-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PjV5W1Q+5xncEvQaEhQShvHJVOPWHSX8+4SOO8sPXzpxioE3bOQ+pOeyKXHmlUSu dRXAuXwR7YQjbz1QJlZJpg== 0001068800-04-000301.txt : 20040430 0001068800-04-000301.hdr.sgml : 20040430 20040430153403 ACCESSION NUMBER: 0001068800-04-000301 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LACLEDE GAS CO CENTRAL INDEX KEY: 0000057183 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 430368139 STATE OF INCORPORATION: MO FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01822 FILM NUMBER: 04769666 BUSINESS ADDRESS: STREET 1: 720 OLIVE ST CITY: ST LOUIS STATE: MO ZIP: 63101 BUSINESS PHONE: 3143420500 MAIL ADDRESS: STREET 1: 720 OLIVE ST CITY: ST LOUIS STATE: MO ZIP: 63101 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LACLEDE GROUP INC CENTRAL INDEX KEY: 0001126956 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 742976504 STATE OF INCORPORATION: MO FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16681 FILM NUMBER: 04769667 BUSINESS ADDRESS: STREET 1: 720 OLIVE ST CITY: ST LOUIS STATE: MO ZIP: 63101 BUSINESS PHONE: 3143420500 MAIL ADDRESS: STREET 1: 720 OLIVE ST STREET 2: RM 1517 CITY: ST LOUIS STATE: MO ZIP: 63101 10-Q 1 lac10q.txt SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 2004 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------------------------------------------------------------------------- Commission File Exact Name of Registrant as State of I.R.S. Number Specified in its Charter and Incorporation Employer Principal Office Address and Identification Number Telephone Number ------------------------------------------------------------------------------------------------------- 1-16681 The Laclede Group, Inc. Missouri 74-2976504 720 Olive Street St. Louis, MO 63101 314-342-0500 ------------------------------------------------------------------------------------------------------- 1-1822 Laclede Gas Company Missouri 43-0368139 720 Olive Street St. Louis, MO 63101 314-342-0500 -------------------------------------------------------------------------------------------------------
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), The Laclede Group, Inc.: Yes X No --- --- Laclede Gas Company: Yes X No --- --- and (2) has been subject to such filing requirements for the past 90 days: The Laclede Group, Inc.: Yes X No --- --- Laclede Gas Company: Yes X No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): The Laclede Group, Inc. Yes X No --- --- Laclede Gas Company: Yes No X --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:
Shares Outstanding At Registrant Description of Common Stock April 30, 2004 - ---------- --------------------------- -------------- The Laclede Group, Inc. Common Stock ($1.00 Par Value) 19,216,842 Laclede Gas Company Common Stock ($1.00 Par Value) 100* *100% owned by The Laclede Group, Inc.
TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION Item 1 Financial Statements The Laclede Group, Inc.: Statements of Consolidated Income 4 Statements of Consolidated Comprehensive Income 5 Consolidated Balance Sheets 6-7 Statements of Consolidated Cash Flows 8 Notes to Consolidated Financial Statements 9-17 Laclede Gas Company: Statements of Income Ex. 99.1, p. 1 Balance Sheets Ex. 99.1, p. 2-3 Statements of Cash Flows Ex. 99.1, p. 4 Notes to Financial Statements Ex. 99.1, p. 5-10 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations (The Laclede Group, Inc.) 18-28 Management's Discussion and Analysis of Financial Condition and Results of Operations (Laclede Gas Company) Ex. 99.1, p. 11-19 Item 3 Quantitative and Qualitative Disclosures About Market Risk 29 Item 4 Controls and Procedures 29 PART II. OTHER INFORMATION Item 1 Legal Proceedings 30 Item 4 Submission of Matters to a Vote of Security Holders 30 Item 6 Exhibits and Other Reports on Form 8-K 31 SIGNATURES - The Laclede Group, Inc. 32 SIGNATURES - Laclede Gas Company 33 INDEX TO EXHIBITS 34
Filing Format - ------------- This Quarterly Report on Form 10-Q is a combined report being filed by two separate registrants: The Laclede Group, Inc. (Laclede Group or the Company) and Laclede Gas Company (Laclede Gas or the Utility). 2 PART I FINANCIAL INFORMATION The interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Form 10-K for the fiscal year ended September 30, 2003. 3 Item 1. Financial Statements THE LACLEDE GROUP, INC. STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) (Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended March 31, March 31, ----------------------------- ------------------------------ 2004 2003 2004 2003 ---- ---- ---- ---- Operating Revenues: Regulated Gas distribution $396,898 $357,456 $658,248 $574,621 Non-Regulated Services 15,250 17,315 34,798 48,138 Gas marketing 61,480 45,874 112,463 77,141 Other 1,327 1,534 2,083 2,450 ----------------------------- ------------------------------ Total Operating Revenues 474,955 422,179 807,592 702,350 ----------------------------- ------------------------------ Operating Expenses: Regulated Natural and propane gas 288,284 247,918 463,559 381,761 Other operation expenses 32,808 29,663 62,291 60,987 Maintenance 4,641 4,950 9,070 9,394 Depreciation and amortization 5,711 5,596 11,369 11,089 Taxes, other than income taxes 24,897 22,579 39,729 36,707 ----------------------------- ------------------------------ Total regulated operating expenses 356,341 310,706 586,018 499,938 Non-Regulated Services 19,538 23,301 39,849 53,945 Gas marketing 59,813 44,744 110,101 74,848 Other 804 1,106 1,771 2,083 ----------------------------- ------------------------------ Total Operating Expenses 436,496 379,857 737,739 630,814 ----------------------------- ------------------------------ Operating Income 38,459 42,322 69,853 71,536 ----------------------------- ------------------------------ Other Income and (Income Deductions) - Net 1,905 (25) 3,337 1,042 ----------------------------- ------------------------------ Interest Charges: Interest on long-term debt 4,815 5,205 9,629 10,410 Interest on long-term debt to unconsolidated affiliate trust 867 867 1,733 1,011 Other interest charges 999 953 2,084 2,302 ----------------------------- ------------------------------ Total Interest Charges 6,681 7,025 13,446 13,723 ----------------------------- ------------------------------ Income Before Income Taxes 33,683 35,272 59,744 58,855 Income Tax Expense 12,128 13,687 21,582 22,159 ----------------------------- ------------------------------ Net Income 21,555 21,585 38,162 36,696 Dividends on Redeemable Preferred Stock - Laclede Gas 15 15 31 31 ----------------------------- ------------------------------ Net Income Applicable to Common Stock $ 21,540 $ 21,570 $ 38,131 $ 36,665 ============================= ============================== Average Number of Common Shares Outstanding 19,167 19,002 19,142 18,981 Basic Earnings Per Share of Common Stock $1.12 $1.14 $1.99 $1.93 Diluted Earnings Per Share of Common Stock $1.12 $1.14 $1.99 $1.93 Dividends Declared Per Share of Common Stock $.340 $.335 $.675 $.670 See notes to consolidated financial statements.
4 THE LACLEDE GROUP, INC. STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED) (Thousands)
Three Months Ended Six Months Ended March 31, March 31, ---------------------------- --------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net Income Applicable to Common Stock $ 21,540 $ 21,570 $ 38,131 $ 36,665 ---------------------------- --------------------------- Other Comprehensive Income: Net gain (loss) on cash flow hedging derivative instruments: Net hedging gain (loss) arising during period (1,626) 260 (2,143) 260 Reclassification adjustment for (gains) losses included in net income 294 - (943) - ---------------------------- --------------------------- Net unrealized gain (loss) on cash flow hedging derivative instruments (1,332) 260 (3,086) 260 ---------------------------- --------------------------- Other Comprehensive Income (Loss), Before Tax (1,332) 260 (3,086) 260 Income Tax (Benefit) Expense Related to Items of Other Comprehensive Income (Loss) (515) 101 (1,192) 101 ---------------------------- --------------------------- Other Comprehensive Income (Loss), Net of Tax (817) 159 (1,894) 159 ---------------------------- --------------------------- Comprehensive Income $ 20,723 $ 21,729 $ 36,237 $ 36,824 ============================ =========================== See notes to consolidated financial statements.
5 THE LACLEDE GROUP, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Mar. 31, Sept. 30, Mar. 31, 2004 2003 2003 ---- ---- ---- (Thousands) ASSETS Utility Plant $1,050,823 $1,030,665 $1,007,958 Less: Accumulated depreciation and amortization 416,767 409,418 402,357 -------------- -------------- --------------- Net Utility Plant 634,056 621,247 605,601 -------------- -------------- --------------- Goodwill 28,124 28,124 28,124 -------------- -------------- --------------- Other Property and Investments 45,805 45,998 46,259 -------------- -------------- --------------- Current Assets: Cash and cash equivalents 25,173 7,291 34,527 Accounts receivable: Gas Customers - billed and unbilled 127,261 70,217 115,568 Other 75,710 41,298 46,665 Allowances for doubtful accounts (8,117) (7,181) (5,728) Delayed customer billings 36,141 - 33,682 Inventories: Natural gas stored underground at LIFO cost 29,422 117,231 24,469 Propane gas at FIFO cost 12,914 17,132 10,128 Materials, supplies, and merchandise at avg. cost 4,686 4,071 4,263 Derivative instrument assets 7,841 12,643 6,017 Deferred income taxes 5,694 7,631 8,417 Prepayments and other 7,375 17,557 11,038 -------------- -------------- --------------- Total Current Assets 324,100 287,890 289,046 -------------- -------------- --------------- Deferred Charges: Prepaid pension cost 104,790 109,445 111,879 Regulatory assets 98,313 103,807 74,929 Other 9,389 6,287 5,649 -------------- -------------- --------------- Total Deferred Charges 212,492 219,539 192,457 -------------- -------------- --------------- Total Assets $1,244,577 $1,202,798 $1,161,487 ============== ============== =============== See notes to consolidated financial statements.
6 THE LACLEDE GROUP, INC. CONSOLIDATED BALANCE SHEETS (Continued) (UNAUDITED)
Mar. 31, Sept. 30, Mar. 31, 2004 2003 2003 ---- ---- ---- (Thousands, except share amounts) CAPITALIZATION AND LIABILITIES Capitalization: Common stock (70,000,000 shares authorized, 19,187,777, 19,082,402 and 19,003,633 shares issued, respectively) $ 19,188 $ 19,082 $ 19,004 Paid-in capital 71,157 68,460 66,558 Retained earnings 236,814 211,610 226,463 Accumulated other comprehensive loss (1,974) (80) (180) ------------- -------------- -------------- Total common stock equity 325,185 299,072 311,845 Redeemable preferred stock (less current sinking fund requirements) - Laclede Gas 1,108 1,258 1,258 Long-term debt to unconsolidated affiliate trust 46,400 46,400 46,400 Long-term debt (less current portion) - Laclede Gas 234,661 259,625 259,588 ------------- -------------- -------------- Total Capitalization 607,354 606,355 619,091 ------------- -------------- -------------- Current Liabilities: Notes payable 191,415 218,200 122,390 Accounts payable 88,541 66,001 98,934 Advance customer billings - 15,361 - Current portion of long-term debt and preferred stock 25,150 - 25,000 Taxes accrued 29,103 13,211 25,667 Unamortized purchased gas adjustment 1,458 5,865 9,524 Other 49,343 47,638 46,509 ------------- -------------- -------------- Total Current Liabilities 385,010 366,276 328,024 ------------- -------------- -------------- Deferred Credits and Other Liabilities: Deferred income taxes 185,748 180,598 159,148 Unamortized investment tax credits 5,163 5,316 5,472 Pension and postretirement benefit costs 24,635 20,973 18,511 Regulatory liabilities 13,878 582 9,830 Other 22,789 22,698 21,411 ------------- -------------- -------------- Total Deferred Credits and Other Liabilities 252,213 230,167 214,372 ------------- -------------- -------------- Total Capitalization and Liabilities $1,244,577 $1,202,798 $1,161,487 ============= ============== ============== See notes to consolidated financial statements.
7 THE LACLEDE GROUP, INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Six Months Ended March 31, -------------------------------- 2004 2003 ---- ---- (Thousands) Operating Activities: Net Income $ 38,162 $ 36,696 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 13,174 12,794 Deferred income taxes and investment tax credits 2,506 2,783 Other - net 110 184 Changes in assets and liabilities: Accounts receivable - net (90,520) (67,027) Unamortized purchased gas adjustments (4,407) (13,452) Deferred purchased gas costs 26,911 117 Advance customer billings - net (51,502) (58,514) Accounts payable 22,540 53,227 Taxes accrued 15,892 15,852 Natural gas stored underground 87,809 52,652 Other assets and liabilities 19,984 14,349 -------------- ------------- Net cash provided by operating activities $ 80,659 $ 49,661 -------------- ------------- Investing Activities: Construction expenditures (25,133) (22,859) Employee benefit trusts (1,702) (507) Other investments 858 (1,002) -------------- ------------- Net cash used in investing activities $(25,977) $(24,368) -------------- ------------- Financing Activities: Repayment of short-term debt - net (26,785) (39,280) Dividends paid (12,818) (12,722) Issuance of common stock 2,803 1,974 Issuance of long-term debt to unconsolidated affiliate trust - 46,400 Preferred stock reacquired and other - (8) -------------- ------------- Net cash used in financing activities $(36,800) $ (3,636) -------------- ------------- Net Increase in Cash and Cash Equivalents $ 17,882 $ 21,657 Cash and Cash Equivalents at Beginning of Period 7,291 12,870 -------------- ------------- Cash and Cash Equivalents at End of Period $ 25,173 $ 34,527 ============== ============= Supplemental Disclosure of Cash Paid During the Period for: Interest $ 13,163 $ 13,766 Income taxes 274 246 See notes to consolidated financial statements.
8 THE LACLEDE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These notes are an integral part of the accompanying consolidated financial statements of The Laclede Group, Inc. (Laclede Group or the Company) and its subsidiaries. In the opinion of Laclede Group, this interim report includes all adjustments (consisting of only normal recurring accruals) necessary for the fair presentation of the results of operations for the periods presented. Certain prior-period amounts have been reclassified to conform to current-period presentation. This Form 10-Q should be read in conjunction with the Notes to Consolidated Financial Statements contained in the Company's Fiscal Year 2003 Form 10-K. The consolidated financial position, results of operations and cash flows of Laclede Group are comprised primarily from the consolidated financial position, results of operations and cash flows of Laclede Gas Company (Laclede Gas or the Utility). Laclede Gas is a regulated natural gas distribution utility having a material seasonal cycle. As a result, these interim statements of income for Laclede Group are not necessarily indicative of annual results or representative of succeeding quarters of the fiscal year. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the November through April period, which generally corresponds with the heating season. The Utility typically experiences losses during the non-heating season. The seasonal effect of the Utility's earnings on Laclede Group is generally expected to be tempered somewhat by the results of SM&P Utility Resources, Inc. (SM&P), a non-regulated underground facility locating and marking service business, whose operations tend to be counter-seasonal to those of Laclede Gas. 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 March 31, 2004 and 2003, for the Utility, was $22.3 million and $13.1 million, respectively. After accrual of related gas cost expense, the accrued pre-tax net revenues at March 31, 2004 and 2003 were $6.9 million and $8.1 million, respectively. The amount of accrued unbilled revenue at September 30, 2003 was $8.9 million. SM&P, Laclede Energy Resources, Inc. (LER) and Laclede Group's other non-regulated subsidiaries record revenues when earned, either when the product is delivered or when services are performed. In the course of its business, Laclede Group's non-regulated marketing affiliate, LER, enters into fixed price commitments associated with the purchase or sale of natural gas. LER's fixed price energy contracts are designated as normal purchases and normal sales, as defined in accordance with the Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." As such, those contracts are accounted for as executory contracts and recorded on an accrual basis. Revenues are recorded using a gross presentation. STOCK-BASED COMPENSATION - The Laclede Group Equity Incentive Plan was approved at the annual meeting of shareholders of Laclede Group on January 30, 2003. The purpose of the Equity Incentive Plan is to provide a more competitive compensation program and to attract and retain those executive and other key employees essential to achieve the Company's strategic objectives. To accomplish this purpose, the compensation committee of the board of directors may grant awards under the Equity Incentive Plan that may be earned by achieving performance objectives and/or other criteria as determined by the compensation committee. Under the terms of the Equity Incentive Plan, key employees of the Company and its subsidiaries, as determined at the sole discretion of the administrator, will be eligible to receive (a) restricted shares of common stock, (b) performance awards, (c) stock options exercisable into shares of common stock, (d) stock appreciation rights, and (e) stock units, as well as any other stock-based awards not inconsistent with the Equity Incentive Plan. Each award under the Equity Incentive Plan shall have a minimum vesting period of at least one year. The total number of shares that may be issued pursuant to awards under the Equity Incentive Plan may not exceed 1,250,000. During the six months ended March 31, 2004, the Company granted 1,500 shares of restricted stock at a weighted average fair value of $28.85 per share. These shares have restrictions on vesting, sale and transferability. The restrictions lapse with the passage of time. The Company holds the certificates for restricted stock until the shares fully vest in November 2005. In the interim, a participant receives full dividends and voting rights. Restricted stock awards are recorded at the market value on the date of the grant. Compensation cost charged against income for the six months ended March 31, 2004 was approximately $6,000, net of tax effects. During the six months ended March 31, 2004, the Company granted 224,000 non-qualified stock options to employees at an exercise price of $28.85 per share (none of these options were granted during the quarter ended March 31, 2004). These options may not be exercised before November 6, 2004. The stock options vest one-fourth each year for four years after the date of the grant and expire on the tenth anniversary of the grant date. The Company accounts for the Equity Incentive Plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. 9 No compensation expense has been recognized in net income, as all options granted under the Equity Incentive Plan had an exercise price equal to the market value of the Company's stock on the date of the grant. Stock option activity for the quarter ended March 31, 2004 is presented below.
