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SPIRE INC 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-31
  4. Ex-32
  5. Ex-99
  6. Ex-99

 


SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

 

[ X ]

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended December 31, 2006

OR

[     ]

TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

Commission File Number

Exact Name of Registrant as Specified in its Charter and Principal Office Address and Telephone Number

 

 

State of Incorporation

I.R.S.

Employer Identification Number

1-16681

The Laclede Group, Inc.

720 Olive Street

St. Louis, MO 63101

314-342-0500

Missouri

74-2976504

1-1822

Laclede Gas Company

720 Olive Street

St. Louis, MO 63101

314-342-0500

Missouri

43-0368139

 

Indicate by check mark whether the registrants (1) have 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) and (2) have been subject to such filing requirements for the past 90 days.

 

Yes

[ X ]

No

[     ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

 

The Laclede Group, Inc.:

Large accelerated filer

[     ]

Accelerated filer

[ X ]

Non-accelerated filer

[     ]

 

 

 

 

 

 

 

Laclede Gas Company:

Large accelerated filer

[     ]

Accelerated filer

[     ]

Non-accelerated filer

[ X ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

                

The Laclede Group, Inc.:

Yes

[     ]

No

[ X ]

 

 

 

 

 

Laclede Gas Company:

Yes

[     ]

No

[ X ]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

 

 

 

Shares Outstanding At

Registrant

Description of Common Stock

January 26, 2007

The Laclede Group, Inc.:

Common Stock ($1.00 Par Value)

21,566,851

Laclede Gas Company:

Common Stock ($1.00 Par Value)

10,197 *

* 100% owned by The Laclede Group, Inc.

 

 


 

 

 

 

 

 

 

TABLE OF CONTENTS

 

Page No.

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1    Financial Statements

 

 

 

 

 

The Laclede Group, Inc.:

 

 

Statements of Consolidated Income

 

4

Statements of Consolidated Comprehensive Income

 

5

Consolidated Balance Sheets

 

6-7

Statements of Consolidated Cash Flows

 

8

Notes to Consolidated Financial Statements

 

9-18

 

 

 

Laclede Gas Company:

 

 

Statements of Income

 

Ex. 99.1, p. 1

Balance Sheets

 

Ex. 99.1, p. 2-3

Statements of Cash Flows

 

Ex. 99.1, p. 4

Notes to Financial Statements

 

Ex. 99.1, p. 5-10

 

 

 

Item 2    Management’s Discussion and Analysis of Financial Condition and

Results of Operations (The Laclede Group, Inc.)

 

19-29

Management’s Discussion and Analysis of Financial Condition and

Results of Operations (Laclede Gas Company)

 

Ex. 99.1, p. 11-20

 

 

 

Item 3   Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

Item 4   Controls and Procedures

 

30

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1    Legal Proceedings

 

31

 

 

 

Item 6    Exhibits

 

31

 

 

 

SIGNATURES – The Laclede Group, Inc.

 

32

 

 

 

SIGNATURES – Laclede Gas Company

 

33

 

 

 

INDEX TO EXHIBITS

 

34

 

 

Filing Format

This Quarterly Report on Form 10-Q is a combined report being filed by two separate registrants: The Laclede Group, Inc. (Laclede Group or the Company) and Laclede Gas Company (Laclede Gas or the Utility).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

PART I. FINANCIAL INFORMATION

 

The interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Form 10-K for the fiscal year ended September 30, 2006.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

Item 1. Financial Statements

THE LACLEDE GROUP, INC.

STATEMENTS OF CONSOLIDATED INCOME

(UNAUDITED)

 

 

 

Three Months Ended

 

 

 

December 31,

 

(Thousands, Except Per Share Amounts)

 

2006

 

2005

 

Operating Revenues:

 

 

 

 

 

 

 

Regulated

 

 

 

 

 

 

 

Gas distribution

 

$

348,488

 

$

411,401

 

Non-Regulated

 

 

 

 

 

 

 

Services

 

 

36,429

 

 

35,458

 

Gas marketing

 

 

153,467

 

 

241,332

 

Other

 

 

1,177

 

 

1,044

 

Total Operating Revenues

 

 

539,561

 

 

689,235

 

Operating Expenses:

 

 

 

 

 

 

 

Regulated

 

 

 

 

 

 

 

Natural and propane gas

 

 

251,523

 

 

312,039

 

Other operation expenses

 

 

33,680

 

 

33,105

 

Maintenance

 

 

5,598

 

 

4,988

 

Depreciation and amortization

 

 

8,497

 

 

6,083

 

Taxes, other than income taxes

 

 

18,759

 

 

19,639

 

Total regulated operating expenses

 

 

318,057

 

 

375,854

 

Non-Regulated

 

 

 

 

 

 

 

Services

 

 

36,361

 

 

33,919

 

Gas marketing

 

 

147,668

 

 

232,474

 

Other

 

 

1,077

 

 

851

 

Total Operating Expenses

 

 

503,163

 

 

643,098

 

Operating Income

 

 

36,398

 

 

46,137

 

Other Income and (Income Deductions) – Net

 

 

3,303

 

 

1,285

 

Interest Charges:

 

 

 

 

 

 

 

Interest on long-term debt

 

 

5,626

 

 

5,643

 

Interest on long-term debt to unconsolidated affiliate trust

 

 

893

 

 

893

 

Other interest charges

 

 

3,434

 

 

2,123

 

Total Interest Charges

 

 

9,953

 

 

8,659

 

Income Before Income Taxes

 

 

29,748

 

 

38,763

 

Income Tax Expense

 

 

10,649

 

 

12,583

 

Net Income

 

 

19,099

 

 

26,180

 

Dividends on Redeemable Preferred Stock – Laclede Gas

 

 

12

 

 

12

 

Net Income Applicable to Common Stock

 

$

19,087

 

$

26,168

 

 

 

 

 

 

 

 

 

Average Number of Common Shares Outstanding

 

 

21,381

 

 

21,191

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share of Common Stock

 

$

.89

 

$

1.23

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share of Common Stock

 

$

.89

 

$

1.23

 

 

 

 

 

 

 

 

 

Dividends Declared Per Share of Common Stock

 

$

.365

 

$

.345

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

4

 

 

 

THE LACLEDE GROUP, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

 

Three Months Ended

 

 

 

December 31,

 

(Thousands)

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Net Income Applicable to Common Stock

 

$

19,087

 

$

26,168

 

Other Comprehensive Income, Before Tax:

 

 

 

 

 

 

 

Net gains (losses) on cash flow hedging derivative instruments:

 

 

 

 

 

 

 

Net hedging gain arising during the period

 

 

1,035

 

 

3,939

 

Reclassification adjustment for (gains) losses included in net income

 

 

(580

)

 

5,721

 

Net unrealized gains on cash flow hedging derivative instruments

 

 

455

 

 

9,660

 

Other Comprehensive Income, Before Tax

 

 

455

 

 

9,660

 

Income Tax Expense Related to Items of Other Comprehensive Income

 

 

176

 

 

3,732

 

Other Comprehensive Income, Net of Tax

 

 

279

 

 

5,928

 

Comprehensive Income

 

$

19,366

 

$

32,096

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

THE LACLEDE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

    

 

 

Dec. 31,

 

 

 

Sept. 30,

 

 

 

Dec. 31,

 

(Thousands)

 

2006

 

 

 

2006

 

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Utility Plant

 

$

1,158,480

 

 

 

$

1,149,104

 

 

 

$

1,114,342

 

Less: Accumulated depreciation and amortization

 

 

389,433

 

 

 

 

385,277

 

 

 

 

379,304

 

Net Utility Plant

 

 

769,047

 

 

 

 

763,827

 

 

 

 

735,038

 

Goodwill

 

 

33,595

 

 

 

 

33,595

 

 

 

 

28,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-utility property

 

 

12,276

 

 

 

 

13,362

 

 

 

 

11,570

 

Other investments

 

 

44,358

 

 

 

 

42,731

 

 

 

 

42,621

 

Other Property and Investments

 

 

56,634

 

 

 

 

56,093

 

 

 

 

54,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

51,918

 

 

 

 

50,778

 

 

 

 

23,811

 

Accounts receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gas Customers – billed and unbilled

 

 

176,181

 

 

 

 

91,519

 

 

 

 

237,650

 

Other

 

 

126,579

 

 

 

 

84,728

 

 

 

 

146,509

 

Allowances for doubtful accounts

 

 

(9,401

)

 

 

 

(13,105

)

 

 

 

(9,209

)

Inventories:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas stored underground at LIFO cost

 

 

135,275

 

 

 

 

137,476

 

 

 

 

147,753

 

Propane gas at FIFO cost

 

 

20,325

 

 

 

 

19,385

 

 

 

 

19,880

 

Materials, supplies, and merchandise at avg. cost

 

 

6,028

 

 

 

 

5,973

 

 

 

 

5,189

 

Derivative instrument assets

 

 

15,976

 

 

 

 

19,117

 

 

 

 

19,769

 

Unamortized purchased gas adjustments

 

 

34,538

 

 

 

 

44,381

 

 

 

 

23,304

 

Deferred income taxes

 

 

 

 

 

 

 

 

 

 

1,663

 

Prepayments and other

 

 

16,815

 

 

 

 

19,594

 

 

 

 

18,852

 

Total Current Assets

 

 

574,234

 

 

 

 

459,846

 

 

 

 

635,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Charges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid pension cost

 

 

62,472

 

 

 

 

65,794

 

 

 

 

78,080

 

Regulatory assets

 

 

178,334

 

 

 

 

185,644

 

 

 

 

140,015

 

Other

 

 

6,835

 

 

 

 

5,361

 

 

 

 

5,610

 

Total Deferred Charges

 

 

247,641

 

 

 

 

256,799

 

 

 

 

223,705

 

Total Assets

 

$

1,681,151

 

 

 

$

1,570,160

 

 

 

$

1,676,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

THE LACLEDE GROUP, INC.

