-----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, JdTp2DeZ6iGgGMhtc+tcofq9Te6KD2UWMi4vetQgBPSlkiuP8NkAsrLFhbQIE07M 958CfeVvcpOMvWHp2Xktgw== 0001068800-05-000053.txt : 20050128 0001068800-05-000053.hdr.sgml : 20050128 20050128162105 ACCESSION NUMBER: 0001068800-05-000053 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050128 DATE AS OF CHANGE: 20050128 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: 05558502 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: 05558501 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 lacledeq.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 December 31, 2004 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------------------------------------------------------------------------- Commission Exact Name of Registrant as State of I.R.S. File Number Specified in its Charter and Incorporation Employer Principal Office Address and Identification Telephone Number 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 January 28, 2005 - ---------- --------------------------- ---------------- The Laclede Group, Inc. Common Stock ($1.00 Par Value) 21,053,708 Laclede Gas Company Common Stock ($1.00 Par Value) 10,031* *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 9-16 Laclede Gas Company: Statements of Income Ex. 99.1, p. 1 Balance Sheets Ex. 99.1, pp. 2-3 Statements of Cash Flows Ex. 99.1, p. 4 Notes to Financial Statements Ex. 99.1, pp. 5-9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations (The Laclede Group, Inc.) 17-26 Management's Discussion and Analysis of Financial Condition and Results of Operations (Laclede Gas Company) Ex. 99.1, pp. 10-18 Item 3 Quantitative and Qualitative Disclosures About Market Risk 27 Item 4 Controls and Procedures 27 PART II. OTHER INFORMATION Item 1 Legal Proceedings 28 Item 6 Exhibits 28 SIGNATURES - The Laclede Group, Inc. 29 SIGNATURES - Laclede Gas Company 30 INDEX TO EXHIBITS 31 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, 2004. 3 Item 1. Financial Statements THE LACLEDE GROUP, INC. STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(Thousands, Except Per Share Amounts) Three Months Ended December 31, ------------------------ 2004 2003 ---- ---- Operating Revenues: Regulated Gas distribution $291,253 $261,350 Non-Regulated Services 27,986 19,548 Gas marketing 118,179 50,983 Other 5,067 756 ------------------------ Total Operating Revenues 442,485 332,637 ------------------------ Operating Expenses: Regulated Natural and propane gas 206,424 175,275 Other operation expenses 30,925 29,483 Maintenance 4,214 4,429 Depreciation and amortization 5,305 5,658 Taxes, other than income taxes 15,823 14,832 ------------------------ Total regulated operating expenses 262,691 229,677 Non-Regulated Services 26,872 20,311 Gas marketing 115,786 50,288 Other 5,171 967 ------------------------ Total Operating Expenses 410,520 301,243 ------------------------ Operating Income 31,965 31,394 ------------------------ Other Income and (Income Deductions) - Net 1,574 1,459 ------------------------ Interest Charges: Interest on long-term debt 5,908 4,814 Interest on long-term debt to unconsolidated affiliate trust 893 893 Other interest charges 970 1,085 ------------------------ Total Interest Charges 7,771 6,792 ------------------------ Income Before Income Taxes 25,768 26,061 Income Tax Expense 9,136 9,454 ------------------------ Net Income 16,632 16,607 Dividends on Redeemable Preferred Stock - Laclede Gas 15 16 ------------------------ Net Income Applicable to Common Stock $ 16,617 $ 16,591 ======================== Average Number of Common Shares Outstanding 21,018 19,116 Basic Earnings Per Share of Common Stock $.79 $.87 Diluted Earnings Per Share of Common Stock $.79 $.87 Dividends Declared Per Share of Common Stock $.340 $.335 See notes to consolidated financial statements.
4 THE LACLEDE GROUP, INC. STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)
(Thousands) Three Months Ended December 31, ----------------------- 2004 2003 ---- ---- Net Income Applicable to Common Stock $16,617 $16,591 ----------------------- Other Comprehensive Income (Loss), Before Tax: Net gains (losses) on cash flow hedging derivative instruments: Net hedging gain (loss) arising during period 756 (517) Reclassification adjustment for (gains) losses included in net income 2,451 (1,237) ----------------------- Net unrealized gains (losses) on cash flow hedging derivative instruments 3,207 (1,754) ----------------------- Other Comprehensive Income (Loss), Before Tax 3,207 (1,754) Income Tax Expense (Benefit) Related to Items of Other Comprehensive Income (Loss) 1,239 (677) ----------------------- Other Comprehensive Income (Loss), Net of Tax 1,968 (1,077) ----------------------- Comprehensive Income $18,585 $15,514 ======================== See notes to consolidated financial statements.
5 THE LACLEDE GROUP, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Dec. 31, Sept. 30, Dec. 31, 2004 2004 2003 ---- ---- ---- (Thousands) ASSETS Utility Plant $1,080,755 $1,070,522 $1,039,472 Less: Accumulated depreciation and amortization 427,484 423,647 412,926 ---------- ---------- ---------- Net Utility Plant 653,271 646,875 626,546 ---------- ---------- ---------- Goodwill 28,124 28,124 28,124 ---------- ---------- ---------- Other Property and Investments 48,158 46,082 46,640 ---------- ---------- ---------- Current Assets: Cash and cash equivalents 23,641 13,854 22,245 Accounts receivable: Gas Customers - billed and unbilled 178,286 76,223 144,286 Other 73,349 51,822 55,752 Allowances for doubtful accounts (8,414) (10,362) (5,832) Inventories: Natural gas stored underground at LIFO cost 120,502 131,773 112,620 Propane gas at FIFO cost 20,060 15,808 17,027 Materials, supplies, and merchandise at avg. cost 5,254 4,714 4,968 Derivative instrument assets 9,407 16,857 13,048 Unamortized purchased gas adjustments 15,836 19,618 - Deferred income taxes 12,296 1,321 6,307 Prepayments and other 14,786 16,008 7,372 ---------- ---------- ---------- Total Current Assets 465,003 337,636 377,793 ---------- ---------- ---------- Deferred Charges: Prepaid pension cost 89,659 92,026 107,117 Regulatory assets 109,410 104,703 93,225 Other 11,598 9,849 7,337 ---------- ---------- ---------- Total Deferred Charges 210,667 206,578 207,679 ---------- ---------- ---------- Total Assets $1,405,223 $1,265,295 $1,286,782 ========== ========== ========== See notes to consolidated financial statements.
6 THE LACLEDE GROUP, INC. CONSOLIDATED BALANCE SHEETS (Continued) (UNAUDITED)
Dec. 31, Sept. 30, Dec. 31, 2004 2004 2003 ---- ---- ---- (Thousands, except share amounts) CAPITALIZATION AND LIABILITIES Capitalization: Common stock (70,000,000 shares authorized, 21,024,482, 20,981,165 and 19,118,229 shares issued, respectively) $ 21,024 $ 20,981 $ 19,118 Paid-in capital 117,172 116,058 69,423 Retained earnings 229,951 220,483 221,797 Accumulated other comprehensive income (loss) 361 (1,607) (1,157) ---------- ---------- ---------- Total common stock equity 368,508 355,915 309,181 Redeemable preferred stock (less current sinking fund requirements) - Laclede Gas 1,108 1,108 1,258 Long-term debt to unconsolidated affiliate trust 46,400 46,400 46,400 Long-term debt (less current portion) - Laclede Gas 333,962 333,936 234,643 ---------- ---------- ---------- Total Capitalization 749,978 737,359 591,482 ---------- ---------- ---------- Current Liabilities: Notes payable 177,300 71,380 265,585 Accounts payable 129,763 68,366 89,408 Advance customer billings 21,195 23,620 12,287 Current portion of long-term debt and preferred stock 145 25,145 25,000 Wages and compensation accrued 15,302 15,596 13,514 Dividends payable 7,251 7,214 6,463 Customer deposits 11,170 10,661 8,291 Interest Accrued 5,625 10,920 4,555 Taxes accrued 20,528 16,725 17,389 Unamortized purchased gas adjustment - - 3,017 Other 12,638 13,003 9,696 ---------- ---------- ---------- Total Current Liabilities 400,917 262,630 455,205 ---------- ---------- ---------- Deferred Credits and Other Liabilities: Deferred income taxes 203,870 189,626 182,018 Unamortized investment tax credits 4,944 5,010 5,240 Pension and postretirement benefit costs 20,355 20,484 22,814 Regulatory liabilities 2,725 28,210 6,375 Other 22,434 21,976 23,648 ---------- ---------- ---------- Total Deferred Credits and Other Liabilities 254,328 265,306 240,095 ---------- ---------- ---------- Total Capitalization and Liabilities $1,405,223 $1,265,295 $1,286,782 ========== ========== ========== See notes to consolidated financial statements.
