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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
FORM 10-K
ANNUAL REPORT
For the Fiscal Year Ended September 30, 2003
THE LACLEDE GROUP, INC.
LACLEDE GAS COMPANY
720 Olive Street, St. Louis, MO 63101
1
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, 2003
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
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Securities registered pursuant to Section 12(b) of the Act (as of
the date of this report)
------------------------------------------------------------------------------------------------------
Name of Registrant Title of Each Name of Each Exchange
Class On Which Registered
------------------------------------------------------------------------------------------------------
The Laclede Group, Inc. Common Stock $1.00 par New York Stock Exchange
value
------------------------------------------------------------------------------------------------------
Preferred Share Purchase
The Laclede Group, Inc. Rights New York Stock Exchange
------------------------------------------------------------------------------------------------------
Laclede Gas Company None
------------------------------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such report),
The Laclede Group, Inc.: Yes X No
--- ---
Laclede Gas Company: Yes X No
--- ---
(2) has been subject to such filing requirements for the past 90 days,
The Laclede Group, Inc.: Yes X No
--- ---
Laclede Gas Company: Yes X No
--- ---
2
and (3) is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):
The Laclede Group, Inc.: Yes X No
--- ---
Laclede Gas Company: Yes No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of The
Laclede Group, Inc. amounted to $440,529,233 as of March 31, 2003.
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, 2003
- ---------- --------------------------- ----------------
The Laclede Group, Inc. Common Stock ($1.00 Par Value) 19,114,458
Laclede Gas Company Common Stock ($1.00 Par Value) 100 (100% owned by The
Laclede Group, Inc.)
Incorporated by Reference: Form 10-K Part III
Proxy Statement dated December 22, 2003*
Index to Exhibits is found on page 64.
*The information under the captions "Compensation Committee Report Regarding
Executive Compensation," "Performance Graph" and "Audit Committee Report" of
the Proxy Statement are NOT incorporated by reference.
3
Part I
Item 1. Business
The Laclede Group, Inc. (Laclede Group or the Company) is an exempt public
utility holding company committed to providing reliable natural gas service
through its regulated core utility operations while developing a presence in
non-regulated activities that provide opportunities for sustainable growth.
Its primary subsidiary--Laclede Gas Company (Laclede Gas or the Utility)--is
the largest natural gas distribution utility in Missouri, serving more than
630,000 residential, commercial, and industrial customers in St. Louis and
surrounding counties of eastern Missouri. In January 2002, Laclede Group
acquired SM&P Utility Resources, Inc. (SM&P), one of the nation's major
underground locating and marking service businesses. SM&P, headquartered in
Carmel, Indiana, is a wholly owned subsidiary of Laclede Group. Laclede
Energy Resources, Inc. (LER) a wholly owned subsidiary, is engaged in
non-regulated efforts to market natural gas and related activities. Other
non-regulated subsidiaries provide less than 10% of revenues.
The Consolidated Financial Statements included in this report present the
consolidated financial position, results of operations and cash flows of
Laclede Group 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.
The information we file or furnish to the SEC, including annual reports on
Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K
and their amendments, are available on our website, www.thelacledegroup.com,
in the investor services portion under SEC filings as soon as reasonably
practical after the information is filed or furnished to the SEC.
NATURAL GAS SUPPLY
During the past year, our Utility's gas supply portfolio has undergone a
complete transformation. Few of the large mid-market supply aggregators that
had, until recently, played a significant supply role nationally and in the
portfolio of Laclede Gas still exist, or they exist in a much smaller role.
Laclede Gas replaced them with large equity owners of natural gas and
smaller natural gas suppliers that, until recently, had used the large
supply aggregators as intermediaries. Although there remain fewer options
today, Laclede Gas anticipates that most, if not all, of the supplier
relationships newly established or expanded during the previous winter
season will continue for years to come. In addition, our firm transportation
access to a diverse number of strategic locations will continue to
facilitate the process of structuring 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 utility's 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 2003, Laclede Gas purchased natural gas from 18 different
suppliers to meet current gas sales and storage injection requirements.
Natural gas purchased by Laclede Gas for delivery to our Utility service
area through the Mississippi River Transmission Corporation (MRT) system
totaled 72.2 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 10.4 Bcf of gas was purchased on the
Southern Star Pipeline system (formerly Williams Gas Pipeline Central) and
8.0 Bcf of gas was purchased on the Panhandle Eastern Pipe Line Company
system. Some of our commercial and industrial
4
customers continue to purchase their own gas and, this year, delivered to us
approximately 19.6 Bcf for transportation to them through our distribution
system.
The fiscal 2003 peak day sendout of natural gas to our Utility customers
occurred on January 23, 2003, when the average temperature was 4 degrees
Fahrenheit. On that day, our customers consumed 1.029 Bcf of natural gas.
About three-fourths of this peak day demand was met with natural gas
transported to St. Louis through the MRT, Panhandle, and Southern Star
transportation systems, and the remaining fourth was met from the Utility's
on-system storage and peak-shaving resources.
UNDERGROUND NATURAL GAS STORAGE
Laclede Gas has a contractual right to store approximately 23.1 Bcf of gas
in MRT's storage 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
On April 3, 2003, the Cole County Circuit Court affirmed the Missouri Public
Service Commission's September 2001 ruling to terminate a Gas Supply
Incentive Plan that had operated for five years. Although this Incentive
Plan had been a mutually beneficial arrangement between Laclede Gas and its
customers, we determined not to seek further judicial review.
However, in the settlement of the most recent Laclede Gas rate case, which
went into effect in November 2002, the Commission approved a different
program, one in which Laclede Gas could achieve, under specific conditions,
income related to the management of its gas supply commodity costs. Due
largely to our gas supply risk management activities, we realized
approximately $35 million in savings under this plan during fiscal 2003, of
which about $3.5 million was retained by the Company with the remaining
$31.5 million being used to lower customer bills.
On April 29, 2003, the Commission decided by a 3-2 vote to disallow our
retention of approximately $4.9 million in pre-tax gains achieved by Laclede
Gas in its incentive-based Price Stabilization Program, and directed us to
flow through that amount to customers. On June 19, 2003, Laclede Gas
appealed the Commission's decision to the Cole County Circuit Court. On
October 10, 2003 the Court granted the Company's request for a stay of the
Commission's April 29th order, and on November 5, 2003, the Court vacated
the Commission's order on the grounds that its decision was unlawful and not
supported by competent and substantial evidence on the record.
In July 2002, Laclede Gas filed a proposed "Catch-Up/Keep-Up" Program with
the Commission that would permit the Company to use a portion of the savings
from its negotiated pipeline discounts to provide a significant level of
funding to assist those who have fallen behind in their payments to manage
their energy bills in a manner that, over time, would eliminate past-due
balances. On January 16, 2003, the Commission, by a 3 to 2 vote, issued an
order rejecting the proposed plan.