CONSOLIDATED BALANCE SHEETS (Continued)

(UNAUDITED)

 

    

 

 

Dec. 31,

 

 

 

Sept. 30,

 

 

 

Dec. 31,

 

(Thousands, except share amounts)

 

2006

 

 

 

2006

 

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CAPITALIZATION AND LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock (70,000,000 shares authorized, 21,542,117,

21,361,639, and 21,252,488 shares issued, respectively)

 

$

21,542

 

 

 

$

21,362

 

 

 

$

21,252

 

Paid-in capital

 

 

131,308

 

 

 

 

127,125

 

 

 

 

122,719

 

Retained earnings

 

 

261,747

 

 

 

 

250,495

 

 

 

 

250,387

 

Accumulated other comprehensive income (loss)

 

 

3,934

 

 

 

 

3,655

 

 

 

 

(1,775

)

Total common stock equity

 

 

418,531

 

 

 

 

402,637

 

 

 

 

392,583

 

Redeemable preferred stock (less current sinking fund

requirements) – Laclede Gas

 

 

787

 

 

 

 

787

 

 

 

 

948

 

Long-term debt to unconsolidated affiliate trust

 

 

46,400

 

 

 

 

46,400

 

 

 

 

46,400

 

Long-term debt (less current portion) – Laclede Gas

 

 

309,062

 

 

 

 

349,041

 

 

 

 

294,057

 

Total Capitalization

 

 

774,780

 

 

 

 

798,865

 

 

 

 

733,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable

 

 

257,150

 

 

 

 

207,300

 

 

 

 

269,400

 

Accounts payable

 

 

149,969

 

 

 

 

103,274

 

 

 

 

227,767

 

Advance customer billings

 

 

19,583

 

 

 

 

31,443

 

 

 

 

13,850

 

Current portion of long-term debt and preferred stock

 

 

40,159

 

 

 

 

159

 

 

 

 

40,061

 

Wages and compensation accrued

 

 

16,883

 

 

 

 

14,885

 

 

 

 

16,355

 

Dividends payable

 

 

7,923

 

 

 

 

7,662

 

 

 

 

7,414

 

Customer deposits

 

 

16,600

 

 

 

 

16,833

 

 

 

 

14,350

 

Interest accrued

 

 

6,270

 

 

 

 

10,464

 

 

 

 

5,863

 

Taxes accrued

 

 

27,100

 

 

 

 

15,026

 

 

 

 

20,713

 

Deferred income taxes

 

 

4,413

 

 

 

 

7,049

 

 

 

 

 

Other

 

 

16,289

 

 

 

 

16,787

 

 

 

 

15,240

 

Total Current Liabilities

 

 

562,339

 

 

 

 

430,882

 

 

 

 

631,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Credits and Other Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

234,670

 

 

 

 

232,148

 

 

 

 

207,840

 

Unamortized investment tax credits

 

 

4,377

 

 

 

 

4,437

 

 

 

 

4,624

 

Pension and postretirement benefit costs

 

 

20,385

 

 

 

 

20,302

 

 

 

 

24,352

 

Asset retirement obligations

 

 

26,409

 

 

 

 

26,018

 

 

 

 

 

Regulatory liabilities

 

 

34,137

 

 

 

 

33,182

 

 

 

 

51,300

 

Other

 

 

24,054

 

 

 

 

24,326

 

 

 

 

23,112

 

Total Deferred Credits and Other Liabilities

 

 

344,032

 

 

 

 

340,413

 

 

 

 

311,228

 

Total Capitalization and Liabilities

 

$

1,681,151

 

 

 

$

1,570,160

 

 

 

$

1,676,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

7

 

 

 

THE LACLEDE GROUP, INC.

STATEMENTS OF CONSOLIDATED CASH FLOWS

(UNAUDITED)

 

 

 

Three Months Ended

 

 

 

December 31,

 

(Thousands)

 

2006

 

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

 

 

 

 

Net Income

 

$

19,099

 

 

 

$

26,180

 

Adjustments to reconcile net income to net cash

provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

Depreciation, amortization, and accretion

 

 

9,606

 

 

 

 

7,020

 

Deferred income taxes and investment tax credits

 

 

(6,560

)

 

 

 

10,762

 

Other – net

 

 

627

 

 

 

 

334

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable – net

 

 

(130,217

)

 

 

 

(218,306

)

Unamortized purchased gas adjustments

 

 

9,843

 

 

 

 

7,957

 

Deferred purchased gas costs

 

 

14,796

 

 

 

 

(89,340

)

Accounts payable

 

 

46,695

 

 

 

 

89,363

 

Advance customer billings

 

 

(11,860

)

 

 

 

(16,838

)

Taxes accrued

 

 

12,074

 

 

 

 

(2,837

)

Natural gas stored underground

 

 

2,201

 

 

 

 

11,890

 

Other assets and liabilities

 

 

2,017

 

 

 

 

17,364

 

Net cash used in operating activities

 

$

(31,679

)

 

 

$

(156,451

)

 

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(11,920

)

 

 

 

(13,730

)

Other investments

 

 

(1,174

)

 

 

 

(4,468

)

Net cash used in investing activities

 

$

(13,094

)

 

 

$

(18,198

)

 

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

 

 

 

Issuance of short-term debt – net

 

 

49,850

 

 

 

 

198,795

 

Issuance of common stock

 

 

3,599

 

 

 

 

954

 

Dividends paid

 

 

(7,592

)

 

 

 

(7,309

)

Other

 

 

56

 

 

 

 

7

 

Net cash provided by financing activities

 

$

45,913

 

 

 

$

192,447

 

 

 

 

 

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

$

1,140

 

 

 

$

17,798

 

Cash and Cash Equivalents at Beginning of Period

 

 

50,778

 

 

 

 

6,013

 

Cash and Cash Equivalents at End of Period

 

$

51,918

 

 

 

$

23,811

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Paid During the Period for:

 

 

 

 

 

 

 

 

 

Interest

 

$

14,204

 

 

 

$

13,425

 

Income taxes

 

 

24

 

 

 

 

2,180

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 

8

 

 

 

THE LACLEDE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

These notes are an integral part of the accompanying consolidated financial statements of The Laclede Group, Inc. (Laclede Group or the Company) and its subsidiaries. In the opinion of Laclede Group, this interim report includes all adjustments (consisting of only normal recurring accruals) necessary for the fair presentation of the results of operations for the periods presented. This Form 10-Q should be read in conjunction with the Notes to Consolidated Financial Statements contained in the Company’s Fiscal Year 2006 Form 10-K.

The consolidated financial position, results of operations and cash flows of Laclede Group are comprised primarily from the financial position, results of operations and cash flows of Laclede Gas Company (Laclede Gas or the Utility). Laclede Gas is a regulated natural gas distribution utility having a material seasonal cycle. As a result, these interim statements of income for Laclede Group are not necessarily indicative of annual results or representative of succeeding quarters of the fiscal year. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the November through April period, which generally corresponds with the heating season. The Utility typically experiences losses during the non-heating season. The seasonal effect of the Utility’s earnings on Laclede Group is generally expected to be tempered somewhat by the results of SM&P Utility Resources, Inc. (SM&P), a non-regulated underground facility locating and marking service business, whose operations tend to be counter-seasonal to those of Laclede Gas.

REVENUE RECOGNITION - Laclede Gas reads meters and bills its customers on monthly cycles. The Utility records its regulated gas distribution revenues from gas sales and transportation services on an accrual basis that includes estimated amounts for gas delivered, but not yet billed. The accruals for unbilled revenues are reversed in the subsequent accounting period when meters are actually read and customers are billed. The amount of accrued unbilled revenues at December 31, 2006 and 2005, for the Utility, were $41.4 million and $72.1 million, respectively. After accrual of related gas cost expense, the accrued pre-tax net revenues at December 31, 2006 and 2005 were $10.2 million and $11.3 million, respectively. The amount of accrued unbilled revenue at September 30, 2006 was $13.8 million. After accrual of related gas cost expense, the accrued pre-tax net revenues at September 30, 2006 was $4.7 million.

GROSS RECEIPTS TAXES - Gross receipts taxes associated with Laclede Gas’ natural gas utility service are imposed on the Utility and billed to its customers. These amounts are recorded gross in the Statements of Consolidated Income. Amounts recorded in Regulated Gas Distribution Operating Revenues for the quarters ended December 31, 2006 and 2005 were $14.7 million, and $15.5 million, respectively. Gross receipts taxes are expensed by the Utility and included in the Taxes Other Than Income line.         

STOCK-BASED COMPENSATION - The Laclede Group Equity Incentive Plan (the 2006 Plan) was approved at the annual meeting of shareholders of Laclede Group on January 26, 2006. The purpose of the 2006 Plan is to encourage officers and employees of the Company and its subsidiaries to contribute to the Company’s success and align their interest with shareholders. To accomplish this purpose, the Compensation Committee of the Board of Directors may grant awards under the 2006 Plan that may be earned by achieving performance objectives and/or other criteria as determined by the Compensation Committee. Under the terms of the 2006 Plan, officers and employees of the Company and its subsidiaries, as determined by the Committee, are eligible to be selected for awards. The 2006 Plan provides for restricted stock, restricted stock units, qualified and non-qualified stock options, stock appreciation rights and performance shares payable in stock, cash or a combination of both. The 2006 Plan generally provides a minimum vesting period of at least three years for each type of award. The maximum number of shares reserved for issuance under the 2006 Plan is 1,250,000. The 2006 Plan replaced the Laclede Group 2003 Equity Incentive Plan (the 2003 Plan). Shares reserved under the 2003 Plan, other than those needed for currently outstanding awards, were canceled upon shareholder approval of the 2006 Plan.

