Exhibit 99.1
LACLEDE GAS COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
(Thousands)
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- -------------------------
2005 2004 2005 2004
---- ---- ---- ----
Operating Revenues:
Utility $ 434,996 $ 396,898 $ 726,249 $ 658,248
Other 574 628 1,154 1,260
------------------------- -------------------------
Total Operating Revenues 435,570 397,526 727,403 659,508
------------------------- -------------------------
Operating Expenses:
Utility
Natural and propane gas 321,228 288,284 527,652 463,559
Other operation expenses 34,675 32,808 65,600 62,291
Maintenance 4,680 4,641 8,894 9,070
Depreciation and amortization 5,667 5,711 10,972 11,369
Taxes, other than income taxes 26,477 24,897 42,300 39,729
------------------------- -------------------------
Total utility operating expenses 392,727 356,341 655,418 586,018
Other 618 619 1,198 1,224
------------------------- -------------------------
Total Operating Expenses 393,345 356,960 656,616 587,242
------------------------- -------------------------
Operating Income 42,225 40,566 70,787 72,266
------------------------- -------------------------
Other Income and (Income Deductions) - Net (87) 1,857 1,423 3,277
------------------------- -------------------------
Interest Charges:
Interest on long-term debt 5,643 4,815 11,551 9,629
Other interest charges 1,302 987 2,259 2,069
------------------------- -------------------------
Total Interest Charges 6,945 5,802 13,810 11,698
------------------------- -------------------------
Income Before Income Taxes 35,193 36,621 58,400 63,845
Income Tax Expense 12,676 13,241 20,781 23,109
------------------------- -------------------------
Net Income 22,517 23,380 37,619 40,736
Dividends on Redeemable Preferred Stock 15 15 30 31
------------------------- -------------------------
Earnings Applicable to Common Stock $ 22,502 $ 23,365 $ 37,589 $ 40,705
========================= =========================
See notes to financial statements.
1
LACLEDE GAS COMPANY
BALANCE SHEETS
(UNAUDITED)
Mar. 31, Sept. 30, Mar. 31,
2005 2004 2004
---- ---- ----
(Thousands)
ASSETS
Utility Plant $1,093,093 $1,070,522 $1,050,823
Less: Accumulated depreciation and amortization 431,568 423,647 416,767
--------------- -------------- ---------------
Net Utility Plant 661,525 646,875 634,056
--------------- -------------- ---------------
Other Property and Investments 30,497 29,664 29,190
--------------- -------------- ---------------
Current Assets:
Cash and cash equivalents 4,907 2,340 7,997
Accounts receivable:
Gas customers - billed and unbilled 148,776 76,223 127,261
Associated companies 439 300 2,679
Other 53,671 11,231 35,466
Allowances for doubtful accounts (10,921) (9,975) (7,775)
Delayed customer billings 26,867 - 36,141
Inventories:
Natural gas stored underground at LIFO cost 32,682 131,725 29,417
Propane gas at FIFO cost 19,982 15,808 12,914
Materials, supplies, and merchandise at avg. cost 4,748 4,588 4,560
Derivative instrument assets 8,034 15,196 7,098
Unamortized purchased gas adjustments 7,724 19,618 -
Deferred income taxes 6,897 1,321 5,694
Prepayments and other 4,293 6,211 3,845
--------------- -------------- ---------------
Total Current Assets 308,099 274,586 265,297
--------------- -------------- ---------------
Deferred Charges:
Prepaid pension cost 87,292 92,026 104,790
Regulatory assets 104,293 104,703 98,313
Other 5,347 8,127 7,643
--------------- -------------- ---------------
Total Deferred Charges 196,932 204,856 210,746
--------------- -------------- ---------------
Total Assets $1,197,053 $1,155,981 $1,139,289
=============== ============== ===============
See notes to financial statements.
