SPIRE INC - Quarter Report: 2011 December (Form 10-Q)
UNITED STATES
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, 2011
|
OR
[ ]
|
TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from __________ to __________
|
Commission File Number 1-16681
![The Laclede Group, Inc. Logo](https://www.sec.gov/Archives/edgar/data/0001126956/000112695612000019/grouplogo.jpg)
THE LACLEDE GROUP, INC.
(Exact name of registrant as specified in its charter)
Missouri
(State of Incorporation)
|
74-2976504
(I.R.S. Employer Identification number)
|
720 Olive Street
St. Louis, MO 63101
(Address and zip code of principal executive offices)
314-342-0500
(Registrant’s telephone number, including area code)
|
Indicate by check mark if the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report) and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [ ]
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
|
[ X ]
|
Accelerated filer
|
[ ]
|
||
Non-accelerated filer
|
[ ]
|
Smaller reporting company
|
[ ]
|
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
As of January 26, 2012, there were 22,486,439 shares of the registrant’s Common Stock, par value $1.00 per share, outstanding.
Page No.
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|||||
PART I. FINANCIAL INFORMATION
|
The interim financial statements included herein have been prepared by The Laclede Group, Inc. (Laclede Group or 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, 2011.
Item 1. Financial Statements
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
Three Months Ended
|
|||||||
December 31,
|
|||||||
(Thousands, Except Per Share Amounts)
|
2011
|
2010
|
|||||
Operating Revenues:
|
|||||||
Regulated Gas Distribution
|
$
|
250,902
|
$
|
277,443
|
|||
Non-Regulated Gas Marketing
|
158,588
|
166,408
|
|||||
Other
|
1,423
|
351
|
|||||
Total Operating Revenues
|
410,913
|
444,202
|
|||||
Operating Expenses:
|
|||||||
Regulated Gas Distribution
|
|||||||
Natural and propane gas
|
146,751
|
173,365
|
|||||
Other operation expenses
|
37,565
|
34,862
|
|||||
Maintenance
|
5,308
|
6,140
|
|||||
Depreciation and amortization
|
10,089
|
9,638
|
|||||
Taxes, other than income taxes
|
14,667
|
15,748
|
|||||
Total Regulated Gas Distribution Operating Expenses
|
214,380
|
239,753
|
|||||
Non-Regulated Gas Marketing
|
152,559
|
163,353
|
|||||
Other
|
869
|
345
|
|||||
Total Operating Expenses
|
367,808
|
403,451
|
|||||
Operating Income
|
43,105
|
40,751
|
|||||
Other Income and (Income Deductions) – Net
|
1,939
|
1,845
|
|||||
Interest Charges:
|
|||||||
Interest on long-term debt
|
5,739
|
5,942
|
|||||
Other interest charges
|
575
|
744
|
|||||
Total Interest Charges
|
6,314
|
6,686
|
|||||
Income Before Income Taxes
|
38,730
|
35,910
|
|||||
Income Tax Expense
|
13,556
|
12,541
|
|||||
Net Income
|
$
|
25,174
|
$
|
23,369
|
|||
Weighted Average Number of Common Shares Outstanding:
|
|||||||
Basic
|
22,193
|
22,041
|
|||||
Diluted
|
22,263
|
22,120
|
|||||
Basic Earnings Per Share of Common Stock
|
$
|
1.13
|
$
|
1.05
|
|||
Diluted Earnings Per Share of Common Stock
|
$
|
1.12
|
$
|
1.05
|
|||
Dividends Declared Per Share of Common Stock
|
$
|
0.415
|
$
|
0.405
|
|||
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
|
|||||||
December 31,
|
|||||||
(Thousands)
|
2011
|
2010
|
|||||
Net Income
|
$
|
25,174
|
$
|
23,369
|
|||
Other Comprehensive Income (Loss), Before Tax:
|
|||||||
Net gains (losses) on cash flow hedging derivative instruments:
|
|||||||
Net hedging gain arising during the period
|
3,047
|
214
|
|||||
Reclassification adjustment for gains included in net income
|
(2,830
|
)
|
(3,090
|
)
|
|||
Net unrealized gains (losses) on cash flow hedging derivative instruments
|
217
|
(2,876
|
)
|
||||
Amortization of actuarial loss included in net periodic pension and
|
|||||||
postretirement benefit cost
|
91
|
107
|
|||||
Other Comprehensive Income (Loss), Before Tax
|
308
|
(2,769
|
)
|
||||
Income Tax Expense (Benefit) Related to Items of Other Comprehensive Income (Loss)
|
119
|
(1,070
|
)
|
||||
Other Comprehensive Income (Loss), Net of Tax
|
189
|
(1,699
|
)
|
||||
Comprehensive Income
|
$
|
25,363
|
$
|
21,670
|
|||
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Dec. 31,
|
Sept. 30,
|
Dec. 31,
|
||||||||||||
(Thousands)
|
2011
|
2011
|
2010
|
|||||||||||
ASSETS
|
||||||||||||||
Utility Plant
|
$
|
1,400,001
|
$
|
1,386,590
|
$
|
1,338,568
|
||||||||
Less: Accumulated depreciation and amortization
|
463,148
|
457,907
|
447,582
|
|||||||||||
Net Utility Plant
|
936,853
|
928,683
|
890,986
|
|||||||||||
Non-utility property
|
4,449
|
4,588
|
4,538
|
|||||||||||
Other investments
|
52,508
|
50,785
|
50,505
|
|||||||||||
Other Property and Investments
|
56,957
|
55,373
|
55,043
|
|||||||||||
Current Assets:
|
||||||||||||||
Cash and cash equivalents
|
44,579
|
43,277
|
25,087
|
|||||||||||
Accounts receivable:
|
||||||||||||||
Utility
|
135,758
|
71,090
|
165,171
|
|||||||||||
Non-utility
|
49,902
|
50,894
|
61,951
|
|||||||||||
Other
|
17,554
|
12,572
|
11,055
|
|||||||||||
Allowance for doubtful accounts
|
(5,989
|
)
|
(10,073
|
)
|
(6,732
|
)
|
||||||||
Inventories:
|
||||||||||||||
Natural gas stored underground at LIFO cost
|
113,668
|
115,170
|
109,171
|
|||||||||||
Propane gas at FIFO cost
|
8,964
|
8,961
|
16,881
|
|||||||||||
Materials, supplies, and merchandise at average cost
|
4,855
|
4,229
|
4,255
|
|||||||||||
Natural gas receivable
|
15,327
|
30,689
|
12,320
|
|||||||||||
Derivative instrument assets
|
3,232
|
7,759
|
13,150
|
|||||||||||
Unamortized purchased gas adjustments
|
19,413
|
25,719
|
18,136
|
|||||||||||
Deferred income taxes
|
—
|
—
|
1,162
|
|||||||||||
Prepayments and other
|
8,250
|
8,847
|
6,080
|
|||||||||||
Total Current Assets
|
415,513
|
369,134
|
437,687
|
|||||||||||
Deferred Charges:
|
||||||||||||||
Regulatory assets
|
458,648
|
423,492
|
453,030
|
|||||||||||
Other
|
6,359
|
6,400
|
7,481
|
|||||||||||
Total Deferred Charges
|
465,007
|
429,892
|
460,511
|
|||||||||||
Total Assets
|
$
|
1,874,330
|
$
|
1,783,082
|
$
|
1,844,227
|
||||||||
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
Dec. 31,
|
Sept. 30,
|
Dec. 31,
|
||||||||||||
(Thousands, except share amounts)
|
2011
|
2011
|
2010
|
|||||||||||
CAPITALIZATION AND LIABILITIES
|
||||||||||||||
Capitalization:
|
||||||||||||||
Common stock (70,000,000 shares authorized, 22,478,635
22,430,734, and 22,376,183 shares issued, respectively)
|
$
|
22,479
|
$
|
22,431
|
$
|
22,376
|
||||||||
Paid-in capital
|
163,944
|
163,702
|
158,976
|
|||||||||||
Retained earnings
|
405,158
|
389,298
|
376,055
|
|||||||||||
Accumulated other comprehensive loss
|
(1,911
|
)
|
(2,100
|
)
|
(8,836
|
)
|
||||||||
Total Common Stock Equity
|
589,670
|
573,331
|
548,571
|
|||||||||||
Long-term debt (less current portion) – Laclede Gas
|
339,372
|
364,357
|
364,313
|
|||||||||||
Total Capitalization
|
929,042
|
937,688
|
912,884
|
|||||||||||
Current Liabilities:
|
||||||||||||||
Notes payable
|
113,000
|
46,000
|
97,450
|
|||||||||||
Accounts payable
|
94,313
|
96,561
|
125,315
|
|||||||||||
Advance customer billings
|
11,600
|
15,230
|
9,639
|
|||||||||||
Current portion of long-term debt
|
25,000
|
—
|
—
|
|||||||||||
Wages and compensation accrued
|
12,529
|
13,650
|
12,406
|
|||||||||||
Dividends payable
|
9,626
|
9,359
|
9,195
|
|||||||||||
Customer deposits
|
10,080
|
10,048
|
11,315
|
|||||||||||
Interest accrued
|
5,519
|
8,812
|
5,756
|
|||||||||||
Taxes accrued
|
11,694
|
11,901
|
17,633
|
|||||||||||
Deferred income taxes
|
7,516
|
8,405
|
—
|
|||||||||||
Other
|
22,302
|
11,968
|
26,623
|
|||||||||||
Total Current Liabilities
|
323,179
|
231,934
|
315,332
|
|||||||||||
Deferred Credits and Other Liabilities:
|
||||||||||||||
Deferred income taxes
|
335,255
|
315,405
|
297,792
|
|||||||||||
Unamortized investment tax credits
|
3,272
|
3,326
|
3,485
|
|||||||||||
Pension and postretirement benefit costs
|
172,791
|
185,701
|
210,642
|
|||||||||||
Asset retirement obligations
|
27,904
|
27,495
|
26,224
|
|||||||||||
Regulatory liabilities
|
51,904
|
50,846
|
47,898
|
|||||||||||
Other
|
30,983
|
30,687
|
29,970
|
|||||||||||
Total Deferred Credits and Other Liabilities
|
622,109
|
613,460
|
616,011
|
|||||||||||
Commitments and Contingencies (Note 11)
|
||||||||||||||
Total Capitalization and Liabilities
|
$
|
1,874,330
|
$
|
1,783,082
|
$
|
1,844,227
|
||||||||
THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
Three Months Ended
|
|||||||||
December 31,
|
|||||||||
(Thousands)
|
2011
|
2010
|
|||||||
Operating Activities:
|
|||||||||
Net Income
|
$
|
25,174
|
$
|
23,369
|
|||||
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
|
|||||||||
Depreciation, amortization, and accretion
|
10,239
|
9,766
|
|||||||
Deferred income taxes and investment tax credits
|
7,940
|
1,078
|
|||||||
Other – net
|
(251
|
)
|
(387
|
)
|
|||||
Changes in assets and liabilities:
|
|||||||||
Accounts receivable – net
|
(72,742
|
)
|
(103,856
|
)
|
|||||
Unamortized purchased gas adjustments
|
6,306
|
5,582
|
|||||||
Deferred purchased gas costs
|
(26,415
|
)
|
30,860
|
||||||
Accounts payable
|
(224
|
)
|
31,159
|
||||||
Advance customer billings
|
(3,630
|
)
|
(7,170
|
)
|
|||||
Taxes accrued
|
(805
|
)
|
7,125
|
||||||
Natural gas stored underground
|
1,502
|
4,405
|
|||||||
Other assets and liabilities
|
2,807
|
3,866
|
|||||||
Net cash (used in) provided by operating activities
|
(50,099
|
)
|
5,797
|
||||||
Investing Activities:
|
|||||||||
Capital expenditures
|
(18,334
|
)
|
(15,627
|
)
|
|||||
Other investments
|
(280
|
)
|
1,002
|
||||||
Net cash used in investing activities
|
(18,614
|
)
|
(14,625
|
)
|
|||||
Financing Activities:
|
|||||||||
Maturity of first mortgage bonds
|
—
|
(25,000
|
)
|
||||||
Issuance (repayment) of short-term debt – net
|
67,000
|
(32,200
|
)
|
||||||
Changes in book overdrafts
|
11,842
|
13,310
|
|||||||
Issuance of common stock
|
1,253
|
591
|
|||||||
Dividends paid
|
(9,035
|
)
|
(8,766
|
)
|
|||||
Employees’ taxes paid associated with restricted shares withheld upon vesting
|
(1,165
|
)
|
(1,166
|
)
|
|||||
Excess tax benefits from stock-based compensation
|
134
|
227
|
|||||||
Other
|
(14
|
)
|
—
|
||||||
Net cash provided by (used in) financing activities
|
70,015
|
(53,004
|
)
|
||||||
Net Increase (Decrease) in Cash and Cash Equivalents
|
1,302
|
(61,832
|
)
|
||||||
Cash and Cash Equivalents at Beginning of Period
|
43,277
|
86,919
|
|||||||
Cash and Cash Equivalents at End of Period
|
$
|
44,579
|
|
$
|
25,087
|
||||
|
|||||||||
Supplemental Disclosure of Cash Paid (Refunded) During the Period for:
|
|||||||||
Interest
|
$
|
9,590
|
$
|
10,288
|
|||||
Income taxes
|
1,161
|
(132
|
)
|
||||||
THE LACLEDE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
These notes are an integral part of the accompanying unaudited 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 2011 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.
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 amounts of accrued unbilled revenues at December 31, 2011 and 2010, for the Utility, were $38.3 million and $54.6 million, respectively. The amount of accrued unbilled revenue at September 30, 2011 was $11.8 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, 2011 and 2010 were $10.2 million, and $11.3 million, respectively. Gross receipts taxes are expensed by the Utility and included in the Taxes, other than income taxes line.