7 THE LACLEDE GROUP, INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Three Months Ended December 31, -------------------------- 2004 2003 ---- ---- (Thousands) Operating Activities: Net Income $ 16,632 $ 16,607 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 6,094 6,555 Deferred income taxes and investment tax credits (1,179) 656 Other - net 77 54 Changes in assets and liabilities: Accounts receivable - net (125,538) (89,872) Unamortized purchased gas adjustments 3,782 (2,848) Deferred purchased gas costs (26,082) 19,588 Advance customer billings - net (2,425) (3,074) Accounts payable 61,397 23,407 Taxes accrued 3,803 4,178 Natural gas stored underground 11,271 4,611 Other assets and liabilities 1,695 5,699 --------- -------- Net cash used in operating activities $ (50,473) $(14,439) --------- -------- Investing Activities: Construction expenditures (12,721) (11,372) Employee benefit trusts (2,503) (1,439) Other investments 556 228 --------- -------- Net cash used in investing activities $ (14,668) $(12,583) --------- -------- Financing Activities: Maturity of first mortgage bonds (25,000) - Issuance of short-term debt - net 105,920 47,385 Dividends paid (7,149) (6,408) Issuance of common stock 1,157 999 --------- -------- Net cash provided by financing activities $ 74,928 $ 41,976 --------- -------- Net Increase in Cash and Cash Equivalents $ 9,787 $ 14,954 Cash and Cash Equivalents at Beginning of Period 13,854 7,291 --------- -------- Cash and Cash Equivalents at End of Period $ 23,641 $ 22,245 ========= ======== Supplemental Disclosure of Cash Paid (Refunded) During the Period for: Interest $ 13,020 $ 9,332 Income taxes (29) - 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 2004 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 the succeeding quarter of the fiscal year. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the November through April period, which generally corresponds with the heating season. The Utility typically experiences losses during the non-heating season. 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 revenues at December 31, 2004 and 2003, for the Utility, were $60.9 million and $38.3 million, respectively. After accrual of related gas cost expense, the accrued pre-tax net revenues at December 31, 2004 and 2003 were $10.2 million and $8.8 million, respectively. The amount of accrued unbilled revenue at September 30, 2004 was $8.8 million. 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 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 quarter ended December 31, 2004, the Company granted 234,000 non-qualified stock options to employees at an exercise price of $30.95 per share. The stock options vest one-fourth each year for four years after the date of the grant beginning November 4, 2005. The Company accounts for the Equity Incentive Plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No compensation expense has been recognized in net income, as all options granted under the Equity Incentive Plan had an exercise price equal to the market value of the Company's stock on the date of the grant. 9 Stock option activity for the quarter ended December 31, 2004 is presented below: Weighted Average Shares Exercise Price ------- ---------------- Outstanding at September 30, 2004 393,200 $26.43 Granted 234,000 $30.95 Exercised (9,450) $25.34 Forfeited (1,750) $26.46 Outstanding at December 31, 2004 616,000 $28.17 Exercisable at December 31, 2004 63,250 $27.86 Exercise prices of options outstanding at December 31, 2004 range from $23.27 to $30.95. The weighted-average contractual life of these options is 9.0 years. The closing price of the Company's common stock was $31.15 at December 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 quarter ended December 31, 2004 is $6.73 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 December 31, ---------------------- 2004 2003 ---- ---- (Thousands, Except Per Share Amounts) Net income applicable to common stock, as reported $16,617 $16,591 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax effects 122 92 ---------------------- Pro forma net income applicable to common stock $16,495 $16,499 ====================== Earnings per share: Basic - as reported $.79 $.87 Diluted - as reported $.79 $.87 Basic - pro forma $.78 $.86 Diluted - pro forma $.78 $.86 The fair value of the options granted during the quarter ended December 31, 2004 was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: Three Months Ended December 31, 2004 ------------------ Risk free interest rate 4.10% Expected dividend yield of stock 4.40% Expected volatility of stock 25.00% Expected life of option 96 months NEW ACCOUNTING STANDARDS - In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs." This Statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, "Inventory Pricing," to clarify the 10 accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. The provisions of this statement shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect adoption of this statement to have a material effect on the financial position or results of operations of the Company. In December 2004, the FASB issued SFAS No. 123 (revised 2004) (123(R)), "Accounting for Stock-Based Compensation." This Statement is a revision to SFAS No. 123, and establishes standards for the accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement supersedes Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. The Company currently accounts for its Equity Incentive Plan in accordance with APB Opinion No. 25, and provides pro forma disclosures in the Notes to Consolidated Financial Statements regarding the effect on net income and earnings as if compensation expense had been determined based on the fair value recognition provisions of SFAS No. 123. SFAS No. 123(R) is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company is currently evaluating the provisions of this Statement and will adopt this Statement no later than the fourth quarter of fiscal 2005. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets." This Statement is an amendment of APB Opinion No. 29, "Accounting for Nonmonetary Transactions." The guidance in APB Opinion No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The provisions of this Statement will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect adoption of this statement to have a material effect on the financial position or results of operations of the Company. 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 outstanding that were anti-dilutive at December 31, 2004 and 2003. Three Months Ended December 31, ---------------------- (Thousands, Except Per Share Amounts) 2004 2003 ---- ---- Basic EPS: Net Income Applicable to Common Stock $16,617 $16,591 Weighted-Average Shares Outstanding 21,018 19,116 Earnings Per Share of Common Stock $.79 $.87 Diluted EPS: Net Income Applicable to Common Stock $16,617 $16,591 Weighted-Average Shares Outstanding 21,018 19,116 Dilutive Effect of Employee Stock Options 35 24 ---------------------- Weighted-Average Diluted Shares 21,053 19,140 ====================== Earnings Per Share of Common Stock $.79 $.87 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. Plan assets consist primarily of corporate and U.S. government obligations and pooled equity funds. Pension costs for the quarters ending December 31, 2004 and 2003 were $1.1 million. These costs include amounts capitalized with construction activities. The net periodic pension costs include the following components: Three Months Ended December 31, ---------------------- (Thousands) 2004 2003 ---- ---- Service cost - benefits earned during the period $ 2,799 $ 2,777 Interest cost on projected benefit obligation 3,994 4,058 Expected return on plan assets (5,291) (5,625) Amortization of prior service cost 309 331 Amortization of actuarial loss 730 951 Regulatory adjustment (1,409) (1,369) ---------------------- Net pension cost $ 1,132 $ 1,123 ====================== 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 gains or losses exceed 10% of the greater of the projected benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. Also in the 2002 rate case, the Commission ordered that the recovery in rates for the Utility's qualified pension plans is based on the ERISA minimum contribution of zero effective October 1, 2002, and on the ERISA minimum contribution of zero plus $3.4 million annually effective July 1, 2003. The difference between this amount on a pro-rata basis and pension expense as calculated pursuant to the above and included in the Statements of Consolidated Income and 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 three months ended December 31, 2004 or the three months ended December 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. Postretirement benefit costs for quarters ending December 31, 2004 and 2003 were $2.0 million. These costs include amounts capitalized with construction activities. 12 Net periodic postretirement benefit costs consisted of the following components: Three Months Ended December 31, -------------------- (Thousands) 2004 2003 ---- ---- Service cost - benefits earned during the period $ 845 $ 794 Interest cost on accumulated postretirement benefit obligation 826 801 Expected return on plan assets (319) (209) Amortization of transition obligation 145 265 Amortization of prior service cost (8) (8) Amortization of actuarial loss 217 174 Regulatory adjustment 295 164 --------------------- Net postretirement benefit cost $2,001 $1,981 ===================== Pursuant to the Commission's Order in the Utility's 2002 rate case, the return on plan assets is based on market related value of plan assets implemented prospectively over a four-year period. Unrecognized gains and losses are amortized only to the extent that such gains or losses exceed 10% of the greater of the accumulated postretirement benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. Also in the 2002 rate case, the Commission ordered that the recovery in rates for the postretirement benefit costs be based on the accounting methodology as ordered in the 1999 rate case. The difference between this amount and postretirement benefit expense as calculated pursuant to the above is deferred as a regulatory asset or liability. 4. FINANCIAL INSTRUMENTS In the course of its business, Laclede Energy Resources (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 December 31, 2004, LER's open positions were not material to Laclede Group's financial position or results of operations. Settled and open future positions were as follows at December 31, 2004:
Average MMBtu Price per Position Month (millions) MMBtu -------------- ---------- ----- Settled net long and short futures positions January 2005 .26 $6.83 Open short futures positions February 2005 .14 $5.90 April 2005 1.04 $6.17 May 2005 .48 $6.07 June 2005 .04 $6.57 July 2005 .04 $6.59 August 2005 .04 $6.63 September 2005 .04 $6.60 October 2005 .04 $6.62 Open long futures positions September 2005 .14 $5.05
The above futures contracts are derivative instruments and management has designated these items as cash flow hedges of forecasted transactions. The fair values of the instruments are recognized on the Consolidated Balance Sheets. The change in the fair value of the effective portion of these hedge instruments is recorded, net of tax, in Other Comprehensive Income, 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 $1.2 million of pre-tax net unrealized gains on cash flow hedging derivative instruments at December 31, 2004 will be reclassified into the Consolidated Statement of Income 13 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. 5. INCOME TAXES Net provision for income taxes was as follows during the periods set forth below: Three Months Ended December 31, --------------------- (Thousands) 2004 2003 ---- ---- Federal Current $8,826 $6,932 Deferred (930) 1,161 State and Local Current 1,489 1,188 Deferred (249) 173 --------------------- Total $9,136 $9,454 ===================== 6. OTHER INCOME AND INCOME DEDUCTIONS - NET Three Months Ended December 31, --------------------- (Thousands) 2004 2003 ---- ---- Allowance for funds used during construction $ (25) $ (32) Other income 565 556 Other income deductions 1,034 935 --------------------- Other income and (income deductions) - net $1,574 $1,459 ===================== 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 underground facility locating industry remains competitive with many contracts subject to termination on as little as 30 days' notice. Also, SM&P's customers are primarily in the utility and telecommunication sector with their workload influenced by construction trends. The Non-Regulated Gas Marketing segment includes the results of LER, a wholly owned subsidiary of Laclede Group. Non-Regulated Other includes the transportation of liquid propane, real estate development, the compression of natural gas, 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
Non- Regulated Non- Regulated Non- Gas Regulated Gas Regulated (Thousands) Distribution Services Marketing Other Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------- Three Months Ended December 31, 2004 - ----------------- Revenues from external customers $ 288,297 $27,923 $109,998 $ 704 $ - $ 426,922 Intersegment revenues 2,956 63 8,181 4,363 - 15,563 -------------------------------------------------------------------------------- Total operating revenues 291,253 27,986 118,179 5,067 - 442,485 Net income (loss) applicable to common stock 15,087 143 1,434 (47) - 16,617 Total assets 1,265,932 59,346 61,011 49,329 (30,395) 1,405,223 Three Months Ended December 31, 2003 - ----------------- Revenues from external customers $ 260,542 $19,483 $ 46,480 $ 809 $ - $ 327,314 Intersegment revenues 808 65 4,503 (53) - 5,323 -------------------------------------------------------------------------------- Total operating revenues 261,350 19,548 50,983 756 - 332,637 Net income (loss) applicable to common stock 17,324 (1,025) 411 (119) - 16,591 Total assets 1,194,498 56,314 27,555 53,549 (45,134) 1,286,782