The Company’s Restricted Stock Plan for Non-Employee Directors was approved by shareholders in January 2003. The principal purpose of the plan is to attract and retain qualified persons who are not employees or former employees of the Company or any of its subsidiaries for service as members of the Board of Directors and to encourage ownership in the Company by such non-employee directors by granting shares of common stock subject to restrictions. Shares vest depending on the participant’s age upon entering the plan and years of service as a director. The total number of shares of common stock that may be issued under the Restricted Stock Plan for Non-Employee Directors is 50,000.

During the quarter ended December 31, 2006, the Company awarded 59,000 shares of performance-contingent restricted stock to executives at a weighted average fair value of $34.95 per share with a three-year performance period ending September 30, 2009. All, or a portion, of these shares will vest in November 2009 depending upon the attainment of certain levels of earnings and dividend growth performance goals. For shares that do not vest, no compensation cost is recognized and any previously recognized compensation cost is reversed. The weighted average fair value of performance-contingent restricted stock awarded during the quarter ended December 31, 2005 was $30.46 per share. For restricted stock awards, the Company holds the certificates for restricted stock until the shares vest. In the interim, the participants receive full dividends and voting rights.

During the quarter ended December 31, 2006, the Company granted 115,500 non-qualified stock options to employees at an exercise price of $34.95 per share. The stock options vest one-fourth each year for four years after the

 

 

 

 

 

 

 

 

 

9

 

 

date of the grant beginning November 3, 2007 and have a ten-year contractual term. The weighted average fair value of options granted during the three months ended December 31, 2006 and December 31, 2005 is $8.07 per option and $6.80 per option, respectively.

 

Restricted stock activity for the quarter ended December 31, 2006 is presented below:

 

 

 

 

 

Weighted average

Grant Date

Fair Value

 

 

 

Shares

 

 

 

 

 

 

 

 

 

 

 

 

Nonvested at September 30, 2006

 

54,200

 

 

 

$

30.55

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

59,000

 

 

 

$

34.95

 

 

Vested

 

 

 

 

$

 

 

Forfeited

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

Nonvested at December 31, 2006

 

113,200

 

 

 

$

32.84

 

 

 

Stock option activity for the quarter ended December 31, 2006 is presented below:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Remaining

 

 

 

Aggregate

 

 

 

 

 

 

 

Average

 

 

 

Contractual

 

 

 

Intrinsic

 

 

 

 

 

 

 

Exercise

 

 

 

Term

 

 

 

Value

 

 

 

Shares

 

 

 

Price

 

 

 

(Years)

 

 

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2006

 

629,875

 

 

 

$

28.90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

115,500

 

 

 

$

34.95

 

 

 

 

 

 

 

 

 

 

Exercised

 

(92,925

)

 

 

$

28.85

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2006

 

652,450

 

 

 

$

29.98

 

 

 

7.9

 

 

 

$

3,296

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2006

 

245,325

 

 

 

$

28.63

 

 

 

7.2

 

 

 

$

1,570

 

 

Exercise prices of options outstanding at December 31, 2006 range from $23.27 to $34.95. During the quarter ended December 31, 2006, cash received from the exercise of stock options was approximately $2.7 million, the intrinsic value of the options exercised was approximately $0.7 million and the related actual tax benefit realized was approximately $0.3 million. There were no stock options exercised during the quarter ended December 31, 2005. No shares of restricted stock vested during the quarter ended December 31, 2006. The total fair value of restricted stock vested during the quarter ended December 31, 2005 was approximately $44,000 and the related actual tax benefit realized was approximately $17,000. The Company generally issues new shares to satisfy employee restricted stock awards and stock option exercises. Shares for non-employee directors are generally purchased on the open market. The closing price of the Company’s common stock was $35.03 at December 31, 2006.

Total compensation cost that has been charged against net income for share-based compensation arrangements was approximately $0.4 million for the quarter ended December 31, 2006 and approximately $0.3 million for the quarter ended December 31, 2005. Compensation cost capitalized as part of fixed assets was approximately $0.1 million for each of the quarters ended December 31, 2006 and December 31, 2005. The total income tax benefit recognized in the income statement for share-based compensation arrangements was approximately $0.2 million for the quarter ended December 31, 2006 and approximately $0.1 million for the quarter ended December 31, 2005. As of December 31, 2006, there was approximately $5.3 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements (options and restricted stock). That cost is expected to be recognized over a weighted average period of 2.6 years.

The fair value of the options granted during the quarter ended December 31, 2006 and the quarter ended December 31, 2005, was estimated at the date of grant using a binomial option-pricing model based on the assumptions noted in the following table. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate is based on U.S. Treasury yields at the grant date. The expected life of options is based on generalized expectations regarding the behavior of option holders since the Company’s experience is not yet sufficient to develop an assumption specific to its employees.

 

 

 

 

 

 

10

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

December 31,

 

December 31,

 

 

 

 

2006

 

2005

 

 

Risk free interest rate

 

4.60%

 

4.60%

 

 

Expected dividend yield of stock

 

4.20%

 

4.50%

 

 

Expected volatility of stock

 

25.00%

 

25.00%

 

 

Expected life of option

 

96 months

 

96 months

 

 

 

NEW ACCOUNTING STANDARDS – In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” This Statement replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 sets forth new guidelines on accounting for voluntary changes in accounting principle and requires certain disclosures. It also applies to the unusual situation in which an accounting pronouncement is issued but does not include specific transition guidelines. This Statement requires such accounting principle changes to be applied retrospectively to all prior periods presented as an adjustment to the balances of assets or liabilities affected along with an offsetting adjustment to retained earnings for the cumulative effect on periods prior to those presented. This Statement carries forward without change the guidance in APB Opinion No. 20 for reporting the correction of an error and a change in accounting estimate. Adoption of SFAS No. 154 on October 1, 2006 had no effect on the Company’s financial position or results of operations.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” a replacement of SFAS No. 125. SFAS No. 155 permits the fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. It also establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. Adoption of SFAS No. 155 on October 1, 2006 had no effect on the Company’s financial position or results of operations.

In June 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 will be effective for the Company as of the beginning of fiscal year 2008. The Company is currently evaluating the provisions of this Interpretation.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The Statement applies to fair value measurements required under other accounting guidance that require or permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements. The guidance in this Statement does not apply to the Company’s stock-based compensation plans accounted for in accordance with SFAS No. 123(R), “Share-Based Payment.” This Statement will be effective for the Company as of the beginning of fiscal year 2009. The Company is currently evaluating the provisions of this Statement.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension Plans and Other Postretirement Plans.” This Statement amends FASB Statements No. 87, “Employers’ Accounting for Pensions,” No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” and No. 132 (revised 2003), “Employers’ Disclosure About Pensions and Other Postretirement Benefits.” Statement No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position. Prior accounting standards allowed an employer to delay recognition of certain economic events that affected the costs of providing postretirement benefits and to disclose the overfunded or underfunded status of a plan in the notes to the financial statements. This Statement eliminates the delayed recognition of actuarial gains and losses and the prior service costs and credits that arise during the period and requires employers to recognize these items as components of other comprehensive income, net of tax. Laclede Group will be required to initially recognize the funded status of its defined benefit postretirement plans and provide the disclosures required by this Statement as of the end of the fiscal year 2007. The Statement also requires that plan assets and benefit obligations be measured as of the date of the employer’s fiscal year-end statement of financial position. This requirement will be effective for the Company as of the end of fiscal year 2009. The Company is currently evaluating the provisions of this Statement.

In September 2006, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 108, “Financial Statements-Concerning the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 provides guidance on the consideration of the effects of prior

 

 

 

 

 

 

 

 

 

11

 

 

year misstatements in quantifying current year misstatements for the purpose of assessing materiality. SAB 108 establishes a dual approach that requires quantification of financial statement errors based on the effects of the error on the Company’s financial statements and the related financial statement disclosures. SAB 108 is effective in fiscal year 2007. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

 

 

2.

EARNINGS PER SHARE

                

SFAS No. 128, “Earnings Per Share,” requires dual presentation of basic and diluted earnings per share (EPS). Basic EPS does not include potentially dilutive securities and is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period. Diluted EPS assumes the issuance of common shares pursuant to the Company’s stock-based compensation plans at the beginning of each respective period, or at the date of grant or award, if later. For the quarter ended December 31, 2006, 225,500 shares attributable to outstanding stock options and restricted stock were excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive. There were 591,500 antidilutive shares for the quarter ended December 31, 2005.

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

December 31,

 

 

(Thousands, Except Per Share Amounts)

 

 

 

 

 

 

2006

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Applicable to Common Stock

 

 

 

 

 

$

19,087

 

$

26,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding

 

 

 

 

 

 

21,381

 

 

21,191

 

 

Earnings Per Share of Common Stock

 

 

 

 

 

$

0.89

 

$

1.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Applicable to Common Stock

 

 

 

 

 

$

19,087

 

$

26,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding

 

 

 

 

 

 

21,381

 

 

21,191

 

 

Dilutive Effect of Employee Stock Options

 

 

 

 

 

 

 

 

 

 

 

 

and Restricted Stock

 

 

 

 

 

 

61

 

 

18

 

 

Weighted Average Diluted Shares

 

 

 

 

 

 

21,442

 

 

21,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share of Common Stock

 

 

 

 

 

$

0.89

 

$

1.23

 

 

 

 

3.

PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

 

Laclede Gas has non-contributory defined benefit, trusteed forms of pension plans covering substantially all employees over the age of twenty-one. Benefits are based on years of service and the employee’s compensation during the highest three years of the last ten years of employment. Plan assets consist primarily of corporate and U.S. government obligations and pooled equity funds.

