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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarter Ended December 31, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
---------------------------------------------------------------------------------------
Commission Exact Name of Registrant as State of I.R.S.
File Number Specified in its Charter and Incorporation Employer
Principal Office Address and Identification
Telephone Number Number
---------------------------------------------------------------------------------------
1-16681 The Laclede Group, Inc. Missouri 74-2976504
720 Olive Street
St. Louis, MO 63101
314-342-0500
---------------------------------------------------------------------------------------
1-1822 Laclede Gas Company Missouri 43-0368139
720 Olive Street
St. Louis, MO 63101
314-342-0500
---------------------------------------------------------------------------------------
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such report),
The Laclede Group, Inc.: Yes X No
--- ---
Laclede Gas Company: Yes X No
--- ---
and (2) has been subject to such filing requirements for the past 90 days:
The Laclede Group, Inc.: Yes X No
--- ---
Laclede Gas Company: Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
The Laclede Group, Inc. Yes X No
--- ---
Laclede Gas Company: Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Shares Outstanding At
Registrant Description of Common Stock January 28, 2005
- ---------- --------------------------- ----------------
The Laclede Group, Inc. Common Stock ($1.00 Par Value) 21,053,708
Laclede Gas Company Common Stock ($1.00 Par Value) 10,031*
*100% owned by The Laclede Group, Inc.
TABLE OF CONTENTS Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
The Laclede Group, Inc.:
Statements of Consolidated Income 4
Statements of Consolidated Comprehensive Income 5
Consolidated Balance Sheets 6-7
Statements of Consolidated Cash Flows 8
Notes to Consolidated Financial Statements 9-16
Laclede Gas Company:
Statements of Income Ex. 99.1, p. 1
Balance Sheets Ex. 99.1, pp. 2-3
Statements of Cash Flows Ex. 99.1, p. 4
Notes to Financial Statements Ex. 99.1, pp. 5-9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations (The Laclede
Group, Inc.) 17-26
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Laclede Gas
Company) Ex. 99.1, pp. 10-18
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 27
Item 4 Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 28
Item 6 Exhibits 28
SIGNATURES - The Laclede Group, Inc. 29
SIGNATURES - Laclede Gas Company 30
INDEX TO EXHIBITS 31
Filing Format
- -------------
This Quarterly Report on Form 10-Q is a combined report being filed by two
separate registrants: The Laclede Group, Inc. (Laclede Group or the Company)
and Laclede Gas Company (Laclede Gas or the Utility).
2
PART I
FINANCIAL INFORMATION
The interim financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. These financial statements should be
read in conjunction with the financial statements and the notes thereto
included in the Company's Form 10-K for the fiscal year ended September 30,
2004.
3
Item 1. Financial Statements
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(Thousands, Except Per Share Amounts)
Three Months Ended
December 31,
------------------------
2004 2003
---- ----
Operating Revenues:
Regulated
Gas distribution $291,253 $261,350
Non-Regulated
Services 27,986 19,548
Gas marketing 118,179 50,983
Other 5,067 756
------------------------
Total Operating Revenues 442,485 332,637
------------------------
Operating Expenses:
Regulated
Natural and propane gas 206,424 175,275
Other operation expenses 30,925 29,483
Maintenance 4,214 4,429
Depreciation and amortization 5,305 5,658
Taxes, other than income taxes 15,823 14,832
------------------------
Total regulated operating expenses 262,691 229,677
Non-Regulated
Services 26,872 20,311
Gas marketing 115,786 50,288
Other 5,171 967
------------------------
Total Operating Expenses 410,520 301,243
------------------------
Operating Income 31,965 31,394
------------------------
Other Income and (Income Deductions) - Net 1,574 1,459
------------------------
Interest Charges:
Interest on long-term debt 5,908 4,814
Interest on long-term debt to unconsolidated
affiliate trust 893 893
Other interest charges 970 1,085
------------------------
Total Interest Charges 7,771 6,792
------------------------
Income Before Income Taxes 25,768 26,061
Income Tax Expense 9,136 9,454
------------------------
Net Income 16,632 16,607
Dividends on Redeemable Preferred Stock -
Laclede Gas 15 16
------------------------
Net Income Applicable to Common Stock $ 16,617 $ 16,591
========================
Average Number of Common Shares
Outstanding 21,018 19,116
Basic Earnings Per Share of Common Stock $.79 $.87
Diluted Earnings Per Share of Common Stock $.79 $.87
Dividends Declared Per Share of Common
Stock $.340 $.335
See notes to consolidated financial statements.
4
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
(Thousands)
Three Months Ended
December 31,
-----------------------
2004 2003
---- ----
Net Income Applicable to Common Stock $16,617 $16,591
-----------------------
Other Comprehensive Income (Loss), Before Tax:
Net gains (losses) on cash flow hedging
derivative instruments:
Net hedging gain (loss) arising during
period 756 (517)
Reclassification adjustment for
(gains) losses included in net income 2,451 (1,237)
-----------------------
Net unrealized gains (losses) on cash flow
hedging derivative instruments 3,207 (1,754)
-----------------------
Other Comprehensive Income (Loss),
Before Tax 3,207 (1,754)
Income Tax Expense (Benefit) Related to
Items of Other Comprehensive Income (Loss) 1,239 (677)
-----------------------
Other Comprehensive Income (Loss), Net of Tax 1,968 (1,077)
-----------------------
Comprehensive Income $18,585 $15,514
========================
See notes to consolidated financial statements.
5
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Dec. 31, Sept. 30, Dec. 31,
2004 2004 2003
---- ---- ----
(Thousands)
ASSETS
Utility Plant $1,080,755 $1,070,522 $1,039,472
Less: Accumulated depreciation and amortization 427,484 423,647 412,926
---------- ---------- ----------
Net Utility Plant 653,271 646,875 626,546
---------- ---------- ----------
Goodwill 28,124 28,124 28,124
---------- ---------- ----------
Other Property and Investments 48,158 46,082 46,640
---------- ---------- ----------
Current Assets:
Cash and cash equivalents 23,641 13,854 22,245
Accounts receivable:
Gas Customers - billed and unbilled 178,286 76,223 144,286
Other 73,349 51,822 55,752
Allowances for doubtful accounts (8,414) (10,362) (5,832)
Inventories:
Natural gas stored underground at LIFO cost 120,502 131,773 112,620
Propane gas at FIFO cost 20,060 15,808 17,027
Materials, supplies, and merchandise at avg. cost 5,254 4,714 4,968
Derivative instrument assets 9,407 16,857 13,048
Unamortized purchased gas adjustments 15,836 19,618 -
Deferred income taxes 12,296 1,321 6,307
Prepayments and other 14,786 16,008 7,372
---------- ---------- ----------
Total Current Assets 465,003 337,636 377,793
---------- ---------- ----------
Deferred Charges:
Prepaid pension cost 89,659 92,026 107,117
Regulatory assets 109,410 104,703 93,225
Other 11,598 9,849 7,337
---------- ---------- ----------
Total Deferred Charges 210,667 206,578 207,679
---------- ---------- ----------
Total Assets $1,405,223 $1,265,295 $1,286,782
========== ========== ==========
See notes to consolidated financial statements.
6
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
Dec. 31, Sept. 30, Dec. 31,
2004 2004 2003
---- ---- ----
(Thousands, except share amounts)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (70,000,000 shares authorized, 21,024,482,
20,981,165 and 19,118,229 shares issued, respectively) $ 21,024 $ 20,981 $ 19,118
Paid-in capital 117,172 116,058 69,423
Retained earnings 229,951 220,483 221,797
Accumulated other comprehensive income (loss) 361 (1,607) (1,157)
---------- ---------- ----------
Total common stock equity 368,508 355,915 309,181
Redeemable preferred stock (less current sinking fund
requirements) - Laclede Gas 1,108 1,108 1,258
Long-term debt to unconsolidated affiliate trust 46,400 46,400 46,400
Long-term debt (less current portion) - Laclede Gas 333,962 333,936 234,643
---------- ---------- ----------
Total Capitalization 749,978 737,359 591,482
---------- ---------- ----------
Current Liabilities:
Notes payable 177,300 71,380 265,585
Accounts payable 129,763 68,366 89,408
Advance customer billings 21,195 23,620 12,287
Current portion of long-term debt and preferred stock 145 25,145 25,000
Wages and compensation accrued 15,302 15,596 13,514
Dividends payable 7,251 7,214 6,463
Customer deposits 11,170 10,661 8,291
Interest Accrued 5,625 10,920 4,555
Taxes accrued 20,528 16,725 17,389
Unamortized purchased gas adjustment - - 3,017
Other 12,638 13,003 9,696
---------- ---------- ----------
Total Current Liabilities 400,917 262,630 455,205
---------- ---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 203,870 189,626 182,018
Unamortized investment tax credits 4,944 5,010 5,240
Pension and postretirement benefit costs 20,355 20,484 22,814
Regulatory liabilities 2,725 28,210 6,375
Other 22,434 21,976 23,648
---------- ---------- ----------
Total Deferred Credits and Other Liabilities 254,328 265,306 240,095
---------- ---------- ----------
Total Capitalization and Liabilities $1,405,223 $1,265,295 $1,286,782
========== ========== ==========
See notes to consolidated financial statements.
