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SPIRE INC 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-12
  4. Ex-31
  5. Ex-32
  6. Graphic
  7. Graphic
LG-2014.03.31-10Q

 
 
 
 
 
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 March 31, 2014
OR
[     ]
TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ­__________ to __________

Commission File Number 1-16681
 

THE LACLEDE GROUP, INC.
(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 April 25, 2014, there were 32,785,833 shares of the registrant’s Common Stock, par value $1.00 per share, outstanding.
 
 
 
 
 



TABLE OF CONTENTS
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I. FINANCIAL INFORMATION

The interim financial statements included herein have been prepared by The Laclede Group, Inc. (Laclede Group or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). 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, 2013.


3


Item 1. Financial Statements

THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)

 
Three Months Ended 
 March 31,
 
Six Months Ended 
 March 31,
(Thousands, Except Per Share Amounts)
2014
 
2013
 
2014
 
2013
Operating Revenues:
 

 
 
 
 

 
 
Gas Utility
$
634,442

 
$
354,097

 
$
1,069,608

 
$
604,208

Gas Marketing
59,811

 
41,255

 
93,064

 
96,504

Other
251

 
2,261

 
441

 
3,904

Total Operating Revenues
694,504

 
397,613

 
1,163,113

 
704,616

Operating Expenses:
 
 
 
 
 
 
 
Gas Utility
 
 
 
 
 
 
 
Natural and propane gas
405,359

 
230,440

 
647,145

 
366,956

Other operation and maintenance expenses
72,009

 
41,191

 
134,331

 
80,842

Depreciation and amortization
20,118

 
11,258

 
40,144

 
22,223

Taxes, other than income taxes
41,739

 
21,751

 
70,328

 
36,557

Total Gas Utility Operating Expenses
539,225

 
304,640

 
891,948

 
506,578

Gas Marketing
65,021

 
35,995

 
116,803

 
93,376

Other
3,079

 
5,129

 
4,280

 
10,727

Total Operating Expenses
607,325

 
345,764

 
1,013,031

 
610,681

Operating Income
87,179

 
51,849

 
150,082

 
93,935

Other Income and (Income Deductions) – Net
(248
)
 
1,340

 
1,401

 
2,424

Interest Charges:
 
 
 
 
 
 
 
Interest on long-term debt
8,630

 
5,689

 
18,324

 
11,127

Other interest charges
742

 
1,016

 
1,509

 
1,604

Total Interest Charges
9,372

 
6,705

 
19,833

 
12,731

Income Before Income Taxes
77,559

 
46,484

 
131,650

 
83,628

Income Tax Expense
25,340

 
16,242

 
43,839

 
27,818

Net Income
$
52,219

 
$
30,242

 
$
87,811

 
$
55,810

 
 
 
 
 
 
 
 
Weighted Average Number of Common Shares Outstanding:
 
 
 
 
 
 
 
Basic
32,617

 
22,421

 
32,593

 
22,396

Diluted
32,656

 
22,498

 
32,652

 
22,466

Basic Earnings Per Share of Common Stock
$
1.59

 
$
1.34

 
$
2.68

 
$
2.48

Diluted Earnings Per Share of Common Stock
$
1.59

 
$
1.34

 
$
2.68

 
$
2.47

Dividends Declared Per Share of Common Stock
$
0.440

 
$
0.425

 
$
0.880

 
$
0.850

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


4


THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)

 
Three Months Ended 
 March 31,
 
Six Months Ended 
 March 31,
(Thousands)
2014
 
2013
 
2014
 
2013
Net Income
$
52,219

 
$
30,242

 
$
87,811

 
$
55,810

Other Comprehensive Income (Loss), Before Tax:
 
 
 
 
 
 
 
Net (losses) gains on cash flow hedging derivative instruments:
 
 
 
 
 
 
 
Net hedging loss arising during the period
(3,451
)
 
(7,590
)
 
(5,097
)
 
(6,201
)
Reclassification adjustment for losses (gains) included in net income
3,194

 
(22
)
 
2,016

 
2,228

Net unrealized losses on cash flow hedging derivative instruments
(257
)
 
(7,612
)
 