NEW ACCOUNTING STANDARDS – In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU amends Accounting Standards Codification (ASC) Topic 820, “Fair Value Measurements and Disclosures,” to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The ASU does not change what items are measured at fair value, but instead makes various changes to the guidance pertaining to how fair value is measured. Additionally, the ASU sets forth additional disclosure requirements, including additional information about Level 3 fair value measurements. Many of the amendments in this ASU are changes to align the wording in U.S. GAAP with IFRS and, as such, are not intended to result in a change in the application of the guidance. The Company is required to adopt the guidance in this ASU on a prospective basis in the second quarter of fiscal year 2012. The Company does not expect the adoption of this ASU to have a material impact on its financial condition or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income,” to amend ASC Topic 220, “Comprehensive Income,” by changing certain financial statement presentation requirements. Under the amended guidance, entities may either present a single continuous statement of comprehensive income or, consistent with the Company’s current presentation, provide separate but consecutive statements (a statement of income and a statement of comprehensive income). ASU No. 2011-05 would have required that, regardless of the method chosen, reclassification adjustments from other comprehensive income to net income be presented on the face of the financial statements, displaying the effect on both net income and other comprehensive income. However, in December 2011, the FASB issued ASU No. 2011-12 to defer the effective date of this particular requirement while it reconsiders this provision of the guidance. The amendments in these ASUs do not change the items that are required to be reported in other comprehensive income and, accordingly, will not impact total net income, comprehensive income, or earnings per share.
In December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities,” to amend ASC Topic 210, “Balance Sheet,” to require additional disclosures about financial instruments and derivative instruments that have been presented on a net basis (offset) in the balance sheet. Additionally, information about financial instruments and derivative instruments that are subject to enforceable master netting arrangements or similar agreements, irrespective of whether they are presented net in the balance sheet, is required to be disclosed. The ASU
impacts disclosures only and will not require any changes to financial statement presentation. The Company will present the new disclosures retrospectively beginning in the first quarter of fiscal year 2014.
2.
|
PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
|
Pension Plans
Laclede Gas has non-contributory, defined benefit, trusteed forms of pension plans covering substantially all employees. Plan assets consist primarily of corporate and U.S. government obligations and equity market exposure achieved through derivative instruments.
Pension costs for the quarters ended December 31, 2011 and 2010 were $4.2 million and $1.6 million, respectively, including amounts charged to construction.
The net periodic pension costs include the following components:
Three Months Ended
|
||||||||
December 31,
|
||||||||
(Thousands)
|
2011
|
2010
|
||||||
Service cost – benefits earned during the period
|
$
|
2,312
|
$
|
2,388
|
||||
Interest cost on projected benefit obligation
|
4,871
|
4,705
|
||||||
Expected return on plan assets
|
(4,899
|
)
|
(4,712
|
)
|
||||
Amortization of prior service cost
|
148
|
160
|
||||||
Amortization of actuarial loss
|
2,277
|
2,557
|
||||||
Sub-total
|
4,709
|
5,098
|
||||||
Regulatory adjustment
|
(483
|
)
|
(3,533
|
)
|
||||
Net pension cost
|
$
|
4,226
|
$
|
1,565
|
Pursuant to the provisions of the Laclede Gas pension plans, pension obligations may be satisfied by lump-sum cash payments. Pursuant to a 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, 2011 and December 31, 2010.
Pursuant to a MoPSC Order, the return on plan assets is based on the market-related value of plan assets implemented prospectively over a four-year period. Gains or losses not yet includible in pension cost 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 annual allowance of $4.8 million effective August 1, 2007 and $15.5 million effective January 1, 2011. The difference between these amounts and pension expense as calculated pursuant to the above and that otherwise would be included in the Statements of Consolidated Income and Statements of Consolidated Comprehensive Income is deferred as a regulatory asset or regulatory liability.
The funding policy of Laclede Gas is to contribute an amount not less than the minimum required by government funding standards, nor more than the maximum deductible amount for federal income tax purposes. Fiscal year 2012 contributions to the pension plans through December 31, 2011 were $17.6 million to the qualified trusts and approximately $0.1 million to the non-qualified plans. Contributions to the pension plans for the remaining nine months of fiscal year 2012 are anticipated to be at least $15.7 million to the qualified trusts and $6.6 million to the non-qualified plans.
Postretirement Benefits
Laclede Gas provides certain life insurance benefits at retirement. Medical insurance is available after early retirement until age 65. The transition obligation not yet includible in postretirement benefit cost is being amortized over 20 years. Postretirement benefit costs for the quarters ended December 31, 2011 and 2010 were $2.4 million and $1.9 million, respectively, including amounts charged to construction.
Net periodic postretirement benefit costs consisted of the following components:
Three Months Ended
|
||||||||
December 31,
|
||||||||
(Thousands)
|
2011
|
2010
|
||||||
Service cost – benefits earned during the period
|
$
|
2,015
|
$
|
1,919
|
||||
Interest cost on accumulated
|
||||||||
postretirement benefit obligation
|
1,380
|
1,211
|
||||||
Expected return on plan assets
|
(991
|
)
|
(911
|
)
|
||||
Amortization of transition obligation
|
34
|
34
|
||||||
Amortization of prior service credit
|
(518
|
)
|
(582
|
)
|
||||
Amortization of actuarial loss
|
1,065
|
1,110
|
||||||
Sub-total
|
2,985
|
2,781
|
||||||
Regulatory adjustment
|
(604
|
)
|
(871
|
)
|
||||
Net postretirement benefit cost
|
$
|
2,381
|
$
|
1,910
|
Missouri state law provides for the recovery in rates of costs accrued pursuant to generally accepted accounting principles (GAAP) 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 a MoPSC Order, the return on plan assets is based on the market-related value of plan assets implemented prospectively over a four-year period. Gains and losses not yet includible in postretirement benefit cost are amortized only to the extent that such gain or 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 Utility’s postretirement benefit plans is based on an annual allowance of $7.6 million effective August 1, 2007 and $9.5 million effective January 1, 2011. The difference between these amounts and postretirement benefit cost based on the above and that otherwise would be included in the Statements of Consolidated Income and Statements of Consolidated Comprehensive Income is deferred as a regulatory asset or regulatory liability.
Laclede Gas’ funding policy is to contribute amounts to the trusts equal to the periodic benefit cost calculated pursuant to GAAP as recovered in rates. Fiscal year 2012 contributions to the postretirement plans through December 31, 2011 were approximately $0.1 million paid directly to participants from Laclede Gas’ funds. No contributions were made to the qualified trusts during the three months ended December 31, 2011. Contributions to the postretirement plans for the remaining nine months of fiscal year 2012 are anticipated to be $11.9 million to the qualified trusts and $0.3 million paid directly to participants from Laclede Gas’ funds.
STOCK-BASED COMPENSATION
|
Awards of stock-based compensation are made pursuant to The Laclede Group 2006 Equity Incentive Plan and the Restricted Stock Plan for Non-Employee Directors. Refer to Note 3 of the Consolidated Financial Statements included in the Company’s Form 10-K for the fiscal year ended September 30, 2011 for descriptions of these plans.
Restricted Stock Awards
During the three months ended December 31, 2011, the Company granted 101,963 performance-contingent restricted share units to executive officers and key employees at a weighted average grant date fair value of $36.05 per share. This number represents the maximum shares that can be earned pursuant to the terms of the awards. The share units have a performance period ending September 30, 2014. While the participants have no interim voting rights on these share units, dividends accrue during the performance period and are paid to the participants upon vesting, but are subject to forfeiture if the underlying shares units do not vest. The number of share units that will ultimately vest is dependent upon the attainment of certain levels of earnings and other strategic goals, as well as the Company’s level of total shareholder return (TSR) during the performance period relative to a comparator group of companies. This TSR provision is considered a market condition under generally accepted accounting principles.
Activity of restricted stock and restricted stock units subject to performance and/or market conditions during the three months ended December 31, 2011 is presented below:
Weighted
|
|||||||||
Average
|
|||||||||
Shares/
|
Grant Date
|
||||||||
Units
|
Fair Value
|
||||||||
Nonvested at September 30, 2011
|
259,075
|
$
|
34.29
|
||||||
Granted (maximum shares that can be earned)
|
101,963
|
$
|
36.05
|
||||||
Vested
|
(48,429
|
)
|
$
|
48.70
|
|||||
Forfeited
|
(35,071
|
)
|
$
|
45.07
|
|||||
Nonvested at December 31, 2011
|
277,538
|
$
|
31.06
|
During the three months ended December 31, 2011, the Company granted 30,075 shares of time-vested restricted stock to executive officers and key employees at a weighted average grant date fair value of $39.72 per share. These shares were awarded on December 1, 2011 and vest December 1, 2014. In the interim, participants receive full voting rights and dividends, which are not subject to forfeiture.
Time-vested restricted stock and time-vested restricted stock unit activity for the three months ended December 31, 2011 is presented below:
Weighted
|
|||||||||
Average
|
|||||||||
Shares/
|
Grant Date
|
||||||||
Units
|
Fair Value
|
||||||||
Nonvested at September 30, 2011
|
143,350
|
$
|
37.00
|
||||||
Granted
|
30,075
|
$
|
39.72
|
||||||
Vested
|
(39,700
|
)
|
$
|
42.43
|
|||||
Forfeited
|
—
|
$
|
—
|
||||||
Nonvested at December 31, 2011
|
133,725
|
$
|
36.00
|
During the three months ended December 31, 2011, 88,129 shares of restricted stock and stock units (performance-contingent and time-vested), awarded on February 14, 2008 and November 5, 2008, vested. The Company withheld 29,157 of the vested shares at a weighted average price of $39.96 per share pursuant to elections by employees to satisfy tax withholding obligations.
Stock Option Awards
Stock option activity for the three months ended December 31, 2011 is presented below:
Weighted
|
|||||||||||||||
Average
|
|||||||||||||||
Weighted
|
Remaining
|
Aggregate
|
|||||||||||||
Average
|
Contractual
|
Intrinsic
|
|||||||||||||
Stock
|
Exercise
|
Term
|
Value
|
||||||||||||
Options
|
Price
|
(Years)
|
($000)
|
||||||||||||
Outstanding at September 30, 2011
|
305,875
|
$
|
30.72
|
||||||||||||
Granted
|
—
|
$
|
—
|
||||||||||||
Exercised
|
(29,000
|
)
|
$
|
29.65
|
|||||||||||
Forfeited
|
—
|
$
|
—
|
||||||||||||
Expired
|
—
|
$
|
—
|
||||||||||||
Outstanding at December 31, 2011
|
276,875
|
$
|
30.84
|
3.1
|
$
|
2,667
|
|||||||||
Fully Vested and Expected to Vest
at December 31, 2011
|
276,875
|
$
|
30.84
|
3.1
|
$
|
2,667
|
|||||||||
Exercisable at December 31, 2011
|
276,875
|
$
|
30.84
|
3.1
|
$
|
2,667
|
The closing price of the Company’s common stock was $40.47 at December 31, 2011.
Equity Compensation Costs
The amounts of compensation cost recognized for share-based compensation arrangements for the three months ended December 31, 2011 and 2010 are presented below:
Three Months Ended
|
|||||||||
December 31,
|
|||||||||
(Thousands)
|
2011
|
2010
|
|||||||
Total equity compensation cost
|
$
|
667
|
$
|
718
|
|||||
Compensation cost capitalized
|
(138
|
)
|
(154
|
)
|
|||||
Compensation cost recognized in net income
|
529
|
564
|
|||||||
Income tax benefit recognized in net income
|
(204
|
)
|
(218
|
)
|
|||||
Compensation cost recognized in net income, net of income tax
|
$
|
325
|
$
|
346
|
As of December 31, 2011, there was $6.5 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 2.4 years.
EARNINGS PER COMMON SHARE
|
Three Months Ended
|
||||||||
December 31,
|
||||||||
(Thousands, Except Per Share Amounts)
|
2011
|
2010
|
||||||
Basic EPS:
|
||||||||
Net Income
|
$
|
25,174
|
$
|
23,369
|
||||
Less: Income allocated to participating securities
|
155
|
201
|
||||||
Net Income Available to Common Shareholders
|
$
|
25,019
|
$
|
23,168
|
||||
Weighted Average Shares Outstanding
|
22,193
|
22,041
|
||||||
Earnings Per Share of Common Stock
|
$
|
1.13
|
$
|
1.05
|
||||
Diluted EPS:
|
||||||||
Net Income
|
$
|
25,174
|
$
|
23,369
|
||||
Less: Income allocated to participating securities
|
155
|
201
|
||||||
Net Income Available to Common Shareholders
|
$
|
25,019
|
$
|
23,168
|
||||
Weighted Average Shares Outstanding
|
22,193
|
22,041
|
||||||
Dilutive Effect of Stock Options
|
||||||||
and Restricted Stock
|
70
|
79
|
||||||
Weighted Average Diluted Shares
|
22,263
|
22,120
|
||||||
Earnings Per Share of Common Stock
|
$
|
1.12
|
$
|
1.05
|
||||
Outstanding Shares Excluded from the
|
||||||||
Calculation of Diluted EPS Attributable to:
|
||||||||
Restricted stock and stock units subject to
performance and/or market conditions
|
278
|
193
|
5.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The carrying amounts and estimated fair values of financial instruments are as follows:
(Thousands)
|
Carrying
Amount
|
Fair
Value
|
||||||
As of December 31, 2011
|
||||||||
Cash and cash equivalents
|
$
|
44,579
|
$
|
44,579
|
||||
Marketable securities
|
15,916
|
15,916
|
||||||
Derivative instrument assets
|
3,630
|
3,630
|
||||||
Derivative instrument liabilities
|
48
|
48
|
||||||
Short-term debt
|
113,000
|
113,000
|
||||||
Long-term debt, including current portion
|
364,372
|
449,968
|
||||||
As of September 30, 2011
|
||||||||
Cash and cash equivalents
|
$
|
43,277
|
$
|
43,277
|
||||
Marketable securities
|
14,833
|
14,833
|
||||||
Derivative instrument assets
|
8,988
|
8,988
|
||||||
Derivative instrument liabilities
|
54
|
54
|
||||||
Short-term debt
|
46,000
|
46,000
|
||||||
Long-term debt
|
364,357
|
443,739
|
||||||
As of December 31, 2010
|
||||||||
Cash and cash equivalents
|
$
|
25,087
|
$
|
25,087
|
||||
Marketable securities
|
13,652
|
13,652
|
||||||
Derivative instrument assets
|
15,415
|
15,415
|
||||||
Derivative instrument liabilities
|
35
|
35
|
||||||
Short-term debt
|
97,450
|
97,450
|
||||||
Long-term debt
|
364,313
|
393,705
|
The carrying amounts for cash and cash equivalents and short-term debt approximate fair value due to the short maturity of these instruments. The fair values of long-term debt are estimated based on market prices for similar issues. The fair values of marketable securities, derivative instrument assets, and derivative instrument liabilities are valued as described in Note 6, Fair Value Measurements.