7
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
Three Months Ended
December 31,
--------------------------
2004 2003
---- ----
(Thousands)
Operating Activities:
Net Income $ 16,632 $ 16,607
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 6,094 6,555
Deferred income taxes and investment
tax credits (1,179) 656
Other - net 77 54
Changes in assets and liabilities:
Accounts receivable - net (125,538) (89,872)
Unamortized purchased gas adjustments 3,782 (2,848)
Deferred purchased gas costs (26,082) 19,588
Advance customer billings - net (2,425) (3,074)
Accounts payable 61,397 23,407
Taxes accrued 3,803 4,178
Natural gas stored underground 11,271 4,611
Other assets and liabilities 1,695 5,699
--------- --------
Net cash used in operating activities $ (50,473) $(14,439)
--------- --------
Investing Activities:
Construction expenditures (12,721) (11,372)
Employee benefit trusts (2,503) (1,439)
Other investments 556 228
--------- --------
Net cash used in investing activities $ (14,668) $(12,583)
--------- --------
Financing Activities:
Maturity of first mortgage bonds (25,000) -
Issuance of short-term debt - net 105,920 47,385
Dividends paid (7,149) (6,408)
Issuance of common stock 1,157 999
--------- --------
Net cash provided by financing activities $ 74,928 $ 41,976
--------- --------
Net Increase in Cash and Cash Equivalents $ 9,787 $ 14,954
Cash and Cash Equivalents at Beginning of Period 13,854 7,291
--------- --------
Cash and Cash Equivalents at End of Period $ 23,641 $ 22,245
========= ========
Supplemental Disclosure of Cash Paid (Refunded)
During the Period for:
Interest $ 13,020 $ 9,332
Income taxes (29) -
See notes to consolidated financial statements.
8
THE LACLEDE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These notes are an integral part of the accompanying consolidated
financial statements of The Laclede Group, Inc. (Laclede Group or the
Company) and its subsidiaries. In the opinion of Laclede Group, this interim
report includes all adjustments (consisting of only normal recurring
accruals) necessary for the fair presentation of the results of operations
for the periods presented. Certain prior-period amounts have been
reclassified to conform to current-period presentation. This Form 10-Q
should be read in conjunction with the Notes to Consolidated Financial
Statements contained in the Company's Fiscal Year 2004 Form 10-K.
The consolidated financial position, results of operations and cash
flows of Laclede Group are comprised primarily from the consolidated
financial position, results of operations and cash flows of Laclede Gas
Company (Laclede Gas or the Utility). Laclede Gas is a regulated natural gas
distribution utility having a material seasonal cycle. As a result, these
interim statements of income for Laclede Group are not necessarily
indicative of annual results or representative of the succeeding quarter of
the fiscal year. Due to the seasonal nature of the business of Laclede Gas,
earnings are typically concentrated in the November through April period,
which generally corresponds with the heating season. The Utility typically
experiences losses during the non-heating season. The seasonal effect of the
Utility's earnings on Laclede Group is generally expected to be tempered
somewhat by the results of SM&P Utility Resources, Inc. (SM&P), a
non-regulated underground facility locating and marking service business,
whose operations tend to be counter-seasonal to those of Laclede Gas.
REVENUE RECOGNITION - Laclede Gas reads meters and bills its
customers on a monthly cycle billing basis. The Utility records its
regulated gas distribution revenues from gas sales and transportation
service on an accrual basis that includes estimated amounts for gas
delivered, but not yet billed. The accruals for unbilled revenues are
reversed in the subsequent accounting period when meters are actually read
and customers are billed. The amount of accrued unbilled revenues at
December 31, 2004 and 2003, for the Utility, were $60.9 million and $38.3
million, respectively. After accrual of related gas cost expense, the
accrued pre-tax net revenues at December 31, 2004 and 2003 were $10.2
million and $8.8 million, respectively. The amount of accrued unbilled
revenue at September 30, 2004 was $8.8 million.
STOCK-BASED COMPENSATION - The Laclede Group Equity Incentive Plan
was approved at the annual meeting of shareholders of Laclede Group on
January 30, 2003. The purpose of the Equity Incentive Plan is to provide a
competitive compensation program and to attract and retain those executive
and other key employees essential to achieve the Company's strategic
objectives. To accomplish this purpose, the Compensation Committee of the
board of directors may grant awards under the Equity Incentive Plan that may
be earned by achieving performance objectives and/or other criteria as
determined by the Compensation Committee. Under the terms of the Equity
Incentive Plan, key employees of the Company and its subsidiaries, as
determined at the sole discretion of the administrator, will be eligible to
receive (a) restricted shares of common stock, (b) performance awards, (c)
stock options exercisable into shares of common stock, (d) stock
appreciation rights, and (e) stock units, as well as any other stock-based
awards not inconsistent with the Equity Incentive Plan. Each award under the
Equity Incentive Plan shall have a minimum vesting period of at least one
year. The total number of shares that may be issued pursuant to awards under
the Equity Incentive Plan may not exceed 1,250,000.
During the quarter ended December 31, 2004, the Company granted
234,000 non-qualified stock options to employees at an exercise price of
$30.95 per share. The stock options vest one-fourth each year for four years
after the date of the grant beginning November 4, 2005. The Company accounts
for the Equity Incentive Plan under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. No compensation
expense has been recognized in net income, as all options granted under the
Equity Incentive Plan had an exercise price equal to the market value of the
Company's stock on the date of the grant.
9
Stock option activity for the quarter ended December 31, 2004 is
presented below:
Weighted Average
Shares Exercise Price
------- ----------------
Outstanding at September 30, 2004 393,200 $26.43
Granted 234,000 $30.95
Exercised (9,450) $25.34
Forfeited (1,750) $26.46
Outstanding at December 31, 2004 616,000 $28.17
Exercisable at December 31, 2004 63,250 $27.86
Exercise prices of options outstanding at December 31, 2004 range
from $23.27 to $30.95. The weighted-average contractual life of these
options is 9.0 years. The closing price of the Company's common stock was
$31.15 at December 31, 2004.
If compensation expense had been determined based on the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have
been reduced to the amounts shown in the following table. The
weighted-average fair value of options granted during the quarter ended
December 31, 2004 is $6.73 per option. The estimated fair value of options
would be amortized to expense over the options' vesting period and
restricted stock would be expensed on the grant date.
Three Months Ended
December 31,
----------------------
2004 2003
---- ----
(Thousands, Except Per Share Amounts)
Net income applicable to
common stock, as reported $16,617 $16,591
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of tax effects 122 92
----------------------
Pro forma net income applicable
to common stock $16,495 $16,499
======================
Earnings per share:
Basic - as reported $.79 $.87
Diluted - as reported $.79 $.87
Basic - pro forma $.78 $.86
Diluted - pro forma $.78 $.86
The fair value of the options granted during the quarter ended
December 31, 2004 was estimated at the date of grant using the Black-Scholes
option pricing model with the following assumptions:
Three Months Ended
December 31,
2004
------------------
Risk free interest rate 4.10%
Expected dividend yield of stock 4.40%
Expected volatility of stock 25.00%
Expected life of option 96 months
NEW ACCOUNTING STANDARDS - In November 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 151, "Inventory Costs." This Statement amends the
guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, "Inventory
Pricing," to clarify the
10
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material. The provisions of this statement shall be
effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The Company does not expect adoption of this statement to
have a material effect on the financial position or results of operations of
the Company.
In December 2004, the FASB issued SFAS No. 123 (revised 2004)
(123(R)), "Accounting for Stock-Based Compensation." This Statement is a
revision to SFAS No. 123, and establishes standards for the accounting for
transactions in which an entity obtains employee services in share-based
payment transactions. This Statement supersedes Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and its
related implementation guidance. The Company currently accounts for its
Equity Incentive Plan in accordance with APB Opinion No. 25, and provides
pro forma disclosures in the Notes to Consolidated Financial Statements
regarding the effect on net income and earnings as if compensation expense
had been determined based on the fair value recognition provisions of SFAS
No. 123. SFAS No. 123(R) is effective for public entities that do not file
as small business issuers as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. The Company is currently
evaluating the provisions of this Statement and will adopt this Statement no
later than the fourth quarter of fiscal 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets." This Statement is an amendment of APB Opinion No. 29,
"Accounting for Nonmonetary Transactions." The guidance in APB Opinion No.
29 is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. This statement
amends APB Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. The provisions of this Statement will be effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The Company does not expect adoption of this statement to have a
material effect on the financial position or results of operations of the
Company.
2. EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires dual presentation of
basic and diluted earnings per share (EPS). Basic EPS does not include
potentially dilutive securities and is computed by dividing net income
applicable to common stock by the weighted-average number of common shares
outstanding during the period. Diluted EPS assumes the issuance of common
shares pursuant to the Company's stock-based compensation plan and the
vesting of non-vested stock awards at the beginning of each respective
period. There were no stock options outstanding that were anti-dilutive at
December 31, 2004 and 2003.
Three Months Ended
December 31,
----------------------
(Thousands, Except Per Share Amounts) 2004 2003
---- ----
Basic EPS:
Net Income Applicable to Common Stock $16,617 $16,591
Weighted-Average Shares Outstanding 21,018 19,116
Earnings Per Share of Common
Stock $.79 $.87
Diluted EPS:
Net Income Applicable to Common Stock $16,617 $16,591
Weighted-Average Shares Outstanding 21,018 19,116
Dilutive Effect of Employee Stock Options 35 24
----------------------
Weighted-Average Diluted Shares 21,053 19,140
======================
Earnings Per Share of Common
Stock $.79 $.87
11
3. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Laclede Gas has non-contributory defined benefit, trusteed forms of
pension plans covering substantially all employees over the age of
twenty-one. Benefits are based on years of service and the employee's
compensation during the last three years of employment.
The funding policy of Laclede Gas is to contribute an amount not
less than the minimum required by government funding standards, nor more
than the maximum deductible amount for federal income tax purposes. Plan
assets consist primarily of corporate and U.S. government obligations and
pooled equity funds.
Pension costs for the quarters ending December 31, 2004 and 2003
were $1.1 million. These costs include amounts capitalized with construction
activities.
The net periodic pension costs include the following components:
Three Months Ended
December 31,
----------------------
(Thousands) 2004 2003
---- ----
Service cost - benefits earned
during the period $ 2,799 $ 2,777
Interest cost on projected
benefit obligation 3,994 4,058
Expected return on plan assets (5,291) (5,625)
Amortization of prior service cost 309 331
Amortization of actuarial loss 730 951
Regulatory adjustment (1,409) (1,369)
----------------------
Net pension cost $ 1,132 $ 1,123
======================
Pursuant to the Missouri Public Service Commission's (MoPSC or
Commission) Order in Laclede Gas' 2002 rate case, the return on plan assets
is based on market-related value of plan assets implemented prospectively
over a four-year period. Unrecognized gains or losses are amortized only to
the extent that such gains or losses exceed 10% of the greater of the
projected benefit obligation or the market-related value of plan assets.
Such excess is amortized over the average remaining service life of active
participants. Also in the 2002 rate case, the Commission ordered that the
recovery in rates for the Utility's qualified pension plans is based on the
ERISA minimum contribution of zero effective October 1, 2002, and on the
ERISA minimum contribution of zero plus $3.4 million annually effective July
1, 2003. The difference between this amount on a pro-rata basis and pension
expense as calculated pursuant to the above and included in the Statements
of Consolidated Income and Consolidated Comprehensive Income is deferred as
a regulatory asset or liability.
Pursuant to the provisions of the Laclede Gas pension plans,
pension obligations may be satisfied by lump sum cash payments. Pursuant to
MoPSC order, lump sum payments are recognized as settlements (which can
result in gains or losses) only if the total of such payments exceeds 100%
of the sum of service and interest costs. No lump sum payments were
recognized as settlements during the three months ended December 31, 2004 or
the three months ended December 31, 2003.
SM&P maintains a defined benefit plan for selected employees. The
plan is a non-qualified plan and therefore has no assets held in trust. Net
pension cost related to the plan is not material.
Laclede Gas also provides certain life insurance benefits at
retirement. Medical insurance is available after early retirement until age 65.
Missouri state law provides for the recovery in rates of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions"
(OPEB), accrued costs provided that such costs are funded through an
independent, external funding mechanism. Laclede Gas established the
Voluntary Employees' Beneficiary Association (VEBA) and Rabbi trusts as its
external funding mechanisms. VEBA and Rabbi trusts assets consist primarily
of money market securities and mutual funds invested in stocks and bonds.
Postretirement benefit costs for quarters ending December 31, 2004
and 2003 were $2.0 million. These costs include amounts capitalized with
construction activities.
12
Net periodic postretirement benefit costs consisted of the
following components:
Three Months Ended
December 31,
--------------------
(Thousands) 2004 2003
---- ----
Service cost - benefits earned
during the period $ 845 $ 794
Interest cost on accumulated
postretirement benefit obligation 826 801
Expected return on plan assets (319) (209)
Amortization of transition obligation 145 265
Amortization of prior service cost (8) (8)
Amortization of actuarial loss 217 174
Regulatory adjustment 295 164
---------------------
Net postretirement benefit cost $2,001 $1,981
=====================
Pursuant to the Commission's Order in the Utility's 2002 rate case,
the return on plan assets is based on market related value of plan assets
implemented prospectively over a four-year period. Unrecognized gains and
losses are amortized only to the extent that such gains or losses exceed 10%
of the greater of the accumulated postretirement benefit obligation or the
market-related value of plan assets. Such excess is amortized over the
average remaining service life of active participants. Also in the 2002 rate
case, the Commission ordered that the recovery in rates for the
postretirement benefit costs be based on the accounting methodology as
ordered in the 1999 rate case. The difference between this amount and
postretirement benefit expense as calculated pursuant to the above is
deferred as a regulatory asset or liability.
4. FINANCIAL INSTRUMENTS
In the course of its business, Laclede Energy Resources (LER)
enters into fixed price commitments associated with the purchase or sale of
natural gas. LER manages the price risk associated with these commitments by
either closely matching the offsetting physical purchase or sale of natural
gas at fixed prices or through the use of exchange-traded futures contracts
to lock in margins. At December 31, 2004, LER's open positions were not
material to Laclede Group's financial position or results of operations.
Settled and open future positions were as follows at December 31,
2004:
Average
MMBtu Price per
Position Month (millions) MMBtu
-------------- ---------- -----
Settled net long and short futures positions January 2005 .26 $6.83
Open short futures positions February 2005 .14 $5.90
April 2005 1.04 $6.17
May 2005 .48 $6.07
June 2005 .04 $6.57
July 2005 .04 $6.59
August 2005 .04 $6.63
September 2005 .04 $6.60
October 2005 .04 $6.62
Open long futures positions September 2005 .14 $5.05
The above futures contracts are derivative instruments and
management has designated these items as cash flow hedges of forecasted
transactions. The fair values of the instruments are recognized on the
Consolidated Balance Sheets. The change in the fair value of the effective
portion of these hedge instruments is recorded, net of tax, in Other
Comprehensive Income, a component of Common Stock Equity. These amounts will
reduce or be charged to Non-Regulated Gas Marketing Operating Revenues or
Expenses in the Statements of Consolidated Income as the transactions occur.
It is expected that approximately $1.2 million of pre-tax net unrealized
gains on cash flow hedging derivative instruments at December 31, 2004 will
be reclassified into the Consolidated Statement of Income
13
during fiscal 2005. The ineffective portions of these hedge instruments were
immaterial for the periods presented, and such amounts are charged to
Non-Regulated Gas Marketing Operating Revenues or Expenses. Cash flows from
hedging transactions are classified in the same category as the cash flows
from the items that are being hedged in the Statements of Consolidated Cash
Flows.
5. INCOME TAXES
Net provision for income taxes was as follows during the periods
set forth below:
Three Months Ended
December 31,
---------------------
(Thousands) 2004 2003
---- ----
Federal
Current $8,826 $6,932
Deferred (930) 1,161
State and Local
Current 1,489 1,188
Deferred (249) 173
---------------------
Total $9,136 $9,454
=====================
6. OTHER INCOME AND INCOME DEDUCTIONS - NET
Three Months Ended
December 31,
---------------------
(Thousands) 2004 2003
---- ----
Allowance for funds used during construction $ (25) $ (32)
Other income 565 556
Other income deductions 1,034 935
---------------------
Other income and (income deductions) - net $1,574 $1,459
=====================
7. INFORMATION BY OPERATING SEGMENT
The Regulated Gas Distribution segment consists of the regulated
operations of Laclede Gas and is the core business segment of Laclede Group.
The Non-Regulated Services segment includes the results of SM&P, an
underground facility locating and marking business operating in the
midwestern states, a wholly owned subsidiary of Laclede Group. The
underground facility locating industry remains competitive with many
contracts subject to termination on as little as 30 days' notice. Also,
SM&P's customers are primarily in the utility and telecommunication sector
with their workload influenced by construction trends. The Non-Regulated Gas
Marketing segment includes the results of LER, a wholly owned subsidiary of
Laclede Group. Non-Regulated Other includes the transportation of liquid
propane, real estate development, the compression of natural gas, the sale
of insurance-related products, and financial investments in other
enterprises. These operations are conducted through five wholly owned
subsidiaries. Certain intersegment revenues with Laclede Gas are not
eliminated in accordance with the provisions of SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation."
