Attached files
file | filename |
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EX-32 - EXHIBIT 32 - SPIRE MISSOURI INC | ex32.htm |
EX-31 - EXHIBIT 31 - SPIRE MISSOURI INC | ex31.htm |
EX-12 - EXHIBIT 12 - SPIRE MISSOURI INC | ex12.htm |
EX-10.1 - EXHIBIT 10.1 - SPIRE MISSOURI INC | ex10-1.htm |
EX-10.2 - EXHIBIT 10.2 - SPIRE MISSOURI INC | ex10-2.htm |
10-Q - THE LACLEDE GROUP, INC. DECEMBER 2009 10-Q - SPIRE MISSOURI INC | form10-qdec2009.htm |
Exhibit
99.1
LACLEDE
GAS COMPANY
STATEMENTS
OF INCOME
(UNAUDITED)
Three
Months Ended
|
|||||||||
December
31,
|
|||||||||
(Thousands)
|
2009
|
2008
|
|||||||
Operating
Revenues:
|
|||||||||
Utility
|
$
|
282,929
|
$
|
358,101
|
|||||
Other
|
10,325
|
597
|
|||||||
Total
Operating Revenues
|
293,254
|
358,698
|
|||||||
Operating
Expenses:
|
|||||||||
Utility
|
|||||||||
Natural
and propane gas
|
182,000
|
254,897
|
|||||||
Other
operation expenses
|
37,463
|
36,301
|
|||||||
Maintenance
|
6,174
|
6,534
|
|||||||
Depreciation
and amortization
|
9,363
|
9,119
|
|||||||
Taxes,
other than income taxes
|
16,224
|
18,358
|
|||||||
Total
Utility Operating Expenses
|
251,224
|
325,209
|
|||||||
Other
|
4,328
|
530
|
|||||||
Total
Operating Expenses
|
255,552
|
325,739
|
|||||||
Operating
Income
|
37,702
|
32,959
|
|||||||
Other
Income and (Income Deductions) – Net
|
1,510
|
610
|
|||||||
Interest
Charges:
|
|||||||||
Interest
on long-term debt
|
6,146
|
6,146
|
|||||||
Other
interest charges
|
563
|
3,189
|
|||||||
Total
Interest Charges
|
6,709
|
9,335
|
|||||||
Income
Before Income Taxes
|
32,503
|
24,234
|
|||||||
Income
Tax Expense
|
11,437
|
8,037
|
|||||||
Net
Income
|
21,066
|
16,197
|
|||||||
Dividends
on Redeemable Preferred Stock
|
—
|
8
|
|||||||
Earnings
Applicable to Common Stock
|
$
|
21,066
|
$
|
16,189
|
|||||
1
LACLEDE
GAS COMPANY
STATEMENTS
OF COMPREHENSIVE INCOME
(UNAUDITED)
Three
Months Ended
|
|||||||
December
31,
|
|||||||
(Thousands)
|
2009
|
2008
|
|||||
Net
Income
|
$
|
21,066
|
$
|
16,197
|
|||
Other
Comprehensive Income, Before Tax:
|
|||||||
Net
gains (losses) on cash flow hedging derivative
instruments:
|
|||||||
Net
hedging gain arising during the period
|
166
|
—
|
|||||
Reclassification
adjustment for gains included in net income
|
(62
|
)
|
—
|
||||
Net
unrealized gains on cash flow hedging derivative
instruments
|
104
|
—
|
|||||
Amortization
of actuarial loss included in net periodic pension and
|
|||||||
postretirement
benefit cost
|
98
|
50
|
|||||
Other
Comprehensive Income, Before Tax
|
202
|
50
|
|||||
Income
Tax Expense Related to Items of Other Comprehensive Income
|
78
|
17
|
|||||
Other
Comprehensive Income, Net of Tax
|
124
|
33
|
|||||
Comprehensive
Income
|
$
|
21,190
|
$
|
16,230
|
|||
2
LACLEDE
GAS COMPANY
BALANCE
SHEETS
(UNAUDITED)
Dec.
31,
|
Sept.
30,
|
Dec.
31,
|
||||||||||||
(Thousands)
|
2009
|
2009
|
2008
|
|||||||||||
ASSETS
|
||||||||||||||
Utility
Plant
|
$
|
1,288,862
|
$
|
1,280,238
|
$
|
1,239,063
|
||||||||
Less: Accumulated
depreciation and amortization
|
429,892
|
424,309
|
410,662
|
|||||||||||
Net
Utility Plant
|
858,970
|
855,929
|
828,401
|
|||||||||||
Other
Property and Investments
|
41,988
|
40,549
|
37,239
|
|||||||||||
Current
Assets:
|
||||||||||||||
Cash
and cash equivalents
|
7,925
|
1,402
|
1,821
|
|||||||||||
Accounts
receivable:
|
||||||||||||||
Utility
|
159,423
|
81,262
|
208,744
|
|||||||||||
Non-utility
|
1,434
|
1,634
|
1,640
|
|||||||||||
Associated
companies
|
735
|
375
|
3,478
|
|||||||||||
Other
|
15,277
|
4,731
|
4,991
|
|||||||||||
Allowances
for doubtful accounts
|
(7,928
|
)
|
(10,791
|
)
|
(8,331
|
)
|
||||||||
Inventories:
|
||||||||||||||
Natural
gas stored underground at LIFO cost
|
88,204
|
93,313
|
197,360
|
|||||||||||
Propane
gas at FIFO cost
|
15,649
|
19,847
|
19,871
|
|||||||||||
Materials,
supplies, and merchandise at average cost
|
4,037
|
4,032
|
5,227
|
|||||||||||
Derivative
instrument assets
|
7,505
|
12,369
|
23,203
|
|||||||||||
Unamortized
purchased gas adjustments
|
—
|
—
|
24,149
|
|||||||||||
Prepayments
and other
|
6,759
|
7,547
|
6,300
|
|||||||||||
Total
Current Assets
|
299,020
|
215,721
|
488,453
|
|||||||||||
Deferred
Charges:
|
||||||||||||||
Regulatory
assets
|
467,130
|
482,999
|
354,274
|
|||||||||||
Other
|
6,640
|
5,089
|
5,844
|
|||||||||||
Total
Deferred Charges
|
473,770
|
488,088
|
360,118
|
|||||||||||
Total
Assets
|
$
|
1,673,748
|
$
|
1,600,287
|
$
|
1,714,211
|
||||||||
3
LACLEDE
GAS COMPANY
BALANCE
SHEETS (Continued)
(UNAUDITED)
Dec.
31,
|
Sept.
30,
|
Dec.
