SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 <TABLE> <CAPTION> ----------------------------------------------------------------------------------------------- Commission Exact Name of Registrant as States of I.R.S. File Number Specified in its Charter and Incorporation Employer Principal Office Address and Identification Telephone Number Number ----------------------------------------------------------------------------------------------- <S> <C> <C> <C> 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 ----------------------------------------------------------------------------------------------- </TABLE> Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), The Laclede Group, Inc.: Yes X No ---- ---- Laclede Gas Company: Yes X No ---- ---- and (2) has been subject to such filing requirements for the past 90 days: The Laclede Group, Inc.: Yes X No ---- ---- Laclede Gas Company: Yes X No ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: <TABLE> <CAPTION> Shares Outstanding At Registrant Description of Common Stock July 26, 2002 - ---------- --------------------------- ------------- <S> <C> <C> The Laclede Group, Inc. Common Stock ($1.00 Par Value) 18,917,068 Laclede Gas Company Common Stock ($1.00 Par Value) 100 (100% owned by Laclede Group) </TABLE> 1
<TABLE> <CAPTION> TABLE OF CONTENTS Page No. -------- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements The Laclede Group, Inc.: Statements of Consolidated Income 4 Consolidated Balance Sheets 5-6 Statements of Consolidated Cash Flows 7 Laclede Gas Company: Statements of Consolidated Income 8 Consolidated Balance Sheets 9-10 Statements of Consolidated Cash Flows 11 Notes to Consolidated Financial Statements (The Laclede Group and Laclede Gas Company - Combined) 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 26 Item 6. Exhibits and Other Reports on Form 8-K 26 SIGNATURES 27 INDEX TO EXHIBITS 28 </TABLE> Filing Format - ------------- This Quarterly Report on Form 10-Q is a combined report being filed by two separate registrants: The Laclede Group, Inc. (Laclede Group or the Company) and Laclede Gas Company (Laclede Gas or the Utility). Effective October 1, 2001, Laclede Gas and its subsidiaries became subsidiaries of The Laclede Group. At that time stock certificates previously representing shares of Laclede Gas common stock were deemed to represent the same number of shares of The Laclede Group common stock. All of the former subsidiaries of Laclede Gas (Laclede Investment LLC, Laclede Energy Resources, Inc., Laclede Gas Family Services, Inc., Laclede Development Company, Laclede Venture Corp. and Laclede Pipeline Company) are now subsidiaries of Laclede Group. 2
PART I. FINANCIAL INFORMATION This Quarterly Report on Form 10-Q includes separate consolidated financial statements (i.e. balance sheets, statements of income and statements of cash flows) for Laclede Group and Laclede Gas. The Laclede Group financial statements (pages 4 through 7) 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 the restructuring (i.e., the highest level of consolidation). The consolidated financial position, results of operations and cash flows of Laclede Gas 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 (i.e. legal entity results). The consolidated financial statements for Laclede Gas (pages 8 through 11) 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. A single set of Notes to the Consolidated Financial Statements begins on page 12 that applies equally to Laclede Group and Laclede Gas, except where otherwise noted. This report includes a single Management's Discussion and Analysis of Financial Condition and Results of Operations for Laclede Group as well as Laclede Gas, due to the similarity of the operating results of the two entities. The interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Form 10-K for the year ended September 30, 2001. 3
Item 1. Financial Statements <TABLE> THE LACLEDE GROUP, INC. STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) <CAPTION> (In Thousands, Except Per Share Amounts) Three Months Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Operating Revenues: Utility operating revenues $ 87,284 $104,195 $527,297 $844,143 Non-utility operating revenues 59,997 18,706 102,091 66,525 ---------------------------------------------------- Total Operating Revenues 147,281 122,901 629,388 910,668 ---------------------------------------------------- Operating Expenses: Utility operating expenses Natural and propane gas 41,565 57,611 313,274 600,524 Other operation expenses 25,497 24,784 80,577 78,617 Maintenance 4,547 4,827 13,179 14,373 Depreciation and amortization 6,106 6,560 18,741 19,603 Taxes, other than income taxes 9,752 11,553 41,088 56,831 ---------------------------------------------------- Total utility operating expenses 87,467 105,335 466,859 769,948 Non-utility operating expenses 55,830 18,316 100,770 64,751 ---------------------------------------------------- Total Operating Expenses 143,297 123,651 567,629 834,699 ---------------------------------------------------- Operating Income (Loss) 3,984 (750) 61,759 75,969 Other Income and Income Deductions - Net (76) (100) 673 1,456 ---------------------------------------------------- Income (Loss) Before Interest and Income Taxes 3,908 (850) 62,432 77,425 ---------------------------------------------------- Interest Charges: Interest on long-term debt 5,205 4,414 15,615 13,168 Other interest charges 1,129 2,361 3,868 9,080 ---------------------------------------------------- Total Interest Charges 6,334 6,775 19,483 22,248 ---------------------------------------------------- Dividends on Preferred Stock - Laclede Gas 16 22 52 66 ---------------------------------------------------- Income (Loss) Before Income Taxes (2,442) (7,647) 42,897 55,111 Income Tax Expense (Benefit) (1,532) (3,952) 15,350 19,626 ---------------------------------------------------- Net Income (Loss) Applicable to Common Stock $ (910) $ (3,695) $ 27,547 $ 35,485 ==================================================== Average Number of Common Shares Outstanding 18,878 18,878 18,878 18,878 Earnings (Loss) Per Share of Common Stock $(.05) $(.20) $1.46 $1.88 Dividends Declared Per Share of Common Stock $.335 $.335 $1.005 $1.005 See notes to consolidated financial statements. </TABLE> 4
<TABLE> THE LACLEDE GROUP, INC. CONSOLIDATED BALANCE SHEETS <CAPTION> June 30 Sept. 30 2002 2001 ---- ---- (Thousands of Dollars) (UNAUDITED) <S> <C> <C> ASSETS Utility Plant $ 977,734 $ 949,775 Less: Accumulated depreciation and amortization 392,644 380,135 -------------------------- Net Utility Plant 585,090 569,640 -------------------------- Other Property and Investments 71,259 32,893 -------------------------- Current Assets: Cash and cash equivalents 14,601 3,223 Accounts receivable 95,573 87,707 Less: Allowances for doubtful accounts (5,592) (9,216) Materials, supplies, and merchandise at avg. cost 5,038 5,393 Natural gas stored underground for current use at LIFO cost 32,001 76,661 Propane gas for current use at FIFO cost 14,723 14,213 Prepayments 4,551 3,999 Deferred income taxes 6,063 8,556 -------------------------- Total Current Assets 166,958 190,536 -------------------------- Deferred Charges: Prepaid pension cost 117,633 110,475 Regulatory assets 72,424 68,599 Other 4,651 3,767 -------------------------- Total deferred charges 194,708 182,841 -------------------------- Total Assets $1,018,015 $ 975,910 ========================== <CAPTION> See notes to consolidated financial statements. 5
THE LACLEDE GROUP, INC. CONSOLIDATED BALANCE SHEETS (Continued) June 30 Sept. 30 2002 2001 ---- ---- (Thousands of Dollars) (UNAUDITED) <S> <C> <C> CAPITALIZATION AND LIABILITIES Capitalization: Common stock (June 30, 2002, 18,877,987 and Sept. 30, 2001, 20,743,625 shares issued) $ 18,878 $ 20,744 Paid-in capital 63,701 85,846 Retained earnings 214,087 205,512 Treasury stock, at cost (1,865,638 shares held Sept. 30, 2001) - (24,017) -------------------------- Total common stock equity 296,666 288,085 Redeemable preferred stock - Laclede Gas 1,266 1,588 Long-term debt (less sinking fund requirements) - Laclede Gas 259,524 284,459 -------------------------- Total Capitalization 557,456 574,132 -------------------------- Current Liabilities: Notes payable 113,310 117,050 Accounts payable 42,532 32,087 Advance customer billings 3,183 11,679 Current portion of long-term debt and preferred stock 25,000 79 Taxes accrued 22,677 14,912 Unamortized purchased gas adjustment 1,720 9,026 Other 40,867 32,863 -------------------------- Total Current Liabilities 249,289 217,696 -------------------------- Deferred Credits and Other Liabilities: Deferred income taxes 139,293 142,515 Unamortized investment tax credits 5,709 5,948 Pension and postretirement benefit costs 23,904 15,847 Regulatory liabilities 22,377 304 Other 19,987 19,468 -------------------------- Total Deferred Credits and Other Liabilities 211,270 184,082 -------------------------- Total Capitalization and Liabilities $1,018,015 $975,910 ========================== See notes to consolidated financial statements. </TABLE> 6