(3,081
)
 
(3,973
)
Defined benefit pension and other postretirement plans:
 
 
 
 
 
 
 
Amortization of actuarial loss included in net periodic pension
and postretirement benefit cost:
97

 
90

 
195

 
181

Other Comprehensive Loss, Before Tax
(160
)
 
(7,522
)
 
(2,886
)
 
(3,792
)
Income Tax Benefit Related to Items of Other Comprehensive Income
(62
)
 
(2,868
)
 
(1,096
)
 
(1,417
)
Other Comprehensive Loss, Net of Tax
(98
)
 
(4,654
)
 
(1,790
)
 
(2,375
)
Comprehensive Income
$
52,121

 
$
25,588

 
$
86,021

 
$
53,435

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


5


THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

 
Mar. 31,
 
Sept. 30,
 
Mar. 31,
(Thousands)
2014
 
2013
 
2013
ASSETS
 
 
 
 
 
Utility Plant
$
2,325,358

 
$
2,271,189

 
$
1,538,890

Less:  Accumulated depreciation and amortization
522,408

 
494,559

 
478,971

Net Utility Plant
1,802,950

 
1,776,630

 
1,059,919

Non-utility property
5,539

 
7,694

 
5,456

Goodwill
216,370

 
247,078

 

Other investments
62,231

 
58,306

 
52,910

Other Property and Investments
284,140

 
313,078

 
58,366

Current Assets:
 
 
 
 
 
Cash and cash equivalents
10,931

 
52,981

 
146,880

Accounts receivable:
 
 
 
 
 
Utility
275,688

 
101,118

 
148,624

Non-utility
103,272

 
63,752

 
55,925

Other
14,579

 
14,451

 
9,290

Allowance for doubtful accounts
(10,549
)
 
(8,046
)
 
(8,833
)
Delayed customer billings
29,667

 

 
19,663

Inventories:
 
 
 
 
 
Natural gas stored underground
67,798

 
182,035

 
32,776

Propane gas
6,633

 
8,962

 
8,963

Materials and supplies at average cost
8,408

 
8,154

 
4,385

Natural gas receivable
3,233

 
18,782

 
13,470

Derivative instrument assets
13,560

 
3,291

 
6,021

Unamortized purchased gas adjustments
1,631

 
17,533

 
11,039

Deferred income taxes
5,871

 

 
2,527

Prepayments and other
10,909

 
12,867

 
9,183

Total Current Assets
541,631

 
475,880

 
459,913

Deferred Charges:
 
 
 
 
 
Regulatory assets
537,398

 
545,947

 
424,743

Other
14,352

 
13,851

 
6,157

Total Deferred Charges
551,750

 
559,798

 
430,900

Total Assets
$
3,180,471

 
$
3,125,386

 
$
2,009,098


6



THE LACLEDE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)

 
Mar. 31,
 
Sept. 30,
 
Mar. 31,
(Thousands, except share amounts)
2014
 
2013
 
2013
CAPITALIZATION AND LIABILITIES
 
 
 
 
 
Capitalization:
 
 
 
 
 
  Common stock (70,000,000 shares authorized, 32,776,595,
    32,696,836, and 22,643,693 shares issued, respectively)
$
32,777

 
$
32,697

 
$
22,644

Paid-in capital
597,468

 
594,269

 
172,736

Retained earnings
478,955

 
420,103

 
451,114

Accumulated other comprehensive loss
(2,578
)
 
(787
)
 
(6,491
)
Total Common Stock Equity
1,106,622

 
1,046,282

 
640,003

Long-term debt (less current portion)
832,817

 
912,712

 
464,434

Total Capitalization
1,939,439

 
1,958,994

 
1,104,437

Current Liabilities:
 
 
 
 
 
Notes payable
36,000

 
74,000

 

Accounts payable
215,085

 
140,234

 
108,648

Advance customer billings

 
23,736

 

Wages and compensation accrued
21,839

 
20,807

 
16,175

Dividends payable
15,083

 
14,556

 
10,059

Customer deposits
15,588

 
15,062

 
7,706

Interest accrued
8,064

 
8,335

 
6,191

Taxes accrued
71,442

 
32,896

 
44,550

Deferred income taxes

 
1,012

 

