Exhibit 99.1
LACLEDE GAS COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
(Thousands)
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Operating Revenues:
Utility $396,898 $357,456 $658,248 $574,621
Other 628 653 1,260 1,303
------------------------- --------------------------
Total Operating Revenues 397,526 358,109 659,508 575,924
------------------------- --------------------------
Operating Expenses:
Utility
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 utility operating expenses 356,341 310,706 586,018 499,938
Other 619 638 1,224 1,273
------------------------- --------------------------
Total Operating Expenses 356,960 311,344 587,242 501,211
------------------------- --------------------------
Operating Income 40,566 46,765 72,266 74,713
------------------------- --------------------------
Other Income and (Income Deductions) - Net 1,857 (87) 3,277 956
------------------------- --------------------------
Interest Charges:
Interest on long-term debt 4,815 5,205 9,629 10,410
Other interest charges 987 944 2,069 2,068
------------------------- --------------------------
Total Interest Charges 5,802 6,149 11,698 12,478
------------------------- --------------------------
Income Before Income Taxes 36,621 40,529 63,845 63,191
Income Tax Expense 13,241 15,631 23,109 23,695
------------------------- --------------------------
Net Income 23,380 24,898 40,736 39,496
Dividends on Redeemable Preferred Stock 15 15 31 31
------------------------- --------------------------
Earnings Applicable to Common Stock $ 23,365 $ 24,883 $ 40,705 $ 39,465
========================= ==========================
See notes to financial statements.
1
LACLEDE GAS COMPANY
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
--------------- -------------- ---------------
Other Property and Investments 29,190 27,898 27,483
--------------- -------------- ---------------
Current Assets:
Cash and cash equivalents 7,997 2,907 11,744
Accounts receivable:
Gas customers - billed and unbilled 127,261 70,217 115,568
Associated companies 2,679 8,957 8,424
Other 35,466 9,196 16,815
Allowances for doubtful accounts (7,775) (6,839) (5,309)
Delayed customer billings 36,141 - 33,682
Natural gas stored underground at LIFO cost 29,417 117,182 24,463
Propane gas at FIFO cost 12,914 17,132 10,128
Materials, supplies, and merchandise at avg. cost 4,560 3,995 4,225
Derivative instrument assets 7,098 10,838 5,454
Deferred income taxes 5,694 7,631 8,417
Prepayments and other 3,845 4,881 7,034
--------------- -------------- ---------------
Total Current Assets 265,297 246,097 240,645
--------------- -------------- ---------------
Deferred Charges:
Prepaid pension cost 104,790 109,445 111,879
Regulatory assets 98,313 103,807 74,929
Other 7,643 4,515 3,852
--------------- -------------- ---------------
Total Deferred Charges 210,746 217,767 190,660
--------------- -------------- ---------------
Total Assets $1,139,289 $1,113,009 $1,064,389
=============== ============== ===============
See notes to financial statements.
2
LACLEDE GAS COMPANY
BALANCE SHEETS (Continued)
(UNAUDITED)
Mar. 31, Sept. 30, Mar. 31,
2004 2003 2003
---- ---- ----
(Thousands, except share amounts)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock and Paid-in capital (100 shares issued and
outstanding) $ 89,529 $ 82,579 $ 82,579
Retained earnings 217,285 189,507 207,466
Accumulated other comprehensive loss (582) (582) (339)
-------------- -------------- ---------------
Total common stock equity 306,232 271,504 289,706
Redeemable preferred stock (less current sinking fund
requirements) 1,108 1,258 1,258
Long-term debt (less current portion) 234,661 259,625 259,588
-------------- -------------- ---------------
Total Capitalization 542,001 532,387 550,552
-------------- -------------- ---------------
Current Liabilities:
Notes payable 191,415 218,200 122,390
Notes payable - associated companies - 11,540 -
Accounts payable 55,906 41,938 73,313
Accounts payable - associated companies 2,891 10,303 5,061
Advance customer billings - 15,361 -
Current portion of long-term debt and preferred stock 25,150 - 25,000
Taxes accrued 31,193 16,287 30,686
Unamortized purchased gas adjustment 1,458 5,865 9,524
Other 39,286 34,344 34,729
-------------- -------------- ---------------
Total Current Liabilities 347,299 353,838 300,703
-------------- -------------- ---------------
Deferred Credits and Other Liabilities:
Deferred income taxes 184,335 177,957 158,516
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 21,978 21,956 20,805
-------------- -------------- ---------------
Total Deferred Credits and Other Liabilities 249,989 226,784 213,134
-------------- -------------- ---------------
Total Capitalization and Liabilities $1,139,289 $1,113,009 $1,064,389
============== ============== ===============
See notes to financial statements.
