SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
FORM 10-K
ANNUAL REPORT
For the Fiscal Year Ended September 30, 2005
THE LACLEDE GROUP, INC.
LACLEDE GAS COMPANY
720 Olive Street, St. Louis, MO 63101
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
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Commission File Number Exact Name of Registrant as States of I.R.S.
Specified in its Charter and Incorporation Employer
Principal Office Address and ID
Telephone Number Number
-----------------------------------------------------------------------------------------------------
1-16681 The Laclede Group, Inc. Missouri 74-2976504
720 Olive Street
St. Louis, MO 63101
314-342-0500
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1-1822 Laclede Gas Company Missouri 43-0368139
720 Olive Street
St. Louis, MO 63101
314-342-0500
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Securities registered pursuant to Section 12(b) of the Act (as of the date of this report)
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Name of Registrant Title of Each Name of Each Exchange
Class On Which Registered
-----------------------------------------------------------------------------------------------------
The Laclede Group, Inc. Common Stock $1.00 par New York Stock Exchange
value
-----------------------------------------------------------------------------------------------------
The Laclede Group, Inc. Preferred Share Purchase New York Stock Exchange
Rights
-----------------------------------------------------------------------------------------------------
Laclede Gas Company None
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Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such report),
The Laclede Group, Inc.: Yes X No
----- -----
Laclede Gas Company: Yes X No
----- -----
(2) has been subject to such filing requirements for the past 90 days,
The Laclede Group, Inc.: Yes X No
----- -----
Laclede Gas Company: Yes X No
----- -----
2
(3) is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):
The Laclede Group, Inc.: Yes X No
----- -----
Laclede Gas Company: Yes No X
----- -----
and (4) is a shell company (as defined in Rule 12b-2 of the Exchange Act):
The Laclede Group, Inc.: Yes No X
----- -----
Laclede Gas Company: Yes No X
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of The
Laclede Group, Inc. amounted to $580,608,624 as of March 31, 2005.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Shares Outstanding At
Registrant Description of Common Stock October 31, 2005
- ------------- ------------------------------ --------------------------
The Laclede Group, Inc. Common Stock ($1.00 Par Value) 21,198,995
Laclede Gas Company Common Stock ($1.00 Par Value) 10,089 *
<FN>
* 100% owned by The Laclede Group, Inc.
Incorporated by Reference: Form 10-K Part III
Proxy Statement dated December 21, 2005**
Index to Exhibits is found on page 69.
<FN>
**The information under the captions "Compensation Committee Report
Regarding Executive Compensation," "Performance Graph" and "Audit Committee
Report" of the Proxy Statement are NOT incorporated by reference.
3
TABLE OF CONTENTS
Page
PART I
Item 1 Business.................................................................................5
Item 2 Properties..............................................................................10
Item 3 Legal Proceedings.......................................................................10
Item 4 Submission of Matters to a Vote of Security Holders.....................................10
Executive Officers of the Registrants (Item 401(b) of Regulation S-K).....................................11
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities..............................14
Item 6 Selected Financial Data.................................................................15
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................17
Item 7A Quantitative and Qualitative Disclosures About Market Risk..............................30
Item 8 Financial Statements and Supplementary Data.............................................31
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................................61
Item 9A Controls and Procedures.................................................................61
Item 9B Other Information ......................................................................61
PART III
Item 10 Directors and Executive Officers of the Registrants.....................................62
Item 11 Executive Compensation..................................................................62
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters ....................................62
Item 13 Certain Relationships and Related Transactions..........................................63
Item 14 Principal Accounting Fees and Services..................................................63
PART IV
Item 15 Exhibits, Financial Statement Schedules.................................................64
SIGNATURES................................................................................................65
FINANCIAL STATEMENT SCHEDULES.............................................................................67
INDEX TO EXHIBITS.........................................................................................69
Note: Laclede Gas Company Selected Financial Data, Management's Discussion
and Analysis of Financial Condition and Results of Operations, Notes to
Financial Statements, Management Report on Internal Control over Financial
Reporting, and Reports of Independent Registered Public Accounting Firm are
included as Exhibit 99.1.
4
Part I
Item 1. Business
The Laclede Group, Inc. (Laclede Group or the Company) is an exempt public
utility holding company formed through a corporate restructuring that became
effective October 1, 2001. Laclede Group is committed to providing reliable
natural gas service through its regulated core utility operations while
developing a presence in non-regulated activities that provide opportunities
for sustainable growth. Its primary subsidiary, Laclede Gas Company (Laclede
Gas or the Utility), is the largest natural gas distribution utility in
Missouri, serving approximately 630,000 residential, commercial, and
industrial customers in St. Louis and surrounding counties of eastern
Missouri. SM&P Utility Resources, Inc. (SM&P), one of the nation's major
underground locating and marking service businesses, is headquartered in
Carmel, Indiana and is a wholly owned subsidiary of Laclede Group. Laclede
Energy Resources, Inc. (LER), a wholly owned subsidiary, is engaged in
non-regulated efforts to market natural gas and related activities. Other
non-regulated subsidiaries provide less than 10% of revenues.
Operating revenues contributed by each segment for the last three fiscal
years are as follows:
2005 2004 2003
------------------------------------------------------------
Regulated Gas Distribution $ 978,195 $ 868,905 $ 774,772
Non-Regulated Services 141,478 104,239 100,168
Non-Regulated Gas Marketing 469,559 270,328 163,861
Non-Regulated Other 7,800 6,848 11,529
------------------------------------------------------------
Total Operating Revenues $1,597,032 $1,250,320 $1,050,330
============================================================
The Consolidated Financial Statements included in this report present the
consolidated financial position, results of operations and cash flows of
Laclede Group. The financial statements, notes to financial statements, and
management's discussion and analysis for Laclede Gas are included in this
report as Exhibit 99.1.
The following chart illustrates the organization structure of The Laclede
Group, Inc. at September 30, 2005:
Organization Structure
--------------
The Laclede
Group, Inc.
--------------
|
|
-----------------------------------------------------------------------------
| | | | |
| | | | |
------------------ ---------------- -------------- ---------------- --------------
SM&P Laclede Laclede Laclede
Laclede Gas Utility Investment Development Pipeline
Company Resources, LLC Company Company
Inc.
------------------ ---------------- -------------- ---------------- --------------
| |
| |
-------------- ----------------
Laclede
Energy Laclede
Resources, Venture Corp.
Inc.
-------------- ----------------
|
|
--------------
Laclede Gas
Family
Services,
Inc.
--------------
Laclede Group common stock is listed on The New York Stock Exchange and
trades under the ticker symbol "LG". Laclede Gas continues to pay dividends
on all serial preferred stock issued.
The information we file or furnish to the Securities and Exchange Commission
(SEC), including annual reports on Form 10-K, quarterly reports on Form
10-Q, and current reports on Form 8-K and their amendments, are available on
our website, www.thelacledegroup.com, in the Investor Services section under
SEC Filings as soon as reasonably practical after the information is filed
or furnished to the SEC.
5
NATURAL GAS SUPPLY
During the past year, Laclede Gas structured its gas supply portfolio around
a number of large natural gas suppliers with equity ownership or control of
assets strategically situated to complement the Utility's regionally diverse
firm transportation arrangements.
Laclede Gas' fundamental gas supply strategy remains unchanged: to meet the
two-fold objective of 1) ensuring that the gas supplies we acquire are
dependable and will be delivered when needed and, 2) insofar as is
compatible with that dependability, purchasing gas that is economically
priced. In structuring our natural gas supply portfolio, we continue to
focus on natural gas assets that are strategically positioned to meet the
gas company's primary objectives. We typically utilize both Mid-Continent
and Gulf Coast gas sources to provide a level of supply diversity that
facilitates the optimization of pricing differentials, as well as protects
against the potential of regional supply disruptions. During fiscal 2005, in
order to take advantage of the favorable Mid-Continent price differential,
the Utility shifted all its supply commitments under Gulf Coast supply
arrangements to the Mid-Continent region for the summer period. In addition
to lowering gas cost for its customers, this effort avoided delivery
interruptions related to Hurricanes Katrina and Rita.
In fiscal 2005, Laclede Gas purchased natural gas from 16 different
suppliers to meet current gas sales and storage injection requirements.
Natural gas purchased by Laclede Gas for delivery to our utility service
area through the Mississippi River Transmission Corporation (MRT) system
totaled 56.6 billion cubic feet (Bcf). Our Utility also holds firm
transportation on several interstate pipeline systems that access our gas
supplies upstream of MRT. An additional 10.8 Bcf of gas was purchased on the
Southern Star Central Pipeline system, and 8.2 Bcf on the Panhandle Eastern
Pipe Line Company system. Some of our commercial and industrial customers
continue to purchase their own gas and delivered to us approximately 19.2
Bcf of gas for transportation to them through our distribution system.
The fiscal 2005 peak day sendout of natural gas to our utility customers
occurred on December 22, 2004, when the average temperature was 16 degrees
Fahrenheit. On that day, our customers consumed .893 Bcf of natural gas.
Approximately eighty-five percent of this peak day demand was met with
natural gas transported to St. Louis through the MRT, Panhandle, and
Southern Star Central Pipeline systems, and the other fifteen percent was
met from the Utility's on-system storage and peak shaving resources.
UNDERGROUND NATURAL GAS STORAGE
Laclede Gas has a contractual right to store approximately 23.1 Bcf of gas
in MRT's storage facility located in Unionville, Louisiana. MRT's tariffs
allow injections into storage from May 16 through November 15 and require
the withdrawal from storage of all but 2.2 Bcf from November 16 through May
15.
In addition, Laclede Gas supplements flowing pipeline gas with natural gas
withdrawn from its own underground storage field located in St. Louis and
St. Charles Counties in Missouri. The field is designed to provide .357 Bcf
of natural gas withdrawals on a peak day and annual withdrawals of
approximately 5.5 Bcf of gas based on the inventory level that Laclede plans
to maintain.
PROPANE SUPPLY
Laclede Pipeline Company, a wholly owned subsidiary, operates a propane
pipeline that connects the propane storage and vaporization facilities of
Laclede Gas to third-party propane supply terminal facilities located in
Illinois. Laclede Gas vaporizes the propane to supplement its natural gas
supply and meet peak demands on its distribution system.
REGULATORY MATTERS
On October 28, 2004, Laclede Gas made its second Infrastructure System
Replacement Surcharge (ISRS) filing pursuant to legislation actively
promoted by the Utility and enacted in 2003 that, among other things, allows
Missouri gas utilities to adjust their rates up to twice per year to recover
the depreciation, property taxes, and rate of return on 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 January 4, 2005, the Missouri Public Service Commission (MoPSC
or Commission) approved a Stipulation and Agreement (S&A) between Laclede
Gas and the Staff of the MoPSC that provided for a $1.4 million annual
increase in ISRS revenues effective January 20, 2005. On April 4, 2005
Laclede Gas made its third ISRS filing, and on June 16, 2005, the MoPSC
approved an S&A between Laclede Gas and the MoPSC
6
Staff that provided for a $1.1 million annual increase in ISRS revenues
effective July 1, 2005. As of July 1, 2005, Laclede Gas' ISRS totaled $6.1
million annually.
On January 11, 2005, the MoPSC issued an Order ruling in favor of Laclede
Gas following the Utility's successful appeal of the MoPSC's decision in
its 1999 rate case relative to the method for calculating Laclede Gas'
depreciation rates. As a direct result of the MoPSC 's Order, Laclede Gas
increased certain of its depreciation rates effective February 1, 2005,
resulting in higher annual depreciation expense totaling $2.3 million, as it
had originally requested in that proceeding. At Laclede Gas' request, the
MoPSC's Order also required an offsetting adjustment reducing the Utility's
operating expenses related to actual removal costs. As a result, the
Commission's Order had no effect on Laclede Gas' net income during fiscal
2005. However, as discussed below, the Commission's decision on depreciation
was fully implemented in the Utility's 2005 general rate case, resulting in
increased cash flow.
On February 18, 2005, Laclede Gas filed tariff sheets with the MoPSC
requesting a general rate increase of approximately $34 million. Although
the filing requested an annual increase of $39.0 million, as of the date of
filing $5.0 million of that amount was already being billed to customers
through the current ISRS, which would cease upon the effective date of new
rate schedules approved by the MoPSC. On August 31, 2005, Laclede and
several parties to the rate proceeding filed an S&A that resolved all issues
in the rate case. The MoPSC approved the S&A on September 30, 2005, to be
effective October 1, 2005.
The approved S&A provided for an increase in base rates for the Utility of
$10.5 million, $6.1 million of which was already being billed to customers
under the ISRS, resulting in a $4.4 million net increase compared to the
Utility's previous rates. In addition, the approved S&A provided that
Laclede's Purchased Gas Adjustment (PGA) rates would be increased by $4.1
million to recover the costs Laclede incurs to finance its investment in gas
supplies that it injects underground in the summer for sale during the
winter. Together, the base and PGA rate increases raised the Utility's rates
by $8.5 million annually, net of the ISRS (which by law was to be reset to
zero effective upon implementation of the new rates).
Under the approved settlement, Laclede will contribute approximately $1
million annually to fund a new low-income energy assistance program to help
the Utility's most vulnerable customers with their utility bills in exchange
for their commitment to conserve energy and improve their payment
performance, and will increase the funding for the Utility's existing
low-income weatherization program from $0.3 million to $0.5 million
annually. Laclede will also contribute $0.3 million annually to fund an
expansion of the number and size of various energy efficiency programs that
customers can use to reduce consumption of natural gas and save on their
utility bills. The settlement approved by the Commission also allows Laclede
Gas to retain certain revenues it realizes from the release of pipeline
capacity and the sale of gas to off-system customers; provides the Utility
an opportunity to retain a portion of any savings it is able to achieve in
connection with the procurement of gas supplies and related financial
hedging instruments; continues its present weather mitigation rate design;
and fully implements Laclede Gas' depreciation method, which was affirmed by
the Commission in January 2005.
On March 1, 2005, the Missouri Court of Appeals for the Western District
affirmed the decision of the Cole County Circuit Court that had vacated the
MoPSC's April 2003 decision to disallow approximately $4.9 million in
pre-tax gains achieved by Laclede Gas in its former incentive-based Price
Stabilization Program. 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. On April
7, 2005, the MoPSC issued its Order on Remand reversing its April 29, 2003
decision and directing that the Utility be permitted to retain the $4.9
million consistent with the Court of Appeals opinion.
On July 14, 2005, Missouri Governor Matt Blunt signed a bill into law that
allows Missouri gas utilities to adjust their rates periodically outside of
general rate proceedings to recover costs incurred to comply with
environmental laws, regulations and rules and to reflect the non-gas revenue
effects of increases or decreases in residential and commercial customer
usage due to weather and conservation. Laclede Gas played an active role in
the passage of this legislation. The MoPSC rules to implement such
legislation are not yet in place, but this legislation is important because,
prior to its enactment, there was no opportunity to adjust rates to account
for the effects of such items. Upon implementation, the timing of these rate
adjustments will be more closely linked to these underlying cost or usage
changes.
On October 21, 2005, Laclede Gas filed an application requesting authority
for the purchase of certain assets of Fidelity Natural Gas, Inc., located in
Sullivan, Missouri. The purchase, contingent on the approval of the MoPSC as
well as other conditions, will add approximately 1,300 natural gas customers
to Laclede Gas' service area. The Utility expects to complete the purchase
in early 2006.
7
OTHER PERTINENT MATTERS
During fiscal year 2005, Laclede Group issued 131,144 shares of common stock
under its Dividend Reinvestment and Stock Purchase Plan and 59,700 shares of
common stock under its Equity Incentive Plan. In May 2004, Laclede Group
issued 1.725 million shares of common stock through a public offering. The
net proceeds of the offering were approximately $44.7 million. Also during
fiscal year 2004, Laclede Group issued 138,213 shares of common stock under
its Dividend Reinvestment and Stock Purchase Plan and 35,550 shares of
common stock under its Equity Incentive Plan.
*****
The business of Laclede Gas is subject to seasonal fluctuations with the
peak period occurring in the winter season. The operations of SM&P tend to
be counter-seasonal to those of Laclede Gas and are impacted by construction
trends. SM&P's revenues are dependent on a limited number of customers,
primarily in the utility and telecommunications sector, with contracts that
may be terminated on as short as 30 days notice.
*****
As of September 30, 2005, Laclede Gas had 1,933 employees, including 13
part-time employees. SM&P had 1,881 employees, including 11 part-time
employees.
***** ***** *****
Regulated Operations:
Laclede Gas had a labor agreement that expired July 31, 2004 with Locals 5-6
and 5-194 of the Paper, Allied Industrial, Chemical & Energy Workers
International Union, two locals that represent approximately 74% of Laclede
Gas' employees. On August 16, 2004, Laclede Gas and Union representatives
reached a new four-year labor agreement replacing the prior agreement. The
new contract applies through July 31, 2008.
Missouri Natural Gas Division of Laclede Gas had a labor agreement that
expired April 15, 2005 with Local 5-884 of the United Steel, Paper and
Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service
Workers International Union, that represents approximately 5% of Laclede
Gas' employees. On April 18, 2005, Missouri Natural Gas and Union
representatives reached a new four-year agreement replacing the prior
agreement. The new contract applies through April 15, 2009.
*****
The business of Laclede Gas has monopoly characteristics in that it is the
only distributor of natural gas within its franchised service area. The
principal competition is the local electric company. Other competitors in
Laclede Gas' service area include suppliers of fuel oil, coal, propane in
outlying areas, natural gas pipelines which can directly connect to large
volume customers, and in a portion of downtown St. Louis, a district steam
system. Laclede Gas has historically sold gas for househeating, certain
other household uses, and commercial and industrial space heating at prices
generally equal to or lower than prices charged for other sources of energy.
Laclede Gas' residential, commercial, and small industrial markets represent
more than 80% of the Utility's revenue. Given the current adequate level of
supply, Laclede Gas believes that the relationship between competitive
equipment and operating costs will not change significantly in the
foreseeable future, and that these markets will continue to be supplied by
natural gas.
In the new multi-family and commercial rental markets, Laclede Gas'
competitive exposure is presently limited to space and water heating
applications. Certain alternative heating systems can be cost competitive in
traditional markets, but the performance and reliability of natural gas
systems has contained the growth of these alternatives. Coal is price
competitive as a fuel source for very large boiler plant loads, but
environmental requirements have forestalled any significant market inroads.
Oil and propane can be used to fuel boiler loads and certain direct-fired
process applications, but these fuels require on-site storage, thus limiting
their competitiveness. In certain cases, district steam has been competitive
with gas for downtown St. Louis area heating users. Laclede Gas offers gas
transportation service to its large user industrial and commercial
customers. The tariff approved for that type of service produces a margin
similar to that which Laclede Gas would have received under its regular
sales rates. The availability of gas transportation service and historically
favorable spot market prices for natural gas may even encourage these types
of customers to maintain or expand operations in Laclede Gas' service area.
8
*****
Laclede Gas is subject to various environmental laws and regulations that,
to date, have not materially affected the Company's financial position and
results of operations. For a detailed discussion of environmental matters,
see Note 15 in the Notes to the Consolidated Financial Statements on page 58.
*****
Customers and revenues contributed by each class of customers of Laclede Gas
for the last three fiscal years are as follows:
Regulated Gas Distribution Operating Revenues $(000)
2005 2004 2003
------------------------------------------------------------
Residential $586,227 $543,996 $502,071
Commercial & Industrial 223,446 202,183 188,688
Interruptible 3,688 3,206 2,744
Transportation 14,726 14,523 15,503
Off-System and Other Incentive 144,195 99,152 60,609
Provision for Refunds and Other 5,913 5,845 5,157
------------------------------------------------------------
Total $978,195 $868,905 $774,772
============================================================
Customers (End of Period)
2005 2004 2003
------------------------------------------------------------
Residential 589,082 591,547 590,785
Commercial & Industrial 40,474 40,417 40,166
Interruptible 16 16 16
Transportation 150 151 154
------------------------------------------------------------
Total Customers 629,722 632,131 631,121
============================================================
Laclede Gas has franchises having initial terms varying from five years to
an indefinite duration. Generally, a franchise allows Laclede Gas, among
other things, to install pipes and construct other facilities in the
community. The franchise in Florissant, Missouri expired in 1992 and since
that time Laclede Gas has continued to provide service in that community
without a formal franchise. The franchise in University City, Missouri
expired in October 2005, and is in the process of renewal. All of the
franchises are free from unduly burdensome restrictions and are adequate for
the conduct of Laclede Gas' current public utility business in the State of
Missouri.
***** ***** *****
Non-Regulated Services:
- -----------------------
SM&P, a wholly owned subsidiary of Laclede Group, is one of the nation's
major underground locating and marking service businesses. SM&P, a Carmel,
Indiana-based company, operates across the nine-state footprint from
Michigan to Texas. Locating technicians mark the placement of underground
facilities for providers of telephone, natural gas, electric, water, cable
TV and fiber optic services so that construction work can be performed
without damaging buried facilities. SM&P's earnings not only diversify
Laclede Group's earnings but also are counter-seasonal to those of Laclede
Gas.
***** ***** *****
Non-Regulated Gas Marketing:
- ----------------------------
Laclede Energy Resources, Inc., a wholly owned subsidiary of Laclede
Investment LLC, is engaged in non-regulated efforts to market natural gas to
both on-system Utility transportation customers and customers outside of
Laclede Gas' traditional service area, and related activities.
***** ***** *****
Non-Regulated Other Subsidiaries include:
- -----------------------------------------
Laclede Pipeline Company, a wholly owned subsidiary of Laclede Group,
operates a propane pipeline that connects the propane storage and
vaporization facilities of Laclede Gas to third-party propane supply
terminal facilities located in Illinois.
9
Laclede Investment LLC, a wholly owned subsidiary of Laclede Group, invests
in other enterprises and has made loans to several joint ventures engaged in
real estate development.
Laclede Gas Family Services, Inc., a wholly owned subsidiary of Laclede
Energy Resources, Inc., is a registered insurance agency in the State of
Missouri.
Laclede Development Company, a wholly owned subsidiary of Laclede Group,
participates in real estate development, primarily through joint ventures.
Laclede Venture Corp., a wholly owned subsidiary of Laclede Development
Company, offers services for the compression of natural gas to third parties
who desire to use or to sell compressed natural gas for use in vehicles.
The lines of business that constitute the Non-Regulated Other activities of
the corporate family are not considered separately reportable operating
segments as defined by current accounting standards.
