Exhibit 99.1
Selected Financial Data
Laclede Gas Company
Fiscal Years Ended September 30
--------------------------------------------------------------------
(Thousands) 2005 2004 2003 2002(a) 2001
--------------------------------------------------------------------
Summary of Operations
Operating Revenues:
Utility $978,195 $868,905 $774,772 $592,097 $ 923,242
Other 2,288 2,577 2,391 2,521 78,867
--------------------------------------------------------------------
Total Operating Revenues 980,483 871,482 777,163 594,618 1,002,109
--------------------------------------------------------------------
Operating Expenses:
Utility
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 utility operating expenses 907,416 798,454 699,382 536,442 852,438
Other 2,318 2,456 2,386 2,572 77,346
--------------------------------------------------------------------
Total Operating Expenses 909,734 800,910 701,768 539,014 929,784
--------------------------------------------------------------------
Operating Income 70,749 70,572 75,395 55,604 72,325
--------------------------------------------------------------------
Allowance for Funds Used During Construction (100) (123) (107) (149) 749
--------------------------------------------------------------------
Other Income and (Income Deductions) - Net 1,443 3,507 986 699 668
--------------------------------------------------------------------
Interest Charges:
Interest on long-term debt 22,835 22,010 20,169 20,820 18,372
Other interest charges 4,076 3,192 3,752 4,285 10,067
--------------------------------------------------------------------
Total Interest Charges 26,911 25,202 23,921 25,105 28,439
--------------------------------------------------------------------
Income Before Income Taxes 45,181 48,754 52,353 31,049 45,303
Income Tax Expense 14,550 16,555 18,011 10,720 14,831
--------------------------------------------------------------------
Net Income 30,631 32,199 34,342 20,329 30,472
Dividends on Redeemable Preferred Stock 55 62 62 68 87
--------------------------------------------------------------------
Earnings Applicable to Common Stock $ 30,576 $ 32,137 $ 34,280 $ 20,261 $ 30,385
====================================================================
1
Selected Financial Data (continued)
Laclede Gas Company
Fiscal Years Ended September 30
--------------------------------------------------------------------
(Thousands) 2005 2004 2003 2002(a) 2001
--------------------------------------------------------------------
Dividends Declared -
Common Stock $ 29,003 $ 27,183 $ 25,492 $ 25,311 $ 25,296
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
Total Assets - End of Period $1,226,487 $1,155,981 $1,113,009 $994,937 $975,910
Capitalization - End of Period
Common Stock and Paid-In
Capital $ 140,381 $ 136,052 $ 82,589 $ 82,589 $106,600
Retained Earnings 196,024 194,451 189,497 180,709 205,502
Accumulated Other Comprehensive
Loss (1,127) (371) (582) (339) -
Treasury Stock - - - - (24,017)
--------------------------------------------------------------------
Common Stock Equity 335,278 330,132 271,504 262,959 288,085
Redeemable Preferred Stock 948 1,108 1,258 1,266 1,588
Long-Term Debt 294,033 333,936 259,625 259,545 284,459
--------------------------------------------------------------------
Total Capitalization $ 630,259 $ 665,176 $ 532,387 $523,770 $574,132
====================================================================
<FN>
(a) Effective October 1, 2001, the corporation reorganized such that
Laclede Gas became a subsidiary of Laclede Group, an exempt public
utility holding company. In conjunction with the restructuring, the
subsidiaries of Laclede Gas became subsidiaries of Laclede Group.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LACLEDE GAS COMPANY
INTRODUCTION
This management's discussion analyzes the financial condition and results of
operations of Laclede Gas Company (Laclede Gas or the Utility). It includes
management's view of factors that affect its business, explanations of past
financial results including changes in earnings and costs from the prior
year periods, and their effects on overall financial condition and
liquidity.
