Exhibit 99.1
LACLEDE GAS COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
(Thousands)
Three Months Ended
December 31,
--------------------
2004 2003
---- ----
Operating Revenues:
Utility $291,253 $261,350
Other 580 632
--------------------
Total Operating Revenues 291,833 261,982
--------------------
Operating Expenses:
Utility
Natural and propane gas 206,424 175,275
Other operation expenses 30,925 29,483
Maintenance 4,214 4,429
Depreciation and amortization 5,305 5,658
Taxes, other than income taxes 15,823 14,832
--------------------
Total utility operating expenses 262,691 229,677
Other 580 605
--------------------
Total Operating Expenses 263,271 230,282
--------------------
Operating Income 28,562 31,700
--------------------
Other Income and (Income Deductions) - Net 1,510 1,420
--------------------
Interest Charges:
Interest on long-term debt 5,908 4,814
Other interest charges 957 1,082
--------------------
Total Interest Charges 6,865 5,896
--------------------
Income Before Income Taxes 23,207 27,224
Income Tax Expense 8,105 9,868
--------------------
Net Income 15,102 17,356
Dividends on Redeemable Preferred Stock 15 16
--------------------
Earnings Applicable to Common Stock $ 15,087 $ 17,340
====================
See notes to financial statements.
1
LACLEDE GAS COMPANY
BALANCE SHEETS
(UNAUDITED)
Dec. 31, Sept. 30, Dec. 31,
2004 2004 2003
---- ---- ----
(Thousands)
ASSETS
Utility Plant $1,080,755 $1,070,522 $1,039,472
Less: Accumulated depreciation and amortization 427,484 423,647 412,926
---------- ---------- ----------
Net Utility Plant 653,271 646,875 626,546
---------- ---------- ----------
Other Property and Investments 32,090 29,664 29,282
---------- ---------- ----------
Current Assets:
Cash and cash equivalents 3,698 2,340 3,301
Accounts receivable:
Gas customers - billed and unbilled 178,286 76,223 144,286
Associated companies 2,668 300 10,096
Other 9,621 11,231 25,951
Allowances for doubtful accounts (8,027) (9,975) (5,490)
Inventories:
Natural gas stored underground at LIFO cost 120,452 131,725 112,579
Propane gas at FIFO cost 20,060 15,808 17,027
Materials, supplies, and merchandise at avg. cost 5,128 4,588 4,842
Derivative instrument assets 7,759 15,196 11,259
Unamortized purchased gas adjustments 15,836 19,618 -
Deferred income taxes 12,296 1,321 6,307
Prepayments and other 5,398 6,211 4,081
---------- ---------- ----------
Total Current Assets 373,175 274,586 334,239
---------- ---------- ----------
Deferred Charges:
Prepaid pension cost 89,659 92,026 107,117
Regulatory assets 109,410 104,703 93,225
Other 9,895 8,127 5,578
---------- ---------- ----------
Total Deferred Charges 208,964 204,856 205,920
---------- ---------- ----------
Total Assets $1,267,500 $1,155,981 $1,195,987
========== ========== ==========
See notes to financial statements.
2
LACLEDE GAS COMPANY
BALANCE SHEETS (Continued)
(UNAUDITED)
Dec. 31, Sept. 30, Dec. 31,
2004 2004 2003
---- ---- ----
(Thousands, except share amounts)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock and Paid-in capital (10,000 shares issued
and outstanding) $ 137,065 $ 136,052 $ 82,589
Retained earnings 202,389 194,451 200,433
Accumulated other comprehensive loss (371) (371) (582)
---------- ---------- ----------
Total common stock equity 339,083 330,132 282,440
Redeemable preferred stock (less current sinking fund
requirements) 1,108 1,108 1,258
Long-term debt (less current portion) 333,962 333,936 234,643
---------- ---------- ----------
Total Capitalization 674,153 665,176 518,341
---------- ---------- ----------
Current Liabilities:
Notes payable 177,300 71,380 265,585
Accounts payable 81,646 44,505 72,674
Accounts payable - associated companies - 834 9,206
Advance customer billings 21,195 23,620 12,287
Current portion of long-term debt and preferred stock 145 25,145 25,000
Wages and compensation accrued 12,207 13,256 11,197
Dividends payable 7,251 7,214 6,463
Customer deposits 11,170 10,661 8,291
Interest accrued 5,327 10,623 4,263
Taxes accrued 22,832 17,669 18,072
Unamortized purchased gas adjustment - - 3,017
Other 3,900 3,232 4,016
---------- ---------- ----------
Total Current Liabilities 342,973 228,139 440,071
---------- ---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 200,854 187,831 180,268
Unamortized investment tax credits 4,944 5,010 5,240
Pension and postretirement benefit costs 20,355 20,484 22,814
Regulatory liabilities 2,725 28,210 6,375
Other 21,496 21,131 22,878
---------- ---------- ----------
Total Deferred Credits and Other Liabilities 250,374 262,666 237,575
---------- ---------- ----------
Total Capitalization and Liabilities $1,267,500 $1,155,981 $1,195,987
========== ========== ==========
See notes to financial statements.
