Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
FORM 10-K
ANNUAL REPORT
For the Fiscal Year Ended September 30, 2004
THE LACLEDE GROUP, INC.
LACLEDE GAS COMPANY
720 Olive Street, St. Louis, MO 63101
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
--------------------- ----------------------
-----------------------------------------------------------------------------------------------------
Commission File Exact Name of Registrant as States of I.R.S.
Number Specified in its Charter and Incorporation Employer
Principal Office Address and ID
Telephone Number Number
-----------------------------------------------------------------------------------------------------
1-16681 The Laclede Group, Inc. Missouri 74-2976504
720 Olive Street
St. Louis, MO 63101
314-342-0500
-----------------------------------------------------------------------------------------------------
1-1822 Laclede Gas Company Missouri 43-0368139
720 Olive Street
St. Louis, MO 63101
314-342-0500
-----------------------------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act (as of the date
of this report)
-------------------------------------------------------------------------------------------------
Name of Registrant Title of Each Name of Each Exchange
Class On which registered
-------------------------------------------------------------------------------------------------
The Laclede Group, Inc. Common Stock $1.00 par New York Stock Exchange
value
-------------------------------------------------------------------------------------------------
The Laclede Group, Inc. Preferred Share Purchase New York Stock Exchange
Rights
-------------------------------------------------------------------------------------------------
Laclede Gas Company None
-------------------------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act: None.
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
--- ---
(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
--- ---
2
and (3) 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of The
Laclede Group, Inc. amounted to $544,209,089 as of March 31, 2004.
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 October 31, 2004
- ------------ ----------------------------- -----------------------
The Laclede Group, Inc. Common Stock ($1.00 Par Value) 21,010,752
Laclede Gas Company Common Stock ($1.00 Par Value) 100 *
* 100% owned by The Laclede Group, Inc.
Incorporated by Reference: Form 10-K Part III
Proxy Statement dated December 21, 2004**
Index to Exhibits is found on page 66.
**The information under the captions "Compensation Committee Report
Regarding Executive Compensation," "Performance Graph" and "Audit Committee
Report" of the Proxy Statement are NOT incorporated by reference.
3
TABLE OF CONTENTS
PART I Page
Item 1 Business.........................................................4
Item 2 Properties.......................................................8
Item 3 Legal Proceedings................................................8
Item 4 Submission of Matters to a Vote of Security Holders..............9
Executive Officers of the Registrants (Item 401(b) of Regulation S-K).......9
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters.....................................13
Item 6 Selected Financial Data .........................................14
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................16
Item 7A Quantitative and Qualitative Disclosures About Market Risk.......28
Item 8 Financial Statements and Supplementary Data......................29
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................58
Item 9A Controls and Procedures..........................................58
Item 9B Other Information ...............................................58
PART III
Item 10 Directors and Executive Officers of the Registrants..............59
Item 11 Executive Compensation...........................................59
Item 12 Security Ownership of Certain Beneficial Owners and
Management .............................................59
Item 13 Certain Relationships and Related Transactions...................60
Item 14 Principal Accounting Fees and Services...........................60
PART IV
Item 15 Exhibits, Financial Statement Schedules..........................61
SIGNATURES..................................................................62
FINANCIAL STATEMENT SCHEDULES...............................................64
INDEX TO EXHIBITS...........................................................66
Note: Laclede Gas Company Selected Financial Data, Management's Discussion
and Analysis of Financial Condition and Results of Operations, Notes to
Financial Statements, Management Report, and Report of Independent Registered
Public Accounting Firm are included as Exhibit 99.1.
i
Part I
Item 1. Business
The Laclede Group, Inc. (Laclede Group or the Company) is an exempt public
utility holding company formed through a corporate restructuring that became
effective October 1, 2001. Laclede Group is committed to providing reliable
natural gas service through its regulated core utility operations while
developing a presence in non-regulated activities that provide opportunities
for sustainable growth. Its primary subsidiary--Laclede Gas Company (Laclede
Gas or the Utility)--is the largest natural gas distribution utility in
Missouri, serving more than 630,000 residential, commercial, and industrial
customers in St. Louis and surrounding counties of eastern Missouri. In
January 2002, Laclede Group acquired SM&P Utility Resources, Inc. (SM&P),
one of the nation's major underground locating and marking service
businesses. SM&P, headquartered in Carmel, Indiana, is a wholly owned
subsidiary of Laclede Group. 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.
The Consolidated Financial Statements included in this report present the
consolidated financial position, results of operations and cash flows of
Laclede Group. The consolidated financial statements, notes to consolidated
financial statements, and management's discussion and analysis for Laclede
Gas are included in this report as Exhibit 99.1.
The following chart illustrates the organization structure of The Laclede
Group, Inc. at September 30, 2004:
Organization Structure
------------
The Laclede
Group, Inc.
------------
|
|
--------------------------------------------------------------------
| | | | |
| | | | |
- ------------- ------------------ ------------- ------------- ----------
SM&P Laclede Laclede Laclede
Laclede Gas Utility Investment Development Pipeline
Company Resources, LLC Company Company
Inc.
- ------------- ------------------ ------------- ------------- ----------
| |
| |
------------- -------------
Laclede
Energy Laclede
Resources, Venture Corp.
Inc.
------------ -------------
|
|
-------------
Laclede Gas
Family
Services,
Inc.
-------------
Laclede Group common stock is listed on the New York Stock Exchange and
trades under the ticker symbol "LG". Laclede Gas continues to pay dividends
on all serial preferred stock issued.
The information we file or furnish to the Securities and Exchange Commission
(SEC), including annual reports on Form 10-K, quarterly reports on Form
10-Q, and current reports on Form 8-K and their amendments, are available on
our website, www.thelacledegroup.com, in the Investor Services section under
SEC Filings as soon as reasonably practical after the information is filed
or furnished to the SEC.
4
NATURAL GAS SUPPLY
Laclede Gas continues to structure its gas supply portfolio around a number
of large natural gas suppliers with equity ownership or control of assets
strategically situated to complement the Utility's regionally diverse firm
transportation arrangements.
Laclede Gas' fundamental gas supply strategy remains unchanged, to meet the
two-fold objective of: (1) ensuring that the gas supplies we acquire are
dependable and will be delivered when needed and, (2) insofar as is
compatible with that dependability, purchasing gas that is economically
priced. In structuring our natural gas supply portfolio, we continue to
focus on natural gas assets that are strategically positioned to meet the
Utility's primary objectives. We utilize both Mid-Continent and Gulf Coast
gas sources to provide a level of supply diversity that facilitates the
optimization of pricing differentials as well as protecting against the
potential of regional supply disruptions.
In fiscal 2004, Laclede Gas purchased natural gas from 18 different
suppliers to meet current gas sales and storage injection requirements.
Natural gas purchased by Laclede Gas for delivery to our Utility service
area through the Mississippi River Transmission Corporation (MRT) system
totaled 60.6 billion cubic feet (Bcf). The Utility also holds firm
transportation on several interstate pipeline systems that access our gas
supplies upstream of MRT. An additional 9.2 Bcf of gas was purchased on the
Panhandle Eastern Pipe Line Company system, and 10.5 Bcf on the Southern
Star Central Pipeline system. Some of our commercial and industrial
customers continued to purchase their own gas and delivered to us
approximately 19.2 Bcf for transportation to them through our distribution
system.
The fiscal 2004 peak day sendout of natural gas to our Utility customers
occurred on January 30, 2004, when the average temperature was 6 degrees
Fahrenheit. On that day, our customers consumed .996 Bcf of natural gas.
Approximately three-fourths of this peak day demand was met with natural gas
transported to St. Louis through the MRT, Panhandle, and Southern Star
transportation systems, and the remaining one-fourth was met from the
Utility's on-system storage and peak-shaving resources.
UNDERGROUND NATURAL GAS STORAGE
Laclede Gas has a contractual right to store approximately 23.1 Bcf of gas
in MRT's storage facility located in Unionville, Louisiana. MRT's tariffs
allow injections into storage from May 16 through November 15 and require
the withdrawal from storage of all but 2.2 Bcf from November 16 through
May 15.
In addition, Laclede Gas supplements flowing pipeline gas with natural gas
withdrawn from its underground storage field located in St. Louis and St.
Charles Counties. The field is designed to provide .357 Bcf of natural gas
withdrawals on a peak day, and annual withdrawals of approximately 5.5 Bcf
of gas based on the inventory level that Laclede plans to maintain.
PROPANE SUPPLY
Laclede Pipeline Company, a wholly owned subsidiary, operates a propane
pipeline that connects the propane storage and vaporization facilities of
Laclede Gas to third-party propane supply terminal facilities located in
Illinois. Laclede Gas vaporizes the propane to supplement its natural gas
supply and meet peak demands on its distribution system.
REGULATORY MATTERS
On March 1, 2004, Laclede Gas made an Infrastructure System Replacement
Surcharge (ISRS) filing with the Missouri Public Service Commission (MoPSC
or Commission) that was designed to increase revenues by $3.86 million
annually. This filing was made possible by legislation enacted in 2003 that,
among other things, allows gas utilities to adjust their rates twice per
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. On June 1, 2004, the MoPSC approved a Stipulation and
Agreement between Laclede Gas and the Staff of the Commission that provided
for a $3.56 million annual surcharge effective June 10, 2004. On October 28,
2004 Laclede Gas made its second ISRS filing in which it is seeking to
increase revenues by approximately an additional $1.6 million per year to
recover these types of costs.
5
Last year, we reported that on November 5, 2003, the Cole County Circuit
Court vacated the Commission's April 2003 decision to disallow approximately
$4.9 million in pre-tax gains achieved by Laclede Gas in its former
incentive-based Price Stabilization Program. The Commission appealed this
decision to the Missouri Court of Appeals for the Western District on
December 5, 2003. Although a decision is still pending on this appeal, the
Utility continues to believe that the Commission's order was unlawful and
not supported by competent and substantial evidence on the record.
In 2003, the Missouri Western District Court of Appeals remanded to the
Commission its decision in the Utility's 1999 rate case relating to the
proper method for calculating the Utility's depreciation rates on the basis
that the Commission had failed to adequately explain its decision. In
September 2004, the Commission held formal hearings for the purpose of
taking additional evidence on the depreciation issue. Laclede Gas expects
the Commission to once again issue a ruling on the matter during fiscal
2005.
OTHER PERTINENT MATTERS
In May 2004, Laclede Group issued 1.725 million shares of common stock
through a public offering. The net proceeds of the offering were
approximately $44.7 million. Also during fiscal 2004, Laclede Group issued
138,213 shares of common stock under its Dividend Reinvestment and Stock
Purchase Plan and 35,550 shares of common stock under its Equity Incentive
Plan. During fiscal 2003, 161,115 shares of common stock were issued under
the Dividend Reinvestment and Stock Purchase Plan.
*****
The business of Laclede Gas is subject to a seasonal fluctuation with the
peak period occurring in the winter season. The operations of SM&P tend to
be counter-seasonal to those of Laclede Gas and 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.
*****
As of September 30, 2004, Laclede Gas had 1,921 employees, including 6
part-time employees. SM&P had 1,521 employees, including 7 part-time
employees.
***** ***** *****
Regulated Operations:
- ---------------------
Laclede Gas had a labor agreement that expired July 31, 2004 with Locals 5-6
and 5-194 of the Paper, Allied-Industrial, Chemical & Energy Workers
International Union, two locals that represent approximately 74% of Laclede
Gas' employees. On August 16, 2004, Laclede Gas and Union representatives
reached a new four-year labor agreement replacing the prior agreement. The
new contract applies through July 31, 2008.
*****
The business of Laclede Gas has monopoly characteristics in that it is the
only distributor of natural gas within its franchised service area. The
principal competition is the local electric company. Other competitors in
Laclede Gas' service area include suppliers of fuel oil, coal, propane in
outlying areas, natural gas pipelines which can directly connect to large
volume customers, and in a portion of downtown St. Louis, a district steam
system. Laclede Gas has historically sold gas for househeating, certain
other household uses, and commercial and industrial space heating at prices
generally equal to or lower than prices charged for other sources of energy.
Laclede Gas' residential, commercial, and small industrial markets,
representing more than 85% of the Utility's revenue, remain committed to
natural gas. Given the current adequate level of supply, Laclede Gas
believes that the relationship between competitive equipment and operating
costs will not change significantly in the foreseeable future, and that
these markets will continue to be supplied by natural gas.
Laclede Gas' competitive exposure is presently limited to space and water
heating applications in the new multi-family and commercial rental markets.
Certain alternative heating systems can be cost competitive in traditional
markets, but the performance and reliability of natural gas systems has
contained the growth of these alternatives. Coal is price competitive as a
fuel source for very large boiler plant loads, but environmental
requirements have forestalled any significant market inroads. Oil and
propane can be used to fuel boiler loads and certain direct-fired process
applications,
6
but these fuels require on-site storage and vary widely in price throughout
the year, thus limiting their competitiveness. In certain cases, district
steam has been competitive with gas for downtown St. Louis area heating
users.
Laclede Gas offers gas transportation service to its large user industrial
and commercial customers. The tariff approved for that type of service
produces a margin similar to that which Laclede Gas would have received
under its regular sales rates. The availability of gas transportation
service and favorable spot market prices for natural gas may even encourage
these types of customers to maintain or expand operations in Laclede Gas'
service area.
*****
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. For a detailed discussion of environmental matters,
see Note 15 in the Notes to the Consolidated Financial Statements on page 55.
*****
Customers and revenues contributed by each class of customers of Laclede Gas
for the last three fiscal years are as follows:
Regulated Gas Distribution Operating Revenues $(000)
2004 2003 2002
----------------------------------------------------------
Residential $543,996 $502,071 $387,594
Commercial & Industrial 202,183 188,688 142,259
Interruptible 3,206 2,744 1,769
Transportation 14,523 15,503 12,868
Off-System and Other Incentive 99,152 60,609 43,443
Provision for Refunds and Other 5,845 5,157 4,164
----------------------------------------------------------
Total $868,905 $774,772 $592,097
==========================================================
Customers (End of Period)
2004 2003 2002
----------------------------------------------------------
Residential 591,547 590,785 588,630
Commercial & Industrial 40,417 40,166 39,842
Interruptible 16 16 14
Transportation 151 154 152
----------------------------------------------------------
Total Customers 632,131 631,121 628,638
==========================================================
Laclede Gas has franchises having initial terms varying from five years to
an indefinite duration. Generally, a franchise allows Laclede Gas, among
other things, to install pipes and construct other facilities in the
community. The franchise in Florissant, Missouri expired in 1992 and since
that time Laclede Gas has continued to provide service in that community
without a formal franchise. All of the franchises are free from unduly
burdensome restrictions and are adequate for the conduct of Laclede Gas'
current public utility business in the State of Missouri.
***** ***** *****
Non-Regulated Services:
- -----------------------
On January 28, 2002, Laclede Group completed its acquisition from NiSource,
Inc. of 100% of the stock of SM&P, one of the nation's major underground
locating and marking service businesses. SM&P, a Carmel, Indiana-based
company, operates across the midwestern states. Locators mark the placement
of underground facilities for 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 not only diversify Laclede Group's earnings but
also are counter-seasonal to those of Laclede Gas.
***** ***** *****
Non-Regulated Gas Marketing:
- ----------------------------
Laclede Energy Resources, Inc., a wholly owned subsidiary of Laclede
Investment LLC, is engaged in non-regulated efforts to market natural gas to
both on-system Utility transportation customers and customers outside of
Laclede Gas' traditional service area and related activities.
***** ***** *****
7
Non-Regulated Other Subsidiaries include:
- -----------------------------------------
Laclede Pipeline Company, a wholly owned subsidiary of Laclede Group,
operates a propane pipeline that connects the propane storage and
vaporization facilities of Laclede Gas to third-party propane supply
terminal facilities located in Illinois.
Laclede Investment LLC, a wholly owned subsidiary of Laclede Group, invests
in other enterprises and has made loans to several joint ventures engaged in
real estate development.
Laclede Gas Family Services, Inc., a wholly owned subsidiary of Laclede
Energy Resources, Inc., is a registered insurance agency in the State of
Missouri.
Laclede Development Company, a wholly owned subsidiary of Laclede Group,
participates in real estate development, primarily through joint ventures.
Laclede Venture Corp., a wholly owned subsidiary of Laclede Development
Company, offers services for the compression of natural gas to third parties
who desire to use or to sell compressed natural gas for use in vehicles.
The lines of business that constitute the Non-Regulated Other activities of
the corporate family are not considered separately reportable operating
segments as defined by current accounting standards.
Item 2. Properties
The principal utility properties of Laclede Gas consist of approximately
15,000 miles of gas main and related service pipes, and meters and
regulators. Other physical properties include regional office buildings and
holder stations. Extensive underground gas storage facilities and equipment
are located in an area in North St. Louis County extending under the
Missouri River into St. Charles County. Substantially all of Laclede Gas'
utility plant is subject to the liens of its mortgage.
All of the utility properties of Laclede Gas are held in fee or by easement
or under lease agreements. The principal lease agreements include
underground storage rights that are of indefinite duration and the general
office building. The current lease on the general office building extends
through February 2010 with options to renew for up to 10 additional years.
For information on SM&P's lease obligations, see Note 15 to the Consolidated
Financial Statements on page 55.
Other non-regulated properties of Laclede Group do not constitute a
significant portion of its properties.
Item 3. Legal Proceedings
For a description of environmental matters, see Note 15 to the Consolidated
Financial Statements on page 55. For a description of pending regulatory
matters of Laclede Gas, see Part I, Item 1, Business, Regulatory Matters on
page 5. For a description of SM&P's employment-related litigation, see Note
15 to the Consolidated Financial Statements on page 56.
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 the final outcome will not have a material
adverse effect on the consolidated financial position or results of
operations reflected in the consolidated financial statements presented
herein.
8
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 2004.
EXECUTIVE OFFICERS OF REGISTRANT - Listed below are executive officers of
Laclede Group and Laclede Gas as defined by the Securities and Exchange
Commission. Their ages, at September 30, 2004, and positions are listed
below along with their business experience during the past five years.
Name, Age, and Position with Company * Appointed (1)
D. H. Yaeger, Age 55
Laclede Group
-------------
Chairman, President and Chief Executive Officer October 2000
Laclede Gas
-----------
Chairman, President and Chief Executive Officer January 1999
President and Chief Executive Officer January 1999
President and Chief Operating Officer December 1997
SM&P
----
Chief Executive Officer January 2002
LER
---
President January 1999
Vice President December 1995
K. J. Neises, Age 63
Laclede Gas
-----------
Executive Vice President - Energy and
Administrative Services January 2002
Senior Vice President - Energy and
Administrative Services March 1998
LER
---
Vice President February 2002
R. E. Shively, Age 42
Laclede Gas
-----------
Senior Vice President - Business and Services
Development (2) January 2001
SM&P
----
President March 2002
9
B. C. Cooper, Age 45
Laclede Group
-------------
Chief Financial Officer (3) September 2002
Laclede Gas
-----------
Chief Financial Officer September 2002
LER
---
Vice President October 2002
M. C. Darrell, Age 46
Laclede Group
-------------
General Counsel (4) May 2004
Laclede Gas
-----------
General Counsel May 2004
D. P. Abernathy, Age 43
Laclede Gas
-----------
Vice President - Associate General Counsel (5) September 2004
M. C. Pendergast, Age 48
Laclede Gas
-----------
Vice President - Associate General Counsel January 2002
Assistant Vice President - Associate General Counsel January 2000
(Associate General Counsel) November 1997
M. R. Spotanski, Age 44
Laclede Gas
-----------
Vice President - Finance January 2001
Assistant Vice President - Finance January 2000
(Assistant to the President) March 1998
M. D. Waltermire, Age 46
Laclede Gas
-----------
Vice President - Operations & Marketing April 2003
Vice President - Operations & Marketing Planning February 2003
Assistant Vice President - Planning May 2001
(Director - Internal Audit) January 1996
J. A. Fallert, Age 49
Laclede Gas
-----------
Controller February 1998
10
R. L. Krutzman, Age 58
Laclede Group
-------------
Treasurer and Assistant Secretary October 2000
Laclede Gas
-----------
Treasurer and Assistant Secretary February 1996
SM&P
----
Assistant Treasurer January 2002
LER
---
Treasurer and Assistant Secretary February 1996
M. C. Kullman, Age 44
Laclede Group
-------------
Chief Governance Officer and Corporate Secretary February 2004
Corporate Secretary October 2000
Laclede Gas
-----------
Secretary and Associate General Counsel February 2001
Secretary and Associate Counsel February 1998
SM&P
----
Secretary January 2002
LER
---
Secretary February 1998
R. A. Skau, Age 47
Laclede Gas
-----------
Vice President - Human Resources February 2004
Assistant Vice President - Human Resources September 2001
(Director, Labor Relations) February 1999
*The information provided relates to the Company and its principal
subsidiaries. Many of the executive officers have served or currently serve
as officers or directors for other subsidiaries of the Company.
( ) Indicates a non-officer position.
(1) Officers of Laclede are normally reappointed at the Annual Meeting of
the Board of Directors in January of each year to serve at the pleasure of
the Board of Directors for the ensuing year and until their successors are
elected and qualify.
(2) Mr. Shively was a principal in the Atlanta office of Scott Madden &
Associates since December 1994.
(3) Mr. Cooper served as Vice President of Finance at GenAmerica Corporation
since 2000, and prior to that he was Vice President/Controller from 1999
through 2000 and Second Vice President/Associate Controller at GenAmerica
Corporation from 1995 through 1999. Before joining GenAmerica Corporation,
11
he was with KPMG Peat Marwick LLP.
