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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 December 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Exact Name of Registrant as
Specified in its Charter and I.R.S.
Commission File Principal Office Address and State of Employer
Number Telephone Number Incorporation Identification Number
-------------------------------------------------------------------------------------------------------
1-16681 The Laclede Group, Inc. Missouri 74-2976504
720 Olive Street
St. Louis, MO 63101
314-342-0500
-------------------------------------------------------------------------------------------------------
1-1822 Laclede Gas Company Missouri 43-0368139
720 Olive Street
St. Louis, MO 63101
314-342-0500
-------------------------------------------------------------------------------------------------------
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such report),
The Laclede Group, Inc.: Yes X No
---- ----
Laclede Gas Company: Yes X No
---- ----
and (2) has been subject to such filing requirements for the past 90 days:
The Laclede Group, Inc.: Yes X No
---- ----
Laclede Gas Company: Yes X No
---- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
The Laclede Group, Inc.: Yes X No
---- ----
Laclede Gas Company: Yes No X
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Shares Outstanding At
Registrant Description of Common Stock January 30, 2004
- ---------- --------------------------- ----------------
The Laclede Group, Inc. Common Stock ($1.00 Par Value) 19,148,534
Laclede Gas Company Common Stock ($1.00 Par Value) 100 (100% owned by
Laclede Group)
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 9-14
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. 5-7
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (The Laclede Group, Inc.) 15-23
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Laclede Gas Company) Ex. 99.1, p. 8-14
Item 3 Quantitative and Qualitative Disclosures About Market Risk 24
Item 4 Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 25
Item 6 Exhibits and Other Reports on Form 8-K 25
SIGNATURES - The Laclede Group, Inc. 26
SIGNATURES - Laclede Gas Company 27
INDEX TO EXHIBITS 28
Filing Format
- -------------
This Quarterly Report on Form 10-Q is a combined report being filed by two
separate registrants: The Laclede Group, Inc. (Laclede Group or the Company)
and Laclede Gas Company (Laclede Gas or the Utility).
2
PART I
FINANCIAL INFORMATION
The interim financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. These financial statements should be
read in conjunction with the financial statements and the notes thereto
included in the Company's Form 10-K for the year ended September 30, 2003.
3
Item 1. Financial Statements
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
Three Months Ended
December 31,
(Thousands, Except Per Share Amounts) 2003 2002
------ ------
Operating Revenues:
Regulated
Gas distribution $ 261,350 $ 217,165
Non-Regulated
Services 19,548 30,823
Gas marketing 50,983 31,267
Other 756 916
-----------------------------
Total Operating Revenues 332,637 280,171
-----------------------------
Operating Expenses:
Regulated
Natural and propane gas 175,275 133,843
Other operation expenses 29,483 31,324
Maintenance 4,429 4,444
Depreciation and amortization 5,658 5,493
Taxes, other than income taxes 14,832 14,128
-----------------------------
Total regulated operating expenses 229,677 189,232
Non-Regulated
Services 20,431 30,625
Gas marketing 50,288 30,104
Other 967 977
-----------------------------
Total Operating Expenses 301,363 250,938
-----------------------------
Operating Income 31,274 29,233
-----------------------------
Other Income and (Income Deductions) - Net 1,552 1,048
-----------------------------
Interest Charges:
Interest on long-term debt 4,814 5,205
Preferred dividends and subsidiary trust
distributions 866 144
Other interest charges 1,085 1,349
-----------------------------
Total Interest Charges 6,765 6,698
-----------------------------
Income Before Income Taxes 26,061 23,583
Income Tax Expense 9,454 8,472
-----------------------------
Net Income 16,607 15,111
Dividends on Redeemable Preferred Stock -
Laclede Gas 16 16
-----------------------------
Net Income Applicable to Common Stock $ 16,591 $ 15,095
=============================
Average Number of Common Shares
Outstanding 19,116 18,961
Basic Earnings Per Share of Common
Stock $.87 $.80
Diluted Earnings Per Share of Common
Stock $.87 $.80
Dividends Declared Per Share of Common
Stock $.335 $.335
See notes to consolidated financial statements.
4
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
December 31,
(Thousands) 2003 2002
------ ------
Net Income Applicable to Common Stock $ 16,591 $ 15,095
----------------------------
Other Comprehensive Income:
Net gain (loss) on cash flow hedging
derivative instruments:
Net hedging gain (loss) arising during
period (517) -
Reclassification adjustment for
gains included in net income (1,237) -
----------------------------
Net unrealized gain (loss) on cash flow
hedging derivative instruments (1,754) -
----------------------------
Other Comprehensive Loss,
Before Tax (1,754) -
Income Tax Benefit Related to
Items of Other Comprehensive Loss (677) -
----------------------------
Other Comprehensive Loss, Net of Tax (1,077) -
----------------------------
Comprehensive Income $ 15,514 $ 15,095
============================
See notes to consolidated financial statements.
5
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Dec. 31, Sept. 30,
2003 2003
-------- ---------
(Thousands)
ASSETS
Utility Plant $1,039,469 $1,030,665
Less: Accumulated depreciation and amortization 412,923 409,418
-------------------------------
Net Utility Plant 626,546 621,247
-------------------------------
Goodwill 28,124 28,124
-------------------------------
Other Property and Investments 45,240 44,598
-------------------------------
Current Assets:
Cash and cash equivalents 22,245 7,291
Accounts receivable:
Gas Customers - billed and unbilled 144,286 70,217
Other 55,752 41,298
Allowances for doubtful accounts (5,832) (7,181)
Inventories:
Natural gas stored underground at LIFO cost 112,620 117,231
Propane gas at FIFO cost 17,027 17,132
Materials, supplies, and merchandise at avg. cost 4,968 4,071
Derivative instrument assets 13,048 12,643
Deferred income taxes 6,307 7,631
Prepayments and other 7,372 17,557
-------------------------------
Total Current Assets 377,793 287,890
-------------------------------
Deferred Charges:
Prepaid pension cost 107,117 109,445
Regulatory assets 93,225 103,807
Other 7,337 6,287
-------------------------------
Total deferred charges 207,679 219,539
-------------------------------
Total Assets $1,285,382 $1,201,398
===============================
See notes to consolidated financial statements.