3
LACLEDE GAS COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
Dec. 31,
---------------------------
2004 2003
---- ----
(Thousands)
Operating Activities:
Net Income $ 15,102 $ 17,356
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 5,308 5,661
Deferred income taxes and investment
tax credits (1,159) 1,547
Other - net (47) 107
Changes in assets and liabilities:
Accounts receivable - net (104,769) (93,312)
Unamortized purchased gas adjustments 3,782 (2,848)
Deferred purchased gas costs (26,082) 19,588
Advance customer billings - net (2,425) (3,074)
Accounts payable 36,307 29,639
Taxes accrued 5,163 1,785
Natural gas stored underground 11,273 4,603
Other assets and liabilities (1,647) 2,335
--------- --------
Net cash used in operating activities $ (59,194) $(16,613)
--------- --------
Investing Activities:
Construction expenditures (11,861) (11,212)
Employee benefit trusts (2,503) (1,439)
Other investments 132 221
--------- --------
Net cash used in investing activities $ (14,232) $(12,430)
--------- --------
Financing Activities:
Maturity of first mortgage bonds (25,000) -
Issuance of short-term debt - net 105,920 35,845
Dividends paid (7,149) (6,408)
Paid-in capital contributions from Laclede Group 1,013 -
--------- --------
Net cash provided by financing activities $ 74,784 $ 29,437
--------- --------
Net Increase in Cash and Cash Equivalents $ 1,358 $ 394
Cash and Cash Equivalents at Beginning of Period 2,340 2,907
--------- --------
Cash and Cash Equivalents at End of Period $ 3,698 $ 3,301
========= ========
Supplemental Disclosure of Cash Paid (Refunded) During the
Period for:
Interest $ 12,154 $ 8,465
Income taxes 849 (20)
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 2004 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 revenues at
December 31, 2004 and 2003, for the Utility, were $60.9 million and $38.3
million, respectively. After accrual of related gas cost expense, the
accrued pre-tax net revenues at December 31, 2004 and 2003 were $10.2
million and $8.8 million, respectively. The amount of accrued unbilled
revenue at September 30, 2004 was $8.8 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. At December 31, 2004, the Laclede Gas Balance Sheet
reflected a total of $2.7 million of intercompany receivables. Laclede Gas
may also, on occasion, borrow funds from, or lend funds to, affiliated
companies as well as charge or reimburse certain tax obligations.
NEW ACCOUNTING STANDARDS - In November 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 151, "Inventory Costs." This Statement amends the
guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. The provisions of
this statement shall be effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. Laclede Gas does not expect adoption of
this statement to have a material effect on its financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004)
(123(R)), "Accounting for Stock-Based Compensation." This Statement is a
revision to SFAS No. 123, and establishes standards for the accounting for
transactions in which an entity obtains employee services in share-based
payment transactions. This Statement supersedes Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and its
related implementation guidance. Laclede Group currently accounts for its
Equity Incentive Plan in accordance with APB Opinion No. 25, and provides
pro forma disclosures in its Notes to Consolidated Financial Statements
regarding the effect on net income and earnings as if compensation expense
had been determined based on the fair value recognition provisions of SFAS
No. 123. SFAS No. 123(R) is effective for public entities that do not file
as small business issuers as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. Laclede Gas is currently
evaluating the provisions of this Statement, and its effect resulting from
Laclede Group's adoption of this Statement no later than the fourth quarter
of fiscal 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets." This Statement is an amendment of APB Opinion No. 29,
"Accounting for Nonmonetary Transactions." The guidance in APB Opinion No.