Weighted Average Shares Exercise Price ------------ -------------------- Outstanding at December 31, 2003 429,000 $26.18 Granted - - Exercised (34,050) $23.27 Forfeited - - Outstanding at March 31, 2004 394,950 $26.43 Exercisable at March 31, 2004 17,200 $23.27
The closing price of the Company's common stock was $30.30 at March 31, 2004. If compensation expense had been determined based on the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the amounts shown in the following table. The weighted-average fair value of options granted during the six months ended March 31, 2004 is $6.22 per option. The estimated fair value of options would be amortized to expense over the options' vesting period and restricted stock would be expensed on the grant date.
Three Months Ended Six Months Ended March 31, March 31, ------------------------------ ----------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- (Thousands, Except Per Share Amounts) Net income applicable to common stock, as reported $21,540 $21,570 $38,131 $36,665 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax effects 84 25 176 25 ------------------------------ ----------------------------- Pro forma net income applicable to common stock $21,456 $21,545 $37,955 $36,640 ============================== ============================= Earnings per share: Basic - as reported $1.12 $1.14 $1.99 $1.93 Diluted - as reported $1.12 $1.14 $1.99 $1.93 Basic - pro forma $1.12 $1.13 $1.98 $1.93 Diluted - pro forma $1.12 $1.13 $1.98 $1.93
The fair value of the options granted during the six months ended March 31, 2004 was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:
Six Months Ended March 31, ----------------------------- 2004 2003 ---- ---- Risk free interest rate 4.30% 4.00% Expected dividend yield of stock 4.60% 5.70% Expected volatility of stock 25.00% 25.00% Expected life of option 96 months 96 months
NEW ACCOUNTING STANDARDS - Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised December 2003) (FIN 46R), "Consolidation of Variable Interest Entities," addresses consolidation of business enterprises of variable interest entities. Public entities shall apply this Interpretation to their interests in special purpose entities as of the first interim period ending after December 15, 2003. Application by public entities 10 for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004. In December 2002, Laclede Group formed a wholly owned trust, Laclede Capital Trust I (Trust), for the sole purpose of issuing preferred securities and lending the gross proceeds to its parent, Laclede Group. As of March 31, 2004, the Trust has $45 million of Trust Preferred Securities outstanding. The sole assets of the Trust are debentures of Laclede Group, totaling $46.4 million, with the same economic terms as the Trust Preferred Securities. Prior to the application of FIN 46R, the Trust was consolidated in the financial statements of Laclede Group. The Company evaluated the effect of this pronouncement on this consolidation. In accordance with the provisions of FIN 46R, Laclede Group has determined that the Trust is a variable interest entity because its common securities investment is considered not at risk, and Laclede Group is not the primary beneficiary of the Trust. Accordingly, the Trust was deconsolidated during the quarter ended March 31, 2004. The Consolidated Balance Sheets have been modified to include Investments in Unconsolidated Subsidiaries of $1.4 million representing Laclede Group's common securities investment in the Trust and to reflect Laclede Group's obligations related to the debentures. The common securities investment is included on the Other Property and Investments line on the Consolidated Balance Sheets. As permitted under FIN 46R, the Trust has been deconsolidated for prior periods and presented to be consistent with the current presentation. The adoption of FIN 46R did not result in a cumulative effect of an accounting change adjustment and did not have a material effect on the financial position or results of operations of Laclede Group. In December 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 132 (revised 2003) (SFAS No. 132(R)), "Employers' Disclosures about Pensions and Other Postretirement Benefits." The provisions of this Statement do not change the measurement and recognition provisions of SFAS No. 87, "Employers' Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132(R) replaces SFAS No. 132, and requires certain additional disclosures that became effective for fiscal years ending after and interim periods beginning after December 15, 2003. The required disclosures are included in Note 3 to the Consolidated Financial Statements on page 12 of this report. 2. EARNINGS PER SHARE SFAS No. 128, "Earnings Per Share," requires dual presentation of basic and diluted earnings per share (EPS). Basic EPS does not include potentially dilutive securities and is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted EPS assumes the issuance of common shares pursuant to the Company's stock-based compensation plan and the vesting of non-vested stock awards at the beginning of each respective period. There were no stock options that were anti-dilutive.
Three Months Ended Six Months Ended March 31, March 31, ----------------------- ----------------------- (Thousands, Except Per Share Amounts) 2004 2003 2004 2003 ---- ---- ---- ---- Basic EPS: Net Income Applicable to Common Stock $21,540 $21,570 $38,131 $36,665 Weighted-Average Shares Outstanding 19,167 19,002 19,142 18,981 Earnings Per Share of Common Stock $1.12 $1.14 $1.99 $1.93 Diluted EPS: Net Income Applicable to Common Stock $21,540 $21,570 $38,131 $36,665 Weighted-Average Shares Outstanding 19,167 19,002 19,142 18,981 Dilutive Effect of Employee Stock Options 30 - 27 - ----------------------- ----------------------- Weighted-Average Diluted Shares 19,197 19,002 19,169 18,981 ======================= ======================= Earnings Per Share of Common Stock $1.12 $1.14 $1.99 $1.93
11 3. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS Laclede Gas has non-contributory defined benefit, trusteed forms of pension plans covering substantially all employees over the age of twenty-one. Benefits are based on years of service and the employee's compensation during the last three years of employment. The funding policy of Laclede Gas is to contribute an amount not less than the minimum required by government funding standards, nor more than the maximum deductible amount for federal income tax purposes. The Utility has contributed $.2 million to the pension funds during the six months ended March 31, 2004, and expects to contribute a total of $.3 million during fiscal year 2004. Plan assets consist primarily of corporate and U.S. government obligations and indexed equity funds. Pension cost amounted to $1.1 million for the quarter ended March 31, 2004 and $.3 million for the same quarter last year. Pension costs for the six months ended March 31, 2004 were $2.2 million compared with $.6 million for the same period last year. These costs include amounts capitalized with construction activities. The net periodic pension costs include the following components:
Three Months Ended Six Months Ended March 31, March 31, ----------------------- ----------------------- (Thousands) 2004 2003 2004 2003 ---- ---- ---- ---- Service cost - benefits earned during the period $ 2,777 $ 2,265 $ 5,554 $ 4,530 Interest cost on projected benefit obligation 4,058 4,150 8,115 8,300 Expected return on plan assets (5,625) (5,650) (11,249) (11,300) Amortization of transition obligation - (59) - (118) Amortization of prior service cost 331 348 662 696 Amortization of actuarial loss 951 334 1,901 669 Regulatory adjustment (1,368) (1,108) (2,737) (2,216) ----------------------- ----------------------- Net pension cost $ 1,124 $ 280 $ 2,246 $ 561 ======================= =======================
Pursuant to the Missouri Public Service Commission's (MoPSC or Commission) order in Laclede Gas' 2002 rate case, the return on plan assets is based on market-related value of plan assets implemented prospectively over a four-year period. Unrecognized gains or losses are amortized only to the extent that such gain or loss exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. Also in the 2002 rate case, the Commission ordered that the recovery in rates for the Utility's qualified pension plans is based on the ERISA minimum contribution of zero effective October 1, 2002, and on the ERISA minimum contribution of zero plus $3.4 million annually effective July 1, 2003. The difference between this amount on a pro-rata basis and pension expense as calculated pursuant to the above and included in the Statement of Consolidated Income and Statement of Consolidated Comprehensive Income is deferred as a regulatory asset or liability. Pursuant to the provisions of the Laclede Gas pension plans, pension obligations may be satisfied by lump sum cash payments. Pursuant to MoPSC order, lump sum payments are recognized as settlements (which can result in gains or losses) only if the total of such payments exceeds 100% of the sum of service and interest costs. No lump sum payments were recognized as settlements during the six months ended March 31, 2004 or the six months ended March 31, 2003. SM&P maintains a defined benefit plan for selected employees. The plan is a non-qualified plan and therefore has no assets held in trust. Net pension cost related to the plan is not material. Laclede Gas also provides certain life insurance benefits at retirement. Medical insurance is available after early retirement until age 65. Missouri state law provides for the recovery in rates of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (OPEB), accrued costs provided that such costs are funded through an independent, external funding mechanism. Laclede Gas established the Voluntary Employees' Beneficiary Association (VEBA) and Rabbi trusts as its external funding mechanisms. VEBA and Rabbi trusts assets consist primarily of money market securities and mutual funds invested in stocks and bonds. Laclede Gas has contributed $.1 million to the plans during the six months ended March 31, 2004, and expects to contribute a total of $7.6 million during fiscal 2004. The unrecognized transition obligation is being amortized over 20 years. Postretirement benefit costs were $2.0 million in the quarter ended March 31, 2004 compared with $1.9 million in the quarter ended March 31, 2003. Postretirement benefit costs were $4.0 million for the six months ended 12 March 31, 2004 compared with $3.9 million for the six months ended March 31, 2003. These costs include amounts capitalized with construction activities. Net periodic postretirement benefit costs consisted of the following components:
Three Months Ended Six Months Ended March 31, March 31, --------------------- ---------------------- (Thousands) 2004 2003 2004 2003 ---- ---- ---- ---- Service cost - benefits earned during the period $ 794 $ 689 $1,587 $1,379 Interest cost on accumulated postretirement benefit obligation 801 915 1,601 1,830 Expected return on plan assets (209) (234) (418) (469) Amortization of transition obligation 265 317 530 634 Amortization of prior service cost (8) 82 (16) 164 Amortization of actuarial loss 174 104 349 208 Regulatory adjustment 164 75 329 151 --------------------- ---------------------- Net postretirement benefit cost $1,981 $1,948 $3,962 $3,897 ===================== ======================
Pursuant to the Commission's order in the Utility's 2002 rate case, the return on plan assets is based on market related value of plan assets implemented prospectively over a four-year period. Unrecognized gains and losses are amortized only to the extent that such gain or loss exceeds 10% of the greater of the accumulated postretirement benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. Also in the 2002 rate case, the Commission ordered that the recovery in rates for the postretirement benefit costs be based on the accounting methodology as ordered in the 1999 rate case. The difference between this amount and postretirement benefit expense as calculated pursuant to the above is deferred as a regulatory asset or liability. 4. FINANCIAL INSTRUMENTS In the course of its business, LER enters into fixed price commitments associated with the purchase or sale of natural gas. LER manages the price risk associated with these commitments by either closely matching the offsetting physical purchase or sale of natural gas at fixed prices or through the use of exchange-traded futures contracts to lock in margins. At March 31, 2004, LER's open positions were not material to Laclede Group's financial position or results of operations. At that same date, LER had settled net long and short futures positions of 0.22 million MmBtu of natural gas for April 2004 and open short futures positions of 1.23 million MmBtu for May 2004, 1.02 million MmBtu for June 2004, 0.30 million MmBtu for November 2004, 0.25 million MmBtu for December 2004, and 0.14 million MmBtu for February 2005 at average prices of $5.07 per MmBtu, $4.97 per MmBtu, $4.90 per MmBtu, $5.92 per MmBtu, and $5.90 per MmBtu, respectively. Also, LER had open long futures positions of 0.30 million MmBtu for October 2004 and 0.14 million MmBtu for September 2005 at average prices of $4.73 per MmBtu and $5.05 per MmBtu, respectively. These futures contracts are derivative instruments and management has designated these items as cash flow hedges of forecasted transactions. The fair values of the instruments are recognized on the Consolidated Balance Sheets. The change in the fair value of the effective portion of these hedge instruments is recorded, net of tax, in Other Comprehensive Income, a component of Common Stock Equity. These amounts will reduce or be charged to Non-Regulated Gas Marketing Operating Revenues or Expenses in the Statements of Consolidated Income as the transactions occur. It is expected that approximately $2.1 million of pre-tax net unrealized losses on cash flow hedging derivative instruments at March 31, 2004 will be reclassified into the Consolidated Statement of Income during fiscal 2004. The remainder, approximately $.2 million of pre-tax net unrealized losses, will be reclassified during fiscal 2005. The ineffective portions of these hedge instruments were immaterial for the periods presented, and such amounts are charged to Non-Regulated Gas Marketing Operating Revenues or Expenses. Cash flows from hedging transactions are classified in the same category as the cash flows from the items that are being hedged in the Statements of Consolidated Cash Flows. 13 5. INCOME TAXES Net provision for income taxes was as follows during the periods set forth below:
Three Months Ended Six Months Ended March 31, March 31, ----------------------- ----------------------- (Thousands) 2004 2003 2004 2003 ---- ---- ---- ---- Federal Current $ 9,441 $11,462 $16,373 $16,565 Deferred 1,025 161 2,186 2,308 State and Local Current 1,515 1,990 2,703 2,811 Deferred 147 74 320 475 ----------------------- ----------------------- Total $12,128 $13,687 $21,582 $22,159 ======================= =======================
6. OTHER INCOME AND INCOME DEDUCTIONS - NET
Three Months Ended Six Months Ended March 31, March 31, ------------------------- -------------------------- (Thousands) 2004 2003 2004 2003 ---- ---- ---- ---- Investment gains $1,947 $ - $1,947 $ - Allowance for funds used during construction (29) (26) (61) (51) Other income 310 340 838 522 Other income deductions (323) (339) 613 571 ------------------------- -------------------------- Other income and income deductions - net $1,905 $ (25) $3,337 $1,042 ========================= ==========================
Laclede Gas recorded the receipt of proceeds totaling $1.9 million during the quarter ended March 31, 2004 related to its interest, as a policyholder, in the sale of a mutual insurance company. This represents an initial distribution relating to certain policies held by the Utility. Subsequent distributions, if any, are not expected to have a material impact on the consolidated financial position or results of operations of the Company. 7. INFORMATION BY OPERATING SEGMENT The Regulated Gas Distribution segment consists of the regulated operations of Laclede Gas and is the core business segment of Laclede Group. The Non-Regulated Services segment includes the results of SM&P, an underground facility locating and marking business operating in the midwestern states, a wholly owned subsidiary of Laclede Group. The Non-Regulated Gas Marketing segment includes the results of LER, a wholly owned subsidiary of Laclede Group. Non-Regulated Other includes the transportation of liquid propane, real estate development, the compression of natural gas, the sale of insurance-related products, and financial investments in other enterprises. These operations are conducted through five wholly owned subsidiaries. Certain intersegment revenues with Laclede Gas are not eliminated in accordance with the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." 14
Regulated Non-Regulated Gas Non-Regulated Gas Non-Regulated (Thousands) Distribution Services Marketing Other Eliminations Consolidated - --------------------------------------------------------------------------------------------------------------------------- Three Months Ended March 31, 2004 - -------------- Revenues from external customers $ 396,468 $ 15,183 $ 56,026 $ 935 $ - $ 468,612 Intersegment revenues 430 67 5,454 392 - 6,343 ------------------------------------------------------------------------------------- Total operating revenues 396,898 15,250 61,480 1,327 - 474,955 Net income (loss) applicable to common stock 23,359 (3,173) 1,016 338 - 21,540 Total assets 1,137,824 48,456 40,946 36,699 (19,348) 1,244,577 Six Months Ended March 31, 2004 - -------------- Revenues from external customers $ 657,007 $ 34,666 $102,503 $ 1,744 $ - $ 795,920 Intersegment revenues 1,241 132 9,960 339 - 11,672 ------------------------------------------------------------------------------------- Total operating revenues 658,248 34,798 112,463 2,083 - 807,592 Net income (loss) applicable to common stock 40,683 (4,198) 1,427 219 - 38,131 Total assets 1,137,824 48,456 40,946 36,699 (19,348) 1,244,577 Three Months Ended March 31, 2003 - -------------- Revenues from external customers $ 356,616 $ 17,259 $ 39,740 $ 1,263 $ - $ 414,878 Intersegment revenues 840 56 6,134 316 (45) 7,301 ------------------------------------------------------------------------------------- Total operating revenues 357,456 17,315 45,874 1,579 (45) 422,179 Net income (loss) applicable to common stock 24,874 (4,264) 650 310 - 21,570 Total assets 1,062,799 54,200 35,860 44,290 (35,662) 1,161,487 Six Months Ended March 31, 2003 - -------------- Revenues from external customers $ 573,781 $ 48,013 $ 67,169 $ 2,174 $ - $ 691,137 Intersegment revenues 840 125 9,972 366 (90) 11,213 ------------------------------------------------------------------------------------- Total operating revenues 574,621 48,138 77,141 2,540 (90) 702,350 Net income (loss) applicable to common stock 39,447 (4,433) 1,333 318 - 36,665 Total assets 1,062,799 54,200 35,860 44,290 (35,662) 1,161,487
