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 March 31, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Exact Name of Registrant as State of I.R.S.
Number Specified in its Charter and Incorporation Employer
Principal Office Address and Identification Number
Telephone Number
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1-16681 The Laclede Group, Inc. Missouri 74-2976504
720 Olive Street
St. Louis, MO 63101
314-342-0500
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1-1822 Laclede Gas Company Missouri 43-0368139
720 Olive Street
St. Louis, MO 63101
314-342-0500
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Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such report),
The Laclede Group, Inc.: Yes X No
--- ---
Laclede Gas Company: Yes X No
--- ---
and (2) has been subject to such filing requirements for the past 90 days:
The Laclede Group, Inc.: Yes X No
--- ---
Laclede Gas Company: Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
The Laclede Group, Inc. Yes X No
--- ---
Laclede Gas Company: Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Shares Outstanding At
Registrant Description of Common Stock April 29, 2005
- ---------- --------------------------- --------------
The Laclede Group, Inc. Common Stock ($1.00 Par Value) 21,113,155
Laclede Gas Company Common Stock ($1.00 Par Value) 10,031*
<FN>
*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 9-18
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. 5-10
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations (The Laclede Group, Inc.) 19-31
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Laclede Gas Company) Ex. 99.1, pp. 11-21
Item 3 Quantitative and Qualitative Disclosures About Market Risk 32
Item 4 Controls and Procedures 32
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 33
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 4 Submission of Matters to a Vote of Security Holders 33
Item 6 Exhibits 33
SIGNATURES - The Laclede Group, Inc. 34
SIGNATURES - Laclede Gas Company 35
INDEX TO EXHIBITS 36
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 Six Months Ended
March 31, March 31,
---------------------------- ------------------------------
2005 2004 2005 2004
---- ---- ---- ----
Operating Revenues:
Regulated
Gas distribution $ 434,996 $ 396,898 $ 726,249 $ 658,248
Non-Regulated
Services 23,806 15,250 51,792 34,798
Gas marketing 116,607 61,480 234,786 112,463
Other 1,146 1,327 6,213 2,083
---------------------------- ------------------------------
Total Operating Revenues 576,555 474,955 1,019,040 807,592
---------------------------- ------------------------------
Operating Expenses:
Regulated
Natural and propane gas 321,228 288,284 527,652 463,559
Other operation expenses 34,675 32,808 65,600 62,291
Maintenance 4,680 4,641 8,894 9,070
Depreciation and amortization 5,667 5,711 10,972 11,369
Taxes, other than income taxes 26,477 24,897 42,300 39,729
---------------------------- ------------------------------
Total regulated operating expenses 392,727 356,341 655,418 586,018
Non-Regulated
Services 26,303 19,538 53,175 39,849
Gas marketing 113,705 59,813 229,491 110,101
Other 846 804 6,017 1,771
---------------------------- ------------------------------
Total Operating Expenses 533,581 436,496 944,101 737,739
---------------------------- ------------------------------
Operating Income 42,974 38,459 74,939 69,853
---------------------------- ------------------------------
Other Income and (Income Deductions) - Net (94) 1,931 1,480 3,390
---------------------------- ------------------------------
Interest Charges:
Interest on long-term debt 5,643 4,815 11,551 9,629
Interest on long-term debt to unconsolidated
affiliate trust 893 893 1,786 1,786
Other interest charges 1,318 999 2,288 2,084
---------------------------- ------------------------------
Total Interest Charges 7,854 6,707 15,625 13,499
---------------------------- ------------------------------
Income Before Income Taxes 35,026 33,683 60,794 59,744
Income Tax Expense 12,568 12,128 21,704 21,582
---------------------------- ------------------------------
Net Income 22,458 21,555 39,090 38,162
Dividends on Redeemable Preferred Stock -
Laclede Gas 15 15 30 31
---------------------------- ------------------------------
Net Income Applicable to Common Stock $ 22,443 $ 21,540 $ 39,060 $ 38,131
============================ ==============================
Average Number of Common Shares
Outstanding 21,060 19,167 21,038 19,142
Basic Earnings Per Share of Common Stock $1.07 $1.12 $1.86 $1.99
Diluted Earnings Per Share of Common Stock $1.06 $1.12 $1.85 $1.99
Dividends Declared Per Share of Common
Stock $.345 $.340 $.685 $.675
See notes to consolidated financial statements.
4
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
(Thousands)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2005 2004 2005 2004
---- ---- ---- ----
Net Income Applicable to Common Stock $ 22,443 $ 21,540 $ 39,060 $ 38,131
--------------------------- ---------------------------
Other Comprehensive Loss, Before Tax:
Net losses on cash flow hedging derivative
instruments:
Net hedging loss arising during period (3,938) (1,626) (3,182) (2,143)
Reclassification adjustment for (gains) losses
included in net income (439) 294 2,012 (943)
--------------------------- ---------------------------
Net unrealized losses on cash flow hedging
derivative instruments (4,377) (1,332) (1,170) (3,086)
--------------------------- ---------------------------
Other Comprehensive Loss, Before Tax (4,377) (1,332) (1,170) (3,086)
Income Tax Benefit Related to Items of Other
Comprehensive Loss (1,691) (515) (452) (1,192)
--------------------------- ---------------------------
Other Comprehensive Loss, Net of Tax (2,686) (817) (718) (1,894)
--------------------------- ---------------------------
Comprehensive Income $ 19,757 $ 20,723 $ 38,342 $ 36,237
=========================== ===========================
See notes to consolidated financial statements.