Pension costs for the quarters ending December 31, 2006 and 2005 were $1.4 million and $1.3 million, respectively. These costs include amounts capitalized with construction activities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

 

The net periodic pension costs include the following components:

 

 

 

Three Months Ended

 

 

 

 

December 31,

 

 

(Thousands)

 

 

2006

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

Service cost - benefits earned

 

 

 

 

 

 

 

 

during the period

 

$

3,106

 

$

3,690

 

 

Interest cost on projected

 

 

 

 

 

 

 

 

benefit obligation

 

 

4,482

 

 

4,176

 

 

Expected return on plan assets

 

 

(5,074

)

 

(5,196

)

 

Amortization of prior service cost

 

 

284

 

 

294

 

 

Amortization of actuarial loss

 

 

920

 

 

1,728

 

 

Regulatory adjustment

 

 

(2,364

)

 

(3,354

)

 

Net pension cost

 

$

1,354

 

$

1,338

 

 

                

Pursuant to the provisions of the Laclede Gas pension plans, pension obligations may be satisfied by lump sum cash payments. Pursuant to Missouri Public Service Commission (MoPSC or Commission) Order, lump sum payments are recognized as settlements (which can result in gains or losses) only if the total of such payments exceeds 100% of the sum of service and interest costs. No lump sum payments were recognized as settlements during the three months ended December 31, 2006 or the three months ended December 31, 2005.

Pursuant to MoPSC Order, the return on plan assets is based on market-related value of plan assets implemented prospectively over a four-year period. Unrecognized gains or losses are amortized only to the extent that such gain or loss exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. The recovery in rates for the Utility’s qualified pension plans is based on an allowance of $4.1 million annually. The difference between this amount and pension expense as calculated pursuant to the above and included in the Statements of Consolidated Income and Consolidated Comprehensive Income is deferred as a regulatory asset or liability.

SM&P maintains a non-qualified, defined benefit plan with four participants that was frozen to new participants in 2002. The plan is a non-qualified plan and therefore has no assets held in trust. Net pension cost related to the plan is not material.

Laclede Gas provides certain life insurance benefits at retirement. Medical insurance is available after early retirement until age 65. The unrecognized transition obligation is being amortized over 20 years. Postretirement benefit costs for the quarters ended December 31, 2006 and 2005 were $2.0 million and $2.2 million, respectively, including amounts charged to construction.

 

Net periodic postretirement benefit costs consisted of the following components:

 

 

 

Three Months Ended

 

 

 

December 31,

 

(Thousands)

 

 

2006

 

 

2005

 

 

 

 

 

 

 

 

 

Service cost – benefits earned during

 

 

 

 

 

 

 

the period

 

$

1,016

 

$

996

 

Interest cost on accumulated

 

 

 

 

 

 

 

postretirement benefit obligation

 

 

900

 

 

740

 

Expected return on plan assets

 

 

(431

)

 

(339

)

Amortization of transition obligation

 

 

34

 

 

82

 

Amortization of prior service cost

 

 

(582

)

 

(9

)

Amortization of actuarial loss

 

 

811

 

 

318

 

Regulatory adjustment

 

 

223

 

 

428

 

Net postretirement benefit cost

 

$

1,971

 

$

2,216

 

 

Missouri state law provides for the recovery in rates of SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (OPEB), accrued costs provided that such costs are funded through an independent, external funding mechanism. Laclede Gas established Voluntary Employees’ Beneficiary Association (VEBA) and Rabbi trusts as its external funding mechanisms. VEBA and Rabbi trusts’ assets consist primarily of money market securities and mutual funds invested in stocks and bonds.

Pursuant to MoPSC Order, the return on plan assets is based on market-related value of plan assets implemented prospectively over a four-year period. Unrecognized gains and losses are amortized only to the extent that such gain or

 

 

 

 

 

 

 

13

 

 

loss exceeds 10% of the greater of the accumulated postretirement benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. The recovery in rates for the postretirement benefit costs is based on an alternative methodology for amortization of unrecognized gains and losses as ordered by the MoPSC. The difference between this amount and postretirement benefit expense as calculated pursuant to the above is deferred as a regulatory asset or liability.

 

 

4.

FINANCIAL INSTRUMENTS

 

In the course of its business, Laclede Group’s non-regulated gas marketing affiliate, Laclede Energy Resources, Inc. (LER), enters into fixed-price commitments associated with the purchase or sale of natural gas. LER manages the price risk associated with these commitments by either closely matching the offsetting physical purchase or sale of natural gas at fixed prices or through the use of exchange-traded futures contracts to lock in margins. At December 31, 2006, LER’s unmatched positions were not material to Laclede Group’s financial position or results of operations.

 

Settled and open futures positions were as follows at December 31, 2006:

 

 

 



Position Month

 


MMBtu
(millions)

 

Average
Price per
MMBtu

 

Settled short positions

 

January 2007

 

.26

 

$

10.08

 

Settled long positions

 

January 2007

 

.17

 

 

6.96

 

 

 

 

 

 

 

 

 

 

Open short futures positions

 

February 2007

 

.18

 

 

8.09

 

 

 

March 2007

 

.08

 

 

7.10

 

 

 

April 2007

 

1.31

 

 

9.13

 

 

 

May 2007

 

.45

 

 

7.90

 

 

 

June 2007

 

.14

 

 

7.52

 

 

 

July 2007

 

.15

 

 

7.89

 

 

 

August 2007

 

.37

 

 

8.25

 

 

 

September 2007

 

.67

 

 

8.55

 

 

 

October 2007

 

.65

 

 

8.49

 

 

The above futures contracts are derivative instruments and management has designated these items as cash flow hedges of forecasted transactions. The fair values of the instruments are recognized on the Consolidated Balance Sheets. The change in the fair value of the effective portion of these hedge instruments is recorded, net of tax, in Other Comprehensive Income (Loss), a component of Common Stock Equity. These amounts will reduce or be charged to Non-Regulated Gas Marketing Operating Revenues or Expenses in the Statements of Consolidated Income as the transactions occur. Pre-tax net unrealized gains on cash flow hedging derivative instruments at December 31, 2006 were $7.8 million. It is expected that approximately $7.1 million of pre-tax net unrealized gains on cash flow hedging derivative instruments at December 31, 2006 will be reclassified into the Consolidated Statement of Income during the remainder of fiscal 2007. The remainder, approximately $0.7 million of pre-tax net unrealized gains, will be reclassified during fiscal 2008. The ineffective portions of these hedge instruments are charged to Non-Regulated Gas Marketing Operating Revenues or Expenses. The net amount of pre-tax gains recognized in earnings for the ineffective portion of cash flow hedges was $0.5 million for the quarter ended December 31, 2006. The net amount of pre-tax losses recognized in earnings for the ineffective portion of cash flow hedges was $1.2 million for the same period last year. Cash flows from hedging transactions are classified in the same category as the cash flows from the items that are being hedged in the Statements of Consolidated Cash Flows.

 

 

5.

INCOME TAXES

 

Income tax expense for the quarter ended December 31, 2005 includes a reduction in income tax expense of approximately $0.9 million for a change in estimated tax depreciation and other property-related deductions.

 

 

 

 

 

 

 

 

14

 

 

 

 

6.

OTHER INCOME AND INCOME DEDUCTIONS – NET

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

December 31,

 

 

(Thousands)

 

 

 

 

2006

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for funds used during construction

 

 

 

$

(14

)

$

(22

)

 

Other income

 

 

 

 

2,268

 

 

1,142

 

 

Other income deductions

 

 

 

 

1,049

 

 

165

 

 

Other income and (income deductions) – net

 

 

 

$

3,303

 

$

1,285

 

 

 

The increase in Other income and income deductions – net for the quarter ended December 31, 2006 compared with the quarter ended December 31, 2005 was primarily due to higher income associated with carrying costs applied to under-recoveries of gas costs and other minor variations. Such carrying costs are recovered through the Utility’s Purchased Gas Adjustment (PGA) Clause.

 

 

7.

INFORMATION BY OPERATING SEGMENT

 

All of Laclede Group’s subsidiaries are wholly owned. The Regulated Gas Distribution 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 and sale of natural gas serving an area in eastern Missouri, with a population of approximately 2.1 million, including the city of St. Louis and parts of ten other counties in eastern Missouri. The Non-Regulated Services segment includes the results of SM&P, an underground locating and marking business operating in nine Midwestern and Southwestern states. The underground facility locating industry remains competitive with many contracts subject to termination on short-term notice. Also, SM&P’s customers are primarily in the utility and telecommunications sectors and, as such, SM&P’s results are influenced by seasonality and trends in the construction sector. The Non-Regulated Gas Marketing segment includes the results of LER, a subsidiary engaged in the non-regulated marketing of natural gas and related activities. Non-Regulated Other includes the transportation of liquid propane, real estate development, the compression of natural gas, and financial investments in other enterprises. These operations are conducted through five subsidiaries. Certain intersegment revenues with Laclede Gas are not eliminated in accordance with the provisions of SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.” Those types of transactions include sales of natural gas from Laclede Gas to LER, services performed by SM&P to locate and mark underground facilities for Laclede Gas, sales of natural gas from LER to Laclede Gas, and sales of propane and transportation services provided by Laclede Pipeline Company to Laclede Gas. These revenues are shown on the Intersegment revenues lines in the table under Regulated Gas Distribution, Non-Regulated Services, Non-Regulated Gas Marketing, and Non-Regulated Other columns, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

Regulated

 

Non-

 

Regulated

 

Non-

 

 

 

 

 

 

 

Gas

 

Regulated

 

Gas

 

Regulated

 

 

 

 

 

(Thousands)

 

Distribution

 

Services

 

Marketing

 

Other

 

Eliminations

 

Consolidated

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

customers

 

$

340,456

 

$

36,337

 

$

137,688

 

$

917

 

$

-

 

$

515,398

 

Intersegment revenues

 

 

8,032

 

 

92

 

 

15,779

 

 

260

 

 

-

 

 

24,163

 

Total operating revenues

 

 

348,488

 

 

36,429

 

 

153,467

 

 

1,177

 

 

-

 

 

539,561

 

Net income (loss) applicable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to common stock

 

 

15,657

 

 

(504

)

 

3,795

 

 

139

 

 

-

 

 

19,087

 

Total assets

 

 

1,473,506

 

 

71,884

 

 

112,739

 

 

79,518

 

 

(56,496

)

 

1,681,151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

customers

 

$

403,317

 

$

35,366

 

$

221,918

 

$

1,013

 

$

-

 

$

661,614

 

Intersegment revenues

 

 

8,084

 

 

92

 

 

19,414

 

 

31

 

 

-

 

 

27,621

 

Total operating revenues

 

 

411,401

 

 

35,458

 

 

241,332

 

 

1,044

 

 

-

 

 

689,235

 

Net income applicable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common stock

 

 

20,192

 

 

410

 

 

5,408

 

 

158

 

 

-

 

 

26,168

 

Total assets

 

 

1,467,109

 

 

67,653

 

 

126,897

 

 

48,353

 

 

(33,783

)

 

1,676,229

 

 

 

8.