In November 2002, two customers notified SM&P that, due to actions they had taken to address workforce management issues, they did not intend to continue to outsource certain functions, which included locating services provided by SM&P, after February and March 2003. One of these customers notified SM&P in January 2003 that it would continue to outsource a portion of its locating services provided by SM&P beyond that timeframe. Revenue from these customers totaled approximately $29 million and $45 million for fiscal 2003 and fiscal 2002, respectively. Revenue from these customers for the quarter ended March 31, 2004 was $4.7 million, compared with $7.2 million for the same period last year. Revenue from these customers for the six months ended March 31, 2004 was $8.6 million, compared with $21.9 for the same period last year. In connection with the reduction in work from these customers, SM&P made reductions in the required levels of personnel, facilities and equipment, for which the Company recorded an after-tax charge of approximately $1.0 million, all of which was expensed during the quarter ended March 31, 2003. SM&P continues to pursue, and has obtained, new business to partially offset the business lost in fiscal year 2003. The underground facility locating industry, however, remains competitive with many contracts subject to termination on as little as 30-days notice. Also, SM&P's customers are primarily in the utility and telecommunication sector with their workload influenced by construction trends. 15 8. COMMITMENTS AND CONTINGENCIES Laclede Gas is subject to various environmental laws and regulations that, to date, have not materially affected the Company's financial position and results of operations. As these laws, regulations, and their interpretation evolve, however, additional costs may be incurred. With regard to a former manufactured gas plant site located in Shrewsbury, Missouri, Laclede Gas and state and federal environmental regulators have agreed upon certain actions and those actions are essentially complete. Laclede Gas currently estimates the overall costs of these actions will be approximately $2.4 million. As of March 31, 2004, Laclede Gas has paid or reserved for these actions. If regulators require additional actions or assert additional claims, Laclede Gas will incur additional costs. Laclede Gas enrolled a second former manufactured gas plant site into the Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to minimize the scope and cost of site cleanup while maximizing possibilities for site development. This site is located in, and is presently owned by, the City of St. Louis, Missouri. The City of St. Louis has separately authorized a developer to prepare both a Remedial Action Plan (RAP), for submission to the VCP, and a site development plan. Laclede Gas is engaged in ongoing meetings with the developer to determine what role, if any, it might play in these efforts. Laclede Gas continues to evaluate other options as well, including, but not limited to, the submission of its own RAP to the VCP. Laclede Gas currently estimates that the cost of site investigations, agency oversight and related legal and engineering consulting may be approximately $650,000. Currently, Laclede Gas has paid or reserved for these actions. Laclede Gas has requested that other former site owners and operators share in these costs and one party has agreed to participate and has reimbursed Laclede Gas to date for $173,000. Laclede Gas anticipates additional reimbursement from this party. Laclede Gas plans to seek proportionate reimbursement of all costs relative to this site from other potentially responsible parties if practicable. Laclede Gas has been advised that a third former manufactured gas plant site may require remediation. Laclede Gas does not, and for many years has not, owned this site. At this time it is not clear whether Laclede Gas will incur any costs in connection with environmental investigations or remediation at the site, and if it does incur any costs, what the amount of those costs would be. Costs incurred are charged to expense or capitalized in accordance with generally accepted accounting principles. A predetermined level of expense is recovered through Laclede Gas' rates. While the scope of future costs relative to the Shrewsbury site will not be significant, the scope of costs relative to the other sites is unknown and may be material. Laclede Gas has notified its insurers that it seeks reimbursement of its costs at these three manufactured gas plant sites. In response, the majority of insurers have reserved their rights. While some of the insurers have denied coverage, Laclede Gas continues to seek reimbursement from them. With regard to the Shrewsbury site, denials of coverage are not expected to have any material impact on the financial position and results of operations of Laclede Gas. With regard to the other two sites, since the scope of costs are unknown and may be significant, denials of coverage may have a material impact on the financial position and results of operations of Laclede Gas. Such costs, if incurred, have typically been subject to recovery in rates. SM&P has been the subject of certain employment-related claims arising out of a practice of SM&P that predated Laclede Group's acquisition. The claims involve whether certain pre- and post-work activities and commuting time for non-supervisory field employees constitute hours worked for purposes of federal and state wage and hour laws. These claims have been asserted in various proceedings, including one "opt-in" collective action filed in March 2003 in Federal District Court for the Eastern District of Texas. As a result of a ruling on February 27, 2004 in that proceeding, approximately 3,500 present and former field employees who worked for SM&P at times since February 27, 2001 were given notice of the lawsuit and the opportunity, until June 7, 2004, to join the lawsuit and assert claims for additional overtime compensation for the three-year period immediately preceding the date that they joined the lawsuit. Approximately 600 of the employees to whom notice was sent have joined this lawsuit to date, the vast majority of whom are former employees. SM&P is unable to predict the number that ultimately will opt-in. SM&P is vigorously contesting these claims, including opposition to this case ultimately proceeding as a collective action. While the results of the claims cannot be predicted with certainty, management, after discussion with counsel, believes that the final outcome will not have a material adverse effect on the consolidated financial position and results of operations of the Company. Laclede Group and its subsidiaries are involved in other litigation, claims and investigations arising in the normal course of business. While the results of such litigation cannot be predicted with certainty, management, after discussion with counsel, believes that the final outcome will not have a material adverse effect on the consolidated financial position or results of operations of the Company. On June 28, 2002, the Staff of the MoPSC filed its recommendation in a proceeding established to review Laclede Gas' gas costs for fiscal 2001. In its recommendation, the Staff proposed to disallow approximately $4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based Price Stabilization Program. This Program was discontinued at the end of the 2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in proceedings before the MoPSC, including a formal hearing that was held on this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains 16 achieved by Laclede Gas, and directed Laclede Gas to flow through such amount to its customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas appealed the MoPSC's decision to the Cole County Circuit Court. On October 10, 2003, the Circuit Court issued an order staying the MoPSC's decision requiring Laclede Gas to flow through the $4.9 million to customers. Pursuant to the Stay Order, Laclede Gas is paying the $4.9 million into the Court's registry pending a final judicial determination of Laclede Gas' entitlement to such amounts. On November 5, 2003, the Circuit Court of Cole County, Missouri, issued its Order and Judgment vacating and setting aside the Commission's decision on the grounds that it was unlawful and not supported by competent and substantial evidence on the record. On December 5, 2003 the MoPSC appealed the Circuit Court's decision to the Missouri Court of Appeals for the Western District. The Company continues to believe in the merit of its position and intends to vigorously assert its position in the appeal. To the extent that a final decision in the courts results in disallowance of the $4.9 million in pre-tax gains, it could have a material effect on the future financial position and results of operation of the Company. SM&P has several operating leases, the aggregate annual cost of which is approximately $5 million, consisting primarily of 12-month operating leases, with renewal options, for vehicles used in its business. Upon acquisition of SM&P, Laclede Group assumed parental guarantees of certain of those vehicle leases. Laclede Group anticipates that the maximum guarantees related to existing leases will not exceed $12 million. No amounts have been recorded for these guarantees in the financial statements. Laclede Group had guarantees totaling $5.5 million for performance and payment of certain wholesale gas supply purchases by LER, as of March 31, 2004. No amounts have been recorded for these guarantees in the financial statements. Laclede Gas Company's Financial Statements and Notes to Financial Statements are included in Exhibit 99.1 to this report. 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations THE LACLEDE GROUP, INC. - ----------------------- This management's discussion analyzes the financial condition and results of operations of The Laclede Group, Inc. (Laclede Group or the Company) and its subsidiaries. It includes management's view of factors that affect its business, explanations of past financial results including changes in earnings and costs from the prior year periods, and their effects on overall financial condition and liquidity. Certain matters discussed in this report, excluding historical information, include forward-looking statements. Certain words, such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "seek," and similar words and expressions identify forward-looking statements that involve uncertainties and risks. Future developments may not be in accordance with our expectations or beliefs and the effect of future developments may not be those anticipated. Among the factors that may cause results to differ materially from those contemplated in any forward-looking statement are: o weather conditions and catastrophic events; o economic, competitive, political and regulatory conditions; o legislative, regulatory and judicial mandates and decisions, some of which may be retroactive, including those affecting o allowed rates of return o incentive regulation o industry structure o purchased gas adjustment provisions o rate design structure and implementation o franchise renewals o environmental or safety matters o taxes o accounting standards; o the results of litigation; o retention, ability to attract, ability to collect from and conservation efforts of customers; o capital and energy commodity market conditions including the ability to obtain funds for necessary capital expenditures and the terms and conditions imposed for obtaining sufficient gas supply; o discovery of material weakness in internal controls; and o employee workforce issues. Readers are urged to consider the risks, uncertainties and other factors that could affect our business as described in this report. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement in light of future events. The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto. 18 THE LACLEDE GROUP, INC. RESULTS OF OPERATIONS The Laclede Group, Inc.'s (Laclede Group or the Company) earnings are primarily derived from the regulated activities of its largest subsidiary, Laclede Gas Company (Laclede Gas or the Utility), Missouri's largest natural gas distribution company. Laclede Gas is regulated by the Missouri Public Service Commission (MoPSC) 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 generated by the sale of heating energy, which was historically heavily influenced by the weather. As part of the 2002 rate case settlement, the Utility initiated, effective November 9, 2002, an innovative weather mitigation rate design that lessens the impact of weather volatility on Laclede Gas customers during cold winters and is expected to stabilize the Utility's earnings in the future by recovering fixed costs more evenly during the heating season. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the November through April period, which generally corresponds with the heating season. The Utility typically experiences losses during the non-heating season. Due to the material seasonal cycle of Laclede Gas, the accompanying interim statements of income for Laclede Group are not necessarily indicative of annual results or representative of succeeding quarters of the fiscal year. The seasonal effect of the Utility's earnings on Laclede Group is generally expected to be tempered somewhat by the results of SM&P Utility Resources, Inc. (SM&P), a non-regulated underground facility locating and marking service business wholly owned by Laclede Group, whose operations tend to be counter-seasonal to those of Laclede Gas. Laclede Energy Resources, Inc. (LER), a wholly owned subsidiary, is engaged in non-regulated efforts to market natural gas and related activities. Other non-regulated subsidiaries provide less than 10% of consolidated revenues. Laclede Group's strategy includes efforts to stabilize and improve performance of its core Utility, while developing non-regulated businesses and taking a measured approach in the pursuit of additional growth opportunities that complement the Utility business. As for the Utility, mitigating the impact of weather fluctuations on Laclede Gas customers while improving the ability to recover its authorized distribution costs and return has been a fundamental component of the Laclede Group strategy. The Utility's distribution costs are the essential, primarily fixed expenditures it must incur to operate and maintain a more than 15,000-mile natural gas distribution system and related storage facilities. In fiscal 2003, when the weather mitigation rate design first went into effect, the weather was essentially normal; therefore, its impact was minimal. However, it has shown its value during the first six months of fiscal 2004, as the downward pressure on revenues and earnings has been significantly mitigated despite temperatures that were 14% warmer than normal. In addition, Laclede Gas is working to continually improve its ability to provide reliable natural gas service at a reasonable cost, while maintaining and building a secure and dependable infrastructure. Laclede Group continues to develop its non-regulated subsidiaries. SM&P is working toward expanding its geographic footprint into new markets, and has made notable gains in adding business in several key markets after experiencing setbacks in fiscal 2003. LER continues to focus on growing its markets on a long-term and sustainable basis by providing both on-system transportation customers and customers outside of Laclede Gas' traditional service area with another choice in unregulated natural gas suppliers. Nevertheless, income from LER's operations, similar to the Utility's income from off-system sales, is subject to fluctuations in market conditions. 19 Quarter Ended March 31, 2004 - -------------------------------
Overview - Net Income by Operating Segment Quarter Ended March 31, ------------------------- (millions, after-tax) 2004 2003 ---- ---- Regulated Gas Distribution $23.4 $24.9 Non-Regulated Services (3.2) (4.3) Non-Regulated Gas Marketing 1.0 .7 Other Non-Regulated Subsidiaries .3 .3 ---------- ----------- Net Income Applicable to Common Stock $21.5 $21.6 ========== ===========
Laclede Group's basic and diluted earnings per share were $1.12 for the quarter ended March 31, 2004, compared with $1.14 per share reported for the same quarter last year. The $.02 per share decrease is primarily the result of the increase in common shares outstanding. The year-to-year decrease in consolidated net income of $.1 million was primarily attributable to the following factors, quantified on a pre-tax basis. Utility earnings decreased primarily due to the following factors: o income from off-system sales and capacity release decreased $2.3 million from the quarter ended March 31, 2003, resulting from less favorable market conditions; and, o operating expenses increased, compared with the same quarter last year, primarily attributable to a higher provision for uncollectible accounts and increased pension costs. These factors were largely offset by higher non-operating income recorded this year, resulting from the receipt of proceeds totaling $1.9 million related to the Utility's interest, as a policyholder, in the sale of a mutual insurance company. This represents an initial distribution relating to certain policies held by the Utility. Subsequent distributions, if any, are not expected to have a material impact on the consolidated financial position or results of operations of the Company. The decrease in Utility earnings was essentially offset on a consolidated basis by improved results reported by SM&P and LER. SM&P's improvement over the prior year primarily reflects the right-sizing costs recorded during the quarter ended March 31, 2003 related to the loss of revenue from two customers (discussed below). LER's earnings were slightly higher compared with the same quarter last year. Regulated Operating Revenues and Operating Expenses Laclede Gas passes on to Utility customers (subject to prudence review) increases and decreases in the wholesale cost of natural gas in accordance with its Purchased Gas Adjustment (PGA) clause. The volatility of the wholesale natural gas market results in fluctuations from period to period in the recorded levels of, among other items, revenues and natural gas cost expense. Nevertheless, increases and decreases in the cost of gas associated with system gas sales volumes have no direct effect on net revenues and net income. Regulated operating revenues for the quarter ended March 31, 2004 were $396.9 million, or $39.4 million greater than the same period last year. The increase was primarily attributable to higher PGA rates totaling approximately $54.7 million and increased off-system sales revenues totaling $4.2 million. Regulated operating revenues were partially offset by lower system gas sales levels resulting from warmer weather and other variations totaling $19.5 million. Temperatures were 8% warmer than normal and 10% warmer than the same quarter last year. System therms sold and transported decreased by 36.0 million therms, or 7.6%, below the quarter ended March 31, 2003. Regulated operating expenses for the quarter ended March 31, 2004 increased $45.6 million from the same quarter last year. Natural and propane gas expense increased $40.4 million above last year's level primarily attributable to higher rates charged by our suppliers and increased off-system gas expense, partially offset by lower volumes purchased for sendout. Other operation and maintenance expenses increased $2.8 million, or 8.2%, primarily due to a higher provision for uncollectible accounts, increased pension costs, and higher wage rates. Depreciation and amortization expense increased $.1 million primarily due to increased depreciable property. Taxes, other than income, increased $2.3 million, or 10.3%, primarily due to higher gross receipts taxes (attributable to the increased revenues). 20 Non-Regulated Services Operating Revenues and Operating Expenses Laclede Group's non-regulated services operating revenue for this quarter decreased $2.1 million primarily due to a reduced level of business from two customers, which was partially offset by the addition of new business in other markets. Revenue from these two customers for the quarter ended March 31, 2004 was $4.7 million, compared with $7.2 million for the same period last year. The reduction in non-regulated services operating expenses totaling $3.8 million was primarily attributable to a reduction in personnel and related expenses and a non-recurring $1.0 million after-tax charge recorded during the quarter ending March 31, 2003. This reduction was partially offset by charges attributable to the employment-related litigation described in Note 8 to the Consolidated Financial Statements on page 16 of this report. The underground facility locating industry remains competitive with many contracts subject to termination on as little as 30-days notice. SM&P's customers are primarily in the utility and telecommunication sector with their workload influenced by construction trends. Non-Regulated Gas Marketing Operating Revenues and Operating Expenses Non-regulated gas marketing operating revenues increased $15.6 million primarily due to higher sales volumes by LER. The increase in non-regulated gas marketing operating expenses was primarily associated with increased gas expense related to higher volumes purchased. Other Income and (Income Deductions) - Net The $1.9 million increase in other income and income deductions - net was primarily attributable to the Utility's recognition during the quarter ended March 31, 2004 of the receipt of proceeds totaling $1.9 million related to its interest, as a policyholder, in the sale of a mutual insurance company. This represents an initial distribution relating to certain policies held by the Utility. Subsequent distributions, if any, are not expected to have a material impact on the consolidated financial position or results of operations of the Company. Consolidated Interest Charges The $.3 million decrease in interest charges was primarily due to lower interest on long-term debt due to the May 2003 maturity of $25 million of 6 1/4% First Mortgage Bonds. Six Months Ended March 31, 2004 - -------------------------------
