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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 June 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Exact Name of Registrant as State of I.R.S.
Number Specified in its Charter and Incorporation Employer
Principal Office Address and Identification
Telephone Number Number
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1-16681 The Laclede Group, Inc. Missouri 74-2976504
720 Olive Street
St. Louis, MO 63101
314-342-0500
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1-1822 Laclede Gas Company Missouri 43-0368139
720 Olive Street
St. Louis, MO 63101
314-342-0500
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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 July 25, 2003
- ---------- --------------------------- -------------
The Laclede Group, Inc. Common Stock ($1.00 Par Value) 19,078,853
Laclede Gas Company Common Stock ($1.00 Par Value) 100 (100% owned by
Laclede Group)
1
TABLE OF CONTENTS Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
The Laclede Group, Inc.:
Statements of Consolidated Income 4
Statements of Consolidated Comprehensive Income 5
Consolidated Balance Sheets 6-7
Statements of Consolidated Cash Flows 8
Notes to Consolidated Financial Statements 9-17
Laclede Gas Company:
Statements of Income Ex. 99.1, p. 1
Balance Sheets Ex. 99.1, p. 2-3
Statements of Cash Flows Ex. 99.1, p. 4
Notes to Financial Statements Ex. 99.1, p. 5-10
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (The Laclede Group, Inc.) 18-26
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Laclede Gas Company) Ex. 99.1, p. 11-19
Item 3 Quantitative and Qualitative Disclosures About Market Risk 27
Item 4 Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 28
Item 6 Exhibits and Other Reports on Form 8-K 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).
Effective October 1, 2001, Laclede Gas and its subsidiaries became
subsidiaries of The Laclede Group. At that time stock certificates
previously representing shares of Laclede Gas common stock were deemed to
represent the same number of shares of The Laclede Group common stock. All
of the former subsidiaries of Laclede Gas (Laclede Investment LLC, Laclede
Energy Resources, Inc., Laclede Gas Family Services, Inc., Laclede
Development Company, Laclede Venture Corp. and Laclede Pipeline Company) are
now subsidiaries of Laclede Group.
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 year ended September 30, 2002.
3
Item 1. Financial Statements
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Operating Revenues:
Regulated
Gas distribution $114,207 $ 87,284 $688,828 $527,297
Non-Regulated
Services 27,276 39,482 75,414 54,756
Gas marketing 41,762 19,650 118,903 44,029
Other 3,350 844 5,800 3,285
-----------------------------------------------------------
Total Operating Revenues 186,595 147,260 888,945 629,367
-----------------------------------------------------------
Operating Expenses:
Regulated
Natural and propane gas 60,293 41,565 442,054 313,274
Other operation expenses 27,097 25,497 88,084 80,577
Maintenance 4,583 4,547 13,977 13,179
Depreciation and amortization 5,579 6,106 16,668 18,741
Taxes, other than income taxes 11,553 9,752 48,260 41,088
-----------------------------------------------------------
Total regulated operating expenses 109,105 87,467 609,043 466,859
Non-Regulated
Services 24,801 35,874 78,161 54,054
Gas marketing 40,381 19,058 115,228 43,594
Other 3,185 898 5,269 3,122
-----------------------------------------------------------
Total Operating Expenses 177,472 143,297 807,701 567,629
-----------------------------------------------------------
Operating Income 9,123 3,963 81,244 61,738
Other Income and (Income Deductions) - Net 12 (55) 469 694
-----------------------------------------------------------
Income Before Interest and Income Taxes 9,135 3,908 81,713 62,432
-----------------------------------------------------------
Interest Charges:
Interest on long-term debt 4,945 5,205 15,355 15,615
Preferred dividends and subsidiary trust
distributions 866 - 1,877 -
Other interest charges 810 1,129 3,112 3,868
-----------------------------------------------------------
Total Interest Charges 6,621 6,334 20,344 19,483
-----------------------------------------------------------
Income (Loss) Before Income Taxes 2,514 (2,426) 61,369 42,949
Income Tax Expense (Benefit) 476 (1,532) 22,635 15,350
-----------------------------------------------------------
Net Income (Loss) 2,038 (894) 38,734 27,599
Dividends on Redeemable Preferred Stock -
Laclede Gas 16 16 47 52
-----------------------------------------------------------
Net Income (Loss) Applicable to Common Stock $ 2,022 $ (910) $ 38,687 $ 27,547
===========================================================
Average Number of Common Shares Outstanding 19,044 18,878 19,002 18,878
Basic Earnings (Loss) Per Share of Common Stock $.11 $(.05) $2.04 $1.46
Diluted Earnings (Loss) Per Share of Common Stock $.11 $(.05) $2.04 $1.46
Dividends Declared Per Share of Common Stock $.335 $.335 $1.005 $1.005
See notes to consolidated financial statements.
4
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
(Thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net Income $2,022 $(910) $38,687 $27,547
--------------------------------------------------------
Other Comprehensive Income:
Net gains on cash flow hedging
derivative instruments:
Net hedging gain arising during period 259 - 519 -
Less: Reclassification adjustment for
gains included in net income 229 - 229 -
--------------------------------------------------------
Net unrealized gains on cash flow
hedging derivative instruments 30 - 290 -
--------------------------------------------------------
Other Comprehensive Income, Before Tax 30 - 290 -
Income Tax Expense Related to
Items of Other Comprehensive Income 11 - 112 -
--------------------------------------------------------
Other Comprehensive Income, Net of Tax 19 - 178 -
--------------------------------------------------------
Comprehensive Income $2,041 $(910) $38,865 $27,547
========================================================
5
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
June 30 Sept. 30
2003 2002
------- --------
(Thousands)
(UNAUDITED)
ASSETS
Utility Plant $1,018,482 $ 988,747
Less: Accumulated depreciation and amortization 406,482 394,371
------------------------------
Net Utility Plant 612,000 594,376
------------------------------
Goodwill 28,124 27,455
------------------------------
Other Property and Investments 44,291 46,986
------------------------------
Current Assets:
Cash and cash equivalents 7,274 12,870
Accounts receivable 109,845 94,010
Allowances for doubtful accounts (5,415) (4,532)
Materials, supplies, and merchandise at avg. cost 4,342 4,364
Natural gas stored underground at LIFO cost 51,870 77,121
Propane gas at FIFO cost 12,473 14,712
Delayed customer billings 16,778 -
Deferred income taxes 6,332 12,305
Prepayments and other 8,869 11,505
------------------------------
Total Current Assets 212,368 222,355
------------------------------
Deferred Charges:
Prepaid pension cost 110,662 114,313
Regulatory assets 72,266 72,484
Other 6,052 3,904
------------------------------
Total deferred charges 188,980 190,701
------------------------------
Total Assets $1,085,763 $1,081,873
==============================
See notes to consolidated financial statements.
6
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
June 30 Sept. 30
2003 2002
------- --------
(Thousands, except share amounts)
(UNAUDITED)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (50,000,000 shares authorized, 19,046,235 and
18,921,287 shares issued, respectively) $ 19,046 $ 18,921
Paid-in capital 67,521 64,667
Retained earnings 222,105 202,517
Accumulated other comprehensive loss (161) (339)
-----------------------------
Total common stock equity 308,511 285,766
Redeemable preferred stock - Laclede Gas 1,258 1,266
Obligated mandatorily redeemable preferred securities of
subsidiary trust 45,000 -
Long-term debt (less sinking fund requirements) - Laclede Gas 259,607 259,545
-----------------------------
Total Capitalization 614,376 546,577
-----------------------------
Current Liabilities:
Notes payable 128,860 161,670
Accounts payable 63,226 45,707
Advance customer billings - 24,832
Current portion of long-term debt - 25,000
Taxes accrued 25,110 9,815
Unamortized purchased gas adjustment 1,898 22,976
Other 43,866 46,797
-----------------------------
Total Current Liabilities 262,960 336,797
-----------------------------
Deferred Credits and Other Liabilities:
Deferred income taxes 155,481 157,378
Unamortized investment tax credits 5,394 5,629
Pension and postretirement benefit costs 20,489 14,658
Other 27,063 20,834
-----------------------------
Total Deferred Credits and Other Liabilities 208,427 198,499
-----------------------------
Total Capitalization and Liabilities $1,085,763 $1,081,873
=============================
See notes to consolidated financial statements.