31,
|
||||||||||||
(Thousands,
except share amounts)
|
2009
|
2009
|
2008
|
|||||||||||
CAPITALIZATION
AND LIABILITIES
|
||||||||||||||
Capitalization:
|
||||||||||||||
Common
stock and Paid-in capital (11,644, 11,634, and
11,603
shares issued, respectively)
|
$
|
204,724
|
$
|
203,754
|
$
|
200,001
|
||||||||
Retained
earnings
|
213,726
|
201,450
|
210,205
|
|||||||||||
Accumulated
other comprehensive loss
|
(2,495
|
)
|
(2,619
|
)
|
(1,757
|
)
|
||||||||
Total
Common Stock Equity
|
415,955
|
402,585
|
408,449
|
|||||||||||
Redeemable
preferred stock (less current sinking fund
requirements)
|
—
|
—
|
467
|
|||||||||||
Long-term
debt
|
364,254
|
389,240
|
389,196
|
|||||||||||
Total
Capitalization
|
780,209
|
791,825
|
798,112
|
|||||||||||
Current
Liabilities:
|
||||||||||||||
Notes
payable
|
145,150
|
129,800
|
263,500
|
|||||||||||
Notes
payable – associated companies
|
—
|
—
|
52,594
|
|||||||||||
Accounts
payable
|
65,378
|
30,220
|
71,584
|
|||||||||||
Accounts
payable – associated companies
|
8
|
—
|
6
|
|||||||||||
Advance
customer billings
|
10,421
|
21,140
|
16,578
|
|||||||||||
Current
portion of long-term debt and preferred stock
|
25,000
|
—
|
160
|
|||||||||||
Wages
and compensation accrued
|
11,715
|
12,682
|
14,063
|
|||||||||||
Dividends
payable
|
8,790
|
8,535
|
8,676
|
|||||||||||
Customer
deposits
|
12,163
|
12,400
|
13,772
|
|||||||||||
Interest
accrued
|
6,217
|
9,943
|
6,825
|
|||||||||||
Taxes
accrued
|
22,778
|
12,414
|
30,118
|
|||||||||||
Unamortized
purchased gas adjustments
|
4,741
|
3,130
|
—
|
|||||||||||
Deferred
income taxes current
|
5,169
|
912
|
5,791
|
|||||||||||
Other
|
19,510
|
10,737
|
16,386
|
|||||||||||
Total
Current Liabilities
|
337,040
|
251,913
|
500,053
|
|||||||||||
Deferred
Credits and Other Liabilities:
|
||||||||||||||
Deferred
income taxes
|
256,339
|
256,381
|
215,860
|
|||||||||||
Unamortized
investment tax credits
|
3,700
|
3,754
|
3,918
|
|||||||||||
Pension
and postretirement benefit costs
|
201,659
|
202,681
|
103,507
|
|||||||||||
Asset
retirement obligations
|
25,876
|
25,495
|
27,220
|
|||||||||||
Regulatory
liabilities
|
44,681
|
44,225
|
42,639
|
|||||||||||
Other
|
24,244
|
24,013
|
22,902
|
|||||||||||
Total
Deferred Credits and Other Liabilities
|
556,499
|
556,549
|
416,046
|
|||||||||||
Total
Capitalization and Liabilities
|
$
|
1,673,748
|
$
|
1,600,287
|
$
|
1,714,211
|
||||||||
4
LACLEDE
GAS COMPANY
STATEMENTS
OF CASH FLOWS
(UNAUDITED)
Three
Months Ended
|
|||||||||
December
31,
|
|||||||||
(Thousands)
|
2009
|
2008
|
|||||||
Operating
Activities:
|
|||||||||
Net
Income
|
$
|
21,066
|
$
|
16,197
|
|||||
Adjustments
to reconcile net income to net cash
provided
by (used in) operating activities:
|
|||||||||
Depreciation
and amortization
|
9,363
|
9,119
|
|||||||
Deferred
income taxes and investment tax credits
|
(3,561
|
)
|
(11,900
|
)
|
|||||
Other
– net
|
326
|
1,950
|
|||||||
Changes
in assets and liabilities:
|
|||||||||
Accounts
receivable – net
|
(91,730
|
)
|
(114,809
|
)
|
|||||
Unamortized
purchased gas adjustments
|
1,611
|
9,262
|
|||||||
Deferred
purchased gas costs
|
23,609
|
(14,832
|
)
|
||||||
Accounts
payable
|
35,998
|
14,875
|
|||||||
Advance
customer billings – net
|
(10,719
|
)
|
(8,970
|
)
|
|||||
Taxes
accrued
|
10,268
|
19,660
|
|||||||
Natural
gas stored underground
|
5,109
|
8,834
|
|||||||
Other
assets and liabilities
|
(1,019
|
)
|
33,907
|
||||||
Net
cash provided by (used in) operating activities
|
321
|
(36,707
|
)
|
||||||
Investing
Activities:
|
|||||||||
Capital
expenditures
|
(11,065
|
)
|
(13,997
|
)
|
|||||
Other
investments
|
(954
|
)
|
(824
|
)
|
|||||
Net
cash used in investing activities
|
(12,019
|
)
|
(14,821
|
)
|
|||||
Financing
Activities:
|
|||||||||
Issuance
of short-term debt – net
|
15,350
|
10,978
|
|||||||
Changes
in book overdrafts
|
11,028
|
6,115
|
|||||||
Dividends
paid
|
(8,535
|
)
|
(8,255
|
)
|
|||||
Issuance
of common stock to Laclede Group
|
346
|
40,868
|
|||||||
Excess
tax benefits from stock-based compensation
|
32
|
595
|
|||||||
Other
|
—
|
(115
|
)
|
||||||
Net
cash provided by financing activities
|
18,221
|
50,186
|
|||||||
Net
Increase (Decrease) in Cash and Cash Equivalents
|
6,523
|
(1,342
|
)
|
||||||
Cash
and Cash Equivalents at Beginning of Period
|
1,402
|
3,163
|
|||||||
Cash
and Cash Equivalents at End of Period
|
$
|
7,925
|
|
$
|
1,821
|
||||
|
|||||||||
Supplemental
Disclosure of Cash Paid (Refunded) During the Period for:
|
|||||||||
Interest
|
$
|
10,294
|
$
|
12,503
|
|||||
Income
taxes
|
(16
|
)
|
76
|
||||||
5
LACLEDE
GAS COMPANY
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
These
notes are an integral part of the accompanying financial statements of Laclede
Gas Company (Laclede Gas or the Utility). In the opinion of Laclede Gas, 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 Financial Statements contained in Laclede Gas’ Fiscal Year 2009
Form 10-K.
Laclede
Gas is a regulated natural gas distribution utility having a material seasonal
cycle. As a result, these interim statements of income for Laclede Gas 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.
BASIS OF PRESENTATION - In
compliance with generally accepted accounting principles, transactions between
Laclede Gas and its affiliates as well as intercompany balances on Laclede Gas’
Balance Sheet have not been eliminated from the Laclede Gas financial
statements.
Laclede
Gas provides administrative and general support to affiliates. All such costs,
which are not material, are billed to the appropriate affiliates. Also, The
Laclede Group, Inc. (Laclede Group) may charge or reimburse Laclede Gas for
certain tax-related amounts. Unpaid balances relating to these activities are
reflected in the Laclede Gas Balance Sheets as Accounts receivable-Associated
companies or as Accounts payable-associated companies. Additionally, Laclede Gas
may, on occasion, borrow funds from affiliated companies. Unpaid balances
relating to these arrangements, if any, are reflected in Notes
payable-associated companies.