2
LACLEDE GAS COMPANY
BALANCE SHEETS (Continued)
(UNAUDITED)
Mar. 31, Sept. 30, Mar. 31,
2005 2004 2004
---- ---- ----
(Thousands, except share amounts)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock and Paid-in capital (10,031, 10,000 and
10,000 shares issued, respectively) $ 138,117 $ 136,052 $ 89,539
Retained earnings 217,618 194,451 217,275
Accumulated other comprehensive loss (371) (371) (582)
-------------- -------------- --------------
Total common stock equity 355,364 330,132 306,232
Redeemable preferred stock (less current sinking fund
requirements) 948 1,108 1,108
Long-term debt (less current portion) 333,985 333,936 234,661
-------------- -------------- --------------
Total Capitalization 690,297 665,176 542,001
-------------- -------------- --------------
Current Liabilities:
Notes payable 86,230 71,380 191,415
Accounts payable 83,920 44,505 55,906
Accounts payable - associated companies 2,710 834 2,891
Advance customer billings - 23,620 -
Current portion of long-term debt and preferred stock 95 25,145 25,150
Wages and compensation accrued 13,338 13,256 12,636
Dividends payable 7,366 7,214 6,601
Customer deposits 11,220 10,661 7,799
Interest accrued 9,835 10,623 7,059
Taxes accrued 37,872 17,669 31,193
Unamortized purchased gas adjustment - - 1,458
Other 5,013 3,232 5,191
-------------- -------------- --------------
Total Current Liabilities 257,599 228,139 347,299
-------------- -------------- --------------
Deferred Credits and Other Liabilities:
Deferred income taxes 188,889 187,831 184,335
Unamortized investment tax credits 4,844 5,010 5,163
Pension and postretirement benefit costs 20,242 20,484 24,635
Regulatory liabilities 14,544 28,210 13,878
Other 20,638 21,131 21,978
-------------- -------------- --------------
Total Deferred Credits and Other Liabilities 249,157 262,666 249,989
-------------- -------------- --------------
Total Capitalization and Liabilities $1,197,053 $1,155,981 $1,139,289
============== ============== ==============
See notes to financial statements.
3
LACLEDE GAS COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
March 31,
--------------------------------
2005 2004
---- ----
(Thousands)
Operating Activities:
Net Income $ 37,619 $ 40,736
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 10,972 11,369
Deferred income taxes and investment
tax credits (1,328) 2,528
Other - net 263 215
Changes in assets and liabilities:
Accounts receivable - net (114,186) (76,100)
Unamortized purchased gas adjustments 11,894 (4,407)
Deferred purchased gas costs (14,690) 26,911
Delayed customer billings - net (50,487) (51,502)
Accounts payable 41,291 6,556
Taxes accrued 20,203 14,906
Natural gas stored underground 99,043 87,765
Other assets and liabilities 11,035 15,968
-------------- -------------
Net cash provided by operating activities $ 51,629 $ 74,945
-------------- -------------
Investing Activities:
Construction expenditures (25,645) (24,719)
Net investment in trusts (1,149) (1,702)
Other investments 339 759
-------------- -------------
Net cash used in investing activities $ (26,455) $(25,662)
-------------- -------------
Financing Activities:
Maturity of first mortgage bonds (25,000) -
Issuance (repayment) of short-term debt - net 14,850 (38,325)
Dividends paid (14,312) (12,818)
Paid-in capital contributions from Laclede Group 1,014 6,950
Issuance of common stock to Laclede Group 1,051 -
Preferred stock reacquired (210) -
-------------- -------------
Net cash used in financing activities $ (22,607) $(44,193)
-------------- -------------
Net Increase in Cash and Cash Equivalents $ 2,567 $ 5,090
Cash and Cash Equivalents at Beginning of Period 2,340 2,907
-------------- -------------
Cash and Cash Equivalents at End of Period $ 4,907 $ 7,997
============== =============
Supplemental Disclosure of Cash Paid (Refunded) During the Period
for:
Interest $ 14,289 $ 11,431
Income taxes (1,574) 2,077
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 March
31, 2005 and 2004, for the Utility, were $26.2 million and $22.3 million,
respectively. After accrual of related gas cost expense, the accrued pre-tax
net revenues at March 31, 2005 and 2004 were $7.9 million and $6.9 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 March 31, 2005, the Laclede Gas Balance Sheet
reflected a total of $0.4 million of intercompany receivables and $1.8
million of intercompany payables. Laclede Gas may also, on occasion, borrow
funds from, or lend funds to, affiliated companies as well as charge or
reimburse certain tax obligations.