Item 2. Properties
The principal utility properties of Laclede Gas consist of more than 16,000
miles of gas main and related service pipes, meters and regulators. Other
physical properties include regional office buildings and holder stations.
Extensive underground gas storage facilities and equipment are located in an
area in North St. Louis County extending under the Missouri River into St.
Charles County. Substantially all of Laclede Gas' utility plant is subject
to the liens of its mortgage.
All of the utility properties of Laclede Gas are held in fee or by easement
or under lease agreements. The principal lease agreements include
underground storage rights that are of indefinite duration and the general
office building. The current lease on the general office building extends
through February 2010 with options to renew for up to 10 additional years.
For further information on Laclede Gas' leases and for information on SM&P's
lease obligations, see Note 15 to the Consolidated Financial Statements on
page 58.
Other non-regulated properties of Laclede Group do not constitute a
significant portion of its properties.
Item 3. Legal Proceedings
For a description of environmental matters, see Note 15 to the Consolidated
Financial Statements on page 58. For a description of pending regulatory
matters of Laclede Gas, see Part I, Item 1, Business, Regulatory Matters on
page 6. For a description of SM&P's employment-related litigation, see
Note 15 to the Consolidated Financial Statements on page 59.
Laclede Group and its subsidiaries are involved in 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 the final outcome will not have a material
adverse effect on the consolidated financial position or results of
operations reflected in the consolidated financial statements presented
herein.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 2005.
10
EXECUTIVE OFFICERS OF REGISTRANTS - Listed below are executive officers of
Laclede Group and Laclede Gas as defined by the Securities and Exchange
Commission. Their ages, at September 30, 2005, and positions are listed
below along with their business experience during the past five years.
Name, Age, and Position with Company * Appointed (1)
D. H. Yaeger, Age 56
Laclede Group
-------------
Chairman, President and Chief Executive Officer October 2000
Laclede Gas
------------
Chairman, President and Chief Executive Officer January 1999
President and Chief Executive Officer January 1999
SM&P
-----
Chief Executive Officer January 2002
LER
----
President January 1999
K. J. Neises, Age 64
Laclede Gas
-----------
Executive Vice President - Energy and
Administrative Services January 2002
Senior Vice President - Energy and
Administrative Services March 1998
LER
----
Vice President February 2002
R. E. Shively, Age 43
Laclede Gas
------------
Senior Vice President - Business and Services
Development (2) January 2001
SM&P
-----
President March 2002
B. C. Cooper, Age 46
Laclede Group
--------------
Chief Financial Officer (3) September 2002
Laclede Gas
------------
Chief Financial Officer September 2002
LER
----
Vice President October 2002
11
M. C. Darrell, Age 47
Laclede Group
--------------
General Counsel (4) May 2004
Laclede Gas
------------
General Counsel May 2004
M. C. Pendergast, Age 49
Laclede Gas
------------
Vice President - Associate General Counsel January 2002
Assistant Vice President - Associate General Counsel January 2000
M. R. Spotanski, Age 45
Laclede Gas
------------
Vice President - Finance January 2001
Assistant Vice President - Finance January 2000
M. D. Waltermire, Age 47
Laclede Gas
------------
Vice President - Operations & Marketing April 2003
Vice President - Operations & Marketing Planning February 2003
Assistant Vice President - Planning May 2001
(Director - Internal Audit) January 1996
J. A. Fallert, Age 50
Laclede Gas
------------
Controller February 1998
M. C. Kullman, Age 45
Laclede Group
--------------
Chief Governance Officer and Corporate Secretary February 2004
Corporate Secretary October 2000
Laclede Gas
------------
Secretary and Associate General Counsel February 2001
Secretary and Associate Counsel February 1998
SM&P
-----
Secretary January 2002
LER
----
Secretary February 1998
R. A. Skau, Age 48
Laclede Gas
------------
Vice President - Human Resources February 2004
Assistant Vice President - Human Resources September 2001
(Director, Labor Relations) February 1999
12
<FN>
*The information provided relates to the Company and its principal
subsidiaries. Many of the executive officers have served or currently serve
as officers or directors for other subsidiaries of the Company.
( ) Indicates a non-officer position.
(1) (1) Officers of Laclede are normally reappointed at the Annual Meeting
of the board of directors in January of each year to serve at the pleasure
of the board of directors for the ensuing year and until their successors
are elected and qualify.
(2) Mr. Shively was a principal in the Atlanta office of Scott Madden &
Associates since December 1994.
(3) Mr. Cooper served as Vice President of Finance at GenAmerica Corporation
since 2000, and prior to that he was Vice President/Controller from 1999
through 2000 and Second Vice President/Associate Controller from 1995
through 1999. Before joining GenAmerica Corporation, he was with KPMG Peat
Marwick LLP.
(4) Mr. Darrell served as Assistant General Counsel for NiSource, Inc. since
2002. Prior to that he was Executive Vice President and Chief Executive Office
in 2001 and General Counsel from 1997 through 2000 at Columbia Gas of Virginia.
13
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
The Laclede Group's common stock trades on The New York Stock Exchange
(NYSE) under the symbol "LG". The high and the low sales price for the
common stock for each quarter in the two most recent fiscal years are:
Fiscal 2005 Fiscal 2004
High Low High Low
- ------------------------------------------------------------------------------------------------------
1st Quarter 32.50 29.00 30.00 27.20
2nd Quarter 32.80 28.58 31.87 28.26
3rd Quarter 32.00 26.90 31.35 26.05
4th Quarter 34.31 30.40 29.35 26.31
The number of holders of record as of September 30, 2005 was 6,268.
Dividends declared on the common stock for the two most recent fiscal years
were:
Fiscal 2005 Fiscal 2004
- --------------------------------------------------------------------------------
1st Quarter $.340 $.335
2nd Quarter $.345 $.340
3rd Quarter $.345 $.340
4th Quarter $.345 $.340
For disclosures relating to securities authorized for issuance under equity
compensation plans, please see Item 12, page 62.
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 Sheets. 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. On
May 10, 2005, Laclede Gas sold 29 shares of Laclede Gas common stock to
Laclede Group at a price per share equal to the book value at March 31,
2005. The proceeds from the sale, totaling $1.0 million, were used to reduce
short-term borrowings. On August 15, 2005, Laclede Gas sold 29 shares of
Laclede Gas common stock to Laclede Group at a price per share equal to the
book value at June 30, 2005. The proceeds from the sale, totaling $1.0
million, were used to reduce short-term borrowings. Exemption from
registration was claimed under Section 4(2) of the Securities Act of 1933.
14
Item 6. Selected Financial Data
The Laclede Group, Inc.
Fiscal Years Ended September 30
-------------------------------------------------------------
(Thousands, Except Per Share Amounts) 2005 2004 2003 2002(a) 2001
-------------------------------------------------------------
Summary of Operations
Operating Revenues:
Regulated
Gas distribution $ 978,195 $ 868,905 $ 774,772 $ 592,097 $ 923,242
Non-Regulated
Services 141,478 104,239 100,168 94,116 -
Gas marketing 469,559 270,328 163,861 64,798 69,455
Other 7,800 6,848 11,529 4,228 9,412
-------------------------------------------------------------
Total Operating Revenues 1,597,032 1,250,320 1,050,330 755,239 1,002,109
-------------------------------------------------------------
Operating Expenses:
Regulated
Natural and propane gas 676,931 575,691 483,742 340,045 640,006
Other operation expenses 125,364 121,596 118,550 106,027 101,915
Maintenance 19,226 18,705 18,759 17,813 19,262
Depreciation and amortization 23,036 22,385 22,229 24,215 26,193
Taxes, other than income taxes 62,859 60,077 56,102 48,342 65,062
-------------------------------------------------------------
Total regulated operating expenses 907,416 798,454 699,382 536,442 852,438
Non-Regulated
Services 129,636 99,511 102,093 90,771 -
Gas marketing 462,348 265,394 159,105 64,042 68,338
Other 7,803 6,400 10,615 4,222 9,008
-------------------------------------------------------------
Total Operating Expenses 1,507,203 1,169,759 971,195 695,477 929,784
-------------------------------------------------------------
Operating Income 89,829 80,561 79,135 59,762 72,325
-------------------------------------------------------------
Allowance for Funds Used During Construction (100) (123) (107) (149) 749
-------------------------------------------------------------
Other Income and (Income Deductions) - Net 1,706 3,758 1,242 827 668
-------------------------------------------------------------
Interest Charges:
Interest on long-term debt 22,835 22,010 20,169 20,820 18,372
Interest on long-term debt to unconsolidated
affiliate trust 3,573 3,573 2,828 - -
Other interest charges 4,141 3,231 3,974 4,989 10,067
-------------------------------------------------------------
Total Interest Charges 30,549 28,814 26,971 25,809 28,439
-------------------------------------------------------------
Income Before Income Taxes 60,886 55,382 53,299 34,631 45,303
Income Tax Expense 20,761 19,264 18,652 12,247 14,831
-------------------------------------------------------------
Net Income 40,125 36,118 34,647 22,384 30,472
Dividends on Redeemable Preferred
Stock - Laclede Gas 55 62 62 68 87
-------------------------------------------------------------
Net Income Applicable to
Common Stock $ 40,070 $ 36,056 $ 34,585 $ 22,316 $ 30,385
=============================================================
Basic Earnings Per Share of Common
Stock $1.90 $1.82 $1.82 $1.18 $1.61
=============================================================
Diluted Earnings Per Share of Common
Stock $1.90 $1.82 $1.82 $1.18 $1.61
=============================================================
15
Item 6. Selected Financial Data (continued)
The Laclede Group, Inc.
Fiscal Years Ended September 30
------------------------------------------------------------
(Thousands, Except Per Share Amounts) 2005 2004 2003 2002 (a) 2001
------------------------------------------------------------
Dividends Declared -
Common Stock $ 29,002 $ 27,183 $ 25,492 $ 25,311 $ 25,296
Dividends Declared Per
Share of Common Stock $1.375 $1.355 $1.34 $1.34 $1.34
Utility Plant
Gross Plant - End of Period $1,105,733 $1,070,522 $1,030,665 $ 988,747 $ 949,775
Net Plant - End of Period 679,453 646,875 621,247 594,376 569,640
Capital Expenditures 54,621 49,130 49,926 48,765 46,952
Property Retirements 19,410 9,276 8,007 9,769 13,141
Goodwill - End of Period 28,124 28,124 28,124 27,455 -
Non-Utility Property 11,791 10,038 11,661 14,897 4,133
Other Investments 37,825 36,044 34,337 32,089 28,760
Total Assets - End of Period $1,385,073 $1,265,295 $1,202,798 $1,090,990 $ 975,910
Capitalization - End of Period
Common Stock and Paid-In Capital $ 142,677 $ 137,039 $ 87,542 $ 83,588 $ 106,590
Retained Earnings 231,551 220,483 211,610 202,517 205,512
Accumulated Other Comprehensive
Loss (7,703) (1,607) (80) (339) -
Treasury Stock - - - - (24,017)
-------------------------------------------------------------
Common Stock Equity 366,525 355,915 299,072 285,766 288,085
Redeemable Preferred Stock - Laclede Gas 948 1,108 1,258 1,266 1,588
Long-Term Debt to Unconsolidated Affiliate
Trust 46,400 46,400 46,400 - -
Long-Term Debt - Laclede Gas 294,033 333,936 259,625 259,545 284,459
------------------------------------------------------------
Total Capitalization $ 707,906 $ 737,359 $ 606,355 $ 546,577 $ 574,132
============================================================
Shares of Common Stock
Outstanding - End of Period 21,172 20,981 19,082 18,921 18,878
Book Value Per Share - End of Period $17.31 $16.96 $15.67 $15.10 $15.26
<FN>
(a) Includes SM&P subsequent to its acquisition on January 28, 2002.
Laclede Gas Company's Selected Financial Data is included in Exhibit 99.1.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE LACLEDE GROUP, INC.
INTRODUCTION
This management's discussion analyzes the financial condition and results of
operations of The Laclede Group, Inc. (Laclede Group or the Company) and its
subsidiaries. It includes management's view of factors that affect its
business, explanations of past financial results including changes in
earnings and costs from the prior year periods, and their effects on overall
financial condition and liquidity.
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Certain words, such as "anticipate,"
"believe," "estimate," "expect," "intend," "plan," "seek," and similar words
and expressions identify forward-looking statements that involve
uncertainties and risks. Future developments may not be in accordance with
our expectations or beliefs and the effect of future developments may not be
those anticipated. Among the factors that may cause results to differ
materially from those contemplated in any forward-looking statement are:
o weather conditions and catastrophic events;
o economic, competitive, political and regulatory conditions;
o legislative, regulatory and judicial mandates and decisions, some of
which may be retroactive, including those affecting
o allowed rates of return
o incentive regulation
o industry structure
o purchased gas adjustment provisions
o rate design structure and implementation
o franchise renewals
o environmental or safety matters
o taxes
o accounting standards;
o the results of litigation;
o retention, ability to attract, ability to collect from and conservation
efforts of customers;
o capital and energy commodity market conditions including the ability to
obtain funds for necessary capital expenditures and the terms and
conditions imposed for obtaining sufficient gas supply;
o discovery of material weakness in internal controls; and
o employee workforce issues.
Readers are urged to consider the risks, uncertainties and other factors
that could affect our business as described in this report. All
forward-looking statements made in this report rely upon the safe harbor
protections provided under the Private Securities Litigation Reform Act of
1995. We do not, by including this statement, assume any obligation to
review or revise any particular forward-looking statement in light of future
events.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto.
17
RESULTS OF OPERATIONS
Laclede Group's earnings are primarily derived from the regulated activities
of its largest subsidiary, Laclede Gas Company (Laclede Gas or the Utility),
Missouri's largest natural gas distribution company. Laclede Gas is
regulated by the Missouri Public Service Commission (MoPSC or Commission)
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 historically had been heavily influenced by the weather. However, 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. Due to the seasonal
nature of the business of Laclede Gas, earnings are typically concentrated
in the November through April period, which generally corresponds with the
heating season. The Utility typically experiences losses during the
non-heating season. The seasonal effect of the Utility's earnings on Laclede
Group is generally expected to be tempered somewhat by the results of SM&P
Utility Resources, Inc. (SM&P), a non-regulated underground facility
locating and marking service business, whose operations tend to be
counter-seasonal to those of Laclede Gas. Laclede Energy Resources, Inc.
(LER), is engaged in non-regulated efforts to market natural gas and related
activities. Other non-regulated subsidiaries provide less than 10% of
consolidated revenues.
Laclede Group's strategy continues to include efforts to stabilize and
improve performance of its core Utility, while developing non-regulated
businesses and taking a measured approach in the pursuit of additional
growth opportunities that complement the Utility business.
As for the Utility, mitigating the impact of weather fluctuations on Laclede
Gas customers while improving the ability to recover its authorized
distribution costs and return continues to be a fundamental component of the
Laclede Group strategy. The Utility's distribution costs are the essential,
primarily fixed expenditures it must incur to operate and maintain a more
than 16,000-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.
Wholesale natural gas prices have recently risen to unprecedented levels
across the Nation. Laclede Gas is continuing to work actively to reduce the
impact of such increases by strategically structuring its natural gas supply
portfolio and through the use of financial instruments. Nevertheless, the
costs of purchased gas are anticipated to increase substantially. The
Utility's Purchased Gas Adjustment Clause (PGA) allows Laclede Gas to flow
through to customers, subject to prudence review, the cost of purchased gas
supplies, including costs, cost reductions, and related carrying costs
associated with the use of financial instruments to hedge the purchase price
of natural gas. While the Utility believes it will continue to be able to
obtain sufficient gas supply, the higher natural gas prices nationwide may
affect sales volumes (due to the conservation efforts of customers) and cash
flows (associated with the timing of collection of gas costs and related
accounts receivable from customers).
Laclede Group continues to develop its non-regulated subsidiaries. SM&P is
working to further the logical expansion of its business in both new and
existing markets, having already made notable gains by adding business in
several key markets after experiencing setbacks in fiscal year 2003. LER
continues to focus on growing its markets on a long-term and sustainable
basis by providing both on-system Utility transportation customers and
customers outside of Laclede Gas' traditional service area with another
choice in unregulated natural gas suppliers. Nevertheless, income from LER's
operations is subject to fluctuations in market conditions.
18
EARNINGS
Overview - Net Income (Loss) by Operating Segment
(Millions, after-tax)
- ------------------------------------------------------- ------------- ------------- --------------
Years Ended September 30 2005 2004 2003
- ------------------------------------------------------- ------------- ------------- --------------
Regulated Gas Distribution $ 30.6 $ 32.1 $ 34.3
Non-Regulated Services 5.0 .7 (3.3)
Non-Regulated Gas Marketing 4.4 3.0 2.9
Non-Regulated Other .1 .3 .7
------------- ------------- --------------
Net Income Applicable to Common Stock $ 40.1 $ 36.1 $ 34.6
============= ============= ==============
Laclede Group's net income applicable to common stock was $40.1 million in
fiscal year 2005, compared with $36.1 million in fiscal year 2004, and $34.6
million in fiscal year 2003. Net income applicable to common stock increased
$4.0 million in fiscal year 2005 (compared with fiscal year 2004) primarily
due to improved results reported by SM&P and LER, partially offset by lower
Utility earnings. Net income applicable to common stock increased $1.5
million in fiscal year 2004 (compared with fiscal year 2003) primarily due
to improved results reported by SM&P, partially offset by lower Utility
income.
Basic and diluted earnings per share were $1.90 for fiscal year 2005
compared with $1.82 for fiscal year 2004. The $0.08 per share increase in
earnings was due to the effect of higher net income, partially offset by an
increase in the number of average shares outstanding this year, primarily
attributable to the sale of 1.725 million shares of common stock in May
2004. Basic and diluted earnings per share totaled $1.82 for fiscal year
2003, the same as fiscal year 2004. Higher net income reported in 2004 was
essentially offset by the effect of the higher shares of common stock
outstanding as described previously. Variations in net income were primarily
attributable to the factors described below.
Regulated Gas Distribution net income decreased by $1.5 million in 2005
compared with 2004 primarily due to the following factors, quantified on a
pre-tax basis:
o increases in operation and maintenance expenses totaling $4.3
million;
o the net effect of lower system gas sales volumes totaling $2.3
million, primarily due to an unseasonably warm weather pattern in
November 2004;
o non-operating income that decreased $2.0 million, primarily due to
variations totaling $1.4 million in proceeds recorded year-to-year
related to the Company's interest, as a policyholder, in the sale
of a mutual insurance company and higher donations; and,
o higher interest charges totaling $1.7 million, primarily due to the
issuance of additional long-term debt and higher short-term
interest expense.
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 (ISRS) effective
June 10, 2004, January 20, 2005, and July 1, 2005 totaling $3.8
million; and,
o higher income this year from off-system sales and capacity release
totaling $2.9 million.
The non-regulated services segment reported earnings in fiscal year 2005
totaling $5.0 million compared with $0.7 million in fiscal year 2004. The
significant improvement over the prior year was primarily due to SM&P's
attainment of additional business in both new and existing markets. In
addition, SM&P re-engineered many processes to facilitate profitable growth,
including training methods, mentoring programs, quality assurance and
leadership development initiatives. SM&P's improvement over the same period
last year was also attributable in part to charges recorded last year
associated with the employment-related litigation described in Note 15 to
the Consolidated Financial Statements.
The non-regulated gas marketing segment reported an increase in earnings of
$1.4 million compared with 2004, primarily due to higher sales volumes by
LER, which grew 39% during the same period principally as a result of
increased interstate pipeline wholesale transactions.
19
Regulated Gas Distribution net income decreased by $2.2 million in fiscal
year 2004 compared with fiscal year 2003 primarily due to the following
factors, quantified on a pre-tax basis:
o income recorded in 2003 totaling $3.5 million related to the
Utility's management of its annual gas supply costs;
o the net effect totaling $2.5 million of lower system gas sales
volumes (resulting from warmer temperatures in Laclede Gas' service
area) tempered by the beneficial effect in fiscal year 2004 of the
fully-implemented weather mitigation rate design that went into
effect November 9, 2002;
o a higher provision for uncollectible accounts totaling $1.7 million
above fiscal year 2003;
o an increase in interest charges of $1.3 million, primarily due to
the issuance of additional long-term debt;
o pension costs that increased $1.1 million from fiscal year 2003; and,
o higher wage rates.
These factors were partially offset by:
o non-operating income recorded in 2004 that increased $2.5 million
primarily reflecting the receipt of additional proceeds totaling
$1.1 million related to the Utility's interest, as a policyholder,
in the sale of a mutual insurance company, increases in other
investment income, and lower donations;
o a decrease in group insurance costs totaling $1.6 million from
fiscal year 2003;
o income from off-system sales and capacity release that increased
$1.4 million from fiscal year 2003;
o the partial-year effect of the implementation of an ISRS effective
June 10, 2004, totaling $1.1 million; and,
o the fully-implemented general rate increase, effective November 9,
2002, totaling $0.9 million.
SM&P reported income in fiscal year 2004 totaling $0.7 million compared with
a loss of $3.3 million in fiscal year 2003. The significant improvement over
the prior year was primarily due to the return of a substantial portion of
business from two large customers as well as attainment of new business in
both existing and new markets. LER reported minor improvements in earnings
results compared with fiscal year 2003.