6
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
Dec. 31, Sept. 30,
2003 2003
-------- ---------
(Thousands, except share amounts)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (50,000,000 shares authorized, 19,118,229 and
19,082,402 shares issued, respectively) $ 19,118 $ 19,082
Paid-in capital 69,423 68,460
Retained earnings 221,797 211,610
Accumulated other comprehensive loss (1,157) (80)
-----------------------------
Total common stock equity 309,181 299,072
Redeemable preferred stock - Laclede Gas 1,258 1,258
Obligated mandatorily redeemable preferred securities of
subsidiary trust 45,000 45,000
Long-term debt (less sinking fund requirements) - Laclede Gas 234,643 259,625
-----------------------------
Total Capitalization 590,082 604,955
-----------------------------
Current Liabilities:
Notes payable 265,585 218,200
Accounts payable 89,408 66,001
Advance customer billings 12,287 15,361
Current portion of long-term debt 25,000 -
Taxes accrued 17,389 13,211
Unamortized purchased gas adjustment 3,017 5,865
Other 42,519 47,638
-----------------------------
Total Current Liabilities 455,205 366,276
-----------------------------
Deferred Credits and Other Liabilities:
Deferred income taxes 182,018 180,598
Unamortized investment tax credits 5,240 5,316
Pension and postretirement benefit costs 22,814 20,973
Regulatory liabilities 6,375 582
Other 23,648 22,698
-----------------------------
Total Deferred Credits and Other Liabilities 240,095 230,167
-----------------------------
Total Capitalization and Liabilities $1,285,382 $1,201,398
=============================
See notes to consolidated financial statements.
7
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
Three Months Ended
December 31,
2003 2002
------ ------
(Thousands)
Operating Activities:
Net Income $ 16,607 $ 15,111
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 6,555 6,381
Deferred income taxes and investment
tax credits 656 2,548
Other - net 54 91
Changes in assets and liabilities:
Accounts receivable - net (89,872) (79,420)
Unamortized purchased gas adjustments (2,848) (6,097)
Deferred purchased gas costs 19,588 (2,035)
Advance customer billings - net (3,074) (13,473)
Accounts payable 23,407 38,470
Taxes accrued 4,178 2,803
Natural gas stored underground 4,611 (1,482)
Other assets and liabilities 5,699 (999)
-----------------------------
Net cash used in operating activities $(14,439) $(38,102)
-----------------------------
Investing Activities:
Construction expenditures (11,372) (11,570)
Employee benefit trusts (1,439) (530)
Other investments 228 171
-----------------------------
Net cash used in investing activities $(12,583) $(11,929)
-----------------------------
Financing Activities:
Issuance of short-term debt - net 47,385 6,370
Dividends paid (6,408) (6,354)
Issuance of common stock 999 987
Issuance of obligated mandatorily redeemable preferred
securities of subsidiary trust - 45,000
-----------------------------
Net cash provided by financing activities $ 41,976 $ 46,003
-----------------------------
Net Increase (Decrease) in Cash and Cash Equivalents $ 14,954 $ (4,028)
Cash and Cash Equivalents at Beginning of Period 7,291 12,870
-----------------------------
Cash and Cash Equivalents at End of Period $ 22,245 $ 8,842
=============================
Supplemental Disclosure of Cash Paid (Refunded)
During the Period for:
Interest $ 9,332 $ 9,033
Income taxes - (4,320)
See notes to consolidated financial statements.
8
THE LACLEDE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These notes are an integral part of the accompanying consolidated
financial statements of The Laclede Group, Inc. (Laclede Group or the
Company) and its subsidiaries. In the opinion of Laclede Group, this interim
report includes all adjustments (consisting of only normal recurring
accruals) necessary for the fair presentation of the results of operations
for the periods presented. Certain prior-period amounts have been
reclassified to conform to current-period presentation. This Form 10-Q
should be read in conjunction with the Notes to Financial Statements
contained in the Company's Fiscal Year 2003 Form 10-K.
The consolidated financial position, results of operations and cash
flows of Laclede Group are comprised primarily from the consolidated
financial position, results of operations and cash flows of Laclede Gas
Company (Laclede Gas or the Utility). Laclede Gas is a regulated natural gas
distribution utility having a material seasonal cycle. As a result, these
interim statements of income for Laclede Group are not necessarily
indicative of annual results or representative of succeeding quarters of the
fiscal year. Due to the seasonal nature of the business of Laclede Gas,
earnings are typically concentrated in the November through April period,
which generally corresponds with the heating season. The Utility typically
experiences losses during the non-heating season. The seasonal effect of the
Utility's earnings on Laclede Group is generally expected to be tempered
somewhat by the results of SM&P Utility Resources, Inc. (SM&P), a
non-regulated underground facility locating and marking service business,
whose operations tend to be counter-seasonal to those of Laclede Gas.
REVENUE RECOGNITION - Laclede Gas reads meters and bills its
customers on a monthly cycle billing basis. The Utility records its
regulated gas distribution revenues from gas sales and transportation
service on an accrual basis that includes estimated amounts for gas
delivered, but not yet billed. The accruals for unbilled revenues are
reversed in the subsequent accounting period when meters are actually read
and customers are billed. The amount of accrued unbilled revenue at December
31, 2003 and 2002, for the Utility, was $38.3 million and $27.0 million,
respectively. After accrual of related gas cost expense, the accrued pre-tax
net revenues at December 31, 2003 and 2002 were $8.8 million and $10.3
million, respectively. The amount of accrued unbilled revenue at September
30, 2003 was $8.9 million.
SM&P, Laclede Energy Resources, Inc. (LER) and Laclede Group's
other non-regulated subsidiaries record revenues when earned, either when
the product is delivered or when services are performed.
In the course of its business, Laclede Group's non-regulated
marketing affiliate, LER, enters into fixed price commitments associated
with the sale of natural gas to customers. LER's fixed price energy
contracts are designated as normal purchases and normal sales, as defined in
accordance with the Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities." As
such, those contracts are accounted for as executory contracts and recorded
on an accrual basis. Revenues are recorded using a gross presentation.