Overview - Net Income by Operating Segment Six Months Ended March 31, -------------------------- (millions, after-tax) 2004 2003 ---- ---- Regulated Gas Distribution $40.7 $39.5 Non-Regulated Services (4.2) (4.4) Non-Regulated Gas Marketing 1.4 1.3 Other Non-Regulated Subsidiaries .2 .3 ---------- ------------ Net Income Applicable to Common Stock $38.1 $36.7 ========== ============
Laclede Group's basic and diluted earnings per share were $1.99 for the six months ended March 31, 2004, an increase of $.06 per share, compared with $1.93 per share reported for the same period last year. The year-to-year increase in consolidated net income of $1.4 million was primarily attributable to the following factors, quantified on a pre-tax basis. 21 Utility earnings increased primarily due to the following factors: o non-operating income recorded this year increased $2.3 million (primarily reflecting the receipt of proceeds discussed above); and, o the fully-implemented general rate increase effective November 9, 2002 totaling $.9 million. These factors were partially offset by: o pension costs that increased $1.4 million over the same period last year; and, o the net effect totaling $1.9 million of lower system gas sales volumes (resulting from temperatures in Laclede Gas' service area that were 12% warmer than normal and 14% warmer than the same period last year) and the beneficial effect this year of the fully-implemented weather mitigation rate design. The magnitude of the effect of lower sales was smaller than would have previously been the case due to the impact of the fully-implemented weather mitigation rate design that produced higher margin revenue for the six months ended March 31, 2004, compared with the same period last year. SM&P and LER reported minor improvements in earnings results compared with the same period last year. Regulated Operating Revenues and Operating Expenses Regulated operating revenues for the six months ended March 31, 2004 were $658.2 million, or $83.6 million greater than the same period last year. The increase was primarily attributable to higher PGA rates totaling approximately $96.0 million, increased off-system sales revenues totaling $24.0 million and, to a lesser extent, the effect of the general rate increase totaling $.9 million. These factors were partially offset by lower system gas sales levels resulting from warmer weather and other variations totaling $37.3 million. Temperatures were 12% warmer than normal and 14% warmer than last year. System therms sold and transported decreased by 73.3 million therms, or 9.1%, below the six months ended March 31, 2003. Regulated operating expenses for the six months ended March 31, 2004 increased $86.1 million from the same period last year. Natural and propane gas expense increased $81.8 million above last year's level primarily attributable to higher rates charged by our suppliers and increased off-system gas expense, partially offset by lower volumes purchased for sendout. Other operation and maintenance expenses increased $1.0 million, or 1.4%, primarily due to increased pension costs and higher wage rates, partially offset by lower group insurance charges and reduced charges to maintenance expense. Depreciation and amortization expense increased $.3 million primarily due to increased depreciable property. Taxes, other than income, increased $3.0 million, or 8.2%, primarily due to higher gross receipts taxes (attributable to the increased revenues). Non-Regulated Services Operating Revenues and Operating Expenses Laclede Group's non-regulated services operating revenue for the six months ended March 31, 2004 decreased $13.3 million primarily due to a reduced level of business from two customers. Revenue from these two customers for the six months ended March 31, 2004 was $8.6 million, compared with $21.9 million for the same period last year. The reduction in non-regulated services operating expenses totaling $14.1 million was primarily attributable to a reduction in personnel and related expenses and a non-recurring $1.0 million after-tax charge recorded during the six months ending March 31, 2003. This reduction was partially offset by charges attributable to the employment-related litigation described in Note 8 to the Consolidated Financial Statements on page 16 of this report. Non-Regulated Gas Marketing Operating Revenues and Operating Expenses Non-regulated gas marketing operating revenues increased $35.3 million primarily due to higher volumes and increased sales prices by LER. The increase in non-regulated gas marketing operating expenses was primarily associated with increased gas expense related to higher volumes purchased and increased prices. Other Income and (Income Deductions) - Net The $2.3 million increase in other income and income deductions - net was primarily attributable to the Utility's recognition this year of the receipt of proceeds totaling $1.9 million related to its interest, as a policyholder, in the sale of a mutual insurance company. This represents an initial distribution relating to certain policies held by the Utility. 22 Subsequent distributions, if any, are not expected to have a material impact on the consolidated financial position or results of operations of the Company. Consolidated Interest Charges The $.3 million decrease in interest charges was primarily due to lower interest on long-term debt due to the May 2003 maturity of $25 million of 6 1/4% First Mortgage Bonds, partially offset by the issuance of long-term debt to an unconsolidated affiliate trust in December 2002. Regulatory Matters - ------------------ Laclede Gas previously appealed the MoPSC's decision in its 1999 rate case relative to the calculation of its depreciation rates. The Circuit Court remanded the decision to the MoPSC based on inadequate findings of fact. The MoPSC upheld its previous order and Laclede Gas appealed this second order to the Circuit Court. In 2002, the Circuit Court ruled that the MoPSC's second order was lawful and reasonable, and Laclede Gas appealed the Circuit Court's decision to the Missouri Court of Appeals for the Western District. On March 4, 2003 the Court of Appeals issued an opinion remanding the decision to the MoPSC based on the MoPSC's failure to support and explain its decision with adequate findings of fact. In May 2003, the Court of Appeals rejected the MoPSC's request that the Court reconsider its opinion or transfer this matter to the Missouri Supreme Court. On March 29, 2004, the MoPSC Staff and Laclede Gas responded to a MoPSC order directing interested parties to submit new proposed findings of fact on this issue for its consideration. On June 28, 2002, the Staff of the MoPSC filed its recommendation in a proceeding established to review Laclede Gas' gas costs for fiscal 2001. In its recommendation, the Staff proposed to disallow approximately $4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based Price Stabilization Program. This Program was discontinued at the end of the 2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in proceedings before the MoPSC, including a formal hearing that was held on this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved by Laclede Gas, and directed Laclede Gas to flow through such amount to its customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas appealed the MoPSC's decision to the Cole County Circuit Court. On October 10, 2003, the Circuit Court issued an order staying the MoPSC's decision requiring Laclede Gas to flow through the $4.9 million to customers. Pursuant to the Stay Order, Laclede Gas is paying the $4.9 million into the Court's registry pending a final judicial determination of Laclede Gas' entitlement to such amounts. On November 5, 2003, the Circuit Court of Cole County, Missouri, issued its Order and Judgment vacating and setting aside the Commission's decision on the grounds that it was unlawful and not supported by competent and substantial evidence on the record. On December 5, 2003 the MoPSC appealed the Circuit Court's decision to the Missouri Court of Appeals for the Western District. The Company continues to believe in the merit of its position and intends to vigorously assert its position in the appeal. To the extent that a final decision in the courts results in disallowance of the $4.9 million in pre-tax gains, it could have a material effect on the future financial position and results of operations of the Company. On March 1, 2004, the Utility made an Infrastructure System Replacement Surcharge (ISRS) filing with the MoPSC that is designed to increase revenues by approximately $3.9 million annually. Such filing was made pursuant to a Missouri law, enacted in 2003, that allows gas utilities to adjust their rates up to twice a year to recover certain facility-related expenditures that are made to comply with state and federal safety requirements or to relocate facilities in connection with public improvement projects. On March 12, 2004, the MoPSC suspended the proposed surcharge until June 29, 2004. 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 23 experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following represent the more significant items requiring the use of judgment and estimates in preparing our consolidated financial statements: Allowances for doubtful accounts - Estimates of the collectibility of trade accounts receivable are based on historical trends, age of receivables, economic conditions, credit risk of specific customers, and other factors. Employee benefits and postretirement obligations - Pension and postretirement obligations are calculated by actuarial consultants that utilize several statistical factors and other assumptions related to future events, such as discount rates, returns on plan assets, compensation increases, and mortality rates. The amount of expense recognized by the Utility is dependent on the regulatory treatment provided for such costs. Certain liabilities related to group medical benefits and workers' compensation claims, portions of which are self-insured and/or contain stop/loss coverage with third-party insurers to limit exposure, are established based on historical trends. Goodwill valuation - In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill is required to be tested for impairment annually or whenever events or circumstances occur that may reduce the value of goodwill. In performing impairment tests, valuation techniques require the use of estimates with regard to discounted future cash flows of operations, involving judgments based on a broad range of information and historical results. If the test indicates impairment has occurred, goodwill would be reduced which would adversely impact earnings. Laclede Gas accounts for its regulated operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." This statement sets forth the application of accounting principles generally accepted in the United States of America for those companies whose rates are established by or are subject to approval by an independent third-party regulator. The provisions of SFAS No. 71 require, among other things, that financial statements of a regulated enterprise reflect the actions of regulators, where appropriate. These actions may result in the recognition of revenues and expenses in time periods that are different than non-regulated enterprises. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses when those amounts are reflected in rates. Also, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for recovery of costs that are expected to be incurred in the future (regulatory liabilities). Management believes that the current regulatory environment supports the continued use of SFAS No. 71 and that all regulatory assets and liabilities are recoverable or refundable through the regulatory process. We believe the following represent the more significant items recorded through the application of SFAS No. 71: The Utility's Purchased Gas Adjustment Clause (PGA) allows Laclede Gas to flow through to customers, subject to prudence review, the cost of purchased gas supplies, including the costs, cost reductions and related carrying costs associated with the Utility's use of natural gas financial instruments to hedge the purchase price of natural gas. The difference between actual costs incurred and costs recovered through the application of the PGA are recorded as regulatory assets and liabilities that are recovered or refunded in a subsequent period. The Company records deferred tax liabilities and assets measured by enacted tax rates for the net tax effect of all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes. Changes in enacted tax rates, if any, and certain property basis differences will be reflected by entries to regulatory asset or liability accounts for regulated companies, and will be reflected as income or loss for non-regulated companies. Also, pursuant to the direction of the MoPSC, Laclede Gas' provision for income tax expense for financial reporting purposes reflects an open-ended method of tax depreciation. This method is consistent with the regulatory treatment prescribed by the MoPSC to depreciate the Utility's assets. For further discussion of significant accounting policies, see the Notes to the Consolidated Financial Statements included in the Company's Form 10-K for the fiscal year ended September 30, 2003. 24 Accounting Pronouncements - ------------------------- Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised December 2003) (FIN 46R), "Consolidation of Variable Interest Entities," addresses consolidation of business enterprises of variable interest entities. Public entities shall apply this Interpretation to their interests in special purpose entities as of the first interim period ending after December 15, 2003. Application by public entities for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004. In December 2002, Laclede Group formed a wholly owned trust, Laclede Capital Trust I (Trust), for the sole purpose of issuing preferred securities and lending the gross proceeds to its parent, Laclede Group. As of March 31, 2004, the Trust has $45 million of Trust Preferred Securities outstanding. The sole assets of the Trust are debentures of Laclede Group, totaling $46.4 million, with the same economic terms as the Trust Preferred Securities. Prior to the application of FIN 46R, the Trust was consolidated in the financial statements of Laclede Group. The Company evaluated the effect of this pronouncement on this consolidation. In accordance with the provisions of FIN 46R, Laclede Group has determined that the Trust is a variable interest entity because its common securities investment is considered not at risk, and Laclede Group is not the primary beneficiary of the Trust. Accordingly, the Trust was deconsolidated during the quarter ended March 31, 2004. The Consolidated Balance Sheets have been modified to include Investments in Unconsolidated Subsidiaries of $1.4 million representing Laclede Group's common securities investment in the Trust and to reflect Laclede Group's obligations related to the debentures. The common securities investment is included on the Other Property and Investments line on the Consolidated Balance Sheets. As permitted under FIN 46R, the Trust has been deconsolidated for prior periods and presented to be consistent with the current presentation. The adoption of FIN 46R did not result in a cumulative effect of an accounting change adjustment and did not have a material effect on the financial position or results of operations of Laclede Group. In December 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 132 (revised 2003) (SFAS No. 132(R)), "Employers' Disclosures about Pensions and Other Postretirement Benefits." The provisions of this Statement do not change the measurement and recognition provisions of SFAS No. 87, "Employers' Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132(R) replaces SFAS No. 132, and requires certain additional disclosures that became effective for fiscal years ending after and interim periods beginning after December 15, 2003. The required disclosures are included in Note 3 to the Consolidated Financial Statements on page 12 of this report. FINANCIAL CONDITION Credit Ratings - -------------- As of March 31, 2004, credit ratings for outstanding securities for Laclede Group and Laclede Gas issues were as follows: Type of Facility S&P Moody's Fitch - ----------------------------------------------------------------------------- Laclede Group Corporate Rating A Laclede Gas First Mortgage Bonds A A3 A+ Laclede Gas Commercial Paper A-1 P-2 Trust Preferred Securities A- Baa3 BBB+ The Company's ratings are investment grade, and the Company believes that it has adequate access to the financial markets to meet its capital requirements. These ratings remain subject to review and change by the rating agencies. Cash Flows - ---------- The Company's short-term borrowing requirements typically peak during colder months when Laclede Gas borrows money to cover the gap between when it purchases its natural gas and when its customers pay for that gas. Changes in the wholesale cost of natural gas, variations in the timing of collections of gas cost under the Utility's PGA Clause, 25 the seasonality of accounts receivable balances, and the utilization of storage gas inventories cause short-term cash requirements to vary during the year, and can cause significant variations in the Utility's cash provided by or used in operating activities. Net cash provided by operating activities for the six months ended March 31, 2004 was $80.7 million, a $31.0 million increase, compared with the same period last year. The increase in cash provided by operating activities was primarily attributable to changes in the cost of natural gas in storage and favorable variations in the timing of collections of gas cost under the PGA clause. Cash flows were adversely impacted by variations in accounts payable, primarily associated with the cost of natural gas. Net cash used in investing activities for the six months ended March 31, 2004 was $26.0 million compared with $24.4 million for the six months ended March 31, 2003. Cash used in investing activities primarily reflected Utility construction expenditures in both periods. Net cash used in financing activities was $36.8 for the six months ended March 31, 2004 compared with $3.6 million for the six months ended March 31, 2003. The variation primarily reflects the issuance last year of long-term debt to an unconsolidated affiliate trust. Liquidity and Capital Resources - ------------------------------- Maximum consolidated short-term borrowings at any one time during the quarter ended March 