COMMITMENTS AND CONTINGENCIES

 

Laclede Gas owns and operates natural gas distribution, transmission and storage facilities, the operations of which are subject to various environmental laws, regulations and interpretations. While environmental issues resulting from such operations arise in the ordinary course of business, such issues have not materially affected the Company’s or Laclede Gas’ financial position and results of operations. As environmental laws, regulations, and their interpretations change, however, Laclede Gas may be required to incur additional costs.

Environmental issues have arisen in the past, and may arise in the future, associated with sites formerly owned or operated by Laclede Gas and/or its predecessor companies, including facilities at which manufactured gas operations took place. Laclede Gas has been advised of the existence of three former manufactured gas plant (“MGP”) sites that may require remediation and has worked with federal and state environmental regulators to address two of the three sites.

With regard to a former MGP site located in Shrewsbury, Missouri, Laclede Gas and state and federal environmental regulators have agreed upon certain remedial actions and those actions are essentially complete. Laclede Gas currently estimates the overall costs of these actions will be approximately $2.4 million. As of December 31, 2006, Laclede Gas has paid or reserved for the cost of these actions. If regulators require additional remedial actions or assert additional claims, Laclede Gas will incur additional costs.

Laclede Gas enrolled a second former MGP site into the Missouri Voluntary Cleanup Program (VCP). The VCP provides potential opportunities to minimize the 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 (City). The City has been exploring development options for the site. Recently, the City announced publicly the selection of a developer with whom it will attempt to negotiate a site development contract. In light of the City’s announcement, Laclede Gas continues to evaluate options concerning this site. Laclede Gas currently estimates the cost of site investigations, agency oversight and related legal and engineering consulting to be approximately $650,000. Laclede Gas has paid or reserved for the cost of these actions. Laclede Gas has requested that other former site owners and operators share in these costs. One party has agreed to participate and has reimbursed Laclede Gas to date for $190,000. Laclede Gas plans to seek proportionate reimbursement of all costs relative to this site from other potentially responsible parties to the extent practicable.

Laclede Gas has been advised that a third former MGP site may require remediation. Laclede Gas has not owned this site for many years. At this time, it is not known whether Laclede Gas will incur any costs in connection with environmental investigations of or remediation at the site, and if it does incur any such costs, what the amount of those costs would be.

While the amount of future costs relative to the actions Laclede Gas has taken at the Shrewsbury site pursuant to the current agreement with state and federal regulators may not be significant, the amount of costs relative to future remedial actions regulators may require at the Shrewsbury site and at the other sites is unknown and may be material.

Laclede Gas has notified its insurers that it seeks reimbursement for costs incurred in the past and future potential liabilities associated with the three MGP sites identified above. In response, the majority of insurers have reserved their rights. While some of the insurers have denied coverage, Laclede Gas is currently holding discussions with

 

 

 

 

16

 

 

the insurers regarding potential reimbursement from them. In June 2005, an outside consultant retained by Laclede Gas completed an analysis of the MGP sites to determine cost estimates for a one-time contractual transfer of risk from each insurer to the Company of environmental coverage for the MGP sites. That analysis demonstrated a range of possible future expenditures to investigate, monitor and remediate these MGP sites from $5.8 million to $36.3 million. This analysis was based upon then currently available facts, technology and laws and regulations. The actual costs that Laclede Gas may incur could be materially higher or lower depending upon several factors, including whether remedial actions will be required, final selection and regulatory approval of any remedial actions, changing technologies and governmental regulations, the ultimate ability of other potentially responsible parties to pay and any insurance recoveries. Costs associated with environmental remediation activities are accrued when such costs are probable and reasonably estimable. As of the date of this report, Laclede Gas has recorded all such costs. However, it is possible that future events may require some level of additional remedial activities that, in turn, would require Laclede Gas to record additional costs.

Laclede Gas enrolled a parcel of property located in the City of St. Louis in the VCP pursuant to an agreement to sell such parcel to a third party. The sale was completed January 8, 2007. Under the terms of the agreement, any costs relative to future investigations or remedial actions regulators may require shall be borne by the third-party buyer. Laclede Gas does not anticipate incurring any material cost in connection with this site.

Laclede Gas anticipates that any costs it may incur in the future to remediate these sites, less any amounts received as insurance proceeds or as contributions from other potentially responsible parties, would be deferred and recovered in rates through periodic adjustments approved by the MoPSC. Accordingly, potential liabilities associated with remediating these sites are not expected to have a material impact on the future financial position and results of operations of Laclede Gas or the Company.

SM&P was the subject of certain employment-related claims arising out of a practice of SM&P that predated Laclede Group’s acquisition. The claims involved whether certain pre- and post-work activities and commuting time for non-supervisory field employees constitute hours worked for purposes of federal and state wage and hour laws. These claims were asserted in various proceedings, including one “opt-in” collective action filed in March 2003 in Federal District Court for the Eastern District of Texas. As a result of a court ruling in that proceeding on February 27, 2004, approximately 3,500 present and former field employees who worked for SM&P at times since February 27, 2001, were given notice of the lawsuit and the opportunity to join the lawsuit and assert claims for additional overtime compensation for the three-year period immediately preceding the date that they joined the lawsuit. Of the individuals to whom notice was sent, 966 joined the lawsuit, the substantial majority of whom were former employees. SM&P vigorously contested these claims, including opposition to this case proceeding as a collective action.

Since the subject of employment practices preceded Laclede Group’s acquisition of SM&P, Laclede Group notified SM&P’s prior owner, NiSource Inc. (NiSource), of the various wage and hour claims. Laclede Group advised NiSource of Laclede Group’s position that NiSource was obligated to indemnify Laclede Group for liabilities and defense costs arising out of the wage and hour claims, subject to the limitations set forth in the Stock Purchase Agreement by and between NiSource and Laclede Group dated as of December 12, 2001. NiSource initially denied that it had an indemnification obligation to Laclede Group.

SM&P and the plaintiffs in the collective action ultimately reached agreement to settle the lawsuit. While not admitting that its practices violated wage and hour laws, SM&P agreed to fund a portion of the amount required to pay the plaintiffs to settle the collective action. In conjunction with SM&P’s agreement to settle the collective action, NiSource agreed to fund the remaining portion of the settlement payment that would be made to the collective action plaintiffs. SM&P’s agreement with the plaintiffs was submitted to the District Court for approval. In the quarter ended March 31, 2006, SM&P recorded a pre-tax charge of $2.5 million to reflect the amount that it had expected to fund for the settlement of the collective action. On August 10, 2006, the District Court approved SM&P’s agreement with the plaintiffs without modification and, subsequently, settlement payments were made to the plaintiffs.

Laclede Group and NiSource further agreed to submit determination of their respective rights and obligations under the Stock Purchase Agreement concerning wage and hour claims, including settlement payments and the attorneys’ fees and related expenses incurred to defend those claims, to an expedited binding arbitration procedure. The arbitration hearing was held on September 17-20, 2006. On September 28, 2006, the arbitration panel rendered a decision awarding Laclede Group a portion of the settlement payment made to the plaintiffs, as well as all legal fees and litigation expenses directly related to the collective action. NiSource made payment to Laclede Group in accordance with the arbitration panel’s decision. Accordingly, in the quarter ended September 30, 2006, SM&P reversed a portion of the previously recorded pre-tax expense totaling $1.3 million to reflect the net amount awarded to Laclede Group in the arbitration proceeding. On October 20, 2006, NiSource submitted a reconsideration request to the arbitration panel seeking to reduce the amount awarded by the arbitration panel by approximately $0.3 million. Laclede Group submitted a letter opposing reconsideration. On November 15, 2006, the arbitration panel issued an Order clarifying its September 28, 2006 decision, and reduced Laclede Group’s award by the amount requested by NiSource. On December 28, 2006, Laclede Group filed a complaint in Federal District Court for the Southern District of Indiana requesting a court order confirming the final arbitration award as originally issued on September 28, 2006, or alternatively, vacating the November 15, 2006 reduced award. Laclede Group contends that the panel did not have the legal authority to modify the September 28, 2006 award. While the results of any future action by the court in response to Laclede Group’s complaint cannot be predicted with certainty, management, after discussion with counsel, believes that the ultimate resolution of the court proceeding will not

 

 

 

 

 

 

 

 

 

17

 

 

have a material adverse effect on the consolidated financial position and results of operations of Laclede Group in future periods.