5
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Mar. 31, Sept. 30, Mar. 31,
2005 2004 2004
---- ---- ----
(Thousands)
ASSETS
Utility Plant $1,093,093 $1,070,522 $1,050,823
Less: Accumulated depreciation and amortization 431,568 423,647 416,767
-------------- -------------- -------------
Net Utility Plant 661,525 646,875 634,056
-------------- -------------- -------------
Goodwill 28,124 28,124 28,124
-------------- -------------- -------------
Other Property and Investments 47,865 46,082 45,805
-------------- -------------- -------------
Current Assets:
Cash and cash equivalents 17,812 13,854 25,173
Accounts receivable:
Gas Customers - billed and unbilled 148,776 76,223 127,261
Other 107,644 51,822 75,710
Allowances for doubtful accounts (11,309) (10,362) (8,117)
Delayed customer billings 26,867 - 36,141
Inventories:
Natural gas stored underground at LIFO cost 32,691 131,773 29,422
Propane gas at FIFO cost 19,982 15,808 12,914
Materials, supplies, and merchandise at avg. cost 4,874 4,714 4,686
Derivative instrument assets 9,048 16,857 7,841
Unamortized purchased gas adjustments 7,724 19,618 -
Deferred income taxes 6,897 1,321 5,694
Prepayments and other 13,032 16,008 7,375
-------------- -------------- -------------
Total Current Assets 384,038 337,636 324,100
-------------- -------------- -------------
Deferred Charges:
Prepaid pension cost 87,292 92,026 104,790
Regulatory assets 104,293 104,703 98,313
Other 7,037 9,849 9,389
-------------- -------------- -------------
Total Deferred Charges 198,622 206,578 212,492
-------------- -------------- -------------
Total Assets $1,320,174 $1,265,295 $1,244,577
============== ============== =============
See notes to consolidated financial statements.
6
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
Mar. 31, Sept. 30, Mar. 31,
2005 2004 2004
---- ---- ----
(Thousands, except share amounts)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock (70,000,000 shares authorized, 21,082,442,
20,981,165 and 19,187,777 shares issued, respectively) $ 21,082 $ 20,981 $ 19,188
Paid-in capital 118,755 116,058 71,157
Retained earnings 245,121 220,483 236,814
Accumulated other comprehensive loss (2,325) (1,607) (1,974)
------------- -------------- -------------
Total common stock equity 382,633 355,915 325,185
Redeemable preferred stock (less current sinking fund
requirements) - Laclede Gas 948 1,108 1,108
Long-term debt to unconsolidated affiliate trust 46,400 46,400 46,400
Long-term debt (less current portion) - Laclede Gas 333,985 333,936 234,661
------------- -------------- -------------
Total Capitalization 763,966 737,359 607,354
------------- -------------- -------------
Current Liabilities:
Notes payable 86,230 71,380 191,415
Accounts payable 128,529 68,366 88,541
Advance customer billings - 23,620 -
Current portion of long-term debt and preferred stock 95 25,145 25,150
Wages and compensation accrued 15,727 15,596 14,558
Dividends payable 7,367 7,214 6,601
Customer deposits 11,220 10,661 7,799
Interest accrued 10,133 10,920 7,350
Taxes accrued 32,840 16,725 29,103
Unamortized purchased gas adjustment - - 1,458
Other 12,485 13,003 13,035
------------- -------------- -------------
Total Current Liabilities 304,626 262,630 385,010
------------- -------------- -------------
Deferred Credits and Other Liabilities:
Deferred income taxes 190,228 189,626 185,748
Unamortized investment tax credits 4,844 5,010 5,163
Pension and postretirement benefit costs 20,242 20,484 24,635
Regulatory liabilities 14,544 28,210 13,878
Other 21,724 21,976 22,789
------------- -------------- -------------
Total Deferred Credits and Other Liabilities 251,582 265,306 252,213
------------- -------------- -------------
Total Capitalization and Liabilities $1,320,174 $1,265,295 $1,244,577
============= ============== =============
See notes to consolidated financial statements.
7
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
Six Months Ended
March 31,
------------------------------------
2005 2004
---- ----
(Thousands)
Operating Activities:
Net Income $ 39,090 $ 38,162
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 12,684 13,174
Deferred income taxes and investment
tax credits (1,336) 2,506
Other - net 421 110
Changes in assets and liabilities:
Accounts receivable - net (127,428) (90,520)
Unamortized purchased gas adjustments 11,894 (4,407)
Deferred purchased gas costs (14,690) 26,911
Delayed customer billings - net (50,487) (51,502)
Accounts payable 60,163 22,540
Taxes accrued 16,115 15,892
Natural gas stored underground 99,082 87,809
Other assets and liabilities 8,962 19,984
---------------- ----------------
Net cash provided by operating activities $ 54,470 $ 80,659
---------------- ----------------
Investing Activities:
Construction expenditures (28,454) (25,133)
Net investment in trusts (1,149) (1,702)
Other investments 966 858
---------------- ----------------
Net cash used in investing activities $(28,637) $ (25,977)
---------------- ----------------
Financing Activities:
Maturity of first mortgage bonds (25,000) -
Issuance (repayment) of short-term debt - net 14,850 (26,785)
Dividends paid (14,312) (12,818)
Issuance of common stock 2,797 2,803
Preferred stock reacquired (210) -
---------------- ----------------
Net cash used in financing activities $(21,875) $ (36,800)
---------------- ----------------
Net Increase in Cash and Cash Equivalents $ 3,958 $ 17,882
Cash and Cash Equivalents at Beginning of Period 13,854 7,291
---------------- ----------------
Cash and Cash Equivalents at End of Period $ 17,812 $ 25,173
================ ================
Supplemental Disclosure of Cash Paid During the Period for:
Interest $ 16,021 $ 13,163
Income taxes 4,213 274
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 quarters of
the fiscal year. Due to the seasonal nature of the business of Laclede Gas,
earnings are typically concentrated in the November through April period,
which generally corresponds with the heating season. The Utility typically
experiences losses during the non-heating season. The seasonal effect of the
Utility's earnings on Laclede Group is generally expected to be tempered
somewhat by the results of SM&P Utility Resources, Inc. (SM&P), a
non-regulated underground facility locating and marking service business,
whose operations tend to be counter-seasonal to those of Laclede Gas.
The consolidated financial statements include the accounts of
Laclede Group and its subsidiary companies. All subsidiaries are wholly
owned. Laclede Gas 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." Those types of
transactions include sales of natural gas from Laclede Gas to Laclede Energy
Resources, Inc. (LER), services performed by SM&P to locate and mark
underground facilities for Laclede Gas, sales of natural gas from LER to
Laclede Gas, and sales of propane by Laclede Pipeline Company to Laclede
Gas. These revenues are shown on the Intersegment revenues lines in the
table included in Note 7 under Regulated Gas Distribution, Non-Regulated
Services, Non-Regulated Gas Marketing, and Non-Regulated Other columns
respectively.