6.
|
FAIR VALUE MEASUREMENTS
|
The following table categorizes the assets and liabilities in the Consolidated Balance Sheets that are accounted for at fair value on a recurring basis in periods subsequent to initial recognition.
(Thousands)
|
Quoted
Prices in
Active
Markets
(Level 1)
|
Significant
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Effects of Netting and Cash Margin Receivables
/Payables
|
Total
|
||||||||||||
As of December 31, 2011
|
|||||||||||||||||
Assets
|
|||||||||||||||||
U. S. Stock/Bond Mutual Funds
|
$
|
15,916
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
15,916
|
|||||||
NYMEX/ICE natural gas contracts
|
1,957
|
1,724
|
—
|
(2,180
|
)
|
1,501
|
|||||||||||
NYMEX gasoline and heating
|
|||||||||||||||||
oil contracts
|
31
|
—
|
—
|
(31
|
)
|
—
|
|||||||||||
Natural gas commodity contracts
|
—
|
2,111
|
117
|
(99
|
)
|
2,129
|
|||||||||||
Total
|
$
|
17,904
|
$
|
3,835
|
$
|
117
|
$
|
(2,310
|
)
|
$
|
19,546
|
||||||
Liabilities
|
|||||||||||||||||
NYMEX/ICE natural gas contracts
|
$
|
27,122
|
$
|
1,400
|
$
|
—
|
$
|
(28,522
|
)
|
$
|
—
|
||||||
Natural gas commodity contracts
|
—
|
67
|
80
|
(99
|
)
|
48
|
|||||||||||
Total
|
$
|
27,122
|
$
|
1,467
|
$
|
80
|
$
|
(28,621
|
)
|
$
|
48
|
||||||
As of September 30, 2011
|
|||||||||||||||||
Assets
|
|||||||||||||||||
U. S. Stock/Bond Mutual Funds
|
$
|
14,833
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
14,833
|
|||||||
NYMEX/ICE natural gas contracts
|
4,856
|
—
|
—
|
1,975
|
6,831
|
||||||||||||
NYMEX gasoline and heating
|
|||||||||||||||||
oil contracts
|
19
|
—
|
—
|
162
|
181
|
||||||||||||
Natural gas commodity contracts
|
—
|
2,018
|
66
|
(108
|
)
|
1,976
|
|||||||||||
Total
|
$
|
19,708
|
$
|
2,018
|
$
|
66
|
$
|
2,029
|
$
|
23,821
|
|||||||
Liabilities
|
|||||||||||||||||
NYMEX/ICE natural gas contracts
|
$
|
20,928
|
$
|
—
|
$
|
—
|
$
|
(20,928
|
)
|
$
|
—
|
||||||
NYMEX gasoline and heating
|
|||||||||||||||||
oil contracts
|
124
|
—
|
—
|
(124
|
)
|
—
|
|||||||||||
Natural gas commodity contracts
|
—
|
109
|
53
|
(108
|
)
|
54
|
|||||||||||
Total
|
$
|
21,052
|
$
|
109
|
$
|
53
|
$
|
(21,160
|
)
|
$
|
54
|
||||||
(Thousands)
|
Quoted
Prices in
Active
Markets
(Level 1)
|
Significant
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Effects of Netting and Cash Margin Receivables
/Payables
|
Total
|
||||||||||||
As of December 31, 2010
|
|||||||||||||||||
Assets
|
|||||||||||||||||
U. S. Stock/Bond Mutual Funds
|
$
|
13,652
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
13,652
|
|||||||
NYMEX/ICE natural gas contracts
|
3,506
|
—
|
—
|
11,201
|
14,707
|
||||||||||||
NYMEX gasoline and heating
|
|||||||||||||||||
oil contracts
|
182
|
—
|
—
|
315
|
497
|
||||||||||||
Natural gas commodity contracts
|
—
|
125
|
140
|
(54
|
)
|
211
|
|||||||||||
Total
|
$
|
17,340
|
$
|
125
|
$
|
140
|
$
|
11,462
|
$
|
29,067
|
|||||||
Liabilities
|
|||||||||||||||||
NYMEX/ICE natural gas contracts
|
$
|
35,753
|
$
|
—
|
$
|
—
|
$
|
(35,753
|
)
|
$
|
—
|
||||||
Natural gas commodity contracts
|
—
|
25
|
64
|
(54
|
)
|
35
|
|||||||||||
Total
|
$
|
35,753
|
$
|
25
|
$
|
64
|
$
|
(35,807
|
)
|
$
|
35
|
The mutual funds included in Level 1 are valued based on exchange-quoted market prices of identical securities. Derivative instruments included in Level 1 are valued using quoted market prices on the New York Mercantile Exchange (NYMEX). Derivative instruments classified in Level 2 include physical commodity derivatives that are valued using broker or dealer quotation services whose prices are derived principally from, or are corroborated by, observable market inputs. Also included in Level 2 are certain derivative instruments that have values that are similar to, and correlate with, quoted prices for exchange-traded instruments in active markets. Derivative instruments included in Level 3 are valued using generally unobservable inputs that are based upon the best information available and reflect management’s assumptions about how market participants would price the asset or liability. The Company’s policy is to recognize transfers between the levels of the fair value hierarchy, if any, as of the beginning of the interim reporting period in which circumstances change or events occur to cause the transfer. The following is a reconciliation of the Level 3 beginning and ending net derivative balances:
Three Months Ended
|
||||||||
December 31,
|
||||||||
(Thousands)
|
2011
|
2010
|
||||||
Beginning of period
|
$
|
13
|
$
|
23
|
||||
Settlements
|
34
|
29
|
||||||
Net gains (losses) related to derivatives still held
at end of period
|
(10
|
)
|
24
|
|||||
End of period
|
$
|
37
|
$
|
76
|
The mutual funds are included in the Other investments line of the Consolidated Balance Sheets. Derivative assets and liabilities, including receivables and payables associated with cash margin requirements, are presented net in the Consolidated Balance Sheets when a legally enforceable netting agreement exists between the Company and the counterparty to a derivative contract. For additional information on derivative instruments, see Note 7, Derivative Instruments and Hedging Activities.
7.
|
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
|
Laclede Gas has a risk management policy that allows for the purchase of natural gas derivative instruments with the goal of managing price risk associated with purchasing natural gas on behalf of its customers. This policy prohibits speculation and permits the Utility to hedge up to 70% of its normal volumes purchased for up to a 36-month period. Costs and cost reductions, including carrying costs, associated with the Utility’s use of natural gas derivative instruments are allowed to be passed on to the Utility’s customers through the operation of its Purchased Gas Adjustment (PGA) Clause, through which the MoPSC allows the Utility to recover gas supply costs, subject to prudence review by the MoPSC. Accordingly, Laclede Gas does not expect any adverse earnings impact as a result of the use of these derivative instruments. The Utility does not designate these instruments as hedging instruments for financial reporting purposes because gains or losses associated with the use of these derivative instruments are deferred and recorded as regulatory assets or regulatory liabilities pursuant to ASC Topic 980, “Regulated Operations,” and, as a result, have no direct impact on the Statements of Consolidated Income. The timing of the operation of the PGA Clause may cause interim variations in short-term cash flows, because the Utility is subject to cash margin requirements associated with changes in the values of these instruments. Nevertheless, carrying costs associated with such requirements are recovered through the PGA Clause.
From time to time, Laclede Gas purchases NYMEX futures and options contracts to help stabilize operating costs associated with forecasted purchases of gasoline and diesel fuels used to power vehicles and equipment used in the course of its business. At December 31, 2011, Laclede Gas held 0.2 million gallons of gasoline futures contracts at an average price of $2.92 per gallon and 0.4 million gallons of gasoline options contracts. Most of these contracts, the longest of which extends to September 2012, are designated as cash flow hedges of forecasted transactions pursuant to ASC Topic 815, “Derivatives and Hedging.” The gains or losses on these derivative instruments are not subject to the Utility’s PGA Clause.
In the course of its business, Laclede Group’s non-regulated gas marketing subsidiary, Laclede Energy Resources, Inc. (LER), enters into commitments associated with the purchase or sale of natural gas. Many of LER’s derivative natural gas contracts are designated as normal purchases or normal sales and, as such, are excluded from the scope of ASC Topic 815 and are accounted for as executory contracts on an accrual basis. Any of LER’s derivative natural gas contracts that are not designated as normal purchases or normal sales are accounted for at fair value. At December 31, 2011, the fair values of 31.6 million MMBtu of non-exchange traded natural gas commodity contracts were reflected in the Consolidated Balance Sheet. Of these contracts, 28.2 million MMBtu will settle during fiscal year 2012, while the remaining 3.4 million MMBtu will settle during fiscal year 2013. These contracts have not been designated as hedges; therefore, changes in the fair value of these contracts are reported in earnings each period. Furthermore, LER manages the price risk associated with its fixed-priced commitments by either closely matching the offsetting physical purchase or sale of natural gas at fixed prices or through the use of NYMEX or ICE futures and swap contracts to lock in margins. At December 31, 2011, LER’s unmatched fixed-price positions were not material to Laclede Group’s financial position or results of operations. LER’s NYMEX and ICE natural gas futures and swap contracts used to lock in margins are generally designated as cash flow hedges of forecasted transactions for financial reporting purposes.
Derivative instruments designated as cash flow hedges of forecasted transactions are recognized on the Consolidated Balance Sheets at fair value and the change in the fair value of the effective portion of these hedge instruments is recorded, net of tax, in other comprehensive income (OCI). Accumulated other comprehensive income (AOCI) is a component of Total Common Stock Equity. Amounts are reclassified from AOCI into earnings when the hedged items affect net income, using the same revenue or expense category that the hedged item impacts. Based on market prices at December 31, 2011, it is expected that approximately $1.0 million of pre-tax unrealized gains will be reclassified into the Statements of Consolidated Income during the next twelve months. 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.
The Company’s exchange-traded/cleared derivative instruments consist primarily of NYMEX and ICE positions. The NYMEX is the primary national commodities exchange on which natural gas derivatives are traded. Open NYMEX/ICE natural gas futures and swap positions at December 31, 2011 were as follows:
Laclede Gas Company
|
Laclede Energy
Resources, Inc.
|
|||||||||||||
MMBtu
(millions)
|
Avg. Price
Per
MMBtu
|
MMBtu
(millions)
|
Avg. Price
Per
MMBtu
|
|||||||||||
Open short futures positions
|
||||||||||||||
Fiscal 2012
|
—
|
$
|
—
|
4.93
|
$
|
4.13
|
||||||||
Fiscal 2013
|
—
|
—
|
1.31
|
4.37
|
||||||||||
Open long futures positions
|
||||||||||||||
Fiscal 2012
|
15.41
|
$
|
4.42
|
2.82
|
$
|
4.62
|
||||||||
Fiscal 2013
|
14.34
|
4.56
|
0.76
|
4.41
|
||||||||||
Fiscal 2014
|
—
|
—
|
0.06
|
4.53
|
At December 31, 2011, Laclede Gas also had 5.2 million MMBtu of other price mitigation in place through the use of NYMEX natural gas option-based strategies.
