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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
FORM 10-K
ANNUAL REPORT
For the Fiscal Year Ended September 30, 2002
THE LACLEDE GROUP, INC.
LACLEDE GAS COMPANY
720 Olive Street, St. Louis, MO 63101
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
--------- ---------
- -------------------------------------------------------------------------------
Commission File Exact Name of Registrant as States of I.R.S.
Number Specified in its Charter and Incorporation Employer
Principal Office Address and ID
Telephone Number Number
- -------------------------------------------------------------------------------
1-16681 The Laclede Group, Inc. Missouri 74-2976504
720 Olive Street
St. Louis, MO 63101
314-342-0500
- -------------------------------------------------------------------------------
1-1822 Laclede Gas Company Missouri 43-0368139
720 Olive Street
St. Louis, MO 63101
314-342-0500
- -------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act (as of the date
of this report)
- -------------------------------------------------------------------------------
Name of Registrant Title of Each Name of Each Exchange
Class on which registered
- -------------------------------------------------------------------------------
The Laclede Group, Inc. Common Stock $1.00 New York Stock Exchange
par value
- -------------------------------------------------------------------------------
The Laclede Group, Inc. Preferred Share New York Stock Exchange
Purchase Rights
- -------------------------------------------------------------------------------
Laclede Gas Company None
- -------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such report),
The Laclede Group, Inc.: Yes X No
----- -----
Laclede Gas Company: Yes X No
----- -----
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
registrant amounted to $447,055,178 as of October 31, 2002.
1
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Shares Outstanding At
Registrant Description of Common Stock October 31, 2002
- ---------- --------------------------- ----------------
The Laclede Group, Inc. Common Stock ($1.00 Par Value) 18,957,798
Laclede Gas Company Common Stock ($1.00 Par Value) 100
Incorporated by Reference: Form 10-K Part III
Proxy Statement dated December 24, 2002*
Index to Exhibits is found on page 60.
*The information under the captions "Compensation Committee Report Regarding
Executive Compensation", "Performance Graph", and "Audit Committee Report"
on pages 12-16 of the Proxy Statement are NOT incorporated by reference.
2
Part I
Item 1. Business
The Laclede Group, Inc. (Laclede Group or the Company) is an exempt public
holding company committed to providing reliable natural gas service through
its regulated core utility operations while developing its presence in
non-regulated activities that fit well and provide opportunities for
sustainable growth. Its primary subsidiary--Laclede Gas Company (Laclede Gas
or the Utility)--is the largest natural gas distribution utility in
Missouri, serving more than 630,000 residential, commercial and industrial
customers in St. Louis and surrounding counties of eastern Missouri. In
January 2002, Laclede Group acquired SM&P Utility Resources, Inc. (SM&P),
one of the nation's major underground locating and marking service
businesses, performing more than 10 million locates annually. SM&P,
headquartered in Carmel, Indiana, now is a wholly owned subsidiary of
Laclede Group. Other non-regulated subsidiaries provide less than 10% of
revenues.
The Consolidated Financial Statements included in this report present the
consolidated financial position, results of operations and cash flows of
Laclede Group after the October 1, 2001 restructuring, as well as the
consolidated financial position, results of operations and cash flows of
Laclede Gas prior to restructuring. The consolidated financial position,
results of operations and cash flows of Laclede Gas Company immediately
before the restructuring are essentially identical to the consolidated
financial position, results of operations and cash flows of Laclede Group
immediately after the restructuring.
The Consolidated Financial Statements for Laclede Gas present the
consolidated financial position, results of operations and cash flows of
Laclede Gas throughout the reported periods, as well as the consolidated
financial position, results of operations and cash flows of Laclede Gas'
former subsidiaries prior to the October 1, 2001 restructuring. These
consolidated financial statements, notes to consolidated financial
statements, and management's discussion and analysis are included in this
report as Exhibit 99.1.
NATURAL GAS SUPPLY
The past year has been one of unprecedented turmoil for the large mid-market
supply aggregators that recently have played a significant role nationally
in natural gas trading and marketing. Laclede Gas did not participate in
such activities and was able to avoid adverse financial impact during this
difficult period. However, the changing marketplace caused us to
significantly revamp our gas supply portfolio for the current heating
season. Relationships are being re-established with large equity owners of
natural gas in addition to smaller natural gas companies that, until
recently, have used the large supply aggregators as intermediaries.
Laclede's firm transportation access to a diverse number of strategic
locations has facilitated the process of restructuring our gas supply
portfolio.
Laclede Gas Company's fundamental gas supply strategy remains unchanged: to
meet the two-fold objective of 1) ensuring that the gas supplies we acquire
are dependable and will be delivered when needed and, 2) insofar as is
compatible with that dependability, purchasing gas that is economically
priced. In structuring our natural gas supply portfolio, we continue to
focus on natural gas assets that are strategically positioned to meet the
gas company's primary objectives. We utilize both Mid-Continent and Gulf
Coast gas sources to provide a level of supply diversity that facilitates
the optimization of pricing differentials as well as protecting against the
potential of regional supply disruptions.
In fiscal 2002, Laclede Gas purchased natural gas from 25 different
suppliers to meet current gas sales and storage injection requirements.
Natural gas purchased by Laclede Gas for delivery to our utility service
area through the Mississippi River Transmission Corporation (MRT) system
totaled 59.2 billion cubic feet (Bcf). Our utility also holds firm
transportation on several interstate pipeline systems that access our gas
supplies upstream of MRT. An additional 10.9 Bcf of gas was purchased on the
Panhandle Eastern Pipe Line Company system, and 10.2 Bcf on the Williams Gas
Pipeline system. Some of our commercial and industrial customers also
purchased their own gas and arranged for delivery to them of approximately
17.4 Bcf for transportation through our distribution system.
The fiscal 2002 peak day sendout of natural gas to our utility customers
occurred on February 26, 2002, when the average temperature was 18 degrees
Fahrenheit. On that day, our customers consumed 864,651 million Btu of
natural gas. About two-thirds of this peak day demand was met with natural
gas transported to St. Louis through the MRT, Panhandle, and Williams
transportation systems, and the other third was met from the Utility's
on-system storage and peak shaving resources.
3
UNDERGROUND NATURAL GAS STORAGE
Laclede Gas has a contractual right to store approximately 23.1 Bcf of gas
in MRT's storage system located in Unionville, Louisiana. MRT's tariffs
allow injections into storage from May 16 through November 15 and require
the withdrawal from storage of all but 2.2 Bcf from November 16 through May
15.
In addition, Laclede Gas supplements flowing pipeline gas with natural gas
withdrawn from its underground storage field located in St. Louis and St.
Charles Counties. The field is designed to provide 357,000 MMBtu of natural
gas withdrawals on a peak day, and annual withdrawals of approximately
5,500,000 MMBtu of gas based on the inventory level that Laclede plans to
maintain.
PROPANE SUPPLY
Laclede Pipeline Company, a wholly owned subsidiary, operates a propane
pipeline that connects the propane storage facilities of Laclede Gas in St.
Louis County, Missouri, to propane supply terminal facilities located at
Wood River and Cahokia, Illinois. Laclede Gas vaporizes the propane to
supplement its natural gas supply and meet the peak demands on the
distribution system.
REGULATORY MATTERS
After regulatory review that occupied a good deal of calendar 2001, Laclede
Gas obtained approval from the Missouri Public Service Commission to
implement new rates, effective December 1, 2001, that were designed to
increase annual utility base rates by about $15 million. The settlement
reached in this case also permitted Laclede Gas to continue to retain all
income earned from sales made outside of its traditional service area and
further provided for retention of all revenues derived from the release of
available pipeline capacity. However, the extreme warm weather of the
2001-2002 heating season eroded much of the fiscal 2002 impact of these new
rates, and the settlement itself left important issues unresolved.
Therefore, on January 25, 2002, Laclede Gas filed a second request for a
general rate increase that would have increased the Company's annual
revenues by $36.1 million to recover costs related to the operation of its
gas distribution system. As part of this rate increase filing, the utility
also proposed a Weather Mitigation Plan that was designed to help stabilize
annual revenues, which historically have been highly dependent on the
weather. During August and September 2002, we entered into a series of
stipulations and agreements with the Commission's Staff, the Office of the
Public Counsel and other parties to settle the rate case in a manner
designed to generate an additional $14 million in annual rate revenues. In
addition, the settlement included the establishment of a new, less
weather-sensitive rate design to ensure that the utility's relatively fixed
distribution costs - costs that are required to serve our heating customers
- - are primarily recovered from sales made to those customers in a manner
that does not vary with the weather. In the settlement, we also were able to
stabilize the regulatory treatment of pension expense, which previously
tended to create significant year-to-year fluctuations in our utility
operating expenses. By essentially locking in pension expense for the
future, we have stabilized another volatile factor that previously had
impacted results. Finally, the settlement imposed a moratorium on additional
general rate increase filings by the Company until March 1, 2004. On October
3, 2002, the Commission approved the comprehensive rate case settlement, and
the new rates went into effect November 9, 2002.
On February 19, 2002, Laclede Gas made a filing to revise its Purchased Gas
Adjustment (PGA) Clause so that we would be permitted to adjust the gas cost
component of our rates more frequently to recover our costs more closely to
the time period in which they are incurred and to better reflect market
prices during the high-volume winter months. The Commission approved such a
plan, in which scheduled gas cost adjustments will be implemented in
November, January, March, and June. As part of the same ruling, the
Commission also clarified that costs and cost reductions associated with the
utility's use of natural gas financial instruments, including carrying
costs, are gas costs that are recoverable through the PGA mechanism.