(4) Mr. Darrell served as Assistant General Counsel for NiSource, Inc. since
2002. Prior to that he was Executive Vice President and Chief Executive
Officer in 2001 and General Counsel from 1997 through 2000 at Columbia Gas
of Virginia.
(5) Mr. Abernathy served as Vice President, General Counsel and Secretary at
Missouri- American Water Company from June 1999 through August 2004. He held
the same position with other American Water Company affiliates from January
2004 through August 2004. He was Vice President, General Counsel and
Secretary for St. Louis County Water Company from June 1999 through December
2001 and for Jefferson City Water Works Company from May 2000 through
December 2001. He was also Vice President and Assistant Secretary at
Continental Water Company and Water Utility Service Company from June 1999
through December 2000.
12
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters
The Laclede Group's common stock trades on the New York Stock Exchange
(NYSE) under the symbol "LG". The high and the low sales price for the
common stock for each quarter in the two most recent fiscal years are:
Fiscal 2004 Fiscal 2003
High Low High Low
- ------------------------------------------------------------------------------
1st Quarter 30.00 27.20 24.84 21.79
2nd Quarter 31.87 28.26 24.90 21.85
3rd Quarter 31.35 26.05 27.75 23.10
4th Quarter 29.35 26.31 28.70 24.85
The number of holders of record as of September 30, 2004 was 6,728.
Dividends declared on the common stock for the two most recent fiscal years
were:
Fiscal 2004 Fiscal 2003
- ------------------------------------------------------------------------------
1st Quarter $.335 $.335
2nd Quarter $.340 $.335
3rd Quarter $.340 $.335
4th Quarter $.340 $.335
For disclosures relating to securities authorized for issuance under equity
compensation plans, please see Item 12, page 59.
13
Item 6. Selected Financial Data
The Laclede Group, Inc.
Fiscal Years Ended September 30
-------------------------------------------------------------
(Thousands, Except Per Share Amounts) 2004 2003 2002 (a) 2001 2000
-------------------------------------------------------------
Summary of Operations
Operating Revenues:
Regulated
Gas distribution $ 868,905 $ 774,772 $592,097 $ 923,242 $529,250
Non-Regulated
Services 104,239 100,168 94,116 - -
Gas marketing 270,328 163,861 64,798 69,455 31,331
Other 6,848 11,529 4,228 9,412 5,547
-------------------------------------------------------------
Total Operating Revenues 1,250,320 1,050,330 755,239 1,002,109 566,128
-------------------------------------------------------------
Operating Expenses:
Regulated
Natural and propane gas 575,691 483,742 340,045 640,006 294,717
Other operation expenses 121,596 118,550 106,027 101,915 86,970
Maintenance 18,705 18,759 17,813 19,262 18,556
Depreciation and amortization 22,385 22,229 24,215 26,193 24,672
Taxes, other than income taxes 60,077 56,102 48,342 65,062 42,788
-------------------------------------------------------------
Total regulated operating expenses 798,454 699,382 536,442 852,438 467,703
Non-Regulated
Services 99,511 102,093 90,771 - -
Gas marketing 265,394 159,105 64,042 68,338 30,831
Other 6,400 10,615 4,222 9,008 4,251
-------------------------------------------------------------
Total Operating Expenses 1,169,759 971,195 695,477 929,784 502,785
-------------------------------------------------------------
Operating Income 80,561 79,135 59,762 72,325 63,343
-------------------------------------------------------------
Allowance for Funds Used During Construction (123) (107) (149) 749 397
-------------------------------------------------------------
Other Income and (Income Deductions) - Net 3,704 1,157 827 668 338
-------------------------------------------------------------
Interest Charges:
Interest on long-term debt 22,010 20,169 20,820 18,372 15,164
Interest on long-term debt to unconsolidated
affiliate trust 3,516 2,743 - - -
Other interest charges 3,234 3,974 4,989 10,067 8,844
-------------------------------------------------------------
Total Interest Charges 28,760 26,886 25,809 28,439 24,008
-------------------------------------------------------------
Income Before Income Taxes 55,382 53,299 34,631 45,303 40,070
Income Tax Expense 19,264 18,652 12,247 14,831 14,105
-------------------------------------------------------------
Net Income 36,118 34,647 22,384 30,472 25,965
Dividends on Redeemable Preferred
Stock - Laclede Gas 62 62 68 87 93
-------------------------------------------------------------
Net Income Applicable to
Common Stock $ 36,056 $ 34,585 $ 22,316 $ 30,385 $ 25,872
=============================================================
Basic Earnings Per Share of Common Stock $1.82 $1.82 $1.18 $1.61 $1.37
=============================================================
Diluted Earnings Per Share of Common Stock $1.82 $1.82 $1.18 $1.61 $1.37
=============================================================
14
Item 6. Selected Financial Data (continued)
The Laclede Group, Inc.
Fiscal Years Ended September 30
-------------------------------------------------------------
(Thousands, Except Per Share Amounts) 2004 2003 2002 (a) 2001 2000
-------------------------------------------------------------
Dividends Declared -
Common Stock $ 27,183 $ 25,492 $ 25,311 $ 25,296 $ 25,297
Dividends Declared Per
Share of Common Stock $1.355 $1.34 $1.34 $1.34 $1.34
Utility Plant
Gross Plant - End of Period $1,070,522 $1,030,665 $ 988,747 $949,775 $915,998
Net Plant - End of Period 646,875 621,247 594,376 569,640 545,715
Construction Expenditures 49,130 49,926 48,765 46,952 51,635
Property Retirements 9,276 8,007 9,769 13,141 6,663
Goodwill - End of Period 28,124 28,124 27,455 - -
Other Property and Investments - End of Period 46,082 45,998 46,986 32,893 29,664
Total Assets - End of Period $1,265,295 $1,202,798 $1,090,990 $975,910 $931,740
Capitalization -
End of Period
Common Stock and Paid-In
Capital $ 137,039 $ 87,542 $ 83,588 $106,590 $106,579
Retained Earnings 220,483 211,610 202,517 205,512 200,423
Accumulated Other Comprehensive
Income (Loss) (1,607) (80) (339) - -
Treasury Stock - - - (24,017) (24,017)
-------------------------------------------------------------
Common Stock Equity 355,915 299,072 285,766 288,085 282,985
Redeemable Preferred Stock - Laclede Gas 1,108 1,258 1,266 1,588 1,763
Long-Term Debt to Unconsolidated Affiliate
Trust 46,400 46,400 - - -
Long-Term Debt - Laclede Gas 333,936 259,625 259,545 284,459 234,408
-------------------------------------------------------------
Total Capitalization $ 737,359 $ 606,355 $ 546,577 $574,132 $519,156
=============================================================
Shares of Common Stock
Outstanding - End of Period 20,981 19,082 18,921 18,878 18,878
Book Value Per Share - End of Period $16.96 $15.67 $15.10 $15.26 $14.99
(a) Includes SM&P subsequent to its acquisition on January 28, 2002.
Laclede Gas Company's Selected Financial Data is included in Exhibit 99.1.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE LACLEDE GROUP, INC.
INTRODUCTION
This management's discussion analyzes the financial condition and results of
operations of The Laclede Group, Inc. (Laclede Group or the Company) and its
subsidiaries. It includes management's view of factors that affect its
business, explanations of past financial results including changes in
earnings and costs from the prior year periods, and their effects on overall
financial condition and liquidity.
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Certain words, such as "anticipate,"
"believe," "estimate," "expect," "intend," "plan," "seek," and similar words
and expressions identify forward-looking statements that involve
uncertainties and risks. Future developments may not be in accordance with
our expectations or beliefs and the effect of future developments may not be
those anticipated. Among the factors that may cause results to differ
materially from those contemplated in any forward-looking statement are:
o weather conditions and catastrophic events;
o economic, competitive, political and regulatory conditions;
o legislative, regulatory and judicial mandates and decisions, some of which
may be retroactive, including those affecting
o allowed rates of return
o incentive regulation
o industry structure
o purchased gas adjustment provisions
o rate design structure and implementation
o franchise renewals
o environmental or safety matters
o taxes
o accounting standards;
o the results of litigation;
o retention, ability to attract, ability to collect from and conservation
efforts of customers;
o capital and energy commodity market conditions including the ability to
obtain funds for necessary capital expenditures and the terms and
conditions imposed for obtaining sufficient gas supply;
o discovery of material weakness in internal controls; and
o employee workforce issues.
Readers are urged to consider the risks, uncertainties and other factors
that could affect our business as described in this report. All
forward-looking statements made in this report rely upon the safe harbor
protections provided under the Private Securities Litigation Reform Act of
1995. We do not, by including this statement, assume any obligation to
review or revise any particular forward-looking statement in light of future
events.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto.
16
RESULTS OF OPERATIONS
Laclede Group's earnings are primarily derived from the regulated activities
of its largest subsidiary, Laclede Gas Company (Laclede Gas or the Utility),
Missouri's largest natural gas distribution company. Laclede Gas is
regulated by the Missouri Public Service Commission (MoPSC or Commission)
and serves the metropolitan St. Louis area and several other counties in
eastern Missouri. Laclede Gas delivers natural gas to retail customers at
rates, and in accordance with tariffs, authorized by the MoPSC. The
Utility's earnings are generated by the sale of heating energy, which
historically has been heavily influenced by the weather. However, as part of
the 2002 rate case settlement, the Utility initiated, effective November 9,
2002, an innovative weather mitigation rate design that lessens the impact
of weather volatility on Laclede Gas customers during cold winters and is
expected to stabilize the Utility's earnings in the future by recovering
fixed costs more evenly during the heating season. 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 wholly owned by Laclede Group, whose
operations tend to be counter-seasonal to those of Laclede Gas. Laclede
Energy Resources, Inc. (LER), a wholly owned subsidiary, is engaged in
non-regulated efforts to market natural gas and related activities. Other
non-regulated subsidiaries provide less than 10% of consolidated revenues.
Laclede Group's strategy includes efforts to stabilize and improve
performance of its core Utility, while developing non-regulated businesses
and taking a measured approach in the pursuit of additional growth
opportunities that complement the Utility business.
As for the Utility, mitigating the impact of weather fluctuations on Laclede
Gas customers while improving the ability to recover its authorized
distribution costs and return has been a fundamental component of the
Laclede Group strategy. The Utility's distribution costs are the essential,
primarily fixed expenditures it must incur to operate and maintain a more
than 15,000-mile natural gas distribution system and related storage
facilities. In fiscal 2003, when the weather mitigation rate design first
went into effect, the weather was essentially normal; therefore, its impact
was minimal. However, it has shown its value during fiscal 2004, as the
downward pressure on revenues and earnings has been significantly mitigated
despite temperatures that were 14% warmer than normal. The Utility's income
from off-system sales remains subject to fluctuations in market conditions.
In addition, Laclede Gas is working to continually improve its ability to
provide reliable natural gas service at a reasonable cost, while maintaining
and building a secure and dependable infrastructure.
Laclede Group continues to develop its non-regulated subsidiaries. SM&P is
working toward expanding its geographic footprint into new markets, and has
made notable gains in adding business in several key markets after
experiencing setbacks in fiscal 2003. LER continues to focus on growing its
markets on a long-term and sustainable basis by providing both on-system
Utility transportation customers and customers outside of Laclede Gas'
traditional service area with another choice in unregulated natural gas
suppliers. Nevertheless, income from LER's operations is subject to
fluctuations in market conditions.
17
EARNINGS
Overview - Net Income (Loss) by Operating Segment
(Millions, after-tax)
- ------------------------------------------------------- ------------- ------------- --------------
Years Ended September 30 2004 2003 2002
- ------------------------------------------------------- ------------- ------------- --------------
Regulated Gas Distribution $ 32.1 $ 34.3 $ 20.3
Non-Regulated Services .7 (3.3) 1.4
Non-Regulated Gas Marketing 3.0 2.9 .5
Other Non-Regulated Subsidiaries .3 .7 .1
------------- ------------- --------------
Net Income Applicable to Common Stock $ 36.1 $ 34.6 $ 22.3
============= ============= ==============
Laclede Group's net income applicable to common stock for fiscal 2004 was
$36.1 million, compared with $34.6 million for fiscal 2003, and $22.3
million for fiscal 2002.
Laclede Group's basic and diluted earnings per share were $1.82 for both the
twelve months ended September 30, 2004 and September 30, 2003. Earnings per
share were unchanged from last year, as the effect of $1.5 million higher
net income in 2004 was essentially offset by the impact of higher average
shares outstanding this year, largely due to the sale of 1.725 million
shares of common stock in May 2004. Variations in net income were primarily
attributable to the following factors, quantified on a pre-tax basis.
Utility earnings decreased by $2.2 million in 2004 compared with 2003
primarily due to the following factors:
o income recorded in 2003 totaling $3.5 million related to the Utility's
management of its annual gas supply costs;
o the net effect totaling $2.5 million of lower system gas sales
volumes (resulting from temperatures in Laclede Gas' service
area that were 14% warmer than normal and 15% warmer than the same
period last year) tempered by the beneficial effect this year of
the fully-implemented weather mitigation rate design that went into
effect November 9, 2002;
o a higher provision for uncollectible accounts totaling $1.7 million
above fiscal year 2003;
o an increase in interest charges of $1.3 million, primarily due to the
issuance of additional long-term debt;
o pension costs that increased $1.1 million from fiscal year 2003; and
o higher wage rates.
These factors were partially offset by:
o non-operating income recorded this year that increased $2.5 million
primarily reflecting the receipt of additional proceeds totaling
$1.1 million related to the Utility's interest, as a policyholder,
in the sale of a mutual insurance company, increases in other
investment income, and lower donations;
o a decrease in group insurance costs totaling $1.6 million from fiscal
year 2003;
o income from off-system sales and capacity release that increased
$1.4 million from fiscal year 2003;
o the partial-year effect of the implementation of an Infrastructure
System Replacement Surcharge effective June 10, 2004, totaling
$1.1 million; and
o the fully-implemented general rate increase, effective November 9,
2002, totaling $.9 million.
SM&P reported income in fiscal 2004 totaling $.7 million compared with a
loss of $3.3 million in fiscal 2003. The significant improvement over the
prior year was primarily due to the return of a substantial portion of
business from two large customers as well as attainment of new business in
both existing and new markets. LER reported minor improvements in earnings
results compared with fiscal year 2003.
Laclede Group's basic and diluted earnings per share were $1.82 for the
twelve months ended September 30, 2003, compared with $1.18 per share for
the twelve-month period ended September 30, 2002. The $.64 per share
increase in earnings was primarily attributable to increased earnings
reported by Laclede Gas. The fiscal year 2003 increase in consolidated net
income of $12.3 million from fiscal year 2002 was primarily attributable to
the following factors, quantified on a pre-tax basis.
18
Utility earnings increased $14.0 million in fiscal 2003 compared with fiscal
2002 primarily due to the following factors:
o general rate increases effective December 1, 2001 and November 9, 2002
totaling $15.2 million;
o the net effect totaling $10.1 million of higher system gas sales
volumes in fiscal 2003 (resulting from temperatures in Laclede Gas'
service area that were 1% colder than normal and 21% colder than the
same period in fiscal 2002), tempered by the partial-year effect of
the weather mitigation rate design effective November 9, 2002;
o income from off-system sales and capacity release that increased
$5.6 million from fiscal year 2002; and
o income recorded in 2003 totaling $3.5 million related to the Utility's
management of its annual gas supply costs.
These factors were partially offset by:
o higher pension costs amounting to $5.1 million;
o the effect of income recorded in fiscal year 2002 produced by the
Utility's Price Stabilization Program totaling $4.9 million;
o a higher provision for uncollectible accounts totaling $4.5 million;
o increased group insurance charges totaling $1.5 million; and
o higher wage rates.
Results reported by SM&P, a non-regulated subsidiary acquired January 28,
2002, declined from fiscal year 2002 mainly due to the full fiscal year
effect of seasonal losses, right-sizing costs and the partial loss of
revenue related to two customers, and additional start-up costs related to
SM&P's expansion into new markets and the addition of new customers.
Earnings reported by LER increased over fiscal year 2002 primarily due to
higher volumes sold and increased margins achieved in a favorable market.
Regulated Operating Revenues and Operating Expenses
Regulated operating revenues for fiscal year 2004 increased $94.1 million,
or 12.1%, above fiscal 2003. The increase was primarily attributable to
higher wholesale gas costs that are passed on to Utility customers (subject
to prudence review by the MoPSC) totaling $105.0 million, increased
off-system sales revenues totaling $42.0 million, and, to a lesser extent,
the effects of the general rate increase totaling $.9 million and the
partial-year effect of the ISRS totaling $1.1 million. These factors were
partially offset by lower system gas sales levels resulting from warmer
weather and other variations totaling $54.9 million. Temperatures were 14%
warmer than normal and 15% warmer than last year.
Regulated operating revenues for fiscal year 2003 increased $182.7 million,
or 30.9%, above fiscal 2002. The increase in operating revenues was
primarily comprised of higher natural gas sales levels resulting from colder
weather and other variations amounting to $61.8 million, higher wholesale
gas costs that are passed on to Utility customers (subject to prudence
review by the MoPSC) of $87.2 million, increased off-system and capacity
release revenues of $18.5 million, and the general rate increases effective
December 1, 2001 and November 9, 2002 amounting to $15.2 million.
Laclede Gas sold and transported 1.12 billion therms in fiscal year 2004
compared with 1.13 billion and 1.06 billion in fiscal years 2003 and 2002,
respectively.
Regulated operating expenses in fiscal 2004 increased $99.1 million, or
14.2%, from fiscal 2003. Natural and propane gas expense increased $91.9
million, primarily attributable to higher rates charged by our suppliers and
increased off-system gas expense, partially offset by lower volumes
purchased for sendout. Other operation and maintenance expenses increased
$3.0 million, or 2.2%, primarily due to a higher provision for uncollectible
accounts, higher pension costs, and higher wage rates, partially offset by
lower group insurance charges. Taxes, other than income, increased $4.0
million, or 7.1%, primarily due to higher gross receipts taxes (attributable
to the increased revenues).
Regulated operating expenses in fiscal 2003 increased $162.9 million, or
30.4%, from fiscal 2002. Natural and propane gas expense increased $143.7
million primarily attributable to higher volumes purchased for sendout
arising from the colder weather, higher rates charged by our suppliers, and
higher off system gas expense. Other operation and maintenance expenses
increased $13.4 million, or 10.9%, primarily due to increased pension
expense, a higher provision for uncollectible accounts, increased group
insurance charges, higher wage rates and increased insurance premiums. These
factors were partially offset by reduced distribution charges. Depreciation
and amortization expense decreased $2.0 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 (see Note 1 related to Utility
Plant, Depreciation and Amortization). This effect was partially
19
offset by increased depreciable property. Taxes, other than income,
increased $7.8 million, or 16.1%, 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 fiscal year
2004 increased $4.1 million from those revenues for fiscal year 2003
primarily due to SM&P's attainment of new business in both new and existing
markets. The reduction in non-regulated services operating expenses,
totaling $2.6 million, was primarily attributable to SM&P's reduction in
personnel and related expenses and a non-recurring $1.0 million after-tax
charge recorded during fiscal year 2003 associated with the loss of business
from two customers. This reduction was partially offset by charges
attributable to the employment-related litigation described in Note 15 to
the Consolidated Financial Statements on page 56 of this report.
Laclede Group's non-regulated services operating revenues for fiscal year
2003 increased $6.1 million from those revenues for fiscal year 2002,
primarily attributable to the twelve-month effect of revenues recorded by
SM&P in 2003 (acquired January 28, 2002), partially offset by the partial
loss of revenue related to two customers. Non-regulated services operating
expenses in fiscal year 2003 increased $11.3 million due to the twelve-month
effect of operating expenses recorded by SM&P (compared with fiscal year
2002), right-sizing costs and the partial loss of business from two
customers, and additional start-up costs related to adding customers in new
markets.
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-regulated gas marketing revenues increased $106.5 million from those
revenues for fiscal year 2003 primarily due to higher volumes sold and
increased sales prices by LER. The increase in non-regulated gas marketing
operating expenses, totaling $106.3 million, was primarily associated with
increased gas expense incurred by LER related to higher volumes purchased
and increased prices.
Non-regulated gas marketing revenues increased $99.1 million from those
revenues for fiscal year 2002 primarily due to increased gas marketing sales
by LER. Non-regulated gas marketing expenses increased $95.1 million in
fiscal year 2003 mainly due to higher expenses associated with increased
sales levels.
Non-Regulated Other Operating Revenues and Operating Expenses
Non-regulated other operating revenues decreased $4.7 million in fiscal year
2004 from fiscal year 2003, and increased $7.3 million in fiscal year 2003
from fiscal year 2002. These variations were primarily due to changes in
sales levels recorded by Laclede Pipeline Company. Non-regulated other
operating expenses decreased $4.2 million from fiscal year 2003 primarily
due to lower expenses associated with decreased sales levels recorded by
Laclede Pipeline Company and increased $6.4 million in fiscal year 2003
mainly due to higher expenses associated with increased sales levels
recorded by Laclede Pipeline Company.
Other Income and Income Deductions - Net
The $2.5 million increase in other income and income deductions-net in
fiscal year 2004 from fiscal year 2003 was primarily attributable to the
Utility's recognition this year of the receipt of additional proceeds
totaling $1.1 million related to its interest, as a policyholder, in the
sale of a mutual insurance company. These proceeds represent initial
distributions relating to certain policies held by the Utility. Subsequent
distributions, if any, are not expected to have a material impact on the
consolidated financial position or results of operations of the Company.