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.
UTILITY PLANT, DEPRECIATION AND AMORTIZATION - In January 2005, the
Missouri Public Service Commission (MoPSC or Commission) issued an Order
effective January 21, 2005 in the Utility's 1999 rate case relative to the
calculation of its depreciation rates. In accordance with the provisions of
the Order, Laclede Gas increased certain of its depreciation rates effective
February 1, 2005 resulting in higher annual depreciation expense totaling
$2.3 million. That same Order also required that operating expenses related
to actual removal costs, which the Utility began expensing as incurred
during fiscal 2002 pursuant to a previous Commission Order, be reduced by
$2.3 million annually. As such, the Order had no immediate effect on income
or the recovery of depreciation expenses.
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 March
31, 2005 and 2004, for the Utility, were $26.2 million and $22.3 million,
respectively. After accrual of related gas cost expense, the accrued pre-tax
net revenues at March 31, 2005 and 2004 were $7.9 million and $6.9 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
9
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 six months ended March 31, 2005, the Company granted
234,000 non-qualified stock options to employees at an exercise price of
$30.95 per share (none of these options were granted during the quarter
ended March 31, 2005). 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.
Stock option activity for the quarter ended March 31, 2005 is
presented below:
Weighted Average
Shares Exercise Price
------------ --------------------
Outstanding at December 31, 2004 616,000 $28.17
Granted - -
Exercised 24,125 $25.09
Forfeited - -
Outstanding at March 31, 2005 591,875 $28.29
Exercisable at March 31, 2005 89,875 $26.01
Exercise prices of options outstanding at March 31, 2005 range from
$23.27 to $30.95. The weighted-average contractual life of these options is
8.8 years. The closing price of the Company's common stock was $29.20 at
March 31, 2005.
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 six months ended
March 31, 2005 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 Six Months Ended
March 31, March 31,
--------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
(Thousands, Except Per Share Amounts)
Net income applicable to
common stock, as reported $22,443 $ 21,540 $39,060 $ 38,131
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of tax effects 144 84 266 176
--------------------------- --------------------------
Pro forma net income applicable
to common stock $22,299 $ 21,456 $38,794 $ 37,955
=========================== ==========================
Earnings per share:
Basic - as reported $1.07 $1.12 $1.86 $1.99
Diluted - as reported $1.06 $1.12 $1.85 $1.99
Basic - pro forma $1.06 $1.12 $1.84 $1.98
Diluted - pro forma $1.06 $1.12 $1.84 $1.98
10
The fair value of the options granted during the six months ended
March 31, 2005 was estimated at the date of grant using a binomial option
pricing model with the following assumptions:
Six Months Ended
March 31, 2005
---------------------
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 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) was to be 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. However, in April
2005, the Securities and Exchange Commission (SEC) amended the compliance
date to allow companies to implement SFAS No. 123(R) at the beginning of
their next fiscal year. The Company is currently evaluating the provisions
of this Statement, which it plans to adopt effective October 1, 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.
In March 2005, the FASB issued Interpretation No. 47 (FIN 47),
"Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies
the manner in which uncertainties concerning the timing and method of
settlement of an asset retirement obligation, as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations," should be accounted for. This
Interpretation also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005. The Company is currently evaluating the provisions
of this Interpretation.
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 plans and the
vesting of non-vested stock awards at the beginning of each respective
period. For the quarter ended March 31, 2005, 234,000 shares attributable to
outstanding stock options were excluded from the calculation of diluted
earnings per share because their inclusion would have been antidilutive.
11
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
(Thousands, Except Per Share Amounts) 2005 2004 2005 2004
---- ---- ---- ----
Basic EPS:
Net Income Applicable to Common Stock $ 22,443 $ 21,540 $ 39,060 $ 38,131
Weighted-Average Shares Outstanding 21,060 19,167 21,038 19,142
Earnings Per Share of Common Stock $1.07 $1.12 $1.86 $1.99
Diluted EPS:
Net Income Applicable to Common Stock $ 22,443 $ 21,540 $ 39,060 $ 38,131
Weighted-Average Shares Outstanding 21,060 19,167 21,038 19,142
Dilutive Effect of Stock Options, Restricted Stock 36 30 36 27
------------------------ ------------------------
Weighted-Average Diluted Shares 21,096 19,197 21,074 19,169
======================== ========================
Earnings Per Share of Common Stock $1.06 $1.12 $1.85 $1.99
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 March 31, 2005 and 2004 were
$1.1 million. Pension costs for the six months ended March 31, 2005 were
$2.3 million compared with $2.2 million for the same period last year. These
costs include amounts capitalized with construction activities.
The net periodic pension costs include the following components:
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- ------------------------
(Thousands) 2005 2004 2005 2004
---- ---- ---- ----
Service cost - benefits earned
during the period $ 2,799 $ 2,777 $ 5,598 $ 5,554
Interest cost on projected
benefit obligation 3,994 4,058 7,988 8,115
Expected return on plan assets (5,291) (5,625) (10,582) (11,249)
Amortization of prior service cost 308 331 617 662
Amortization of actuarial loss 730 951 1,460 1,901
Regulatory adjustment (1,408) (1,368) (2,817) (2,737)
----------------------- ------------------------
Net pension cost $ 1,132 $ 1,124 $ 2,264 $ 2,246
======================= ========================
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 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
12
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 six months ended March 31, 2005 or the
six months ended March 31, 2004.
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 March 31, 2005 and
2004 were $2.0 million. Postretirement benefit costs for the six months
ended March 31, 2005 and 2004 were $4.0 million. These costs include amounts
capitalized with construction activities.
Net periodic postretirement benefit costs consisted of the
following components:
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ---------------------
(Thousands) 2005 2004 2005 2004
---- ---- ---- ----
Service cost - benefits earned
during the period $ 844 $ 794 $ 1,689 $ 1,587
Interest cost on accumulated
postretirement benefit obligation 826 801 1,652 1,601
Expected return on plan assets (318) (209) (637) (418)
Amortization of transition obligation 144 265 289 530
Amortization of prior service cost (8) (8) (16) (16)
Amortization of actuarial loss 217 174 434 349
Regulatory adjustment 295 164 590 329
------------------------ ---------------------
Net postretirement benefit cost $ 2,000 $ 1,981 $ 4,001 $ 3,962
======================== =====================
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 March 31, 2005, LER's open positions were not
material to Laclede Group's financial position or results of operations.