REVENUE RECOGNITION - Laclede
Gas reads meters and bills its customers on monthly cycles. The Utility records
its utility operating revenues from gas sales and transportation services on an
accrual basis that includes estimated amounts for gas delivered, but not yet
billed. The accruals for unbilled revenues are reversed in the subsequent
accounting period when meters are actually read and customers are billed. The
amounts of accrued unbilled revenues at December 31, 2009 and 2008,
for the Utility, were $55.0 million and $69.0 million, respectively. The amount
of accrued unbilled revenue at September 30, 2009 was $12.7
million.
GROSS RECEIPTS TAXES - Gross
receipts taxes associated with Laclede Gas’ natural gas utility service are
imposed on the Utility and billed to its customers. These amounts are recorded
gross in the Statements of Income. Amounts recorded in Utility Operating
Revenues for the quarters ended December 31, 2009 and 2008 were $12.0
million, and $14.8 million, respectively. Gross receipts taxes are expensed by
the Utility and included in the Taxes, other than income taxes
line.
SUBSEQUENT EVENTS - The
preparation of financial statements in accordance with generally accepted
accounting principles requires the consideration of events or transactions that
occur after the balance sheet date but before the financial statements are
issued. Depending on the nature of the subsequent event, financial statement
recognition or disclosure of the subsequent event is required. In preparing its
financial statements, Laclede Gas has evaluated subsequent events known through
the time of this filing on January 29, 2010, the date the financial
statements were issued.
STOCK-BASED COMPENSATION –
Officers and employees of Laclede Gas, as determined by the Compensation
Committee of Laclede Group’s Board of Directors, are eligible to be selected for
awards under the Laclede Group 2006 Equity Incentive Plan. For Laclede Group’s
non-employee directors, shares are awarded under the Restricted Stock Plan for
Non-Employee Directors. Refer to Note 1 of the Notes to Financial Statements
included in the Utility’s Form 10-K for the fiscal year ended
September 30, 2009 for descriptions of these plans. For awards made to
its employees, the Utility records its allocation of compensation cost from
Laclede Group with a corresponding increase to additional paid-in
capital.
6
The
amounts of compensation cost allocated to the Utility for share-based
compensation arrangements for the quarters ended December 31, 2009 and
2008 are presented below:
Three
Months Ended
|
|||||||||
December
31,
|
|||||||||
(Thousands)
|
2009
|
2008
|
|||||||
Total
equity compensation cost
|
$
|
758
|
$
|
739
|
|||||
Compensation
cost capitalized
|
(138
|
)
|
(180
|
)
|
|||||
Compensation
cost recognized in net income
|
620
|
559
|
|||||||
Income
tax benefit recognized in net income
|
(239
|
)
|
(215
|
)
|
|||||
Compensation
cost recognized in net income, net of income tax
|
$
|
381
|
$
|
344
|
As
of December 31, 2009, there was $5.9 million in unrecognized
compensation cost related to nonvested share-based compensation arrangements
that is expected to be allocated to the Utility over a weighted average period
of 2.4 years.
NEW
ACCOUNTING STANDARDS – In September 2006, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 157, “Fair Value Measurements,” as codified in Accounting
Standards Codification (ASC) Topic 820, “Fair Value Measurements and
Disclosures.” This Statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. The Statement applies to fair value
measurements required under other accounting guidance that require or permit
fair value measurements. Accordingly, this Statement does not require any new
fair value measurements. The guidance in this Statement does not apply to
Laclede Group’s stock-based compensation plans accounted for in accordance with
ASC Topic 718, “Compensation-Stock Compensation.” The Utility partially adopted
SFAS No. 157 on October 1, 2008 and elected the one-year deferral
allowed by FASB Staff Position (FSP) No. FAS 157-2, which permits delayed
application of this Statement for nonfinancial assets and nonfinancial
liabilities, except for those recognized or disclosed at fair value on a
recurring basis. The partial adoption of this Statement had no impact on the
Utility’s financial position or results of operations. For disclosures required
pursuant to ASC Topic 820, see Note 4, Fair Value
Measurements. The Utility adopted SFAS No. 157 for certain nonfinancial assets
and nonfinancial liabilities as of October 1, 2009. Such adoption had
no impact on the Utility’s financial position or results of
operations.
In
December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures
about Postretirement Benefit Plan Assets,” as codified in ASC Topic 715,
“Compensation-Retirement Benefits.” This FSP provides guidance on an employer’s
disclosures about plan assets of a defined benefit pension or other
postretirement plan. The FSP requires disclosure of information regarding
investment policies and strategies, the categories of plan assets, fair value
measurements of plan assets, and significant concentrations of risk. The Utility
will be required to provide the additional disclosures with its annual financial
statements for fiscal year 2010. The Utility is currently evaluating the
provisions of this FSP.
In
August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05,
“Measuring Liabilities at Fair Value,” to update ASC Topic 820. The guidance
provides clarification on measuring liabilities at fair value when a quoted
price in an active market is not available. In such circumstances, the ASU
specifies that a valuation technique should be applied that uses either the
quote of the identical liability when traded as an asset, the quoted prices for
similar liabilities or similar liabilities when traded as assets, or another
valuation technique consistent with existing fair value measurement guidance.
Laclede Gas’ adoption of this ASU in the first quarter of fiscal year 2010 had
no impact on the Utility’s financial position or results of
operations.
7
2.
|
PENSION
PLANS AND OTHER POSTRETIREMENT
BENEFITS
|
Pension
Plans
Laclede
Gas has non-contributory defined benefit, trusteed forms of pension plans
covering substantially all employees. Effective January 1, 2009, the
Utility modified the calculation of future benefits under the primary plan from
a years of service and final average compensation formula to a cash balance
formula, which accrues benefits based on a percentage of compensation. Benefits
attributable to plan participation prior to January 1, 2009 will be
based on final average compensation at the date of termination of employment and
years of service earned through January 1, 2009. Plan assets consist
primarily of corporate and U.S. government obligations and equity
investments.
Pension
costs for the quarters ending December 31, 2009 and 2008 were $1.6
million and $1.5 million, respectively, including amounts charged to
construction.
The
net periodic pension costs include the following components:
Three
Months Ended
|
||||||||
December
31,
|
||||||||
(Thousands)
|
2009
|
2008
|
||||||
Service
cost – benefits earned
|
||||||||
during
the period
|
$
|
2,274
|
$
|
3,485
|
||||
Interest
cost on projected
|
||||||||
benefit
obligation
|
4,957
|
5,268
|
||||||
Expected
return on plan assets
|
(5,032
|
)
|
(5,235
|
)
|
||||
Amortization
of prior service cost
|
239
|
259
|
||||||
Amortization
of actuarial loss
|
2,034
|
774
|
||||||
Sub-total
|
4,472
|
4,551
|
||||||
Regulatory
adjustment
|
(2,893
|
)
|
(3,002
|
)
|
||||
Net
pension cost
|
$
|
1,579
|
$
|
1,549
|
Pursuant
to the provisions of the Laclede Gas pension plans, pension obligations may be
satisfied by lump-sum cash payments. Pursuant to a Missouri Public Service
Commission (MoPSC or Commission) Order, lump-sum payments are recognized as
settlements (which can result in gains or losses) only if the total of such
payments exceeds 100% of the sum of service and interest costs. No lump-sum
payments were recognized as settlements during the three months ended
December 31, 2009 and December 31, 2008.
