SPIRE INC - Quarter Report: 2011 June (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 June 30, 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
![Company Logo](https://www.sec.gov/Archives/edgar/data/0001126956/000112695611000058/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 July 28, 2011, there were 22,429,189 shares of the registrant’s Common Stock, par value $1.00 per share, outstanding.
Page No.
|
|||||
Item 5 | Other Information | 44 | |||
FILING FORMAT
The Laclede Group, Inc. (Laclede Group or the Company) and Laclede Gas Company (Laclede Gas or the Utility) previously filed joint Forms 10-K and 10-Q, with the Utility’s Financial Statements, Notes to Financial Statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Exhibit 99.1 in the combined reports. Beginning with the quarter ended December 31, 2010, the Company and the Utility are each filing separate periodic reports with the SEC.
The interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Form 10-K for the fiscal year ended September 30, 2010.
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
June 30,
|
June 30,
|
||||||||||||||
(Thousands, Except Per Share Amounts)
|
2011
|
2010
|
2011
|
2010
|
|||||||||||
Operating Revenues:
|
|||||||||||||||
Regulated Gas Distribution
|
$
|
151,423
|
$
|
124,745
|
$
|
817,241
|
$
|
781,194
|
|||||||
Non-Regulated Gas Marketing
|
174,309
|
199,307
|
495,828
|
658,305
|
|||||||||||
Other
|
18,549
|
455
|
19,192
|
11,499
|
|||||||||||
Total Operating Revenues
|
344,281
|
324,507
|
1,332,261
|
1,450,998
|
|||||||||||
Operating Expenses:
|
|||||||||||||||
Regulated Gas Distribution
|
|||||||||||||||
Natural and propane gas
|
76,632
|
57,315
|
510,703
|
489,553
|
|||||||||||
Other operation expenses
|
36,930
|
33,227
|
111,292
|
108,469
|
|||||||||||
Maintenance
|
5,932
|
7,198
|
18,513
|
20,591
|
|||||||||||
Depreciation and amortization
|
9,856
|
9,396
|
29,233
|
28,144
|
|||||||||||
Taxes, other than income taxes
|
12,332
|
12,016
|
52,766
|
54,290
|
|||||||||||
Total Regulated Gas Distribution Operating Expenses
|
141,682
|
119,152
|
722,507
|
701,047
|
|||||||||||
Non-Regulated Gas Marketing
|
168,580
|
192,230
|
484,235
|
641,121
|
|||||||||||
Other
|
8,265
|
258
|
9,071
|
5,029
|
|||||||||||
Total Operating Expenses
|
318,527
|
311,640
|
1,215,813
|
1,347,197
|
|||||||||||
Operating Income
|
25,754
|
12,867
|
116,448
|
103,801
|
|||||||||||
Other Income and (Income Deductions) – Net
|
157
|
(191
|
)
|
2,469
|
1,714
|
||||||||||
Interest Charges:
|
|||||||||||||||
Interest on long-term debt
|
5,739
|
6,146
|
17,421
|
18,437
|
|||||||||||
Other interest charges
|
408
|
631
|
1,701
|
1,720
|
|||||||||||
Total Interest Charges
|
6,147
|
6,777
|
19,122
|
20,157
|
|||||||||||
Income Before Income Taxes
|
19,764
|
5,899
|
99,795
|
85,358
|
|||||||||||
Income Tax Expense
|
4,374
|
1,168
|
33,143
|
29,721
|
|||||||||||
Net Income
|
$
|
15,390
|
$
|
4,731
|
$
|
66,652
|
$
|
55,637
|
|||||||
Average Number of Common Shares Outstanding:
|
|||||||||||||||
Basic
|
22,120
|
21,997
|
22,087
|
21,978
|
|||||||||||
Diluted
|
22,188
|
22,048
|
22,160
|
22,025
|
|||||||||||
Basic Earnings Per Share of Common Stock
|
$
|
0.69
|
$
|
0.21
|
$
|
2.99
|
$
|
2.51
|
|||||||
Diluted Earnings Per Share of Common Stock
|
$
|
0.69
|
$
|
0.21
|
$
|
2.98
|
$
|
2.50
|
|||||||
Dividends Declared Per Share of Common Stock
|
$
|
0.405
|
$
|
0.395
|
$
|
1.215
|
$
|
1.185
|
|||||||
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
June 30,
|
June 30,
|
||||||||||||||
(Thousands)
|
2011
|
2010
|
2011
|
2010
|
|||||||||||
Net Income
|
$
|
15,390
|
$
|
4,731
|
$
|
66,652
|
$
|
55,637
|
|||||||
Other Comprehensive Income (Loss), Before Tax:
|
|||||||||||||||
Net gains (losses) on cash flow hedging derivative instruments:
|
|||||||||||||||
Net hedging gain (loss) arising during the period
|
710
|
(2,496
|
)
|
1,884
|
4,980
|
||||||||||
Reclassification adjustment for losses (gains) included | |||||||||||||||
in net income
|
2,261
|
(4,334
|
)
|
(976
|
)
|
(9,950
|
)
|
||||||||
Net unrealized gains (losses) on cash flow hedging
|
|||||||||||||||
derivative instruments
|
2,971
|
(6,830
|
)
|
908
|
(4,970
|
)
|
|||||||||
Amortization of actuarial loss included in net periodic
|
|||||||||||||||
pension and postretirement benefit cost
|
107
|
98
|
320
|
295
|
|||||||||||
Other Comprehensive Income (Loss), Before Tax
|
3,078
|
(6,732
|
)
|
1,228
|
(4,675
|
)
|
|||||||||
Income Tax Expense (Benefit) Related to Items of Other
|
|||||||||||||||
Comprehensive Income (Loss)
|
1,189
|
(2,601
|
)
|
474
|
(1,805
|
)
|
|||||||||
Other Comprehensive Income (Loss), Net of Tax
|
1,889
|
(4,131
|
)
|
754
|
(2,870
|
)
|
|||||||||
Comprehensive Income
|
$
|
17,279
|
$
|
600
|
$
|
67,406
|
$
|
52,767
|
|||||||
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30,
|
Sept. 30,
|
June 30,
|
||||||||||||
(Thousands)
|
2011
|
2010
|
2010
|
|||||||||||
ASSETS
|
||||||||||||||
Utility Plant
|
$
|
1,362,780
|
$
|
1,326,284
|
$
|
1,311,881
|
||||||||
Less: Accumulated depreciation and amortization
|
455,075
|
442,200
|
438,435
|
|||||||||||
Net Utility Plant
|
907,705
|
884,084
|
873,446
|
|||||||||||
Non-utility property
|
4,597
|
4,551
|
4,449
|
|||||||||||
Other investments
|
52,290
|
50,226
|
49,112
|
|||||||||||
Other Property and Investments
|
56,887
|
54,777
|
53,561
|
|||||||||||
Current Assets:
|
||||||||||||||
Cash and cash equivalents
|
60,922
|
86,919
|
109,287
|
|||||||||||
Accounts receivable:
|
||||||||||||||
Utility
|
87,021
|
70,053
|
79,729
|
|||||||||||
Non-utility
|
58,645
|
56,160
|
67,305
|
|||||||||||
Other
|
6,233
|
11,671
|
5,642
|
|||||||||||
Allowance for doubtful accounts
|
(11,915
|
)
|
(10,295
|
)
|
(13,037
|
)
|
||||||||
Delayed customer billings
|
11,517
|
—
|
12,535
|
|||||||||||
Inventories:
|
||||||||||||||
Natural gas stored underground at LIFO cost
|
56,976
|
113,576
|
54,308
|
|||||||||||
Propane gas at FIFO cost
|
8,962
|
15,625
|
15,625
|
|||||||||||
Materials, supplies, and merchandise at average cost
|
4,310
|
3,867
|
3,942
|
|||||||||||
Natural gas receivable
|
29,767
|
22,963
|
21,447
|
|||||||||||
Derivative instrument assets
|
10,127
|
10,285
|
13,657
|
|||||||||||
Unamortized purchased gas adjustments
|
3,939
|
23,718
|
—
|
|||||||||||
Deferred income taxes
|
9,064
|
—
|
3,807
|
|||||||||||
Prepayments and other
|
9,082
|
9,653
|
12,828
|
|||||||||||
Total Current Assets
|
344,650
|
414,195
|
387,075
|
|||||||||||
Deferred Charges:
|
||||||||||||||
Regulatory assets
|
427,021
|
479,462
|
457,034
|
|||||||||||
Other
|
6,041
|
7,678
|
5,804
|
|||||||||||
Total Deferred Charges
|
433,062
|
487,140
|
462,838
|
|||||||||||
Total Assets
|
$
|
1,742,304
|
$
|
1,840,196
|
$
|
1,776,920
|
||||||||
THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
June 30,
|
Sept. 30,
|
June 30,
|
||||||||||||
(Thousands, except share amounts)
|
2011
|
2010
|
2010
|
|||||||||||
CAPITALIZATION AND LIABILITIES
|
||||||||||||||
Capitalization:
|
||||||||||||||
Common stock (70,000,000 shares authorized, 22,416,923,
22,292,804, and 22,282,410 shares issued, respectively)
|
$
|
22,417
|
$
|
22,293
|
$
|
22,282
|
||||||||
Paid-in capital
|
162,309
|
158,698
|
157,362
|
|||||||||||
Retained earnings
|
401,208
|
361,723
|
372,072
|
|||||||||||
Accumulated other comprehensive loss
|
(6,383
|
)
|
(7,137
|
)
|
(5,036
|
)
|
||||||||
Total Common Stock Equity
|
579,551
|
535,577
|
546,680
|
|||||||||||
Long-term debt (less current portion) – Laclede Gas
|
364,343
|
364,298
|
364,283
|
|||||||||||
Total Capitalization
|
943,894
|
899,875
|
910,963
|
|||||||||||
Current Liabilities:
|
||||||||||||||
Notes payable
|
—
|
129,650
|
76,200
|
|||||||||||
Accounts payable
|
101,782
|
95,595
|
107,288
|
|||||||||||
Advance customer billings
|
—
|
16,809
|
—
|
|||||||||||
Current portion of long-term debt
|
—
|
25,000
|
25,000
|
|||||||||||
Wages and compensation accrued
|
14,866
|
13,410
|
14,310
|
|||||||||||
Dividends payable
|
9,280
|
8,942
|
8,982
|
|||||||||||
Customer deposits
|
10,914
|
11,244
|
12,328
|
|||||||||||
Interest accrued
|
5,603
|
9,639
|
6,072
|
|||||||||||
Taxes accrued
|
29,091
|
10,501
|
23,758
|
|||||||||||
Unamortized purchased gas adjustments
|
—
|
—
|
392
|
|||||||||||
Deferred income taxes
|
—
|
155
|
—
|
|||||||||||
Other
|
13,958
|
12,979
|
11,491
|
|||||||||||
Total Current Liabilities
|
185,494
|
333,924
|
285,821
|
|||||||||||
Deferred Credits and Other Liabilities:
|
||||||||||||||
Deferred income taxes
|
305,374
|
292,391
|
274,787
|
|||||||||||
Unamortized investment tax credits
|
3,379
|
3,538
|
3,592
|
|||||||||||
Pension and postretirement benefit costs
|
196,757
|
207,607
|
199,563
|
|||||||||||
Asset retirement obligations
|
26,996
|
25,837
|
26,648
|
|||||||||||
Regulatory liabilities
|
50,308
|
47,365
|
45,468
|
|||||||||||
Other
|
30,102
|
29,659
|
30,078
|
|||||||||||
Total Deferred Credits and Other Liabilities
|
612,916
|
606,397
|
580,136
|
|||||||||||
Commitments and Contingencies (Note 11)
|
||||||||||||||
Total Capitalization and Liabilities
|
$
|
1,742,304
|
$
|
1,840,196
|
$
|
1,776,920
|
||||||||
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
Nine Months Ended
|
|||||||||
June 30,
|
|||||||||
(Thousands)
|
2011
|
2010
|
|||||||
Operating Activities:
|
|||||||||
Net Income
|
$
|
66,652
|
$
|
55,637
|
|||||
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
|
|||||||||
Depreciation, amortization, and accretion
|
29,624
|
28,358
|
|||||||
Deferred income taxes and investment tax credits
|
5,946
|
13,431
|
|||||||
Other – net
|
1,145
|
2,761
|
|||||||
Changes in assets and liabilities:
|
|||||||||
Accounts receivable – net
|
(12,395
|
)
|
(19,644
|
)
|
|||||
Unamortized purchased gas adjustments
|
19,779
|
(2,738
|
)
|
||||||
Deferred purchased gas costs
|
48,752
|
31,765
|
|||||||
Accounts payable
|
7,853
|
35,510
|
|||||||
Delayed customer billings – net
|
(28,326
|
)
|
(33,675
|
)
|
|||||
Taxes accrued
|
18,577
|
7,681
|
|||||||
Natural gas stored underground
|
56,600
|
39,005
|
|||||||
Other assets and liabilities
|
(12,901
|
)
|
(294
|
)
|
|||||
Net cash provided by operating activities
|
201,306
|
157,797
|
|||||||
Investing Activities:
|
|||||||||
Capital expenditures
|
(47,082
|
)
|
(40,259
|
)
|
|||||
Other investments
|
102
|
(3,554
|
)
|
||||||
Net cash used in investing activities
|
(46,980
|
)
|
(43,813
|
)
|
|||||
Financing Activities:
|
|||||||||
Maturity of first mortgage bonds
|
(25,000
|
)
|
—
|
||||||
Repayment of short-term debt – net
|
(129,650
|
)
|
(53,600
|
)
|
|||||
Changes in book overdrafts
|
474
|
(25
|
)
|
||||||
Issuance of common stock
|
2,021
|
1,413
|
|||||||
Non-employee directors’ restricted stock awards
|
(494
|
)
|
(406
|
)
|
|||||
Dividends paid
|
(26,808
|
)
|
(26,067
|
)
|
|||||
Employees’ taxes paid associated with restricted shares withheld upon vesting
|
(1,162
|
)
|
(576
|
)
|
|||||
Excess tax benefits from stock-based compensation
|
294
|
99
|
|||||||
Other
|
2
|
(126
|
)
|
||||||
Net cash used in financing activities
|
(180,323
|
)
|
(79,288
|
)
|
|||||
Net (Decrease) Increase in Cash and Cash Equivalents
|
(25,997
|
)
|
34,696
|
||||||
Cash and Cash Equivalents at Beginning of Period
|
86,919
|
74,591
|
|||||||
Cash and Cash Equivalents at End of Period
|
$
|
60,922
|
|
$
|
109,287
|
||||
|
|||||||||
Supplemental Disclosure of Cash Paid (Refunded) During the Period for:
|
|||||||||
Interest
|
$
|
22,588
|
$
|
23,535
|
|||||
Income taxes
|
4,609
|
(1,937
|
)
|
||||||
THE LACLEDE GROUP, INC.