7
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30,
2003 2002
---- ----
(Thousands)
Operating Activities:
Net Income $ 38,734 $ 27,599
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 18,901 19,963
Deferred income taxes and investment
tax credits 4,899 (7,834)
Other - net 450 685
Changes in assets and liabilities:
Accounts receivable - net (14,952) 3,192
Unamortized purchased gas adjustments (21,078) (7,306)
Deferred purchased gas costs 6,257 24,244
Delayed customer billings - net (41,610) (8,496)
Accounts payable 17,519 7,563
Taxes accrued 15,295 8,674
Natural gas stored underground 25,251 44,660
Other assets and liabilities 9,100 (2,230)
-----------------------------
Net cash provided by operating activities $ 58,766 $110,714
-----------------------------
Investing Activities:
Construction expenditures (35,824) (37,109)
Employee benefit trusts (151) 32
Acquisition of SM&P, net of cash and cash equivalents - (38,044)
Other investments 556 (1,056)
-----------------------------
Net cash used in investing activities $(35,419) $(76,177)
-----------------------------
Financing Activities:
Maturity of first mortgage bonds (25,000) -
Repayment of short-term debt - net (32,810) (3,740)
Dividends paid (19,104) (19,024)
Issuance of common stock 2,979 -
Issuance of obligated mandatorily redeemable preferred
Securities of subsidiary trust 45,000 -
Preferred stock reacquired (8) (395)
-----------------------------
Net cash used in financing activities $(28,943) $(23,159)
-----------------------------
Net Increase (Decrease) in Cash and Cash Equivalents $ (5,596) $ 11,378
Cash and Cash Equivalents at Beg of Period 12,870 3,223
-----------------------------
Cash and Cash Equivalents at End of Period $ 7,274 $ 14,601
=============================
Supplemental Disclosure of Cash Paid
During the Period for:
Interest $ 22,120 $ 19,565
Income taxes 473 10,777
See notes to consolidated financial statements.
8
THE LACLEDE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.) 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 Financial Statements contained in the
Company's Fiscal Year 2002 Form 10-K.
2.) On December 16, 2002, Laclede Capital Trust I (Trust), a wholly
owned Delaware Statutory trust of Laclede Group, issued $45 million
of 7.70% Trust Preferred Securities with a liquidation value of $25
per share due December 1, 2032. These securities can be redeemed on
or after December 16, 2007. All of the proceeds from the sale of
the Trust Preferred Securities were invested by the Trust in
debentures of Laclede Group with the same economic terms as the
Trust Preferred Securities. Net proceeds of approximately $43.3
million from the sale of these debentures were used to repay the
$42.8 million bank note obtained in January 2002 to fund the
acquisition of SM&P, and for other general corporate purposes.
The Trust Preferred Securities sold by the Trust represent
preferred beneficial interests and 97% beneficial ownership in the
assets held by the Trust. In exchange for the funds realized from
the sale of the Trust Preferred Securities and Trust common
securities representing 3% beneficial ownership interest in the
assets held by the Trust, Laclede Group issued $46.4 million of
junior subordinated debt instruments that constitute 100% of the
assets of the Trust.
The Trust Preferred Securities are rated A- (stable outlook) by
Standard & Poor's Ratings Group (S&P), Baa3 (stable outlook) by
Moody's Investors Service, Inc. and BBB+ (negative outlook) by
Fitch Ratings. These ratings remain subject to review and change by
the rating agencies.
3.) On October 3, 2002, the Missouri Public Service Commission (MoPSC or
the Commission) approved a settlement reached among the parties to
the 2002 rate case, filed by Laclede Gas Company (Laclede Gas or
the Utility) on January 25, 2002. The terms of the settlement
included (1) an annual rate increase of $14 million effective on
November 9, 2002; (2) a moratorium on additional rate filings
until March 1, 2004; and (3) an innovative rate design that is
expected to provide the Utility with the ability to recover its
distribution costs, which are essentially fixed, in a manner that
is significantly less sensitive to weather. The settlement also
provided for, among other things, changes resulting in negative
amortization of the depreciation reserve of $3.4 million annually
effective from July 1, 2002 until the Utility's next rate case
proceeding, minor changes in depreciation rates effective January
1, 2003, and changes in the regulatory treatment of pension costs
primarily designed to stabilize such costs, effective beginning
fiscal 2003. Also approved was an incentive program beginning in
fiscal 2003 under which the Utility may achieve, under specific
conditions, income related to management of its gas supply
commodity costs. Previously deferred costs of $.3 million are
being recovered and amortized on a straight-line basis over a
ten-year period, without return on investment, effective with
implementation of the new rates, in addition to certain amounts
authorized previously.
4.) On January 28, 2002, Laclede Group completed its acquisition from
NiSource, Inc. of 100% of the stock of SM&P Utility Resources,
Inc. (SM&P), one of the nation's major underground locating and
marking service businesses. SM&P, a Carmel, Indiana-based company,
operates in the midwestern states. Locators mark the placement of
underground facilities for major providers of telephone, natural
gas, electric, water, cable TV and fiber optic services so that
construction work can be performed without damaging buried
facilities. As a result of the acquisition, SM&P's earnings flow
is expected to diversify Laclede Group's earnings and be
counter-seasonal to those of Laclede Gas. SM&P is a subsidiary of
Laclede Group and remains headquartered in Indiana. This
acquisition was financed initially with conventional bank debt
totaling $42.8 million, that was refinanced through the issuance
of Laclede Capital Trust I Preferred Securities on December 16,
2002.
The following table summarizes the fair values of the assets
acquired and liabilities assumed at the date of acquisition. The
goodwill recognized in this transaction is fully deductible for tax
purposes. Acquired intangible assets of $498,000 were assigned to
registered trademarks that are not subject to amortization. Net
assets acquired includes cash and cash equivalents of $5.1 million.
9
At January 28, 2002
-------------------
(Thousands)
Current assets $20,578
Property, plant, and equipment 7,457
Other assets 456
Intangible assets 498
Goodwill 28,124
-------
Total assets acquired $57,113
-------
Current liabilities $13,571
Long-term liabilities 404
-------
Total liabilities assumed $13,975
-------
Net assets acquired $43,138
=======
The fair values of assets acquired and liabilities assumed at the
date of acquisition were adjusted to final valuation amounts during
the quarter ended March 31, 2003, resulting in an increase to
goodwill amounting to approximately $662,000.
SM&P's earnings are impacted by construction trends. SM&P's
revenues are dependent on a limited number of customers, primarily
in the utility and telecommunications sector, with contracts that
may be terminated on as short as 30 days' notice. For more
information, see Note 11 on page 13.
5.) 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. Laclede Gas is a natural gas distribution
utility having a material seasonal cycle. As a result, these
interim statements of income for Laclede Group are not necessarily
indicative of annual results or representative of succeeding
quarters of the fiscal year. Due to the seasonal nature of the
business of Laclede Gas, earnings are typically concentrated in
the November through April period, which generally corresponds
with the heating season. The Utility typically experiences losses
during the non-heating season. This seasonal effect on Laclede
Group is expected to be tempered somewhat by the impact of the
weather mitigation rate design implemented in November 2002 and
the addition of SM&P, whose operations tend to be counter-seasonal
to those of Laclede Gas.
