SR

Business Context and Reporting Period

This Form 10-Q is a combined quarterly report for The Laclede Group, Inc. (the Company) and its primary subsidiary, Laclede Gas Company (the Utility), for the quarter and nine months ended June 30, 2004. The Company operates a regulated natural gas distribution utility serving the St. Louis metropolitan area and eastern Missouri, alongside non-regulated businesses including underground facility locating (SM&P) and gas marketing (LER). The Utility's earnings are highly seasonal, typically concentrated in the November through April heating season.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 31% in Q2 2004 and 18% for the nine-month period compared to the prior year. This was driven primarily by a 93% increase in Gas Marketing revenues ($80.5M vs $41.8M in Q2) and a 10% increase in Regulated Gas Distribution revenues.
• Profitability: Net income applicable to common stock rose 85% in Q2 and 8% for the nine-month period. The Q2 increase was largely due to improved results from non-regulated subsidiaries (SM&P and LER).
• Weather Impact: Temperatures were 24% warmer than normal in Q2 and 13% warmer than normal for the nine-month period. Despite this, the Utility's weather mitigation rate design helped stabilize earnings, though system gas sales volumes decreased by 5.3% in Q2 and 8.6% for the nine months.
• Debt Structure: In April 2004, the Company issued $150 million in First Mortgage Bonds and redeemed $50 million of existing bonds. Short-term borrowings were significantly reduced during the period.

Outlook, Risks, and Contingencies

• Regulatory Litigation: A significant contingency involves a $4.9 million pre-tax gain from a discontinued Price Stabilization Program. The Missouri Public Service Commission (MoPSC) ordered the gain flowed to customers, but a Circuit Court vacated this decision. The MoPSC has appealed to the Court of Appeals, with oral arguments scheduled for August 2004. A final disallowance could materially affect future financial results.
• Environmental Liabilities: The Company is addressing remediation at three former manufactured gas plant sites. Costs for the Shrewsbury site are estimated at $2.4 million (reserved). Costs for a second site are estimated at $650,000 (reserved). A third site's costs are unknown but could be material; insurance coverage for these sites is currently disputed.
• Legal Proceedings: SM&P is facing a collective action lawsuit regarding overtime compensation for field employees. Management believes the outcome will not have a material adverse effect.
• Labor Relations: The Utility's labor agreement with the union expired July 31, 2004. A settlement offer was scheduled for a union vote on August 1, 2004.
• Accounting Changes: The Company deconsolidated Laclede Capital Trust I in Q1 2004 due to the adoption of FIN 46R, though this had no material effect on financial position.

Investor Verification Checklist

• Regulatory Appeal Outcome: Monitor the Missouri Court of Appeals decision regarding the $4.9 million Price Stabilization Program gain disallowance.
• Environmental Cost Scope: Verify if remediation costs for the two non-Shrewsbury gas plant sites exceed current estimates or if insurance denials result in unrecoverable costs.
• Non-Regulated Performance: Assess the sustainability of revenue growth in the Gas Marketing and SM&P segments, which are subject to market volatility and contract terminations.
• Weather Sensitivity: Evaluate the effectiveness of the weather mitigation rate design in future heating seasons to ensure earnings stability despite temperature fluctuations.
• Labor Agreement: Confirm the terms of the new labor agreement following the union vote to assess potential future cost impacts.