3
LACLEDE GAS COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
March 31,
--------------------------------
2004 2003
---- ----
(Thousands)
Operating Activities:
Net Income $ 40,736 $ 39,496
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 11,369 11,095
Deferred income taxes and investment
tax credits 2,528 2,707
Other - net 215 305
Changes in assets and liabilities:
Accounts receivable - net (76,100) (73,958)
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 6,556 47,536
Taxes accrued 14,906 21,191
Natural gas stored underground 87,765 52,624
Other assets and liabilities 15,968 13,547
-------------- -------------
Net cash provided by operating activities $ 74,945 $ 42,694
-------------- -------------
Investing Activities:
Construction expenditures (24,719) (22,714)
Employee benefit trusts (1,702) (507)
Other investments 759 164
-------------- -------------
Net cash used in investing activities $(25,662) $(23,057)
-------------- -------------
Financing Activities:
Issuance (Repayment) of short-term debt - net (38,325) 3,520
Dividends paid (12,818) (12,722)
Paid-in capital contribution from Laclede Group 6,950 -
Preferred stock reacquired and other - (8)
-------------- -------------
Net cash provided by financing activities $(44,193) $ (9,210)
-------------- -------------
Net Increase in Cash and Cash Equivalents $ 5,090 $ 10,427
Cash and Cash Equivalents at Beginning of Period 2,907 1,317
-------------- -------------
Cash and Cash Equivalents at End of Period $ 7,997 $ 11,744
============== =============
Supplemental Disclosure of Cash Paid (Refunded)
During the Period for:
Interest $ 11,431 $ 11,369
Income taxes 2,077 (4,303)
See notes to financial statements.
4
LACLEDE GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These notes are an integral part of the accompanying financial
statements of Laclede Gas Company (Laclede Gas or the Utility). In the
opinion of Laclede Gas, this interim report includes all adjustments
(consisting of only normal recurring accruals) necessary for the fair
presentation of the results of operations for the periods presented. Certain
prior-period amounts have been reclassified to conform to current-period
presentation. This Form 10-Q should be read in conjunction with the Notes to
Financial Statements contained in Laclede Gas' Fiscal Year 2003 Form 10-K.
Laclede Gas is a regulated natural gas distribution utility having
a material seasonal cycle. As a result, these interim statements of income
for Laclede Gas are not necessarily indicative of annual results or
representative of succeeding quarters of the fiscal year. Due to the
seasonal nature of the business of Laclede Gas, earnings are typically
concentrated in the November through April period, which generally
corresponds with the heating season. The Utility typically experiences
losses during the non-heating season.
REVENUE RECOGNITION - Laclede Gas reads meters and bills its
customers on a monthly cycle billing basis. The Utility records its
regulated gas distribution revenues from gas sales and transportation
service on an accrual basis that includes estimated amounts for gas
delivered, but not yet billed. The accruals for unbilled revenues are
reversed in the subsequent accounting period when meters are actually read
and customers are billed. The amount of accrued unbilled revenue at 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 net
pre-tax 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.
BASIS OF CONSOLIDATION - In compliance with generally accepted
accounting principles, transactions between Laclede Gas and its affiliates
as well as intercompany balances on Laclede Gas' balance sheet have not been
eliminated from the Laclede Gas financial statements.
Laclede Gas provides administrative and general support to
affiliates. All such costs, which are not material, are billed to the
appropriate affiliates and are reflected in accounts receivable on Laclede
Gas' Balance Sheet. Laclede Gas may also, on occasion, borrow funds from, or
lend funds to, affiliated companies. At March 31, 2004, the Laclede Gas
Balance Sheet reflected a total of $2.7 million of intercompany receivables
and $2.9 million of intercompany payables.
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 for all other types of variable interest entities is
required in financial statements for periods ending after March 15, 2004.
There was no effect on the financial position or results of operations of
Laclede Gas upon adoption.
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 2 to
the Financial Statements on page 6 of this report.
5
2. 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.
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
6
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 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.
3. INCOME TAXES
Net provisions for income taxes were 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 $10,561 $13,215 $17,689 $17,980
Deferred 863 102 2,205 2,243
State and Local
Current 1,698 2,249 2,892 3,008
Deferred 119 65 323 464
----------------------- -----------------------
Total $13,241 $15,631 $23,109 $23,695
======================= =======================
7
4. 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 262 270 778 428
Other income deductions (323) (331) 613 579
-------------------------- --------------------------
Other income and income
deductions - net $1,857 $ (87) $3,277 $956
========================== ==========================
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
Utility.
