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