Exhibit 99.1
LACLEDE GAS COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
(Thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Operating Revenues:
Utility $125,870 $114,207 $784,118 $688,828
Other 643 622 1,903 1,925
------------------------- --------------------------
Total Operating Revenues 126,513 114,829 786,021 690,753
------------------------- --------------------------
Operating Expenses:
Utility
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 utility operating expenses 119,629 109,105 705,647 609,043
Other 614 600 1,838 1,873
------------------------- --------------------------
Total Operating Expenses 120,243 109,705 707,485 610,916
------------------------- --------------------------
Operating Income 6,270 5,124 78,536 79,837
------------------------- --------------------------
Other Income and (Income Deductions) - Net 11 (154) 3,288 802
------------------------- --------------------------
Interest Charges:
Interest on long-term debt 6,207 4,945 15,836 15,355
Other interest charges 552 799 2,621 2,867
------------------------- --------------------------
Total Interest Charges 6,759 5,744 18,457 18,222
------------------------- --------------------------
Income (Loss) Before Income Taxes (478) (774) 63,367 62,417
Income Tax Expense (Benefit) (363) (827) 22,746 22,868
------------------------- --------------------------
Net Income (Loss) (115) 53 40,621 39,549
Dividends on Redeemable Preferred Stock 16 16 47 47
------------------------- --------------------------
Earnings Applicable to Common Stock $ (131) $ 37 $ 40,574 $ 39,502
========================= ==========================
See notes to financial statements.
1
LACLEDE GAS COMPANY
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
-------------- -------------- --------------
Other Property and Investments 29,474 27,898 26,660
-------------- -------------- --------------
Current Assets:
Cash and cash equivalents 2,092 2,907 1,786
Accounts receivable:
Gas customers - billed and unbilled 78,633 70,217 70,444
Associated companies 3,005 8,957 8,562
Other 8,064 9,196 7,036
Allowances for doubtful accounts (7,547) (6,839) (5,121)
Delayed customer billings 11,211 - 16,778
Natural gas stored underground at LIFO cost 56,157 117,182 51,853
Propane gas at FIFO cost 15,808 17,132 12,473
Materials, supplies, and merchandise at avg. cost 4,794 3,995 4,305
Derivative instrument assets 6,225 10,838 11,350
Deferred income taxes 5,579 7,631 6,332
Prepayments and other 6,744 4,881 5,858
-------------- -------------- --------------
Total Current Assets 190,765 246,097 191,656
-------------- -------------- --------------
Deferred Charges:
Prepaid pension cost 102,463 109,445 110,662
Regulatory assets 102,200 103,807 72,266
Other 8,167 4,515 4,272
-------------- -------------- --------------
Total Deferred Charges 212,830 217,767 187,200
-------------- -------------- --------------
Total Assets $1,072,943 $1,113,009 $1,017,516
============== ============== ==============
See notes to financial statements.
2
LACLEDE GAS COMPANY
BALANCE SHEETS (Continued)
(UNAUDITED)
June 30, Sept. 30, June 30,
2004 2003 2003
---- ---- ----
(Thousands, except share amounts)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock and Paid-in capital (100 shares issued and
outstanding) $ 135,090 $ 82,579 $ 82,580
Retained earnings 210,032 189,507 201,122
Accumulated other comprehensive loss (582) (582) (339)
-------------- -------------- --------------
Total common stock equity 344,540 271,504 283,363
Redeemable preferred stock (less current sinking fund
requirements) 1,108 1,258 1,258
Long-term debt (less current portion) 333,911 259,625 259,607
-------------- -------------- --------------
Total Capitalization 679,559 532,387 544,228
-------------- -------------- --------------
Current Liabilities:
Notes payable 3,625 218,200 128,860
Notes payable - associated companies - 11,540 15,003
Accounts payable 55,393 41,938 42,498
Accounts payable - associated companies 1,321 10,303 8,748
Advance customer billings - 15,361 -
Current portion of long-term debt and preferred stock 25,145 - -
Taxes accrued 26,397 16,287 27,718
Unamortized purchased gas adjustment 1,149 5,865 1,898
Other 39,266 34,344 30,226
-------------- -------------- --------------
Total Current Liabilities 152,296 353,838 254,951
-------------- -------------- --------------
Deferred Credits and Other Liabilities:
Deferred income taxes 192,003 177,957 154,809
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 21,907 21,956 21,508
-------------- -------------- --------------
Total Deferred Credits and Other Liabilities 241,088 226,784 218,337
-------------- -------------- --------------
Total Capitalization and Liabilities $1,072,943 $1,113,009 $1,017,516
============== ============== ==============
See notes to financial statements.