13
Settled and open futures positions were as follows at March 31,
2005:
Average
MMBtu Price per
Position Month (millions) MMBtu
-------------- ---------- -----
Settled net long and short futures positions April 2005 1.04 $6.17
Open short futures positions May 2005 1.16 $6.30
June 2005 .04 $6.57
July 2005 .13 $7.15
August 2005 .22 $6.87
September 2005 .04 $6.60
October 2005 .37 $6.88
December 2005 .20 $7.35
January 2006 .25 $7.26
February 2006 .04 $7.23
Open long futures positions May 2005 .04 $6.24
September 2005 .14 $5.05
October 2005 .30 $6.39
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 $2.5 million of pre-tax net unrealized
losses on cash flow hedging derivative instruments at March 31, 2005 will be
reclassified into the Consolidated Statement of Income during fiscal 2005.
The remainder, approximately $0.7 million pre-tax net unrealized losses,
will be reclassified during fiscal 2006. 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.
5. INCOME TAXES
Net provision for income taxes was as follows during the
periods set forth below:
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- -------------------------
(Thousands) 2005 2004 2005 2004
---- ---- ---- ----
Federal
Current $10,969 $ 9,441 $19,795 $16,373
Deferred (291) 1,025 (1,221) 2,186
State and Local
Current 1,756 1,515 3,245 2,703
Deferred 134 147 (115) 320
----------------------- -------------------------
Total $12,568 $12,128 $21,704 $21,582
======================= =========================
14
6. OTHER INCOME AND INCOME DEDUCTIONS - NET
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- ---------------------
(Thousands) 2005 2004 2005 2004
---- ---- ---- ----
Investment gains $ - $ 1,947 $ - $ 1,947
Allowance for funds used during construction (24) (29) (49) (61)
Other income 528 335 1,093 891
Other income deductions (598) (322) 436 613
----------------------- ---------------------
Other income and (income deductions) - net $ (94) $ 1,931 $ 1,480 $ 3,390
======================= =====================
Laclede Gas recorded the receipt of proceeds totaling $1.9 million
during the quarter ended March 31, 2004 related to its interest, as a
policyholder, in the sale of a mutual insurance company. This represented an
initial distribution relating to certain policies held by the Utility.
Subsequent distributions are not expected to have a material impact on the
consolidated financial position or results of operations of the Company.
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
and, as such, SM&P's results are influenced by construction seasonality and
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, 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." Those types of transactions include sales of natural gas
from Laclede Gas to LER, services performed by SM&P to locate and mark
underground facilities for Laclede Gas, sales of natural gas from LER to
Laclede Gas, and sales of propane by Laclede Pipeline Company to Laclede
Gas. These revenues are shown on the Intersegment revenues lines in the
table under Regulated Gas Distribution, Non-Regulated Services,
Non-Regulated Gas Marketing, and Non-Regulated Other columns respectively.
15
Non-
Regulated Non- Regulated Non-
Gas Regulated Gas Regulated
(Thousands) Distribution Services Marketing Other Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, 2005
- --------------
Revenues from external
customers $ 426,583 $ 23,732 $ 110,807 $ 733 $ - $ 561,855
Intersegment revenues 8,413 74 5,800 413 - 14,700
------------------------------------------------------------------------------------
Total operating revenues 434,996 23,806 116,607 1,146 - 576,555
Net income (loss) applicable to
common stock 22,529 (2,062) 1,786 190 - 22,443
Total assets 1,195,499 54,693 55,969 42,684 (28,671) 1,320,174
Six Months Ended
March 31, 2005
- --------------
Revenues from external
customers $ 714,880 $ 51,655 $ 220,805 $ 1,437 $ - $ 988,777
Intersegment revenues 11,369 137 13,981 4,776 - 30,263
------------------------------------------------------------------------------------
Total operating revenues 726,249 51,792 234,786 6,213 - 1,019,040
Net income (loss) applicable to
common stock 37,616 (1,919) 3,220 143 - 39,060
Total assets 1,195,499 54,693 55,969 42,684 (28,671) 1,320,174
Three Months Ended
March 31, 2004
- --------------
Revenues from external
customers $ 396,465 $ 15,183 $ 56,023 $ 935 $ - $ 468,606
Intersegment revenues 433 67 5,457 392 - 6,349
------------------------------------------------------------------------------------
Total operating revenues 396,898 15,250 61,480 1,327 - 474,955
Net income (loss) applicable to
common stock 23,359 (3,173) 1,016 338 - 21,540
Total assets 1,137,824 48,456 40,946 36,699 (19,348) 1,244,577
Six Months Ended
March 31, 2004
- --------------
Revenues from external
customers $ 657,007 $ 34,666 $ 102,503 $ 1,744 $ - $ 795,920
Intersegment revenues 1,241 132 9,960 339 - 11,672
------------------------------------------------------------------------------------
Total operating revenues 658,248 34,798 112,463 2,083 - 807,592
Net income (loss) applicable to
common stock 40,683 (4,198) 1,427 219 - 38,131
Total assets 1,137,824 48,456 40,946 36,699 (19,348) 1,244,577
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 March 31, 2005,
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.
16
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 $190,000. 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 own, 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 of past and future claims
associated with investigation of and remediation 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 pursue claims against 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.
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 Circuit Court of Cole County, Missouri.
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 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 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. On March 1, 2005, the Court of Appeals affirmed the
decision of the Cole County Circuit Court, finding that the plain language
of the Company's tariff permitted Laclede Gas to retain the pre-tax gains.