The Effect of Derivative Instruments on the Statements of Consolidated Income and Statements of Consolidated Comprehensive Income
|
|||||||||
Three Months Ended
|
|||||||||
Location of Gain (Loss)
|
December 31,
|
||||||||
(Thousands)
|
Recorded in Income
|
2011
|
2010
|
||||||
Derivatives in Cash Flow Hedging Relationships
|
|||||||||
Effective portion of gain recognized in OCI
|
|||||||||
on derivatives:
|
|||||||||
NYMEX/ICE natural gas contracts
|
$
|
2,997
|
$
|
41
|
|||||
NYMEX gasoline and heating oil contracts
|
50
|
173
|
|||||||
Total
|
$
|
3,047
|
$
|
214
|
|||||
Effective portion of gain (loss) reclassified from
|
|||||||||
AOCI to income:
|
|||||||||
NYMEX/ICE natural gas contracts
|
Non-Regulated Gas Marketing Operating Revenues
|
$
|
6,740
|
$
|
4,834
|
||||
Non-Regulated Gas Marketing Operating Expenses
|
(3,924
|
)
|
(1,793
|
)
|
|||||
Sub-total
|
2,816
|
3,041
|
|||||||
NYMEX gasoline and heating oil contracts
|
Other Regulated Gas Distribution Operating Expenses
|
14
|
49
|
||||||
Total
|
$
|
2,830
|
$
|
3,090
|
|||||
Ineffective portion of gain (loss) on derivatives
|
|||||||||
recognized in income:
|
|||||||||
NYMEX/ICE natural gas contracts
|
Non-Regulated Gas Marketing Operating Revenues
|
$
|
19
|
$
|
9
|
||||
Non-Regulated Gas Marketing Operating Expenses
|
(106
|
)
|
(125
|
)
|
|||||
Sub-total
|
(87
|
)
|
(116
|
)
|
|||||
NYMEX gasoline and heating oil contracts
|
Other Regulated Gas Distribution Operating Expenses
|
6
|
29
|
||||||
Total
|
$
|
(81
|
)
|
$
|
(87
|
)
|
|||
Derivatives Not Designated as Hedging Instruments *
|
|||||||||
Gain (loss) recognized in income on derivatives:
|
|||||||||
Natural gas commodity contracts
|
Non-Regulated Gas Marketing Operating Revenues
|
$
|
(767
|
)
|
$
|
(442
|
)
|
||
Non-Regulated Gas Marketing Operating Expenses
|
687
|
450
|
|||||||
NYMEX/ICE natural gas contracts
|
Non-Regulated Gas Marketing Operating Revenues
|
70
|
(36
|
)
|
|||||
NYMEX gasoline and heating oil contracts
|
Other Income and (Income Deductions) - Net
|
1
|
16
|
||||||
Total
|
$
|
(9
|
)
|
$
|
(12
|
)
|
*
|
Gains and losses on Laclede Gas’ natural gas derivative instruments, which are not designated as hedging instruments for financial reporting purposes, are deferred pursuant to the Utility’s PGA Clause and initially recorded as regulatory assets or regulatory liabilities. These gains and losses are excluded from the table above because they have no direct impact on the Statements of Consolidated Income. Such amounts are recognized in the Statements of Consolidated Income as a component of Utility Natural and Propane Gas operating expenses when they are recovered through the PGA Clause and reflected in customer billings.
|
Fair Value of Derivative Instruments in the Consolidated Balance Sheet at December 31, 2011
|
|||||||||
Asset Derivatives
|
Liability Derivatives
|
||||||||
(Thousands)
|
Balance Sheet Location
|
Fair
Value
|
*
|
Balance Sheet Location
|
Fair
Value
|
*
|
|||
Derivatives designated as hedging instruments
|
|||||||||
NYMEX/ICE natural gas contracts
|
Derivative Instrument Assets
|
$
|
3,124
|
Derivative Instrument Assets
|
$
|
2,021
|
|||
Other Deferred Charges
|
220
|
Other Deferred Charges
|
148
|
||||||
NYMEX gasoline and heating oil contracts
|
Accounts Receivable – Other
|
24
|
Accounts Receivable - Other
|
—
|
|||||
Sub-total
|
3,368
|
2,169
|
|||||||
Derivatives not designated as hedging instruments
|
|||||||||
NYMEX/ICE natural gas contracts
|
Accounts Receivable - Other
|
8
|
Accounts Receivable - Other
|
26,349
|
|||||
Derivative Instrument Assets
|
3
|
Derivative Instrument Assets
|
4
|
||||||
Other Deferred Charges
|
326
|
Other Deferred Charges
|
—
|
||||||
Natural gas commodity contracts
|
Derivative Instrument Assets
|
2,229
|
Derivative Instrument Assets
|
100
|
|||||
Other Current Liabilities
|
—
|
Other Current Liabilities
|
47
|
||||||
NYMEX gasoline and heating oil contracts
|
Accounts Receivable – Other
|
7
|
Accounts Receivable - Other
|
—
|
|||||
Sub-total
|
2,573
|
26,500
|
|||||||
Total derivatives
|
$
|
5,941
|
$
|
28,669
|
|||||
Fair Value of Derivative Instruments in the Consolidated Balance Sheet at September 30, 2011
|
|||||||||
Asset Derivatives
|
Liability Derivatives
|
||||||||
(Thousands)
|
Balance Sheet Location
|
Fair
Value
|
*
|
Balance Sheet Location
|
Fair
Value
|
*
|
|||
Derivatives designated as hedging instruments
|
|||||||||
NYMEX/ICE natural gas contracts
|
Derivative Instrument Assets
|
$
|
4,395
|
Derivative Instrument Assets
|
$
|
4,105
|
|||
Other Deferred Charges
|
4
|
Other Deferred Charges
|
85
|
||||||
NYMEX gasoline and heating oil contracts
|
Derivative Instrument Assets
|
15
|
Derivative Instrument Assets
|
117
|
|||||
Sub-total
|
4,414
|
4,307
|
|||||||
Derivatives not designated as hedging instruments
|
|||||||||
NYMEX/ICE natural gas contracts
|
Derivative Instrument Assets
|
457
|
Derivative Instrument Assets
|
16,330
|
|||||
Other Deferred Charges
|
—
|
Other Deferred Charges
|
408
|
||||||
Natural gas commodity contracts
|
Derivative Instrument Assets
|
1,894
|
Derivative Instrument Assets
|
100
|
|||||
Other Deferred Charges
|
183
|
Other Deferred Charges
|
—
|
||||||
Other Current Liabilities
|
8
|
Other Current Liabilities
|
62
|
||||||
NYMEX gasoline and heating oil contracts
|
Derivative Instrument Assets
|
4
|
Derivative Instrument Assets
|
7
|
|||||
Sub-total
|
2,546
|
16,907
|
|||||||
Total derivatives
|
$
|
6,960
|
$
|
21,214
|
|||||
Fair Value of Derivative Instruments in the Consolidated Balance Sheet at December 31, 2010
|
|||||||||
Asset Derivatives
|
Liability Derivatives
|
||||||||
(Thousands)
|
Balance Sheet Location
|
Fair
Value
|
*
|
Balance Sheet Location
|
Fair
Value
|
*
|
|||
Derivatives designated as hedging instruments
|
|||||||||
NYMEX/ICE natural gas contracts
|
Derivative Instrument Assets
|
$
|
1,102
|
Derivative Instrument Assets
|
$
|
11,088
|
|||
Other Deferred Charges
|
21
|
Other Deferred Charges
|
1,240
|
||||||
NYMEX gasoline and heating oil contracts
|
Derivative Instrument Assets
|
169
|
Derivative Instrument Assets
|
—
|
|||||
Sub-total
|
1,292
|
12,328
|
|||||||
Derivatives not designated as hedging instruments
|
|||||||||
NYMEX/ICE natural gas contracts
|
Derivative Instrument Assets
|
2,289
|
Derivative Instrument Assets
|
23,180
|
|||||
Other Deferred Charges
|
94
|
Other Deferred Charges
|
245
|
||||||
Natural gas commodity contracts
|
Derivative Instrument Assets
|
201
|
Derivative Instrument Assets
|
4
|
|||||
Other Deferred Charges
|
14
|
Other Deferred Charges
|
—
|
||||||
Other Current Liabilities
|
50
|
Other Current Liabilities
|
85
|
||||||
NYMEX gasoline and heating oil contracts
|
Derivative Instrument Assets
|
13
|
Derivative Instrument Assets
|
—
|
|||||
Sub-total
|
2,661
|
23,514
|
|||||||
Total derivatives
|
$
|
3,953
|
$
|
35,842
|
*
|
The fair values of Asset Derivatives and Liability Derivatives exclude the fair value of cash margin receivables or payables with counterparties subject to netting arrangements. Fair value amounts of derivative contracts (including the fair value amounts of cash margin receivables and payables) for which there is a legal right to set off are presented net on the Consolidated Balance Sheets. As such, the gross balances presented in the table above are not indicative of the Company’s net economic exposure. Refer to Note 6, Fair Value Measurements, for information on the valuation of derivative instruments.
|
Following is a reconciliation of the amounts in the tables above to the amounts presented in the Consolidated Balance Sheets:
Dec. 31,
|
Sept. 30,
|
Dec. 31,
|
|||||||||
(Thousands)
|
2011
|
2011
|
2010
|
||||||||
Fair value of asset derivatives presented above
|
$
|
5,941
|
$
|
6,960
|
$
|
3,953
|
|||||
Fair value of cash margin receivables offset with derivatives
|
26,310
|
23,188
|
47,269
|
||||||||
Netting of assets and liabilities with the same counterparty
|
(28,621
|
)
|
(21,160
|
)
|
(35,807
|
)
|
|||||
Total
|
$
|
3,630
|
$
|
8,988
|
$
|
15,415
|
|||||
Derivative Instrument Assets, per Consolidated Balance Sheets:
|
|||||||||||
Derivative instrument assets
|
$
|
3,232
|
$
|
7,759
|
$
|
13,150
|
|||||
Other deferred charges
|
398
|
1,229
|
2,265
|
||||||||
Total
|
$
|
3,630
|
$
|
8,988
|
$
|
15,415
|
|||||
Fair value of liability derivatives presented above
|
$
|
28,669
|
$
|
21,214
|
$
|
35,842
|
|||||
Netting of assets and liabilities with the same counterparty
|
(28,621
|
)
|
(21,160
|
)
|
(35,807
|
)
|
|||||
Derivative instrument liabilities, per Consolidated Balance Sheets*
|
$
|
48
|
$
|
54
|
$
|
35
|
|||||
*
|
Included in the Other line of the Current Liabilities section
|
8.
|
CONCENTRATIONS OF CREDIT RISK
|
A significant portion of LER’s transactions are with (or are associated with) energy producers, utility companies, and pipelines. These concentrations of transactions with these counterparties have the potential to affect the Company’s overall exposure to credit risk, either positively or negatively, in that each of these three groups may be affected similarly by changes in economic, industry, or other conditions. To manage this risk, as well as credit risk from significant counterparties in these and other industries, LER has established procedures to determine the creditworthiness of its counterparties. These procedures include obtaining credit ratings and credit reports, analyzing counterparty financial statements to assess financial condition, and considering the industry environment in which the counterparty operates. This information is monitored on an ongoing basis. In some instances, LER may require credit assurances such as prepayments, letters of credit, or parental guarantees. In addition, LER may enter into netting arrangements to mitigate credit risk with counterparties in the energy industry from which LER both sells and purchases natural gas. Sales are typically made on an unsecured credit basis with payment due the month following delivery. Accounts receivable amounts are closely monitored and provisions for uncollectible amounts are accrued when losses are probable. To date, losses have not been significant. LER records accounts receivable, accounts payable, and prepayments for physical sales and purchases of natural gas on a gross basis. The amount included in accounts receivable attributable to energy producers and their marketing affiliates amounted to $14.8 million, or 30.9% of LER’s total accounts receivable at December 31, 2011. Net receivable amounts from these customers on the same date, reflecting netting arrangements, were $11.5 million. Accounts receivable attributable to utility companies and their marketing affiliates comprised $20.0 million of LER’s total accounts receivable, or 41.9% at December 31, 2011, while net receivable amounts from these customers, reflecting netting arrangements, were $17.0 million. LER also has concentrations of credit risk with certain individually significant counterparties. At December 31, 2011, the amounts included in accounts receivable from LER’s five largest counterparties (in terms of net accounts receivable exposure), were $17.0 million, or 35.4% of LER’s total accounts receivable. These five counterparties are either investment-grade rated or owned by investment-grade rated companies. Net receivable amounts from these customers on the same date, reflecting netting arrangements, were $14.6 million. Additionally, LER has concentrations of credit risk with pipeline companies associated with its natural gas receivable amounts.
9.
|
OTHER INCOME AND (INCOME DEDUCTIONS) – NET
|
Three Months Ended
|
||||||||
December 31,
|
||||||||
(Thousands)
|
2011
|
2010
|
||||||
Interest income
|
$
|
348
|
$
|
448
|
||||
Net investment gain
|
1,030
|
737
|
||||||
Other income
|
—
|
13
|
||||||
Other income deductions
|
561
|
647
|
||||||
Other Income and (Income Deductions) – Net
|
$
|
1,939
|
$
|
1,845
|
10.
|
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 2.2 million, including the City of St. Louis and parts of ten counties in eastern Missouri. 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, and LER Storage Services, Inc., which was formed in October 2011 to utilize natural gas storage contracts for providing natural gas sales, but was not yet operational as of December 31, 2011. Other includes Laclede Pipeline Company’s transportation of liquid propane regulated by the Federal Energy Regulatory Commission (FERC) as well as non-regulated activities, including real estate development, the compression of natural gas, and financial investments in other enterprises. These operations are conducted through five subsidiaries. Other also includes Laclede Gas’ non-regulated business activities, which are comprised of its non-regulated propane sales transactions and its propane storage and related services. Accounting policies are described in Note 1. Certain intersegment revenues with Laclede Gas are not eliminated in accordance with the provisions of ASC Topic 980. Those types of transactions include sales of natural gas from Laclede Gas to LER, sales of natural gas from LER to Laclede Gas, 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 Gas Marketing, and Other columns, respectively.
Management evaluates the performance of the operating segments based on the computation of net economic earnings. Net economic earnings exclude from reported net income the after-tax impacts of net unrealized gains and losses and other timing differences associated with energy-related transactions. Net economic earnings will also exclude, if applicable, the after-tax impact of costs related to acquisition, divestiture, and restructuring activities.
