SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
----------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------
1-16681 The Laclede Group, Inc. Missouri 74-2976504
720 Olive Street
St. Louis, MO 63101
314-342-0500
----------------------------------------------------------------------------------------------------
1-1822 Laclede Gas Company Missouri 43-0368139
720 Olive Street
St. Louis, MO 63101
314-342-0500
----------------------------------------------------------------------------------------------------
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 July 30, 2004
- ---------- --------------------------- -------------
The Laclede Group, Inc. Common Stock ($1.00 Par Value) 20,978,823
Laclede Gas Company Common Stock ($1.00 Par Value) 100*
<FN>
*100% owned by The Laclede Group, Inc.
TABLE OF CONTENTS Page No.
--------
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 9-18
Laclede Gas Company:
Statements of Income Ex. 99.1, p. 1
Balance Sheets Ex. 99.1, pp. 2-3
Statements of Cash Flows Ex. 99.1, p. 4
Notes to Financial Statements Ex. 99.1, pp. 5-10
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (The Laclede Group, Inc.) 19-29
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Laclede Gas Company) Ex. 99.1, pp. 11-19
Item 3 Quantitative and Qualitative Disclosures About Market Risk 30
Item 4 Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 31
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 Nine Months Ended
June 30, June 30,
--------------------------- ----------------------------
2004 2003 2004 2003
---- ---- ---- ----
Operating Revenues:
Regulated
Gas distribution $125,870 $114,207 $784,118 $688,828
Non-Regulated
Services 34,973 27,276 69,771 75,414
Gas marketing 80,475 41,762 192,938 118,903
Other 3,742 3,350 5,825 5,800
--------------------------- ----------------------------
Total Operating Revenues 245,060 186,595 1,052,652 888,945
--------------------------- ----------------------------
Operating Expenses:
Regulated
Natural and propane gas 68,855 60,293 532,414 442,054
Other operation expenses 28,411 27,097 90,702 88,084
Maintenance 4,599 4,583 13,669 13,977
Depreciation and amortization 5,746 5,579 17,115 16,668
Taxes, other than income taxes 12,018 11,553 51,747 48,260
--------------------------- -----------------------------
Total regulated operating expenses 119,629 109,105 705,647 609,043
Non-Regulated
Services 29,619 24,721 69,468 78,666
Gas marketing 78,567 40,381 188,668 115,228
Other 3,690 3,185 5,461 5,269
--------------------------- -----------------------------
Total Operating Expenses 231,505 177,392 969,244 808,206
--------------------------- -----------------------------
Operating Income 13,555 9,203 83,408 80,739
--------------------------- -----------------------------
Other Income and (Income Deductions) - Net 65 (68) 3,402 974
--------------------------- -----------------------------
Interest Charges:
Interest on long-term debt 6,207 4,945 15,836 15,355
Interest on long-term debt to unconsolidated
affiliate trust 893 866 2,626 1,877
Other interest charges 565 810 2,649 3,112
--------------------------- -----------------------------
Total Interest Charges 7,665 6,621 21,111 20,344
--------------------------- -----------------------------
Income Before Income Taxes 5,955 2,514 65,699 61,369
Income Tax Expense 2,192 476 23,774 22,635
--------------------------- -----------------------------
Net Income 3,763 2,038 41,925 38,734
Dividends on Redeemable Preferred Stock -
Laclede Gas 16 16 47 47
--------------------------- -----------------------------
Net Income Applicable to Common Stock $ 3,747 $ 2,022 $ 41,878 $ 38,687
=========================== =============================
Average Number of Common Shares Outstanding 19,863 19,044 19,381 19,002
Basic Earnings Per Share of Common Stock $.19 $.11 $2.16 $2.04
Diluted Earnings Per Share of Common Stock $.19 $.11 $2.16 $2.04
Dividends Declared Per Share of Common Stock $.340 $.335 $1.015 $1.005
See notes to consolidated financial statements.