8. COMMITMENTS AND CONTINGENCIES Laclede Gas owns and operates natural gas distribution, transmission and storage facilities, the operations of which are subject to various environmental laws, regulations and interpretations. While environmental issues resulting from such operations arise in the ordinary course of business, such issues have not materially affected the Company's or Laclede Gas' financial position and results of operations. As environmental laws, regulations, and their interpretations evolve, however, Laclede Gas may be required to incur additional costs. With regard to a former manufactured gas plant site located in Shrewsbury, Missouri, Laclede Gas and state and federal environmental regulators have agreed upon certain remedial actions and those actions are essentially complete. Laclede Gas currently estimates the overall costs of these actions will be approximately $2.4 million. As of December 31, 2004, Laclede Gas has paid or reserved for these actions. If regulators require additional remedial actions or assert additional claims, Laclede Gas will incur additional costs. Laclede Gas enrolled a second former manufactured gas plant site into the Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to minimize the scope and cost of site cleanup while maximizing possibilities for site development. This site is located in, and is presently owned by, the City of St. Louis, Missouri. Laclede Gas continues to evaluate options concerning this site, including, but not limited to, the submission of its own Remedial Action Plan (RAP) to the VCP. Laclede Gas currently estimates that the cost of site investigations, agency oversight and related legal and engineering consulting may be approximately $650,000. Currently, Laclede Gas has paid or reserved for these actions. Laclede Gas has requested that other former site owners and operators share in these costs and one party has agreed to participate and has reimbursed Laclede Gas to date for $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 to the extent 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 known whether Laclede Gas will incur any costs in connection with environmental investigations of or remediation at the site, and if it does incur any such costs, what the amount of those costs would be. Costs incurred are charged to expense or capitalized in accordance with generally accepted accounting principles. A predetermined level of expense is recovered through Laclede Gas' rates. While the scope of future costs relative to the actions Laclede Gas has taken at the Shrewsbury site pursuant to the current agreement with state and federal regulators may not be significant, the scope of costs relative to future remedial actions regulators may require at the Shrewsbury site and to the other sites is unknown and may be material. Laclede Gas has notified its insurers 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 costs incurred under current agreement regarding the Shrewsbury site, denials of coverage are not expected to have a material impact on the financial position and results of operations of Laclede Gas or the Company. With regard to the other two sites and with regard to any future actions that might be required at the Shrewsbury site, since the scope of costs are unknown 15 and may be significant, denials of coverage may have a material impact on the financial position and results of operations of Laclede Gas or the Company. Such costs, if incurred, have typically been subject to recovery in rates. On June 28, 2002, the Staff of the MoPSC filed its recommendation in a proceeding established to review Laclede Gas' gas costs for fiscal 2001. In its recommendation, the Staff proposed to disallow approximately $4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based Price Stabilization Program. This Program was discontinued at the end of the 2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in proceedings before the MoPSC, including a formal hearing that was held on this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved by Laclede Gas, and directed Laclede Gas to flow through such amount to its customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas appealed the MoPSC's decision to the 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 has paid $4.9 million into the Court's registry pending a final judicial determination of Laclede Gas' entitlement to such amounts. On November 5, 2003, the Circuit Court 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. Oral arguments were held in the Missouri Court of Appeals for the Western District on August 17, 2004. The Utility is now awaiting the court's decision. The Utility continues to believe in the merits of its position and intends, if necessary, to assert its position vigorously throughout the appellate process. However, 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 or results of operations of the Company. SM&P has been the subject of certain employment-related claims arising out of a practice of SM&P that predated Laclede Group's acquisition. The claims involve whether certain pre- and post-work activities and commuting time for non-supervisory field employees constitute hours worked for purposes of federal and state wage and hour laws. These claims have been asserted in various proceedings, including one "opt-in" collective action filed in March 2003 in Federal District Court for the Eastern District of Texas. As a result of a ruling on February 27, 2004 in that proceeding, approximately 3,500 present and former field employees who worked for SM&P at times since February 27, 2001, were given notice of the lawsuit and the opportunity, until June 7, 2004, to join the lawsuit and assert claims for additional overtime compensation for the three-year period immediately preceding the date that they joined the lawsuit. Of the employees to whom notice was sent, 966 joined this lawsuit within the opt-in deadline established by the court. The substantial majority of the plaintiffs are former employees. A limited number of individuals have attempted to opt-in after the court's deadline, while simultaneously, a limited number of plaintiffs have withdrawn from participation after having opted into the lawsuit. SM&P is vigorously contesting these claims, including opposition to this case ultimately proceeding as a collective action. While the results of the claims cannot be predicted with certainty, management, after discussion with counsel, believes that the final outcome will not have a material adverse effect on the consolidated financial position and results of operations of the Company. Laclede Group and its subsidiaries are involved in other litigation, claims and investigations arising in the normal course of business. While the results of such litigation cannot be predicted with certainty, management, after discussion with counsel, believes that the final outcome will not have a material adverse effect on the consolidated financial position or results of operations of the Company. 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 will not exceed $12 million. No amounts have been recorded for these guarantees in the financial statements. Laclede Group had guarantees totaling $10 million for performance and payment of certain wholesale gas supply purchases by Laclede Energy Resources, Inc. (the Company's non-utility marketing affiliate), as of December 31, 2004. Laclede Group issued an additional $1.0 million guarantee in January 2005 on behalf of LER. Laclede Gas Company's Financial Statements and Notes to Financial Statements are included in Exhibit 99.1 to this report. 16 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. 17 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 or Commission) and serves the metropolitan St. Louis area and several other counties in eastern Missouri. Laclede Gas delivers natural gas to retail customers at rates, and in accordance with tariffs, authorized by the MoPSC. The Utility's earnings are generated primarily by the sale of heating energy, which historically has been heavily influenced by the weather. However, as part of the 2002 rate case settlement, the Utility initiated, effective November 9, 2002, an innovative weather mitigation rate design that lessens the impact of weather volatility on Laclede Gas customers during cold winters and is expected to stabilize the Utility's earnings in the future by recovering fixed costs more evenly during the heating season. The weather mitigation rate design minimizes the impact of weather volatility during the peak cold months of December through March and reduces the impact of weather volatility, to a lesser extent, during the months of November and April. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the November through April period, which generally corresponds with the heating season. The Utility typically experiences losses during the non-heating season. 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 the 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 continues to include efforts to stabilize and improve the performance of its core Utility, while developing non-regulated businesses and taking a measured approach in the pursuit of additional growth opportunities that complement the Utility business. As for the Utility, mitigating the impact of weather fluctuations on Laclede Gas customers while improving the ability to recover its authorized distribution costs and return continues to be a fundamental component of the Laclede Group strategy. The Utility's distribution costs are the essential, primarily fixed expenditures it must incur to operate and maintain a more than 15,000-mile natural gas distribution system and related storage facilities. The Utility's income from off system sales remains subject to fluctuations in market conditions. 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 to further the logical expansion of its geographic footprint into new markets, having already made notable gains by adding business in several key markets. LER continues to focus on growing its markets on a long-term and sustainable basis by providing both on system Utility transportation customers and customers outside of Laclede Gas' traditional service area with another choice in unregulated natural gas suppliers. Nevertheless, income from LER's operations is subject to fluctuations in market conditions. Quarter Ended December 31, 2004 - ------------------------------- Overview - Net Income (Loss) by Operating Segment Quarter Ended December 31, -------------------- (millions, after-tax) 2004 2003 ---- ---- Regulated Gas Distribution $15.1 $17.3 Non-Regulated Services .1 (1.0) Non-Regulated Gas Marketing 1.4 .4 Other Non-Regulated Subsidiaries - (.1) -------------------- Net Income Applicable to Common Stock $16.6 $16.6 ==================== 18 Laclede Group's net income applicable to common stock was $16.6 million for the quarter ended December 31, 2004, essentially the same as the quarter ended December 31, 2003. Basic and diluted earnings per share were $.79 for the quarter ended December 31, 2004, compared with $.87 per share reported for the same quarter last year. The decrease in earnings per share was due to an increase in the number of average shares outstanding this year, primarily due to the sale of 1.725 million shares of common stock in May 2004. Variations in net income were primarily attributable to the following factors described below. Utility earnings decreased by $2.2 million for the quarter ended December 31, 2004 compared with the quarter ended December 31, 2003. Temperatures experienced in the Utility's service area during the quarter were 15% warmer than normal, but 3% colder than the same period last year. However, reduced gas sales levels resulting from 21% warmer than normal weather in the month of November contributed to lower earnings this quarter, despite being tempered by the weather mitigation rate design. The decrease in the Utility's earnings for the quarter was primarily attributable to the following factors, quantified on a pre-tax basis: o the net effect totaling $1.7 million of lower system gas sales volumes primarily due to an unseasonably warm weather pattern in November; o lower income this year from off system sales and capacity release totaling $1.2 million; o higher interest charges totaling $1.0 million, primarily due to the issuance of additional long-term debt; and, o a higher provision for uncollectible accounts totaling $.5 million above the same period last year. These factors were partially offset by the recovery of eligible costs incurred to build and maintain the Utility's distribution system through the implementation of an Infrastructure System Replacement Surcharge effective June 10, 2004 totaling $.9 million. SM&P recorded earnings of $.1 million during the quarter ended December 31, 2004 compared with a loss for the same period last year totaling $1.0 million. SM&P's improved results were primarily due to the return of a substantial portion of business from two large customers and the attainment of additional business in both new and existing markets. SM&P's improvement over the same period last year was also attributable in part to charges recorded last year associated with the employment-related litigation described in Note 8 to the Consolidated Financial Statements. LER's income increased $1.0 million primarily due to higher sales volumes and increased margins. 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 December 31, 2004 were $291.3 million, or $29.9 million greater than the same period last year. The increase was primarily attributable to higher PGA rates totaling $39.9 million, partially offset by decreased off system sales revenues totaling $5.7 million and lower system gas sales levels and other variations totaling $4.3 million. System therms sold and transported decreased by 6.8 million therms, or 2.3%, below the quarter ended December 31, 2003. Regulated operating expenses for the quarter ended December 31, 2004 increased $33.0 million from the same quarter last year. Natural and propane gas expense increased $31.1 million from last year's level primarily attributable to higher rates charged by our suppliers, partially offset by lower volumes purchased for sendout and decreased off system gas cost expense. Other operation and maintenance expenses increased $1.2 million, or 3.6%, primarily due to a higher provision for uncollectible accounts, increased distribution charges and higher wage rates, partially offset by lower pension costs and decreased group insurance charges. Taxes, other than income, increased $1.0 million, or 6.7%, primarily due to higher gross receipts taxes (reflecting increased revenues) and higher real estate and personal property taxes. Non-Regulated Services Operating Revenues and Operating Expenses Laclede Group's non-regulated services operating revenue for this quarter increased $8.4 million reflecting the return to SM&P of a substantial portion of business from two large customers and the attainment of additional business in both new and existing markets. The increase in non-regulated services operating expenses, totaling $6.6 million, was primarily attributable to charges associated with the new business, partially offset by charges recorded during the 19 same quarter last year attributable to the employment-related litigation. 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 $67.2 million primarily due to increased sales volumes and higher sales prices by LER. The increase in non-regulated gas marketing operating expenses, totaling $65.5 million, was primarily associated with increased gas expense related to increased volumes purchased and higher prices. Non-Regulated Other Operating Revenues and Operating Expenses Non-regulated other operating revenues increased $4.3 million primarily due to higher sales levels recorded by Laclede Pipeline Company. Non-regulated other operating expenses increased $4.2 million primarily due to higher expenses associated with increased sales levels recorded by Laclede Pipeline Company. Interest Charges The $1.0 million increase in interest charges was primarily due to higher interest on long-term debt due to the April 2004 issuance of $50 million of 5 1/2% First Mortgage Bonds and $100 million of 6% First Mortgage Bonds, partially offset by the early redemption in June 2004 of $50 million of 6 5/8% First Mortgage Bonds and the November 2004 maturity of $25 million of 8 1/2% First Mortgage Bonds. This increase in interest on long-term debt was partially offset by reduced interest on short-term debt, mainly attributable to lower short-term borrowings. Regulatory Matters - ------------------ Laclede Gas previously appealed the MoPSC's decision in its 1999 rate case relative to the calculation of its depreciation rates. The Circuit Court remanded the decision to the MoPSC based on inadequate findings of fact. The MoPSC upheld its previous order and Laclede Gas appealed this second order to the Circuit Court. In 2002, the Circuit Court ruled that the MoPSC's second order was lawful and reasonable, and Laclede Gas appealed the Circuit Court's decision to the Missouri Court of Appeals for the Western District. On March 4, 2003 the Court of Appeals issued an opinion remanding the decision to the MoPSC based on the MoPSC's failure to support and explain its decision with adequate findings of fact. In May 2003, the Court of Appeals rejected the MoPSC's request that the Court reconsider its opinion or transfer this matter to the Missouri Supreme Court. On January 11, 2005, the Commission issued an Order ruling in favor of Laclede Gas on the depreciation issue. As a direct result of the Commission's Order ruling in favor of the Utility's position, Laclede Gas will increase certain of its depreciation rates effective February 1, 2005 resulting in higher annual depreciation expense totaling $2.3 million, as it originally requested. At the same time, operating expenses related to actual removal costs, which the Utility began expensing as incurred during fiscal 2002, will be reduced by $2.3 million annually, as ordered by the Commission. As such, there will be no effect on net income, and the Commission's decision will not have an immediate effect on the Utility's recovery of depreciation expenses. However, the Utility expects that the Commission's confirmation of Laclede Gas' position on the proper method for calculating depreciation rates will result in increased cash flows from capital recovery in future rate cases. On June 28, 2002, the Staff of the MoPSC filed its recommendation in a proceeding established to review Laclede Gas' gas costs for fiscal 2001. In its recommendation, the Staff proposed to disallow approximately $4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based Price Stabilization Program. This Program was discontinued at the end of the 2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in