Regulated Operating Revenues and Operating Expenses
Regulated operating revenues for fiscal year 2005 increased $109.3 million,
or 12.6% above fiscal year 2004. Temperatures experienced in the Utility's
service area during 2005 were 14.0% warmer than normal and essentially the
same as last year. Total system therms sold and transported were 0.91
billion for fiscal year 2005 compared with 0.95 billion for fiscal year
2004. Total off-system therms sold and transported were 0.20 billion for
fiscal year 2005 compared with 0.17 billion for fiscal year 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) $84.3
Higher prices charged for off-system sales 26.3
Lower system sales volumes and other variations (22.3)
Higher off-system sales volumes (reflecting more favorable market conditions
as described in greater detail in the Results of Operations) 17.2
Effect of the ISRS 3.8
-------------
Total Variation $109.3
=============
Regulated operating revenues for fiscal year 2004 increased $94.1 million,
or 12.1%, above fiscal year 2003. Temperatures for fiscal year 2004 were 14%
warmer than normal and 15% warmer than fiscal year 2003. Total system therms
sold and transported were 0.95 billion for fiscal year 2004 compared with
1.03 billion for fiscal year 2003. Total off-system therms sold and
transported were 0.17 billion for fiscal year 2004 compared with 0.09
billion in fiscal year 2003. The increase in regulated operating revenues
was primarily attributable to the following factors:
20
Millions
-------------
Higher wholesale gas costs (passed on to Utility customers subject to
prudence review by the MoPSC) $105.0
Lower system sales volumes and other variations (54.9)
Higher off-system sales volumes (reflecting more favorable market conditions
as described in greater detail in the Results of Operations) 47.5
Lower prices charged for off-system sales (5.5)
Effect of the ISRS 1.1
Effect of the general rate increase 0.9
-------------
Total Variation $ 94.1
=============
Regulated operating expenses in fiscal year 2005 increased $109.0 million,
or 13.6%, from fiscal year 2004. Natural and propane gas expense increased
$101.2 million, primarily attributable to higher rates charged by our
suppliers and increased off-system gas expense, partially offset by lower
system volumes purchased for sendout. Other operation and maintenance
expenses increased $4.3 million, or 3.1%, primarily due to a higher
provision for injuries and damages, increased insurance premiums and higher
wage rates. These factors were partially offset by decreased group insurance
charges, lower distribution charges and reduced pension costs. Depreciation
and amortization expense increased $0.7 million or 2.9%, primarily due to
higher rates effective February 1, 2005 and additional depreciable property,
partially offset by lower amortization of software-related costs. Taxes,
other than income, increased $2.8 million, or 4.6%, primarily due to higher
gross receipts taxes (attributable to the increased revenues).
Regulated operating expenses in fiscal year 2004 increased $99.1 million, or
14.2%, from fiscal year 2003. Natural and propane gas expense increased
$91.9 million, primarily attributable to higher rates charged by our
suppliers and increased off-system gas expense, partially offset by lower
system volumes purchased for sendout. Other operation and maintenance
expenses increased $3.0 million, or 2.2%, primarily due to a higher
provision for uncollectible accounts, higher pension costs, and higher wage
rates, partially offset by lower group insurance charges. Taxes, other than
income, increased $4.0 million, or 7.1%, primarily due to higher gross
receipts taxes (attributable to the increased revenues).
Non-Regulated Services Operating Revenues and Operating Expenses
Laclede Group's non-regulated services operating revenues for fiscal year
2005 increased $37.2 million from those revenues for fiscal year 2004
primarily due to SM&P's attainment of additional business in both new and
existing markets. The increase in non-regulated services operating expenses
totaling $30.1 million was primarily attributable to charges associated with
the additional business, partially offset by charges recorded during fiscal
year 2004 attributable to the employment related litigation described in
Note 15 to the Consolidated Financial Statements.
Laclede Group's non-regulated services operating revenues for fiscal year
2004 increased $4.1 million from those revenues for fiscal year 2003
primarily due to SM&P's attainment of new business in both new and existing
markets. The reduction in non-regulated services operating expenses,
totaling $2.6 million, was primarily attributable to SM&P's reduction in
personnel and related expenses and a non-recurring $1.0 million after-tax
charge recorded during fiscal year 2003 associated with the loss of business
from two customers. This reduction was partially offset by charges
attributable to the employment-related litigation referenced in the
preceding paragraph.
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-regulated gas marketing revenues increased $199.2 million in fiscal year
2005 from those revenues for fiscal year 2004 primarily due to higher
volumes and increased sales prices by LER. The increase in non-regulated gas
marketing operating expenses, totaling $197.0 million, was primarily
associated with increased gas expense related to higher volumes purchased
and increased prices.
Non-regulated gas marketing revenues increased $106.5 million in fiscal year
2004 from those revenues for fiscal year 2003 primarily due to higher
volumes sold and increased sales prices by LER. The increase in
non-regulated gas marketing operating expenses, totaling $106.3 million, was
primarily associated with increased gas expense incurred by LER related to
higher volumes purchased and increased prices.
21
Non-Regulated Other Operating Revenues and Operating Expenses
Non-regulated other operating revenues increased $1.0 million in fiscal year
2005 from fiscal year 2004, and decreased $4.7 million in fiscal year 2004
from fiscal year 2003. These variations were primarily due to changes in
sales levels recorded by Laclede Pipeline Company. Non-regulated other
operating expenses increased $1.4 million in fiscal year 2005 from fiscal
year 2004 and decreased $4.2 million in fiscal year 2004 compared to fiscal
year 2003 primarily due to changes in expenses associated with sales
variations recorded by Laclede Pipeline Company.
Other Income and Income Deductions-Net
The $2.0 million decrease in other income and income deductions-net in
fiscal year 2005 from fiscal year 2004 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, partially offset by recognition of additional
proceeds totaling $0.5 million received in fiscal year 2005. Other income
and income deductions-net also decreased due to higher donations. The $2.5
million increase in other income and income deductions-net in fiscal year
2004 from fiscal year 2003 was primarily attributable to the Utility's
recognition of the receipts described above. These proceeds represented an
initial distribution relating to certain policies held by the Utility. Other
income and income deductions-net also increased due to higher investment
income and lower donations.
Interest Charges
Interest charges increased $1.7 million, or 6.0%, in fiscal year 2005
(compared with fiscal year 2004) 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. The increase in interest charges was also attributable to
higher interest on short-term debt mainly attributable to higher rates,
partially offset by reduced borrowings.
Interest charges increased $1.8 million, or 6.8% in fiscal year 2004
(compared with fiscal year 2003) 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, the April 2004 issuance of $100
million principal amount of 6% First Mortgage Bonds, and the full-year
effect of the issuance of long-term debt to an unconsolidated affiliate
trust in December 2002 totaling $46.4 million. These increases in interest
costs were partially offset by the early redemption in June 2004 of $50
million principal amount of 6 5/8% First Mortgage Bonds and the May 2003
maturity of $25 million principal amount of 6 1/4% First Mortgage Bonds, as
well as reduced interest on short-term debt, mainly attributable to lower
borrowings.
Income Taxes
The increases in income taxes for all periods reported are primarily due to
higher pre-tax income.
Labor Agreement
Laclede Gas had a labor agreement that expired July 31, 2004 with Locals 5-6
and 5-194 of the Paper, Allied Industrial, Chemical & Energy Workers
International Union, two locals that represent approximately 74% of Laclede
Gas' employees. On August 16, 2004, Laclede Gas and Union representatives
reached a new four-year labor agreement replacing the prior agreement. The
new contract applies through July 31, 2008.
Missouri Natural Gas Division of Laclede Gas had a labor agreement that
expired April 15, 2005 with Local 5-884 of the United Steel, Paper and
Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service
Workers International Union, that represents approximately 5% of Laclede
Gas' employees. On April 18, 2005, Missouri Natural Gas and Union
representatives reached a new four-year agreement replacing the prior
agreement. The new contract applies through April 15, 2009.
22
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition, results of
operations, liquidity and capital resources is based upon our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. Generally
accepted accounting principles require that we make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
evaluate our estimates on an ongoing basis. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates. We believe the following represent the more significant
items requiring the use of judgment and estimates in preparing our
consolidated financial statements:
Allowances for doubtful accounts - Estimates of the collectibility
of trade accounts receivable are based on historical trends, age of
receivables, economic conditions, credit risk of specific
customers, and other factors.
Employee benefits and postretirement obligations - Pension and
postretirement obligations are calculated by actuarial consultants
that utilize several statistical factors and other assumptions
related to future events, such as discount rates, returns on plan
assets, compensation increases, and mortality rates. The amount of
expense recognized by the Utility is dependent on the regulatory
treatment provided for such costs. Certain liabilities related to
group medical benefits and workers' compensation claims, portions
of which are self-insured and/or contain "stop-loss" coverage with
third-party insurers to limit exposure, are established based on
historical trends.
Goodwill valuation - In accordance with Statements of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets," goodwill is required to be tested for impairment annually
or whenever events or circumstances occur that may reduce the value
of goodwill. In performing impairment tests, valuation techniques
require the use of estimates with regard to discounted future cash
flows of operations, involving judgments based on a broad range of
information and historical results. If the test indicates
impairment has occurred, goodwill would be reduced, adversely
impacting earnings.
Laclede Gas accounts for its regulated operations in accordance with 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 instruments to hedge the purchase
price of natural gas. The difference between actual costs incurred
and costs recovered through the application of the PGA are recorded
as regulatory assets and liabilities that are recovered or refunded
in a subsequent period.
The Company records deferred tax liabilities and assets measured by
enacted tax rates for the net tax effect of all temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes, and the amounts used for income
tax purposes. Changes in enacted tax rates, if any, and certain
property basis differences will be reflected by entries to
regulatory asset or liability accounts for regulated companies, and
will be reflected as income or loss for non-regulated companies.
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. Laclede Gas' provision for
income tax expense also records the income tax effect associated
with the difference between overheads capitalized to construction
for financial reporting purposes and those recognized for tax
purposes without recording an offsetting deferred income tax
expense. These two methods are consistent with the regulatory
treatment prescribed by the MoPSC.
23
For further discussion of significant accounting policies, see Note 1 to the
Consolidated Financial Statements included in this report on Form 10-K on
page 41.
REGULATORY MATTERS
At the state level, there have been several important developments during
the fiscal year affecting Laclede Gas.
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 year 2002
pursuant to a previous Commission Order, be reduced by $2.3 million
annually. As such, the Commission's decision had no effect on net income or
the Utility's recovery of depreciation expenses during fiscal year 2005.
However, 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 upon implementation of new base rates
effective October 1, 2005 resulting from settlement of the Utility's 2005
rate proceeding.
On June 28, 2002, the Staff of the MoPSC filed its recommendation in a
proceeding established to review Laclede Gas' gas costs for fiscal year
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. Laclede Gas appealed the MoPSC's
decision through various courts ultimately resulting in the Missouri Western
District Court of Appeals reversing the Commission's decision on the grounds
that it was unlawful and not supported by competent and substantial evidence
on the record. Consistent with the Court of Appeals' decision, on April 7,
2005, the Commission issued its Order on Remand reversing its April 29, 2003
decision and directing that Laclede Gas be permitted to retain the $4.9
million. 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 had no effect on the financial
position or results of operations of the Company.
Laclede Gas filed its first Infrastructure System Replacement Surcharge
(ISRS) filing with the MoPSC on March 1, 2004 to increase revenues by
approximately $3.9 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 $3.6 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 an
S&A between Laclede Gas and the Staff of the Commission that provided for a
$1.4 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. On June 16, 2005, the
MoPSC approved an S&A between Laclede Gas and the Staff of the Commission
that provided for a $1.1 million annual increase in ISRS revenues effective
July 1, 2005. These surcharges, totaling $6.1 million annually, were reset
to zero effective October 1, 2005 as the ISRS-related costs were included in
new base rates established in the Utility's 2005 rate proceeding. The
Utility will continue to adjust rates up to twice per year to recover such
costs in the future.
On February 18, 2005, Laclede Gas filed tariff sheets with the MoPSC
requesting a general rate increase of approximately $34 million. Although
the filing requested an annual increase of $39 million, as of the date of
the filing $5.0 million of that amount was already being billed to customers
through the ISRS, which would cease upon the effective date of new rate
schedules approved by the MoPSC. On August 31, 2005, Laclede and several
parties to the rate proceeding filed an S&A that resolved all issues in the
rate case. The MoPSC approved the S&A on September 30, 2005, to be effective
24
October 1, 2005. The approved S&A provided for an increase in base rates for
the Utility by $10.5 million, $6.1 million of which was already being billed
to customers under the ISRS, resulting in a $4.4 million net increase
compared to the Company's previous rates. In addition, the approved S&A
provided that Laclede's Purchased Gas Adjustment (PGA) rates would be
increased by $4.1 million to recover the costs Laclede incurs to finance its
investment in gas supplies that it injects underground in the summer for
sale during the winter. Together, the base and PGA rate increases raised the
Company's rates by $8.5 million annually, net of the ISRS (which by law was
reset to zero effective upon implementation of the new rates). Under the
approved settlement, Laclede Gas will provide approximately $1 million
annually to fund a new low-income energy assistance program to help the
Utility's most vulnerable customers with their utility bills in exchange for
their commitment to conserve energy and improve their payment performance,
and will increase the funding for the Utility's existing low-income
weatherization program from $0.3 million to $0.5 million annually. Laclede
Gas will also contribute $0.3 million annually to fund an expansion of the
number and size of various energy efficiency programs that customers can use
to reduce consumption of natural gas and save on their utility bills. The
settlement approved by the Commission also allows Laclede Gas to retain
certain revenues it realizes from the release of pipeline capacity and the
sale of gas to off-system customers; provides an opportunity to retain a
portion of any savings the Utility is able to achieve in connection with the
procurement of gas supplies and related financial hedging instruments;
continues its present weather mitigation rate design; and fully implements
the Utility's depreciation method, which was affirmed by the Commission in
January 2005. Pursuant to the terms of the S&A, higher depreciation rates
will become effective January 1, 2006.
On July 14, 2005, Missouri Governor Matt Blunt signed Senate Bill 179 into
law. This law, which becomes effective January 1, 2006, authorizes the
Missouri Public Service Commission to implement rules and tariff provisions
through which rates can be adjusted between general rate case proceedings to
reflect increases and decreases in certain costs and revenues. For gas
utilities like Laclede Gas, these include rate adjustments to reflect
revenue changes resulting from the impact of weather and conservation on
customer usage and to reflect changes in the costs to comply with
environmental laws, rules and regulations.
On October 21, 2005, Laclede Gas filed an application requesting authority
for the purchase of certain assets of Fidelity Natural Gas, Inc., located in
Sullivan, Missouri. The purchase, contingent on the approval of the MoPSC as
well as other conditions, will add approximately 1,300 natural gas customers
to Laclede Gas' service area. The Utility expects to complete the purchase
in early 2006.
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.
The Company does not expect adoption of this Statement to have a material
effect on the financial position or results of operations of the Company.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) (123(R)),
"Share-Based Payment." 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. Through fiscal year 2005, the Company accounted for its Equity
Incentive Plan in accordance with APB Opinion No. 25, and provided pro forma
disclosures in the 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. The Company will implement the provisions of this Statement on
a modified prospective basis effective October 1, 2005. The Company does not
expect the adoption of this Statement to have a material effect on the
financial position or results of operations of the Company.
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 became effective for nonmonetary asset
exchanges occurring in
25
fiscal periods beginning after June 15, 2005. Adoption of this Statement had
no effect on the financial position or results of operations of the Company.
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. The Company is currently evaluating the provisions of this
Interpretation.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Correction." This Statement replaces APB Opinion No. 20, "Accounting
Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements." SFAS No. 154 sets forth new guidelines on accounting for
voluntary changes in accounting principle and requires certain disclosures.
It also applies to the unusual situation in which an accounting
pronouncement is issued but does not include specific transition guidelines.
This Statement requires such accounting principle changes to be applied
retrospectively to all prior periods presented and an adjustment to the
balance of assets or liabilities affected along with an offsetting
adjustment to retained earnings for the cumulative effect on periods prior
to those presented. This Statement carries forward without change the
guidance in APB Opinion No. 20 for reporting the correction of an error and
a change in accounting estimate. This Statement is effective for fiscal
years beginning after December 15, 2005. The Company is currently evaluating
the provisions of this Statement.
INFLATION
The accompanying consolidated financial statements reflect the historical
costs of events and transactions, regardless of the purchasing power of the
dollar at the time. Due to the capital-intensive nature of the business of
Laclede Gas, the most significant impact of inflation is on the depreciation
of utility plant. Rate regulation, to which Laclede Gas is subject, allows
recovery through its rates of only the historical cost of utility plant as
depreciation. While no plans exist to undertake replacements of plant in
service other than normal replacements and those under existing replacement
programs, Laclede Gas believes that any higher costs experienced upon
replacement of existing facilities would be recovered through the normal
regulatory process.
CREDIT RATINGS
As of September 30, 2005, credit ratings for outstanding securities for
Laclede Group and Laclede Gas issues were as follows:
Type of Facility S&P Moody's Fitch
- --------------------------------------------------------------------------------------------
Laclede Group Corporate Rating A
Laclede Gas First Mortgage Bonds A A3 A+
Laclede Gas Commercial Paper A-1 P-2
Trust Preferred Securities A- Baa3 BBB+
The Company 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
The Company's short-term borrowing requirements typically peak during colder
months when Laclede Gas borrows money to cover the gap between when it
purchases its natural gas and when its customers pay for that gas. Changes
in the wholesale cost of natural gas, variations in the timing of
collections of gas costs 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 fiscal year ended 2005 was
$103.1 million, an $19.0 million increase, compared with fiscal year 2004.
The increase in cash provided by operating activities was primarily
attributable to the net effects of changes in accounts payable, accounts
receivable, deferred purchased gas cost, and the cost of natural gas storage
inventories, all of which were impacted by changes in the wholesale cost of
natural gas. Net cash provided by
26
operating activities for the fiscal year ended 2004 was $84.1 million,
compared with cash used in operating activities in fiscal year 2003 totaling
$9.0 million. The increase in cash provided by operating activities was
primarily attributable to changes in the cost of natural gas in storage and
variations in the timing of collections of gas costs under the PGA clause.
Net cash used in investing activities for fiscal years 2005, 2004 and 2003
was $61.4 million, $51.6 million and $51.5 million, respectively. Net cash
used in investing activities primarily reflected capital expenditures in all
periods.
Net cash used in financing activities was $49.5 million for fiscal year
2005, primarily reflecting the payment of dividends and the November 2004
maturity of $25 million principal amount of 8 1/2% First Mortgage bonds. Net
cash used in financing activities was $25.9 million for fiscal year 2004,
primarily reflecting the repayment of short-term debt and the payment of
dividends, partially offset by the issuance of additional long-term debt and
common stock. Net cash provided by financing activities was $55.0 million
for fiscal year 2003, reflecting the issuance of long-term debt to
unconsolidated affiliate trust and additional short-term borrowings,
partially offset by the May 2003 maturity of $25 million principal amount of
6 1/4% First Mortgage Bonds and the payment of dividends.
LIQUIDITY AND CAPITAL RESOURCES
The Company's short-term borrowing requirements have traditionally been met
through the sale of commercial paper supported by lines of credit with
banks. During the fiscal year 2005 heating season, Laclede Gas had lines of
credit totaling $300 million. Of the $300 million, $15 million expires in
April 2006 and $285 million expires in September 2009. Short-term commercial
paper borrowings outstanding at September 30, 2005 were $63.6 million at a
weighted average interest rate of 3.8% per annum. Laclede Gas had short-term
commercial paper outstanding aggregating to a maximum of $186.6 million at
any one time during the fiscal year. Based on short-term borrowings at
September 30, 2005, a change in interest rates of 100 basis points would
increase or decrease Laclede Gas' pre-tax earnings and cash flows by
approximately $0.6 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) to be at least 2.25 times interest expense. On September 30, 2005,
total debt was 54% of total capitalization. For the fiscal year ended
September 30, 2005, EBITDA was 3.53 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 September
30, 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 $62.4 million, reflecting capital
contributions that have been made by Laclede Group to Laclede Gas under this
authority through September 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 September 30, 2005, Laclede Gas had fixed-rate
long-term debt totaling $335 million, including the $40 million current
portion. While these long-term debt issues are fixed-rate, they are subject
to changes in fair value as market interest rates change. However, increases
or decreases in fair value would impact earnings and cash flows only if
Laclede Gas were to reacquire any of these issues in the open market prior
to maturity.
Laclede Group has on file a shelf registration on Form S-3, which allows for
the issuance of equity securities, other than preferred stock, and debt
securities. Of the $500 million of securities originally registered under
this Form S-3, $362.4 million remain registered and unissued as of September
30, 2005. Laclede Group issued 1.725 million shares of common stock in May
2004 under this registration. The net proceeds of approximately $44.7
million from this sale were used to make a capital contribution to Laclede
Gas. Laclede Gas used the contribution to reduce short-term borrowings and
for general corporate purposes. The amount, timing and type of additional
financing to be issued under this shelf registration will depend on cash
requirements and market conditions.
27
Short-term cash requirements outside of Laclede Gas have generally been met
with internally-generated funds. However, Laclede Group has a $40 million
working capital line of credit expiring in August 2008, to meet the
short-term liquidity needs of its subsidiaries. This line of credit replaces
a $20 million line that was scheduled to expire in June 2006. It has a
covenant limiting the total debt of the consolidated Laclede Group to no
more that 70% of the Company's total capitalization, giving a 50% debt
weighting to the subordinated debt issued to an unconsolidated affiliated
trust. This ratio stood at 52% on September 30, 2005. This line has been
used to provide letters of credit of $1.5 million on behalf of SM&P, which
have not been drawn, and to provide for seasonal funding needs of the
various subsidiaries from time to time. The maximum balance outstanding
during fiscal year 2005 was $7.0 million, which was the balance outstanding
on September 30, 2005.
SM&P has several operating leases, the aggregate annual cost of which is
approximately $8 million, consisting primarily of 12-month operating leases,
with renewal options, for vehicles used in its business. Laclede Group has
parental guarantees of certain of those vehicle leases and anticipates that
the maximum guarantees, including renewals and new leases, will not exceed
$22 million. No amounts have been recorded for these guarantees in the
financial statements.
Laclede Group had guarantees totaling $11.5 million for performance and
payment of certain wholesale gas supply purchases by LER, as of September
30, 2005. Since that date, Laclede Group issued an additional $7.0 million
in guarantees on behalf of LER, and $3.0 million expired, leaving $15.5
million in guarantees outstanding at November 18, 2005.
Utility capital expenditures were $54.6 million in fiscal year 2005,
compared with $49.1 million and $49.9 million for the fiscal years 2004 and
2003, respectively. Utility capital expenditures are expected to be
approximately $57 million in fiscal year 2006. Non-utility capital
expenditures for fiscal year 2005 were $5.6 million compared with $2.2
million in fiscal year 2004, and $1.2 million in fiscal year 2003, and are
estimated at approximately $7 million in fiscal year 2006.
Consolidated capitalization at September 30, 2005, excluding current
obligations of long-term debt and preferred stock, consisted of 51.8%
Laclede Group common stock equity, 0.1% Laclede Gas preferred stock equity,
6.6% long-term debt to unconsolidated affiliate trust, and 41.5% Laclede Gas
long-term debt.
Laclede Group's ratio of earnings to fixed charges was 2.8 for fiscal years
2003 through 2005.
It is management's view that the Company has adequate access to capital
markets and will have sufficient capital resources, both internal and
external, to meet anticipated capital requirements.