<TABLE> THE LACLEDE GROUP, INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) <CAPTION> Nine Months Ended June 30, 2002 2001 ---- ---- (Thousands of Dollars) <S> <C> <C> Operating Activities: Net Income $ 27,547 $ 35,485 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 18,879 19,795 Deferred income taxes and investment tax credits (7,834) (3,672) Dividends on preferred stock - Laclede Gas 52 66 Other - net 685 (1,061) Changes in assets and liabilities: Accounts receivable - net 3,192 (38,465) Unamortized purchased gas adjustments (7,306) 15,159 Deferred purchased gas costs 24,244 2,826 Advance customer billings - net (8,496) (40,497) Accounts payable 7,563 619 Taxes accrued 8,674 12,291 Natural gas stored underground 44,660 59,766 Other assets and liabilities (2,230) (20,827) --------------------------- Net cash provided by operating activities $109,630 $ 41,485 --------------------------- Investing Activities: Construction expenditures (34,317) (33,649) Investments - non-utility (40,839) (318) Employee benefit trusts 32 (1,242) Other 31 (2,000) --------------------------- Net cash used in investing activities $(75,093) $(37,209) --------------------------- Financing Activities: Issuance of first mortgage bonds - 50,000 Issuance (Repayment) of short-term debt - net (3,740) (36,800) Dividends paid (19,024) (19,038) Preferred stock reacquired and other (395) (135) --------------------------- Net cash (used in) financing activities $(23,159) $ (5,973) --------------------------- Net Increase/(Decrease) in Cash and Cash Equivalents $ 11,378 $ (1,697) Cash and Cash Equivalents at Beg. of Period 3,223 4,215 --------------------------- Cash and Cash Equivalents at End of Period $ 14,601 $ 2,518 =========================== Supplemental Disclosure of Cash Paid During the Period for: Interest $ 19,565 $ 24,242 Income taxes 10,777 11,857 See notes to consolidated financial statements. </TABLE> 7
<TABLE> LACLEDE GAS COMPANY STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) <CAPTION> (In Thousands, Except Per Share Amounts) Three Months Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Operating Revenues: Utility operating revenues $ 87,284 $104,195 $527,297 $844,143 Other operating revenues 684 18,706 1,887 66,525 ---------------------------------------------------- Total Operating Revenues 87,968 122,901 529,184 910,668 ---------------------------------------------------- Operating Expenses: Utility operating expenses Natural and propane gas 41,565 57,611 313,274 600,524 Other operation expenses 25,497 24,784 80,577 78,617 Maintenance 4,547 4,827 13,179 14,373 Depreciation and amortization 6,106 6,560 18,741 19,603 Taxes, other than income taxes 9,752 11,553 41,088 56,831 ---------------------------------------------------- Total utility operating expenses 87,467 105,335 466,859 769,948 Other operating expenses 713 18,316 1,892 64,751 ---------------------------------------------------- Total Operating Expenses 88,180 123,651 468,751 834,699 ---------------------------------------------------- Operating Income (Loss) (212) (750) 60,433 75,969 Other Income and Income Deductions - Net (108) (100) 608 1,456 ---------------------------------------------------- Income (Loss) Before Interest and Income Taxes (320) (850) 61,041 77,425 ---------------------------------------------------- Interest Charges: Interest on long-term debt 5,205 4,414 15,615 13,168 Other interest charges 841 2,361 3,451 9,080 ---------------------------------------------------- Total Interest Charges 6,046 6,775 19,066 22,248 ---------------------------------------------------- Income (Loss) Before Income Taxes (6,366) (7,625) 41,975 55,177 Income Tax Expense (Benefit) (2,987) (3,952) 14,893 19,626 ---------------------------------------------------- Net Income (Loss) (3,379) (3,673) 27,082 35,551 Dividends on Preferred Stock - Laclede Gas 16 22 52 66 ---------------------------------------------------- Earnings (Loss) Applicable to Common Stock $ (3,395) $ (3,695) $ 27,030 $ 35,485 ==================================================== See notes to consolidated financial statements. </TABLE> 8
<TABLE> LACLEDE GAS COMPANY CONSOLIDATED BALANCE SHEETS <CAPTION> June 30 Sept. 30 2002 2001 ---- ---- (Thousands of Dollars) (UNAUDITED) <S> <C> <C> ASSETS Utility Plant $977,734 $949,775 Less: Accumulated depreciation and amortization 392,644 380,135 ------------------------- Net Utility Plant 585,090 569,640 ------------------------- Other Property and Investments 25,535 32,893 ------------------------- Current Assets: Cash and cash equivalents 1,829 3,223 Accounts receivable 64,637 87,707 Less: Allowances for doubtful accounts (4,889) (9,216) Materials, supplies, and merchandise at avg. cost 5,000 5,393 Natural gas stored underground for current use at LIFO cost 31,985 76,661 Propane gas for current use at FIFO cost 14,723 14,213 Prepayments and other 2,928 3,999 Deferred income taxes 6,063 8,556 ------------------------- Total Current Assets 122,276 190,536 ------------------------- Deferred Charges: Prepaid pension cost 117,633 110,475 Regulatory assets 72,424 68,599 Other 4,583 3,767 ------------------------- Total deferred charges 194,640 182,841 ------------------------- Total Assets $927,541 $975,910 ========================= <CAPTION> See notes to consolidated financial statements. 9
LACLEDE GAS COMPANY CONSOLIDATED BALANCE SHEETS (Continued) June 30 Sept. 30 2002 2001 ---- ---- (Thousands of Dollars) (UNAUDITED) <S> <C> <C> CAPITALIZATION AND LIABILITIES Capitalization: Common stock and Paid-in capital (June 30, 2002, 100 and Sept. 30, 2001, 20,743,625 shares issued) $ 82,579 $106,590 Retained earnings 193,826 205,512 Treasury stock, at cost (1,865,638 shares held Sept. 30, 2001) - (24,017) ---------------------------- Total common stock equity 276,405 288,085 Redeemable preferred stock - Laclede Gas 1,266 1,588 Long-term debt (less sinking fund requirements) - Laclede Gas 259,524 284,459 ---------------------------- Total Capitalization 537,195 574,132 ---------------------------- Current Liabilities: Notes payable 70,510 117,050 Accounts payable 28,210 32,087 Advance customer billings 3,183 11,679 Current portion of long-term debt and preferred stock 25,000 79 Taxes accrued 23,541 14,912 Unamortized purchased gas adjustment 1,720 9,026 Other 28,577 32,863 ---------------------------- Total Current Liabilities 180,741 217,696 ---------------------------- Deferred Credits and Other Liabilities: Deferred income taxes 138,161 142,515 Unamortized investment tax credits 5,709 5,948 Pension and postretirement benefit costs 23,904 15,847 Regulatory liabilities 22,377 304 Other 19,454 19,468 ---------------------------- Total Deferred Credits and Other Liabilities 209,605 184,082 ---------------------------- Total Capitalization and Liabilities $927,541 $975,910 ============================ See notes to consolidated financial statements. </TABLE> 10
