2003. The variation primarily reflects the issuance last year of long-term
debt to an unconsolidated affiliate trust.
Liquidity and Capital Resources
- -------------------------------
Maximum consolidated short-term borrowings at any one time during the
quarter ended March 31, 2004 were $241.8 million.
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 $265 million, after the
expiration of a seasonal line of $25 million on February 13, 2004.
Short-term borrowings outstanding at March 31, 2004 were $191.4 million at a
weighted average interest rate of 1.11%. Based on short-term borrowings at
March 31, 2004, a change in interest rates of 100 basis points would
increase or decrease pre-tax earnings and cash flows by approximately $1.9
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
March 31, 2004, total debt was 59% of total capitalization.
Short-term cash requirements outside of Laclede Gas have generally been met
with internally-generated funds. However, Laclede Group has a $20 million
working capital line of credit expiring in June 2004, with interest rates
indexed to LIBOR or Prime, to meet short-term liquidity needs of its
subsidiaries. This line of credit has a covenant limiting the total debt of
Laclede Gas Company to no more than 70% of the utility's total
capitalization (as noted above, this ratio stood at 59% on March 31, 2004).
This line has been used to provide a letter of credit of $1.2 million on
behalf of SM&P as of April 2004, which has not been drawn, and to provide
for seasonal funding needs of the various subsidiaries from time to time.
There were no borrowings outstanding as of March 31, 2004.
Laclede Group has on file a shelf registration on Form S-3, which allows for
the issuance of equity securities, other than preferred stock, and debt
securities. Of the $500 million of securities originally registered under
this S-3, $408.6 million remain registered and unissued as of March 31,
2004. Subject to favorable market conditions, the Company contemplates
issuing 1.5 million shares of common stock (plus up to an additional 15% of
that amount to cover over-allotments) during the quarter ending June 30,
2004. The proceeds from the sale will be utilized to reduce short-term
borrowings at our subsidiary, Laclede Gas, and for general corporate
purposes.
At March 31, 2004, 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.
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 March 31, 2004. On
April 28, 2004, Laclede Gas sold $50 million principal amount of First
Mortgage Bonds, 5 1/2% Series due May 1, 2019 and $100 million principal
amount of First Mortgage Bonds, 6% Series due May 1, 2034. The net proceeds
from such
26
sale, estimated to be $147.9 million, will be used to reduce short-term
debt, to redeem at par $50 million principal amount of Laclede Gas' 6 5/8%
First Mortgage Bonds on or after June 15, 2004, to pay at maturity $25
million principal amount of 8 1/2% First Mortgage Bonds in November 2004 and
for general corporate purposes.
SM&P has several operating leases, the aggregate annual cost of which is
approximately $5 million, consisting primarily of 12-month operating leases,
with renewal options, for vehicles used in its business. Upon acquisition of
SM&P, Laclede Group assumed parental guarantees of certain of those vehicle
leases. Laclede Group anticipates that the maximum guarantees related to
existing leases will not exceed $12 million. No amounts have been recorded
for these guarantees in the financial statements.
Laclede Group had guarantees totaling $5.5 million for performance and
payment of certain wholesale gas supply purchases by LER, as of March 31,
2004. No amounts have been recorded for these guarantees in the financial
statements.
Utility construction expenditures were $24.7 million for the six months
ended March 31, 2004, compared with $22.7 million for the same period last
year. Non-utility construction expenditures were $.4 million for the six
months ended March 31, 2004, compared with $.2 million for the same period
last year.
Consolidated capitalization at March 31, 2004, excluding current obligations
of long-term debt and preferred stock, increased $1.0 million since
September 30, 2003 and consisted of 53.6% Laclede Group common stock equity,
..2% Laclede Gas preferred stock equity, 7.6% long-term debt to
unconsolidated affiliate trust and 38.6% Laclede Gas long-term debt.
It is management's view that the Company has adequate access to capital
markets and will have sufficient capital resources, both internal and
external, to meet anticipated capital requirements.
The seasonal nature of Laclede Gas' sales affects the comparison of certain
balance sheet items at March 31, 2004 and at September 30, 2003, such as
Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts
Payable, Regulatory Assets and Liabilities, and Delayed and Advance Customer
Billings. The Consolidated Balance Sheet at March 31, 2003 is presented to
facilitate comparison of these items with the corresponding interim period
of the preceding fiscal year.
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 March 31, 2004, the Utility held
approximately 11.6 million MmBtu of futures contracts at an average price of
$5.33 per MmBtu. Additionally, approximately 5.1 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.
In the course of its business, Laclede Group's non-regulated marketing
affiliate, Laclede Energy Resources, Inc. (LER), enters into fixed price
commitments associated with the purchase or sale of natural gas. LER manages
the price risk associated with these commitments by either closely matching
the offsetting physical purchase or sale of natural gas at fixed prices or
through the use of exchange-traded futures contracts to lock in margins. At
March 31, 2004, LER's open positions were not material to Laclede Group's
financial position or results of operations.