Other income and income deductions-net also increased due to higher
investment income and lower donations. The change in other income and income
deductions-net in fiscal year 2003 from fiscal year 2002 was minor because
the receipt of proceeds related to the Utility's interest in the sale of a
mutual insurance company in 2003 totaling $.8 million was essentially offset
by higher donations.
20
Interest Charges
Interest charges increased $1.9 million, or 7.0%, in fiscal 2004 (compared
with fiscal 2003) primarily due to higher interest on long-term debt due to
the April 2004 issuance of $50 million of 5 1/2% First Mortgage Bonds, the
April 2004 issuance of $100 million of 6% First Mortgage Bonds, and the
full-year effect of the issuance of long-term debt to an unconsolidated
affiliate trust in December 2002 totaling $46.4 million. These increases in
interest costs were partially offset by the early redemption in June 2004 of
$50 million of 6 5/8% First Mortgage Bonds and the May 2003 maturity of $25
million of 6 1/4% First Mortgage Bonds, as well as reduced interest on
short-term debt, mainly attributable to lower borrowings.
Interest charges increased $1.1 million, or 4.2%, in fiscal 2003 (compared
with fiscal 2002) primarily due to the issuance of long-term debt to an
unconsolidated affiliate trust in December 2002, partially offset by lower
interest on long-term debt (due to the May 2003 maturity of $25 million of
6 1/4% First Mortgage Bonds) and reduced short-term interest expense
(primarily due to lower rates).
Income Taxes
The increases in income taxes for all periods reported are primarily due to
higher pre-tax income.
Labor Agreement
Laclede Gas had a labor agreement that expired July 31, 2004 with Locals 5-6
and 5-194 of the Paper, Allied-Industrial, Chemical & Energy Workers
International Union, two locals that represent approximately 74% of Laclede
Gas' employees. On August 16, 2004, Laclede Gas and Union representatives
reached a new four-year labor agreement replacing the prior agreement. The
new contract applies through July 31, 2008.
CRITICAL ACCOUNTING POLICIES
Our Discussion and Analysis of our financial condition, results of
operations, liquidity and capital resources is based upon our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. Generally
accepted accounting principles require that we make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
evaluate our estimates on an ongoing basis. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates. We believe the following represent the more significant
items requiring the use of judgment and estimates in preparing our
consolidated financial statements:
Allowances for doubtful accounts - Estimates of the collectibility
of trade accounts receivable are based on historical trends, age of
receivables, economic conditions, credit risk of specific
customers, and other factors.
Employee benefits and postretirement obligations - Pension and
postretirement obligations are calculated by actuarial consultants
that utilize several statistical factors and other assumptions
related to future events, such as discount rates, returns on plan
assets, compensation increases, and mortality rates. The amount of
expense recognized by the Utility is dependent on the regulatory
treatment provided for such costs. Certain liabilities related to
group medical benefits and workers' compensation claims, portions
of which are self-insured and/or contain stop/loss coverage with
third-party insurers to limit exposure, are established based on
historical trends.
Goodwill valuation - In accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets," goodwill is required to be tested for
impairment annually or whenever events or circumstances occur that
may reduce the value of goodwill. In performing impairment tests,
valuation techniques require the use of estimates with regard to
discounted future cash flows of operations, involving judgments
based on a broad range of information and historical results. If
the test indicates impairment has occurred, goodwill would be
reduced adversely impacting earnings.
Laclede Gas accounts for its regulated operations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." This statement sets forth the
application of
21
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 Note 1 to the
Consolidated Financial Statements included in this report on Form 10-K on
page 38.
REGULATORY MATTERS
At the state level, there have been several important developments during
the fiscal year affecting Laclede Gas, some of which are still pending.
Laclede Gas previously appealed the MoPSC's decision in its 1999 rate case
relative to the calculation of its depreciation rates. The Circuit Court
remanded the decision to the MoPSC based on inadequate findings of fact. The
MoPSC upheld its previous order and Laclede Gas appealed this second order
to the Circuit Court. In 2002, the Circuit Court ruled that the MoPSC's
second order was lawful and reasonable, and Laclede Gas appealed the Circuit
Court's decision to the Missouri Court of Appeals for the Western District.
On March 4, 2003 the Court of Appeals issued an opinion remanding the
decision to the MoPSC based on the MoPSC's failure to support and explain
its decision with adequate findings of fact. In May 2003, the Court of
Appeals rejected the MoPSC's request that the Court reconsider its opinion
or transfer this matter to the Missouri Supreme Court. On March 29, 2004,
the MoPSC Staff and Laclede Gas responded to a MoPSC order directing
interested parties to submit new proposed findings of fact on this issue for
its consideration. By Order dated May 4, 2004, the MoPSC determined that it
was necessary to take additional evidence on this issue. Evidentiary
hearings were held on September 22-24, 2004, and briefs were filed on
November 2, 2004. This proceeding now awaits the MoPSC's decision. Laclede
Gas believes that a favorable decision, when recognized in rates, would be
expected to benefit its cash flows.
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 $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
22
Judgment vacating and setting aside the Commission's decision on the grounds
that it was unlawful and not supported by competent and substantial evidence
on the record. On December 5, 2003, the MoPSC appealed the Circuit Court's
decision to the Missouri Court of Appeals for the Western District. Oral
arguments were held in the Missouri Court of Appeals for the Western
District on August 17, 2004. The Utility is now awaiting the court's
decision. The Utility continues to believe in the merits of its position and
intends, if necessary, to assert its position vigorously throughout the
appellate process. However, to the extent that a final decision in the
courts results in disallowance of the $4.9 million in pre-tax gains, it
could have a material effect on the future financial position or results of
operations of the Company.
On March 1, 2004, Laclede Gas submitted to the MoPSC an Infrastructure
System Replacement Surcharge (ISRS) filing designed to increase revenues by
approximately $3.86 million annually. Such filing was made pursuant to a
Missouri law, enacted in 2003, that allows gas utilities to adjust their
rates up to twice a year to recover certain facility-related expenditures
that are made to comply with state and federal safety requirements or to
relocate facilities in connection with public improvement projects. On March
12, 2004, the MoPSC suspended the proposed surcharge until June 29, 2004
pursuant to the statute. On May 27, 2004 the Utility and the Staff of the
MoPSC filed a Stipulation and Agreement ("S&A") that provided for a $3.56
million annual surcharge effective June 10, 2004. On June 1, 2004 the MoPSC
approved the S&A. On October 28, 2004, Laclede Gas submitted its second ISRS
filing to the MoPSC designed to increase revenues by approximately an
additional $1.6 million annually.
ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised
December 2003) (FIN 46R), "Consolidation of Variable Interest Entities,"
addresses consolidation of business enterprises of variable interest
entities. Public entities shall apply this Interpretation to their interests
in special purpose entities as of the first interim period ending after
December 15, 2003. Application by public entities for all other types of
variable interest entities was required in financial statements for periods
ending after March 15, 2004.
In December 2002, Laclede Group formed a wholly owned trust, Laclede Capital
Trust I (Trust), for the sole purpose of issuing preferred securities and
lending the gross proceeds to its parent, Laclede Group. As of September 30,
2004, the Trust had $45 million of Trust Preferred Securities outstanding.
The sole assets of the Trust are debentures of Laclede Group, totaling $46.4
million, with the same economic terms as the Trust Preferred Securities.
Prior to the application of FIN 46R, the Trust was consolidated in the
financial statements of Laclede Group. The Company evaluated the effect of
this pronouncement on this consolidation. In accordance with the provisions
of FIN 46R, Laclede Group determined that the Trust is a variable interest
entity because its common securities investment is considered not at risk,
and Laclede Group is not the primary beneficiary of the Trust. Accordingly,
the Trust was deconsolidated during the quarter ended March 31, 2004. The
Consolidated Balance Sheets have been modified to include Investments in
Unconsolidated Subsidiaries of $1.4 million representing Laclede Group's
common securities investment in the Trust and to reflect Laclede Group's
obligations related to the debentures. The common securities investment is
included on the Other Property and Investments line on the Consolidated
Balance Sheets. As permitted under FIN 46R, the Trust has been
deconsolidated for prior periods and presented to be consistent with the
current presentation. The adoption of FIN 46R did not result in a cumulative
effect of an accounting change adjustment and did not have a material effect
on the financial position or results of operations of Laclede Group.
In December 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 132 (revised 2003) (SFAS No. 132(R)), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The
provisions of this Statement do not change the measurement and recognition
provisions of SFAS No. 87, "Employers' Accounting for Pensions," No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132(R)
replaces SFAS No. 132, and requires certain additional disclosures that
became effective for fiscal years ending after and interim periods beginning
after December 15, 2003. The required disclosures are included in Note 2 to
the Consolidated Financial Statements on page 42 of this report, and the
disclosures for prior periods are presented consistent with current
presentation.
The Emerging Issues Task Force (EITF) deliberated Issue 03-01, "The Meaning
of Other-Than-Temporary Impairment and its Application to Certain
Investments." The Issue was intended to address the meaning of
other-than-temporary impairment and its application to certain investments
held at cost. A consensus was reached regarding disclosure requirements
concerning unrealized losses on available-for-sale debt and equity
securities accounted for under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" and SFAS No. 124, "Accounting for
Certain Investments Held for Not-for-Profit Organizations." The guidance for
evaluating whether an investment is other-than-temporarily impaired should
be applied in reporting periods beginning after June 15, 2004. The
disclosures are effective
23
in annual financial statements for fiscal years ended after December 15,
2003, for investments accounted for under SFAS Nos. 115 and 124. For all
other investments within the scope of this Issue, the disclosures are
effective in annual financial statements for fiscal years ending after June
15, 2004. Additional disclosures for cost method investments are effective
for fiscal years ending after June 15, 2004. The required disclosures are
included in Note 10 to the Consolidated Financial Statements on page 51 of
this report.
In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." FSP 106-2 supersedes FSP
106-1 issued in January 2004. FSP 106-2 provides guidance on the accounting
for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (Act) for employers that sponsor postretirement
health care plans that provide prescription drug benefits. The Act
introduces two new features to Medicare that an employer needs to consider
in measuring its obligation and net periodic postretirement benefit costs.
The effective date for FSP 106-2 is the first interim or annual period
beginning after June 15, 2004. The adoption of FSP 106-2 did not have a
material effect on the financial position or results of operations of the
Company.
INFLATION
The accompanying consolidated financial statements reflect the historical
costs of events and transactions, regardless of the purchasing power of the
dollar at the time. Due to the capital-intensive nature of the business of
Laclede Gas, the most significant impact of inflation is on the depreciation
of utility plant. Rate regulation, to which Laclede Gas is subject, allows
recovery through its rates of only the historical cost of utility plant as
depreciation. While no plans exist to undertake replacements of plant in
service other than normal replacements and those under existing replacement
programs, Laclede Gas believes that any higher costs experienced upon
replacement of existing facilities would be recovered through the normal
regulatory process.
CREDIT RATINGS
As of September 30, 2004, credit ratings for outstanding securities for
Laclede Group and Laclede Gas issues were as follows:
Type of Facility S&P Moody's Fitch
- -----------------------------------------------------------------------------
Laclede Group Corporate Rating A
Laclede Gas First Mortgage Bonds A A3 A+
Laclede Gas Commercial Paper A-1 P-2
Trust Preferred Securities A- Baa3 BBB+
The Company has investment grade ratings, and believes that it will have
adequate access to the financial markets to meet its capital requirements.
These ratings remain subject to review and change by the rating agencies.
CASH FLOWS
The Company's short-term borrowing requirements typically peak during colder
months when Laclede Gas borrows money to cover the gap between when it
purchases its natural gas and when its customers pay for that gas. Changes
in the wholesale cost of natural gas, variations in the timing of
collections of gas costs under the Utility's PGA Clause, the seasonality of
accounts receivable balances, and the utilization of storage gas inventories
cause short-term cash requirements to vary during the year, and can cause
significant variations in the Utility's cash provided by or used in
operating activities.
Net cash provided by operating activities for the fiscal year ended 2004 was
$84.1 million, a $93.1 million increase, compared with fiscal year 2003. The
increase in cash provided by operating activities was primarily attributable
to changes in the cost of natural gas in storage and variations in the
timing of collections of gas costs under the PGA clause. Net cash used in
operating activities for the fiscal year ended 2003 was $9.0 million,
compared with cash provided by operations in fiscal year 2002 totaling $83.8
million. The adverse effect on cash related to operating activities was
primarily due to changes in the cost of natural gas in storage and
unfavorable variations in the timing of collections of gas costs under the
PGA clause.
24
Net cash used in investing activities for fiscal year 2004 was $51.6 million
compared with $51.5 million for fiscal year 2003. Cash used in investing
activities during both periods primarily reflected Utility construction
expenditures. Net cash used in investing activities for fiscal year 2002 was
$94.1 million primarily reflecting Utility construction expenditures and the
acquisition of SM&P.
Net cash used in financing activities was $25.9 million for fiscal year
2004, primarily reflecting the repayment of short-term debt and the payment
of dividends, partially offset by the issuance of additional long-term debt
and common stock. Net cash provided by financing activities was $55.0
million for fiscal year 2003, reflecting the issuance of long-term debt to
unconsolidated affiliate trust and additional short-term borrowings,
partially offset by the May 2003 maturity of $25 million of 6 1/4% First
Mortgage Bonds and the payment of dividends. Net cash provided by financing
activities in fiscal 2002 was $19.9 million primarily due to additional
short-term borrowings partially offset by the payment of dividends.
LIQUIDITY AND CAPITAL RESOURCES
The Company's short-term borrowing requirements have traditionally been met
through the sale of commercial paper supported by lines of credit with
banks. During the fiscal year 2004 heating season, Laclede Gas had lines of
credit in place of up to $290 million, including a $25 million seasonal line
during the peak winter season. Laclede Gas had short-term borrowings
aggregating to a maximum of $274.7 million at any one time during the fiscal
year. These borrowings were primarily commercial paper, supplemented from
time to time by draws on the seasonal line of credit or short-term loans
from Laclede Group. Loans from Laclede Group were no more than $12.6 million
at any time. At the date of this report, Laclede Gas has aggregate lines of
credit totaling $300 million, with $15 million expiring in April 2005 and
$285 million expiring in September 2009. Short-term commercial paper
borrowings outstanding at September 30, 2004 were $71.4 million at a
weighted average interest rate of 1.9% per annum. Based on short-term
borrowings at September 30, 2004, a change in interest rates of 100 basis
points would increase or decrease pre-tax earnings and cash flows by
approximately $0.7 million on an annual basis.
Most of Laclede Gas' lines of credit include covenants limiting total debt,
including short-term debt, to no more than 70% of total capitalization and
requiring earnings before interest, taxes, depreciation and amortization
(EBITDA) to be at least 2.25 times interest expense. On September 30, 2004,
total debt was 56% of total capitalization. For the fiscal year ended
September 30, 2004, EBITDA was 3.82 times interest expense.
Laclede Gas has on file a shelf registration on Form S-3. Of the $350
million of securities originally registered under this Form S-3, $120
million of debt securities remained registered and unissued as of September
30, 2004. The original MoPSC authorization for issuing securities registered
on this Form S-3 expired in September 2003. In response to an application
filed by the Utility, the MoPSC extended this authorization to issue debt
securities and receive paid-in capital through October 31, 2006. The
remaining MoPSC authorization is $65.5 million, reflecting capital
contributions that have been made by Laclede Group to Laclede Gas under this
authority through October 2004. The amount, timing and type of additional
financing to be issued under this shelf registration will depend on cash
requirements and market conditions.
In April 2004, Laclede Gas issued $50 million of First Mortgage Bonds,
5 1/2% Series, due May 1, 2019, and $100 million of First Mortgage Bonds, 6%
Series, due May 1, 2034. The net proceeds of approximately $147.9 million
from this issuance were used to repay short-term debt and to call at par the
$50 million 6 5/8% Series First Mortgage Bonds in June 2004. The proceeds
were also used to pay at maturity $25 million of 8 1/2% First Mortgage Bonds
in November 2004. At September 30, 2004, Laclede Gas had fixed-rate
long-term debt totaling $360 million, including the $25 million current
portion. While these long-term debt issues are fixed-rate, they are subject
to changes in fair value as market interest rates change. However, increases
or decreases in fair value would impact earnings and cash flows only if
Laclede Gas were to reacquire any of these issues in the open market prior
to maturity.
Laclede Group has on file a shelf registration on Form S-3, which allows for
the issuance of equity securities, other than preferred stock, and debt
securities. Of the $500 million of securities originally registered under
this Form S-3, $362.4 million remain registered and unissued as of September
30, 2004. Laclede Group issued 1.725 million shares of common stock in May
2004 under this registration. The net proceeds of approximately $44.7
million from this sale were used to make a capital contribution to Laclede
Gas. Laclede Gas used the contribution to reduce short-term borrowings and
for general corporate purposes. The amount, timing and type of additional
financing to be issued under this shelf registration will depend on cash
requirements and market conditions.
25
Short-term cash requirements outside of Laclede Gas have generally been met
with internally-generated funds. However, Laclede Group has a $20 million
working capital line of credit obtained from U.S. Bank National Association,
expiring in June 2005, to meet 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 that 70% of the Utility's total
capitalization (as noted above, this ratio stood at 56% on September 30,
2004). This line has been used to provide letters of credit of $1.2 million
on behalf of SM&P, which have not been drawn, and to provide for seasonal
funding needs of the various subsidiaries from time to time. The maximum
balance outstanding during fiscal year 2004 was $10.0 million, and there was
no balance outstanding as of September 30, 2004.
SM&P has several operating leases, the aggregate annual cost of which is
approximately $5 million, consisting primarily of 12-month operating leases,
with renewal options, for vehicles used in its business. Upon acquisition of
SM&P, Laclede Group assumed parental guarantees of certain of those vehicle
leases. Laclede Group anticipates that the maximum guarantees related to
existing leases will not exceed $12 million. No amounts have been recorded
for these guarantees in the financial statements.
Laclede Group had guarantees outstanding totaling $8.5 million for
performance and payment of certain wholesale gas supply purchases by LER as
of September 30, 2004. Laclede Group issued an additional $1.5 million
guarantee in October 2004 on behalf of LER.
Utility construction expenditures were $49.1 million in fiscal 2004 compared
with $49.9 million in fiscal 2003 and $48.8 million in fiscal 2002. Laclede
Gas expects fiscal 2005 utility construction expenditures to approximate $56
million. Non-utility construction expenditures for fiscal 2004 were $2.2
million compared with $1.2 million in fiscal 2003, and $4.2 million in
fiscal 2002, and are estimated at approximately $5 million in fiscal 2005.
Consolidated capitalization at September 30, 2004, excluding current
obligations of long-term debt, consisted of 48.3% Laclede Group common stock
equity, .2% Laclede Gas preferred stock equity, 6.3% Long-term debt to
unconsolidated affiliate trust, and 45.2% Laclede Gas long-term debt.
The ratio of earnings to fixed charges was 2.8 for fiscal year 2004, 2.8 for
fiscal year 2003, and 2.2 for fiscal year 2002.
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.
CONTRACTUAL OBLIGATIONS
As of September 30, 2004, Laclede Group had contractual obligations with
payments due as summarized below (in millions):
Payments due by period
-------------------------------------------------------
Less than 1-3 3-5 More than
Contractual Obligations Total 1 year Years Years 5 years
- ---------------------------------------------------------------------------------------------------------
Long-Term Debt (a) $704.9 $ 46.0 $ 74.0 $68.6 $516.3
Capital Leases - - - - -
Operating Leases (b) 18.7 8.1 4.9 3.3 2.4
Purchase Obligations - Natural Gas (c) 246.0 165.4 67.9 6.4 6.3
Purchase Obligations - Other (d) 11.2 5.3 3.9 2.0 -
Other Long-Term Liabilities - - - - -
--------------------------------------------------------------------
Total $980.8 $224.8 $150.7 $80.3 $525.0
====================================================================
(a) Long-term debt obligations reflect principal maturities and
interest payments.
(b) Operating lease obligations are primarily for office space,
vehicles, and power operated equipment in the gas distribution and
non-regulated services segments. Additional payments will be
incurred if renewal options are exercised under the provisions of
certain agreements.
(c) These purchase obligations represent the minimum payments required
under existing natural gas transportation and storage contracts and
natural gas supply agreements in the utility gas distribution and
non-regulated gas marketing segments. These amounts reflect fixed
obligations as well as obligations to purchase natural gas at
future market prices, calculated using September 30, 2004 NYMEX
futures prices. Laclede Gas recovers the costs related to its
purchases, transportation, and storage of natural gas through the
operation of its Purchased
26
Gas Adjustment Clause; however, variations in the timing of collections
of gas costs from customers affect short-term cash requirements.
Additional contractual commitments are generally entered into prior to
or during the heating season.
(d) These purchase obligations reflect miscellaneous agreements for the
purchase of materials and the procurement of services necessary for
normal operations.
MARKET RISK
Laclede Gas adopted a risk management policy that provides for the purchase
of natural gas financial instruments with the goal of managing price risk
associated with purchasing natural gas on behalf of its customers. This
policy prohibits speculation. Costs and cost reductions, including carrying
costs, associated with the Utility's use of natural gas financial
instruments are allowed to be passed on to the Utility's customers through
the operation of its Purchased Gas Adjustment Clause, through which the
MoPSC allows the Utility to recover gas supply costs. Accordingly, Laclede
Gas does not expect any adverse earnings impact as a result of the use of
these financial instruments. At September 30, 2004, the Utility held
approximately 29 million MmBtu of futures contracts at an average price of
$6.67 per MmBtu. These positions have various expiration dates, the longest
of which extends through March 2005.