14
Non-
Regulated Non- Regulated Non-
Gas Regulated Gas Regulated
(Thousands) Distribution Services Marketing Other Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended
December 31, 2004
- -----------------
Revenues from external
customers $ 288,297 $27,923 $109,998 $ 704 $ - $ 426,922
Intersegment revenues 2,956 63 8,181 4,363 - 15,563
--------------------------------------------------------------------------------
Total operating revenues 291,253 27,986 118,179 5,067 - 442,485
Net income (loss) applicable to
common stock 15,087 143 1,434 (47) - 16,617
Total assets 1,265,932 59,346 61,011 49,329 (30,395) 1,405,223
Three Months Ended
December 31, 2003
- -----------------
Revenues from external
customers $ 260,542 $19,483 $ 46,480 $ 809 $ - $ 327,314
Intersegment revenues 808 65 4,503 (53) - 5,323
--------------------------------------------------------------------------------
Total operating revenues 261,350 19,548 50,983 756 - 332,637
Net income (loss) applicable to
common stock 17,324 (1,025) 411 (119) - 16,591
Total assets 1,194,498 56,314 27,555 53,549 (45,134) 1,286,782
8. COMMITMENTS AND CONTINGENCIES
Laclede Gas owns and operates natural gas distribution,
transmission and storage facilities, the operations of which are subject to
various environmental laws, regulations and interpretations. While
environmental issues resulting from such operations arise in the ordinary
course of business, such issues have not materially affected the Company's
or Laclede Gas' financial position and results of operations. As
environmental laws, regulations, and their interpretations evolve, however,
Laclede Gas may be required to incur additional costs.
With regard to a former manufactured gas plant site located in
Shrewsbury, Missouri, Laclede Gas and state and federal environmental
regulators have agreed upon certain remedial actions and those actions are
essentially complete. Laclede Gas currently estimates the overall costs of
these actions will be approximately $2.4 million. As of December 31, 2004,
Laclede Gas has paid or reserved for these actions. If regulators require
additional remedial actions or assert additional claims, Laclede Gas will
incur additional costs.
Laclede Gas enrolled a second former manufactured gas plant site
into the Missouri Voluntary Cleanup Program (VCP). The VCP provides
opportunities to minimize the scope and cost of site cleanup while
maximizing possibilities for site development. This site is located in, and
is presently owned by, the City of St. Louis, Missouri. Laclede Gas
continues to evaluate options concerning this site, including, but not
limited to, the submission of its own Remedial Action Plan (RAP) to the VCP.
Laclede Gas currently estimates that the cost of site investigations, agency
oversight and related legal and engineering consulting may be approximately
$650,000. Currently, Laclede Gas has paid or reserved for these actions.
Laclede Gas has requested that other former site owners and operators share
in these costs and one party has agreed to participate and has reimbursed
Laclede Gas to date for $173,000. Laclede Gas anticipates additional
reimbursement from this party. Laclede Gas plans to seek proportionate
reimbursement of all costs relative to this site from other potentially
responsible parties to the extent practicable.
Laclede Gas has been advised that a third former manufactured gas
plant site may require remediation. Laclede Gas does not, and for many years
has not, owned this site. At this time, it is not known whether Laclede Gas
will incur any costs in connection with environmental investigations of or
remediation at the site, and if it does incur any such costs, what the
amount of those costs would be.
Costs incurred are charged to expense or capitalized in accordance
with generally accepted accounting principles. A predetermined level of
expense is recovered through Laclede Gas' rates. While the scope of future
costs relative to the actions Laclede Gas has taken at the Shrewsbury site
pursuant to the current agreement with state and federal regulators may not
be significant, the scope of costs relative to future remedial actions
regulators may require at the Shrewsbury site and to the other sites is
unknown and may be material.
Laclede Gas has notified its insurers that it seeks reimbursement
of its costs at these three manufactured gas plant sites. In response, the
majority of insurers have reserved their rights. While some of the insurers
have denied coverage, Laclede Gas continues to seek reimbursement from them.
With regard to costs incurred under current agreement regarding the
Shrewsbury site, denials of coverage are not expected to have a material
impact on the financial position and results of operations of Laclede Gas or
the Company. With regard to the other two sites and with regard to any
future actions that might be required at the Shrewsbury site, since the
scope of costs are unknown
15
and may be significant, denials of coverage may have a material impact on
the financial position and results of operations of Laclede Gas or the
Company. Such costs, if incurred, have typically been subject to recovery in
rates.
On June 28, 2002, the Staff of the MoPSC filed its recommendation
in a proceeding established to review Laclede Gas' gas costs for fiscal
2001. In its recommendation, the Staff proposed to disallow approximately
$4.9 million in pre-tax gains achieved by Laclede Gas in its incentive-based
Price Stabilization Program. This Program was discontinued at the end of the
2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in
proceedings before the MoPSC, including a formal hearing that was held on
this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC
decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved
by Laclede Gas, and directed Laclede Gas to flow through such amount to its
customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas
appealed the MoPSC's decision to the Cole County Circuit Court. On October
10, 2003, the Circuit Court issued an order staying the MoPSC's decision
requiring Laclede Gas to flow through the $4.9 million to customers.
Pursuant to the Stay Order, Laclede Gas has paid $4.9 million into the
Court's registry pending a final judicial determination of Laclede Gas'
entitlement to such amounts. On November 5, 2003, the Circuit Court of Cole
County, Missouri, issued its Order and Judgment vacating and setting aside
the Commission's decision on the grounds that it was unlawful and not
supported by competent and substantial evidence on the record. On December
5, 2003, the MoPSC appealed the Circuit Court's decision to the Missouri
Court of Appeals for the Western District. Oral arguments were held in the
Missouri Court of Appeals for the Western District on August 17, 2004. The
Utility is now awaiting the court's decision. The Utility continues to
believe in the merits of its position and intends, if necessary, to assert
its position vigorously throughout the appellate process. However, to the
extent that a final decision in the courts results in disallowance of the
$4.9 million in pre-tax gains, it could have a material effect on the future
financial position or results of operations of the Company.
SM&P has been the subject of certain employment-related claims
arising out of a practice of SM&P that predated Laclede Group's acquisition.
The claims involve whether certain pre- and post-work activities and
commuting time for non-supervisory field employees constitute hours worked
for purposes of federal and state wage and hour laws. These claims have been
asserted in various proceedings, including one "opt-in" collective action
filed in March 2003 in Federal District Court for the Eastern District of
Texas. As a result of a ruling on February 27, 2004 in that proceeding,
approximately 3,500 present and former field employees who worked for SM&P
at times since February 27, 2001, were given notice of the lawsuit and the
opportunity, until June 7, 2004, to join the lawsuit and assert claims for
additional overtime compensation for the three-year period immediately
preceding the date that they joined the lawsuit. Of the employees to whom
notice was sent, 966 joined this lawsuit within the opt-in deadline
established by the court. The substantial majority of the plaintiffs are
former employees. A limited number of individuals have attempted to opt-in
after the court's deadline, while simultaneously, a limited number of
plaintiffs have withdrawn from participation after having opted into the
lawsuit. SM&P is vigorously contesting these claims, including opposition to
this case ultimately proceeding as a collective action. While the results of
the claims cannot be predicted with certainty, management, after discussion
with counsel, believes that the final outcome will not have a material
adverse effect on the consolidated financial position and results of
operations of the Company.
Laclede Group and its subsidiaries are involved in other
litigation, claims and investigations arising in the normal course of
business. While the results of such litigation cannot be predicted with
certainty, management, after discussion with counsel, believes that the
final outcome will not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
SM&P has several operating leases, the aggregate annual cost of
which is approximately $5 million, consisting primarily of 12-month
operating leases, with renewal options, for vehicles used in its business.
Upon acquisition of SM&P, Laclede Group assumed parental guarantees of
certain of those vehicle leases. Laclede Group anticipates that the maximum
guarantees will not exceed $12 million. No amounts have been recorded for
these guarantees in the financial statements.
Laclede Group had guarantees totaling $10 million for performance
and payment of certain wholesale gas supply purchases by Laclede Energy
Resources, Inc. (the Company's non-utility marketing affiliate), as of
December 31, 2004. Laclede Group issued an additional $1.0 million guarantee
in January 2005 on behalf of LER.
Laclede Gas Company's Financial Statements and Notes to Financial
Statements are included in Exhibit 99.1 to this report.
16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THE LACLEDE GROUP, INC.
- -----------------------
This management's discussion analyzes the financial condition and results of
operations of The Laclede Group, Inc. (Laclede Group or the Company) and its
subsidiaries. It includes management's view of factors that affect its
business, explanations of past financial results including changes in
earnings and costs from the prior year periods, and their effects on overall
financial condition and liquidity.