On December 29, 2005, the MoPSC Staff proposed a disallowance of approximately $3.3 million related to Laclede Gas’ recovery of its purchased gas costs applicable to fiscal 2004. Following technical conferences, the Staff subsequently reduced its proposed disallowance to $2.4 million. On January 4, 2007, the MoPSC Staff informed the Utility that the Staff further reduced its proposed disallowance by $0.3 million to approximately $2.1 million. Laclede Gas believes that the MoPSC Staff’s position lacks merit and continues to vigorously oppose the adjustment in proceedings before the MoPSC. Formal hearings are scheduled for January 29-30, 2007.

Laclede Gas began implementation of an automated meter reading (AMR) system in July 2005. Through the date of this report, the AMR system has been deployed to more than 610,000 customers. The implementation is expected to be substantially completed in early 2007. Certain regulatory issues have arisen in conjunction with this implementation. The Utility has approximately 40% of customers with meters inside their premises. On February 2, 2006, the MoPSC Staff filed a complaint against the Utility alleging that it failed to adequately obtain or use actual meter readings from certain customers and failed to adequately respond to unauthorized gas use. In addition to seeking authority to pursue penalties, the Staff sought customer service accommodations for those customers with meters located inside their homes whose previous estimated bills will require adjustment to reflect actual usage. On May 11, 2006, the Missouri Office of Public Counsel also filed a complaint alleging that Laclede Gas billed customers for prior underestimated usage for a longer period of time than permitted by Commission rules. Laclede Gas filed responses generally denying the MoPSC Staff’s and Office of Public Counsel’s allegations. On November 7, 2006, Laclede Gas, the Office of the Public Counsel, and other parties filed a Stipulation & Agreement that resolves certain issues raised in this case. The MoPSC Staff neither supported nor opposed the Stipulation. On December 21, 2006, the Commission approved the Stipulation & Agreement, dismissed the Office of Public Counsel’s complaint, and suspended Staff’s complaint, subject to Laclede’s compliance with the Stipulation & Agreement. The primary terms of the Stipulation & Agreement include the Utility’s provision of bill credits totaling approximately $0.5 million to customers who received billing adjustments reconciling undercharges for periods exceeding 12 months, a limit on future billing adjustments that reconcile undercharges to 12 months, and additional notices to customers concerning such billing adjustments. The Utility’s labor union representing field service workers, USW Local 11-6 (Union), has also raised a number of regulatory matters with the MoPSC alleging safety issues associated with the installation of AMR and changes in other work practices implemented by Laclede Gas. On November 2, 2006, the MoPSC denied and dismissed one of these complaints. On December 11-12, 2006, the MoPSC held a hearing on the Union’s last remaining complaint. That hearing was not completed and has been continued to February 14, 2007. The Utility continues to believe that the Union’s allegations in the remaining case are without merit.

On December 28, 2006, the MoPSC Staff proposed a disallowance of approximately $7.2 million related to Laclede Gas’ recovery of its purchased gas costs applicable to fiscal 2005, largely on the same grounds as it has proposed regarding the disallowance of the Utility’s recovery of purchased gas cost applicable to fiscal 2004. Laclede Gas believes that the MoPSC Staff’s position lacks merit and intends to vigorously oppose the adjustment in proceedings before the MoPSC.

Laclede Group and its subsidiaries are involved in other litigation, claims and investigations arising in the normal course of business. While the results of such litigation cannot be predicted with certainty, management, after discussion with counsel, believes that the final outcome will not have a material adverse effect on the consolidated financial position or results of operations of the Company.

Laclede Gas has several operating leases for the rental of vehicles that contain provisions requiring Laclede Gas to guarantee certain amounts related to the residual value of the leased property. These leases have various terms, the longest of which extends through 2011. At December 31, 2006, the maximum guarantees under these leases are approximately $1.7 million. However, the Utility estimates that the residual value of the leased vehicles will be adequate to satisfy most of the guaranteed amounts. At December 31, 2006, the carrying value of the liability recognized for these guarantees was approximately $0.2 million.

SM&P has several operating leases, the aggregate annual cost of which is approximately $9.0 million, consisting primarily of 12-month operating leases, with renewal options, for vehicles used in its business. Laclede Group has parental guarantees of certain of those vehicle leases and anticipates that the maximum guarantees, including renewals and new leases, will not exceed $20.7 million. In the event Laclede Group would be required to make payments under these guarantees, it is expected that a significant portion of such payments would be recovered through proceeds from the liquidation of assets obtained under the terms of the leases. The fair market value of the vehicles being leased is estimated at $17.2 million. No amounts have been recorded for these guarantees in the financial statements.

Laclede Group had guarantees totaling $26.0 million for performance and payment of certain wholesale gas supply purchases by LER, as of December 31, 2006. No amounts have been recorded for these guarantees in the financial statements.

 

Laclede Gas Company’s Financial Statements and Notes to Financial Statements are included in Exhibit 99.1 to this report.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18

 

 

 

Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The Laclede Group, Inc.

 

This management’s discussion analyzes the financial condition and results of operations of The Laclede Group, Inc. (Laclede Group or the Company) and its subsidiaries. It includes management’s view of factors that affect its business, explanations of past financial results including changes in earnings and costs from the prior year periods, and their effects on overall financial condition and liquidity.

 

Certain matters discussed in this report, excluding historical information, include forward-looking statements. Certain words, such as “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:

 

weather conditions and catastrophic events, particularly severe weather in the natural gas producing areas of the country;

volatility in gas prices, particularly sudden and sustained spikes in natural gas prices;

the impact of higher natural gas prices on our competitive position in relation to suppliers of alternative heating sources, such as electricity;

changes in gas supply and pipeline availability; particularly those changes that impact supply for and access to our market area;

legislative, regulatory and judicial mandates and decisions, some of which may be retroactive, including those affecting

 

allowed rates of return

 

incentive regulation

 

industry structure

 

purchased gas adjustment provisions

 

rate design structure and implementation

 

franchise renewals

 

environmental or safety matters

 

taxes

 

pension and other post-retirement benefit liabilities and funding obligations

 

accounting standards;

the results of litigation;

retention of, ability to attract, ability to collect from and conservation efforts of customers;

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;

discovery of material weakness in internal controls; and

employee workforce issues.

 

Readers are urged to consider the risks, uncertainties and other factors that could affect our business as described in this report. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement in light of future events.

 

The Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes thereto.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

 

 

THE LACLEDE GROUP, INC.

 

RESULTS OF OPERATIONS

 

Laclede Group’s earnings are primarily derived from the regulated activities of its largest subsidiary, Laclede Gas Company (Laclede Gas or the Utility), Missouri’s largest natural gas distribution company. Laclede Gas is regulated by the Missouri Public Service Commission (MoPSC or Commission) and serves St. Louis city and parts of ten other counties in eastern Missouri. Laclede Gas delivers natural gas to retail customers at rates, and in accordance with tariffs, authorized by the MoPSC. The Utility’s earnings are primarily generated by the sale of heating energy. The Utility’s innovative weather mitigation rate design lessens the impact of weather volatility on Laclede Gas customers during cold winters and stabilizes the Utility’s earnings by recovering fixed costs more evenly during the heating season. The weather mitigation rate design minimizes the impact of weather volatility during the peak cold months of December through March and reduces the impact of weather volatility, to a lesser extent, during the months of November and April. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the November through April period, which generally corresponds with the heating season. The Utility typically experiences losses during the non-heating season. The seasonal effect of the Utility’s earnings on Laclede Group is generally expected to be tempered somewhat by the results of SM&P Utility Resources, Inc. (SM&P), a non-regulated underground facility locating and marking service business, whose operations tend to be counter-seasonal to those of Laclede Gas. The underground locating industry remains competitive with many contracts subject to termination on short-term notice. SM&P’s customers are primarily in the utility and telecommunications sectors and, as such, SM&P’s results are influenced by construction seasonality and trends. Laclede Energy Resources, Inc. (LER) is engaged in the non-regulated marketing of natural gas and related activities. LER markets natural gas to both on-system Utility transportation customers and customers outside of Laclede Gas’ traditional service territory, including large retail and wholesale customers. As such, LER’s operations and customer base are subject to fluctuations in market conditions. Other non-regulated subsidiaries provide less than 10% of consolidated revenues.

 

Laclede Group’s strategy continues to include efforts to stabilize and improve the performance of its core Utility, while developing non-regulated businesses and taking a measured approach in the pursuit of additional growth opportunities that complement the Utility business.

 

As for the Utility, mitigating the impact of weather fluctuations on Laclede Gas customers while improving the ability to recover its authorized distribution costs and return continues to be a fundamental component of Laclede Group’s strategy. The Utility’s distribution costs are the essential, primarily fixed expenditures it must incur to operate and maintain a more than 16,000 mile natural gas distribution system and related storage facilities. In addition, Laclede Gas is working to continually improve its ability to provide reliable natural gas service at a reasonable cost, while maintaining and building a secure and dependable infrastructure. The Utility’s income from off-system sales remains subject to fluctuations in market conditions. In conjunction with the settlement of the 2005 rate case, effective October 1, 2005, the Utility retains all pre-tax income from off-system sales and capacity release revenues up to $12 million annually. Pre-tax amounts in excess of $12 million, if any, are shared with customers, with the Utility retaining 50% of amounts exceeding that threshold. Some of the factors impacting the level of off-system sales include the availability and cost of the Utility’s natural gas supply, the weather in its service area, and the weather in other markets. When Laclede Gas’ service area experiences warmer-than-normal weather while other markets experience colder weather or supply constraints, some of the Utility’s natural gas supply is available for off-system sales and there may be a demand for such supply in other markets.

 

Wholesale natural gas prices for the 2005-2006 heating season rose to unprecedented levels across the nation. Laclede Gas continues to work actively to reduce the impact of higher costs by strategically structuring its natural gas supply portfolio and through the use of financial instruments. Nevertheless, the cost of purchased gas remains high, relative to historical levels. 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 costs, cost reductions, and related carrying costs associated with the use of financial instruments to hedge the purchase price of natural gas, as well as gas inventory carrying costs. The Utility believes it will continue to be able to obtain sufficient gas supply. While wholesale natural gas prices have declined for the 2006-2007 heating season, the generally higher price levels may continue to affect sales volumes (due to the conservation efforts of customers) and cash flows (associated with the timing of collection of gas costs and related accounts receivable from customers).