6.) Net provision (benefit) for income taxes was as follows during the
periods set forth below:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
(Thousands)
Federal
Current $(1,774) $(6,793) $14,790 $19,819
Deferred 1,782 5,554 4,090 (6,793)
State and Local
Current 135 (1,277) 2,946 3,334
Deferred 333 984 809 (1,010)
-----------------------------------------------
Total $ 476 $(1,532) $22,635 $15,350
===============================================
In the quarter ended June 30, 2003, Laclede Gas filed an election
with the Internal Revenue Service to change its income tax method
of accounting for the net costs of removal for certain
straight-line vintage property, effective with fiscal year 2002.
The Utility changed its method of accounting for tax purposes to
expense such costs of removal, and take any related salvage
proceeds into income; instead of charging removal costs, net of
salvage proceeds, to the depreciation reserve. Deductible cost of
removal resulting from
10
this change in method of accounting decreased income tax expense
by approximately $.3 million for the quarter ended June 30, 2003.
7.) Under the Gas Supply Incentive Plan (GSIP) of Laclede Gas, the Utility
shared with its customers certain gains and losses related to the
acquisition and management of its gas supply assets. The
provisions of the GSIP extended through September 30, 2001. In
September 2001, the MoPSC ruled that the GSIP should be allowed to
expire. The Utility requested clarification and rehearing, which
were denied. The Utility then sought a stay of the decision, which
was denied, and then sought a judicial review of the MoPSC's
decision. On April 3, 2003, the Cole County Circuit Court issued
its Order and Judgment affirming the MoPSC's decision to terminate
the GSIP. The Company has determined that it will not seek further
judicial review of the MoPSC's decision. However, in the 2002 rate
case, the Commission approved a new Gas Supply Incentive Plan
applicable only to the Company's gas supply commodity costs. In
addition, pursuant to the 2001 rate case settlement, the MoPSC
authorized Laclede Gas to retain all income from releases of
pipeline capacity effective December 1, 2001. Income from releases
of pipeline capacity was previously shared with customers under
the terms of the GSIP. Laclede Gas will continue to retain all
income resulting from sales outside of its traditional service
area, as previously authorized by the Commission. Income related
to releases of pipeline capacity and sales made outside its
traditional service area are volatile in nature and subject to
market conditions.
Three Months Ended Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
(Thousands)
Pre-Tax Income - Capacity Release $1,523 $428 $2,838 $1,008
Pre-Tax Income - Off System Sales 408 512 7,123 3,615
------------------------ -------------------------
Total Pre-Tax Income $1,931 $940 $9,961 $4,623
======================== =========================
8.) In the course of its business, Laclede Group's non-regulated marketing
affiliate, Laclede Energy Resources, Inc. (LER), enters into fixed
price commitments for the sale of natural gas to customers. LER
manages the price risk associated with these sales by either
closely matching the purchases of physical supplies at fixed
prices or through the use of exchange-traded futures contracts to
lock in margins. At June 30, 2003, LER's open positions were not
material to Laclede Group's financial position or results of
operations. At that same date, LER had settled futures positions
of .6 million MmBtu of natural gas for July 2003 and open long
positions of .56 million MmBtu for March 2004 at an average price
of $5.19 per MmBtu. Also, LER had open short futures positions of
.05 million MmBtu for August 2003, .01 million MmBtu for September
2003 and .75 million MmBtu for November 2003 at average prices of
$6.41 per MmBtu, $6.27 per MmBtu and $5.82 per MmBtu,
respectively. These futures contracts are derivative instruments
and management has designated these items as cash flow hedges of
forecasted transactions. The fair values of the instruments are
recognized on the Consolidated Balance Sheets. The change in the
fair value of the effective portion of these hedge instruments is
recorded, net of tax, in Other Comprehensive Income, a component
of Common Stock Equity. These amounts will reduce or be charged to
Non-Regulated Gas Marketing Operating Revenues or Expenses in the
Statements of Consolidated Income as the transactions occur. It is
expected that approximately $.2 million of the net unrealized
gains on cash flow hedging derivative instruments at June 30, 2003
will be reclassified into the Consolidated Statement of Income
during fiscal 2004. 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.
9.) The Laclede Group Equity Plan was approved at the annual meeting of
shareholders of Laclede Group on January 30, 2003. The purpose of
the Equity Plan is to provide a more competitive compensation
program and to attract and retain those executive and other key
employees essential to achieve the Company's strategic objectives.
To accomplish this purpose, the compensation committee may grant
awards under the Equity 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 Plan, key
employees of the Company and its subsidiaries, as determined by
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,
11
(d) stock appreciation rights, and (e) stock units, as well as any
other stock-based awards not inconsistent with the Equity Plan.
Each award under the Equity 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 Plan may not exceed
1,250,000.
During the quarter ended March 31, 2003, the Company granted
221,500 non-qualified stock options to employees at an exercise
price of $23.27 per share. No option can be exercised before
February 6, 2004. The stock options vest one-fourth each year for
four years after the date of the grant and expire on the tenth
anniversary of the grant date. The Company accounts for the Equity
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 Plan had an exercise price equal to the market value of the
Company's stock on the date of the grant.
Weighted Average
Shares Exercise Price
------ ----------------
Outstanding at March 31, 2003 221,500 $23.27
Granted - -
Exercised - -
Forfeited (12,500) $23.27
Outstanding at June 30, 2003 209,000 $23.27
Exercisable at June 30, 2003 -
The closing price of the Company's common stock was $26.80 at June 30,
2003.
If compensation expense had been determined based on the fair value
recognition provisions of Statement of Financial Accounting
Standards (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 2003 is $4.33
per option. The estimated fair value of options would be amortized
to expense over the options' vesting period.
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
(Thousands, Except Per Share Amounts)
Net income (loss) applicable to
common stock, as reported $2,022 $(910) $38,687 $27,547
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of tax effects 33 - 58 -
-----------------------------------------------------------
Pro forma net income (loss) applicable
to common stock $1,989 $(910) $38,629 $27,547
===========================================================
Earnings (loss) per share:
Basic - as reported $.11 $(.05) $2.04 $1.46
Diluted - as reported $.11 $(.05) $2.04 $1.46
Basic - pro forma $.10 $(.05) $2.03 $1.46
Diluted - pro forma $.10 $(.05) $2.03 $1.46
12
The fair value of the options was estimated at the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions:
2003 2002
------------------------------
Risk free interest rate 4.00% Not Applicable
Expected dividend yield of stock 5.70% Not Applicable
Expected volatility of stock 25.00% Not Applicable
Expected life of option 96 months Not Applicable
10.) SFAS No. 128, Earnings Per Share, requires dual presentation of
basic and diluted earnings per share (EPS). Basic EPS does not
include potentially dilutive securities and is computed by dividing
net income applicable to common stock by the weighted-average
number of common shares outstanding during the period. Diluted EPS
assumes the issuance of common shares pursuant to the Company's
stock-based compensation plan at the beginning of each respective
period.