29 is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. This statement
amends APB Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. The provisions of this Statement will be effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June
5
15, 2005. Laclede Gas does not expect adoption of this statement to have a
material effect on its financial position or results of operations.
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. Plan
assets consist primarily of corporate and U.S. government obligations and
pooled equity funds.
Pension costs for the quarters ending December 31, 2004 and 2003
were $1.1 million. These costs include amounts capitalized with construction
activities.
The net periodic pension costs include the following components:
Three Months Ended
December 31,
-------------------
(Thousands) 2004 2003
---- ----
Service cost - benefits earned
during the period $ 2,799 $ 2,777
Interest cost on projected
benefit obligation 3,994 4,058
Expected return on plan assets (5,291) (5,625)
Amortization of prior service cost 309 331
Amortization of actuarial loss 730 951
Regulatory adjustment (1,409) (1,369)
-------------------
Net pension cost $ 1,132 $ 1,123
===================
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 gains or losses exceed 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 Income and 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 three months ended December 31, 2004 or
the three months ended December 31, 2003.
Laclede Gas also provides certain life insurance benefits at
retirement. Medical insurance is available after early retirement until age 65.
Missouri state law provides for the recovery in rates of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"
(OPEB), accrued costs provided that such costs are funded through an
independent, external funding mechanism. Laclede Gas established the
Voluntary Employees' Beneficiary Association (VEBA) and Rabbi trusts as its
external funding mechanisms. VEBA and Rabbi trusts assets consist primarily
of money market securities and mutual funds invested in stocks and bonds.
Postretirement benefit costs for quarters ending December 31, 2004
and 2003 were $2.0 million. These costs include amounts capitalized with
construction activities.
6
Net periodic postretirement benefit costs consisted of the following
components:
Three Months Ended
December 31,
------------------
(Thousands) 2004 2003
---- ----
Service cost - benefits earned
during the period $ 845 $ 794
Interest cost on accumulated
postretirement benefit obligation 826 801
Expected return on plan assets (319) (209)
Amortization of transition obligation 145 265
Amortization of prior service cost (8) (8)
Amortization of actuarial loss 217 174
Regulatory adjustment 295 164
------------------
Net postretirement benefit cost $2,001 $1,981
==================
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 gains or losses exceed 10%
of the greater of the accumulated postretirement benefit obligation or the
market-related value of plan assets. Such excess is amortized over the
average remaining service life of active participants. Also in the 2002 rate
case, the Commission ordered that the recovery in rates for the
postretirement benefit costs be based on the accounting methodology as
ordered in the 1999 rate case. The difference between this amount and
postretirement benefit expense as calculated pursuant to the above is
deferred as a regulatory asset or liability.
3. INCOME TAXES
Net provision (benefit) for income taxes was as follows during the
periods set forth below:
Three Months Ended
December 31,
------------------
(Thousands) 2004 2003
---- ----
Federal
Current $7,956 $7,128
Deferred (913) 1,342
State and Local
Current 1,308 1,194
Deferred (246) 204
------------------
Total $8,105 $9,868
==================
4. OTHER INCOME AND INCOME DEDUCTIONS - NET
Three Months Ended
December 31,
------------------
(Thousands) 2004 2003
---- ----
Allowance for funds used during construction $ (25) $ (32)
Other income 501 517
Other income deductions 1,034 935
------------------
Other income and income deductions - net $1,510 $1,420
==================
7
5. INFORMATION BY OPERATING SEGMENT
The Regulated Gas Distribution segment consists of the regulated
operations of Laclede Gas. The Non-Regulated Other segment includes the
retail sale of gas appliances. There are no material intersegment revenues.