<TABLE> LACLEDE GAS COMPANY STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) <CAPTION> Nine Months Ended June 30, 2002 2001 ---- ---- (Thousands of Dollars) <S> <C> <C> Operating Activities: Net Income $ 27,082 $ 35,551 Adjustments to reconcile net income To net cash provided by (used in) operating activities: Depreciation and amortization 18,692 19,795 Deferred income taxes and investment tax credits (7,772) (3,672) Other - net 685 (1,061) Changes in assets and liabilities: Accounts receivable - net 16,983 (38,465) Unamortized purchased gas adjustments (7,306) 15,159 Deferred purchased gas costs 24,244 2,826 Advance customer billings - net (8,496) (40,497) Accounts payable (4,583) 619 Taxes accrued 7,979 12,291 Natural gas stored underground 44,645 59,766 Other assets and liabilities (13,174) (20,827) --------------------------- Net cash provided by (used in) operating activities $ 98,979 $ 41,485 --------------------------- Investing Activities: Construction expenditures (33,863) (33,649) Investments - non-utility (219) (318) Employee benefit trusts 76 (1,242) Other (408) (2,000) --------------------------- Net cash used in investing activities $(34,414) $(37,209) --------------------------- Financing Activities: Issuance of first mortgage bonds - 50,000 Issuance (Repayment) of short-term debt - net (46,540) (36,800) Dividends paid (19,024) (19,038) Preferred stock reacquired and other (395) (135) --------------------------- Net cash provided by (used in) financing activities $(65,959) $ (5,973) --------------------------- Net Increase in Cash and Cash Equivalents $ (1,394) $ (1,697) Cash and Cash Equivalents at Beg. of Period 3,223 4,215 --------------------------- Cash and Cash Equivalents at End of Period $ 1,829 $ 2,518 =========================== Supplemental Disclosure of Cash Paid During the Period for: Interest $ 19,264 $ 24,242 Income taxes 10,376 11,857 See notes to consolidated financial statements. </TABLE> 11
THE LACLEDE GROUP, INC. AND LACLEDE GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1.) Effective October 1, 2001, Laclede Gas Company (Laclede Gas or the Utility) and its subsidiaries became subsidiaries of The Laclede Group, Inc. (Laclede Group or the Company), an exempt holding company under the Public Utility Holding Company Act of 1935. See the Company's Annual Report on Form 10-K for the year ended September 30, 2001 for additional details on this restructuring. This Quarterly Report on Form 10-Q is a combined report of Laclede Group and Laclede Gas. Consolidated Financial Statements included in this report are presented as follows: Laclede Group - Presents 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. Laclede Gas - Presents 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. In conjunction with the October 1, 2001 restructuring, Laclede Gas dividended its equity in its subsidiaries of $19.7 million to Laclede Group. Also as of that same date, Laclede Gas cancelled its treasury stock of $24.0 million. These notes are an integral part of the accompanying consolidated financial statements of Laclede Group and its subsidiaries, including Laclede Gas. Except where otherwise noted, these Notes to Consolidated Financial Statements apply equally to Laclede Group and Laclede Gas. In the opinion of Laclede Group and Laclede Gas, this interim report includes all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the results of operations for the periods presented. Certain prior-period amounts have been reclassified to conform to current-period presentation. This Form 10-Q should be read in conjunction with the Notes to Financial Statements contained in the Company's Fiscal 2001 Form 10-K. 2.) On January 28, 2002, Laclede Group completed its acquisition from NiSource, Inc. of 100% of the stock of SM&P Utility Resources, Inc. (SM&P), one of the nation's largest underground locating and marking service businesses. SM&P, a Carmel, Indiana-based company, performs over 10 million locates a year and currently generates approximately $130 million in revenues annually from the $1.3 billion facility-locating industry. Its 2,000 employees operate across 10 centrally located states - Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Ohio, Oklahoma, Texas and Wisconsin. Locators mark the placement of underground facilities for major providers of telephone, natural gas, electric, water, cable TV and fiber optic services so that construction work can be performed without damaging buried facilities. As a result of the acquisition, SM&P's earnings flow will not only diversify Laclede Group's earnings but also will be counter-seasonal to those of Laclede Gas. This acquisition was financed initially with conventional bank debt totaling $42.8 million. SM&P is a subsidiary of Laclede Group and will remain headquartered in Indiana. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The allocation of the purchase price included in the consolidated statement of financial position is preliminary and may be revised up to one year from the date of acquisition due to refinements in the estimated fair value of the assets acquired and liabilities assumed. The goodwill recognized in this transaction is expected to be fully deductible for tax purposes. 12
<TABLE> <CAPTION> At January 28, 2002 ------------------- (Thousands of Dollars) <S> <C> Current assets $21,034 Property, plant, and equipment 7,157 Goodwill 27,997 ------- Total assets acquired $56,188 ------- Current liabilities $13,067 ------- Total liabilities assumed $13,067 ------- Net assets acquired $43,121 ======= </TABLE> The results of SM&P's operations since January 28, 2002 have been included in Laclede Group's consolidated financial statements. Goodwill has been included in Other Property and Investments on Laclede Group's consolidated balance sheets. SM&P's earnings are impacted by trends in the construction industry. 3.) In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," which requires all business combinations in the scope of the 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 Company has 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, "Goodwill and Other Intangible Assets." 4.) The consolidated financial position, results of operations and cash flows of Laclede Group are comprised primarily from the consolidated financial position, results of operations and cash flows of Laclede Gas. Laclede Gas is a natural gas distribution utility having a material seasonal cycle. As a result, these interim statements of income for Laclede Group and Laclede Gas are not necessarily indicative of annual results or representative of succeeding quarters of the fiscal year. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the first six months of the fiscal year, which generally corresponds with the heating season. The Utility typically experiences losses over the last half of its fiscal year. This seasonal effect on Laclede Group is expected to be tempered somewhat by the addition of SM&P, whose operations tend to be counter-seasonal to those of Laclede Gas. 5.) Settlement of Laclede Gas' 2001 rate case resulted in implementation of a general rate increase effective December 1, 2001, as approved by the Missouri Public Service Commission (MoPSC or the Commission). The settlement provided for an annual increase of about $12 million as well as an additional $3 million annually to cover the cost of initiating service to customers. The MoPSC also authorized the cost of removing retired utility plant to be recovered as an expense when incurred rather than being included in depreciation rates. Prior to December 1, 2001, the Utility's removal costs, less salvage, were charged to accumulated depreciation. Pursuant to the settlement, Laclede Gas instituted lower depreciation rates effective December 1, 2001 and began expensing all removal costs, net of salvage, as incurred. These costs are included in the Other Operation Expenses line on the income statement. The settlement also provided for the continued deferral of certain costs related to the Laclede Gas pipe replacement program as well as authorizing the recovery of costs previously deferred under that program. Previously deferred costs of $2,756,000 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. 6.) Prior to the restructuring on October 1, 2001, Laclede Gas' consolidated financial statements included subsidiary tax obligations. Subsequent to the restructuring on October 1, 2001, Laclede Group's 13