The Court of Appeals remanded the case to the Cole County Circuit Court,
with instructions to remand the case to the MoPSC for further proceedings
consistent with the Court of Appeals' opinion. The MoPSC did not file for
rehearing or an appeal of the Court of Appeals' opinion. On April 4, 2005,
the Cole County Circuit Court remitted to Laclede Gas the $4.9 million
previously paid into the Court's registry. On April 7, 2005, the Commission
issued its Order on Remand in which it reversed its April 29, 2003 decision
and directed that Laclede Gas be permitted to retain the $4.9 million
consistent with the Court of Appeals opinion. The Commission's Order on
Remand is now final and unappealable. The return of the pre-tax gains,
however, was previously recorded as income in the 2002 fiscal year, so the
decision will have no 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
17
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.
On March 11, 2005, Laclede Gas Company signed a 15-year service
agreement with Cellnet Technology, Inc., to install and operate an automated
meter reading (AMR) system. Upon implementation, the Utility will pay
Cellnet monthly for successful billing reads. AMR is designed to eliminate
the need for Laclede, which has nearly 40 percent of its approximately
650,000 meters indoors, to gain physical access to meters in order to obtain
monthly meter readings. Under the terms of the agreement, Cellnet will
install and own the system as well as handle data collection, meter data
delivery, and network operation and maintenance services. Installation of
equipment on customer meters is scheduled to begin in July 2005 and will
take approximately two years to complete. The Cellnet AMR system employs a
wireless fixed network with read devices that will be attached to existing
Laclede Gas customer meters. Reads from each meter are transmitted to local
network receivers and transferred to Laclede's customer billing system,
resulting in the production of a timely, accurate bill.
Laclede Group had guarantees totaling $11 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 March
31, 2005.
SM&P has several operating leases, the aggregate annual cost of
which is approximately $6 million, consisting primarily of 12-month
operating leases, with renewal options, for vehicles used in its business.
Laclede Group has parental guarantees of certain of those vehicle leases and
anticipates that the maximum guarantees, including renewals and new leases,
will not exceed $20 million. No amounts have been recorded for these
guarantees in the financial statements.
Laclede Gas Company's Financial Statements and Notes to Financial
Statements are included in Exhibit 99.1 to this report.
18
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.
19
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 stabilizes the Utility's
earnings 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. 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. The
Utility's income from off-system sales remains subject to fluctuations in
market conditions. Some of the factors impacting the level of off-system
sales include the availability and cost of its natural gas supply, the
weather in the Utility's service area, and the weather in other markets.
When Laclede Gas' service area experiences warmer-than-normal weather while
other markets experience colder weather or supply constraints, some of the
Utility's natural gas supply is available for off-system sales and there may
be a demand for such supply in other markets.
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 March 31, 2005
- ------------------------------------------
Overview - Net Income (Loss) by Operating Segment Quarter Ended
March 31,
-------------------------
(millions, after-tax) 2005 2004
---- ----
Regulated Gas Distribution $22.5 $23.4
Non-Regulated Services (2.1) (3.2)
Non-Regulated Gas Marketing 1.8 1.0
Non-Regulated Other .2 .3
---------- -----------
Net Income Applicable to Common Stock $22.4 $21.5
========== ===========
20
Laclede Group's net income applicable to common stock was $22.4 million for
the quarter ended March 31, 2005, compared with $21.5 million for the
quarter ended March 31, 2004. Basic and diluted earnings per share were
$1.07 and $1.06, respectively, for the quarter ended March 31, 2005,
compared with basic and diluted earnings per share of $1.12 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 factors
described below.
Utility earnings decreased by $0.9 million for the quarter ended March 31,
2005 compared with the quarter ended March 31, 2004. The decrease in the
Utility's earnings for the quarter was primarily attributable to the
following factors, quantified on a pre-tax basis:
o non-operating income that decreased $1.9 million, primarily due to the
proceeds recorded during the quarter ended March 31, 2004 related to
the Company's interest, as a policyholder, in the sale of a mutual
insurance company totaling $1.9 million;
o higher interest charges totaling $1.1 million, primarily due to the
issuance of additional long-term debt;
o increases in operation and maintenance expenses of $1.0 million; and,
o a higher provision for uncollectible accounts totaling $0.9 million.
These factors were partially offset by:
o higher income this year from off-system sales and capacity release
totaling $2.5 million; and,
o the recovery of eligible costs incurred to build and maintain the
Utility's distribution system through the implementation of
Infrastructure System Replacement Surcharges effective June 10, 2004
and January 20, 2005 totaling $1.2 million.
SM&P recorded a loss of $2.1 million during the quarter ended March 31, 2005
compared with a loss for the same period last year totaling $3.2 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 $0.8 million primarily due to higher sales volumes.
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 income.
Regulated operating revenues for the quarter ended March 31, 2005 were
$435.0 million, or $38.1 million greater than the same period last year.
Temperatures experienced in the Utility's service area during the quarter
were 10% warmer than normal and 3% warmer than the same period last year.
Total therms sold and transported were 510.7 million, an increase of 2.7
million, or 0.5%, above the quarter ended March 31, 2004. The increase in
regulated operating revenues was primarily attributable to the following
factors:
Millions
-------------
Higher wholesale gas costs (passed on to Utility customers subject to
prudence review by the MoPSC) $ 29.4
Lower system sales volumes resulting from warmer weather and other variations (21.7)
Higher off-system sales volumes, reflecting more favorable market
conditions as described in greater detail in the Results of Operations 18.5
Higher prices charged for off-system sales 10.7
Partial-year effect of the Infrastructure System Replacement Surcharges (ISRS) 1.2
-------------
Total Variation $ 38.1
=============
21
Regulated operating expenses for the quarter ended March 31, 2005 increased
$36.4 million from the same quarter last year. Natural and propane gas
expense increased $32.9 million from last year's level primarily
attributable to higher rates charged by our suppliers and increased
off-system gas expense, partially offset by lower volumes purchased for
sendout. Other operation and maintenance expenses increased $1.9 million, or
5.1%, primarily due to a higher provision for uncollectible accounts,
increased insurance premiums and higher wage rates. These factors were
partially offset by decreased distribution charges, lower pension costs and
decreased group insurance charges. Taxes, other than income, increased $1.6
million, or 6.3%, primarily due to higher gross receipts taxes (reflecting
increased revenues).