Non-
|
||||||||||||||||
Regulated
|
Regulated
|
|||||||||||||||
Gas
|
Gas
|
|||||||||||||||
(Thousands)
|
Distribution
|
Marketing
|
Other
|
Eliminations
|
Consolidated
|
|||||||||||
Three Months Ended
|
||||||||||||||||
December 31, 2011
|
||||||||||||||||
Revenues from external
|
||||||||||||||||
customers
|
$
|
250,899
|
$
|
151,977
|
$
|
1,163
|
$
|
—
|
$
|
404,039
|
||||||
Intersegment revenues
|
3
|
6,611
|
260
|
—
|
6,874
|
|||||||||||
Total Operating Revenues
|
250,902
|
158,588
|
1,423
|
—
|
410,913
|
|||||||||||
Net Economic Earnings
|
21,079
|
3,439
|
375
|
—
|
24,893
|
|||||||||||
Total assets
|
1,753,859
|
167,879
|
137,768
|
(185,176
|
)
|
1,874,330
|
||||||||||
Three Months Ended
|
||||||||||||||||
December 31, 2010
|
||||||||||||||||
Revenues from external
|
||||||||||||||||
customers
|
$
|
276,505
|
$
|
157,701
|
$
|
91
|
$
|
—
|
$
|
434,297
|
||||||
Intersegment revenues
|
938
|
8,707
|
260
|
—
|
9,905
|
|||||||||||
Total Operating Revenues
|
277,443
|
166,408
|
351
|
—
|
444,202
|
|||||||||||
Net Economic Earnings
|
21,434
|
1,946
|
8
|
—
|
23,388
|
|||||||||||
Total assets
|
1,734,389
|
166,394
|
121,235
|
(177,791
|
)
|
1,844,227
|
Reconciliation of Consolidated Net Economic Earnings to Consolidated Net Income
|
||||||||
Three Months Ended
|
||||||||
December 31,
|
||||||||
(Thousands)
|
2011
|
2010
|
||||||
Total Net Economic Earnings above
|
$
|
24,893
|
$
|
23,388
|
||||
Add: Unrealized gain (loss) on energy-related
|
||||||||
derivative contracts, net of tax
|
281
|
(19
|
)
|
|||||
Net Income
|
$
|
25,174
|
$
|
23,369
|
COMMITMENTS AND CONTINGENCIES
|
Commitments
Laclede Gas and LER have entered into various contracts, expiring on dates through 2017, for the storage, transportation, and supply of natural gas. Minimum payments required under the contracts in place at December 31, 2011 are estimated at approximately $496 million. Additional contracts are generally entered into prior to or during the heating season. Laclede Gas recovers its costs from customers in accordance with the PGA Clause.
During fiscal 2011, the Utility initiated a multi-year project to replace its existing work management, financial, and supply chain software applications to enhance its technology, customer service, and business processes. At December 31, 2011, the Company was contractually committed to costs of approximately $8 million related to this project, with additional expenditures to be incurred throughout the project’s life.
Leases and Guarantees
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 into 2015. At December 31, 2011, the maximum guarantees under these leases are $0.9 million. However, the Utility believes it is unlikely that it will be subject to the maximum payment amount because it estimates that the residual value of the leased vehicles will be adequate to satisfy most of the guaranteed amounts. At December 31, 2011, the carrying value of the liability recognized for these guarantees was $0.2 million.
Laclede Group had guarantees totaling $96.3 million for performance and payment of certain gas supply transactions by LER, as of December 31, 2011. Since that date, total guarantees issued by Laclede Group on behalf of LER increased by $1.0 million, bringing the total to $97.3 million in guarantees outstanding at January 27, 2012. No amounts have been recorded for these guarantees in the financial statements. As of December 31, 2011, management believes the probability is low that Laclede Group will be required to make payments under these guarantees.
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.
Similar to other natural gas utility companies, Laclede Gas faces the risk of incurring environmental liabilities. In the natural gas industry, these are typically associated with sites formerly owned or operated by gas distribution companies like Laclede Gas and/or its predecessor companies at which manufactured gas operations took place. At this time, Laclede Gas has identified three former manufactured gas plant (MGP) sites where costs have been incurred and claims have been asserted: one in Shrewsbury, Missouri and two in the City of St. Louis, Missouri.
With regard to the former MGP site located in Shrewsbury, Missouri, Laclede Gas and state and federal environmental regulators agreed upon certain remedial actions to a portion of the site in a 1999 Administrative Order on Consent (AOC), which actions have been completed. On September 22, 2008, EPA Region VII issued a letter of Termination and Satisfaction terminating the AOC. However, if after this termination of the AOC, regulators require additional remedial actions, or additional claims are asserted, Laclede Gas may incur additional costs.
One of the sites located in the City of St. Louis is currently owned by a development agency of the City, which, together with other City development agencies, has selected a developer to redevelop the site. In conjunction with this redevelopment effort, Laclede Gas and another former owner of the site entered into an agreement (Remediation Agreement) with the City development agencies, the developer, and an environmental consultant that obligates one of the City agencies and the environmental consultant to remediate the site and obtain a No Further Action letter from the Missouri Department of Natural Resources. The Remediation Agreement also provides for a release of Laclede Gas and the other former site owner from certain liabilities related to the past and current environmental condition of the site and requires the developer and the environmental consultant to maintain certain insurance coverages, including remediation cost containment, premises pollution liability, and professional liability. The operative provisions of the Remediation Agreement were triggered on December 20, 2010, on which date Laclede Gas and the other former site owner, as full consideration under the Remediation Agreement, paid a small percentage of the cost of remediation of the site. The amount paid by Laclede Gas, which is its only monetary obligation under the Remediation Agreement, did not materially impact the financial condition, results of operations, or cash flows of the Company.
Laclede Gas has not owned the other site located in the City of St. Louis for many years. In a letter dated June 29, 2011, the Attorney General for the State of Missouri informed Laclede Gas that the Missouri Department of Natural Resources had completed an investigation of the site. The Attorney General requested that Laclede Gas participate in the follow up investigations of the site. In a letter dated January 10, 2012, the Company stated that it would participate in future environmental response activities at the site assuming that other potentially responsible parties are willing to contribute to such efforts in a meaningful and equitable fashion.
To date, amounts required for remediation at these sites have not been material. However, the amount of costs relative to future remedial actions at these and 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 MGP sites. While some of the insurers have denied coverage and reserved their rights, Laclede Gas continues to discuss potential reimbursements with them. In 2005, the Utility’s outside consultant completed an analysis of the MGP sites to determine cost estimates for a one-time contractual transfer of risk from each of the Utility’s insurers 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 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, the successful completion of remediation efforts required by the Remediation Agreement described above, and any insurance recoveries. Costs associated with environmental remediation activities are accrued when such costs are probable and reasonably estimable.
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, any potential liabilities that may arise 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.
On December 28, 2006, the MoPSC Staff proposed a disallowance of $7.2 million related to Laclede Gas’ recovery of its purchased gas costs applicable to fiscal year 2005, which the Staff later reduced to a $1.7 million disallowance pertaining to Laclede Gas’ purchase of gas from a marketing affiliate, LER. The MoPSC Staff has also proposed disallowances of $2.8 million and $1.5 million of gas costs relating to Laclede Gas purchases of gas supply from LER for fiscal years 2006 and 2007, respectively. The MoPSC Staff proposed a number of non-monetary recommendations, based on its review of gas costs for fiscal years 2008 and 2009. Laclede Gas believes that the proposed disallowances lack merit and is vigorously opposing these adjustments in proceedings before the MoPSC. As such, no amount has been recorded in the financial statements for these proposed disallowances.
In connection with the affiliate transactions mentioned above, on July 7, 2010, the MoPSC Staff filed a complaint against Laclede Gas alleging that, by stating that it was not in possession of proprietary LER documents, Laclede Gas violated the MoPSC Order authorizing the holding company structure (2001 Order). Laclede Gas counterclaimed that the Staff failed to adhere to the pricing provisions of the MoPSC’s affiliate transaction rules and Laclede Gas’ Cost Allocation Manual. By orders dated November 3, 2010 and February 4, 2011, respectively, the MoPSC dismissed Laclede’s counterclaim and granted summary judgment to Staff, finding that Laclede Gas violated the terms of the 2001 Order and authorizing its General Counsel to seek penalties in court against Laclede Gas. On March 30, 2011, Laclede Gas sought review of the February 4 Order with the Missouri Cole County Circuit Court. On May 19, 2011, the Commission’s General Counsel filed a petition with the Cole County Circuit Court seeking penalties in connection with the Commission’s February 4 Order. On July 7, 2011, the Circuit Court Judge signed an agreed Order holding the penalty case in abeyance while the February 4 Order is appealed. On December 21, 2011, the Circuit Court reversed both the MoPSC’s November 3, 2010 Order and its February 4, 2011 Order.
Subsequent to the July 7, 2010 complaint, the MoPSC Staff filed a related complaint on October 6, 2010 against Laclede Gas, LER, and Laclede Group, alleging that the Utility has failed to comply with the MoPSC’s affiliate transaction rules. LER and Laclede Group both filed motions to be dismissed from the proceeding, which were granted by the Commission on December 22, 2010. On January 26, 2011, the Commission also dismissed certain counts of the complaint against Laclede Gas. The remaining counts and a counterclaim against the Staff, filed by Laclede Gas, are still pending before the Commission. Laclede Gas believes that the complaint lacks merit and is vigorously opposing it.
On June 29, 2010, the Office of Federal Contract Compliance Programs issued a Notice of Violations to Laclede Gas alleging lapses in certain employment selection procedures during a two-year period ending in February 2006. The Company believes that the allegations lack merit and is vigorously defending its position. Management, after discussion with counsel, believes that the final outcome of these matters will not have a material effect on the consolidated financial position and results of operations of the Company.
As discussed in Note 7, Derivative Instruments and Hedging Activities, Laclede Gas and LER enter into NYMEX and ICE exchange-traded/cleared derivative instruments. Previously, these instruments were held in accounts at MF Global, Inc. On October 31, 2011, affiliated entities of MF Global filed a Chapter 11 petition at the U.S. Bankruptcy Court in the Southern District of New York. Subsequently, the court-appointed bankruptcy trustee transferred all of the open positions and a significant portion of the margin deposits of Laclede Gas and LER to a new brokerage firm. As of January 26, 2012, Laclede Gas and LER had $1.5 million and $0.5 million, respectively, on deposit with MF Global in customer-segregated accounts that remain unavailable pending final resolution by the bankruptcy trustee. While the Company’s total exposure at this time is not considered material, management is unable to predict when, or to what extent, these remaining funds will be returned.
Laclede Group is involved in other litigation, claims, and investigations arising in the normal course of business. Management, after discussion with counsel, believes that the final outcome will not have a material effect on the consolidated financial position, results of operations, or cash flows of the Company.
Item 1A. Risk Factors
The following paragraphs should be read in conjunction with the risk factors included in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended September 30, 2011.
RISKS THAT RELATE TO THE NON-REGULATED GAS MARKETING SEGMENT
Increased competition, regional fluctuations in natural gas commodity prices, and pipeline infrastructure projects may adversely impact LER’s future profitability.
Competition in the marketplace and regional fluctuations in natural gas commodity prices have a direct impact on LER’s business. Changing market conditions, the narrowing of regional and seasonal price differentials, and limited future price volatility may adversely impact LER’s sales margins or affect LER’s ability to procure gas supplies and/or to serve certain customers, which may reduce sales profitability and/or increase certain credit requirements caused by reductions in netting capability. Although the FERC regulates the interstate transportation of natural gas and establishes the general terms and conditions under which LER may use interstate gas pipeline capacity to purchase and transport natural gas, LER must occasionally renegotiate its transportation agreements with a concentrated group of pipeline companies. Renegotiated terms of new agreements may impact LER’s future profitability. Profitability may also be adversely impacted if pipeline capacity or future storage capacity secured by LER is not fully utilized and/or its costs are not fully recovered.
Risk management policies, including the use of derivative instruments, may not fully protect LER’s sales and results of operations from volatility and may result in financial losses.
In the course of its business, LER enters into contracts to purchase and sell natural gas at fixed prices and index-based prices. Commodity price risk associated with these contracts has the potential to impact earnings and cash flows. To minimize this risk, LER has a risk management policy that provides for daily monitoring of a number of business measures, including fixed price commitments. LER currently manages the commodity price risk associated with fixed-price commitments for the purchase or sale of natural gas by either closely matching the offsetting physical purchase or sale of natural gas at fixed prices or through the use of natural gas futures and swap contracts traded on or cleared through the NYMEX and ICE to lock in margins. These exchange-traded/cleared contracts are generally designated as cash flow hedges of forecasted transactions. However, market conditions and regional price changes may cause ineffective portions of matched positions to result in financial losses. Additionally, to the extent that LER’s natural gas commitments do not qualify for the normal purchases or normal sales designation (or the designation is not elected), the contracts are recorded as derivatives at fair value each period. Accordingly, the associated gains and losses are reported directly in earnings and may cause volatility in results of operations. Depending on the circumstances, gains or losses (realized and unrealized) on these contracts may be required to be presented on a net basis (instead of a gross basis) in the statements of consolidated income. Such presentation could result in reductions to and/or volatility in the Company’s operating revenues.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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:
•
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weather conditions and catastrophic events, particularly severe weather in the natural gas producing areas of the country;
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|
•
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volatility in gas prices, particularly sudden and sustained changes in natural gas prices, including the related impact on margin deposits associated with the use of natural gas derivative instruments;
|
|
•
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the impact of changes and volatility in natural gas prices on our competitive position in relation to suppliers of alternative heating sources, such as electricity;
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•
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changes in gas supply and pipeline availability, including decisions by natural gas producers to reduce production or shut in producing natural gas wells as well as other changes that impact supply for and access to the markets in which our subsidiaries transact business;
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•
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legislative, regulatory and judicial mandates and decisions, some of which may be retroactive, including those affecting
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|
•
|
allowed rates of return
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|
•
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incentive regulation
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|
•
|
industry structure
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|
•
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purchased gas adjustment provisions
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|
•
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rate design structure and implementation
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|
•
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regulatory assets
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|
•
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non-regulated and affiliate transactions
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|
•
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franchise renewals
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|
•
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environmental or safety matters, including the potential impact of legislative and regulatory actions related to climate change and pipeline safety
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•
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taxes
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•
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pension and other postretirement benefit liabilities and funding obligations
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•
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accounting standards, including the effect of potential changes relative to adoption of or convergence with international accounting standards;
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•
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the results of litigation;
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•
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retention of, ability to attract, ability to collect from, and conservation efforts of, customers;
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•
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capital and energy commodity market conditions, including the ability to obtain funds with reasonable terms for necessary capital expenditures and general operations and the terms and conditions imposed for obtaining sufficient gas supply;
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|
•
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discovery of material weakness in internal controls; and
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•
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employee workforce issues.
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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.