STOCK-BASED COMPENSATION - The Laclede Group Equity Incentive Plan
was approved at the annual meeting of shareholders of Laclede Group on
January 30, 2003. The purpose of the Equity Incentive Plan is to provide a
more competitive compensation program and to attract and retain those
executive and other key employees essential to achieve the Company's
strategic objectives. To accomplish this purpose, the compensation committee
of the board of directors may grant awards under the Equity Incentive Plan
that may be earned by achieving performance objectives and/or other criteria
as determined by the compensation committee. Under the terms of the Equity
Incentive Plan, key employees of the Company and its subsidiaries, as
determined 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, (d) stock
appreciation rights, and (e) stock units, as well as any other stock-based
awards not inconsistent with the Equity Incentive Plan. Each award under the
Equity Incentive Plan shall have a minimum vesting period of at least one
year. The total number of shares that may be issued pursuant to awards under
the Equity Incentive Plan may not exceed 1,250,000.
During the quarter ended December 31, 2003, the Company granted
1,500 shares of restricted stock at a weighted average fair value of $28.85
per share. These shares have restrictions on vesting, sale and
transferability. The restrictions lapse with the passage of time. The
Company holds the certificates for restricted stock until the shares fully
vest in November 2005. In the interim, a participant receives full dividends
and voting rights. Restricted stock awards are recorded at the market value
on the date of the grant. Compensation cost charged against income for the
quarter ended December 31, 2003 was approximately $2,000, net of tax
effects.
During the quarter ended December 31, 2003, the Company granted
224,000 non-qualified stock options to employees at an exercise price of
$28.85 per share. These options may not be exercised before November 6,
2004. The stock options vest one-fourth each year for four years after the
date of the grant and expire on the tenth anniversary of the grant date. The
Company accounts for the Equity Incentive Plan under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
compensation expense has been recognized in net income, as all options
9
granted under the Equity Incentive Plan had an exercise price equal to the
market value of the Company's stock on the date of the grant.
Weighted Average
Shares Exercise Price
---------- ------------------
Outstanding at September 30, 2003 209,000 $23.27
Granted 224,000 $28.85
Exercised - -
Forfeited (4,000) $23.27
Outstanding at December 31, 2003 429,000 $26.18
Exercisable at December 31, 2003 - -
The closing price of the Company's common stock was $28.55 at December 31,
2003.
If compensation expense had been determined based on the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have
been reduced to the amounts shown in the following table. The
weighted-average fair value of options granted during the quarter ended
December 31, 2003 is $6.22 per option. The estimated fair value of options
would be amortized to expense over the options' vesting period and
restricted stock would be expensed on the grant date.
Three Months Ended
December 31,
------------------
2003 2002
---- ----
(Thousands, Except Per Share Amounts)
Net income applicable to
Common stock, as reported $16,591 $15,095
Deduct: Total stock-based employee
Compensation expense determined
Under the fair value based method
for all awards, net of tax effects 92 -
------------------------------
Pro forma net income applicable
to common stock $16,499 $15,095
==============================
Earnings per share:
Basic - as reported $.87 $.80
Diluted - as reported $.87 $.80
Basic - pro forma $.86 $.80
Diluted - pro forma $.86 $.80
The fair value of the options granted during the quarter ended
December 31, 2003 was estimated at the date of grant using the Black-Scholes
option pricing model with the following assumptions:
Three Months Ended
December 31,
------------------------------------
2003 2002
------------------------------------
Risk free interest rate 4.30% Not Applicable
Expected dividend yield of stock 4.60% Not Applicable
Expected volatility of stock 25.00% Not Applicable
Expected life of option 96 months Not Applicable
NEW ACCOUNTING STANDARDS - Financial Accounting Standards Board
(FASB) Interpretation No. 46 (Revised December 2003), "Consolidation of
Variable Interest Entities," addresses consolidation of business enterprises
of variable interest entities. Public entities shall apply this
Interpretation to their interests in special
10
purpose entities as of the first interim period ending after December 15,
2003. Application by public entities for all other types of variable
interest entities is required in financial statements for periods ending
after March 15, 2004. 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 or results of operations of Laclede Group.
In December 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 132 (revised 2003), "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The provisions of this
Statement do not change the measurement and recognition provisions of SFAS
No. 87, "Employers' Accounting for Pensions," No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 132(R) replaces SFAS
No. 132, and requires certain additional disclosures that become effective
for fiscal years ending after and interim periods beginning after December
15, 2003.
2. EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires dual presentation of
basic and diluted earnings per share (EPS). Basic EPS does not include
potentially dilutive securities and is computed by dividing net income
applicable to common stock by the weighted-average number of common shares
outstanding during the period. Diluted EPS assumes the issuance of common
shares pursuant to the Company's stock-based compensation plan and the
vesting of non-vested stock awards at the beginning of each respective
period. There were no stock options that were anti-dilutive.
Three Months Ended
December 31,
(Thousands, Except Per Share Amounts) 2003 2002
----------------------
Basic EPS:
Net Income Applicable to Common Stock $16,591 $15,095
Weighted-Average Shares Outstanding 19,116 18,961
Earnings Per Share of Common
Stock $.87 $.80
Diluted EPS:
Net Income Applicable to Common Stock $16,591 $15,095
Weighted-Average Shares Outstanding 19,116 18,961
Dilutive Effect of Employee Stock Options 24 -
------------------------
Weighted-Average Diluted Shares 19,140 18,961
========================
Earnings Per Share of Common
Stock $.87 $.80
3. FINANCIAL INSTRUMENTS
In the course of its business, LER enters into fixed price
commitments associated with 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 December 31,
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 0.35 million MmBtu of natural gas for January 2004 and
open short futures positions of 0.07 million MmBtu for February 2004, 0.62
million MmBtu for March 2004, 0.45 million MmBtu for April 2004, 0.55
million MmBtu for May 2004, 0.64 million MmBtu for June 2004 and 0.30
million MmBtu for November 2004 at average prices of $5.54 per MmBtu, $5.35
per MmBtu, $4.94 per MmBtu, $4.65 per MmBtu, $4.59 per MmBtu and $4.90 per
MmBtu, respectively. Also, LER had an open long futures positions of 0.56
million MmBtu for March 2004 and 0.30 million MmBtu for October 2004 at
average prices of $5.19 per MmBtu and $4.73 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
11
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 $.9
million of pre-tax net unrealized losses on cash flow hedging derivative
instruments at December 31, 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.