5. INFORMATION BY OPERATING SEGMENT
The Regulated Gas Distribution segment consists of the regulated
operations of Laclede Gas. The Non-Regulated Other segment includes the
retail sale of gas appliances. There are no material intersegment revenues.
Regulated
Gas Non-Regulated
(Thousands) Distribution Other Eliminations Consolidated
------------------------------------------------------------------------------------------
Three Months Ended
March 31, 2004
--------------
Operating revenues $ 396,898 $ 628 $ - $ 397,526
Net income 23,374 6 - 23,380
Total assets 1,137,824 1,465 - 1,139,289
Six Months Ended
March 31, 2004
--------------
Operating revenues $ 658,248 $1,260 $ - $ 659,508
Net income 40,714 22 - 40,736
Total assets 1,137,824 1,465 - 1,139,289
Three Months Ended
March 31, 2003
--------------
Operating revenues $ 357,456 $ 653 $ - $ 358,109
Net income 24,889 9 - 24,898
Total assets 1,062,799 1,590 - 1,064,389
Six Months Ended
March 31, 2003
--------------
Operating revenues $ 574,621 $1,303 $ - $ 575,924
Net income 39,478 18 - 39,496
Total assets 1,062,799 1,590 - 1,064,389
8
6. COMMITMENTS AND CONTINGENCIES
Laclede Gas is subject to various environmental laws and
regulations that, to date, have not materially affected its 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.
Laclede Gas is involved in other litigation, claims and
investigations arising in the normal course of business. While the results
of such litigation cannot be predicted with certainty, management, after
discussion with counsel, believes that the final outcome will not have a
material adverse effect on the financial position or results of operations
of Laclede Gas.
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.
9
Laclede Gas continues to believe in the merit of its position and intends to
vigorously assert its position in the appeal. To the extent that a final
decision in the courts results in disallowance of the $4.9 million in
pre-tax gains, it could have a material effect on the future financial
position and results of operation of Laclede Gas.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LACLEDE GAS COMPANY
- -------------------
This management's discussion analyzes the financial condition and results of
operations of Laclede Gas Company (Laclede Gas or the Utility). It includes
management's view of factors that affect its business, explanations of past
financial results including changes in earnings and costs from the prior
year 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; and
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 Utility's Financial
Statements and the notes thereto.
11
LACLEDE GAS COMPANY
RESULTS OF OPERATIONS
Laclede Gas Company (Laclede Gas or the Utility) is regulated by the
Missouri Public Service Commission (MoPSC) and serves the metropolitan St.
Louis area and several other counties in eastern Missouri. Laclede Gas
delivers natural gas to retail customers at rates, and in accordance with
tariffs, authorized by the MoPSC. The Utility's earnings are primarily
generated by the sale of heating energy, which was historically heavily
influenced by the weather. As part of the 2002 rate case settlement, the
Utility initiated, effective November 9, 2002, an innovative weather
mitigation rate design that lessens the impact of weather volatility on
Laclede Gas customers during cold winters and is expected to stabilize the
Utility's earnings in the future by recovering fixed costs more evenly
during the heating season. 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 Gas 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. Due to the
seasonal nature of the business of Laclede Gas, earnings are typically
concentrated in the November through April period, which generally
corresponds with the heating season. The Utility typically experiences
losses during the non-heating season. Due to the material seasonal cycle of
Laclede Gas, the accompanying interim statements of income for Laclede Gas
are not necessarily indicative of annual results or representative of
succeeding quarters of the fiscal year.
Quarter Ended March 31, 2004
- ----------------------------
Laclede Gas' net income for the quarter ended March 31, 2004 was $23.4
million, compared with $24.9 million reported for the same quarter last
year. The year-to-year decrease in net income of $1.5 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 Utility.
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.
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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).
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 Utility.
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
- -------------------------------
Laclede Gas' net income for the six months ended March 31, 2004 was $40.7
million, compared with $39.5 million reported for the same period last year.
The year-to-year improvement in net income of $1.2 million was primarily
attributable to the following factors, quantified on a pre-tax basis.
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.
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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).
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.
Subsequent distributions, if any, are not expected to have a material impact
on the consolidated financial position or results of operations of the
Utility.
Interest Charges
The $.8 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.
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
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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. Laclede Gas continues to believe in the merit of its
position and intends to vigorously assert its position in the appeal. To the
extent that a final decision in the courts results in disallowance of the
$4.9 million in pre-tax gains, it could have a material effect on the future
financial position and results of operations of Laclede Gas.
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 experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates. We believe the following represent the more significant
items requiring the use of judgment and estimates in preparing our
consolidated financial statements:
Allowances for doubtful accounts - Estimates of the collectibility
of trade accounts receivable are based on historical trends, age of
receivables, economic conditions, credit risk of specific
customers, and other factors.