On June 28, 2002, the Commission's Staff, in a proceeding established to
review the utility's gas costs for fiscal 2001, recommended the disallowance
of approximately $4.9 million in pre-tax gains achieved by the utility
through its incentive-based Price Stabilization Program, which was
discontinued beyond March 31, 2002. We believe that Staff's position lacks
merit and intend to vigorously oppose the adjustment in a proceeding for
which a hearing is scheduled to occur in February 2003.
On July 29, 2002, Laclede Gas made a tariff filing to implement an
innovative "Catch-Up/Keep-Up" Program for eligible, low-income customers.
The purpose of this unique, new program is to assist those who have fallen
behind in their payments manage their energy bills in a manner that, over
time, will eliminate their past due balances for natural gas service, ensure
their continued access to gas service under manageable terms, and ultimately
reduce the level of uncollectibles experienced by the utility to the benefit
of all customers. After intensive discussions, on September 18, 2002,
Laclede Gas withdrew its original filing in order to prepare a new filing,
which we ultimately made on September 23, 2002, that reflected various
revisions responsive to the comments of the Staff and the Office of the
Public Counsel in connection with our original filing. An essential aspect
of this program is that it is to be funded
4
by savings we are able to achieve as a result of our ability to successfully
negotiate discounts from the rates charged by our pipeline suppliers. A
hearing is scheduled in early December, after which the Commission will
determine whether to allow us to implement this important program.
As previously reported, in September 2001, the Commission ruled that our Gas
Supply Incentive Plan (GSIP) should be allowed to expire on September 30,
2001. Under the GSIP, the utility shared with its customers certain gains
and losses related to the acquisition and management of its gas supply
assets. On February 19, 2002, the Commission denied our application for
rehearing, whereupon we filed a petition for judicial review of the
Commission's decision with the Cole County Circuit Court, together with a
motion requesting that the Commission's decision be stayed. The request for
stay was denied on May 13, 2002. The petition for judicial review is still
pending.
OTHER PERTINENT MATTERS
At its January 25, 2001 annual meeting of shareholders, Laclede Gas
shareholders approved, by a two-thirds majority, a proposal to reorganize
its corporate structure to form a holding company, known as The Laclede
Group, Inc. Laclede subsequently received the necessary approval for this
restructuring from the MoPSC, and the corporate restructuring became
effective on October 1, 2001. Under the new structure, Laclede Gas and its
former subsidiaries operate as separate subsidiaries of The Laclede Group.
The following charts illustrate the major organizational changes resulting
from this restructuring.
Organization Structure
Prior to October 1, 2001
-------------------
Laclede Gas Company
-------------------
|
--------------------------------------------------------------------
| | |
---------------------- --------------------------- ------------------------
Laclede Investment LLC Laclede Development Company Laclede Pipeline Company
---------------------- --------------------------- ------------------------
| |
------------------------------ ---------------------
Laclede Energy Resources, Inc. Laclede Venture Corp.
------------------------------ ---------------------
|
---------------------------------
Laclede Gas Family Services, Inc.
---------------------------------
Organization Structure
Effective October 1, 2001
-----------------------
The Laclede Group, Inc.
-----------------------
|
-------------------------------------------------------------------------------------------
| | | |
- ------------------- ---------------------- --------------------------- ------------------------
Laclede Gas Company Laclede Investment LLC Laclede Development Company Laclede Pipeline Company
- ------------------- ---------------------- --------------------------- ------------------------
| |
------------------------------ ---------------------
Laclede Energy Resources, Inc. Laclede Venture Corp.
------------------------------ ---------------------
|
---------------------------------
Laclede Gas Family Services, Inc.
---------------------------------
Since the October 1, 2001 restructuring, stock certificates previously
representing shares of Laclede Gas common stock have represented the same
number of shares of The Laclede Group common stock. All serial preferred
stock issued by Laclede Gas remains issued and outstanding as shares of
Laclede Gas serial preferred stock. The dividend rate for the preferred
stock has not changed and those dividends will continue to be paid by
Laclede Gas. All outstanding indebtedness and other obligations of Laclede
Gas prior to the restructuring remain outstanding as obligations of Laclede
Gas.
On October 1, 2001, The Laclede Group had no outstanding securities other
than common stock, but it could issue other securities in the future. The
Laclede Group common stock is listed on the New York Stock Exchange and
trades under the ticker symbol "LG".
5
The business of Laclede Gas is subject to a seasonal fluctuation with the
peak period occurring in the winter season. The operations of SM&P tend to
be counter-seasonal to those of Laclede Gas and are impacted by construction
trends. SM&P's revenues are dependent on a limited number of customers,
primarily in the utility and telecommunications sector, with contracts that
may be terminated on as short as 30 days' notice.
*****
As of September 30, 2002, Laclede Gas had 1,948 employees, which includes 16
part-time employees. SM&P had 2,005 employees, which includes 17 part-time
employees.
*****
Laclede Gas has a labor agreement with Locals 5-6 and 5-194 of the Paper,
Allied-Industrial, Chemical & Energy Workers International Union (formerly
known as the Oil, Chemical and Atomic Workers International Union), two
locals which represent approximately 70% of Laclede's employees. On July 30,
2000, Laclede and Union representatives reached a new four-year labor
agreement replacing the prior agreement which was to expire July 31, 2000.
The new contract extends through July 31, 2004. The settlement resulted in
wage increases of 2.75% in all four years, along with lump-sum payment
provisions and other benefit improvements.
*****
The business of Laclede Gas has monopoly characteristics in that it is the
only distributor of natural gas within its (franchised) service area. The
principal competition is the local electric company. Other competitors in
Laclede's service area include suppliers of fuel oil, coal, liquefied
petroleum gas in outlying areas, natural gas pipelines which can directly
connect to large volume customers, and in a portion of downtown St. Louis, a
district steam system. Gas for househeating, certain other household uses,
and commercial and industrial space heating has historically been sold by
Laclede at prices generally equal to or lower than are charged for other
energies. Coal is price competitive as a fuel source for very large boiler
plant loads, but environmental requirements have forestalled any significant
market inroads. Oil and propane can be used to fuel boiler loads and certain
direct-fired process applications, but these fuels require on-site storage
and vary widely in price throughout the year, thus limiting their
competitiveness. In certain cases, district steam has been competitive with
gas for downtown area heating users.
Laclede Gas' residential, commercial, and small industrial markets,
representing 83% of sales, remain committed to natural gas. Given the
current adequate level of supply, Laclede Gas believes that the relationship
between competitive equipment and operating costs will not change
significantly in the foreseeable future, and that these markets will
continue to be supplied by natural gas.
Laclede Gas' competitive exposure is presently limited to space and water
heating applications in the new multi-family and commercial rental markets.
Certain alternative heating systems can be cost competitive in traditional
markets, but the performance and reliability of natural gas systems has
contained the growth of these alternatives. Several large customers use coal
for boiler fuel. Environmental restrictions and their associated high
capital costs for new equipment forestalls options toward further use of
coal.
Laclede Gas offers gas transportation service to its large user industrial
and commercial customers. The tariff approved for that type of service
produces a margin similar to that which Laclede Gas would have received
under its regular sales rates. The availability of gas transportation
service and favorable spot market prices for natural gas during certain
times of the year may offer additional competitive advantages to Laclede Gas
and new opportunities for distributed generation, cogeneration, and large
tonnage air conditioning applications.
*****
Laclede Gas is subject to various environmental laws and regulations that,
to date, have not materially affected the company's financial position and
results of operations. For a detailed discussion of environmental matters,
see Note 14 in the Notes to the Consolidated Financial Statements on page
46.
*****
Laclede Group issued 43,300 shares of its common stock during fiscal 2002
under its Dividend Reinvestment and Stock Purchase Plan. No additional
common stock shares were issued in fiscal 2001.
Laclede Gas cancelled its treasury stock of 1,865,638 shares, in conjunction
with the restructuring on October 1, 2001.
6
Customers and revenues contributed by each class of customers of Laclede Gas
for the last three fiscal years are as follows:
Regulated Gas Distribution Operating Revenues $(000)
2002 2001 2000
---- ---- ----
Residential $387,594 $619,090 $346,159
Commercial & Industrial 142,259 250,741 123,578
Interruptible 1,769 3,063 1,922
Transportation 12,868 14,350 13,722
Off-System and Other Incentive 43,443 30,218 40,163
Provision for Refunds and Other 4,164 5,780 3,706
-------- -------- --------
Total $592,097 $923,242 $529,250
======== ======== ========
Customers (End of Period)
2002 2001 2000
---- ---- ----
Residential 588,630 584,269 586,783
Commercial & Industrial 39,842 39,264 39,419
Interruptible 14 15 14
Transportation 152 152 154
------- ------- -------
Total Customers 628,638 623,700 626,370
======= ======= =======
Laclede Gas has franchises having initial terms varying from five years to
an indefinite duration. Generally, a franchise allows Laclede Gas to lay
pipes and other facilities in the community. The franchise in Florissant,
Missouri expired in 1992 and since that time Laclede has continued to
provide service in that community without a formal franchise. All of the
franchises are free from unduly burdensome restrictions and are adequate for
the conduct of Laclede Gas' current public utility business in the State of
Missouri.
*****
Non-Regulated Services:
On January 28, 2002, Laclede Group completed its acquisition from NiSource,
Inc. of 100% of the stock of SM&P, one of the nation's major underground
locating and marking service businesses. SM&P, a Carmel, Indiana-based
company, performs over 10 million locates annually. During fiscal 2002, its
approximate 2,000 employees operated across 10 centrally located states -
Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Ohio, Oklahoma,
Texas and Wisconsin. Locators mark the placement of underground facilities
for providers of telephone, natural gas, electric, water, cable TV and fiber
optic services so that construction work can be performed without damaging
buried facilities. As a result of the acquisition, SM&P's earnings flow will
not only diversify Laclede Group's earnings but also will be
counter-seasonal to those of Laclede Gas. SM&P is a subsidiary of Laclede
Group and will remain headquartered in Indiana. This acquisition was
financed initially with conventional bank debt totaling $42.8 million.