4. INCOME TAXES
Net provision for income taxes was as follows during the periods
set forth below:
Laclede Group
Three Months Ended
December 31,
----------------------
2003 2002
---- ----
(Thousands)
Federal
Current $6,932 $5,103
Deferred 1,161 2,147
State and Local
Current 1,188 821
Deferred 173 401
-----------------------
Total $9,454 $8,472
=======================
5. INFORMATION BY OPERATING SEGMENT
The Regulated Gas Distribution segment consists of the regulated
operations of Laclede Gas and is the core business segment of Laclede Group.
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 facility locating and
marking business operating in the midwestern states, a wholly owned
subsidiary of Laclede Group. The Non-Regulated Gas Marketing segment
includes the results of LER, a wholly owned subsidiary of Laclede Group.
Non-Regulated Other includes the transportation of liquid propane, 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 five wholly owned subsidiaries.
Non-Regulated Other also includes 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 LES' operations while active are included in Laclede Group's
Consolidated Financial Statements. Certain inter-segment revenues with
Laclede Gas are not eliminated in accordance with the provisions of SFAS No.
71, "Accounting for the Effects of Certain Types of Regulation."
12
Regulated Non-Regulated
Gas Non-Regulated Gas Non-Regulated
(Thousands) Distribution Services Marketing Other Eliminations Consolidated
--------------------------------------------------------------------------------------------------------------------
Three Months Ended
December 31, 2003
-----------------
Revenues from
external customers $ 260,539 $ 19,483 $ 46,477 $ 809 $ - $ 327,308
Inter-segment
revenues 811 65 4,506 (53) - 5,329
------------------------------------------------------------------------------------------
Total operating
revenues 261,350 19,548 50,983 756 - 332,637
Net income
applicable to
common stock 17,324 (1,025) 411 (119) - 16,591
Total assets 1,194,498 56,314 27,555 52,149 (45,134) 1,285,382
Three Months Ended
December 31, 2002
-----------------
Revenues from
external customers $ 217,165 $ 30,754 $ 27,429 $ 911 $ - $ 276,259
Inter-segment
revenues - 69 3,838 50 (45) 3,912
------------------------------------------------------------------------------------------
Total operating 217,165 30,823 31,267 961 (45) 280,171
revenues
Net income
applicable to
common stock 14,573 (169) 683 8 - 15,095
Total assets 1,084,036 64,095 23,715 43,368 (43,108) 1,172,106
In November 2002, two customers notified SM&P that, due to actions
they had taken to address workforce management issues, they did not intend
to continue to outsource certain functions, which included locating services
provided by SM&P, after February and March 2003. One of these customers
notified SM&P in January 2003 that it would continue to outsource a portion
of its locating services provided by SM&P beyond that timeframe. Revenue
from these customers totaled approximately $29 million and $45 million for
fiscal 2003 and fiscal 2002, respectively. Revenue from these customers for
the quarter ended December 31, 2003 was $3.9 million, compared with $14.7
million for the same period last year. In connection with the reduction in
work from these customers, SM&P made reductions in the required levels of
personnel, facilities and equipment, for which the Company recorded an
after-tax charge of approximately $1.0 million, all of which was expensed
during the quarter ended March 31, 2003. SM&P continues to pursue and has
obtained new business to partially offset the business lost in fiscal year
2003. The underground locating industry, however, remains competitive with
many contracts subject to termination on as little as 30 days' notice. Also,
SM&P's customers are primarily in the utility and telecommunications sector
with their workload influenced by construction trends.
6. COMMITMENTS AND CONTINGENCIES
Laclede Gas is subject to various environmental laws and
regulations that, to date, have not materially affected the Company's
financial position and results of operations. As these laws, regulations,
and their interpretation evolve, however, additional costs may be incurred.
With regard to a former manufactured gas plant site located in
Shrewsbury, Missouri, Laclede Gas and state and federal environmental
regulators have agreed upon certain actions and those actions are
essentially complete. Laclede Gas currently estimates the overall costs of
these actions will be approximately $2.4 million. As of December 31, 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
is engaged in ongoing meetings with the developer to determine what role, if
any, it might play in these efforts. Laclede Gas continues to evaluate other
options as well,
13
including, but not limited to, the submission of its own RAP to the VCP.
Laclede Gas currently estimates that the cost of site investigations, agency
oversight and related legal and engineering consulting may be approximately
$650,000. Currently, Laclede Gas has paid or reserved for these actions.
Laclede Gas has requested that other former site owners and operators share
in these costs and one party has agreed to participate and has reimbursed
Laclede Gas to date for $173,000. Laclede Gas anticipates additional
reimbursement from this party. Laclede Gas plans to seek proportionate
reimbursement of all costs relative to this site from other potentially
responsible parties if practicable.
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 may require remediation. Laclede Gas does not, and for many years
has not, owned this site. At this time it is not clear whether Laclede Gas
will incur any costs in connection with environmental investigations or
remediation at the site, and if it does incur any costs, what the amount of
those costs would be.
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.
SM&P has been the subject of certain employment-related claims
arising out of a practice of SM&P that predated Laclede Group's acquisition.
The claims involve whether certain pre- and post-work activities and
commuting time for non-supervisory field employees constitute hours worked
for purposes of federal and state wage and hour laws. SM&P is vigorously
defending these claims. While the results of the claims cannot be predicted
with certainty, management, after discussion with counsel, believes that the
final outcome will not have a material adverse effect on the consolidated
financial position and results of operations of the Company.