3
LACLEDE GAS COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30,
-------------------------------
2004 2003
---- ----
(Thousands)
Operating Activities:
Net Income $ 40,621 $ 39,549
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 17,118 16,382
Deferred income taxes and investment
tax credits 10,567 4,794
Other - net 368 618
Changes in assets and liabilities:
Accounts receivable - net (624) (19,381)
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 4,473 20,408
Taxes accrued 10,110 18,223
Natural gas stored underground 61,025 25,234
Other assets and liabilities 7,148 4,597
------------- ------------
Net cash provided by operating activities $ 131,839 $ 54,014
------------- ------------
Investing Activities:
Construction expenditures (36,597) (34,670)
Employee benefit trusts (2,041) (151)
Other investments 1,037 395
------------- ------------
Net cash used in investing activities $ (37,601) $(34,426)
------------- ------------
Financing Activities:
Issuance of first mortgage bonds 150,000 -
Maturity/Redemption of first mortgage bonds (50,000) (25,000)
Issuance (Repayment) of short-term debt - net (226,115) 24,993
Dividends paid (19,357) (19,104)
Paid-in capital contribution from Laclede Group 52,511 -
Preferred stock reacquired (5) (8)
Other (2,087) -
------------- ------------
Net cash used in financing activities $ (95,053) $(19,119)
------------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents (815) $ 469
Cash and Cash Equivalents at Beginning of Period 2,907 1,317
------------- ------------
Cash and Cash Equivalents at End of Period $ 2,092 $ 1,786
============= ============
Supplemental Disclosure of Cash Paid (Refunded)
During the Period for:
Interest $ 19,222 $ 20,301
Income taxes 2,799 (4,299)
See notes to financial statements.
4
LACLEDE GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These notes are an integral part of the accompanying financial
statements of Laclede Gas Company (Laclede Gas or the Utility). In the
opinion of Laclede Gas, this interim report includes all adjustments
(consisting of only normal recurring accruals) necessary for the fair
presentation of the results of operations for the periods presented. Certain
prior-period amounts have been reclassified to conform to current-period
presentation. This Form 10-Q should be read in conjunction with the Notes to
Financial Statements contained in Laclede Gas' Fiscal Year 2003 Form 10-K.
Laclede Gas is a regulated natural gas distribution utility having
a material seasonal cycle. As a result, these interim statements of income
for Laclede Gas are not necessarily indicative of annual results or
representative of 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.
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 net
pre-tax 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.
BASIS OF CONSOLIDATION - In compliance with generally accepted
accounting principles, transactions between Laclede Gas and its affiliates
as well as intercompany balances on Laclede Gas' balance sheet have not been
eliminated from the Laclede Gas financial statements.
Laclede Gas provides administrative and general support to
affiliates. All such costs, which are not material, are billed to the
appropriate affiliates and are reflected in accounts receivable on Laclede
Gas' Balance Sheet. Laclede Gas may also, on occasion, borrow funds from, or
lend funds to, affiliated companies. At June 30, 2004, the Laclede Gas
Balance Sheet reflected a total of $3.0 million of intercompany receivables
and $1.3 million of intercompany payables.
NEW ACCOUNTING STANDARDS - Financial Accounting Standards Board
(FASB) Interpretation No. 46 (Revised December 2003) (FIN 46R),
"Consolidation of Variable Interest Entities," addresses consolidation of
business enterprises of variable interest entities. Public entities shall
apply this Interpretation to their interests in special purpose entities as
of the first interim period ending after December 15, 2003. Application by
public entities for all other types of variable interest entities is
required in financial statements for periods ending after March 15, 2004.
There was no effect on the financial position or results of operations of
Laclede Gas upon adoption.