31, 2004 were $241.8 million. Short-term cash requirements have traditionally been met through the sale of commercial paper supported by lines of credit with banks. Laclede Gas currently has lines of credit in place of up to $265 million, after the expiration of a seasonal line of $25 million on February 13, 2004. Short-term borrowings outstanding at March 31, 2004 were $191.4 million at a weighted average interest rate of 1.11%. Based on short-term borrowings at March 31, 2004, a change in interest rates of 100 basis points would increase or decrease pre-tax earnings and cash flows by approximately $1.9 million on an annual basis. Most of Laclede Gas' lines of credit include a covenant limiting total debt, including short-term debt, to no more than 70% of total capitalization. On March 31, 2004, total debt was 59% of total capitalization. Short-term cash requirements outside of Laclede Gas have generally been met with internally-generated funds. However, Laclede Group has a $20 million working capital line of credit expiring in June 2004, with interest rates indexed to LIBOR or Prime, to meet short-term liquidity needs of its subsidiaries. This line of credit has a covenant limiting the total debt of Laclede Gas Company to no more than 70% of the utility's total capitalization (as noted above, this ratio stood at 59% on March 31, 2004). This line has been used to provide a letter of credit of $1.2 million on behalf of SM&P as of April 2004, which has not been drawn, and to provide for seasonal funding needs of the various subsidiaries from time to time. There were no borrowings outstanding as of March 31, 2004. Laclede Group has on file a shelf registration on Form S-3, which allows for the issuance of equity securities, other than preferred stock, and debt securities. Of the $500 million of securities originally registered under this S-3, $408.6 million remain registered and unissued as of March 31, 2004. Subject to favorable market conditions, the Company contemplates issuing 1.5 million shares of common stock (plus up to an additional 15% of that amount to cover over-allotments) during the quarter ending June 30, 2004. The proceeds from the sale will be utilized to reduce short-term borrowings at our subsidiary, Laclede Gas, and for general corporate purposes. At March 31, 2004, Laclede Gas had fixed-rate long-term debt totaling $260 million, including a $50 million 6 5/8% issue callable in June 2004 and a current portion of $25 million scheduled to mature in November 2004. While these long-term debt issues are fixed-rate, they are subject to changes in fair value as market interest rates change. However, increases or decreases in fair value would impact earnings and cash flows only if Laclede Gas were to reacquire any of these issues in the open market prior to maturity. Laclede Gas has on file a shelf registration on Form S-3. Of the $350 million of securities originally registered under this S-3, $270 million of debt securities remained registered and unissued as of March 31, 2004. On April 28, 2004, Laclede Gas sold $50 million principal amount of First Mortgage Bonds, 5 1/2% Series due May 1, 2019 and $100 million principal amount of First Mortgage Bonds, 6% Series due May 1, 2034. The net proceeds from such 26 sale, estimated to be $147.9 million, will be used to reduce short-term debt, to redeem at par $50 million principal amount of Laclede Gas' 6 5/8% First Mortgage Bonds on or after June 15, 2004, to pay at maturity $25 million principal amount of 8 1/2% First Mortgage Bonds in November 2004 and for general corporate purposes. SM&P has several operating leases, the aggregate annual cost of which is approximately $5 million, consisting primarily of 12-month operating leases, with renewal options, for vehicles used in its business. Upon acquisition of SM&P, Laclede Group assumed parental guarantees of certain of those vehicle leases. Laclede Group anticipates that the maximum guarantees related to existing leases will not exceed $12 million. No amounts have been recorded for these guarantees in the financial statements. Laclede Group had guarantees totaling $5.5 million for performance and payment of certain wholesale gas supply purchases by LER, as of March 31, 2004. No amounts have been recorded for these guarantees in the financial statements. Utility construction expenditures were $24.7 million for the six months ended March 31, 2004, compared with $22.7 million for the same period last year. Non-utility construction expenditures were $.4 million for the six months ended March 31, 2004, compared with $.2 million for the same period last year. Consolidated capitalization at March 31, 2004, excluding current obligations of long-term debt and preferred stock, increased $1.0 million since September 30, 2003 and consisted of 53.6% Laclede Group common stock equity, ..2% Laclede Gas preferred stock equity, 7.6% long-term debt to unconsolidated affiliate trust and 38.6% Laclede Gas long-term debt. It is management's view that the Company has adequate access to capital markets and will have sufficient capital resources, both internal and external, to meet anticipated capital requirements. The seasonal nature of Laclede Gas' sales affects the comparison of certain balance sheet items at March 31, 2004 and at September 30, 2003, such as Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts Payable, Regulatory Assets and Liabilities, and Delayed and Advance Customer Billings. The Consolidated Balance Sheet at March 31, 2003 is presented to facilitate comparison of these items with the corresponding interim period of the preceding fiscal year. Market Risk - ----------- Laclede Gas adopted a risk management policy that provides for the purchase of natural gas financial instruments with the goal of managing price risk associated with purchasing natural gas on behalf of its customers. This policy prohibits speculation. Costs and cost reductions, including carrying costs, associated with the Utility's use of natural gas financial instruments are allowed to be passed on to the Utility's customers through the operation of its Purchased Gas Adjustment Clause, through which the MoPSC allows the Utility to recover gas supply costs. Accordingly, Laclede Gas does not expect any adverse earnings impact as a result of the use of these financial instruments. At March 31, 2004, the Utility held approximately 11.6 million MmBtu of futures contracts at an average price of $5.33 per MmBtu. Additionally, approximately 5.1 million MmBtu of other price risk mitigation was in place through the use of option-based strategies. These positions have various expiration dates, the longest of which extends through October 2004. In the course of its business, Laclede Group's non-regulated marketing affiliate, Laclede Energy Resources, Inc. (LER), enters into fixed price commitments associated with the purchase or sale of natural gas. LER manages the price risk associated with these commitments by either closely matching the offsetting physical purchase or sale of natural gas at fixed prices or through the use of exchange-traded futures contracts to lock in margins. At March 31, 2004, LER's open positions were not material to Laclede Group's financial position or results of operations. 27 Environmental Matters - --------------------- Laclede Gas is subject to various environmental laws and regulations that, to date, have not materially affected the Company's financial position and results of operations. As these laws, regulations, and their interpretation evolve, however, additional costs may be incurred. With regard to a former manufactured gas plant site located in Shrewsbury, Missouri, Laclede Gas and state and federal environmental regulators have agreed upon certain actions and those actions are nearing completion. Laclede Gas currently estimates the overall costs of these actions will be approximately $2.4 million. As of March 31, 2004, Laclede Gas has paid or reserved for these actions. If regulators require additional actions or assert additional claims, Laclede Gas will incur additional costs. Laclede Gas enrolled a second former manufactured gas plant site into the Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to minimize the scope and cost of site cleanup while maximizing possibilities for site development. This site is located in, and is presently owned by, the City of St. Louis, Missouri. The City of St. Louis has separately authorized a developer to prepare both a Remedial Action Plan (RAP), for submission to the VCP, and a site development plan. Laclede Gas continues to explore with the developer what role, if any, it might play in these efforts. Laclede Gas continues to evaluate other options as well, including, but not limited to, the submission of its own RAP to the VCP. Laclede Gas currently estimates that the cost of site investigations, agency oversight and related legal and engineering consulting may be approximately $650,000. Currently, Laclede Gas has paid or reserved for these actions. Laclede Gas has requested that other former site owners and operators share in these costs and one party has agreed to participate and has reimbursed Laclede Gas to date for $173,000. Laclede Gas anticipates additional reimbursement from this party. Laclede Gas plans to seek proportionate reimbursement of all costs relative to this site from other potentially responsible parties if practicable. Laclede Gas has been advised that a third former manufactured gas plant site may require remediation. Laclede Gas does not, and for many years has not, owned this site. At this time it is not clear whether Laclede Gas will incur any costs in connection with environmental investigations or remediation at the site, and if it does incur any costs, what the amount of those costs would be. Costs incurred are charged to expense or capitalized in accordance with generally accepted accounting principles. A predetermined level of expense is recovered through Laclede Gas' rates. While the scope of future costs relative to the Shrewsbury site will not be significant, the scope of costs relative to the other sites is unknown and may be material. Laclede Gas has notified its insurers that it seeks reimbursement of its costs at these three manufactured gas plant sites. In response, the majority of insurers have reserved their rights. While some of the insurers have denied coverage, Laclede Gas continues to seek reimbursement from them. With regard to the Shrewsbury site, denials of coverage are not expected to have any material impact on the financial position and results of operations of Laclede Gas. With regard to the other two sites, since the scope of costs are unknown and may be significant, denials of coverage may have a material impact on the financial position and results of operations of Laclede Gas. Such costs, if incurred, have typically been subject to recovery in rates. OFF-BALANCE SHEET ARRANGEMENTS Laclede Group has no off-balance sheet arrangements. Laclede Gas Company's Management's Discussion and Analysis of Financial Condition is included in Exhibit 99.1 of this report. 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk For this discussion, see the "Market Risk" subsection in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, page 27 of this report. Item 4. Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15e and Rule 15d-15e under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. There have been no changes in our internal control over financial reporting that occurred during our second fiscal quarter that has materially affected, or is reasonably likely to materially affect, our control over financial reporting. 29 PART II. OTHER INFORMATION Item 1. Legal Proceedings For a description of environmental matters, see Note 8 to the Consolidated Financial Statements on page 16. For a description of pending regulatory matters of Laclede Gas, see Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Matters, page 23 of this report. SM&P has been the subject of certain employment-related claims arising out of a practice of SM&P that predated Laclede Group's acquisition. The claims involve whether certain pre- and post-work activities and commuting time for non-supervisory field employees constitute hours worked for purposes of federal and state wage and hour laws. These claims have been asserted in various proceedings, including one "opt-in" collective action filed in March 2003 in Federal District Court for the Eastern District of Texas. As a result of a ruling on February 27, 2004 in that proceeding, approximately 3,500 present and former field employees who worked for SM&P at times since February 27, 2001 were given notice of the lawsuit and the opportunity, until June 7, 2004, to join the lawsuit and assert claims for additional overtime compensation for the three-year period immediately preceding the date that they joined the lawsuit. Approximately 600 of the employees to whom notice was sent have joined this lawsuit to date, the vast majority of whom are former employees. SM&P is unable to predict the number that ultimately will opt-in. SM&P is vigorously contesting these claims, including opposition to this case ultimately proceeding as a collective action. While the results of the claims cannot be predicted with certainty, management, after discussion with counsel, believes that the final outcome will not have a material adverse effect on the consolidated financial position and results of operations of the Company. Laclede Group and its subsidiaries are involved in other litigation, claims and investigations arising in the normal course of business. While the results of such litigation cannot be predicted with certainty, management, after discussion with counsel, believes that the final outcome will not have a material adverse effect on the consolidated financial position or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders: The annual meeting of shareholders of The Laclede Group was held on January 29, 2004, for the purpose of electing three directors to the board of directors and ratifying the appointment of independent auditors. Management's three nominees for directors listed in the proxy statement were unopposed and were elected upon the following votes: DIRECTOR NOMINEE FOR WITHHELD ---------------- ---- -------- Dr. Henry Givens, Jr. 15,832,230 342,768 Mary Ann Van Lokeren 15,907,201 267,797 Douglas H. Yaeger 15,830,955 344,042 The proposal to ratify the appointment of Deloitte & Touche LLP, Certified Public Accountants, to audit the accounts of the Company for the fiscal year ending September 30, 2004 was passed upon the following vote: FOR AGAINST ABSTAIN --- ------- ------- 15,886,256 168,447 120,294 30 Item 6. Exhibits and Reports on Form 8-K (a) See Exhibit Index (b) Reports on Form 8-K During the quarter, Laclede Group had three reports on Form 8-K: 1. Form 8-K dated January 29, 2004 furnishing under Items 7 and 12 the Company's first quarter earnings release. 2. Form 8-K dated January 29, 2004 furnishing under Items 7 and 9 regarding the presentation of the Company's officers at the annual meeting of shareholders on that same date. 3. Form 8-K dated January 29, 2004 furnishing under Items 7 and 9 the dividend declaration press release. 31 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. The Laclede Group, Inc. By: /s/ Barry C. Cooper -------------------------- Dated: April 27, 2004 Barry C. Cooper -------------- Chief Financial Officer (Authorized Signatory and Chief Financial Officer) 32 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. Laclede Gas Company By: /s/ Barry C. Cooper ------------------------- Dated: April 27, 2004 Barry C. Cooper -------------- Chief Financial Officer (Authorized Signatory and Chief Financial Officer) 33 INDEX TO EXHIBITS ----------------- Exhibit No. - ------- 10.17 - Form of Restricted Stock Award Agreement under The Laclede Group Equity Incentive Plan. 12 - Ratio of Earnings to Fixed Charges. 31 - Certificates under Rule 13a-14(a) of the CEO and CFO of The Laclede Group, Inc. and Laclede Gas Company. 32 - Section 1350 Certifications under Rule 13a-14(b) of the CEO and CFO of The Laclede Group, Inc. and Laclede Gas Company. 99.1 - Laclede Gas Company - Management's Discussion and Analysis of Financial Condition and Results of Operations, Financial Statements and Notes to Financial Statements. 34 EX-10.17 2 ex10p17.txt Exhibit 10.17 THE LACLEDE GROUP, INC. EQUITY INCENTIVE PLAN RESTRICTED STOCK AWARD AGREEMENT THIS AGREEMENT, made as of this ___ day of ____________ 20__, between The Laclede Group, Inc. (the "Company") and ________________ (the "Participant"). WHEREAS, the Company has adopted and maintains The Laclede Group, Inc. Equity Incentive Plan (the "Plan") to promote the interests of the Company and its stockholders by providing the key employees of the Company and its subsidiaries with an appropriate incentive to encourage them to continue in the employ of the Company and its subsidiaries and to improve the growth and profitability of the Company; WHEREAS, the Plan provides for the Award to Participants in the Plan of Restricted Stock of the Company. NOW, THEREFORE, in consideration of the mutual covenants set forth in this Agreement, the parties hereto hereby agree as follows: 1. GRANT OF RESTRICTED STOCK. Pursuant to, and subject to, the terms and conditions set forth herein and in the Plan, the Company grants to the Participant ____ Shares of Common Stock of the Company subject to the restrictions set forth in Section 4 of this Agreement (the "Restricted Stock"). 2. GRANT DATE. The Grant Date of the Restricted Stock is ________________, 20__. 3. INCORPORATION OF PLAN. All terms, conditions and restrictions of the Plan are incorporated herein and made part hereof as if stated herein. If there is any conflict between the terms and conditions of the Plan and this Agreement, the terms and conditions of the Plan, as interpreted by the Administrator, shall govern. All capitalized terms used herein shall have the meaning given to such terms in the Plan. 4. RESTRICTIONS. Except as hereinafter provided, Participant shall forfeit, for no consideration from the Company, all of the Shares of Restricted Stock awarded hereunder upon Participant's termination of employment for any reason prior to _____________, 20__. This Award shall expire on the Participant's termination of employment with respect to all of the Shares of Restricted Stock as to which restrictions have not lapsed as provided in Section 5, and the Participant shall forfeit any right to such Shares. THE LACLEDE GROUP, INC. Equity Incentive Plan Restricted Stock Award Agreement ============================================================================ 5. LAPSE OF RESTRICTIONS. The restrictions imposed by Section 4 shall lapse and all of the Shares of Restricted Stock shall vest in Participant on ____________, 20__. For purposes of this Section 5, a leave of absence granted to Participant with the approval of the Board of Directors shall not be deemed to cause Participant to cease to be continuously employed by the Company. Notwithstanding the foregoing, unless the Administrator determines otherwise at a later date, if within two years following a Change in Control the Participant's employment is terminated by the Company or its subsidiary without Cause (a "Change in Control Termination"), the restrictions shall lapse on ____________ or at the date of the Change in Control Termination, whichever happens sooner. 6. SHAREHOLDER RIGHTS. Participant shall have all of the rights of a shareholder of the Company with respect to shares of Restricted Stock, including the right to vote and to receive dividends; but shares subject to the restrictions of Section 4 shall not be transferable. 7. HOW SHARES ARE HELD. The Restricted Stock shall be held by a Company custodian until such restrictions have lapsed. The Company shall cause certificates without a restrictive legend to be issued for any Restricted Stock as, and when, such restrictions lapse as provided in Section 5. 