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Certain words, such as "anticipate,"
"believe," "estimate," "expect," "intend," "plan," "seek," and similar words
and expressions identify forward-looking statements that involve
uncertainties and risks. Future developments may not be in accordance with
our expectations or beliefs and the effect of future developments may not be
those anticipated. Among the factors that may cause results to differ
materially from those contemplated in any forward-looking statement are:
o weather conditions and catastrophic events;
o economic, competitive, political and regulatory conditions;
o legislative, regulatory and judicial mandates and decisions, some
of which may be retroactive, including those affecting
o allowed rates of return
o incentive regulation
o industry structure
o purchased gas adjustment provisions
o rate design structure and implementation
o franchise renewals
o environmental or safety matters
o taxes
o accounting standards;
o the results of litigation;
o retention, ability to attract, ability to collect from and
conservation efforts of customers;
o capital and energy commodity market conditions including the ability
to obtain funds for necessary capital expenditures and the terms and
conditions imposed for obtaining sufficient gas supply;
o discovery of material weakness in internal controls; and
o employee workforce issues.
Readers are urged to consider the risks, uncertainties and other factors
that could affect our business as described in this report. All
forward-looking statements made in this report rely upon the safe harbor
protections provided under the Private Securities Litigation Reform Act of
1995. We do not, by including this statement, assume any obligation to
review or revise any particular forward-looking statement in light of future
events.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto.
17
THE LACLEDE GROUP, INC.
RESULTS OF OPERATIONS
The Laclede Group, Inc.'s (Laclede Group or the Company) earnings are
primarily derived from the regulated activities of its largest subsidiary,
Laclede Gas Company (Laclede Gas or the Utility), Missouri's largest natural
gas distribution company. Laclede Gas is regulated by the Missouri Public
Service Commission (MoPSC or Commission) and serves the metropolitan St.
Louis area and several other counties in eastern Missouri. Laclede Gas
delivers natural gas to retail customers at rates, and in accordance with
tariffs, authorized by the MoPSC. The Utility's earnings are generated
primarily by the sale of heating energy, which historically has been heavily
influenced by the weather. However, as part of the 2002 rate case
settlement, the Utility initiated, effective November 9, 2002, an innovative
weather mitigation rate design that lessens the impact of weather volatility
on Laclede Gas customers during cold winters and is expected to stabilize
the Utility's earnings in the future by recovering fixed costs more evenly
during the heating season. The weather mitigation rate design minimizes the
impact of weather volatility during the peak cold months of December through
March and reduces the impact of weather volatility, to a lesser extent,
during the months of November and April. Due to the seasonal nature of the
business of Laclede Gas, earnings are typically concentrated in the November
through April period, which generally corresponds with the heating season.
The Utility typically experiences losses during the non-heating season. Due
to the material seasonal cycle of Laclede Gas, the accompanying interim
statements of income for Laclede Group are not necessarily indicative of
annual results or representative of the succeeding quarters of the fiscal
year. The seasonal effect of the Utility's earnings on Laclede Group is
generally expected to be tempered somewhat by the results of SM&P Utility
Resources, Inc. (SM&P), a non-regulated underground facility locating and
marking service business wholly owned by Laclede Group, whose operations
tend to be counter-seasonal to those of Laclede Gas. Laclede Energy
Resources, Inc. (LER), a wholly owned subsidiary, is engaged in
non-regulated efforts to market natural gas and related activities. Other
non-regulated subsidiaries provide less than 10% of consolidated revenues.
Laclede Group's strategy continues to include efforts to stabilize and
improve the performance of its core Utility, while developing non-regulated
businesses and taking a measured approach in the pursuit of additional
growth opportunities that complement the Utility business.
As for the Utility, mitigating the impact of weather fluctuations on Laclede
Gas customers while improving the ability to recover its authorized
distribution costs and return continues to be a fundamental component of the
Laclede Group strategy. The Utility's distribution costs are the essential,
primarily fixed expenditures it must incur to operate and maintain a more
than 15,000-mile natural gas distribution system and related storage
facilities. The Utility's income from off system sales remains subject to
fluctuations in market conditions. In addition, Laclede Gas is working to
continually improve its ability to provide reliable natural gas service at a
reasonable cost, while maintaining and building a secure and dependable
infrastructure.
Laclede Group continues to develop its non-regulated subsidiaries. SM&P is
working to further the logical expansion of its geographic footprint into
new markets, having already made notable gains by adding business in several
key markets. LER continues to focus on growing its markets on a long-term
and sustainable basis by providing both on system Utility transportation
customers and customers outside of Laclede Gas' traditional service area
with another choice in unregulated natural gas suppliers. Nevertheless,
income from LER's operations is subject to fluctuations in market
conditions.
Quarter Ended December 31, 2004
- -------------------------------
Overview - Net Income (Loss) by Operating Segment Quarter Ended
December 31,
--------------------
(millions, after-tax) 2004 2003
---- ----
Regulated Gas Distribution $15.1 $17.3
Non-Regulated Services .1 (1.0)
Non-Regulated Gas Marketing 1.4 .4
Other Non-Regulated Subsidiaries - (.1)
--------------------
Net Income Applicable to Common Stock $16.6 $16.6
====================
18
Laclede Group's net income applicable to common stock was $16.6 million for
the quarter ended December 31, 2004, essentially the same as the quarter
ended December 31, 2003. Basic and diluted earnings per share were $.79 for
the quarter ended December 31, 2004, compared with $.87 per share reported
for the same quarter last year. The decrease in earnings per share was due
to an increase in the number of average shares outstanding this year,
primarily due to the sale of 1.725 million shares of common stock in May
2004. Variations in net income were primarily attributable to the following
factors described below.
Utility earnings decreased by $2.2 million for the quarter ended December
31, 2004 compared with the quarter ended December 31, 2003. Temperatures
experienced in the Utility's service area during the quarter were 15% warmer
than normal, but 3% colder than the same period last year. However, reduced
gas sales levels resulting from 21% warmer than normal weather in the month
of November contributed to lower earnings this quarter, despite being
tempered by the weather mitigation rate design. The decrease in the
Utility's earnings for the quarter was primarily attributable to the
following factors, quantified on a pre-tax basis:
o the net effect totaling $1.7 million of lower system gas sales
volumes primarily due to an unseasonably warm weather pattern in
November;
o lower income this year from off system sales and capacity release
totaling $1.2 million;
o higher interest charges totaling $1.0 million, primarily due to the
issuance of additional long-term debt; and,
o a higher provision for uncollectible accounts totaling $.5 million
above the same period last year.
These factors were partially offset by the recovery of eligible costs
incurred to build and maintain the Utility's distribution system through the
implementation of an Infrastructure System Replacement Surcharge effective
June 10, 2004 totaling $.9 million.
SM&P recorded earnings of $.1 million during the quarter ended December 31,
2004 compared with a loss for the same period last year totaling $1.0
million. SM&P's improved results were primarily due to the return of a
substantial portion of business from two large customers and the attainment
of additional business in both new and existing markets. SM&P's improvement
over the same period last year was also attributable in part to charges
recorded last year associated with the employment-related litigation
described in Note 8 to the Consolidated Financial Statements.
LER's income increased $1.0 million primarily due to higher sales volumes
and increased margins.
Regulated Operating Revenues and Operating Expenses
Laclede Gas passes on to Utility customers (subject to prudence review)
increases and decreases in the wholesale cost of natural gas in accordance
with its Purchased Gas Adjustment (PGA) clause. The volatility of the
wholesale natural gas market results in fluctuations from period to period
in the recorded levels of, among other items, revenues and natural gas cost
expense. Nevertheless, increases and decreases in the cost of gas associated
with system gas sales volumes have no direct effect on net revenues and net
income.
Regulated operating revenues for the quarter ended December 31, 2004 were
$291.3 million, or $29.9 million greater than the same period last year. The
increase was primarily attributable to higher PGA rates totaling $39.9
million, partially offset by decreased off system sales revenues totaling
$5.7 million and lower system gas sales levels and other variations totaling
$4.3 million. System therms sold and transported decreased by 6.8 million
therms, or 2.3%, below the quarter ended December 31, 2003.
Regulated operating expenses for the quarter ended December 31, 2004
increased $33.0 million from the same quarter last year. Natural and propane
gas expense increased $31.1 million from last year's level primarily
attributable to higher rates charged by our suppliers, partially offset by
lower volumes purchased for sendout and decreased off system gas cost
expense. Other operation and maintenance expenses increased $1.2 million, or
3.6%, primarily due to a higher provision for uncollectible accounts,
increased distribution charges and higher wage rates, partially offset by
lower pension costs and decreased group insurance charges. Taxes, other than
income, increased $1.0 million, or 6.7%, primarily due to higher gross
receipts taxes (reflecting increased revenues) and higher real estate and
personal property taxes.
Non-Regulated Services Operating Revenues and Operating Expenses
Laclede Group's non-regulated services operating revenue for this quarter
increased $8.4 million reflecting the return to SM&P of a substantial
portion of business from two large customers and the attainment of
additional business in both new and existing markets. The increase in
non-regulated services operating expenses, totaling $6.6 million, was
primarily attributable to charges associated with the new business,
partially offset by charges recorded during the
19
same quarter last year attributable to the employment-related litigation.