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Certain words, such as "anticipate,"
"believe," "estimate," "expect," "intend," "plan," "seek," and similar words
and expressions identify forward-looking statements that involve
uncertainties and risks. Future developments may not be in accordance with
our expectations or beliefs and the effect of future developments may not be
those anticipated. Among the factors that may cause results to differ
materially from those contemplated in any forward-looking statement are:
o weather conditions and catastrophic events;
o economic, competitive, political and regulatory conditions;
o legislative, regulatory and judicial mandates and decisions, some of
which may be retroactive, including those affecting
o allowed rates of return
o incentive regulation
o industry structure
o purchased gas adjustment provisions
o rate design structure and implementation
o franchise renewals
o environmental or safety matters
o taxes
o accounting standards;
o the results of litigation;
o retention, ability to attract, ability to collect from and conservation
efforts of customers;
o capital and energy commodity market conditions including the ability to
obtain funds for necessary capital expenditures and the terms and
conditions imposed for obtaining sufficient gas supply;
o discovery of material weakness in internal controls; and
o employee workforce issues.
Readers are urged to consider the risks, uncertainties and other factors
that could affect our business as described in this report. All
forward-looking statements made in this report rely upon the safe harbor
protections provided under the Private Securities Litigation Reform Act of
1995. We do not, by including this statement, assume any obligation to
review or revise any particular forward-looking statement in light of future
events.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the Utility's Financial
Statements and the notes thereto.
3
RESULTS OF OPERATIONS
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.
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 Gas 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 Gas' net income applicable to common stock for fiscal year 2005 was
$30.6 million, compared with $32.1 million for fiscal year 2004. The
decrease in net income of $1.5 million was primarily attributable 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 Utility'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.
Laclede Gas' net income applicable to common stock for fiscal year 2004 was
$32.1 million, compared with $34.3 million for fiscal year 2003. The
decrease of $2.2 million was primarily attributable to the following
factors, quantified on a pre-tax basis:
4
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.
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:
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
5
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).
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 policy holder, 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 6.8%, 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 $1.3 million, or 5.4% 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 and the April 2004 issuance of $100
million principal amount of 6% First Mortgage Bonds. 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 of 6 1/4% First Mortgage Bonds, as well as reduced
interest on short-term debt, mainly attributable to lower borrowings.
Income Taxes
The decrease in income taxes for all periods reported are primarily due to
lower 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
6
Union representatives reached a new four-year agreement replacing the prior
agreement. The new contract applies through April 15, 2009.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition, results of
operations, liquidity and capital resources is based upon our financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. Generally
accepted accounting principles require that we make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
evaluate our estimates on an ongoing basis. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates. We believe the following represent the more significant
items requiring the use of judgment and estimates in preparing our financial
statements:
Allowances for doubtful accounts - Estimates of the collectibility
of trade accounts receivable are based on historical trends, age of
receivables, economic conditions, credit risk of specific
customers, and other factors.
Employee benefits and postretirement obligations - Pension and
postretirement obligations are calculated by actuarial consultants
that utilize several statistical factors and other assumptions
related to future events, such as discount rates, returns on plan
assets, compensation increases, and mortality rates. The amount of
expense recognized by the Utility is dependent on the regulatory
treatment provided for such costs. Certain liabilities related to
group medical benefits and workers' compensation claims, portions
of which are self-insured and/or contain "stop-loss" coverage with
third-party insurers to limit exposure, are established based on
historical trends.
Laclede Gas accounts for its regulated operations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." This statement sets forth the
application of accounting principles generally accepted in the United States
of America for those companies whose rates are established by or are subject
to approval by an independent third-party regulator. The provisions of SFAS
No. 71 require, among other things, that financial statements of a regulated
enterprise reflect the actions of regulators, where appropriate. These
actions may result in the recognition of revenues and expenses in time
periods that are different than non-regulated enterprises. When this occurs,
costs are deferred as assets in the balance sheet (regulatory assets) and
recorded as expenses when those amounts are reflected in rates. Also,
regulators can impose liabilities upon a regulated company for amounts
previously collected from customers and for recovery of costs that are
expected to be incurred in the future (regulatory liabilities). Management
believes that the current regulatory environment supports the continued use
of SFAS No. 71 and that all regulatory assets and liabilities are
recoverable or refundable through the regulatory process. We believe the
following represent the more significant items recorded through the
application of SFAS No. 71:
The Utility's Purchased Gas Adjustment (PGA) Clause allows Laclede
Gas to flow through to customers, subject to prudence review, the
cost of purchased gas supplies, including the costs, cost
reductions and related carrying costs associated with the Utility's
use of natural gas financial instruments to hedge the purchase
price of natural gas. The difference between actual costs incurred
and costs recovered through the application of the PGA are recorded
as regulatory assets and liabilities that are recovered or refunded
in a subsequent period.
