SR

Business Context and Reporting Period

This Form 10-Q is a combined quarterly report for The Laclede Group, Inc. (the holding company) and Laclede Gas Company (the regulated utility subsidiary) for the quarter and six months ended March 31, 2002. Effective October 1, 2001, Laclede Gas became a wholly-owned subsidiary of The Laclede Group. The primary business is the retail distribution of natural gas in eastern Missouri. On January 28, 2002, the Group acquired SM&P Utility Resources, Inc., a facility locating and marking business, to diversify earnings and counteract the seasonal nature of the utility operations.

Key Financial Metrics (Six Months Ended March 31, 2002)

Note: Figures represent consolidated results for The Laclede Group, Inc.

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased to $482.1 million from $787.8 million in the prior year. Utility revenues dropped $299.9 million, primarily due to significantly warmer weather (26% warmer than the prior year) reducing gas sales volumes and lower wholesale natural gas prices passed through to customers.
• Earnings Decline: Net income applicable to common stock fell to $28.5 million ($1.51 EPS) from $39.2 million ($2.08 EPS). This was driven by lower gas sales and the expiration of the Gas Supply Incentive Plan (GSIP), partially offset by a general rate increase implemented in December 2001.
• Expense Reduction: Utility operating expenses decreased $285.2 million, largely due to lower natural gas costs ($271.2 million reduction) resulting from lower supplier rates and reduced volumes.
• Acquisition Impact: The acquisition of SM&P added non-utility revenues but contributed to a seasonal operating loss in the quarter, as construction activity is typically low in winter months.

Outlook, Risks, and Management Commentary

• Seasonality: Management notes that earnings are typically concentrated in the first six months (heating season), with losses often occurring in the second half of the fiscal year. The SM&P acquisition is expected to temper this seasonality.
• Regulatory Matters:
  • Rate Case: A request for a general rate increase to recover $36.1 million in annual costs was filed in January 2002 but suspended by the Missouri Public Service Commission (MoPSC) pending review.
  • GSIP Expiration: The MoPSC denied a rehearing request to continue the Gas Supply Incentive Plan. Laclede Gas has filed for judicial review. The company now retains income from pipeline capacity releases and off-system sales.
  • Cost Disallowance: The MoPSC staff recommended disallowing $2.6 million in gas costs for fiscal 2000, which Laclede Gas intends to vigorously oppose.
• Environmental Contingencies: The company is assessing cleanup costs for two former manufactured gas plant sites (Shrewsbury and Carondelet). Estimated costs are approximately $2.3 million and $0.6 million, respectively. A third site's liability is unknown and could be material.
• Liquidity: The company maintains $170 million in total credit lines. Commercial paper outstanding was $75.6 million at period end. A shelf registration for up to $500 million in securities was filed in April 2002.

Investor Verification Checklist

• Weather Sensitivity: Verify the correlation between heating degree days and revenue volatility, as a 26% warmer winter significantly impacted results.
• Regulatory Outcomes: Monitor the status of the suspended general rate increase request and the judicial review of the GSIP expiration.
• Environmental Liabilities: Track the final cost assessments for the Carondelet and third-party gas plant sites, as current estimates may be insufficient.
• SM&P Integration: Assess whether the SM&P acquisition achieves the projected counter-seasonal earnings benefit in the second half of the fiscal year.
• Debt Structure: Review the maturity profile of the $118.4 million in short-term notes payable and the $284.5 million in long-term debt.