RESULTS OF OPERATIONS
Overview
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 the City of St. Louis and parts of ten 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 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. Due to the seasonal nature of the business of Laclede Gas, Laclede Group’s earnings are typically concentrated in the November through April period, which generally corresponds with the heating season.
Laclede Energy Resources, Inc. (LER) is engaged in the marketing of natural gas and related activities on a non-regulated basis. 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. LER’s operations and customer base are more subject to fluctuations in market conditions than the Utility.
In October 2011, LER formed a wholly owned subsidiary, LER Storage Services, Inc. (LSS), to utilize natural gas storage contracts for providing natural gas sales, but was not yet operational as of December 31, 2011. Effective January 1, 2012, LSS contracted for 1 Bcf of natural gas storage capacity for a thirteen month period through January 2013, and purchased 1 Bcf of natural gas in place during January 2012 for $3.0 million. Further, and separately, LSS has entered into a precedent agreement with a natural gas storage facility operator that will provide 1 Bcf of natural gas storage subject to the facility’s successful completion of an expansion program in early to mid-2013.
Other subsidiaries provide less than 10% of consolidated revenues.
On January 26, 2012, Laclede Group’s Board of Directors named Mr. William E. Nasser as Chairman of the Board and appointed Ms. Suzanne Sitherwood, currently President, as Chief Executive Officer (CEO). Ms. Sitherwood will also serve as Laclede Gas Company’s Chairman, President and CEO. These appointments are all effective February 1, 2012, concurrent with Mr. Douglas H. Yaeger’s retirement.
Based on the nature of the business of the Company and its subsidiaries, as well as current economic conditions, management focuses on the following key variables in evaluating the financial condition and results of operations and managing the business:
Regulated Gas Distribution Segment:
•
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the Utility’s ability to recover the costs of purchasing and distributing natural gas from its customers;
|
•
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the impact of weather and other factors, such as customer conservation, on revenues and expenses;
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•
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changes in the regulatory environment at the federal, state, and local levels, as well as decisions by regulators, that impact the Utility’s ability to earn its authorized rate of return;
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•
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the Utility’s ability to access credit markets and maintain working capital sufficient to meet operating requirements; and,
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•
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the effect of natural gas price volatility on the business.
|
Non-Regulated Gas Marketing Segment:
•
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the risks of competition;
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•
|
regional and seasonal fluctuations in natural gas prices;
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•
|
new national pipeline infrastructure projects;
|
•
|
the ability to procure firm transportation and storage services at reasonable rates;
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•
|
credit and/or capital market access;
|
•
|
counterparty risks;
|
•
|
the effect of natural gas price volatility on the business; and,
|
•
|
pursuing additional growth.
|
Further information regarding how management seeks to manage these key variables is discussed below.
|
Laclede Gas continues to provide reliable natural gas service at a reasonable cost, while maintaining and building a secure and dependable infrastructure. The Utility’s strategy focuses on improving performance and mitigating the impact of weather fluctuations on Laclede Gas’ customers while improving the ability to recover its authorized distribution costs and return. The Utility’s distribution costs are the essential, primarily fixed, expenditures it must incur to operate and maintain more than 16,000 miles of mains and services comprising its natural gas distribution system and related storage facilities. The Utility’s distribution costs include wages and employee benefit costs, depreciation and maintenance expenses, and other regulated utility operating expenses, excluding natural and propane gas expense. Distribution costs are considered in the ratemaking process, and recovery of these types of costs is included in revenues generated through the Utility’s tariff rates, as approved by the MoPSC. The settlement of the Utility’s rate case in 2010 retained the Utility’s weather mitigation rate design that better ensures the recovery of its fixed costs and margins despite variations in sales volumes due to the impacts of weather and other factors that affect customer usage.
The Utility’s income from off-system sales and capacity release remains subject to fluctuations in market conditions. The Utility is allowed to retain 15% to 25% of the first $6 million in annual income earned (depending on the level of income earned) and 30% of income exceeding $6 million annually. 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. See the Regulatory and Other Matters section on page 36 of this report for additional information on regulatory issues relative to the Utility.
Laclede Gas works actively to reduce the impact of wholesale natural gas price volatility on its costs by strategically structuring its natural gas supply portfolio to increase its gas supply availability and pricing alternatives and through the use of derivative instruments to protect its customers from significant changes in the commodity price of natural gas. Nevertheless, the overall cost of purchased gas remains subject to fluctuations in market conditions. The Utility’s Purchased Gas Adjustment (PGA) Clause allows Laclede Gas to flow through to customers, subject to prudence review by the MoPSC, the cost of purchased gas supplies, including costs, cost reductions, and related carrying costs associated with the use of derivative 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. The price of natural gas supplies and other economic conditions may 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.
The Utility relies on both short-term credit and long-term capital markets, as well as cash flows from operations, to satisfy its seasonal cash requirements and fund its cost of capital expenditures. Laclede Gas’ ability to issue commercial paper supported by lines of credit, to issue long-term bonds, or to obtain new lines of credit is dependent on current conditions in the credit and capital markets. Management focuses on maintaining a strong balance sheet and believes it currently has adequate access to credit and capital markets and will have sufficient capital resources to meet its foreseeable obligations. See the Liquidity and Capital Resources section on page 38 for additional information.
LER provides both on-system Utility transportation customers and customers outside of Laclede Gas’ traditional service area with another choice in non-regulated natural gas suppliers. LER utilizes its natural gas supply agreements, transportation agreements, storage agreements, and other executory contracts to support a variety of services to its customers at competitive prices. It closely monitors and manages the natural gas commodity price risk associated with providing such services to its customers through the use of exchange-traded/cleared derivative instruments and other contractual arrangements. LER is committed to managing commodity price risk, while it seeks to expand the services that it now provides. Nevertheless, income from LER’s operations is more subject to fluctuations in market conditions than the Utility’s operations. LER’s business is directly impacted by the effects of competition in the marketplace, the impact of new pipeline infrastructure, and surplus natural gas supplies on regional natural gas commodity prices.
In the course of its business, LER enters into commitments associated with the purchase or sale of natural gas. Many of LER’s physical purchase and sale transactions are recognized in earnings when the natural gas is delivered. However, generally accepted accounting principles (GAAP) require that some of LER’s energy-related transactions be accounted for as derivatives, with the changes in their fair value (representing unrealized gains or losses) recorded in earnings in periods prior to physical delivery. Because related transactions of a purchase and sale strategy may be accounted for differently, there may be timing differences in the recognition of earnings under GAAP and economic earnings realized upon settlement. The Company reports both GAAP and net economic earnings, as discussed below.
In addition to its operating cash flows, LER relies on Laclede Group’s parental guarantees to secure its purchase and sales obligations of natural gas. LER also has access to Laclede Group’s liquidity resources. A large portion of LER’s receivables are from customers in the energy industry. LER also enters into netting arrangements with many of its energy counterparties to reduce overall credit and collateral exposure. Although LER’s uncollectible amounts are closely monitored and have not been significant, increases in uncollectible amounts from customers are possible and could adversely affect LER’s liquidity and results.
LER carefully monitors the creditworthiness of counterparties to its transactions. LER performs in-house credit reviews of potential customers and may require credit assurances such as prepayments, letters of credit, or parental guarantees when appropriate. Credit limits for customers are established and monitored.
EARNINGS
The Laclede Group reports net income and earnings per share determined in accordance with GAAP. Management also uses the non-GAAP measures of net economic earnings and net economic earnings per share when internally evaluating results of operations. These non-GAAP measures exclude from net income the after-tax impacts of fair value accounting adjustments and other timing adjustments associated with energy-related transactions. These adjustments include timing differences where the accounting treatment differs from the economic substance of the underlying transaction, including the following:
•
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Net unrealized gains and losses on energy-related derivatives that are required by GAAP fair value accounting associated with current changes in the fair value of financial and physical transactions prior to their completion and settlement. These unrealized gains and losses result primarily from two sources:
|
|
1)
|
changes in the fair values of physical and/or financial derivatives prior to the period of settlement; and,
|
|
2)
|
ineffective portions of accounting hedges, required to be recorded in earnings prior to settlement, due to differences in commodity price changes between the locations of the forecasted physical purchase or sale transactions and the locations of the underlying hedge instruments;
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|
•
|
Lower of cost or market adjustments to the carrying value of commodity inventories resulting when the market price of the commodity falls below its original cost, to the extent that those commodities are economically hedged; and,
|
|
•
|
Realized gains and losses resulting from the settlement of economic hedges prior to the sale of the physical commodity.
|
These adjustments eliminate the impact of timing differences, including the impact of current changes in the fair value of financial and physical transactions prior to their completion and settlement. Unrealized gains or losses are recorded in each period until being replaced with the actual gains or losses realized when the associated physical transaction(s) occur. While management uses these non-GAAP measures to evaluate both Laclede Gas and LER, the net effect of adjustments on the Utility’s earnings is minimal because gains or losses on its natural gas derivative instruments are deferred pursuant to its PGA Clause, as authorized by the MoPSC.
Management believes that excluding the earnings volatility caused by recognizing changes in fair value prior to settlement and other timing differences associated with related purchase and sale transactions provides a useful representation of the economic effects of only the actual settled transactions and their effects on results of operations. In addition, management will exclude the effect of costs related to unique acquisition, divestiture, and restructuring activities, if any, when evaluating on-going performance, and therefore will exclude these costs from net economic earnings. These internal non-GAAP operating metrics should not be considered as an alternative to, or more meaningful
than, GAAP measures such as net income. Reconciliations of net economic earnings and net economic earnings per share to the Company’s most directly comparable GAAP measures are provided below.
(Millions, except per share amounts)
|
Net Economic Earnings
(Non-GAAP)
|
Add: Unrealized gain (loss) on energy-related derivative contracts*
|
Net Income
(GAAP)
|
||||||||||
Quarter Ended December 31, 2011
|
|||||||||||||
Regulated Gas Distribution
|
$
|
21.1
|
$
|
—
|
$
|
21.1
|
|||||||
Non-Regulated Gas Marketing
|
3.4
|
0.3
|
3.7
|
||||||||||
Other
|
0.4
|
—
|
0.4
|
||||||||||
Total
|
$
|
24.9
|
$
|
0.3
|
$
|
25.2
|
|||||||
Per Share Amounts **
|
$
|
1.11
|
$
|
0.01
|
$
|
1.12
|
|||||||
Quarter Ended December 31, 2010
|
|||||||||||||
Regulated Gas Distribution
|
$
|
21.5
|
$
|
—
|
$
|
21.5
|
|||||||
Non-Regulated Gas Marketing
|
1.9
|
—
|
1.9
|
||||||||||
Other
|
—
|
—
|
—
|
||||||||||
Total
|
$
|
23.4
|
$
|
—
|
$
|
23.4
|
|||||||
Per Share Amounts **
|
$
|
1.05
|
$
|
—
|
$
|
1.05
|
|||||||
*
|
Amounts presented net of income taxes. Income taxes are calculated by applying federal, state, and local income tax rates applicable to ordinary income to the amounts of unrealized gain (loss) on energy-related derivative contracts. For the quarter ended December 31, 2011, the amount of income tax expense included in the reconciling item above is $0.2 million.
|
||||||||||||
**
|
Net economic earnings per share is calculated by replacing consolidated net income with consolidated net economic earnings in the GAAP diluted earnings per share calculation.
|
Laclede Group’s net income was $25.2 million for the quarter ended December 31, 2011, compared with $23.4 million for the quarter ended December 31, 2010. Basic and diluted earnings per share for the quarter ended December 31, 2011 were $1.13 and $1.12, respectively, compared with basic and diluted earnings per share of $1.05 for the quarter ended December 31, 2010. Earnings increased compared to last year primarily due to improved results reported by Laclede Group’s Non-Regulated Gas Marketing Segment. Net economic earnings were $24.9 million for the quarter ended December 31, 2011 compared with $23.4 million for the same quarter last year. Net economic earnings per share were $1.11 for the quarter ended December 31, 2011 compared with $1.05 for the quarter ended December 31, 2010.
Both Regulated Gas Distribution net income and net economic earnings decreased by $0.4 million for the quarter ended December 31, 2011, compared with the quarter ended December 31, 2010. Quantified on a pre-tax basis, the decrease was primarily attributable to increases in pension expenses totaling $1.8 million, partially offset by higher Infrastructure System Replacement Surcharge (ISRS) revenues totaling $1.2 million.
The Non-Regulated Gas Marketing segment reported GAAP earnings totaling $3.7 million, an increase of $1.8 million compared with the same quarter last year. Net economic earnings for the three months ended December 31, 2011 increased $1.5 million from the three months ended December 31, 2010. These increases were primarily due to higher margins attributable to reduced transportation costs resulting from the renegotiation of contracts that were renewed during fiscal year 2011.
Regulated Gas Distribution Operating Revenues
Laclede Gas passes on to Utility customers (subject to prudence review by the MoPSC) 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 Gas Distribution Operating Revenues for the quarter ended December 31, 2011 were $250.9 million, or $26.5 million less than the same period last year. Temperatures experienced in the Utility’s service area during the quarter were 20.8% warmer than the same quarter last year and 22.1% warmer than normal. Total system therms sold and transported were 238.6 million for the quarter ended December 31, 2011 compared with 285.9 million for the same period last year. Total off-system therms sold and transported were 98.2 million for the quarter ended December 31, 2011 compared with 53.7 million for the same period last year. The decrease in Regulated Gas Distribution Operating Revenues was primarily attributable to the following factors:
(Millions)
|
||||
Lower system sales volumes and other variations
|
$
|
(29.7
|
)
|
|
Higher off-system sales volumes (reflecting more favorable market conditions as described in greater
detail in the Results of Operations)
|
17.7
|
|||
Lower wholesale gas costs passed on to Utility customers (subject to prudence review by the MoPSC)
|
(10.0
|
)
|
||
Lower prices charged for off-system sales
|
(5.7
|
)
|
||
Higher ISRS revenues
|
1.2
|
|||
Total Variation
|
$
|
(26.5
|
)
|
Regulated Gas Distribution Operating Expenses
Regulated Gas Distribution Operating Expenses for the quarter ended December 31, 2011 decreased $25.4 million from the same quarter last year. Natural and propane gas expense decreased $26.6 million, or 15.4%, from last year’s level, primarily attributable to decreased system volumes purchased for sendout and lower rates charged by our suppliers, partially offset by higher off-system gas expense. Other operation and maintenance expenses increased $1.9 million, or 4.6%, primarily due to increased pension and compensation expenses, partially offset by decreased maintenance charges. Taxes, other than income taxes, decreased $1.1 million, or 6.9%, primarily due to decreased gross receipts taxes (attributable to the decreased revenues).