Laclede Gas records deferred tax liabilities and assets measured by
enacted tax rates for the net tax effect of all temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes, and the amounts used for income
tax purposes. Changes in enacted tax rates, if any, and certain
property basis differences will be reflected by entries to
regulatory asset or liability accounts. 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.
For further discussion of significant accounting policies, see Note 1 to the
Financial Statements included in this report on page 25 of Exhibit 99.1.
7
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
on 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 Utility.
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
October 1, 2005. The approved S&A provided for Laclede Gas to increase its
base rates 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 Utility's previous rates. In addition, the approved S&A
provided that Laclede Gas' Purchased Gas Adjustment (PGA)
8
rates would be increased by $4.1 million to recover the costs the Utility
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 Laclede Gas' 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 Utility does not expect adoption of this Statement to have a material
effect on the financial position or results of operations of the Utility.
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, Laclede Group 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. Laclede Group will implement the provisions of this Statement
on a modified prospective basis effective October 1, 2005, at which time
Laclede Gas will be allocated its proportionate share of compensation costs.
Laclede Gas does not expect the adoption of this Statement to have a
material effect on the financial position or results of operations.
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
9
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. Laclede Gas 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. Laclede Gas is currently evaluating
the provisions of this Statement.
INFLATION
The accompanying 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 Gas issues were as follows:
Type of Facility S&P Moody's Fitch
- ---------------------------------------------------------------------------------------
Laclede Gas First Mortgage Bonds A A3 A+
Laclede Gas Commercial Paper A-1 P-2
The Utility has investment grade ratings, and believes that it will have
adequate access to the financial markets to meet its capital requirements.
These ratings remain subject to review and change by the rating agencies.
CASH FLOWS
Laclede Gas' short-term borrowing requirements typically peak during colder
months when Laclede Gas borrows money to cover the gap between when it
purchases its natural gas and when its customers pay for that gas. Changes
in the wholesale cost of natural gas, variations in the timing of
collections of gas 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
$113.4 million, a $30.4 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 costs, 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 operating activities for the
fiscal year ended 2004 was $83.0 million compared with cash used by
operating activities in
10
fiscal year 2003 totaling $8.2 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 $55.2 million, $50.1 million, and $50.6 million, respectively. Net cash
used in investing activities primarily reflected capital expenditures in all
periods.
Net cash used in financing activities for fiscal year 2005 totaled $57.8
million, 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 $33.5 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
paid-in capital contributions from Laclede Group. Cash provided by financing
activities was $60.4 million in fiscal year 2003 primarily reflecting the
issuance of short-term debt, partially offset by the May 2003 maturity of
$25 million principal amount of 6 1/4% First Mortgage Bonds and dividend
payments.
LIQUIDITY AND CAPITAL RESOURCES
The Utility'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 in place 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.
In January 2005, the board of directors of Laclede Gas desired to sell
shares to its sole shareholder, Laclede Group, at a price per share equal to
book value. However, Laclede Gas is prohibited from issuing fractional
shares, so the board first authorized a stock dividend of ninety-nine shares
of its common stock, par value $1.00 per share, on each outstanding share of
its common stock to be paid on January 21, 2005, to increase its outstanding
shares from 100 to 10,000. The retroactive effect of this stock dividend has
been presented in the Balance Sheet. As such, $9,900 was transferred to
common stock and paid-in capital from retained earnings, representing the
aggregate par value of the shares issued under the stock dividend. All
references to the number of shares have been restated from 100 shares to
10,000 shares to give retroactive effect to the stock dividend for all
periods presented.
11
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.
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.
Capitalization at September 30, 2005, excluding current obligations of
long-term debt and preferred stock, consisted of 53.2% common stock equity,
0.2% preferred stock and 46.6% long-term debt.
Laclede Gas' ratio of earnings to fixed charges was 2.6 for fiscal year
2005, 2.9 for fiscal year 2004, and 3.2 for fiscal year 2003.
It is management's view that Laclede Gas has adequate access to capital
markets and will have sufficient capital resources, both internal and
external, to meet anticipated capital requirements.