Other
16,863

 
22,540

 
14,015

Total Current Liabilities
399,964

 
353,178

 
207,344

Deferred Credits and Other Liabilities:
 
 
 
 
 
Deferred income taxes
392,461

 
379,114

 
343,016

Unamortized investment tax credits
2,794

 
2,900

 
3,006

Pension and postretirement benefit costs
223,970

 
228,653

 
191,778

Asset retirement obligations
73,353

 
74,554

 
41,512

Regulatory liabilities
102,407

 
82,560

 
83,026

Other
46,083

 
45,433

 
34,979

Total Deferred Credits and Other Liabilities
841,068

 
813,214

 
697,317

Commitments and Contingencies (Note 12)
 
 
 
 
 
Total Capitalization and Liabilities
$
3,180,471

 
$
3,125,386

 
$
2,009,098

 
 
 
 
 


7


THE LACLEDE GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED) 
 
Six Months Ended 
 March 31,
(Thousands)
2014
 
2013
Operating Activities:
 
 
 
 Net Income
$
87,811

 
$
55,810

  Adjustments to reconcile net income to net cash provided by (used in)
      operating activities:
 
 
 
Depreciation, amortization, and accretion
40,501

 
22,913

Deferred income taxes and investment tax credits
3,396

 
(11,132
)
Other – net
2,102

 
450

Changes in assets and liabilities:
 
 
 
Accounts receivable – net
(211,715
)
 
(71,164
)
Unamortized purchased gas adjustments
15,901

 
29,635

Deferred purchased gas costs
27,766

 
43,827

Accounts payable
79,357

 
23,797

Delayed customer billings - net
(53,403
)
 
(44,809
)
Taxes accrued
38,123

 
32,971

Natural gas stored underground
114,237

 
59,953

Other assets and liabilities
(1,272
)
 
115

Net cash provided by operating activities
142,804

 
142,366

Investing Activities:
 
 
 
Capital expenditures
(68,226
)
 
(62,707
)
Other investments
(5,082
)
 
(2,126
)
Proceeds from sale of right to acquire NEG
11,000

 

Proceeds from final reconciliation of acquisition of MGE
23,925

 

Net cash used in investing activities
(38,383
)
 
(64,833
)
Financing Activities:
 
 
 
Issuance of long-term debt

 
125,000

Redemption and maturity of first mortgage bonds
(80,000
)
 
(25,000
)
Repayment of short-term debt – net
(38,000
)
 
(40,100
)
Changes in book overdrafts
(1,184
)
 
(1,262
)
Issuance of common stock
1,440

 
2,852

Dividends paid
(28,503
)
 
(19,054
)
Employees’ taxes paid associated with restricted shares withheld upon vesting
(1,053
)
 
(729
)
Excess tax benefits from stock-based compensation
880

 
636

Other
(51
)
 
(453
)
Net cash (used in) provided by financing activities
(146,471
)
 
41,890

Net (Decrease) Increase in Cash and Cash Equivalents
(42,050
)
 
119,423

Cash and Cash Equivalents at Beginning of Period
52,981

 
27,457

Cash and Cash Equivalents at End of Period
$
10,931

 
$
146,880

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
19,724

 
$
14,569

Income taxes paid (refunded)
2,595

 
(3,165
)
 
 
 