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-Regulated Gas Marketing Operating Revenues decreased $7.8 million primarily due to lower per unit gas prices charged by LER. LER’s sales volumes during the quarter ended December 31, 2011 were essentially unchanged from the same period last year. The decrease in Non-Regulated Gas Marketing Operating Expenses, totaling $10.8 million, was primarily associated with lower prices charged by suppliers and reduced transportation expenses.
Other Income and (Income Deductions) - Net
Other Income and (Income Deductions) – Net increased $0.1 million primarily due to higher net investment gains, largely offset by a decrease in income associated with carrying costs applied to under-recoveries of gas costs, and other minor variations. Carrying costs on under-recoveries of gas costs are recovered through the Utility’s PGA Clause.
Interest Charges
The $0.4 million decrease in interest charges was primarily due to lower interest on long-term debt, attributable to the November 2010 maturity of $25 million principal amount of 6 1/2 % first mortgage bonds, and lower interest on short-term debt. Average short-term interest rates were 0.3% for the quarter ended December 31, 2011 compared with 0.4% for the quarter ended December 31, 2010. Average short-term borrowings were $81.2 million for the quarter ended December 31, 2011 compared with $127.9 million for the quarter ended December 31, 2010.
Income Taxes
The $1.0 million increase in income taxes was primarily due to higher pre-tax income.
REGULATORY AND OTHER MATTERS
On December 28, 2006, the MoPSC Staff proposed a disallowance of $7.2 million related to Laclede Gas’ recovery of its purchased gas costs applicable to fiscal year 2005, which the Staff later reduced to a $1.7 million disallowance pertaining to Laclede Gas’ purchase of gas from a marketing affiliate, LER. The MoPSC Staff has also proposed disallowances of $2.8 million and $1.5 million of gas costs relating to Laclede Gas purchases of gas supply from LER for fiscal years 2006 and 2007, respectively. The MoPSC Staff proposed a number of non-monetary recommendations, based on its review of gas costs for fiscal years 2008 and 2009. Laclede Gas believes that the proposed disallowances lack merit and is vigorously opposing these adjustments in proceedings before the MoPSC. As such, no amount has been recorded in the financial statements for these proposed disallowances.
In connection with the affiliate transactions mentioned above, on July 7, 2010, the MoPSC Staff filed a complaint against Laclede Gas alleging that, by stating that it was not in possession of proprietary LER documents, Laclede Gas violated the MoPSC Order authorizing the holding company structure (2001 Order). Laclede Gas counterclaimed that the Staff failed to adhere to the pricing provisions of the MoPSC’s affiliate transaction rules and Laclede Gas’ Cost Allocation Manual. By orders dated November 3, 2010 and February 4, 2011, respectively, the MoPSC dismissed Laclede’s counterclaim and granted summary judgment to Staff, finding that Laclede Gas violated the terms of the 2001 Order and authorizing its General Counsel to seek penalties in court against Laclede Gas. On March 30, 2011, Laclede Gas sought review of the February 4 Order with the Missouri Cole County Circuit Court. On May 19, 2011, the Commission’s General Counsel filed a petition with the Cole County Circuit Court seeking penalties in connection with the Commission’s February 4 Order. On July 7, 2011, the Circuit Court Judge signed an agreed Order holding the penalty case in abeyance while the February 4 Order is appealed. On December 21, 2011, the Circuit Court reversed both the MoPSC’s November 3, 2010 Order and its February 4, 2011 Order.
Subsequent to the July 7, 2010 complaint, the MoPSC Staff filed a related complaint on October 6, 2010 against Laclede Gas, LER, and Laclede Group, alleging that the Utility has failed to comply with the MoPSC’s affiliate transaction rules. LER and Laclede Group both filed motions to be dismissed from the proceeding, which were granted by the Commission on December 22, 2010. On January 26, 2011, the Commission also dismissed certain counts of the complaint against Laclede Gas. The remaining counts and a counterclaim against the Staff, filed by Laclede Gas, are still pending before the Commission. Laclede Gas believes that the complaint lacks merit and is vigorously opposing it.
On July 9, 2008, Laclede Gas made a tariff filing with the MoPSC that would make the payment provisions for the restoration of gas service under the Utility’s Cold Weather Rule available to customers in the summer of 2008 and enable the Utility to increase or decrease its PGA rates to correct for any shortfall or surplus created by the difference between the gas cost portion of the Utility’s actual net bad debt write-offs and the amount of such cost that is embedded in its existing rates. As a result of the ensuing procedural schedule, the Cold Weather Rule portion of the filing became moot. On April 15, 2009, the Commission rejected the Utility’s tariffs on the grounds that it did not have the legal authority to approve them. On appeal, the Cole County Circuit Court reversed the Commission’s Order, but that Court’s decision was likewise reversed by the Western District of the Missouri Court of Appeals. Laclede’s application to the Missouri Supreme Court was denied on January 25, 2011.
On November 9, 2011, the Utility made an ISRS filing with the Commission designed to increase revenues by $2.0 million annually, essentially all of which was approved by the MoPSC effective January 13, 2012.
On June 29, 2010, the Office of Federal Contract Compliance Programs issued a Notice of Violations to Laclede Gas alleging lapses in certain employment selection procedures during a two-year period ending in February 2006. The Company believes that the allegations lack merit and is vigorously defending its position. Management, after discussion with counsel, believes that the final outcome of these matters will not have a material effect on the consolidated financial position and results of operations of the Company.
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 GAAP. GAAP requires 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. Our critical accounting policies used in the preparation of our Consolidated Financial Statements are described in Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2011 and include the following:
•
|
Accounts receivable and allowance for doubtful accounts
|
|
•
|
Employee benefits and postretirement obligations
|
|
•
|
Regulated operations
|
|
•
|
Non-regulated gas marketing energy contracts
|
There were no significant changes to these critical accounting policies during the three months ended December 31, 2011. For discussion of other significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the fiscal year ended September 30, 2011.
ACCOUNTING PRONOUNCEMENTS
The Company has evaluated or is in the process of evaluating the impact that recently issued accounting standards will have on the Company’s financial position or results of operations upon adoption. For disclosures related to the adoption of new accounting standards, see the New Accounting Standards section of Note 1 of the Notes to Consolidated Financial Statements.
The Company continues to monitor the developments of the Financial Accounting Standards Board (FASB) relative to possible changes in accounting standards. Currently, the FASB is considering various changes to U. S. GAAP, some of which may be significant, as part of a joint effort with the International Accounting Standards Board to converge accounting standards. Future developments, depending on the outcome, have the potential to impact the Company’s financial condition and results of operations.
FINANCIAL CONDITION
CASH FLOWS
The Company’s short-term borrowing requirements typically peak during colder months when Laclede Gas borrows money to cover the lag between when it purchases its natural gas and when its customers pay for that gas. Changes in the wholesale cost of natural gas (including cash payments for margin deposits associated with the Utility’s use of natural gas derivative instruments), variations in the timing of collections of gas cost under the Utility’s PGA Clause, and the utilization of storage gas inventories cause short-term cash requirements to vary during the year and from year to year, and can cause significant variations in the Utility’s cash provided by or used in operating activities.
Net cash used in operating activities was $50.1 million for the three months ended December 31, 2011, compared with net cash provided operating activities of $5.8 million for the three months ended December 31, 2010. The variation is primarily attributable to increased cash payments for margin deposits associated with the Utility’s use of natural gas derivative instruments and other variations associated with the timing of collections of gas cost under the Utility’s PGA Clause, as well as increased cash payments for the funding of pension plans.
Net cash used in investing activities for the three months ended December 31, 2011 was $18.6 million compared with $14.6 million for the three months ended December 31, 2010. Cash used in investing activities primarily reflected capital expenditures in both periods.
Net cash provided by financing activities was $70.0 million for the three months ended December 31, 2011 compared with net cash used in financing activities of $53.0 million for the three months ended December 31, 2010. The variation primarily reflects the increased issuance of short-term debt this year and the effect of the maturity of long-term debt last year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
Laclede Group had temporary cash investments totaling $19.8 million at December 31, 2011, earning an average interest rate of 0.2%. These investments, which are presented in the Cash and cash equivalents line of the Consolidated Balance Sheets, were diversified among money market funds and interest-bearing deposits at highly-rated commercial banks. The money market funds are accessible by the Company on demand. The bank deposits are also generally available on demand, though the banks reserve the right to require seven days’ notice for a withdrawal. These funds are used to support the working capital needs of the Company’s subsidiaries. The balance of short-term investments was stable during the three months ended December 31, 2011. Due to lower yields available to Laclede Group on its short-term investments, Laclede Group elected to provide a portion of Laclede Gas’ short-term funding through intercompany lending during the three months ended December 31, 2011.
Short-term Debt
As indicated in the discussion of cash flows above, the Company’s short-term borrowing requirements typically peak during the colder months. These short-term cash requirements can be met through the sale of commercial paper supported by lines of credit with banks or through direct use of the lines of credit. At December 31, 2011, Laclede Gas had a syndicated line of credit in place of $300 million from seven banks, with the largest portion provided by a single bank being 17.9%. This line is scheduled to expire in July 2016. Laclede Gas’ line of credit includes a covenant limiting total debt, including short-term debt, to no more than 70% of total capitalization. On December 31, 2011, total debt was 55% of total capitalization.
Short-term cash requirements outside of Laclede Gas have generally been met with internally-generated funds. However, Laclede Group has $50 million in a syndicated line of credit, scheduled to expire in July 2016, to meet short-term liquidity needs of its subsidiaries. The line of credit has a covenant limiting the total debt of the consolidated Laclede Group to no more than 70% of the Company’s total capitalization. This ratio stood at 45% on December 31, 2011. Laclede Group’s lines have been used to provide for seasonal funding needs. There were no borrowings under Laclede Group’s line during the three months ended December 31, 2011.
Information about Laclede Group’s consolidated short-term borrowings (excluding intercompany borrowings) during the three months ended December 31, 2011 and as of December 31, 2011, is presented below:
Laclede Gas Commercial Paper Borrowings
|
|
Three Months Ended December 31, 2011
|
|
Weighted average borrowings outstanding
|
$81.2 million
|
Weighted average interest rate
|
0.3%
|
Range of borrowings outstanding
|
$40.0 – $133.5 million
|
As of December 31, 2011
|
|
Borrowings outstanding at end of period
|
$113.0 million
|
Weighted average interest rate
|
0.3%
|
Based on average short-term borrowings for the three months ended December 31, 2011, an increase in the average interest rate of 100 basis points would decrease Laclede Group’s pre-tax earnings and cash flows by approximately $0.8 million on an annual basis, portions of which may be offset through the application of PGA carrying costs.
Long-term Debt, Equity, and Shelf Registrations
The Utility has MoPSC authority to issue debt securities and preferred stock, including on a private placement basis, as well as to issue common stock, receive paid-in capital, and enter into capital lease agreements, all for a total of up to $518 million, effective through June 30, 2013. During the three months ended December 31, 2011, pursuant to this authority, the Utility sold 11 shares of its common stock to Laclede Group for $0.4 million. As of January 27, 2012, $515.3 million remains available under this authorization. The amount, timing, and type of additional financing to be issued will depend on cash requirements and market conditions, as well as future MoPSC authorizations.
At December 31, 2011, Laclede Gas had fixed-rate long-term debt totaling $365 million (including current maturities). While these long-term debt issues are fixed-rate, they are subject to changes in their fair value as market interest rates change. However, increases or decreases in fair value would impact earnings and cash flows only if Laclede Gas were to reacquire any of these issues in the open market prior to maturity. Under GAAP applicable to Laclede Gas’ regulated operations, losses or gains on early redemptions of long-term debt would typically be deferred as regulatory assets or regulatory liabilities and amortized over a future period. Of the Utility’s $365 million in long-term debt, $50 million have no call option, $235 million have make-whole call options, and $80 million are callable at par in 2013. None of the debt has any put options.
Laclede Group has a registration statement on file on Form S-3 for the issuance and sale of up to 285,222 shares of its common stock under its Dividend Reinvestment and Stock Purchase Program. There were 274,207 and 265,903 shares at December 31, 2011 and January 27, 2012, respectively, remaining available for issuance under its Form S-3. Laclede Group also has an automatic shelf registration statement on Form S-3 for the issuance of equity and debt securities. No securities have been issued under that S-3. The amount, timing, and type of financing to be issued under this shelf registration will depend on cash requirements and market conditions.
Guarantees
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 into 2015. At December 31, 2011, the maximum guarantees under these leases were $0.9 million. However, the Utility believes it is unlikely that it will be subject to the maximum payment amount because it estimates that the residual value of the leased vehicles will be adequate to satisfy most of the guaranteed amounts. At December 31, 2011, the carrying value of the liability recognized for these guarantees was $0.2 million.
Laclede Group had guarantees totaling $96.3 million for performance and payment of certain wholesale gas supply purchases by LER, as of December 31, 2011. Since that date, total guarantees issued by Laclede Group on behalf of LER increased by $1.0 million, bringing the total to $97.3 million in guarantees outstanding at January 27, 2012. No amounts have been recorded for these guarantees in the financial statements.