*****
Other Non-Regulated Subsidiaries include:
Laclede Investment LLC, a wholly owned subsidiary of The Laclede Group,
invests in other enterprises and has made loans to several joint ventures
engaged in real estate development.
Laclede Energy Resources, Inc., a wholly owned subsidiary of Laclede
Investment LLC, is engaged in non-regulated efforts to market natural gas
and related activities.
Laclede Gas Family Services, Inc., a wholly owned subsidiary of Laclede
Energy Resources, Inc., is a registered insurance agency in the State of
Missouri. It promotes the sale of insurance-related and other direct
marketing products.
Laclede Development Company, a wholly owned subsidiary of The Laclede Group,
participates in real estate development, primarily through joint ventures.
Laclede Venture Corp., a wholly owned subsidiary of Laclede Development
Company, offers services for the compression of natural gas to third parties
who desire to use or to sell compressed natural gas for use in vehicles.
Laclede Venture Corp. also has a 28.5% interest in the LBP Partnership, a
general
7
partnership which previously engaged in research and development of light
beam profiling technology. There is presently no book value and no effect on
earnings is anticipated from this partnership investment.
Laclede Energy Services, Inc., a wholly owned subsidiary of The Laclede
Group, Inc., was formed during fiscal 2002, and is engaged in providing
energy management services. Effective May 1, 2002, Laclede Energy Services,
Inc., began providing energy management services to Laclede Gas and Laclede
Energy Resources, Inc.
The lines of business that constitute the other non-regulated activities of
the corporate family are not considered separately reportable operating
segments as defined by current accounting standards.
Item 2. Properties
The principal utility properties of Laclede Gas consist of approximately
8,152 miles of gas main, related service pipes, meters and regulators. Other
physical properties include regional office buildings and holder stations.
Extensive underground gas storage facilities and equipment are located in an
area in North St. Louis County extending under the Missouri River into St.
Charles County. Substantially all of Laclede Gas' utility plant is subject
to the liens of its mortgage.
All of the utility properties of Laclede Gas are held in fee or by easement
or under lease agreements. The principal lease agreements include
underground storage rights which are of indefinite duration and the general
office building. The current lease on the general office building extends
through February 2005 with options to renew for up to 15 additional years.
For information on SM&P's lease obligations, see Note 14 in the Notes to the
Consolidated Financial Statements on page 46.
Other non-regulated properties of The Laclede Group do not constitute a
significant portion of its properties.
Item 3. Legal Proceedings
For a description of environmental matters, see Note 14 to the Consolidated
Financial Statements on page 46. For a description of pending regulatory
matters of Laclede Gas, see Part I, Item I, Business, Regulatory Matters on
page 4.
In late August 2001, Laclede Gas was named a defendant in a lawsuit in the
Circuit Court of the City of St. Louis, Missouri, Ronald J. Johnson vs.
Laclede Gas Company, alleging that a class of persons residing in homes
provided natural gas by Laclede Gas through direct buried copper service
lines have, among other things, suffered diminution in property values and
annoyance and discomfort due to residing in homes served by such allegedly
corroded lines. The suit sought actual and punitive damages and an
injunction requiring the repair and/or replacement of all such lines, which
were alleged to number approximately 78,000. By letter dated September 21,
2001, its liability insurer advised Laclede Gas that the claims in the
lawsuit, as pled, failed to qualify for any coverage under its excess
general liability policy. Laclede Gas disagrees and continues to assert its
right to coverage under the policy. The gas distribution business of Laclede
Gas is regulated by the MoPSC, including as to safe and adequate service and
rate matters. Under a current program, the Commission has provided for the
monitoring and replacement of such lines. The costs of replacement,
including carrying costs, have been included in rates established by the
Commission. The MoPSC filed a Motion to Intervene and a Motion to Strike
Plaintiff's Prayer for Injunctive Relief and to Stay Matters Within the
Primary Jurisdiction of the MoPSC. The court subsequently granted the
MoPSC's request for intervention. Laclede Gas filed a Motion to Dismiss
which urged, among other things, the exclusive jurisdiction of the MoPSC as
to gas safety matters generally and the direct buried copper service
replacement program in particular. Laclede Gas filed a motion to dismiss the
lawsuit that was granted by the Court on February 22, 2002. The plaintiff
did not file an amended petition within the time granted by the Court but
filed an appeal on April 3, 2002. On May 13, 2002, the plaintiff dismissed
the appeal.
Laclede Group and its subsidiaries are involved in litigation, claims, and
investigations arising in the normal course of business. While the results
of such litigation cannot be predicted with certainty, management, after
discussion with counsel, believes the final outcome will not have a material
adverse effect on the consolidated financial position and results of
operations reflected in the financial statements presented herein.
8
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 2002.
EXECUTIVE OFFICERS OF REGISTRANT
Name, Age, and Position with Company Appointed (1)
D. H. Yaeger, Age 53
The Laclede Group
-----------------
Chairman, President and Chief Executive Officer October 2000
Laclede Gas
-----------
Chairman, President and Chief Executive Officer January 1999
President and Chief Executive Officer January 1999
President and Chief Operating Officer December 1997
Executive Vice President - Operations and
Marketing September 1995
SM&P
----
Chief Executive Officer January 2002
K. J. Neises, Age 61
Laclede Gas
-----------
Executive Vice President - Energy and
Administrative Services January 2002
Senior Vice President - Energy and
Administrative Services March 1998
Senior Vice President - Gas Supply and
Regulatory Affairs September 1995
J. Moten, Jr., Age 61
Laclede Gas
-----------
Senior Vice President - Operations and Marketing July 2001
Vice President - Community Relations January 1994
R. E. Shively, Age 40
Laclede Gas
-----------
Senior Vice President - Business and Services
Development (3) January 2001
SM&P
----
President March 2002
B. C. Cooper, Age 43
The Laclede Group
-----------------
Chief Financial Officer (2) September 2002
Laclede Gas
-----------
Chief Financial Officer September 2002
C. R. Hoeferlin, Age 40
Laclede Gas
-----------
Vice President - Operations July 2001
Assistant Vice President - Operations January 2001
(Superintendent of Operations) May 1999
(Chief Engineer) December 1996
9
P. J. Palumbo, Age 57
Laclede Gas
-----------
Vice President - Industrial Relations September 1992
M. C. Pendergast, Age 46
Laclede Gas
-----------
Vice President - Associate General Counsel January 2002
Assistant Vice President - Associate General Counsel January 2000
(Associate General Counsel) November 1997
(Assistant General Counsel) November 1993
M. R. Spotanski, Age 42
Laclede Gas
-----------
Vice President - Finance January 2001
Assistant Vice President - Finance January 2000
(Assistant to the President) March 1998
(Manager, Gas Supply Planning) January 1996
J. A. Fallert, Age 47
Laclede Gas
-----------
Controller February 1998
(Manager, Financial Services) February 1992
R. L. Krutzman, Age 56
The Laclede Group
-----------------
Treasurer and Assistant Secretary October 2000
Laclede Gas
-----------
Treasurer and Assistant Secretary February 1996
SM&P
----
Assistant Treasurer January 2002
M. C. Kullman, Age 42
The Laclede Group
-----------------
Corporate Secretary October 2000
Laclede Gas
-----------
Secretary and Associate General Counsel February 2001
Secretary and Associate Counsel February 1998
(Associate Counsel) August 1990
SM&P
----
Secretary January 2002
P. B. Hunker, Jr., Age 63
Laclede Gas
-----------
Assistant Vice President - Associate General Counsel February 1997
S. F. Mathews, Age 44
Laclede Gas
-----------
Assistant Vice President - Gas Supply February 2001
(Director of Gas Supply) September 1995
R. L. Sherwin, Age 49
Laclede Gas
-----------
Assistant Vice President - Regulatory Administration February 1999
Assistant Vice President - Human Resources January 1997
10
R. A. Skau, Age 45
Laclede Gas
-----------
Assistant Vice President - Human Resources September 2001
(Director, Labor Relations) February 1999
(Manager, Labor Relations) February 1996
M. D. Waltermire, Age 44
Laclede Gas
-----------
Assistant Vice President - Planning May 2001
(Director - Internal Audit) January 1996
L. D. Rawlings, Age 49
Laclede Gas
-----------
Assistant Treasurer (4) February 2000
( ) Indicates a non-officer position.
(1) Officers of Laclede Gas Company are normally reappointed at the Annual
Meeting of the Board of Directors in January of each year "to serve for the
ensuing year and until their successors are elected and qualify".
(2) Mr. Cooper served as Vice President of Finance at GenAmerica Corporation
since 2000, and prior to that he was Vice President/Controller from 1999
through 2000 and Second Vice President/Associate Controller at GenAmerica
Corporation from 1995 through 1999. Before joining GenAmerica Corporation,
he was with KPMG Peat Marwick LLP.
(3) Prior to joining Laclede, Mr. Shively was a principal in the Atlanta
office of Scott Madden & Associates since December 1994.
(4) Ms. Rawlings served as Vice President and Assistant Treasurer at
Mercantile Bancorporation, which became Firstar Corp. in September 1999,
from February 1996 to January 2000.