CONTRACTUAL OBLIGATIONS
As of September 30, 2005, Laclede Gas 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) $677.8 $62.6 $73.7 $32.2 $509.3
Capital Leases - - - - -
Operating Leases (b) 11.6 3.4 5.6 2.6 -
Purchase Obligations - Natural Gas (c) 158.1 63.5 69.9 14.2 10.5
Purchase Obligations - Other (d) 131.9 10.2 22.2 16.6 82.9
Other Long-Term Liabilities - - - - -
--------------------------------------------------------------------
Total (e) $979.4 $139.7 $171.4 $ 65.6 $602.7
====================================================================
<FN>
(a) Long-term debt obligations reflect principal maturities and
interest payments.
(b) Operating lease obligations are primarily for office space,
vehicles, and power operated equipment. Additional payments will be
incurred if renewal options are exercised under the provisions of
certain agreements.
(c) These purchase obligations represent the minimum payments required
under existing natural gas transportation and storage contracts and
natural gas supply agreements. These amounts reflect fixed
obligations as well as obligations to purchase natural gas at
future market prices, calculated using 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 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. Laclede Gas 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 Utility anticipates it 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 Utility's pension and postretirement benefit
plans, refer to Note 2, Pension and Other Postretirement Benefits.
12
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.
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 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.
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
13
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 Gas has no off-balance sheet arrangements.
14
Management Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
controls over financial reporting. Laclede Gas' 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.
Laclede Gas' management, including our Chief Executive Officer and Chief
Financial Officer, conducted an assessment of the effectiveness of Laclede
Gas' 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 Laclede Gas' internal control over financial reporting was
effective as of September 30, 2005. Management's assessment of the
effectiveness of Laclede Gas' 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.
15
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of
Laclede Gas Company:
We have audited management's assessment, included in the accompanying
Management Report on Internal Control over Financial Reporting, that Laclede
Gas Company (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
16
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of
Laclede Gas Company:
We have audited the accompanying balance sheets and statements of
capitalization of Laclede Gas Company (a wholly owned subsidiary of The
Laclede Group, Inc.) (the "Company") as of September 30, 2005 and 2004, and
the related statements of 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 financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements present fairly, in all material
respects, the financial position of Laclede Gas Company 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 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
17
LACLEDE GAS COMPANY
STATEMENTS OF INCOME
(Thousands)
- ------------------------------------------------- -------- -------- --------
Years Ended September 30 2005 2004 2003
- ------------------------------------------------- -------- -------- --------
Operating Revenues:
Utility $978,195 $868,905 $774,772
Other 2,288 2,577 2,391
-------- -------- --------
Total Operating Revenues 980,483 871,482 777,163
-------- -------- --------
Operating Expenses:
Utility
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 utility operating expenses 907,416 798,454 699,382
Other 2,318 2,456 2,386
-------- -------- --------
Total Operating Expenses 909,734 800,910 701,768
-------- -------- --------
Operating Income 70,749 70,572 75,395
-------- -------- --------
Other Income and (Income Deductions) - Net 1,343 3,384 879
-------- -------- --------
Interest Charges:
Interest on long-term debt 22,835 22,010 20,169
Other interest charges 4,076 3,192 3,752
-------- -------- --------
Total Interest Charges 26,911 25,202 23,921
-------- -------- --------
Income Before Income Taxes 45,181 48,754 52,353
Income Tax Expense 14,550 16,555 18,011
-------- -------- --------
Net Income 30,631 32,199 34,342
Dividends on Redeemable Preferred Stock 55 62 62
-------- -------- --------
Earnings Applicable to Common Stock $ 30,576 $ 32,137 $ 34,280
======== ======== ========
See the accompanying notes to financial statements.
18
LACLEDE GAS COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
(Thousands)
- ------------------------------------------------ ------- ------- --------
Years Ended September 30 2005 2004 2003
- ------------------------------------------------ ------- ------- --------
Net Income $30,631 $32,199 $ 34,342
------- ------- --------
Other Comprehensive Income (Loss) Before Tax:
Minimum pension liability adjustment (1,232) 344 (396)
Income tax expense (benefit) related to items
of other comprehensive income (loss) (476) 133 (153)
------- ------- --------
Other Comprehensive Income (Loss), Net of Tax (756) 211 (243)
------- ------- --------
Comprehensive Income $29,875 $32,410 $ 34,099
======= ======= ========
See the accompanying notes to financial statements.