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. The difference between this amount and pension expense as calculated
pursuant to the above and that otherwise would be included in the Statements of
Income and Statements of Comprehensive Income is deferred as a regulatory asset
or regulatory liability.
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 both the quarters ended
December 31, 2009 and 2008 were $1.9 million, including amounts
charged to construction.
8
Net
periodic postretirement benefit costs consisted of the following
components:
Three
Months Ended
|
||||||||
December
31,
|
||||||||
(Thousands)
|
2009
|
2008
|
||||||
Service
cost – benefits earned
|
||||||||
during
the period
|
$
|
1,610
|
$
|
1,283
|
||||
Interest
cost on accumulated
|
||||||||
postretirement
benefit obligation
|
1,129
|
1,170
|
||||||
Expected
return on plan assets
|
(758
|
)
|
(594
|
)
|
||||
Amortization
of transition obligation
|
34
|
34
|
||||||
Amortization
of prior service credit
|
(582
|
)
|
(582
|
)
|
||||
Amortization
of actuarial loss
|
995
|
877
|
||||||
Sub-total
|
2,428
|
2,188
|
||||||
Regulatory
adjustment
|
(518
|
)
|
(278
|
)
|
||||
Net
postretirement benefit cost
|
$
|
1,910
|
$
|
1,910
|
Missouri
state law provides for the recovery in rates of costs accrued pursuant to
generally accepted accounting principles 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. The difference between this amount and
postretirement benefit cost based on the above and that otherwise would be
included in the Statements of Income and Statements of Comprehensive Income is
deferred as a regulatory asset or regulatory liability.
3.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
The
carrying amounts and estimated fair values of financial instruments are as
follows:
(Thousands)
|
Carrying
Amount
|
Fair
Value
|
||||||
As
of December 31, 2009
|
||||||||
Cash
and cash equivalents
|
$
|
7,925
|
$
|
7,925
|
||||
Marketable
securities
|
11,679
|
11,679
|
||||||
Derivative
instrument assets
|
7,505
|
7,505
|
||||||
Short-term
debt
|
145,150
|
145,150
|
||||||
Long-term
debt, including current portion
|
389,254
|
409,216
|
||||||
As
of September 30, 2009
|
||||||||
Cash
and cash equivalents
|
$
|
1,402
|
$
|
1,402
|
||||
Marketable
securities
|
11,110
|
11,110
|
||||||
Derivative
instrument assets
|
12,369
|
12,369
|
||||||
Short-term
debt
|
129,800
|
129,800
|
||||||
Long-term
debt
|
389,240
|
423,375
|
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 value of
long-term debt is based on market prices for similar issues. The fair values of
marketable securities and derivative instrument assets are valued as described
in Note 4, Fair Value Measurements.
9
FAIR
VALUE MEASUREMENTS
|
The
following table categorizes the assets and liabilities in the Balance Sheets
that are accounted for at fair value on a recurring basis in periods subsequent
to initial recognition.
(Thousands)
|
Quoted
Prices
in
Active
Markets
(Level
1)
|
Significant
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
Effects
of Netting and Cash Margin Receivables
/Payables
|
Total
|
||||||||||||
As
of December 31, 2009
|
|||||||||||||||||
Assets
|
|||||||||||||||||
Marketable
securities
|
$
|
11,679
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
11,679
|
|||||||
Derivative
instruments
|
1,488
|
—
|
—
|
6,017
|
7,505
|
||||||||||||
Total
|
$
|
13,167
|
$
|
—
|
$
|
—
|
$
|
6,017
|
$
|
19,184
|
|||||||
Liabilities
|
|||||||||||||||||
Derivative
instruments
|
$
|
48,208
|
$
|
—
|
$
|
—
|
$
|
(48,208
|
)
|
$
|
—
|
||||||
As
of September 30, 2009
|
|||||||||||||||||
Assets
|
|||||||||||||||||
Marketable
securities
|
$
|
11,110
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
11,110
|
|||||||
Derivative
instruments
|
7,249
|
—
|
—
|
5,120
|
12,369
|
||||||||||||
Total
|
$
|
18,359
|
$
|
—
|
$
|
—
|
$
|
5,120
|
$
|
23,479
|
|||||||
Liabilities
|
|||||||||||||||||
Derivative
instruments
|
$
|
53,144
|
$
|
—
|
$
|
—
|
$
|
(53,144
|
)
|
$
|
—
|
||||||
As
of December 31, 2008
|
|||||||||||||||||
Assets
|
|||||||||||||||||
Marketable
securities
|
$
|
8,918
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
8,918
|
|||||||
Derivative
instruments
|
1,735
|
—
|
—
|
21,468
|
23,203
|
||||||||||||
Total
|
$
|
10,653
|
$
|
—
|
$
|
—
|
$
|
21,468
|
$
|
32,121
|
|||||||
Liabilities
|
|||||||||||||||||
Derivative
instruments
|
$
|
98,102
|
$
|
—
|
$
|
—
|
$
|
(98,102
|
)
|
$
|
—
|
Marketable
securities included in Level 1 are mutual funds 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. Marketable securities are
included in the Other investments line of the Balance Sheets. Liabilities for
derivative instruments, if any, are included in the Other line of the Current
Liabilities section of the Balance Sheets. Derivative assets and liabilities,
including receivables and payables associated with cash margin requirements, are
presented net in the Balance Sheets when a legally enforceable netting agreement
exists between Laclede Gas and the counterparty to a derivative
contract.
10
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 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 December 31, 2009, Laclede Gas held 0.4 million gallons of gasoline
futures contracts at an average price of $1.39 per gallon. These futures
contracts, the longest of which extends to October 2010, 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.
Derivative
instruments designated as cash flow hedges of forecasted transactions are
recognized on the Balance Sheets at fair value and the change in the fair value
of the effective portion of these hedge instruments is recorded, net of tax, in
other comprehensive income (OCI). Accumulated other comprehensive income (AOCI)
is a component of Total Common Stock Equity. Amounts are reclassified from AOCI
into earnings when the hedged items affect net income, using the same revenue or
expense category that the hedged item impacts. Based on market prices at
December 31, 2009, it is expected that approximately $0.2 million of
pre-tax unrealized gains will be reclassified into the Statements of 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 Cash Flows.
The
Utility’s 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 December 31, 2009 were as
follows:
MMBtu
(millions)
|
Avg.