11
Part II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
At September 30, 2002, there were 7,458 holders of record of Laclede's
common stock, which was listed on the New York Stock Exchange. As of October
1, 2001, the certificates for Laclede Gas common stock are deemed to
represent the same number of shares of The Laclede Group common stock. The
Laclede Group's stock is listed on the New York Stock Exchange and trades
under the symbol "LG".
Common Stock Market and Dividend Information
Price Range Dividends
Fiscal 2002 High Low Declared
- --------------------------------------------------------
1st Quarter 25.300 22.600 $.335
2nd Quarter 24.900 22.000 $.335
3rd Quarter 24.880 22.000 $.335
4th Quarter 25.000 19.000 $.335
Price Range Dividends
Fiscal 2001 High Low Declared
- --------------------------------------------------------
1st Quarter 24.750 21.375 $.335
2nd Quarter 24.625 21.250 $.335
3rd Quarter 25.480 23.100 $.335
4th Quarter 25.400 21.750 $.335
12
Item 6. Selected Financial Data
The Laclede Group, Inc.
Fiscal Years Ended September 30
(Thousands, Except Per Share Amounts) 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Summary of Operations
Operating Revenues:
Regulated
Gas distribution $ 592,097 $ 923,242 $ 529,250 $ 473,031 $ 547,229
Non-Regulated
Services 94,116 - - - -
Other 69,026 78,867 36,878 18,287 14,614
---------- ---------- ---------- ---------- ----------
Total operating revenues 755,239 1,002,109 566,128 491,318 561,843
---------- ---------- ---------- ---------- ----------
Operating Expenses:
Regulated:
Natural and propane gas 340,045 640,006 294,717 246,294 311,759
Other operation expenses 106,027 101,915 86,970 83,661 86,128
Maintenance 17,813 19,262 18,556 19,517 18,665
Depreciation & amortization 24,215 26,193 24,672 21,470 25,304
Taxes, other than
income taxes 48,342 65,062 42,788 41,660 43,773
---------- ---------- ---------- ---------- ----------
Total regulated operating
expenses 536,442 852,438 467,703 412,602 485,629
Non-Regulated
Services 90,771 - - - -
Other 68,264 77,346 35,082 17,497 12,894
---------- ---------- ---------- ---------- ----------
Total operating expenses 695,477 929,784 502,785 430,099 498,523
---------- ---------- ---------- ---------- ----------
Operating Income 59,762 72,325 63,343 61,219 63,320
Allowance for Funds Used
During Construction (149) 749 397 739 609
Other Income and Income
Deductions - Net 827 668 338 (942) 674
---------- ---------- ---------- ---------- ----------
Income Before Interest
and Income Taxes 60,440 73,742 64,078 61,016 64,603
---------- ---------- ---------- ---------- ----------
Interest Charges:
Interest on long-term debt 20,820 18,372 15,164 13,966 14,797
Other interest charges 4,989 10,067 8,844 6,627 6,473
---------- ---------- ---------- ---------- ----------
Total interest charges 25,809 28,439 24,008 20,593 21,270
---------- ---------- ---------- ---------- ----------
Income Before Income Taxes 34,631 45,303 40,070 40,423 43,333
Income Taxes 12,247 14,831 14,105 14,361 15,441
Dividends on Redeemable Preferred
Stock - Laclede Gas 68 87 93 97 97
---------- ---------- ---------- ---------- ----------
Net Income Applicable to
Common Stock $ 22,316 $ 30,385 $ 25,872 $ 25,965 $ 27,795
========== ========== ========== ========== ==========
Earnings Per Share of
Common Stock $1.18 $1.61 $1.37 $1.43 $1.58
========== ========== ========== ========== ==========
13
Item 6. Selected Financial Data (continued)
The Laclede Group, Inc.
Fiscal Years Ended September 30
(Thousands, Except Per Share Amounts) 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Dividends Declared-
Common Stock $ 25,311 $ 25,296 $ 25,297 $ 24,459 $ 23,229
Dividends Declared Per
Share of Common Stock $1.34 $1.34 $1.34 $1.34 $1.32
Utility Plant
Gross Plant-End of Period $ 988,747 $ 949,775 $ 915,998 $ 872,527 $ 833,685
Net Plant-End of Period 594,376 569,640 545,715 517,635 490,585
Construction Expenditures 48,765 46,952 51,635 48,698 47,254
Property Retirements 9,769 13,141 6,663 8,190 6,205
Goodwill 27,455 - - -
Other Property and Investments 46,986 32,893 29,664 27,866 33,834
Total Assets $1,081,873 $ 975,910 $ 931,740 $ 837,664 $ 777,291
Capitalization-
End of Period
Common Stock and Paid-In
Capital $ 83,588 $ 106,590 $ 106,579 $ 106,570 $ 82,460
Retained Earnings 202,517 205,512 200,423 199,848 198,342
Accumulated Other
Comprehensive Income (Loss) (339) - - (77) -
Treasury Stock - (24,017) (24,017) (24,017) (24,017)
----------- ---------- ---------- ----------- ----------
Common stock equity 285,766 288,085 282,985 282,324 256,785
Redeemable Preferred Stock -
Laclede Gas 1,266 1,588 1,763 1,923 1,960
Long-Term Debt 259,545 284,459 234,408 204,323 179,238
----------- ---------- ---------- ----------- ----------
Total capitalization $ 546,577 $ 574,132 $ 519,156 $ 488,570 $ 437,983
=========== ========== ========== =========== ==========
Shares of Common Stock
Outstanding-End of Period 18,921 18,878 18,878 18,878 17,628
Book Value Per Share $15.10 $15.26 $14.99 $14.96 $14.57
Laclede Gas Company's Selected Financial Data is included in Exhibit 99.1.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE LACLEDE GROUP, INC.
INTRODUCTION
This management's discussion analyzes the financial condition and results of
operations of The Laclede Group, Inc. (Laclede Group or the Company) and its
subsidiaries, under the corporate organizational structure that was in place
during the three fiscal years ended September 30, 2002. It includes
management's view of factors that affect its business, explanations of past
financial results including changes in earnings and costs from the prior
year, and their effects on overall financial condition and liquidity.
Effective October 1, 2001, the corporation reorganized, such that Laclede
Gas Company (Laclede Gas or the Utility) and its subsidiaries became
separate subsidiaries of Laclede Group, an exempt holding company under the
Public Utility Holding Company Act of 1935. The consolidated results of
Laclede Group for fiscal year 2002 are comparable to the consolidated
results for Laclede Gas for fiscal years 2001 and 2000. Note 2 to the
Consolidated Financial Statements discusses the new holding company
structure.
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Certain words, such as "may,"
"anticipate," "believe," "estimate," "expect," "intend," "plan," "seek," and
similar words and expressions identify forward-looking statements that
involve uncertainties and risks. Future developments may not be in
accordance with our expectations or beliefs and the effect of future
developments may not be those anticipated. Among the factors that may cause
results to differ materially from those contemplated in any forward-looking
statement are:
o weather conditions and catastrophic events;
o economic, competitive, political and regulatory conditions;
o legislative, regulatory and judicial mandates and decisions, some of
which may be retroactive, including those affecting
o allowed rates of return
o incentive regulation
o industry and rate structures
o purchased gas adjustment provisions
o franchise renewals
o environmental or safety matters
o taxes
o accounting standards;
o the results of litigation;
o retention, ability to attract, ability to collect from and conservation
efforts of customers;
o capital and energy commodity market conditions including the ability to
obtain funds for necessary capital expenditures and general operations
and the terms and conditions imposed for obtaining sufficient gas
supply; and
o employee workforce issues.
Readers are urged to consider the risks, uncertainties and other factors
that could affect our business as described in this report. All
forward-looking statements made in this report rely upon the safe harbor
protections provided under the Private Securities Litigation Reform Act of
1995. We do not, by including this statement, assume any obligation to
review or revise any particular forward-looking statement in light of future
events.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the Company's Consolidated
Financial Statements and the combined notes thereto.
RESULTS OF OPERATIONS
Earnings
Laclede Group's results are primarily impacted by the regulated activities
of its largest subsidiary, Laclede Gas, Missouri's largest natural gas
distribution company. Utility earnings are generated by the sale of heating
energy, which historically have been heavily influenced by the weather. The
seasonal effect of the Utility is tempered somewhat by the results of SM&P
Utility Resources, Inc. (SM&P), a wholly owned underground locating and
marking service business acquired on January 28, 2002, whose operations tend
to be counter-seasonal to those of Laclede Gas.
Net income applicable to common stock for fiscal 2002 was $22.3 million,
compared with $30.4 million for fiscal 2001, and $25.9 for fiscal 2000.
Temperatures in the Laclede Gas service area during fiscal 2002, the fifth
warmest on record, were 15% warmer than normal and 22% warmer than fiscal
2001. Temperatures during fiscal 2001 were 10% colder than normal and 30%
colder than in fiscal 2000--which was the third warmest over the last 100
years.
15
Laclede Group's earnings were $1.18 per share for the twelve months ended
September 30, 2002 compared with $1.61 per share for the same period last
year. The $.43 per share decrease in earnings was primarily attributable to
reduced earnings reported by Laclede Gas. The utility's earnings were
adversely affected by (1) lower gas sales arising from temperatures in its
service area that were significantly warmer than last year; and, (2) the
Missouri Public Service Commission's decision not to extend the Utility's
Gas Supply Incentive Plan (GSIP) beyond September 30, 2001. The GSIP
produced significant benefits for customers and shareholders during the past
five years during which the program was in effect. These factors were
partially offset by (1) the benefit of the general rate increase effective
on December 1, 2001; (2) nearly $4.9 million of pre-tax income from the
Utility's Price Stabilization Program (PSP) recorded this year; and (3)
higher income from off-system sales and capacity release revenues. The PSP
is discussed further in the Regulatory Matters section below. Laclede
Group's consolidated earnings were positively impacted by income recorded by
SM&P since its acquisition on January 28, 2002, amounting to approximately
$1.4 million, or $.08 per share.