19
LACLEDE GAS COMPANY
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
---------- ----------
Other Property and Investments 30,858 29,664
---------- ----------
Current Assets:
Cash and cash equivalents 2,703 2,340
Accounts receivable:
Gas customers - billed and unbilled 77,268 76,223
Associated companies 258 300
Other 7,287 11,231
Allowances for doubtful accounts (11,442) (9,975)
Inventories:
Natural gas stored underground at LIFO cost 159,579 131,725
Propane gas at FIFO cost 19,980 15,808
Materials, supplies and merchandise at average
cost 4,859 4,588
Derivative instrument assets 16,090 15,196
Unamortized purchased gas adjustments 31,261 19,618
Deferred income taxes - 1,321
Prepayments and other 6,240 6,211
---------- ----------
Total Current Assets 314,083 274,586
---------- ----------
Deferred Charges:
Prepaid pension cost 82,557 92,026
Regulatory assets 115,950 104,703
Other 3,586 8,127
---------- ----------
Total Deferred Charges 202,093 204,856
---------- ----------
Total Assets $1,226,487 $1,155,981
========== ==========
20
LACLEDE GAS COMPANY
BALANCE SHEETS (continued)
(Thousands)
- ------------------------------------------------------------------------ ---------- ----------
September 30 2005 2004
- ------------------------------------------------------------------------ ---------- ----------
Capitalization and Liabilities
Capitalization:
Common stock equity $ 335,278 $ 330,132
Redeemable preferred stock (less current sinking fund requirements) 948 1,108
Long-term debt (less current portion) 294,033 333,936
---------- ----------
Total Capitalization 630,259 665,176
---------- ----------
Current Liabilities:
Notes payable 63,600 71,380
Accounts payable 73,998 44,505
Accounts payable - associated companies 2,340 834
Advance customer billings 30,688 23,620
Current portion of long-term debt and preferred stock 40,061 25,145
Wages and compensation accrued 10,920 13,256
Dividends payable 7,371 7,214
Customer deposits 13,229 10,661
Interest accrued 9,919 10,623
Taxes accrued 24,990 17,669
Deferred income taxes current 1,822 -
Other 4,505 3,232
---------- ----------
Total Current Liabilities 283,443 228,139
---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 188,592 187,831
Unamortized investment tax credits 4,678 5,010
Pension and postretirement benefit costs 24,529 20,484
Regulatory liabilities 74,506 28,210
Other 20,480 21,131
---------- ----------
Total Deferred Credits and Other Liabilities 312,785 262,666
---------- ----------
Commitments and Contingencies (Note 12)
---------- ----------
Total Capitalization and Liabilities $1,226,487 $1,155,981
========== ==========
See the accompanying notes to financial statements.
21
LACLEDE GAS COMPANY
STATEMENTS OF CAPITALIZATION
(Thousands, Except Per Share Amounts)
- ------------------------------------------------------------------------ -------- --------
September 30 2005 2004
- ------------------------------------------------------------------------ -------- --------
Common Stock Equity:
Common stock, par value $1 per share and Paid-in Capital:
Authorized - 2005 and 2004, 50,000,000 shares
Issued - 2005 10,089, 2004 10,000 shares $140,381 $136,052
Retained earnings 196,024 194,451
Accumulated other comprehensive loss - minimum pension liability (1,127) (371)
-------- --------
Total Common Stock Equity 335,278 330,132
-------- --------
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:
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 294,033 333,936
-------- --------
Total $630,259 $665,176
======== ========
Long-term debt and preferred stock dollar amounts are exclusive of current
portion.
See the accompanying notes to financial statements.