consolidated financial statements include the tax obligations of Laclede Gas and its other subsidiaries. Net provisions for income taxes were charged (credited) as follows during the periods set forth below: <TABLE> <CAPTION> Laclede Group Laclede Gas ----------------------------------------------- ---------------------------------------------- Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, ----------------------- --------------------- ---------------------- --------------------- 2002 2001 2002 2001 2002 2001 2002 2001 ---- ---- ---- ---- ---- ---- ---- ---- (Thousands of Dollars) (Thousands of Dollars) <S> <C> <C> <C> <C> <C> <C> <C> <C> Federal Current $(6,793) $(2,865) $19,819 $22,369 $(8,250) $(2,865) $19,382 $22,369 Deferred 5,554 (591) (6,793) (5,658) 5,596 (591) (6,767) (5,658) State and Local Current (1,277) (433) 3,334 3,736 (1,324) (433) 3,283 3,736 Deferred 984 (63) (1,010) (821) 991 (63) (1,005) (821) ---------------------------------------------------------------------------------------------- Total $(1,532) $(3,952) $15,350 $19,626 $(2,987) $(3,952) $14,893 $19,626 ============================================================================================== </TABLE> 7.) Under the Gas Supply Incentive Plan (GSIP) of Laclede Gas, the Utility shared with its customers certain gains and losses related to the acquisition and management of its gas supply assets. The provisions of the GSIP extended through September 30, 2001. In September 2001, the MoPSC ruled that the GSIP should be allowed to expire. The Utility requested clarification and rehearing. On February 19, 2002, the MoPSC denied the Utility's application for rehearing. Laclede Gas filed a petition for judicial review of the MoPSC's decision with the Cole County Circuit Court, together with a motion requesting that the MoPSC's decision be stayed. The request for stay was denied on May 13, 2002. The petition for judicial review is still pending. However, pursuant to the 2001 rate case settlement, the MoPSC authorized Laclede Gas to retain all income from releases of pipeline capacity effective December 1, 2001. Income from releases of pipeline capacity was previously shared with customers under the terms of the GSIP. Laclede Gas will continue to retain all income resulting from sales outside of its traditional service area, as previously authorized by the Commission. Income related to releases of pipeline capacity and sales made outside its traditional service area are volatile in nature and subject to market conditions. <TABLE> <CAPTION> Three Months Ended Nine Months Ended June 30, June 30, ------------------ ------------------- 2002 2001 2002 2001 ---- ---- ---- ---- (Thousands of Dollars) <S> <C> <C> <C> <C> Pre-Tax Income - GSIP/Capacity Release $428 $3,055 $1,008 $6,867 Pre-Tax Income - Off System Sales 512 124 3,615 899 -------------------------- ---------------------------- Total Pre-Tax Income $940 $3,179 $4,623 $7,766 ========================== ============================ </TABLE> 8.) Laclede Gas and other subsidiaries of Laclede Group may engage in related party transactions during the ordinary course of business. All significant intercompany balances have been eliminated from the consolidated financial statements of Laclede Group. In addition, all such significant transactions between Laclede Gas and its affiliates that occurred prior to the October 1, 2001 restructuring have similarly been eliminated from the consolidated financial statements of Laclede Gas. In compliance with generally accepted accounting principles, transactions between Laclede Gas and its affiliates that occurred after the October 1, 2001 restructuring, as well as intercompany balances remaining on Laclede Gas' balance sheet on June 30, 2002, have not been eliminated from the Laclede Gas consolidated financial statements. These amounts are not disclosed on the face of the Laclede Gas consolidated financial statements, since they are not material. Laclede Gas provides administrative and general support to affiliates and has filed consolidated tax returns, which include affiliated company tax obligations. All such costs, which are not material, are 14
billed to the appropriate affiliates and are reflected in accounts receivable on Laclede Gas' Consolidated Balance Sheet. Laclede Gas may also, on occasion, borrow funds from, or lend funds to, affiliated companies. At June 30, 2002, the Laclede Gas Consolidated Balance Sheet reflected a total of $2.9 million of intercompany receivables and $.1 million intercompany payables. 9.) The regulated utility segment consists of the regulated operations of Laclede Gas and is the core business segment of Laclede Group. Laclede Gas is a public utility engaged in the retail distribution of natural gas serving an area in eastern Missouri, with a population of approximately 2.0 million, including the City of St. Louis, St. Louis County, and parts of eight other counties. Non-regulated operations include the transportation of liquid propane, gas marketing, the sale of insurance related products, real estate development, the compression of natural gas, and financial investments in other enterprises. These operations are conducted through six wholly-owned subsidiaries that became subsidiaries of Laclede Group as a result of the restructuring on October 1, 2001. This segment also includes the results of Laclede Energy Services, Inc. (LES), a wholly-owned subsidiary of Laclede Group which became operational on May 1, 2002, that performs administrative gas supply and risk management services. The Utility Services segment includes the results of SM&P, an underground locating and marking business operating in 10 Midwestern states, and a wholly-owned subsidiary of Laclede Group acquired on January 28, 2002. The results of SM&P's operations since January 28, 2002 and the results of LES' operations since May 1, 2002 are included in Laclede Group's consolidated financial statements. <TABLE> <CAPTION> Regulated Utility Gas Services All Other (Thousands of Dollars) Utility (Non-Regulated) (Non-Regulated) Eliminations Consolidated - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Three Months Ended June 30, 2002 Operating revenues $ 87,284 $ 39,482 $ 20,515 $ - $ 147,281 Net income (loss) (3,376) 2,096 370 - (910) Total assets 926,018 60,478 38,237 (6,718) 1,018,015 Nine Months Ended June 30, 2002 Operating revenues $527,297 $ 54,756 $ 47,335 $ - $ 629,388 Net income (loss) 27,034 63 450 - 27,547 Total assets 926,018 60,478 38,237 (6,718) 1,018,015 Three Months Ended June 30, 2001 Operating revenues $104,195 $ - $ 18,706 $ - $ 122,901 Net income (loss) (3,944) - 249 - (3,695) Total assets 959,728 - 34,301 (27,294) 966,735 Nine Months Ended June 30, 2001 Operating revenues $844,143 $ - $ 66,525 $ - $ 910,668 Net income (loss) 34,480 - 1,005 - 35,485 Total assets 959,728 - 34,301 (27,294) 966,735 </TABLE> 10.) As previously reported, Laclede Gas is subject to various environmental laws and regulations that, to date, have not materially affected its financial position and results of operations. Laclede Gas is presently involved in the clean up or formal assessment of two former manufactured gas plant sites, the Shrewsbury site and the Carondelet City of St. Louis site. With regard to the Shrewsbury site, Laclede Gas and state and federal environmental regulators have agreed upon certain actions and those actions are nearing completion. Laclede Gas currently estimates the 15
overall costs of these actions will be approximately $2,307,000. As of June 30, 2002, Laclede Gas has paid $2,214,000 and reserved $93,000 for these actions. If regulators require additional actions, Laclede Gas will incur additional costs. The Carondelet City of St. Louis site was placed 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. Laclede Gas currently estimates that the cost of the site investigations, agency oversight and related legal and engineering consulting may be approximately $609,000. Currently, Laclede Gas has paid $512,000 and reserved an additional $97,000. Laclede has requested that other former site owners and operators participate in the cost of any site investigation. One former owner and operator agreed to participate in these costs and has reimbursed Laclede Gas to date for $159,000. Laclede Gas anticipates additional reimbursement from this party of approximately $69,000. Laclede Gas plans to seek proportionate reimbursement of all costs relative to this site from other potentially responsible parties if practicable. Laclede Gas and the participating former owner and operator are currently having discussions with the City of St. Louis, the present owner of the site, regarding remediation and development possibilities. Costs incurred are charged to expense or capitalized in accordance with generally accepted accounting principles. A predetermined level of expense is included in Laclede Gas' rates. Laclede Gas has been advised that a third former manufactured gas plant site previously operated, but no longer owned by Laclede Gas, is believed to contain gas plant waste that may require remediation. Laclede Gas is working to determine the nature and extent of such waste, if any, and Laclede Gas' responsibility, if any, for any remediation costs. While the scope of costs relative to the Shrewsbury site will not be significant, the scope of costs relative to the other sites are unknown and may be material. Laclede Gas has notified its insurers that it intends to seek reimbursement of its costs at the sites. 