(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 2010 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 June 30, 2011 and 2010, for the Utility, were $9.6 million and $9.4 million, respectively. The amount of accrued unbilled revenue at September 30, 2010 was $11.3 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 June 30, 2011 and 2010 were $7.5 million and $6.5 million, respectively. Amounts recorded in Regulated Gas Distribution Operating Revenues for the nine months ended June 30, 2011 and 2010 were $39.1 million and $40.0 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 currently evaluating the provisions of this ASU to determine the potential impact on its financial statements and disclosures. The Company is required to adopt the guidance in this ASU on a prospective basis in the second quarter of fiscal year 2012.
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 present separate but consecutive statements (a statement of income and a statement of comprehensive income). Regardless of the method chosen, reclassification adjustments from other comprehensive income to net income are required to be presented on the face of the financial statements, displaying the effect on both net income and other comprehensive income. The amendments in this ASU 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. The Company will adopt the changes in presentation required by this ASU in the first quarter of fiscal year 2013 on a retrospective basis, as required by the ASU.
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 investments.
Similar to modifications made to Laclede Gas’ primary plan in 2009, effective January 1, 2010, the Utility modified the calculation of future benefits under its Missouri Natural Gas division plan from a career average formula to a cash balance formula, which accrues benefits based on a percentage of compensation, provides interest credits on the balance, and provides certain transition credits. Benefits attributable to plan participation prior to January 1, 2010, will be based on career average compensation earned as a participant prior to January 1, 2010.
Pension costs for all of Laclede Gas’ defined-benefit pension plans for the quarters ended June 30, 2011 and 2010 were $4.2 million and $1.6 million, respectively, including amounts charged to construction. Pension costs for the nine months ended June 30, 2011 and 2010 were $10.0 million and $4.7 million, respectively, including amounts charged to construction.
The net periodic pension costs include the following components:
Three Months Ended
|
Nine Months Ended
|
|||||||||||||
June 30,
|
June 30,
|
|||||||||||||
(Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||
Service cost – benefits earned during the period
|
$
|
2,388
|
$
|
2,189
|
$
|
7,164
|
$
|
6,652
|
||||||
Interest cost on projected benefit obligation
|
4,705
|
4,924
|
14,115
|
14,805
|
||||||||||
Expected return on plan assets
|
(4,712
|
)
|
(5,074
|
)
|
(14,136
|
)
|
(15,181
|
)
|
||||||
Amortization of prior service cost
|
161
|
172
|
481
|
583
|
||||||||||
Amortization of actuarial loss
|
2,557
|
2,024
|
7,671
|
6,083
|
||||||||||
Sub-total
|
5,099
|
4,235
|
15,295
|
12,942
|
||||||||||
Regulatory adjustment
|
(864
|
)
|
(2,656
|
)
|
(5,259
|
)
|
(8,206
|
)
|
||||||
Net pension cost
|
$
|
4,235
|
$
|
1,579
|
$
|
10,036
|
$
|
4,736
|
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 nine months ended June 30, 2011 and June 30, 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 allowance of $4.8 million annually effective August 1, 2007 and $15.5 million annually 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 2011 contributions to the pension plans through June 30, 2011 were $16.8 million to the qualified trusts and approximately $3.0 million to the non-qualified plans. Laclede Gas does not expect to make contributions to its qualified, trusteed pension plans during the remaining three months of fiscal year 2011. Contributions to the pension plans for the non-qualified plans for the remaining three months of fiscal year 2011 are anticipated to be approximately $0.1 million.
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 June 30, 2011 and 2010 were $2.4 million and $1.9 million, respectively, including amounts charged to construction. Postretirement benefit costs for the nine months ended June 30, 2011 and 2010 were $6.7 million and $5.7 million, respectively, including amounts charged to construction.
Net periodic postretirement benefit costs consisted of the following components:
Three Months Ended
|
Nine Months Ended
|
|||||||||||||
June 30,
|
June 30,
|
|||||||||||||
(Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||
Service cost – benefits earned during the period
|
$
|
1,919
|
$
|
1,610
|
$
|
5,757
|
$
|
4,831
|
||||||
Interest cost on accumulated
|
||||||||||||||
postretirement benefit obligation
|
1,210
|
1,129
|
3,632
|
3,387
|
||||||||||
Expected return on plan assets
|
(911
|
)
|
(758
|
)
|
(2,734
|
)
|
(2,274
|
)
|
||||||
Amortization of transition obligation
|
34
|
34
|
102
|
102
|
||||||||||
Amortization of prior service credit
|
(582
|
)
|
(582
|
)
|
(1,746
|
)
|
(1,746
|
)
|
||||||
Amortization of actuarial loss
|
1,111
|
995
|
3,332
|
2,985
|
||||||||||
Sub-total
|
2,781
|
2,428
|
8,343
|
7,285
|
||||||||||
Regulatory adjustment
|
(400
|
)
|
(518
|
)
|
(1,671
|
)
|
(1,554
|
)
|
||||||
Net postretirement benefit cost
|
$
|
2,381
|
$
|
1,910
|
$
|
6,672
|
$
|
5,731
|
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 Commission ordered that the recovery in rates be 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 2011 contributions to the postretirement plans through June 30, 2011 were $5.6 million to the qualified trusts and approximately $0.2 million paid directly to participants from Laclede Gas’ funds. Contributions to the postretirement plans for the remaining three months of fiscal year 2011 are anticipated to be $5.6 million to the qualified trusts and $0.1 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 4 of the Consolidated Financial Statements included in the Company’s Form 10-K for the fiscal year ended September 30, 2010 for descriptions of these plans.
Restricted Stock Awards
During the nine months ended June 30, 2011, the Company granted 81,525 performance-contingent restricted shares and share units to executive officers and key employees at a weighted average grant date fair value of $30.78 per share. This number represents the maximum shares that can be earned pursuant to the terms of the awards. The shares and share units have a performance period ending September 30, 2013, during which participants are entitled to voting rights on the target level, or 54,350 shares. Dividends on these target level of shares accrue during the performance period and are paid to the participants up to the target level upon vesting, but are subject to forfeiture if the underlying shares do not vest. The number of shares and share units that will ultimately vest is dependent upon the attainment of certain levels of earnings growth and portfolio development performance goals; further, under the terms of the award, the Compensation Committee of the Board of Directors has the discretion to reduce by up to 25% the number that vest if the Company’s total shareholder return (TSR) during the performance period ranks below the median relative to a comparator group of companies. This TSR provision is considered a market condition under generally accepted accounting principles.
Performance-contingent restricted stock and performance-contingent restricted stock unit activity for the nine months ended June 30, 2011 is presented below:
Weighted
|
|||||||||
Average
|
|||||||||
Shares/
|
Grant Date
|
||||||||
Units
|
Fair Value
|
||||||||
Nonvested at September 30, 2010
|
255,300
|
$
|
34.07
|
||||||
Granted (maximum shares that can be earned)
|
81,525
|
$
|
30.78
|
||||||
Vested
|
(72,750
|
)
|
$
|
29.32
|
|||||
Forfeited
|
(15,000
|
)
|
$
|
32.65
|
|||||
Nonvested at June 30, 2011
|
249,075
|
$
|
34.46
|
During the nine months ended June 30, 2011, the Company granted 29,250 shares of time-vested restricted stock to executive officers and key employees at a weighted average grant date fair value of $35.93 per share. These shares were awarded on December 1, 2010 and vest December 1, 2013. In the interim, participants receive full voting rights and dividends, which are not subject to forfeiture.
During the nine months ended June 30, 2011, the Company granted 12,500 shares of time-vested restricted stock to non-employee directors at a weighted average grant date fair value of $39.48 per share. These shares vest depending on the participant’s age upon entering the plan and years of service as a director. The plan’s trustee acquires the shares for the awards in the open market and holds the shares as trustee for the benefit of the non-employee directors until the restrictions expire. In the interim, the participants receive full dividends and voting rights.