4
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
(Thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ---------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net Income Applicable to Common Stock $3,747 $2,022 $41,878 $38,687
------------------------- ---------------------------
Other Comprehensive Income:
Net gain (loss) on cash flow hedging
derivative instruments:
Net hedging gain (loss) arising during
period (727) 259 (2,870) 519
Reclassification adjustment for
(gains) losses included in net income 2,693 (229) 1,750 (229)
------------------------- ---------------------------
Net unrealized gain (loss) on cash flow
hedging derivative instruments 1,966 30 (1,120) 290
------------------------- ---------------------------
Other Comprehensive Income (Loss), 30 (1,120) 290
Before Tax 1,966
Income Tax (Benefit) Expense Related to
Items of Other Comprehensive Income (Loss) 760 11 (432) 112
------------------------- ---------------------------
Other Comprehensive Income (Loss), Net
of Tax 1,206 19 (688) 178
------------------------- ---------------------------
Comprehensive Income $4,953 $2,041 $41,190 $38,865
========================= ===========================
See notes to consolidated financial statements.
5
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, Sept. 30, June 30,
2004 2003 2003
---- ---- ----
(Thousands)
ASSETS
Utility Plant $1,060,868 $1,030,665 $1,018,482
Less: Accumulated depreciation and amortization 420,994 409,418 406,482
-------------- -------------- -------------
Net Utility Plant 639,874 621,247 612,000
-------------- -------------- -------------
Goodwill 28,124 28,124 28,124
-------------- -------------- -------------
Other Property and Investments 45,785 45,998 45,691
-------------- -------------- -------------
Current Assets:
Cash and cash equivalents 11,877 7,291 7,274
Accounts receivable:
Gas Customers - billed and unbilled 78,633 70,217 70,444
Other 64,858 41,298 39,401
Allowances for doubtful accounts (7,935) (7,181) (5,415)
Delayed customer billings 11,211 - 16,778
Inventories:
Natural gas stored underground at LIFO cost 56,173 117,231 51,870
Propane gas at FIFO cost 15,808 17,132 12,473
Materials, supplies, and merchandise at avg. cost 4,920 4,071 4,342
Derivative instrument assets 7,141 12,643 11,521
Deferred income taxes 5,579 7,631 6,332
Prepayments and other 15,052 17,557 8,698
-------------- -------------- -------------
Total Current Assets 263,317 287,890 223,718
-------------- -------------- -------------
Deferred Charges:
Prepaid pension cost 102,463 109,445 110,662
Regulatory assets 102,200 103,807 72,266
Other 9,901 6,287 6,052
-------------- -------------- -------------
Total Deferred Charges 214,564 219,539 188,980
-------------- -------------- -------------
Total Assets $1,191,664 $1,202,798 $1,098,513
============== ============== =============
See notes to consolidated financial statements.
6
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
June 30, Sept. 30, June 30,
2004 2003 2003
---- ---- ----
(Thousands, except share amounts)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (70,000,000 shares authorized, 20,946,171,
19,082,402 and 19,046,235 shares issued, respectively) $ 20,946 $ 19,082 $ 19,046
Paid-in capital 115,138 68,460 67,521
Retained earnings 233,439 211,610 222,105
Accumulated other comprehensive loss (768) (80) (161)
------------- ------------- -------------
Total common stock equity 368,755 299,072 308,511
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 333,911 259,625 259,607
------------- ------------- -------------
Total Capitalization 750,174 606,355 615,776
------------- ------------- -------------
Current Liabilities:
Notes payable 3,625 218,200 128,860
Accounts payable 91,565 66,001 63,226
Advance customer billings - 15,361 -
Current portion of long-term debt and preferred stock 25,145 - -
Taxes accrued 24,111 13,211 25,110
Unamortized purchased gas adjustment 1,149 5,865 1,898
Other 51,830 47,638 43,866
------------- ------------- -------------
Total Current Liabilities 197,425 366,276 262,960
------------- ------------- -------------
Deferred Credits and Other Liabilities:
Deferred income taxes 194,185 180,598 155,481
Unamortized investment tax credits 5,087 5,316 5,394
Pension and postretirement benefit costs 21,164 20,973 20,489
Regulatory liabilities 927 582 16,137
Other 22,702 22,698 22,276
------------- ------------- -------------
Total Deferred Credits and Other Liabilities 244,065 230,167 219,777
------------- ------------- -------------
Total Capitalization and Liabilities $1,191,664 $1,202,798 $1,098,513
============= ============= =============
See notes to consolidated financial statements.