Regulated Non-
Gas Regulated
(Thousands) Distribution Other Eliminations Total
-------------------------------------------------------------------------------------------
Three Months Ended
December 31, 2004
-----------------
Operating revenues $ 291,253 $ 580 $ - $ 291,833
Net income 15,102 - - 15,102
Total assets 1,265,932 1,568 - 1,267,500
Three Months Ended
December 31, 2003
-----------------
Operating revenues $ 261,350 $ 632 $ - $ 261,982
Net income 17,340 16 - 17,356
Total assets 1,194,498 1,489 - 1,195,987
6. COMMITMENTS AND CONTINGENCIES
Laclede Gas owns and operates natural gas distribution,
transmission and storage facilities, the operations of which are subject to
various environmental laws, regulations and interpretations. While
environmental issues resulting from such operations arise in the ordinary
course of business, such issues have not materially affected Laclede Gas'
financial position and results of operations. As environmental laws,
regulations, and their interpretations evolve, however, Laclede Gas may be
required to incur additional costs.
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 remedial actions and those actions are
essentially complete. Laclede Gas currently estimates the overall costs of
these actions will be approximately $2.4 million. As of December 31, 2004,
Laclede Gas has paid or reserved for these actions. If regulators require
additional remedial 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. Laclede Gas
continues to evaluate options concerning this site, including, but not
limited to, the submission of its own Remedial Action Plan (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 to the extent 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 known whether Laclede Gas
will incur any costs in connection with environmental investigations of or
remediation at the site, and if it does incur any such 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 actions Laclede Gas has taken at the Shrewsbury site
pursuant to the current agreement with state and federal regulators may not
be significant, the scope of costs relative to future remedial actions
regulators may require at the Shrewsbury site and to the other sites is
unknown and may be material.
8
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 costs incurred under current agreement regarding the
Shrewsbury site, denials of coverage are not expected to have a material
impact on the financial position and results of operations of Laclede Gas.
With regard to the other two sites and with regard to any future actions
that might be required at the Shrewsbury site, since the scope of costs are
unknown and may be significant, denials of coverage may have a material
impact on the financial position and results of operations of Laclede Gas.
Such costs, if incurred, have typically been subject to recovery in rates.
On June 28, 2002, the Staff of the MoPSC filed its recommendation
in a proceeding established to review Laclede Gas' gas costs for fiscal
2001. In its recommendation, the Staff proposed to disallow approximately
$4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based
Price Stabilization Program. This Program was discontinued at the end of the
2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in
proceedings before the MoPSC, including a formal hearing that was held on
this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC
decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved
by Laclede Gas, and directed Laclede Gas to flow through such amount to its
customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas
appealed the MoPSC's decision to the Cole County Circuit Court. On October
10, 2003, the Circuit Court issued an order staying the MoPSC's decision
requiring Laclede Gas to flow through the $4.9 million to customers.
Pursuant to the Stay Order, Laclede Gas has paid $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 were held in the
Missouri Court of Appeals for the Western District on August 17, 2004. The
Utility is now awaiting the court's decision. The Utility continues to
believe in the merits of its position and intends, if necessary, to assert
its position vigorously throughout the appellate process. However, 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 or results of operations of Laclede Gas.
7. SUBSEQUENT EVENT
In January 2005, the Board of Directors of Laclede Gas desired to
sell shares to its sole shareholder, Laclede Group, at a price per share
equal to book value. However, Laclede Gas is prohibited from issuing
fractional shares, so the Board first authorized a stock dividend of
ninety-nine shares of its common stock, par value $1.00 per share, on each
outstanding share of its common stock to be paid on January 21, 2005 to
increase its outstanding shares from 100 to 10,000. The retroactive effect
of this stock dividend has been presented in the Balance Sheet. As such,
$9,900 was transferred to common stock and paid-in capital from retained
earnings, representing the aggregate par value of the shares issued under
the stock dividend. All references to the number of shares have been
restated from 100 shares to 10,000 shares to give retroactive effect to the
stock dividend for all periods presented.
The Board also approved, subsequent to the stock dividend, the sale
of 31 shares of Laclede Gas common stock to Laclede Group at a price per
share equal to the book value at December 31, 2004, as adjusted for the
effect of the stock dividend described above. The proceeds from the sale,
totaling approximately $1.1 million, were used to reduce short-term
borrowings. Exemption from registration was claimed under Section 4(2) of
the Securities Act of 1933.
9
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;
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.