On July 10, 2003, Missouri Governor Bob Holden signed a bill into law that,
among other things, allows natural gas utilities to adjust their rates twice
a year to recover the depreciation, property taxes, and rate of return on
facility-related expenditures that are made to comply with state and federal
safety requirements or to relocate facilities in connection with public
improvement projects. Laclede Gas played an active role in the passage of
this legislation. The Commission rules
5
to implement such legislation are not yet in place, but this legislation is
extremely important because, prior to its enactment, utilities were unable
to recover such costs until its next rate case. Now, the timing of the
recovery of these costs will be more closely linked with their expenditure.
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.
---------------------------------
6
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. The Laclede Group common stock is listed on the New York
Stock Exchange and trades under the ticker symbol "LG".
*****
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, 2003, Laclede Gas had 1,944 employees, which includes 6
part-time employees. SM&P had 1,174 employees, which includes 16 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 Gas' employees. On July
30, 2000, Laclede Gas 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 Gas' 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. Laclede Gas has historically sold gas for
househeating, certain other household uses, and commercial and industrial
space heating at prices generally equal to or lower than 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 approximately 90% of the Utility's revenue, remain committed to
natural gas. Given the current adequate level of supply, Laclede Gas
believes that the relationship between competitive equipment and operating
costs will not change significantly in the foreseeable future, and that
these markets will continue to be supplied by natural gas.
Laclede Gas' competitive exposure is presently limited to space and water
heating applications in the new multi-family and commercial rental markets.
Certain alternative heating systems can be cost competitive in traditional
markets, but the performance and reliability of natural gas systems has
contained the growth of these alternatives. 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.
7
*****
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 17 in the Notes to the Consolidated Financial Statements on page 53.
*****
Under its Dividend Reinvestment and Stock Purchase Plan, Laclede Group
issued 161,115 and 43,300 shares of its common stock during fiscal 2003 and
fiscal 2002, respectively. Laclede Gas cancelled its treasury stock of
1,865,638 shares, in conjunction with the restructuring on October 1, 2001.
*****
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)
2003 2002 2001
------------------------------------------------------------
Residential $502,071 $387,594 $619,090
Commercial & Industrial 188,688 142,259 250,741
Interruptible 2,744 1,769 3,063
Transportation 15,503 12,868 14,350
Off-System and Other Incentive 60,609 43,443 30,218
Provision for Refunds and Other 5,157 4,164 5,780
------------------------------------------------------------
Total $774,772 $592,097 $923,242
============================================================
Customers (End of Period)
2003 2002 2001
------------------------------------------------------------
Residential 590,785 588,630 584,269
Commercial & Industrial 40,166 39,842 39,264
Interruptible 16 14 15
Transportation 154 152 152
------------------------------------------------------------
Total Customers 631,121 628,638 623,700
============================================================
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 Gas has continued to
provide service in that community without a formal franchise. All of the
franchises are free from unduly burdensome restrictions and are adequate for
the conduct of Laclede Gas' current public utility business in the State of
Missouri.
*****
Non-Regulated Services:
On January 28, 2002, Laclede Group completed its acquisition from NiSource,
Inc. of 100% of the stock of SM&P, one of the nation's major underground
locating and marking service businesses. SM&P, a Carmel, Indiana-based
company, operates across the midwestern states. Locators mark the placement
of underground facilities for providers of telephone, natural gas, electric,
water, cable TV and fiber optic services so that construction work can be
performed without damaging buried facilities. As a result of the
acquisition, SM&P's earnings flow not only diversifies Laclede Group's
earnings but also is counter-seasonal to those of Laclede Gas.
*****
Non-Regulated Gas Marketing
Laclede Energy Resources, Inc., a wholly owned subsidiary of Laclede
Investment LLC, is engaged in non-regulated efforts to market natural gas
and related activities.
*****
8
Non-Regulated Other Subsidiaries include:
Laclede Pipeline Company, a wholly owned subsidiary of The Laclede Group,
operates a propane pipeline that connects the propane storage facilities of
Laclede Gas in St. Louis County, Missouri, to propane supply terminal
facilities at Wood River and Cahokia, Illinois.
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 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 Energy Services, Inc., a wholly owned subsidiary of The Laclede
Group, Inc., became operational on May 1, 2002, and was engaged in providing
energy management services. On April 14, 2003, Laclede Energy Services, Inc.
was dissolved. The dissolution of LES had no material effect on the
financial position or results of operation of Laclede Group, Inc.
The lines of business that constitute the Non-Regulated Other activities of
the corporate family are not considered separately reportable operating
segments as defined by current accounting standards.
Item 2. Properties
The principal utility properties of Laclede Gas consist of approximately
8,224 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 that 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 17 in the Notes to the
Consolidated Financial Statements on page 53.
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 17 to the Consolidated
Financial Statements on page 53. For a description of pending regulatory
matters of Laclede Gas, see Part I, Item I, Business, Regulatory Matters on
page 5.
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.
9
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 2003.
EXECUTIVE OFFICERS OF REGISTRANT - Listed below are executive officers of
Laclede Group and Laclede Gas as defined by the Securities and Exchange
Commission.
Name, Age, and Position with Company * Appointed (1)
D. H. Yaeger, Age 54
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
SM&P
----
Chief Executive Officer January 2002
LER
---
President January 1999
Vice President December 1995
K. J. Neises, Age 62
Laclede Gas
-----------
Executive Vice President - Energy and
Administrative Services January 2002
Senior Vice President - Energy and
Administrative Services March 1998
LER
---
Vice President February 2002
R. E. Shively, Age 41
Laclede Gas
-----------
Senior Vice President - Business and Services
Development (2) January 2001
SM&P
----
President March 2002
10
B. C. Cooper, Age 44
The Laclede Group
-----------------
Chief Financial Officer (3) September 2002
Laclede Gas
-----------
Chief Financial Officer September 2002
LER
---
Vice President October 2002
M. C. Pendergast, Age 47
Laclede Gas
-----------
Vice President - Associate General Counsel January 2002
Assistant Vice President - Associate General Counsel January 2000
(Associate General Counsel) November 1997
M. R. Spotanski, Age 43
Laclede Gas
-----------
Vice President - Finance January 2001
Assistant Vice President - Finance January 2000
(Assistant to the President) March 1998
M. D. Waltermire, Age 45
Laclede Gas
-----------
Vice President - Operations & Marketing April 2003
Vice President - Operations & Marketing Planning February 2003
Assistant Vice President - Planning May 2001
(Director - Internal Audit) January 1996
J. A. Fallert, Age 48
Laclede Gas
-----------
Controller February 1998
11
R. L. Krutzman, Age 57
The Laclede Group
-----------------
Treasurer and Assistant Secretary October 2000
Laclede Gas
-----------
Treasurer and Assistant Secretary February 1996
SM&P
----
Assistant Treasurer January 2002
LER
---
Treasurer and Assistant Secretary February 1996
M. C. Kullman, Age 43
The Laclede Group
-----------------
Corporate Secretary October 2000
Laclede Gas
-----------
Secretary and Associate General Counsel February 2001
Secretary and Associate Counsel February 1998
SM&P
----
Secretary January 2002
LER
---
Secretary February 1998
R. A. Skau, Age 46
Laclede Gas
-----------
Assistant Vice President - Human Resources September 2001
(Director, Labor Relations) February 1999
(Manager, Labor Relations) February 1996
*The information provided relates to the principal subsidiaries of the
Company. Many of the executive officers have served or currently serve as
officers or directors for other subsidiaries of the Company.