Non-Regulated Services Operating Revenues and Operating Expenses
Laclede Group's non-regulated services operating revenue for this quarter
increased $8.6 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 $6.8 million, was
primarily attributable to charges associated with the new business,
partially offset by charges recorded during the same quarter last year
attributable to the employment-related litigation, described in Note 8 to
the Consolidated Financial Statements on page 17 of this report. 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 and, as
such SM&P's results are influenced by construction seasonality and trends.
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-regulated gas marketing operating revenues increased $55.1 million
primarily due to increased sales volumes and higher sales prices by LER. The
increase in non-regulated gas marketing operating expenses, totaling $53.9
million, was primarily associated with increased gas expense related to
increased volumes purchased and higher prices.
Other Income and (Income Deductions) - Net
The $2.0 million decrease in other income and income deductions - net was
primarily attributable to the Utility's recognition of the receipt of
proceeds totaling $1.9 million related to its interest, as a policyholder,
in the sale of a mutual insurance company during the quarter ended March 31,
2004.
Interest Charges
The $1.1 million increase in interest charges was primarily due to higher
interest on long-term debt due to the April 2004 issuance of $50 million
principal amount of 5 1/2% First Mortgage Bonds and $100 million principal
amount of 6% First Mortgage Bonds, partially offset by the early redemption
in June 2004 of $50 million principal amount of 6 5/8% First Mortgage Bonds
and the November 2004 maturity of $25 million principal amount of 8 1/2%
First Mortgage Bonds.
Income Taxes
The increase in income taxes was primarily attributable to higher pre-tax
income.
Six Months Ended March 31, 2005
- ------------------------------------------
Overview - Net Income (Loss) by Operating Segment Six Months Ended
March 31,
-------------------------
(millions, after-tax) 2005 2004
---- ----
Regulated Gas Distribution $37.6 $40.7
Non-Regulated Services (1.9) (4.2)
Non-Regulated Gas Marketing 3.2 1.4
Non-Regulated Other .2 .2
---------- -----------
Net Income Applicable to Common Stock $39.1 $38.1
========== ===========
Laclede Group's net income applicable to common stock was $39.1 million for
the six months ended March 31, 2005, compared with $38.1 million for the six
months ended March 31, 2004. Basic and diluted earnings per share were $1.86
and $1.85, respectively, for the six months ended March 31, 2005, compared
with basic and diluted earnings per
22
share of $1.99 reported for the same period last year. The decrease in
earnings per share was due to the aforementioned increase in the number of
average shares outstanding this year. Variations in net income were
primarily attributable to the factors described below.
Utility earnings decreased by $3.1 million for the six months ended March
31, 2005 compared with the same period last year. The decrease in the
Utility's earnings for the six-month period were primarily attributable to
the following factors, quantified on a pre-tax basis:
o higher interest charges totaling $2.1 million, primarily due to the
issuance of additional long-term debt;
o non-operating income that decreased $1.9 million, primarily due to the
proceeds recorded during the quarter ended March 31, 2004 related to
the Company's interest, as a policyholder, in the sale of a mutual
insurance company totaling $1.9 million;
o the net effect of lower system gas sales volumes totaling $1.8 million,
primarily due to an unseasonably warm weather pattern in November;
o increases in operation and maintenance expenses totaling $1.7 million;
and,
o a higher provision for uncollectible accounts totaling $1.4 million.
These factors were partially offset by:
o the recovery of eligible costs incurred to build and maintain the
Utility's distribution system through the implementation of
Infrastructure System Replacement Surcharges effective June 10, 2004
and January 20, 2005 totaling $2.1 million; and
o higher income this year from off-system sales and capacity release
totaling $1.2 million.
SM&P recorded a loss of $1.9 million during the six months ended March 31,
2005 compared with a loss for the same period last year totaling $4.2
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 $1.8 million primarily due to higher sales volumes
and increased margins.
Regulated Operating Revenues and Operating Expenses
Regulated operating revenues for the six months ended March 31, 2005 were
$726.2 million, or $68.0 million greater than the same period last year.
Temperatures experienced in the Utility's service area during the six months
ended March 31, 2005 were 12% warmer than normal and essentially equal to
the same period last year. Total therms sold and transported were 834.3
million, a decrease of 27.8 million, or 3.2%, below the six months ended
March 31, 2004. The increase in regulated operating revenues was primarily
attributable to the following factors:
Millions
-------------
Higher wholesale gas costs (passed on to Utility customers subject to
prudence review by the MoPSC) $ 67.2
Lower system sales volumes resulting from warmer weather and other variations (25.0)
Higher prices charged for off-system sales 18.3
Higher off-system sales volumes, reflecting more favorable market
conditions as described in greater detail in the Results of Operations 5.4
Partial-year effect of the ISRS 2.1
-------------
Total Variation $ 68.0
=============
Regulated operating expenses for the six months ended March 31, 2005
increased $69.4 million from the same period last year. Natural and propane
gas expense increased $64.1 million above last year's level primarily
attributable to higher rates charged by our suppliers and increased
off-system gas expense, partially offset by lower volumes purchased for
sendout. Other operation and maintenance expenses increased $3.1 million, or
4.4%, primarily due to a higher provision for uncollectible accounts,
increased insurance premiums, and higher wage rates. These factors were
partially offset by lower pension costs and decreased group insurance
charges. Taxes, other than income, increased $2.6 million, or 6.5%,
primarily due to higher gross receipts taxes (attributable to the increased
revenues).
23
Non-Regulated Services Operating Revenues and Operating Expenses
Laclede Group's non-regulated services operating revenue for the six months
ended March 31, 2005 increased $17.0 million primarily due to SM&P's
attainment of new business in both new and existing markets. The increase in
non-regulated services operating expenses totaling $13.3 million was
primarily attributable to charges associated with the new business,
partially offset by charges recorded during the same period last year
attributable to the employment-related litigation, described in Note 8 to
the Consolidated Financial Statements on page 17 of this report.
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-regulated gas marketing operating revenues increased $122.3 million
primarily due to higher volumes and increased sales prices by LER. The
increase in non-regulated gas marketing operating expenses was primarily
associated with increased gas expense related to higher volumes purchased
and increased prices totaling $119.4 million.