UTILITY PLANT, DEPRECIATION AND AMORTIZATION - In January 2005, the
Missouri Public Service Commission (MoPSC or Commission) issued an Order
effective January 21, 2005 in the Utility's 1999 rate case relative to the
calculation of its depreciation rates. In accordance with the provisions of
the Order, Laclede Gas increased certain of its depreciation rates effective
February 1, 2005 resulting in higher annual depreciation expense totaling
$2.3 million. That same Order also required that operating expenses related
to actual removal costs, which the Utility began expensing as incurred
during fiscal 2002 pursuant to a previous Commission Order, be reduced by
$2.3 million annually. As such, the Order had no immediate effect on income
or the recovery of depreciation expenses.
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) was to be 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. However, in April
2005, the Securities and
5
Exchange Commission (SEC) amended the compliance date to allow companies to
implement SFAS No. 123(R) at the beginning of their next fiscal year.
Laclede Gas is currently evaluating the provisions of this Statement, and
its effect resulting from Laclede Group's planned adoption of this Statement
effective October 1, 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
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 March 2005, the FASB issued Interpretation No. 47 (FIN 47),
"Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies
the manner in which uncertainties concerning the timing and method of
settlement of an asset retirement obligation, as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations," should be accounted for. This
Interpretation also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005. Laclede Gas is currently evaluating the provisions
of this Interpretation.
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 March 31, 2005 and 2004 were
$1.1 million. Pension costs for the six months ended March 31, 2005 were
$2.3 million compared with $2.2 million for the same period last year. These
costs include amounts capitalized with construction activities.
The net periodic pension costs include the following components:
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- ------------------------
(Thousands) 2005 2004 2005 2004
---- ---- ---- ----
Service cost - benefits earned
during the period $ 2,799 $ 2,777 $ 5,598 $ 5,554
Interest cost on projected
benefit obligation 3,994 4,058 7,988 8,115
Expected return on plan assets (5,291) (5,625) (10,582) (11,249)
Amortization of prior service cost 308 331 617 662
Amortization of actuarial loss 730 951 1,460 1,901
Regulatory adjustment (1,408) (1,368) (2,817) (2,737)
----------------------- ------------------------
Net pension cost $ 1,132 $ 1,124 $ 2,264 $ 2,246
======================= ========================
Pursuant to the Commission's 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
6
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 six months ended March 31, 2005 or the
six months ended March 31, 2004.
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 March 31, 2005 and
2004 were $2.0 million. Postretirement benefit costs for the six months
ended March 31, 2005 and 2004 were $4.0 million. These costs include amounts
capitalized with construction activities.
Net periodic postretirement benefit costs consisted of the
following components:
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
(Thousands) 2005 2004 2005 2004
---- ---- ---- ----
Service cost - benefits earned
during the period $ 844 $ 794 $ 1,689 $ 1,587
Interest cost on accumulated
postretirement benefit obligation 826 801 1,652 1,601
Expected return on plan assets (318) (209) (637) (418)
Amortization of transition obligation 144 265 289 530
Amortization of prior service cost (8) (8) (16) (16)
Amortization of actuarial loss 217 174 434 349
Regulatory adjustment 295 164 590 329
------------------------ ------------------------
Net postretirement benefit cost $ 2,000 $ 1,981 $ 4,001 $ 3,962
======================== ========================
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.