( ) Indicates a non-officer position.
(1) Officers of Laclede are normally reappointed at the Annual Meeting of
the Board of Directors in January of each year "to serve for the ensuing
year and until their successors are elected and qualify".
(2) Prior to joining Laclede, Mr. Shively was a principal in the Atlanta
office of Scott Madden & Associates since December 1994.
(3) Mr. Cooper served as Vice President of Finance at GenAmerica Corporation
since 2000, and prior to that he was Vice President/Controller from 1999
through 2000 and Second Vice President/Associate Controller at GenAmerica
Corporation from 1995 through 1999. Before joining GenAmerica Corporation,
he was with KPMG Peat Marwick LLP.
12
Part II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The Laclede Group's common stock trades on the New York Stock Exchange
(NYSE) under the symbol "LG". The high and the low sales price for the
common stock for each quarter in the two most recent fiscal years are:
Fiscal 2003 Fiscal 2002
High Low High Low
- ------------------------------------------------------------------------------------------------------
1st Quarter 24.84 21.79 25.30 22.60
2nd Quarter 24.90 21.85 24.90 22.00
3rd Quarter 27.75 23.10 24.88 22.00
4th Quarter 28.70 24.85 25.00 19.00
The number of holders of record as of September 30, 2003 was 7,099.
Dividends declared on the common stock for the two most recent fiscal years
were:
Fiscal 2003 Fiscal 2002
- ------------------------------------------------------------------------------
1st Quarter $.335 $.335
2nd Quarter $.335 $.335
3rd Quarter $.335 $.335
4th Quarter $.335 $.335
For disclosures relating to securities authorized for issuance under equity
compensation plans, please see Item 12, page 57.
13
Item 6. Selected Financial Data
The Laclede Group, Inc.
Fiscal Years Ended September 30
(Thousands, Except Per Share Amounts) 2003 2002 2001 2000 1999
--------------------------------------------------------------
Summary of Operations
Operating Revenues:
Regulated
Gas distribution $ 774,772 $592,097 $ 923,242 $529,250 $473,031
Non-Regulated
Services 100,168 94,116 - - -
Gas marketing 163,861 64,798 69,455 31,331 14,118
Other 11,529 4,228 9,412 5,547 4,169
--------------------------------------------------------------
Total Operating Revenues 1,050,330 755,239 1,002,109 566,128 491,318
--------------------------------------------------------------
Operating Expenses:
Regulated:
Natural and propane gas 483,742 340,045 640,006 294,717 246,294
Other operation expenses 118,550 106,027 101,915 86,970 83,661
Maintenance 18,759 17,813 19,262 18,556 19,517
Depreciation & amortization 22,229 24,215 26,193 24,672 21,470
Taxes, other than income taxes 56,102 48,342 65,062 42,788 41,660
--------------------------------------------------------------
Total regulated operating
expenses 699,382 536,442 852,438 467,703 412,602
Non-regulated
Services 101,586 90,771 - - -
Gas marketing 159,105 64,042 68,338 30,831 14,033
Other 10,615 4,222 9,008 4,251 3,464
--------------------------------------------------------------
Total Operating Expenses 970,688 695,477 929,784 502,785 430,099
--------------------------------------------------------------
Operating Income 79,642 59,762 72,325 63,343 61,219
Allowance for Funds Used During
Construction (107) (149) 749 397 739
Other Income and Income
Deductions - Net 650 827 668 338 (942)
--------------------------------------------------------------
Income Before Interest
and Income Taxes 80,185 60,440 73,742 64,078 61,016
--------------------------------------------------------------
Interest Charges:
Interest on long-term debt 20,169 20,820 18,372 15,164 13,966
Preferred dividends and subsidiary
trust distributions 2,743 - - - -
Other interest charges 3,974 4,989 10,067 8,844 6,627
--------------------------------------------------------------
Total Interest Charges 26,886 25,809 28,439 24,008 20,593
--------------------------------------------------------------
Income Before Income Taxes 53,299 34,631 45,303 40,070 40,423
Income Tax Expense 18,652 12,247 14,831 14,105 14,361
--------------------------------------------------------------
Net Income 34,647 22,384 30,472 25,965 26,062
Dividends on Redeemable Preferred
Stock - Laclede Gas 62 68 87 93 97
--------------------------------------------------------------
Net Income Applicable to
Common Stock $ 34,585 $ 22,316 $ 30,385 $ 25,872 $ 25,965
==============================================================
Basic Earnings Per Share of Common Stock $1.82 $1.18 $1.61 $1.37 $1.43
==============================================================
Diluted Earnings Per Share of Common Stock $1.82 $1.18 $1.61 $1.37 $1.43
==============================================================
14
Item 6. Selected Financial Data (continued)
The Laclede Group, Inc.
Fiscal Years Ended September 30
(Thousands, Except Per Share Amounts) 2003 2002 2001 2000 1999
------------------------------------------------------------
Dividends Declared -
Common Stock $ 25,492 $ 25,311 $ 25,296 $ 25,297 $ 24,459
Dividends Declared Per
Share of Common Stock $1.34 $1.34 $1.34 $1.34 $1.34
Utility Plant
Gross Plant - End of Period $1,030,665 $988,747 $949,775 $915,998 $872,527
Net Plant - End of Period 621,247 594,376 569,640 545,715 517,635
Construction Expenditures 49,926 48,765 46,952 51,635 48,698
Property Retirements 8,007 9,769 13,141 6,663 8,190
Goodwill 28,124 27,455 - - -
Other Property and Investments 44,598 46,986 32,893 29,664 27,866
Total Assets $1,201,398 $1,090,990 $975,910 $931,740 $837,664
Capitalization -
End of Period
Common Stock and Paid-In
Capital $ 87,542 $ 83,588 $106,590 $106,579 $106,570
Retained Earnings 211,610 202,517 205,512 200,423 199,848
Accumulated Other Comprehensive
Income / (Loss) (80) (339) - - (77)
Treasury Stock - - (24,017) (24,017) (24,017)
------------------------------------------------------------
Common Stock Equity 299,072 285,766 288,085 282,985 282,324
Redeemable Preferred Stock -
Laclede Gas 1,258 1,266 1,588 1,763 1,923
Obligated mandatorily redeemable
preferred securities of subsidiary
trust 45,000 - - - -
Long-Term Debt 259,625 259,545 284,459 234,408 204,323
------------------------------------------------------------
Total Capitalization $ 604,955 $ 546,577 $574,132 $519,156 $488,570
============================================================
Shares of Common Stock
Outstanding - End of Period 19,082 18,921 18,878 18,878 18,878
Book Value Per Share $15.67 $15.10 $15.26 $14.99 $14.96
Laclede Gas Company's Selected Financial Data is included in Exhibit 99.1.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE LACLEDE GROUP, INC.