As a result of the colder weather experienced during fiscal 2001 (compared
with fiscal 2000), consolidated earnings, at $1.61 per share, were up nearly
18% over fiscal 2000 earnings of $1.37 per share. The $.24 per share
increase in fiscal 2001 earnings versus fiscal 2000 was primarily due to the
benefit of the colder weather experienced during 2001. This benefit was
partially offset by higher expenses resulting from high wholesale natural
gas prices during fiscal 2001. These included a higher provision for
uncollectible accounts and higher carrying costs reflecting the interest and
other costs incurred by Laclede Gas from the date it purchased gas in the
wholesale market to the time it received payment from its customers. Laclede
Gas does not benefit from higher wholesale natural gas prices, which are set
in a competitive national market, but passes its actual purchased gas costs
through to customers. In addition to the increased costs related to the high
wholesale gas prices, fiscal 2001 expenses were higher, when compared with
fiscal 2000, due to higher pension costs, expenses related to the formation
of the holding company, and other increased costs of doing business.
Operating Revenues
Regulated operating revenues for fiscal year 2002 decreased $331.1 million,
or 35.9%, below fiscal 2001, reflecting both the return to a more
traditional level of wholesale gas prices and a weather-related reduction in
natural gas sales. Wholesale natural gas prices are passed on to Utility
customers, subject to prudence review, under the Purchased Gas Adjustment
(PGA) Clause. The decrease in operating revenues was primarily comprised of
lower wholesale natural gas costs of $228.2 million and lower natural gas
sales levels and other variations of $125.3 million. These factors were
slightly offset by the benefit of the Utility's general rate increase,
implemented December 1, 2001, amounting to $9.2 million, and higher
off-system sales, capacity release and incentive revenues of $13.2 million.
Fiscal 2001 regulated operating revenues increased $394.0 million, or 74.4%,
above fiscal 2000 primarily due to higher wholesale gas costs of $317.3
million (reflecting an unprecedented rise in market prices during the fiscal
2001 winter), higher gas sales volumes and other variations amounting to
$83.0 million, and the remaining effect of the Laclede Gas 1999 general rate
increase of $3.6 million. These factors were slightly offset by lower
off-system sales and incentive revenues of $9.9 million.
Total therms sold and transported in 2002 were 1.06 billion compared with
1.12 billion in 2001 and 1.04 billion in 2000.
Laclede Group's non-regulated operating revenues increased $94.1 million in
fiscal 2002 reflecting revenues recorded this year by its newly-acquired
subsidiary, SM&P. Other non-regulated operating revenues decreased $9.8
million in fiscal 2002 (from fiscal 2001), and increased $42.0 million in
fiscal 2001 (from fiscal 2000), primarily due to variations in gas marketing
sales by Laclede Energy Resources, Inc.
Operating Expenses
Regulated operating expenses in fiscal 2002 decreased $316.0 million, or
37.1%, from fiscal 2001. Natural and propane gas expense decreased $300.0
million primarily due to decreased rates charged by suppliers and lower
volumes purchased for sendout due to the warmer weather, partially offset by
higher off-system gas expense. Other operation and maintenance expenses
increased $2.7 million, or 2.2%, primarily due to higher group insurance
charges, higher wage rates, increased insurance premiums, lower net pension
credits, and costs to remove retired utility plant. These factors were
partially offset by a lower provision for uncollectible accounts and reduced
distribution and maintenance charges. Depreciation and amortization expense
decreased $2.0 million primarily due to the effect of lower depreciation
rates instituted December 1, 2001 and negative amortization of a portion of
the depreciation reserve effective July 1, 2002, as authorized by the MoPSC
(see Note 1 related to Utility Plant, Depreciation and Amortization). These
effects were partially offset by increased depreciable property. Taxes,
other than income, decreased $16.7 million, or 25.7%, primarily due to lower
gross receipts taxes, reflecting the decreased revenues.
Regulated operating expenses in fiscal 2001 increased $384.7 million, or
82.3%, from fiscal 2000. Natural and propane gas expense increased $345.3
million in fiscal 2001 from fiscal 2000 primarily due to nationwide
increases in natural gas rates charged by our suppliers and higher volumes
purchased for sendout arising from the colder weather, the effects of which
were slightly offset by lower off-system sales gas expense. Other operation
and maintenance expenses in 2001 increased $15.7 million, or 14.8%,
16
over 2000 primarily due to increased net pension costs, a higher provision
for uncollectible accounts, increased distribution and maintenance costs,
higher wage rates, and other increases in the costs of doing business.
Depreciation and amortization expense in 2001 increased $1.5 million, or
6.2%, primarily due to additional depreciable property. Taxes, other than
income taxes, increased $22.3 million in 2001 compared with 2000. The
increase was principally attributable to higher gross receipts taxes,
reflecting increased gas sales revenues.
Laclede Group's non-regulated operating expenses increased $90.8 million in
fiscal 2002 due to the operating expenses of SM&P. Other non-regulated
operating expenses decreased $9.1 million in fiscal 2002 (compared with
2001), and increased $42.3 million in fiscal 2001 (compared with 2000)
primarily due to variations in expenses associated with gas marketing sales
by Laclede Energy Resources, Inc.
Other Income and Income Deductions - Net
Other income and income deductions - net decreased $.7 million in fiscal
2002 (compared with fiscal 2001), and increased $.7 million in fiscal 2001
(compared with fiscal 2000). The variations for both periods primarily
reflect higher interest income recorded in fiscal 2001, partially offset by
expenses related to the holding company formation and strategic planning
initiatives also recorded in that same year.
Interest Charges
Interest expense decreased $2.6 million, or 9.2%, in fiscal 2002 (compared
with fiscal 2001) primarily due to decreased short-term interest expense
(reflecting lower rates and reduced average borrowings), partially offset by
higher interest on long-term debt resulting from the issuance of $50 million
of 6 5/8% first mortgage bonds in June 2001 and interest charges related to
the bank note used to finance the acquisition of SM&P.
Interest expense increased $4.4 million, or 18.5%, in fiscal 2001 (compared
with fiscal 2000) primarily due to the issuance of $30 million of 7.90%
first mortgage bonds in September 2000, the issuance of $50 million of 6
5/8% first mortgage bonds in June 2001, and increased short-term interest
expense (reflecting the net effect of higher average borrowings and lower
rates).
Income Taxes
The variations in income taxes for all periods reported are primarily due to
changes in pre-tax income.
Labor Agreement
On July 30, 2000, Laclede Gas and Union representatives reached a new
four-year labor agreement replacing the prior agreement that was to expire
July 31, 2000. The new contract extends through July 31, 2004. The
settlement resulted in wage increases of 2.75% in all four years, along with
lump-sum payment provisions and other benefit improvements.
Recent Developments
In November 2002, SM&P was notified by two customers that, due to actions
they have taken to address workforce management issues, they do not intend
to continue to outsource certain functions at this time, which include
locating services provided by SM&P after February and March 2003. Revenue
from these customers totaled approximately $45 million, or approximately 48%
of SM&P's revenues and 6% of Laclede Group's consolidated revenues, for
fiscal 2002. Management is currently evaluating the impact of this
development on the financial position and results of operations of the
Company.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition, results of
operations, liquidity and capital resources is based upon our financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. 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.
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
17
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).
REGULATORY MATTERS
At the state level, there have been several important developments during
the fiscal year affecting Laclede Gas, some of which are still pending.
On January 25, 2002, Laclede filed a request with the Missouri Public
Service Commission (MoPSC or Commission) for a general rate increase of
$36.1 million annually to recover costs related to the operation of its gas
distribution system. As part of this rate increase filing, the Utility
proposed a weather mitigation plan that would protect its customers from
weather-related fluctuations in their bills and help stabilize its annual
revenues in that regard. On October 3, 2002, the Commission approved a
settlement reached among the parties to the case. The terms of the
settlement include (1) an annual rate increase of $14 million effective on
November 9, 2002; (2) a moratorium on additional rate filings until March 1,
2004; and (3) an innovative rate design that is expected to provide the
Utility with the ability to recover its distribution costs, which are
essentially fixed, in a manner that is significantly less sensitive to
weather. The settlement also provided for, among other things, changes
resulting in negative amortization of the depreciation reserve of $3.4
million annually effective from July 1, 2002 until the Utility's next rate
case proceeding, minor changes in depreciation rates effective January 1,
2003, and changes in the regulatory treatment of pension costs primarily
designed to stabilize such costs, effective during fiscal 2003. Also
approved was an incentive program beginning in fiscal 2003 under which the
Utility may achieve, under specific conditions, income related to management
of its gas supply commodity costs.
On March 8, 2002, Laclede Gas filed an application requesting that the MoPSC
issue an Accounting Authority Order (AAO) that would allow Laclede Gas to
defer for future recovery consideration unrecovered costs due solely to the
negative impact of the extraordinarily warm weather experienced in the
Utility's service area during the winter of 2001-2002. Laclede Gas has filed
to withdraw its application in conjunction with the 2002 rate case
settlement.