The underground facility locating industry remains competitive with many
contracts subject to termination on as little as 30 days' notice. SM&P's
customers are primarily in the utility and telecommunication sector with
their workload influenced by construction trends.
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-regulated gas marketing operating revenues increased $67.2 million
primarily due to increased sales volumes and higher sales prices by LER. The
increase in non-regulated gas marketing operating expenses, totaling $65.5
million, was primarily associated with increased gas expense related to
increased volumes purchased and higher prices.
Non-Regulated Other Operating Revenues and Operating Expenses
Non-regulated other operating revenues increased $4.3 million primarily due
to higher sales levels recorded by Laclede Pipeline Company. Non-regulated
other operating expenses increased $4.2 million primarily due to higher
expenses associated with increased sales levels recorded by Laclede Pipeline
Company.
Interest Charges
The $1.0 million increase in interest charges was primarily due to higher
interest on long-term debt due to the April 2004 issuance of $50 million of
5 1/2% First Mortgage Bonds and $100 million of 6% First Mortgage Bonds,
partially offset by the early redemption in June 2004 of $50 million of
6 5/8% First Mortgage Bonds and the November 2004 maturity of $25 million of
8 1/2% First Mortgage Bonds. This increase in interest on long-term debt was
partially offset by reduced interest on short-term debt, mainly attributable
to lower short-term borrowings.
Regulatory Matters
- ------------------
Laclede Gas previously appealed the MoPSC's decision in its 1999 rate case
relative to the calculation of its depreciation rates. The Circuit Court
remanded the decision to the MoPSC based on inadequate findings of fact. The
MoPSC upheld its previous order and Laclede Gas appealed this second order
to the Circuit Court. In 2002, the Circuit Court ruled that the MoPSC's
second order was lawful and reasonable, and Laclede Gas appealed the Circuit
Court's decision to the Missouri Court of Appeals for the Western District.
On March 4, 2003 the Court of Appeals issued an opinion remanding the
decision to the MoPSC based on the MoPSC's failure to support and explain
its decision with adequate findings of fact. In May 2003, the Court of
Appeals rejected the MoPSC's request that the Court reconsider its opinion
or transfer this matter to the Missouri Supreme Court. On January 11, 2005,
the Commission issued an Order ruling in favor of Laclede Gas on the
depreciation issue. As a direct result of the Commission's Order ruling in
favor of the Utility's position, Laclede Gas will increase certain of its
depreciation rates effective February 1, 2005 resulting in higher annual
depreciation expense totaling $2.3 million, as it originally requested. At
the same time, operating expenses related to actual removal costs, which the
Utility began expensing as incurred during fiscal 2002, will be reduced by
$2.3 million annually, as ordered by the Commission. As such, there will be
no effect on net income, and the Commission's decision will not have an
immediate effect on the Utility's recovery of depreciation expenses.
However, the Utility expects that the Commission's confirmation of Laclede
Gas' position on the proper method for calculating depreciation rates will
result in increased cash flows from capital recovery in future rate cases.
On June 28, 2002, the Staff of the MoPSC filed its recommendation in a
proceeding established to review Laclede Gas' gas costs for fiscal 2001. In
its recommendation, the Staff proposed to disallow approximately $4.9
million in pre-tax gains achieved by Laclede Gas in its incentive-based
Price Stabilization Program. This Program was discontinued at the end of the
2001-2002 heating season. Laclede Gas vigorously opposed the adjustment in
proceedings before the MoPSC, including a formal hearing that was held on
this matter in February 2003. Nevertheless, on April 29, 2003, the MoPSC
decided by a 3-2 vote to disallow the $4.9 million in pre-tax gains achieved
by Laclede Gas, and directed Laclede Gas to flow through such amount to its
customers in its November 2003 PGA filing. On June 19, 2003, Laclede Gas
appealed the MoPSC's decision to the Cole County Circuit Court. On October
10, 2003, the Circuit Court issued an order staying the MoPSC's decision
requiring Laclede Gas to flow through the $4.9 million to customers.
Pursuant to the Stay Order, Laclede Gas has paid $4.9 million into the
Court's registry pending a final judicial determination of Laclede Gas'
entitlement to such amounts. On November 5, 2003, the Circuit Court of Cole
County, Missouri, issued its Order and Judgment vacating and setting aside
the Commission's decision on the grounds that it was unlawful and not
supported by competent and substantial evidence on the record. On December
5, 2003, the MoPSC appealed the Circuit Court's decision to the Missouri
Court of Appeals for the Western District. Oral arguments were held in the
Missouri Court of Appeals for the Western District
20
on August 17, 2004. The Utility is now awaiting the court's decision. The
Utility continues to believe in the merits of its position and intends, if
necessary, to assert its position vigorously throughout the appellate
process. However, to the extent that a final decision in the courts results
in disallowance of the $4.9 million in pre-tax gains, it could have a
material effect on the future financial position or results of operations of
the Company.
Laclede Gas filed its first Infrastructure System Replacement Surcharge
(ISRS) filing with the MoPSC on March 1, 2004 to increase revenues by
approximately $3.86 million annually. The filing was made pursuant to a
Missouri law, enacted in 2003, that allows gas utilities to adjust their
rates up to twice a year to recover certain facility-related expenditures
that are made to comply with state and federal safety requirements or to
relocate facilities in connection with public improvement projects. On June
1, 2004, the MoPSC approved a Stipulation and Agreement ("S&A") between
Laclede Gas and the Staff of the Commission that provided for a $3.56
million annual surcharge effective June 10, 2004. Laclede Gas made its
second ISRS filing on October 28, 2004 to increase revenues by approximately
an additional $1.6 million annually. On January 4, 2005, the MoPSC approved
a S&A between Laclede Gas and the Staff of the Commission that provided for
a $1.42 million annual increase in ISRS revenues effective January 20, 2005.
Critical Accounting Policies
- ----------------------------
Our Discussion and Analysis of our financial condition, results of
operations, liquidity and capital resources is based upon our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. Generally
accepted accounting principles require that we make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
evaluate our estimates on an ongoing basis. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates. We believe the following represent the more significant
items requiring the use of judgment and estimates in preparing our
consolidated financial statements:
Allowances for doubtful accounts - Estimates of the collectibility
of trade accounts receivable are based on historical trends, age of
receivables, economic conditions, credit risk of specific
customers, and other factors.
Employee benefits and postretirement obligations - Pension and
postretirement obligations are calculated by actuarial consultants
that utilize several statistical factors and other assumptions
related to future events, such as discount rates, returns on plan
assets, compensation increases, and mortality rates. The amount of
expense recognized by the Utility is dependent on the regulatory
treatment provided for such costs. Certain liabilities related to
group medical benefits and workers' compensation claims, portions
of which are self-insured and/or contain "stop-loss" coverage with
third-party insurers to limit exposure, are established based on
historical trends.
Goodwill valuation - In accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets," goodwill is required to be tested for
impairment annually or whenever events or circumstances occur that
may reduce the value of goodwill. In performing impairment tests,
valuation techniques require the use of estimates with regard to
discounted future cash flows of operations, involving judgments
based on a broad range of information and historical results. If
the test indicates impairment has occurred, goodwill would be
reduced, adversely impacting earnings.
Laclede Gas accounts for its regulated operations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." This statement sets forth the
application of accounting principles generally accepted in the United States
of America for those companies whose rates are established by or are subject
to approval by an independent third-party regulator. The provisions of SFAS
No. 71 require, among other things, that financial statements of a regulated
enterprise reflect the actions of regulators, where appropriate. These
actions may result in the recognition of revenues and expenses in time
periods that are different than non-regulated enterprises. When this occurs,
costs are deferred as assets in the balance sheet (regulatory assets) and
recorded as expenses when those amounts are reflected in rates. Also,
regulators can impose liabilities upon a regulated company for amounts
previously collected from customers and for recovery of costs that are
expected to be incurred in the future (regulatory liabilities). Management
believes that the current regulatory environment supports the continued use
of SFAS No. 71 and that all regulatory assets and liabilities are
recoverable or refundable through
21
the regulatory process. We believe the following represent the more
significant items recorded through the application of SFAS No. 71:
The Utility's Purchased Gas Adjustment (PGA) Clause allows Laclede
Gas to flow through to customers, subject to prudence review, the
cost of purchased gas supplies, including the costs, cost
reductions and related carrying costs associated with the Utility's
use of natural gas financial instruments to hedge the purchase
price of natural gas. The difference between actual costs incurred
and costs recovered through the application of the PGA are recorded
as regulatory assets and liabilities that are recovered or refunded
in a subsequent period.
The Company records deferred tax liabilities and assets measured by
enacted tax rates for the net tax effect of all temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes, and the amounts used for income
tax purposes. Changes in enacted tax rates, if any, and certain
property basis differences will be reflected by entries to
regulatory asset or liability accounts for regulated companies, and
will be reflected as income or loss for non-regulated companies.