Three Months Ended Nine Months Ended
June 30 June 30
(Thousands, Except Per Share Amounts) 2003 2002 2003 2002
----------------------- -----------------------
Basic EPS:
Net Income Applicable to Common Stock $ 2,022 $ (910) $38,687 $27,547
Weighted-Average Shares Outstanding 19,044 18,878 19,002 18,878
Earnings (Loss) Per Share of Common Stock $.11 $(.05) $2.04 $1.46
Diluted EPS:
Net Income Applicable to Common Stock $ 2,022 $ (910) $38,687 $27,547
Weighted-Average Shares Outstanding 19,044 18,878 19,002 18,878
Dilutive Effect of Employee Stock Options 10 - 3 -
----------------------- -----------------------
Weighted-Average Diluted Shares 19,054 18,878 19,005 18,878
Earnings (Loss) Per Share of Common Stock $.11 $(.05) $2.04 $1.46
11.) The Regulated Gas Distribution segment consists of the regulated
operations of Laclede Gas and is the core business segment of
Laclede Group. Laclede Gas is a public utility engaged in the
retail distribution of natural gas serving an area in eastern
Missouri, with a population of approximately 2.0 million,
including the City of St. Louis, St. Louis County, and parts of
eight other counties. The Non-Regulated Services segment includes
the results of SM&P, an underground locating and marking business
operating in the midwestern states, a wholly owned subsidiary of
Laclede Group acquired on January 28, 2002. The Non-Regulated Gas
Marketing segment includes the results of Laclede Energy
Resources, Inc., a wholly owned subsidiary of Laclede Group as a
result of the October 1, 2001 restructuring. Previously, LER's
operations did not meet the quantitative thresholds to produce a
reportable segment. Its operations are included as a reportable
segment in the current period, and prior-period segment
information has been reclassified. Non-Regulated Other includes
the transportation of liquid propane, the sale of insurance
related products, real estate development, the compression of
natural gas, and financial investments in other enterprises. These
operations are conducted through six wholly owned subsidiaries,
five of which became subsidiaries of Laclede Group as a result of
the restructuring on October 1, 2001, plus Laclede Energy
Services, Inc. (LES), a wholly owned subsidiary of Laclede Group
that became operational on May 1, 2002 and was dissolved on
April 14, 2003. LES performed administrative gas supply and risk
management services. The dissolution of LES had no material effect
on the financial position or results of operations of Laclede
Group. The results of SM&P's operations since January 28, 2002 and
the results of LES' operations since May 1, 2002 are included in
Laclede Group's Consolidated Financial Statements. There are no
material intersegment revenues.
13
Regulated Non-Regulated
Gas Non-Regulated Gas Non-Regulated
(Thousands) Distribution Services Marketing Other Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------
Three Months Ended
June 30, 2003
-------------
Operating revenues $ 114,207 $27,276 $ 41,762 $ 3,339 $ 11 $ 186,595
Net income
applicable to
common stock 23 995 888 116 - 2,022
Total assets 1,004,537 57,720 32,841 28,822 (38,157) 1,085,763
Nine Months Ended
June 30, 2003
-------------
Operating revenues $ 688,828 $75,414 $118,903 $ 5,879 $ (79) $ 888,945
Net income
applicable to
common stock 39,470 (3,438) 2,221 434 - 38,687
Total assets 1,004,537 57,720 32,841 28,822 (38,157) 1,085,763
Three Months Ended
June 30, 2002
-------------
Operating revenues $ 87,284 $39,482 $ 19,650 844 $ - $ 147,260
Net income
applicable to
common stock (3,376) 2,096 367 3 - (910)
Total assets 926,018 60,478 16,460 31,002 (15,943) 1,018,015
Nine Months Ended
June 30, 2002
-------------
Operating revenues $ 527,297 $54,756 $ 44,029 $ 3,285 $ - $ 629,367
Net income
applicable to
common stock 27,034 63 288 162 - 27,547
Total assets 926,018 60,478 16,460 31,002 (15,943) 1,018,015
In November 2002, two customers notified SM&P that, due to actions
they have taken to address workforce management issues, they did
not intend to continue to outsource certain functions, which
include locating services provided by SM&P, after February and
March 2003. One of these customers notified SM&P in January 2003
that it will continue to outsource a portion of its locating
services provided by SM&P beyond that timeframe. Revenue from these
customers totaled approximately $45 million for fiscal 2002 and is
currently expected to total approximately $28 million for fiscal
2003. In connection with the reduction in work from these
customers, SM&P made reductions in the required levels of
personnel, facilities and equipment. Management continues to
estimate that the total cost of these reductions will result in an
after-tax charge of approximately $1 million, all of which was
expensed during the quarter ended March 31, 2003.
12.) Laclede Gas is subject to various environmental laws and
regulations that, to date, have not materially affected the
Company's financial position and results of operations. As these
laws, regulations, and their interpretation evolve, however,
additional costs may be incurred.
With regard to a former manufactured gas plant site located in
Shrewsbury, Missouri, Laclede Gas and state and federal
environmental regulators have agreed upon certain actions and those
actions are nearing completion. Laclede Gas currently estimates the
overall costs of these actions will be approximately $2.3 million.
As of June 30, 2003, Laclede Gas has paid or reserved for these
actions. If regulators require additional actions or assert
additional claims, Laclede Gas will incur additional costs.
Laclede Gas enrolled a second former manufactured gas plant site
into the Missouri Voluntary Cleanup Program (VCP). The VCP provides
opportunities to minimize the scope and cost of site cleanup while
maximizing possibilities for site development. This site is located
in and is presently owned by the City of
14
St. Louis, Missouri. The City of St. Louis has separately
authorized a developer to prepare both a Remedial Action Plan
(RAP), for submission to the VCP, and a site development plan.
Laclede Gas continues to explore with the developer what role, if
any, it might play in these efforts. Laclede Gas continues to
evaluate other options as well, including, but not limited to, the
submission of its own RAP to the VCP. Laclede Gas currently
estimates that the cost of site investigations, agency oversight
and related legal and engineering consulting may be approximately
$629,000. Currently, Laclede Gas has paid or reserved for these
actions. Laclede has requested that other former site owners and
operators share in these costs and one party has agreed to
participate and has reimbursed Laclede Gas to date for $173,000.
Laclede Gas anticipates additional reimbursement from this party.
Laclede Gas plans to seek proportionate reimbursement of all costs
relative to this site from other potentially responsible parties
if practicable.
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.
Laclede Gas has been advised that a third former manufactured gas
plant site previously operated but no longer owned by Laclede Gas
may contain gas plant waste that may require remediation. Laclede
Gas is working to determine the nature and extent of such waste, if
any, and its responsibility, if any, for any remediation costs.
While the scope of costs relative to the Shrewsbury site will not
be significant, the scope of costs relative to the other sites is
unknown and may be material. Laclede Gas has notified its insurers
that it seeks reimbursement of its costs at these three
manufactured gas plant sites. In response, the majority of insurers
have reserved their rights. While some of the insurers have denied
coverage, Laclede Gas continues to seek reimbursement from them.
With regard to the Shrewsbury site, denials of coverage are not
expected to have any material impact on the financial position and
results of operations of Laclede Gas. With regard to the other two
sites, since the scope of costs are unknown and may be significant,
denials of coverage may have a material impact on the financial
position and results of operations of Laclede Gas. Such costs, if
incurred, have typically been subject to recovery in rates.
13.) 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 believes that Staff's position lacks merit and
has 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 ratepayers in its November 2003 PGA filing. On
June 19, 2003, Laclede Gas appealed the MoPSC's decision to the
Cole County Circuit Court. Laclede Gas continues to believe in the
merit of its position and intends to vigorously pursue its appeal.
To the extent that a final decision in the Courts sustains the
Commission's disallowance, the proceeding's outcome could have a
material effect on the future financial position and results of
operations of Laclede Gas.
14.) In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations," which requires all business
combinations in the scope of this Statement to be accounted for
using the purchase method. The provisions of this Statement apply
to all business combinations initiated after June 30, 2001. The
FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which addresses how acquired goodwill and other
intangible assets that are acquired individually or with a group
of other assets should be accounted for in financial statements
upon acquisition and after they have been initially recognized in
the financial statements. The Company adopted the provisions of
SFAS No. 141 with the acquisition of SM&P. As required by SFAS No.
141, the goodwill for SM&P is being accounted for consistent with
the provisions of SFAS No. 142. The complete adoption of SFAS Nos.