Laclede Group and its subsidiaries are involved in litigation,
claims and investigations arising in the normal course of business. While
the results of such litigation cannot be predicted with certainty,
management, after discussion with counsel, believes that the final outcome
will not have a material adverse effect on the consolidated financial
position and results of operations of the Company.
On June 28, 2002, the Staff of the MoPSC filed its recommendation
in a proceeding established to review Laclede Gas' gas costs for fiscal
2001. In its recommendation, the Staff proposed to disallow approximately
$4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based
Price Stabilization Program. This Program was discontinued at the end of the
2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in
proceedings before the MoPSC, including a formal hearing that was held on
this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC
decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved
by Laclede Gas, and directed Laclede Gas to flow through such amount to its
customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas
appealed the MoPSC's decision to the Cole County Circuit Court. On October
10, 2003, the Circuit Court issued an order staying the MoPSC's decision
requiring Laclede Gas to flow through the $4.9 million to customers.
Pursuant to the Stay Order, Laclede Gas is paying the $4.9 million into the
Court's registry pending a final judicial determination of Laclede Gas'
entitlement to such amounts. On November 5, 2003, the Circuit Court of Cole
County, Missouri, issued its Order and Judgment vacating and setting aside
the Commission's decision on the grounds that it was unlawful and not
supported by competent and substantial evidence on the record. On December
5, 2003 the MoPSC appealed the Circuit Court's decision to the Missouri
Western District Court of Appeals. The Company continues to believe in the
merit of its position and intends to vigorously assert its position in the
appeal. To the extent that a final decision in the Courts results in
disallowance of the $4.9 million in pre-tax gains, it could have a material
effect on the future financial position and results of operation of the
Company.
SM&P has several operating leases, the aggregate annual cost of
which is approximately $5 million, consisting primarily of 12-month
operating leases, with renewal options, for vehicles used in its business.
Upon acquisition of SM&P, Laclede Group assumed parental guarantees of
certain of those vehicle leases. Laclede Group anticipates that the maximum
guarantees related to existing leases will not exceed $12 million. No
amounts have been recorded for these guarantees in the financial statements.
Laclede Group had guarantees totaling $5.5 million for performance
and payment of certain wholesale gas supply purchases by LER, as of December
31, 2003. No amounts have been recorded for these guarantees in the
financial statements.
Laclede Gas Company's Consolidated Financial Statements and Notes
to Consolidated Financial Statements are included in Exhibit 99.1.
14
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.
15
THE LACLEDE GROUP, INC.
RESULTS OF OPERATIONS
The Laclede Group, Inc.'s (Laclede Group or the Company) earnings are
primarily derived from the regulated activities of its largest subsidiary,
Laclede Gas Company (Laclede Gas or the Utility), Missouri's largest natural
gas distribution company. Laclede Gas is regulated by the Missouri Public
Service Commission (MoPSC) and serves the metropolitan St. Louis area and
several other counties in eastern Missouri. Laclede Gas delivers natural gas
to retail customers at rates and in accordance with tariffs authorized by
the MoPSC. The Utility's earnings are generated by the sale of heating
energy, which was historically heavily influenced by the weather. As part of
the 2002 rate case settlement, the Utility initiated, effective November 9,
2002, an innovative weather mitigation rate design that lessens the impact
of weather volatility on Laclede Gas customers during cold winters and is
expected to stabilize the Utility's earnings in the future by recovering
fixed costs more evenly during the heating season. Due to the seasonal
nature of the business of Laclede Gas, earnings are typically concentrated
in the November through April period, which generally corresponds with the
heating season. The Utility typically experiences losses during the
non-heating season. Due to the material seasonal cycle of Laclede Gas, the
accompanying interim statements of income for Laclede Group are not
necessarily indicative of annual results or representative of succeeding
quarters of the fiscal year. The seasonal effect of the Utility's earnings
on Laclede Group is generally expected to be tempered somewhat by the
results of SM&P Utility Resources, Inc. (SM&P), a non-regulated underground
facility locating and marking service business wholly owned by Laclede
Group, whose operations tend to be counter-seasonal to those of Laclede Gas.
Laclede Energy Resources, Inc. (LER), a wholly owned subsidiary, is engaged
in non-regulated efforts to market natural gas and related activities. Other
non-regulated subsidiaries provide less than 10% of revenues.
Quarter Ended December 31, 2003
- -------------------------------
Overview - Net Income by Operating Segment Quarter Ended
December 31,
2003 2002
---------- ------------
(millions, after-tax)
Regulated Gas Distribution $17.3 $14.6
Non-Regulated Services (1.0) (.2)
Non-Regulated Gas Marketing .4 .7
Other Non-Regulated Subsidiaries (.1) -
---------- ------------
Net Income Applicable to Common Stock $16.6 $15.1
========== ============
Laclede Group's basic earnings per share were $.87 for the quarter ended
December 31, 2003, an increase of $.07 per share, compared with $.80 per
share reported for the same quarter last year. The year-to-year improvement
in consolidated net income of $1.5 million was primarily attributable to the
following factors, quantified on a pre-tax basis.
Increased Utility earnings were primarily due to:
o higher income from off-system sales and capacity release totaling
$2.4 million resulting from favorable market conditions;
o lower operation and maintenance expenses totaling $1.9 million,
primarily due to a lower provision for uncollectible accounts; and,
o the fully-implemented general rate increase totaling $.9 million
effective November 9, 2002.
These factors were partially offset by the net effect totaling $1.3 million
of lower system gas sales volumes (resulting from temperatures in Laclede
Gas' service area that were 18% warmer than normal and 19% warmer than the
same period last year) and the beneficial effect this year of the
fully-implemented weather mitigation rate design. The magnitude of the
effect of lower sales was smaller than would have previously been the case
due to the impact of the fully-implemented weather mitigation rate design
that produced higher margin revenue for the quarter ended December 31, 2003,
compared with the same period last year.
16
The Utility's contribution to higher consolidated earnings was partially
offset by a loss recorded by SM&P during the first quarter this year and
slightly lower earnings reported by LER.