10
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. The weather mitigation rate design minimizes the
impact of weather volatility during the peak cold months of December through
March and reduces the impact of weather volatility, to a lesser extent,
during the months of November and April. 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 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 quarters of the fiscal year.
Quarter Ended December 31, 2004
- -------------------------------
Laclede Gas' net income applicable to common stock for the quarter ended
December 31, 2004 was $15.1 million, compared with net income of $17.3
million for the same quarter last year. Temperatures experienced in the
Utility's service area during the quarter were 15% warmer than normal, but
3% colder than the same period last year. However, reduced gas sales levels
resulting from 21% warmer than normal weather in the month of November
contributed to lower earnings this quarter, despite being tempered by the
weather mitigation rate design. The decrease in net income of $2.2 million
is primarily attributable to the following factors, quantified on a pre-tax
basis:
o the net effect totaling $1.7 million of lower system gas sales volumes
primarily due to an unseasonably warm weather pattern in November;
o lower income this year from off system sales and capacity release totaling
$1.2 million;
o higher interest charges totaling $1.0 million, primarily due to the
issuance of additional long-term debt; and,
o a higher provision for uncollectible accounts totaling $.5 million above
the same period last year.
These factors were partially offset by the recovery of eligible costs
incurred to build and maintain the Utility's distribution system through the
implementation of an Infrastructure System Replacement Surcharge effective
June 10, 2004 totaling $.9 million.
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.
11
Regulated operating revenues for the quarter ended December 31, 2004 were
$291.3 million, or $29.9 million greater than the same period last year. The
increase was primarily attributable to higher PGA rates totaling $39.9
million, partially offset by decreased off system sales revenues totaling
$5.7 million and lower system gas sales levels and other variations totaling
$4.3 million. System therms sold and transported decreased by 6.8 million
therms, or 2.3%, below the quarter ended December 31, 2003.
Regulated operating expenses for the quarter ended December 31, 2004
increased $33.0 million from the same quarter last year. Natural and propane
gas expense increased $31.1 million from last year's level primarily
attributable to higher rates charged by our suppliers, partially offset by
lower volumes purchased for sendout and decreased off system gas cost
expense. Other operation and maintenance expenses increased $1.2 million, or
3.6%, primarily due to a higher provision for uncollectible accounts,
increased distribution charges and higher wage rates, partially offset by
lower pension costs and decreased group insurance charges. Taxes, other than
income, increased $1.0 million, or 6.7%, primarily due to higher gross
receipts taxes (reflecting increased revenues) and higher real estate and
personal property taxes.
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 and the November 2004 maturity of $25 million of
8 1/2% 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 short-term borrowings.
Income Taxes
The decrease in income taxes was primarily attributable to lower pre-tax
income.
Regulatory Matters
- ------------------
Laclede Gas previously appealed the MoPSC's decision in its 1999 rate case
relative to the calculation of its depreciation rates. The Circuit Court
remanded the decision to the MoPSC based on inadequate findings of fact. The
MoPSC upheld its previous order and Laclede Gas appealed this second order
to the Circuit Court. In 2002, the Circuit Court ruled that the MoPSC's
second order was lawful and reasonable, and Laclede Gas appealed the Circuit
Court's decision to the Missouri 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 January 11, 2005,
the Commission issued an Order ruling in favor of Laclede Gas on the
depreciation issue. As a direct result of the Commission's Order ruling in
favor of the Utility's position, Laclede Gas will increase certain of its
depreciation rates effective February 1, 2005 resulting in higher annual
depreciation expense totaling $2.3 million, as it originally requested. At
the same time, operating expenses related to actual removal costs, which the
Utility began expensing as incurred during fiscal 2002, will be reduced by
$2.3 million annually, as ordered by the Commission. As such, there will be
no effect on net income, and the Commission's decision will not have an
immediate effect on the Utility's recovery of depreciation expenses.
However, the Utility expects that the Commission's confirmation of Laclede
Gas' position on the proper method for calculating depreciation rates will
result in increased cash flows from capital recovery in future rate cases.
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
12
customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas
appealed the MoPSC's decision to the Cole County Circuit Court. On October
10, 2003, the Circuit Court issued an order staying the MoPSC's decision
requiring Laclede Gas to flow through the $4.9 million to customers.