CONTRACTUAL OBLIGATIONS
As of September 30, 2005, Laclede Group had contractual obligations with
payments due as summarized below (in millions):
Payments due by period
--------------------------------------------------------
Less than 1-3 3-5 More than
Contractual Obligations Total 1 year Years Years 5 years
- ----------------------------------------------------------------------------------------------------------
Long-Term Debt (a) $ 821.6 $ 66.1 $ 80.9 $ 39.4 $635.2
Capital Leases - - - - -
Operating Leases (b) 17.4 5.3 7.0 3.5 1.6
Purchase Obligations - Natural Gas (c) 548.0 377.2 144.6 15.7 10.5
Purchase Obligations - Other (d) 131.9 10.2 22.2 16.6 82.9
Other Long-Term Liabilities - - - - -
---------------------------------------------------------------------
Total (e) $1,518.9 $458.8 $254.7 $ 75.2 $730.2
=====================================================================
<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 in the gas distribution and
non-regulated services segments. 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 in the utility gas distribution and
non-regulated gas marketing segments. These amounts reflect fixed
obligations as well as obligations to purchase natural gas at
future market prices, calculated using September 30, 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
28
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 are generally entered into prior to or 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. The Company expects to
make contributions to its qualified, trusteed pension plans
totaling $0.7 million in fiscal year 2006. Laclede Gas anticipates
a $0.3 million contribution relative to its non-qualified pension
plans during fiscal year 2006. With regard to the postretirement
benefits, the Company anticipates Laclede Gas will contribute $8.2
million to the qualified trusts and $0.6 million directly to
participants from Laclede Gas' funds during fiscal year 2006. For
further discussion of the Company's pension and postretirement
benefit plans, refer to Note 2, Pensions and Other Postretirement
Benefits, of the Notes to Consolidated Financial Statements.
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 September 30, 2005, the Utility held
approximately 9.8 million MmBtu of futures contracts at an average price of
$10.21 per MmBtu. Additionally, approximately 7.2 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.
In the course of its business, Laclede Group's non-regulated marketing
affiliate, LER, enters into fixed price commitments associated with the
purchase or sale of natural gas. LER manages the price risk associated with
these commitments by either closely matching the offsetting physical
purchase or sale of natural gas at fixed prices or through the use of
exchange-traded futures contracts to lock in margins. At September 30, 2005,
LER's open positions were not material to Laclede Group's financial position
or results of operations.
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 the Company's or Laclede
Gas' financial position and results of operations. As environmental laws,
regulations, and their interpretations change, however, Laclede Gas may be
required to incur additional costs.
Environmental issues have arisen in the past, and may arise in the future,
associated with sites formerly owned or operated by Laclede Gas and/or its
predecessor companies, including facilities at which manufactured gas
operations took place. Laclede Gas has been advised of the existence of
three former manufactured gas plant ("MGP") sites that may require
remediation and has worked with federal and state environmental regulators
to address two of the three sites.
With regard to a former MGP 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 September 30, 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 MGP site into the Missouri Voluntary
Cleanup Program (VCP). The VCP provides potential opportunities to minimize
the cost of site cleanup while maximizing possibilities for site
development. This site is located in, and is presently owned by, the City of
St. Louis, Missouri. The City is exploring development options for the site.
Laclede Gas also continues to evaluate options concerning this site. Laclede
Gas currently estimates that the cost of site investigations, agency
oversight and related legal and engineering consulting to be approximately
$650,000. Laclede Gas has paid or reserved for these actions. Laclede Gas
has requested that other former site owners and operators share in these
costs. One party has agreed to participate and has reimbursed Laclede Gas to
date for $190,000. Laclede Gas plans to seek proportionate reimbursement of
all costs relative to this site from other potentially responsible parties
to the extent practicable.
29
Laclede Gas has been advised that a third former MGP site may require
remediation. Laclede Gas has not owned this site for many years. 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.
While the amount 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 amount of costs relative
to future remedial actions regulators may require at the Shrewsbury site and
at the other sites is unknown and may be material.
Laclede Gas has notified its insurers that it seeks reimbursement for costs
incurred in the past and future potential liabilities associated with the
three MGP sites identified above. 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. In June 2005, an
outside consultant retained by Laclede Gas completed an analysis of the MGP
sites to determine cost estimates for a one-time contractual transfer of
risk from the insurers to the Company of environmental coverage for the MGP
sites. That analysis demonstrated a range of possible future expenditures to
investigate, monitor and remediate these MGP sites from $5.8 million to
$36.3 million. This analysis is based upon currently available facts,
existing technology and presently enacted laws and regulations. The actual
costs that Laclede Gas may incur could be materially higher or lower
depending upon several factors, including whether remedial actions will be
required, final determination of any remedial actions, changing technologies
and governmental regulations, the ultimate ability of other potentially
responsible parties to pay and any insurance recoveries. Costs associated
with environmental remediation activities are accrued when such costs are
probable and reasonably estimable. As of the date of this report, Laclede
Gas has recorded all such costs. However, it is possible that future events
may require some level of additional remedial activities that, in turn,
would require Laclede Gas to record additional costs.
Laclede Gas anticipates that any costs it may incur in the future to
remediate these sites, less any amounts received as insurance proceeds or as
contributions from other potentially responsible parties, would be deferred
and recovered in rates through periodic adjustments approved by the MoPSC.
Accordingly, potential liabilities associated with remediating the MGP sites
are not expected to have a material impact on the future financial position
and results of operations of Laclede Gas or the Company.
OFF-BALANCE SHEET ARRANGEMENTS
Laclede Group has no off-balance sheet arrangements.
Laclede Gas Company's Management Discussion and Analysis of Financial
Condition is included in Exhibit 99.1.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For this discussion, see the "Market Risk" subsection in Management's
Discussion and Analysis of Financial Condition and Results of Operations,
page 29.
30
Item 8. Financial Statements and Supplementary Data
Management Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
controls over financial reporting. The Company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements and can provide only reasonable assurance
with respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods are subject
to the risks that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
The Company's management, including our Chief Executive Officer and Chief
Financial Officer, conducted an assessment of the effectiveness of the
Company's internal control over financial reporting as of September 30,
2005. In making this assessment, management used the criteria in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on that assessment,
management concluded that the Company's internal control over financial
reporting was effective as of September 30, 2005. Management's assessment of
the effectiveness of the Company's internal control over financial reporting
as of September 30, 2005 has been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in their report
which is included herein.
31
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
The Laclede Group, Inc.:
We have audited management's assessment, included in the accompanying
Management Report on Internal Control over Financial Reporting, that The
Laclede Group, Inc. and its subsidiaries (the "Company") maintained
effective internal control over financial reporting as of September 30,
2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other
personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not
be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of September 30,
2005, is fairly stated, in all material respects, based on the criteria
established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Also in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of September 30, 2005, based on
the criteria established in Internal Control--Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule as of and for the year ended
September 30, 2005, of the Company and our report dated November 18, 2005,
expressed an unqualified opinion on those financial statements and financial
statement schedule.
DELOITTE & TOUCHE LLP
St. Louis, Missouri
November 18, 2005
32
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
The Laclede Group, Inc.:
We have audited the accompanying consolidated balance sheets and statements
of consolidated capitalization of The Laclede Group, Inc. and its
subsidiaries (the "Company") as of September 30, 2005 and 2004, and the
related statements of consolidated income, common shareholders' equity,
comprehensive income, and cash flows for each of the three years in the
period ended September 30, 2005. Our audits also included the financial
statement schedule listed in the Index at Part IV, Item 15(a) 2. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Laclede Group, Inc. and
its subsidiaries as of September 30, 2005 and 2004, and the results of its
operations and its cash flows for each of the three years in the period
ended September 30, 2005, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of September 30,
2005, based on the criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated November 18, 2005, expressed an
unqualified opinion on management's assessment of the effectiveness of the
Company's internal control over financial reporting and an unqualified
opinion on the effectiveness of the Company's internal control over
financial reporting.
DELOITTE & TOUCHE LLP
St. Louis, Missouri
November 18, 2005
33
Item 8. Financial Statements and Supplementary Data
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED INCOME
(Thousands, Except Per Share Amounts)
- ------------------------------------------------------- ------------- ------------- --------------
Years Ended September 30 2005 2004 2003
- ------------------------------------------------------- ------------- ------------- --------------
Operating Revenues:
Regulated
Gas distribution $ 978,195 $ 868,905 $ 774,772
Non-Regulated
Services 141,478 104,239 100,168
Gas marketing 469,559 270,328 163,861
Other 7,800 6,848 11,529
------------- ------------- --------------
Total Operating Revenues 1,597,032 1,250,320 1,050,330
------------- ------------- --------------
Operating Expenses:
Regulated
Natural and propane gas 676,931 575,691 483,742
Other operation expenses 125,364 121,596 118,550
Maintenance 19,226 18,705 18,759
Depreciation and amortization 23,036 22,385 22,229
Taxes, other than income taxes 62,859 60,077 56,102
------------- ------------- --------------
Total regulated operating expenses 907,416 798,454 699,382
Non-Regulated
Services 129,636 99,511 102,093
Gas marketing 462,348 265,394 159,105
Other 7,803 6,400 10,615
------------- ------------- --------------
Total Operating Expenses 1,507,203 1,169,759 971,195
------------- ------------- --------------
Operating Income 89,829 80,561 79,135
------------- ------------- --------------
Other Income and (Income Deductions) - Net 1,606 3,635 1,135
------------- ------------- --------------
Interest Charges:
Interest on long-term debt 22,835 22,010 20,169
Interest on long-term debt to unconsolidated 3,573
affiliate trust 3,573 2,828
Other interest charges 4,141 3,231 3,974
------------- ------------- --------------
Total Interest Charges 30,549 28,814 26,971
------------- ------------- --------------
Income Before Income Taxes 60,886 55,382 53,299
Income Tax Expense 20,761 19,264 18,652
------------- ------------- --------------
Net Income 40,125 36,118 34,647
Dividends on Redeemable Preferred Stock -
Laclede Gas 55 62 62
------------- ------------- --------------
Net Income Applicable to Common
Stock $ 40,070 $ 36,056 $ 34,585
============= ============= ==============
Average Number of Common Shares
Outstanding 21,080 19,783 19,022
Basic Earnings Per Share of Common
Stock $1.90 $1.82 $1.82
Diluted Earnings Per Share of Common
Stock $1.90 $1.82 $1.82
See the accompanying notes to consolidated financial statements.
34
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Thousands)
- ---------------------------------------------------------- ----------- ----------- -----------
Years Ended September 30 2005 2004 2003
- ---------------------------------------------------------- ----------- ----------- -----------
Net Income Applicable to Common Stock $ 40,070 $36,056 $34,585
----------- ----------- -----------
Other Comprehensive Income (Loss), Before Tax:
Net gains (losses) on cash flow hedging derivative
instruments:
Net hedging gain (loss) arising during the period (11,760) (4,809) 1,184
Reclassification adjustment for (gains) losses included
in net income 3,059 1,977 (366)
----------- ----------- -----------
Net unrealized gains (losses) on cash flow
hedging derivative instruments (8,701) (2,832) 818
Minimum pension liability adjustment (1,233) 344 (396)
----------- ----------- -----------
Other Comprehensive Income (Loss), Before Tax (9,934) (2,488) 422
Income Tax Expense (Benefit) Related to Items
of Other Comprehensive Income (Loss) (3,838) (961) 163
----------- ----------- -----------
Other Comprehensive Income (Loss), Net of Tax (6,096) (1,527) 259
----------- ----------- -----------
Comprehensive Income $ 33,974 $34,529 $34,844
=========== =========== ===========
See the accompanying notes to consolidated financial statements.
35
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands)
- ------------------------------------------------------------- ------------- ------------
September 30 2005 2004
- ------------------------------------------------------------- ------------- ------------
Assets
Utility Plant $1,105,733 $1,070,522
Less - Accumulated depreciation and amortization 426,280 423,647
------------- ------------
Net Utility Plant 679,453 646,875
------------- ------------
Goodwill 28,124 28,124
------------- ------------
Non-utility property (net of accumulated depreciation
and amortization, 2005, $13,358; 2004, $12,661) 11,791 10,038
Other investments 37,825 36,044
------------- ------------
Other Property and Investments 49,616 46,082
Current Assets:
Cash and cash equivalents 6,013 13,854
Accounts receivable:
Gas customers - billed and unbilled 77,268 76,223
Other 91,189 51,822
Less - Allowances for doubtful accounts (11,813) (10,362)
Inventories:
Natural gas stored underground at LIFO cost 159,643 131,773
Propane gas at FIFO cost 19,980 15,808
Materials, supplies and merchandise at average
cost 4,985 4,714
Derivative instrument assets 20,325 16,857
Unamortized purchased gas adjustments 31,261 19,618
Deferred income taxes - 1,321
Prepayments and other 25,275 16,008
------------- ------------
Total Current Assets 424,126 337,636
------------- ------------
Deferred Charges:
Prepaid pension cost 82,557 92,026
Regulatory assets 115,950 104,703
Other 5,247 9,849
------------- ------------
Total Deferred Charges 203,754 206,578
------------- ------------
Total Assets $1,385,073 $1,265,295
============= ============
36
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Thousands)
- ------------------------------------------------------------------------ ----------- ------------
September 30 2005 2004
- ------------------------------------------------------------------------ ----------- ------------
Capitalization and Liabilities
Capitalization:
Common stock equity $ 366,525 $ 355,915
Redeemable preferred stock (less current sinking fund requirements)
- Laclede Gas 948 1,108
Long-term debt to unconsolidated affiliate trust 46,400 46,400
Long-term debt (less current portion) - Laclede Gas 294,033 333,936
------------ ------------
Total Capitalization 707,906 737,359
------------ ------------
Current Liabilities:
Notes payable 70,605 71,380
Accounts payable 138,404 68,366
Advance customer billings 30,688 23,620
Current portion of long-term debt and preferred stock 40,061 25,145
Wages and compensation accrued 14,113 15,596
Dividends payable 7,369 7,214
Customer deposits 13,229 10,661
Interest accrued 10,216 10,920
Taxes accrued 23,550 16,725
Deferred income taxes current 1,822 -
Other 15,503 13,003
------------ ------------
Total Current Liabilities 365,560 262,630
------------ ------------
Deferred Credits and Other Liabilities:
Deferred income taxes 186,236 189,626
Unamortized investment tax credits 4,678 5,010
Pension and postretirement benefit costs 24,529 20,484
Regulatory liabilities 74,506 28,210
Other 21,658 21,976
------------ ------------
Total Deferred Credits and Other Liabilities 311,607 265,306
------------ ------------
Commitments and Contingencies (Note 15)
------------ ------------
Total Capitalization and Liabilities $1,385,073 $1,265,295
============ ============
See the accompanying notes to consolidated financial statements.
37
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED CAPITALIZATION
(Thousands, Except Per Share Amounts)
- ------------------------------------------------------------------------ ----------- ------------
September 30 2005 2004
- ------------------------------------------------------------------------ ----------- ------------
Common Stock Equity:
Common stock, par value $1 per share:
Authorized - 2005 and 2004, 70,000,000 shares
Issued - 2005, 21,172,009 shares; and
2004, 20,981,165 shares $ 21,172 $ 20,981
Paid-in capital 121,505 116,058
Retained earnings 231,551 220,483
Accumulated other comprehensive loss (7,703) (1,607)
----------- ------------
Total Common Stock Equity 366,525 355,915
----------- ------------
Redeemable Preferred Stock - Laclede Gas, par value $25 per share
(1,480,000 shares authorized)
Issued and outstanding:
5% Series B - 2005, 34,452 shares; and
2004, 44,192 shares 800 960
4.56% Series C - 2005 and 2004, 5,906 shares 148 148
----------- ------------
Total Redeemable Preferred Stock 948 1,108
----------- ------------
Long-Term Debt to Unconsolidated Affiliate Trust 46,400 46,400
----------- ------------
Long-Term Debt - Laclede Gas:
First mortgage bonds:
8-5/8% Series, due May 15, 2006 - 40,000
7-1/2% Series, due November 1, 2007 40,000 40,000
6-1/2% Series, due November 15, 2010 25,000 25,000
6-1/2% Series, due October 15, 2012 25,000 25,000
5-1/2% Series, due May 1, 2019 50,000 50,000
7% Series, due June 1, 2029 25,000 25,000
7.90% Series, due September 15, 2030 30,000 30,000
6% Series, due May 1, 2034 100,000 100,000
----------- ------------
Total 295,000 335,000
Unamortized discount, net of premium,
on long-term debt (967) (1,064)
----------- ------------
Total Long-Term Debt - Laclede Gas 294,033 333,936
----------- ------------
Total $707,906 $737,359
=========== ============
Long-term debt and preferred stock dollar amounts are exclusive of current
portion.
See the accompanying notes to consolidated financial statements.
38
THE LACLEDE GROUP, INC.
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
Common Stock Issued
(Thousands, Except for ------------------------- Paid-in Retained Accum. Other
Shares) Shares Amount Capital Earnings Comp. Income Total
------ ------ ------- -------- ------------ -----
-----------------------------------------------------------------------
BALANCE OCTOBER 1, 2002 18,921,287 $18,921 $ 64,667 $202,517 $ (339) $285,766
-----------------------------------------------------------------------
Net Income Applicable to Common
Stock - - - 34,585 - 34,585
Dividend reinvestment plan 161,115 161 3,793 - - 3,954
Dividends declared:
Common stock ($1.34 per share) - - - (25,492) - (25,492)
Other comprehensive income (loss) - - - - 259 259
-----------------------------------------------------------------------
BALANCE SEPTEMBER 30, 2003 19,082,402 $19,082 $68,460 $211,610 $ (80) $299,072
-----------------------------------------------------------------------
Net Income Applicable to Common Stock - - - 36,056 - 36,056
Common stock offering 1,725,000 1,725 43,003 - - 44,728
Dividend reinvestment plan 138,213 138 3,809 - - 3,947
Equity plan 35,550 36 800 - - 836
Dividends declared:
Common stock ($1.355 per share) - - - (27,183) - (27,183)
Other comprehensive income (loss) - - - - (1,527) (1,527)
Other - - (14) - - (14)
-----------------------------------------------------------------------
BALANCE SEPTEMBER 30, 2004 20,981,165 $20,981 $116,058 $220,483 $ (1,607) $355,915
=======================================================================
Net Income Applicable to Common Stock - - - 40,070 - 40,070
Common stock offering - - (96) - - (96)
Dividend reinvestment plan 131,144 131 3,839 - - 3,970
Equity plan 59,700 60 1,428 - - 1,488
Tax benefit - stock compensation - - 263 - - 263
Dividends declared:
Common stock ($1.375 per share) - - - (29,002) - (29,002)
Other comprehensive income (loss) - - - - (6,096) (6,096)
Other - - 13 - - 13
-----------------------------------------------------------------------
BALANCE SEPTEMBER 30, 2005 21,172,009 $21,172 $121,505 $231,551 $ (7,703) $366,525
=======================================================================
See the accompanying notes to consolidated financial statements.
39
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Thousands)
- ---------------------------------------------------------------------------------------------------------------
Years Ended September 30 2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 40,125 $ 36,118 $ 34,647
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 26,645 25,572 25,615
Deferred income taxes and investment
tax credits 424 15,568 15,412
Other - net 709 256 502
Changes in assets and liabilities:
Accounts receivable - net (38,961) (13,349) (14,856)
Unamortized purchased gas adjustments (11,643) (25,483) (17,111)
Deferred purchased gas costs 44,575 41,022 (21,461)
Accounts payable 70,038 2,365 20,294
Advance (delayed) customer billings - net 7,068 8,259 (9,471)
Taxes accrued 6,825 3,514 3,396
Natural gas stored underground (27,870) (14,542) (40,110)
Other assets and liabilities (14,843) 4,817 (5,886)
---------------------------------------
Net cash provided by (used in)
operating activities 103,092 84,117 (9,029)
Investing Activities:
Capital expenditures (60,203) (51,309) (51,112)
Net investment in trusts (1,334) (2,221) (1,099)
Other investments 144 1,885 685
---------------------------------------
Net cash used in
investing activities (61,393) (51,645) (51,526)
Financing Activities:
Issuance of first mortgage bonds - 150,000 -
Maturity/Redemption of first mortgage bonds (25,000) (50,000) (25,000)
Issuance (repayment) of short-term debt - net (775) (146,820) 56,530
Issuance of common stock 5,375 49,497 3,954
Dividends paid (28,896) (26,494) (25,500)
Issuance of long-term debt to unconsolidated affiliate trust - - 45,000
Preferred stock reacquired (244) (5) (8)
Other - (2,087) -
---------------------------------------
Net cash (used in) provided by
financing activities (49,540) (25,909) 54,976
---------------------------------------
Net (Decrease) Increase in Cash and
Cash Equivalents (7,841) 6,563 (5,579)
Cash and Cash Equivalents at
Beginning of Year 13,854 7,291 12,870
---------------------------------------
Cash and Cash Equivalents at End of Year $ 6,013 $ 13,854 $ 7,291
=======================================
Supplemental Disclosure of Cash Paid
During the Year for:
Interest $ 30,313 $ 24,325 $ 26,183
Income taxes 12,167 376 156
See the accompanying notes to consolidated financial statements.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE LACLEDE GROUP, INC.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION - The consolidated financial statements
include the accounts of The Laclede Group, Inc. (Laclede Group or the
Company) and its subsidiary companies. All subsidiaries are wholly owned.
Laclede Gas Company (Laclede Gas or the Utility) and other subsidiaries of
Laclede Group may engage in related party transactions during the ordinary
course of business. All significant intercompany balances have been
eliminated from the consolidated financial statements of Laclede Group
except that certain intercompany transactions with Laclede Gas are not
eliminated in accordance with the provisions of Statement of Financial
Accounting Standard (SFAS) No. 71, "Accounting for the Effects of Certain
Types of Regulation." Those types of transactions include sales of natural
gas from Laclede Gas to Laclede Energy Resources, Inc. (LER), services
performed by SM&P Utility Resources, Inc. (SM&P) to locate and mark
underground facilities for Laclede Gas, sales of natural gas from LER to
Laclede Gas, and sales of propane by Laclede Pipeline Company to Laclede
Gas. These revenues are shown on the Intersegment revenues lines in the
table included in Note 14 under Regulated Gas Distribution, Non-Regulated
Services, Non-Regulated Gas Marketing, and Non-Regulated Other columns
respectively.