7
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30,
-------------------------------
2004 2003
---- ----
(Thousands)
Operating Activities:
Net Income $ 41,925 $ 38,734
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 19,834 18,901
Deferred income taxes and investment
tax credits 10,553 4,899
Other - net 174 450
Changes in assets and liabilities:
Accounts receivable - net (31,222) (14,952)
Unamortized purchased gas adjustments (4,716) (21,078)
Deferred purchased gas costs 12,321 6,278
Delayed customer billings - net (26,572) (41,610)
Accounts payable 25,564 17,519
Taxes accrued 10,900 15,295
Natural gas stored underground 61,058 25,251
Other assets and liabilities 10,772 9,079
------------- -------------
Net cash provided by operating activities $ 130,591 $ 58,766
------------- -------------
Investing Activities:
Construction expenditures (37,609) (35,824)
Employee benefit trusts (2,041) (151)
Other investments 1,127 (844)
------------- -------------
Net cash used in investing activities $ (38,523) $(36,819)
------------- -------------
Financing Activities:
Issuance of first mortgage bonds 150,000 -
Maturity/Redemption of first mortgage bonds (50,000) (25,000)
Repayment of short-term debt - net (214,575) (32,810)
Dividends paid (19,357) (19,104)
Issuance of common stock 48,542 2,979
Issuance of long-term debt to unconsolidated affiliate trust - 46,400
Preferred stock reacquired (5) (8)
Other (2,087) -
------------ -------------
Net cash used in financing activities $ (87,482) $(27,543)
------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents $ 4,586 $ (5,596)
Cash and Cash Equivalents at Beginning of Period 7,291 12,870
------------- -------------
Cash and Cash Equivalents at End of Period $ 11,877 $ 7,274
============= =============
Supplemental Disclosure of Cash Paid During the Period for:
Interest $ 21,821 $ 22,120
Income taxes 422 473
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 the succeeding quarter 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 June 30,
2004 and 2003, for the Utility, was $7.1 million and $6.5 million,
respectively. After accrual of related gas cost expense, the accrued pre-tax
net revenues at June 30, 2004 and 2003 were $3.3 million and $2.7 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 nine months ended June 30, 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
nine months ended June 30, 2004 was approximately $9,000, net of tax
effects.
During the nine months ended June 30, 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 June 30, 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. No
compensation
9
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 June 30, 2004 is
presented below.
Weighted Average
Shares Exercise Price
--------- ------------------
Outstanding at March 31, 2004 394,950 $26.43
Granted - -
Exercised - -
Forfeited - -
Outstanding at June 30, 2004 394,950 $26.43
Exercisable at June 30, 2004 17,200 $23.27
The closing price of the Company's common stock was $27.41 at June 30, 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 nine months ended
June 30, 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 Nine Months Ended
June 30, June 30,
------------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
(Thousands, Except Per Share Amounts)
Net income applicable to
common stock, as reported $3,747 $2,022 $41,878 $38,687
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of tax effects 85 33 261 58
------------------------- ------------------------
Pro forma net income applicable
to common stock $3,662 $1,989 $41,617 $38,629
========================= ========================
Earnings per share:
Basic - as reported $.19 $.11 $2.16 $2.04
Diluted - as reported $.19 $.11 $2.16 $2.04
Basic - pro forma $.18 $.10 $2.15 $2.03
Diluted - pro forma $.18 $.10 $2.15 $2.03
The fair value of the options granted during the nine months ended
June 30, 2004 was estimated at the date of grant using the Black-Scholes
option pricing model with the following assumptions:
Nine Months Ended
June 30,
----------------------------
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
10
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 June 30, 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.
The Emerging Issues Task Force (EITF) deliberated Issue 03-01, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." The Issue was intended to address the meaning of
other-than-temporary impairment and its application to certain investments
held at cost. A consensus was reached regarding disclosure requirements
concerning unrealized losses on available-for-sale debt and equity
securities accounted for under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" and SFAS No. 124, "Accounting for
Certain Investments Held for Not-for-Profit Organizations." The guidance for
evaluating whether an investment is other-than-temporarily impaired should
be applied in reporting periods beginning after June 15, 2004. The
disclosures are effective in annual financial statements for fiscal years
ended after December 15, 2003, for investments accounted for under SFAS Nos.
115 and 124. For all other investments within the scope of this Issue, the
disclosures are effective in annual financial statements for fiscal years
ending after June 15, 2004. Additional disclosures for cost method
investments are effective for fiscal years ending after June 15, 2004.
Laclede Group is currently evaluating the effect of this pronouncement on
its financial statements.
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 224,000 stock options outstanding that were anti-dilutive
at June 30, 2004.