141 and 142 on October 1, 2002 did not have a material effect on
the financial position and results of operations of Laclede Group.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which addresses financial accounting and reporting
for obligations associated with the retirement of tangible
long-lived assets and associated asset retirement costs. It applies
to legal obligations associated with the retirement of long-lived
assets that result from acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. The provisions of the Statement provide for
rate-regulated entities that meet the criteria for application of
SFAS No. 71, such as Laclede Gas, to recognize regulatory
15
assets or liabilities for differences in the timing of recognition
of the period costs associated with asset retirement obligations
for financial reporting pursuant to this Statement and rate-making
purposes. The adoption of this Statement on October 1, 2002 did
not affect the financial position and results of operations of
Laclede Group. There are legal obligations related to final
abandonment of the Utility's gas distribution system. However,
these obligations related to mass property and other distribution
system assets generally continue in perpetuity and can not be
measured under SFAS No. 143 because of indeterminate settlement
dates and cash flow estimates.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure", provides alternative methods for a voluntary
change to the fair value based method of accounting for stock-based
compensation. In addition, this statement requires prominent
disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and
the method used on reported results. The disclosure provisions are
effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002.
The required disclosures are included in Note 9, page 11.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities", amends and clarifies financial accounting
and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. This Statement is effective for
contracts entered into or modified after June 30, 2003, with
certain exceptions, and for all hedging relationships designated
after June 30, 2003. Laclede Group does not expect a material
effect on its financial position and results of operations.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", establishes
standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously
classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company is currently reviewing
the classification of its obligated mandatorily redeemable
preferred securities of subsidiary trust and redeemable preferred
stock on the Consolidated Balance Sheets. These items are currently
classified between equity and liabilities. Laclede Group does not
expect any material effect on its financial position and results of
operations.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", requires an entity to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. This requirement is
to be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. This Interpretation also requires
disclosures in interim and annual financial statements about
obligations under certain guarantees that the entity has issued.
These disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15,
2002. The required disclosures are included in Note 15, page 17.
FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities", addresses consolidation of business enterprises of
variable interest entities. This Interpretation applies immediately
to variable interest entities created after January 31, 2003, and
to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest acquired
before February 1, 2003. The Company is currently evaluating the
effect of this pronouncement on the consolidation of its obligated
mandatorily redeemable preferred securities of subsidiary trust,
but does not expect a material effect on the financial position and
results of operations of Laclede Group.
16
15.) 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 $8 million.
Laclede Group had guarantees outstanding of $5.0 million for
performance and payment of certain wholesale gas supply purchases
by Laclede Energy Resources, Inc. (its non-regulated marketing
affiliate), as of June 30, 2003. Laclede Group issued an additional
$1.0 million guarantee of performance commencing in July 2003.
Laclede Gas Company's Consolidated Financial Statements and Notes
to Consolidated Financial Statements are included in Exhibit 99.1.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THE LACLEDE GROUP, INC.
- -----------------------
This management's discussion analyzes the financial condition and results of
operations of The Laclede Group, Inc. (Laclede Group or the Company) and its
subsidiaries. It includes management's view of factors that affect its
business, explanations of past financial results including changes in
earnings and costs from the prior year, 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 and rate structures
o purchased gas adjustment provisions
o franchise renewals
o environmental or safety matters;
o taxes;
o accounting standards;
o the results of litigation;
o retention, ability to attract, ability to collect from and conservation
efforts of customers;
o capital and energy commodity market conditions including the ability to
obtain funds for necessary capital expenditures and the terms and conditions
imposed for obtaining sufficient gas supply; and
o 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 combined notes thereto.
18
THE LACLEDE GROUP, INC.
RESULTS OF OPERATIONS
Laclede Group's earnings are primarily derived from the regulated activities
of its largest subsidiary, Laclede Gas Company, Missouri's largest natural
gas distribution company. Those utility earnings are generated by the sale
of heating energy, which has historically been heavily influenced by the
weather. 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. This seasonal effect on
Laclede Group was tempered somewhat by the impact of the weather mitigation
rate design implemented in November 2002, and the addition of SM&P Utility
Resources, Inc. (SM&P), a wholly owned subsidiary acquired January 28, 2002
whose operations tend to be counter-seasonal to those of Laclede Gas.
Quarter Ended June 30, 2003
- ---------------------------
Laclede Group's basic earnings per share were $.11 for the quarter ended
June 30, 2003 compared with a loss of $.05 per share for the quarter ended
June 30, 2002. The year-to-year improvement in consolidated results was
primarily due to lower seasonal losses experienced by the Utility and, to a
lesser extent, higher earnings reported by Laclede Energy Resources, Inc.
(LER). Temperatures in Laclede Gas' service area during the quarter were 11%
warmer than normal and 4% warmer than the same quarter last year. Seasonal
losses typically experienced by Laclede Gas were mitigated this year by the
implementation of a new rate design that lessens the impact of weather on
the Utility's earnings and recovers fixed costs more evenly during the
heating season. This resulting shift in the interim margin revenue pattern
resulted in higher margin revenue for the quarter ended June 30, 2003
compared with the same period last year. This effect of higher margin
revenue combined with a general rate increase effective November 9, 2002 and
higher income from capacity release at the Utility, was partially offset by
higher costs of doing business. These improved results were partially offset
by lower earnings reported by SM&P during the quarter ended June 30, 2003
compared with the same period last year.
Regulated operating revenues for the quarter ended June 30, 2003 were
$114.2 million, or $26.9 million more than the same period last year. The
increase was primarily attributable to higher Purchased Gas Adjustment (PGA)
Clause rates that are passed on to Utility customers (subject to prudence
review), and to a lesser extent, the effect of the general rate increase.
These factors were partially offset by lower off-system sales revenues.
System therms sold and transported were essentially the same as the quarter
ended June 30, 2002.
Laclede Group's non-regulated services operating revenues for this quarter
decreased $12.2 million primarily due to the loss of two customers by SM&P.
Non-regulated gas marketing operating revenues increased $22.1 million
primarily due to increased gas marketing sales by Laclede Energy Resources,
Inc. Other non-regulated operating revenues increased $2.5 million primarily
due to higher revenues recorded by Laclede Pipeline Company (LPC), a wholly
owned subsidiary that transports liquid propane.
Regulated operating expenses for the quarter ended June 30, 2003 increased
$21.6 million from the same quarter last year. Natural and propane gas
expense increased $18.7 million above last year's level primarily
attributable to higher rates charged by our suppliers, partially offset by
lower off-system gas expense. Other operation and maintenance expenses
increased $1.6 million, or 5.4%, primarily due to higher pension costs and
higher group insurance charges, partially offset by a lower provision for
uncollectible accounts and reduced distribution charges. Depreciation and
amortization expense decreased $.5 million primarily due to the effect of
negative amortization of a portion of the depreciation reserve effective
July 1, 2002, as authorized by the Missouri Public Service Commission
(MoPSC). This effect was partially offset by increased depreciable property.
Taxes, other than income, increased $1.8 million, or 18.5%, primarily due to
higher gross receipts taxes (reflecting the increased revenues).
All variations in non-regulated operating expenses are primarily associated
with changes in sales levels.
The $.3 million increase in interest charges is primarily due to the
issuance of trust preferred securities in December 2002, partially offset by
a reduction in short-term interest charges (reflecting reduced rates) and
lower interest on long-term debt due to the May 2003 maturity of $25 million
of 6 1/4% First Mortgage Bonds.
The increase in income taxes is primarily due to higher pre-tax income.
19
Nine Months Ended June 30, 2003
- -------------------------------
Laclede Group's basic earnings per share were $2.04 for the nine months
ended June 30, 2003 compared with $1.46 per share for the same period last
year. Earnings were primarily comprised of those of Laclede Gas, which were
favorably affected by higher gas sales arising from temperatures in its
service area that were colder than last year, the benefit of the general
rate increases put into effect by Laclede Gas on December 1, 2001 and
November 9, 2002 and higher income from off-system sales and capacity
release. Temperatures for the nine-month period ended June 30, 2003 were
1% colder than normal and 20% colder than the same period last year. These
benefits were partially offset by the effect of income recorded in the same
period last year produced by the Utility's Price Stabilization Program and
higher costs of doing business. The increased Utility earnings, coupled with
higher earnings reported by LER, were partially offset by losses recorded by
SM&P (acquired January 28, 2002) mainly reflecting the full
fiscal-year-to-date effect of seasonal losses this year and right-sizing
costs related to the loss of two customers (discussed below).