Other
The Company’s and the Utility’s access to capital markets, including the commercial paper market, and their respective financing costs, may depend on the credit rating of the entity that is accessing the capital markets. The credit ratings of the Company and the Utility remain at investment grade, but are subject to review and change by the rating agencies.
Utility capital expenditures were $18.3 million for the three months ended December 31, 2011, compared with $15.5 million for the same period last year. The increase in capital expenditures, compared with the prior period, is primarily attributable to additional expenditures for distribution plant and information technology investments. During fiscal 2011, Laclede Gas began a multi-year project to enhance its technology, customer service, and business processes by replacing its existing work management, financial, and supply chain software applications. There were essentially no non-utility capital expenditures during the three months ended December 31, 2011. Non-utility capital expenditures were $0.1 million for the same period last year.
Consolidated capitalization at December 31, 2011 consisted of 63.5% Laclede Group common stock equity and 36.5% Laclede Gas long-term debt.
It is management’s view that the Company has adequate access to capital markets and will have sufficient capital resources, both internal and external, to meet anticipated capital requirements, which primarily include capital expenditures, scheduled maturities of long-term debt, short-term seasonal needs, and dividends.
The seasonal nature of Laclede Gas’ sales affects the comparison of certain balance sheet items at December 31, 2011 and at September 30, 2011, such as Accounts receivable - net, Gas stored underground, Notes payable, Accounts payable, Regulatory assets and Regulatory liabilities, and Advance customer billings. The Consolidated Balance Sheet at December 31, 2010 is presented to facilitate comparison of these items with the corresponding interim period of the preceding fiscal year.
CONTRACTUAL OBLIGATIONS
As of December 31, 2011, Laclede Group had contractual obligations with payments due as summarized below (in millions):
Payments due by period
|
||||||||||||||||
Remaining
|
Fiscal Years
|
|||||||||||||||
Contractual Obligations
|
Total
|
Fiscal Year
2012
|
Fiscal Years
2013-2014
|
Fiscal Years
2015-2016
|
2017 and
thereafter
|
|||||||||||
Principal Payments on Long-Term Debt
|
$
|
365.0
|
$
|
—
|
$
|
25.0
|
$
|
—
|
$
|
340.0
|
||||||
Interest Payments on Long-Term Debt
|
452.1
|
13.9
|
43.5
|
42.7
|
352.0
|
|||||||||||
Capital Leases (a)
|
0.3
|
0.1
|
0.1
|
0.1
|
—
|
|||||||||||
Operating Leases (a)
|
10.5
|
3.4
|
6.3
|
0.8
|
—
|
|||||||||||
Purchase Obligations – Natural Gas (b)
|
496.4
|
318.4
|
155.2
|
15.4
|
7.4
|
|||||||||||
Purchase Obligations – Other (c)
|
92.0
|
28.4
|
23.3
|
18.4
|
21.9
|
|||||||||||
Total (d)
|
$
|
1,416.3
|
$
|
364.2
|
$
|
253.4
|
$
|
77.4
|
$
|
721.3
|
(a)
|
Lease obligations are primarily for office space, office equipment, vehicles, and power operated equipment in the Regulated Gas Distribution segment. Additional payments will be incurred if renewal options are exercised under the provisions of certain agreements.
|
(b)
|
These purchase obligations represent the minimum payments required under existing natural gas transportation and storage contracts and natural gas supply agreements in the Regulated Gas Distribution and Non-Regulated Gas Marketing segments. These amounts reflect fixed obligations as well as obligations to purchase natural gas at future market prices, calculated using December 31, 2011 forward market prices. Laclede Gas recovers the costs related to its purchases, transportation, and storage of natural gas through the operation of its PGA Clause, subject to prudence review by the MoPSC; however, variations in the timing of collections of gas costs from customers affect short-term cash requirements. Additional contractual commitments are generally entered into prior to or during the heating season.
|
(c)
|
These purchase obligations primarily reflect miscellaneous agreements for the purchase of materials and the procurement of services necessary for normal operations.
|
(d)
|
The category of Other Long-Term Liabilities has been excluded from the table above because there are no material amounts of contractual obligations under this category. Long-term liabilities associated with unrecognized tax benefits, totaling $5.7 million, have been excluded from the table above because the timing of future cash outflows, if any, cannot be reasonably estimated. Also, commitments related to pension and postretirement benefit plans have been excluded from the table above. At this writing, the Company expects to make contributions to its qualified, trusteed pension plans of at least $15.7 million during the remaining nine months of fiscal year 2012. Laclede Gas anticipates a $6.6 million contribution relative to its non-qualified pension plans during the remaining nine months of fiscal year 2012. With regard to the postretirement benefits, the Company anticipates Laclede Gas will contribute $11.9 million to the qualified trusts and $0.3 million directly to participants from Laclede Gas’ funds during the remaining nine months of fiscal year 2012. For further discussion of the Company’s pension and postretirement benefit plans, refer to Note 2, Pension Plans and Other Postretirement Benefits, of the Notes to Consolidated Financial Statements.
|
MARKET RISK
Commodity Price Risk
Laclede Gas’ commodity price risk, which arises from market fluctuations in the price of natural gas, is primarily managed through the operation of its PGA Clause. The PGA Clause allows Laclede Gas to flow through to customers, subject to prudence review by the MoPSC, the cost of purchased gas supplies. The Utility is allowed the flexibility to make up to three discretionary PGA changes during each year, in addition to its mandatory November PGA change, so long as such changes are separated by at least two months. The Utility is able to mitigate, to some extent, changes in commodity prices through the use of physical storage supplies and regional supply diversity. Laclede Gas also has a risk management policy that allows for the purchase of natural gas derivative instruments with the goal of managing its price risk associated with purchasing natural gas on behalf of its customers. This policy prohibits speculation. Costs and cost reductions, including carrying costs, associated with the Utility’s use of natural gas derivative instruments are allowed to be passed on to the Utility’s customers through the operation of its PGA Clause. Accordingly, Laclede Gas does not expect any adverse earnings impact as a result of the use of these derivative instruments. However, the timing of recovery for cash payments related to margin requirements may cause short-term cash requirements to vary. Nevertheless, carrying costs associated with such requirements, as well as other variations in the timing of collections of gas costs, are recovered through the PGA Clause. For more information about the Utility’s natural gas derivative instruments, see Note 7, Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements.
In the course of its business, Laclede Group’s non-regulated gas marketing subsidiary, LER, enters into contracts to purchase and sell natural gas at fixed prices and natural gas index-based prices. Commodity price risk associated with these contracts has the potential to impact earnings and cash flows. To minimize this risk, LER has a risk management policy that provides for daily monitoring of a number of business measures, including fixed price commitments. In accordance with the risk management policy, LER manages the price risk associated with its fixed-price commitments. This risk is currently managed either by closely matching the offsetting physical purchase or sale of natural gas at fixed-prices or through the use of natural gas futures and swap contracts traded on or cleared through the NYMEX and ICE to lock in margins. At December 31, 2011, LER’s unmatched fixed-price positions were not material to Laclede Group’s financial position or results of operations.
As mentioned above, LER uses natural gas futures and swap contracts traded on or cleared through the NYMEX and ICE to manage the commodity price risk associated with its fixed-price natural gas purchase and sale commitments. These derivative instruments are generally designated as cash flow hedges of forecasted purchases or sales. Such accounting treatment generally permits a substantial portion of the gain or loss to be deferred from recognition in earnings until the period that the associated forecasted purchase or sale is recognized in earnings. To the extent a hedge is effective, gains or losses on the derivatives will be offset by changes in the value of the hedged forecasted transactions. Accordingly, the Company does not expect any material earnings impact associated with the use of these instruments. Information about the fair values of LER’s exchange-traded/cleared natural gas derivative instruments is presented below:
(Thousands)
|
Derivative
Fair
Values
|
Cash
Margin
|
Derivatives
and Cash
Margin
|
|||||||
Net balance of derivative assets at September 30, 2011
|
$
|
209
|
$
|
1,100
|
$
|
1,309
|
||||
Changes in fair value
|
2,981
|
—
|
2,981
|
|||||||
Settlements
|
(1,689
|
)
|
—
|
(1,689
|
)
|
|||||
Changes in cash margin
|
—
|
(851
|
)
|
(851
|
)
|
|||||
Net balance of derivative assets at December 31, 2011
|
$
|
1,501
|
$
|
249
|
$
|
1,750
|
At December 31, 2011
|
|||||||||||||
Maturity by Fiscal Year
|
|||||||||||||
(Thousands)
|
Total
|
2012
|
2013
|
2014
|
|||||||||
Fair values of exchange-traded/cleared natural gas derivatives - net
|
$
|
1,501
|
$
|
1,390
|
$
|
130
|
$
|
(19
|
)
|
||||
MMBtu – net long (short) futures/swap positions
|
(2,600
|
)
|
(2,110
|
)
|
(553
|
)
|
63
|
Many of LER’s physical natural gas derivative contracts are designated as normal purchases or normal sales, as permitted by GAAP. This election permits the Company to account for the contract in the period the natural gas is delivered. However, certain contracts do not qualify for this election under GAAP and are required to be accounted for as derivatives with changes in fair value recognized in earnings in the periods prior to physical delivery. Below is a reconciliation of the beginning and ending balances for physical natural gas contracts accounted for as derivatives, none of which will settle beyond fiscal year 2013:
(Thousands)
|
||||
Net balance of derivative assets at September 30, 2011
|
$
|
1,923
|
||
Changes in fair value
|
(80
|
)
|
||
Settlements
|
238
|
|||
Net balance of derivative assets at December 31, 2011
|
$
|
2,081
|
For further details related to LER’s derivatives and hedging activities, see Note 7, Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements.
Counterparty Credit Risk
LER has concentrations of counterparty credit risk in that a significant portion of its transactions are with (or are associated with) energy producers, utility companies, and pipelines. These concentrations of counterparties have the potential to affect the Company’s overall exposure to credit risk, either positively or negatively, in that each of these three groups may be affected similarly by changes in economic, industry, or other conditions. LER also has concentrations of credit risk with certain individually significant counterparties. To the extent possible, LER enters into netting arrangements with its counterparties to mitigate exposure to credit risk. Although not recorded on the consolidated balance sheets, LER is also exposed to credit risk associated with its derivative contracts designated as normal purchases and normal sales. LER closely monitors its credit exposure and, although uncollectible amounts have not been significant, increased counterparty defaults are possible and may result in financial losses and/or capital limitations. For more information on these concentrations of credit risk, including how LER manages these risks, see Note 8, Concentrations of Credit Risk, of the Notes to Consolidated Financial Statements.
Interest Rate Risk
The Company is subject to interest rate risk associated with its long-term and short-term debt issuances. Based on average short-term borrowings during the three months ended December 31, 2011, an increase of 100 basis points in the underlying average interest rate for short-term debt would have caused an increase in interest expense of approximately $0.8 million on an annual basis. Portions of such increases may be offset through the application of PGA carrying costs. At December 31, 2011, Laclede Gas had fixed-rate long-term debt totaling $365 million (including current maturities). While these long-term debt issues are fixed-rate, they are subject to changes in fair value as market interest rates change. However, increases or decreases in fair value would impact earnings and cash flows only if Laclede Gas were to reacquire any of these issues in the open market prior to maturity. Under GAAP applicable to Laclede Gas’ regulated operations, losses or gains on early redemptions of long-term debt would typically be deferred as regulatory assets or regulatory liabilities and amortized over a future period.
ENVIRONMENTAL MATTERS
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. For information relative to environmental matters, see Note 11, Commitments and Contingencies, of the Notes to Consolidated Financial Statements.
OFF-BALANCE SHEET ARRANGEMENTS
Laclede Group has no off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For this discussion, see Part I., Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk, on page 41 of this report.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15e and Rule 15d-15e under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
There have been no changes in our internal control over financial reporting that occurred during our first fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of environmental matters and legal proceedings, see Note 11, Commitments and Contingencies, of the Notes to Consolidated Financial Statements. For a description of pending regulatory matters of Laclede Gas, see Part I., Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory and Other Matters, on page 36 of this report.
Laclede Group and its subsidiaries are involved in litigation, claims and investigations arising in the normal course of business. Management, after discussion with counsel, believes that the final outcome of these matters will not have a material effect on the consolidated financial position or results of operations of the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended December 31, 2011, the only repurchases of our common stock were pursuant to elections by employees to have shares of stock withheld to cover employee tax withholding obligations upon the vesting of performance-based and time-vested restricted stock and stock units. The following table provides information on those repurchases.
Period
|
Total No. of
Shares Purchased
|
Average Price Paid
Per Share
|
Total No. of Shares
Purchased as Part of
Publicly Announced
Plans
|
Maximum No. of
Shares that May
Yet be Purchased
Under the Plans
|
October 1, 2011 –
October 31, 2011
|
—
|
—
|
—
|
—
|
November 1, 2011 –
November 30, 2011
|
22,790
|
$40.03
|
—
|
—
|
December 1, 2011 –
December 31, 2011
|
6,367
|
$39.72
|
—
|
—
|
Total
|
29,157
|
—
|
—
|
—
|
Item 6. Exhibits
(a)
|
See Exhibit Index
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The Laclede Group, Inc.
|
|||||
Dated:
|
January 27, 2012
|
By:
|
/s/ Mark D. Waltermire
|
||
Mark D. Waltermire
|
|||||
Chief Financial Officer
|
|||||
(Authorized Signatory and Chief Financial Officer)
|
INDEX TO EXHIBITS
Exhibit No.
|
||
-
|
Form of Performance Contingent Restricted Stock Unit Award Agreement
|
|
-
|
Ratio of Earnings to Fixed Charges.
|
|
-
|
CEO and CFO Certifications under Exchange Act Rule 13a – 14(a).
|
|
-
|
CEO and CFO Section 1350 Certifications.
|
|
47