 

Laclede Group continues to develop its non-regulated subsidiaries. SM&P is working to further the logical expansion of its business in both new and existing markets. LER continues to focus on growing its markets on a long-term and sustainable basis by providing both on-system Utility transportation customers and customers outside of Laclede Gas’ traditional service area with another choice in unregulated natural gas suppliers. Nevertheless, income from LER’s operations is subject to fluctuations in market conditions. LER reported record earnings during fiscal year 2006 as a result

 

 

 

 

 

 

 

20

 

 

of high margins, caused by increased price volatility and hurricane-related regional supply/demand imbalances, as well as higher wholesale sales volumes.

 

Quarter Ended December 31, 2006

------------------------------------------

 

Overview – Net Income (Loss) by Operating Segment

 

 

 

Quarter Ended

 

 

 

 

 

December 31,

 

(millions, after-tax)

 

 

 

 

2006

 

 

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Regulated Gas Distribution

 

 

 

$

15.7

 

 

 

$

20.2

 

Non-Regulated Services

 

 

 

 

(.5

)

 

 

 

.4

 

Non-Regulated Gas Marketing

 

 

 

 

3.8

 

 

 

 

5.4

 

Non-Regulated Other

 

 

 

 

.1

 

 

 

 

.2

 

Net Income Applicable to Common Stock

 

 

 

$

19.1

 

 

 

$

26.2

 

                

Laclede Group’s net income applicable to common stock was $19.1 million for the quarter ended December 31, 2006, compared with $26.2 million for the quarter ended December 31, 2005. Basic and diluted earnings per share were $.89 for the quarter ended December 31, 2006, compared with $1.23 per share reported for the same quarter last year. Earnings per share decreased compared to last year for all of Laclede Group’s operating segments. Variations in net income were primarily attributable to the factors described below.

 

Regulated Gas Distribution net income decreased by $4.5 million for the quarter ended December 31, 2006 compared with the quarter ended December 31, 2005. The decrease in net income was primarily due to the following factors, quantified on a pre-tax basis:

 

lower income from off-system sales and capacity release totaling $4.2 million;

higher depreciation and amortization expense totaling $2.4 million resulting from the implementation of new depreciation rates effective January 1, 2006, as authorized by the MoPSC, and additional depreciable property; and,

increases in operation and maintenance expenses totaling $1.2 million.

 

The Non-Regulated Services segment reported a loss of $0.5 million during the quarter ended December 31, 2006 compared with net income of $0.4 million for the same period last year. While revenues were higher, the earnings decline resulted from increased operating expenses, primarily due to growth and expansion.

 

The Non-Regulated Gas Marketing segment reported a decrease in earnings of $1.6 million compared with the same period last year. The decrease was primarily attributable to significantly lower margins than those realized during the same quarter last year by LER. Last year’s higher margins were the result of increased price volatility and hurricane-related regional supply/demand imbalances. The effect of lower margins this year was partially offset by higher wholesale sales volumes.

 

Regulated Operating Revenues and Operating Expenses

 

Laclede Gas passes on to Utility customers (subject to prudence review) increases and decreases in the wholesale cost of natural gas in accordance with its PGA Clause. The volatility of the wholesale natural gas market results in fluctuations from period to period in the recorded levels of, among other items, revenues and natural gas cost expense. Nevertheless, increases and decreases in the cost of gas associated with system gas sales volumes have no direct effect on net revenues and net income.

 

Regulated operating revenues for the quarter ended December 31, 2006 were $348.5 million, or $62.9 million less than the same period last year. Temperatures experienced in the Utility’s service area during the quarter were 8.4% warmer than normal, and 7.4% warmer than the same period last year. Total system therms sold and transported were 0.28 billion for the quarter ended December 31, 2006 compared with 0.30 billion for the same period last year. Total off-system therms sold and transported were 0.07 billion for the quarter ended December 31, 2006 compared with 0.05 billion for the same period last year. The decrease in regulated operating revenues was primarily attributable to the following factors:

 

 

 

 

 

 

21

 

 

 

 

 

 

Millions

 

Lower system sales volumes and other variations, primarily due to warmer weather

 

 

 

 

  and the continued conservation efforts of customers

 

$

(29.2

)

Lower prices charged for off-system sales

 

 

(26.1

)

Lower wholesale gas costs passed on to Utility customers (subject to prudence

 

 

 

 

review by the MoPSC)

 

 

(20.8

)

Higher off-system sales volumes

 

 

12.7

 

Higher Infrastructure System Replacement Surcharges (ISRS) implemented June 15, 2006

 

 

0.5

 

Total Variation

 

$

(62.9

)

 

Regulated operating expenses for the quarter ended December 31, 2006 decreased $57.8 million from the same quarter last year. Natural and propane gas expense decreased $60.5 million, or 19.4%, from last year’s level, primarily attributable to lower system volumes purchased for sendout, lower rates charged by our suppliers, and lower off-system gas expense. Other operation and maintenance expenses increased $1.2 million, or 3.1%, primarily due to increased maintenance charges, higher group insurance charges, and higher wage rates, partially offset by lower injuries and damages expenses. Depreciation and amortization expense increased $2.4 million, or 39.7%, primarily due to higher rates effective January 1, 2006 and additional depreciable property. Taxes, other than income, decreased $0.9 million, or 4.5%, primarily due to lower gross receipts taxes (attributable to the lower revenues).

 

Non-Regulated Services Operating Revenues and Operating Expenses

 

Laclede Group’s non-regulated services operating revenues for this quarter increased $1.0 million primarily due to SM&P’s attainment of new business in existing markets. The increase in non-regulated services operating expenses totaling $2.4 million was attributable to increased operating expenses primarily due to growth and expansion.

 

Non-Regulated Gas Marketing Operating Revenues and Operating Expenses

 

Non-regulated gas marketing operating revenues decreased $87.9 million primarily due to lower per unit gas sales prices by LER, partially offset by increased sales volumes. The decrease in non-regulated gas marketing operating expenses totaling $84.8 million was primarily associated with decreased gas expense related to lower prices, partially offset by increased volumes purchased.

 

Other Income and (Income Deductions) - Net

 

Other income and income deductions – net increased $2.0 million primarily due to higher income associated with carrying costs applied to under-recoveries of gas costs and other minor variations. Such carrying costs are recovered through the Utility’s PGA Clause.

 

Interest Charges

 

The $1.3 million increase in interest charges was primarily due to higher interest on short-term debt. Average short-term interest rates were approximately 5.3% for the quarter ended December 31, 2006 compared with approximately 4.2% for the same period last year. Average short-term borrowings were approximately $209.7 million and $155.1 million for the quarters ended December 31, 2006 and December 31, 2005, respectively.

 

Income Taxes

 

The $1.9 million decrease in income taxes was primarily due to lower pre-tax income this year, partially offset by a change in estimated tax depreciation and other property-related deductions recorded during the quarter ended December 31, 2005.

 

Regulatory Matters

------------------------

 

A new law became effective January 1, 2006, that authorizes the MoPSC to implement rules and tariff provisions through which rates can be adjusted between general rate case proceedings to reflect increases and decreases in certain costs and revenues. For gas utilities like Laclede Gas, these include rate adjustments to reflect revenue changes resulting from the impact of weather and conservation on customer usage and to reflect changes in the costs to comply with environmental

 

 

 

22

 

 

laws, rules and regulations. Various parties have been meeting in an attempt to negotiate rules to implement these programs; however, to date, the MoPSC has only acted on a rule relating to the establishment of a fuel adjustment clause for electric utilities.

 

On October 24, 2005, the Office of the Public Counsel proposed an emergency amendment to the MoPSC’s Cold Weather Rule. Such rule governs the disconnection and reconnection practices of utilities during the winter heating season. On December 19, 2005, the MoPSC issued an Order approving certain changes to the rule to be effective between January 1 and March 31, 2006. These temporary rule changes were expected to increase utilities’ costs; however, the rule allows for incremental compliance costs to be deferred for consideration for future recovery in rates. Laclede Gas, along with other gas utilities, appealed the Order to the Cole County Circuit Court on the grounds that the rule failed to provide a separate and more definitive recovery mechanism for such costs. Although the Court declined to stay the Order, it did express serious concerns over the rule’s legality. On February 8, 2006, the Cole County Circuit Court held that the rule was unlawful and void because it did not make adequate provision for a cost recovery mechanism to address the revenue losses associated with implementing the rule. The MoPSC appealed the Court’s decision. On October 31, 2006, the Missouri Court of Appeals for the Western District issued its opinion reversing the judgment of the Cole County Circuit Court, upholding the lawfulness of the MoPSC’s emergency rule. Laclede Gas, along with other gas utilities, filed an application with the Court of Appeals on November 15, 2006, requesting that it rehear or transfer the appeal to the Missouri Supreme Court. On December 19, 2006, the Court of Appeals declined to rehear or transfer the appeal. The Utility’s appeal to the Missouri Supreme Court is pending. In the meantime, the MoPSC proposed a rulemaking on May 22, 2006, to permanently incorporate many of the changes to the Cold Weather Rule that were implemented on an emergency basis for the 2005-2006 heating season. A public hearing on the proposed rule was held on July 19, 2006, at which Laclede Gas and other gas utilities recommended revisions to the proposed rule, including a more definitive recovery mechanism for uncollectible expenses. On August 11, 2006, the MoPSC approved permanent modifications to the rule, including provisions to allow the Utility to obtain accounting authorizations and defer for future recovery the costs previously incurred with the emergency amendment as well as future costs of complying with the new permanent rule. In September 2006, pursuant to those provisions, the Utility deferred costs for future recovery associated with the emergency amendment totaling $4.7 million and filed applications for the accounting authorizations provided for in the Rule. On October 31, 2006, pursuant to this Rule, the Utility filed for determination and subsequent recovery from customers of the deferred amount. On November 13, 2006, the MoPSC Staff recommended that the MoPSC grant the accounting authorizations requested by Laclede Gas and ultimately determine and permit recovery of any deferred costs consistent with the terms of the permanent rule. On December 7, 2006, the Commission granted the accounting authorizations. In December 2006, the Utility adjusted its deferral of such costs to an estimated $3.7 million, reflecting a reduction in applicable uncollectible expenses during the quarter. The Utility’s request for determination of the amount of costs associated with compliance with the amendment is pending.