Time-vested restricted stock and time-vested restricted stock unit activity for the nine months ended June 30, 2011 is presented below:
Weighted
|
|||||||||
Average
|
|||||||||
Shares/
|
Grant Date
|
||||||||
Units
|
Fair Value
|
||||||||
Nonvested at September 30, 2010
|
121,850
|
$
|
36.62
|
||||||
Granted
|
41,750
|
$
|
36.99
|
||||||
Vested
|
(26,250
|
)
|
$
|
35.15
|
|||||
Forfeited
|
(1,000
|
)
|
$
|
35.47
|
|||||
Nonvested at June 30, 2011
|
136,350
|
$
|
37.03
|
During the nine months ended June 30, 2011, 94,500 shares of restricted stock (performance-contingent and time-vested), awarded on December 5, 2007, vested. The Company withheld 32,373 of the vested shares at a weighted average price of $35.90 per share pursuant to elections by employees to satisfy tax withholding obligations.
In June 2011, Laclede Group offered to grant certain stock-based compensation awards to an executive officer whose employment will commence on September 1, 2011. On that date, the individual will receive 7,000 time-vested restricted stock units that will vest ratably over three years. Additionally, 10,000 performance-contingent restricted stock units will be granted that vest after two years of employment and satisfaction of a market condition related to the Company’s stock price. These performance-contingent restricted stock units will expire September 1, 2016. The Company will begin recognizing the associated compensation cost effective September 1, 2011.
Stock Option Awards
Stock option activity for the nine months ended June 30, 2011 is presented below:
Weighted
|
|||||||||||||||
Average
|
|||||||||||||||
Weighted
|
Remaining
|
Aggregate
|
|||||||||||||
Average
|
Contractual
|
Intrinsic
|
|||||||||||||
Stock
|
Exercise
|
Term
|
Value
|
||||||||||||
Options
|
Price
|
(Years)
|
($000)
|
||||||||||||
Outstanding at September 30, 2010
|
335,975
|
$
|
30.75
|
||||||||||||
Granted
|
—
|
$
|
—
|
||||||||||||
Exercised
|
(29,350
|
)
|
$
|
31.03
|
|||||||||||
Forfeited
|
—
|
$
|
—
|
||||||||||||
Expired
|
—
|
$
|
—
|
||||||||||||
Outstanding at June 30, 2011
|
306,625
|
$
|
30.73
|
3.6
|
$
|
2,178
|
|||||||||
Fully Vested and Expected to Vest
at June 30, 2011
|
306,625
|
$
|
30.73
|
3.6
|
$
|
2,178
|
|||||||||
Exercisable at June 30, 2011
|
306,625
|
$
|
30.73
|
3.6
|
$
|
2,178
|
The closing price of the Company’s common stock was $37.83 at June 30, 2011.
Equity Compensation Costs
The amounts of compensation cost recognized for share-based compensation arrangements are presented below:
Three Months Ended
|
Nine Months Ended
|
|||||||||||||
June 30,
|
June 30,
|
|||||||||||||
(Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||
Total equity compensation cost
|
$
|
1,555
|
$
|
953
|
$
|
3,095
|
$
|
2,862
|
||||||
Compensation cost capitalized
|
(371
|
)
|
(224
|
)
|
(702
|
)
|
(581
|
)
|
||||||
Compensation cost recognized in net income
|
1,184
|
729
|
2,393
|
2,281
|
||||||||||
Income tax benefit recognized in net income
|
(457
|
)
|
(282
|
)
|
(923
|
)
|
(880
|
)
|
||||||
Compensation cost recognized in net income,
|
||||||||||||||
net of income tax
|
$
|
727
|
$
|
447
|
$
|
1,470
|
$
|
1,401
|
As of June 30, 2011, there was $4.3 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
|
Nine Months Ended
|
|||||||||||||
June 30,
|
June 30,
|
|||||||||||||
(Thousands, Except Per Share Amounts)
|
2011
|
2010
|
2011
|
2010
|
||||||||||
Basic EPS:
|
||||||||||||||
Net Income
|
$
|
15,390
|
$
|
4,731
|
$
|
66,652
|
$
|
55,637
|
||||||
Less: Income allocated to participating securities
|
125
|
44
|
552
|
550
|
||||||||||
Net Income Available to Common Shareholders
|
$
|
15,265
|
$
|
4,687
|
$
|
66,100
|
$
|
55,087
|
||||||
Weighted Average Shares Outstanding
|
22,120
|
21,997
|
22,087
|
21,978
|
||||||||||
Earnings Per Share of Common Stock
|
$
|
0.69
|
$
|
0.21
|
$
|
2.99
|
$
|
2.51
|
||||||
Diluted EPS:
|
||||||||||||||
Net Income
|
$
|
15,390
|
$
|
4,731
|
$
|
66,652
|
$
|
55,637
|
||||||
Less: Income allocated to participating securities
|
125
|
44
|
551
|
549
|
||||||||||
Net Income Available to Common Shareholders
|
$
|
15,265
|
$
|
4,687
|
$
|
66,101
|
$
|
55,088
|
||||||
Weighted Average Shares Outstanding
|
22,120
|
21,997
|
22,087
|
21,978
|
||||||||||
Dilutive Effect of Stock Options
|
||||||||||||||
and Restricted Stock
|
68
|
51
|
73
|
47
|
||||||||||
Weighted Average Diluted Shares
|
22,188
|
22,048
|
22,160
|
22,025
|
||||||||||
Earnings Per Share of Common Stock
|
$
|
0.69
|
$
|
0.21
|
$
|
2.98
|
$
|
2.50
|
||||||
Outstanding Shares Excluded from the
|
||||||||||||||
Calculation of Diluted EPS Attributable to:
|
||||||||||||||
Antidilutive stock options
|
—
|
77
|
—
|
77
|
||||||||||
Performance-contingent restricted stock
|
193
|
145
|
193
|
145
|
||||||||||
Total
|
193
|
222
|
193
|
222
|
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 June 30, 2011
|
||||||||
Cash and cash equivalents
|
$
|
60,922
|
$
|
60,922
|
||||
Marketable securities
|
16,096
|
16,096
|
||||||
Derivative instrument assets
|
10,916
|
10,916
|
||||||
Derivative instrument liabilities
|
30
|
30
|
||||||
Short-term debt
|
—
|
—
|
||||||
Long-term debt
|
364,343
|
397,684
|
||||||
As of September 30, 2010
|
||||||||
Cash and cash equivalents
|
$
|
86,919
|
$
|
86,919
|
||||
Marketable securities
|
12,856
|
12,856
|
||||||
Derivative instrument assets
|
12,761
|
12,761
|
||||||
Derivative instrument liabilities
|
14
|
14
|
||||||
Short-term debt
|
129,650
|
129,650
|
||||||
Long-term debt, including current portion
|
389,298
|
443,959
|
||||||
As of June 30, 2010
|
||||||||
Cash and cash equivalents
|
$
|
109,287
|
$
|
109,287
|
||||
Marketable securities
|
11,533
|
11,533
|
||||||
Derivative instrument assets
|
13,657
|
13,657
|
||||||
Derivative instrument liabilities
|
219
|
219
|
||||||
Short-term debt
|
76,200
|
76,200
|
||||||
Long-term debt, including current portion
|
389,283
|
432,675
|
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.
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 June 30, 2011
|
|||||||||||||||||
Assets
|
|||||||||||||||||
U. S. Stock/Bond Mutual Funds
|
$
|
16,096
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
16,096
|
|||||||
NYMEX natural gas contracts
|
2,956
|
—
|
—
|
5,609
|
8,565
|
||||||||||||
NYMEX gasoline and heating
|
|||||||||||||||||
oil contracts
|
143
|
—
|
—
|
164
|
307
|
||||||||||||
Natural gas commodity contracts
|
—
|
2,150
|
7
|
(113
|
)
|
2,044
|
|||||||||||
Total
|
$
|
19,195
|
$
|
2,150
|
$
|
7
|
$
|
5,660
|
$
|
27,012
|
|||||||
Liabilities
|
|||||||||||||||||
NYMEX natural gas contracts
|
$
|
19,513
|
$
|
—
|
$
|
—
|
$
|
(19,513
|
)
|
$
|
—
|
||||||
NYMEX gasoline and heating
|
|||||||||||||||||
oil contracts
|
4
|
—
|
—
|
(4
|
)
|
—
|
|||||||||||
Natural gas commodity contracts
|
—
|
138
|
5
|
(113
|
)
|
30
|
|||||||||||
Total
|
$
|
19,517
|
$
|
138
|
$
|
5
|
$
|
(19,630
|
)
|
$
|
30
|
||||||
As of September 30, 2010
|
|||||||||||||||||
Assets
|
|||||||||||||||||
U. S. Stock/Bond Mutual Funds
|
$
|
12,856
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
12,856
|
|||||||
NYMEX natural gas contracts
|
5,087
|
—
|
—
|
7,214
|
12,301
|
||||||||||||
NYMEX gasoline and heating
|
|||||||||||||||||
oil contracts
|
59
|
—
|
—
|
220
|
279
|
||||||||||||
Natural gas commodity contracts
|
—
|
161
|
76
|
(56
|
)
|
181
|
|||||||||||
Total
|
$
|
18,002
|
$
|
161
|
$
|
76
|
$
|
7,378
|
$
|
25,617
|
|||||||
Liabilities
|
|||||||||||||||||
NYMEX natural gas contracts
|
$
|
53,677
|
$
|
—
|
$
|
—
|
$
|
(53,677
|
)
|
$
|
—
|
||||||
NYMEX gasoline and heating
|
|||||||||||||||||
oil contracts
|
37
|
—
|
—
|
(37
|
)
|
—
|
|||||||||||
Natural gas commodity contracts
|
—
|
17
|
53
|
(56
|
)
|
14
|
|||||||||||
Total
|
$
|
53,714
|
$
|
17
|
$
|
53
|
$
|
(53,770
|
)
|
$
|
14
|
||||||
As of June 30, 2010
|
|||||||||||||||||
Assets
|
|||||||||||||||||
U. S. Stock/Bond Mutual Funds
|
$
|
11,533
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
11,533
|
|||||||
NYMEX natural gas contracts
|
7,532
|
—
|
—
|
5,845
|
13,377
|
||||||||||||
NYMEX gasoline and heating
|
|||||||||||||||||
oil contracts
|
96
|
—
|
—
|
91
|
187
|
||||||||||||
Natural gas commodity contracts
|
—
|
113
|
—
|
(20
|
)
|
93
|
|||||||||||
Total
|
$
|
19,161
|
$
|
113
|
$
|
—
|
$
|
5,916
|
$
|
25,190
|
|||||||
Liabilities
|
|||||||||||||||||
NYMEX natural gas contracts
|
$
|
52,330
|
$
|
—
|
$
|
—
|
$
|
(52,330
|
)
|
$
|
—
|
||||||
NYMEX gasoline and heating
oil contracts
|
88
|
—
|
—
|
(88
|
)
|
—
|
|||||||||||
Natural gas commodity contracts
|
—
|
239
|
—
|
(20
|
)
|
219
|
|||||||||||
Total
|
$
|
52,418
|
$
|
239
|
$
|
—
|
$
|
(52,438
|
)
|
$
|
219
|
The mutual funds included in Level 1 are valued based on quoted market prices of identical securities that are provided by the trustees of these securities. Derivative instruments included in Level 1 are valued using quoted market prices on the New York Mercantile Exchange (NYMEX). Derivative instruments included in Level 2 are valued using broker or dealer quotation services or by using observable market inputs. 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. During the quarter and nine months ended June 30, 2011 and June 30, 2010, there were no transfers between the levels of the fair value hierarchy. The Company’s policy is to recognize such transfers, if any, as for 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
|
Nine Months Ended
|
|||||||||||||
June 30,
|
June 30,
|
|||||||||||||
(Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||
Beginning of period
|
$
|
24
|
$
|
(15
|
)
|
$
|
23
|
$
|
(101
|
)
|
||||
Issuances and settlement - net
|
(33
|
)
|
15
|
(85
|
)
|
53
|
||||||||
Net (losses) gains related to derivatives not held
at end of period
|
—
|
—
|
(78
|
)
|
48
|
|||||||||
Net gains related to derivatives still held
at end of period
|
11
|
—
|
142
|
—
|
||||||||||
End of period
|
$
|
2
|
$
|
—
|
$
|
2
|
$
|
—
|
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.