Pursuant to the Stay Order, Laclede Gas has paid $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 were held in the
Missouri Court of Appeals for the Western District on August 17, 2004. The
Utility is now awaiting the court's decision. The Utility continues to
believe in the merits of its position and intends, if necessary, to assert
its position vigorously throughout the appellate process. However, 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 or results of operations of Laclede Gas.
Laclede Gas filed its first Infrastructure System Replacement Surcharge
(ISRS) filing with the MoPSC on March 1, 2004 to increase revenues by
approximately $3.86 million annually. The 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 June
1, 2004, the MoPSC approved a Stipulation and Agreement ("S&A") between
Laclede Gas and the Staff of the Commission that provided for a $3.56
million annual surcharge effective June 10, 2004. Laclede Gas made its
second ISRS filing on October 28, 2004 to increase revenues by approximately
an additional $1.6 million annually. On January 4, 2005, the MoPSC approved
a S&A between Laclede Gas and the Staff of the Commission that provided for
a $1.42 million annual increase in ISRS revenues effective January 20, 2005.
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 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
13
expenses in time periods that are different than non-regulated enterprises.
When this occurs, costs are deferred as assets in the balance sheet
(regulatory assets) and recorded as expenses when those amounts are
reflected in rates. Also, regulators can impose liabilities upon a regulated
company for amounts previously collected from customers and for recovery of
costs that are expected to be incurred in the future (regulatory
liabilities). Management believes that the current regulatory environment
supports the continued use of SFAS No. 71 and that all regulatory assets and
liabilities are recoverable or refundable through the regulatory process. We
believe the following represent the more significant items recorded through
the application of SFAS No. 71:
The Utility's Purchased Gas Adjustment (PGA) Clause allows Laclede
Gas to flow through to customers, subject to prudence review, the
cost of purchased gas supplies, including the costs, cost
reductions and related carrying costs associated with the Utility's
use of natural gas financial instruments to hedge the purchase
price of natural gas. The difference between actual costs incurred
and costs recovered through the application of the PGA are recorded
as regulatory assets and liabilities that are recovered or refunded
in a subsequent period.
Laclede Gas records deferred tax liabilities and assets measured by
enacted tax rates for the net tax effect of all temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes, and the amounts used for income
tax purposes. Changes in enacted tax rates, if any, and certain
property basis differences will be reflected by entries to
regulatory asset or liability accounts. 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 Exhibit 99.1 of the Laclede Group's
Form 10-K for the fiscal year ended September 30, 2004.
Accounting Pronouncements
- -------------------------
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory
Costs." This Statement amends the guidance in Accounting Research Bulletin
(ARB) No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and
wasted material. The provisions of this statement shall be effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Laclede Gas does not expect adoption of this statement to have a material
effect on its financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) (123(R)),
"Accounting for Stock-Based Compensation." This Statement is a revision to
SFAS No. 123, and establishes standards for the accounting for transactions
in which an entity obtains employee services in share-based payment
transactions. This Statement supersedes Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. Laclede Group currently accounts for its Equity
Incentive Plan in accordance with APB Opinion No. 25, and provides pro forma
disclosures in its Notes to Consolidated Financial Statements regarding the
effect on net income and earnings as if compensation expense had been
determined based on the fair value recognition provisions of SFAS No. 123.
SFAS No. 123(R) is effective for public entities that do not file as small
business issuers as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. Laclede Gas is currently
evaluating the provisions of this Statement, and its effect resulting from
Laclede Group's adoption of this Statement no later than the fourth quarter
of fiscal 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets." This Statement is an amendment of APB Opinion No. 29, "Accounting
for Nonmonetary Transactions." The guidance in APB
14
Opinion No. 29 is based on the principle that exchanges of nonmonetary
assets should be measured based on the fair value of the assets exchanged.
This statement amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. The provisions of this Statement will be effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. Laclede Gas does not expect adoption of this statement to have a
material effect on its financial position or results of operations.