Investment in Unconsolidated Affiliate Trust - Laclede Group
formed a wholly owned trust, Laclede Capital Trust I (Trust) for the sole
purpose of issuing preferred securities and lending the gross proceeds to
its parent, Laclede Group. The sole assets of the Trust are debentures of
Laclede Group.
On December 16, 2002, Laclede Group invested $1.4 million in
common securities of the Trust and the Trust issued $45 million of 7.70%
Trust Preferred Securities with a liquidation value of $25 per share due
December 1, 2032. The Trust Preferred Securities can be redeemed on or after
December 16, 2007. All of the proceeds from the sale of the Trust Preferred
Securities, along with the Trust common securities, were invested by the
Trust in debentures of Laclede Group, totaling $46.4 million, with the same
economic terms as the Trust Preferred Securities.
Prior to the adoption of Financial Accounting Standards Board
Interpretation No. 46 (Revised December 2003) (FIN 46R), "Consolidation of
Variable Interest Entities," the Trust was consolidated in the financial
statements of Laclede Group. Concurrent with the adoption of FIN 46R, the
Trust was deconsolidated during the quarter ended March 31, 2004. The
Consolidated Balance Sheets were modified to include Investments in
Unconsolidated Subsidiaries of $1.4 million representing Laclede Group's
common securities investment in the Trust and to reflect Laclede Group's
obligations related to the debentures totaling $46.4 million. The common
securities investment is included on the Other Investments line on the
Consolidated Balance Sheets. As permitted under FIN 46R, the Trust has been
deconsolidated for prior periods and presented to be consistent with the
current presentation.
NATURE OF OPERATIONS - Laclede Group is an exempt holding company
under the Public Utility Holding Company Act of 1935. Laclede Gas, Laclede
Group's largest subsidiary and core business unit, is a public utility
engaged in the retail distribution and sale of natural gas. Laclede Gas
serves an area in eastern Missouri, with a population of approximately 2.0
million, including the City of St. Louis, St. Louis County, and parts of
eight other counties. As an adjunct to its gas distribution business,
Laclede Gas operates underground natural gas storage fields. SM&P is one of
the nation's major underground locating and marking service businesses. SM&P
is headquartered in Carmel, Indiana and operates in the midwestern states.
LER is a wholly-owned subsidiary engaged in non-regulated efforts to market
natural gas and related activities. The activities of other wholly-owned
subsidiaries are described in Note 14, Information by Operating Segment.
USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
SYSTEM OF ACCOUNTS - The accounts of Laclede Gas are maintained
in accordance with the uniform system of accounts prescribed by the Missouri
Public Service Commission (MoPSC or Commission), which system substantially
conforms to that prescribed by the Federal Energy Regulatory Commission.
UTILITY PLANT, DEPRECIATION AND AMORTIZATION - Utility plant is
stated at original cost. The cost of additions to utility plant includes
contracted work, direct labor and materials, allocable overheads, and an
allowance for funds used during construction. The costs of units of property
retired, replaced, or renewed are removed from utility plant and are charged
to accumulated depreciation. Maintenance and repairs of property and
replacement and renewal of items determined to be less than units of
property are charged to maintenance expenses. Effective December 1, 2001,
the MoPSC ordered the cost of removing retired utility plant to be recovered
as an expense when incurred rather than being included in depreciation
rates. Prior to December 1, 2001, the Utility's removal costs, net of
salvage, were charged to accumulated depreciation. As ordered by the MoPSC,
Laclede Gas instituted lower depreciation rates effective December 1, 2001
and began expensing all removal costs, net of salvage, as incurred. These
costs are included in the Other Operation Expenses line on the income
statement. Effective July 1, 2002, the MoPSC ordered the negative
41
amortization on a straight-line basis of a portion of the Utility's
depreciation reserve, amounting to $3.4 million annually, until
implementation of rates in the Utility's next rate proceeding during which
the parties agreed to review the depreciation issue in light of
implementation of SFAS No. 143, "Accounting for Asset Retirement
Obligations." Minor changes in depreciation rates were implemented January
1, 2003, as authorized by the MoPSC. In January 2005, the Commission issued
an Order in the Utility's 1999 rate case relative to the calculation of its
depreciation rates with regard to cost of removal. 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 in fiscal year 2002, be reduced by $2.3 million annually. As
such, the Order had no effect on income or the recovery of depreciation
expenses during fiscal year 2005.
The recent settlement of the Utility's 2005 rate proceeding fully
implements Laclede Gas' depreciation method that was confirmed by the
Commission in January 2005. Pursuant to the terms of the rate case
settlement, higher depreciation rates will become effective January 1, 2006,
reflecting, in part, an accrual for future removal costs, including costs
related to interim retirements. In light of the outcomes of the recent
Commission Order and rate case settlement, the Utility is conducting a study
to quantify the amount of accrued asset removal costs previously recovered
through rates in excess of actual costs incurred. Management anticipates
that this amount will be reclassified on the Balance Sheets from
"accumulated depreciation and amortization" to "regulatory liabilities"
pursuant to SFAS No. 143 and SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation," when such study is completed during fiscal
year 2006.
Utility plant is depreciated on a straight-line basis at rates
based on estimated service lives of the various classes of property. Annual
depreciation and amortization in 2005, 2004 and 2003 averaged approximately
2.5%, 2.6% and 2.7%, respectively, of the original cost of depreciable and
amortizable property.
REGULATED OPERATIONS - Laclede Gas accounts for its regulated
operations in accordance with SFAS No. 71. 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).
The following regulatory assets and regulatory liabilities were
reflected in the Consolidated Balance Sheets as of September 30:
(Thousands) 2005 2004
-----------------------------------------------------------------------------------------
Regulatory Assets:
Future income taxes due from customers $ 66,271 $ 62,834
Pension and postretirement benefit costs 36,116 27,480
Unamortized purchased gas adjustments 31,261 19,618
Compensated absences 6,893 6,706
Other 6,670 7,751
-----------------------
Total Regulatory Assets $147,211 $124,389
=======================
Regulatory Liabilities:
Unamortized investment tax credits $ 4,678 $ 5,010
Purchased gas costs 71,848 27,273
Other 2,658 937
-----------------------
Total Regulatory Liabilities $ 79,184 $ 33,220
=======================
As authorized by the MoPSC, Laclede Gas discontinued deferring
certain costs for future recovery, as expenses associated with those
specific areas were included in approved rates effective December 27, 1999.
Previously deferred costs of $10.5 million are being recovered and amortized
on a straight-line basis over a fifteen-year period, without return on
investment. Approximately $4.0 million has been amortized from December 27,
1999 through September 30, 2005. Previously deferred costs of $2.1 million
are being recovered and amortized on a straight-line basis over a ten-year
period, without return on investment. Approximately $1.2 million has been
amortized from December 27, 1999 through September 30, 2005. The Commission
also authorized previously deferred costs of $2.8 million and $0.3 million
to be recovered and amortized on a straight-line basis over a ten-year
period, without return on investment, effective December 1, 2001 and
November 9, 2002, respectively. Approximately $1.1 million and $0.1 million
has been amortized, respectively, through September 30, 2005.
In light of the outcomes of the recent Commission Order and rate
case settlement as described in Note 1 - Utility Plant, Depreciation and
Amortization, the Utility is conducting a study to quantify the amount of
accrued asset removal costs previously recovered through rates in excess of
actual costs incurred. Management anticipates that this amount will be
reclassified on the Balance Sheets from "accumulated depreciation and
amortization" to "regulatory liabilities" pursuant to SFAS No. 143 and SFAS
No. 71, and will be disclosed in the table above, when such study is
completed during fiscal year 2006.
42
NATURAL GAS STORED UNDERGROUND - Inventory of Utility natural gas
in storage is priced on a last-in, first-out (LIFO) basis. The replacement
cost of natural gas stored underground for current use at September 30, 2005
exceeded the LIFO cost by $103.0 million and at September 30, 2004 exceeded
the LIFO cost by $6.5 million. The inventory carrying value is not adjusted
to the lower of cost or market prices because, pursuant to the Laclede Gas
Purchased Gas Adjustment (PGA) Clause, actual gas costs are recovered in
customer rates.
REVENUE RECOGNITION - Laclede Gas reads meters and bills its
customers on a monthly cycle billing basis. The Utility records its
regulated gas distribution revenues from gas sales and transportation
service on an accrual basis that includes estimated amounts for gas
delivered, but not yet billed. The accruals for unbilled revenues are
reversed in the subsequent accounting period when meters are actually read
and customers are billed. The amount of accrued unbilled revenue at
September 30, 2005 and 2004, for the Utility, was $11.4 million and $8.8
million, respectively. After accrual of related gas cost expense, the
accrued pre-tax net revenues at September 30, 2005 and 2004 were $4.8
million and $4.2 million, respectively.
SM&P, LER and Laclede Group's other non-regulated subsidiaries
record revenues when earned, either when the product is delivered or when
services are performed.
In the course of its business, Laclede Group's non-regulated
marketing affiliate, LER, enters into fixed price commitments associated
with the purchase or sale of natural gas. LER's fixed price energy contracts
are designated as normal purchases and normal sales, as defined in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." As such, those contracts are accounted for as executory
contracts and recorded on an accrual basis. Revenues are recorded using a
gross presentation.
PURCHASED GAS ADJUSTMENTS AND DEFERRED ACCOUNT - The PGA Clause
allows Laclede Gas to flow through to customers, subject to prudence review,
the cost of purchased gas supplies. The Utility is allowed to file to
modify, on a periodic basis, the level of gas costs in its PGA. Currently,
the MoPSC allows Laclede Gas to adjust the gas cost component of its rates
in order to better match customer billings with market natural gas prices.
Currently, the tariffs allow scheduled gas cost adjustments in November,
January, March and June. The MoPSC clarified that costs, cost reductions and
carrying costs associated with the Utility's use of natural gas financial
instruments are gas costs recoverable through the PGA mechanism.
The provisions of the PGA Clause also include operation of the gas
supply cost management program, whereby Laclede Gas is permitted to share in
certain costs savings related to its natural gas procurement activities.
Pursuant to the provisions of the PGA Clause, the difference
between actual costs incurred and costs recovered through the application of
the PGA (including costs, cost reductions, and carrying costs associated
with the use of financial instruments), and amounts due to or from customers
related to the operation of the gas supply cost management program are
reflected as a deferred charge or credit until fiscal year end. At that
time, the balance is classified as a current asset or liability and is
recovered from or credited to customers over an annual period commencing in
November. The balance in the current account is amortized as amounts are
reflected in customer billings.
INCOME TAXES - Laclede Group and its subsidiaries have elected, for
tax purposes only, various accelerated depreciation provisions of the
Internal Revenue Code. In addition, certain other costs are expensed
currently for tax purposes while being deferred for book purposes. The
provision for current income taxes reflects the tax treatment of these
items. Laclede Group companies record deferred tax liabilities and assets
measured by enacted tax rates for the net tax effect of all temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes, and the amounts used for income tax purposes.
Changes in enacted tax rates, if any, and certain property basis differences
will be reflected by entries to regulatory asset or liability accounts for
regulated companies, and will be reflected as income or loss for
non-regulated companies.
Laclede Gas' investment tax credits utilized prior to 1986 have
been deferred and are being amortized in accordance with regulatory
treatment over the useful life of the related property.
CASH AND CASH EQUIVALENTS - All highly liquid debt instruments
purchased are considered to be cash equivalents. Such instruments are
carried at cost, which approximates market value.
EARNINGS PER COMMON SHARE - Basic earnings per common share is
computed by dividing income available for common stock by the weighted
average number of shares outstanding for the period. Diluted earnings per
common share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock. The only potentially dilutive securities the Company had
outstanding at September 30, 2005 were stock options and unvested restricted
stock. The diluted weighted average shares outstanding, as shown in Note 5,
reflects the potential dilution as a result of these stock options and
unvested restricted stock as determined using the Treasury Stock Method.
Stock options that are antidilutive are excluded from the calculation of
diluted earnings per share.
STOCK-BASED COMPENSATION - The Laclede Group Equity Incentive Plan
was approved at the annual meeting of shareholders of Laclede Group on
January 30, 2003. The purpose of the Equity Incentive Plan is to provide a
more competitive compensation program and to attract and retain those
executives and other key employees essential to achieve the Company's
strategic objectives. To accomplish this purpose, the Compensation Committee
of the board of directors may grant awards under the Equity Incentive Plan
that may be earned by achieving performance objectives and/or other criteria
as determined by the Compensation Committee. Under the terms of the Equity
Incentive Plan, key employees of the Company and its subsidiaries, as
determined by the sole discretion of the administrator, will be eligible
43
to receive (a) restricted shares of common stock, (b) performance awards,
(c) stock options exercisable into shares of common stock, (d) stock
appreciation rights, and (e) stock units, as well as any other stock-based
awards not inconsistent with the Equity Incentive Plan. Each award under the
Equity Incentive Plan shall have a minimum vesting period of at least one
year. The total number of shares that may be issued pursuant to awards under
the Equity Incentive Plan may not exceed 1,250,000.
During fiscal year 2004, the Company granted 1,500 shares of
restricted stock at a weighted average fair value of $28.85 per share. These
shares have restrictions on vesting, sale and transferability. The
restrictions lapse with the passage of time. The Company held the
certificates for restricted stock until the shares fully vested in November
2005. In the interim, the participant received full dividends and voting
rights. Restricted stock awards are recorded at the market value on the date
of the grant. Compensation cost charged against income for the twelve months
ended September 30, 2005 and September 30, 2004 was approximately $13,000,
and $12,000 respectively, net of tax effects.
During the twelve months ended September 30, 2005, the Company
granted 234,000 non-qualified stock options to employees at an exercise
price of $30.95 per share. These options were not exercisable before
November 4, 2005. During the twelve months ended September 30, 2004, the
Company granted 224,000 non-qualified stock options at an exercise price of
$28.85 per share. These options were not exercisable before November 8,
2004. During the twelve months ended September 30, 2003, the Company granted
221,500 non-qualified stock options at an exercise price of $23.27 per
share. These options were not exercisable before February 6, 2004. The stock
options vest one-fourth each year for four years after the date of the
grant. The Company accounts for the Equity Incentive Plan under the
recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. No compensation expense has been recognized in net income,
as all options granted under the Equity Incentive Plan had an exercise price
equal to the market value of the Company's stock on the date of the grant.
Stock option activity for the years ended September 30, 2005,
September 30, 2004, and September 30, 2003 is presented below:
Weighted Average
Shares Exercise Price
Outstanding at October 1, 2002 - -
Granted 221,500 $23.27
Exercised - -
Forfeited (12,500) 23.27
Outstanding at September 30, 2003 209,000 $23.27
Exercisable at September 30, 2003 - -
Granted 224,000 $28.85
Exercised (34,050) 23.27
Forfeited (5,750) 24.24
Outstanding at September 30, 2004 393,200 $26.43
Exercisable at September 30, 2004 17,200 $23.27
Granted 234,000 $30.95
Exercised (59,700) 24.91
Forfeited (6,250) 27.96
Outstanding at September 30, 2005 561,250 $28.46
Exercisable at September 30, 2005 63,750 $26.60
Exercise prices of options outstanding at September 30, 2005 range
from $23.27 to $30.95. The weighted-average contractual life of these
options is 8.3 years. The closing price of the Company's common stock was
$32.49 at September 30, 2005.
If compensation expense had been determined based on the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share of common
stock would have been reduced to the amounts shown in the following table.
The weighted-average fair value of options granted during the twelve months
ended September 30, 2005, 2004, and 2003 is $6.73 per option, $6.22 per
option, and $4.33 per option respectively. The estimated fair value of
options would be amortized to expense over the options' vesting period and
restricted stock would be expensed on the grant date.
44
(Thousands, Except Per Share Amounts) 2005 2004 2003
------------------------------------------------------------------------------
Net income applicable to
common stock, as reported $40,070 $36,056 $34,585
Deduct: Total stock-based
employee compensation expense
determined under the fair value
based method for all awards,
net of tax effects 547 343 93
-----------------------------------
Pro forma net income
applicable to common stock $39,523 $35,713 $34,492
===================================
Earnings per share:
Basic - as reported $1.90 $1.82 $1.82
Diluted - as reported $1.90 $1.82 $1.82
Basic - pro forma $1.87 $1.80 $1.81
Diluted - pro forma $1.87 $1.80 $1.81
The fair value of the options granted during the twelve months
ended September 30, 2005, September 30, 2004, and September 30, 2003 was
estimated at the date of grant using a binomial option-pricing model with
the following assumptions:
2005 2004 2003
---------------------------------------------------
Risk free interest rate 4.10% 4.30% 4.00%
Expected dividend yield of stock 4.40% 4.60% 5.70%
Expected volatility of stock 25.00% 25.00% 25.00%
Expected life of option 96 months 96 months 96 months
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. The Company does not expect adoption of
this Statement to have a material effect on the financial position or
results of operations of the Company.
In December 2004, the FASB issued SFAS No. 123 (revised 2004)
(123(R)), "Share-Based Payment." 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. Through fiscal year 2005, the Company accounted for its Equity
Incentive Plan in accordance with APB Opinion No. 25, and provided pro forma
disclosures in the 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. The Company will implement the provisions of this Statement on
a modified prospective basis effective October 1, 2005. The Company does not
expect the adoption of this Statement to have a material effect on the
financial position or results of operations of the Company.
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 became effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Adoption of this Statement had no effect on the financial position or
results of operations of the Company.
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. The Company is currently evaluating the provisions
of this Interpretation.
45
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Correction." This Statement replaces APB Opinion No. 20, "Accounting
Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements." SFAS No. 154 sets forth new guidelines on accounting for
voluntary changes in accounting principle and requires certain disclosures.
It also applies to the unusual situation in which an accounting
pronouncement is issued but does not include specific transition guidelines.
This Statement requires such accounting principle changes to be applied
retrospectively to all prior periods presented and an adjustment to the
balance of assets or liabilities affected along with an offsetting
adjustment to retained earnings for the cumulative effect on periods prior
to those presented. This Statement carries forward without change the
guidance in APB Opinion No. 20 for reporting the correction of an error and
a change in accounting estimate. This Statement is effective for fiscal
years beginning after December 15, 2005. The Company is currently evaluating
the provisions of this Statement.
RECLASSIFICATION - Certain prior-period amounts have been
reclassified to conform to current-period presentation.
2. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension Plans
- -------------
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. Pension cost in
2005, 2004 and 2003 amounted to $4.5, $4.5 and $2.2 million, respectively,
including amounts recorded in construction.
The net periodic pension costs include the following components:
(Thousands) 2005 2004 2003
--------------------------------------------------------------------------------------------
Service cost - benefits earned
during the period $ 11,196 $ 11,107 $ 9,060
Interest cost on projected
benefit obligation 15,977 16,231 16,600
Expected return on plan assets (21,164) (22,499) (22,601)
Amortization of transition obligation - - (236)
Amortization of prior service cost 1,234 1,324 1,392
Amortization of actuarial loss 2,921 3,803 1,338
-----------------------------------
Sub-Total $ 10,164 $ 9,966 $ 5,553
Loss on lump-sum settlement - 8,109 273
Regulatory adjustment (5,635) (13,583) (3,582)
-----------------------------------
Net pension cost $ 4,529 $ 4,492 $ 2,244
===================================
Effective with the implementation of rates (from the 1999 rate
case) on December 27, 1999, the Commission authorized amounts that were
deferred pursuant to provisions in previous rate cases to be included in
rates without return on investment and amortized over a fifteen-year period.
The return on plan assets is based on market-related value of
plan assets implemented prospectively over a four-year period beginning
October 1, 2002. Unrecognized gains or losses are amortized only to the
extent that such gain or loss exceeds 10% of the greater of the projected
benefit obligation or the market-related value of plan assets. Such excess
is amortized over the average remaining service life of active participants.
Pursuant to the provisions of the Laclede Gas pension plans,
pension obligations may be paid in the form of lump-sum cash payments.
Lump-sum payments are recognized as settlements only if the total of such
payments exceeds 100% of the sum of service and interest costs. There were
no lump-sum payments recognized as settlements in fiscal year 2005. Lump-sum
payments recognized as settlements totaled $32.7 million and $0.5 million in
fiscal years 2004 and 2003, respectively.
Changes in the minimum pension liability resulted in
charges/(credits) to Other Comprehensive Income of $4.3 million in fiscal
year 2005, $(0.7) million in fiscal year 2004, and $5.1 million in fiscal
year 2003.
In the Utility's 2002 rate case, the Commission ordered that
the recovery in rates for 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 effective July 1, 2003. The
difference between this amount and pension expense as calculated pursuant to
the above and included in the Statements of Consolidated Income and
Statements of Consolidated Comprehensive Income is deferred as a regulatory
asset or liability.
46
The following table sets forth the reconciliation of the
beginning and ending balances of the pension benefit obligation recognized
in the Consolidated Balance Sheets at September 30:
(Thousands) 2005 2004
---------------------------------------------------------------------------------------
Benefit obligation at beginning of year $252,583 $268,439
Service cost 11,196 11,107
Interest cost 15,977 16,231
Plan amendments - (55)
Actuarial (gain) loss 70,732 (2,825)
Settlements - (32,677)
Gross benefits paid (23,286) (7,637)
------------------------
Benefit obligation at end of year $327,202 $252,583
========================
Accumulated benefit obligation at end of year $261,921 $199,819
The following table sets forth the reconciliation of the beginning
and ending balances of the fair value of plan assets recognized in the
Consolidated Balance Sheets at September 30:
(Thousands) 2005 2004
--------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $259,478 $274,542
Actual return on plan assets 36,238 24,980
Employer contributions 352 270
Settlements - (32,677)
Gross benefits paid (23,286) (7,637)
------------ ------------
Fair value of plan assets at end of year $272,782 $259,478
------------ ------------
Funded status at end of year $(54,420) $ 6,896
Unrecognized net actuarial loss 118,263 65,525
Unrecognized prior service cost 14,650 15,884
Fourth quarter contribution adjustment 56 56
-------------------------
Net amount recognized at end of year $ 78,549 $ 88,361
=========================
Amounts recognized in the Consolidated Balance Sheets consist of:
Prepaid pension cost $ 80,232 $ 88,607
Accrued benefit liability (11,509) (5,827)
Intangible asset 633 691
Regulatory adjustment 7,356 4,286
Accumulated other comprehensive income 1,837 604
-------------------------
Net amount recognized at end of year $ 78,549 $ 88,361
=========================
The pension benefit obligation and the fair value of plan assets
are based on a June 30 measurement date.