8. SHARES NON-TRANSFERABLE. Shares of Restricted Stock awarded hereunder shall not be transferable by Participant and may not be assigned, pledged, or otherwise encumbered until after the restrictions have lapsed as provided in Section 5. 9. RIGHT TO CONTINUED EMPLOYMENT. Nothing in this Agreement shall confer on any individual any right to continue in the employ of the Company or a subsidiary or interfere with the right of the Company or a subsidiary to terminate the Participant's employment at any time. 10. TAX WITHHOLDING AND TAX ELECTION. The Company shall not be obligated to transfer any shares of Restricted Stock until Participant pays to the Company in cash, or any other form of property, including Company common stock, acceptable to the Company, the amount required to be withheld from the wages of Participant with respect to such shares. The Company also shall withhold from dividends any amount required to be withheld by any governmental entity. The Participant may, but is not required to, elect to apply the rules of Section 83(b) of the Internal Revenue Code, as amended ("Code") to the issuance of the shares of Restricted Stock that is subject to a substantial risk of forfeiture. If the Participant makes an affirmative election under Section 83(b) of the Code, the Participant must file such election within 30 days after the date of this Agreement with the Internal Revenue Service and notify the Company within 30 days after making such election. - 2 - THE LACLEDE GROUP, INC. Equity Incentive Plan Restricted Stock Award Agreement ============================================================================ 11. NON-COMPETITION AND CONFIDENTIAL INFORMATION. Notwithstanding any provision of this Agreement to the contrary, all proceeds realized, or that could be realized, on the sale of the Shares by the Participant as a result of this Award, shall be payable to the Company by the Participant if, during the period beginning on the date hereof and ending eighteen months following the date the Participant's employment with the Company and its subsidiaries terminates, the Participant: (1) discloses Confidential Information, as defined below, to any person not employed by the Company or not engaged to render services to the Company; or (2) Engages in Competition, as defined below. For purposes of this Section 11, "Confidential Information" means any confidential information obtained by the Participant while in the employ of the Company or a subsidiary, including, without limitation, any of the Company's or subsidiary's inventions, processes, methods of distribution, customers or trade secrets; provided, however, that this provision shall not preclude the Participant from use or disclosure of information known generally to the public or of information not considered confidential by persons engaged in the business conducted by the Company or subsidiary or from disclosure required by law or court order. "Engage in Competition" means the Participant's direct or indirect hire, solicit to hire, or attempt to induce any employee of the Company or a subsidiary (who is an employee of the Company or a subsidiary as of the time of such hire or solicitation or attempt to hire) or any former employee of the Company or a subsidiary (who was employed by the Company or a subsidiary within the 12-month period immediately preceding the date of such hire or solicitation or attempt to hire) to leave the employment of the Company or a subsidiary. 12. INTEGRATION. This Agreement, and the other documents referred to herein or delivered pursuant hereto which form a part hereof, contain the entire understanding of the parties with respect to its subject matter. There are no restrictions, agreements, promises, representations, warranties, covenants or undertakings with respect to the subject matter hereof other than those expressly set forth herein. This Agreement, including without limitation the Plan, supersedes all prior agreements and understandings between the parties with respect to its subject matter and may only be amended by mutual written consent of the parties. 13. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Missouri, without regard to the provisions governing conflict of laws. - 3 - THE LACLEDE GROUP, INC. Equity Incentive Plan Restricted Stock Award Agreement ============================================================================ 14. PARTICIPANT ACKNOWLEDGMENT. By accepting this Award, the Participant acknowledges receipt of a copy of the Plan, and acknowledges that all decisions, determinations and interpretations of the Administrator in respect of the Plan and this Agreement shall be final and conclusive. In addition, the Participant acknowledges that violation by the Participant of Section 11 of this Agreement will obligate the Participant to pay to the Company all proceeds realized or that could be realized by the Participant as a result of this Award. THE LACLEDE GROUP, INC. By: _________________________________________ Title: _________________________________________ --------------------------------------------- Participant --------------------------------------------- Printed Name - 4 - EX-12 3 ex12.txt Exhibit 12 THE LACLEDE GROUP, INC. AND SUBSIDIARY COMPANIES SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES -----------------------------------------------------------------
Twelve Months Ended -------------------------------------------------------------------------------- March 31, September 30, ------------ ---------------------------------------------------------------- (Thousands of Dollars) 2004 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- ---- Income before interest charges and income taxes $80,797 $80,185 $60,440 $73,742 $64,078 $61,016 Add: One third of applicable rentals charged to operating expense (which approximates the interest factor) 2,160 2,873 2,662 313 310 301 -------------------------------------------------------------------------------- Total Earnings $82,957 $83,058 $63,102 $74,055 $64,388 $61,317 ================================================================================ Interest on long-term debt - Laclede Gas $19,388 $20,169 $20,820 $18,372 $15,164 $13,966 Other interest 7,221 6,717 4,989 10,067 8,844 6,627 Add: One third of applicable rentals charged to operating expense (which approximates the interest factor) 2,270 2,873 2,662 313 310 301 -------------------------------------------------------------------------------- Total Fixed Charges $28,879 $29,759 $28,471 $28,752 $24,318 $20,894 ================================================================================ Ratio of Earnings to Fixed Charges 2.87 2.79 2.22 2.58 2.65 2.93
LACLEDE GAS COMPANY SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES -----------------------------------------------------------------
Twelve Months Ended -------------------------------------------------------------------------------- March 31, September 30, ------------ ---------------------------------------------------------------- (Thousands of Dollars) 2004 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- ---- Income before interest charges and income taxes $76,148 $76,274 $56,154 $73,742 $64,078 $61,016 Add: One third of applicable rentals charged to operating expense (which approximates the interest factor) 392 457 315 313 310 301 -------------------------------------------------------------------------------- Total Earnings $76,540 $76,731 $56,469 $74,055 $64,388 $61,317 ================================================================================ Interest on long-term debt $19,388 $20,169 $20,820 $18,372 $15,164 $13,966 Other interest 3,753 3,752 4,285 10,067 8,844 6,627 Add: One third of applicable rentals charged to operating expense (which approximates the interest factor) 502 457 315 313 310 301 -------------------------------------------------------------------------------- Total Fixed Charges $23,643 $24,378 $25,420 $28,752 $24,318 $20,894 ================================================================================ Ratio of Earnings to Fixed Charges 3.24 3.15 2.22 2.58 2.65 2.93
EX-31 4 ex31.txt Exhibit 31 CERTIFICATION - ------------- I, Douglas H. Yaeger, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Laclede Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) THIS PARAGRAPH INTENTIONALLY OMITTED AS PERMITTED IN RELEASE NO. 34-47986. c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 27, 2004 Signature: /s/ Douglas H. Yaeger ---------------- ------------------------ Douglas H. Yaeger Chairman of the Board, President and Chief Executive Officer CERTIFICATION - ------------- I, Barry C. Cooper, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Laclede Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) THIS PARAGRAPH INTENTIONALLY OMITTED AS PERMITTED IN RELEASE NO. 34-47986. c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 27, 2004 Signature: /s/ Barry C. Cooper ---------------- --------------------- Barry C. Cooper Chief Financial Officer CERTIFICATION - ------------- I, Douglas H. Yaeger, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Laclede Gas Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) THIS PARAGRAPH INTENTIONALLY OMITTED AS PERMITTED IN RELEASE NO. 34-47986. c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 27, 2004 Signature: /s/ Douglas H. Yaeger ---------------- ----------------------- Douglas H. Yaeger Chairman of the Board, President and Chief Executive Officer CERTIFICATION - ------------- I, Barry C. Cooper, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Laclede Gas Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) THIS PARAGRAPH INTENTIONALLY OMITTED AS PERMITTED IN RELEASE NO. 34-47986. c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 27, 2004 Signature: /s/ Barry C. Cooper ---------------- --------------------- Barry C. Cooper Chief Financial Officer EX-32 5 ex32.txt Exhibit 32 Section 1350 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Douglas H. Yaeger, Chairman of the Board, President and Chief Executive Officer of The Laclede Group, Inc., hereby certify that (a) To the best of my knowledge, the accompanying report on Form 10-Q for the quarter ended March 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (b) To the best of my knowledge, the information contained in the accompanying report on Form 10-Q for the quarter ended March 31, 2004 fairly presents, in all material respects, the financial condition and results of operations of The Laclede Group, Inc. Date: April 27, 2004 ------------------ /s/ Douglas H. Yaeger --------------------- Douglas H. Yaeger Chairman of the Board, President and Chief Executive Officer Section 1350 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Barry C. Cooper, Chief Financial Officer of The Laclede Group, Inc. hereby certify that (a) To the best of my knowledge, the accompanying report on Form 10-Q for the quarter ended March 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (b) To the best of my knowledge, the information contained in the accompanying report on Form 10-Q for the quarter ended March 31, 2004 fairly presents, in all material respects, the financial condition and results of operations of The Laclede Group, Inc. Date: April 27, 2004 ------------------ /s/ Barry C. Cooper ------------------- Barry C. Cooper Chief Financial Officer Section 1350 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Douglas H. Yaeger, Chairman of the Board, President and Chief Executive Officer of Laclede Gas Company, hereby certify that (a) To the best of my knowledge, the accompanying report on Form 10-Q for the quarter ended March 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (b) To the best of my knowledge, the information contained in the accompanying report on Form 10-Q for the quarter ended March 31, 2004 fairly presents, in all material respects, the financial condition and results of operations of Laclede Gas Company. Date: April 27, 2004 ------------------ /s/ Douglas H. Yaeger --------------------- Douglas H. Yaeger Chairman of the Board, President and Chief Executive Officer Section 1350 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Barry C. Cooper, Chief Financial Officer of Laclede Gas Company, hereby certify that (a) To the best of my knowledge, the accompanying report on Form 10-Q for the quarter ended March 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (b) To the best of my knowledge, the information contained in the accompanying report on Form 10-Q for the quarter ended March 31, 2004 fairly presents, in all material respects, the financial condition and results of operations of Laclede Gas Company. Date: April 27, 2004 ------------------ /s/ Barry C. Cooper ------------------- Barry C. Cooper Chief Financial Officer EX-99.1 6 exh99p1.txt Exhibit 99.1 LACLEDE GAS COMPANY STATEMENTS OF INCOME (UNAUDITED) (Thousands)
Three Months Ended Six Months Ended March 31, March 31, ------------------------- -------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Operating Revenues: Utility $396,898 $357,456 $658,248 $574,621 Other 628 653 1,260 1,303 ------------------------- -------------------------- Total Operating Revenues 397,526 358,109 659,508 575,924 ------------------------- -------------------------- Operating Expenses: Utility Natural and propane gas 288,284 247,918 463,559 381,761 Other operation expenses 32,808 29,663 62,291 60,987 Maintenance 4,641 4,950 9,070 9,394 Depreciation and amortization 5,711 5,596 11,369 11,089 Taxes, other than income taxes 24,897 22,579 39,729 36,707 ------------------------- -------------------------- Total utility operating expenses 356,341 310,706 586,018 499,938 Other 619 638 1,224 1,273 ------------------------- -------------------------- Total Operating Expenses 356,960 311,344 587,242 501,211 ------------------------- -------------------------- Operating Income 40,566 46,765 72,266 74,713 ------------------------- -------------------------- Other Income and (Income Deductions) - Net 1,857 (87) 3,277 956 ------------------------- -------------------------- Interest Charges: Interest on long-term debt 4,815 5,205 9,629 10,410 Other interest charges 987 944 2,069 2,068 ------------------------- -------------------------- Total Interest Charges 5,802 6,149 11,698 12,478 ------------------------- -------------------------- Income Before Income Taxes 36,621 40,529 63,845 63,191 Income Tax Expense 13,241 15,631 23,109 23,695 ------------------------- -------------------------- Net Income 23,380 24,898 40,736 39,496 Dividends on Redeemable Preferred Stock 15 15 31 31 ------------------------- -------------------------- Earnings Applicable to Common Stock $ 23,365 $ 24,883 $ 40,705 $ 39,465 ========================= ========================== See notes to financial statements.
1 LACLEDE GAS COMPANY BALANCE SHEETS (UNAUDITED)
Mar. 31, Sept. 30, Mar. 31, 2004 2003 2003 ---- ---- ---- (Thousands) ASSETS Utility Plant $1,050,823 $1,030,665 $1,007,958 Less: Accumulated depreciation and amortization 416,767 409,418 402,357 --------------- -------------- --------------- Net Utility Plant 634,056 621,247 605,601 --------------- -------------- --------------- Other Property and Investments 29,190 27,898 27,483 --------------- -------------- --------------- Current Assets: Cash and cash equivalents 7,997 2,907 11,744 Accounts receivable: Gas customers - billed and unbilled 127,261 70,217 115,568 Associated companies 2,679 8,957 8,424 Other 35,466 9,196 16,815 Allowances for doubtful accounts (7,775) (6,839) (5,309) Delayed customer billings 36,141 - 33,682 Natural gas stored underground at LIFO cost 29,417 117,182 24,463 Propane gas at FIFO cost 12,914 17,132 10,128 Materials, supplies, and merchandise at avg. cost 4,560 3,995 4,225 Derivative instrument assets 7,098 10,838 5,454 Deferred income taxes 5,694 7,631 8,417 Prepayments and other 3,845 4,881 7,034 --------------- -------------- --------------- Total Current Assets 265,297 246,097 240,645 --------------- -------------- --------------- Deferred Charges: Prepaid pension cost 104,790 109,445 111,879 Regulatory assets 98,313 103,807 74,929 Other 7,643 4,515 3,852 --------------- -------------- --------------- Total Deferred Charges 210,746 217,767 190,660 --------------- -------------- --------------- Total Assets $1,139,289 $1,113,009 $1,064,389 =============== ============== =============== See notes to financial statements.
2 LACLEDE GAS COMPANY BALANCE SHEETS (Continued) (UNAUDITED)
Mar. 31, Sept. 30, Mar. 31, 2004 2003 2003 ---- ---- ---- (Thousands, except share amounts) CAPITALIZATION AND LIABILITIES Capitalization: Common stock and Paid-in capital (100 shares issued and outstanding) $ 89,529 $ 82,579 $ 82,579 Retained earnings 217,285 189,507 207,466 Accumulated other comprehensive loss (582) (582) (339) -------------- -------------- --------------- Total common stock equity 306,232 271,504 289,706 Redeemable preferred stock (less current sinking fund requirements) 1,108 1,258 1,258 Long-term debt (less current portion) 234,661 259,625 259,588 -------------- -------------- --------------- Total Capitalization 542,001 532,387 550,552 -------------- -------------- --------------- Current Liabilities: Notes payable 191,415 218,200 122,390 Notes payable - associated companies - 11,540 - Accounts payable 55,906 41,938 73,313 Accounts payable - associated companies 2,891 10,303 5,061 Advance customer billings - 15,361 - Current portion of long-term debt and preferred stock 25,150 - 25,000 Taxes accrued 31,193 16,287 30,686 Unamortized purchased gas adjustment 1,458 5,865 9,524 Other 39,286 34,344 34,729 -------------- -------------- --------------- Total Current Liabilities 347,299 353,838 300,703 -------------- -------------- --------------- Deferred Credits and Other Liabilities: Deferred income taxes 184,335 177,957 158,516 Unamortized investment tax credits 5,163 5,316 5,472 Pension and postretirement benefit costs 24,635 20,973 18,511 Regulatory liabilities 13,878 582 9,830 Other 21,978 21,956 20,805 -------------- -------------- --------------- Total Deferred Credits and Other Liabilities 249,989 226,784 213,134 -------------- -------------- --------------- Total Capitalization and Liabilities $1,139,289 $1,113,009 $1,064,389 ============== ============== =============== See notes to financial statements.
3 LACLEDE GAS COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended March 31, -------------------------------- 2004 2003 ---- ---- (Thousands) Operating Activities: Net Income $ 40,736 $ 39,496 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 11,369 11,095 Deferred income taxes and investment tax credits 2,528 2,707 Other - net 215 305 Changes in assets and liabilities: Accounts receivable - net (76,100) (73,958) Unamortized purchased gas adjustments (4,407) (13,452) Deferred purchased gas costs 26,911 117 Advance customer billings - net (51,502) (58,514) Accounts payable 6,556 47,536 Taxes accrued 14,906 21,191 Natural gas stored underground 87,765 52,624 Other assets and liabilities 15,968 13,547 -------------- ------------- Net cash provided by operating activities $ 74,945 $ 42,694 -------------- ------------- Investing Activities: Construction expenditures (24,719) (22,714) Employee benefit trusts (1,702) (507) Other investments 759 164 -------------- ------------- Net cash used in investing activities $(25,662) $(23,057) -------------- ------------- Financing Activities: Issuance (Repayment) of short-term debt - net (38,325) 3,520 Dividends paid (12,818) (12,722) Paid-in capital contribution from Laclede Group 6,950 - Preferred stock reacquired and other - (8) -------------- ------------- Net cash provided by financing activities $(44,193) $ (9,210) -------------- ------------- Net Increase in Cash and Cash Equivalents $ 5,090 $ 10,427 Cash and Cash Equivalents at Beginning of Period 2,907 1,317 -------------- ------------- Cash and Cash Equivalents at End of Period $ 7,997 $ 11,744 ============== ============= Supplemental Disclosure of Cash Paid (Refunded) During the Period for: Interest $ 11,431 $ 11,369 Income taxes 2,077 (4,303) See notes to financial statements.