proceedings before the MoPSC, including a formal hearing that was held on this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved by Laclede Gas, and directed Laclede Gas to flow through such amount to its customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas appealed the MoPSC's decision to the 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 has paid $4.9 million into the Court's registry pending a final judicial determination of Laclede Gas' entitlement to such amounts. On November 5, 2003, the Circuit Court 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. Oral arguments were held in the Missouri Court of Appeals for the Western District 20 on August 17, 2004. The Utility is now awaiting the court's decision. The Utility continues to believe in the merits of its position and intends, if necessary, to assert its position vigorously throughout the appellate process. However, 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 or results of operations of the Company. Laclede Gas filed its first Infrastructure System Replacement Surcharge (ISRS) filing with the MoPSC on March 1, 2004 to increase revenues by approximately $3.86 million annually. The filing was made pursuant to a Missouri law, enacted in 2003, that allows gas utilities to adjust their rates up to twice a year to recover certain facility-related expenditures that are made to comply with state and federal safety requirements or to relocate facilities in connection with public improvement projects. On June 1, 2004, the MoPSC approved a Stipulation and Agreement ("S&A") between Laclede Gas and the Staff of the Commission that provided for a $3.56 million annual surcharge effective June 10, 2004. Laclede Gas made its second ISRS filing on October 28, 2004 to increase revenues by approximately an additional $1.6 million annually. On January 4, 2005, the MoPSC approved a S&A between Laclede Gas and the Staff of the Commission that provided for a $1.42 million annual increase in ISRS revenues effective January 20, 2005. Critical Accounting Policies - ---------------------------- Our Discussion and Analysis of our financial condition, results of operations, liquidity and capital resources is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Generally accepted accounting principles require that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following represent the more significant items requiring the use of judgment and estimates in preparing our consolidated financial statements: Allowances for doubtful accounts - Estimates of the collectibility of trade accounts receivable are based on historical trends, age of receivables, economic conditions, credit risk of specific customers, and other factors. Employee benefits and postretirement obligations - Pension and postretirement obligations are calculated by actuarial consultants that utilize several statistical factors and other assumptions related to future events, such as discount rates, returns on plan assets, compensation increases, and mortality rates. The amount of expense recognized by the Utility is dependent on the regulatory treatment provided for such costs. Certain liabilities related to group medical benefits and workers' compensation claims, portions of which are self-insured and/or contain "stop-loss" coverage with third-party insurers to limit exposure, are established based on historical trends. Goodwill valuation - In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill is required to be tested for impairment annually or whenever events or circumstances occur that may reduce the value of goodwill. In performing impairment tests, valuation techniques require the use of estimates with regard to discounted future cash flows of operations, involving judgments based on a broad range of information and historical results. If the test indicates impairment has occurred, goodwill would be reduced, adversely impacting earnings. Laclede Gas accounts for its regulated operations in accordance with 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 21 the regulatory process. We believe the following represent the more significant items recorded through the application of SFAS No. 71: The Utility's Purchased Gas Adjustment (PGA) Clause allows Laclede Gas to flow through to customers, subject to prudence review, the cost of purchased gas supplies, including the costs, cost reductions and related carrying costs associated with the Utility's use of natural gas financial instruments to hedge the purchase price of natural gas. The difference between actual costs incurred and costs recovered through the application of the PGA are recorded as regulatory assets and liabilities that are recovered or refunded in a subsequent period. The Company records deferred tax liabilities and assets measured by enacted tax rates for the net tax effect of all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes. Changes in enacted tax rates, if any, and certain property basis differences will be reflected by entries to regulatory asset or liability accounts for regulated companies, and will be reflected as income or loss for non-regulated companies. 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, 2004. Accounting Pronouncements - ------------------------- In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs." This Statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. The provisions of this statement shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect adoption of this statement to have a material effect on the financial position or results of operations of the Company. In December 2004, the FASB issued SFAS No. 123 (revised 2004) (123(R)), "Accounting for Stock-Based Compensation." This Statement is a revision to SFAS No. 123, and establishes standards for the accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement supersedes Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. The Company currently accounts for its Equity Incentive Plan in accordance with APB Opinion No. 25, and provides pro forma disclosures in the Notes to Consolidated Financial Statements regarding the effect on net income and earnings as if compensation expense had been determined based on the fair value recognition provisions of SFAS No. 123. SFAS No. 123(R) is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company is currently evaluating the provisions of this Statement and will adopt this Statement no later than the fourth quarter of fiscal 2005. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets." This Statement is an amendment of APB Opinion No. 29, "Accounting for Nonmonetary Transactions." The guidance in APB Opinion No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The provisions of this Statement will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect adoption of this statement to have a material effect on the financial position or results of operations of the Company. 22 FINANCIAL CONDITION Credit Ratings - -------------- As of December 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 has investment grade ratings, and believes that it will have adequate access to the financial markets to meet its capital requirements. These ratings remain subject to review and change by the rating agencies. Cash Flows - ---------- The Company's short-term borrowing requirements typically peak during colder months when Laclede Gas borrows money to cover the gap between when it purchases its natural gas and when its customers pay for that gas. Changes in the wholesale cost of natural gas, variations in the timing of collections of gas 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 used in operating activities for the three months ended December 31, 2004 was $50.5 million, a $36.0 million increase, compared with the same period last year. The increase in cash used in operating activities was primarily attributable to the net effects of changes in wholesale gas prices, increased sales volumes by LER, and lower Utility off system sales on accounts receivable, accounts payable, and deferred purchased gas costs. Net cash used in investing activities for the three months ended December 31, 2004 was $14.7 million compared with $12.6 million for the three months ended December 31, 2003. Cash used in investing activities primarily reflected Utility construction expenditures in both periods. Net cash provided by financing activities was $74.9 million for the three months ended December 31, 2004 compared with $42.0 million for the three months ended December 31, 2003. The variation primarily reflects the issuance of additional short-term debt this year, partially offset by the November 2004 maturity of $25 million 8 1/2% First Mortgage Bonds. Liquidity and Capital Resources - ------------------------------- As indicated above, the Company's short-term borrowing requirements typically peak during colder months. These short-term cash requirements have traditionally been met through the sale of commercial paper supported by lines of credit with banks. Laclede Gas currently has lines of credit in place of $300 million, with $15 million expiring in April 2005 and $285 million expiring in September 2009. Short-term commercial paper borrowings outstanding at December 31, 2004 were $177.3 million (the peak for the quarter) at a weighted average interest rate of 2.5% per annum. Based on short-term borrowings at December 31, 2004, a change in interest rates of 100 basis points would increase or decrease pre-tax earnings and cash flows by approximately $1.8 million on an annual basis. Most of Laclede Gas' lines of credit include covenants limiting total debt, including short-term debt, to no more than 70% of total capitalization and requiring earnings before interest, taxes, depreciation and amortization (EBITDA) for a trailing twelve-month period to be at least 2.25 times interest expense. On December 31, 2004, total debt was 60% of total capitalization. For the twelve-months ending December 31, 2004, EBITDA was 3.55 times interest expense. 23 Laclede Gas has on file a shelf registration on Form S-3. Of the $350 million of securities originally registered under this Form S-3, $120 million of debt securities remained registered and unissued as of December 31, 2004. The original MoPSC authorization for issuing securities registered on this Form S-3 expired in September 2003. In response to an application filed by the Utility, the MoPSC extended this authorization to issue debt and equity securities and receive capital contributions through October 31, 2006. The remaining MoPSC authorization is $64.4 million, reflecting capital contributions that have been made by Laclede Group to Laclede Gas under this authority through January 2005. The amount, timing and type of additional financing to be issued under this shelf registration will depend on cash requirements and market conditions. In April 2004, Laclede Gas issued $50 million of First Mortgage Bonds, 5 1/2% Series due May 1, 2019 and $100 million of First Mortgage Bonds, 6% Series, due May 1, 2034. The net proceeds of approximately $147.9 million from this issuance were used to repay short-term debt and to call at par the $50 million 6 5/8% Series First Mortgage Bonds in June 2004. The proceeds were also used to pay at maturity $25 million of 8 1/2% First Mortgage Bonds in November 2004. At December 31, 2004, Laclede Gas had fixed-rate long-term debt totaling $335 million. While these long-term debt issues are fixed-rate, they are subject to changes in fair value as market interest rates change. However, increases or decreases in fair value would impact earnings and cash flows only if Laclede Gas were to reacquire any of these issues in the open market prior to maturity. Laclede Group has on file a shelf registration on Form S-3, which allows for the issuance of equity securities, other than preferred stock, and debt securities. Of the $500 million of securities originally registered under this Form S-3, $362.4 million remain registered and unissued as of December 31, 2004. Laclede Group issued 1.725 million shares of common stock in May 2004 under this registration. The net proceeds of approximately $44.7 million from this sale were used to make a capital contribution to Laclede Gas. Laclede Gas used the contribution to reduce short-term borrowings and for general corporate purposes. The amount, timing and type of additional financing to be issued under this shelf registration will depend on cash requirements and market conditions. 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 obtained from U.S. Bank National Association, expiring in June 2005, to meet the 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 60% on December 31, 2004). This line has been used to provide letters of credit of $1.2 million on behalf of SM&P, which have not been drawn, and to provide for seasonal funding needs of the various non-regulated subsidiaries from time to time. There were no borrowings under this line in the quarter ending December 31, 2004. 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 $10 million for performance and payment of certain wholesale gas supply purchases by LER, as of December 31, 2004. Laclede Group issued an additional $1.0 million guarantee in January 2005 on behalf of LER. Utility construction expenditures were $11.9 million for the three months ended December 31, 2004, compared with $11.2 million for the same period last year. Non-utility construction expenditures were $.8 million for the three months ended December 31, 2004, compared with $.2 million for the same period last year. Consolidated capitalization at December 31, 2004, excluding current obligations of preferred stock, consisted of 49.1% Laclede Group common stock equity, .2% Laclede Gas preferred stock equity, 6.2% long-term debt to unconsolidated affiliate trust and 44.5% 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 December 31, 2004 and at September 30, 2004, such as Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts Payable, Regulatory Assets and Liabilities, and Advance Customer Billings. The Consolidated Balance Sheet at 24 December 31, 2003 is presented to facilitate comparison of these items with the corresponding interim period of the preceding fiscal year. Contractual Obligations - ----------------------- As of December 31, 2004, Laclede Group had contractual obligations with payments due as summarized below (in millions):
Payments due by period -------------------------------------------------------- Remaining Fiscal Years Fiscal Year Fiscal Years Fiscal Years 2009 and Contractual Obligations Total 2005 2006-2007 2008-2009 thereafter - ------------------------------------------------------------------------------------------------------------ Long-Term Debt (a) $ 839.7 $ 15.2 $ 88.8 $80.9 $654.8 Capital Leases - - - - - Operating Leases (b) 16.7 6.1 4.9 3.3 2.4 Purchase Obligations - Natural Gas (c) 483.2 355.5 114.5 6.9 6.3 Purchase Obligations - Other (d) 11.0 5.0 4.0 2.0 - Other Long-Term Liabilities - - - - - --------------------------------------------------------------------- Total $1,350.6 $381.8 $212.2 $93.1 $663.5 ===================================================================== (a) Long-term debt obligations reflect principal maturities and interest payments. (b) Operating lease obligations are primarily for office space, vehicles, and power operated equipment in the gas distribution and non-regulated services segments. Additional payments will be incurred if renewal options are exercised under the provisions of certain agreements. (c) These purchase obligations represent the minimum payments required under existing natural gas transportation and storage contracts and natural gas supply agreements in the utility gas distribution and non-regulated gas marketing segments. These amounts reflect fixed obligations as well as obligations to purchase natural gas at future market prices, calculated using December 31, 2004 NYMEX futures prices. Laclede Gas recovers the costs related to its purchases, transportation, and storage of natural gas through the operation of its Purchased Gas Adjustment Clause; however, variations in the timing of collections of gas costs from customers affect short-term cash requirements. Additional contractual commitments may be entered into during the heating season. (d) These purchase obligations reflect miscellaneous agreements for the purchase of materials and the procurement of services necessary for normal operations.