The assumptions used to calculate net periodic pension costs are as
follows:
2005 2004 2003
----------------------------------------------------------------------------------------------------
Weighted average discount rate 6.25% 6.00% 7.25%
Weighted average rate of future compensation increase 3.25% 3.00% 4.00%
Expected long-term rate of return on plan assets 8.50% 8.50% 8.50%
The weighted average discount rate is based on long-term, high
quality bond indices at the measurement date. The expected long-term rate of
return on plan assets is based on historical and projected rates of return
for current and planned asset classes in the investment portfolio. Assumed
projected rates of return for each asset class were selected after analyzing
historical experience and future expectations of the returns. The overall
expected rate of return for the portfolio was developed based on the target
allocation for each class. The expected return is a long-term assumption
that generally does not change annually.
The assumptions used to calculate the benefit obligations are as
follows:
2005 2004
----------------------------------------------------------------------------------------
Weighted average discount rate 5.00% 6.25%
Weighted average rate of future compensation increase 3.00% 3.25%
47
Following are the projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for plans that have a projected
benefit obligation and an accumulated benefit obligation in excess of plan
assets:
(Thousands) 2005 2004
----------------------------------------------------------------------------------------
Projected benefit obligation $327,202 $25,026
Fair value of plan assets 272,782 15,034
Accumulated benefit obligation 27,686 22,139
Fair value of plan assets 14,774 15,034
Following are the targeted and actual plan assets by category:
2006 2005 2004
Target Actual Actual
--------------------------------------------------------------------------------------
Equity Securities 50% 50% 51%
Debt Securities 50% 50% 49%
--------- --------- ---------
Total 100% 100% 100%
Laclede Gas' investment policy is designed to preserve, to the
extent possible, the current funded status of the plan and minimize
contributions to the trusts. The policy seeks to maximize investment returns
consistent with these objectives and Laclede Gas' tolerance for risk.
Outside investment management specialists are utilized in each asset class.
Such specialists are provided with guidelines, where appropriate, designed
to ensure that the investment portfolio is managed in accordance with
policy. Performance and compliance with the guidelines is regularly
monitored.
Laclede Gas' current investment policy targets an asset allocation
of 50% to equity securities and 50% to debt securities (including short-term
securities held for the purpose of making benefit payments). Laclede Gas
generally rebalances quarterly if the actual allocation deviates from the
target allocation by more than 2%.
Following are expected pension benefit payments for the succeeding
five fiscal years, and in aggregate for the five years thereafter:
Pensions Pensions
from from
Qualified Laclede
(Millions) Trust Gas Funds
-----------------------------------------------------------------------------------
2006 $ 15.6 $ .3
2007 13.8 .4
2008 14.4 .4
2009 17.2 .5
2010 19.2 .5
2011 - 2015 136.8 2.9
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.
Contributions to the pension plans in fiscal year 2006 are anticipated to be
$0.7 million into the qualified trusts, and $0.3 million into the
non-qualified plans.
Postretirement Benefits
- -----------------------
Laclede Gas provides certain life insurance benefits at retirement.
Medical insurance is available after early retirement until age 65. The
unrecognized transition obligation is being amortized over 20 years.
Postretirement benefit costs in 2005, 2004 and 2003 amounted to
approximately $8.0 million, $7.9 million, and $7.8 million, respectively,
including amounts charged to construction.
48
Net periodic postretirement benefit costs consisted of the
following components:
(Thousands) 2005 2004 2003
---------------------------------------------------------------------------------------
Service cost - benefits earned
during the period $ 3,379 $ 3,175 $ 2,758
Interest cost on accumulated
postretirement benefit obligation 3,303 3,202 3,661
Expected return on plan assets (1,274) (836) (937)
Amortization of transition
obligation 578 1,059 1,267
Amortization of prior service cost (32) (32) 328
Amortization of actuarial loss 868 697 415
Regulatory adjustment 1,181 658 301
-----------------------------------
Net postretirement benefit cost $ 8,003 $ 7,923 $ 7,793
===================================
Effective with the implementation of rates (from the 1999 rate
case) on December 27, 1999, the Commission authorized amounts that were
deferred pursuant to provisions in previous rate cases, to be included in
rates without return on investment and amortized over a fifteen-year period.
The return on plan assets is based on market related value of plan
assets implemented prospectively over a four-year period beginning October
1, 2002. Unrecognized gains and losses are amortized only to the extent that
such gain or loss exceeds 10% of the greater of the accumulated
postretirement benefit obligation or the market-related value of plan
assets. Such excess is amortized over the average remaining service life of
active participants. Pursuant to Commission order, the recovery in rates for
postretirement benefit cost includes amortization of unrecognized gains or
losses based on the most recent five-year average of the unrecognized gain
or loss balance, amortized over a five-year period. The difference between
this amount and postretirement benefit expense as calculated pursuant to the
above is deferred as a regulatory asset or liability.
The following table sets forth the reconciliation of the beginning
and ending balances of the postretirement benefit obligation at September
30:
(Thousands) 2005 2004
------------------------------------------------------ -----------------------
Benefit obligation at beginning of year $51,735 $52,508
Service cost 3,379 3,175
Interest cost 3,303 3,202
Plan amendments (2,069) (4,323)
Actuarial loss 7,942 2,577
Gross benefits paid (6,646) (5,404)
-----------------------
Benefit obligation at end of year $57,644 $51,735
=======================
The following table sets forth the reconciliation of the beginning
and ending balances of the fair value of plan assets recognized in the
Consolidated Balance Sheets at September 30:
(Thousands) 2005 2004
--------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 16,976 $ 14,254
Actual return on plan assets 1,078 802
Employer contributions 7,363 7,324
Gross benefits paid (6,646) (5,404)
-------------------------
Fair value of plan assets at end of year $ 18,771 $ 16,976
-------------------------
Funded status at end of year $(38,872) $(34,759)
Unrecognized net actuarial loss 25,849 18,579
Unrecognized prior service cost (272) (245)
Unrecognized net transition obligation 2,599 5,188
-------------------------
Net amount recognized at end of year
as postretirement benefit cost $(10,696) $(11,237)
=========================
The accumulated postretirement benefit obligation and the fair
value of plan assets are based on a June 30 measurement date.
49
The assumptions used to calculate net periodic postretirement
benefit costs are as follows:
2005 2004 2003
--------------------------------------------------------------------------------------------
Weighted average discount rate 6.25% 6.00% 7.25%
Weighted average rate of future compensation increase 3.25% 3.00% 4.00%
Expected long-term rate of return on plan assets 8.50% 8.50% 8.50%
Medical cost trend rate (initial) 9.00% 7.00% 8.00%
Medical cost trend rate (ultimate) 5.00% 5.00% 5.00%
The weighted average discount rate is based on long-term, high
quality bond indices at the measurement date. The expected long-term rate of
return on plan assets is based on historical and projected rates of return
for current and planned asset classes in the investment portfolio. Assumed
projected rates of return for each asset class were selected after analyzing
historical experience and future expectations of the returns. The overall
expected rate of return for the portfolio was developed based on the target
allocation for each class. The expected return is a long-term assumption
that generally does not change annually.
The assumptions used to calculate the accumulated postretirement
benefit obligations are as follows:
2005 2004
--------------------------------------------------------------------------------------
Weighted average discount rate 5.00% 6.25%
Weighted average rate of future compensation increase 3.00% 3.25%
Medical cost trend rate (initial) 8.00% 9.00%
Medical cost trend rate (ultimate) 5.00% 5.00%
The following table presents the effect of an assumed 1% change in
the assumed medical cost trend rate:
(Thousands) 1% Increase 1% Decrease
------------------------------------------------------------------------------------------
Effect on net periodic benefit cost $ 480 $ (450)
Effect on accumulated postretirement benefit obligation 1,700 (1,630)
Following are the targeted and actual plan assets by category:
2006 2005 2004
Target Actual Actual
--------------------------------------------------------------------------------------
Equity Securities 50% 50% 53%
Debt Securities 50% 50% 47%
--------- --------- ---------
Total 100% 100% 100%
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 Voluntary
Employees' Beneficiary Association (VEBA) and Rabbi trusts as its external
funding mechanisms. Laclede Gas' investment policy seeks to maximize
investment returns consistent with Laclede Gas' tolerance for risk. Outside
investment management specialists are utilized in each asset class. Such
specialists are provided with guidelines, where appropriate, designed to
ensure that the investment portfolio is managed in accordance with policy.
Performance and compliance with the guidelines is regularly monitored.
Laclede Gas' current investment policy targets an asset allocation of 60% to
equity securities and 40% to debt securities, excluding cash held in
short-term securities for the purpose of making benefit payments. Laclede
Gas currently invests in a mutual fund which is continually rebalanced to
the target allocation.
Following are expected postretirement benefit payments for the
succeeding five fiscal years, and in aggregate for the five years
thereafter:
Benefits Paid Benefits Paid
from Qualified from Laclede
(Millions) Trusts Gas Funds
----------------------------------------------------------------------------------------
2006 $ 4.6 $ .4
2007 4.7 .4
2008 4.8 .4
2009 4.7 .4
2010 4.9 .4
2011 - 2015 28.5 2.2
50
Laclede Gas' funding policy is to contribute amounts to the trusts
equal to the periodic benefit cost calculated pursuant to SFAS No. 106 as
recovered in rates. Contributions to the postretirement plans in fiscal year
2006 are anticipated to be $8.2 million to the qualified trusts, and $0.6
million paid directly to participants from Laclede Gas funds.
Other Plans
- -----------
Laclede Gas sponsors 401(k) plans that cover substantially all
employees. The plans allow employees to contribute a portion of their base
pay in accordance with specific guidelines. Laclede Gas provides a match of
such contributions within specific limits. The cost of the defined
contribution plans of Laclede Gas amounted to approximately $2.9 million per
year for fiscal years 2005, 2004 and 2003.
SM&P Utility Resources, Inc.
- ----------------------------
SM&P maintains a defined benefit plan for selected employees. The
plan is a non-qualified plan and therefore has no assets held in trust. Net
pension cost related to the plan was $38,000 for fiscal years 2005 and 2004,
and $62,000 for fiscal year 2003. The net liability recognized under the
plan was $427,000, $389,000, and $351,000 at September 30, 2005, 2004 and
2003, respectively.
SM&P sponsors defined contribution plans which cover substantially
all employees. The plans allow employees to contribute a portion of their
base pay in accordance with specific guidelines. The Company provides a
match of such contributions within specific limits. The cost of the defined
contribution plans of SM&P amounted to $0.5 million, $0.7 million and $0.6
million, respectively, for the fiscal years 2005, 2004 and 2003.
3. GAS SUPPLY COST MANAGEMENT
In the 2002 rate case, the MoPSC approved a new plan applicable to
the management of the Utility's gas supply commodity costs under which it
may retain up to 10% of cost savings associated with the acquisition of
natural gas below an established benchmark level of gas cost. Laclede Gas
achieved approximately $3.5 million in pre-tax income under the plan during
fiscal year 2003, but did not record any income under the plan during fiscal
year 2004 or fiscal year 2005. Income recorded under the plan is included in
the Regulated Gas Distribution Operating Revenues on the Statements of
Consolidated Income.
4. FINANCIAL INSTRUMENTS
In the course of its business, Laclede Group's non-regulated
marketing affiliate, Laclede Energy Resources, Inc. (LER), enters into fixed
price commitments associated with the purchase or sale of natural gas. LER
manages the price risk associated with these commitments by either closely
matching the offsetting physical purchase or sale of natural gas at fixed
prices or through the use of exchange-traded futures contracts to lock in
margins. At September 30, 2005, LER's open positions were not material to
Laclede Group's financial position or results of operations.
Settled and open futures positions were as follows at September 30,
2005:
Average
MMBtu Price per
Position Month (millions) MMBtu
-------------- ---------- -----
Settled short positions October 2005 .42 $ 6.95
Settled long positions October 2005 .30 6.39
Open short futures positions November 2005 .63 8.10
December 2005 .71 10.02
January 2006 .25 7.26
February 2006 .04 7.23
April 2006 .98 7.64
Open long futures positions February 2006 .16 13.86
The above futures contracts are derivative instruments and
management has designated these items as cash flow hedges of forecasted
transactions. The fair values of the instruments are recognized on the
Consolidated Balance Sheets. The change in the fair value of the effective
portion of these hedge instruments is recorded, net of tax, in Other
Comprehensive Income (Loss), a component of Common Stock Equity. These
amounts will reduce or be charged to Non-Regulated Gas Marketing Operating
Revenues or Expenses in the Statements of Consolidated Income as the
51
transactions occur. It is expected that approximately $10.7 million of
pre-tax net unrealized losses on cash flow hedging derivative instruments at
September 30, 2005 will be reclassified into the Consolidated Statement of
Income during fiscal year 2006. The ineffective portions of these hedge
instruments are charged to Non-Regulated Gas Marketing Operating Revenues or
Expenses. The net amount of pre-tax losses recognized in earnings for the
ineffective portion of cash flow hedges was $2.0 million in fiscal year
2005, primarily due to the impact of recent hurricanes on natural gas prices
at certain locations. The amount of ineffectiveness recognized in fiscal
years 2004 and 2003 was not material. Cash flows from hedging transactions
are classified in the same category as the cash flows from the items that
are being hedged in the Statements of Consolidated Cash Flows.
5. EARNINGS PER SHARE OF COMMON STOCK
SFAS No. 128, Earnings Per Share, requires dual presentation of
basic and diluted earnings per share (EPS). Basic EPS does not include
potentially dilutive securities and is computed by dividing net income
applicable to common stock by the weighted-average number of common shares
outstanding during the period. Diluted EPS assumes the issuance of common
shares pursuant to the Company's stock-based compensation plan at the
beginning of each respective period. There were no antidilutive shares for
the periods presented.
(Thousands, Except Per Share Amounts) 2005 2004 2003
-----------------------------
Basic EPS:
Net Income Applicable to Common Stock $40,070 $36,056 $34,585
Weighted-Average Shares Outstanding 21,080 19,783 19,022
Earnings Per Share of Common Stock $1.90 $1.82 $1.82
Diluted EPS:
Net Income Applicable to Common Stock $40,070 $36,056 $34,585
Weighted-Average Shares Outstanding 21,080 19,783 19,022
Dilutive Effect of Employee Stock
Options, Restricted Stock 40 22 7
-----------------------------
Weighted-Average Diluted Shares 21,120 19,805 19,029
=============================
Earnings Per Share of Common Stock $1.90 $1.82 $1.82
6. COMMON STOCK AND PAID-IN CAPITAL
Total shares of common stock outstanding were 21.17 million and
20.98 million at September 30, 2005 and 2004, respectively.
Paid-in capital increased $5.4 million in 2005 due to the
issuance of 131,144 shares of common stock under the Dividend Reinvestment
Plan and 59,700 shares of common stock under the Equity Incentive Plan.
In May 2004, Laclede Group issued 1.725 million shares of common
stock through a public stock offering. Also in fiscal year 2004, Laclede
Group issued 138,213 shares of common stock under its Dividend Reinvestment
Plan and 35,550 shares of common stock under its Equity Incentive Plan.
Paid-in capital increased $47.6 million in 2004 as a result of these
issuances.
On August 23, 2001, Laclede Group declared a dividend of one
preferred share purchase right for each outstanding share of common stock as
of October 1, 2001. Each preferred share purchase right entitles the
registered holder to purchase from Laclede Group one one-hundredth of Series
A junior participating preferred stock for a purchase price of $90, subject
to adjustment. The value of one one-hundredth of a preferred share
purchasable upon the exercise of each right should, because of the nature of
the preferred shares' dividend, liquidation and voting rights, approximate
the value of one common share. The rights expire on October 1, 2011 and may
be redeemed by Laclede Group for one cent each at any time before they
become exercisable. The rights will not be exercisable or transferable apart
from the common stock until ten business days after (i) public announcement
that a person or group has acquired beneficial ownership of 20% or more of
the common stock, or (ii) commencement, or announcement of an intention to
make, a tender offer or exchange for beneficial ownership of 20% or more of
the common stock. Following the former event, a right will entitle its
holder to purchase, for the purchase price, the number of shares equal to
the purchase price divided by one-half of the market price. Alternatively,
Laclede Group may exchange each right for one one-hundredth of a preferred
share. A total of 21.17 million rights were outstanding on September 30,
2005.
Laclede Group has on file a shelf registration on Form S-3, which
allows for the issuance of equity securities, other than preferred stock,
and debt securities. Of the $500 million of securities originally registered
under this Form S-3,
52
$362.4 million remain registered and unissued as of September 30, 2005.
Laclede Group issued 1.725 million shares of common stock in May 2004 under
this registration. The net proceeds of approximately $44.7 million from this
sale were used to make a capital contribution to Laclede Gas. Laclede Gas
used the contribution to reduce short-term borrowings and for general
corporate purposes. The amount, timing and type of additional financing to
be issued under this shelf registration will depend on cash requirements and
market conditions.
7. REDEEMABLE PREFERRED STOCK
The preferred stock, which is non-voting except in certain
circumstances, may be redeemed at the option of the Laclede Gas board of
directors. The redemption price is equal to par of $25.00 a share.
During 2005 and 2004, 3,948 shares and 221 shares of 5% Series B
preferred stock were reacquired, respectively.
Any default in a sinking fund payment must be cured before Laclede
Gas may pay dividends on or acquire any common stock. Sinking fund
requirements on preferred stock for the next five years subsequent to
September 30, 2005 are $0.1 million in 2006 and $0.2 million in 2007 through
2010.
8. LONG-TERM DEBT & LONG-TERM DEBT TO UNCONSOLIDATED AFFILIATE TRUST
Maturities on long-term debt, including current portion, for the
five fiscal years subsequent to September 30, 2005 are as follows:
2006 $40 million
2007 -
2008 $40 million
2009 -
2010 -
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 Laclede Gas' 8 1/2% First
Mortgage Bonds in November 2004.
As of September 30, 2005, $120 million of the Laclede Gas shelf
registration on Form S-3 remained registered and unissued. The original
MoPSC authorization for issuing securities registered on 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 $62.4 million, reflecting capital contributions that have
been made by Laclede Group to Laclede Gas under this authority through
September 2005. The amount, timing and type of additional financing to be
issued under this shelf registration will depend on cash requirements and
market conditions.
Substantially all of the utility plant of Laclede Gas is subject to
the liens of its mortgage. Its mortgage contains provisions that restrict
retained earnings from declaration or payment of cash dividends. As of
September 30, 2005 and 2004, all of the retained earnings of Laclede Gas
were free from such restrictions.
9. NOTES PAYABLE AND CREDIT AGREEMENTS
In September 2004, Laclede Gas renewed its syndicated line of
credit for a term of five years and increased the amount of the line to $285
million from $250 million. The Utility has supplemental 364-day lines
totaling $15 million through April 2006.
Laclede Gas issues commercial paper that is supported by the bank
lines of credit. During fiscal year 2005, the Utility's short-term borrowing
requirements, which peaked at $186.6 million, were met by the sale of
commercial paper. Laclede Gas had $63.6 million in commercial paper
outstanding as of September 30, 2005, at a weighted average interest rate of
3.8% per annum, and $71.4 million outstanding as of September 30, 2004, at a
weighted average interest rate of 1.9% per annum.
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) to be at least 2.25 times interest expense. On
September 30, 2005, total debt was 54% of total capitalization. For the
fiscal year ended September 30, 2005, EBITDA was 3.53 times interest
expense.
53
Short-term cash requirements outside of Laclede Gas have generally
been met with internally-generated funds. However, Laclede Group has a $40
million working capital line of credit expiring in August 2008, to meet
short-term liquidity needs of its subsidiaries. This line of credit replaces
a $20 million line that was scheduled to expire in June 2006. It has a
covenant limiting the total debt of the consolidated Laclede Group to no
more than 70% of the Company's total capitalization, giving a 50% debt
weighting to the subordinated debt issued to an unconsolidated affiliated
trust. This ratio stood at 52% on September 30, 2005. This line has been
used to provide letters of credit totaling $1.5 million on behalf of SM&P
Utility Resources, which have not been drawn, and to provide for seasonal
funding needs of the various subsidiaries from time to time. The maximum
balance outstanding during fiscal year 2005 was $7.0 million, which was the
balance outstanding on September 30, 2005.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of financial
instruments at September 30, 2005 and 2004 are as follows:
Carrying Fair
(Thousands) Amount Value
---------------------------------------------------------------------------------------
2005:
Cash and cash equivalents $ 6,013 $ 6,013
Investment in unconsolidated affiliate trust 1,400 1,400
Short-term debt 70,605 70,605
Long-term debt, including current portion 334,033 365,144
Redeemable preferred stock, including current sinking fund
requirements 1,009 1,009
Long-term debt to unconsolidated affiliate trust 46,400 48,380
2004:
Cash and cash equivalents $ 13,854 $ 13,854
Investment in unconsolidated affiliate trust 1,400 1,400
Short-term debt 71,380 71,380
Long-term debt, including current portion 358,936 393,735
Redeemable preferred stock, including current sinking fund
requirements 1,253 1,253
Long-term debt to unconsolidated affiliate trust 46,400 49,910
The carrying amounts for cash and cash equivalents and short-term
debt approximate fair value due to the short maturity of these investments.
Fair value of long-term debt, preferred stock, and long-term debt to
unconsolidated affiliate trust is estimated based on market prices for
similar issues.
Investments in unconsolidated affiliate trust - The Company's
cost method investments consist of $1.4 million in common securities of
Capital Trust I, a wholly owned subsidiary trust. This investment was not
evaluated for impairment because the Company did not identify any events or
changes in circumstances that may have had a significant adverse effect on
the fair value of that investment.