Also, pursuant to the direction of the MoPSC, Laclede Gas'
provision for income tax expense for financial reporting purposes
reflects an open-ended method of tax depreciation. This method is
consistent with the regulatory treatment prescribed by the MoPSC to
depreciate the Utility's assets.
For further discussion of significant accounting policies, see the Notes to
the Consolidated Financial Statements included in the Company's Form 10-K
for the fiscal year ended September 30, 2004.
Accounting Pronouncements
- -------------------------
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory
Costs." This Statement amends the guidance in Accounting Research Bulletin
(ARB) No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and
wasted material. The provisions of this statement shall be effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
The Company does not expect adoption of this statement to have a material
effect on the financial position or results of operations of the Company.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) (123(R)),
"Accounting for Stock-Based Compensation." This Statement is a revision to
SFAS No. 123, and establishes standards for the accounting for transactions
in which an entity obtains employee services in share-based payment
transactions. This Statement supersedes Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. The Company currently accounts for its Equity
Incentive Plan in accordance with APB Opinion No. 25, and provides pro forma
disclosures in the Notes to Consolidated Financial Statements regarding the
effect on net income and earnings as if compensation expense had been
determined based on the fair value recognition provisions of SFAS No. 123.
SFAS No. 123(R) is effective for public entities that do not file as small
business issuers as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. The Company is currently
evaluating the provisions of this Statement and will adopt this Statement no
later than the fourth quarter of fiscal 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets." This Statement is an amendment of APB Opinion No. 29, "Accounting
for Nonmonetary Transactions." The guidance in APB Opinion No. 29 is based
on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. This statement amends APB
Opinion No. 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. The
provisions of this Statement will be effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The
Company does not expect adoption of this statement to have a material effect
on the financial position or results of operations of the Company.
22
FINANCIAL CONDITION
Credit Ratings
- --------------
As of December 31, 2004, credit ratings for outstanding securities for
Laclede Group and Laclede Gas issues were as follows:
Type of Facility S&P Moody's Fitch
- -------------------------------------------------------------------------
Laclede Group Corporate Rating A
Laclede Gas First Mortgage Bonds A A3 A+
Laclede Gas Commercial Paper A-1 P-2
Trust Preferred Securities A- Baa3 BBB+
The Company has investment grade ratings, and believes that it will have
adequate access to the financial markets to meet its capital requirements.
These ratings remain subject to review and change by the rating agencies.
Cash Flows
- ----------
The Company's short-term borrowing requirements typically peak during colder
months when Laclede Gas borrows money to cover the gap between when it
purchases its natural gas and when its customers pay for that gas. Changes
in the wholesale cost of natural gas, variations in the timing of
collections of gas cost under the Utility's PGA Clause, the seasonality of
accounts receivable balances, and the utilization of storage gas inventories
cause short-term cash requirements to vary during the year, and can cause
significant variations in the Utility's cash provided by or used in
operating activities.
Net cash used in operating activities for the three months ended December
31, 2004 was $50.5 million, a $36.0 million increase, compared with the same
period last year. The increase in cash used in operating activities was
primarily attributable to the net effects of changes in wholesale gas
prices, increased sales volumes by LER, and lower Utility off system sales
on accounts receivable, accounts payable, and deferred purchased gas costs.
Net cash used in investing activities for the three months ended December
31, 2004 was $14.7 million compared with $12.6 million for the three months
ended December 31, 2003. Cash used in investing activities primarily
reflected Utility construction expenditures in both periods.
Net cash provided by financing activities was $74.9 million for the three
months ended December 31, 2004 compared with $42.0 million for the three
months ended December 31, 2003. The variation primarily reflects the
issuance of additional short-term debt this year, partially offset by the
November 2004 maturity of $25 million 8 1/2% First Mortgage Bonds.
Liquidity and Capital Resources
- -------------------------------
As indicated above, the Company's short-term borrowing requirements
typically peak during colder months. These short-term cash requirements have
traditionally been met through the sale of commercial paper supported by
lines of credit with banks.
Laclede Gas currently has lines of credit in place of $300 million, with $15
million expiring in April 2005 and $285 million expiring in September 2009.
Short-term commercial paper borrowings outstanding at December 31, 2004 were
$177.3 million (the peak for the quarter) at a weighted average interest
rate of 2.5% per annum. Based on short-term borrowings at December 31, 2004,
a change in interest rates of 100 basis points would increase or decrease
pre-tax earnings and cash flows by approximately $1.8 million on an annual
basis.
Most of Laclede Gas' lines of credit include covenants limiting total debt,
including short-term debt, to no more than 70% of total capitalization and
requiring earnings before interest, taxes, depreciation and amortization
(EBITDA) for a trailing twelve-month period to be at least 2.25 times
interest expense. On December 31, 2004, total debt was 60% of total
capitalization. For the twelve-months ending December 31, 2004, EBITDA was
3.55 times interest expense.
23
Laclede Gas has on file a shelf registration on Form S-3. Of the $350
million of securities originally registered under this Form S-3, $120
million of debt securities remained registered and unissued as of December
31, 2004. The original MoPSC authorization for issuing securities registered
on this Form S-3 expired in September 2003. In response to an application
filed by the Utility, the MoPSC extended this authorization to issue debt
and equity securities and receive capital contributions through October 31,
2006. The remaining MoPSC authorization is $64.4 million, reflecting capital
contributions that have been made by Laclede Group to Laclede Gas under this
authority through January 2005. The amount, timing and type of additional
financing to be issued under this shelf registration will depend on cash
requirements and market conditions.
In April 2004, Laclede Gas issued $50 million of First Mortgage Bonds,
5 1/2% Series due May 1, 2019 and $100 million of First Mortgage Bonds, 6%
Series, due May 1, 2034. The net proceeds of approximately $147.9 million
from this issuance were used to repay short-term debt and to call at par the
$50 million 6 5/8% Series First Mortgage Bonds in June 2004. The proceeds
were also used to pay at maturity $25 million of 8 1/2% First Mortgage Bonds
in November 2004. At December 31, 2004, Laclede Gas had fixed-rate long-term
debt totaling $335 million. While these long-term debt issues are
fixed-rate, they are subject to changes in fair value as market interest
rates change. However, increases or decreases in fair value would impact
earnings and cash flows only if Laclede Gas were to reacquire any of these
issues in the open market prior to maturity.
Laclede Group has on file a shelf registration on Form S-3, which allows for
the issuance of equity securities, other than preferred stock, and debt
securities. Of the $500 million of securities originally registered under
this Form S-3, $362.4 million remain registered and unissued as of December
31, 2004. Laclede Group issued 1.725 million shares of common stock in May
2004 under this registration. The net proceeds of approximately $44.7
million from this sale were used to make a capital contribution to Laclede
Gas. Laclede Gas used the contribution to reduce short-term borrowings and
for general corporate purposes. The amount, timing and type of additional
financing to be issued under this shelf registration will depend on cash
requirements and market conditions.
Short-term cash requirements outside of Laclede Gas have generally been met
with internally-generated funds. However, Laclede Group has a $20 million
working capital line of credit obtained from U.S. Bank National Association,
expiring in June 2005, to meet the short-term liquidity needs of its
subsidiaries. This line of credit has a covenant limiting the total debt of
Laclede Gas Company to no more than 70% of the Utility's total
capitalization (as noted above, this ratio stood at 60% on December 31,
2004). This line has been used to provide letters of credit of $1.2 million
on behalf of SM&P, which have not been drawn, and to provide for seasonal
funding needs of the various non-regulated subsidiaries from time to time.
There were no borrowings under this line in the quarter ending December 31,
2004.
SM&P has several operating leases, the aggregate annual cost of which is
approximately $5 million, consisting primarily of 12-month operating leases,
with renewal options, for vehicles used in its business. Upon acquisition of
SM&P, Laclede Group assumed parental guarantees of certain of those vehicle
leases. Laclede Group anticipates that the maximum guarantees related to
existing leases will not exceed $12 million. No amounts have been recorded
for these guarantees in the financial statements.
Laclede Group had guarantees totaling $10 million for performance and
payment of certain wholesale gas supply purchases by LER, as of December 31,
2004. Laclede Group issued an additional $1.0 million guarantee in January
2005 on behalf of LER.
Utility construction expenditures were $11.9 million for the three months
ended December 31, 2004, compared with $11.2 million for the same period
last year. Non-utility construction expenditures were $.8 million for the
three months ended December 31, 2004, compared with $.2 million for the same
period last year.
Consolidated capitalization at December 31, 2004, excluding current
obligations of preferred stock, consisted of 49.1% Laclede Group common
stock equity, .2% Laclede Gas preferred stock equity, 6.2% long-term debt to
unconsolidated affiliate trust and 44.5% Laclede Gas long-term debt.
It is management's view that the Company has adequate access to capital
markets and will have sufficient capital resources, both internal and
external, to meet anticipated capital requirements.