On May 18, 2001, Laclede Gas filed a request with the Missouri Public
Service Commission for a general rate increase of $39.8 million annually to
recover costs related to the operation of its distribution system. This
filing culminated in a settlement among the parties to the case, which was
approved by the Commission on November 29, 2001. The settlement provided
Laclede Gas an annual increase of about $12 million effective December 1,
2001. Additionally, effective on December 1, 2001 Laclede Gas was permitted
to charge customers $36 to cover the cost of initiating service at a
particular address. This new charge was anticipated to generate additional
revenue of approximately $3 million annually. The settlement also provided
for the continued deferral of certain costs related to the Laclede Gas pipe
replacement program as well as recovery of costs previously deferred under
that program. The cost of removing retired utility plant is treated as an
expense pursuant to this settlement, rather than being included in
depreciation rates. However, Laclede Gas will continue to pursue a reversal
of the Commission's treatment of depreciation rates in the courts as
discussed in greater detail below. As part of the settlement, Laclede Gas
agreed to implement the terms of a rulemaking promulgated by the Commission
on November 8, 2001 that relaxed the requirements for the fiscal 2002
heating season for reinstatement of certain customers who had been
disconnected for nonpayment. The settlement provides for a recovery
mechanism under which Laclede Gas will be reimbursed for any incremental
costs associated with the new rule. Finally, under the terms of the
agreement, Laclede Gas continues to be permitted to retain all income
resulting from sales made outside its traditional service area, and is
permitted to retain all income from releases of available pipeline capacity.
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. On April 29, 2002, the Court ruled that the MoPSC's
second order was lawful and reasonable. On June 7, 2002, Laclede Gas
appealed the Circuit Court's decision to the Missouri Western District Court
of Appeals. All briefs to the Court of Appeals have been submitted and oral
arguments have been scheduled for December 2002.
Under the GSIP of Laclede Gas, the Utility shared with its customers certain
gains and losses related to the acquisition and management of its gas supply
assets. In fiscal 2001, the GSIP contributed $.29 per share to consolidated
earnings. The provisions of the GSIP extended through September 30, 2001. In
September 2001, the MoPSC ruled that the GSIP should be allowed to expire.
On February 19, 2002, the MoPSC denied Laclede Gas' application for
rehearing. Laclede Gas filed a petition for judicial review of the MoPSC's
decision with the Cole County Circuit Court, together with a motion
requesting that the MoPSC's decision be stayed. The request for stay was
denied on May 13, 2002. The petition for judicial review is still pending.
However, pursuant to the 2001 rate case settlement approved by the MoPSC in
November 2001, and consistent with the 2002 rate case settlement, the MoPSC
authorized Laclede Gas to retain all income from releases of pipeline
capacity effective December 1, 2001, which previously was shared with
customers under the GSIP. Laclede Gas continues to retain all income
resulting from sales outside of its traditional service area, as previously
authorized by the MoPSC. However, Laclede Gas
18
was not able to retain any of the savings it obtains relative to gas supply
costs or any savings it obtains from pipeline discounts. Income related to
releases of available pipeline capacity and sales made outside its
traditional service area are volatile in nature and subject to market
conditions. See Note 5 for more information on the GSIP.
The Price Stabilization Program (PSP) authorized Laclede Gas to purchase
certain financial instruments in an effort to hedge against significant
increases in the cost of natural gas. The cost of such financial
instruments, however, like the cost of natural gas itself, increased
significantly during fiscal 2001. As a result, the MoPSC granted the request
of Laclede Gas to reduce the amount of natural gas purchases required to be
covered by such financial instruments for that heating season. In February
2001, the MoPSC approved modifications to the PSP, including a provision
that $4 million in supplemental funding be added to the PSP for the purchase
of financial instruments for the fiscal 2002 heating season. Concurrently,
Laclede Gas relinquished a claim on $4 million arising from gains realized
from the purchase and sale of such instruments during the fiscal 2001
heating season and offered to utilize a similar amount to provide for future
funding for such instruments in the event the program was allowed to
continue. The MoPSC also approved modifications to the PSP to reduce the
fiscal 2002 percentage of gas requirements to be covered by the PSP. The PSP
was allowed to expire at the end of the fiscal 2002 heating season, at which
time the Utility recorded nearly $4.9 million of pre-tax income produced
through the program.
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 the approximately $4.9
million of pre-tax income achieved under the PSP. Laclede Gas believes that
Staff's position lacks merit and continues to vigorously oppose the
adjustment in a proceeding before the MoPSC, the hearing for which is
currently scheduled to occur in February 2003. Regulatory proceeding results
are uncertain, and to the extent that a final Commission decision sustains
Staff's recommended disallowance, the outcome of the proceeding could have a
material effect on the future financial position and results of operations
of Laclede Gas. Missouri statutes provide an opportunity for court review of
Commission decisions.
The PGA clause allows Laclede Gas to flow through to customers, subject to
prudence review, the cost of purchased gas supplies. The Utility is allowed
to file to modify, on a periodic basis, the level of gas costs in its PGA.
Previously, the Commission allowed two scheduled PGA filings each year, one
for the summer months and another for the winter period, plus one
unscheduled winter filing if certain conditions were met. The significant
fluctuations in natural gas prices during fiscal 2001 necessitated
additional unscheduled filings, which were approved by the MoPSC, to better
match customer billings with market natural gas prices. In February 2002,
the MoPSC approved Laclede Gas' proposal to revise its PGA clause to adjust
the gas cost component of its rates more frequently to recover its costs.
The new approved tariffs allow scheduled gas cost adjustments in November,
January, March and June, thereby enabling Laclede Gas to more closely
recover its costs of gas, especially during the high-volume winter months.
As part of the same ruling, the MoPSC clarified that costs, cost reductions
and carrying costs associated with the Utility's use of natural gas
financial instruments (except as provided previously under the PSP) are gas
costs recoverable through the PGA mechanism.
On March 15, 2002, the Staff of the MoPSC recommended in a proceeding to
review Laclede Gas' gas costs for fiscal 2000 to disallow the recovery of
approximately $2.6 million in gas costs. The alleged grounds were that
Laclede Gas had slightly more transportation capacity than necessary to
serve its customers. The Utility demonstrated to the Staff the
appropriateness of the then-current level of transportation capacity. On May
9, 2002, the Staff revised its recommendation to withdraw the $2.6 million
proposed disallowance.
On May 31, 2002, the Staff of the Commission filed a Motion to Investigate
Laclede Gas Company's alleged transfer of its gas supply function to Laclede
Energy Services, Inc. (LES), a subsidiary of Laclede Group, and such
action's ramifications, including whether such alleged transfer required
Commission approval or was otherwise lawful. On June 10, 2002 Laclede Gas
responded, pointing out that it had not transferred its gas supply functions
to LES but had instead delegated six employees to LES with responsibility
for performing various gas supply administrative duties, many of which had
been performed in prior years by an outside party. Laclede Gas remains
primarily responsible for the gas supply function. Laclede Gas urged the
Commission to deny Staff's Motion on this and other grounds. The Commission
concluded that a case should be established to investigate the issues raised
by the Staff. The Commission also ordered the Staff to file a status report
regarding progress of the investigation and Laclede Gas to file any
responses to the Staff's status report. Laclede Gas believes its actions
comply with applicable law and intends to vigorously defend its position.
The outcome of any regulatory proceeding is uncertain. However, Laclede Gas
does not believe that the eventual outcome of the case will have a material
effect on the financial results of Laclede Gas.
On July 29, 2002, Laclede Gas filed a proposed Catch-Up/Keep-Up Program with
the MoPSC that would permit the Company to use a portion of the savings from
its negotiated pipeline discounts to fund a low-income energy assistance
program. Pursuant to, and among revisions to the Program filed by the
Utility on September 23, 2002, the amount of discount savings that could be
used for this purpose would be limited to $6 million per year. In response
to certain objections filed by the MoPSC Staff and Missouri Office of the
Public Counsel, the Commission has suspended the tariffs implementing the
Program and scheduled a prehearing conference that occurred on October 23,
2002. Evidentiary hearings are scheduled for early December, 2002.
19
ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
requires all business combinations in the scope of this Statement to be
accounted for using the purchase method. The provisions of this Statement
apply to all business combinations initiated after June 30, 2001. The FASB
also issued SFAS No. 142, "Goodwill and Other Intangible Assets," which
addresses how acquired goodwill and other intangible assets that are
acquired individually or with a group of other assets should be accounted
for in financial statements upon acquisition and after they have been
initially recognized in the financial statements. The provisions of this
Statement are required to be applied at the beginning of fiscal 2003. The
Company had adopted the provisions of SFAS No. 141 with the acquisition of
SM&P. As required by SFAS No. 141, the goodwill for SM&P is being accounted
for consistent with the provisions of SFAS No. 142. The adoption of SFAS
Nos. 141 and 142 did not have a material effect on the financial position
and results of operations of Laclede Group.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations,"
which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and associated
asset retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. This Statement is effective for fiscal 2003.
The provisions of the Statement provide for rate-regulated entities that
meet the criteria for application of SFAS No. 71, such as Laclede Gas, to
recognize regulatory assets or liabilities for differences in the timing of
recognition of the period costs associated with asset retirement obligations
for financial reporting pursuant to this Statement and rate-making purposes.
The effect of the adoption of this Statement on October 1, 2002 did not have
a material effect on the financial position and results of operations of
Laclede Group.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," to consolidate accounting guidance on
various issues related to this matter. This Statement is effective for
fiscal 2003. Adoption of this Statement is not expected to have a material
effect on the financial position and results of operations of Laclede Group.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for a
cost associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
adoption of SFAS No. 146 is not expected to have a material effect on the
financial position or results of operations of Laclede Group.
In October 2002, the Emerging Issues Task Force (EITF) reached a consensus
on Issue No. 02-3, "Issues Related to Accounting for Contracts Involved in
Energy Trading and Risk Management Activities." The consensus rescinded EITF
Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and
Risk Management Activities." The consensus precludes mark-to-market
accounting for all energy trading contracts not within the scope of SFAS No.