Regulated Operating Revenues and Operating Expenses
Laclede Gas passes on to Utility customers (subject to prudence review)
increases and decreases in the wholesale cost of natural gas in accordance
with its Purchased Gas Adjustment (PGA) clause. The volatility of the
wholesale natural gas market results in fluctuations from period to period
in the recorded levels of, among other items, revenues and natural gas cost
expense. Nevertheless, increases and decreases in the cost of gas associated
with system gas sales volumes have no direct effect on net revenues and net
income.
Regulated operating revenues for the quarter ended December 31, 2003 were
$261.4 million, or $44.2 million greater than the same period last year. The
increase was primarily attributable to higher PGA rates totaling
approximately $41.2 million. Regulated operating revenues also increased, to
a lesser extent, due to higher off-system sales and capacity release
revenues amounting to $19.8 million and the effect of the general rate
increase totaling $.9 million. These factors were partially offset by lower
gas sales levels resulting from the warmer weather and other variations
totaling $17.7 million. System therms sold and transported decreased by 37.3
million therms, or 11.4%, below the quarter ended December 31, 2002.
Regulated operating expenses for the quarter ended December 31, 2003
increased $40.4 million from the same quarter last year. Natural and propane
gas expense increased $41.4 million above last year's level primarily
attributable to higher rates charged by our suppliers and increased
off-system gas expense, partially offset by lower volumes purchased for
sendout. Other operation and maintenance expenses decreased $1.9 million, or
5.2%, primarily due to a lower provision for uncollectible accounts totaling
$1.8 million, principally resulting from variations in write-offs
experienced. Minor reductions in group insurance and distribution charges
were partially offset by higher pension costs and increased charges for
injuries and damages. Depreciation and amortization expense increased $.2
million primarily due to increased depreciable property. Taxes, other than
income, increased $.7 million, or 5.0%, primarily due to higher gross
receipts taxes (attributable to the increased revenues).
Non-Regulated Services Operating Revenues and Operating Expenses
Laclede Group's non-regulated services operating revenues for this quarter
decreased $11.3 million primarily due to reduced or lost business from two
customers by SM&P. The reduction in non-regulated services operating
expenses was primarily associated with reduced sales levels. In November
2002, two customers notified SM&P that, due to actions they had taken to
address workforce management issues, they did not intend to continue to
outsource certain functions, which included locating services provided by
SM&P, after February and March 2003. One of these customers notified SM&P in
January 2003 that it would continue to outsource a portion of its locating
services provided by SM&P beyond that timeframe. Revenue from these
customers totaled approximately $29 million and $45 million for fiscal 2003
and fiscal 2002 respectively. Revenue from these customers for the quarter
ended December 31, 2003 was $3.9 million, compared with $14.7 million for
the same period last year. In connection with the reduction in work from
these customers, SM&P made reductions in the required levels of personnel,
facilities and equipment, for which the Company recorded an after-tax charge
of approximately $1.0 million, all of which was expensed during the quarter
ended March 31, 2003. SM&P continues to pursue and has obtained new business
to partially offset the business lost in fiscal year 2003. The underground
locating industry, however, remains competitive with many contracts subject
to termination on as little as 30 days' notice. Also, SM&P's customers are
primarily in the utility and telecommunications sector with their workload
influenced by construction trends.
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-regulated gas marketing operating revenues increased $19.7 million
primarily due to higher volumes and increased sales prices by LER. The
increase in non-regulated gas marketing operating expenses was primarily
associated with increased gas expense related to higher volumes purchased
and increased prices.
17
Consolidated Interest Charges and Income Taxes
The $.1 million increase in interest charges is primarily due to the
issuance of trust preferred securities in December 2002, largely offset by
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.
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 June 28, 2002, the Staff of the MoPSC filed its recommendation in a
proceeding established to review Laclede Gas' gas costs for fiscal 2001. In
its recommendation, the Staff proposed to disallow approximately $4.9
million in pre-tax gains achieved by Laclede Gas in its incentive-based
Price Stabilization Program. This Program was discontinued at the end of the
2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in
proceedings before the MoPSC, including a formal hearing that was held on
this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC
decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved
by Laclede Gas, and directed Laclede Gas to flow through such amount to its
customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas
appealed the MoPSC's decision to the Cole County Circuit Court. On October
10, 2003, the Circuit Court issued an order staying the MoPSC's decision
requiring Laclede Gas to flow through the $4.9 million to customers.
Pursuant to the Stay Order, Laclede Gas is paying the $4.9 million into the
Court's registry pending a final judicial determination of Laclede Gas'
entitlement to such amounts. On November 5, 2003, the Circuit Court of Cole
County, Missouri, issued its Order and Judgment vacating and setting aside
the Commission's decision on the grounds that it was unlawful and not
supported by competent and substantial evidence on the record. On December
5, 2003 the MoPSC appealed the Circuit Court's decision to the Missouri
Western District Court of Appeals. The Company continues to believe in the
merit of its position and intends to vigorously assert its position in the
appeal. To the extent that a final decision in the Courts results in
disallowance of the $4.9 million in pre-tax gains, it could have a material
effect on the future financial position and results of operation of the
Company.
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
18
recognized by the Utility is dependent on the regulatory treatment
provided for such costs. Certain liabilities related to group
medical benefits and workers' compensation claims, portions of
which are self-insured and/or contain stop/loss coverage with
third-party insurers to limit exposure, are established based on
historical trends.
Goodwill valuation - In accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets," goodwill is required to be tested for
impairment annually or whenever events or circumstances occur that
may reduce the value of goodwill. In performing impairment tests,
valuation techniques require the use of estimates with regard to
discounted future cash flows of operations, involving judgments
based on a broad range of information and historical results. If
the test indicates impairment has occurred, goodwill would be
reduced which would adversely impact earnings.