INTRODUCTION
This management's discussion analyzes the financial condition and results of
operations of The Laclede Group, Inc. (Laclede Group or the Company) and its
subsidiaries, under the corporate organizational structure that was in place
during the three fiscal years ended September 30, 2003. 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 years 2003 and 2002 are comparable to the
consolidated results for Laclede Gas for fiscal year 2001. Note 2 to the
Consolidated Financial Statements discusses the 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.
16
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.
During fiscal 2002, earnings from this segment suffered from a significant
weather-related reduction in natural gas sales, primarily as a result of a
heating season that was the fifth warmest on record and 15% warmer than
normal. In sharp contrast, natural gas sales returned to near-normal levels
for fiscal 2003 as the heating season was just 1% colder than normal, but
21% colder than fiscal 2002. The significantly warmer temperatures
experienced in fiscal 2002 were 22% warmer than in fiscal 2001.
As part of the 2002 rate case settlement, the Utility initiated, effective
November 9, 2002, an innovative weather mitigation rate design that lessens
the impact of weather volatility on Laclede Gas customers during cold
winters and is expected to stabilize the Utility's earnings for the future.
Laclede Group's net income applicable to common stock for fiscal 2003 was
$34.6 million, compared with $22.3 million for fiscal 2002, and $30.4
million for fiscal 2001. Laclede Group's basic and diluted earnings per
share were $1.82 for the twelve months ended September 30, 2003 compared
with $1.18 per share for the same period last year. The $.64 per share
increase in earnings was primarily attributable to increased earnings
reported by Laclede Gas. In addition to the favorable effect of higher gas
sales arising from the colder weather, earnings also improved due to the
impacts of rate changes put into effect by Laclede Gas on December 1, 2001
and November 9, 2002, higher income from off-system sales and capacity
release, and benefits resulting from the Utility's management of its annual
gas supply costs. These factors were partially offset by the effect of
income recorded in fiscal 2002 produced by the Utility's Price Stabilization
Program and higher costs of doing business. The increased Utility earnings,
coupled with higher earnings reported by Laclede Group's non-regulated gas
marketing subsidiary, Laclede Energy Resources, Inc. (LER), were partially
offset by decreased results this year by SM&P Utility Resources, Inc.
(SM&P), a non-regulated subsidiary acquired January 28, 2002. SM&P's results
mainly reflect the full fiscal year effect of seasonal losses this year,
right-sizing costs related to the loss of revenue related to two customers
(discussed below), and additional start up costs related to SM&P's expansion
into new markets and the addition of new customers.
Laclede Group's basic earnings per share were $1.18 for the twelve months
ended September 30, 2002 compared with $1.61 per share for the twelve month
period ending September 30, 2001. 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
the prior 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 preceding 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 in 2002; 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.
Operating Revenues
Regulated operating revenues for fiscal year 2003 increased $182.7 million,
or 30.9%, above fiscal 2002. The increase in operating revenues was
primarily comprised of higher natural gas sales levels resulting from colder
weather and other variations amounting to $61.8 million, higher PGA rates
that are passed on to Utility customers (subject to prudence review) of
$87.2 million, increased off-system and capacity release revenues of $18.5
million, and the general rate increases amounting to $15.2 million.
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. 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.
17
Laclede Gas sold and transported 1.13 billion therms in 2003 compared with
1.06 billion and 1.12 billion in 2002 and 2001, respectively.
Laclede Group's non-regulated services operating revenues for fiscal year
2003 increased $6.1 million from those revenues for last fiscal year
primarily attributable to the twelve-month effect of revenues recorded this
year by SM&P (acquired January 28, 2002), partially offset by the partial
loss of revenue related to two customers. Non-regulated services operating
revenues increased $94.1 million in fiscal year 2002 (from fiscal year 2001)
due to the increased revenues from the SM&P acquisition during fiscal year
2002.
Non-regulated gas marketing revenues increased $99.1 million from those
revenues for fiscal year 2002 primarily due to increased gas marketing sales
by Laclede Energy Resources, Inc. Non-regulated gas marketing revenues
decreased $4.7 in fiscal year 2002 (from fiscal year 2001) primarily due to
decreased gas marketing sales by Laclede Energy Resources, Inc.
Non-regulated other operating revenues increased $7.3 million in fiscal year
2003 from fiscal year 2002, and decreased $5.2 million in fiscal year 2002
from fiscal year 2001. These variations were primarily due to changes in
sales levels recorded by Laclede Pipeline Company.
Operating Expenses
Regulated operating expenses in fiscal 2003 increased $162.9 million, or
30.4%, from fiscal 2002. Natural and propane gas expense increased $143.7
million primarily attributable to higher volumes purchased for sendout
arising from the colder weather, higher rates charged by our suppliers, and
higher off system gas expense. Other operation and maintenance expenses
increased $13.4 million, or 10.9%, primarily due to increased pension
expense, a higher provision for uncollectible accounts, increased group
insurance charges, higher wage rates, and increased insurance premiums.
These factors were partially offset by reduced distribution charges.
Depreciation and amortization expense decreased $2.0 million primarily due
to the effect of negative amortization of a portion of the depreciation
reserve effective July 1, 2002, as authorized by the MoPSC (see Note 1
related to Utility Plant, Depreciation and Amortization). This effect was
partially offset by increased depreciable property. Taxes, other than
income, increased $7.8 million, or 16.1%, primarily due to higher gross
receipts taxes, reflecting the increased revenues.
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.
Laclede Group's non-regulated services operating expenses in fiscal year
2003 increased $10.8 million due to the twelve-month effect of operating
expenses recorded this year by SM&P (compared with fiscal year 2002),
right-sizing costs expensed this year related to the aforementioned customer
loss, and additional start up costs related to adding customers in new
markets. Non-regulated services operating expenses increased $90.8 million
in fiscal year 2002 (from fiscal year 2001) due to the acquisition of SM&P
during fiscal year 2002.
Non-regulated gas marketing operating expenses increased $95.1 million and
other non-regulated operating expenses increased $6.4 million in fiscal year
2003 mainly due to higher expenses associated with increased sales levels.
Non-regulated gas marketing operating expenses decreased $4.3 million and
other non-regulated operating expenses decreased $4.8 million in fiscal year
2002, compared with fiscal year 2001 primarily due to lower expenses
associated with decreased sales levels.
18
Interest Charges
Interest expense increased $1.1 million, or 4.2%, in fiscal 2003 (compared
with fiscal 2002) primarily due to the issuance of trust preferred
securities in December 2002, partially offset by lower interest on long-term
debt (due to the May 2003 maturity of $25 million of 6 1/4% First Mortgage
Bonds) and reduced short-term interest expense (primarily due to lower
rates).