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 December 31, 2004, the Utility held approximately 12.1 million MMBtu of futures contracts at an average price of $7.05 per MMBtu. Additionally, approximately 3.8 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 2005. 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 December 31, 2004, LER's open positions were not material to Laclede Group's financial position or results of operations. 25 Environmental Matters - --------------------- Laclede Gas owns and operates natural gas distribution, transmission and storage facilities, the operations of which are subject to various environmental laws, regulations and interpretations. While environmental issues resulting from such operations arise in the ordinary course of business, such issues have not materially affected the Company's or Laclede Gas' financial position and results of operations. As environmental laws, regulations, and their interpretations evolve, however, Laclede Gas may be required to incur additional costs. With regard to a former manufactured gas plant site located in Shrewsbury, Missouri, Laclede Gas and state and federal environmental regulators have agreed upon certain remedial actions and those actions are essentially complete. Laclede Gas currently estimates the overall costs of these actions will be approximately $2.4 million. As of December 31, 2004, Laclede Gas has paid or reserved for these actions. If regulators require additional remedial actions or assert additional claims, Laclede Gas will incur additional costs. Laclede Gas enrolled a second former manufactured gas plant site into the Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to minimize the scope and cost of site cleanup while maximizing possibilities for site development. This site is located in, and is presently owned by, the City of St. Louis, Missouri. Laclede Gas continues to evaluate options concerning this site, including, but not limited to, the submission of its own Remedial Action Plan (RAP) to the VCP. Laclede Gas currently estimates that the cost of site investigations, agency oversight and related legal and engineering consulting may be approximately $650,000. Currently, Laclede Gas has paid or reserved for these actions. Laclede Gas has requested that other former site owners and operators share in these costs and one party has agreed to participate and has reimbursed Laclede Gas to date for $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 to the extent 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 known whether Laclede Gas will incur any costs in connection with environmental investigations of or remediation at the site, and if it does incur any such costs, what the amount of those costs would be. Costs incurred are charged to expense or capitalized in accordance with generally accepted accounting principles. A predetermined level of expense is recovered through Laclede Gas' rates. While the scope of future costs relative to the actions Laclede Gas has taken at the Shrewsbury site pursuant to the current agreement with state and federal regulators may not be significant, the scope of costs relative to future remedial actions regulators may require at the Shrewsbury site and to the other sites is unknown and may be material. Laclede Gas has notified its insurers 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 costs incurred under current agreement regarding the Shrewsbury site, denials of coverage are not expected to have a material impact on the financial position and results of operations of Laclede Gas or the Company. With regard to the other two sites and with regard to any future actions that might be required at the Shrewsbury site, since the scope of costs are unknown and may be significant, denials of coverage may have a material impact on the financial position and results of operations of Laclede Gas or the Company. 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. 26 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 25 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 first fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings For a description of environmental matters and legal proceedings, see Note 8 to the Consolidated Financial Statements on page 15. For a description of SM&P's employment-related litigation, 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 20 of this report. 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 6. Exhibits (a) See Exhibit Index 28 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: January 25, 2005 Barry C. Cooper ---------------- Chief Financial Officer (Authorized Signatory and Chief Financial Officer) 29 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: January 25, 2005 Barry C. Cooper ---------------- Chief Financial Officer (Authorized Signatory and Chief Financial Officer) 30 INDEX TO EXHIBITS ----------------- Exhibit No. - ------- 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. 31 EX-12 2 ex12.txt Exhibit 12 THE LACLEDE GROUP, INC. AND SUBSIDIARY COMPANIES SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES -------------------------------------------------------------
Twelve Months Ended -------------------------------------------------------------------------- December 31, September 30, ------------ ------------------------------------------------------- (Thousands of Dollars) 2004 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- ---- Income before interest charges and income taxes $84,882 $84,196 $80,270 $60,440 $73,742 $64,078 Add: One third of applicable rentals charged to operating expense (which approximates the interest factor) 2,454 2,333 2,873 2,662 313 310 ------- ------------------------------------------------------- Total Earnings $87,336 $86,529 $83,143 $63,102 $74,055 $64,388 ======= ======================================================= Interest on long-term debt - Laclede Gas $23,104 $22,010 $20,169 $20,820 $18,372 $15,164 Other interest 6,689 6,804 6,802 4,989 10,067 8,844 Add: One third of applicable rentals charged to operating expense (which approximates the interest factor) 2,454 2,333 2,873 2,662 313 310 ------- ------------------------------------------------------- Total Fixed Charges $32,247 $31,147 $29,844 $28,471 $28,752 $24,318 ======= ======================================================= Ratio of Earnings to Fixed Charges 2.71 2.78 2.79 2.22 2.58 2.65
LACLEDE GAS COMPANY SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES -------------------------------------------------------------
Twelve Months Ended -------------------------------------------------------------------------- December 31, September 30, ------------ ------------------------------------------------------- (Thousands of Dollars) 2004 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- ---- Income before interest charges and income taxes $70,907 $73,956 $76,274 $56,154 $73,742 $64,078 Add: One third of applicable rentals charged to operating expense (which approximates the interest factor) 563 538 457 315 313 310 ------- ------------------------------------------------------- Total Earnings $71,470 $74,494 $76,731 $56,469 $74,055 $64,388 ======= ======================================================= Interest on long-term debt $23,104 $22,010 $20,169 $20,820 $18,372 $15,164 Other interest 3,066 3,192 3,752 4,285 10,067 8,844 Add: One third of applicable rentals charged to operating expense (which approximates the interest factor) 563 538 457 315 313 310 ------- ------------------------------------------------------- Total Fixed Charges $26,733 $25,740 $24,378 $25,420 $28,752 $24,318 ======= ======================================================= Ratio of Earnings to Fixed Charges 2.67 2.89 3.15 2.22 2.58 2.65
EX-31 3 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 (the registrant's fourth fiscal quarter in the case of an annual report) 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: January 25, 2005 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 (the registrant's fourth fiscal quarter in the case of an annual report) 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: January 25, 2005 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 (the registrant's fourth fiscal quarter in the case of an annual report) 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: January 25, 2005 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 (the registrant's fourth fiscal quarter in the case of an annual report) 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: January 25, 2005 Signature: /s/ Barry C. Cooper ---------------- ----------------------- Barry C. Cooper Chief Financial Officer EX-32 4 ex32.txt Exhibit 32 Section 1350 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Secton 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 December 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 December 31, 2004 fairly presents, in all material respects, the financial condition and results of operations of The Laclede Group, Inc. Date: January 25, 2005 ---------------- /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 December 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 December 31, 2004 fairly presents, in all material respects, the financial condition and results of operations of The Laclede Group, Inc. Date: January 25, 2005 ---------------- /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 December 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 December 31, 2004 fairly presents, in all material respects, the financial condition and results of operations of Laclede Gas Company. Date: January 25, 2005 ---------------- /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 December 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 December 31, 2004 fairly presents, in all material respects, the financial condition and results of operations of Laclede Gas Company. Date: January 25, 2005 ---------------- /s/ Barry C. Cooper ----------------------- Barry C. Cooper Chief Financial Officer EX-99.1 5 ex99p1.txt Exhibit 99.1 LACLEDE GAS COMPANY STATEMENTS OF INCOME (UNAUDITED)
(Thousands) Three Months Ended December 31, -------------------- 2004 2003 ---- ---- Operating Revenues: Utility $291,253 $261,350 Other 580 632 -------------------- Total Operating Revenues 291,833 261,982 -------------------- Operating Expenses: Utility Natural and propane gas 206,424 175,275 Other operation expenses 30,925 29,483 Maintenance 4,214 4,429 Depreciation and amortization 5,305 5,658 Taxes, other than income taxes 15,823 14,832 -------------------- Total utility operating expenses 262,691 229,677 Other 580 605 -------------------- Total Operating Expenses 263,271 230,282 -------------------- Operating Income 28,562 31,700 -------------------- Other Income and (Income Deductions) - Net 1,510 1,420 -------------------- Interest Charges: Interest on long-term debt 5,908 4,814 Other interest charges 957 1,082 -------------------- Total Interest Charges 6,865 5,896 -------------------- Income Before Income Taxes 23,207 27,224 Income Tax Expense 8,105 9,868 -------------------- Net Income 15,102 17,356 Dividends on Redeemable Preferred Stock 15 16 -------------------- Earnings Applicable to Common Stock $ 15,087 $ 17,340 ==================== See notes to financial statements.
1 LACLEDE GAS COMPANY BALANCE SHEETS (UNAUDITED)
Dec. 31, Sept. 30, Dec. 31, 2004 2004 2003 ---- ---- ---- (Thousands) ASSETS Utility Plant $1,080,755 $1,070,522 $1,039,472 Less: Accumulated depreciation and amortization 427,484 423,647 412,926 ---------- ---------- ---------- Net Utility Plant 653,271 646,875 626,546 ---------- ---------- ---------- Other Property and Investments 32,090 29,664 29,282 ---------- ---------- ---------- Current Assets: Cash and cash equivalents 3,698 2,340 3,301 Accounts receivable: Gas customers - billed and unbilled 178,286 76,223 144,286 Associated companies 2,668 300 10,096 Other 9,621 11,231 25,951 Allowances for doubtful accounts (8,027) (9,975) (5,490) Inventories: Natural gas stored underground at LIFO cost 120,452 131,725 112,579 Propane gas at FIFO cost 20,060 15,808 17,027 Materials, supplies, and merchandise at avg. cost 5,128 4,588 4,842 Derivative instrument assets 7,759 15,196 11,259 Unamortized purchased gas adjustments 15,836 19,618 - Deferred income taxes 12,296 1,321 6,307 Prepayments and other 5,398 6,211 4,081 ---------- ---------- ---------- Total Current Assets 373,175 274,586 334,239 ---------- ---------- ---------- Deferred Charges: Prepaid pension cost 89,659 92,026 107,117 Regulatory assets 109,410 104,703 93,225 Other 9,895 8,127 5,578 ---------- ---------- ---------- Total Deferred Charges 208,964 204,856 205,920 ---------- ---------- ---------- Total Assets $1,267,500 $1,155,981 $1,195,987 ========== ========== ========== See notes to financial statements.
2 LACLEDE GAS COMPANY BALANCE SHEETS (Continued) (UNAUDITED)
Dec. 31, Sept. 30, Dec. 31, 2004 2004 2003 ---- ---- ---- (Thousands, except share amounts) CAPITALIZATION AND LIABILITIES Capitalization: Common stock and Paid-in capital (10,000 shares issued and outstanding) $ 137,065 $ 136,052 $ 82,589 Retained earnings 202,389 194,451 200,433 Accumulated other comprehensive loss (371) (371) (582) ---------- ---------- ---------- Total common stock equity 339,083 330,132 282,440 Redeemable preferred stock (less current sinking fund requirements) 1,108 1,108 1,258 Long-term debt (less current portion) 333,962 333,936 234,643 ---------- ---------- ---------- Total Capitalization 674,153 665,176 518,341 ---------- ---------- ---------- Current Liabilities: Notes payable 177,300 71,380 265,585 Accounts payable 81,646 44,505 72,674 Accounts payable - associated companies - 834 9,206 Advance customer billings 21,195 23,620 12,287 Current portion of long-term debt and preferred stock 145 25,145 25,000 Wages and compensation accrued 12,207 13,256 11,197 Dividends payable 7,251 7,214 6,463 Customer deposits 11,170 10,661 8,291 Interest accrued 5,327 10,623 4,263 Taxes accrued 22,832 17,669 18,072 Unamortized purchased gas adjustment - - 3,017 Other 3,900 3,232 4,016 ---------- ---------- ---------- Total Current Liabilities 342,973 228,139 440,071 ---------- ---------- ---------- Deferred Credits and Other Liabilities: Deferred income taxes 200,854 187,831 180,268 Unamortized investment tax credits 4,944 5,010 5,240 Pension and postretirement benefit costs 20,355 20,484 22,814 Regulatory liabilities 2,725 28,210 6,375 Other 21,496 21,131 22,878 ---------- ---------- ---------- Total Deferred Credits and Other Liabilities 250,374 262,666 237,575 ---------- ---------- ---------- Total Capitalization and Liabilities $1,267,500 $1,155,981 $1,195,987 ========== ========== ========== See notes to financial statements.