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. 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 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 June 30, 2011, Laclede Gas held 0.3 million gallons of gasoline futures contracts at an average price of $2.45 per gallon and 0.1 million gallons of heating oil futures contracts (to hedge diesel fuel purchases) at an average price of $2.58 per gallon. Most of these futures contracts, the longest of which extends to February 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 June 30, 2011, the fair values of 34.8 million MMBtu of non-exchange traded natural gas commodity contracts were reflected in the Consolidated Balance Sheet. Of these contracts, 13.1 million MMBtu will settle during fiscal year 2011, 20.2 million MMBtu will settle during fiscal year 2012, the remaining 1.5 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 futures contracts to lock in margins. At June 30, 2011, LER’s unmatched fixed-price positions were not material to Laclede Group’s financial position or results of operations. LER’s NYMEX natural gas futures 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 June 30, 2011, it is expected that approximately $6.0 million of pre-tax unrealized losses 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 positions. The NYMEX is the primary national commodities exchange on which natural gas derivatives are traded. NYMEX-traded contracts are supported by the financial and credit quality of the clearing members of the NYMEX and have nominal credit risk. Open NYMEX natural gas futures positions at June 30, 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 2011
|
—
|
$
|
—
|
3.10
|
$
|
4.46
|
||||||||
Fiscal 2012
|
—
|
—
|
6.03
|
4.60
|
||||||||||
Open long futures positions
|
||||||||||||||
Fiscal 2011
|
1.69
|
$
|
7.34
|
1.54
|
$
|
6.14
|
||||||||
Fiscal 2012
|
13.07
|
5.17
|
2.64
|
6.13
|
||||||||||
Fiscal 2013
|
0.47
|
4.80
|
0.08
|
5.35
|
At June 30, 2011, Laclede Gas also had 15.63 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
|
Nine Months Ended
|
||||||||||||||
Location of Gain (Loss)
|
June 30,
|
June 30,
|
|||||||||||||
(Thousands)
|
Recorded in Income
|
2011
|
2010
|
2011
|
2010
|
||||||||||
Derivatives in Cash Flow Hedging Relationships
|
|||||||||||||||
Effective portion of gain (loss) recognized in OCI on derivatives:
|
|||||||||||||||
NYMEX natural gas contracts
|
$
|
701
|
$
|
(2,348
|
)
|
$
|
1,435
|
$
|
4,902
|
||||||
NYMEX gasoline and heating oil contracts
|
9
|
(148
|
)
|
449
|
78
|
||||||||||
Total
|
$
|
710
|
$
|
(2,496
|
)
|
$
|
1,884
|
$
|
4,980
|
||||||
Effective portion of gain (loss) reclassified from AOCI to income:
|
|||||||||||||||
NYMEX natural gas contracts
|
Non-Regulated Gas Marketing Operating Revenues
|
$
|
782
|
$
|
5,837
|
$
|
6,373
|
$
|
12,088
|
||||||
Non-Regulated Gas Marketing Operating
|
|
|
|
|
|
|
|
|
|||||||
Expenses | (3,239 | ) | (1,580 | ) | (5,714 | ) | (2,351 | ) | |||||||
Sub-total
|
(2,457
|
)
|
4,257
|
659
|
9,737
|
||||||||||
NYMEX gasoline and heating oil contracts
|
Regulated Gas Distribution Other Operation Expenses
|
196
|
77
|
317
|
213
|
||||||||||
Total
|
$
|
(2,261
|
)
|
$
|
4,334
|
$
|
976
|
$
|
9,950
|
||||||
Ineffective portion of gain (loss) on derivatives recognized in income:
|
|||||||||||||||
NYMEX natural gas contracts
|
Non-Regulated Gas Marketing Operating Revenues
|
$
|
(10
|
)
|
$
|
(53
|
)
|
$
|
550
|
$
|
1,336
|
||||
Non-Regulated Gas Marketing Operating | |||||||||||||||
Expenses
|
(371
|
)
|
541
|
(994
|
)
|
(1,703
|
)
|
||||||||
Sub-total
|
(381
|
)
|
488
|
(444
|
)
|
(367
|
)
|
||||||||
NYMEX gasoline and heating oil contracts | Regulated Gas Distribution Other Operation | ||||||||||||||
|
Expenses
|
(13
|
)
|
19
|
35
|
(60
|
)
|
||||||||
Total
|
$
|
(394
|
)
|
$
|
507
|
$
|
(409
|
)
|
$
|
(427
|
)
|
||||
Derivatives Not Designated as Hedging Instruments *
|
|||||||||||||||
Gain (loss) recognized in income on derivatives:
|
|||||||||||||||
Natural gas commodity contracts
|
Non-Regulated Gas Marketing Operating Revenues
|
$
|
(300
|
)
|
$
|
229
|
$
|
(599
|
)
|
$
|
4,344
|
||||
Non-Regulated Gas Marketing Operating Expenses
|
1,927
|
(37
|
)
|
3,123
|
(3,745
|
)
|
|||||||||
NYMEX natural gas contracts
|
Non-Regulated Gas Marketing Operating Revenues
|
(7
|
)
|
(8
|
)
|
(85
|
)
|
34
|
|||||||
Non-Regulated Gas Marketing Operating Expenses
|
—
|
—
|
—
|
(552
|
)
|
||||||||||
NYMEX gasoline and heating oil contracts
|
Other Income and (Income Deductions) - Net
|
(19
|
)
|
(11
|
)
|
44
|
(9
|
)
|
|||||||
Total
|
$
|
1,601
|
$
|
173
|
$
|
2,483
|
$
|
72
|
*
|
Gains and losses on Laclede Gas’ NYMEX 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 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.
|
Fair Value of Derivative Instruments in the Consolidated Balance Sheet at June 30, 2011
|
||||||||||
Asset Derivatives
|
Liability Derivatives
|
|||||||||
(Thousands)
|
Balance Sheet Location
|
Fair Value
|
*
|
Balance Sheet Location
|
Fair Value
|
*
|
||||
Derivatives designated as hedging instruments
|
||||||||||
NYMEX natural gas contracts
|
Derivative Instrument Assets
|
$
|
1,031
|
Derivative Instrument Assets
|
$
|
7,057
|
||||
Other Deferred Charges
|
—
|
Other Deferred Charges
|
77
|
|||||||
NYMEX gasoline and heating oil contracts
|
Derivative Instrument Assets
|
133
|
Derivative Instrument Assets
|
3
|
||||||
Sub-total
|
1,164
|
7,137
|
||||||||
Derivatives not designated as hedging instruments
|
||||||||||
NYMEX natural gas contracts
|
Derivative Instrument Assets
|
1,835
|
Derivative Instrument Assets
|
12,379
|
||||||
Other Deferred Charges
|
90
|
Other Deferred Charges
|
—
|
|||||||
Natural gas commodity contracts
|
Derivative Instrument Assets
|
1,842
|
Derivative Instrument Assets
|
106
|
||||||
Other Deferred Charges
|
308
|
Other Deferred Charges
|
—
|
|||||||
Other Current Liabilities
|
7
|
Other Current Liabilities
|
37
|
|||||||
NYMEX gasoline and heating oil contracts
|
Derivative Instrument Assets
|
10
|
Derivative Instrument Assets
|
1
|
||||||
Sub-total
|
4,092
|
12,523
|
||||||||
Total derivatives
|
$
|
5,256
|
$
|
19,660
|
||||||
Fair Value of Derivative Instruments in the Consolidated Balance Sheet at September 30, 2010
|
||||||||||
Asset Derivatives
|
Liability Derivatives
|
|||||||||
(Thousands)
|
Balance Sheet Location
|
Fair Value
|
*
|
Balance Sheet Location
|
Fair Value
|
*
|
||||
Derivatives designated as hedging instruments
|
||||||||||
NYMEX natural gas contracts
|
Derivative Instrument Assets
|
$
|
3,174
|
Derivative Instrument Assets
|
$
|
9,705
|
||||
Other Deferred Charges
|
4
|
Other Deferred Charges
|
3,435
|
|||||||
NYMEX gasoline and heating oil contracts
|
Derivative Instrument Assets
|
56
|
Derivative Instrument Assets
|
34
|
||||||
Sub-total
|
3,234
|
13,174
|
||||||||
Derivatives not designated as hedging instruments
|
||||||||||
NYMEX natural gas contracts
|
Derivative Instrument Assets
|
1,401
|
Derivative Instrument Assets
|
37,457
|
||||||
Other Deferred Charges
|
508
|
Other Deferred Charges
|
3,080
|
|||||||
Natural gas commodity contracts
|
Derivative Instrument Assets
|
237
|
Derivative Instrument Assets
|
56
|
||||||
Other Current Liabilities
|
—
|
Other Current Liabilities
|
14
|
|||||||
NYMEX gasoline and heating oil contracts |
Derivative Instrument Assets
|
3
|
Derivative Instrument Assets
|
3
|
||||||
Sub-total
|
2,149
|
40,610
|
||||||||
Total derivatives
|
$
|
5,383
|
$
|
53,784
|
||||||
Fair Value of Derivative Instruments in the Consolidated Balance Sheet at June 30, 2010
|
||||||||||
Asset Derivatives
|
Liability Derivatives
|
|||||||||
(Thousands)
|
Balance Sheet Location
|
Fair Value
|
*
|
Balance Sheet Location
|
Fair Value
|
*
|
||||
Derivatives designated as hedging instruments
|
||||||||||
NYMEX natural gas contracts
|
Derivative Instrument Assets
|
$
|
3,627
|
Derivative Instrument Assets
|
$
|
8,156
|
||||
NYMEX gasoline and heating oil contracts
|
Derivative Instrument Assets
|
95
|
Derivative Instrument Assets
|
79
|
||||||
Sub-total
|
3,722
|
8,235
|
||||||||
Derivatives not designated as hedging instruments
|
||||||||||
NYMEX natural gas contracts
|
Derivative Instrument Assets
|
3,905
|
Derivative Instrument Assets
|
44,174
|
||||||
Natural gas commodity contracts
|
Derivative Instrument Assets
|
93
|
Derivative Instrument Assets
|
239
|
||||||
Other Current Liabilities
|
20
|
Other Current Liabilities
|
—
|
|||||||
NYMEX gasoline and heating oil contracts
|
Derivative Instrument Assets
|
1
|
Derivative Instrument Assets
|
9
|
||||||
Sub-total
|
4,019
|
44,422
|
||||||||
Total derivatives
|
$
|
7,741
|
$
|
52,657
|
*
|
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:
June 30,
|
Sept. 30,
|
June 30,
|
|||||||||
(Thousands)
|
2011
|
2010
|
2010
|
||||||||
Fair value of asset derivatives presented above
|
$
|
5,256
|
$
|
5,383
|
$
|
7,741
|
|||||
Fair value of cash margin receivables
|
25,290
|
61,148
|
58,354
|
||||||||
Netting of assets and liabilities with the same counterparty
|
(19,630
|
)
|
(53,770
|
)
|
(52,438
|
)
|
|||||
Total
|
$
|
10,916
|
$
|
12,761
|
$
|
13,657
|
|||||
Derivative Instrument Assets, per Consolidated Balance Sheets:
|
|||||||||||
Derivative instrument assets
|
$
|
10,127
|
$
|
10,285
|
$
|
13,657
|
|||||
Other deferred charges
|
789
|
2,476
|
—
|
||||||||
Total
|
$
|
10,916
|
$
|
12,761
|
$
|
13,657
|
|||||
Fair value of liability derivatives presented above
|
$
|
19,660
|
$
|
53,784
|
$
|
52,657
|
|||||
Netting of assets and liabilities with the same counterparty
|
(19,630
|
)
|
(53,770
|
)
|
(52,438
|
)
|
|||||
Derivative instrument liabilities, per Consolidated Balance Sheet*
|
$
|
30
|
$
|
14
|
$
|
219
|
|||||
*
|
Included in the Other line of the Current Liabilities section
|
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 $12.0 million, or 20.9% of LER’s total accounts receivable at June 30, 2011. Net receivable amounts from these customers on the same date, reflecting netting arrangements, were $4.5 million. Accounts receivable attributable to utility companies and their marketing affiliates comprised $25.8 million of LER’s total accounts receivable, or 45.1% at June 30, 2011, while net receivable amounts from these customers, reflecting netting arrangements, were $23.9 million. LER also has concentrations of credit risk with certain individually significant counterparties. At June 30, 2011, the amounts included in accounts receivable from LER’s five largest counterparties (in terms of net accounts receivable exposure) were $20.2 million, or 35.2% of LER’s total accounts receivable. Four of these five counterparties are investment-grade rated companies. Net receivable amounts from these customers on the same date, reflecting netting arrangements, were $19.0 million. Additionally, LER has concentrations of credit risk with pipeline companies associated with its natural gas receivable amounts.