Non-Regulated Other Operating Revenues and Operating Expenses
Non-regulated other operating revenues increased $4.1 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.
Other Income and (Income Deductions) - Net
The $1.9 million decrease in other income and income deductions - net was
primarily attributable to the Utility's recognition of the receipt of
proceeds totaling $1.9 million related to its interest, as a policyholder,
in the sale of a mutual insurance company last year.
Interest Charges
The $2.1 million increase in interest charges was primarily due to higher
interest on long-term debt due to the April 2004 issuance of $50 million
principal amount of 5 1/2% First Mortgage Bonds and $100 million principal
amount of 6% First Mortgage Bonds, partially offset by the early redemption
in June 2004 of $50 million principal amount of 6 5/8% First Mortgage Bonds
and the November 2004 maturity of $25 million principal amount of 8 1/2%
First Mortgage Bonds.
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 increased certain of its
depreciation rates effective February 1, 2005 resulting in higher annual
depreciation expense totaling $2.3 million, as it originally requested. That
same Order also required that operating expenses related to actual removal
costs, which the Utility began expensing as incurred during fiscal 2002
pursuant to a previous Commission Order, be reduced by $2.3 million
annually. As such, there was no effect on net income, and the Commission's
decision had no 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.
24
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 Circuit Court of Cole County, Missouri.
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 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 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. On March 1, 2005, the Court of Appeals affirmed the
decision of the Cole County Circuit Court, finding that the plain language
of the Company's tariff permitted Laclede Gas to retain the pre-tax gains.
The Court of Appeals remanded the case to the Cole County Circuit Court,
with instructions to remand the case to the MoPSC for further proceedings
consistent with the Court of Appeals' opinion. The MoPSC did not file for
rehearing or an appeal of the Court of Appeals' opinion. On April 4, 2005,
the Cole County Circuit Court remitted to Laclede Gas the $4.9 million
previously paid into the Court's registry. On April 7, 2005, the Commission
issued its Order on Remand in which it reversed its April 29, 2003 decision
and directed that Laclede Gas be permitted to retain the $4.9 million
consistent with the Court of Appeals opinion. The Commission's Order on
Remand is now final and unappealable. The return of the pre-tax gains,
however, was previously recorded as income in the 2002 fiscal year, so the
decision will have no 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.
Laclede Gas made its third ISRS filing on April 4, 2005 to increase revenues
by approximately an additional $1.3 million annually. The MoPSC has not yet
acted on the Company's latest request.
On February 18, 2005, Laclede Gas filed tariff sheets with the MoPSC
requesting a general rate increase of approximately $34 million. If granted,
customers' bills would increase by an average of 4.1%. Although the filing
requests an annual increase of $39.0 million, $5.0 million of that amount is
already being billed to customers through the current ISRS, which would
cease upon the effective date of new rate schedules approved by the MoPSC.
The Company's filing also includes a proposal to modify the Company's gas
supply incentive plan. On February 28, 2005, the MoPSC suspended
implementation of the Company's proposed rates until January 2006.
Historically, the MoPSC has not granted Laclede Gas' rate increase requests
in full.
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:
25
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 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.
26
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) was to be 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. However, in April 2005,
the Securities and Exchange Commission (SEC) amended the compliance date to
allow companies to implement SFAS No. 123(R) at the beginning of their next
fiscal year. The Company is currently evaluating the provisions of this
Statement, which it plans to adopt effective October 1, 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.
In March 2005, the FASB issued Interpretation No. 47 (FIN 47), "Accounting
for Conditional Asset Retirement Obligations." FIN 47 clarifies the manner
in which uncertainties concerning the timing and method of settlement of an
asset retirement obligation, as used in SFAS No. 143, "Accounting for Asset
Retirement Obligations," should be accounted for. This Interpretation also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN 47 is
effective no later than the end of fiscal years ending after December 15,
2005. The Company is currently evaluating the provisions of this
Interpretation.
FINANCIAL CONDITION
Credit Ratings
- --------------
As of March 31, 2005, 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 provided by operating activities for the six months ended March 31,
2005 was $54.5 million, a $26.2 million decrease, compared with the same
period last year. The decrease in cash provided by operating activities was
27
primarily attributable to the net effects of changes in wholesale gas
prices, increased sales volumes by LER and higher Utility off-system sales
on accounts receivable, accounts payable, and deferred purchased gas costs.
Net cash used in investing activities for the six months ended March 31,
2005 was $28.6 million compared with $26.0 million for the six months ended
March 31, 2004. Cash used in investing activities primarily reflected
Utility construction expenditures in both periods.
Net cash used in financing activities was $21.9 million for the six months
ended March 31, 2005 compared with $36.8 million for the six months ended
March 31, 2004. The variation primarily reflects the issuance of additional
short-term debt this year, partially offset by the November 2004 maturity of
$25 million principal amount of 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 2006 and $285 million expiring in September 2009.
Short-term commercial paper borrowings outstanding at March 31, 2005 were
$86.2 million at a weighted average interest rate of 2.8% per annum. Based
on short-term borrowings at March 31, 2005, a change in interest rates of
100 basis points would increase or decrease Laclede Gas' pre-tax earnings
and cash flows by approximately $.9 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 March 31, 2005, total debt was 54% of total
capitalization. For the twelve-months ending March 31, 2005, EBITDA was 3.4
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 March 31,
2005. 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 March 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 principal amount of First
Mortgage Bonds, 5 1/2% Series due May 1, 2019 and $100 million principal
amount 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 principal amount of
6 5/8% Series First Mortgage Bonds in June 2004. The proceeds were also used
to pay at maturity $25 million principal amount of 8 1/2% First Mortgage
Bonds in November 2004. At March 31, 2005, 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 March 31,
2005. 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
28
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
54% on March 31, 2005). This line has been used to provide letters of credit
of $1.5 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.
There were no borrowings under this line in the quarter ending March 31,
2005.
SM&P has several operating leases, the aggregate annual cost of which is
approximately $6 million, consisting primarily of 12-month operating leases,
with renewal options, for vehicles used in its business. Laclede Group has
parental guarantees of certain of those vehicle leases and anticipates that
the maximum guarantees, including renewals and new leases, will not exceed
$20 million. No amounts have been recorded for these guarantees in the
financial statements.