11
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
(Thousands, Except Per Share Amounts) 2004 2003 2004 2003
---- ---- ---- ----
Basic EPS:
Net Income Applicable to Common Stock $ 3,747 $ 2,022 $41,878 $38,687
Weighted-Average Shares Outstanding 19,863 19,044 19,381 19,002
Earnings Per Share of Common
Stock $.19 $.11 $2.16 $2.04
Diluted EPS:
Net Income Applicable to Common Stock $ 3,747 $ 2,022 $41,878 $38,687
Weighted-Average Shares Outstanding 19,863 19,044 19,381 19,002
Dilutive Effect of Employee Stock Options 18 10 24 3
----------------------- -----------------------
Weighted-Average Diluted Shares 19,881 19,054 19,405 19,005
======================= =======================
Earnings Per Share of Common
Stock $.19 $.11 $2.16 $2.04
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 nine
months ended June 30, 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 June
30, 2004 and $.3 million for the same quarter last year. Pension costs for
the nine months ended June 30, 2004 were $3.4 million compared with $.8
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 Nine Months Ended
June 30, June 30,
----------------------- -----------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Service cost - benefits earned
during the period $ 2,776 $ 2,265 $ 8,330 $ 6,795
Interest cost on projected
benefit obligation 4,058 4,150 12,173 12,450
Expected return on plan assets (5,625) (5,650) (16,874) (16,950)
Amortization of transition obligation - (59) - (177)
Amortization of prior service cost 331 348 993 1,044
Amortization of actuarial loss 951 334 2,852 1,003
Regulatory adjustment (1,368) (1,108) (4,105) (3,324)
----------------------- -----------------------
Net pension cost $ 1,123 $ 280 $ 3,369 $ 841
======================= =======================
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
12
above and included in the Statements of Consolidated Income and 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 nine months ended June 30, 2004 or the
nine months ended June 30, 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 $5.5 million to the plans during the nine months
ended June 30, 2004, and expects to contribute a total of $7.4 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
June 30, 2004 compared with $1.9 million in the quarter ended June 30, 2003.
Postretirement benefit costs were $5.9 million for the nine months ended
June 30, 2004 compared with $5.8 million for the nine months ended June 30,
2003. These costs include amounts capitalized with construction activities.
Net periodic postretirement benefit costs consisted of the
following components:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ -----------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Service cost - benefits earned
during the period $ 794 $ 690 $2,381 $2,069
Interest cost on accumulated
postretirement benefit obligation 801 916 2,402 2,746
Expected return on plan assets (209) (234) (627) (703)
Amortization of transition
obligation 264 316 794 950
Amortization of prior service cost (8) 82 (24) 246
Amortization of actuarial loss 174 103 523 311
Regulatory adjustment 165 75 494 226
------------------------ -----------------------
Net postretirement benefit cost $1,981 $1,948 $5,943 $5,845
======================== =======================
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
June 30, 2004, LER's open positions were not material to Laclede Group's
financial position or results of operations.
13
Settled and open future positions were as follows at June 30, 2004:
Average
MMBtu Price per
Position Month (millions) MMBtu
-------------- ---------- -----
Settled net long and short futures positions July 04 .26 5.85
Open short futures positions August 04 .38 5.84
November 04 .30 4.90
December 04 .30 6.10
February 05 .14 5.90
Open long futures positions October 04 .30 4.73
September 05 .14 5.05
The above 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 $.1 million of pre-tax net unrealized
losses on cash flow hedging derivative instruments at June 30, 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.
5. INCOME TAXES
Net provision for income taxes was as follows during the periods
set forth below:
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Federal
Current $(5,059) $(1,774) $11,314 $14,790
Deferred 6,905 1,782 9,091 4,090
State and Local
Current (796) 135 1,907 2,946
Deferred 1,142 333 1,462 809
----------------------- -----------------------
Total $ 2,192 $ 476 $23,774 $22,635
======================= =======================
14
6. OTHER INCOME AND INCOME DEDUCTIONS - NET
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ------------------------
(Thousands) 2004 2003 2004 2003
---- ---- ---- ----
Investment gains $ - $ - $1,947 $ -
Allowance for funds used during
construction (33) (26) (94) (77)
Other income 309 237 1,147 759
Other income deductions (211) (279) 402 292
------------------------ ------------------------
Other income and income
deductions - net $ 65 $ (68) $3,402 $974
======================== ========================
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."