OTHER INCOME AND (INCOME DEDUCTIONS) – NET
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||
June 30,
|
June 30,
|
|||||||||||||
(Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||
Interest income
|
$
|
182
|
$
|
402
|
$
|
897
|
$
|
1,298
|
||||||
Net investment gain (loss)
|
414
|
(433
|
)
|
1,541
|
237
|
|||||||||
Other income
|
(21
|
)
|
151
|
53
|
176
|
|||||||||
Other income deductions
|
(418
|
)
|
(311
|
)
|
(22
|
)
|
3
|
|||||||
Other Income and (Income Deductions) – Net
|
$
|
157
|
$
|
(191
|
)
|
$
|
2,469
|
$
|
1,714
|
The increase in Other Income and (Income Deductions) – Net for the nine months ended June 30, 2011, compared with the nine months ended June 30, 2010, was primarily due to higher net investment gains, partially offset by lower 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.
INFORMATION BY OPERATING SEGMENT
|
All of Laclede Group’s subsidiaries are wholly owned. The Regulated Gas Distribution segment consists of the regulated operations of Laclede Gas and is the core business segment of Laclede Group. Laclede Gas is a public utility engaged in the retail distribution and sale of natural gas serving an area in eastern Missouri, with a population of approximately 2.1 million, including the City of St. Louis and parts of ten 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. 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 propane transactions and propane storage 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.
Laclede Group’s non-regulated subsidiary, LER, and to a lesser extent, Laclede Gas account for certain transactions through fair value measurements. As a result, 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 impact of net unrealized gains and losses on energy-related derivative contracts.
Non-
|
|||||||||||||||||
Regulated
|
Regulated
|
||||||||||||||||
Gas
|
Gas
|
||||||||||||||||
(Thousands)
|
Distribution
|
Marketing
|
Other
|
Eliminations
|
Consolidated
|
||||||||||||
Three Months Ended
|
|||||||||||||||||
June 30, 2011
|
|||||||||||||||||
Revenues from external customers
|
$
|
151,423
|
$
|
167,770
|
$
|
18,289
|
$
|
—
|
$
|
337,482
|
|||||||
Intersegment revenues
|
—
|
6,539
|
260
|
—
|
6,799
|
||||||||||||
Total Operating Revenues
|
151,423
|
174,309
|
18,549
|
—
|
344,281
|
||||||||||||
Net Economic Earnings
|
5,363
|
2,747
|
6,536
|
—
|
14,646
|
||||||||||||
Total assets
|
1,582,214
|
175,606
|
121,088
|
(136,604
|
)
|
1,742,304
|
|||||||||||
Nine Months Ended
|
|||||||||||||||||
June 30, 2011
|
|||||||||||||||||
Revenues from external customers
|
$
|
815,665
|
$
|
476,776
|
$
|
18,413
|
$
|
—
|
$
|
1,310,854
|
|||||||
Intersegment revenues
|
1,576
|
19,052
|
779
|
—
|
21,407
|
||||||||||||
Total Operating Revenues
|
817,241
|
495,828
|
19,192
|
—
|
1,332,261
|
||||||||||||
Net Economic Earnings
|
53,000
|
6,028
|
6,468
|
—
|
65,496
|
||||||||||||
Total assets
|
1,582,214
|
175,606
|
121,088
|
(136,604
|
)
|
1,742,304
|
|||||||||||
Three Months Ended
|
|||||||||||||||||
June 30, 2010
|
|||||||||||||||||
Revenues from external customers
|
$
|
124,023
|
$
|
195,988
|
$
|
195
|
$
|
—
|
$
|
320,206
|
|||||||
Intersegment revenues
|
722
|
3,319
|
260
|
—
|
4,301
|
||||||||||||
Total Operating Revenues
|
124,745
|
199,307
|
455
|
—
|
324,507
|
||||||||||||
Net Economic Earnings
|
32
|
4,053
|
340
|
—
|
4,425
|
||||||||||||
Total assets
|
1,580,772
|
180,830
|
135,887
|
(120,569
|
)
|
1,776,920
|
|||||||||||
Nine Months Ended
|
|||||||||||||||||
June 30, 2010
|
|||||||||||||||||
Revenues from external customers
|
$
|
778,332
|
$
|
638,196
|
$
|
10,720
|
$
|
—
|
$
|
1,427,248
|
|||||||
Intersegment revenues
|
2,862
|
20,109
|
779
|
—
|
23,750
|
||||||||||||
Total Operating Revenues
|
781,194
|
658,305
|
11,499
|
—
|
1,450,998
|
||||||||||||
Net Economic Earnings
|
40,904
|
12,452
|
4,189
|
—
|
57,545
|
||||||||||||
Total assets
|
1,580,772
|
180,830
|
135,887
|
(120,569
|
)
|
1,776,920
|
Reconciliation of Consolidated Net Economic Earnings to Consolidated Net Income
|
|||||||||||||||
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
June 30,
|
June 30,
|
||||||||||||||
(Thousands)
|
2011
|
2010
|
2011
|
2010
|
|||||||||||
Total Net Economic Earnings above
|
$
|
14,646
|
$
|
4,425
|
$
|
65,496
|
$
|
57,545
|
|||||||
Add: Unrealized gain (loss) on energy-related
|
|||||||||||||||
derivative contracts, net of tax
|
744
|
306
|
1,156
|
(1,908
|
)
|
||||||||||
Net Income
|
$
|
15,390
|
$
|
4,731
|
$
|
66,652
|
$
|
55,637
|
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 June 30, 2011 are estimated at approximately $676 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.
In order to enhance its technology, customer service, and business processes, Laclede Gas began a multi-year project to replace most of the Utility’s existing software applications. At June 30, 2011, the Utility was contractually committed to project costs of approximately $14 million, most of which will be capital expenditures, and plans to pay approximately $8 million during the fourth quarter of fiscal year 2011. Total Utility capital expenditures for fiscal year 2011 are estimated at approximately $72 million, including payments associated with these commitments.
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 June 30, 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 June 30, 2011, the carrying value of the liability recognized for these guarantees was $0.2 million.
Laclede Group had guarantees totaling $99.3 million for performance and payment of certain gas supply transactions by LER, as of June 30, 2011. Since that date, total guarantees issued by Laclede Group on behalf of LER increased by $5.0 million, bringing the total to $104.3 million in guarantees outstanding at July 29, 2011. No amounts have been recorded for these guarantees in the financial statements. As of June 30, 2011, management believes the likelihood that Laclede Group will be required to make payments under these guarantees is remote.
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.
As with other companies, Laclede Gas faces the risk of 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 located in Missouri: one in Shrewsbury and two in the City of St. Louis.
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 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, and other past and current owners of the site, participate in the follow up investigations of the site. The Company is evaluating the Attorney General’s request to ascertain whether, or to what extent, it will be involved in additional site investigations and/or site remediation.
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, potential liabilities associated with remediating these sites are not expected to have a material impact on the future financial position and results of operations of Laclede Gas or the Company.
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 approving a 2001 Stipulation and Agreement that permitted Laclede Gas’ corporate reorganization into a holding company structure. Laclede Gas filed a counterclaim against the MoPSC Staff alleging that the Staff has failed to adhere to the pricing provisions of the MoPSC’s affiliate transaction rules and Laclede Gas’ Cost Allocation Manual. However, on November 3, 2010, the MoPSC issued an Order dismissing Laclede Gas’ counterclaim for failure to state a claim upon which relief may be granted. On February 4, 2011, the MoPSC issued an Order finding that Laclede Gas violated the terms of the 2001 Stipulation and Agreement pertaining to Laclede Gas’ corporate reorganization and authorizing its General Counsel to seek penalties in court against Laclede Gas. On March 30, 2011, Laclede Gas filed a petition with the Cole County Circuit Court seeking judicial review of the February 4 Order. 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. Laclede Gas believes that the complaint lacks merit and is vigorously opposing it.
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 dismiss, 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.
Laclede Group and its subsidiaries are involved in other 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, results of operations, or cash flows of the Company.
SUBSEQUENT EVENT
|
On July 18, 2011, Laclede Gas entered into a new syndicated line of credit of $300 million, which is scheduled to expire in July 2016. This replaced the previous $320 million line of credit that terminated on that same date, which was set to expire in December 2011. The largest portion provided by a single bank in the new line of credit is 17.9%. The line of credit supports the sale of commercial paper or can be used directly. Like the previous line of credit, the new line includes a covenant limiting total debt, including short-term debt, to no more than 70% of total capitalization. On June 30, 2011, total debt was 47% of capitalization. While the previous line required earnings before interest, taxes, depreciation and amortization (EBITDA) to be at least 2.25 times interest expense, the new line does not contain such provision.
Also on July 18, 2011, Laclede Group entered into a new syndicated line of credit of $50 million, which will expire in July 2016. This replaced the previous $50 million in working capital lines of credit, which were set to expire in September 2011. Laclede Group’s lines of credit have been used to provide for seasonal funding needs of various subsidiaries. Like the previous lines of credit, the new line includes a covenant limiting total debt of the consolidated Laclede Group to no more than 70% of total capitalization. This ratio stood at 39% on June 30, 2011.
This management’s discussion analyzes the financial condition and results of operations of The Laclede Group, Inc. (Laclede Group or the Company) and its subsidiaries. It includes management’s view of factors that affect its business, explanations of past financial results including changes in earnings and costs from the prior year periods, and their effects on overall financial condition and liquidity.