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 will not have any significant impact on the financial position and results of operations of Laclede Gas. With regard to the other sites, since the scope of costs relative to these sites are unknown and may be material, 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. 11.) The legal proceedings item for the Form 10-K for the year ended September 30, 2001 included disclosure of a class action lawsuit filed in August 2001 against Laclede Gas. Laclede Gas filed a motion to dismiss the lawsuit that was granted by the Court on February 22, 2002. The plaintiff did not file an amended petition within the time granted by the Court but filed an appeal on April 3, 2002. On May 13, 2002, the plaintiff dismissed the appeal. 12.) On March 15, 2002, the Staff of the MoPSC filed its recommendation in the proceeding established to review Laclede Gas' gas costs for fiscal 2000. In its recommendation, the Staff proposed to disallow the recovery of approximately $2.6 million in gas costs on the alleged grounds that Laclede Gas had slightly more transportation capacity than necessary to serve its customers. On May 9, 2002, the Staff revised its recommendation to withdraw the $2.6 million proposed disallowance. 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 intends to vigorously oppose the adjustment in a proceeding before the MoPSC, which is currently scheduled to occur in February 2003. Regulatory proceeding results are, however, inherently uncertain, and to the extent that a final Commission decision sustains Staff's recommended disallowance, the proceeding's outcome could have a material effect on the future financial position and results of operations of Laclede Gas. Missouri statute provides an opportunity for court review of Commission decisions. 16
13.) 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, Laclede Gas responded, pointing out that it had not transferred its gas supply functions to LES but had instead delegated six employees to LES with responsibility for performing various administrative duties, many of which had been performed in prior years by an outside party. Laclede Gas remains primarily responsible for the gas supply function. Laclede urged the Commission to deny Staff's Motion on this and other grounds. By its order granting Motion to Establish Case issued July 16, 2002, the Commission concluded that a case should be established to investigate the issues raised by the Staff; ordered the Staff to file a status report regarding progress of the investigation not later than November 13, 2002; and authorized any responses to Staff's status report to be filed not later than ten days after the status report filing. Laclede Gas believes its action complies with applicable law and intends to participate in the case and vigorously defend its delegation of administrative services in connection with the gas supply function. The outcome of any regulatory proceeding is often uncertain. However, Laclede Gas does not believe that the eventual outcome of the case will have any material effect on the financial results of Laclede Gas. 14.) SM&P has several operating leases, the aggregate annual cost of which is approximately $11 million, consisting primarily of revolving operating leases for vehicles used in its business. Upon acquisition of SM&P, Laclede Group assumed parental guarantees of certain of those vehicle leases. Laclede Group anticipates that the maximum guarantees will not exceed $15 million. Laclede Group has issued a $5.0 million guarantee of performance and payment of certain gas supply purchases by Laclede Energy Resources, Inc. (the Company's non-utility marketing affiliate) starting in July 2002. 17
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain matters discussed in this report, excluding historical information, include forward-looking statements. Certain words, such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "seek," and similar words and expressions identify forward-looking statements that involve uncertainties and risks. Future developments may not be in accordance with our expectations or beliefs and the effect of future developments may not be those anticipated. Among the factors that may cause results to differ materially from those contemplated in any forward-looking statement are: o weather conditions and catastrophic events; o economic, competitive, political and regulatory conditions; o legislative, regulatory and judicial mandates and decisions, some of which may be retroactive, including those affecting o allowed rates of return o incentive regulation o industry 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 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. 18
THE LACLEDE GROUP, INC. RESULTS OF OPERATIONS Quarter Ended June 30, 2002 Laclede Group's results for the quarter ended June 30, 2002 were primarily impacted by the regulated activities of its largest subsidiary, Laclede Gas Company, Missouri's largest natural gas distribution company. Since those utility earnings are generated by the sale of heating energy, which is heavily influenced by the weather, the Utility typically experiences losses over the last half of its fiscal year. The seasonal effect of the Utility was tempered somewhat by the addition of SM&P Utility Resources, Inc. (SM&P), whose operations tend to be counter-seasonal to those of Laclede Gas. Laclede Group recorded a loss of $.05 per share for the quarter ended June 30, 2002 compared with a loss of $.20 per share reported for the quarter ended June 30, 2001. The improvement in Laclede Group's results was primarily attributable to income recorded this quarter from the operations of its newly-acquired subsidiary, SM&P, a wholly owned facility locating and marking business acquired on January 28, 2002. The results of Laclede Gas improved slightly over the same quarter last year primarily due to the impact of: higher gas sales resulting from cooler weather experienced this year during the quarter, and a $15 million annual general rate increase (implemented December 1, 2001). These factors were partially offset by the adverse effect of the Missouri Public Service Commission's (MoPSC's) decision allowing the Utility's highly successful Gas Supply Incentive Plan (GSIP) to expire on September 30, 2001 despite the significant benefits derived for customers and shareholders during the past five years the program was in effect. Utility operating revenues for the quarter ended June 30, 2002 were $87.3 million, or $16.9 million less than the same period last year. The decrease was primarily attributable to reduced wholesale natural gas prices that are passed on to Utility customers, subject to prudence review, under the Purchased Gas Adjustment (PGA) Clause. This decrease was partially offset by higher gas sales levels resulting from the cooler weather during the quarter and the general rate increase. System therms sold and transported increased by 18.1 million therms, or 15.5%, above the quarter ended June 30, 2001. Laclede Group's non-utility operating revenues for this quarter were $60.0 million, or $41.3 million, above those revenues for the same quarter last year mainly due to additional revenues recorded this year resulting from the recent acquisition of SM&P and increased gas marketing sales by Laclede Energy Resources, Inc. Laclede Gas' other operating revenues decreased $18.0 million reflecting exclusion of subsidiary revenues in the presentation of this year's amounts subsequent to the October 1, 2001 restructuring. Utility operating expenses for the