Regulated operating revenues for the nine months ended June 30, 2003 were
$688.8 million, or $161.5 million more than the same period last year. The
increase was primarily attributable to higher gas sales levels resulting
from colder weather, higher PGA rates that are passed on to Utility
customers (subject to prudence review), increased off-system and capacity
release revenues, and the general rate increases. System therms sold and
transported increased by 111.0 million therms, or 13.4%, above the nine
months ended June 30, 2002.
Laclede Group's non-regulated services operating revenues for this period
increased $20.7 million from those revenues for the same period last year
primarily attributable to the nine-month effect of revenues recorded this
year by SM&P (acquired January 28, 2002), partially offset by the loss of
revenue related to two customers. Non-regulated gas marketing revenues
increased $74.9 million primarily due to increased gas marketing sales by
Laclede Energy Resources, Inc. Other non-regulated operating revenues
increased $2.5 million primarily due to higher revenues recorded by Laclede
Pipeline Company.
Regulated operating expenses for the nine months ended June 30, 2003
increased $142.2 million from the same period last year. Natural and propane
gas expense increased $128.8 million above last year's level primarily
attributable to higher volumes purchased for sendout due to the colder
weather, higher rates charged by our suppliers and higher off system gas
expense. Other operation and maintenance expenses increased $8.3 million, or
8.9%, primarily due to increased pension costs, higher wage rates, higher
group insurance charges, increased insurance premiums, and a higher
provision for uncollectible accounts. These factors were partially offset by
reduced distribution charges. Depreciation and amortization expense
decreased $2.1 million primarily due to the effect of negative amortization
of a portion of the depreciation reserve effective July 1, 2002, as
authorized by the MoPSC. This effect was partially offset by increased
depreciable property. Taxes, other than income, increased $7.2 million, or
17.5%, primarily due to higher gross receipts taxes (reflecting the
increased revenues).
Laclede Group's non-regulated services operating expenses increased
$24.1 million for the nine months ended June 30, 2003 due to the nine-month
effect of operating expenses recorded this year by SM&P and right-sizing
costs expensed this year related to the aforementioned customer loss.
Non-regulated gas marketing operating expenses increased $71.6 million and
other non-regulated operating expenses increased $2.1 million mainly due to
higher expenses associated with increased sales levels.
The $.9 million increase in interest expense was primarily due to the
issuance of trust preferred securities in December 2002, partially offset by
a reduction in short-term interest charges (reflecting reduced rates) and
lower interest on long-term debt due to the May 2003 maturity of $25 million
of 6 1/4% First Mortgage Bonds.
The increase in income taxes is mainly due to higher pre-tax income.
In November 2002, two customers notified SM&P that, due to actions they have
taken to address workforce management issues, they did not intend to
continue to outsource certain functions, which include locating services
provided by SM&P, after February and March 2003. One of these customers
notified SM&P in January 2003 that it will continue to outsource a portion
of its locating services provided by SM&P beyond that timeframe. Revenue
from these customers totaled approximately $45 million for fiscal 2002 and
is currently expected to total approximately $28 million for fiscal 2003. In
connection with the reduction in work from these customers, SM&P made
reductions in the required levels of personnel, facilities and equipment.
Management continues to estimate that the total cost of these reductions
will result in an after-tax charge of approximately $1 million, all of which
was expensed during the quarter ended March 31, 2003.
20
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 Western District Court of Appeals. 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 May 31, 2002, the Staff of the Commission filed a Motion to Investigate
Laclede Gas Company's alleged transfer of its gas supply function to Laclede
Energy Services, Inc. (LES), a subsidiary of Laclede Group, and such
action's ramifications, including whether such alleged transfer required
Commission approval or was otherwise lawful. On June 10, 2002 Laclede Gas
responded, pointing out that it had not transferred its gas supply functions
to LES but had instead delegated five employees to LES with responsibility
for performing various gas supply administrative duties, many of which had
been performed in prior years by an outside party. Laclede Gas remained
primarily responsible for the gas supply function. Laclede Gas urged the
Commission to deny Staff's Motion on this and other grounds. The Commission
concluded that a case should be established to investigate the issues raised
by the Staff. The Commission also ordered the Staff to file a status report
regarding progress of the investigation and Laclede Gas to file any
responses to the Staff's status report. On March 28, 2003, Laclede Gas filed
a Motion with the Commission indicating that LES would be dissolved and that
in light of such action the parties had agreed that the investigation could
be terminated and the case closed. On April 14, 2003, LES ceased to exist as
a corporation. On April 22, 2003, the Commission ordered that the
investigation be dismissed and the case closed. The dissolution of LES had
no material effect on the financial position and results of operations of
Laclede Group.
On July 29, 2002, Laclede Gas filed a proposed Catch-Up/Keep-Up Program with
the MoPSC that would permit the Company to use a portion of the savings from
its negotiated pipeline discounts to fund a low-income energy assistance
program. Pursuant to, and among revisions to the Program filed by the
Utility on September 23, 2002, the amount of discount savings that could be
used for this purpose would be limited to $6 million per year. In response
to certain objections filed by the MoPSC Staff and Missouri Office of the
Public Counsel, the Commission suspended the tariffs implementing the
Program and scheduled a prehearing conference that occurred on October 23,
2002. On January 16, 2003, the Commission, by a 3 to 2 vote, issued an order
rejecting the proposed plan. On January 23, 2003, the Utility filed a Motion
for Reconsideration seeking to identify whether the Commission would approve
the Program at a reduced funding level of $3 million per year. On February
13, 2003 the Commission convened a hearing for oral argument. On March 6,
2003 the Commission denied the Company's Motion for Reconsideration.
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 believes that Staff's position lacks
merit and has 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 ratepayers in its
November 2003 PGA filing. On June 19, 2003, Laclede Gas appealed the MoPSC's
decision to the Cole County Circuit Court. Laclede Gas continues to believe
in the merit of its position and intends to vigorously pursue its appeal. To
the extent that a final decision in the Courts sustains the Commission's
disallowance, the proceeding's outcome could have a material effect on the
future financial position and results of operations of Laclede Gas.
On July 10, 2003, a bill was signed into Missouri law that, among other
things, allows gas utilities to adjust their rates twice a year to recover
the depreciation, property taxes, and rate of return on facility-related
expenditures that are made to comply with state and federal safety
requirements or to relocate facilities in connection with public improvement
projects. This bill is expected to become effective late this summer. The
Utility does not expect any impact during fiscal year 2003 due to the new
law, and is currently evaluating the impact it may have on future periods.
21
Critical Accounting Policies
- ----------------------------
Our Discussion and Analysis of our financial condition, results of
operations, liquidity and capital resources is based upon our financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. Generally
accepted accounting principles require that we make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
evaluate our estimates on an ongoing basis. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates. We believe the following represent the more significant
items requiring the use of judgment and estimates in preparing our
consolidated financial statements:
Allowances for doubtful accounts - Estimates of the collectibility
of trade accounts receivable are based on historical trends, age of
receivables, economic conditions, credit risk of specific
customers, and other factors.
Employee benefits and postretirement obligations - Pension and
postretirement obligations are calculated by actuarial consultants
that utilize several statistical factors and other assumptions
related to future events, such as discount rates, returns on plan
assets, compensation increases, and mortality rates. The amount of
expense recognized by the Utility is dependent on the regulatory
treatment provided for such costs. Certain liabilities related to
group medical benefits and workers' compensation claims, portions
of which are self-insured and/or contain stop/loss coverage with
third-party insurers to limit exposure, are established based on
historical trends.