In December 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 132 (revised 2003) (SFAS No. 132(R)), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The
provisions of this Statement do not change the measurement and recognition
provisions of SFAS No. 87, "Employers' Accounting for Pensions," No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132(R)
replaces SFAS No. 132, and requires certain additional disclosures that
became effective for fiscal years ending after and interim periods beginning
after December 15, 2003. The required disclosures are included in Note 2 to
the Financial Statements on page 6 of this report.
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
5
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 Gas is currently evaluating the effect
of this pronouncement on its financial statements.
2. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Laclede Gas has non-contributory defined benefit, trusteed forms of
pension plans covering substantially all employees over the age of
twenty-one. Benefits are based on years of service and the employee's
compensation during the last three years of employment.
The funding policy of Laclede Gas is to contribute an amount not
less than the minimum required by government funding standards, nor more
than the maximum deductible amount for federal income tax purposes. The
Utility has contributed $.2 million to the pension funds during the 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 $ 2,776 $ 2,265 $ 8,330 $ 6,795
during the period
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 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.
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
6
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.
2. INCOME TAXES
Net provision (benefit) 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 $(7,195) $(2,875) $10,494 $15,105
Deferred 6,898 1,757 9,103 4,000
State and Local
Current (1,207) (39) 1,685 2,969
Deferred 1,141 330 1,464 794
----------------------- -----------------------
Total $ (363) $ (827) $22,746 $22,868
======================= =======================
7
3. 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 255 151 1,033 579
Other income deductions (211) (279) 402 300
--------------------- ------------------------
Other income and income
deductions - net $ 11 $(154) $3,288 $802
===================== ========================
Laclede Gas recorded the receipt of proceeds totaling $1.9 million
during the quarter ended March 31, 2004 related to its interest, as a
policyholder, in the sale of a mutual insurance company. This represents an
initial distribution relating to certain policies held by the Utility.
Subsequent distributions, if any, are not expected to have a material impact
on the consolidated financial position or results of operations of the
Utility.
4. INFORMATION BY OPERATING SEGMENT
The Regulated Gas Distribution segment consists of the regulated
operations of Laclede Gas. The Non-Regulated Other segment includes the
retail sale of gas appliances. There are no material intersegment revenues.
Regulated
Gas Non-Regulated
(Thousands) Distribution Other Eliminations Consolidated
-------------------------------------------------------------------------------------------
Three Months Ended
June 30, 2004
-------------
Operating revenues $ 125,870 $ 643 $ - $ 126,513
Net income (Loss) (133) 18 - (115)
Total assets 1,071,350 1,593 - 1,072,943
Nine Months Ended
June 30, 2004
-------------
Operating revenues $ 784,118 $1,903 $ - $ 786,021
Net income 40,581 40 - 40,621
Total assets 1,071,350 1,593 - 1,072,943
Three Months Ended
June 30, 2003
-------------
Operating revenues $ 114,207 $ 622 $ - $ 114,829
Net income 39 14 - 53
Total assets 1,015,887 1,629 - 1,017,516
Nine Months Ended
June 30, 2003
-------------
Operating revenues $ 688,828 $1,925 $ - $ 690,753
Net income 39,517 32 - 39,549
Total assets 1,015,887 1,629 - 1,017,516
8
6. COMMITMENTS AND CONTINGENCIES
Laclede Gas is subject to various environmental laws and
regulations that, to date, have not materially affected its financial
position and results of operations. As these laws, regulations, and their
interpretation evolve, however, additional costs may be incurred.
With regard to a former manufactured gas plant site located in
Shrewsbury, Missouri, Laclede Gas and state and federal environmental
regulators have agreed upon certain actions and those actions are
essentially complete. Laclede Gas currently estimates the overall costs of
these actions will be approximately $2.4 million. As of 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.
Laclede Gas is involved in other litigation, claims and
investigations arising in the normal course of business. While the results
of such litigation cannot be predicted with certainty, management, after
discussion with counsel, believes that the final outcome will not have a
material adverse effect on the financial position or results of operations
of Laclede Gas.