Certain matters discussed in this report, excluding historical information, include forward-looking statements. Certain words, such as “may,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” and similar words and expressions identify forward-looking statements that involve uncertainties and risks. Future developments may not be in accordance with our expectations or beliefs and the effect of future developments may not be those anticipated. Among the factors that may cause results to differ materially from those contemplated in any forward-looking statement are:
•
|
weather conditions and catastrophic events, particularly severe weather in the natural gas producing areas of the country;
|
|
•
|
volatility in gas prices, particularly sudden and sustained changes in natural gas prices, including the related impact on margin deposits associated with the use of natural gas derivative instruments;
|
|
•
|
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;
|
|
•
|
changes in gas supply and pipeline availability, particularly those changes that impact supply for and access to our markets in which our subsidiaries transact business;
|
|
•
|
legislative, regulatory and judicial mandates and decisions, some of which may be retroactive, including those affecting
|
|
•
|
allowed rates of return
|
|
•
|
incentive regulation
|
|
•
|
industry structure
|
|
•
|
purchased gas adjustment provisions
|
|
•
|
rate design structure and implementation
|
|
•
|
regulatory assets
|
|
•
|
non-regulated and affiliated transactions
|
|
•
|
franchise renewals
|
|
•
|
environmental or safety matters, including the potential impact of legislative and regulatory actions related to climate change and pipeline safety
|
|
•
|
taxes
|
|
•
|
pension and other postretirement benefit liabilities and funding obligations
|
|
•
|
accounting standards, including the effect of potential changes relative to adoption of or convergence with international accounting standards;
|
|
•
|
the results of litigation;
|
|
•
|
retention of, ability to attract, ability to collect from, and conservation efforts of, customers;
|
|
•
|
capital and energy commodity market conditions, including the ability to obtain funds with reasonable terms for necessary capital expenditures and general operations and the terms and conditions imposed for obtaining sufficient gas supply;
|
|
•
|
discovery of material weakness in internal controls; and
|
|
•
|
employee workforce issues.
|
Readers are urged to consider the risks, uncertainties, and other factors that could affect our business as described in this report. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement in light of future events.
The Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes thereto.
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 seasonal in nature and 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.
Other subsidiaries provide less than 10% of consolidated revenues.
In June 2011, the Company’s Board of Directors named Ms. Suzanne Sitherwood, age 50, as successor to Mr. Douglas H. Yaeger, who will retire on February 1, 2012. Ms. Sitherwood will become President of the Company effective September 1, 2011 and Chief Executive Officer effective upon Mr. Yaeger’s retirement. In connection with Mr. Yaeger’s transition to retirement, Mr. Yaeger will relinquish his title of President of the Company on September 1, 2011. For further information relative to Ms. Sitherwood’s employment, refer to the Company’s Form 8-K filed with the SEC on June 21, 2011. On July 28, 2011, the Company's Board of Directors elected Ms. Sitherwood to the board effective September 1, 2011.
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:
•
|
the Utility’s ability to recover the costs of purchasing and distributing natural gas from its customers;
|
•
|
the impact of weather and other factors, such as customer conservation, on revenues and expenses;
|
•
|
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;
|
•
|
the Utility’s ability to access credit markets and maintain working capital sufficient to meet operating requirements; and,
|
•
|
the effect of natural gas price volatility on the business.
|
Non-Regulated Gas Marketing Segment:
•
|
the risks of competition;
|
•
|
regional fluctuations in natural gas prices;
|
•
|
new national pipeline infrastructure projects;
|
•
|
credit and/or capital market access;
|
•
|
counterparty risks; and,
|
•
|
the effect of natural gas price volatility on the business.
|
Further information regarding how management seeks to manage these key variables is discussed below.
Laclede Group’s strategy is to improve the performance of its core Utility, while developing non-regulated businesses and taking a measured approach in the pursuit of additional growth opportunities that complement the Company’s businesses.
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. In addition, Laclede Gas is working to improve its ability to provide reliable natural gas service at a reasonable cost, while maintaining and building a secure and dependable infrastructure. 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 35 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 prices 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, 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. Long-term increases in the wholesale cost of natural gas supplies may adversely impact the Utility’s competitive position compared with alternative energy sources.
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 focuses on growing its markets on a long-term and sustainable basis by providing both on-system Utility transportation customers and customers outside of Laclede Gas’ traditional service area with another choice in non-regulated natural gas suppliers. LER utilizes its natural gas supply agreements, transportation agreements, and other executory contracts to provide 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 continues to seek new growth opportunities and 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 and 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 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. Laclede Group’s non-regulated subsidiary, LER, and to a lesser extent, Laclede Gas account for certain transactions through fair value measurements. As a result, management also uses the non-GAAP measures of net economic earnings and net economic earnings per share when internally evaluating results of operations. Net economic earnings exclude from net income the after-tax impacts of net unrealized gains and losses on energy-related derivatives that are required by GAAP fair value accounting. This adjustment eliminates the impact of timing differences related to current changes in the fair value of financial and physical transactions prior to their completion and settlement. Management believes that excluding the earnings volatility caused by recognizing changes in fair value prior to settlement provides a useful representation of the economic impact of only the actual settled transactions and their effects on results of operations. These internal non-GAAP operating metrics should not be considered as an alternative to, or more meaningful than, GAAP measures such as net income. While management uses these non-GAAP measures to evaluate both Laclede Gas and LER, the net effect of unrealized gains and losses 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. These unrealized gains and losses result primarily from two sources:
1)
|
changes in 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.
|
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.
Reconciliations of net economic earnings and net economic earnings per share to the Company’s most directly comparable GAAP measures are provided below.
Quarter Ended June 30, 2011
(Millions, except per share amounts)
|
Net Economic Earnings
(Non-GAAP)
|
Add: Unrealized gain (loss) on energy-related derivative contracts*
|
Net Income
(GAAP)
|
||||||||||
Quarter Ended June 30, 2011
|
|||||||||||||
Regulated Gas Distribution
|
$
|
5.4
|
$
|
—
|
$
|
5.4
|
|||||||
Non-Regulated Gas Marketing
|
2.7
|
0.8
|
3.5
|
||||||||||
Other
|
6.5
|
—
|
6.5
|
||||||||||
Total
|
$
|
14.6
|
$
|
0.8
|
$
|
15.4
|
|||||||
Per Share Amounts **
|
$
|
0.65
|
$
|
0.04
|
$
|
0.69
|
|||||||
Quarter Ended June 30, 2010
|
|||||||||||||
Regulated Gas Distribution
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||||
Non-Regulated Gas Marketing
|
4.1
|
0.3
|
4.4
|
||||||||||
Other
|
0.3
|
—
|
0.3
|
||||||||||
Total
|
$
|
4.4
|
$
|
0.3
|
$
|
4.7
|
|||||||
Per Share Amounts **
|
$
|
0.20
|
$
|
0.01
|
$
|
0.21
|
|||||||
*
|
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 quarters ended June 30, 2011 and 2010, the amounts of income tax expense included in the reconciling items above are $0.5 million and $0.2 million, respectively.
|
||||||||||||
**
|
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 $15.4 million for the quarter ended June 30, 2011, compared with $4.7 million for the quarter ended June 30, 2010. Basic and diluted earnings per share for the quarter ended June 30, 2011 were $0.69 compared with basic and diluted earnings per share of $0.21 for the quarter ended June 30, 2010. Earnings increased compared to last year primarily due to the effect of an April 2011 non-regulated sale of propane inventory recorded in Other income and improved results reported by Laclede Group’s Regulated Gas Distribution segment. These increases were partially offset by lower income reported by Laclede Group’s Non-Regulated Gas Marketing segment. Net economic earnings were $14.6 million for the quarter ended June 30, 2011 compared with $4.4 million for the same quarter last year. Net economic earnings per share were $0.65 for the quarter ended June 30, 2011 compared with $0.20 for the quarter ended June 30, 2010.
Both Regulated Gas Distribution net income and Regulated Gas Distribution net economic earnings increased by $5.4 million for the quarter ended June 30, 2011, compared with the quarter ended June 30, 2010. The increase was primarily due to the following factors, quantified on a pre-tax basis (except for the income tax item):
•
|
the benefit of the general rate increase, effective September 1, 2010, totaling $7.9 million,
|
•
|
increased net investment gains, totaling $0.8 million; and,
|
•
|
the net effect of changes in unrecognized tax benefits recorded in earnings, totaling $0.7 million.
|
These benefits were partially offset by the following factors:
•
|
lower Infrastructure System Replacement Surcharge (ISRS) revenues, totaling $2.0 million; and,
|
•
|
increases in operation and maintenance expense, totaling $2.4 million.
|
The Non-Regulated Gas Marketing segment reported GAAP earnings totaling $3.5 million, a decrease of $0.9 million compared with the same quarter last year. Net economic earnings for the quarter ended June 30, 2011 decreased $1.4 million from the quarter ended June 30, 2010. These decreases were primarily due to the effect of 16% lower sales volumes and reduced margins on sales of natural gas by LER. The reduced volumes and sales margins were driven primarily by narrow regional price differentials and limited price volatility that have prevailed in the marketplace throughout the year and become the norm in the marketplace.
Both Other net income and Other net economic earnings increased $6.2 million compared with the same period last year primarily due to the effect of Laclede Gas’ April 2011 sale of 320,000 barrels of propane from inventory that were no longer required to serve utility customers. The revenues from this non-regulated transaction were $17.9 million and the resulting income, net of income taxes, totaled $6.1 million.
Regulated Gas Distribution Operating Revenues
Laclede Gas passes on to Utility customers (subject to prudence review) increases and decreases in the wholesale cost of natural gas in accordance with its PGA Clause. The volatility of the wholesale natural gas market results in fluctuations from period to period in the recorded levels of, among other items, revenues and natural gas cost expense. Nevertheless, increases and decreases in the cost of gas associated with system gas sales volumes have no direct effect on net revenues and net income.
Regulated Gas Distribution Operating Revenues for the quarter ended June 30, 2011 were $151.4 million, or $26.7 million more than the same period last year. Temperatures experienced in the Utility’s service area during the quarter were 82.1% colder than the same quarter last year, but 15.5% warmer than normal. Total system therms sold and transported were 111.8 million for the quarter ended June 30, 2011 compared with 102.2 million for the same period last year. Total off-system therms sold and transported were 64.0 million for the quarter ended June 30, 2011 compared with 31.5 million for the same period last year. The increase in Regulated Gas Distribution Operating Revenues was primarily attributable to the following factors:
(Millions)
|
||||
Higher off-system sales volumes
|
$
|
13.5
|
||
General rate increase, effective September 1, 2010
|
7.9
|
|||
Higher system sales volumes and other variations
|
5.2
|
|||
Higher prices charged for off-system sales
|
2.3
|
|||
Lower ISRS revenues
|
(2.0
|
)
|
||
Lower wholesale gas costs passed on to Utility customers (subject to prudence review by the MoPSC)
|
(0.2
|
)
|
||
Total Variation
|
$
|
26.7
|
Regulated Gas Distribution Operating Expenses
Regulated Gas Distribution Operating Expenses for the quarter ended June 30, 2011 increased $22.5 million from the same quarter last year. Natural and propane gas expense increased $19.3 million, or 33.7%, from last year’s level, primarily attributable to higher off-system gas expense and increased system volumes purchased for sendout. Other operation and maintenance expenses increased $2.4 million, or 6.0%, primarily due to higher net pension expense and increased group insurance charges, partially offset by decreased maintenance charges and a higher rate of overheads capitalized. Depreciation and amortization expense increased $0.5 million, or 4.9%, primarily due to additional depreciable property. Taxes, other than income taxes, increased $0.3 million, or 2.6%, primarily due to increased gross receipts taxes (attributable to increased system sales revenues).