quarter ended June 30, 2002 decreased $17.9 million from the same quarter last year. Natural and propane gas expense decreased $16.0 million below last year's level primarily due to decreased rates charged by suppliers, partially offset by higher volumes purchased for sendout arising from cooler weather. Other operation and maintenance expenses increased $.4 million, or 1.4%, primarily due to higher group insurance charges, lower net pension credits, higher wage rates, increased insurance premiums and costs to remove retired utility plant, partially offset by lower maintenance expenses. Depreciation and amortization expense decreased $.5 million primarily due to the net effect of lower depreciation rates instituted December 1, 2001 (reflecting elimination of a provision for removal costs), as authorized by the MoPSC, partially offset by additional depreciable property. Taxes, other than income, decreased $1.8 million, or 15.6%, primarily due to lower gross receipts taxes (reflecting the decreased revenues). Laclede Group's non-utility operating expenses increased $37.5 million this quarter mainly due to the operating expenses of recently-acquired SM&P and increased gas expense associated with gas marketing sales by Laclede Energy Resources, Inc. Laclede Gas' other operating expenses decreased $17.6 million reflecting exclusion of subsidiary expenses in the presentation of this year's amounts subsequent to the October 1, 2001 restructuring. The $.4 million decrease in Laclede Group's interest expense was 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 19
related to the bank note used to finance the acquisition of SM&P. The $.7 million decrease in Laclede Gas' interest expense was primarily due to the aforementioned reduction in short-term interest charges, partially offset by higher interest on long-term debt. The decrease in income taxes is mainly due to lower pre-tax income. Nine Months Ended June 30, 2002 Laclede Group's earnings were $1.46 per share for the nine months ended June 30, 2002 compared with $1.88 per share for the same period last year. Earnings were primarily comprised of those of Laclede Gas, which were adversely affected by lower gas sales arising from temperatures in its service area that were significantly warmer than last year and the expiration of the GSIP. Temperatures for the nine-month period ended June 30, 2002 were 15% warmer than normal and 22% warmer than the same period last year. Earnings during the period were positively impacted, but to a lesser extent, by the benefit of the general rate increase put into effect by Laclede Gas on December 1, 2001, nearly $4.9 million of pre-tax income produced by the Utility's Price Stabilization Program (PSP) recorded this year and higher income from off system sales. Laclede Gas had previously offered to include the aforementioned PSP revenues in a continuation of the program, but the program was allowed to expire on March 31, 2002. The PSP is discussed further in the Regulatory Matters section below. The impact of the operating income recorded by SM&P since its acquisition on January 28, 2002 on Laclede Group's earnings has not been material to date; however, the acquisition is expected to be accretive to earnings for the entire fiscal year. Utility operating revenues for the nine months ended June 30, 2002 were $527.3 million, or $316.8 million less than the same period last year. The decrease was primarily attributable to reduced wholesale natural gas prices that are passed on to Utility customers, subject to prudence review, under the PGA Clause and lower gas sales levels resulting from the warmer weather. These factors were partially offset by higher off system sales and the general rate increase. System therms sold and transported decreased by 155.6 million therms, or 15.8%, below the nine months ended June 30, 2001. Laclede Group's non-utility operating revenues for this period were $102.1 million, an increase of $35.6 million, from those revenues for the same period last year mainly attributable to revenues recorded this year due to the recent acquisition of SM&P partially offset by lower gas marketing sales by Laclede Energy Resources, Inc. Laclede Gas' other operating revenues decreased $64.6 million reflecting exclusion of subsidiary revenues in the presentation of this year's amounts subsequent to the October 1, 2001 restructuring. Utility operating expenses for the nine months ended June 30, 2002 decreased $303.1 million from the same period last year. Natural and propane gas expense decreased $287.3 million below last year's level primarily attributable 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 $.8 million, or .8%, primarily due to higher group insurance charges, higher wage rates, increased insurance premiums, lower net pension credits, and costs to remove retired utility plant, largely offset by a lower provision for uncollectible accounts and reduced distribution and maintenance charges. Depreciation and amortization expense decreased $.9 million primarily due to the net effect of lower depreciation rates instituted December 1, 2001 (reflecting elimination of a provision for removal costs), as authorized by the MoPSC and increased depreciable property. Taxes, other than income, decreased $15.7 million, or 27.7%, primarily due to lower gross receipts taxes (reflecting the decreased revenues). Laclede Group's non-utility operating expenses increased $36.0 million for the nine months ended June 30, 2002 mainly due to higher operating expenses of the newly-acquired SM&P partially offset by lower gas expense associated with gas marketing sales by Laclede Energy Resources, Inc. Laclede Gas' other operating expenses decreased $62.9 million reflecting exclusion of subsidiary expenses in the presentation of this year's amounts subsequent to the October 1, 2001 restructuring. The $2.8 million decrease in Laclede Group's interest expense was 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. The $3.2 million decrease in Laclede Gas' 20
interest expense was primarily due to the aforementioned reduction in short-term interest charges, partially offset by higher interest on long-term debt. The decrease in income taxes is mainly due to lower pre-tax income. Regulatory Matters - ------------------ On January 25, 2002, Laclede filed a request with the Missouri Public Service Commission (MoPSC or Commission) for a general rate increase to recover costs related to the operation of its gas distribution system. Laclede does not anticipate higher rate levels during the current fiscal year. As part of this rate increase filing, the Utility is proposing a Weather Mitigation Plan (Plan) that would protect its customers from weather-related fluctuations in their bills and help stabilize its annual revenues in that regard. Currently, revenues of Laclede Gas increase or decrease depending on colder- or warmer-than-normal weather. The objective of the Plan is to mitigate the volatile effects of weather on the distribution costs of Laclede Gas, that portion of a customer's bill that covers the cost of operating and maintaining the distribution system and storage facilities. It would not affect increases and decreases in wholesale gas costs that are passed on to customers in accordance with the Purchased Gas Adjustment (PGA) Clause. By stabilizing weather-related revenues, the Plan would allow Laclede Gas to cover what are primarily fixed costs that do not fluctuate with the weather while still providing a fair return on investment. On January 31, 2002, the Commission issued an order suspending the general rate increase until it has reviewed and audited the filing, held hearings and reached its determination whether and to what extent the rate increase request should be granted. By statute, the MoPSC process may take no longer than eleven months. Laclede's request is for a rate adjustment that would increase its annual revenues by $36.1 million and increase a typical residential heating customer's bill by an average of about $4.40 a month. The Commission Staff and Office of Public Counsel generally opposed the rate increase. Hearings will be held during the last week in August 2002, and a decision is expected by December 25, 2002. Historically, the MoPSC has not granted Laclede's rate increase requests in full. In late