On June 28, 2002, the Staff of the MoPSC filed its recommendation
in a proceeding established to review Laclede Gas' gas costs for fiscal
2001. In its recommendation, the Staff proposed to disallow approximately
$4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based
Price Stabilization Program. This Program was discontinued at the end of the
2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in
proceedings before the MoPSC, including a formal hearing that was held on
this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC
decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved
by Laclede Gas, and directed Laclede Gas to flow through such amount to its
customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas
appealed the MoPSC's decision to the Cole County Circuit Court. On October
10, 2003, the Circuit Court issued an order staying the MoPSC's decision
requiring Laclede Gas to flow through the $4.9 million to 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
9
District for August 17, 2004. Laclede Gas continues to believe in the merit
of its position and intends to vigorously assert its position in the appeal.
To the extent that a final decision in the courts results in disallowance of
the $4.9 million in pre-tax gains, it could have a material effect on the
future financial position and results of operation of Laclede Gas.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LACLEDE GAS COMPANY
- -------------------
This management's discussion analyzes the financial condition and results of
operations of Laclede Gas Company (Laclede Gas or the Utility). It includes
management's view of factors that affect its business, explanations of past
financial results including changes in earnings and costs from the prior
year periods, and their effects on overall financial condition and
liquidity.
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Certain words, such as "anticipate,"
"believe," "estimate," "expect," "intend," "plan," "seek," and similar words
and expressions identify forward-looking statements that involve
uncertainties and risks. Future developments may not be in accordance with
our expectations or beliefs and the effect of future developments may not be
those anticipated. Among the factors that may cause results to differ
materially from those contemplated in any forward-looking statement are:
o weather conditions and catastrophic events;
o economic, competitive, political and regulatory conditions;
o legislative, regulatory and judicial mandates and decisions, some of which
may be retroactive, including those affecting
o allowed rates of return
o incentive regulation
o industry structure
o purchased gas adjustment provisions
o rate design structure and implementation
o franchise renewals
o environmental or safety matters
o taxes
o accounting standards;
o the results of litigation;
o retention, ability to attract, ability to collect from and conservation
efforts of customers;
o capital and energy commodity market conditions including the ability to
obtain funds for necessary capital expenditures and the terms and
conditions imposed for obtaining sufficient gas supply; and
o discovery of material weakness in internal controls; and
o employee workforce issues.
Readers are urged to consider the risks, uncertainties and other factors
that could affect our business as described in this report. All
forward-looking statements made in this report rely upon the safe harbor
protections provided under the Private Securities Litigation Reform Act of
1995. We do not, by including this statement, assume any obligation to
review or revise any particular forward-looking statement in light of future
events.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the Utility's Financial
Statements and the notes thereto.
11
LACLEDE GAS COMPANY
RESULTS OF OPERATIONS
Laclede Gas Company (Laclede Gas or the Utility) is regulated by the
Missouri Public Service Commission (MoPSC) and serves the metropolitan St.
Louis area and several other counties in eastern Missouri. Laclede Gas
delivers natural gas to retail customers at rates, and in accordance with
tariffs, authorized by the MoPSC. The Utility's earnings are primarily
generated by the sale of heating energy, which was historically heavily
influenced by the weather. As part of the 2002 rate case settlement, the
Utility initiated, effective November 9, 2002, an innovative weather
mitigation rate design that lessens the impact of weather volatility on
Laclede Gas customers during cold winters and is expected to stabilize the
Utility's earnings in the future by recovering fixed costs more evenly
during the heating season. Mitigating the impact of weather fluctuations on
Laclede Gas customers while improving the ability to recover its authorized
distribution costs and return has been a fundamental component of the
Laclede Gas strategy. The Utility's distribution costs are the essential,
primarily fixed expenditures it must incur to operate and maintain a more
than 15,000-mile natural gas distribution system and related storage
facilities. In fiscal 2003, when the weather mitigation rate design first
went into effect, the weather was essentially normal; therefore, its impact
was minimal. However, it has shown its value during the first 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. Due to the
seasonal nature of the business of Laclede Gas, earnings are typically
concentrated in the November through April period, which generally
corresponds with the heating season. The Utility typically experiences
losses during the non-heating season. Due to the material seasonal cycle of
Laclede Gas, the accompanying interim statements of income for Laclede Gas
are not necessarily indicative of annual results or representative of the
succeeding quarter of the fiscal year.