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.
Income Taxes
The variations in income taxes for all periods reported are primarily due to
changes in pre-tax income.
Other Matters
In November 2002, two customers notified SM&P that, due to actions they have
taken to address workforce management issues, they did not intend to
continue to outsource certain functions, which include locating services
provided by SM&P, after February and March 2003. One of these customers
notified SM&P in January 2003 that it would continue to outsource a portion
of its locating services provided by SM&P beyond that timeframe. Revenue
from these customers totaled approximately $29 million and $45 million for
fiscal 2003 and 2002, respectively. In connection with the reduction in work
from these customers, SM&P made reductions in the required levels of
personnel, facilities and equipment, for which the Company recorded an
after-tax charge of approximately $1 million, all of which was expensed
during the quarter ended March 31, 2003.
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.
CRITICAL ACCOUNTING POLICIES
Our Discussion and Analysis of our financial condition, results of
operations, liquidity and capital resources is based upon our financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. Generally
accepted accounting principles require that we make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
evaluate our estimates on an ongoing basis. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates. We believe the following represent the more significant
items requiring the use of judgment and estimates in preparing our
consolidated financial statements:
Allowances for doubtful accounts - Estimates of the collectibility
of trade accounts receivable are based on historical trends, age of
receivables, economic conditions, credit risk of specific
customers, and other factors.
Employee benefits and postretirement obligations - Pension and
postretirement obligations are calculated by actuarial consultants
that utilize several statistical factors and other assumptions
related to future events, such as discount rates, returns on plan
assets, compensation increases, and mortality rates. The amount of
expense recognized by the Utility is dependent on the regulatory
treatment provided for such costs. Certain liabilities related to
group medical benefits and workers' compensation claims, portions
of which are self-insured and/or contain stop/loss coverage with
third-party insurers to limit exposure, are established based on
historical trends.
19
Goodwill valuation - In accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets," goodwill is required to be tested for
impairment annually or whenever events or circumstances occur that
may reduce the value of goodwill. In performing impairment tests,
valuation techniques require the use of estimates with regard to
discounted future cash flows of operations, involving judgments
based on a broad range of information and historical results. If
the test indicates impairment has occurred, goodwill would be
reduced which would adversely impact earnings.
Laclede Gas accounts for its regulated operations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." This statement sets forth the
application of accounting principles generally accepted in the United States
of America for those companies whose rates are established by or are subject
to approval by an independent third-party regulator. The provisions of SFAS
No. 71 require, among other things, that financial statements of a regulated
enterprise reflect the actions of regulators, where appropriate. These
actions may result in the recognition of revenues and expenses in time
periods that are different than non-regulated enterprises. When this occurs,
costs are deferred as assets in the balance sheet (regulatory assets) and
recorded as expenses when those amounts are reflected in rates. Also,
regulators can impose liabilities upon a regulated company for amounts
previously collected from customers and for recovery of costs that are
expected to be incurred in the future (regulatory liabilities). Management
believes that the current regulatory environment supports the continued use
of SFAS No. 71 and that all regulatory assets and liabilities are
recoverable or refundable through the regulatory process. We believe the
following represent the more significant items recorded through the
application of SFAS No. 71:
The Utility's Purchased Gas Adjustment (PGA) Clause allows Laclede
Gas to flow through to customers, subject to prudence review, the
cost of purchased gas supplies, including the costs, cost
reductions and related carrying costs associated with the Utility's
use of natural gas financial instruments to hedge the purchase
price of natural gas. The difference between actual costs incurred
and costs recovered through the application of the PGA are recorded
as regulatory assets and liabilities that are recovered or refunded
in a subsequent period.
The Company records deferred tax liabilities and assets measured by
enacted tax rates for the net tax effect of all temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes, and the amounts used for income
tax purposes. Changes in enacted tax rates, if any, and certain
property basis differences will be reflected by entries to
regulatory asset or liability accounts for regulated companies, and
will be reflected as income or loss for non-regulated companies.
Also, pursuant to the direction of the MoPSC, Laclede Gas'
provision for income tax expense for financial reporting purposes
reflects an open-ended method of tax depreciation. This method is
consistent with the regulatory treatment prescribed by the MoPSC to
depreciate the Utility's assets.
For further discussion of significant accounting policies, see Note 1 to the
Consolidated Financial Statements included in this report on Form 10-K on
page 39.
REGULATORY MATTERS
At the state level, there have been several important developments during
the fiscal year affecting Laclede Gas, some of which are still pending.
Laclede Gas previously appealed the MoPSC's decision in its 1999 rate case
relative to the calculation of its depreciation rates. The Circuit Court
remanded the decision to the MoPSC based on inadequate findings of fact. The
MoPSC upheld its previous order and Laclede Gas appealed this second order
to the Circuit Court. In 2002, the Circuit Court ruled that the MoPSC's
second order was lawful and reasonable, and Laclede Gas appealed the Circuit
Court's decision to the Missouri Western District Court of Appeals. On March
4, 2003 the Court of Appeals issued an opinion remanding the decision to the
MoPSC based on the MoPSC's failure to support and explain its decision with
adequate findings of fact. In May 2003, the Court of Appeals rejected the
MoPSC's request that the Court reconsider its opinion or transfer this
matter to the Missouri Supreme Court.
On 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 five employees to LES with responsibility
for performing various gas supply administrative duties, many of
20
which had been performed in prior years by an outside party. Laclede Gas
remained 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. On March 28, 2003, Laclede Gas filed
a Motion with the Commission indicating that LES would be dissolved and that
in light of such action the parties had agreed that the investigation could
be terminated and the case closed. On April 14, 2003, LES ceased to exist as
a corporation. On April 22, 2003, the Commission ordered that the
investigation be dismissed and the case closed. The dissolution of LES had
no material effect on the financial position and results of operations of
Laclede Group.
On June 28, 2002, the Staff of the MoPSC filed its recommendation in a
proceeding established to review Laclede Gas' gas costs for fiscal 2001. In
its recommendation, the Staff proposed to disallow approximately $4.9
million in pre-tax gains achieved by Laclede Gas in its incentive-based
Price Stabilization Program. This Program was discontinued at the end of the
2001-2002 heating season. Laclede Gas believes that Staff's position lacks
merit and has vigorously opposed the adjustment in proceedings before the
MoPSC, including a formal hearing that was held on this matter in February
2003. Nevertheless, on April 29, 2003, the MoPSC decided by a 3-2 vote to
disallow the $4.9 million in pre-tax gains achieved by Laclede Gas, and
directed Laclede Gas to flow through such amount to its customers in its
November 2003 PGA filing. On June 19, 2003, Laclede Gas appealed the MoPSC's
decision to the Cole County Circuit Court. On October 10, 2003, the Circuit
Court issued an order staying the MoPSC's decision requiring Laclede to flow
through the $4.9 million to customers. Pursuant to the Stay Order, Laclede
will instead pay the $4.9 million into the Court's registry pending a final
judicial determination of Laclede's entitlement to such amounts. On November
5, 2003, the Circuit Court of Cole County, Missouri, issued its Order and
Judgment vacating and setting aside the Commission's decision on the grounds
that it was unlawful and not supported by competent and substantial evidence
on the record. The Court's Order and Judgment becomes final 30 days after
the date it was issued, at which time it will be subject to appeal.