Price
Per
MMBtu
|
|||||||
Open
long futures positions
|
||||||||
Fiscal
2010
|
9.77
|
$
|
8.71
|
|||||
Fiscal
2011
|
6.58
|
8.55
|
||||||
Fiscal
2012
|
0.60
|
8.31
|
11
At
December 31, 2009, Laclede Gas also had 8.65 million MMBtu of other
price risk mitigation in place through the use of NYMEX natural gas option-based
strategies.
The
Effect of Derivative Instruments on the Statements of Income and
Statements of Comprehensive Income
|
|||||||
(Thousands)
|
Location
of Gain (Loss)
Recorded
in Income
|
Three
Months
Ended
Dec.
31, 2009
|
|||||
Derivatives
in ASC Topic 815 Cash Flow Hedging Relationships
|
|||||||
NYMEX
gasoline and heating oil contracts
|
|||||||
Effective
portion of gain recognized in OCI on derivative
|
$
|
166
|
|||||
Effective
portion of gain reclassified from
accumulated
OCI to income
|
Utility
– Other Operation Expenses
|
62
|
|||||
Ineffective
portion of loss on derivatives
recognized
in income
|
Utility
– Other Operation Expenses
|
(56
|
)
|
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
Income.
12
Fair
Value of Derivative Instruments in the Balance Sheet at December 31,
2009
|
||||||||||
Asset
Derivatives
|
Liability
Derivatives
|
|||||||||
(Thousands)
|
Balance
Sheet Location
|
Fair
Value
|
*
|
Balance
Sheet Location
|
Fair
Value
|
*
|
||||
Derivatives
designated as hedging instruments under ASC Topic 815
|
||||||||||
NYMEX
gasoline and
heating
oil contracts
|
Derivative
Instrument Assets
|
$
|
289
|
Derivative
Instrument Assets
|
$
|
—
|
||||
Derivatives
not designated as hedging instruments under
ASC
Topic 815
|
||||||||||
NYMEX
natural gas contracts
|
Derivative
Instrument Assets
|
1,199
|
Derivative
Instrument Assets
|
48,208
|
||||||
Total
derivatives
|
$
|
1,488
|
$
|
48,208
|
||||||
Fair
Value of Derivative Instruments in the Balance Sheet at September 30,
2009
|
||||||||||
Asset
Derivatives
|
Liability
Derivatives
|
|||||||||
(Thousands)
|
Balance
Sheet Location
|
Fair
Value
|
*
|
Balance
Sheet Location
|
Fair
Value
|
*
|
||||
Derivatives
designated as hedging instruments under ASC Topic 815
|
||||||||||
NYMEX
gasoline and
heating
oil contracts
|
Derivative
Instrument Assets
|
$
|
278
|
Derivative
Instrument Assets
|
$
|
—
|
||||
Derivatives
not designated as hedging instruments under
ASC
Topic 815
|
||||||||||
NYMEX
natural gas contracts
|
Derivative
Instrument Assets
|
6,971
|
Derivative
Instrument Assets
|
53,144
|
||||||
Total
derivatives
|
$
|
7,249
|
$
|
53,144
|
*
|
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. The amounts excluded in receivables at
December 31, 2009 and September 30, 2009 were $54.2
million and $58.3 million, respectively, which were associated with NYMEX
contracts. 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 Balance Sheets. As such,
the gross balances presented in the table above are not indicative of the
Utility’s net economic exposure. Refer to Note 4, Fair Value Measurements,
for information on the valuation of derivative
instruments.
|
13
6.
|
OTHER
INCOME AND (INCOME DEDUCTIONS) –
NET
|
Three
Months Ended
|
||||||||
December
31,
|
||||||||
(Thousands)
|
2009
|
2008
|
||||||
Interest
income
|
$
|
448
|
$
|
1,010
|
||||
Net
investment gain (loss)
|
484
|
(1,369
|
)
|
|||||
Other
income
|
—
|
277
|
||||||
Other
income deductions
|
578
|
692
|
||||||
Other
Income and (Income Deductions) – Net
|
$
|
1,510
|
$
|
610
|
The
increase in Other Income and (Income Deductions) – Net for the quarter ended
December 31, 2009, compared with the quarter ended
December 31, 2008, was primarily due to higher net investment gains,
partially offset by lower income associated with carrying costs applied to
under-recoveries of gas costs. Carrying costs on under-recoveries of gas costs
are recovered through the Utility’s PGA Clause.
7.
|
INFORMATION
BY OPERATING SEGMENT
|
The
Regulated Gas Distribution segment consists of the regulated operations of
Laclede Gas. The Non-Regulated Other segment includes the retail sale of gas
appliances, which ceased operation September 30, 2009 and was not
material, and the non-regulated sale of propane. There are no material
intersegment revenues.
Beginning
this fiscal year, Laclede Gas’ parent company, Laclede Group, evaluates the
performance of its 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. For comparative purposes, the measurement of segment performance has
been presented to conform to the current-period presentation.
Regulated
|
Non-
|
Adjustments
|
|||||||||||
Gas
|
Regulated
|
&
|
|||||||||||
(Thousands)
|
Distribution
|
Other
|
Eliminations
|
Total
|
|||||||||
Three
Months Ended
|
|||||||||||||
December
31, 2009
|
|||||||||||||
Operating
revenues
|
$
|
282,929
|
$
|
10,325
|
$
|
—
|
$
|
293,254
|
|||||
Net
Economic Earnings
|
17,432
|
3,683
|
—
|
21,115
|
|||||||||
Total
assets
|
1,662,121
|
11,627
|
—
|
1,673,748
|
|||||||||
Three
Months Ended
|
|||||||||||||
December
31, 2008
|
|||||||||||||
Operating
revenues
|
$
|
358,101
|
$
|
597
|
$
|
—
|
$
|
358,698
|
|||||
Net
Economic Earnings
|
16,156
|
41
|
—
|
16,197
|
|||||||||
Total
assets
|
1,712,374
|
1,837
|
—
|
1,714,211
|
Reconciliation
of Net Economic Earnings to Net Income
|
||||||||
Three
Months Ended
|
||||||||
December
31,
|
||||||||
(Thousands)
|
2009
|
2008
|
||||||
Total
Net Economic Earnings above
|
$
|
21,115
|
$
|
16,197
|
||||
Add:
Unrealized gain (loss) on energy-related
|
||||||||
derivative
contracts, net of tax
|
(49
|
)
|
—
|
|||||
Net
Income
|
$
|
21,066
|
$
|
16,197
|
14
COMMITMENTS
AND CONTINGENCIES
|
Commitments
Laclede
Gas has entered into various contracts, expiring on dates through 2017, for the
storage, transportation, and supply of natural gas. Minimum payments required
under the contracts in place at December 31, 2009 are estimated at
approximately $436 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.
Leases
and Guarantees
Laclede
Gas has several operating leases for the rental of vehicles that contain
provisions requiring Laclede Gas to guarantee certain amounts related to the
residual value of the leased property. These leases have various terms, the
longest of which extends into 2015. At December 31, 2009, the maximum
guarantees under these leases are $1.5 million. However, the Utility believes it
is unlikely that it will be subject to the maximum payment amount because it
estimates that the residual value of the leased vehicles will be adequate to
satisfy most of the guaranteed amounts. At December 31, 2009, the
carrying value of the liability recognized for these guarantees was $0.4
million.