133, "Accounting for Derivative and Hedging Activities." The consensus to
rescind EITF 98-10 is applicable for fiscal periods beginning after December
15, 2002, except that energy trading contracts not within the scope of SFAS
No. 133 purchased after October 25, 2002, but prior to the implementation of
the consensus, are not permitted to apply mark-to-market accounting. The
EITF also reached a consensus that gains and losses on derivative
instruments within the scope of SFAS No. 133 should be shown net in the
income statement if the derivative instruments are purchased for trading
purposes. Application of these consensuses is not expected to have a
material effect on the financial position or results of operations of
Laclede Group.
INFLATION
The accompanying consolidated financial statements reflect the historical
costs of events and transactions, regardless of the purchasing power of the
dollar at the time. Due to the capital-intensive nature of the business of
Laclede Gas, the most significant impact of inflation is on the depreciation
of utility plant. Rate regulation, to which Laclede Gas is subject, allows
recovery through its rates of only the historical cost of utility plant as
depreciation. While no plans exist to undertake replacements of plant in
service other than normal replacements and those under existing replacement
programs, Laclede Gas believes that any higher costs experienced upon
replacement of existing facilities would be recovered through the normal
regulatory process.
20
CREDIT RATINGS
As of September 30, 2002, 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
On April 24, 2002, Standard & Poor's (S&P) downgraded the rating for Laclede
Gas' First Mortgage Bonds from AA- to A+, and also downgraded the commercial
paper rating from A-1+ to A-1. S&P cited bondholder protection parameters
that have eroded due to several successive warmer-than-normal winters and
increasing debt leverage as reasons for the downgrade. S&P ratings outlook
is currently stable.
Moody's Investors Service (Moody's) downgraded Laclede Gas' First Mortgage
Bonds from Aa3 to A1 on May 2, 2002. Moody's cited concerns regarding
Laclede's weakened credit measures due to increased earnings pressure and
near-term regulatory risk. On August 6, 2002, Moody's announced additional
downgrades, as the Laclede Gas' First Mortgage Bonds were lowered from A1 to
A3 and its commercial paper rating was lowered from P-1 to P-2. The outlook
indication from Moody's is now stable. Moody's cited Laclede Gas' declining
debt protection measures and the continuing sensitivity of its earnings and
cash flow to weather fluctuations in the absence of regulatory relief for
warmer-than-normal winters, as well as other pending regulatory matters.
Moody's indicated that it would review the potential impact of pending
regulatory decisions as they occur.
Ratings from Fitch Ratings remained unchanged from the past year. However,
on October 8, 2002, Fitch Ratings revised the rating outlook from stable to
negative, citing recent deterioration in consolidated credit measures.
Despite these recent downgrades, the Company's ratings remain investment
grade, and the Company believes that it will have adequate access to the
markets to meet its capital requirements. These ratings remain subject to
review and change by the rating agencies.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from the operations of Laclede Gas, net of dividend payments, has
generally provided the principal liquidity to meet operating requirements
and to fund the majority of its construction program. Any remaining funding
requirements for construction or other needs have been provided by long-term
and short-term financing. The issuance of long-term financing is dependent
on management's evaluation of need, financial market conditions, and other
factors. Short-term financing is used to meet seasonal cash requirements
and/or to defer long-term financing until market conditions are favorable.
Short-term borrowing requirements typically peak during colder months when
Laclede Gas borrows money to cover the gap between when it purchases its
natural gas and when its customers pay for that gas. These short-term cash
requirements have traditionally been met through the sale of commercial
paper supported by lines of credit with banks.
During the fiscal year 2002 heating season, Laclede Gas had lines of credit
in place of up to $170 million. Laclede Gas sold commercial paper
aggregating to a maximum of $139.7 million at any one time during the fiscal
year, but did not borrow from the banks under the aforementioned agreements.
At this writing, Laclede Gas has aggregate lines of credit totaling $230
million. Short-term commercial paper borrowings outstanding at September 30,
2002 were $118.9 million at a weighted average interest rate of 1.9%. Based
on short-term borrowings at September 30, 2002, a change in interest rates
of 100 basis points would increase or decrease pre-tax earnings and cash
flows by approximately $1.2 million on an annual basis.
Most of Laclede Gas' lines of credit include a covenant limiting total debt,
including short-term debt, to no more than 70% of total capitalization. On
September 30, 2002, total debt was 60% of total capitalization.
On June 26, 2001, Laclede Gas issued $50 million of first mortgage bonds
with an interest rate of 6 5/8% at an overall cost of 6.968%. The bonds were
dated June 15, 2001 and mature June 15, 2016. The proceeds were used to
repay short-term debt. The bonds were rated AAA by Standard & Poor's and
Fitch Ratings and Aaa by Moody's in consideration of insurance issued by
Ambac Assurance covering the timely payment of the principal of, and
interest on, the bonds. These ratings apply only to these insured bonds, and
not to the other outstanding uninsured bonds of Laclede Gas. These bonds
were issued under Laclede Gas' shelf registration statement on Form S-3 and
MoPSC authorization obtained in 2000. Of the $350 million of securities
originally registered under this S-3, $270 million of debt securities
remained registered and unissued as of September 30, 2002. The amount,
timing and type of securities remaining to be issued under the shelf
registration will depend on cash requirements and market conditions.
At September 30, 2002, Laclede Gas had fixed-rate long-term debt, including
current portion, totaling $285 million. While these long-term debt issues
are fixed-rate, they are subject to changes in fair
21
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.
Short-term cash requirements outside of Laclede Gas have been met thus far
with internally-generated funds. However, Laclede Group has put into place a
working capital line of credit for $20 million, expiring in June 2003, to
meet short-term funding needs of its non-utility subsidiaries. While this
line has not been used to date, it is expected to be used for seasonal needs
of the various subsidiaries from time to time throughout the year. At
September 30, 2002, Laclede Group had a bank note in the amount of $42.8
million related to the acquisition of SM&P. The weighted average interest
rate during fiscal 2002 was 2.7%.
On April 22, 2002, Laclede Group filed a registration statement on Form S-3
with the Securities and Exchange Commission (SEC) in connection with the
sale of up to $500 million of equity securities, other than preferred stock,
and debt securities. This registration statement became effective on May 6,
2002. The amount, timing and type of financing to be issued under this shelf
registration will depend on cash requirements and market conditions.
Certain of the Company's credit facilities include rating triggers which
would trigger default in the event that the Company's ratings fall below a
specified level. These triggers apply specifically to the $42.8 million
outstanding bank loan which was used to acquire SM&P and the $20 million
working capital line of credit (none of such line of credit has been
employed at this writing). Both the bank loan and the line of credit were
obtained from U. S. Bank National Association, and include interest rates at
the lower of a rate indexed to LIBOR, or Prime. The applicable rating
triggers are a rating on Laclede Gas Company's senior secured debt of no
lower than A3 (Moody's) or A- (S&P). Therefore, these triggers would take
effect in the event of a downgrade of three notches from the current level
by S&P or of one notch by Moody's.
Construction expenditures for utility purposes were $48.8 million in fiscal
2002 compared with $47.0 million in fiscal 2001 and $51.6 million in fiscal
2000. Laclede Gas expects fiscal 2003 utility construction expenditures to
approximate $53 million. Non-regulated construction expenditures for fiscal
2002 were $4.2 million, and are estimated at approximately $.5 million in
fiscal 2003.
SM&P has several operating leases, the aggregate annual cost of which is
approximately $8 million, consisting primarily of 12-month operating leases,
with renewal options, for vehicles used in its business. Upon acquisition of
SM&P, Laclede Group assumed parental guarantees of certain of those vehicle
leases. Laclede Group anticipates that the maximum guarantees will not
exceed $15 million.
During fiscal 2002, Laclede Group issued guarantees totaling $9.0 million
for performance and payment of certain gas supply purchases by Laclede
Energy Resources, Inc. (its non-regulated marketing affiliate).
Consolidated capitalization at September 30, 2002 consisted of 52.3% common
stock equity, .2% preferred stock and 47.5% long-term debt.
The ratio of earnings to fixed charges was 2.2 for 2002, 2.6 for 2001 and
2.6 for 2000.
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.
MARKET RISK
The management of Laclede Gas has 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 (except as provided for previously under the PSP) 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 earnings impact as a result of the use of these financial
instruments. At September 30, 2002, the Utility held approximately 15
million MmBtu of futures contracts at an average price of $3.83 per MmBtu.
Additionally, approximately 12 million MmBtu of 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 2003.
In the course of its business, Laclede Group's non-regulated marketing
affiliate, Laclede Energy Resources, Inc. (LER), enters into fixed price
commitments for the sale of natural gas to customers. LER manages the price
risk associated with these sales by closely matching the purchases of
physical supplies at fixed prices to lock in margins. At September 30, 2002,
LER's open positions were not material to Laclede Group's financial position
or results of operations.
22
ENVIRONMENTAL MATTERS
Laclede Gas is subject to various environmental laws and regulations that,
to date, have not materially affected the Company's financial position and
results of operations. As these laws, regulations, and their interpretation
evolve, however, additional costs may be incurred.
With regard to a former manufactured gas plant site located in Shrewsbury,
Missouri, Laclede Gas and state and federal environmental regulators have
agreed upon certain actions and those actions are nearing completion.
Laclede Gas currently estimates the overall costs of these actions will be
approximately $2.3 million. As of September 30, 2002, Laclede Gas has paid
or reserved for these actions. If regulators require additional actions,
Laclede Gas will incur additional costs.