In the course of its business, Laclede Group's non-regulated marketing
affiliate, Laclede Energy Resources, Inc. (LER), enters into fixed price
commitments associated with the purchase or sale of natural gas. LER manages
the price risk associated with these commitments by either closely matching
the offsetting physical purchase or sale of natural gas at fixed prices or
through the use of exchange-traded futures contracts to lock in margins. At
September 30, 2004, 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 interpretations
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 remedial actions and those actions are essentially
complete. Laclede Gas currently estimates the overall costs of these actions
will be approximately $2.4 million. As of September 30, 2004, Laclede Gas
has paid or reserved for these actions. If regulators require additional
remedial actions or assert additional claims, Laclede Gas will incur
additional costs.
Laclede Gas enrolled a second former manufactured gas plant site into the
Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to
minimize the scope and cost of site cleanup while maximizing possibilities
for site development. This site is located in, and is presently owned by,
the City of St. Louis, Missouri. Laclede Gas continues to evaluate options
concerning this site, including, but not limited to, the submission of its
own Remedial Action Plan (RAP) to the VCP. Laclede Gas currently estimates
that the cost of site investigations, agency oversight and related legal and
engineering consulting may be approximately $650,000. Currently, Laclede Gas
has paid or reserved for these actions. Laclede Gas has requested that other
former site owners and operators share in these costs and one party has
agreed to participate and has reimbursed Laclede Gas to date for $173,000.
Laclede Gas anticipates additional reimbursement from this party. Laclede
Gas plans to seek proportionate reimbursement of all costs relative to this
site from other potentially responsible parties if practicable.
Laclede Gas has been advised that a third former manufactured gas plant site
may require remediation. Laclede Gas does not, and for many years has not,
owned this site. At this time, it is not clear whether Laclede Gas will
incur any costs in connection with environmental investigations or
remediation at the site, and if it does incur any costs, what the amount of
those costs would be.
Costs incurred are charged to expense or capitalized in accordance with
generally accepted accounting principles. A predetermined level of expense
is recovered through Laclede Gas' rates. While the scope of future costs
relative to the actions Laclede Gas has taken at the Shrewsbury site
pursuant to the current agreement with federal and state regulators may not
be significant, the scope of costs relative to future remedial actions
regulators may require at the Shrewsbury site and to the other sites is
unknown and may be material.
27
Laclede Gas has notified its insurers that it seeks reimbursement of its
costs at these three manufactured gas plant sites. In response, the majority
of insurers have reserved their rights. While some of the insurers have
denied coverage, Laclede Gas continues to seek reimbursement from them. With
regard to costs incurred under current agreement regarding the Shrewsbury
site, denials of coverage are not expected to have any material impact on
the financial position and results of operations of Laclede Gas. With regard
to the other two sites, and with regard to any future actions that might be
required at the Shrewsbury site, since the scope of costs are unknown and
may be significant, denials of coverage may have a material impact on the
financial position and results of operations of Laclede Gas. Such costs, if
incurred, have typically been subject to recovery in rates.
OFF-BALANCE SHEET ARRANGEMENTS
Laclede Group has no off-balance sheet arrangements.
Laclede Gas Company's Management Discussion and Analysis of Financial
Condition is included in Exhibit 99.1.
Item 7A. 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 27.
28
Item 8. Financial Statements and Supplementary Data
Management Report
Management is responsible for the preparation, presentation and integrity of
the consolidated financial statements and other financial information in
this report. The statements were prepared in conformity with accounting
principles generally accepted in the United States of America and include
amounts that are based on management's best estimates and judgments. In the
opinion of management, the financial statements fairly reflect the Company's
financial position, results of operations and cash flows.
The Company maintains internal accounting systems and related administrative
controls that are designed to provide reasonable assurance, on a
cost-effective basis, that transactions are executed in accordance with
management's authorization, that consolidated financial statements are
prepared in conformity with accounting principles generally accepted in the
United States of America and that the Company's assets are properly
accounted for and safeguarded. The Company's Internal Audit Department,
which has unrestricted access to all levels of Company management, monitors
compliance with established controls and procedures.
Deloitte & Touche LLP, the Company's independent auditors, whose report is
contained herein, is responsible for auditing the Company's financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards include obtaining an
understanding of the internal control structure in order to design the audit
of the financial statements.
The Audit Committee of the Board of Directors, which consists of four
outside directors, meets periodically with management, the internal auditor,
and the independent auditors to review the manner in which they are
performing their responsibilities. Both the internal auditor and the
independent auditors periodically meet alone with the Audit Committee and
have access to the Audit Committee at any time.
The Certificates under Rule 13a-14(a) and Section 1350 Certifications of the
CEO and CFO of Laclede Group are included in this report as Exhibits 31 and
32, respectively.
Douglas H. Yaeger
Chairman of the Board,
President and Chief Executive Officer
Barry C. Cooper
Chief Financial Officer
29
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
The Laclede Group, Inc.
We have audited the accompanying consolidated balance sheets and statements
of consolidated capitalization of The Laclede Group, Inc. and its
subsidiaries ("the Company") as of September 30, 2004 and 2003, and the
related statements of consolidated income, common shareholders' equity,
comprehensive income, and cash flows for each of the three years in the
period ended September 30, 2004. Our audits also included the financial
statement schedule listed in the Index at Part IV, Item 15(a) 2. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Laclede Group, Inc. and
its subsidiaries as of September 30, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the period
ended September 30, 2004 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
St. Louis, Missouri
November 17, 2004
30
Item 8. Financial Statements and Supplementary Data
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED INCOME
(Thousands, Except Per Share Amounts)
- ------------------------------------------------------- ------------- ------------- -------------
Years Ended September 30 2004 2003 2002
- ------------------------------------------------------- ------------- ------------- -------------
Operating Revenues:
Regulated
Gas distribution $ 868,905 $ 774,772 $592,097
Non-Regulated
Services 104,239 100,168 94,116
Gas marketing 270,328 163,861 64,798
Other 6,848 11,529 4,228
------------- ------------- -------------
Total Operating Revenues 1,250,320 1,050,330 755,239
------------- ------------- -------------
Operating Expenses:
Regulated
Natural and propane gas 575,691 483,742 340,045
Other operation expenses 121,596 118,550 106,027
Maintenance 18,705 18,759 17,813
Depreciation and amortization 22,385 22,229 24,215
Taxes, other than income taxes 60,077 56,102 48,342
------------- ------------- -------------
Total regulated operating expenses 798,454 699,382 536,442
Non-Regulated
Services 99,511 102,093 90,771
Gas marketing 265,394 159,105 64,042
Other 6,400 10,615 4,222
------------- ------------- -------------
Total Operating Expenses 1,169,759 971,195 695,477
------------- ------------- -------------
Operating Income 80,561 79,135 59,762
------------- ------------- -------------
Other Income and (Income Deductions) - Net 3,581 1,050 678
------------- ------------- -------------
Interest Charges:
Interest on long-term debt 22,010 20,169 20,820
Interest on long-term debt to unconsolidated
affiliate trust 3,516 2,743 -
Other interest charges 3,234 3,974 4,989
------------- ------------- -------------
Total Interest Charges 28,760 26,886 25,809
------------- ------------- -------------
Income Before Income Taxes 55,382 53,299 34,631
Income Tax Expense 19,264 18,652 12,247
------------- ------------- -------------
Net Income 36,118 34,647 22,384
Dividends on Redeemable Preferred Stock -
Laclede Gas 62 62 68
------------- ------------- -------------
Net Income Applicable to Common Stock $ 36,056 $ 34,585 $ 22,316
============= ============= =============
Average Number of Common Shares Outstanding 19,783 19,022 18,888
Basic Earnings Per Share of Common Stock $1.82 $1.82 $1.18
Diluted Earnings Per Share of Common Stock $1.82 $1.82 $1.18
See the accompanying notes to consolidated financial statements.
31
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Thousands)
- ---------------------------------------------------------- ----------- ----------- -----------
Years Ended September 30 2004 2003 2002
- ---------------------------------------------------------- ----------- ----------- -----------
Net Income Applicable to Common Stock $36,056 $34,585 $22,316
----------- ----------- -----------
Other Comprehensive Income (Loss), Before Tax:
Net gains (losses) on cash flow hedging derivative
instruments:
Net hedging gain (loss) arising during the period (4,809) 1,184 -
Reclassification adjustment for (gains) losses included
in net income 1,977 (366) -
----------- ----------- -----------
Net unrealized gains (losses) on cash flow
hedging derivative instruments (2,832) 818 -
Minimum pension liability adjustment 344 (396) (553)
----------- ----------- -----------
Other Comprehensive Income (Loss), Before Tax (2,488) 422 (553)
Income Tax Expense (Benefit) Related to Items
of Other Comprehensive Income (Loss) (961) 163 (214)
----------- ----------- -----------
Other Comprehensive Income (Loss), Net of Tax (1,527) 259 (339)
----------- ----------- -----------
Comprehensive Income $34,529 $34,844 $21,977
=========== =========== ===========
See the accompanying notes to consolidated financial statements.
32
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands)
- ------------------------------------------------------------- ------------- ------------
September 30 2004 2003
- ------------------------------------------------------------- ------------- ------------
Assets
Utility Plant $1,070,522 $1,030,665
Less - Accumulated depreciation and amortization 423,647 409,418
------------- ------------
Net Utility Plant 646,875 621,247
------------- ------------
Goodwill 28,124 28,124
------------- ------------
Other Property and Investments (net of accumulated
depreciation and amortization, 2004, $12,661;
2003, $9,486) 46,082 45,998
------------- ------------
Current Assets:
Cash and cash equivalents 13,854 7,291
Accounts receivable:
Gas customers - billed and unbilled 76,223 70,217
Other 51,822 41,298
Less - Allowances for doubtful accounts (10,362) (7,181)
Inventories:
Natural gas stored underground at LIFO cost 131,773 117,231
Propane gas at FIFO cost 15,808 17,132
Materials, supplies and merchandise at average cost 4,714 4,071
Derivative instrument assets 16,857 12,643
Unamortized purchased gas adjustments 19,618 -
Deferred income taxes 1,321 7,631
Prepayments and other 16,008 17,557
------------- ------------
Total Current Assets 337,636 287,890
------------- ------------
Deferred Charges:
Prepaid pension cost 92,026 109,445
Regulatory assets 104,703 103,807
Other 9,849 6,287
------------- ------------
Total Deferred Charges 206,578 219,539
------------- ------------
Total Assets $1,265,295 $1,202,798
============= ============
See the accompanying notes to consolidated financial statements.
33
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Thousands)
- ------------------------------------------------------------------------ ------------ ------------
September 30 2004 2003
- ------------------------------------------------------------------------ ------------ ------------
Capitalization and Liabilities
Capitalization:
Common stock equity $ 355,915 $ 299,072
Redeemable preferred stock (less current sinking fund requirements)
- Laclede Gas 1,108 1,258
Long-term debt to unconsolidated affiliate trust 46,400 46,400
Long-term debt (less current portion) - Laclede Gas 333,936 259,625
------------ ------------
Total Capitalization 737,359 606,355
------------ ------------
Current Liabilities:
Notes payable 71,380 218,200
Accounts payable 68,366 66,001
Advance customer billings 23,620 15,361
Current portion of long-term debt and preferred stock 25,145 -
Wages and compensation accrued 15,596 15,859
Dividends payable 7,214 6,461
Customer deposits 10,661 5,044
Interest accrued 10,920 7,363
Taxes accrued 16,725 13,211
Unamortized purchased gas adjustment - 5,865
Other 13,003 12,911
------------ ------------
Total Current Liabilities 262,630 366,276
------------ ------------
Deferred Credits and Other Liabilities:
Deferred income taxes 189,626 180,598
Unamortized investment tax credits 5,010 5,316
Pension and postretirement benefit costs 20,484 20,973
Regulatory liabilities 28,210 582
Other 21,976 22,698
------------ ------------
Total Deferred Credits and Other Liabilities 265,306 230,167
------------ ------------
Commitments and Contingencies (Note 15)
------------ ------------
Total Capitalization and Liabilities $1,265,295 $1,202,798
============ ============
See the accompanying notes to consolidated financial statements.
34
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED CAPITALIZATION
(Thousands, Except Per Share Amounts)
- ------------------------------------------------------------------------ ---------- ----------
September 30 2004 2003
- ------------------------------------------------------------------------ ---------- ----------
Common Stock Equity:
Common stock, par value $1 per share:
Authorized - 2004 and 2003, 70,000,000 shares
Issued - 2004, 20,981,165 shares; and
2003, 19,082,402 shares $ 20,981 $ 19,082
Paid-in capital 116,058 68,460
Retained earnings 220,483 211,610
Accumulated other comprehensive income (loss) (1,607) (80)
---------- ----------
Total Common Stock Equity 355,915 299,072
---------- ----------
Redeemable Preferred Stock - Laclede Gas, par value $25 per share
(1,480,000 shares authorized)
Issued and outstanding:
5% Series B - 2004, 44,192 shares; and
2003, 44,413 shares 960 1,110
4.56% Series C - 2004 and 2003, 5,906 shares 148 148
---------- ----------
Total Redeemable Preferred Stock 1,108 1,258
---------- ----------
Long-Term Debt to Unconsolidated Affiliate Trust 46,400 46,400
---------- ----------
Long-Term Debt - Laclede Gas:
First mortgage bonds:
8-1/2% Series, due November 15, 2004 - 25,000
8-5/8% Series, due May 15, 2006 40,000 40,000
7-1/2% Series, due November 1, 2007 40,000 40,000
6-1/2% Series, due November 15, 2010 25,000 25,000
6-1/2% Series, due October 15, 2012 25,000 25,000
6-5/8% Series, due June 15, 2016 - 50,000
5-1/2% Series, due May 1, 2019 50,000 -
7% Series, due June 1, 2029 25,000 25,000
7.90% Series, due September 15, 2030 30,000 30,000
6% Series, due May 1, 2034 100,000 -
---------- ----------
Total 335,000 260,000
Unamortized discount, net of premium,
on long-term debt (1,064) (375)
---------- ----------
Total Long-Term Debt - Laclede Gas 333,936 259,625
---------- ----------
Total $737,359 $606,355
========== ==========
Long-term debt and preferred stock dollar amounts are exclusive of current
portion.
See the accompanying notes to consolidated financial statements.
35
THE LACLEDE GROUP, INC.
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
Common Stock Issued
---------------------- Paid-in Retained Accum. Other Treasury
(Thousands, Except for Shares) Shares Amount Capital Earnings Comp. Income Stock Total
------ ------ ------- -------- ------------ --------- -----
--------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 2001 20,743,625 $20,744 $ 85,846 $205,512 $ - $(24,017) $288,085
--------------------------------------------------------------------------------
Net Income Applicable to Common
Stock - - - 22,316 - - 22,316
Cancel treasury stock (1,865,638) (1,866) (22,151) - - 24,017 -
Dividend reinvestment plan 43,300 43 966 - - - 1,009
Dividends declared:
Common stock ($1.34 per share) - - - (25,311) - - (25,311)
Other comprehensive income (loss) - - - - (339) - (339)
Other - - 6 - - - 6
--------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 2002 18,921,287 $18,921 $ 64,667 $202,517 $ (339) $ - $285,766
--------------------------------------------------------------------------------
Net Income Applicable to Common
Stock - - - 34,585 - - 34,585
Dividend reinvestment plan 161,115 161 3,793 - - - 3,954
Dividends declared:
Common stock ($1.34 per share) - - - (25,492) - - (25,492)
Other comprehensive income (loss) - - - - 259 - 259
--------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 2003 19,082,402 $19,082 $ 68,460 $211,610 $ (80) $ - $299,072
--------------------------------------------------------------------------------
Net Income Applicable to Common Stock - - - 36,056 - - 36,056
Common stock offering 1,725,000 1,725 43,003 - - - 44,728
Dividend reinvestment plan 138,213 138 3,809 - - - 3,947
Equity plan 35,550 36 800 - - - 836
Dividends declared:
Common stock ($1.355 per share) - - - (27,183) - - (27,183)
Other comprehensive income (loss) - - - - (1,527) - (1,527)
Other - - (14) - - - (14)
--------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 2004 20,981,165 $20,981 $116,058 $220,483 $(1,607) $ - $355,915
================================================================================
See the accompanying notes to consolidated financial statements.
36
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Thousands)
- ------------------------------------------------------------------------------------------------------------
Years Ended September 30 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 36,118 $ 34,647 $22,384
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 25,572 25,615 26,223
Deferred income taxes and investment
tax credits 15,568 15,412 5,666
Other - net 256 502 801
Changes in assets and liabilities:
Accounts receivable - net (13,349) (14,856) 3,714
Unamortized purchased gas adjustments (25,483) (17,111) 13,950
Deferred purchased gas costs 41,022 (21,461) 185
Accounts payable 2,365 20,294 11,093
Advance customer billings - net 8,259 (9,471) 13,153
Taxes accrued 3,514 3,396 (5,097)
Natural gas stored underground (14,542) (40,110) (460)
Other assets and liabilities 4,817 (5,886) (7,768)
------------------------------------
Net cash provided by (used in)
operating activities 84,117 (9,029) 83,844
Investing Activities:
Construction expenditures (51,309) (51,112) (52,999)
Employee benefit trusts (2,221) (1,099) (1,508)
Acquisition of SM&P, net of cash and cash equivalents - - (38,044)
Other investments 1,885 685 (1,515)
------------------------------------
Net cash used in
investing activities (51,645) (51,526) (94,066)
Financing Activities:
Issuance of first mortgage bonds 150,000 - -
Maturity/Redemption of first mortgage bonds (50,000) (25,000) -
Issuance (repayment) of short-term debt - net (146,820) 56,530 44,620
Issuance of common stock 49,497 3,954 1,009
Dividends paid (26,494) (25,500) (25,365)
Issuance of long-term debt to unconsolidated affiliate trust - 45,000 -
Preferred stock reacquired (5) (8) (395)
Other (2,087) - -
------------------------------------
Net cash (used in) provided by
financing activities (25,909) 54,976 19,869
------------------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents 6,563 (5,579) 9,647
Cash and Cash Equivalents at
Beginning of Year 7,291 12,870 3,223
------------------------------------
Cash and Cash Equivalents at End of Year $ 13,854 $ 7,291 $ 12,870
====================================
Supplemental Disclosure of Cash Paid
During the Year for:
Interest $ 24,325 $ 26,183 $ 23,125
Income taxes 376 156 12,087
See the accompanying notes to consolidated financial statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE LACLEDE GROUP, INC.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION - The consolidated financial
statements include the accounts of The Laclede Group, Inc. (Laclede Group or
the Company) and its subsidiary companies. All subsidiaries are wholly
owned. Laclede Gas Company (Laclede Gas or the Utility) and other
subsidiaries of Laclede Group may engage in related party transactions
during the ordinary course of business. All significant intercompany
balances have been eliminated from the consolidated financial statements of
Laclede Group except that certain intercompany transactions with Laclede Gas
are not eliminated in accordance with the provisions of Statement of
Financial Accounting Standard (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation."
Investment in Unconsolidated Affiliate Trust - Laclede Group
formed a wholly owned trust, Laclede Capital Trust I (Trust) for the sole
purpose of issuing preferred securities and lending the gross proceeds to
its parent, Laclede Group. The sole assets of the Trust are debentures of
Laclede Group.
On December 16, 2002, Laclede Group invested $1.4 million in
common securities of the Trust and the Trust issued $45 million of 7.70%
Trust Preferred Securities with a liquidation value of $25 per share due
December 1, 2032. The Trust Preferred Securities can be redeemed on or after
December 16, 2007. All of the proceeds from the sale of the Trust Preferred
Securities, along with the Trust common securities, were invested by the
Trust in debentures of Laclede Group, totaling $46.4 million, with the same
economic terms as the Trust Preferred Securities.
Prior to the adoption of Financial Accounting Standards Board
Interpretation No. 46 (Revised December 2003) (FIN 46R), "Consolidation of
Variable Interest Entities," the Trust was consolidated in the financial
statements of Laclede Group. Concurrent with the adoption of FIN 46R, the
Trust was deconsolidated during the quarter ended March 31, 2004. The
Consolidated Balance Sheets were modified to include Investments in
Unconsolidated Subsidiaries of $1.4 million representing Laclede Group's
common securities investment in the Trust and to reflect Laclede Group's
obligations related to the debentures totaling $46.4 million. The common
securities investment is included on the Other Property and Investments line
on the Consolidated Balance Sheets. As permitted under FIN 46R, the Trust
has been deconsolidated for prior periods and presented to be consistent
with the current presentation.
NATURE OF OPERATIONS - Laclede Group is an exempt holding company
under the Public Utility Holding Company Act of 1935. Laclede Gas, Laclede
Group's largest subsidiary and core business unit, is a public utility
engaged in the retail distribution of natural gas. Laclede Gas serves 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. As an adjunct to its gas distribution business, Laclede Gas
operates underground natural gas storage fields. SM&P Utility Resources,
Inc. (SM&P), acquired by Laclede Group on January 28, 2002, is one of the
nation's major underground locating and marking service businesses. SM&P is
headquartered in Carmel, Indiana and operates in the midwestern states.
Laclede Energy Resources, Inc. (LER) is a wholly-owned subsidiary engaged in
non-regulated efforts to market natural gas and related activities. The
activities of other wholly-owned subsidiaries are described in Note 14,
Information by Operating Segment.
USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
SYSTEM OF ACCOUNTS - The accounts of Laclede Gas are maintained
in accordance with the uniform system of accounts prescribed by the Missouri
Public Service Commission (MoPSC or Commission), which system substantially
conforms to that prescribed by the Federal Energy Regulatory Commission.
UTILITY PLANT, DEPRECIATION AND AMORTIZATION - Utility plant is
stated at original cost. The cost of additions to utility plant includes
contracted work, direct labor and materials, allocable overheads, and an
allowance for funds used during construction. The costs of units of property
retired, replaced, or renewed are removed from utility plant and are charged
to accumulated depreciation. Maintenance and repairs of property and
replacement and renewal of items determined to be less than units of
property are charged to maintenance expenses. Effective December 1, 2001,
the MoPSC ordered the cost of removing retired utility plant to be recovered
as an expense when incurred rather than being included in depreciation
rates. Prior to December 1, 2001, the Utility's removal costs, net of
salvage, were charged to accumulated depreciation. As ordered by the MoPSC,
Laclede Gas instituted lower depreciation rates effective December 1, 2001
and began expensing all removal costs, net of salvage, as incurred. These
costs are included in the Other Operation Expenses line on the income
statement. Effective July 1, 2002, the MoPSC ordered the negative
amortization on a straight-line basis of a portion of the Utility's
depreciation reserve, amounting to $3.4 million annually, until
implementation of rates in the Utility's next rate case proceeding during
which the parties have agreed to review the depreciation issue in light of
SFAS No. 143 implementation. Minor changes in depreciation rates were
implemented January 1, 2003, as authorized by the MoPSC.
38
Utility plant is depreciated on a straight-line basis at rates
based on estimated service lives of the various classes of property. Annual
depreciation and amortization in 2004, 2003 and 2002 averaged approximately
2.6%, 2.7% and 2.8%, respectively, of the original cost of depreciable and
amortizable property.
REGULATED OPERATIONS - Laclede Gas accounts for its regulated
operations in accordance with 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).
The following regulatory assets and regulatory liabilities were
reflected in the Consolidated Balance Sheets as of September 30:
(Thousands) 2004 2003
-----------------------------------------------------------------------------------------
Regulatory Assets:
Future income taxes due from customers $ 62,834 $ 62,633
Pension and postretirement benefit costs 27,480 14,358
Unamortized purchased gas adjustments 19,618 -
Purchased gas costs - 13,749
Compensated absences 6,706 6,511
Other 7,751 6,984
-----------------------
Total Regulatory Assets $124,389 $104,235
=======================
Regulatory Liabilities:
Unamortized investment tax credits $ 5,010 $ 5,316
Unamortized purchased gas adjustments - 5,865
Purchased gas costs 27,273 -
Other 937 582
-----------------------
Total Regulatory Liabilities $ 33,220 $ 11,763
=======================
As authorized by the MoPSC, Laclede Gas discontinued deferring
certain costs for future recovery, as expenses associated with those
specific areas were included in approved rates effective December 27, 1999.
Previously deferred costs of $10.5 million are being recovered and amortized
on a straight-line basis over a fifteen-year period, without return on
investment. Approximately $3.3 million has been amortized from December 27,
1999 through September 30, 2004. Previously deferred costs of $2.1 million
are being recovered and amortized on a straight line basis over a ten-year
period, without return on investment. Approximately $1.0 million has been
amortized from December 27, 1999 through September 30, 2004. The Commission
also authorized previously deferred costs of $2.8 million and $.3 million to
be recovered and amortized on a straight-line basis over a ten-year period,
without return on investment, effective December 1, 2001 and November 9, 2002,
respectively. Approximately $.8 million and $.1 million has been amortized,
respectively, through September 30, 2004.
NATURAL GAS STORED UNDERGROUND - Inventory of Utility natural gas
in storage is priced on a last-in, first-out (LIFO) basis. The replacement
cost of natural gas stored underground for current use at September 30, 2004
exceeded the LIFO cost by $6.5 million and at September 30, 2003 exceeded
the LIFO cost by $19.6 million. The inventory carrying value is not adjusted
to the lower of cost or market prices because, pursuant to the Laclede Gas
Purchased Gas Adjustment (PGA) Clause, actual gas costs are recovered in
customer rates.
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
September 30, 2004 and 2003, for the Utility, was $8.8 million and $8.9
million, respectively. After accrual of related gas cost expense, the
accrued pre-tax net revenues at September 30, 2004 and 2003 were $4.2
million and $3.7 million, respectively.
SM&P, LER and Laclede Group's other non-regulated subsidiaries
record revenues when earned, either when the product is delivered or when
services are performed.
In the course of its business, Laclede Group's non-regulated
marketing affiliate, LER, enters into fixed price commitments associated
with the purchase or sale of natural gas. LER's fixed price energy contracts
are designated as normal purchases and normal sales, as defined in
accordance with 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.
39
PURCHASED GAS ADJUSTMENTS AND DEFERRED ACCOUNT - The PGA Clause
allows Laclede Gas to flow through to customers, subject to prudence review,
the cost of purchased gas supplies. The Utility is allowed to file to
modify, on a periodic basis, the level of gas costs in its PGA. Currently,
the MoPSC allows Laclede Gas to adjust the gas cost component of its rates
in order to better match customer billings with market natural gas prices.
Currently, the tariffs allow scheduled gas cost adjustments in November,
January, March and June. Effective February 2002, the MoPSC clarified that
costs, cost reductions and carrying costs associated with the Utility's use
of natural gas financial instruments (except as provided previously under
the Price Stabilization Program (PSP)) are gas costs recoverable through the
PGA mechanism.
The provisions of the PGA Clause also include operation of the
gas supply cost management program, whereby Laclede Gas is permitted to
share in certain costs savings related to its natural gas procurement
activities.
Operation of the PSP was also included in the provisions of the
PGA Clause. Under those provisions, the MoPSC authorized Laclede Gas to
purchase financial instruments to protect itself and its customers from
unusually large winter period gas price increases. The costs of purchasing
these instruments and financial gains derived from such activities were
passed on to Laclede Gas customers through the operation of its PGA Clause.
Laclede Gas had an opportunity to benefit from gains and cost reductions
achieved under the Program. The PSP was allowed to expire at the end of the
fiscal 2002 heating season, at which time, the Utility recorded nearly $4.9
million in pre-tax income produced through the Program. See Note 15 for
further discussion of the PSP.
Pursuant to the provisions of the PGA Clause, the difference
between actual costs incurred and costs recovered through the application of
the PGA (including costs, cost reductions, and carrying costs associated
with the use of financial instruments), and amounts due to or from customers
related to the operation of the gas supply cost management program and PSP
are reflected as a deferred charge or credit until fiscal year end. At that
time, the balance is classified as a current asset or liability and is
recovered from or credited to customers over an annual period commencing in
November. The balance in the current account is amortized as amounts are
reflected in customer billings.
INCOME TAXES - Laclede Group and its subsidiaries have elected,
for tax purposes only, various accelerated depreciation provisions of the
Internal Revenue Code. In addition, certain other costs are expensed
currently for tax purposes while being deferred for book purposes. The
provision for current income taxes reflects the tax treatment of these
items. Laclede Group companies record 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.
Laclede Gas' investment tax credits utilized prior to 1986 have
been deferred and are being amortized in accordance with regulatory
treatment over the useful life of the related property.
CASH AND CASH EQUIVALENTS - All highly liquid debt instruments
purchased are considered to be cash equivalents. Such instruments are
carried at cost, which approximates market value.
EARNINGS PER COMMON SHARE - Basic earnings per common share is
computed by dividing income available for common stock by the weighted
average number of shares outstanding for the period. Diluted earnings per
common share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock. The only potentially dilutive securities the Company had
outstanding at September 30, 2004 were stock options. The diluted weighted
average shares outstanding, as shown in Note 5, reflects the potential
dilution as a result of these stock options as determined using the Treasury
Stock Method. Stock options that are antidilutive are excluded from the
calculation of diluted earnings per share.
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
executives 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
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 fiscal 2004, the Company granted 1,500 shares of
restricted stock at a weighted average fair value of $28.85 per share. These
shares have restrictions on vesting, sale and transferability. The
restrictions lapse with the passage of time. The Company holds the
certificates for restricted stock until the shares fully vest in November
2005. In the interim, a participant receives full dividends and voting
rights. Restricted stock awards are recorded at the market value on the date
of the grant. Compensation cost charged against income for the twelve months
ended September 30, 2004 was approximately $12,000, net of tax effects.
40
During the twelve months ended September 30, 2004, the Company
granted 224,000 non-qualified stock options to employees at an exercise
price of $28.85 per share. These options were not exercisable before
November 8, 2004. During the twelve months ended September 30, 2003, the
Company granted 221,500 non-qualified stock options at an exercise price of
$23.27 per share, a portion of which became exercisable on February 6, 2004.
The stock options vest one-fourth each year for four years after the date of
the grant. The Company accounts for the Equity Incentive Plan under the
recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. No compensation expense has been recognized in net income,
as all options granted under the Equity Incentive Plan had an exercise price
equal to the market value of the Company's stock on the date of the grant.
Stock option activity for the years ended September 30, 2004 and
September 30, 2003 is presented below:
Weighted Average
Shares Exercise Price
------- ----------------
Outstanding at September 30, 2002 - -
Granted 221,500 $23.27
Exercised - -
Forfeited (12,500) 23.27
Outstanding at September 30, 2003 209,000 $23.27
Granted 224,000 28.85
Exercised (34,050) 23.27
Forfeited (5,750) 24.24
Outstanding at September 30, 2004 393,200 $26.43
Exercisable at September 30, 2004 17,200 $23.27
Exercise prices of options outstanding at September 30, 2004 range
from $23.27 to $28.85. The weighted-average contractual life of these
options is 8.8 years. The closing price of the Company's common stock was
$29.23 at September 30, 2004.
If compensation expense had been determined based on the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share of common
stock would have been reduced to the amounts shown in the following table.
The weighted-average fair value of options granted during the twelve months
ended September 30, 2004 and 2003 is $6.22 per option and $4.33 per option,
respectively. 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.
(Thousands, Except Per Share Amounts) 2004 2003 2002
------------------------------------------------------------------------------
Net income applicable to
common stock, as reported $36,056 $34,585 $22,316
Deduct: Total stock-based
employee compensation expense
determined under the fair value
based method for all awards,
net of tax effects 343 93 -
----------------------------------
Pro forma net income
applicable to common stock $35,713 $34,492 $22,316
==================================
Earnings per share:
Basic - as reported $1.82 $1.82 $1.18
Diluted - as reported $1.82 $1.82 $1.18
Basic - pro forma $1.80 $1.81 $1.18
Diluted - pro forma $1.80 $1.81 $1.18
The fair value of the options granted during the twelve months
ended September 30, 2004 and September 30, 2003 was estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions:
2004 2003 2002
----------------------------------------------------
Risk free interest rate 4.30% 4.00% Not Applicable
Expected dividend yield of stock 4.60% 5.70% Not Applicable
Expected volatility of stock 25.00% 25.00% Not Applicable
Expected life of option 96 months 96 months Not Applicable
41
NEW ACCOUNTING STANDARDS - FIN 46R, "Consolidation of Variable
Interest Entities," addresses consolidation of business enterprises of
variable interest entities. Public entities shall apply this Interpretation
to their interests in special purpose entities as of the first interim
period ending after December 15, 2003. Application by public
entities for all other types of variable interest entities was required in
financial statements for periods ending after March 15, 2004.
In December 2002, Laclede Group formed a wholly owned trust,
Laclede Capital Trust I (Trust), for the sole purpose of issuing preferred
securities and lending the gross proceeds to its parent, Laclede Group. As
of September 30, 2004, the Trust had $45 million of Trust Preferred
Securities outstanding. The sole assets of the Trust are debentures of
Laclede Group, totaling $46.4 million, with the same economic terms as the
Trust Preferred Securities. Prior to the application of FIN 46R, the Trust
was consolidated in the financial statements of Laclede Group. The Company
evaluated the effect of this pronouncement on this consolidation. In
accordance with the provisions of FIN 46R, Laclede Group determined that the
Trust is a variable interest entity because its common securities investment
is considered not at risk, and Laclede Group is not the primary beneficiary
of the Trust. Accordingly, the Trust was deconsolidated during the quarter
ended March 31, 2004. The Consolidated Balance Sheets have been modified to
include Investments in Unconsolidated Subsidiaries of $1.4 million
representing Laclede Group's common securities investment in the Trust and
to reflect Laclede Group's obligations related to the debentures. The common
securities investment is included on the Other Property and Investments line
on the Consolidated Balance Sheets. As permitted under FIN 46R, the Trust
has been deconsolidated for prior periods and presented to be consistent
with the current presentation. The adoption of FIN 46R did not result in a
cumulative effect of an accounting change adjustment and did not have a
material effect on the financial position or results of operations of
Laclede Group.
In December 2003, the FASB issued SFAS No. 132 (revised 2003) (SFAS
No. 132(R), "Employers' Disclosures about Pensions and Other Postretirement
Benefits." The provisions of this Statement do not change the measurement
and recognition provisions of SFAS No. 87, "Employers' Accounting for
Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits," and No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
SFAS No. 132(R) replaces SFAS No. 132, and requires certain additional
disclosures that became effective for fiscal years ending after and interim
periods beginning after December 15, 2003. The required disclosures are
included in Note 2, and the disclosures for prior periods are presented
consistent with current presentation.
The Emerging Issues Task Force (EITF) deliberated Issue 03-01, "The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments." The Issue was intended to address the meaning of
other-than-temporary impairment and its application to certain investments
held at cost. A consensus was reached regarding disclosure requirements
concerning unrealized losses on available-for-sale debt and equity
securities accounted for under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" and SFAS No. 124, "Accounting for
Certain Investments Held for Not-for-Profit Organizations." The guidance for
evaluating whether an investment is other-than-temporarily impaired should
be applied in reporting periods beginning after June 15, 2004. The
disclosures are effective in annual financial statements for fiscal years
ended after December 15, 2003, for investments accounted for under SFAS Nos.
115 and 124. For all other investments within the scope of this Issue, the
disclosures are effective in annual financial statements for fiscal years
ending after June 15, 2004. Additional disclosures for cost method
investments are effective for fiscal years ending after June 15, 2004. The
required disclosures are included in Note 10.
In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." FSP 106-2 supersedes FSP
106-1 issued in January 2004. FSP 106-2 provides guidance on the accounting
for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (Act) for employers that sponsor postretirement
health care plans that provide prescription drug benefits. The Act
introduces two new features to Medicare that an employer needs to consider
in measuring its obligation and net periodic postretirement benefit costs.
The effective date for FSP 106-2 is the first interim or annual period
beginning after June 15, 2004. The adoption of FSP 106-2 did not have a
material effect on the financial position or results of operations of the
Company.
RECLASSIFICATION - Certain prior-period amounts have been
reclassified to conform to current-period presentation.
2. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension Plans
- -------------
Laclede Gas has non-contributory defined benefit, trusteed forms
of pension plans covering substantially all employees over the age of
twenty-one. Benefits are based on years of service and the employee's
compensation during the last three years of employment. Pension cost in 2004
and 2003 amounted to $4.5 and $2.2 million, respectively, and pension
credits in 2002 amounted to $4.5 million, including amounts recorded in
construction.
42
The net periodic pension costs (credits) include the following
components:
(Thousands) 2004 2003 2002
--------------------------------------------------------------------------------------------
Service cost - benefits earned
during the period $ 11,107 $ 9,060 $ 8,399
Interest cost on projected
benefit obligation 16,231 16,600 14,653
Expected return on plan assets (22,499) (22,601) (24,749)
Amortization of transition obligation - (236) (602)
Amortization of prior service cost 1,324 1,392 1,127
Amortization of actuarial (gain)/loss 3,803 1,338 (3,768)
-----------------------------------
Sub-Total $ 9,966 $ 5,553 $ (4,940)
Loss on lump sum settlement 8,109 273 -
Regulatory adjustment (13,583) (3,582) 435
-----------------------------------
Net pension cost (credit) $ 4,492 $ 2,244 $ (4,505)
===================================
Effective with the implementation of rates (from the 1999 rate
case) on December 27, 1999, the Commission authorized amounts that were
deferred pursuant to provisions in previous rate cases to be included in
rates without return on investment and amortized over a fifteen-year period.
Additionally, pursuant to that order and effective for fiscal 2002, the
return on plan assets was based on the market value of plan assets and the
unrecognized gain or loss balances subject to amortization were based upon
the most recent five-year average of the unrecognized gain or loss balance.
Net gains and losses in fiscal 2002 subject to amortization were amortized
over a five-year period, as ordered by the MoPSC in the 1999 rate case.
Effective for fiscal 2003 and 2004, pursuant to the Commission's
order in Laclede Gas' 2002 rate case, the return on plan assets is based on
market-related value of plan assets implemented prospectively over a
four-year period. Unrecognized gains or losses are amortized only to the
extent that such gain or loss exceeds 10% of the greater of the projected
benefit obligation or the market-related value of plan assets. Such excess
is amortized over the average remaining service life of active participants.
Pursuant to the provisions of the Laclede Gas pension plans,
pension obligations may be paid in the form of lump-sum cash payments.
Pursuant to MoPSC order in the Utility's 2001 rate case, effective for
fiscal 2002 through 2004, lump sum payments are recognized as settlements
only if the total of such payments exceeds 100% of the sum of service and
interest costs. Lump sum payments recognized as settlements totaled $32.7
million in fiscal 2004, $.5 million in fiscal 2003, and none in fiscal 2002.
Changes in the minimum pension liability resulted in
charges/(credits) to Other Comprehensive Income of $(.7) million in fiscal
2004, $5.1 million in fiscal 2003, and $.6 million in fiscal 2002.
In the 2002 rate case, the Commission ordered that the recovery
in rates for the Utility's qualified pension plans is based on the ERISA
minimum contribution of zero effective October 1, 2002, and on the ERISA
minimum contribution of zero plus $3.4 million effective July 1, 2003. The
difference between this amount and pension expense as calculated pursuant to
the above and included in the Statements of Consolidated Income and
Statements of Consolidated Comprehensive Income is deferred as a regulatory
asset or liability.
The following table sets forth the reconciliation of the
beginning and ending balances of the pension benefit obligation recognized
in the Consolidated Balance Sheets at September 30:
(Thousands) 2004 2003
--------------------------------------------------------------------------------------
Benefit obligation at beginning of year $268,439 $228,090
Service cost 11,107 9,060
Interest cost 16,231 16,600
Plan amendments (55) -
Actuarial (gain) loss (2,825) 38,864
Settlements (32,677) (491)
Gross benefits paid (7,637) (23,684)
-----------------------
Benefit obligation at end of year $252,583 $268,439
=======================
Accumulated benefit obligation at end of year $199,819 $219,799
43
The following table sets forth the reconciliation of the
beginning and ending balances of the fair value of plan assets recognized in
the Consolidated Balance Sheets at September 30:
(Thousands) 2004 2003
------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $274,542 $273,230
Actual return on plan assets 24,980 23,989
Employer contributions 270 1,498
Settlements (32,677) (491)
Gross benefits paid (7,637) (23,684)
-----------------------
Fair value of plan assets at end of year $259,478 $274,542
-----------------------
Funded status at end of year $ 6,896 $ 6,103
Unrecognized net actuarial loss 65,525 82,743
Unrecognized prior service cost 15,884 17,264
Fourth quarter contribution adjustment 56 56
-----------------------
Net amount recognized at end of year $ 88,361 $106,166
=======================
Amounts recognized in the Consolidated Balance Sheets consist of:
Prepaid pension cost $ 88,607 $105,081
Accrued benefit liability (5,827) (5,294)
Intangible asset 691 753
Regulatory adjustment 4,286 4,677
Accumulated other comprehensive income 604 949
-----------------------
Net amount recognized at end of year $ 88,361 $106,166
=======================
The pension benefit obligation and the fair value of plan assets
are based on a June 30 measurement date.
The assumptions used to calculate net periodic pension costs are
as follows:
2004 2003 2002
-------------------------------------------------------------------------------------------------
Weighted average discount rate 6.00% 7.25% 7.75%
Weighted average rate of future compensation increase 3.00% 4.00% 4.00%
Expected long term rate of return on plan assets 8.50% 8.50% 8.50%
The expected long term rate of return on plan assets is based on
historical and projected rates of return for current and planned asset
classes in the investment portfolio. Assumed projected rates of return for
each asset class were selected after analyzing historical experience and
future expectations of the returns. The overall expected rate of return for
the portfolio was developed based on the target allocation for each class.
The expected return is a long term assumption that generally does not change
annually.
The assumptions used to calculate the benefit obligations are as
follows:
2004 2003
--------------------------------------------------------------------------------------
Weighted average discount rate 6.25% 6.00%
Weighted average rate of future compensation increase 3.25% 3.00%
Following are the projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for plans that have a projected
benefit obligation and an accumulated benefit obligation in excess of plan
assets:
(Thousands) 2004 2003
--------------------------------------------------------------------------------------
Projected benefit obligation $25,026 $23,920
Accumulated benefit obligation 22,139 21,428
Fair value of plan assets 15,034 14,788
Following are the targeted and actual plan assets by category:
2005 2004 2003
Target Actual Actual
----------------------------------------------------------------------------------------
Equity Securities 50% 51% 52%
Debt Securities 50% 49% 48%
-------------------------------
Total 100% 100% 100%
44
Laclede Gas' investment policy is designed to preserve, to the
extent possible, a surplus of plan assets over the projected benefit
obligation and minimize contributions to the trusts. The policy seeks to
maximize investment returns consistent with these objectives and Laclede
Gas' tolerance for risk. Outside investment management specialists are
utilized in each asset class. Such specialists are provided with guidelines,
where appropriate, designed to ensure that the investment portfolio is
managed in accordance with policy. Performance and compliance with the
guidelines is regularly monitored.