22
LACLEDE GAS COMPANY
STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
Common Stock Issued
(Thousands, Except for ------------------- Paid-in Retained Accum. Other
Shares and Per Share Amounts ) Shares Amount Capital Earnings Comp. Income Total
------ ------ ------- -------- ------------ -----
--------------------------------------------------------------------
BALANCE OCTOBER 1, 2002 10,000 $10 $ 82,579 $180,709 $ (339) $262,959
--------------------------------------------------------------------
Net Income - - - 34,342 - 34,342
Dividends declared:
Common stock - - - (25,492) - (25,492)
Preferred stock - - - (62) - (62)
Other comprehensive income (loss) - - - - (243) (243)
--------------------------------------------------------------------
BALANCE SEPTEMBER 30, 2003 10,000 $10 $ 82,579 $189,497 $ (582) $271,504
--------------------------------------------------------------------
Net Income - - - 32,199 - 32,199
Dividends declared:
Common stock - - - (27,183) - (27,183)
Preferred stock - - - (62) - (62)
Other comprehensive income (loss) - - - - 211 211
Paid-in capital contributions from
Laclede Group - - 53,463 - - 53,463
--------------------------------------------------------------------
BALANCE SEPTEMBER 30, 2004 10,000 $10 $136,042 $194,451 $ (371) $330,132
====================================================================
Net Income - - - 30,631 - 30,631
Dividends declared:
Common stock - - - (29,003) - (29,003)
Preferred stock - - - (55) - (55)
Tax benefit - stock compensation - - 227 - - 227
Other comprehensive income (loss) - - - - (756) (756)
Issuance of common stock to and paid-in
capital contributions from Laclede Group 89 - 4,102 - - 4,102
--------------------------------------------------------------------
BALANCE SEPTEMBER 30, 2005 10,089 $10 $140,371 $196,024 $(1,127) $335,278
====================================================================
See the accompanying notes to financial statements.
23
LACLEDE GAS COMPANY
STATEMENTS OF CASH FLOWS
(Thousands)
- ---------------------------------------------------------------------------------------------------------------
Years Ended September 30 2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 30,631 $ 32,199 $ 34,342
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 23,036 22,323 22,241
Deferred income taxes and investment
tax credits 1,220 15,311 13,542
Other - net 500 409 730
Changes in assets and liabilities:
Accounts receivable - net 4,408 3,752 (19,991)
Unamortized purchased gas adjustments (11,643) (25,483) (17,111)
Deferred purchased gas costs 44,575 41,022 (21,461)
Accounts payable 30,999 (6,902) 21,403
Advance (delayed) customer billings - net 7,068 8,259 (9,471)
Taxes accrued 7,321 1,382 6,792
Natural gas stored underground (27,854) (14,543) (40,095)
Other assets and liabilities 3,155 5,270 925
---------------------------------
Net cash provided by (used in)
operating activities 113,416 82,999 (8,154)
Investing Activities:
Capital expenditures (54,621) (49,130) (49,926)
Net investment in trusts (1,334) (2,221) (1,099)
Other investments 720 1,268 407
---------------------------------
Net cash used in
investing activities (55,235) (50,083) (50,618)
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 (7,780) (158,360) 110,870
Dividends paid (28,896) (26,494) (25,500)
Issuance of common stock to and paid-in capital
contributions from Laclede Group 4,102 53,463 -
Preferred stock reaquired (244) (5) (8)
Other - (2,087) -
---------------------------------
Net cash (used in) provided by
financing activities (57,818) (33,483) 60,362
---------------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents 363 (567) 1,590
Cash and Cash Equivalents at
Beginning of Year 2,340 2,907 1,317
---------------------------------
Cash and Cash Equivalents at End of Year $ 2,703 $ 2,340 $ 2,907
=================================
Supplemental Disclosure of Cash Paid
(Refunded) During the Year for:
Interest $ 26,848 $ 20,860 $ 23,497
Income taxes 3,184 2,003 (4,317)
See the accompanying notes to financial statements.
24
NOTES TO FINANCIAL STATEMENTS
LACLEDE GAS COMPANY
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION - The financial statements include the
accounts of Laclede Gas Company (Laclede Gas or the Utility).
In compliance with accounting principles generally accepted in the
United States of America, transactions between Laclede Gas and its
affiliates as well as intercompany balances remaining on Laclede Gas'
balance sheet on September 30, 2005, have not been eliminated from the
Laclede Gas financial statements.
Laclede Gas provides administrative and general support to
affiliates. These costs, which are not material, are billed to the
appropriate affiliates and are reflected in accounts receivable on Laclede
Gas' Balance Sheet. Laclede Gas may also, on occasion, borrow funds from, or
lend funds to, affiliated companies as well as charge or reimburse certain
tax obligations. At September 30, 2005, the Laclede Gas Balance Sheet
reflected a total of $0.3 million of intercompany receivables and $2.3
million of intercompany payables. At September 30, 2004, the Laclede Gas
Balance Sheet reflected a total of $0.3 million of intercompany receivables
and $0.8 million of intercompany payables.