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 suspended the tariffs implementing the
Program and scheduled a prehearing conference that occurred on October 23,
2002. Formal hearings were held on December 2 and 3, 2002. On January 16,
2003, the Commission, by a 3 to 2 vote, issued an order rejecting the
proposed plan. On January 23, 2003, the Utility filed a Motion for
Reconsideration seeking to identify whether the Commission would approve the
Program at a reduced funding level of $3 million per year. On February 13,
2003 the Commission convened a hearing for oral argument. On March 6, 2003
the Commission denied the Company's Motion for Reconsideration.
On October 3, 2002, the MoPSC approved a settlement reached among the
parties to the 2002 rate case, filed by Laclede Gas on January 25, 2002. The
terms of the settlement included (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 beginning 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. Previously deferred costs of $.3 million
are being recovered and amortized on a straight-line basis over a ten-year
period, without return on investment, effective with implementation of the
new rates, in addition to certain amounts authorized previously.
On July 10, 2003, a bill was signed into Missouri law that, among other
things, allows gas utilities to adjust their rates twice a year to recover
the depreciation, property taxes, and rate of return on facility-related
expenditures that are made to comply with state and federal safety
requirements or to relocate facilities in connection with public improvement
projects. This bill was signed into law and became effective on August 28,
2003. The bill did not have any impact on Laclede during fiscal year 2003,
and the Utility is currently evaluating the impact it may have on future
periods. The Utility anticipates that the bill will have a generally
favorable impact on cash flows and earnings.
On October 9, 2003, the MoPSC issued an order conditionally granting the
Utility's request for a three year extension, through October 31, 2006, of
its authorization to issue securities pursuant to its Universal Shelf
Registration. The
21
extension authorizes the Utility to issue securities in an amount not to
exceed $270 million, which represented the unused portion of the $350
million Shelf Registration amount previously authorized in 2000.
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 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 complete adoption of SFAS Nos. 141 and
142 on October 1, 2002 did not have a material effect on the financial
position or 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. 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 adoption of this Statement on
October 1, 2002 did not affect the financial position or results of
operations of Laclede Group. There are legal obligations related to final
abandonment of the Utility's gas distribution system. However, these
obligations related to mass property and other distribution system assets
generally continue in perpetuity and can not be measured under SFAS No. 143
because of indeterminate settlement dates and cash flow estimates.
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. Adoption of this Statement in fiscal
2003 did not have a material effect on the financial position or 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 did not have a material effect on the financial
position or results of operations of Laclede Group.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," provides alternative methods for a voluntary change to the fair
value based method of accounting for stock-based compensation. In addition,
this statement requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the method used on reported results. The disclosure
provisions are effective for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002.
The required disclosures are included in Note 1, page 38.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities," amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133.
This Statement is effective for contracts entered into or modified after
June 30, 2003, with certain exceptions, and for all hedging relationships
designated after June 30, 2003. There was no effect on the financial
position or results of operations of Laclede Group.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity," establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or
an asset in some circumstances). Many of those instruments were previously
classified as equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003. The
Company's obligated mandatorily redeemable preferred securities of
subsidiary trust and redeemable preferred stock are liabilities under the
provision of SFAS No. 150 and are presented
22
within the Capitalization section on the Consolidated Balance Sheets. There
was not a material effect on the financial position or results of operations
of Laclede Group.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others", requires an entity to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This requirement is to be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. This
Interpretation also requires disclosures in interim and annual financial
statements about obligations under certain guarantees that the entity has
issued. These disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. The required
disclosures are included in Note 17, page 53.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities",
addresses consolidation of business enterprises of variable interest
entities. This Interpretation applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities
in which an enterprise obtains an interest after that date. It applies in
the first interim period ending after December 15, 2003, to variable
interest entities in which an enterprise holds a variable interest acquired
before February 1, 2003. The Company is currently evaluating the effect of
this pronouncement on the consolidation of its obligated mandatorily
redeemable preferred securities of subsidiary trust, but does not expect a
material effect on the financial position or results of operations of
Laclede Group.
In 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 did not 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.
CREDIT RATINGS
As of September 30, 2003, credit ratings for outstanding securities for
Laclede Group and Laclede Gas issues were as follows:
Type of Facility S&P Moody's Fitch
- --------------------------------------------------------------------------------------------
Laclede Group Corporate Rating A
Laclede Gas First Mortgage Bonds A A3 A+
Laclede Gas Commercial Paper A-1 P-2
Trust Preferred Securities A- Baa3 BBB+
On May 5, 2003, Standard & Poor's (S&P) downgraded the long-term corporate
credit rating for Laclede Group and Laclede Gas' First Mortgage Bonds from
A+ to A. 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.
23
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
The Company's short-term borrowing requirements typically peak during colder
months when Laclede Gas borrows money to cover the gap between when it
purchases its natural gas and when its customers pay for that gas. 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 2003 heating season, Laclede Gas had lines of credit
in place of up to $230 million. Laclede Gas sold commercial paper
aggregating to a maximum of $220.7 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 $290
million, including a seasonal credit line of $25 million expiring February
13, 2004. Short-term commercial paper borrowings outstanding at September
30, 2003 were $218.2 million at a weighted average interest rate of 1.16%.
Based on short-term borrowings at September 30, 2003, a change in interest
rates of 100 basis points would increase or decrease pre-tax earnings and
cash flows by approximately $2.2 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, 2003, total debt was 64% of total capitalization.
Laclede Gas has filed a shelf registration on Form S-3. Of the $350 million
of securities originally registered under this S-3, $270 million of debt
securities remained registered and unissued as of September 30, 2003. The
original MoPSC authorization for issuing securities registered on this Form
S-3 expired in September 2003. In response to an application filed by the
Utility, the MoPSC has extended this authorization through October 31, 2006.
The amount, timing and type of additional financing to be issued under this
shelf registration will depend on cash requirements and market conditions.
On May 1, 2003, $25 million of 6 1/4% Series First Mortgage Bonds matured
and were funded with the sale of commercial paper. At September 30, 2003,
Laclede Gas had fixed-rate long-term debt totaling $260 million. While these
long-term debt issues are fixed-rate, they are subject to changes in fair
value as market interest rates change. However, increases or decreases in
fair value would impact earnings and cash flows only if Laclede Gas were to
reacquire any of these issues in the open market prior to maturity.