Employee benefits and postretirement obligations - Pension and
postretirement obligations are calculated by actuarial consultants
that utilize several statistical factors and other assumptions
related to future events, such as discount rates, returns on plan
assets, compensation increases, and mortality rates. The amount of
expense recognized by the Utility is dependent on the regulatory
treatment provided for such costs. Certain liabilities related to
group medical benefits and workers' compensation claims, portions
of which are self-insured and/or contain stop/loss coverage with
third-party insurers to limit exposure, are established based on
historical trends.
Laclede Gas accounts for its regulated operations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." This statement sets forth the
application of accounting principles generally accepted in the United States
of America for those companies whose rates are established by or are subject
to approval by an independent third-party regulator. The provisions of SFAS
No. 71 require, among other things, that financial statements of a regulated
enterprise reflect the actions of regulators, where appropriate. These
actions may result in the recognition of revenues and expenses in time
periods that are different than non-regulated enterprises. When this occurs,
costs are deferred as assets in the balance sheet (regulatory assets) and
recorded as expenses when those amounts are reflected in rates. Also,
regulators can impose liabilities upon a regulated company for amounts
previously collected from customers and for recovery of costs that are
expected to be incurred in the future (regulatory liabilities). Management
believes that the current regulatory environment supports the continued use
of SFAS No. 71 and that all regulatory assets and liabilities are
recoverable or refundable through the regulatory process. We believe the
following represent the more significant items recorded through the
application of SFAS No. 71:
15
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.
Laclede Gas records deferred tax liabilities and assets measured by
enacted tax rates for the net tax effect of all temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes, and the amounts used for income
tax purposes. Changes in enacted tax rates, if any, and certain
property basis differences will be reflected by entries to
regulatory asset or liability accounts for regulated companies, and
will be reflected as income or loss for non-regulated companies.
Also, pursuant to the direction of the MoPSC, Laclede Gas'
provision for income tax expense for financial reporting purposes
reflects an open-ended method of tax depreciation. This method is
consistent with the regulatory treatment prescribed by the MoPSC to
depreciate the Utility's assets.
For further discussion of significant accounting policies, see the Notes to
the Financial Statements included in Laclede Gas' 10-K for the fiscal year
ended September 30, 2003.
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. There was no effect on the financial position
or results of operations of Laclede Gas upon adoption.
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 2 to
the Financial Statements on page 6 of this report.
FINANCIAL CONDITION
Credit Ratings
- --------------
As of March 31, 2004, credit ratings for outstanding securities for Laclede
Gas issues were as follows:
Type of Facility S&P Moody's Fitch
- -----------------------------------------------------------------------------
Laclede Gas First Mortgage Bonds A A3 A+
Laclede Gas Commercial Paper A-1 P-2
The Utility's ratings are investment grade, and the Utility believes that it
has adequate access to the financial markets to meet its capital
requirements. These ratings remain subject to review and change by the
rating agencies.
16
Cash Flows
- ----------
Laclede Gas' short-term borrowing requirements typically peak during colder
months when Laclede Gas borrows money to cover the gap between when it
purchases its natural gas and when its customers pay for that gas. Changes
in the wholesale cost of natural gas, variations in the timing of
collections of gas cost under the Utility's PGA Clause, the seasonality of
accounts receivable balances, and the utilization of storage gas inventories
cause short-term cash requirements to vary during the year, and can cause
significant variations in the Utility's cash provided by or used in
operating activities.
Net cash provided by operating activities for the six months ended March 31,
2004 was $74.9 million, a $32.3 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 $25.7 million compared with $23.1 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 $44.2 for the six months ended
March 31, 2004 compared with $9.2 million for the six months ended March 31,
2003. Cash used in financing activities increased $35.0 primarily due to
additional repayments of short-term borrowings this year.
Liquidity and Capital Resources
- -------------------------------
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. Laclede
Gas' short-term borrowing during the quarter peaked at $241.8 million.
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.
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 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 milllion principal amount of 8 1/2% First Mortgage Bonds in
November 2004 and for general corporate purposes.
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
17
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 Laclede Gas'
short-term borrowings and for general corporate purposes.
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.
Capitalization at March 31, 2004, excluding current obligations of long-term
debt and preferred stock, increased $9.6 million since September 30, 2003
and consisted of 56.5% common stock equity, .2% preferred stock and 43.3%
long-term debt. The portion of common stock equity increased during the
period primarily due to a capital contribution from Laclede Group.
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 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.
Environmental Matters
- ---------------------
Laclede Gas is subject to various environmental laws and regulations that,
to date, have not materially affected its 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
18
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 Gas has no off-balance sheet arrangements.
19