11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss),
net of income taxes, recognized in the Consolidated Balance Sheets at
September 30 were as follows:
Net Unrealized Gains
(Losses) on Cash Flow Minimum Pension
Hedges Liability Adjustment Total
--------------------------------------------------------------
Balance, September 30, 2003 $ 502 $ (582) $ (80)
Current-period change (1,738) 211 (1,527)
--------------------------------------------------------------
Balance, September 30, 2004 (1,236) (371) (1,607)
Current-period change (5,340) (756) (6,096)
--------------------------------------------------------------
Balance, September 30, 2005 $(6,576) $(1,127) $ (7,703)
==============================================================
54
12. INCOME TAXES
The net provisions for income taxes charged during the years
ended September 30, 2005, 2004 and 2003 are as follows:
(Thousands)
----------------------------------------------------------------------------
Years Ended September 30 2005 2004 2003
----------------------------------------------------------------------------
Included in Statements of
Consolidated Income:
Federal
Current $17,346 $ 3,606 $ 2,166
Deferred 533 13,062 13,741
Investment tax credit
adjustments - net (332) (305) (313)
State and local
Current 2,991 89 1,074
Deferred 223 2,812 1,984
-----------------------------
Total $20,761 $19,264 $18,652
=============================
The effective income tax rate varied from the federal statutory
income tax rate for each year due to the following:
2005 2004 2003
---------------------------------
Federal income tax statutory rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal income tax benefits 3.4 3.4 3.7
Certain expenses capitalized on books
and deducted on tax return (3.2) (3.1) (2.9)
Other items - net (1.1) (0.5) (0.8)
---------------------------------
Effective income tax rate 34.1% 34.8% 35.0%
=================================
The significant items comprising the net deferred tax liability
recognized in the Consolidated Balance Sheets as of September 30 are as
follows:
(Thousands) 2005 2004
-----------------------------------------------------------------------
Deferred tax assets:
Reserves not currently deductible $ 21,895 $ 21,508
Unamortized investment tax credits 2,945 3,154
Other 11,332 6,330
------------------------
Total deferred tax assets 36,172 30,992
Deferred tax liabilities:
Relating to property 169,145 159,326
Pension 32,112 38,904
Deferred gas costs 4,697 5,589
Other 18,276 15,478
------------------------
Total deferred tax liabilities 224,230 219,297
Net deferred tax liability 188,058 188,305
Net deferred tax asset (liability) - current (1,822) 1,321
------------------------
Net deferred tax liability - non-current $186,236 $189,626
========================
13. OTHER INCOME AND INCOME DEDUCTIONS - NET
(Thousands) 2005 2004 2003
---------------------------------------------------------------------------------
Non-recurring investment gains $ 540 $ 1,947 $ 816
Allowance for funds used during construction (100) (123) (107)
Other income 2,150 1,561 1,024
Other income deductions (984) 250 (598)
-------------------------------
Other income and (income deductions) - net $ 1,606 $ 3,635 $1,135
===============================
Laclede Gas recorded the receipt of proceeds totaling $0.5 million,
$1.9 million and $0.8 million during fiscal years 2005, 2004 and 2003,
respectively, related to its interest, as a policy holder, in the sale of a
mutual insurance company. These proceeds represent initial distributions
relating to certain policies held by the Utility. Subsequent
55
distributions, if any, are not expected to have a material impact on the
consolidated financial position or results of operations of the Company.
14. INFORMATION BY OPERATING SEGMENT
The Regulated Gas Distribution segment consists of the regulated
operations of Laclede Gas and is the core business segment of Laclede Group.
Laclede Gas is a public utility engaged in the retail distribution and sale
of natural gas serving an area in eastern Missouri, with a population of
approximately 2.0 million, including the City of St. Louis, St. Louis
County, and parts of eight other counties. The Non-Regulated Services
segment includes the results of SM&P, an underground locating and marking
business operating in the nine-state footprint from Michigan to Texas. The
underground facility locating industry remains competitive with many
contracts subject to termination on as little as 30 days' notice. Also,
SM&P's customers are primarily in the utility and telecommunication sector
and, as such, SM&P's results are influenced by construction seasonality and
trends. The Non-Regulated Gas Marketing segment includes the results of LER,
a wholly owned subsidiary of Laclede Group. Non-Regulated Other includes the
transportation of liquid propane, real estate development, the compression
of natural gas, and financial investments in other enterprises. These
operations are conducted through five wholly owned subsidiaries, plus
Laclede Energy Services, Inc. (LES), a wholly owned subsidiary of Laclede
Group that became operational on May 1, 2002 and was dissolved on April 14,
2003. LES performed administrative gas supply and risk management services.
The dissolution of LES had no material effect on the financial position or
results of operations of Laclede Group. The results of LES' operations
(while active) are included in Laclede Group's Consolidated Financial
Statements. Certain intersegment revenues with Laclede Gas are not
eliminated in accordance with the provisions of SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation." Those types of transactions
include sales of natural gas from Laclede Gas to LER, services performed by
SM&P to locate and mark underground facilities for Laclede Gas, sales of
natural gas from LER to Laclede Gas, and sales of propane by Laclede
Pipeline Company to Laclede Gas. These revenues are shown on the
Intersegment revenues lines in the table under Regulated Gas Distribution,
Non-Regulated Services, Non-Regulated Gas Marketing, and Non-Regulated Other
columns respectively.
56
Regulated Gas Non-Regulated Non-Regulated Non-Regulated
(Thousands) Distribution Services Gas Marketing Other Eliminations Consolidated
------------------------------------------------------------------------------------------
FISCAL 2005
Revenues from
external customers $ 950,467 $ 141,118 $ 435,817 $ 2,885 $ - $1,530,287
Intersegment
revenues 27,728 360 33,742 4,915 - 66,745
------------------------------------------------------------------------------------------
Total operating
revenues 978,195 141,478 469,559 7,800 - 1,597,032
------------------------------------------------------------------------------------------
Depreciation &
amortization 23,036 -* - -** - 23,036
Interest charges 26,911 3,430 148 398 (338) 30,549
Income tax
expense 14,561 3,463 2,763 (26) - 20,761
Net income
applicable to
common stock 30,594 5,006 4,378 92 - 40,070
Total assets 1,224,947 70,213 79,440 46,252 (35,779) 1,385,073
Capital
expenditures 54,621 5,415 - 167 - 60,203
FISCAL 2004
Revenues from
external customers $ 865,946 $ 103,885 $ 250,013 $ 3,386 $ - $1,223,230
Intersegment
revenues 2,959 354 20,315 3,462 - 27,090
------------------------------------------------------------------------------------------
Total operating
revenues 868,905 104,239 270,328 6,848 - 1,250,320
------------------------------------------------------------------------------------------
Depreciation &
amortization 22,385 -* - -** - 22,385
Interest charges 25,202 3,488 75 477 (428) 28,814
Income tax
expense 16,508 625 1,896 235 - 19,264
Net income
applicable to
common stock 32,063 650 3,021 322 - 36,056
Total assets 1,154,365 58,466 33,971 33,830 (15,337) 1,265,295
Capital
expenditures 49,130 1,701 - 478 - 51,309
FISCAL 2003
Revenues from
external customers $ 771,334 $ 99,820 $ 143,226 $ 3,984 $ - $1,018,364
Intersegment
revenues 3,438 348 20,635 7,624 (79) 31,966
------------------------------------------------------------------------------------------
Total operating
revenues 774,772 100,168 163,861 11,608 (79) 1,050,330
------------------------------------------------------------------------------------------
Depreciation &
amortization 22,229 -* - -** - 22,229
Interest charges 23,921 2,995 43 420 (408) 26,971
Income tax
expense/(benefit) 18,009 (1,652) 1,819 476 - 18,652
Net income/(loss)
applicable to
common stock 34,277 (3,262) 2,889 681 - 34,585
Total assets 1,111,503 58,640 36,655 49,396 (53,396) 1,202,798
Capital
expenditures 49,926 1,179 - 7 - 51,112
<FN>
* Depreciation & amortization for Non-Regulated Services is included in
Non-Regulated - Services Operating Expenses on the Statements of
Consolidated Income (2005, $3.3 million; 2004, $3.5 million; 2003,
$3.2 million).
** Depreciation & amortization for Non-Regulated Other is included
in the Non-Regulated - Other Operating Expenses on the Statements of
Consolidated Income (2005, $0.3 million; 2004, $0.2 million; 2003,
$0.2 million).
In November 2002, two customers notified SM&P that, due to actions
they had taken to address workforce management issues, they did not intend
to continue to outsource certain functions, which included locating services
provided by SM&P, after February and March 2003. One of these customers
notified SM&P in January 2003 that it would continue to outsource a portion
of its locating services provided by SM&P beyond that timeframe. In
connection with the reduction in work from these customers, SM&P made
reductions in the required levels of personnel, facilities and equipment,
for which the Company recorded an after-tax charge of approximately $1.0
million, all of which was expensed during the quarter ended March 31, 2003.
Beginning in 2004 and continuing into 2005, SM&P has not only regained most
of the previously withdrawn work, but has also gained new business with
these customers. Revenue from
57
these customers totaled approximately $59 million, $29 million and $29
million for fiscal years 2005, 2004 and fiscal year 2003, respectively.
15. COMMITMENTS AND CONTINGENCIES
Laclede Gas estimates fiscal year 2006 utility capital expenditures
at approximately $57 million. Fiscal year 2006 capital expenditures for
non-regulated subsidiaries are estimated at approximately $7 million. There
are no material contractual commitments at September 30, 2005 related to
these estimated capital expenditures.
The lease agreement covering the general office space of Laclede
Gas extends through February 2010 with options to renew for up to 10
additional years. The aggregate rental expense for fiscal years 2005, 2004
and 2003 was $865,000, $856,000 and $847,000, respectively. The annual
minimum rental payment for fiscal year 2006 is anticipated to be
approximately $874,000 with a maximum annual rental payment escalation of
$8,800 per year for each year through fiscal year 2010. Laclede Gas has
other relatively minor rental arrangements that provide for minimum rental
payments. Laclede Gas has entered into various operating lease agreements
for the rental of vehicles and power operated equipment. The rental costs
will be approximately $2.4 million in fiscal year 2006, $2.1 million in
fiscal year 2007, $1.5 million in fiscal year 2008, $0.9 million in fiscal
year 2009, and $0.4 million in fiscal year 2010. Laclede Gas and LER have
entered into various contracts, expiring on dates through 2011, for the
storage, transportation, and supply of natural gas. Minimum payments
required under the contracts in place at September 30, 2005 are estimated at
approximately $548 million. Additional contracts are generally entered into
prior to or during the heating season. Laclede Gas estimates that it will
pay approximately $88 million annually, at present rate levels, for fixed
charges related to these or other contracts that are expected to be in place
for the upcoming year for the reservation of gas supplies and pipeline
transmission and storage capacity. The Utility recovers these costs from
customers in accordance with the PGA Clause.
On March 11, 2005, Laclede Gas 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 began 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 bill.
SM&P has several operating leases, the aggregate annual cost of
which is approximately $8 million, consisting primarily of 12-month
operating leases, with renewal options, for vehicles used in its business.
Upon acquisition of SM&P, Laclede Group assumed parental guarantees of
certain of those vehicle leases. Laclede Group anticipates that the maximum
guarantees will not exceed $22 million. SM&P also has lease agreements
covering general office space extending through 2015 that resulted in rental
expense for fiscal years 2005, 2004 and 2003 of $0.9 million, $0.8 million
and $1.2 million, respectively. Payments will be $0.8 million in fiscal year
2006, $0.7 million in fiscal year 2007, $0.6 million in fiscal year 2008,
$0.5 million in fiscal year 2009, and $0.4 million in fiscal year 2010.
Laclede Group had guarantees totaling $11.5 million for performance
and payment of certain wholesale gas supply purchases by LER, as of
September 30, 2005. Since that date, Laclede Group issued an additional $7.0
million in guarantees on behalf of LER, and $3.0 million expired, leaving
$15.5 million in guarantees outstanding at November 18, 2005.
A consolidated subsidiary is a general partner in an
unconsolidated partnership, which invests in real estate partnerships. The
subsidiary and third parties are jointly and severally liable for the
payment of mortgage loans in the aggregate outstanding amount of
approximately $2.5 million incurred in connection with various real estate
ventures. Laclede Group has no reason to believe that the other principal
liable parties will not be able to meet their proportionate share of these
obligations. Laclede Group further believes that the asset values of the
real estate properties are sufficient to support these mortgage loans.
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 the Company's
or Laclede Gas' financial position and results of operations. As
environmental laws, regulations, and their interpretations change, however,
Laclede Gas may be required to incur additional costs.
Environmental issues have arisen in the past, and may arise in the
future, associated with sites formerly owned or operated by Laclede Gas
and/or its predecessor companies, including facilities at which manufactured
gas operations took place. Laclede Gas has been advised of the existence of
three former manufactured gas plant ("MGP") sites that may require
remediation and has worked with federal and state environmental regulators
to address two of the three sites.
58
With regard to a former MGP 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 September 30, 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 MGP site into the Missouri
Voluntary Cleanup Program (VCP). The VCP provides potential opportunities to
minimize the cost of site cleanup while maximizing possibilities for site
development. This site is located in, and is presently owned by, the City of
St. Louis, Missouri. The City is exploring development options for the site.
Laclede Gas also continues to evaluate options concerning this site. Laclede
Gas currently estimates that the cost of site investigations, agency
oversight and related legal and engineering consulting to be approximately
$650,000. Laclede Gas has paid or reserved for these actions. Laclede Gas
has requested that other former site owners and operators share in these
costs. One party has agreed to participate and has reimbursed Laclede Gas to
date for $190,000. 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 MGP site may
require remediation. Laclede Gas has not owned this site for many years. 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.
While the amount 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 amount of costs
relative to future remedial actions regulators may require at the Shrewsbury
site and at the other sites is unknown and may be material.
Laclede Gas has notified its insurers that it seeks reimbursement
for costs incurred in the past and future potential liabilities associated
with the three MGP sites identified above. 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. In June
2005, an outside consultant retained by Laclede Gas completed an analysis of
the MGP sites to determine cost estimates for a one-time contractual
transfer of risk from the insurers to the Company of environmental coverage
for the MGP sites. That analysis demonstrated a range of possible future
expenditures to investigate, monitor and remediate these MGP sites from $5.8
million to $36.3 million. This analysis is based upon currently available
facts, existing technology and presently enacted laws and regulations. The
actual costs that Laclede Gas may incur could be materially higher or lower
depending upon several factors, including whether remedial actions will be
required, final determination of any remedial actions, changing technologies
and governmental regulations, the ultimate ability of other potentially
responsible parties to pay and any insurance recoveries. Costs associated
with environmental remediation activities are accrued when such costs are
probable and reasonably estimable. As of the date of this report, Laclede
Gas has recorded all such costs. However, it is possible that future events
may require some level of additional remedial activities that, in turn,
would require Laclede Gas to record additional costs.
Laclede Gas anticipates that any costs it may incur in the future
to remediate these sites, less any amounts received as insurance proceeds or
as contributions from other potentially responsible parties, would be
deferred and recovered in rates through periodic adjustments approved by the
MoPSC. Accordingly, potential liabilities associated with remediating the
MGP sites are not expected to have a material impact on the future financial
position and results of operations of Laclede Gas or the Company.
On June 28, 2002, the Staff of the MoPSC filed its recommendation
in a proceeding established to review Laclede Gas' gas costs for fiscal year
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. Laclede Gas appealed the MoPSC's
decision through various courts ultimately resulting in the Missouri Western
District Court of Appeals reversing the Commission's decision on the grounds
that it was unlawful and not supported by competent and substantial evidence
on the record. Consistent with the Court of Appeals' decision, on April 7,
2005, the Commission issued its Order on Remand reversing its April 29, 2003
decision and directing that Laclede Gas be permitted to retain the $4.9
million. 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 had no effect on the financial
position or results of operations of the Company.
SM&P has been the subject of certain employment-related claims
arising out of a practice of SM&P that predated Laclede Group's acquisition.
The claims involve whether certain pre- and post-work activities and
commuting time for non-supervisory field employees constitute hours worked
for purposes of federal and state wage and hour laws. These claims have been
asserted in various proceedings, including one "opt-in" collective action
filed in March 2003 in Federal District Court for the Eastern District of
Texas. As a result of a ruling on February 27, 2004, in that proceeding,
approximately 3,500 present and former field employees who worked for SM&P
at times since February 27, 2001, were given notice of the lawsuit and the
opportunity, until June 7, 2004, to join the lawsuit and assert claims for
additional
59
overtime compensation for the three-year period immediately preceding the
date that they joined the lawsuit. Of the employees to whom notice was sent,
966 joined this lawsuit within the opt-in deadline established by the court.
The substantial majority of the plaintiffs are former employees. A limited
number of individuals have attempted to opt-in after the court's deadline,
while simultaneously, a limited number of plaintiffs have withdrawn from
participation after having opted into the lawsuit. SM&P is vigorously
contesting these claims, including opposition to this case ultimately
proceeding as a collective action. While the results of the claims cannot be
predicted with certainty, management, after discussion with counsel,
believes that the final outcome will not have a material adverse effect on
the consolidated financial position and results of operations of the
Company.
Laclede Group and its subsidiaries are involved in other
litigation, claims and investigations arising in the normal course of
business. While the results of such litigation cannot be predicted with
certainty, management, after discussion with counsel, believes that the
final outcome will not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
16. INTERIM FINANCIAL INFORMATION (UNAUDITED)
In the opinion of Laclede Group, the quarterly information
presented below for fiscal years 2005 and 2004 includes all adjustments
(consisting of only normal recurring accruals) necessary for a fair
statement of the results of operations for such periods. Variations in
consolidated operations reported on a quarterly basis primarily reflect the
seasonal nature of the business of Laclede Gas.
(Thousands, Except Per Share Amounts)
------------------------------------- ----------- ---------- ---------- -----------
Three Months Ended Dec. 31 March 31 June 30 Sept. 30
------------------------------------- ----------- ---------- ---------- -----------
2005
Total operating revenues $442,485 $576,555 $311,327 $266,665
Operating income (loss) 31,965 42,974 15,496 (606)
Net income (loss) applicable to
common stock 16,617 22,443 6,098 (5,088)
Earnings (loss) per share of
common stock $.79 $1.07 $.29 $(.24)
------------------------------------- ----------- ---------- ---------- -----------
Three Months Ended Dec. 31 March 31 June 30 Sept. 30
------------------------------------- ----------- ---------- ---------- -----------
2004
Total operating revenues $332,637 $474,955 $245,060 $197,668
Operating income (loss) 31,394 38,459 13,555 (2,847)
Net income (loss) applicable to
common stock 16,591 21,540 3,747 (5,822)
Earnings (loss) per share
of common stock $.87 $1.12 $.19 $(.28)
Laclede Gas Company's Financial Statements and Notes to Financial Statements
are included in Exhibit 99.1.
60
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no disagreements on accounting and financial
disclosure with Laclede's outside auditors that are required to be
disclosed.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, we carried
out an evaluation, under the supervision and with participation of our
management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15e and Rule 15d-15e under the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective.
There have been no changes in our internal control over financial
reporting that occurred during our fourth fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
The Management Report on Internal Control over Financial Reporting
and the Reports of Independent Registered Public Accounting Firm are
included under Item 8, pages 31 through 33.
Item 9B. Other Information
None.
61
Part III
Item 10. Directors and Executive Officers of the Registrants
The information concerning directors required by this item is set
forth in the Company's proxy statement dated December 21, 2005 under the
headings "Corporate Governance," "Information about the Nominees and
Directors," and "Section 16(a) Beneficial Ownership Reporting Compliance"
and are incorporated herein by reference.
The information concerning executive officers required by this item
is reported in Part I of this Form 10-K.
The board of directors has approved a Financial Code of Ethics that
covers the Chief Executive Officer and certain of the Company's senior
financial officers, including but not limited to, the Company's Chief
Financial Officer, Vice President - Finance, Controller, principal
accounting officer or officers of the Company serving in a finance,
accounting, treasury, or tax role. This code is posted on our website,
www.thelacledegroup.com, in the Investor Services section under SEC Filings.
The corporate governance guidelines, charters for the audit,
corporate governance and compensation committees, and code of business
conduct, are available on our website, and a copy will be sent to any
shareholder upon request.
Item 11. Executive Compensation
The information required by this item is set forth in the Company's
proxy statement dated December 21, 2005 under the headings "Directors'
Compensation," "Summary Compensation Table," "Option Grants in Fiscal 2005,"
"Total Options Exercised in Fiscal 2005 and Year-end Value," "Long-Term
Incentive Plans - Awards in Last Fiscal Year," "Retirement Plan" and "Other
Plans" and are incorporated herein by reference but the information under
the captions "Compensation Committee Report Regarding Executive
Compensation" and "Performance Graph" in such proxy statement are expressly
NOT incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information required by this item is set forth in the Company's
proxy statement dated December 21, 2005 under the heading "Beneficial
Ownership of Laclede Group Common Stock" and is incorporated herein by
reference.
The following table sets forth aggregate information regarding the
Company's equity compensation plans as of September 30, 2005:
Equity Compensation Plan Information
Number of securities
remaining available for
Number of securities Weighted-average future issuance under
to be issued upon exercise price of equity compensation
exercise of outstanding plans (excluding
outstanding options, options, warrants securities reflected
Plan Category warrants and rights and rights in column (a))
- ----------------------------------------- -------------------- ----------------- -----------------------
(a) (b) (c)
Equity compensation plans approved by
security holders (1) 570,800 $28.46 635,450
Equity compensation plans not approved
by security holders - - -
-------------------- ----------------- -----------------------
Total 570,800 $28.46 635,450
<FN>
(1) Includes the Company's Equity Incentive Plan and Restricted Stock Plan
for Non-Employee Directors. Included in column (a) are 8,050 shares
awarded under the Restricted Stock Plan and 1,500 restricted shares
awarded under the Company's Equity Incentive Plan. These shares were
disregarded for purposes of computing the weighted-average exercise
price in column (b). Included in column (c) are 41,950 shares remaining
available to award under the Restricted Stock Plan. Shares for the
Restricted Stock Plan are not original issue shares but are purchased
by the Plan's trustee in the open market.
Information regarding the Equity Incentive Plan is set forth in
Note 1 to the Consolidated Financial Statements in this report.
62
Item 13. Certain Relationships and Related Transactions
There were no transactions required to be disclosed pursuant to
this item.
Item 14. Principal Accounting Fees and Services
Information required by this item is set forth in the Company's
proxy statement dated December 21, 2005 under the headings "Fees of
Independent Auditor" and "Policy Regarding the Approval of Independent
Auditor Provision of Audit and Non-Audit Services" and are incorporated
herein by reference.