Short-term cash requirements outside of Laclede Gas have been met with
internally-generated funds. However, Laclede Group has a $20 million working
capital line of credit obtained from U.S. Bank National Association,
expiring in June 2004, with interest rates indexed to LIBOR or Prime, to
meet short-term liquidity needs of its subsidiaries. In April 2003, the
ratings triggers in this line of credit were replaced by a covenant limiting
the total debt of Laclede Gas Company to no more than 70% of the utility's
total capitalization (as noted above, this ratio stood at 64% on September
30, 2003.) This line has been used to provide a letter of credit of $0.5
million on behalf of SM&P. The letter of credit has not been drawn, nor have
there been other uses of this credit line to date. It may, however, be used
for seasonal funding needs of the various subsidiaries from time to time
throughout the year.
On December 16, 2002, Laclede Capital Trust I issued 1,800,000 trust
preferred securities at a par value of $25.00 each and a distribution rate
of 7.70%. These securities mature December 1, 2032, but may be redeemed at
Laclede's option on or after December 16, 2007. The proceeds of this
issuance were used to repay Laclede Group's short-term loan of $42.8 million
from U. S. Bank, which had funded the acquisition in January 2002 of SM&P
Utility Resources, Inc., and for other general corporate purposes. These
trust preferred securities were issued under Laclede Group's shelf
registration on Form S-3, which became effective May 6, 2002, and allows for
the issuance of equity securities, other than preferred stock, and debt
securities. Of the $500 million of securities originally registered under
this S-3, $408.6 million remain registered and unissued as of September 30,
2003. The amount, timing and type of additional financing to be issued under
this shelf registration will depend on cash requirements and market
conditions.
SM&P has several operating leases, the aggregate annual cost of which is
approximately $5 million, consisting primarily of 12-month operating leases,
with renewal options, for vehicles used in its business. Upon acquisition of
SM&P, Laclede Group assumed parental guarantees of certain of those vehicle
leases. Laclede Group anticipates that the maximum guarantees related to
existing leases will not exceed $12 million.
24
Laclede Group had guarantees outstanding totaling $1.0 million for
performance and payment of certain wholesale gas supply purchases by Laclede
Energy Resources, Inc. (LER) (its non-regulated marketing affiliate), as of
September 30, 2003. Laclede Group issued an additional $1.0 million
guarantee in November 2003 on behalf of LER.
Utility construction expenditures were $49.9 million in fiscal 2003 compared
with $48.8 million in fiscal 2002 and $47.0 million in fiscal 2001. Laclede
Gas expects fiscal 2004 utility construction expenditures to approximate $57
million. Non-regulated construction expenditures for fiscal 2003 were $1.2
million compared with $4.2 million in fiscal 2002, and are estimated at
approximately $1.8 million in fiscal 2004.
Consolidated capitalization at September 30, 2003, excluding current
obligations of long-term debt, consisted of 49.5% Laclede Group common stock
equity, .2% Laclede Gas preferred stock, 7.4% Laclede Capital Trust I
preferred securities and 42.9% Laclede Gas long-term debt. The portion of
preferred securities in the consolidated capital structure increased with
the December 16, 2002 issuance of trust preferred securities by Laclede
Capital Trust I.
The ratio of earnings to fixed charges was 2.8 for 2003, 2.2 for 2002 and
2.6 for 2001.
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
Laclede Gas adopted a risk management policy that provides for the purchase
of natural gas financial instruments with the goal of managing price risk
associated with purchasing natural gas on behalf of its customers. This
policy prohibits speculation. Costs and cost reductions, including carrying
costs, associated with the Utility's use of natural gas financial
instruments are allowed to be passed on to the Utility's customers through
the operation of its Purchased Gas Adjustment Clause, through which the
MoPSC allows the Utility to recover gas supply costs. Accordingly, Laclede
Gas does not expect any adverse earnings impact as a result of the use of
these financial instruments. At September 30, 2003, the Utility held
approximately 13.8 million MmBtu of futures contracts at an average price of
$5.82 per MmBtu. Additionally, approximately 15.2 million MmBtu of other
price risk mitigation was in place through the use of option-based
strategies. These positions have various expiration dates, the longest of
which extends through September 2004.
In the course of its business, Laclede Group's non-regulated marketing
affiliate, Laclede Energy Resources, Inc. (LER), enters into fixed price
commitments for the sale of natural gas to customers. LER manages the price
risk associated with these sales by either closely matching the purchases of
physical supplies at fixed prices or through the use of exchange-traded
futures contracts to lock in margins. At September 30, 2003, LER's open
positions were not material to Laclede Group's financial position or results
of operations.
ENVIRONMENTAL MATTERS
Laclede Gas is subject to various environmental laws and regulations that,
to date, have not materially affected the Company's financial position and
results of operations. As these laws, regulations, and their interpretation
evolve, however, additional costs may be incurred.
With regard to a former manufactured gas plant site located in Shrewsbury,
Missouri, Laclede Gas and state and federal environmental regulators have
agreed upon certain actions and those actions are essentially complete.
Laclede Gas currently estimates the overall costs of these actions will be
approximately $2.4 million. As of September 30, 2003, Laclede Gas has paid
or reserved for these actions. If regulators require additional actions or
assert additional claims, Laclede Gas will incur additional costs.
Laclede Gas enrolled a second former manufactured gas plant site into the
Missouri Voluntary Cleanup Program (VCP). The VCP provides opportunities to
minimize the scope and cost of site cleanup while maximizing possibilities
for site development. This site is located in and is presently owned by the
City of St. Louis, Missouri. The City of St. Louis has separately authorized
a developer to prepare both a Remedial Action Plan (RAP), for submission to
the VCP, and a site development plan. Laclede Gas is engaged in ongoing
meetings with the developer to determine what role, if any, it might play in
these efforts. Laclede Gas continues to evaluate other options as well,
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
25
oversight and related legal and engineering consulting may be approximately
$650,000. Currently, Laclede Gas has paid or reserved for these actions.
Laclede Gas has requested that other former site owners and operators share
in these costs and one party has agreed to participate and has reimbursed
Laclede Gas to date for $173,000. Laclede Gas anticipates additional
reimbursement from this party. Laclede Gas plans to seek proportionate
reimbursement of all costs relative to this site from other potentially
responsible parties if practicable.
Costs incurred are charged to expense or capitalized in accordance with
generally accepted accounting principles. A predetermined level of expense
is recovered through Laclede Gas' rates.
Laclede Gas has been advised that a third former manufactured gas plant site
may require remediation. Laclede Gas does not and for many years has not
owned this site. At this time it is not clear whether Laclede Gas will incur
any costs in connection with environmental investigations or remediation at
the site, and if it does incur any costs, what the amount of those costs
would be.