4 LACLEDE GAS COMPANY NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These notes are an integral part of the accompanying financial statements of Laclede Gas Company (Laclede Gas or the Utility). In the opinion of Laclede Gas, this interim report includes all adjustments (consisting of only normal recurring accruals) necessary for the fair presentation of the results of operations for the periods presented. Certain prior-period amounts have been reclassified to conform to current-period presentation. This Form 10-Q should be read in conjunction with the Notes to Financial Statements contained in Laclede Gas' Fiscal Year 2003 Form 10-K. Laclede Gas is a regulated natural gas distribution utility having a material seasonal cycle. As a result, these interim statements of income for Laclede Gas are not necessarily indicative of annual results or representative of succeeding quarters of the fiscal year. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the November through April period, which generally corresponds with the heating season. The Utility typically experiences losses during the non-heating season. REVENUE RECOGNITION - Laclede Gas reads meters and bills its customers on a monthly cycle billing basis. The Utility records its regulated gas distribution revenues from gas sales and transportation service on an accrual basis that includes estimated amounts for gas delivered, but not yet billed. The accruals for unbilled revenues are reversed in the subsequent accounting period when meters are actually read and customers are billed. The amount of accrued unbilled revenue at March 31, 2004 and 2003, for the Utility, was $22.3 million and $13.1 million, respectively. After accrual of related gas cost expense, the accrued net pre-tax revenues at March 31, 2004 and 2003 were $6.9 million and $8.1 million, respectively. The amount of accrued unbilled revenue at September 30, 2003 was $8.9 million. BASIS OF CONSOLIDATION - In compliance with generally accepted accounting principles, transactions between Laclede Gas and its affiliates as well as intercompany balances on Laclede Gas' balance sheet have not been eliminated from the Laclede Gas financial statements. Laclede Gas provides administrative and general support to affiliates. All such costs, which are not material, are billed to the appropriate affiliates and are reflected in accounts receivable on Laclede Gas' Balance Sheet. Laclede Gas may also, on occasion, borrow funds from, or lend funds to, affiliated companies. At March 31, 2004, the Laclede Gas Balance Sheet reflected a total of $2.7 million of intercompany receivables and $2.9 million of intercompany payables. NEW ACCOUNTING STANDARDS - Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised December 2003) (FIN 46R), "Consolidation of Variable Interest Entities," addresses consolidation of business enterprises of variable interest entities. Public entities shall apply this Interpretation to their interests in special purpose entities as of the first interim period ending after December 15, 2003. Application by public entities for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004. There was no effect on the financial position or results of operations of Laclede Gas upon adoption. In December 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 132 (revised 2003) (SFAS No. 132(R)), "Employers' Disclosures about Pensions and Other Postretirement Benefits." The provisions of this Statement do not change the measurement and recognition provisions of SFAS No. 87, "Employers' Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132(R) replaces SFAS No. 132, and requires certain additional disclosures that became effective for fiscal years ending after and interim periods beginning after December 15, 2003. The required disclosures are included in Note 2 to the Financial Statements on page 6 of this report. 5 2. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS Laclede Gas has non-contributory defined benefit, trusteed forms of pension plans covering substantially all employees over the age of twenty-one. Benefits are based on years of service and the employee's compensation during the last three years of employment. The funding policy of Laclede Gas is to contribute an amount not less than the minimum required by government funding standards, nor more than the maximum deductible amount for federal income tax purposes. The Utility has contributed $.2 million to the pension funds during the six months ended March 31, 2004, and expects to contribute a total of $.3 million during fiscal year 2004. Plan assets consist primarily of corporate and U.S. government obligations and indexed equity funds. Pension cost amounted to $1.1 million for the quarter ended March 31, 2004 and $.3 million for the same quarter last year. Pension costs for the six months ended March 31, 2004 were $2.2 million compared with $.6 million for the same period last year. These costs include amounts capitalized with construction activities. The net periodic pension costs include the following components:
Three Months Ended Six Months Ended March 31, March 31, ----------------------- ----------------------- (Thousands) 2004 2003 2004 2003 ---- ---- ---- ---- Service cost - benefits earned during the period $ 2,777 $ 2,265 $ 5,554 $ 4,530 Interest cost on projected benefit obligation 4,058 4,150 8,115 8,300 Expected return on plan assets (5,625) (5,650) (11,249) (11,300) Amortization of transition obligation - (59) - (118) Amortization of prior service cost 331 348 662 696 Amortization of actuarial loss 951 334 1,901 669 Regulatory adjustment (1,368) (1,108) (2,737) (2,216) ----------------------- ----------------------- Net pension cost $ 1,124 $ 280 $ 2,246 $ 561 ======================= =======================
Pursuant to the Missouri Public Service Commission's (MoPSC or Commission) order in Laclede Gas' 2002 rate case, the return on plan assets is based on market-related value of plan assets implemented prospectively over a four-year period. Unrecognized gains or losses are amortized only to the extent that such gain or loss exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. Also in the 2002 rate case, the Commission ordered that the recovery in rates for the Utility's qualified pension plans is based on the ERISA minimum contribution of zero effective October 1, 2002, and on the ERISA minimum contribution of zero plus $3.4 million annually effective July 1, 2003. The difference between this amount on a pro-rata basis and pension expense as calculated pursuant to the above and included in the Statement of Consolidated Income and Statement of Consolidated Comprehensive Income is deferred as a regulatory asset or liability. Pursuant to the provisions of the Laclede Gas pension plans, pension obligations may be satisfied by lump sum cash payments. Pursuant to MoPSC order, lump sum payments are recognized as settlements (which can result in gains or losses) only if the total of such payments exceeds 100% of the sum of service and interest costs. No lump sum payments were recognized as settlements during the six months ended March 31, 2004 or the six months ended March 31, 2003. Laclede Gas also provides certain life insurance benefits at retirement. Medical insurance is available after early retirement until age 65. Missouri state law provides for the recovery in rates of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (OPEB), accrued costs provided that such costs are funded through an independent, external funding mechanism. Laclede Gas established the Voluntary Employees' Beneficiary Association (VEBA) and Rabbi trusts as its external funding mechanisms. VEBA and Rabbi trusts assets consist primarily of money market securities and mutual funds invested in stocks and bonds. Laclede Gas has contributed $.1 million to the plans during the six months ended March 31, 2004, and expects to 6 contribute a total of $7.6 million during fiscal 2004. The unrecognized transition obligation is being amortized over 20 years. Postretirement benefit costs were $2.0 million in the quarter ended March 31, 2004 compared with $1.9 million in the quarter ended March 31, 2003. Postretirement benefit costs were $4.0 million for the six months ended March 31, 2004 compared with $3.9 million for the six months ended March 31, 2003. These costs include amounts capitalized with construction activities. Net periodic postretirement benefit costs consisted of the following components:
Three Months Ended Six Months Ended March 31, March 31, ------------------------ ----------------------- (Thousands) 2004 2003 2004 2003 ---- ---- ---- ---- Service cost - benefits earned during the period $ 794 $ 689 $1,587 $1,379 Interest cost on accumulated postretirement benefit obligation 801 915 1,601 1,830 Expected return on plan assets (209) (234) (418) (469) Amortization of transition obligation 265 317 530 634 Amortization of prior service cost (8) 82 (16) 164 Amortization of actuarial loss 174 104 349 208 Regulatory adjustment 164 75 329 151 ------------------------ ----------------------- Net postretirement benefit cost $1,981 $1,948 $3,962 $3,897 ======================== =======================
Pursuant to the Commission's order in the Utility's 2002 rate case, the return on plan assets is based on market related value of plan assets implemented prospectively over a four-year period. Unrecognized gains and losses are amortized only to the extent that such gain or loss exceeds 10% of the greater of the accumulated postretirement benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. Also in the 2002 rate case, the Commission ordered that the recovery in rates for the postretirement benefit costs be based on the accounting methodology as ordered in the 1999 rate case. The difference between this amount and postretirement benefit expense as calculated pursuant to the above is deferred as a regulatory asset or liability. 3. INCOME TAXES Net provisions for income taxes were as follows during the periods set forth below:
Three Months Ended Six Months Ended March 31, March 31, ----------------------- ----------------------- (Thousands) 2004 2003 2004 2003 ---- ---- ---- ---- Federal Current $10,561 $13,215 $17,689 $17,980 Deferred 863 102 2,205 2,243 State and Local Current 1,698 2,249 2,892 3,008 Deferred 119 65 323 464 ----------------------- ----------------------- Total $13,241 $15,631 $23,109 $23,695 ======================= =======================
7 4. OTHER INCOME AND INCOME DEDUCTIONS - NET
Three Months Ended Six Months Ended March 31, March 31, -------------------------- -------------------------- (Thousands) 2004 2003 2004 2003 ---- ---- ---- ---- Investment gains $1,947 $ - $1,947 $ - Allowance for funds used during construction (29) (26) (61) (51) Other income 262 270 778 428 Other income deductions (323) (331) 613 579 -------------------------- -------------------------- Other income and income deductions - net $1,857 $ (87) $3,277 $956 ========================== ==========================
Laclede Gas recorded the receipt of proceeds totaling $1.9 million during the quarter ended March 31, 2004 related to its interest, as a policyholder, in the sale of a mutual insurance company. This represents an initial distribution relating to certain policies held by the Utility. Subsequent distributions, if any, are not expected to have a material impact on the consolidated financial position or results of operations of the Utility. 5. INFORMATION BY OPERATING SEGMENT The Regulated Gas Distribution segment consists of the regulated operations of Laclede Gas. The Non-Regulated Other segment includes the retail sale of gas appliances. There are no material intersegment revenues.
Regulated Gas Non-Regulated (Thousands) Distribution Other Eliminations Consolidated ------------------------------------------------------------------------------------------ Three Months Ended March 31, 2004 -------------- Operating revenues $ 396,898 $ 628 $ - $ 397,526 Net income 23,374 6 - 23,380 Total assets 1,137,824 1,465 - 1,139,289 Six Months Ended March 31, 2004 -------------- Operating revenues $ 658,248 $1,260 $ - $ 659,508 Net income 40,714 22 - 40,736 Total assets 1,137,824 1,465 - 1,139,289 Three Months Ended March 31, 2003 -------------- Operating revenues $ 357,456 $ 653 $ - $ 358,109 Net income 24,889 9 - 24,898 Total assets 1,062,799 1,590 - 1,064,389 Six Months Ended March 31, 2003 -------------- Operating revenues $ 574,621 $1,303 $ - $ 575,924 Net income 39,478 18 - 39,496 Total assets 1,062,799 1,590 - 1,064,389
8 6. COMMITMENTS AND CONTINGENCIES Laclede Gas is subject to various environmental laws and regulations that, to date, have not materially affected its financial position and results of operations. As these laws, regulations, and their interpretation evolve, however, additional costs may be incurred. With regard to a former manufactured gas plant site located in Shrewsbury, Missouri, Laclede Gas and state and federal environmental regulators have agreed upon certain actions and those actions are essentially complete. Laclede Gas currently estimates the overall costs of these actions will be approximately $2.4 million. As of March 31, 2004, Laclede Gas has paid or reserved for these actions. If regulators require additional actions or assert additional claims, Laclede Gas will incur additional costs. Laclede Gas enrolled a second former manufactured gas plant site into the Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to minimize the scope and cost of site cleanup while maximizing possibilities for site development. This site is located in, and is presently owned by, the City of St. Louis, Missouri. The City of St. Louis has separately authorized a developer to prepare both a Remedial Action Plan (RAP), for submission to the VCP, and a site development plan. Laclede Gas is engaged in ongoing meetings with the developer to determine what role, if any, it might play in these efforts. Laclede Gas continues to evaluate other options as well, including, but not limited to, the submission of its own RAP to the VCP. Laclede Gas currently estimates that the cost of site investigations, agency oversight and related legal and engineering consulting may be approximately $650,000. Currently, Laclede Gas has paid or reserved for these actions. Laclede Gas has requested that other former site owners and operators share in these costs and one party has agreed to participate and has reimbursed Laclede Gas to date for $173,000. Laclede Gas anticipates additional reimbursement from this party. Laclede Gas plans to seek proportionate reimbursement of all costs relative to this site from other potentially responsible parties if practicable. Laclede Gas has been advised that a third former manufactured gas plant site may require remediation. Laclede Gas does not, and for many years has not, owned this site. At this time it is not clear whether Laclede Gas will incur any costs in connection with environmental investigations or remediation at the site, and if it does incur any costs, what the amount of those costs would be. Costs incurred are charged to expense or capitalized in accordance with generally accepted accounting principles. A predetermined level of expense is recovered through Laclede Gas' rates. While the scope of future costs relative to the Shrewsbury site will not be significant, the scope of costs relative to the other sites is unknown and may be material. Laclede Gas has notified its insurers that it seeks reimbursement of its costs at these three manufactured gas plant sites. In response, the majority of insurers have reserved their rights. While some of the insurers have denied coverage, Laclede Gas continues to seek reimbursement from them. With regard to the Shrewsbury site, denials of coverage are not expected to have any material impact on the financial position and results of operations of Laclede Gas. With regard to the other two sites, since the scope of costs are unknown and may be significant, denials of coverage may have a material impact on the financial position and results of operations of Laclede Gas. Such costs, if incurred, have typically been subject to recovery in rates. Laclede Gas is involved in other litigation, claims and investigations arising in the normal course of business. While the results of such litigation cannot be predicted with certainty, management, after discussion with counsel, believes that the final outcome will not have a material adverse effect on the financial position or results of operations of Laclede Gas. On June 28, 2002, the Staff of the MoPSC filed its recommendation in a proceeding established to review Laclede Gas' gas costs for fiscal 2001. In its recommendation, the Staff proposed to disallow approximately $4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based Price Stabilization Program. This Program was discontinued at the end of the 2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in proceedings before the MoPSC, including a formal hearing that was held on this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved by Laclede Gas, and directed Laclede Gas to flow through such amount to its customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas appealed the MoPSC's decision to the Cole County Circuit Court. On October 10, 2003, the Circuit Court issued an order staying the MoPSC's decision requiring Laclede Gas to flow through the $4.9 million to customers. Pursuant to the Stay Order, Laclede Gas is paying the $4.9 million into the Court's registry pending a final judicial determination of Laclede Gas' entitlement to such amounts. On November 5, 2003, the Circuit Court of Cole County, Missouri, issued its Order and Judgment vacating and setting aside the Commission's decision on the grounds that it was unlawful and not supported by competent and substantial evidence on the record. On December 5, 2003 the MoPSC appealed the Circuit Court's decision to the Missouri Court of Appeals for the Western District. 9 Laclede Gas continues to believe in the merit of its position and intends to vigorously assert its position in the appeal. To the extent that a final decision in the courts results in disallowance of the $4.9 million in pre-tax gains, it could have a material effect on the future financial position and results of operation of Laclede Gas. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations LACLEDE GAS COMPANY - ------------------- This management's discussion analyzes the financial condition and results of operations of Laclede Gas Company (Laclede Gas or the Utility). It includes management's view of factors that affect its business, explanations of past financial results including changes in earnings and costs from the prior year periods, and their effects on overall financial condition and liquidity. Certain matters discussed in this report, excluding historical information, include forward-looking statements. Certain words, such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "seek," and similar words and expressions identify forward-looking statements that involve uncertainties and risks. Future developments may not be in accordance with our expectations or beliefs and the effect of future developments may not be those anticipated. Among the factors that may cause results to differ materially from those contemplated in any forward-looking statement are: o weather conditions and catastrophic events; o economic, competitive, political and regulatory conditions; o legislative, regulatory and judicial mandates and decisions, some of which may be retroactive, including those affecting o allowed rates of return o incentive regulation o industry structure o purchased gas adjustment provisions o rate design structure and implementation o franchise renewals o environmental or safety matters o taxes o accounting standards; o the results of litigation; o retention, ability to attract, ability to collect from and conservation efforts of customers; o capital and energy commodity market conditions including the ability to obtain funds for necessary capital expenditures and the terms and conditions imposed for obtaining sufficient gas supply; and o discovery of material weakness in internal controls; and o employee workforce issues. Readers are urged to consider the risks, uncertainties and other factors that could affect our business as described in this report. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement in light of future events. The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Utility's Financial Statements and the notes thereto. 11 LACLEDE GAS COMPANY RESULTS OF OPERATIONS Laclede Gas Company (Laclede Gas or the Utility) is regulated by the Missouri Public Service Commission (MoPSC) and serves the metropolitan St. Louis area and several other counties in eastern Missouri. Laclede Gas delivers natural gas to retail customers at rates, and in accordance with tariffs, authorized by the MoPSC. The Utility's earnings are primarily generated by the sale of heating energy, which was historically heavily influenced by the weather. As part of the 2002 rate case settlement, the Utility initiated, effective November 9, 2002, an innovative weather mitigation rate design that lessens the impact of weather volatility on Laclede Gas customers during cold winters and is expected to stabilize the Utility's earnings in the future by recovering fixed costs more evenly during the heating season. Mitigating the impact of weather fluctuations on Laclede Gas customers while improving the ability to recover its authorized distribution costs and return has been a fundamental component of the Laclede Gas strategy. The Utility's distribution costs are the essential, primarily fixed expenditures it must incur to operate and maintain a more than 15,000-mile natural gas distribution system and related storage facilities. In fiscal 2003, when the weather mitigation rate design first went into effect, the weather was essentially normal; therefore, its impact was minimal. However, it has shown its value during the first six months of fiscal 2004, as the downward pressure on revenues and earnings has been significantly mitigated despite temperatures that were 14% warmer than normal. In addition, Laclede Gas is working to continually improve its ability to provide reliable natural gas service at a reasonable cost, while maintaining and building a secure and dependable infrastructure. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the November through April period, which generally corresponds with the heating season. The Utility typically experiences losses during the non-heating season. Due to the material seasonal cycle of Laclede Gas, the accompanying interim statements of income for Laclede Gas are not necessarily indicative of annual results or representative of succeeding quarters of the fiscal year. Quarter Ended March 31, 2004 - ---------------------------- Laclede Gas' net income for the quarter ended March 31, 2004 was $23.4 million, compared with $24.9 million reported for the same quarter last year. The year-to-year decrease in net income of $1.5 million was primarily attributable to the following factors, quantified on a pre-tax basis. Utility earnings decreased primarily due to the following factors: o income from off-system sales and capacity release decreased $2.3 million from the quarter ended March 31, 2003, resulting from less favorable market conditions; and, o operating expenses increased, compared with the same quarter last year, primarily attributable to a higher provision for uncollectible accounts and increased pension costs. These factors were largely offset by higher non-operating income recorded this year, resulting from the receipt of proceeds totaling $1.9 million related to the Utility's interest, as a policyholder, in the sale of a mutual insurance company. This represents an initial distribution relating to certain policies held by the Utility. Subsequent distributions, if any, are not expected to have a material impact on the consolidated financial position or results of operations of the Utility. Regulated Operating Revenues and Operating Expenses Laclede Gas passes on to Utility customers (subject to prudence review) increases and decreases in the wholesale cost of natural gas in accordance with its Purchased Gas Adjustment (PGA) clause. The volatility of the wholesale natural gas market results in fluctuations from period to period in the recorded levels of, among other items, revenues and natural gas cost expense. Nevertheless, increases and decreases in the cost of gas associated with system gas sales volumes have no direct effect on net revenues and net income. 