The seasonal nature of Laclede Gas' sales affects the comparison of certain
balance sheet items at December 31, 2004 and at September 30, 2004, such as
Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts
Payable, Regulatory Assets and Liabilities, and Advance Customer Billings.
The Consolidated Balance Sheet at
24
December 31, 2003 is presented to facilitate comparison of these items with
the corresponding interim period of the preceding fiscal year.
Contractual Obligations
- -----------------------
As of December 31, 2004, Laclede Group had contractual obligations with
payments due as summarized below (in millions):
Payments due by period
--------------------------------------------------------
Remaining Fiscal Years
Fiscal Year Fiscal Years Fiscal Years 2009 and
Contractual Obligations Total 2005 2006-2007 2008-2009 thereafter
- ------------------------------------------------------------------------------------------------------------
Long-Term Debt (a) $ 839.7 $ 15.2 $ 88.8 $80.9 $654.8
Capital Leases - - - - -
Operating Leases (b) 16.7 6.1 4.9 3.3 2.4
Purchase Obligations - Natural Gas (c) 483.2 355.5 114.5 6.9 6.3
Purchase Obligations - Other (d) 11.0 5.0 4.0 2.0 -
Other Long-Term Liabilities - - - - -
---------------------------------------------------------------------
Total $1,350.6 $381.8 $212.2 $93.1 $663.5
=====================================================================
(a) Long-term debt obligations reflect principal maturities and
interest payments.
(b) Operating lease obligations are primarily for office space,
vehicles, and power operated equipment in the gas distribution and
non-regulated services segments. Additional payments will be
incurred if renewal options are exercised under the provisions of
certain agreements.
(c) These purchase obligations represent the minimum payments required
under existing natural gas transportation and storage contracts and
natural gas supply agreements in the utility gas distribution and
non-regulated gas marketing segments. These amounts reflect fixed
obligations as well as obligations to purchase natural gas at
future market prices, calculated using December 31, 2004 NYMEX
futures prices. Laclede Gas recovers the costs related to its
purchases, transportation, and storage of natural gas through the
operation of its Purchased Gas Adjustment Clause; however,
variations in the timing of collections of gas costs from customers
affect short-term cash requirements. Additional contractual
commitments may be entered into during the heating season.
(d) These purchase obligations reflect miscellaneous agreements for the
purchase of materials and the procurement of services necessary for
normal operations.
Market Risk
- -----------
Laclede Gas adopted a risk management policy that provides for the purchase
of natural gas financial instruments with the goal of managing price risk
associated with purchasing natural gas on behalf of its customers. This
policy prohibits speculation. Costs and cost reductions, including carrying
costs, associated with the Utility's use of natural gas financial
instruments are allowed to be passed on to the Utility's customers through
the operation of its Purchased Gas Adjustment Clause, through which the
MoPSC allows the Utility to recover gas supply costs. Accordingly, Laclede
Gas does not expect any adverse earnings impact as a result of the use of
these financial instruments. At December 31, 2004, the Utility held
approximately 12.1 million MMBtu of futures contracts at an average price of
$7.05 per MMBtu. Additionally, approximately 3.8 million MMBtu of other
price risk mitigation was in place through the use of option-based
strategies. These positions have various expiration dates, the longest of
which extends through October 2005.
In the course of its business, Laclede Group's non-regulated marketing
affiliate, Laclede Energy Resources, Inc. (LER), enters into fixed price
commitments associated with the purchase or sale of natural gas. LER manages
the price risk associated with these commitments by either closely matching
the offsetting physical purchase or sale of natural gas at fixed prices or
through the use of exchange-traded futures contracts to lock in margins. At
December 31, 2004, LER's open positions were not material to Laclede Group's
financial position or results of operations.
25
Environmental Matters
- ---------------------
Laclede Gas owns and operates natural gas distribution, transmission and
storage facilities, the operations of which are subject to various
environmental laws, regulations and interpretations. While environmental
issues resulting from such operations arise in the ordinary course of
business, such issues have not materially affected the Company's or Laclede
Gas' financial position and results of operations. As environmental laws,
regulations, and their interpretations evolve, however, Laclede Gas may be
required to incur additional costs.
With regard to a former manufactured gas plant site located in Shrewsbury,
Missouri, Laclede Gas and state and federal environmental regulators have
agreed upon certain remedial actions and those actions are essentially
complete. Laclede Gas currently estimates the overall costs of these actions
will be approximately $2.4 million. As of December 31, 2004, Laclede Gas has
paid or reserved for these actions. If regulators require additional
remedial actions or assert additional claims, Laclede Gas will incur
additional costs.
Laclede Gas enrolled a second former manufactured gas plant site into the
Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to
minimize the scope and cost of site cleanup while maximizing possibilities
for site development. This site is located in, and is presently owned by,
the City of St. Louis, Missouri. Laclede Gas continues to evaluate options
concerning this site, including, but not limited to, the submission of its
own Remedial Action Plan (RAP) to the VCP. Laclede Gas currently estimates
that the cost of site investigations, agency oversight and related legal and
engineering consulting may be approximately $650,000. Currently, Laclede Gas
has paid or reserved for these actions. Laclede Gas has requested that other
former site owners and operators share in these costs and one party has
agreed to participate and has reimbursed Laclede Gas to date for $173,000.
Laclede Gas anticipates additional reimbursement from this party. Laclede
Gas plans to seek proportionate reimbursement of all costs relative to this
site from other potentially responsible parties to the extent practicable.
Laclede Gas has been advised that a third former manufactured gas plant site
may require remediation. Laclede Gas does not, and for many years has not,
owned this site. At this time, it is not known whether Laclede Gas will
incur any costs in connection with environmental investigations of or
remediation at the site, and if it does incur any such costs, what the
amount of those costs would be.
Costs incurred are charged to expense or capitalized in accordance with
generally accepted accounting principles. A predetermined level of expense
is recovered through Laclede Gas' rates. While the scope of future costs
relative to the actions Laclede Gas has taken at the Shrewsbury site
pursuant to the current agreement with state and federal regulators may not
be significant, the scope of costs relative to future remedial actions
regulators may require at the Shrewsbury site and to the other sites is
unknown and may be material.
Laclede Gas has notified its insurers that it seeks reimbursement of its
costs at these three manufactured gas plant sites. In response, the majority
of insurers have reserved their rights. While some of the insurers have
denied coverage, Laclede Gas continues to seek reimbursement from them. With
regard to costs incurred under current agreement regarding the Shrewsbury
site, denials of coverage are not expected to have a material impact on the
financial position and results of operations of Laclede Gas or the Company.
With regard to the other two sites and with regard to any future actions
that might be required at the Shrewsbury site, since the scope of costs are
unknown and may be significant, denials of coverage may have a material
impact on the financial position and results of operations of Laclede Gas or
the Company. Such costs, if incurred, have typically been subject to
recovery in rates.
OFF-BALANCE SHEET ARRANGEMENTS
Laclede Group has no off-balance sheet arrangements.
Laclede Gas Company's Management's Discussion and Analysis of Financial
Condition is included in Exhibit 99.1 of this report.
26
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For this discussion, see the "Market Risk" subsection in Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, page 25 of this report.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15e and Rule 15d-15e under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective.
There have been no changes in our internal control over financial reporting
that occurred during our first fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of environmental matters and legal proceedings,
see Note 8 to the Consolidated Financial Statements on page 15. For
a description of SM&P's employment-related litigation, see Note 8
to the Consolidated Financial Statements on page 16. For a
description of pending regulatory matters of Laclede Gas, see Item
2, Management's Discussion and Analysis of Financial Condition and
Results of Operations - Regulatory Matters, page 20 of this report.
Laclede Group and its subsidiaries are involved in other
litigation, claims and investigations arising in the normal course
of business. While the results of such litigation cannot be
predicted with certainty, management, after discussion with
counsel, believes that the final outcome will not have a material
adverse effect on the consolidated financial position or results of
operations of the Company.
Item 6. Exhibits
(a) See Exhibit Index
28
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
The Laclede Group, Inc.
By: /s/ Barry C. Cooper
--------------------------
Dated: January 25, 2005 Barry C. Cooper
---------------- Chief Financial Officer
(Authorized Signatory and
Chief Financial Officer)
29
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
Laclede Gas Company
By: /s/ Barry C. Cooper
--------------------------
Dated: January 25, 2005 Barry C. Cooper
---------------- Chief Financial Officer
(Authorized Signatory and
Chief Financial Officer)
30
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
12 - Ratio of Earnings to Fixed Charges.
31 - Certificates under Rule 13a-14(a) of the CEO and CFO of
The Laclede Group, Inc. and Laclede Gas Company.
32 - Section 1350 Certifications under Rule 13a-14(b) of the CEO
and CFO of The Laclede Group, Inc. and Laclede Gas Company.
99.1 - Laclede Gas Company - Management's Discussion and Analysis of
Financial Condition and Results of Operations, Financial
Statements and Notes to Financial Statements.
31