Goodwill valuation - In accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets", goodwill related to the acquisition of
SM&P is required to be tested for impairment annually or whenever
events or circumstances occur that may reduce the value of
goodwill. In performing impairment tests, valuation techniques
require the use of estimates with regard to discounted future cash
flows of operations, involving judgments based on a broad range of
information and historical results. If the test indicates
impairment has occurred, goodwill would be reduced which would
adversely impact earnings.
Laclede Gas accounts for its regulated operations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." This statement sets forth the
application of accounting principles generally accepted in the United States
of America for those companies whose rates are established by or are subject
to approval by an independent third-party regulator. The provisions of SFAS
No. 71 require, among other things, that financial statements of a regulated
enterprise reflect the actions of regulators, where appropriate. These
actions may result in the recognition of revenues and expenses in time
periods that are different than non-regulated enterprises. When this occurs,
costs are deferred as assets in the balance sheet (regulatory assets) and
recorded as expenses when those amounts are reflected in rates. Also,
regulators can impose liabilities upon a regulated company for amounts
previously collected from customers and for recovery of costs that are
expected to be incurred in the future (regulatory liabilities). Management
believes that the current regulatory environment supports the continued use
of SFAS No. 71 and that all regulatory assets and liabilities are
recoverable or refundable through the regulatory process. We believe the
following represent the more significant items recorded through the
application of SFAS No. 71:
The Utility's Purchased Gas Adjustment (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, 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.
22
For further discussion of significant accounting policies, see the Notes to
the Consolidated Financial Statements included in the Company's 10-K for the
year ended September 30, 2002.
Accounting Pronouncements
- -------------------------
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
requires all business combinations in the scope of this Statement to be
accounted for using the purchase method. The provisions of this Statement
apply to all business combinations initiated after June 30, 2001. The FASB
also issued SFAS No. 142, "Goodwill and Other Intangible Assets," which
addresses how acquired goodwill and other intangible assets that are
acquired individually or with a group of other assets should be accounted
for in financial statements upon acquisition and after they have been
initially recognized in the financial statements. The Company had adopted
the provisions of SFAS No. 141 with the acquisition of SM&P. As required by
SFAS No. 141, the goodwill for SM&P is being accounted for consistent with
the provisions of SFAS No. 142. The complete adoption of SFAS Nos. 141 and
142 on October 1, 2002 did not have a material effect on the financial
position and results of operations of Laclede Group.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations,"
which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and associated
asset retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. The provisions of the Statement provide for
rate-regulated entities that meet the criteria for application of SFAS No.
71, such as Laclede Gas, to recognize regulatory assets or liabilities for
differences in the timing of recognition of the period costs associated with
asset retirement obligations for financial reporting pursuant to this
Statement and rate-making purposes. The adoption of this Statement on
October 1, 2002 did not affect the financial position and results of
operations of Laclede Group. There are legal obligations related to final
abandonment of the Utility's gas distribution system. However, these
obligations related to mass property and other distribution system assets
generally continue in perpetuity and can not be measured under SFAS No. 143
because of indeterminate settlement dates and cash flow estimates.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", provides alternative methods for a voluntary change to the fair
value based method of accounting for stock-based compensation. In addition,
this statement requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the method used on reported results. The disclosure
provisions are effective for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002.
The required disclosures are included in Note 9, page 11.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities", amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133.
This Statement is effective for contracts entered into or modified after
June 30, 2003, with certain exceptions, and for all hedging relationships
designated after June 30, 2003. Laclede Group does not expect a material
effect on its financial position and results of operations.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or
an asset in some circumstances). Many of those instruments were previously
classified as equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003. The
Company is currently reviewing the classification of its obligated
mandatorily redeemable preferred securities of subsidiary trust and
redeemable preferred stock on the Consolidated Balance Sheets. These items
are currently classified between equity and liabilities. Laclede Group does
not expect any material effect on its financial position and results of
operations.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others", requires an entity to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This requirement is to be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. This
Interpretation also requires disclosures in interim and annual financial
statements about obligations under certain guarantees that the entity has
23
issued. These disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. The required
disclosures are included in Note 15, page 17.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities",
addresses consolidation of business enterprises of variable interest
entities. This Interpretation applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities
in which an enterprise obtains an interest after that date. It applies in
the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest
acquired before February 1, 2003. The Company is currently evaluating the
effect of this pronouncement on the consolidation of its obligated
mandatorily redeemable preferred securities of subsidiary trust, but does
not expect a material effect on the financial position and results of
operations of Laclede Group.
Credit Ratings
- --------------
As of June 30, 2003, 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+
On May 5, 2003, Standard & Poor's (S&P) downgraded the long-term corporate
credit rating for Laclede Group and Laclede Gas' First Mortgage Bonds from
A+ to A. S&P cited bondholder protection parameters that have eroded due to
several successive warmer-than-normal winters and increasing debt leverage
as reasons for the downgrade. S&P ratings outlook is currently stable.
The Company's ratings remain investment grade, and the Company believes
that it will have adequate access to the markets to meet its capital
requirements. These ratings remain subject to review and change by the
rating agencies.
Liquidity and Capital Resources
- -------------------------------
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. 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 a primary line of credit in place of up to
$215 million, expiring September 15, 2003, and supplemental credit lines of
$15 million expiring January 31, 2004. During the quarter ending June 30, 2003,
Laclede Gas sold commercial paper aggregating to a maximum of $148.1 million
at any one time, but did not borrow from the banks under the aforementioned
agreements. At this writing, Laclede Gas has aggregate lines of credit
totaling $230 million. Short-term commercial paper borrowings outstanding at
June 30, 2003 were $128.9 million at a weighted average interest rate of
1.22%. Based on short-term borrowings at June 30, 2003, a change in interest
rates of 100 basis points would increase or decrease pre-tax earnings and
cash flows by approximately $1.3 million on an annual basis.
Most of Laclede Gas' lines of credit include a covenant limiting total debt,
including short-term debt, to no more than 70% of total capitalization. On
June 30, 2003, total debt was 59% of total capitalization.
Laclede Gas has filed a shelf registration on Form S-3. Of the $350 million
of securities originally registered under this S-3, $270 million of debt
securities remained registered and unissued as of June 30, 2003. The MoPSC
authorization for issuing securities registered on Form S-3 expires in
September 2003. On July 9, 2003, the Utility filed a request with the MoPSC
to extend their authorization through September 1, 2006. The amount, timing
and type of additional financing to be issued under this shelf registration
will depend on cash requirements and market conditions.
24
Short-term cash requirements outside of Laclede Gas have 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 2004, with interest rates indexed to LIBOR or Prime, to
meet short-term liquidity needs of its non-utility subsidiaries. In April
2003, the ratings triggers in this line of credit were replaced by a
covenant limiting the total debt of Laclede Gas Company to no more than 70%
of the utility's total capitalization (as noted above, this ratio stood at
59% on June 30, 2003.) While this line has not been drawn on to date, it may
be used for seasonal funding needs of the various subsidiaries from time to
time throughout the year or to provide letters of credit.
On December 16, 2002, Laclede Capital Trust I issued 1,800,000 trust
preferred securities at a par value of $25.00 each and a distribution rate
of 7.70%. These securities mature December 1, 2032, but may be redeemed at
Laclede's option on or after December 16, 2007. The proceeds of this
issuance were used to repay Laclede Group's short-term loan of $42.8 million
from U. S. Bank, which had funded the acquisition in January 2002 of SM&P
Utility Resources, Inc., and for other general corporate purposes. These
trust preferred securities were issued under Laclede Group's shelf
registration on Form S-3, which became effective May 6, 2002, and allows for
the issuance of equity securities, other than preferred stock, and debt
securities. Of the $500 million of securities originally registered under
this S-3, $408.6 million remain registered and unissued as of June 30, 2003.