Laclede Gas' current investment policy targets an asset allocation
of 50% to equity securities and 50% to debt securities (including short term
securities held for the purpose of making benefit payments). Laclede Gas
generally rebalances quarterly if the actual allocation deviates from the
target allocation by more than 2%.
Following are expected pension benefit payments for the succeeding
five fiscal years, and in aggregate for the five years thereafter:
Pensions Pensions
from from
Qualified Laclede
(Millions) Trust Gas Funds
---------------------------------------------------------------------------------
2005 $ 16.2 $ .3
2006 15.3 .4
2007 14.9 .4
2008 16.1 .4
2009 18.6 .5
2010 - 2014 119.5 2.9
The funding policy of Laclede Gas is to contribute an amount not
less than the minimum required by government funding standards, nor more
than the maximum deductible amount for federal income tax purposes.
Contributions to the pension plans in fiscal 2005 are anticipated to be none
into the qualified trusts, and $.3 million into the non-qualified plans.
Postretirement Benefits
- -----------------------
Laclede Gas provides certain life insurance benefits at retirement.
Medical insurance is available after early retirement until age 65. The
unrecognized transition obligation is being amortized over 20 years.
Postretirement benefit costs in 2004, 2003 and 2002 amounted to
approximately $7.9 million, $7.8 million, and $6.5 million, respectively,
including amounts charged to construction.
Net periodic postretirement benefit costs consisted of the
following components:
(Thousands) 2004 2003 2002
---------------------------------------------------------------------------------------
Service cost - benefits earned
during the period $3,175 $2,758 $2,205
Interest cost on accumulated
postretirement benefit obligation 3,202 3,661 3,266
Expected return on plan assets (836) (937) (853)
Amortization of transition
obligation 1,059 1,267 1,267
Amortization of prior service cost (32) 328 365
Amortization of actuarial loss 697 415 227
Regulatory adjustment 658 301 69
------------------------------------
Net postretirement benefit cost $7,923 $7,793 $6,546
====================================
Effective with the implementation of rates (from the 1999 rate
case) on December 27, 1999, the Commission authorized amounts that were
deferred pursuant to provisions in previous rate cases, to be included in
rates without return on investment and amortized over a fifteen-year period.
Additionally, pursuant to that order and effective for fiscal 2002, the
return on plan assets was based on the market value of plan assets and the
unrecognized gain or loss balances subject to amortization were based upon
the most recent five-year average of the unrecognized gain or loss balance.
Net gains and losses in fiscal 2002 subject to amortization were amortized
over a five-year period, as ordered by the MoPSC in the 1999 rate case.
Effective for fiscal 2003 and 2004, pursuant to the Commission's
order in the Utility's 2002 rate case, the return on plan assets is based on
market related value of plan assets implemented prospectively over a
four-year period. Unrecognized gains and losses are amortized only to the
extent that such gain or loss exceeds 10% of the greater of the accumulated
postretirement benefit obligation or the market-related value of plan
assets. Such excess is amortized over
45
the average remaining service life of active participants. Also in the 2002
rate case, the Commission ordered that the recovery in rates for the
postretirement benefit costs be based on the accounting methodology as
ordered in the 1999 rate case. The difference between this amount and
postretirement benefit expense as calculated pursuant to the above is
deferred as a regulatory asset or liability.
The following table sets forth the reconciliation of the
beginning and ending balances of the postretirement benefit obligation at
September 30:
(Thousands) 2004 2003
------------------------------------------------------ -----------------------
Benefit obligation at beginning of year $52,508 $50,027
Service cost 3,175 2,758
Interest cost 3,202 3,661
Plan amendments (4,323) (4,021)
Actuarial loss 2,577 5,131
Gross benefits paid (5,404) (5,048)
-----------------------
Benefit obligation at end of year $51,735 $52,508
=======================
The following table sets forth the reconciliation of the beginning
and ending balances of the fair value of plan assets recognized in the
Consolidated Balance Sheets at September 30:
(Thousands) 2004 2003
-----------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 14,254 $ 12,081
Actual return on plan assets 802 61
Employer contributions 7,324 7,160
Gross benefits paid (5,404) (5,048)
-----------------------
Fair value of plan assets at end of year $ 16,976 $ 14,254
-----------------------
Funded status at end of year $(34,759) $(38,254)
Unrecognized net actuarial loss 18,579 16,665
Unrecognized prior service cost (245) (277)
Unrecognized net transition obligation 5,188 10,570
-----------------------
Net amount recognized at end of year
as postretirement benefit cost $(11,237) $(11,296)
=======================
The accumulated postretirement benefit obligation and the fair
value of plan assets are based on a June 30 measurement date.
The assumptions used to calculate net periodic postretirement
benefit costs are as follows:
2004 2003 2002
-------------------------------------------------------------------------------------------
Weighted average discount rate 6.00% 7.25% 7.75%
Weighted average rate of future compensation increase 3.00% 4.00% 4.00%
Expected long term rate of return on plan assets 8.50% 8.50% 8.50%
Medical cost trend rate (initial) 7.00% 8.00% 5.00%
Medical cost trend rate (ultimate) 5.00% 5.00% 5.00%
The expected long term rate of return on plan assets is based on
historical and projected rates of return for current and planned asset
classes in the investment portfolio. Assumed projected rates of return for
each asset class were selected after analyzing historical experience and
future expectations of the returns. The overall expected rate of return for
the portfolio was developed based on the target allocation for each class.
The expected return is a long term assumption that generally does not change
annually.
The assumptions used to calculate the accumulated postretirement
benefit obligations are as follows:
2004 2003
-------------------------------------------------------------------------------------
Weighted average discount rate 6.25% 6.00%
Weighted average rate of future compensation increase 3.25% 3.00%
Medical cost trend rate (initial) 9.00% 7.00%
Medical cost trend rate (ultimate) 5.00% 5.00%
46
The following table presents the effect of an assumed 1% change in
the assumed medical cost trend rate:
(Thousands) 1% Increase 1% Decrease
-------------------------------------------------------------------------------------------
Effect on net periodic benefit cost $ 430 $ (410)
Effect on accumulated postretirement benefit obligation 1,660 (1,580)
Following are the targeted and actual plan assets by category:
2005 2004 2003
Target Actual Actual
---------------------------------------------------------------------------------------
Equity Securities 60% 53% 45%
Debt Securities 40% 47% 55%
------------------------------
Total 100% 100% 100%
Missouri state law provides for the recovery in rates of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"
(OPEB), accrued costs provided that such costs are funded through an
independent, external funding mechanism. Laclede Gas established Voluntary
Employees' Beneficiary Association (VEBA) and Rabbi trusts as its external
funding mechanisms. Laclede Gas' investment policy seeks to maximize
investment returns consistent with Laclede Gas' tolerance for risk. Outside
investment management specialists are utilized in each asset class. Such
specialists are provided with guidelines, where appropriate, designed to
ensure that the investment portfolio is managed in accordance with policy.
Performance and compliance with the guidelines is regularly monitored.
Laclede Gas' current investment policy targets an asset allocation of 60% to
equity securities and 40% to debt securities, excluding cash held in short
term securities for the purpose of making benefit payments. Laclede Gas
currently invests in a mutual fund which is continually rebalanced to the
target allocation.
Following are expected postretirement benefit payments for the
succeeding five fiscal years, and in aggregate for the five years
thereafter:
Benefits Paid Benefits Paid
from Qualified from Laclede
(Millions) Trusts Gas Funds
---------------------------------------------------------------------------------------
2005 $ 4.2 $ .4
2006 4.4 .4
2007 4.6 .4
2008 4.6 .5
2009 4.8 .5
2010 - 2014 28.2 2.4
Laclede Gas' funding policy is to contribute amounts to the trusts
equal to the periodic benefit cost calculated pursuant to SFAS No. 106 as
recovered in rates. Contributions to the postretirement plans in fiscal 2005
are anticipated to be $7.5 million to the qualified trusts, and $.4 million
paid directly to participants from Laclede Gas funds.
Other Plans
- -----------
Laclede Gas sponsors 401(k) plans that cover substantially all
employees. The plans allow employees to contribute a portion of their base
pay in accordance with specific guidelines. Laclede Gas provides a match of
such contributions within specific limits. The cost of the defined
contribution plans of Laclede Gas amounted to approximately $2.9 million per
year for fiscal years 2004, 2003 and 2002.
SM&P Utility Resources, Inc.
- ----------------------------
SM&P maintains a defined benefit plan for selected employees. The
plan is a non-qualified plan and therefore has no assets held in trust. Net
pension cost related to the plan was $38,000 for fiscal 2004, $62,000 for
fiscal 2003, and $54,000 from the date of acquisition of SM&P through the
end of fiscal 2002. The net liability recognized under the plan was $389,000
and $351,000 at September 30, 2004 and 2003, respectively.
SM&P sponsors defined contribution plans which cover substantially
all employees. The plans allow employees to contribute a portion of their
base pay in accordance with specific guidelines. The Company provides a
match of such contributions within specific limits. The cost of the defined
contribution plans of SM&P amounted to $.7 million and $.6 million,
respectively, for the fiscal years 2004 and 2003, and $.7 million from the
date of acquisition of SM&P through the end of fiscal 2002.
47
3. GAS SUPPLY COST MANAGEMENT
In the 2002 rate case, the MoPSC approved a new plan applicable
to the management of the Utility's gas supply commodity costs under which it
may retain up to 10% of cost savings associated with the acquisition of
natural gas below an established benchmark level of gas cost. Laclede Gas
achieved approximately $3.5 million in pre-tax income under the plan during
fiscal 2003, but did not record any income under the plan during fiscal
2004. Income recorded under the plan is included in the Regulated Gas
Distribution Operating Revenues on the Statements of Consolidated Income.
4. FINANCIAL INSTRUMENTS
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 purchase or sale of natural gas. LER manages the
price risk associated with these commitments by either closely matching the
offsetting physical purchase or sale of natural gas at fixed prices or
through the use of exchange-traded futures contracts to lock in margins. At
September 30, 2004, LER's open positions were not material to Laclede
Group's financial position or results of operations.
Settled and open future positions were as follows at September 30,
2004:
Average
MMBtu Price per
Position Month (millions) MMBtu
-------------- ---------- ---------
Settled net long and short futures positions October 2004 .68 $5.26
Open short futures positions November 2004 .70 5.70
December 2004 .77 6.35
January 2005 .26 6.83
February 2005 .14 5.90
April 2005 1.00 6.14
May 2005 .44 6.03
Open long futures positions November 2004 .30 6.07
September 2005 .14 5.05
The above futures contracts are derivative instruments and
management has designated these items as cash flow hedges of forecasted
transactions. The fair values of the instruments are recognized on the
Consolidated Balance Sheets. The change in the fair value of the effective
portion of these hedge instruments is recorded, net of tax, in Other
Comprehensive Income (Loss), 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 $2.0 million of
pre-tax net unrealized losses on cash flow hedging derivative instruments at
September 30, 2004 will be reclassified into the Consolidated Statement of
Income during fiscal 2005. The ineffective portions of these hedge
instruments were not material 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.
48
5. EARNINGS PER SHARE OF COMMON STOCK
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. There were no antidilutive shares for
the periods presented.
(Thousands, Except Per Share Amounts) 2004 2003 2002
-----------------------------
Basic EPS:
Net Income Applicable to Common Stock $36,056 $34,585 $22,316
Weighted-Average Shares Outstanding 19,783 19,022 18,888
Earnings Per Share of Common
Stock $1.82 $1.82 $1.18
Diluted EPS:
Net Income Applicable to Common Stock $36,056 $34,585 $22,316
Weighted-Average Shares Outstanding 19,783 19,022 18,888
Dilutive Effect of Employee Stock
Options 22 7 -
-----------------------------
Weighted-Average Diluted Shares 19,805 19,029 18,888
=============================
Earnings Per Share of Common
Stock $1.82 $1.82 $1.18
6. COMMON STOCK AND PAID-IN CAPITAL
Total shares of common stock outstanding were 20.98 million and
19.08 million at September 30, 2004 and 2003, respectively.
In May 2004, Laclede Group issued 1.725 million shares of common
stock through a public stock offering. Also in fiscal 2004, Laclede Group
issued 138,213 shares of common stock under its Dividend Reinvestment Plan
and 35,550 shares of common stock under its Equity Incentive Plan. Paid-in
capital increased $47.6 million in 2004 as a result of these issuances.
Paid-in capital increased $3.8 million in 2003 primarily due to
the issuance of 161,115 shares of common stock under the Dividend
Reinvestment and Stock Purchase Plan.
On August 23, 2001, Laclede Group declared a dividend of one
preferred share purchase right for each outstanding share of common stock as
of October 1, 2001. Each preferred share purchase right entitles the
registered holder to purchase from Laclede Group one one-hundredth of Series
A junior participating preferred stock for a purchase price of $90, subject
to adjustment. The value of one one-hundredth of a preferred share
purchasable upon the exercise of each right should, because of the nature of
the preferred shares' dividend, liquidation and voting rights, approximate
the value of one common share. The rights expire on October 1, 2011 and may
be redeemed by Laclede Group for one cent each at any time before they
become exercisable. The rights will not be exercisable or transferable apart
from the common stock until ten business days after (i) public announcement
that a person or group has acquired beneficial ownership of 20% or more of
the common stock, or (ii) commencement, or announcement of an intention to
make, a tender offer or exchange for beneficial ownership of 20% or more of
the common stock. Following the former event, a right will entitle its
holder to purchase, for the purchase price, the number of shares equal to
the purchase price divided by one-half of the market price. Alternatively,
Laclede Group may exchange each right for one one-hundredth of a preferred
share. A total of 20.98 million rights were outstanding on September 30,
2004.
As of September 30, 2004, $120 million of the Laclede Gas shelf
registration on Form S-3 remained registered and unissued. The original
MoPSC authorization for issuing securities registered on Form S-3 expired in
September 2003. In response to an application filed by the Utility, the
MoPSC extended this authorization to issue debt securities and receive
paid-in capital through October 31, 2006. The remaining MoPSC authorization
is $65.5 million, reflecting capital contributions that have been made by
Laclede Group to Laclede Gas under this authority through October 2004. The
amount, timing and type of additional financing to be issued under this
shelf registration will depend on cash requirements and market conditions.
49
7. REDEEMABLE PREFERRED STOCK
The preferred stock, which is non-voting except in certain
circumstances, may be redeemed at the option of the Laclede Gas Board of
Directors. The redemption price is equal to par of $25.00 a share.
During 2004, 221 shares of 5% Series B preferred stock were
reacquired; in 2003, 336 shares of 5% Series B preferred stock were
reacquired.
Any default in a sinking fund payment must be cured before
Laclede Gas may pay dividends on or acquire any common stock. Sinking fund
requirements on preferred stock for the next five years subsequent to
September 30, 2004 are $.1 million in 2005, and $.2 million each in 2006
through 2009.
8. LONG-TERM DEBT & LONG-TERM DEBT TO UNCONSOLIDATED AFFILIATE TRUST
Maturities on long-term debt, including current portion, for the
five fiscal years subsequent to September 30, 2004 are as follows:
2005 $25 million
2006 $40 million
2007 -
2008 $40 million
2009 -
In April 2004, Laclede Gas issued $50 million of First Mortgage
Bonds, 5 1/2% Series due May 1, 2019 and $100 million of First Mortgage
Bonds, 6% Series due May 1, 2034. The net proceeds of approximately $147.9
million from this issuance were used to repay short-term debt and to call at
par the $50 million 6 5/8% Series First Mortgage Bonds in June 2004. The
proceeds were also used to pay at maturity $25 million principal amount of
Laclede Gas' 8 1/2% First Mortgage Bonds in November 2004.
On December 16, 2002, Laclede Group invested $1.4 million in common
securities of Laclede Capital Trust I (Trust), a wholly owned Delaware
Statutory trust of Laclede Group, and the Trust 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,
along with the Trust common securities, were invested by the Trust in
debentures of Laclede Group, totaling $46.4 million, 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.
As of September 30, 2004, $120 million of the Laclede Gas shelf
registration on Form S-3 remained registered and unissued. The original
MoPSC authorization for issuing securities registered on Form S-3 expired in
September 2003. In response to an application filed by the Utility, the
MoPSC extended this authorization to issue debt securities and receive
paid-in capital through October 31, 2006. The remaining MoPSC authorization
is $65.5 million, reflecting capital contributions that have been made by
Laclede Group to Laclede Gas under this authority through October 2004. The
amount, timing and type of additional financing to be issued under this
shelf registration will depend on cash requirements and market conditions.
Substantially all of the utility plant of Laclede Gas is subject
to the liens of its mortgage. Its mortgage contains provisions that restrict
retained earnings from declaration or payment of cash dividends. As of
September 30, 2004 and 2003, all of the retained earnings of Laclede Gas
were free from such restrictions.
9. NOTES PAYABLE AND CREDIT AGREEMENTS
In September 2004, Laclede Gas renewed its syndicated line of
credit for a term of five years and increased the amount of the line to $285
million from $250 million. The Utility has supplemental 364-day lines
totaling $15 million through April 2005. Laclede Gas also had a seasonal
credit line of $25 million for the period of October 14, 2003 through
February 13, 2004.
Laclede Gas issues commercial paper that is supported by the bank
lines of credit. During fiscal year 2004, the Utility's short-term borrowing
requirements, which peaked at $274.7 million, were met primarily by the sale
of commercial paper, supplemented from time to time by draws on its seasonal
credit line or short-term loans from Laclede Group. Loans from Laclede Group
were no more than $12.6 million at any time. Laclede Gas had $71.4 million
in commercial paper outstanding as of September 30, 2004, at a weighted
average interest rate of 1.9% per annum, and $218.2 million outstanding as
of September 30, 2003, at a weighted average interest rate of 1.2% per
annum.
50
Most of Laclede Gas' lines of credit include covenants limiting
total debt, including short-term debt, to no more than 70% of total
capitalization and requiring earnings before interest, taxes, depreciation
and amortization (EBITDA) to be at least 2.25 times interest expense. On
September 30, 2004, total debt was 56% of total capitalization. For the
fiscal year ended September 30, 2004, EBITDA was 3.82 times interest
expense.
Short-term cash requirements outside of Laclede Gas have generally
been met with internally-generated funds. However, Laclede Group has a $20
million working capital line of credit obtained from U.S. Bank National
Association, expiring in June 2005, to meet short-term liquidity needs of
its subsidiaries. This line of credit has a covenant limiting the total debt
of Laclede Gas to no more than 70% of the utility's total capitalization
(this ratio stood at 56% on September 30, 2004.) This line has been used to
provide letters of credit totaling $1.2 million on behalf of SM&P Utility
Resources, which have not been drawn, and to provide for seasonal funding
needs of the various subsidiaries from time to time. The maximum balance
outstanding during fiscal year 2004 was $10.0 million, and there was no
balance outstanding at September 30, 2004.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of financial
instruments at September 30, 2004 and 2003 are as follows:
Carrying Fair
(Thousands) Amount Value
---------------------------------------------------------------------------------------
2004:
Cash and cash equivalents $ 13,854 $ 13,854
Investment in unconsolidated affiliate trust 1,400 1,400
Short-term debt 71,380 71,380
Long-term debt, including current portion 358,936 393,735
Redeemable preferred stock, including current sinking fund
requirements 1,253 1,253
Long-term debt to unconsolidated affiliate trust 46,400 49,910
2003:
Cash and cash equivalents $ 7,291 $ 7,291
Investment in unconsolidated affiliate trust 1,400 1,400
Short-term debt 218,200 218,200
Long-term debt, including current portion 259,625 290,780
Redeemable preferred stock 1,258 1,258
Long-term debt to unconsolidated affiliate trust 46,400 50,000
The carrying amounts for cash and cash equivalents and short-term
debt approximate fair value due to the short maturity of these investments.
Fair value of long-term debt, preferred stock, and long-term debt to
unconsolidated affiliate trust is estimated based on market prices for
similar issues.
Investments in unconsolidated affiliate trust - The Company's
cost method investments consist of $1.4 million in common securities of
Capital Trust I, a wholly owned subsidiary trust. This investment was not
evaluated for impairment because the Company did not identify any events or
changes in circumstances that may have had a significant adverse effect on
the fair value of that investment.
11. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income (loss),
net of income taxes, recognized in the Consolidated Balance Sheets at
September 30 were as follows:
Net Unrealized Minimum Pension
Gains (Losses) on Liability
Cash Flow Hedges Adjustment Total
-----------------------------------------------------------
Balance, September 30, 2002 $ - $(339) $ (339)
Current-period change 502 (243) 259
-----------------------------------------------------------
Balance, September 30, 2003 502 (582) (80)
Current-period change (1,738) 211 (1,527)
-----------------------------------------------------------
Balance, September 30, 2004 $(1,236) $(371) $(1,607)
===========================================================
51
12. INCOME TAXES
The net provisions for income taxes charged during the years
ended September 30, 2004, 2003 and 2002 are as follows:
(Thousands)
-------------------------------------------------------------------------------
Years Ended September 30 2004 2003 2002
-------------------------------------------------------------------------------
Included in Statements of
Consolidated Income:
Federal
Current $ 3,606 $ 2,166 $ 5,510
Deferred 13,062 13,741 5,069
Investment tax credit
adjustments - net (305) (313) (319)
State and local
Current 89 1,074 1,071
Deferred 2,812 1,984 916
------------------------------
Total $19,264 $18,652 $12,247
==============================
The effective income tax rate varied from the federal statutory
income tax rate for each year due to the following:
2004 2003 2002
---------------------------------
Federal income tax statutory rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal income tax benefits 3.4 3.7 3.7
Certain expenses capitalized on books
and deducted on tax return (3.1) (2.9) (4.4)
Taxes related to prior years (.2) (1.3) 1.3
Other items - net (.3) 0.5 (0.2)
---------------------------------
Effective income tax rate 34.8% 35.0% 35.4%
=================================
The significant items comprising the net deferred tax liability
recognized in the Consolidated Balance Sheets as of September 30 are as
follows:
(Thousands) 2004 2003
---------------------------------------------------------------------
Deferred tax assets:
Reserves not currently deductible $ 21,508 $ 18,043
Deferred gas cost - 1,602
Unamortized investment tax credits 3,154 3,347
Other 6,330 4,788
----------------------
Total deferred tax assets 30,992 27,780
Deferred tax liabilities:
Relating to utility property 159,326 146,854
Pension 38,904 42,500
Deferred gas cost 5,589 -
Other 15,478 11,393
----------------------
Total deferred tax liabilities 219,297 200,747
Net deferred tax liability 188,305 172,967
Net deferred tax asset - current 1,321 7,631
----------------------
Net deferred tax liability - non-current $189,626 $180,598
======================
13. OTHER INCOME AND INCOME DEDUCTIONS - NET
(Thousands) 2004 2003 2002
---------------------------------------------------------------------------------
Non-recurring investment gains $1,947 $ 816 $ -
Allowance for funds used during construction (123) (107) (149)
Other income 1,507 939 978
Other income deductions 250 (598) (151)
-------------------------------
Other income and (income deductions) - net $3,581 $1,050 $ 678
===============================
52
Laclede Gas recorded the receipt of proceeds totaling $1.9 million
and $.8 million during fiscal 2004 and 2003, respectively, related to its
interest, as a policy holder, in the sale of a mutual insurance company.
These proceeds represent initial distributions relating to certain policies
held by the Utility. Subsequent distributions, if any, are not expected to
have a material impact on the consolidated financial position or results of
operations of the Company.
14. 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 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 LER, a wholly owned subsidiary of Laclede
Group. In 2002 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 2002 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 five wholly owned
subsidiaries, 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 (while active) are included in Laclede Group's Consolidated
Financial Statements. Certain intersegment revenues with Laclede Gas are not
eliminated in accordance with the provisions of SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation."
53
Regulated Gas Non-Regulated Non-Regulated Non-Regulated
(Thousands) Distribution Services Gas Marketing Other Eliminations Consolidated
-----------------------------------------------------------------------------------------
FISCAL 2004
Revenues from
external customers $ 865,946 $103,885 $250,004 $ 3,386 $ - $1,223,221
Intersegment
revenues 2,959 354 20,324 3,462 - 27,099
-----------------------------------------------------------------------------------------
Total operating
revenues 868,905 104,239 270,328 6,848 - 1,250,320
-----------------------------------------------------------------------------------------
Depreciation &
amortization 22,385 -* - -** - 22,385
Interest charges 25,202 3,488 75 423 (428) 28,760
Income tax
expense 16,508 625 1,896 235 - 19,264
Net income
applicable to
common stock 32,063 650 3,021 322 - 36,056
Total assets 1,154,365 58,466 33,971 33,830 (15,337) 1,265,295
Construction
expenditures 49,130 1,701 - 478 - 51,309
FISCAL 2003
Revenues from
external customers $ 771,334 $ 99,820 $143,226 $ 3,984 $ - $1,018,364
Intersegment
revenues 3,438 348 20,635 7,624 (79) 31,966
-----------------------------------------------------------------------------------------
Total operating
revenues 774,772 100,168 163,861 11,608 (79) 1,050,330
-----------------------------------------------------------------------------------------
Depreciation &
amortization 22,229 -* - -** - 22,229
Interest charges 23,921 2,995 43 335 (408) 26,886
Income tax
expense/(benefit) 18,009 (1,652) 1,819 476 - 18,652
Net income/(loss)
applicable to
common stock 34,277 (3,262) 2,889 681 - 34,585
Total assets 1,111,503 58,640 36,655 49,396 (53,396) 1,202,798
Construction
expenditures 49,926 1,179 - 7 - 51,112
FISCAL 2002
Revenues from
external customers $ 592,097 $ 93,888 $ 55,944 $ 3,258 $ - $ 745,187
Intersegment
revenues - 228 8,854 1,035 (65) 10,052
-----------------------------------------------------------------------------------------
Total operating
revenues 592,097 94,116 64,798 4,293 (65) 755,239
-----------------------------------------------------------------------------------------
Depreciation &
amortization 24,215 -* - -** - 24,215
Interest charges 25,105 850 - 33 (179) 25,809
Income tax expense 10,740 1,077 284 146 - 12,247
Net income
applicable to
common stock 20,292 1,434 452 138 - 22,316
Total assets 993,490 67,195 19,210 30,226 (19,131) 1,090,990
Construction
expenditures 48,765 4,228 - 6 - 52,999
* Depreciation & amortization for Non-Regulated Services is included in
Non-Regulated - Services Operating Expenses on the Statements of
Consolidated Income (2004, $3.5 million; 2003, $3.2 million; 2002, $1.9
million).
** Depreciation & amortization for Non-Regulated Other is included in the
Non-Regulated - Other Operating Expenses on the Statements of
Consolidated Income (2004, $.2 million; 2003, $.2 million; 2002,
$.2 million).
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. In
connection with the reduction in work from these customers, SM&P made
reductions in the required levels of personnel, facilities
54
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. Revenue from these customers totaled approximately $29
million, $29 million and $45 million for fiscal years 2004, 2003 and fiscal
2002, respectively. SM&P has regained a portion of the previously withdrawn
work and has gained new business with these customers. The underground
facility locating industry, however, remains competitive with many contracts
subject to termination on as little as 30-days' notice. Also, SM&P's
customers are primarily in the utility and telecommunication sector with
their workload influenced by construction trends.
15. COMMITMENTS AND CONTINGENCIES
Laclede Gas estimates fiscal year 2005 utility construction
expenditures at approximately $56 million. Fiscal 2005 construction
expenditures for non-regulated subsidiaries are estimated at approximately
$5 million. There are no material contractual commitments at September 30,
2004 related to these estimated construction expenditures.
The lease agreement covering the general office space of Laclede
Gas extends through February 2010 with options to renew for up to 10
additional years. The aggregate rental expense for fiscal years 2004, 2003
and 2002 was $856,000, $847,000 and $838,000, respectively. The annual
minimum rental payment for fiscal year 2005 is anticipated to be
approximately $865,000 with a maximum annual rental payment escalation of
$8,800 per year for each year through fiscal 2010. Laclede Gas has other
relatively minor rental arrangements that provide for minimum rental
payments. Laclede Gas has entered into various operating lease agreements
for the rental of vehicles and power operated equipment. The rental costs
will be approximately $1.3 million in fiscal 2005, $1.1 million in fiscal
2006, $.8 million in fiscal 2007, $.5 million in fiscal 2008 and $.2 million
in fiscal 2009. Laclede Gas and LER have entered into various contracts,
expiring on dates through 2011, for the storage, transportation, and supply
of natural gas. Minimum payments required under the contracts in place at
September 30, 2004 are estimated at approximately $246 million. Additional
contracts are generally entered into prior to or during the heating season.
Laclede Gas and LER estimate that they will pay approximately $89 million
annually, at present rate levels, for fixed charges related to these or
other contracts that are expected to be in place for the upcoming year for
the reservation of gas supplies and pipeline transmission and storage
capacity. The Utility recovers these costs from customers in accordance with
the PGA Clause.
SM&P has several operating leases, the aggregate annual cost of
which is approximately $5 million, consisting primarily of 12-month
operating leases, with renewal options, for vehicles used in its business.
Upon acquisition of SM&P, Laclede Group assumed parental guarantees of
certain of those vehicle leases. Laclede Group anticipates that the maximum
guarantees will not exceed $12 million. SM&P also has lease agreements
covering general office space extending through 2008 that resulted in rental
expense for fiscal years 2004, 2003 and 2002 of $.8 million, $1.2 million
and $.8 million, respectively. Payments will be $.7 million in fiscal 2005,
$.5 million in fiscal 2006, $.5 million in fiscal 2007, $.4 million in
fiscal 2008, and $.3 million in fiscal 2009.
Laclede Group had guarantees totaling $8.5 million for
performance and payment of certain wholesale gas supply purchases by Laclede
Energy Resources, Inc. (the Company's non-utility marketing affiliate), as
of September 30, 2004. Laclede Group issued an additional $1.5 million
guarantee in October 2004 on behalf of LER.
A consolidated subsidiary is a general partner in an unconsolidated
partnership, which invests in real estate partnerships. The subsidiary and
third parties are jointly and severally liable for the payment of mortgage
loans in the aggregate outstanding amount of approximately $2.6 million
incurred in connection with various real estate ventures. Laclede Group has
no reason to believe that the other principal liable parties will not be able
to meet their proportionate share of these obligations. Laclede Group further
believes that the asset values of the real estate properties are sufficient to
support these mortgage loans.
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 interpretations 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 remedial actions and those actions are
essentially complete. Laclede Gas currently estimates the overall costs of
these actions will be approximately $2.4 million. As of September 30, 2004,
Laclede Gas has paid or reserved for these actions. If regulators require
additional remedial actions or assert additional claims, Laclede Gas will
incur additional costs.
Laclede Gas enrolled a second former manufactured gas plant site
into the Missouri Voluntary Cleanup Program (VCP). The VCP provides
opportunities to minimize the scope and cost of site cleanup while
maximizing possibilities for site development. This site is located in, and
is presently owned by, the City of St. Louis, Missouri. Laclede Gas
continues to evaluate options concerning this site, including, but not
limited to, the submission of its own Remedial Action Plan (RAP) to the VCP.
Laclede Gas currently estimates that the cost of site investigations, agency
oversight and related legal and engineering consulting may be approximately
$650,000. Currently, Laclede Gas has paid or reserved for these actions.
Laclede Gas has requested that other former site owners and operators share
in these costs and one party has agreed to participate and has reimbursed
Laclede Gas to date for $173,000. Laclede Gas anticipates additional
55
reimbursement from this party. Laclede Gas plans to seek proportionate
reimbursement of all costs relative to this site from other potentially
responsible parties if practicable.
Laclede Gas has been advised that a third former manufactured gas
plant site may require remediation. Laclede Gas does not, and for many years
has not, owned this site. At this time, it is not clear whether Laclede Gas
will incur any costs in connection with environmental investigations or
remediation at the site, and if it does incur any costs, what the amount of
those costs would be.
Costs incurred are charged to expense or capitalized in accordance
with generally accepted accounting principles. A predetermined level of
expense is recovered through Laclede Gas' rates. While the scope of future
costs relative to the actions Laclede Gas has taken at the Shrewsbury site
pursuant to the current agreement with federal and state regulators may not
be significant, the scope of costs relative to future remedial actions
regulators may require at the Shrewsbury site and to the other sites is
unknown and may be material.
Laclede Gas has notified its insurers that it seeks reimbursement
of its costs at these three manufactured gas plant sites. In response, the
majority of insurers have reserved their rights. While some of the insurers
have denied coverage, Laclede Gas continues to seek reimbursement from them.
With regard to costs incurred under current agreement regarding the
Shrewsbury site, denials of coverage are not expected to have any material
impact on the financial position and results of operations of Laclede Gas.
With regard to the other two sites, and with regard to any future actions
that might be required at the Shrewsbury site, since the scope of costs are
unknown and may be significant, denials of coverage may have a material
impact on the financial position and results of operations of Laclede Gas.
Such costs, if incurred, have typically been subject to recovery in rates.
On June 28, 2002, the Staff of the MoPSC filed its recommendation
in a proceeding established to review Laclede Gas' gas costs for fiscal
2001. In its recommendation, the Staff proposed to disallow approximately
$4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based
Price Stabilization Program. This Program was discontinued at the end of the
2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in
proceedings before the MoPSC, including a formal hearing that was held on
this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC
decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved
by Laclede Gas, and directed Laclede Gas to flow through such amount to its
customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas
appealed the MoPSC's decision to the Cole County Circuit Court. On October
10, 2003, the Circuit Court issued an order staying the MoPSC's decision
requiring Laclede Gas to flow through the $4.9 million to customers.
Pursuant to the Stay Order, Laclede Gas is paying $4.9 million into the
Court's registry pending a final judicial determination of Laclede Gas'
entitlement to such amounts. On November 5, 2003, the Circuit Court of Cole
County, Missouri, issued its Order and Judgment vacating and setting aside
the Commission's decision on the grounds that it was unlawful and not
supported by competent and substantial evidence on the record. On December
5, 2003, the MoPSC appealed the Circuit Court's decision to the Missouri
Court of Appeals for the Western District. Oral arguments were held in the
Missouri Court of Appeals for the Western District on August 17, 2004. The
Utility is now awaiting the court's decision. The Utility continues to
believe in the merits of its position and intends, if necessary, to assert
its position vigorously throughout the appellate process. However, to the
extent that a final decision in the courts results in disallowance of the
$4.9 million in pre-tax gains, it could have a material effect on the future
financial position or results of operations of the Company.
SM&P has been the subject of certain employment-related claims
arising out of a practice of SM&P that predated Laclede Group's acquisition.
The claims involve whether certain pre- and post-work activities and
commuting time for non-supervisory field employees constitute hours worked
for purposes of federal and state wage and hour laws. These claims have been
asserted in various proceedings, including one "opt-in" collective action
filed in March 2003 in Federal District Court for the Eastern District of
Texas. As a result of a ruling on February 27, 2004, in that proceeding,
approximately 3,500 present and former field employees who worked for SM&P
at times since February 27, 2001, were given notice of the lawsuit and the
opportunity, until June 7, 2004, to join the lawsuit and assert claims for
additional overtime compensation for the three-year period immediately
preceding the date that they joined the lawsuit. Of the employees to whom
notice was sent, 966 joined this lawsuit within the opt-in deadline
established by the court. The substantial majority of the plaintiffs are
former employees. A limited number of individuals have attempted to opt-in
after the court's deadline, while simultaneously, a limited number of
plaintiffs have withdrawn from participation after having opted into the
lawsuit. SM&P is vigorously contesting these claims, including opposition to
this case ultimately proceeding as a collective action. While the results of
the claims cannot be predicted with certainty, management, after discussion
with counsel, believes that the final outcome will not have a material
adverse effect on the consolidated financial position and results of
operations of the Company.
Laclede Group and its subsidiaries are involved in other
litigation, claims and investigations arising in the normal course of
business. While the results of such litigation cannot be predicted with
certainty, management, after discussion with counsel, believes that the
final outcome will not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
56
16. INTERIM FINANCIAL INFORMATION (UNAUDITED)
In the opinion of Laclede Group, the quarterly information
presented below for fiscal years 2004 and 2003 includes all adjustments
(consisting of only normal recurring accruals) necessary for a fair
statement of the results of operations for such periods. Variations in
consolidated operations reported on a quarterly basis primarily reflect the
seasonal nature of the business of Laclede Gas.
(Thousands, Except Per Share Amounts)
------------------------------------- ----------- ---------- ---------- -----------
Three Months Ended Dec. 31 March 31 June 30 Sept. 30
------------------------------------- ----------- ---------- ---------- -----------
2004
Total operating revenues $332,637 $474,955 $245,060 $197,668
Operating income (loss) 31,394 38,459 13,555 (2,847)
Net income (loss) applicable to
common stock 16,591 21,540 3,747 (5,822)
Earnings (loss) per share of
common stock $.87 $1.12 $.19 $(.28)
------------------------------------- ----------- ---------- ---------- -----------
Three Months Ended Dec. 31 March 31 June 30 Sept. 30
------------------------------------- ----------- ---------- ---------- -----------
2003
Total operating revenues $280,171 $422,179 $186,595 $161,385
Operating income (loss) 29,214 42,322 9,203 (1,604)
Net income (loss) applicable to
common stock 15,095 21,570 2,022 (4,102)
Earnings (loss) per share
of common stock $.80 $1.14 $.11 $(.21)
SM&P's seasonal operations (which are counter-seasonal to those of
Laclede Gas), impacted the consolidated earnings per share presented by:
Quarter Ended Fiscal 2004
---------------------------------------
December 31 $(.05)
March 31 $(.16)
June 30 $ .14
September 30 $ .10
Quarter Ended Fiscal 2003
---------------------------------------
December 31 $(.01)
March 31 $(.22)
June 30 $ .05
September 30 $ .01
Laclede Gas Company's Financial Statements and Notes to Financial Statements
are included in Exhibit 99.1.
57
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
There have been no disagreements on accounting and financial
disclosure with Laclede's outside auditors that are required to be
disclosed.
Item 9A. 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 fourth fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information
None.
58
Part III
Item 10. Directors and Executive Officers of the Registrant
The information concerning directors required by this item is set
forth in the Company's proxy statement dated December 21, 2004 under the
headings "Corporate Governance," "Information about the Nominees and
Directors," "The Board of Directors and Committees of the Board," and
"Section 16(a) Beneficial Ownership Reporting Compliance" and are
incorporated herein by reference.
The information concerning executive officers required by this
item is reported in Part I of this Form 10-K.
The Board of Directors has approved a Financial Code of Ethics
that covers the Chief Executive Officer and certain of the Company's senior
financial officers, including but not limited to, the Company's Chief
Financial Officer, Vice President - Finance, Controller, principal
accounting officer or officers of the Company serving in a finance,
accounting, treasury, or tax role. This code is posted on our website,
www.thelacledegroup.com, in the Investor Services section under SEC Filings.
The corporate governance guidelines, charters for the audit,
corporate governance and compensation committees, and code of business
conduct, are available on our website, and a copy will be sent to any
shareholder upon request.
Item 11. Executive Compensation
The information required by this item is set forth in the
Company's proxy statement dated December 21, 2004 under the headings
"Compensation of Directors," "Summary Compensatory Table," "Option Grants in
Fiscal 2004," "Total Options Exercised in Fiscal 2004 and Year-end Value,"
"Long-Term Incentive Plans - Awards in Last Fiscal Year," "Pension Plan" and
"Other Plans" and are incorporated herein by reference but the information
under the captions "Compensation Committee Report Regarding Executive
Compensation" and "Performance Graph" in such proxy statement are expressly
NOT incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is set forth in the Company's
proxy statement dated December 21, 2004 under the heading "Beneficial
Ownership of Laclede Group Common Stock" and is incorporated herein by
reference.
The following table sets forth aggregate information regarding
the Company's equity compensation plans as of September 30, 2004:
Equity Compensation Plan Information
Number of securities
remaining available
for future issuance
Number of securities Weighted-average under equity
to be issued upon exercise price of compensation plans
exercise of outstanding (excluding securities
outstanding options, options, warrants reflected in column
Plan Category warrants and rights and rights (a))
- ----------------------------------------- ---------------------- ------------------- ---------------------
(a) (b) (c)
Equity compensation plans approved by
security holders (1) 398,750 $26.43 867,200
Equity compensation plans not approved by
security holders - - -
---------------------- ------------------- ---------------------
Total 398,750 $26.43 867,200
(1) Includes the Company's Equity Plan and Restricted Stock Plan for
Non-Employee Directors. Included in column (a) are 4,050 shares awarded
under the Restricted Stock Plan and 1,500 restricted shares awarded
under the Company's Equity Incentive Plan. These shares were
disregarded for purposes of computing the weighted-average exercise
price in column (b). Included in column (c) are 45,950 shares remaining
available to award under the Restricted Stock Plan. Shares for the
Restricted Stock Plan are not original issue shares but are purchased
by the Plan's trustee in the open market.
Information regarding the Equity Plan is set forth in Note 1 to
the Consolidated Financial Statements in this report.
59
Item 13. Certain Relationships and Related Transactions
There were no transactions required to be disclosed pursuant to
this item.
Item 14. Principal Accounting Fees and Services
Information required by this item is set forth in the Company's
proxy statement dated December 21, 2004 under the headings "Fees of
Independent Accountant" and "Policy Regarding the Approval of Independent
Auditor Provision of Audit and Non-Audit Services" and are incorporated
herein by reference.
60
Part IV
Item 15. Exhibits, Financial Statement Schedules
(a) 1. Financial Statements: 2004 10-K Page
--------------
The Laclede Group, Inc.:
For Years Ended September 30, 2004, 2003 and 2002:
Statements of Consolidated Income 31
Statements of Consolidated Comprehensive Income 32
Consolidated Statements of Common Shareholders' Equity 36
Statements of Consolidated Cash Flows 37
As of September 30, 2004 & 2003:
Consolidated Balance Sheets 33-34
Statements of Consolidated Capitalization 35
Notes to Consolidated Financial Statements 38-57
Management Report 29
Report of Independent Registered Public Accounting Firm 30
Laclede Gas Company:
For Years Ended September 30, 2004, 2003 and 2002:
Statements of Income Ex. 99.1, p. 15
Statements of Comprehensive Income Ex. 99.1, p. 16
Statements of Common Shareholders' Equity Ex. 99.1, p. 20
Statements of Cash Flows Ex. 99.1, p. 21
As of September 30, 2004 & 2003:
Balance Sheets Ex. 99.1, pp. 17-18
Statements of Capitalization Ex. 99.1, p. 19
Notes to Financial Statements Ex. 99.1, pp. 22-35
Management Report Ex. 99.1, p. 13
Report of Independent Registered Public Accounting Firm Ex. 99.1, p. 14
2. Supplemental Schedules
II - Reserves - Laclede Group 64
II - Reserves - Laclede Gas 65
Schedules not included have been omitted because they are not
applicable or the required data has been included in the financial
statements or notes to financial statements.