Laclede Gas accounts for its regulated operations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." This statement sets forth the
application of accounting principles generally accepted in the United States
of America for those companies whose rates are established by or are subject
to approval by an independent third-party regulator. The provisions of SFAS
No. 71 require, among other things, that financial statements of a regulated
enterprise reflect the actions of regulators, where appropriate. These
actions may result in the recognition of revenues and expenses in time
periods that are different than non-regulated enterprises. When this occurs,
costs are deferred as assets in the balance sheet (regulatory assets) and
recorded as expenses when those amounts are reflected in rates. Also,
regulators can impose liabilities upon a regulated company for amounts
previously collected from customers and for recovery of costs that are
expected to be incurred in the future (regulatory liabilities). Management
believes that the current regulatory environment supports the continued use
of SFAS No. 71 and that all regulatory assets and liabilities are
recoverable or refundable through the regulatory process. We believe the
following represent the more significant items recorded through the
application of SFAS No. 71:
The Utility's Purchased Gas Adjustment (PGA) Clause allows Laclede
Gas to flow through to customers, subject to prudence review, the
cost of purchased gas supplies, including the costs, cost
reductions and related carrying costs associated with the Utility's
use of natural gas financial instruments to hedge the purchase
price of natural gas. The difference between actual costs incurred
and costs recovered through the application of the PGA are recorded
as regulatory assets and liabilities that are recovered or refunded
in a subsequent period.
The Company records deferred tax liabilities and assets measured by
enacted tax rates for the net tax effect of all temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes, and the amounts used for income
tax purposes. Changes in enacted tax rates, if any, and certain
property basis differences will be reflected by entries to
regulatory asset or liability accounts for regulated companies, and
will be reflected as income or loss for non-regulated companies.
Also, pursuant to the direction of the MoPSC, Laclede Gas'
provision for income tax expense for financial reporting purposes
reflects an open-ended method of tax depreciation. This method is
consistent with the regulatory treatment prescribed by the MoPSC to
depreciate the Utility's assets.
For further discussion of significant accounting policies, see the Notes to
the Consolidated Financial Statements included in the Company's Form 10-K
for the year ended September 30, 2003.
Accounting Pronouncements
- -------------------------
Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised
December 2003), "Consolidation of Variable Interest Entities," addresses
consolidation of business enterprises of variable interest entities. Public
entities shall apply this Interpretation to their interests in special
purpose entities as of the first interim period ending after December 15,
2003. Application by public entities for all other types of variable
interest entities is required in financial statements for periods ending
after March 15, 2004. 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 or results of operations of Laclede Group.
In December 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 132 (revised 2003), "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The provisions of this
Statement do not change the measurement and recognition provisions of SFAS
No. 87, "Employers' Accounting for Pensions," No. 88,
19
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132(R)
replaces SFAS No. 132, and requires certain additional disclosures that
become effective for fiscal years ending after and interim periods beginning
after December 15, 2003.
FINANCIAL CONDITION
Credit Ratings
- --------------
As of December 31, 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+
The Company's ratings are investment grade, and the Company believes that it
has adequate access to the financial markets to meet its capital
requirements. These ratings remain subject to review and change by the
rating agencies.
Cash Flows
- ----------
The Company's short-term borrowing requirements typically peak during colder
months when Laclede Gas borrows money to cover the gap between when it
purchases its natural gas and when its customers pay for that gas. Changes
in the wholesale cost of natural gas, variations in the timing of
collections of gas cost under the Utility's PGA Clause, the seasonality of
accounts receivable balances, and the utilization of storage gas inventories
cause short-term cash requirements to vary during the year, and can cause
significant variations in the Utility's cash provided by or used in
operating activities.
Cash used in operating activities for the quarter ended December 31, 2003
was $14.4 million, a $23.7 million decrease, compared with the same period
last year. The decrease in cash used in operating activities was primarily
attributable to variations in the timing of collections of gas cost under
the PGA Clause and changes in the cost of natural gas in storage.
Cash used in investing activities for the quarter ended December 31, 2003
was $12.6 million compared with $11.9 million for the quarter ended December
31, 2002. Cash used in investing activities primarily reflected Utility
construction expenditures in both periods.
Cash provided by financing activities was $42.0 for the quarter ended
December 31, 2003, primarily due to additional short-term borrowings. Cash
provided by financing activities was $46.0 million for the quarter ended
December 31, 2002, primarily reflecting the issuance last year of trust
preferred securities.
Liquidity and Capital Resources
- -------------------------------
Maximum consolidated short-term borrowings at any one time during the
quarter ended December 31, 2003 were $272.2 million.
Short-term cash requirements have traditionally been met through the sale of
commercial paper supported by lines of credit with banks. Laclede Gas
currently has lines of credit in place of up to $290 million, including a
seasonal line of $25 million expiring February 13, 2004. Short-term
borrowings outstanding at December 31, 2003 were $265.6 million at a
weighted average interest rate of 1.25%. Based on short-term borrowings at
December 31, 2003, a change in interest rates of 100 basis points would
increase or decrease pre-tax earnings and cash flows by approximately $2.7
million on an annual basis.
20
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
December 31, 2003, total debt was 65% of total capitalization.
Short-term cash requirements outside of Laclede Gas have generally been met
with internally-generated funds. However, Laclede Group has a $20 million
working capital line of credit expiring in June 2004, with interest rates
indexed to LIBOR or Prime, to meet short-term liquidity needs of its
subsidiaries. This line of credit has a covenant limiting the total debt of
Laclede Gas Company to no more than 70% of the utility's total
capitalization (as noted above, this ratio stood at 65% on December 31,
2003.) This line has been used to provide a letter of credit of $0.5 million
on behalf of SM&P, which has not been drawn, and to provide for seasonal
funding needs of the various subsidiaries from time to time. There was no
balance outstanding as of December 31, 2003.
Laclede Group has on file a shelf registration on Form S-3, which allows for
the issuance of equity securities, other than preferred stock, and debt
securities. Of the $500 million of securities originally registered under
this S-3, $408.6 million remain registered and unissued as of December 31,
2003. The amount, timing and type of additional financing to be issued under
this shelf registration will depend on cash requirements and market
conditions.
Laclede Gas has on file a shelf registration on Form S-3. Of the $350
million of securities originally registered under this S-3, $270 million of
debt securities remained registered and unissued as of December 31, 2003.