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-Regulated Gas Marketing Operating Revenues decreased $25.0 million primarily due to the effect of 16% lower sales volumes, partially offset by higher per unit gas prices charged by LER. The decrease in Non-Regulated Gas Marketing Operating Expenses, totaling $23.7 million, was primarily associated with decreased volumes purchased, partially offset by higher prices charged by suppliers.
Other Operating Revenues and Operating Expenses
Other Operating Revenues increased $18.1 million primarily due to the effect of the aforementioned non-regulated sale of propane inventory by Laclede Gas. The increase in Other Operating Expenses, totaling $8.0 million, was primarily due to expenses associated with this propane transaction.
Interest Charges
The $0.6 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. Average short-term interest rates were 0.3% for both the quarters ended June 30, 2011 and June 30, 2010. Average short-term borrowings were $0.4 million for the quarter ended June 30, 2011 compared with $85.5 million for the quarter ended June 30, 2010.
Income Taxes
The $3.2 million increase in income taxes was primarily due to higher pre-tax income, partially offset by the effects of various property-related deductions and net changes in unrecognized tax benefits recorded in earnings.
Nine Months Ended June 30, 2011
(Millions, except per share amounts)
|
Net Economic Earnings
(Non-GAAP)
|
Add: Unrealized gain (loss) on energy-related derivative contracts*
|
Net Income
(GAAP)
|
||||||||||
Nine Months Ended June 30, 2011
|
|||||||||||||
Regulated Gas Distribution
|
$
|
53.0
|
$
|
—
|
$
|
53.0
|
|||||||
Non-Regulated Gas Marketing
|
6.0
|
1.2
|
7.2
|
||||||||||
Other
|
6.5
|
—
|
6.5
|
||||||||||
Total
|
$
|
65.5
|
$
|
1.2
|
$
|
66.7
|
|||||||
Per Share Amounts **
|
$
|
2.93
|
$
|
0.05
|
$
|
2.98
|
|||||||
Nine Months Ended June 30, 2010
|
|||||||||||||
Regulated Gas Distribution
|
$
|
40.9
|
$
|
(0.1
|
)
|
$
|
40.8
|
||||||
Non-Regulated Gas Marketing
|
12.4
|
(1.8
|
)
|
10.6
|
|||||||||
Other
|
4.2
|
—
|
4.2
|
||||||||||
Total
|
$
|
57.5
|
$
|
(1.9
|
)
|
$
|
55.6
|
||||||
Per Share Amounts **
|
$
|
2.59
|
$
|
(0.09
|
)
|
$
|
2.50
|
||||||
*
|
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 nine months ended June 30, 2011 and 2010, the amounts of income tax expense (benefit) included in the reconciling items above are $0.7 million and $(1.2) million, respectively.
|
||||||||||||
**
|
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 $66.7 million for the nine months ended June 30, 2011, compared with $55.6 million for the nine months ended June 30, 2010. Basic and diluted earnings per share for the nine months ended June 30, 2011 were $2.99 and $2.98, respectively, compared with basic and diluted earnings per share of $2.51 and $2.50, respectively, for the nine months ended June 30, 2010. Earnings increased compared to last year primarily due to improved results reported by Laclede Group’s Regulated Gas Distribution segment and increased Other income, partially offset by lower income reported by Laclede Group’s Non-Regulated Gas Marketing segment. Net economic earnings were $65.5 million for the nine months ended June 30, 2011 compared with $57.5 million for the same period last year. Net economic earnings per share were $2.93 for the nine months ended June 30, 2011 compared with $2.59 for the nine months ended June 30, 2010.
Regulated Gas Distribution net income and Regulated Gas Distribution net economic earnings increased by $12.2 million and $12.1 million, respectively, for the nine months ended June 30, 2011 compared with the nine months ended June 30, 2010. These increases were primarily attributable to the following factors, quantified on a pre-tax basis (except for the income tax item):
•
|
the benefit of the general rate increase, effective September 1, 2010, totaling $22.7 million,
|
•
|
increased net investment gains, totaling $1.2 million; and,
|
•
|
the net effect of changes in unrecognized tax benefits recorded in earnings, totaling $0.9 million.
|
These factors were partially offset by:
•
|
lower Infrastructure System Replacement Surcharge (ISRS) revenues, totaling $5.5 million; and,
|
•
|
lower system gas sales volumes and other variations, totaling $1.6 million.
|
The Non-Regulated Gas Marketing segment reported a decrease in GAAP earnings of $3.4 million compared with the same period last year. Net economic earnings for the nine months ended June 30, 2011 decreased $6.4 million from the nine months ended June 30, 2010. The decreased net economic earnings were primarily due to LER’s reduced margins on sales of natural gas and the effect of 16% lower sales volumes. The reduced sales margins and volumes were driven primarily by narrow regional price differentials and limited price volatility that have prevailed in the marketplace throughout the year and become the norm in the marketplace. On a GAAP basis, the reduced sales margins also included the effect of after-tax net unrealized gains from certain of LER’s energy-related derivative contracts, totaling $1.2 million, recognized in earnings during the nine months ended June 30, 2011, compared with after-tax net unrealized losses totaling $1.8 million, recognized during the nine months ended June 30, 2010.
Both Other net income and Other net economic earnings increased $2.3 million compared with the same period last year primarily due to the effect of non-regulated propane transactions by Laclede Gas in both periods. During the nine months ended June 30, 2011, Laclede Gas sold 320,000 barrels of propane from inventory that was no longer required to serve its utility customers. This transaction resulted in income, net of income taxes, totaling $6.1 million. This amount was partially offset by the effect of a propane transaction in the wholesale market during the nine months ended June 30, 2010. That transaction resulted from an inventory exchange that the counterparty settled in cash instead of through a return of inventory, resulting in income, net of income taxes, totaling $3.7 million.
Regulated Gas Distribution Operating Revenues
Laclede Gas passes on to Utility customers (subject to prudence review) increases and decreases in the wholesale cost of natural gas in accordance with its PGA Clause. The volatility of the wholesale natural gas market results in fluctuations from period to period in the recorded levels of, among other items, revenues and natural gas cost expense. Nevertheless, increases and decreases in the cost of gas associated with system gas sales volumes have no direct effect on net revenues and net income.
Regulated Gas Distribution Operating Revenues for the nine months ended June 30, 2011 were $817.2 million, or $36.0 million more than the same period last year. Temperatures experienced in the Utility’s service area during the nine months ended June 30, 2011 were essentially normal and the same as last year. Total system therms sold and transported were 808.8 million for the nine months ended June 30, 2011 compared with 820.9 million for the same period last year. Total off-system therms sold and transported were 202.1 million for the nine months ended June 30, 2011 compared with 70.7 million for the same period last year. The increase in Regulated Gas Distribution Operating Revenues was primarily attributable to the following factors:
(Millions)
|
||||
Higher off-system sales volumes
|
$
|
58.7
|
||
General rate increase, effective September 1, 2010
|
22.7
|
|||
Lower wholesale gas costs passed on to Utility customers (subject to prudence review by the MoPSC)
|
(19.8
|
)
|
||
Lower system sales volumes and other variations
|
(15.2
|
)
|
||
Lower ISRS revenues
|
(5.5
|
)
|
||
Lower prices charged for off-system sales
|
(4.9
|
)
|
||
Total Variation
|
$
|
36.0
|
Regulated Gas Distribution Operating Expenses
Regulated Gas Distribution Operating Expenses for the nine months ended June 30, 2011 increased $21.5 million from the same period last year. Natural and propane gas expense increased $21.2 million, or 4.3%, from last year’s level, primarily attributable to higher off-system gas expense, partially offset by lower rates charged by our suppliers and decreased system volumes purchased for sendout. Other operation and maintenance expenses increased $0.7 million, or 0.6%, primarily due to due to higher net pension expense and increased group insurance charges, partially offset by decreased maintenance charges and a higher rate of overheads capitalized. Depreciation and amortization expense increased $1.1 million, or 3.9%, primarily due to additional depreciable property. Taxes, other than income taxes, decreased $1.5 million, or 2.8%, primarily due to decreased gross receipts taxes (attributable to decreased system sales revenues).
Non-Regulated Gas Marketing Operating Revenues and Operating Expenses
Non-Regulated Gas Marketing Operating Revenues decreased $162.5 million primarily due to the effect of 16% lower sales volumes and lower per unit gas prices charged by LER. The decrease in Non-Regulated Gas Marketing Operating Expenses, totaling $156.9 million, was primarily associated with decreased volumes purchased and lower prices charged by suppliers.
Other Operating Revenues and Operating Expenses
Other Operating Revenues increased $7.7 million primarily due to the year-over-year effect of the aforementioned propane transactions by Laclede Gas. The increase in Other Operating Expenses, totaling $4.0 million, was primarily due to higher expenses associated with this year’s propane transaction.
Other Income and (Income Deductions) - Net
Other Income and (Income Deductions) – Net increased $0.8 million primarily due to higher net investment gains, partially offset by lower 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 $1.0 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. Average short-term interest rates were 0.3% and 0.2% for the nine months ended June 30, 2011 and June 30, 2010, respectively. Average short-term borrowings were $61.1 million for the nine months ended June 30, 2011 compared with $114.4 million for the nine months ended June 30, 2010.
Income Taxes
The $3.4 million increase in income taxes was primarily due to higher pre-tax income, partially offset by the effects of various property-related deductions and net changes in unrecognized tax benefits recorded in earnings.
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 approving a 2001 Stipulation and Agreement that permitted Laclede Gas’ corporate reorganization into a holding company structure. Laclede Gas filed a counterclaim against the MoPSC Staff alleging that the Staff has failed to adhere to the pricing provisions of the MoPSC’s affiliate transaction rules and Laclede Gas’ Cost Allocation Manual. However, on November 3, 2010, the MoPSC issued an Order dismissing Laclede Gas’ counterclaim for failure to state a claim upon which relief may be granted. On February 4, 2011, the MoPSC issued an Order finding that Laclede Gas violated the terms of the 2001 Stipulation and Agreement pertaining to Laclede Gas’ corporate reorganization and authorizing its General Counsel to seek penalties in court against Laclede Gas. On March 30, 2011, Laclede Gas filed a petition with the Cole County Circuit Court seeking judicial review of the February 4 Order. 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. Laclede Gas believes that the complaint lacks merit and is vigorously opposing it.
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 dismiss, 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, of which Laclede Gas sought judicial review. On January 11, 2010, the Court found that the Commission did have the legal authority to approve such tariffs, which decision the Commission appealed to the Missouri Court of Appeals, Western District. On October 19, 2010, the Western District overruled the Cole County Circuit Court’s decision and affirmed the Commission’s April 15, 2009 Order. Laclede Gas filed with the Western District a motion for rehearing and an application to transfer the case to the Missouri Supreme Court. On December 7, 2010, the Western District denied the Utility’s requests for rehearing and for transfer to the Missouri Supreme Court. On December 22, 2010, the Utility filed an application at the Missouri Supreme Court for transfer of the case to that Court. The Utility’s application was denied by the Missouri Supreme Court on January 25, 2011.
On October 29, 2010, the Utility made an ISRS filing with the Commission designed to increase revenues by $2.6 million annually, $2.5 million of which the MoPSC approved effective January 7, 2011. Also, on May 2, 2011, the Utility made another ISRS filing with the Commission designed to increase revenues by $2.3 million annually, which was approved by the MoPSC effective July 8, 2011.
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, 2010 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 nine months ended June 30, 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, 2010.
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 provided by operating activities was $201.3 million for the nine months ended June 30, 2011, compared with $157.8 million for the same period last year. The improvement is primarily attributable to reduced cash payments for margin deposits associated with the Utility’s use of natural gas derivative instruments and other variations in the timing of the collection of gas costs under the PGA Clause, as well as improved operating earnings of the Utility. These factors were partially offset by a reduction in operating cash flows at LER.