While the scope of costs relative to the Shrewsbury site will not be
significant, the scope of costs relative to the other sites is unknown and
may be material. Laclede Gas has notified its insurers that it seeks
reimbursement of its costs at these three manufactured gas plant sites. In
response, the majority of insurers have reserved their rights. While some of
the insurers have denied coverage, Laclede Gas continues to seek
reimbursement from them. With regard to the Shrewsbury site, denials of
coverage are not expected to have any material impact on the financial
position and results of operations of Laclede Gas. With regard to the other
two sites, since the scope of costs are unknown and may be significant,
denials of coverage may have a material impact on the financial position and
results of operations of Laclede Gas. Such costs, if incurred, have
typically been subject to recovery in rates.
OFF-BALANCE SHEET ARRANGEMENTS
Laclede Group has no off-balance sheet arrangements.
Laclede Gas Company's Management Discussion and Analysis of Financial
Condition is included in Exhibit 99.1
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For this discussion, see the "Market Risk" subsection in Management's
Discussion and Analysis of Financial Condition and Results of Operations,
page 25.
26
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, 2003 and 2002, and the related
statements of consolidated income, common shareholder' equity, comprehensive
income, and cash flows for each of the three years in the period ended
September 30, 2003. 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 2003 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 18, 2003
27
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 four
outside directors, meets periodically with management, the internal auditor,
and the independent auditors to review the manner in which they are
performing their responsibilities. Both the internal auditor and the
independent auditors periodically meet alone with the Audit Committee and
have access to the Audit Committee at any time.
Douglas H. Yaeger
Chairman of the Board,
President and Chief Executive Officer
Barry C. Cooper
Chief Financial Officer
28
Item 8. Financial Statements and Supplementary Data
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED INCOME
(Thousands, Except Per Share Amounts)
- ------------------------------------------------------- ------------- ----------- ------------
Years Ended September 30 2003 2002 2001
- ------------------------------------------------------- ------------- ----------- ------------
Operating Revenues:
Regulated
Gas distribution $ 774,772 $592,097 $ 923,242
Non-Regulated
Services 100,168 94,116 -
Gas marketing 163,861 64,798 69,455
Other 11,529 4,228 9,412
------------- ----------- ------------
Total Operating Revenues 1,050,330 755,239 1,002,109
------------- ----------- ------------
Operating Expenses:
Regulated
Natural and propane gas 483,742 340,045 640,006
Other operation expenses 118,550 106,027 101,915
Maintenance 18,759 17,813 19,262
Depreciation and amortization 22,229 24,215 26,193
Taxes, other than income taxes 56,102 48,342 65,062
------------- ----------- ------------
Total regulated operating expenses 699,382 536,442 852,438
Non-Regulated
Services 101,586 90,771 -
Gas marketing 159,105 64,042 68,338
Other 10,615 4,222 9,008
------------- ----------- ------------
Total Operating Expenses 970,688 695,477 929,784
------------- ----------- ------------
Operating Income 79,642 59,762 72,325
Other Income and (Income Deductions) - Net 543 678 1,417
------------- ----------- ------------
Income Before Interest and Income Taxes 80,185 60,440 73,742
------------- ----------- ------------
Interest Charges:
Interest on long-term debt 20,169 20,820 18,372
Preferred dividends and subsidiary trust
distributions 2,743 - -
Other interest charges 3,974 4,989 10,067
------------- ----------- ------------
Total Interest Charges 26,886 25,809 28,439
------------- ----------- ------------
Income Before Income Taxes 53,299 34,631 45,303
Income Tax Expense 18,652 12,247 14,831
------------- ----------- ------------
Net Income 34,647 22,384 30,472
Dividends on Redeemable Preferred Stock -
Laclede Gas 62 68 87
------------- ----------- ------------
Net Income Applicable to Common Stock $ 34,585 $ 22,316 $ 30,385
============= =========== ============
Average Number of Common Shares
Outstanding 19,022 18,888 18,878
Basic Earnings Per Share of Common Stock $1.82 $1.18 $1.61
Diluted Earnings Per Share of Common Stock $1.82 $1.18 $1.61
See the accompanying notes to consolidated financial statements.
29
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Thousands)
- ---------------------------------------------------------- ----------- ----------- ----------
Years Ended September 30 2003 2002 2001
- ---------------------------------------------------------- ----------- ----------- ----------
Net Income Applicable to Common Stock $34,585 $22,316 $30,385
----------- ----------- ----------
Other Comprehensive Income:
Net gains on cash flow hedging derivative
instruments:
Net hedging gain arising during the period 1,184 - -
Less: Reclassification adjustment for
gains included in net income 366 - -
----------- ----------- ----------
Net unrealized gains on cash flow
hedging derivative instruments 818 - -
Minimum pension liability adjustment (396) (553) -
----------- ----------- ----------
Other Comprehensive Income (Loss) before tax 422 (553) -
Income tax expense (benefit)related to items
of other comprehensive income (loss) 163 (214) -
----------- ----------- ----------
Other Comprehensive Income (Loss), net of tax 259 (339) -
----------- ----------- ----------
Comprehensive Income $34,844 $21,977 $30,385
=========== =========== ==========
See the accompanying notes to consolidated financial statements.
30
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands)
- ------------------------------------------------------------- ------------- ------------
September 30 2003 2002
- ------------------------------------------------------------- ------------- ------------
Assets
Utility Plant $1,030,665 $ 988,747
Less - Accumulated depreciation and amortization 409,418 394,371
------------- ------------
Net utility plant 621,247 594,376
------------- ------------
Goodwill 28,124 27,455
------------- ------------
Other Property and Investments (net of accumulated
Depreciation and amortization, 2003, $9,486;
2002, $5,265) 44,598 46,986
------------- ------------
Current Assets:
Cash and cash equivalents 7,291 12,870
Accounts receivable:
Gas customers - billed and unbilled 70,217 51,419
Other 41,298 42,591
Less - Allowances for doubtful accounts (7,181) (4,532)
Inventories:
Natural gas stored underground at LIFO cost 117,231 77,121
Propane gas at FIFO cost 17,132 14,712
Materials, supplies and merchandise at average
cost 4,071 4,364
Derivative instrument assets 12,643 11,329
Deferred income taxes 7,631 12,305
Prepayments and other 17,557 11,505
------------- ------------
Total current assets 287,890 233,684
------------- ------------
Deferred Charges:
Prepaid pension cost 109,445 114,313
Regulatory assets 103,807 70,272
Other 6,287 3,904
------------- ------------
Total deferred charges 219,539 188,489
------------- ------------
Total Assets $1,201,398 $1,090,990
============= ============
See the accompanying notes to consolidated financial statements.
31
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Thousands)
- ------------------------------------------------------------------------ ------------ ------------
September 30 2003 2002
- ------------------------------------------------------------------------ ------------ ------------
Capitalization and Liabilities
Capitalization:
Common stock equity $ 299,072 $ 285,766
Redeemable preferred stock - Laclede Gas 1,258 1,266
Obligated mandatorily redeemable preferred securities
of subsidiary trust 45,000 -
Long-term debt (less sinking fund requirements) -
Laclede Gas 259,625 259,545
------------ ------------
Total Capitalization 604,955 546,577
------------ ------------
Current Liabilities:
Notes payable 218,200 161