February, the MoPSC approved Laclede Gas' filing that was made to revise its PGA Clause to permit the adjustment of the gas cost component of its rates more frequently to recover its costs. Under the new tariffs approved by the MoPSC, scheduled gas cost adjustments will be implemented in November, January, March and June, thereby enabling Laclede Gas to more closely recover its costs of gas, especially during the high-volume winter months. As part of the same ruling, the MoPSC also clarified that costs and cost reductions associated with the Utility's use of natural gas financial instruments (except as provided for previously under the PSP) are gas costs and are recoverable through the PGA mechanism, including carrying costs. Under the GSIP of Laclede Gas, the Utility shared with its customers certain gains and losses related to the acquisition and management of its gas supply assets. The provisions of the GSIP extended through September 30, 2001. In September, 2001, the MoPSC ruled that the GSIP should be allowed to expire. On February 19, 2002, the MoPSC denied Laclede Gas' application for rehearing. Laclede Gas filed a petition for judicial review of the MoPSC's decision with the Cole County Circuit Court, together with a motion requesting that the MoPSC's decision be stayed. The request for stay was denied on May 13, 2002. The petition for judicial review is still pending. However, pursuant to the rate case settlement approved by the MoPSC in November 2001, the MoPSC authorized Laclede Gas to retain all income from releases of pipeline capacity effective December 1, 2001. Income from releases of pipeline capacity was previously shared with customers under the GSIP. Laclede Gas continues to retain all income resulting from sales outside of its traditional service area, as previously authorized by the MoPSC. Income related to releases of pipeline capacity and sales made outside its traditional service area are volatile in nature and subject to market conditions. On March 8, 2002, Laclede Gas filed an application requesting that the MoPSC issue an Accounting Authority Order (AAO) that would allow Laclede to defer for future recovery consideration unrecovered costs due solely to the negative impact of the extraordinarily warm weather experienced in the Utility's service area this past winter. The MoPSC Staff and Office of Public Counsel have opposed the AAO request. The Commission has not yet ruled on the matter, but a hearing is scheduled during the week of August 19, 2002. There were no costs relative to this request deferred on the Utility's books at June 30, 2002. 21
On March 15, 2002, the Staff of the MoPSC filed its recommendation in the proceeding established to review Laclede Gas' gas costs for fiscal 2000. In its recommendation, the Staff proposed to disallow the recovery of approximately $2.6 million in gas costs on the alleged grounds that Laclede Gas had slightly more transportation capacity than necessary to serve its customers. On May 9, 2002, the Staff revised its recommendation to withdraw the $2.6 million proposed disallowance. 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 intends to vigorously oppose the adjustment in a proceeding before the MoPSC, which is currently scheduled to occur in February 2003. Regulatory proceeding results are, however, inherently uncertain, and to the extent that a final Commission decision sustains Staff's recommended disallowance, the proceeding's outcome could have a material effect on the future financial position and results of operations of Laclede Gas. Missouri statute provides an opportunity for court review of Commission decisions. 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 Court. On April 29, 2002, the Court ruled that the MoPSC's second order was lawful and reasonable. On June 7, 2002, Laclede Gas appealed the Circuit Court's decision to the Missouri Western District Court of Appeals. 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, Laclede Gas responded, pointing out that it had not transferred its gas supply functions to LES but had instead delegated six employees to LES with responsibility for performing various administrative duties, many of which had been performed in prior years by an outside party. Laclede Gas remains primarily responsible for the gas supply function. Laclede urged the Commission to deny Staff's Motion on this and other grounds. By its order granting Motion to Establish Case issued July 16, 2002, the Commission concluded that a case should be established to investigate the issues raised by the Staff; ordered the Staff to file a status report regarding progress of the investigation not later than November 13, 2002; and authorized any responses to Staff status report to be filed not later than ten days after the status report filing. Laclede Gas believes its action complies with applicable law and intends to participate in the case and vigorously defend its delegation of administrative services in connection with the gas supply function. The outcome of any regulatory proceeding is often uncertain. However, Laclede Gas does not believe that the eventual outcome of the case will have any material effect on the financial results of Laclede Gas. Critical Accounting Policies - ---------------------------- 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). Accounting Pronouncements - ------------------------- In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," which requires all business combinations in the scope of the 22
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 Company has 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, "Goodwill and Other Intangible Assets." Credit Ratings - -------------- As of June 30, 2002, credit ratings of the Company were as follows: Type of Facility Moody's S&P Fitch - ----------------- ------- --- ----- Laclede Gas Commercial Paper P-1 A-1 Laclede Group Corporate A+ Laclede Gas First Mortgage Bonds A1 A+ A+ On April 24, 2002, Standard & Poors (S&P) downgraded the rating for Laclede Gas' First Mortgage Bonds from AA- to A+, and also downgraded the commercial paper rating from A-1+ to A-1. S&P cited bondholder protection parameters that have eroded due to several successive warmer-than-normal winters and increasing debt leverage as reasons for the downgrade. On May 2, 2002, Moody's downgraded Laclede Gas' First Mortgage Bonds from Aa3 to A1. Moody's cited concerns regarding Laclede's weakened credit measures due to increased earnings pressure and near-term regulatory risk. Moody's outlook remains negative due to regulatory risk. Despite these recent downgrades, the Company's ratings remain investment grade, and the Company believes that it will have adequate access to the markets to meet its capital requirements. These ratings however, 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 Utility's sale of commercial paper supported by lines of credit with banks. Laclede Gas currently has a primary line of credit for $135 million extending through September 30, 2002. Laclede Gas also has supplemental lines of credit expiring in January 2003 that bring the total credit lines to $150 million currently. During fiscal 2002 to date, the Utility sold commercial paper aggregating to a maximum of $139.7 million at any one time, but did not borrow from the banks under the aforementioned lines of credit. Commercial paper amounted to $70.5 million at June 30, 2002. Short-term cash requirements outside of Laclede Gas have been met thus far with internally-generated funds. However, Laclede Group has put into place a working capital line of credit for $20 million, expiring in June 2003, to meet short-term funding needs of its non-utility subsidiaries. While this line has not been used to date, it is expected to be used for seasonal needs of the various subsidiaries from time to time throughout the year. On April 22, 2002, Laclede Group filed a registration statement on Form S-3 with the Securities and Exchange Commission (SEC) in connection with the sale of up to $500 million of equity securities, other than preferred stock, and debt securities. This registration statement became effective on May 6, 2002. The amount, timing and type of financing to be issued under this shelf registration will depend on cash requirements and market conditions. Certain of the Company's credit facilities include rating triggers which would trigger default in the event that the Company's ratings fall below a specified level. These triggers apply specifically to the $42.8 million outstanding bank loan which was used to acquire SM&P and the $20 million working capital line of credit (none of which has been employed at this writing). Both the bank loan and the line of credit were obtained from U.S. Bank, N.A., and include interest rates at the lower of a rate indexed to LIBOR, or Prime. The applicable rating triggers are a rating on Laclede Gas Company's senior secured debt of no lower than A3 (Moody's) or A- (S&P). Therefore, these triggers would only take effect in the event of a downgrade of three notches from the current levels. 23