FINANCIAL CONDITION
Credit Ratings
- --------------
As of December 31, 2004, credit ratings for outstanding securities for
Laclede Gas issues were as follows:
Type of Facility S&P Moody's Fitch
- --------------------------------------------------------------------------
Laclede Gas First Mortgage Bonds A A3 A+
Laclede Gas Commercial Paper A-1 P-2
The Utility has investment grade ratings, and believes that it will have
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 used in operating activities for the three months ended December
31, 2004 was $59.2 million, a $42.6 million increase, compared with the same
period last year. The increase in cash used in operating activities was
primarily attributable to the net effects of changes in wholesale gas prices
and lower off system sales on accounts receivable, accounts payable, and
deferred purchased gas costs.
Net cash used in investing activities for the three months ended December
31, 2004 was $14.2 million compared with $12.4 million for the three months
ended December 31, 2003. Cash used in investing activities primarily
reflected Utility construction expenditures in both periods.
Net cash provided by financing activities was $74.8 million for the three
months ended December 31, 2004 compared with $29.4 million for the three
months ended December 31, 2003. The variation primarily reflects the
issuance of additional short-term debt this year, partially offset by the
November 2004 maturity of $25 million 8 1/2% First Mortgage Bonds.
Liquidity and Capital Resources
- -------------------------------
As indicated above, the Utility's short-term borrowing requirements
typically peak during colder months. These short-term cash requirements have
traditionally been met through the sale of commercial paper supported by
lines of credit with banks.
15
Laclede Gas currently has lines of credit in place of $300 million, with $15
million expiring in April 2005 and $285 million expiring in September 2009.
Short-term commercial paper borrowings outstanding at December 31, 2004 were
$177.3 million (the peak for the quarter) at a weighted average interest
rate of 2.5% per annum. Based on short-term borrowings at December 31, 2004,
a change in interest rates of 100 basis points would increase or decrease
Laclede Gas pre-tax earnings and cash flows by approximately $1.8 million on
an annual basis.
Most of Laclede Gas' lines of credit include covenants limiting total debt,
including short-term debt, to no more than 70% of total capitalization and
requiring earnings before interest, taxes, depreciation and amortization
(EBITDA) for a trailing twelve-month period to be at least 2.25 times
interest expense. On December 31, 2004, total debt was 60% of total
capitalization. For the twelve months ending December 31, 2004, EBITDA was
3.55 times interest expense.
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 December
31, 2004. The original MoPSC authorization for issuing securities registered
on this Form S-3 expired in September 2003. In response to an application
filed by the Utility, the MoPSC extended this authorization to issue debt
and equity securities and receive capital contributions through October 31,
2006. The remaining MoPSC authorization is $64.4 million, reflecting capital
contributions that have been made by Laclede Group to Laclede Gas under this
authority through January 2005. The amount, timing and type of additional
financing to be issued under this shelf registration will depend on cash
requirements and market conditions.
In April 2004, Laclede Gas issued $50 million of First Mortgage Bonds,
5 1/2% Series, due May 1, 2019, and $100 million of First Mortgage Bonds, 6%
Series, due May 1, 2034. The net proceeds of approximately $147.9 million
from this issuance were used to repay short-term debt and to call at par the
$50 million 6 5/8% Series First Mortgage Bonds in June 2004. The proceeds
were also used to pay at maturity $25 million of 8 1/2% First Mortgage Bonds
in November 2004. At December 31, 2004, Laclede Gas had fixed-rate long-term
debt totaling $335 million. 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.
In January 2005, the Board of Directors of Laclede Gas desired to sell
shares to its sole shareholder, Laclede Group, at a price per share equal to
book value. However, Laclede Gas is prohibited from issuing fractional
shares, so the Board first authorized a stock dividend of ninety-nine shares
of its common stock on each outstanding share of its common stock to be paid
on January 21, 2005 to increase its outstanding shares from 100 to 10,000.
The Board also approved, subsequent to the stock dividend, the sale of 31
shares of Laclede Gas common stock to Laclede Group at a price per share
equal to the book value at December 31, 2004, as adjusted for the effect of
the stock dividend. The proceeds from the sale, totaling approximately $1.1
million, were used to reduce short-term borrowings.
Utility construction expenditures were $11.9 million for the three months
ended December 31, 2004, compared with $11.2 million for the same period
last year.