7
3. INCOME TAXES
Net provision (benefit) for income taxes was as follows during the
periods set forth below:
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- ------------------------
2005 2004 2005 2004
---- ---- ---- ----
(Thousands)
Federal
Current $11,076 $ 10,561 $19,032 $ 17,689
Deferred (301) 863 (1,214) 2,205
State and Local
Current 1,769 1,698 3,077 2,892
Deferred 132 119 (114) 323
----------------------- ------------------------
Total $12,676 $ 13,241 $20,781 $ 23,109
======================= ========================
4. OTHER INCOME AND INCOME DEDUCTIONS - NET
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- -----------------------
(Thousands) 2005 2004 2005 2004
---- ---- ---- ----
Investment gains $ - $ 1,947 $ - $ 1,947
Allowance for funds used during construction (24) (29) (49) (61)
Other income 393 262 894 778
Other income deductions (456) (323) 578 613
------------------------- -----------------------
Other income and income deductions - net $ (87) $ 1,857 $1,423 $ 3,277
============= =========== =========== ===========
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 represented an
initial distribution relating to certain policies held by the Utility.
Subsequent distributions are not expected to have a material impact on the
consolidated financial position or results of operations of the Company.
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.
8
Regulated Non-
Gas Regulated
(Thousands) Distribution Other Eliminations Total
----------------------------------------------------------------------------------------
Three Months Ended
March 31, 2005
--------------
Operating revenues $ 434,996 $ 574 $ - $ 435,570
Net income 22,544 (27) - 22,517
Total assets 1,195,499 1,554 - 1,197,053
Six Months Ended
March 31, 2005
--------------
Operating revenues $ 726,249 $ 1,154 $ - $ 727,403
Net income 37,646 (27) - 37,619
Total assets 1,195,499 1,554 - 1,197,053
Three Months Ended
March 31, 2004
--------------
Operating revenues $ 396,898 $ 628 $ - $ 397,526
Net income 23,374 6 - 23,380
Total assets 1,137,824 1,465 - 1,139,289
Six Months Ended
March 31, 2004
--------------
Operating revenues $ 658,248 $ 1,260 $ - $ 659,508
Net income 40,714 22 - 40,736
Total assets 1,137,824 1,465 - 1,139,289
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 March 31, 2005,
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 $190,000. 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 own, 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.
9
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 of past and future claims
associated with investigation of and remediation 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 pursue claims against 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 Circuit Court of Cole County, Missouri.
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 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 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. On March 1, 2005, the Court of Appeals affirmed the
decision of the Cole County Circuit Court, finding that the plain language
of the Utility's tariff permitted Laclede Gas to retain the pre-tax gains.
The Court of Appeals remanded the case to the Cole County Circuit Court,
with instructions to remand the case to the MoPSC for further proceedings
consistent with the Court of Appeals' opinion. The MoPSC did not file for
rehearing or an appeal of the Court of Appeals' opinion. On April 4, 2005,
the Cole County Circuit Court remitted to Laclede Gas the $4.9 million
previously paid into the Court's registry. On April 7, 2005, the Commission
issued its Order on Remand in which it reversed its April 29, 2003 decision
and directed that Laclede Gas be permitted to retain the $4.9 million
consistent with the Court of Appeals opinion. The Commission's Order on
Remand is now final and unappealable. The return of the pre-tax gains,
however, was previously recorded as income in the 2002 fiscal year, so the
decision will have no effect on the future financial position or results of
operations of Laclede Gas.
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 operation of
the Utility.
On March 11, 2005, Laclede Gas Company signed a 15-year service
agreement with Cellnet Technology, Inc., to install and operate an automated
meter reading (AMR) system. Upon implementation, the Utility will pay
Cellnet monthly for successful billing reads. AMR is designed to eliminate
the need for Laclede, which has nearly 40 percent of its approximately
650,000 meters indoors, to gain physical access to meters in order to obtain
monthly meter readings. Under the terms of the agreement, Cellnet will
install and own the system as well as handle data collection, meter data
delivery, and network operation and maintenance services. Installation of
equipment on customer meters is scheduled to begin in July 2005 and will
take approximately two years to complete. The Cellnet AMR system employs a
wireless fixed network with read devices that will be attached to existing
Laclede Gas customer meters. Reads from each meter are transmitted to local
network receivers and transferred to Laclede's customer billing system,
resulting in the production of a timely, accurate bill.