27
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 $2.4 million. As of March 31, 2004, 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 $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.
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.
Costs incurred are charged to expense or capitalized in accordance with
generally accepted accounting principles. A predetermined level of expense
is recovered through Laclede Gas' rates.
While the scope of future costs relative to the 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 Group has no off-balance sheet arrangements.
Laclede Gas Company's Management's Discussion and Analysis of Financial
Condition is included in Exhibit 99.1 of this report.
28
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For this discussion, see the "Market Risk" subsection in Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, page 27 of this report.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15e and Rule 15d-15e under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective.
There have been no changes in our internal control over financial reporting
that occurred during our second fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our control over financial
reporting.
29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of environmental matters, see Note 8 to the
Consolidated Financial Statements on page 16. For a description of
pending regulatory matters of Laclede Gas, see Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Regulatory Matters, page 23 of this report.
SM&P has been the subject of certain employment-related claims
arising out of a practice of SM&P that predated Laclede Group's
acquisition. The claims involve whether certain pre- and post-work
activities and commuting time for non-supervisory field employees
constitute hours worked for purposes of federal and state wage and
hour laws. These claims have been asserted in various proceedings,
including one "opt-in" collective action filed in March 2003 in
Federal District Court for the Eastern District of Texas. As a
result of a ruling on February 27, 2004 in that proceeding,
approximately 3,500 present and former field employees who worked
for SM&P at times since February 27, 2001 were given notice of the
lawsuit and the opportunity, until June 7, 2004, to join the
lawsuit and assert claims for additional overtime compensation for
the three-year period immediately preceding the date that they
joined the lawsuit. Approximately 600 of the employees to whom
notice was sent have joined this lawsuit to date, the vast majority
of whom are former employees. SM&P is unable to predict the number
that ultimately will opt-in. SM&P is vigorously contesting these
claims, including opposition to this case ultimately proceeding as
a collective action. While the results of the claims cannot be
predicted with certainty, management, after discussion with
counsel, believes that the final outcome will not have a material
adverse effect on the consolidated financial position and results
of operations of the Company.
Laclede Group and its subsidiaries are involved in other
litigation, claims and investigations arising in the normal course
of business. While the results of such litigation cannot be
predicted with certainty, management, after discussion with
counsel, believes that the final outcome will not have a material
adverse effect on the consolidated financial position or results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders:
The annual meeting of shareholders of The Laclede Group was held on
January 29, 2004, for the purpose of electing three directors to
the board of directors and ratifying the appointment of independent
auditors. Management's three nominees for directors listed in the
proxy statement were unopposed and were elected upon the following
votes:
DIRECTOR NOMINEE FOR WITHHELD
---------------- ---- --------
Dr. Henry Givens, Jr. 15,832,230 342,768
Mary Ann Van Lokeren 15,907,201 267,797
Douglas H. Yaeger 15,830,955 344,042
The proposal to ratify the appointment of Deloitte & Touche LLP,
Certified Public Accountants, to audit the accounts of the Company
for the fiscal year ending September 30, 2004 was passed upon the
following vote:
FOR AGAINST ABSTAIN
--- ------- -------
15,886,256 168,447 120,294
30
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index
(b) Reports on Form 8-K
During the quarter, Laclede Group had three reports on Form 8-K:
1. Form 8-K dated January 29, 2004 furnishing under Items 7 and 12 the
Company's first quarter earnings release.
2. Form 8-K dated January 29, 2004 furnishing under Items 7 and 9
regarding the presentation of the Company's officers at the annual
meeting of shareholders on that same date.
3. Form 8-K dated January 29, 2004 furnishing under Items 7 and 9 the
dividend declaration press release.
31
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
The Laclede Group, Inc.
By: /s/ Barry C. Cooper
--------------------------
Dated: April 27, 2004 Barry C. Cooper
-------------- Chief Financial Officer
(Authorized Signatory and
Chief Financial Officer)
32
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
Laclede Gas Company
By: /s/ Barry C. Cooper
-------------------------
Dated: April 27, 2004 Barry C. Cooper
-------------- Chief Financial Officer
(Authorized Signatory and
Chief Financial Officer)
33
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
10.17 - Form of Restricted Stock Award Agreement under The Laclede Group
Equity Incentive Plan.
12 - Ratio of Earnings to Fixed Charges.
31 - Certificates under Rule 13a-14(a) of the CEO and CFO of The Laclede
Group, Inc. and Laclede Gas Company.
32 - Section 1350 Certifications under Rule 13a-14(b) of the CEO and CFO
of The Laclede Group, Inc. and Laclede Gas Company.
99.1 - Laclede Gas Company - Management's Discussion and Analysis of
Financial Condition and Results of Operations, Financial Statements
and Notes to Financial Statements.
34