 

On December 29, 2005, the MoPSC Staff proposed a disallowance of approximately $3.3 million related to Laclede Gas’ recovery of its purchased gas costs applicable to fiscal 2004. Following technical conferences, the Staff subsequently reduced its proposed disallowance to $2.4 million. On January 4, 2007, the MoPSC Staff informed the Utility that the Staff further reduced its proposed disallowance by $0.3 million to approximately $2.1 million. Laclede Gas believes that the MoPSC Staff’s position lacks merit and continues to vigorously oppose the adjustment in proceedings before the MoPSC. Formal hearings are scheduled for January 29-30, 2007.

 

On November 3, 2006, the Utility made an ISRS filing with the Commission designed to increase revenues by an additional $1.9 million annually. On December 28, 2006, the MoPSC approved implementation of the Utility’s proposed ISRS filing to be effective January 2, 2007.

 

Laclede Gas began implementation of an automated meter reading (AMR) system in July 2005. Through the date of this report, the AMR system has been deployed to more than 610,000 customers. The implementation is expected to be substantially completed in early 2007. Certain regulatory issues have arisen in conjunction with this implementation. The Utility has approximately 40% of customers with meters inside their premises. On February 2, 2006, the MoPSC Staff filed a complaint against the Utility alleging that it failed to adequately obtain or use actual meter readings from certain customers and failed to adequately respond to unauthorized gas use. In addition to seeking authority to pursue penalties, the Staff sought customer service accommodations for those customers with meters located inside their homes whose previous estimated bills will require adjustment to reflect actual usage. On May 11, 2006, the Missouri Office of Public Counsel also filed a complaint alleging that Laclede Gas billed customers for prior underestimated usage for a longer period of time than permitted by Commission rules. Laclede Gas filed responses generally denying the MoPSC Staff’s and Office of Public Counsel’s allegations. On November 7, 2006, Laclede Gas, the Office of the Public Counsel, and other parties filed a Stipulation & Agreement that resolves certain issues raised in this case. The MoPSC Staff neither supported nor opposed the Stipulation. On December 21, 2006, the Commission approved the Stipulation & Agreement, dismissed the Office of Public Counsel’s complaint, and suspended Staff’s complaint, subject to Laclede’s compliance with the Stipulation & Agreement. The primary terms of the Stipulation & Agreement include the Utility’s provision of bill credits totaling approximately $0.5 million to customers who received billing adjustments reconciling undercharges

 

 

 

 

 

 

 

 

 

23

 

 

for periods exceeding 12 months, a limit on future billing adjustments that reconcile undercharges to 12 months, and additional notices to customers concerning such billing adjustments. The Utility’s labor union representing field service workers, USW Local 11-6 (Union), has also raised a number of regulatory matters with the MoPSC alleging safety issues associated with the installation of AMR and changes in other work practices implemented by Laclede Gas. On November 2, 2006, the MoPSC denied and dismissed one of these complaints. On December 11-12, 2006, the MoPSC held a hearing on the Union’s last remaining complaint. That hearing was not completed and has been continued to February 14, 2007. The Utility continues to believe that the Union’s allegations in the remaining case are without merit.

 

On December 1, 2006, Laclede Gas filed tariff sheets that are designed to increase total revenues by approximately $52.9 million annually, or 5.6%. Although the Utility’s filing requests an increase of $44.9 million in non-gas revenues, $1.8 million of that amount is already being paid by customers through the current ISRS, which would no longer be collected upon approval of the Utility’s rate request. In addition, Laclede Gas proposed to increase its PGA rates by $9.8 million in order to recover the gas cost portion of its bad debts through the PGA rather than through its non-gas distribution rates. The December 1 filing also proposes a comprehensive regulatory compact that includes: 1) a pilot program in which residential customers could lock in for a twelve-month period the cost of gas included in their monthly bill; 2) a conservation program that would provide customers an opportunity to earn a rebate by conserving natural gas use during the peak winter heating months; 3) a three-year base rate moratorium; and 4) an Earnings Sharing Mechanism in which the Utility would share with its customers up to 90 percent of earnings in excess of its authorized return, depending on the level of earnings achieved, to the extent that the Utility would achieve any such additional earnings as a result of its efforts to make utility service more efficient and sell gas in markets outside of its traditional service territory. Finally, Laclede Gas proposed several modifications to its weather mitigation rate design in order to better ensure the Utility’s recovery of its fixed costs. On December 13, 2006, the MoPSC suspended implementation of the Utility’s proposed rates until November 1, 2007 and set the case for hearing during summer 2007.

 

On December 28, 2006, the MoPSC Staff proposed a disallowance of approximately $7.2 million related to Laclede Gas’ recovery of its purchased gas costs applicable to fiscal 2005, largely on the same grounds as it has proposed regarding the disallowance of the Utility’s recovery of purchased gas cost applicable to fiscal 2004. Laclede Gas believes that the MoPSC Staff’s position lacks merit and intends to vigorously oppose the adjustment in proceedings before the MoPSC.

 

At the federal level, Laclede Pipeline Company (Pipeline), a wholly-owned subsidiary of Laclede Group, filed a tariff with the Federal Energy Regulatory Commission (FERC) on March 1, 2006, requesting approval to transport liquefied petroleum gas (LPG) under the Interstate Commerce Act (ICA). Historically, Pipeline has supplied propane to Laclede Gas to supplement the Utility’s natural gas supplies during peak consumption periods. Prior to April 1, 2006, in various Utility rate proceedings over the years, the MoPSC approved Laclede Gas’ rates that were intended to include the recovery of Pipeline’s costs. Pipeline made the March 1 tariff filing due to changes in the types of transactions Pipeline conducts with third parties during those periods when Laclede Gas is not fully utilizing Pipeline’s capacity. The MoPSC filed a protest to Pipeline’s filing, to which Pipeline responded, and on March 31, 2006, the FERC accepted Pipeline’s tariff, effective April 1, 2006. On May 1, 2006, the MoPSC filed a request for rehearing of the FERC’s Order approving Pipeline’s tariff, and on May 31, 2006, the FERC issued a “tolling order” in connection with the MoPSC’s request for rehearing which extends the 30-day statutory time period for the FERC to rule on the MoPSC’s request. Pipeline is providing liquid propane transportation service to Laclede Gas pursuant to the newly approved FERC tariff and a new contractual arrangement between Pipeline and Laclede Gas. In accordance with the terms of that agreement, subject to further proceedings before the FERC, Laclede Gas is obligated to pay Pipeline approximately $1.0 million annually, at current rates, commencing April 1, 2006. The agreement renews at the end of each contract year, unless terminated by either party upon provision of at least six months’ notice.

 

Critical Accounting Policies

-----------------------------------

 

Our discussion and analysis of our financial condition, results of operations, liquidity and capital resources is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Generally accepted accounting principles require that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following represent the more significant items requiring the use of judgment and estimates in preparing our consolidated financial statements:

 

 

 

 

 

 

 

 

 

 

24

 

 

 

 

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. The Utility’s provision for uncollectible accounts is dependent on the regulatory treatment provided for such costs. Beginning in fiscal 2006, the Utility is allowed to defer for future recovery certain costs associated with amendments to the Cold Weather Rule, as approved by the MoPSC.

 

 

 

Employee benefits and postretirement obligations – Pension and postretirement obligations are calculated by actuarial consultants that utilize several statistical factors and other assumptions related to future events, such as discount rates, returns on plan assets, compensation increases, and mortality rates. The amount of expense recognized by the Utility is dependent on the regulatory treatment provided for such costs. Certain liabilities related to group medical benefits and workers’ compensation claims, portions of which are self-insured and/or contain “stop-loss” coverage with third-party insurers to limit exposure, are established based on historical trends.

 

 

 

Goodwill valuation – In accordance with Statements of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” goodwill is required to be tested for impairment annually or whenever events or circumstances occur that may reduce the value of goodwill. In performing impairment tests, valuation techniques require the use of estimates with regard to discounted future cash flows of operations, involving judgments based on a broad range of information and historical results. If the test indicates impairment has occurred, goodwill would be reduced, adversely impacting earnings.

 

Laclede Gas accounts for its regulated operations in accordance with 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 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. Effective October 1, 2005, the Utility was authorized to implement the recovery of gas inventory carrying costs through its PGA rates to recover costs it incurs to finance its investment in gas supplies that are purchased during the injection season for sale during the heating season. The MoPSC also approved the application of carrying costs to all over- or under-recoveries of gas costs, including costs and cost reductions associated with the use of financial instruments. Previously, carrying costs were applicable only to certain gas cost components exceeding a predetermined threshold.

 

 

 

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. 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. Laclede Gas’ provision for income tax expense also records the income tax effect associated with the difference between overheads capitalized to construction for financial reporting purposes and those recognized for tax purposes without recording an offsetting deferred income tax expense. These two methods are consistent with the regulatory treatment prescribed by the MoPSC.

 

 

 

 

 

 

 

 

 

 

25

 

 

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