3 LACLEDE GAS COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended Dec. 31, --------------------------- 2004 2003 ---- ---- (Thousands) Operating Activities: Net Income $ 15,102 $ 17,356 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 5,308 5,661 Deferred income taxes and investment tax credits (1,159) 1,547 Other - net (47) 107 Changes in assets and liabilities: Accounts receivable - net (104,769) (93,312) Unamortized purchased gas adjustments 3,782 (2,848) Deferred purchased gas costs (26,082) 19,588 Advance customer billings - net (2,425) (3,074) Accounts payable 36,307 29,639 Taxes accrued 5,163 1,785 Natural gas stored underground 11,273 4,603 Other assets and liabilities (1,647) 2,335 --------- -------- Net cash used in operating activities $ (59,194) $(16,613) --------- -------- Investing Activities: Construction expenditures (11,861) (11,212) Employee benefit trusts (2,503) (1,439) Other investments 132 221 --------- -------- Net cash used in investing activities $ (14,232) $(12,430) --------- -------- Financing Activities: Maturity of first mortgage bonds (25,000) - Issuance of short-term debt - net 105,920 35,845 Dividends paid (7,149) (6,408) Paid-in capital contributions from Laclede Group 1,013 - --------- -------- Net cash provided by financing activities $ 74,784 $ 29,437 --------- -------- Net Increase in Cash and Cash Equivalents $ 1,358 $ 394 Cash and Cash Equivalents at Beginning of Period 2,340 2,907 --------- -------- Cash and Cash Equivalents at End of Period $ 3,698 $ 3,301 ========= ======== Supplemental Disclosure of Cash Paid (Refunded) During the Period for: Interest $ 12,154 $ 8,465 Income taxes 849 (20) See notes to financial statements.
4 LACLEDE GAS COMPANY NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These notes are an integral part of the accompanying financial statements of Laclede Gas Company (Laclede Gas or the Utility). In the opinion of Laclede Gas, this interim report includes all adjustments (consisting of only normal recurring accruals) necessary for the fair presentation of the results of operations for the periods presented. Certain prior-period amounts have been reclassified to conform to current-period presentation. This Form 10-Q should be read in conjunction with the Notes to Financial Statements contained in Laclede Gas' Fiscal Year 2004 Form 10-K. Laclede Gas is a regulated natural gas distribution utility having a material seasonal cycle. As a result, these interim statements of income for Laclede Gas are not necessarily indicative of annual results or representative of the succeeding quarter of the fiscal year. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the November through April period, which generally corresponds with the heating season. The Utility typically experiences losses during the non-heating season. REVENUE RECOGNITION - Laclede Gas reads meters and bills its customers on a monthly cycle billing basis. The Utility records its regulated gas distribution revenues from gas sales and transportation service on an accrual basis that includes estimated amounts for gas delivered, but not yet billed. The accruals for unbilled revenues are reversed in the subsequent accounting period when meters are actually read and customers are billed. The amount of accrued unbilled revenues at December 31, 2004 and 2003, for the Utility, were $60.9 million and $38.3 million, respectively. After accrual of related gas cost expense, the accrued pre-tax net revenues at December 31, 2004 and 2003 were $10.2 million and $8.8 million, respectively. The amount of accrued unbilled revenue at September 30, 2004 was $8.8 million. BASIS OF CONSOLIDATION - In compliance with generally accepted accounting principles, transactions between Laclede Gas and its affiliates as well as intercompany balances on Laclede Gas' balance sheet have not been eliminated from the Laclede Gas financial statements. Laclede Gas provides administrative and general support to affiliates. All such costs, which are not material, are billed to the appropriate affiliates and are reflected in accounts receivable on Laclede Gas' Balance Sheet. At December 31, 2004, the Laclede Gas Balance Sheet reflected a total of $2.7 million of intercompany receivables. Laclede Gas may also, on occasion, borrow funds from, or lend funds to, affiliated companies as well as charge or reimburse certain tax obligations. NEW ACCOUNTING STANDARDS - In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs." This Statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. The provisions of this statement shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Laclede Gas does not expect adoption of this statement to have a material effect on its financial position or results of operations. In December 2004, the FASB issued SFAS No. 123 (revised 2004) (123(R)), "Accounting for Stock-Based Compensation." This Statement is a revision to SFAS No. 123, and establishes standards for the accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement supersedes Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. Laclede Group currently accounts for its Equity Incentive Plan in accordance with APB Opinion No. 25, and provides pro forma disclosures in its Notes to Consolidated Financial Statements regarding the effect on net income and earnings as if compensation expense had been determined based on the fair value recognition provisions of SFAS No. 123. SFAS No. 123(R) is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Laclede Gas is currently evaluating the provisions of this Statement, and its effect resulting from Laclede Group's adoption of this Statement no later than the fourth quarter of fiscal 2005. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets." This Statement is an amendment of APB Opinion No. 29, "Accounting for Nonmonetary Transactions." The guidance in APB Opinion No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The provisions of this Statement will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 5 15, 2005. Laclede Gas does not expect adoption of this statement to have a material effect on its financial position or results of operations. 2. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS Laclede Gas has non-contributory defined benefit, trusteed forms of pension plans covering substantially all employees over the age of twenty-one. Benefits are based on years of service and the employee's compensation during the last three years of employment. The funding policy of Laclede Gas is to contribute an amount not less than the minimum required by government funding standards, nor more than the maximum deductible amount for federal income tax purposes. Plan assets consist primarily of corporate and U.S. government obligations and pooled equity funds. Pension costs for the quarters ending December 31, 2004 and 2003 were $1.1 million. These costs include amounts capitalized with construction activities. The net periodic pension costs include the following components: Three Months Ended December 31, ------------------- (Thousands) 2004 2003 ---- ---- Service cost - benefits earned during the period $ 2,799 $ 2,777 Interest cost on projected benefit obligation 3,994 4,058 Expected return on plan assets (5,291) (5,625) Amortization of prior service cost 309 331 Amortization of actuarial loss 730 951 Regulatory adjustment (1,409) (1,369) ------------------- Net pension cost $ 1,132 $ 1,123 =================== 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 gains or losses exceed 10% of the greater of the projected benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. Also in the 2002 rate case, the Commission ordered that the recovery in rates for the Utility's qualified pension plans is based on the ERISA minimum contribution of zero effective October 1, 2002, and on the ERISA minimum contribution of zero plus $3.4 million annually effective July 1, 2003. The difference between this amount on a pro-rata basis and pension expense as calculated pursuant to the above and included in the Statements of Income and Comprehensive Income is deferred as a regulatory asset or liability. Pursuant to the provisions of the Laclede Gas pension plans, pension obligations may be satisfied by lump sum cash payments. Pursuant to MoPSC order, lump sum payments are recognized as settlements (which can result in gains or losses) only if the total of such payments exceeds 100% of the sum of service and interest costs. No lump sum payments were recognized as settlements during the three months ended December 31, 2004 or the three months ended December 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. Postretirement benefit costs for quarters ending December 31, 2004 and 2003 were $2.0 million. These costs include amounts capitalized with construction activities. 6 Net periodic postretirement benefit costs consisted of the following components: Three Months Ended December 31, ------------------ (Thousands) 2004 2003 ---- ---- Service cost - benefits earned during the period $ 845 $ 794 Interest cost on accumulated postretirement benefit obligation 826 801 Expected return on plan assets (319) (209) Amortization of transition obligation 145 265 Amortization of prior service cost (8) (8) Amortization of actuarial loss 217 174 Regulatory adjustment 295 164 ------------------ Net postretirement benefit cost $2,001 $1,981 ================== Pursuant to the Commission's Order in the Utility's 2002 rate case, the return on plan assets is based on market related value of plan assets implemented prospectively over a four-year period. Unrecognized gains and losses are amortized only to the extent that such gains or losses exceed 10% of the greater of the accumulated postretirement benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. Also in the 2002 rate case, the Commission ordered that the recovery in rates for the postretirement benefit costs be based on the accounting methodology as ordered in the 1999 rate case. The difference between this amount and postretirement benefit expense as calculated pursuant to the above is deferred as a regulatory asset or liability. 3. INCOME TAXES Net provision (benefit) for income taxes was as follows during the periods set forth below: Three Months Ended December 31, ------------------ (Thousands) 2004 2003 ---- ---- Federal Current $7,956 $7,128 Deferred (913) 1,342 State and Local Current 1,308 1,194 Deferred (246) 204 ------------------ Total $8,105 $9,868 ================== 4. OTHER INCOME AND INCOME DEDUCTIONS - NET Three Months Ended December 31, ------------------ (Thousands) 2004 2003 ---- ---- Allowance for funds used during construction $ (25) $ (32) Other income 501 517 Other income deductions 1,034 935 ------------------ Other income and income deductions - net $1,510 $1,420 ================== 7 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 Non- Gas Regulated (Thousands) Distribution Other Eliminations Total ------------------------------------------------------------------------------------------- Three Months Ended December 31, 2004 ----------------- Operating revenues $ 291,253 $ 580 $ - $ 291,833 Net income 15,102 - - 15,102 Total assets 1,265,932 1,568 - 1,267,500 Three Months Ended December 31, 2003 ----------------- Operating revenues $ 261,350 $ 632 $ - $ 261,982 Net income 17,340 16 - 17,356 Total assets 1,194,498 1,489 - 1,195,987
6. COMMITMENTS AND CONTINGENCIES Laclede Gas owns and operates natural gas distribution, transmission and storage facilities, the operations of which are subject to various environmental laws, regulations and interpretations. While environmental issues resulting from such operations arise in the ordinary course of business, such issues have not materially affected Laclede Gas' financial position and results of operations. As environmental laws, regulations, and their interpretations evolve, however, Laclede Gas may be required to incur additional costs. With regard to a former manufactured gas plant site located in Shrewsbury, Missouri, Laclede Gas and state and federal environmental regulators have agreed upon certain remedial actions and those actions are essentially complete. Laclede Gas currently estimates the overall costs of these actions will be approximately $2.4 million. As of December 31, 2004, Laclede Gas has paid or reserved for these actions. If regulators require additional remedial actions or assert additional claims, Laclede Gas will incur additional costs. Laclede Gas enrolled a second former manufactured gas plant site into the Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to minimize the scope and cost of site cleanup while maximizing possibilities for site development. This site is located in, and is presently owned by, the City of St. Louis, Missouri. Laclede Gas continues to evaluate options concerning this site, including, but not limited to, the submission of its own Remedial Action Plan (RAP) to the VCP. Laclede Gas currently estimates that the cost of site investigations, agency oversight and related legal and engineering consulting may be approximately $650,000. Currently, Laclede Gas has paid or reserved for these actions. Laclede Gas has requested that other former site owners and operators share in these costs and one party has agreed to participate and has reimbursed Laclede Gas to date for $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 to the extent 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 known whether Laclede Gas will incur any costs in connection with environmental investigations of or remediation at the site, and if it does incur any such costs, what the amount of those costs would be. Costs incurred are charged to expense or capitalized in accordance with generally accepted accounting principles. A predetermined level of expense is recovered through Laclede Gas' rates. While the scope of future costs relative to the actions Laclede Gas has taken at the Shrewsbury site pursuant to the current agreement with state and federal regulators may not be significant, the scope of costs relative to future remedial actions regulators may require at the Shrewsbury site and to the other sites is unknown and may be material. 8 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 costs incurred under current agreement regarding the Shrewsbury site, denials of coverage are not expected to have a material impact on the financial position and results of operations of Laclede Gas. With regard to the other two sites and with regard to any future actions that might be required at the Shrewsbury site, since the scope of costs are unknown and may be significant, denials of coverage may have a material impact on the financial position and results of operations of Laclede Gas. Such costs, if incurred, have typically been subject to recovery in rates. On June 28, 2002, the Staff of the MoPSC filed its recommendation in a proceeding established to review Laclede Gas' gas costs for fiscal 2001. In its recommendation, the Staff proposed to disallow approximately $4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based Price Stabilization Program. This Program was discontinued at the end of the 2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in proceedings before the MoPSC, including a formal hearing that was held on this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved by Laclede Gas, and directed Laclede Gas to flow through such amount to its customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas appealed the MoPSC's decision to the 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 has paid $4.9 million into the Court's registry pending a final judicial determination of Laclede Gas' entitlement to such amounts. On November 5, 2003, the Circuit Court 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. Oral arguments were held in the Missouri Court of Appeals for the Western District on August 17, 2004. The Utility is now awaiting the court's decision. The Utility continues to believe in the merits of its position and intends, if necessary, to assert its position vigorously throughout the appellate process. However, 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 or results of operations of Laclede Gas. 7. SUBSEQUENT EVENT In January 2005, the Board of Directors of Laclede Gas desired to sell shares to its sole shareholder, Laclede Group, at a price per share equal to book value. However, Laclede Gas is prohibited from issuing fractional shares, so the Board first authorized a stock dividend of ninety-nine shares of its common stock, par value $1.00 per share, on each outstanding share of its common stock to be paid on January 21, 2005 to increase its outstanding shares from 100 to 10,000. The retroactive effect of this stock dividend has been presented in the Balance Sheet. As such, $9,900 was transferred to common stock and paid-in capital from retained earnings, representing the aggregate par value of the shares issued under the stock dividend. All references to the number of shares have been restated from 100 shares to 10,000 shares to give retroactive effect to the stock dividend for all periods presented. The Board also approved, subsequent to the stock dividend, the sale of 31 shares of Laclede Gas common stock to Laclede Group at a price per share equal to the book value at December 31, 2004, as adjusted for the effect of the stock dividend described above. The proceeds from the sale, totaling approximately $1.1 million, were used to reduce short-term borrowings. Exemption from registration was claimed under Section 4(2) of the Securities Act of 1933. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations LACLEDE GAS COMPANY - ------------------- This management's discussion analyzes the financial condition and results of operations of Laclede Gas Company (Laclede Gas or the Utility). It includes management's view of factors that affect its business, explanations of past financial results including changes in earnings and costs from the prior year periods, and their effects on overall financial condition and liquidity. Certain matters discussed in this report, excluding historical information, include forward-looking statements. Certain words, such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "seek," and similar words and expressions identify forward-looking statements that involve uncertainties and risks. Future developments may not be in accordance with our expectations or beliefs and the effect of future developments may not be those anticipated. Among the factors that may cause results to differ materially from those contemplated in any forward-looking statement are: o weather conditions and catastrophic events; o economic, competitive, political and regulatory conditions; o legislative, regulatory and judicial mandates and decisions, some of which may be retroactive, including those affecting o allowed rates of return o incentive regulation o industry structure o purchased gas adjustment provisions o rate design structure and implementation o franchise renewals o environmental or safety matters o taxes o accounting standards; o the results of litigation; o retention, ability to attract, ability to collect from and conservation efforts of customers; o capital and energy commodity market conditions including the ability to obtain funds for necessary capital expenditures and the terms and conditions imposed for obtaining sufficient gas supply; o discovery of material weakness in internal controls; and o employee workforce issues. Readers are urged to consider the risks, uncertainties and other factors that could affect our business as described in this report. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement in light of future events. The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Utility's Financial Statements and the notes thereto. 10 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. The weather mitigation rate design minimizes the impact of weather volatility during the peak cold months of December through March and reduces the impact of weather volatility, to a lesser extent, during the months of November and April. Mitigating the impact of weather fluctuations on Laclede Gas customers while improving the ability to recover its authorized distribution costs and return has been a fundamental component of the Laclede Gas strategy. The Utility's distribution costs are the essential, primarily fixed expenditures it must incur to operate and maintain a more than 15,000-mile natural gas distribution system and related storage facilities. In addition, Laclede Gas is working to continually improve its ability to provide reliable natural gas service at a reasonable cost, while maintaining and building a secure and dependable infrastructure. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the November through April period, which generally corresponds with the heating season. The Utility typically experiences losses during the non-heating season. Due to the material seasonal cycle of Laclede Gas, the accompanying interim statements of income for Laclede Gas are not necessarily indicative of annual results or representative of the succeeding quarters of the fiscal year. Quarter Ended December 31, 2004 - ------------------------------- Laclede Gas' net income applicable to common stock for the quarter ended December 31, 2004 was $15.1 million, compared with net income of $17.3 million for the same quarter last year. Temperatures experienced in the Utility's service area during the quarter were 15% warmer than normal, but 3% colder than the same period last year. However, reduced gas sales levels resulting from 21% warmer than normal weather in the month of November contributed to lower earnings this quarter, despite being tempered by the weather mitigation rate design. The decrease in net income of $2.2 million is primarily attributable to the following factors, quantified on a pre-tax basis: o the net effect totaling $1.7 million of lower system gas sales volumes primarily due to an unseasonably warm weather pattern in November; o lower income this year from off system sales and capacity release totaling $1.2 million; o higher interest charges totaling $1.0 million, primarily due to the issuance of additional long-term debt; and, o a higher provision for uncollectible accounts totaling $.5 million above the same period last year. These factors were partially offset by the recovery of eligible costs incurred to build and maintain the Utility's distribution system through the implementation of an Infrastructure System Replacement Surcharge effective June 10, 2004 totaling $.9 million. Regulated Operating Revenues and Operating Expenses Laclede Gas passes on to Utility customers (subject to prudence review) increases and decreases in the wholesale cost of natural gas in accordance with its Purchased Gas Adjustment (PGA) clause. The volatility of the wholesale natural gas market results in fluctuations from period to period in the recorded levels of, among 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. 11 Regulated operating revenues for the quarter ended December 31, 2004 were $291.3 million, or $29.9 million greater than the same period last year. The increase was primarily attributable to higher PGA rates totaling $39.9 million, partially offset by decreased off system sales revenues totaling $5.7 million and lower system gas sales levels and other variations totaling $4.3 million. System therms sold and transported decreased by 6.8 million therms, or 2.3%, below the quarter ended December 31, 2003. Regulated operating expenses for the quarter ended December 31, 2004 increased $33.0 million from the same quarter last year. Natural and propane gas expense increased $31.1 million from last year's level primarily attributable to higher rates charged by our suppliers, partially offset by lower volumes purchased for sendout and decreased off system gas cost expense. Other operation and maintenance expenses increased $1.2 million, or 3.6%, primarily due to a higher provision for uncollectible accounts, increased distribution charges and higher wage rates, partially offset by lower pension costs and decreased group insurance charges. Taxes, other than income, increased $1.0 million, or 6.7%, primarily due to higher gross receipts taxes (reflecting increased revenues) and higher real estate and personal property taxes. Interest Charges The $1.0 million increase in interest charges was primarily due to higher interest on long-term debt due to the April 2004 issuance of $50 million of 5 1/2% First Mortgage Bonds and $100 million of 6% First Mortgage Bonds, partially offset by the early redemption in June 2004 of $50 million of 6 5/8% First Mortgage Bonds and the November 2004 maturity of $25 million of 8 1/2% First Mortgage Bonds. This increase in interest on long-term debt was partially offset by reduced interest on short-term debt, mainly attributable to lower short-term borrowings. Income Taxes The decrease in income taxes was primarily attributable to lower pre-tax income. Regulatory Matters - ------------------ Laclede Gas previously appealed the MoPSC's decision in its 1999 rate case relative to the calculation of its depreciation rates. The Circuit Court remanded the decision to the MoPSC based on inadequate findings of fact. The MoPSC upheld its previous order and Laclede Gas appealed this second order to the Circuit Court. In 2002, the Circuit Court ruled that the MoPSC's second order was lawful and reasonable, and Laclede Gas appealed the Circuit Court's decision to the Missouri Court of Appeals for the Western District. On March 4, 2003 the Court of Appeals issued an opinion remanding the decision to the MoPSC based on the MoPSC's failure to support and explain its decision with adequate findings of fact. In May 2003, the Court of Appeals rejected the MoPSC's request that the Court reconsider its opinion or transfer this matter to the Missouri Supreme Court. On January 11, 2005, the Commission issued an Order ruling in favor of Laclede Gas on the depreciation issue. As a direct result of the Commission's Order ruling in favor of the Utility's position, Laclede Gas will increase certain of its depreciation rates effective February 1, 2005 resulting in higher annual depreciation expense totaling $2.3 million, as it originally requested. At the same time, operating expenses related to actual removal costs, which the Utility began expensing as incurred during fiscal 2002, will be reduced by $2.3 million annually, as ordered by the Commission. As such, there will be no effect on net income, and the Commission's decision will not have an immediate effect on the Utility's recovery of depreciation expenses. However, the Utility expects that the Commission's confirmation of Laclede Gas' position on the proper method for calculating depreciation rates will result in increased cash flows from capital recovery in future rate cases. On June 28, 2002, the Staff of the MoPSC filed its recommendation in a proceeding established to review Laclede Gas' gas costs for fiscal 2001. In its recommendation, the Staff proposed to disallow approximately $4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based Price Stabilization Program. This Program was discontinued at the end of the 2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in proceedings before the MoPSC, including a formal hearing that was held on this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved by Laclede Gas, and directed Laclede Gas to flow through such amount to its 12 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 has paid $4.9 million into the Court's registry pending a final judicial determination of Laclede Gas' entitlement to such amounts. On November 5, 2003, the Circuit Court 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. Oral arguments were held in the Missouri Court of Appeals for the Western District on August 17, 2004. The Utility is now awaiting the court's decision. The Utility continues to believe in the merits of its position and intends, if necessary, to assert its position vigorously throughout the appellate process. However, 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 or results of operations of Laclede Gas. Laclede Gas filed its first Infrastructure System Replacement Surcharge (ISRS) filing with the MoPSC on March 1, 2004 to increase revenues by approximately $3.86 million annually. The filing was made pursuant to a Missouri law, enacted in 2003, that allows gas utilities to adjust their rates up to twice a year to recover certain facility-related expenditures that are made to comply with state and federal safety requirements or to relocate facilities in connection with public improvement projects. On June 1, 2004, the MoPSC approved a Stipulation and Agreement ("S&A") between Laclede Gas and the Staff of the Commission that provided for a $3.56 million annual surcharge effective June 10, 2004. Laclede Gas made its second ISRS filing on October 28, 2004 to increase revenues by approximately an additional $1.6 million annually. On January 4, 2005, the MoPSC approved a S&A between Laclede Gas and the Staff of the Commission that provided for a $1.42 million annual increase in ISRS revenues effective January 20, 2005. Critical Accounting Policies - ---------------------------- Our Discussion and Analysis of our financial condition, results of operations, liquidity and capital resources is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Generally accepted accounting principles require that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following represent the more significant items requiring the use of judgment and estimates in preparing our financial statements: Allowances for doubtful accounts - Estimates of the collectibility of trade accounts receivable are based on historical trends, age of receivables, economic conditions, credit risk of specific customers, and other factors. Employee benefits and postretirement obligations - Pension and postretirement obligations are calculated by actuarial consultants that utilize several statistical factors and other assumptions related to future events, such as discount rates, returns on plan assets, compensation increases, and mortality rates. The amount of expense recognized by the Utility is dependent on the regulatory treatment provided for such costs. Certain liabilities related to group medical benefits and workers' compensation claims, portions of which are self-insured and/or contain "stop-loss" coverage with third-party insurers to limit exposure, are established based on historical trends. Laclede Gas accounts for its regulated operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." This statement sets forth the application of accounting principles generally accepted in the United States of America for those companies whose rates are established by or are subject to approval by an independent third-party regulator. The provisions of SFAS No. 71 require, among other things, that financial statements of a regulated enterprise reflect the actions of regulators, where appropriate. These actions may result in the recognition of revenues and 13 expenses in time periods that are different than non-regulated enterprises. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses when those amounts are reflected in rates. Also, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for recovery of costs that are expected to be incurred in the future (regulatory liabilities). Management believes that the current regulatory environment supports the continued use of SFAS No. 71 and that all regulatory assets and liabilities are recoverable or refundable through the regulatory process. We believe the following represent the more significant items recorded through the application of SFAS No. 71: The Utility's Purchased Gas Adjustment (PGA) Clause allows Laclede Gas to flow through to customers, subject to prudence review, the cost of purchased gas supplies, including the costs, cost reductions and related carrying costs associated with the Utility's use of natural gas financial instruments to hedge the purchase price of natural gas. The difference between actual costs incurred and costs recovered through the application of the PGA are recorded as regulatory assets and liabilities that are recovered or refunded in a subsequent period. Laclede Gas records deferred tax liabilities and assets measured by enacted tax rates for the net tax effect of all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes. Changes in enacted tax rates, if any, and certain property basis differences will be reflected by entries to regulatory asset or liability accounts. Also, pursuant to the direction of the MoPSC, Laclede Gas' provision for income tax expense for financial reporting purposes reflects an open-ended method of tax depreciation. This method is consistent with the regulatory treatment prescribed by the MoPSC to depreciate the Utility's assets. For further discussion of significant accounting policies, see the Notes to the Financial Statements included in Exhibit 99.1 of the Laclede Group's Form 10-K for the fiscal year ended September 30, 2004. Accounting Pronouncements - ------------------------- In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs." This Statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. The provisions of this statement shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Laclede Gas does not expect adoption of this statement to have a material effect on its financial position or results of operations. In December 2004, the FASB issued SFAS No. 123 (revised 2004) (123(R)), "Accounting for Stock-Based Compensation." This Statement is a revision to SFAS No. 123, and establishes standards for the accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement supersedes Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. Laclede Group currently accounts for its Equity Incentive Plan in accordance with APB Opinion No. 25, and provides pro forma disclosures in its Notes to Consolidated Financial Statements regarding the effect on net income and earnings as if compensation expense had been determined based on the fair value recognition provisions of SFAS No. 123. SFAS No. 123(R) is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Laclede Gas is currently evaluating the provisions of this Statement, and its effect resulting from Laclede Group's adoption of this Statement no later than the fourth quarter of fiscal 2005. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets." This Statement is an amendment of APB Opinion No. 29, "Accounting for Nonmonetary Transactions." The guidance in APB 14 Opinion No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The provisions of this Statement will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Laclede Gas does not expect adoption of this statement to have a material effect on its financial position or results of operations. FINANCIAL CONDITION Credit Ratings - -------------- As of December 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 has investment grade ratings, and believes that it will have adequate access to the financial markets to meet its capital requirements. These ratings remain subject to review and change by the rating agencies. Cash Flows - ---------- Laclede Gas' short-term borrowing requirements typically peak during colder months when Laclede Gas borrows money to cover the gap between when it purchases its natural gas and when its customers pay for that gas. Changes in the wholesale cost of natural gas, variations in the timing of collections of gas cost under the Utility's PGA Clause, the seasonality of accounts receivable balances, and the utilization of storage gas inventories cause short-term cash requirements to vary during the year, and can cause significant variations in the Utility's cash provided by or used in operating activities. Net cash used in operating activities for the three months ended December 31, 2004 was $59.2 million, a $42.6 million increase, compared with the same period last year. The increase in cash used in operating activities was primarily attributable to the net effects of changes in wholesale gas prices and lower off system sales on accounts receivable, accounts payable, and deferred purchased gas costs. Net cash used in investing activities for the three months ended December 31, 2004 was $14.2 million compared with $12.4 million for the three months ended December 31, 2003. Cash used in investing activities primarily reflected Utility construction expenditures in both periods. Net cash provided by financing activities was $74.8 million for the three months ended December 31, 2004 compared with $29.4 million for the three months ended December 31, 2003. The variation primarily reflects the issuance of additional short-term debt this year, partially offset by the November 2004 maturity of $25 million 8 1/2% First Mortgage Bonds. Liquidity and Capital Resources - ------------------------------- As indicated above, the Utility's short-term borrowing requirements typically peak during colder months. These short-term cash requirements have traditionally been met through the sale of commercial paper supported by lines of credit with banks. 15 Laclede Gas currently has lines of credit in place of $300 million, with $15 million expiring in April 2005 and $285 million expiring in September 2009. Short-term commercial paper borrowings outstanding at December 31, 2004 were $177.3 million (the peak for the quarter) at a weighted average interest rate of 2.5% per annum. Based on short-term borrowings at December 31, 2004, a change in interest rates of 100 basis points would increase or decrease Laclede Gas pre-tax earnings and cash flows by approximately $1.8 million on an annual basis. Most of Laclede Gas' lines of credit include covenants limiting total debt, including short-term debt, to no more than 70% of total capitalization and requiring earnings before interest, taxes, depreciation and amortization (EBITDA) for a trailing twelve-month period to be at least 2.25 times interest expense. On December 31, 2004, total debt was 60% of total capitalization. For the twelve months ending December 31, 2004, EBITDA was 3.55 times interest expense. Laclede Gas has on file a shelf registration on Form S-3. Of the $350 million of securities originally registered under this Form S-3, $120 million of debt securities remained registered and unissued as of December 31, 2004. The original MoPSC authorization for issuing securities registered on this Form S-3 expired in September 2003. In response to an application filed by the Utility, the MoPSC extended this authorization to issue debt and equity securities and receive capital contributions through October 31, 2006. The remaining MoPSC authorization is $64.4 million, reflecting capital contributions that have been made by Laclede Group to Laclede Gas under this authority through January 2005. The amount, timing and type of additional financing to be issued under this shelf registration will depend on cash requirements and market conditions. In April 2004, Laclede Gas issued $50 million of First Mortgage Bonds, 5 1/2% Series, due May 1, 2019, and $100 million of First Mortgage Bonds, 6% Series, due May 1, 2034. The net proceeds of approximately $147.9 million from this issuance were used to repay short-term debt and to call at par the $50 million 6 5/8% Series First Mortgage Bonds in June 2004. The proceeds were also used to pay at maturity $25 million of 8 1/2% First Mortgage Bonds in November 2004. At December 31, 2004, Laclede Gas had fixed-rate long-term debt totaling $335 million. While these long-term debt issues are fixed-rate, they are subject to changes in fair value as market interest rates change. However, increases or decreases in fair value would impact earnings and cash flows only if Laclede Gas were to reacquire any of these issues in the open market prior to maturity. In January 2005, the Board of Directors of Laclede Gas desired to sell shares to its sole shareholder, Laclede Group, at a price per share equal to book value. However, Laclede Gas is prohibited from issuing fractional shares, so the Board first authorized a stock dividend of ninety-nine shares of its common stock on each outstanding share of its common stock to be paid on January 21, 2005 to increase its outstanding shares from 100 to 10,000. The Board also approved, subsequent to the stock dividend, the sale of 31 shares of Laclede Gas common stock to Laclede Group at a price per share equal to the book value at December 31, 2004, as adjusted for the effect of the stock dividend. The proceeds from the sale, totaling approximately $1.1 million, were used to reduce short-term borrowings. Utility construction expenditures were $11.9 million for the three months ended December 31, 2004, compared with $11.2 million for the same period last year. Capitalization at December 31, 2004, excluding current obligations of preferred stock, consisted of 50.3% common stock equity, .2% preferred stock equity and 49.5% long-term debt. It is management's view that Laclede Gas has adequate access to capital markets and will have sufficient capital resources, both internal and external, to meet anticipated capital requirements. The seasonal nature of Laclede Gas' sales affects the comparison of certain balance sheet items at December 31, 2004 and at September 30, 2004, such as Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts Payable, Regulatory Assets and Liabilities, and Advance Customer Billings. The Balance Sheet at December 31, 2003 is presented to facilitate comparison of these items with the corresponding interim period of the preceding fiscal year. 16 Contractual Obligations - ----------------------- As of December 31, 2004, Laclede Gas had contractual obligations with payments due as summarized below (in millions):
Payments due by period -------------------------------------------------------- Remaining Fiscal Years Fiscal Year Fiscal Years Fiscal Years 2009 and Contractual Obligations Total 2005 2006-2007 2008-2009 thereafter - ---------------------------------------------------------------------------------------------------------- Long-Term Debt (a) $ 693.3 $ 12.5 $ 81.7 $73.7 $525.4 Capital Leases - - - - - Operating Leases (b) 8.6 1.7 3.9 2.6 .4 Purchase Obligations - Natural Gas (c) 427.1 301.5 113.2 6.5 5.9 Purchase Obligations - Other (d) 11.0 5.0 4.0 2.0 - Other Long-Term Liabilities - - - - - ------------------------------------------------------------------- Total $1,140.0 $320.7 $202.8 $84.8 $531.7 =================================================================== (a) Long-term debt obligations reflect principal maturities and interest payments. (b) Operating lease obligations are primarily for office space, vehicles, and power operated equipment. Additional payments will be incurred if renewal options are exercised under the provisions of certain agreements. (c) These purchase obligations represent the minimum payments required under existing natural gas transportation and storage contracts and natural gas supply agreements. These amounts reflect fixed obligations as well as obligations to purchase natural gas at future market prices, calculated using December 31, 2004 NYMEX futures prices. Laclede Gas recovers the costs related to its purchases, transportation, and storage of natural gas through the operation of its Purchased Gas Adjustment Clause; however, variations in the timing of collections of gas costs from customers affect short-term cash requirements. Additional contractual commitments may be entered into during the heating season. (d) These purchase obligations reflect miscellaneous agreements for the purchase of materials and the procurement of services necessary for normal operations.
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 December 31, 2004, the Utility held approximately 12.1 million MMBtu of futures contracts at an average price of $7.05 per MMBtu. Additionally, approximately 3.8 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 2005. Environmental Matters - --------------------- Laclede Gas owns and operates natural gas distribution, transmission and storage facilities, the operations of which are subject to various environmental laws, regulations and interpretations. While environmental issues resulting from such operations arise in the ordinary course of business, such issues have not materially affected Laclede Gas' financial position and results of operations. As environmental laws, regulations, and their interpretations evolve, however, Laclede Gas may be required to incur additional costs. 17 With regard to a former manufactured gas plant site located in Shrewsbury, Missouri, Laclede Gas and state and federal environmental regulators have agreed upon certain remedial actions and those actions are essentially complete. Laclede Gas currently estimates the overall costs of these actions will be approximately $2.4 million. As of December 31, 2004, Laclede Gas has paid or reserved for these actions. If regulators require additional remedial actions or assert additional claims, Laclede Gas will incur additional costs. Laclede Gas enrolled a second former manufactured gas plant site into the Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to minimize the scope and cost of site cleanup while maximizing possibilities for site development. This site is located in, and is presently owned by, the City of St. Louis, Missouri. Laclede Gas continues to evaluate options concerning this site, including, but not limited to, the submission of its own Remedial Action Plan (RAP) to the VCP. Laclede Gas currently estimates that the cost of site investigations, agency oversight and related legal and engineering consulting may be approximately $650,000. Currently, Laclede Gas has paid or reserved for these actions. Laclede Gas has requested that other former site owners and operators share in these costs and one party has agreed to participate and has reimbursed Laclede Gas to date for $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 to the extent 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 known whether Laclede Gas will incur any costs in connection with environmental investigations of or remediation at the site, and if it does incur any such costs, what the amount of those costs would be. Costs incurred are charged to expense or capitalized in accordance with generally accepted accounting principles. A predetermined level of expense is recovered through Laclede Gas' rates. While the scope of future costs relative to the actions Laclede Gas has taken at the Shrewsbury site pursuant to the current agreement with state and federal regulators may not be significant, the scope of costs relative to future remedial actions regulators may require at the Shrewsbury site and to the other sites is unknown and may be material. Laclede Gas has notified its insurers 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 costs incurred under current agreement regarding the Shrewsbury site, denials of coverage are not expected to have a material impact on the financial position and results of operations of Laclede Gas. With regard to the other two sites and with regard to any future actions that might be required at the Shrewsbury site, since the scope of costs are unknown and may be significant, denials of coverage may have a material impact on the financial position and results of operations of Laclede Gas. Such costs, if incurred, have typically been subject to recovery in rates. OFF-BALANCE SHEET ARRANGEMENTS Laclede Gas has no off-balance sheet arrangements. 18 -----END PRIVACY-ENHANCED MESSAGE-----