Laclede Gas enrolled a second former manufactured gas plant site into the
Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to
minimize the scope and cost of site cleanup while maximizing possibilities
for site development. This site is located in and is presently owned by the
City of St. Louis, Missouri. The City of St. Louis has separately authorized
a developer to prepare both a Remedial Action Plan (RAP), for submission to
the VCP, and a site development plan. Laclede Gas is presently meeting with
the developer to determine what role, if any, it might play in these
efforts. Laclede Gas continues to evaluate other options as well, including,
but not limited to, the submission of its own RAP to the VCP. Laclede Gas
currently estimates that the cost of site investigations, agency oversight
and related legal and engineering consulting may be approximately $629,000.
Currently, Laclede Gas has paid or reserved for these actions. Laclede has
requested that other former site owners and operators share in these costs
and one party has agreed to participate and has reimbursed Laclede Gas to
date for $173,000. Laclede Gas anticipates additional reimbursement from
this party. Laclede Gas plans to seek proportionate reimbursement of all
costs relative to this site from other potentially responsible parties if
practicable.
Costs incurred are charged to expense or capitalized in accordance with
generally accepted accounting principles. A predetermined level of expense
is included in Laclede Gas' rates.
Laclede Gas has been advised that a third former manufactured gas plant site
previously operated but no longer owned by Laclede Gas may contain gas plant
waste that may require remediation. Laclede Gas is working to determine the
nature and extent of such waste, if any, and its responsibility, if any, for
any remediation costs.
While the scope of costs relative to the Shrewsbury site will not be
significant , the scope of costs relative to the other sites is unknown and
may be material. Laclede Gas has notified its insurers that it seeks
reimbursement of its costs at these three manufactured gas plant sites. In
response, the majority of insurers have reserved their rights. While some of
the insurers have denied coverage, Laclede Gas continues to seek
reimbursement from them. With regard to the Shrewsbury site, denials of
coverage are not expected to have any material impact on the financial
position and results of operations of Laclede Gas. With regard to the other
two sites, since the scope of costs are unknown and they may be significant,
denials of coverage may have a material impact on the financial position and
results of operations of Laclede Gas. Such costs, if incurred, have
typically been subject to recovery in rates.
Laclede Gas Company's Management Discussion and Analysis of Financial
Condition is included in Exhibit 99.1
23
Item 8. Financial Statements and Supplementary Data
Independent Auditors' Report
To the Board of Directors and Shareholders of
The Laclede Group, Inc.:
We have audited the consolidated balance sheets and statements of
consolidated capitalization of The Laclede Group, Inc. and its subsidiaries
("the Company") as of September 30, 2002 and 2001, and the related
statements of consolidated income, retained earnings, comprehensive income,
and cash flows for each of the three years in the period ended September 30,
2002. Our audits also included the financial statement schedule listed in
the Index at Part IV, Item 15(a) 2. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Laclede Group, Inc. and
its subsidiaries as of September 30, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 2002 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
St. Louis, Missouri
November 19, 2002 (December 2, 2002 as to the last paragraph of Note 13)
24
Management Report
Management is responsible for the preparation, presentation and integrity of
the consolidated financial statements and other financial information in
this report. The statements were prepared in conformity with accounting
principles generally accepted in the United States of America and include
amounts that are based on management's best estimates and judgments. In the
opinion of management, the financial statements fairly reflect the Company's
financial position, results of operations and cash flows.
The Company maintains internal accounting systems and related administrative
controls that are designed to provide reasonable assurance, on a
cost-effective basis, that transactions are executed in accordance with
management's authorization, that consolidated financial statements are
prepared in conformity with accounting principles generally accepted in the
United States of America and that the Company's assets are properly
accounted for and safeguarded.
The Company's Internal Audit Department, which has unrestricted access to
all levels of Company management, monitors compliance with established
controls and procedures.
Deloitte & Touche LLP, the Company's independent auditors, whose report is
contained herein, are responsible for auditing the Company's financial
statements in accordance with auditing standards generally accepted in the
United States of America. Such standards include obtaining an understanding
of the internal control structure in order to design the audit of the
financial statements.
The Audit Committee of the Board of Directors, which consists of five
outside directors, meets periodically with management, the internal auditor,
and the independent auditors to review the manner in which they are
performing their responsibilities. Both the internal auditor and the
independent auditors periodically meet alone with the Audit Committee and
have access to the Audit Committee at any time.
Douglas H. Yaeger
Chairman of the Board,
President and Chief Executive Officer
Barry C. Cooper
Chief Financial Officer
25
Item 8. Financial Statements and Supplementary Data
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED INCOME
(Thousands, Except Per Share Amounts)
- ------------------------------------ ---------- ---------- ----------
Years Ended September 30 2002 2001 2000
- ------------------------------------ ---------- ---------- ----------
Operating Revenues:
Regulated
Gas distribution $ 592,097 $ 923,242 $ 529,250
Non-Regulated
Services 94,116 - -
Other 69,026 78,867 36,878
---------- ---------- ----------
Total operating revenues 755,239 1,002,109 566,128
---------- ---------- ----------
Operating Expenses:
Regulated
Natural and propane gas 340,045 640,006 294,717
Other operation expenses 106,027 101,915 86,970
Maintenance 17,813 19,262 18,556
Depreciation and amortization 24,215 26,193 24,672
Taxes, other than income taxes 48,342 65,062 42,788
---------- ---------- ----------
Total regulated operating expenses 536,442 852,438 467,703
Non-Regulated
Services 90,771 - -
Other 68,264 77,346 35,082
---------- ---------- ----------
Total operating expenses 695,477 929,784 502,785
---------- ---------- ----------
Operating Income 59,762 72,325 63,343
Other Income and Income Deductions - Net 678 1,417 735
---------- ---------- ----------
Income Before Interest and
Income Taxes 60,440 73,742 64,078
---------- ---------- ----------
Interest Charges:
Interest on long-term debt 20,820 18,372 15,164
Other interest charges 4,989 10,067 8,844
---------- ---------- ----------
Total interest charges 25,809 28,439 24,008
---------- ---------- ----------
Income Before Income Taxes 34,631 45,303 40,070
Income Taxes 12,247 14,831 14,105
Dividends on Redeemable Preferred Stock -
Laclede Gas 68 87 93
---------- ---------- ----------
Net Income Applicable to Common Stock $ 22,316 $ 30,385 $ 25,872
========== ========== ==========
Average Shares of Common Stock
Outstanding 18,888 18,878 18,878
========== ========== ==========
Earnings Per Share of Common Stock $1.18 $1.61 $1.37
========== ========== ==========
See the accompanying notes to consolidated financial statements.
26
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(Thousands, Except Per Share Amounts)
- -------------------------------------- ---------- ---------- ----------
Years Ended September 30 2002 2001 2000
- -------------------------------------- ---------- ---------- ----------
Balance at Beginning of Year $ 205,512 $ 200,423 $ 199,848
Add - Net Income 22,316 30,385 25,872
Deduct - Cash Dividends Declared:
Common stock, $1.34 per share in 2002,
2001 and 2000 25,311 25,296 25,297
---------- ---------- ----------
Balance at End of Year $ 202,517 $ 205,512 $ 200,423
========== ========== ==========
See the accompanying notes to consolidated financial statements.
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Thousands)
- ----------------------------------------- ---------- ---------- ----------
Years Ended September 30 2002 2001 2000
- ----------------------------------------- ---------- ---------- ----------
Net Income $ 22,316 $ 30,385 $ 25,872
---------- ---------- ----------
Other Comprehensive Income (Loss):
Minimum pension liability adjustment (553) - 125
Income tax expense (benefit) (214) - 48
---------- ---------- ----------
Other Comprehensive Income (Loss) (339) - 77
---------- ---------- ----------
Comprehensive Income $ 21,977 $ 30,385 $ 25,949
========== ========== ==========
See the accompanying notes to consolidated financial statements.
27
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands)
- ------------------------------------------- ----------- -----------
September 30 2002 2001
- ------------------------------------------- ----------- -----------
Assets
Utility Plant $ 988,747 $ 949,775
Less - Accumulated depreciation and amortization 394,371 380,135
----------- -----------
Net utility plant 594,376 569,640
----------- -----------
Goodwill 27,455 -
----------- -----------
Other Property and Investments
(net of accumulated depreciation and amortization,
2002, $5,265; 2001, $4,798) 46,986 32,893
----------- -----------
Current Assets:
Cash and cash equivalents 12,870 3,223
Accounts receivable:
Gas customers - Billed and unbilled 51,419 74,604
Other 42,591 13,103
Less - Allowances for doubtful accounts (4,532) (9,216)
Inventories:
Natural gas stored underground
at LIFO cost 77,121 76,661
Propane gas at FIFO cost 14,712 14,213
Materials, supplies and merchandise at
average cost 4,364 5,393
Deferred income taxes 12,305 8,556
Prepayments and other 11,505 3,999
----------- -----------
Total current assets 222,355 190,536
----------- -----------
Deferred Charges:
Prepaid pension cost 114,313 110,475
Regulatory assets 72,484 68,599
Other 3,904 3,767
----------- -----------
Total deferred charges 190,701 182,841
----------- -----------
Total Assets $1,081,873 $ 975,910
=========== ===========
See the accompanying notes to consolidated financial statements.
28
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Thousands)
- ------------------------------------------------------ ----------- -----------
September 30 2002 2001
- ------------------------------------------------------ ----------- -----------
Capitalization and Liabilities
Capitalization:
Common stock equity $ 285,766 $ 288,085
Redeemable preferred stock - Laclede Gas 1,266 1,588
Long-term debt 259,545 284,459
----------- -----------
Total capitalization 546,577 574,132
----------- -----------
Current Liabilities:
Notes payable 161,670 117,050
Accounts payable 45,707 32,087
Advance customer billings