15
Regulated Non-Regulated
Gas Non-Regulated Gas Non-Regulated
(Thousands) Distribution Services Marketing Other Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended
June 30, 2004
- -------------
Revenues from external
Customers $ 125,477 $34,858 $ 76,757 $ 804 $ - $ 237,896
Intersegment revenues 393 115 3,718 2,938 - 7,164
---------------------------------------------------------------------------------------
Total operating revenues 125,870 34,973 80,475 3,742 - 245,060
Net income (loss) applicable to
common stock (149) 2,686 1,171 39 - 3,747
Total assets 1,071,350 59,393 46,578 35,663 (21,320) 1,191,664
Nine Months Ended
June 30, 2004
- -------------
Revenues from external
customers $ 782,484 $69,524 $179,260 $ 2,548 $ - $1,033,816
Intersegment revenues 1,634 247 13,678 3,277 - 18,836
---------------------------------------------------------------------------------------
Total operating revenues 784,118 69,771 192,938 5,825 - 1,052,652
Net income (loss) applicable to
common stock 40,534 (1,512) 2,598 258 - 41,878
Total assets 1,071,350 59,393 46,578 35,663 (21,320) 1,191,664
Three Months Ended
June 30, 2003
- -------------
Revenues from external
customers $ 114,120 $27,163 $ 37,385 $ 1,004 $ - $ 179,672
Intersegment revenues 87 113 4,377 2,335 11 6,923
---------------------------------------------------------------------------------------
Total operating revenues 114,207 27,276 41,762 3,339 11 186,595
Net income applicable to
common stock 23 995 888 116 - 2,022
Total assets 1,015,887 57,720 32,841 53,314 (61,249) 1,098,513
Nine Months Ended
June 30, 2003
- -------------
Revenues from external
customers $ 687,901 $75,176 $104,554 $ 3,178 $ - $ 870,809
Intersegment revenues 927 238 14,349 2,701 (79) 18,136
---------------------------------------------------------------------------------------
Total operating revenues 688,828 75,414 118,903 5,879 (79) 888,945
Net income (loss) applicable to
common stock 39,470 (3,438) 2,221 434 - 38,687
Total assets 1,015,887 57,720 32,841 53,314 (61,249) 1,098,513
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. 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.
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 June 30, 2004 was $9.5 million, compared
with $3.5 million for the same period last year. Revenue from these
customers for the nine months ended June 30, 2004 was $18.1 million,
compared with $25.4 for the same period last year. SM&P has regained a
portion of the previously withdrawn work and has gained new business with
these customers. 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.
16
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 June 30, 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 has met with the developer to explore 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 may
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. Of the employees to whom
notice was sent, 933 have joined this lawsuit to date, the substantial
majority of whom are former employees. Eighteen more individuals have
attempted to opt-in after the court's deadline. 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 achieved
by Laclede Gas, and directed Laclede Gas to flow through such amount to its
customers in its November
17
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 its 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. Oral arguments are currently scheduled in the Missouri
Court of Appeals for the Western District for August 17, 2004. 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 $8.5 million for performance
and payment of certain wholesale gas supply purchases by LER, as of June 30,
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.
18
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.
19
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 the succeeding
quarter 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 nine months of
fiscal 2004, as the downward pressure on revenues and earnings has been
significantly mitigated despite temperatures that were 13% 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.
20
Quarter Ended June 30, 2004
- ---------------------------
Overview - Net Income by Operating Segment Quarter Ended
June 30,
-------------------------
(millions, after-tax) 2004 2003
---- ----
Regulated Gas Distribution $(.2) $ -
Non-Regulated Services 2.7 1.0
Non-Regulated Gas Marketing 1.2 .9
Other Non-Regulated Subsidiaries .1 .1
--------- ---------
Net Income Applicable to Common Stock $3.8 $2.0
========= =========
Laclede Group's basic and diluted earnings per share were $.19 for the
quarter ended June 30, 2004, compared with $.11 per share reported for the
same quarter last year. The year-to-year increase in consolidated net income
of $1.8 million was primarily attributable to improved results reported by
SM&P and LER. SM&P's improvement over the prior year was primarily due to
attainment of new business. LER's earnings were higher compared with the
same quarter last year primarily due to higher sales levels. Utility results
decreased slightly primarily due to increased operating costs and higher
interest expense, largely offset by higher income from off-system sales and
capacity release.