3. Exhibits
Incorporated herein by reference to Index to Exhibits, page 66.
Item 15(a)(3) See the marked exhibits in the Index to Exhibits, page 66.
(b) Incorporated herein by reference to Index to Exhibits, page 66.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE LACLEDE GROUP, INC.
November 18, 2004 By /s/ Barry C. Cooper
Barry C. Cooper
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date Signature Title
11/18/04 /s/ Douglas H. Yaeger Chairman of the Board,
Douglas H. Yaeger President and Chief Executive
Officer (Principal Executive
Officer)
11/18/04 /s/ Barry C. Cooper Chief Financial Officer
Barry C. Cooper (Principal Financial and
Accounting Officer)
11/18/04 /s/ Arnold W. Donald Director
Arnold W. Donald
11/18/04 /s/ Henry Givens, Jr. Director
Henry Givens, Jr.
11/18/04 /s/ C. Ray Holman Director
C. Ray Holman
11/18/04 /s/ Robert C. Jaudes Director
Robert C. Jaudes
11/18/04 /s/ W. Stephen Maritz Director
W. Stephen Maritz
11/18/04 /s/ William E. Nasser Director
William E. Nasser
11/18/04 /s/ Robert P. Stupp Director
Robert P. Stupp
11/18/04 /s/ Mary Ann Van Lokeren Director
Mary Ann Van Lokeren
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LACLEDE GAS COMPANY
November 18, 2004 By /s/ Barry C. Cooper
Barry C. Cooper
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date Signature Title
11/18/04 /s/ Douglas H. Yaeger Chairman of the Board,
Douglas H. Yaeger President and Chief Executive
Officer (Principal Executive
Officer)
11/18/04 /s/ Barry C. Cooper Director, Chief Financial Officer
Barry C. Cooper (Principal Financial and
Accounting Officer)
11/18/04 /s/ Mark D. Waltermire Director, Vice President
Mark D. Waltermire Operations & Marketing
11/18/04 /s/ Kenneth J. Neises Director, Executive Vice President
Kenneth J. Neises Energy & Administrative Services
63
SCHEDULE II
THE LACLEDE GROUP, INC. AND SUBSIDIARY COMPANIES
RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002
- ---------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT ADDITIONS CHARGED DEDUCTIONS BALANCE
BEGINNING TO TO OTHER FROM AT CLOSE
DESCRIPTION OF PERIOD INCOME ACCOUNTS RESERVES OF PERIOD
- ---------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
YEAR ENDED
SEPTEMBER 30, 2004:
DOUBTFUL ACCOUNTS $ 7,181 $12,388 $6,433 (a) $15,640 (b) $10,362
=========================================================================
MISCELLANEOUS:
Injuries and
property damage $ 7,155 $ 7,433 $ - $ 6,308 (c) $ 8,280
Deferred compensation 10,891 1,386 - 2,229 10,048
-------------------------------------------------------------------------
TOTAL $18,046 $ 8,819 $ - $ 8,537 $18,328
=========================================================================
YEAR ENDED
SEPTEMBER 30, 2003:
DOUBTFUL ACCOUNTS $ 4,532 $10,830 $5,926 (a) $14,107 (b) $ 7,181
=========================================================================
MISCELLANEOUS:
Injuries and
property damage $ 8,091 $ 6,402 $ - $ 7,338 (c) $ 7,155
Deferred compensation 10,429 1,735 - 1,273 10,891
-------------------------------------------------------------------------
TOTAL $18,520 $ 8,137 $ - $ 8,611 $18,046
=========================================================================
YEAR ENDED
SEPTEMBER 30, 2002:
DOUBTFUL ACCOUNTS $ 9,216 $ 6,640 (d) $7,309 (a) $18,633 (b) $ 4,532
=========================================================================
MISCELLANEOUS:
Injuries and
property damage $ 3,423 $11,474 (d) $ - $ 6,806 (c) $ 8,091
Deferred compensation 10,092 1,329 - 992 10,429
-------------------------------------------------------------------------
TOTAL $13,515 $12,803 $ - $ 7,798 $18,520
=========================================================================
(a) Accounts reinstated, cash recoveries, etc.
(b) Accounts written off.
(c) Claims settled, less reimbursements from insurance companies.
(d) Includes addition of SM&P's reserve balances at January 28, 2002.
64
SCHEDULE II
LACLEDE GAS COMPANY
RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002
- ---------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT ADDITIONS CHARGED DEDUCTIONS BALANCE
BEGINNING TO TO OTHER FROM AT CLOSE
DESCRIPTION OF PERIOD INCOME ACCOUNTS RESERVES OF PERIOD
- ---------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
YEAR ENDED
SEPTEMBER 30, 2004:
DOUBTFUL ACCOUNTS $ 6,839 $12,310 $ 6,433 (a) $15,607 (b) $ 9,975
=========================================================================
MISCELLANEOUS:
Injuries and
property damage $ 3,927 $ 2,132 $ - $ 1,733 (c) $ 4,326
Deferred compensation 10,891 1,386 - 2,229 10,048
-------------------------------------------------------------------------
TOTAL $14,818 $ 3,518 $ - $ 3,962 $14,374
=========================================================================
YEAR ENDED
SEPTEMBER 30, 2003:
DOUBTFUL ACCOUNTS $ 3,718 $10,613 $ 5,926 (a) $13,418 (b) $ 6,839
=========================================================================
MISCELLANEOUS:
Injuries and
property damage $ 3,176 $ 3,006 $ - $ 2,255 (c) $ 3,927
Deferred compensation 10,429 1,735 - 1,273 10,891
-------------------------------------------------------------------------
TOTAL $13,605 $ 4,741 $ - $ 3,528 $14,818
=========================================================================
YEAR ENDED
SEPTEMBER 30, 2002:
DOUBTFUL ACCOUNTS $ 9,216 $ 5,827 (d) $ 7,309 (a) $18,634 (b) $ 3,718
=========================================================================
MISCELLANEOUS:
Injuries and
property damage $ 3,423 $ 2,855 (d) $ - $ 3,102 (c) $ 3,176
Deferred compensation 10,092 1,329 - 992 10,429
-------------------------------------------------------------------------
TOTAL $13,515 $ 4,184 $ - $ 4,094 $13,605
=========================================================================
(a) Accounts reinstated, cash recoveries, etc.
(b) Accounts written off.
(c) Claims settled, less reimbursements from insurance companies.
(d) Includes elimination of subsidiary provision due to October 1, 2001
restructuring.
65
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
2.01* - Agreement and Plan of Merger and Reorganization, filed
as Appendix A to proxy statement/prospectus contained in
the Company's registration statement on Form S-4, No. 333-48794.
3.01(i)* - Laclede's Restated Articles of Incorporation effective
March 18, 2002; filed as exhibit 3.3 to Form 8-K filed May 29,
2002.
3.01(ii)* - Bylaws of Laclede effective January 18, 2002; filed as exhibit
3.4 to Laclede's Form 8-K filed May 29, 2002.
3.02(i)* - The Company's Articles of Incorporation, filed as Appendix B
to the proxy statement/prospectus contained in the Company's
registration statement on Form S-4, No. 333-48794.
3.02(ii)* - The Company's Bylaws as amended August 22, 2002, filed as
exhibit 1 to the Company's Form 8-K filed October 4, 2002.
4.01* - Mortgage and Deed of Trust, dated as of February 1, 1945; filed
as exhibit 7-A to registration statement No. 2-5586.
4.02* - Fourteenth Supplemental Indenture, dated as of October 26, 1976;
filed on June 26, 1979 as exhibit b-4 to registration statement
No. 2-64857.
4.03* - Seventeenth Supplemental Indenture, dated as of May 15,
1988; filed as exhibit 28(a) to the registration statement
No. 33-38413.
4.04* - Nineteenth Supplemental Indenture, dated as of May 15, 1991;
filed on May 16, 1991 as exhibit 4.01 to Laclede's Form 8-K.
4.05* - Twentieth Supplemental Indenture, dated as of November 1,1992;
filed on November 4, 1992 as exhibit 4.01 to Laclede's Form 8-K.
4.06* - Twenty-Second Supplemental Indenture dated as of November 15,
1995; filed on December 8, 1995 as exhibit 4.01 to Laclede's
Form 8-K.
4.07* - Twenty-Third Supplemental Indenture dated as of October 15, 1997;
filed on November 6, 1997 as exhibit 4.01 to Laclede's Form 8-K.
4.08* - Twenty-Fourth Supplemental Indenture dated as of June 1, 1999,
filed on June 4, 1999 as exhibit 4.01 to Laclede's Form 8-K.
*Incorporated herein by reference and made a part hereof. Laclede's
File No. 1-1822; the Company's File No. 1-16681.
BOLD ITEMS REFLECT MANAGEMENT, CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
66
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
4.09* - Twenty-Fifth Supplemental Indenture dated as of September 15,
2000, filed on September 27, 2000 as exhibit 4.01 to Laclede's
Form 8-K.
4.11* - Twenty-Seventh Supplemental Indenture dated as of April 15,
2004, filed on April 28, 2004 as exhibit 4.01 to Laclede's
Form 8-K.
4.12* - Twenty-Eighth Supplemental Indenture dated as of April 15,
2004, filed on April 28, 2004 as exhibit 4.02 to Laclede's
Form 8-K.
4.13* - Certificate of Trust of Laclede Capital Trust I, dated April 4,
2002, filed as exhibit 4.3 to the Company's registration
statement on Form S-3 (No. 333-86722).
4.14* - Declaration of Trust of Laclede Capital Trust I, dated April 4,
2002, filed as exhibit 4.4 to the Company's registration
statement on Form S-3 (No. 333-86722).
4.15* - Amended and Restated Declaration of Trust dated December 16,
2002, filed as exhibit 1 to Company's Form 8-K dated
December 16, 2002.
4.16* - Common Securities Guarantee Agreement dated December 16,
2002, filed as exhibit 2 to Company's Form 8-K dated
December 16, 2002.
4.17* - Preferred Securities Guarantee Agreement dated December 16,
2002, filed as exhibit 3 to Company's Form 8-K dated
December 16, 2002.
4.18* - Indenture for Subordinated Debt Securities dated
December 16, 2002, filed as exhibit 4 to Company's Form 8-K
dated December 16, 2002.
4.19* - First Supplemental Indenture dated December 16, 2002, filed as
exhibit 5 to Company's Form 8-K dated December 16, 2002.
4.20* - Laclede Gas Company Board of Directors' Resolution dated
August 28, 1986 which generally provides that the Board may
delegate its authority in the adoption of certain employee
benefit plan amendments to certain designated Executive
Officers; filed as exhibit 4.12 to Laclede's 1991 10-K.
4.20a - Company Board of Directors' Resolutions dated March 27, 2003,
updating authority delegated pursuant to August 28, 1986 Laclede
Gas Company resolutions.
4.21* - Rights Agreement dated as of April 3, 1996; filed on April 3,
1996 as exhibit 1 to Laclede's Form 8-A.
4.22* - Rights Agreement dated as of October 1, 2001; filed as exhibit 4
to the Company's Form 8-A on September 6, 2001.
*Incorporated herein by reference and made a part hereof. Laclede's File
No. 1-1822; the Company's File No. 1-16681.
BOLD ITEMS REFLECT MANAGEMENT, CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
67
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
10.01* - LACLEDE INCENTIVE COMPENSATION PLAN, AS AMENDED; FILED AS
EXHIBIT 10.03 TO LACLEDE'S 1989 10-K.
10.01a* - AMENDMENT ADOPTED BY THE BOARD OF DIRECTORS ON JULY 26,
1990 TO THE INCENTIVE COMPENSATION PLAN; FILED AS EXHIBIT 10.02a
TO LACLEDE'S 1990 10-K.
10.01b* - AMENDMENTS ADOPTED BY THE BOARD OF DIRECTORS ON AUGUST 23, 1990
TO THE INCENTIVE COMPENSATION PLAN; FILED AS EXHIBIT 10.02b TO
LACLEDE'S 1990 10-K.
10.01c* - AMENDMENTS TO LACLEDE'S INCENTIVE COMPENSATION PLAN, EFFECTIVE
JANUARY 26, 1995; FILED AS EXHIBIT 10.3 TO LACLEDE'S 10-Q FOR
THE FISCAL QUARTER ENDED MARCH 31, 1995.
10.02* - SENIOR OFFICERS' LIFE INSURANCE PROGRAM OF LACLEDE, AS AMENDED;
FILED AS EXHIBIT 10.03 TO LACLEDE'S 1990 10-K.
10.02a* - CERTIFIED COPY OF RESOLUTIONS OF LACLEDE'S BOARD OF DIRECTORS
ADOPTED ON JUNE 27, 1991 AMENDING THE SENIOR OFFICERS' LIFE
INSURANCE PROGRAM; FILED AS EXHIBIT 10.01 TO LACLEDE'S 10-Q FOR
THE FISCAL QUARTER ENDED JUNE 30, 1991.
10.02b* - CERTIFIED COPY OF RESOLUTIONS OF LACLEDE'S BOARD OF DIRECTORS
ADOPTED ON JANUARY 28, 1993 AMENDING THE SENIOR OFFICERS' LIFE
INSURANCE PROGRAM; FILED AS EXHIBIT 10.03 TO LACLEDE'S 10-Q FOR
THE FISCAL QUARTER ENDED MARCH 31, 1993.
10.03* - LACLEDE GAS COMPANY SUPPLEMENTAL RETIREMENT BENEFIT PLAN, AS
AMENDED AND RESTATED EFFECTIVE JULY 25, 1991; FILED AS
EXHIBIT 10.05 TO LACLEDE'S 1991 10-K.
10.04* - Transportation Service Agreement For Rate Schedule FSS,
Contract #3147 between Mississippi River Transmission Corporation
("MRT") and Laclede effective May 1, 2002; filed as exhibit 10.1
to Laclede's 10-Q for the fiscal quarter ended June 30, 2002.
10.04a* - Transportation Service Agreement for Rate Schedule FTS, Contract
#3310 between Laclede and MRT effective May 1, 2002; filed as
exhibit 10.2 to Laclede's 10-Q for the fiscal quarter ended
June 30, 2002.
10.04b* - Transportation Service Agreement for Rate Schedule FTS, Contract
#3311, between Laclede and MRT effective May 1, 2002; filed as
exhibit 10.3 to Laclede's 10-Q for the fiscal quarter ended
June 30, 2002.
* Incorporated herein by reference and made a part hereof. Laclede's File
No. 1-1822; the Company's File No. 1-16681.
BOLD ITEMS REFLECT MANAGEMENT, CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
68
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
10.05* - AMENDMENT AND RESTATEMENT OF RETIREMENT PLAN FOR NON-EMPLOYEE
DIRECTORS AS OF NOVEMBER 1, 2002; FILED AS EXHIBIT 10.08c TO THE
COMPANY'S 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002.
10.05a* - AMENDMENT TO TERMS OF RETIREMENT PLAN FOR NON-EMPLOYEE
DIRECTORS AS OF OCTOBER 1, 2004; FILED AS EXHIBIT 10.2 TO THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004.
10.08* SALIENT FEATURES OF THE LACLEDE GAS COMPANY DEFERRED INCOME
PLAN FOR DIRECTORS AND SELECTED EXECUTIVES, INCLUDING
AMENDMENTS ADOPTED BY THE BOARD OF DIRECTORS ON JULY 26, 1990;
FILED AS EXHIBIT 10.12 TO THE LACLEDE'S 1991 10-K.
10.08a* - AMENDMENT TO LACLEDE'S DEFERRED INCOME PLAN FOR DIRECTORS AND
SELECTED EXECUTIVES, ADOPTED BY THE BOARD OF DIRECTORS ON
AUGUST 27, 1992; FILED AS EXHIBIT 10.12a TO LACLEDE'S 1992 10-K.
10.09* - FORM OF INDEMNIFICATION AGREEMENT BETWEEN LACLEDE AND ITS
DIRECTORS AND OFFICERS; FILED AS EXHIBIT 10.13 TO LACLEDE'S
1990 10-K.
10.10* - LACLEDE GAS COMPANY MANAGEMENT CONTINUITY PROTECTION PLAN, AS
AMENDED, EFFECTIVE AT THE CLOSE OF BUSINESS ON JANUARY 27, 1994,
BY THE BOARD OF DIRECTORS; FILED AS EXHIBIT 10.1 TO LACLEDE'S
10-Q FOR THE FISCAL QUARTER ENDED MARCH 31, 1994.
10.11* - 2002 RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS AS
OF NOVEMBER 1, 2002; FILED AS EXHIBIT 10.12d TO THE COMPANY'S
FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002.
10.11a* - AMENDMENT TO THE 2002 RESTRICTED STOCK PLAN FOR NON-EMPLOYEE
DIRECTORS AS OF OCTOBER 1, 2004; FILED AS EXHIBIT 10.3 TO THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004.
10.12* - SALIENT FEATURES OF THE LACLEDE GAS COMPANY DEFERRED INCOME PLAN
II FOR DIRECTORS AND SELECTED EXECUTIVES ADOPTED BY THE BOARD OF
DIRECTORS ON SEPTEMBER 23, 1993; FILED AS EXHIBIT 10.17 TO
LACLEDE'S 1993 10-K.
* Incorporated herein by reference and made a part hereof. Laclede's File No.
1-1822; the Company's File No. 1-16681.
BOLD ITEMS REFLECT MANAGEMENT, CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
69
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
10.13* - Revolving Credit Agreement between the Company and U.S. Bank
National Association dated June 13, 2002; filed as exhibit 10.4
to the Company's 10-Q for the quarter ended June 30, 2002.
10.13a* - April 16, 2003 First Amendment to Revolving Credit Agreement
between The Laclede Group, Inc. and U. S. Bank; filed as
exhibit 10.4 to the Company's Form 10-Q for the quarter ended
June 30, 2003.
10.13b* - June 12, 2003 Second Amendment to Revolving Credit Agreement
between The Laclede Group, Inc. and U. S. Bank; filed as
exhibit 10.5 to the Company's Form 10-Q for the quarter ended
June 30, 2003.
10.13c* - June 11, 2004 Third Amendment to Revolving Credit Agreement
between The Laclede Group, Inc. and U.S. Bank; filed as
exhibit 10.1 to The Company's Form 10-Q for the quarter ended
June 30, 2004.
10.14* - Amendment Restated Loan Agreement dated September 10, 2004 for
Laclede with U. S. Bank National Association as administrative
agent and lead arranger, Bank Hapoalim B. M., as syndication
agent, and Southwest Bank of St. Louis as documentation agent;
filed as exhibit 10.1 on Form 8-K filed on September 13, 2004.
10.15* - THE LACLEDE GROUP, INC. MANAGEMENT BONUS PLAN; FILED AS
EXHIBIT 10.20 TO THE COMPANY'S FORM 10-K FOR THE YEAR
ENDED SEPTEMBER 30, 2002.
10.16* - Stock Purchase Agreement between NiSource Inc. and The Laclede
Group, Inc.; filed as exhibit 10.21 to the Company's Form 10-K
for the year ended September 30, 2002.
10.17* - THE LACLEDE GROUP, INC. 2002 EQUITY INCENTIVE PLAN; FILED
AS EXHIBIT 10.22 TO THE COMPANY'S FORM 10-K FOR THE YEAR
ENDED SEPTEMBER 30, 2002.
10.17c* - FORM OF NON-QUALIFIED STOCK OPTION AWARD AGREEMENT WITH
MANDATORY RETIREMENT PROVISIONS FOR NOVEMBER 2004 AWARDS,
FILED AS EXHIBIT 10.1 TO THE COMPANY'S FORM 8-K FILED
NOVEMBER 5, 2004.
10.17d* - FORM OF NON-QUALIFIED STOCK OPTION AWARD AGREEMENT WITHOUT
MANDATORY RETIREMENT PROVISIONS FOR NOVEMBER 2004 AWARDS,
FILED AS EXHIBIT 10.2 TO THE COMPANY'S FORM 8-K FILED
NOVEMBER 5, 2004.
10.18* - Lease between Laclede Gas Company, as Lessee and First
National Bank in St. Louis, Trustee, as Lessor; filed as
exhibit 10.23 to the Company's Form 10-K for the year
ended September 30, 2002.
12 - Ratio of Earnings to Fixed Charges.
21 - Subsidiaries of the Registrant.
23 - Consent of Independent Registered Public Accounting Firm.
31 - Certificates under Rule 13a-14(a) of the CEO and CFO of
The Laclede Group, Inc. and Laclede Gas Company.
* Incorporated herein by reference and made a part hereof. Laclede's File
No. 1-1822; the Company's File No. 1-16681.
BOLD ITEMS REFLECT MANAGEMENT, CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
70
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
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 - Selected Financial Data, Management's
Discussion and Analysis of Financial Condition and Results of
Operations, Notes to Financial Statements, Management Report,
and Report of Independent Registered Public Accounting Firm.
*Incorporated herein by reference and made a part hereof. Laclede's File
No. 1-1822; the Company's File No. 1-16681.
BOLD ITEMS REFLECT MANAGEMENT, CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
71