Quarter Ended June 30, 2004
- ---------------------------
Laclede Gas recorded a loss of $.1 million for the quarter ended June 30,
2004 compared with net income that was essentially break-even during the
same quarter last year. The slight variation was primarily attributable 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 above 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.
12
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 in long-term debt was
partially offset by reduced interest on short-term debt reflecting lower
borrowings.
Nine Months Ended June 30, 2004
- -------------------------------
Laclede Gas' net income for the nine months ended June 30, 2004 was $40.6
million, compared with $39.5 million reported for the same period last year.
The year-to-year improvement in net income of $1.1 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 $2.5 million
primarily reflecting the receipt of proceeds totaling $1.9 million
related to the Utility's interest, as a policyholder, in the sale of a
mutual insurance company,
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.
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 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).
Other Income and Income Deductions - Net
The $2.5 million increase in other income and income deductions - net was
primarily attributable to the Utility's recognition this year of the receipt
of proceeds totaling $1.9 million related to its interest, as a
policyholder, in the sale of a mutual insurance company. This represents an
initial distribution relating to certain policies held by the Utility.
Subsequent distributions, if any, are not expected to have a material impact
on the consolidated financial position or results of operations of the
Utility.
13
Interest Charges
The $.2 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 and the May 2003 maturity of $25 million of 6 1/4%
First Mortgage Bonds. The higher interest on long-term debt was partially
offset by lower short-term interest reflecting reduced borrowings.
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.
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. Laclede Gas continues to believe in the merit of its
position and intends to vigorously assert its position in the appeal. To the
extent that a final decision in the courts results in disallowance of the
$4.9 million in pre-tax gains, it could have a material effect on the future
financial position and results of operations of Laclede Gas.
On March 1, 2004, the Utility made an Infrastructure System Replacement
Surcharge (ISRS) filing with the MoPSC that 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
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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.
Employee benefits and postretirement obligations - Pension and
postretirement obligations are calculated by actuarial consultants
that utilize several statistical factors and other assumptions
related to future events, such as discount rates, returns on plan
assets, compensation increases, and mortality rates. The amount of
expense recognized by the Utility is dependent on the regulatory
treatment provided for such costs. Certain liabilities related to
group medical benefits and workers' compensation claims, portions
of which are self-insured and/or contain stop/loss coverage with
third-party insurers to limit exposure, are established based on
historical trends.
Laclede Gas accounts for its regulated operations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." This statement sets forth the
application of accounting principles generally accepted in the United States
of America for those companies whose rates are established by or are subject
to approval by an independent third-party regulator. The provisions of SFAS
No. 71 require, among other things, that financial statements of a regulated
enterprise reflect the actions of regulators, where appropriate. These
actions may result in the recognition of revenues and expenses in time
periods that are different than non-regulated enterprises. When this occurs,
costs are deferred as assets in the balance sheet (regulatory assets) and
recorded as expenses when those amounts are reflected in rates. Also,
regulators can impose liabilities upon a regulated company for amounts
previously collected from customers and for recovery of costs that are
expected to be incurred in the future (regulatory liabilities). Management
believes that the current regulatory environment supports the continued use
of SFAS No. 71 and that all regulatory assets and liabilities are
recoverable or refundable through the regulatory process. We believe the
following represent the more significant items recorded through the
application of SFAS No. 71:
The Utility's Purchased Gas Adjustment Clause (PGA) allows Laclede
Gas to flow through to customers, subject to prudence review, the
cost of purchased gas supplies, including the costs, cost
reductions and related carrying costs associated with the Utility's
use of natural gas financial instruments to hedge the purchase
price of natural gas. The difference between actual costs incurred
and costs recovered through the application of the PGA are recorded
as regulatory assets and liabilities that are recovered or refunded
in a subsequent period.
Laclede Gas records deferred tax liabilities and assets measured by
enacted tax rates for the net tax effect of all temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes, and the amounts used for income
tax purposes. Changes in enacted tax rates, if any, and certain
property basis differences will be reflected by entries to
regulatory asset or liability
15
accounts for regulated companies, and will be reflected as income or
loss for non-regulated companies. Also, pursuant to the direction of
the MoPSC, Laclede Gas' provision for income tax expense for financial
reporting purposes reflects an open-ended method of tax depreciation.