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 June 30, 2004 were $125.9
million, or $11.7 million greater than the same period last year. The
increase was primarily attributable to increased off-system sales revenues
totaling $17.1 million. This factor was partially offset by lower PGA rates
totaling $5.3 million and lower system gas sales levels resulting from
warmer weather and other variations totaling $.1 million. Temperatures were
24% warmer than normal and 18% warmer than the same quarter last year.
System therms sold and transported decreased by 7.2 million therms, or 5.3%,
below the quarter ended June 30, 2003.
Regulated operating expenses for the quarter ended June 30, 2004 increased
$10.5 million from the same quarter last year. Natural and propane gas
expense increased $8.6 million from last year's level primarily attributable
to increased off-system gas expense, partially offset by lower rates charged
by our suppliers and lower volumes purchased for sendout. Other operation
and maintenance expenses increased $1.3 million, or 4.2%, primarily due to a
higher provision for uncollectible accounts, increased insurance premiums
and higher wage rates, partially offset by lower group insurance charges.
Taxes, other than income, increased $.5 million, or 4.0%, due to higher real
estate and personal property taxes and other variations.
Non-Regulated Services Operating Revenues and Operating Expenses
Laclede Group's non-regulated services operating revenue for this quarter
increased $7.7 million reflecting attainment of new business. The increase
in non-regulated services operating expenses, totaling $4.9 million, was
primarily attributable to charges associated with the new business. 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 $38.7 million
primarily due to increased sales volumes and higher sales prices by LER. The
increase in non-regulated gas marketing operating expenses, totaling $38.2
million, was primarily associated with increased gas expense related to
increased volumes purchased and higher prices.
21
Interest Charges
The $1.0 million increase in interest charges was primarily due to higher
interest on long-term debt due to the April 2004 issuance of $50 million of
5 1/2% First Mortgage Bonds and $100 million of 6% First Mortgage Bonds,
partially offset by the early redemption in June 2004 of $50 million of
6 5/8% First Mortgage Bonds. This increase in interest on long-term debt was
partially offset by reduced interest on short-term debt, mainly attributable
to lower borrowings.
Income Taxes
The increase in income taxes is primarily attributable to higher pre-tax
income.
Nine Months Ended June 30, 2004
- -------------------------------
Overview - Net Income by Operating Segment Nine Months Ended
June 30,
-----------------------
(millions, after-tax) 2004 2003
---- ----
Regulated Gas Distribution $40.5 $39.5
Non-Regulated Services (1.5) (3.4)
Non-Regulated Gas Marketing 2.6 2.2
Other Non-Regulated Subsidiaries .3 .4
--------- --------
Net Income Applicable to Common Stock $41.9 $38.7
========= ========
Laclede Group's basic and diluted earnings per share were $2.16 for the nine
months ended June 30, 2004, an increase of $.12 per share, compared with
$2.04 per share reported for the same period last year. The year-to-year
increase in consolidated net income of $3.2 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 $2.4 million
primarily reflecting the receipt of proceeds totaling $1.9 million
related to the Company's interest, as a policyholder, in the sale of a
mutual insurance company;
o the fully-implemented general rate increase effective November 9, 2002
totaling $.9 million, and;
o income from off-system sales and capacity release increased $1.4 million
from the nine months ended June 30, 2003.
These factors were partially offset by pension costs that increased $1.6
million over the same period last year.
SM&P's improvement over the prior year primarily reflects the attainment of
new business, partially offset by a reduced level of business from two
customers. 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 nine months ended June 30, 2004 were
$784.1 million, or $95.3 million greater than the same period last year. The
increase was primarily attributable to higher PGA rates totaling
approximately $90.3 million, increased off-system sales revenues totaling
$41.1 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 $37.0 million. Temperatures were 13% warmer than normal and 14%
warmer than last year. System therms sold and transported decreased by 80.5
million therms, or 8.6%, below the nine months ended June 30, 2003.
Regulated operating expenses for the nine months ended June 30, 2004
increased $96.6 million from the same period last year. Natural and propane
gas expense increased $90.4 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 $2.3 million, or
2.3%, primarily due to
22
increased pension costs, a higher provision for uncollectible accounts, and
increased injuries and damages premiums, partially offset by lower group
insurance charges and reduced maintenance charges. Taxes, other than income,
increased $3.5 million, or 7.2%, primarily due to higher gross receipts
taxes (related to the increased revenues).