The MoPSC authorization for issuing securities registered on this Form S-3
expires October 31, 2006. The amount, timing and type of additional
financing to be issued under this shelf registration will depend on cash
requirements and market conditions.
At December 31, 2003, Laclede Gas had fixed-rate long-term debt totaling
$260 million, including a $50 million 6 5/8% issue callable in June 2004 and
a current portion of $25 million scheduled to mature in November 2004. While
these long-term debt issues are fixed-rate, they are subject to changes in
fair value as market interest rates change. However, increases or decreases
in fair value would impact earnings and cash flows only if Laclede Gas were
to reacquire any of these issues in the open market prior to maturity.
SM&P has several operating leases, the aggregate annual cost of which is
approximately $5 million, consisting primarily of 12-month operating leases,
with renewal options, for vehicles used in its business. Upon acquisition of
SM&P, Laclede Group assumed parental guarantees of certain of those vehicle
leases. Laclede Group anticipates that the maximum guarantees related to
existing leases will not exceed $12 million. No amounts have been recorded
for these guarantees in the financial statements.
Laclede Group had guarantees totaling $5.5 million for performance and
payment of certain wholesale gas supply purchases by LER, as of December 31,
2003. No amounts have been recorded for these guarantees in the financial
statements.
Utility construction expenditures were $11.2 million for the three months
ended December 31, 2003, compared with $11.4 million for the same period
last year. Non-utility construction expenditures were $.2 million for the
three months ended December 31, 2003, compared with $.2 million for the same
period last year.
Consolidated capitalization at December 31, 2003, excluding current
obligations of long-term debt, decreased $14.9 million since September 30,
2003 and consisted of 52.4% Laclede Group common stock equity, .2% Laclede
Gas preferred stock equity, 7.6% Laclede Capital Trust I preferred
securities and 39.8% Laclede Gas long-term debt.
It is management's view that the Company has adequate access to capital
markets and will have sufficient capital resources, both internal and
external, to meet anticipated capital requirements.
The seasonal nature of Laclede Gas' sales affects the comparison of certain
balance sheet items at December 31, 2003 and at September 30, 2003, such as
Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts
Payable, Regulatory Liabilities, and Advance 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
21
Gas Adjustment Clause, through which the MoPSC allows the Utility to recover
gas supply costs. Accordingly, Laclede Gas does not expect any adverse
earnings impact as a result of the use of these financial instruments. At
December 31, 2003, the Utility held approximately 10.9 million MmBtu of
futures contracts at an average price of $5.33 per MmBtu. Additionally,
approximately 8.1 million MmBtu of other price risk mitigation was in place
through the use of option-based strategies. These positions have various
expiration dates, the longest of which extends through October 2004.
In the course of its business, Laclede Group's non-regulated marketing
affiliate, Laclede Energy Resources, Inc. (LER), enters into fixed price
commitments 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 December 31, 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 $2.4 million. As of December 31, 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 $650,000. Currently, Laclede Gas
has paid or reserved for these actions. Laclede Gas has requested that other
former site owners and operators share in these costs and one party has
agreed to participate and has reimbursed Laclede Gas to date for $173,000.
Laclede Gas anticipates additional reimbursement from this party. Laclede
Gas plans to seek proportionate reimbursement of all costs relative to this
site from other potentially responsible parties if practicable.
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
may require remediation. Laclede Gas does not, and for many years has not,
owned this site. At this time it is not clear whether Laclede Gas will incur
any costs in connection with environmental investigations or remediation at
the site, and if it does incur any costs, what the amount of those costs
would be.
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.
22
OFF-BALANCE SHEET ARRANGEMENTS
Laclede Group has no off-balance sheet arrangements.
Laclede Gas Company's Management Discussion and Analysis of Financial
Condition is included in Exhibit 99.1.
23
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 21.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15e and Rule 15d-15e under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective.
There have been no changes in our internal control over financial reporting
that occurred during our first fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our control over financial
reporting.
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of environmental matters, see Note 6 to the
Consolidated Financial Statements on page 13. For a description of
pending regulatory matters of Laclede Gas, see Management's
Discussion and Analysis of Financial Condition and Results of
Operations, Regulatory Matters, page 18.
SM&P has been the subject of certain employment-related claims
arising out of a practice of SM&P that predated Laclede Group's
acquisition. The claims involve whether certain pre- and post-work
activities and commuting time for non-supervisory field employees
constitute hours worked for purposes of federal and state wage and
hour laws. SM&P is vigorously defending these claims. While the
results of the claims cannot be predicted with certainty,
management, after discussion with counsel, believes that the final
outcome will not have a material adverse effect on the consolidated
financial position and results of operations of the Company.
Laclede Group and its subsidiaries are involved in litigation,
claims and investigations arising in the normal course of business.
While the results of such litigation cannot be predicted with
certainty, management, after discussion with counsel, believes that
the final outcome will not have a material adverse effect on the
consolidated financial position and results of operations of the
Company.
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 October 30, 2003 furnishing under Item 12 the
Company's fiscal 2003 year-end results.
2. Form 8-K dated November 5, 2003 filed under Item 5 a news release
about the appellate court's decision vacating the Missouri Public
Service Commission's decision.
25
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
The Laclede Group, Inc.
By: /s/ Barry C. Cooper
--------------------------
Dated: January 30, 2004 Barry C. Cooper
---------------- Chief Financial Officer
(Authorized Signatory and
Chief Financial Officer)
26
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
Laclede Gas Company
By: /s/ Barry C. Cooper
-------------------------
Dated: January 30, 2004 Barry C. Cooper
---------------- Chief Financial Officer
(Authorized Signatory and
Chief Financial Officer)
27
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
31 - Certificates under Rule 13a-14(a) of the CEO and CFO of The Laclede Group, Inc. and Laclede Gas
Company.
32 - Section 1350 Certifications under Rule 13a-14(b) of the CEO and CFO of The Laclede Group, Inc.
and Laclede Gas Company.
99.1 - Laclede Gas Company - Management's Discussion and Analysis of Financial Condition and Results of
Operations, Financial Statements and Notes to Financial Statements.
28