63
Part IV
Item 15. Exhibits, Financial Statement Schedules
2005 10-K Page
--------------
(a) 1. Financial Statements:
The Laclede Group, Inc.:
For Years Ended September 30, 2005, 2004 and 2003:
Statements of Consolidated Income 34
Statements of Consolidated Comprehensive Income 35
Consolidated Statements of Common Shareholders' Equity 39
Statements of Consolidated Cash Flows 40
As of September 30, 2005 & 2004:
Consolidated Balance Sheets 36-37
Statements of Consolidated Capitalization 38
Notes to Consolidated Financial Statements 41-60
Management Report on Internal Control over Financial Reporting 31
Reports of Independent Registered Public Accounting Firm 32-33
Laclede Gas Company:
For Years Ended September 30, 2005, 2004 and 2003:
Statements of Income Ex. 99.1, p. 18
Statements of Comprehensive Income Ex. 99.1, p. 19
Statements of Common Shareholders' Equity Ex. 99.1, p. 23
Statements of Cash Flows Ex. 99.1, p. 24
As of September 30, 2005 & 2004:
Balance Sheets Ex. 99.1, pp. 20-21
Statements of Capitalization Ex. 99.1, p. 22
Notes to Financial Statements Ex. 99.1, pp. 25-39
Management Report on Internal Control over Financial Reporting Ex. 99.1, p. 15
Reports of Independent Registered Public Accounting Firm Ex. 99.1, p. 16-17
2. Supplemental Schedules
II - Reserves - Laclede Group 67
II - Reserves - Laclede Gas 68
Schedules not included have been omitted because they are not
applicable or the required data has been included in the financial
statements or notes to financial statements.
3. Exhibits
Incorporated herein by reference to Index to Exhibits, page 69.
Item 15(a)(3) See the marked exhibits in the Index to Exhibits, page 69.
(b) Incorporated herein by reference to Index to Exhibits, page 69.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE LACLEDE GROUP, INC.
November 18, 2005 By /s/ Barry C. Cooper
Barry C. Cooper
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date Signature Title
11/18/05 /s/ Douglas H. Yaeger Chairman of the Board,
Douglas H. Yaeger President and Chief Executive Officer
(Principal Executive Officer)
11/18/05 /s/ Barry C. Cooper Chief Financial Officer
Barry C. Cooper (Principal Financial and
Accounting Officer)
11/18/05 /s/ Arnold W. Donald Director
Arnold W. Donald
11/18/05 /s/ Henry Givens, Jr. Director
Henry Givens, Jr.
11/18/05 /s/ Edward L. Glotzbach Director
Edward L. Glotzbach
11/18/05 /s/ W. Stephen Maritz Director
W. Stephen Maritz
11/18/05 /s/ William E. Nasser Director
William E. Nasser
11/18/05 /s/ John P. Stupp, Jr. Director
John P. Stupp, Jr.
11/18/05 /s/ Mary Ann Van Lokeren Director
Mary Ann Van Lokeren
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LACLEDE GAS COMPANY
November 18, 2005 By /s/ Barry C. Cooper
Barry C. Cooper
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date Signature Title
11/18/05 /s/ Douglas H. Yaeger Chairman of the Board,
Douglas H. Yaeger President and Chief Executive
Officer (Principal Executive Officer)
11/18/05 /s/ Barry C. Cooper Director, Chief Financial Officer
Barry C. Cooper (Principal Financial and
Accounting Officer)
11/18/05 /s/ Mark D. Waltermire Director, Vice President
Mark D. Waltermire Operations & Marketing
11/18/05 /s/ Kenneth J. Neises Director, Executive Vice President
Kenneth J. Neises Energy & Administrative Services
66
SCHEDULE II
THE LACLEDE GROUP, INC. AND SUBSIDIARY COMPANIES
RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT ADDITIONS CHARGED DEDUCTIONS BALANCE
BEGINNING TO TO OTHER FROM AT CLOSE
DESCRIPTION OF PERIOD INCOME ACCOUNTS RESERVES OF PERIOD
- --------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
YEAR ENDED
SEPTEMBER 30, 2005:
DOUBTFUL ACCOUNTS $10,362 $12,064 $7,417 (a) $18,030 (b) $11,813
====================================================================================
MISCELLANEOUS:
Injuries and
property damage $ 8,280 $11,458 $ - $ 9,194 (c) $10,544
Deferred compensation 10,048 1,252 - 1,705 9,595
------------------------------------------------------------------------------------
TOTAL $18,328 $12,710 $ - $10,899 $20,139
====================================================================================
YEAR ENDED
SEPTEMBER 30, 2004:
DOUBTFUL ACCOUNTS $ 7,181 $12,388 $6,433 (a) $15,640 (b) $10,362
====================================================================================
MISCELLANEOUS:
Injuries and
property damage $ 7,155 $ 7,433 $ - $ 6,308 (c) $ 8,280
Deferred compensation 10,891 1,386 - 2,229 10,048
------------------------------------------------------------------------------------
TOTAL $18,046 $ 8,819 $ - $ 8,537 $18,328
====================================================================================
YEAR ENDED
SEPTEMBER 30, 2003:
DOUBTFUL ACCOUNTS $ 4,532 $10,830 $5,926 (a) $14,107 (b) $ 7,181
====================================================================================
MISCELLANEOUS:
Injuries and
property damage $ 8,091 $ 6,402 $ - $ 7,338 (c) $ 7,155
Deferred compensation 10,429 1,735 - 1,273 10,891
------------------------------------------------------------------------------------
TOTAL $18,520 $ 8,137 $ - $ 8,611 $18,046
====================================================================================
<FN>
(a) Accounts reinstated, cash recoveries, etc.
(b) Accounts written off.
(c) Claims settled, less reimbursements from insurance companies.
67
SCHEDULE II
LACLEDE GAS COMPANY
RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT ADDITIONS CHARGED DEDUCTIONS BALANCE
BEGINNING TO TO OTHER FROM AT CLOSE
DESCRIPTION OF PERIOD INCOME ACCOUNTS RESERVES OF PERIOD
- --------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
YEAR ENDED
SEPTEMBER 30, 2005:
DOUBTFUL ACCOUNTS $ 9,975 $12,064 $7,417 (a) $18,014 (b) $11,442
====================================================================================
MISCELLANEOUS:
Injuries and
property damage $ 4,326 $ 3,026 $ - $ 2,799 (c) $ 4,553
Deferred compensation 10,048 1,252 - 1,705 9,595
------------------------------------------------------------------------------------
TOTAL $14,374 $ 4,278 $ - $ 4,504 $14,148
====================================================================================
YEAR ENDED
SEPTEMBER 30, 2004:
DOUBTFUL ACCOUNTS $ 6,839 $12,310 $6,433 (a) $15,607 (b) $ 9,975
====================================================================================
MISCELLANEOUS:
Injuries and
property damage
$ 3,927 $ 2,132 $ - $ 1,733 (c) $ 4,326
Deferred compensation 10,891 1,386 - 2,229 10,048
------------------------------------------------------------------------------------
TOTAL $14,818 $ 3,518 $ - $ 3,962 $14,374
====================================================================================
YEAR ENDED
SEPTEMBER 30, 2003:
DOUBTFUL ACCOUNTS $ 3,718 $10,613 $5,926 (a) $13,418 (b) $ 6,839
====================================================================================
MISCELLANEOUS:
Injuries and
property damage $ 3,176 $ 3,006 $ - $ 2,255 (c) $ 3,927
Deferred compensation 10,429 1,735 - 1,273 10,891
------------------------------------------------------------------------------------
TOTAL $13,605 $ 4,741 $ - $ 3,528 $14,818
====================================================================================
<FN>
(a) Accounts reinstated, cash recoveries, etc.
(b) Accounts written off.
(c) Claims settled, less reimbursements from insurance companies.
68
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
2.01* - Agreement and Plan of Merger and Reorganization, filed
as Appendix A to proxy statement/prospectus contained in
the Company's registration statement on Form S-4,
No. 333-48794.
3.01(i)* - Laclede's Restated Articles of Incorporation effective
March 18, 2002; filed as Exhibit 3.3 to Form 8-K filed
May 29, 2002.
3.01(ii)* - Bylaws of Laclede effective January 18, 2002; filed as
Exhibit 3.4 to Laclede's Form 8-K filed May 29, 2002.
3.02(i)* - The Company's Articles of Incorporation, filed as
Appendix B to the proxy statement/prospectus contained
in the Company's registration statement on Form S-4,
No. 333-48794.
3.02(ii)* - The Company's Bylaws as amended August 22, 2002, filed as
Exhibit 1 to the Company's Form 8-K filed October 4, 2002.
4.01* - Mortgage and Deed of Trust, dated as of February 1, 1945;
filed as Exhibit 7-A to registration statement No. 2-5586.
4.02* - Fourteenth Supplemental Indenture, dated as of October 26,
1976; filed on June 26, 1979 as Exhibit b-4 to registration
statement No. 2-64857.
4.03* - Nineteenth Supplemental Indenture, dated as of May 15,
1991; filed on May 16, 1991 as Exhibit 4.01 to Laclede's
Form 8-K.
4.04* - Twentieth Supplemental Indenture, dated as of
November 1,1992; filed on November 4, 1992 as
Exhibit 4.01 to Laclede's Form 8-K.
4.05* - Twenty-Second Supplemental Indenture dated as of
November 15, 1995; filed on December 8, 1995 as Exhibit
4.01 to Laclede's Form 8-K.
4.06* - Twenty-Third Supplemental Indenture dated as of
October 15, 1997; filed on November 6, 1997 as Exhibit
4.01 to Laclede's Form 8-K.
4.07* - Twenty-Fourth Supplemental Indenture dated as of June 1,
1999, filed on June 4, 1999 as Exhibit 4.01 to Laclede's
Form 8-K.
<FN>
*Incorporated herein by reference and made a part hereof.
Laclede's File No. 1-1822; the Company's File No. 1-16681.
BOLD ITEMS REFLECT MANAGEMENT, CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
69
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
4.08* - Twenty-Fifth Supplemental Indenture dated as of
September 15, 2000, filed on September 27, 2000 as
Exhibit 4.01 to Laclede's Form 8-K.
4.09* - Twenty-Seventh Supplemental Indenture dated as of
April 15, 2004, filed on April 28, 2004 as Exhibit 4.01
to Laclede's Form 8-K.
4.10* - Twenty-Eighth Supplemental Indenture dated as of
April 15, 2004, filed on April 28, 2004 as Exhibit 4.02
to Laclede's Form 8-K.
4.11* - Certificate of Trust of Laclede Capital Trust I, dated
April 4, 2002, filed as Exhibit 4.3 to the Company's
registration statement on Form S-3 (No. 333-86722).
4.12* - Declaration of Trust of Laclede Capital Trust I, dated
April 4, 2002, filed as Exhibit 4.4 to the Company's
registration statement on Form S-3 (No. 333-86722).
4.13* - Amended and Restated Declaration of Trust dated
December 16, 2002, filed as Exhibit 1 to Company's
Form 8-K dated December 16, 2002.
4.14* - Common Securities Guarantee Agreement dated
December 16, 2002, filed as Exhibit 2 to
Company's Form 8-K dated December 16, 2002.
4.15* - Preferred Securities Guarantee Agreement dated
December 16, 2002, filed as Exhibit 3 to Company's
Form 8-K dated December 16, 2002.
4.16* - Indenture for Subordinated Debt Securities dated
December 16, 2002, filed as Exhibit 4 to Company's
Form 8-K dated December 16, 2002.
4.17* - First Supplemental Indenture dated December 16, 2002,
filed as Exhibit 5 to Company's Form 8-K dated
December 16, 2002.
4.18* - Laclede Gas Company Board of Directors' Resolution dated
August 28, 1986 which generally provides that the Board
may delegate its authority in the adoption of certain
employee benefit plan amendments to certain designated
Executive Officers; filed as Exhibit 4.12 to Laclede's
1991 10-K.
4.18a* - Company Board of Directors' Resolutions dated March 27,
2003, updating authority delegated pursuant to August 28,
1986 Laclede Gas Company resolutions; filed as Exhibit
4.19(a) to the Company's Form 10-K for the year ended
September 30, 2003.
4.19* - Rights Agreement dated as of April 3, 1996;
filed on April 3, 1996 as Exhibit 1 to Laclede's
Form 8-A.
4.20* - Rights Agreement dated as of October 1, 2001; filed
as Exhibit 4 to the Company's Form 8-A on September 6,
2001.
<FN>
*Incorporated herein by reference and made a part hereof.
Laclede's File No. 1-1822; the Company's File No. 1-16681.
BOLD ITEMS REFLECT MANAGEMENT, CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
70
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
10.01* - LACLEDE INCENTIVE COMPENSATION PLAN, AS AMENDED;
FILED AS EXHIBIT 10.03 TO LACLEDE'S 1989 10-K.
10.01a* - AMENDMENT ADOPTED BY THE BOARD OF DIRECTORS ON JULY 26,
1990 TO THE INCENTIVE COMPENSATION PLAN; FILED AS
EXHIBIT 10.02a TO LACLEDE'S 1990 10-K.
10.01b* - AMENDMENTS ADOPTED BY THE BOARD OF DIRECTORS ON
AUGUST 23, 1990 TO THE INCENTIVE COMPENSATION PLAN;
FILED AS EXHIBIT 10.02b TO LACLEDE'S 1990 10-K.
10.01c* - AMENDMENTS TO LACLEDE'S INCENTIVE COMPENSATION
PLAN, EFFECTIVE JANUARY 26, 1995; FILED AS EXHIBIT 10.3
TO LACLEDE'S 10-Q FOR THE FISCAL QUARTER ENDED
MARCH 31, 1995.
10.02* - SENIOR OFFICERS' LIFE INSURANCE PROGRAM OF LACLEDE,
AS AMENDED; FILED AS EXHIBIT 10.03 TO LACLEDE'S 1990 10-K.
10.02a* - CERTIFIED COPY OF RESOLUTIONS OF LACLEDE'S BOARD OF
DIRECTORS ADOPTED ON JUNE 27, 1991 AMENDING THE SENIOR
OFFICERS' LIFE INSURANCE PROGRAM; FILED AS EXHIBIT 10.01
TO LACLEDE'S 10-Q FOR THE FISCAL QUARTER ENDED
JUNE 30, 1991.
10.02b* - CERTIFIED COPY OF RESOLUTIONS OF LACLEDE'S BOARD OF
DIRECTORS ADOPTED ON JANUARY 28, 1993 AMENDING THE
SENIOR OFFICERS' LIFE INSURANCE PROGRAM; FILED AS
EXHIBIT 10.03 TO LACLEDE'S 10-Q FOR THE FISCAL
QUARTER ENDED MARCH 31, 1993.
10.03* - LACLEDE GAS COMPANY SUPPLEMENTAL RETIREMENT BENEFIT
PLAN, AS AMENDED AND RESTATED EFFECTIVE JULY 25, 1991;
FILED AS EXHIBIT 10.05 TO LACLEDE'S 1991 10-K.
10.04* - Transportation Service Agreement For Rate Schedule FSS,
Contract #3147 between Mississippi River Transmission
Corporation ("MRT") and Laclede effective May 1, 2002;
filed as Exhibit 10.1 to Laclede's 10-Q for the fiscal
quarter ended June 30, 2002.
10.04a* - Transportation Service Agreement for Rate Schedule FTS,
Contract #3310 between Laclede and MRT effective
May 1, 2002; filed as Exhibit 10.2 to Laclede's 10-Q
for the fiscal quarter ended June 30, 2002.
10.04b* - Transportation Service Agreement for Rate Schedule FTS,
Contract #3311, between Laclede and MRT effective
May 1, 2002; filed as Exhibit 10.3 to Laclede's 10-Q
for the fiscal quarter ended June 30, 2002.
<FN>
* Incorporated herein by reference and made a part hereof.
Laclede's File No. 1-1822; the Company's File No. 1-16681.
BOLD ITEMS REFLECT MANAGEMENT, CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
71
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
10.05* - AMENDMENT AND RESTATEMENT OF RETIREMENT PLAN FOR
NON-EMPLOYEE DIRECTORS AS OF NOVEMBER 1, 2002; FILED AS
EXHIBIT 10.08c TO THE COMPANY'S 10-K FOR THE FISCAL YEAR
ENDED SEPTEMBER 30, 2002.
10.05a* - AMENDMENT TO TERMS OF RETIREMENT PLAN FOR NON-EMPLOYEE
DIRECTORS AS OF OCTOBER 1, 2004; FILED AS EXHIBIT 10.2 TO THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004.
10.06* - SALIENT FEATURES OF THE LACLEDE GAS COMPANY DEFERRED
INCOME PLAN FOR DIRECTORS AND SELECTED EXECUTIVES,
INCLUDING AMENDMENTS ADOPTED BY THE BOARD OF DIRECTORS
ON JULY 26, 1990; FILED AS EXHIBIT 10.12 TO THE LACLEDE'S
1991 10-K.
10.06a* - AMENDMENT TO LACLEDE'S DEFERRED INCOME PLAN FOR
DIRECTORS AND SELECTED EXECUTIVES, ADOPTED BY THE BOARD
OF DIRECTORS ON AUGUST 27, 1992; FILED AS EXHIBIT 10.12a
TO LACLEDE'S 1992 10-K.
10.07* - FORM OF INDEMNIFICATION AGREEMENT BETWEEN LACLEDE
AND ITS DIRECTORS AND OFFICERS; FILED AS EXHIBIT 10.13
TO LACLEDE'S 1990 10-K.
10.08* - LACLEDE GAS COMPANY MANAGEMENT CONTINUITY PROTECTION
PLAN, AS AMENDED, EFFECTIVE AT THE CLOSE OF BUSINESS ON
JANUARY 27, 1994, BY THE BOARD OF DIRECTORS; FILED AS
EXHIBIT 10.1 TO LACLEDE'S 10-Q FOR THE FISCAL
QUARTER ENDED MARCH 31, 1994.
10.09* - 2002 RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS AS
OF NOVEMBER 1, 2002; FILED AS EXHIBIT 10.12d TO THE
COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 2002.
10.09a* - AMENDMENT TO THE 2002 RESTRICTED STOCK PLAN FOR NON-EMPLOYEE
DIRECTORS AS OF OCTOBER 1, 2004; FILED AS EXHIBIT 10.3 TO
THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004.
10.09b* - AMENDMENT TO RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
AS OF JANUARY 1, 2006; FILED AS EXHIBIT 10.2 TO THE
COMPANY'S FORM 8-K FILED NOVEMBER 1, 2005.
10.10* - SALIENT FEATURES OF THE LACLEDE GAS COMPANY DEFERRED
INCOME PLAN II FOR DIRECTORS AND SELECTED EXECUTIVES
ADOPTED BY THE BOARD OF DIRECTORS ON SEPTEMBER 23, 1993;
FILED AS EXHIBIT 10.17 TO LACLEDE'S 1993 10-K.
<FN>
* Incorporated herein by reference and made a part hereof.
Laclede's File No. 1-1822; the Company's File No. 1-16681.
BOLD ITEMS REFLECT MANAGEMENT, CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
72
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
10.11* - Amended and Restated Revolving Credit Agreement between
the Company and U.S. Bank National Association dated
August 4, 2005; filed as Exhibit 10.1 to the Company's 8-K
filed August 5, 2005.
10.12* - Amended and Restated Loan Agreement dated September 10, 2004
for Laclede with U. S. Bank National Association as
administrative agent and lead arranger, Bank Hapoalim B. M.,
as syndication agent, and Southwest Bank of St. Louis as
documentation agent; filed as Exhibit 10.1 on Form 8-K filed
on September 13, 2004.
10.13* - THE LACLEDE GROUP, INC. MANAGEMENT BONUS PLAN; FILED AS
EXHIBIT 10.20 TO THE COMPANY'S FORM 10-K FOR THE YEAR
ENDED SEPTEMBER 30, 2002.
10.14* - Stock Purchase Agreement between NiSource Inc. and The
Laclede Group, Inc.; filed as Exhibit 10.21 to the
Company's Form 10-K for the year ended September 30, 2002.
10.15* - THE LACLEDE GROUP, INC. 2002 EQUITY INCENTIVE PLAN; FILED
AS EXHIBIT 10.22 TO THE COMPANY'S FORM 10-K FOR THE YEAR
ENDED SEPTEMBER 30, 2002.
10.15c* - FORM OF NON-QUALIFIED STOCK OPTION AWARD AGREEMENT WITH
MANDATORY RETIREMENT PROVISIONS; FILED AS EXHIBIT 10.1 TO THE
COMPANY'S FORM 8-K FILED NOVEMBER 5, 2004.
10.15d* - FORM OF NON-QUALIFIED STOCK OPTION AWARD AGREEMENT WITHOUT
MANDATORY RETIREMENT PROVISIONS; FILED AS EXHIBIT 10.2
TO THE COMPANY'S FORM 8-K FILED NOVEMBER 5, 2004.
10.15e* - FORM OF RESTRICTED STOCK AWARD AGREEMENT, FILED AS EXHIBIT
10.17 TO THE COMPANY'S 10-Q FOR THE QUARTER ENDED MARCH 31,
2004.
10.15f* - FORM OF PERFORMANCE - CONTINGENT RESTRICTED STOCK AWARD
AGREEMENT, FILED AS EXHIBIT 10.3 TO THE COMPANY'S FORM 8-K
FILED NOVEMBER 1, 2005.
10.16* - Lease between Laclede Gas Company, as Lessee and First
National Bank in St. Louis, Trustee, as Lessor; filed as
Exhibit 10.23 to the Company's Form 10-K for the year
ended September 30, 2002.
10.17* - Automated Meter Reading Services Agreement executed
March 11, 2005, filed as Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended March 31, 2005. Confidential
portions of this exhibit have been omitted and filed
separately with the SEC pursuant to a request for
confidential treatment.
10.18* - STOCK OWNERSHIP GUIDELINES AND HOLDING REQUIREMENTS FILED AS
EXHIBIT 10.1 TO THE COMPANY'S FORM 8-K FILED NOVEMBER 1, 2005.
12 - Ratio of Earnings to Fixed Charges.
21 - Subsidiaries of the Registrant.
23 - Consents of Independent Registered Public Accounting Firm.
31 - Certificates under Rule 13a-14(a) of the CEO and CFO of
The Laclede Group, Inc. and Laclede Gas Company.
<FN>
* Incorporated herein by reference and made a part hereof.
Laclede's File No. 1-1822; the Company's File No. 1-16681.
BOLD ITEMS REFLECT MANAGEMENT, CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
73
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
32 - Section 1350 Certifications under Rule 13a-14(b) of the
CEO and CFO of The Laclede Group, Inc. and Laclede Gas
Company.
99.1 - Laclede Gas Company - Selected Financial Data,
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Notes to Financial
Statements, Management Report on Internal Control
over Financial Reporting, and Reports of Independent
Registered Public Accounting Firm.
<FN>
*Incorporated herein by reference and made a part hereof.
Laclede's File No. 1-1822; the Company's File No. 1-16681.
BOLD ITEMS REFLECT MANAGEMENT, CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
74