Non-Regulated Services Operating Revenues and Operating Expenses
Laclede Group's non-regulated services operating revenue for the nine months
ended June 30, 2004 decreased $5.6 million primarily due to a reduced level
of business from two customers. Revenue from these two customers for the
nine months ended June 30, 2004 was $18.1 million, compared with $25.4
million for the same period last year. The reduction in non-regulated
services operating expenses totaling $9.2 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 17 of this report.
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-regulated gas marketing operating revenues for the nine months ended
June 30, 2004 increased $74.0 million primarily due to higher volumes and
increased sales prices by LER. The increase in non-regulated gas marketing
operating expenses, totaling $73.4 million, was primarily associated with
increased gas expense related to higher volumes purchased and increased
prices.
Other Income and Income Deductions - Net
The $2.4 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
Company.
Interest Charges
The $.8 million increase in interest charges was primarily due to higher
interest on long-term debt due to the April 2004 issuance of $50 million of
5 1/2% First Mortgage Bonds and $100 million of 6% First Mortgage Bonds and
the issuance of long-term debt to an unconsolidated affiliate trust in
December 2002 totaling $46.4 million, partially offset by the early
redemption in June 2004 of $50 million of 6 5/8% First Mortgage Bonds and
the May 2003 maturity of $25 million of 6 1/4% First Mortgage Bonds.
Income Taxes
The increase in income taxes is primarily attributable to higher pre-tax
income.
Other Matters
- -------------
The basic term of Laclede Gas' labor agreement with Locals 5-6 and 5-194
(the union) of the Paper, Allied-Industrial , Chemical & Energy Workers
International Union (formerly known as the Oil, Chemical and Atomic Workers
International Union) expires at midnight, July 31, 2004. An offer of
settlement will be presented to the union for a vote on August 1, 2004.
23
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. By Order dated May 4, 2004, the MoPSC determined that it
was necessary to take additional evidence on this issue and subsequently
scheduled evidentiary hearings for that purpose for late September 2004.
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 its 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. Oral arguments are currently
scheduled in the Missouri Court of Appeals for the Western District for
August 17, 2004. 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 was designed to increase
revenues by approximately $3.86 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. On May 27, 2004 the Company and the Staff of the MoPSC
filed a stipulation and agreement ("S&A") that provided for a $3.56 million
annual surcharge effective June 10, 2004. On June 1, 2004 the MoPSC approved
the S&A.
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.
24
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 adversely impacting 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.
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
25
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.
The Emerging Issues Task Force (EITF) deliberated Issue 03-01, "The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain
Investments." The Issue was intended to address the meaning of
other-than-temporary impairment and its application to certain investments
held at cost. A consensus was reached regarding disclosure requirements
concerning unrealized losses on available-for-sale debt and equity
securities accounted for under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" and SFAS No. 124, "Accounting for
Certain Investments Held for Not-for-Profit Organizations." The guidance for
evaluating whether an investment is other-than-temporarily impaired should
be applied in reporting periods beginning after June 15, 2004. The
disclosures are effective in annual financial statements for fiscal years
ended after December 15, 2003, for investments accounted for under SFAS Nos.
115 and 124. For all other investments within the scope of this Issue, the
disclosures are effective in annual financial statements for fiscal years
ending after June 15, 2004. Additional disclosures for cost method
investments are effective for fiscal years ending after June 15, 2004.
Laclede Group is currently evaluating the effect of this pronouncement on
its financial statements.
FINANCIAL CONDITION
Credit Ratings
- --------------
As of June 30, 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.
26
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, 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 nine months ended June 30,
2004 was $130.6 million, a $71.8 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.
Net cash used in investing activities for the nine months ended June 30,
2004 was $38.5 million compared with $36.8 million for the nine months ended
June 30, 2003. Cash used in investing activities primarily reflected Utility
construction expenditures in both periods.
Net cash used in financing activities was $87.5 for the nine months ended
June 30, 2004 compared with $27.5 million for the nine months ended June 30,
2003. The variation primarily reflects the repayment of short-term debt this
year, partially offset by the issuance of additional long-term debt and
common stock.
Liquidity and Capital Resources
- -------------------------------
Maximum consolidated short-term borrowings at any one time during the
quarter ended June 30, 2004 were $191.7 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 June 30, 2004 were $3.6 million at a
weighted average interest rate of 1.6%. Based on short-term borrowings at
June 30, 2004, a change in interest rates of 100 basis points would increase
or decrease pre-tax earnings and cash flows by approximately $36,000 on an
annual basis.