Capitalization at December 31, 2004, excluding current obligations of
preferred stock, consisted of 50.3% common stock equity, .2% preferred stock
equity and 49.5% long-term debt.
It is management's view that Laclede Gas has adequate access to capital
markets and will have sufficient capital resources, both internal and
external, to meet anticipated capital requirements.
The seasonal nature of Laclede Gas' sales affects the comparison of certain
balance sheet items at December 31, 2004 and at September 30, 2004, such as
Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts
Payable, Regulatory Assets and Liabilities, and Advance Customer Billings.
The Balance Sheet at December 31, 2003 is presented to facilitate comparison
of these items with the corresponding interim period of the preceding fiscal
year.
16
Contractual Obligations
- -----------------------
As of December 31, 2004, Laclede Gas had contractual obligations with
payments due as summarized below (in millions):
Payments due by period
--------------------------------------------------------
Remaining Fiscal Years
Fiscal Year Fiscal Years Fiscal Years 2009 and
Contractual Obligations Total 2005 2006-2007 2008-2009 thereafter
- ----------------------------------------------------------------------------------------------------------
Long-Term Debt (a) $ 693.3 $ 12.5 $ 81.7 $73.7 $525.4
Capital Leases - - - - -
Operating Leases (b) 8.6 1.7 3.9 2.6 .4
Purchase Obligations - Natural Gas (c) 427.1 301.5 113.2 6.5 5.9
Purchase Obligations - Other (d) 11.0 5.0 4.0 2.0 -
Other Long-Term Liabilities - - - - -
-------------------------------------------------------------------
Total $1,140.0 $320.7 $202.8 $84.8 $531.7
===================================================================
<FN>
(a) Long-term debt obligations reflect principal maturities and
interest payments.
(b) Operating lease obligations are primarily for office space,
vehicles, and power operated equipment. Additional payments will be
incurred if renewal options are exercised under the provisions of
certain agreements.
(c) These purchase obligations represent the minimum payments required
under existing natural gas transportation and storage contracts and
natural gas supply agreements. These amounts reflect fixed
obligations as well as obligations to purchase natural gas at
future market prices, calculated using December 31, 2004 NYMEX
futures prices. Laclede Gas recovers the costs related to its
purchases, transportation, and storage of natural gas through the
operation of its Purchased Gas Adjustment Clause; however,
variations in the timing of collections of gas costs from customers
affect short-term cash requirements. Additional contractual
commitments may be entered into during the heating season.
(d) These purchase obligations reflect miscellaneous agreements for the
purchase of materials and the procurement of services necessary for
normal operations.
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 December 31, 2004, the Utility held
approximately 12.1 million MMBtu of futures contracts at an average price of
$7.05 per MMBtu. Additionally, approximately 3.8 million MMBtu of other
price risk mitigation was in place through the use of option-based
strategies. These positions have various expiration dates, the longest of
which extends through October 2005.
Environmental Matters
- ---------------------
Laclede Gas owns and operates natural gas distribution, transmission and
storage facilities, the operations of which are subject to various
environmental laws, regulations and interpretations. While environmental
issues resulting from such operations arise in the ordinary course of
business, such issues have not materially affected Laclede Gas' financial
position and results of operations. As environmental laws, regulations, and
their interpretations evolve, however, Laclede Gas may be required to incur
additional costs.
17
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 remedial actions and those actions are essentially
complete. Laclede Gas currently estimates the overall costs of these actions
will be approximately $2.4 million. As of December 31, 2004, Laclede Gas has
paid or reserved for these actions. If regulators require additional
remedial 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. Laclede Gas continues to evaluate options
concerning this site, including, but not limited to, the submission of its
own Remedial Action Plan (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 to the extent 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 known whether Laclede Gas will
incur any costs in connection with environmental investigations of or
remediation at the site, and if it does incur any such 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 actions Laclede Gas has taken at the Shrewsbury site
pursuant to the current agreement with state and federal regulators may not
be significant, the scope of costs relative to future remedial actions
regulators may require at the Shrewsbury site and 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 costs incurred under current agreement regarding the Shrewsbury
site, denials of coverage are not expected to have a material impact on the
financial position and results of operations of Laclede Gas. With regard to
the other two sites and with regard to any future actions that might be
required at the Shrewsbury site, 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.
18