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 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.
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. 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, 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.
15
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. On September 14, 2007, the Staff withdrew its
pursuit of $5.5 million of the disallowance it had originally proposed. The
remaining $1.7 million pertains to Laclede Gas’ purchase of gas from a marketing
affiliate, Laclede Energy Resources, Inc. (LER). The MoPSC Staff has also
proposed disallowances of gas costs relating to Laclede Gas purchases of gas
supply from LER for fiscal years 2006 and 2007. On December 31, 2007,
the MoPSC Staff proposed a disallowance of $2.8 million applicable to fiscal
year 2006, and on December 31, 2008, the MoPSC Staff proposed a
disallowance of $1.5 million applicable to fiscal year 2007. On
December 31, 2009, the MoPSC Staff proposed a number of non-monetary
recommendations only, based on its review of gas costs for fiscal year 2008.
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
the December 31, 2007 filing, the MoPSC Staff also raised questions
regarding whether certain sales and capacity release transactions subject to the
Federal Energy Regulatory Commission (FERC)’s oversight were consistent with the
FERC’s regulations and policies regarding capacity release. Laclede Group
commenced an internal review of the questions raised by the MoPSC Staff and
notified the FERC Staff that it took this action. Subsequently, as a result of
the internal review, Laclede Group has provided the FERC Staff with a report
regarding compliance of sales and capacity release activities with the FERC’s
regulations and policies. On July 23, 2008, the FERC Staff requested
additional information which Laclede Group provided and on
February 11, 2009, the FERC Staff submitted follow-up questions to
which the Laclede Group responded on February 25, 2009. On
March 2, 2009, FERC Staff requested clarification of certain aspects
of Laclede Group’s February 25, 2009 response, which Laclede Group
clarified on March 4, 2009.
Laclede
Gas is involved in other litigation, claims, and investigations arising in the
normal course of business. While the results of such litigation cannot be
predicted with certainty, management, after discussion with counsel, believes
that the final outcome will not have a material adverse effect on the financial
position, results of operations, or cash flows of the Utility.
16
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LACLEDE
GAS COMPANY
This
management’s discussion analyzes the financial condition and results of
operations of Laclede Gas Company (Laclede Gas or the Utility). 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 higher natural gas prices on our competitive position in
relation to suppliers of alternative heating sources, such as
electricity;
|
|
•
|
changes
in gas supply and pipeline availability, particularly those changes that
impact supply for and access to our service area;
|
|
•
|
legislative,
regulatory and judicial mandates and decisions, some of which may be
retroactive, including those affecting
|
|
•
|
allowed
rates of return
|
|
•
|
incentive
regulation
|
|
•
|
industry
structure
|
|
•
|
purchased
gas adjustment provisions
|
|
•
|
rate
design structure and implementation
|
|
•
|
regulatory
assets
|
|
•
|
franchise
renewals
|
|
•
|
environmental
or safety matters
|
|
•
|
taxes
|
|
•
|
pension
and other postretirement benefit liabilities and funding
obligations
|
|
•
|
accounting
standards;
|
|
•
|
the
results of litigation;
|
|
•
|
retention
of, ability to attract, ability to collect from and conservation efforts
of customers;
|
|
•
|
capital
and energy commodity market conditions, including the ability to obtain
funds 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 Utility’s Financial Statements
and the Notes thereto.
17
LACLEDE
GAS COMPANY
RESULTS
OF OPERATIONS
Overview
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, earnings are typically concentrated in the November
through April period, which generally corresponds with the heating
season.
Based
on the nature of the business of the Utility, 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:
•
|
the
Utility’s ability to recover the costs of distribution of natural gas to
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.
|
Further information regarding how management seeks to manage these key
variables is discussed below.
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. As
previously reported, Laclede Gas had undertaken an evaluation of the Utility’s
natural gas storage field, which was developed more than 50 years ago, to assess
the field’s current and future capabilities. Based on the initial assessment and
management’s expectations regarding the future operation of the storage field,
inventory balances included in the Balance Sheet at June 30, 2009,
were reclassified. The assessment is now complete and information derived should
result in improved efficiencies in managing the operation of the field. The
completion of the assessment did not result in any further adjustment to the
classification of inventory balances. 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 2007 rate case resulted in enhancements to the
Utility’s weather mitigation rate design that better ensure 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 Matters section on page 21 of
this report for additional information on regulatory issues.
18
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 23 for
additional information.
Quarter
Ended December 31, 2009
Earnings
Laclede
Gas’ net income for the quarter ended December 31, 2009 was $21.1
million, compared with net income of $16.2 million for the quarter ended
December 31, 2008. The increase in net income was primarily due to the
following factors, quantified on a pre-tax basis:
•
|
income
from the non-regulated sale of propane in the wholesale market totaling
$6.0 million,
|
•
|
increased
net investment gains totaling $1.9 million; and,
|
•
|
higher
Infrastructure System Replacement Surcharge (ISRS) revenues totaling $1.1
million.
|
These
factors were partially offset by increases in operation and maintenance expenses
totaling $0.8 million.
Utility
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.
19
Utility
Operating Revenues for the quarter ended December 31, 2009 were $282.9
million, or $75.2 million less than the same period last year. Temperatures
experienced in the Utility’s service area during the quarter were 7.4% warmer
than the same quarter last year and 3.4% warmer than normal. Total system therms
sold and transported were 288.0 million for the quarter ended
December 31, 2009 compared with 308.8 million for the same period last
year. Total off-system therms sold and transported were 28.5 million for the
quarter ended December 31, 2009 compared with 39.4 million for the
same period last year. The decrease in Utility Operating Revenues was primarily
attributable to the following factors:
(Millions)
|
||||
Lower
wholesale gas costs passed on to Utility customers (subject to prudence
review by the MoPSC)
|
$
|
(51.9
|
)
|
|
Lower
system sales volumes and other variations
|
(12.5
|
)
|
||
Lower
off-system sales volumes
|
(7.0
|
)
|
||
Lower
prices charged for off-system sales
|
(4.9
|
)
|
||
Higher
ISRS revenues
|
1.1
|
|||
Total
Variation
|
$
|
(75.2
|
)
|
Utility
Operating Expenses
Utility
Operating Expenses for the quarter ended December 31, 2009 decreased
$74.0 million from the same quarter last year. Natural and propane gas expense
decreased $72.9 million, or 28.6%, from last year’s level, primarily
attributable to lower rates charged by our suppliers, decreased system volumes
purchased for sendout, and lower off-system gas expense. Other operation and
maintenance expenses increased $0.8 million, or 1.9%, primarily due to increased
group insurance charges and other minor variations, partially offset by lower
maintenance charges. Taxes, other than income taxes, decreased $2.1 million, or
11.6%, primarily due to decreased gross receipts taxes (attributable to the
decreased revenues).