Laclede Group had guarantees totaling $11 million for performance and
payment of certain wholesale gas supply purchases by LER, as of March 31,
2005.
Utility construction expenditures were $25.6 million for the six months
ended March 31, 2005, compared with $24.7 million for the same period last
year. Non-utility construction expenditures were $2.8 million for the six
months ended March 31, 2005, compared with $0.4 million for the same period
last year.
Consolidated capitalization at March 31, 2005, excluding current obligations
of preferred stock, consisted of 50.1% Laclede Group common stock equity,
0.1% Laclede Gas preferred stock equity, 6.1% long-term debt to
unconsolidated affiliate trust and 43.7% 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 March 31, 2005 and at September 30, 2004, such as
Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts
Payable, Regulatory Assets and Liabilities, and Delayed and Advance Customer
Billings. The Consolidated Balance Sheet at March 31, 2004 is presented to
facilitate comparison of these items with the corresponding interim period
of the preceding fiscal year.
Contractual Obligations
- -----------------------
As of March 31, 2005, Laclede Group had contractual obligations with
payments due as summarized below (in millions):
Payments due by period
------------------------------------------------------------
Remaining Fiscal Fiscal Fiscal Years
Fiscal Year Years Years 2010 and
Contractual Obligations Total 2005 2006-2007 2008-2009 thereafter
- ----------------------------------------------------------------------------------------------------------------
Long-Term Debt (a) $ 837.7 $ 13.1 $ 88.9 $ 80.9 $654.8
Capital Leases - - - - -
Operating Leases (b) 18.6 5.1 7.1 4.0 2.4
Purchase Obligations - Natural Gas (c) 433.9 282.4 138.3 6.9 6.3
Purchase Obligations - Other (d) 130.0 4.1 16.3 18.4 91.2
Other Long-Term Liabilities - - - - -
-------------------------------------------------------------------------
Total (e) $1,420.2 $304.7 $250.6 $110.2 $754.7
=========================================================================
<FN>
(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 March 31, 2005 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, subject to prudence review;
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.
29
(d) These purchase obligations reflect miscellaneous agreements for the
purchase of materials and the procurement of services necessary for
normal operations.
(e) Commitments related to pension and postretirement benefit plans
have been excluded from the table above. The Company does not
expect to make any contributions to its qualified, trusteed pension
plans in fiscal 2005. It anticipates Laclede Gas will make a $0.1
million contribution relative to its non-qualified pension plans
during the remainder of fiscal 2005. With regard to the
postretirement benefits, the Company anticipates Laclede Gas will
contribute $3.8 million to the qualified trusts and $0.2 million
directly to participants from Laclede Gas' funds during the rest of
fiscal 2005. For further discussion of the Company's pension and
postretirement benefit plans, refer to Note 3, Pensions and Other
PostRetirement Benefits, of the Notes to Consolidated Financial
Statements.
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 March 31, 2005, the Utility held
approximately 5.9 million MMBtu of futures contracts at an average price of
$7.68 per MMBtu. Additionally, approximately 9.5 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 March 2006.
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
March 31, 2005, LER's open positions were not material to Laclede Group's
financial position or results of operations.
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 March 31, 2005, 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 $190,000.
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.
30
Laclede Gas has been advised that a third former manufactured gas plant site
may require remediation. Laclede Gas does not own, 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 of past and future claims associated
with investigation of and remediation 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
pursue claims against 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.
31
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 30 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 second fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
32
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 16. For
a description of SM&P's employment-related litigation, see Note 8
to the Consolidated Financial Statements on page 17. 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 24 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
In January 2005, the Board of Directors of Laclede Gas desired to
sell shares to its sole shareholder, Laclede Group, at a price per
share equal to book value. However, Laclede Gas is prohibited from
issuing fractional shares, so the Board first authorized a stock
dividend of ninety-nine shares of its common stock, par value
$1.00 per share, on each outstanding share of its common stock to
be paid on January 21, 2005 to increase its outstanding shares from
100 to 10,000. The retroactive effect of this stock dividend has
been presented in the Balance Sheet. As such, $9,900 was
transferred to common stock and paid-in capital from retained
earnings, representing the aggregate par value of the shares issued
under the stock dividend. All references to the number of shares
have been restated from 100 shares to 10,000 shares to give
retroactive effect to the stock dividend for all periods presented.
The Board also approved, subsequent to the stock dividend, the sale
of 31 shares of Laclede Gas common stock to Laclede Group at a
price per share equal to the book value at December 31, 2004, as
adjusted for the effect of the stock dividend described above. The
proceeds from the sale, totaling approximately $1.1 million, were
used to reduce short-term borrowings. Exemption from registration
was claimed under Section 4(2) of the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders:
The annual meeting of shareholders of The Laclede Group was held on
January 27, 2005, for the purpose of electing three directors to
the board of directors and ratifying the appointment of independent
auditors. Management's three nominees for directors listed in the
proxy statement were unopposed and were elected upon the following
votes:
DIRECTOR NOMINEE FOR WITHHELD
---------------- ---- --------
Edward L. Glotzbach 17,293,859 234,080
W. Stephen Maritz 17,298,940 228,999
John P. Stupp, Jr. 17,319,551 208,388
The proposal to ratify the appointment of Deloitte & Touche LLP,
Independent Registered Public Accounting Firm, to audit the
accounts of the Company for the fiscal year ending September 30,
2005 was passed upon the following vote:
FOR AGAINST ABSTAIN
--- ------- -------
17,310,919 127,241 89,779
Item 6. Exhibits
(a) See Exhibit Index
33
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: April 26, 2005 Barry C. Cooper
--------------------- Chief Financial Officer
(Authorized Signatory and
Chief Financial Officer)
34
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: April 26, 2005 Barry C. Cooper
--------------------- Chief Financial Officer
(Authorized Signatory and
Chief Financial Officer)
35
INDEX TO EXHIBITS
-----------------
Exhibit
No.
- -------
10.1 - Automated Meter Reading Services Agreement executed March 11,
2005. Confidential portions of this exhibit have been omitted
and filed separately with the SEC pursuant to a request for
confidential treatment.
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.
36