NATURE OF OPERATIONS - Laclede Gas is a public utility engaged in
the retail distribution 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.
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 Missouri Public Service Commission (MoPSC or Commission) 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 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.
25
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 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.
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.
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,
26
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 Gas has 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 Gas records deferred tax
liabilities and assets measured by enacted tax rates for the net tax effect
of all temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes, and the amounts used for
income tax purposes. Changes in enacted tax rates, if any, and certain
property basis differences will be reflected by entries to regulatory asset
or liability accounts.
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.
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 Utility does not expect adoption of
this Statement to have a material effect on the financial position or
results of operations of the Utility.
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, Laclede Group 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. Laclede Group will implement the provisions of this Statement
on a modified prospective basis effective October 1, 2005, at which time,
Laclede Gas will be allocated its proportionate share of compensation costs.
Laclede Gas does not expect the adoption of this Statement to have a
material effect on the financial position or results of operations.
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 its financial position or
results of operations.
In March 2005, the FASB issued Interpretation No. 47 (FIN 47),
"Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies
the manner in which uncertainties concerning the timing and method of
settlement of an asset retirement obligation, as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations," should be accounted for. This
Interpretation also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005. Laclede Gas is currently evaluating the provisions
of this Interpretation.
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
27
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. Laclede Gas 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 Income and Statements of
Comprehensive Income is deferred as a regulatory asset or liability.
28
The following table sets forth the reconciliation of the beginning
and ending balances of the pension benefit obligation recognized in the
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
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 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%
29
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 the
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.
30
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
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.
31
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
32
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.
3. GAS SUPPLY COST MANAGEMENT
In the 2002 rate case, the MoPSC approved a new plan applicable to
the management of Laclede Gas' 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
Utility Operating Revenues on the Statements of Income.
4. COMMON STOCK AND PAID-IN CAPITAL
Laclede Gas issued 89 shares of its common stock to Laclede Group
during fiscal year 2005 as described below. No shares of its common stock
were issued during fiscal year 2004. Total shares of common stock
outstanding were 10,089 and 10,000 at September 30, 2005 and 2004,
respectively.
Paid-in capital increased by $4.3 million and $53.5 million during
fiscal years 2005 and 2004, respectively, due to capital contributions from
Laclede Group.
In January 2005, the board of directors of Laclede Gas desired to
sell shares to its sole shareholder, Laclede Group, at a price per share
equal to book value. However, Laclede Gas is prohibited from issuing
fractional shares, so the board first authorized a stock dividend of
ninety-nine shares of its common stock, par value $1.00 per share, on each
outstanding share of its common stock to be paid on January 21, 2005 to
increase its outstanding shares from 100 to 10,000. The retroactive effect
of this stock dividend has been presented in the Balance Sheet. As such,
$9,900 was transferred to common stock and paid-in capital from retained
earnings, representing the aggregate par value of the shares issued under
the stock dividend. All references to the number of shares have been
restated from 100 shares to 10,000 shares to give retroactive effect to the
stock dividend for all periods presented.
The board also approved, subsequent to the stock dividend, the sale
of 31 shares of Laclede Gas common stock to Laclede Group at a price per
share equal to the book value at December 31, 2004, as adjusted for the
effect of the stock dividend described above. The proceeds from the sale,
totaling approximately $1.1 million, were used to reduce short-term
borrowings. 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.
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.
33
5. 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.
6. LONG-TERM DEBT
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.
7. 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.
34
8. 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 $ 2,703 $ 2,703
Short-term debt 63,600 63,600
Long-term debt, including current portion 334,033 365,144
Redeemable preferred stock, including current sinking fund
requirements 1,009 1,009
2004:
Cash and cash equivalents $ 2,340 $ 2,340
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
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 and preferred stock is estimated based on
market prices for similar issues.