Net cash used in investing activities for the nine months ended June 30, 2011 was $47.0 million compared with $43.8 million for the nine months ended June 30, 2010. Cash used in investing activities primarily reflected capital expenditures in both periods.
Net cash used in financing activities was $180.3 million for the nine months ended June 30, 2011 compared with $79.3 million for the nine months ended June 30, 2010. The variation primarily reflects increased repayments of short-term debt and the maturity of long-term debt this year.
Short-term Investments
Laclede Group had short-term investments totaling $20.3 million at June 30, 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 several 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 ranged between $13.3 million and $85.8 million during the nine months ended June 30, 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 nine months ended June 30, 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 June 30, 2011, Laclede Gas had a syndicated line of credit in place of $320 million from 10 banks, with the largest portion provided by a single bank being 17.5%. This line was scheduled to expire in December 2011. However, on July 18, 2011, Laclede Gas entered into a new syndicated line of credit of $300 million, scheduled to expire in July 2016, which replaced the previous line which terminated on that same date. The largest portion provided by a single bank in the new line of credit is 17.9%. Laclede Gas’ previous and new lines of credit include covenants limiting total debt, including short-term debt, to no more than 70% of total capitalization. The previous line also required earnings before interest, taxes, depreciation and amortization (EBITDA) to be at least 2.25 times interest expense. On June 30, 2011, total debt was 47% of total capitalization. For the twelve months ended June 30, 2011, EBITDA was 5.51 times interest expense.
Short-term cash requirements outside of Laclede Gas have generally been met with internally-generated funds. At June 30, 2011, Laclede Group had $50 million in working capital lines of credit, scheduled to expire in September 2011, to meet short-term liquidity needs of its subsidiaries. On July 18, 2011, Laclede Group entered into a new syndicated line of credit of $50 million, scheduled to expire in July 2016, which replaced the previous line which terminated on that same date. Both the previous and new lines of credit have covenants limiting the total debt of the consolidated Laclede Group to no more than 70% of the Company’s total capitalization. This ratio stood at 39% on June 30, 2011. These lines have been used to provide for seasonal funding needs of various subsidiaries from time to time. There were no borrowings under Laclede Group’s lines during the nine months ended June 30, 2011, other than minimal one-day draws under each line for administrative purposes.
Information about Laclede Group’s consolidated short-term borrowings (excluding intercompany borrowings) during the nine months ended June 30, 2011 and as of June 30, 2011, is presented below:
Laclede Gas Commercial Paper Borrowings
|
|
Nine Months Ended June 30, 2011
|
|
Weighted average borrowings outstanding
|
$61.1 million
|
Weighted average interest rate
|
0.3%
|
Range of borrowings outstanding
|
$0 – $172.1 million
|
As of June 30, 2011
|
|
Borrowings outstanding at end of period
|
None
|
Weighted average interest rate
|
N/A
|
Based on average short-term borrowings for the nine months ended June 30, 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 $0.6 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 nine months ended June 30, 2011, pursuant to this authority, the Utility sold 29 shares of its common stock to Laclede Group for $1.1 million. For more information on these sales of stock, see Part II., Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. As of July 29, 2011, $516.3 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 June 30, 2011, Laclede Gas had fixed-rate long-term debt totaling $365 million. 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 400,000 shares of its common stock under its Dividend Reinvestment and Stock Purchase Program. At June 30, 2011, there were 297,488 shares remaining available for issuance under this Form S-3. The Company anticipates filing a Form S-3 immediately after the filing of this quarterly report on Form 10-Q to replace the existing Form S-3, which is scheduled to expire later this year. In addition, on January 28, 2011, Laclede Group filed 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 June 30, 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 June 30, 2011, the carrying value of the liability recognized for these guarantees was $0.2 million.
Laclede Group had guarantees totaling $99.3 million for performance and payment of certain gas supply transactions by LER, as of June 30, 2011. Since that date, total guarantees issued by Laclede Group on behalf of LER increased by $5.0 million, bringing the total to $104.3 million in guarantees outstanding at July 29, 2011. 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 $46.8 million for the nine months ended June 30, 2011, compared with $39.7 million for the same period last year. Non-utility capital expenditures were $0.3 million for the nine months ended June 30, 2011, compared with $0.6 million for the nine months ended June 30, 2010. Total Utility capital expenditures for fiscal year 2011 are estimated at approximately $72 million, including expected fourth quarter expenditures associated with a multi-year software replacement project that Laclede Gas recently began in order to enhance its technology, customer service, and business processes.
Consolidated capitalization at June 30, 2011 consisted of 61.4% Laclede Group common stock equity and 38.6% 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 June 30, 2011 and at September 30, 2010, such as Accounts receivable - net, Gas stored underground, Notes payable, Accounts payable, Regulatory assets and Regulatory liabilities, and Advance and Delayed customer billings. The Consolidated Balance Sheet at June 30, 2010 is presented to facilitate comparison of these items with the corresponding interim period of the preceding fiscal year.
CONTRACTUAL OBLIGATIONS
As of June 30, 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
2011
|
Fiscal Years
2012-2013
|
Fiscal Years
2014-2015
|
2016 and
thereafter
|
|||||||||||
Principal Payments on Long-Term Debt
|
$
|
365.0
|
$
|
—
|
$
|
25.0
|
$
|
—
|
$
|
340.0
|
||||||
Interest Payments on Long-Term Debt
|
463.6
|
2.5
|
45.1
|
42.7
|
373.3
|
|||||||||||
Capital Leases (a)
|
0.3
|
0.1
|
0.1
|
0.1
|
—
|
|||||||||||
Operating Leases (a)
|
12.7
|
1.3
|
7.8
|
3.6
|
—
|
|||||||||||
Purchase Obligations – Natural Gas (b)
|
676.3
|
150.0
|
484.2
|
27.5
|
14.6
|
|||||||||||
Purchase Obligations – Other (c)
|
108.3
|
15.4
|
35.8
|
19.2
|
37.9
|
|||||||||||
Total (d)
|
$
|
1,626.2
|
$
|
169.3
|
$
|
598.0
|
$
|
93.1
|
$
|
765.8
|
(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 June 30, 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; 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 does not expect to make contributions to its qualified, trusteed pension plans during the remaining three months of fiscal year 2011. Laclede Gas anticipates a $0.1 million contribution relative to its non-qualified pension plans during the remaining three months of fiscal year 2011. With regard to the postretirement benefits, the Company anticipates Laclede Gas will contribute $5.6 million to the qualified trusts and $0.1 million directly to participants from Laclede Gas’ funds during the remaining three months of fiscal year 2011. 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.
|
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, 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. Pursuant to this risk management policy, LER manages the price risk associated with its fixed-price commitments 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 to lock in margins. At June 30, 2011 and 2010, 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 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 (liabilities) assets at September 30, 2010
|
$
|
(9,962
|
)
|
$
|
11,568
|
$
|
1,606
|
|||
Changes in fair value
|
906
|
—
|
906
|
|||||||
Settlements
|
2,953
|
—
|
2,953
|
|||||||
Changes in cash margin
|
—
|
(3,507
|
)
|
(3,507
|
)
|
|||||
Net balance of derivative (liabilities) assets at June 30, 2011
|
$
|
(6,103
|
)
|
$
|
8,061
|
$
|
1,958
|
At June 30, 2011
|
|||||||||||||
Maturity by Fiscal Year
|
|||||||||||||
(Thousands)
|
Total
|
2011
|
2012
|
2013
|
|||||||||
Fair values of exchange-traded/cleared natural gas derivatives - net
|
$
|
(6,103
|
)
|
$
|
(2,477
|
)
|
$
|
(3,597
|
)
|
$
|
(29
|
)
|
|
MMBtu – net long (short) futures/swap positions
|
(4,873
|
)
|
(1,555
|
)
|
(3,393
|
)
|
75
|
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, 2010
|
$
|
168
|
||
Changes in fair value
|
2,523
|
|||
Settlements
|
(677
|
)
|
||
Net balance of derivative assets at June 30, 2011
|
$
|
2,014
|
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 nine months ended June 30, 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 $0.6 million on an annual basis. Portions of such increases may be offset through the application of PGA carrying costs. At June 30, 2011, Laclede Gas had fixed-rate long-term debt totaling $365 million. 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 third fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 35 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
On May 12, 2011, the Board of Directors of Laclede Gas approved the sale of 9 shares of Laclede Gas common stock to Laclede Group. The proceeds from the sale, totaling $0.3 million, were used to reduce short-term borrowings. Exemption from registration was claimed under Section 4(2) of the Securities Act of 1933.
Item 5. Other Information
(a)
|
On July 28, 2011, the Company’s Board of Directors approved increasing the size of the board from 9 to 10 effective September 1, 2011. The Board also appointed Suzanne Sitherwood, who will become president of the Company on September 1, 2011, to fill the vacancy created by the new director position. While Ms. Sitherwood will be in the class of directors whose term expires at the annual meeting in January 2013, the Company will seek shareholder ratification of her election at the next annual meeting.
The Board also approved recognition awards, each in the amount of $100,000, to Messrs. Waltermire, the Company’s Chief Financial Officer and the Utility’s Senior Vice President and Chief Financial Officer, and Spotanski, the Utility’s Senior Vice President of Operations and Marketing, in recognition of their past and continued leadership commitment to Laclede. These awards will vest on September 30, 2012 and be payable within 30 days thereafter. The awards become payable in full upon a change in control or payable on a pro rata basis if the awardee ceases to be an employee due to death, disability, or termination without cause. Change in control, disability, and cause are all as defined in the Company’s annual incentive plan.
In addition, the Board approved an amendment to the Restricted Stock Plan for Non-Employee Directors to increase the annual grants to non-employee directors by 150 shares effective with the next grants in January 2012. The annual grants for the six directors who have no benefit under the Retirement Plan for Non-Employee Directors will be increased from 1,600 to 1,750 shares and for the two directors with vested benefits under the Retirement Plan will be increased from 1,450 to 1,600 shares.
|
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:
|
July 29, 2011
|
By:
|
/s/ Mark D. Waltermire
|
||
Mark D. Waltermire
|
|||||
Chief Financial Officer
|
|||||
(Authorized Signatory and Chief Financial Officer)
|
Exhibit No.
|
||
-
|
Severance Benefits Agreement with Suzanne Sitherwood effective September 1, 2011
|
|
-
|
Performance Contingent Restricted Stock Agreement with Suzanne Sitherwood effective September 1, 2011
|
|
-
|
Restricted Stock Unit Award Agreement with Suzanne Sitherwood effective September 1, 2011
|
|
-
|
Loan agreement with Laclede Gas Company dated July 18, 2011 with several banks, including Wells Fargo Bank, National Association as administrative agent, U. S. Bank National Association as lead arranger, and JPMorgan Chase Bank, N. A. as documentation agent
|
|
-
|
Loan agreement with The Laclede Group, Inc. dated July 18, 2011 with several banks, including Wells Fargo Bank, National Association as administrative agent, U. S. Bank National Association as lead arranger, and JPMorgan Chase Bank, N. A. as documentation agent
|
|
10.6 | - | Amendment to the 2009 Restricted Stock Plan for Non-Employee Directors |
-
|
Ratio of Earnings to Fixed Charges.
|
|
-
|
CEO and CFO Certifications under Exchange Act Rule 13a – 14(a).
|
|
-
|
CEO and CFO Section 1350 Certifications.
|
|