This method is consistent with the regulatory treatment prescribed
by the MoPSC to depreciate the Utility's assets.
For further discussion of significant accounting policies, see the Notes to
the Financial Statements included in Laclede Gas' 10-K for the fiscal year
ended September 30, 2003.
Accounting Pronouncements
- -------------------------
Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised
December 2003) (FIN 46R), "Consolidation of Variable Interest Entities,"
addresses consolidation of business enterprises of variable interest
entities. Public entities shall apply this Interpretation to their interests
in special purpose entities as of the first interim period ending after
December 15, 2003. Application by public entities for all other types of
variable interest entities is required in financial statements for periods
ending after March 15, 2004. There was no effect on the financial position
or results of operations of Laclede Gas upon adoption.
In December 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 132 (revised 2003) (SFAS No. 132 (R)), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The
provisions of this Statement do not change the measurement and recognition
provisions of SFAS No. 87, "Employers' Accounting for Pensions," No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132(R)
replaces SFAS No. 132, and requires certain additional disclosures that
became effective for fiscal years ending after and interim periods beginning
after December 15, 2003. The required disclosures are included in Note 2 to
the Financial Statements on page 6 of this report.
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 Gas 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
Gas issues were as follows:
Type of Facility S&P Moody's Fitch
- -----------------------------------------------------------------------------
Laclede Gas First Mortgage Bonds A A3 A+
Laclede Gas Commercial Paper A-1 P-2
16
The Utility's ratings are investment grade, and the Utility believes that it
has adequate access to the financial markets to meet its capital
requirements. These ratings remain subject to review and change by the
rating agencies.
Cash Flows
- ----------
Laclede Gas' short-term borrowing requirements typically peak during colder
months when Laclede Gas borrows money to cover the gap between when it
purchases its natural gas and when its customers pay for that gas. Changes
in the wholesale cost of natural gas, variations in the timing of
collections of gas cost under the Utility's PGA Clause, the seasonality of
accounts receivable balances, and the utilization of storage gas inventories
cause short-term cash requirements to vary during the year, and can cause
significant variations in the Utility's cash provided by or used in
operating activities.
Net cash provided by operating activities for the nine months ended June 30,
2004 was $131.8 million, a $77.8 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 $37.6 million compared with $34.4 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 $95.1 for the nine months ended
June 30, 2004 compared with $19.1 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
paid-in capital contributions from Laclede Group.
Liquidity and Capital Resources
- -------------------------------
Short-term cash requirements have traditionally been met through the sale of
commercial paper supported by lines of credit with banks. Laclede Gas
currently has lines of credit in place of up to $265 million, after the
expiration of a seasonal line of $25 million on February 13, 2004. Laclede
Gas' short-term borrowing during the quarter peaked at $191.7 million.
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.
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.
Laclede Gas has on file a shelf registration on Form S-3. Of the $350
million of securities originally registered under this Form 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.
17
Laclede Group has on file a shelf registration on Form S-3, which allows for
the issuance of equity securities, other than preferred stock, and debt
securities. Of the $500 million of securities originally registered under
this S-3, $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
make a capital contribution to Laclede Gas. Laclede Gas used the
contribution to reduce short-term borrowings and for general corporate
purposes.
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.
Capitalization at June 30, 2004, excluding current obligations of long-term
debt and preferred stock, increased $147.2 million since September 30, 2003
as a result of the long-term debt issuance and capital contributions from
Laclede Group. Capital consisted of 50.7% common stock equity, .2% preferred
stock and 49.1% 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 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.
Environmental Matters
- ---------------------
Laclede Gas is subject to various environmental laws and regulations that,
to date, have not materially affected its financial position and results of
operations. As these laws, regulations, and their interpretation evolve,
however, additional costs may be incurred.
With regard to a former manufactured gas plant site located in Shrewsbury,
Missouri, Laclede Gas and state and federal environmental regulators have
agreed upon certain actions and those actions are essentially complete.
Laclede Gas currently estimates the overall costs of these actions will be
approximately $2.4 million. As of 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
18
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 Gas has no off-balance sheet arrangements.
19