SM&P has several operating leases, the aggregate annual cost of which is approximately $11 million, consisting primarily of revolving operating leases for vehicles used in its business. Upon acquisition of SM&P, Laclede Group assumed parental guarantees of certain of those vehicle leases. Laclede Group anticipates that the maximum guarantees will not exceed $15 million. Laclede Group has issued a $5.0 million guarantee of performance and payment of certain gas supply purchases by Laclede Energy Resources, Inc. (the Company's non-utility marketing affiliate) starting in July 2002. Utility construction expenditures were $33.9 million for the nine months ended June 30, 2002, compared with $33.6 million for the same period last year. Non-utility construction expenditures were $.4 million for the same period this year. Consolidated capitalization at June 30, 2002, excluding current obligations of long-term debt and preferred stock, decreased $16.7 million since September 30, 2001 and consisted of 53.2% Laclede Group common stock equity, ..2% Laclede Gas preferred stock equity and 46.6% Laclede Gas long-term debt. The seasonal nature of Laclede Gas' sales affects the comparison of certain balance sheet items at June 30, 2002 and at September 30, 2001 such as Accounts Receivable - Net, Gas Stored Underground, Notes Payable, Accounts Payable, Regulatory Liabilities, and Advance and Delayed Customer Billings. Market Risk - ----------- The management of Laclede Gas has adopted a risk management policy that provides for the purchase of natural gas financial instruments with the goal of managing price risk associated with purchasing natural gas on behalf of its customers. This policy prohibits speculation. Costs and cost reductions, including carrying costs, associated with the Utility's use of natural gas financial instruments (except as provided for previously under the PSP) are allowed to be passed on to the Utility's customers through the operation of its Purchased Gas Adjustment Clause, through which the MoPSC provides for the Utility to recover gas supply costs. Accordingly, Laclede Gas does not expect any earnings impact as a result of the use of these financial instruments. At June 30, 2002, the Utility held futures contracts and options extending through March 2003 under the policy. Environmental Matters - --------------------- As previously reported, Laclede Gas is subject to various environmental laws and regulations that, to date, have not materially affected its financial position and results of operations. Laclede Gas is presently involved in the clean up or formal assessment of two former manufactured gas plant sites, the Shrewsbury site and the Carondelet City of St. Louis site. With regard to the Shrewsbury site, Laclede Gas and state and federal environmental regulators have agreed upon certain actions and those actions are nearing completion. Laclede Gas currently estimates the overall costs of these actions will be approximately $2,307,000. As of June 30, 2002, Laclede Gas has paid $2,214,000 and reserved $93,000 for these actions. If regulators require additional actions, Laclede Gas will incur additional costs. The Carondelet City of St. Louis site was placed 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. Laclede Gas currently estimates that the cost of the site investigations, agency oversight and related legal and engineering consulting may be approximately $609,000. Currently, Laclede Gas has paid $512,000 and reserved an additional $97,000. Laclede has requested that other former site owners and operators participate in the cost of any site investigation. One former owner and operator agreed to participate in these costs and has reimbursed Laclede Gas to date for $159,000. Laclede Gas anticipates additional reimbursement from this party of approximately $69,000. Laclede Gas plans to seek proportionate reimbursement of all costs relative to this site from other potentially responsible parties if practicable. Laclede Gas and the participating former owner and 24
operator are currently having discussions with the City of St. Louis, the present owner of the site, regarding remediation and development possibilities. Costs incurred are charged to expense or capitalized in accordance with generally accepted accounting principles. A predetermined level of expense is included in Laclede Gas' rates. Laclede Gas has been advised that a third former manufactured gas plant site previously operated, but no longer owned by Laclede Gas, is believed to contain gas plant waste that may require remediation. Laclede Gas is working to determine the nature and extent of such waste, if any, and Laclede Gas' responsibility, if any, for any remediation costs. While the scope of costs relative to the Shrewsbury site will not be significant, the scope of costs relative to the other sites are unknown and may be material. Laclede Gas has notified its insurers that it intends to seek reimbursement of its costs at the sites. 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 will not have any significant impact on the financial position and results of operations of Laclede Gas. With regard to the other sites, since the scope of costs relative to these sites are unknown and may be material, 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. 25
PART II. OTHER INFORMATION Item 1. Legal Proceedings For a description of environmental matters and Laclede Gas' pending regulatory matters, see the Management's Discussion and Analysis, Environmental Matter, page 24 and Regulatory Matters, page 21. The legal proceedings item for the Form 10-K for the year ended September 30, 2001 included disclosure of a class action lawsuit filed in August 2001 against Laclede Gas. Laclede Gas filed a motion to dismiss the lawsuit that was granted by the Court on February 22, 2002. The plaintiff did not file an amended petition within the time granted by the Court but filed an appeal on April 3, 2002. On May 13, 2002, the plaintiff dismissed the appeal. Item 6. Exhibits and Reports on Form 8-K (a) See Exhibit Index (b) Reports on Form 8-K During the quarter, Laclede Group filed two reports on Form 8-K: 1. Form 8-K with report date of May 6, 2002, reporting under Item 9 a slide presentation made by Laclede Group, Inc. management at the American Gas Association's Financial Analysts Conference. 2. Form 8-K with report date of May 29, 2002 reporting under Item 5 updates to several regulatory and legal matters. 26
Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. The Laclede Group, Inc. Laclede Gas Company (Co-Registrants) By: /s/ Gerald T. McNeive Jr. ------------------------- Dated: July 26, 2002 Gerald T. McNeive Jr. ---------------- Senior Vice President (Authorized Signatory and Chief Financial Officer) 27
<TABLE> Index to Exhibits <CAPTION> Sequentially Exhibit Numbered Number Exhibit Page - ------ ------- ------------ <C> <S> <C> 10.1 Transportation Service Agreement For Rate Schedule FSS contract #3147 between Laclede Gas Company and Mississippi River Transmission Corporation effective May 1, 2002. 29 10.2 Transportation Service Agreement For Rate Schedule FTS contract #3310 between Laclede Gas Company and Mississippi River Transmission Corporation effective May 1, 2002. 33 10.3 Transportation Service Agreement For Rate Schedule FTS contract #3311 between Laclede Gas Company and Mississippi River Transmission Corporation effective May 1, 2002. 43 10.4 Revolving Credit Agreement between The Laclede Group, Inc. and U.S. Bank National Association dated June 13, 2002. 49 </TABLE> 28