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;
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 stabilizes the Utility's
earnings 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. The
Utility's income from off-system sales remains subject to fluctuations in
market conditions. Some of the factors impacting the level of off-system
sales include the availability and cost of its natural gas supply, the
weather in the Utility's service area, and the weather in other markets.
When Laclede Gas' service area experiences warmer-than-normal weather while
other markets experience colder weather or supply constraints, some of the
Utility's natural gas supply is available for off-system sales and there may
be a demand for such supply in other markets. 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 March 31, 2005
- ----------------------------
Laclede Gas' net income applicable to common stock for the quarter ended
March 31, 2005 was $22.5 million, compared with net income of $23.4 million
for the same quarter last year. The decrease in net income of $0.9 million
is primarily attributable to the following factors, quantified on a pre-tax
basis:
o non-operating income that decreased $1.9 million, primarily due to the
proceeds recorded during the quarter ended March 31, 2004 related to
the Company's interest, as a policyholder, in the sale of a mutual
insurance company totaling $1.9 million;
o higher interest charges totaling $1.1 million, primarily due to the
issuance of additional long-term debt;
o increases in operation and maintenance expenses of $1.0 million; and,
o a higher provision for uncollectible accounts totaling $0.9 million.
These factors were partially offset by:
o higher income this year from off-system sales and capacity release
totaling $2.5 million; and,
o the recovery of eligible costs incurred to build and maintain the
Utility's distribution system through the implementation of
Infrastructure System Replacement Surcharges effective June 10, 2004
and January 20, 2005 totaling $1.2 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
12
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 income.
Regulated operating revenues for the quarter ended March 31, 2005 were
$435.0 million, or $38.1 million greater than the same period last year.
Temperatures experienced in the Utility's service area during the quarter
were 10% warmer than normal and 3% warmer than the same period last year.
Total therms sold and transported were 510.7 million, an increase of 2.7
million, or 0.5%, above the quarter ended March 31, 2004. The increase in
regulated operating revenues was primarily attributable to the following
factors:
Millions
-------------
Higher wholesale gas costs (passed on to Utility customers subject to
prudence review by the MoPSC) $ 29.4
Lower system sales volumes resulting from warmer weather and other variations (21.7)
Higher off-system sales volumes, reflecting more favorable market
conditions as described in greater detail in the Results of Operations 18.5
Higher prices charged for off-system sales 10.7
Partial-year effect of the Infrastructure System Replacement Surcharges (ISRS) 1.2
-------------
Total Variation $ 38.1
=============
Regulated operating expenses for the quarter ended March 31, 2005 increased
$36.4 million from the same quarter last year. Natural and propane gas
expense increased $32.9 million from last year's level primarily
attributable to higher rates charged by our suppliers and increased
off-system gas expense, partially offset by lower volumes purchased for
sendout. Other operation and maintenance expenses increased $1.9 million, or
5.1%, primarily due to a higher provision for uncollectible accounts,
increased insurance premiums and higher wage rates. These factors were
partially offset by decreased distribution charges, lower pension costs and
decreased group insurance charges. Taxes, other than income, increased $1.6
million, or 6.3%, primarily due to higher gross receipts taxes (reflecting
increased revenues).
Other Income and (Income Deductions) - Net
The $1.9 million decrease in other income and income deductions - net was
primarily attributable to the Utility's recognition of the receipt of
proceeds totaling $1.9 million related to its interest, as a policyholder,
in the sale of a mutual insurance company during the quarter ended March 31,
2004.
Interest Charges
The $1.1 million increase in interest charges was primarily due to higher
interest on long-term debt due to the April 2004 issuance of $50 million
principal amount of 5 1/2% First Mortgage Bonds and $100 million principal
amount of 6% First Mortgage Bonds, partially offset by the early redemption
in June 2004 of $50 million principal amount of 6 5/8% First Mortgage Bonds
and the November 2004 maturity of $25 million principal amount of 8 1/2%
First Mortgage Bonds.