12 Regulated operating revenues for the quarter ended March 31, 2004 were $396.9 million, or $39.4 million greater than the same period last year. The increase was primarily attributable to higher PGA rates totaling approximately $54.7 million and increased off-system sales revenues totaling $4.2 million. Regulated operating revenues were partially offset by lower system gas sales levels resulting from warmer weather and other variations totaling $19.5 million. Temperatures were 8% warmer than normal and 10% warmer than the same quarter last year. System therms sold and transported decreased by 36.0 million therms, or 7.6%, below the quarter ended March 31, 2003. Regulated operating expenses for the quarter ended March 31, 2004 increased $45.6 million from the same quarter last year. Natural and propane gas expense increased $40.4 million above last year's level primarily attributable to higher rates charged by our suppliers and increased off-system gas expense, partially offset by lower volumes purchased for sendout. Other operation and maintenance expenses increased $2.8 million, or 8.2%, primarily due to a higher provision for uncollectible accounts, increased pension costs, and higher wage rates. Depreciation and amortization expense increased $.1 million primarily due to increased depreciable property. Taxes, other than income, increased $2.3 million, or 10.3%, primarily due to higher gross receipts taxes (attributable to the increased revenues). Other Income and (Income Deductions) - Net The $1.9 million increase in other income and income deductions - net was primarily attributable to the Utility's recognition during the quarter ended March 31, 2004 of the receipt of proceeds totaling $1.9 million related to its interest, as a policyholder, in the sale of a mutual insurance company. This represents an initial distribution relating to certain policies held by the Utility. Subsequent distributions, if any, are not expected to have a material impact on the consolidated financial position or results of operations of the Utility. Interest Charges The $.3 million decrease in interest charges was primarily due to lower interest on long-term debt due to the May 2003 maturity of $25 million of 6 1/4% First Mortgage Bonds. Six Months Ended March 31, 2004 - ------------------------------- Laclede Gas' net income for the six months ended March 31, 2004 was $40.7 million, compared with $39.5 million reported for the same period last year. The year-to-year improvement in net income of $1.2 million was primarily attributable to the following factors, quantified on a pre-tax basis. Utility earnings increased primarily due to the following factors: o non-operating income recorded this year increased $2.3 million (primarily reflecting the receipt of proceeds discussed above); and, o the fully-implemented general rate increase effective November 9, 2002 totaling $.9 million. These factors were partially offset by: o pension costs that increased $1.4 million over the same period last year; and, o the net effect totaling $1.9 million of lower system gas sales volumes (resulting from temperatures in Laclede Gas' service area that were 12% warmer than normal and 14% warmer than the same period last year) and the beneficial effect this year of the fully-implemented weather mitigation rate design. The magnitude of the effect of lower sales was smaller than would have previously been the case due to the impact of the fully-implemented weather mitigation rate design that produced higher margin revenue for the six months ended March 31, 2004, compared with the same period last year. 13 Regulated Operating Revenues and Operating Expenses Regulated operating revenues for the six months ended March 31, 2004 were $658.2 million, or $83.6 million greater than the same period last year. The increase was primarily attributable to higher PGA rates totaling approximately $96.0 million, increased off-system sales revenues totaling $24.0 million and, to a lesser extent, the effect of the general rate increase totaling $.9 million. These factors were partially offset by lower system gas sales levels resulting from warmer weather and other variations totaling $37.3 million. Temperatures were 12% warmer than normal and 14% warmer than last year. System therms sold and transported decreased by 73.3 million therms, or 9.1%, below the six months ended March 31, 2003. Regulated operating expenses for the six months ended March 31, 2004 increased $86.1 million from the same period last year. Natural and propane gas expense increased $81.8 million above last year's level primarily attributable to higher rates charged by our suppliers and increased off-system gas expense, partially offset by lower volumes purchased for sendout. Other operation and maintenance expenses increased $1.0 million, or 1.4%, primarily due to increased pension costs and higher wage rates, partially offset by lower group insurance charges and reduced charges to maintenance expense. Depreciation and amortization expense increased $.3 million primarily due to increased depreciable property. Taxes, other than income, increased $3.0 million, or 8.2%, primarily due to higher gross receipts taxes (attributable to the increased revenues). Other Income and (Income Deductions) - Net The $2.3 million increase in other income and income deductions - net was primarily attributable to the Utility's recognition this year of the receipt of proceeds totaling $1.9 million related to its interest, as a policyholder, in the sale of a mutual insurance company. This represents an initial distribution relating to certain policies held by the Utility. Subsequent distributions, if any, are not expected to have a material impact on the consolidated financial position or results of operations of the Utility. Interest Charges The $.8 million decrease in interest charges was primarily due to lower interest on long-term debt due to the May 2003 maturity of $25 million of 6 1/4% First Mortgage Bonds. Regulatory Matters - ------------------ Laclede Gas previously appealed the MoPSC's decision in its 1999 rate case relative to the calculation of its depreciation rates. The Circuit Court remanded the decision to the MoPSC based on inadequate findings of fact. The MoPSC upheld its previous order and Laclede Gas appealed this second order to the Circuit Court. In 2002, the Circuit Court ruled that the MoPSC's second order was lawful and reasonable, and Laclede Gas appealed the Circuit Court's decision to the Missouri Court of Appeals for the Western District. On March 4, 2003 the Court of Appeals issued an opinion remanding the decision to the MoPSC based on the MoPSC's failure to support and explain its decision with adequate findings of fact. In May 2003, the Court of Appeals rejected the MoPSC's request that the Court reconsider its opinion or transfer this matter to the Missouri Supreme Court. On March 29, 2004, the MoPSC Staff and Laclede Gas responded to a MoPSC order directing interested parties to submit new proposed findings of fact on this issue for its consideration. On June 28, 2002, the Staff of the MoPSC filed its recommendation in a proceeding established to review Laclede Gas' gas costs for fiscal 2001. In its recommendation, the Staff proposed to disallow approximately $4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based Price Stabilization Program. This Program was discontinued at the end of the 2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in proceedings before the MoPSC, including a formal hearing that was held on this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved by Laclede Gas, and directed Laclede Gas to flow through such amount to its customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas appealed the MoPSC's decision 14 to the Cole County Circuit Court. On October 10, 2003, the Circuit Court issued an order staying the MoPSC's decision requiring Laclede Gas to flow through the $4.9 million to customers. Pursuant to the Stay Order, Laclede Gas is paying the $4.9 million into the Court's registry pending a final judicial determination of Laclede Gas' entitlement to such amounts. On November 5, 2003, the Circuit Court of Cole County, Missouri, issued its Order and Judgment vacating and setting aside the Commission's decision on the grounds that it was unlawful and not supported by competent and substantial evidence on the record. On December 5, 2003 the MoPSC appealed the Circuit Court's decision to the Missouri Court of Appeals for the Western District. Laclede Gas continues to believe in the merit of its position and intends to vigorously assert its position in the appeal. To the extent that a final decision in the courts results in disallowance of the $4.9 million in pre-tax gains, it could have a material effect on the future financial position and results of operations of Laclede Gas. On March 1, 2004, the Utility made an Infrastructure System Replacement Surcharge (ISRS) filing with the MoPSC that is designed to increase revenues by approximately $3.9 million annually. Such filing was made pursuant to a Missouri law, enacted in 2003, that allows gas utilities to adjust their rates up to twice a year to recover certain facility-related expenditures that are made to comply with state and federal safety requirements or to relocate facilities in connection with public improvement projects. On March 12, 2004, the MoPSC suspended the proposed surcharge until June 29, 2004. Critical Accounting Policies - ---------------------------- Our Discussion and Analysis of our financial condition, results of operations, liquidity and capital resources is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Generally accepted accounting principles require that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following represent the more significant items requiring the use of judgment and estimates in preparing our consolidated financial statements: Allowances for doubtful accounts - Estimates of the collectibility of trade accounts receivable are based on historical trends, age of receivables, economic conditions, credit risk of specific customers, and other factors. Employee benefits and postretirement obligations - Pension and postretirement obligations are calculated by actuarial consultants that utilize several statistical factors and other assumptions related to future events, such as discount rates, returns on plan assets, compensation increases, and mortality rates. The amount of expense recognized by the Utility is dependent on the regulatory treatment provided for such costs. Certain liabilities related to group medical benefits and workers' compensation claims, portions of which are self-insured and/or contain stop/loss coverage with third-party insurers to limit exposure, are established based on historical trends. Laclede Gas accounts for its regulated operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." This statement sets forth the application of accounting principles generally accepted in the United States of America for those companies whose rates are established by or are subject to approval by an independent third-party regulator. The provisions of SFAS No. 71 require, among other things, that financial statements of a regulated enterprise reflect the actions of regulators, where appropriate. These actions may result in the recognition of revenues and expenses in time periods that are different than non-regulated enterprises. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses when those amounts are reflected in rates. Also, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for recovery of costs that are expected to be incurred in the future (regulatory liabilities). Management believes that the current regulatory environment supports the continued use of SFAS No. 71 and that all regulatory assets and liabilities are recoverable or refundable through the regulatory process. We believe the following represent the more significant items recorded through the application of SFAS No. 71: 15 The Utility's Purchased Gas Adjustment Clause (PGA) allows Laclede Gas to flow through to customers, subject to prudence review, the cost of purchased gas supplies, including the costs, cost reductions and related carrying costs associated with the Utility's use of natural gas financial instruments to hedge the purchase price of natural gas. The difference between actual costs incurred and costs recovered through the application of the PGA are recorded as regulatory assets and liabilities that are recovered or refunded in a subsequent period. Laclede Gas records deferred tax liabilities and assets measured by enacted tax rates for the net tax effect of all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes. Changes in enacted tax rates, if any, and certain property basis differences will be reflected by entries to regulatory asset or liability accounts for regulated companies, and will be reflected as income or loss for non-regulated companies. Also, pursuant to the direction of the MoPSC, Laclede Gas' provision for income tax expense for financial reporting purposes reflects an open-ended method of tax depreciation. This method is consistent with the regulatory treatment prescribed by the MoPSC to depreciate the Utility's assets. For further discussion of significant accounting policies, see the Notes to the Financial Statements included in Laclede Gas' 10-K for the fiscal year ended September 30, 2003. Accounting Pronouncements - ------------------------- Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised December 2003) (FIN 46R), "Consolidation of Variable Interest Entities," addresses consolidation of business enterprises of variable interest entities. Public entities shall apply this Interpretation to their interests in special purpose entities as of the first interim period ending after December 15, 2003. Application by public entities for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004. There was no effect on the financial position or results of operations of Laclede Gas upon adoption. In December 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 132 (revised 2003) (SFAS No. 132 (R)), "Employers' Disclosures about Pensions and Other Postretirement Benefits." The provisions of this Statement do not change the measurement and recognition provisions of SFAS No. 87, "Employers' Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132(R) replaces SFAS No. 132, and requires certain additional disclosures that became effective for fiscal years ending after and interim periods beginning after December 15, 2003. The required disclosures are included in Note 2 to the Financial Statements on page 6 of this report. FINANCIAL CONDITION Credit Ratings - -------------- As of March 31, 2004, credit ratings for outstanding securities for Laclede Gas issues were as follows: Type of Facility S&P Moody's Fitch - ----------------------------------------------------------------------------- Laclede Gas First Mortgage Bonds A A3 A+ Laclede Gas Commercial Paper A-1 P-2 The Utility's ratings are investment grade, and the Utility believes that it has adequate access to the financial markets to meet its capital requirements. These ratings remain subject to review and change by the rating agencies. 16 Cash Flows - ---------- Laclede Gas' short-term borrowing requirements typically peak during colder months when Laclede Gas borrows money to cover the gap between when it purchases its natural gas and when its customers pay for that gas. Changes in the wholesale cost of natural gas, variations in the timing of collections of gas cost under the Utility's PGA Clause, the seasonality of accounts receivable balances, and the utilization of storage gas inventories cause short-term cash requirements to vary during the year, and can cause significant variations in the Utility's cash provided by or used in operating activities. Net cash provided by operating activities for the six months ended March 31, 2004 was $74.9 million, a $32.3 million increase, compared with the same period last year. The increase in cash provided by operating activities was primarily attributable to changes in the cost of natural gas in storage and favorable variations in the timing of collections of gas cost under the PGA clause. Cash flows were adversely impacted by variations in accounts payable, primarily associated with the cost of natural gas. Net cash used in investing activities for the six months ended March 31, 2004 was $25.7 million compared with $23.1 million for the six months ended March 31, 2003. Cash used in investing activities primarily reflected Utility construction expenditures in both periods. Net cash used in financing activities was $44.2 for the six months ended March 31, 2004 compared with $9.2 million for the six months ended March 31, 2003. Cash used in financing activities increased $35.0 primarily due to additional repayments of short-term borrowings this year. Liquidity and Capital Resources - ------------------------------- Short-term cash requirements have traditionally been met through the sale of commercial paper supported by lines of credit with banks. Laclede Gas currently has lines of credit in place of up to $265 million, after the expiration of a seasonal line of $25 million on February 13, 2004. Laclede Gas' short-term borrowing during the quarter peaked at $241.8 million. Short-term borrowings outstanding at March 31, 2004 were $191.4 million at a weighted average interest rate of 1.11%. Based on short-term borrowings at March 31, 2004, a change in interest rates of 100 basis points would increase or decrease pre-tax earnings and cash flows by approximately $1.9 million on an annual basis. Most of Laclede Gas' lines of credit include a covenant limiting total debt, including short-term debt, to no more than 70% of total capitalization. On March 31, 2004, total debt was 59% of total capitalization. At March 31, 2004, Laclede Gas had fixed-rate long-term debt totaling $260 million, including a $50 million 6 5/8% issue callable in June 2004 and a current portion of $25 million scheduled to mature in November 2004. While these long-term debt issues are fixed-rate, they are subject to changes in fair value as market interest rates change. However, increases or decreases in fair value would impact earnings and cash flows only if Laclede Gas were to reacquire any of these issues in the open market prior to maturity. Laclede Gas has on file a shelf registration on Form S-3. Of the $350 million of securities originally registered under this S-3, $270 million of debt securities remained registered and unissued as of March 31, 2004. On April 28, 2004, Laclede Gas sold $50 million principal amount of First Mortgage Bonds, 5 1/2% Series due May 1, 2019 and $100 million principal amount of First Mortgage Bonds, 6% Series due May 1, 2034. The net proceeds from such sale, estimated to be $147.9 million, will be used to reduce short-term debt, to redeem at par $50 million principal amount of Laclede Gas' 6 5/8% First Mortgage Bonds on or after June 15, 2004, to pay at maturity $25 milllion principal amount of 8 1/2% First Mortgage Bonds in November 2004 and for general corporate purposes. Laclede Group has on file a shelf registration on Form S-3, which allows for the issuance of equity securities, other than preferred stock, and debt securities. Of the $500 million of securities originally registered under 17 this S-3, $408.6 million remain registered and unissued as of March 31, 2004. Subject to favorable market conditions, the Company contemplates issuing 1.5 million shares of common stock (plus up to an additional 15% of that amount to cover over-allotments) during the quarter ending June 30, 2004. The proceeds from the sale will be utilized to reduce Laclede Gas' short-term borrowings and for general corporate purposes. Utility construction expenditures were $24.7 million for the six months ended March 31, 2004, compared with $22.7 million for the same period last year. Capitalization at March 31, 2004, excluding current obligations of long-term debt and preferred stock, increased $9.6 million since September 30, 2003 and consisted of 56.5% common stock equity, .2% preferred stock and 43.3% long-term debt. The portion of common stock equity increased during the period primarily due to a capital contribution from Laclede Group. It is management's view that the Company has adequate access to capital markets and will have sufficient capital resources, both internal and external, to meet anticipated capital requirements. The seasonal nature of Laclede Gas' sales affects the comparison of certain balance sheet items at March 31, 2004 and at September 30, 2003, such as Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts Payable, Regulatory Assets and Liabilities, and Delayed and Advance Customer Billings. The Balance Sheet at March 31, 2003 is presented to facilitate comparison of these items with the corresponding interim period of the preceding fiscal year. Market Risk - ----------- Laclede Gas adopted a risk management policy that provides for the purchase of natural gas financial instruments with the goal of managing price risk associated with purchasing natural gas on behalf of its customers. This policy prohibits speculation. Costs and cost reductions, including carrying costs, associated with the Utility's use of natural gas financial instruments are allowed to be passed on to the Utility's customers through the operation of its Purchased Gas Adjustment Clause, through which the MoPSC allows the Utility to recover gas supply costs. Accordingly, Laclede Gas does not expect any adverse earnings impact as a result of the use of these financial instruments. At March 31, 2004, the Utility held approximately 11.6 million MmBtu of futures contracts at an average price of $5.33 per MmBtu. Additionally, approximately 5.1 million MmBtu of other price risk mitigation was in place through the use of option-based strategies. These positions have various expiration dates, the longest of which extends through October 2004. Environmental Matters - --------------------- Laclede Gas is subject to various environmental laws and regulations that, to date, have not materially affected its financial position and results of operations. As these laws, regulations, and their interpretation evolve, however, additional costs may be incurred. With regard to a former manufactured gas plant site located in Shrewsbury, Missouri, Laclede Gas and state and federal environmental regulators have agreed upon certain actions and those actions are essentially complete. Laclede Gas currently estimates the overall costs of these actions will be approximately $2.4 million. As of March 31, 2004, Laclede Gas has paid or reserved for these actions. If regulators require additional actions or assert additional claims, Laclede Gas will incur additional costs. Laclede Gas enrolled a second former manufactured gas plant site into the Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to minimize the scope and cost of site cleanup while maximizing possibilities for site development. This site is located in, and is presently owned by, the City of St. Louis, Missouri. The City of St. Louis has separately authorized a developer to prepare both a Remedial Action Plan (RAP), for submission to the VCP, and a site development plan. Laclede Gas is engaged in ongoing meetings with the developer to determine what role, if any, it might play in these efforts. Laclede Gas continues to evaluate other options as well, including, but not limited to, the submission of its own RAP to the VCP. Laclede Gas currently estimates that the cost of site investigations, agency oversight and related legal 18 and engineering consulting may be approximately $650,000. Currently, Laclede Gas has paid or reserved for these actions. Laclede Gas has requested that other former site owners and operators share in these costs and one party has agreed to participate and has reimbursed Laclede Gas to date for $173,000. Laclede Gas anticipates additional reimbursement from this party. Laclede Gas plans to seek proportionate reimbursement of all costs relative to this site from other potentially responsible parties if practicable. Laclede Gas has been advised that a third former manufactured gas plant site may require remediation. Laclede Gas does not, and for many years has not, owned this site. At this time it is not clear whether Laclede Gas will incur any costs in connection with environmental investigations or remediation at the site, and if it does incur any costs, what the amount of those costs would be. Costs incurred are charged to expense or capitalized in accordance with generally accepted accounting principles. A predetermined level of expense is recovered through Laclede Gas' rates. While the scope of future costs relative to the Shrewsbury site will not be significant, the scope of costs relative to the other sites is unknown and may be material. Laclede Gas has notified its insurers that it seeks reimbursement of its costs at these three manufactured gas plant sites. In response, the majority of insurers have reserved their rights. While some of the insurers have denied coverage, Laclede Gas continues to seek reimbursement from them. With regard to the Shrewsbury site, denials of coverage are not expected to have any material impact on the financial position and results of operations of Laclede Gas. With regard to the other two sites, since the scope of costs are unknown and may be significant, denials of coverage may have a material impact on the financial position and results of operations of Laclede Gas. Such costs, if incurred, have typically been subject to recovery in rates. OFF-BALANCE SHEET ARRANGEMENTS Laclede Gas has no off-balance sheet arrangements. 19 -----END PRIVACY-ENHANCED MESSAGE-----