Other
Operating Revenues and Expenses
Other
Operating Revenues increased $9.7 million primarily due to a sale of propane in
the wholesale market during the quarter ended December 31, 2009. This
non-regulated sale resulted from an inventory exchange that the counterparty
settled in cash instead of through a return of inventory. The increase in Other
Operating Expenses, totaling $3.8 million, was primarily due to expenses
associated with this sale of propane.
Other
Income and (Income Deductions) - Net
Other
Income and (Income Deductions) – Net increased $0.9 million primarily due to
higher net investment gains, partially offset by lower income associated with
carrying costs applied to under-recoveries of gas costs. Carrying costs on
under-recoveries of gas costs are recovered through the Utility’s PGA
Clause.
Interest
Charges
The
$2.6 million decrease in interest charges was primarily due to lower interest on
short-term debt. Average short-term interest rates were 0.22% for the quarter
ended December 31, 2009 compared with 3.0% for the quarter ended
December 31, 2008. Average short-term borrowings were $146.1 million
for the quarter ended December 31, 2009 compared with $335.4 million
for the quarter ended December 31, 2008.
Income
Taxes
The
$3.4 million increase in income taxes was primarily due to higher pre-tax
income.
20
During
fiscal year 2006, the MoPSC approved permanent modifications to the Cold Weather
Rule affecting the disconnection and reconnection practices of utilities during
the winter heating season. Those modifications included provisions to allow the
Utility to obtain accounting authorizations and defer for future recovery
certain costs incurred with the modifications. During fiscal year 2007, the
Utility deferred for future recovery $2.7 million of costs associated with the
fiscal year 2007 heating season. On October 31, 2007, the Utility
filed for determination and subsequent recovery of the deferred amount. On
November 16, 2007, the MoPSC directed the MoPSC Staff and the Missouri
Office of Public Counsel (Public Counsel) to submit their positions regarding
the Utility’s filing and on February 28, 2008, the Utility and the
MoPSC Staff filed a Non-Unanimous Stipulation & Agreement in which these
parties agreed to a recovery of $2.5 million of costs. Public Counsel opposed
the Non-Unanimous Stipulation & Agreement and a hearing in this matter was
held before the Commission. On April 17, 2008, the Commission issued
its Report and Order approving the $2.5 million cost recovery recommended by the
Utility and the MoPSC Staff. Consistent with the approved amount, the Utility
recorded a reduction in its deferral totaling $0.2 million during the quarter
ended March 31, 2008. On May 29, 2008, Public Counsel
appealed the MoPSC’s Order to the Cole County, Missouri Circuit Court and on
January 6, 2009, the Court issued its judgment affirming the
Commission’s Order approving the Cold Weather Rule compliance cost amount that
the Utility and Staff had recommended over Public Counsel’s objection. On
February 9, 2009, Public Counsel appealed the Circuit Court’s
affirmation of the MoPSC’s April 17, 2008 Order to the Court of Appeals for the
Western District of Missouri. On December 22, 2009, the Court of
Appeals also issued a judgment affirming the Commission’s Order. On
January 5, 2010, Public Counsel sought rehearing of the decision or
transfer to the Missouri Supreme Court. The Court has not yet acted on this
request.
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. On September 14, 2007, the Staff withdrew its
pursuit of $5.5 million of the disallowance it had originally proposed. The
remaining $1.7 million pertains to Laclede Gas’ purchase of gas from a marketing
affiliate, Laclede Energy Resources, Inc. (LER). The MoPSC Staff has also
proposed disallowances of gas costs relating to Laclede Gas purchases of gas
supply from LER for fiscal years 2006 and 2007. On December 31, 2007,
the MoPSC Staff proposed a disallowance of $2.8 million applicable to fiscal
year 2006, and on December 31, 2008, the MoPSC Staff proposed a
disallowance of $1.5 million applicable to fiscal year 2007. On
December 31, 2009, the MoPSC Staff proposed a number of non-monetary
recommendations only, based on its review of gas costs for fiscal year 2008.
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.
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 issued its Order rejecting the
Utility’s tariffs on the grounds that it did not have the legal authority to
approve them. On May 28, 2009, Laclede Gas filed for a petition with
the Circuit Court of Cole County seeking judicial review of the Commission’s
decision. On January 11, 2010, the Court issued a judgment that the
Commission did have the legal authority to approve such tariffs. Further appeals
are anticipated.
On
December 4, 2009, Laclede Gas filed tariff sheets in a new general
rate case proceeding that are designed to increase revenues by approximately
$52.6 million annually, or 6.9%. The Utility also proposed several alternatives
to better ensure its recovery of its fixed costs of doing business. On
December 10, 2009, the MoPSC suspended implementation of the Utility’s
proposed rates and set the case for hearing during the summer of
2010.
On
January 15, 2010, the Utility made an ISRS filing with the Commission
designed to increase revenues by $3.2 million annually. The filing is pending
Commission approval.
21
CRITICAL
ACCOUNTING POLICIES
Our
discussion and analysis of our financial condition, results of operations,
liquidity, and capital resources is based upon our financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. Generally accepted accounting principles
require that we make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. We evaluate our estimates on an ongoing basis. We base
our estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates. Our critical accounting policies used in the preparation of
Financial Statements are described in Exhibit
99.1 of The Laclede Group, Inc’s (Laclede Group) Form 10-K for the fiscal
year ended September 30, 2009 and include the following:
•
|
Allowances
for doubtful accounts
|
|
•
|
Employee
benefits and postretirement obligations
|
|
•
|
Regulated
operations
|
There
were no significant changes to these critical accounting policies during the
quarter ended December 31, 2009. For discussion of other significant
accounting policies, see Note 1 of the Notes to Financial Statements included in
Exhibit
99.1 of Laclede Group’s Form 10-K for the fiscal year ended
September 30, 2009.
ACCOUNTING
PRONOUNCEMENTS
Laclede
Gas has evaluated or is in the process of evaluating the impact that recently
issued accounting standards will have on the Utility’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 Financial
Statements.
FINANCIAL
CONDITION
CREDIT
RATINGS
As
of December 31, 2009, credit ratings for outstanding securities for
Laclede Gas issues were as follows:
Type
of Facility
|
S&P
|
Moody’s
|
Fitch
|
Laclede
Gas Issuer Rating
|
A
|
A-
|
|
Laclede
Gas First Mortgage Bonds
|
A
|
A2
|
A+
|
Laclede
Gas Commercial Paper
|
A-1
|
P-2
|
F1
|
The
Utility has investment grade ratings, and believes that it will have adequate
access to the financial markets to meet its capital requirements. These ratings
remain subject to review and change by the rating agencies.
22
CASH
FLOWS
Laclede
Gas’ 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 for the three months ended
December 31, 2009 was $0.3 million, compared with net cash used in
operating activities of $36.7 million for the same period last year. The lower
cash requirements were primarily attributable to the net effect of reduced cash
payments for margin deposits associated with the Utility’s use of natural gas
derivative instruments and other variations associated with the timing of the
collections of gas cost under the Utility’s PGA Clause.