Income Taxes
The decrease in income taxes was primarily attributable to lower pre-tax
income.
Six Months Ended March 31, 2005
- -------------------------------
Laclede Gas' net income for the six months ended March 31, 2005 was $37.6
million, compared with $40.7 million reported for the same period last year.
The year-to-year decrease net income of $3.1 million was primarily
attributable to the following factors, quantified on a pre-tax basis.
o higher interest charges totaling $2.1 million, primarily due to the
issuance of additional long-term debt;
o non-operating income decreased $1.9 million, essentially due to the
proceeds recorded during the quarter ended March 31, 2004 related to
the Company's interest, as a policyholder, in the sale of a mutual
insurance company totaling $1.9 million;
13
o the net effect of lower system gas sales volumes totaling $1.8 million
primarily due to an unseasonably warm weather pattern in November;
o other increases in operation and maintenance expenses totaling $1.7
million; and,
o a higher provision for uncollectible accounts totaling $1.4 million.
These factors were partially offset by:
o the recovery of eligible costs incurred to build and maintain the
Utility's distribution system through the implementation of
Infrastructure System Replacement Surcharges effective June 10, 2004
and January 20, 2005 totaling $2.1 million; and,
o higher income this year from off-system sales and capacity release
totaling $1.2 million.
Regulated Operating Revenues and Operating Expenses
Regulated operating revenues for the six months ended March 31, 2005 were
$726.2 million, or $68.0 million greater than the same period last year.
Temperatures experienced in the Utility's service area during the six months
ended March 31, 2005 were 12% warmer than normal and essentially equal to
the same period last year. Total therms sold and transported were 834.3
million, a decrease of 27.8 million, or 3.2%, below the six months ended
March 31, 2004. The increase in regulated operating revenues was primarily
attributable to the following factors:
Millions
-------------
Higher wholesale gas costs (passed on to Utility customers subject to
prudence review by the MoPSC) $ 67.2
Lower system sales volumes resulting from warmer weather and other variations (25.0)
Higher prices charged for off-system sales 18.3
Higher off-system sales volumes, reflecting more favorable market
conditions as described in greater detail in the Results of Operations 5.4
Partial-year effect of the ISRS 2.1
-------------
Total Variation $ 68.0
=============
Regulated operating expenses for the six months ended March 31, 2005
increased $69.4 million from the same period last year. Natural and propane
gas expense increased $64.1 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 $3.1 million, or
4.4%, primarily due to a higher provision for uncollectible accounts,
increased insurance premiums, and higher wage rates. These factors were
partially offset by lower pension costs and decreased group insurance
charges. Taxes, other than income, increased $2.6 million, or 6.5%,
primarily due to higher gross receipts taxes (attributable to the increased
revenues).
Other Income and (Income Deductions) - Net
The $1.9 million decrease in other income and income deductions - net was
primarily attributable to the Utility's recognition of the receipt of
proceeds totaling $1.9 million related to its interest, as a policyholder,
in the sale of a mutual insurance company last year.
Interest Charges
The $2.1 million increase in interest charges was primarily due to higher
interest on long-term debt due to the April 2004 issuance of $50 million
principal amount of 5 1/2% First Mortgage Bonds and $100 million principal
amount of 6% First Mortgage Bonds, partially offset by the early redemption
in June 2004 of $50 million principal amount of 6 5/8% First Mortgage Bonds
and the November 2004 maturity of $25 million principal amount of 8 1/2%
First Mortgage Bonds.
Income Taxes
The decrease in income taxes was primarily attributable to lower pre-tax
income.
14
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 increased certain of its
depreciation rates effective February 1, 2005 resulting in higher annual
depreciation expense totaling $2.3 million, as it originally requested. That
same Order also required that operating expenses related to actual removal
costs, which the Utility began expensing as incurred during fiscal 2002
pursuant to a previous Commission Order be reduced by $2.3 million annually.
As such, there was no effect on net income, and the Commission's decision
had no 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
customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas
appealed the MoPSC's decision to the Circuit Court of Cole County, Missouri.