Most of Laclede Gas' lines of credit include a covenant limiting total debt,
including short-term debt, to no more than 70% of total capitalization. On
June 30, 2004, total debt was 51% 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 2005, 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 51% on June 30, 2004).
This line has been used to provide a letter of credit of $1.2 million on
behalf of SM&P as of July 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 June 30, 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 Form S-3, $362.37 million remain registered and unissued as of June 30,
2004. The Company issued 1.725 million shares of common stock in May 2004.
The proceeds from the sale of approximately $44.7 million were utilized to
reduce short-terms borrowings and for general corporate purposes.
At June 30, 2004, Laclede Gas had fixed-rate long-term debt totaling $360
million, including 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.
27
Laclede Gas has on file a shelf registration on Form S-3. Of the $350
million of securities originally registered under this S-3, $120 million of
debt securities remained registered and unissued as of June 30, 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
of $147.9 million from this sale were used to reduce short-term debt, to
redeem at par $50 million principal amount of Laclede Gas' 6 5/8% First
Mortgage Bonds on June 15, 2004, and for general corporate purposes. The
proceeds will also be used to pay at maturity $25 million principal amount
of Laclede Gas' 8 1/2% First Mortgage Bonds in November 2004.
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 $8.5 million for performance and
payment of certain wholesale gas supply purchases by LER, as of June 30,
2004. No amounts have been recorded for these guarantees in the financial
statements.
Utility construction expenditures were $36.6 million for the nine months
ended June 30, 2004, compared with $34.7 million for the same period last
year. Non-utility construction expenditures were $1.0 million for the nine
months ended June 30, 2004, compared with $1.1 million for the same period
last year.
Consolidated capitalization at June 30, 2004, excluding current obligations
of long-term debt and preferred stock, increased $143.8 million since
September 30, 2003 as a result of the long-term debt and stock issuance
discussed above. Capital consisted of 49.2% Laclede Group common stock
equity, .1% Laclede Gas preferred stock equity, 6.2% long-term debt to
unconsolidated affiliate trust and 44.5% 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 June 30, 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 June 30, 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 June 30, 2004, the Utility held
approximately 12.8 million MMBtu of futures contracts at an average price of
$6.08 per MMBtu. Additionally, approximately 4.9 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 March 2005.
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
June 30, 2004, LER's open positions were not material to Laclede Group's
financial position or results of operations.
28
Environmental Matters
- ---------------------
Laclede Gas is subject to various environmental laws and regulations that,
to date, have not materially affected the Company's financial position and
results of operations. As these laws, regulations, and their interpretation
evolve, however, additional costs may be incurred.
With regard to a former manufactured gas plant site located in Shrewsbury,
Missouri, Laclede Gas and state and federal environmental regulators have
agreed upon certain actions and those actions are essentially complete.
Laclede Gas currently estimates the overall costs of these actions will be
approximately $2.4 million. As of June 30, 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 has met with
the developer to explore 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 may 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.
29
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 28 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 third fiscal quarter that have materially affected,
or are reasonably likely to materially affect, our control over financial
reporting.
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of environmental matters and legal proceedings,
see Note 8 to the Consolidated Financial Statements on page 17. 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 24 of this
report.
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 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 April 21, 2004 filed by Laclede Gas Company reporting
under Item 5 the sale of $150 million in principal amount of first
mortgage bonds.
2. Form 8-K dated April 29, 2004 filed by The Laclede Group furnishing
under Items 9 and 12 the results of operations and financial condition
for the quarter ended March 31, 2004.
3. Form 8-K dated May 25, 2004 filed by The Laclede Group reporting under
Item 5 the offering of 1,725,000 shares of common stock of The Laclede
Group.
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: July 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: July 27, 2004 Barry C. Cooper
------------- Chief Financial Officer
(Authorized Signatory and
Chief Financial Officer)
33
INDEX TO EXHIBITS
Exhibit
No.
- -------
10.1 - Third Amendment to Revolving Credit Agreement dated as of
June 11, 2004.
10.2 - Amendment to Terms of Retirement Plan for Non-Employee
Directors.
10.3 - Amendment to the 2002 Restricted Stock Plan for Non-Employee
Directors.
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