The amount, timing and type of additional financing to be issued under this
shelf registration will depend on cash requirements and market conditions.
The Trust Preferred Securities are rated A- (stable outlook) by Standard &
Poor's Ratings Group (S&P), Baa3 (stable outlook) by Moody's Investors
Service, Inc. and BBB+ (negative outlook) by Fitch Ratings. These ratings
remain subject to review and change by the rating agencies.
On May 1, 2003, $25 million of 6 1/4% Series First Mortgage Bonds matured
and was funded with the sale of commercial paper.
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 $8 million.
Laclede Group had guarantees outstanding of $5.0 million for performance and
payment of certain wholesale gas supply purchases by Laclede Energy
Resources, Inc. (its non-regulated marketing affiliate), as of June 30,
2003. Laclede Group issued an additional $1.0 million guarantee of
performance commencing in July 2003.
Utility construction expenditures were $34.7 million for the nine months
ended June 30, 2003, compared with $33.9 million for the same period last
year. Non-utility construction expenditures were $1.1 million for the nine
months ended June 30, 2003, compared with $3.2 for the same period last
year.
Consolidated capitalization at June 30, 2003, excluding current obligations
of long-term debt, increased $67.8 million since September 30, 2002 and
consisted of 50.2% Laclede Group common stock equity, .2% Laclede Gas
preferred stock equity, 7.3% Laclede Capital Trust I preferred securities
and 42.3% Laclede Gas long-term debt. The proportion of preferred securities
in the consolidated capital structure increased with the December 16, 2002
issuance of trust preferred securities by Laclede Capital Trust I.
The seasonal nature of Laclede Gas' sales affects the comparison of certain
balance sheet items at June 30, 2003 and at September 30, 2002, such as
Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts
Payable, Regulatory Liabilities, and Advance and Delayed Customer Billings.
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 June 30, 2003, the Utility held
approximately 8.7 million MmBtu of futures contracts at an average price of
$5.94 per
25
MmBtu. Additionally, approximately 23.4 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 September 2004.
In the course of its business, Laclede Group's non-regulated marketing
affiliate, Laclede Energy Resources, Inc. (LER), enters into fixed price
commitments for the sale of natural gas to customers. LER manages the price
risk associated with these sales by either closely matching the purchases of
physical supplies at fixed prices or through the use of exchange-traded
futures contracts to lock in margins. At June 30, 2003, LER's open positions
were not material to Laclede Group's financial position or results of
operations.
Environmental Matters
- ---------------------
Laclede Gas is subject to various environmental laws and regulations that,
to date, have not materially affected the Company's financial position and
results of operations. As these laws, regulations, and their interpretation
evolve, however, additional costs may be incurred.
With regard to a former manufactured gas plant site located in Shrewsbury,
Missouri, Laclede Gas and state and federal environmental regulators have
agreed upon certain actions and those actions are nearing completion.
Laclede Gas currently estimates the overall costs of these actions will be
approximately $2.3 million. As of June 30, 2003, Laclede Gas has paid or
reserved for these actions. If regulators require additional actions or
assert additional claims, Laclede Gas will incur additional costs.
Laclede Gas enrolled a second former manufactured gas plant site into the
Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to
minimize the scope and cost of site cleanup while maximizing possibilities
for site development. This site is located in and is presently owned by the
City of St. Louis, Missouri. The City of St. Louis has separately authorized
a developer to prepare both a Remedial Action Plan (RAP), for submission to
the VCP, and a site development plan. Laclede Gas continues to explore with
the developer what role, if any, it might play in these efforts. Laclede Gas
continues to evaluate other options as well, including, but not limited to,
the submission of its own RAP to the VCP. Laclede Gas currently estimates
that the cost of site investigations, agency oversight and related legal and
engineering consulting may be approximately $629,000. Currently, Laclede Gas
has paid or reserved for these actions. Laclede has requested that other
former site owners and operators share in these costs and one party has
agreed to participate and has reimbursed Laclede Gas to date for $173,000.
Laclede Gas anticipates additional reimbursement from this party. Laclede
Gas plans to seek proportionate reimbursement of all costs relative to this
site from other potentially responsible parties if practicable.
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.
Laclede Gas has been advised that a third former manufactured gas plant site
previously operated but no longer owned by Laclede Gas may contain gas plant
waste that may require remediation. Laclede Gas is working to determine the
nature and extent of such waste, if any, and its responsibility, if any, for
any remediation costs.
While the scope of costs relative to the Shrewsbury site will not be
significant, the scope of costs relative to the other sites is unknown and
may be material. Laclede Gas has notified its insurers that it seeks
reimbursement of its costs at these three manufactured gas plant sites. In
response, the majority of insurers have reserved their rights. While some of
the insurers have denied coverage, Laclede Gas continues to seek
reimbursement from them. With regard to the Shrewsbury site, denials of
coverage are not expected to have any material impact on the financial
position and results of operations of Laclede Gas. With regard to the other
two sites, since the scope of costs are unknown and may be significant,
denials of coverage may have a material impact on the financial position and
results of operations of Laclede Gas. Such costs, if incurred, have
typically been subject to recovery in rates.
Laclede Gas Company's Management Discussion and Analysis of Financial
Condition is included in Exhibit 99.1.
26
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For this discussion, see the "Market Risk" subsection in Management's
Discussion and Analysis of Financial Condition and Results of Operations,
page 25.
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-14 and Rule 15d-14 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 significant changes in our internal control over
financial reporting or in other factors which could, or could be reasonable
likely to, significantly affect internal control over financial reporting
subsequent to the date we carried out our evaluation.
27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of environmental matters, see Note 12 to the
Consolidated Financial Statements on page 14. For a description of
pending regulatory matters of Laclede Gas, see Management's
Discussion and Analysis of Financial Condition and Results of
Operations, page 21.
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 believes the final outcome
will not have a material adverse effect on the consolidated
financial position and results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index
(b) Reports on Form 8-K
During the quarter, Laclede Group had two reports on Form 8-K:
1. Form 8-K dated April 24, 2003 furnishing under Items 9 and 12 the
Company's earnings press release.
2. Form 8-K dated May 2, 2003 furnishing under Item 9 the Company's
press release regarding appeal of Missouri Public Service
Commission's decision.
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: July 24, 2003 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: July 24, 2003 Barry C. Cooper
------------- Chief Financial Officer
(Authorized Signatory and
Chief Financial Officer)
30
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
10.1 - Amendments to Employees Retirement Plan of Laclede Gas Company as
adopted by the Board of Directors on April 24, 2003.
10.2 - Amendments to Employees Retirement Plan of Laclede Gas Company as
adopted by delegation on July 2, 2003.
10.3 - Amendments to Laclede Gas Company Salary Deferral Savings Plan
adopted by delegation on July 2, 2003.
10.4 - April 16, 2003 First Amendment to Revolving Credit Agreement
between The Laclede Group, Inc. and U. S. Bank.
10.5 - June 12, 2003 Second Amendment to Revolving Credit Agreement
between The Laclede Group, Inc. and U. S. Bank.
99.1 - Laclede Gas Company - Management's Discussion and Analysis of
Financial Condition and Results of Operations, Financial Statements
and Notes to Financial Statements.
99.2 - Section 302 certifications for The Laclede Group, Inc. for Douglas
H. Yaeger and Barry C. Cooper.
99.3 - Section 906 certificates for The Laclede Group, Inc. for Douglas
H. Yaeger and Barry C. Cooper.
99.4 - Section 302 certifications for Laclede Gas Company for Douglas H.
Yaeger and Barry C. Cooper.
99.5 - Section 906 certificates for Laclede Gas Company for Douglas H.
Yaeger and Barry C. Cooper.
31