9. 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
Income:
Federal
Current $11,511 $ 1,628 $ 3,342
Deferred 1,188 12,785 12,112
Investment tax credit
adjustments - net (332) (305) (313)
State and local
Current 1,819 (384) 1,127
Deferred 364 2,831 1,743
--------------------------------
Total $14,550 $16,555 $18,011
================================
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 3.1 3.3 3.6
Certain expenses capitalized on books
and deducted on tax return (4.3) (3.1) (2.9)
Other items - net (1.6) (1.2) (1.3)
-------------------------------
Effective income tax rate 32.2% 34.0% 34.4%
===============================
35
The significant items comprising the net deferred tax liability
recognized in the 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 6,314 4,748
----------------------
Total deferred tax assets 31,154 29,410
Deferred tax liabilities:
Relating to utility property 169,014 159,206
Pension 32,112 38,904
Deferred gas cost 4,697 5,589
Other 15,745 12,221
----------------------
Total deferred tax liabilities 221,568 215,920
Net deferred tax liability 190,414 186,510
Net deferred tax asset (liability) - current (1,822) 1,321
----------------------
Net deferred tax liability - non-current $188,592 $187,831
======================
10. 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 1,755 1,310 759
Other Income Deductions (852) 250 (589)
-------------------------------
Other Income and (Income Deductions) - Net $1,343 $3,384 $ 879
===============================
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 distributions,
if any, are not expected to have a material impact on the financial position
or results of operations of Laclede Gas.
11. INFORMATION BY OPERATING SEGMENT
The Regulated Gas Distribution segment consists of the regulated
operations of Laclede Gas. Laclede Gas is a public utility engaged in the
retail distribution 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 Other
segment includes merchandise sales activities. Accounting policies are as
described in Note 1. There are no material intersegment revenues.
36
(Thousands)
Regulated Gas Non-Regulated
Distribution Other Eliminations Total
-------------------------------------------------------------
Fiscal 2005
Operating Revenues $ 978,195 $2,288 $ - $ 980,483
Depreciation & Amortization 23,036 - - 23,036
Interest Charges 26,911 - - 26,911
Income Tax Expense 14,561 (11) - 14,550
Net Income 30,649 (18) - 30,631
Total Assets 1,224,947 1,540 - 1,226,487
Capital Expenditures 54,621 - - 54,621
Fiscal 2004
Operating Revenues $ 868,905 $2,577 $ - $ 871,482
Depreciation & Amortization 22,385 - - 22,385
Interest Charges 25,202 - - 25,202
Income Tax Expense 16,508 47 - 16,555
Net Income 32,125 74 - 32,199
Total Assets 1,154,365 1,616 - 1,155,981
Capital Expenditures 49,130 - - 49,130
Fiscal 2003
Operating Revenues $ 774,772 $2,391 $ - $ 777,163
Depreciation & Amortization 22,229 - - 22,229
Interest Charges 23,921 - - 23,921
Income Tax Expense 18,009 2 - 18,011
Net Income 34,339 3 - 34,342
Total Assets 1,111,503 1,506 - 1,113,009
Capital Expenditures 49,926 - - 49,926
12. COMMITMENTS AND CONTINGENCIES
Laclede Gas estimates fiscal year 2006 utility capital expenditures
at approximately $57 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 has 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
$158 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.
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 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.
37
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.
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 Laclede Gas.
Laclede Gas is involved in other litigation, claims and
investigations arising in the normal course of business. While the results
of such litigation cannot be predicted with certainty, management, after
discussion with counsel,
38
believes that the final outcome will not have a material adverse effect on
the financial position or results of operations of the Utility.
13. INTERIM FINANCIAL INFORMATION (UNAUDITED)
In the opinion of Laclede Gas, 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 operations reported on
a quarterly basis primarily reflect the seasonal nature of the business of
Laclede Gas.
(Thousands)
- ---------------------------------------- ------------- ------------ ----------- ------------
Three Months Ended Dec. 31 March 31 June 30 Sept. 30
- ---------------------------------------- ------------- ------------ ----------- ------------
2005
Total operating revenues $291,833 $435,570 $162,936 $ 90,144
Operating income (loss) 28,562 42,225 7,203 (7,241)
Net income (loss) 15,102 22,517 1,576 (8,564)
- ---------------------------------------- ------------- ------------ ----------- ------------
Three Months Ended Dec. 31 March 31 June 30 Sept. 30
- ---------------------------------------- ------------- ------------ ----------- ------------
2004
Total operating revenues $261,982 $397,526 $126,513 $ 85,461
Operating income (loss) 31,700 40,566 6,270 (7,964)
Net income (loss) 17,356 23,380 (115) (8,422)
39