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 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 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. On March 1, 2005, the Court of Appeals affirmed the
decision of the Cole County Circuit Court, finding that the plain language
of the Utility's tariff permitted Laclede Gas to retain the pre-tax gains.
The Court of Appeals remanded the case to the Cole County Circuit Court,
with instructions to remand the case to the MoPSC for further proceedings
consistent with the Court of Appeals' opinion. The MoPSC did not file for
rehearing or an appeal of the Court of Appeals' opinion. On April 4, 2005,
the Cole County Circuit Court remitted to Laclede Gas the $4.9 million
previously paid into the Court's registry. On April 7, 2005, the Commission
issued its Order on Remand in which it reversed its April 29, 2003 decision
and directed that Laclede Gas be permitted to retain the $4.9 million
consistent with the Court of Appeals opinion. The Commission's Order on
Remand is now final and unappealable. The return of the pre-tax gains,
however, was previously recorded as income in the 2002 fiscal year, so the
decision will have no 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
15
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. Laclede Gas made its third ISRS filing
on April 4, 2005 to increase revenues by approximately an additional $1.3
million annually. The MoPSC has not yet acted on the Company's latest
request.
On February 18, 2005, Laclede Gas filed tariff sheets with the MoPSC
requesting a general rate increase of approximately $34 million. If granted,
customers' bills would increase by an average of 4.1%. Although the filing
requests an annual increase of $39.0 million, $5.0 million of that amount is
already being billed to customers through the current ISRS, which would
cease upon the effective date of new rate schedules approved by the MoPSC.
The Utility's filing also includes a proposal to modify the Utility's gas
supply incentive plan. On February 28, 2005, the MoPSC suspended
implementation of the Utility's proposed rates until January 2006.
Historically, the MoPSC has not granted Laclede Gas' rate increase requests
in full.
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 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
16
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) was to be 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. However, in April 2005,
the Securities and Exchange Commission (SEC) amended the compliance date to
allow companies to implement SFAS No. 123(R) at the beginning of their next
fiscal year. Laclede Gas is currently evaluating the provisions of this
Statement, and its effect resulting from Laclede Group's planned adoption of
this Statement effective October 1, 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 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 March 2005, the FASB issued Interpretation No. 47 (FIN 47), "Accounting
for Conditional Asset Retirement Obligations." FIN 47 clarifies the manner
in which uncertainties concerning the timing and method of settlement of an
asset retirement obligation, as used in SFAS No. 143, "Accounting for Asset
Retirement Obligations," should be accounted for. This Interpretation also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN 47 is
17
effective no later than the end of fiscal years ending after December 15,
2005. Laclede Gas is currently evaluating the provisions of this
Interpretation.
FINANCIAL CONDITION
Credit Ratings
- --------------
As of March 31, 2005, 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 provided by operating activities for the six months ended March 31,
2005 was $51.6 million, a $23.3 million decrease, compared with the same
period last year. The decrease in cash provided by operating activities was
primarily attributable to the net effects of changes in wholesale gas prices
and higher off-system sales on accounts receivable, accounts payable, and
deferred purchased gas costs.
Net cash used in investing activities for the six months ended March 31,
2005 was $26.5 million compared with $25.7 million for the six months ended
March 31, 2004. Cash used in investing activities primarily reflected
Utility construction expenditures in both periods.
Net cash used in financing activities was $22.6 million for the six months
ended March 31, 2005 compared with $44.2 million for the six months ended
March 31, 2004. The variation primarily reflects the issuance of additional
short-term debt this year, partially offset by the November 2004 maturity of
$25 million principal amount of 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.
Laclede Gas currently has lines of credit in place of $300 million, with $15
million expiring in April 2006 and $285 million expiring in September 2009.
Short-term commercial paper borrowings outstanding at March 31, 2005 were
$86.2 million at a weighted average interest rate of 2.8% per annum. Based
on short-term borrowings at March 31, 2005, a change in interest rates of
100 basis points would increase or decrease Laclede Gas pre-tax earnings and
cash flows by approximately $0.9 million on an annual basis.