Net
cash used in investing activities for the three months ended
December 31, 2009 was $12.0 million compared with $14.8 million for
the three months ended December 31, 2008. Cash used in investing
activities primarily reflected capital expenditures in both
periods.
Net
cash provided by financing activities was $18.2 million for the three months
ended December 31, 2009 compared with $50.2 million for the three
months ended December 31, 2008. The decrease primarily reflects the
reduced sales of shares of common stock to Laclede Group.
Short-term
Debt
As
indicated above, the Utility’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. Laclede
Gas has 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 expires in
December 2011. During the quarter ending December 31, 2009,
Laclede Gas utilized only commercial paper for external short-term funding.
Commercial paper outstanding at December 31, 2009 was $145.2 million,
and there were no outstanding bank line advances. The weighted average interest
rate on the short-term borrowings was 0.22% per annum at
December 31, 2009. Based on total short-term borrowings at
December 31, 2009, an increase in interest rate of 100 basis points
would decrease pre-tax earnings and cash flows by approximately $1.5 million on
an annual basis. Portions of such increases or decreases may be offset through
the application of PGA carrying costs. Although Laclede Gas borrowed funds from
Laclede Group from time to time during the quarter ended
December 31, 2009, there were no such borrowings outstanding at the
end of the period. The Utility had short-term borrowings (including borrowings
from Laclede Group) aggregating to a maximum of $178.0 million at any one time
during the quarter. Excluding borrowings from Laclede Group, the Utility’s
maximum borrowings for the quarter were also $178.0 million.
Laclede
Gas’ lines of credit include covenants limiting total debt, including short-term
debt, to no more than 70% of total capitalization and requiring earnings before
interest, taxes, depreciation, and amortization (EBITDA) to be at least 2.25
times interest expense. On December 31, 2009, total debt was 56% of
total capitalization. For the twelve months ended December 31, 2009,
EBITDA was 4.33 times interest expense.
Long-term
Debt and Equity
The
Utility has authority from the MoPSC until February 15, 2010 to issue
up to $500 million in First Mortgage Bonds, unsecured debt, and equity
securities, of which $370.1 million remains available under this authorization
as of December 31, 2009. On June 30, 2009, the Utility filed
an application with the MoPSC requesting 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 $600 million over the next three years. This
application is under review by the Commission at this time. 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.
23
At
December 31, 2009, Laclede Gas had fixed-rate long-term debt,
including current obligations, totaling $390 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.
Guarantees
Laclede
Gas has several operating leases for the rental of vehicles that contain
provisions requiring Laclede Gas to guarantee certain amounts related to the
residual value of the leased property. These leases have various terms, the
longest of which extends into 2015. At December 31, 2009, the maximum
guarantees under these leases were $1.5 million. However, the Utility believes
it is unlikely that it will be subject to the maximum payment amount because it
estimates that the residual value of the leased vehicles will be adequate to
satisfy most of the guaranteed amounts. At December 31, 2009, the
carrying value of the liability recognized for these guarantees was $0.4
million.
Other
Utility
capital expenditures were $11.1 million for the three months ended
December 31, 2009, compared with $14.0 million for the same period
last year.
Capitalization
at December 31, 2009 consisted of 53.3% common stock equity and 46.7%
long-term debt.
It
is management’s view that Laclede Gas has adequate access to capital markets and
will have sufficient capital resources, both internal and external, to meet
anticipated capital requirements.
The
seasonal nature of Laclede Gas’ sales affects the comparison of certain balance
sheet items at December 31, 2009 and at September 30, 2009,
such as Accounts receivable – net, Gas stored underground, Notes payable,
Accounts payable, Regulatory assets and Regulatory liabilities, and Advance
customer billings. The Balance Sheet at December 31, 2008 is presented
to facilitate comparison of these items with the corresponding interim period of
the preceding fiscal year.
24
CONTRACTUAL
OBLIGATIONS
As
of December 31, 2009, Laclede Gas had contractual obligations with
payments due as summarized below (in millions):
Payments
due by period
|
||||||||||||||||
Remaining
|
Fiscal
Years
|
|||||||||||||||
Contractual
Obligations
|
Total
|
Fiscal
Year
2010
|
Fiscal
Years
2011-2012
|
Fiscal
Years
2013-2014
|
2015
and
thereafter
|
|||||||||||
Principal
Payments on Long-Term Debt
|
$
|
390.0
|
$
|
—
|
$
|
25.0
|
$
|
25.0
|
$
|
340.0
|
||||||
Interest
Payments on Long-Term Debt
|
499.6
|
14.7
|
46.7
|
43.5
|
394.7
|
|||||||||||
Operating
Leases (a)
|
15.1
|
4.2
|
7.1
|
3.4
|
0.4
|
|||||||||||
Purchase
Obligations – Natural Gas (b)
|
435.9
|
212.3
|
153.0
|
49.1
|
21.5
|
|||||||||||
Purchase
Obligations – Other (c)
|
98.1
|
13.4
|
22.4
|
17.2
|
45.1
|
|||||||||||
Total
(d)
|
$
|
1,438.7
|
$
|
244.6
|
$
|
254.2
|
$
|
138.2
|
$
|
801.7
|
(a)
|
Operating
lease obligations are primarily for office space, vehicles, and power
operated equipment. 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. These amounts reflect fixed obligations as well as
obligations to purchase natural gas at future market prices, calculated
using December 31, 2009 New York Mercantile Exchange futures
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 reflect miscellaneous agreements for the purchase of
materials and the procurement of services necessary for normal
operations.
|
(d)
|
The
categories of Capital Leases and Other Long-Term Liabilities have been
excluded from the table above because there are no material amounts of
contractual obligations under these categories. Long-term liabilities
associated with unrecognized tax benefits, totaling $1.6 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. The Utility expects to make contributions to its
qualified, trusteed pension plans totaling $1.2 million during the
remainder of fiscal year 2010. Laclede Gas anticipates a $0.3 million
contribution relative to its non-qualified pension plans during the
remainder of fiscal year 2010. With regard to the postretirement
benefits, the Utility anticipates it will contribute $8.5 million to the
qualified trusts and $0.3 million directly to participants from Laclede
Gas’ funds during the remainder of fiscal year 2010. For further
discussion of the Utility’s pension and postretirement benefit plans,
refer to Note 2, Pension Plans and Other Postretirement Benefits, of the
Notes to Financial Statements.
|
25
MARKET
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 5, Derivative Instruments and Hedging Activities, of
the Notes to Financial Statements.
The
Utility is also subject to interest rate risk associated with its long-term and
short-term debt issuances. Refer to the Liquidity and Capital Resources section
of this Management’s Discussion and Analysis of Financial Condition and Results
of Operations for information about the effect of changes in interest
rates.
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 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 14, Commitments and Contingencies, of the
Notes to Financial Statements included in the Utility's Form 10-K
for the fiscal year ended September 30, 2009. For changes during the
quarter ended December 31, 2009, see Note 8,
Commitments and Contingencies, of the Notes to Financial Statements.
OFF-BALANCE
SHEET ARRANGEMENTS
Laclede
Gas has no off-balance sheet arrangements.
26