18
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 March 31, 2005, total debt was 54% of total
capitalization. For the twelve months ending March 31, 2005, EBITDA was 3.4
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 March 31,
2005. 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 March 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 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 approximately $147.9 million from this issuance were used to repay
short-term debt and to call at par the $50 million principal amount of
6 5/8% Series First Mortgage Bonds in June 2004. The proceeds were also used
to pay at maturity $25 million principal amount of 8 1/2% First Mortgage
Bonds in November 2004. At March 31, 2005, 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 subsequently approved the sale of 31 shares of Laclede Gas common
stock to Laclede Group at a price per share equal to book value during the
quarter ended March 31, 2005. The proceeds from this sale, totaling $1.1
million were used to reduce short-term borrowings.
Utility construction expenditures were $25.5 million for the six months
ended March 31, 2005, compared with $24.7 million for the same period last
year.
Capitalization at March 31, 2005, excluding current obligations of preferred
stock, consisted of 51.5% common stock equity, 0.1% preferred stock equity
and 48.4% 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 March 31, 2005 and at September 30, 2004, such as
Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts
Payable, Regulatory Assets and Liabilities, and Delayed and Advance Customer
Billings. The Balance Sheet at March 31, 2004 is presented to facilitate
comparison of these items with the corresponding interim period of the
preceding fiscal year.
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Contractual Obligations
- -----------------------
As of March 31, 2005, Laclede Gas had contractual obligations with payments
due as summarized below (in millions):
Payments due by period
---------------------------------------------------------------
Remaining Fiscal Fiscal Fiscal Years
Fiscal Year Years Years 2010 and
Contractual Obligations Total 2005 2006-2007 2008-2009 thereafter
- -----------------------------------------------------------------------------------------------------------------
Long-Term Debt (a) $ 692.1 $ 11.3 $ 81.7 $ 73.7 $525.4
Capital Leases - - - - -
Operating Leases (b) 10.2 1.5 5.1 3.2 .4
Purchase Obligations - Natural Gas (c) 368.7 235.1 121.0 6.6 6.0
Purchase Obligations - Other (d) 130.0 4.1 16.3 18.4 91.2
Other Long-Term Liabilities - - - - -
----------------------------------------------------------------------------
Total (e) $1,201.0 $252.0 $224.1 $101.9 $623.0
============================================================================
<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 March 31, 2005 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, subject to prudence review;
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.
(e) Commitments related to pension and postretirement benefit plans
have been excluded from the table above. Laclede Gas does not
expect to make any contributions to its qualified, trusteed pension
plans in fiscal 2005. Laclede Gas anticipates it will make a $0.1
million contribution relative to its non-qualified pension plans
during the remainder of fiscal 2005. With regard to the
postretirement benefits, the Utility anticipates it will contribute
$3.8 million to the qualified trusts and $0.2 million directly to
participants from Laclede Gas' funds during the rest of fiscal
2005. For further discussion of the Utility's pension and
postretirement benefit plans, refer to Note 2, Pensions and Other
PostRetirement Benefits.
Market Risk
- -----------
Laclede Gas adopted a risk management policy that provides for the purchase
of natural gas financial instruments with the goal of managing price risk
associated with purchasing natural gas on behalf of its customers. This
policy prohibits speculation. Costs and cost reductions, including carrying
costs, associated with the Utility's use of natural gas financial
instruments are allowed to be passed on to the Utility's customers through
the operation of its Purchased Gas Adjustment Clause, through which the
MoPSC allows the Utility to recover gas supply costs. Accordingly, Laclede
Gas does not expect any adverse earnings impact as a result of the use of
these financial instruments. At March 31, 2005, the Utility held
approximately 5.9 million MMBtu of futures contracts at an average price of
$7.68 per MMBtu. Additionally, approximately 9.5 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 2006.
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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.
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 March 31, 2005, 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 $190,000.
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 own, 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 of past and future claims associated
with investigation of and remediation 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
pursue claims against 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.
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