8


THE LACLEDE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. 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 2013 Form 10-K.
The consolidated financial position, results of operations, and cash flows of Laclede Group are primarily derived from the financial position, results of operations, and cash flows of Laclede Gas Company (the Utility), a wholly owned subsidiary. The Utility 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. The Utility's recent acquisition of Missouri Gas Energy (MGE) is included in the results of operations for the six months ended March 31, 2014, and impacts the comparability of the current year financial statements to prior years. For a further discussion of the acquisition, see Note 2, MGE acquisition. Due to the seasonal nature of the Utility, Laclede Group’s earnings are typically concentrated during the heating season of November through April each fiscal year, although earnings for MGE are less seasonal than earnings from Laclede Gas due to MGE's rate design which recovers fixed costs more evenly over the year. The Gas Utility segment serves St. Louis and eastern Missouri through Laclede Gas and serves Kansas City and western Missouri through MGE. The Company's primary non-utility business, Laclede Energy Resources, Inc. (LER), included in the Gas Marketing segment, provides non-regulated natural gas services.
REVENUE RECOGNITION - The Utility reads meters and bills its customers on monthly cycles. The Utility records its gas utility 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 March 31, 2014 and 2013, for the Utility, were $77.1 million and $33.3 million, respectively. The amount of accrued unbilled revenue at September 30, 2013 was $25.2 million.
GROSS RECEIPTS TAXES - Gross receipts taxes associated with the Utility’s 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 Gas Utility Operating Revenues for the three months ended March 31, 2014 and 2013 were $34.3 million and $17.2 million, respectively. Amounts recorded in Gas Utility Operating Revenues for the six months ended March 31, 2014 and 2013 were $54.3 million and $27.5 million, respectively. Gross receipts taxes are expensed by the Utility and included in the Taxes, other than income taxes line.

2. MGE ACQUISITION
Effective September 1, 2013, the Utility completed the purchase of substantially all of the assets and liabilities of MGE, a utility engaged in the distribution of natural gas on a regulated basis in western Missouri, from Southern Union Company (SUG), an affiliate of Energy Transfer Equity, L.P. (ETE) and Energy Transfer Partners, L.P. The purchase was completed pursuant to the Purchase and Sales Agreement (MGE PSA) dated December 14, 2012. Under the terms of the MGE PSA, the Utility acquired MGE for a purchase price of $975 million, subject to reconciliation of certain amounts as discussed below.
The strategic rationale for the purchase for Laclede Group to is described below:
With a larger market capitalization and enterprise value, the Company improved trading liquidity and has
better access to the capital markets.
The Company now serves Missouri's two largest metropolitan areas in a state where it already had a working
relationship with regulators.
In accordance with Section 3.2 of the MGE PSA, Laclede Gas provided to SUG a reconciliation of certain balance sheet accounts from the amounts at September 30, 2012 to August 31, 2013, indicating the difference due to changes in the actual net assets transferred to the Company at closing from the level at September 30, 2012. Laclede Gas and SUG agreed to the final reconciliation amount of $23.9 million which was paid by ETE to Laclede Gas on February 14, 2014.
Also, on December 12, 2012, a subsidiary of Laclede Group, Plaza Massachusetts Acquisition Inc. (Plaza Mass), agreed to purchase New England Gas Company (NEG) from SUG. Subsequently, on February 11, 2013, the Company agreed to sell Plaza Mass to Algonquin Power & Utilities Corp. (APUC). On December 13, 2013, the Massachusetts Department of Public Utilities (MDPU) approved the transfer of NEG to an APUC subsidiary. Consistent with the February 11, 2013 agreements, on December 20, 2013, the Company closed the sale of Plaza Mass to an APUC subsidiary and received $11.0 million from APUC.

9


On December 24, 2013, the Massachusetts Attorney General filed a Motion for Clarification/Reconsideration with the MDPU which, among other things, claims that legislative approval is required for a transfer of utility assets. On March 26, 2014, the MDPU issued an order denying the Attorney General's motion, so the MDPU's order approving the sale of NEG is now final.
These receipts of funds in December and February effectively reduced the Utility's purchase price of MGE to $940.1 million and reduced goodwill related to the transaction to $216.4 million. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805 (“Topic 805”), “Business Combinations.” Accordingly, goodwill was measured as the excess of the acquisition-date fair value of the consideration transferred over the amount of acquisition-date identifiable assets acquired net of assumed liabilities. As part of the MGE acquisition, Laclede Gas has estimated the asset retirement obligation of MGE's long-lived assets as of the acquisition date. This allocation of asset retirement obligations is preliminary and will be finalized upon completion of a detailed fair value analysis that is being performed by the Company and will be finalized prior to September 30, 2014.
For the three and six months ended March 31, 2014, operating revenues for MGE were $236.6 million and $396.7 million, respectively.

3. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

Pension Plans
The Utility 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 a growth segment consisting of exposure to equity markets, commodities, real estate and inflation-indexed securities, achieved through derivative instruments.
Pension costs for the three months ended March 31, 2014 and 2013 were $6.6 million and $4.2 million, respectively, including amounts charged to construction. Pension costs for the six months ended March 31, 2014 and 2013 were $13.2 million and $8.4 million, respectively, including amounts charged to construction.
The net periodic pension costs include the following components:
 
Three Months Ended 
 March 31,
 
Six Months Ended 
 March 31,
(Thousands)
2014
 
2013
 
2014
 
2013
Service cost – benefits earned during the period
$
2,428

 
$
2,311

 
$
4,856

 
$
4,622

Interest cost on projected benefit obligation
6,010

 
4,066

 
12,020

 
8,132

Expected return on plan assets
(6,645
)
 
(4,741
)
 
(13,290
)
 
(9,482
)
Amortization of prior service cost
125

 
136

 
249

 
272

Amortization of actuarial loss
1,772

 
2,839

 
3,544

 
5,678

Loss on lump-sum settlement
1,319

 

 
1,319

 

Sub-total
5,009

 
4,611

 
8,698

 
9,222

Regulatory adjustment
1,571

 
(433
)
 
4,461

 
(867
)
Net pension cost
$
6,580

 
$
4,178

 
$
13,159

 
$
8,355

Pursuant to the provisions of the Utility's 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. Lump-sum payments recognized as settlements during the six months ended March 31, 2014 were $10.9 million. There were no lump-sum payments recognized as settlements during the six months ended March 31, 2013.
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 Laclede Gas' qualified pension plans is based on an annual allowance of $15.5 million effective January 1, 2011. The recovery in rates for MGE's qualified pension plan is based on an annual allowance of $10.0 million effective February 20, 2010. 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 the Utility 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 2014 contributions to the pension plans through March 31, 2014 were $9.6 million to the qualified trusts and $0.2 million to the non-qualified plans.

10


Contributions to the pension plans for the remaining six months of fiscal 2014 are anticipated to be approximately $14.4 million to the qualified trusts and $0.2 million to the non-qualified plans.
Postretirement Benefits
The Utility provides certain life insurance benefits at retirement. Under the Laclede Gas plans, medical insurance is currently available after early retirement until age 65. Under the MGE plans, medical insurance is currently available upon retirement until death. The transition obligation not yet includible in postretirement benefit cost is being amortized over 20 years.
Postretirement benefit costs for both the three months ended March 31, 2014 and 2013 were $2.4 million, including amounts charged to construction. Postretirement benefit costs for both the six months ended March 31, 2014 and 2013 were $4.8 million, including amounts charged to construction.
Net periodic postretirement benefit costs consisted of the following components:
 
Three Months Ended 
 March 31,
 
Six Months Ended 
 March 31,
(Thousands)
2014
 
2013
 
2014
 
2013
Service cost – benefits earned during the period
$
2,804

 
$
2,534

 
$
5,608

 
$
5,067

Interest cost on accumulated postretirement benefit obligation
2,170

 
1,279

 
4,339

 
2,558

Expected return on plan assets
(1,709
)
 
(1,081
)
 
(3,418
)
 
(2,162
)
Amortization of transition obligation

 
23

 

 
46

Amortization of prior service cost (credit)
(1
)
 
1

 
(2
)
 
2

Amortization of actuarial loss
1,505

 
1,325

 
3,010

 
2,650

Sub-total
4,769

 
4,081

 
9,537

 
8,161

Regulatory adjustment
(2,388
)
 
(1,699
)
 
(4,775
)
 
(3,398
)
Net postretirement benefit cost
$
2,381

 
$
2,382

 
$
4,762

 
$
4,763

Missouri state law provides for the recovery in rates of costs accrued pursuant to GAAP provided that such costs are funded through an independent, external funding mechanism. The Utility established Voluntary Employees’ Beneficiary Association (VEBA) and Rabbi trusts as its external funding mechanisms. The assets of VEBA and Rabbi trusts consist primarily of money market securities and mutual funds invested in stocks and bonds.
Pursuant to a MoPSC Order, the return on plan assets is based on the market-related value of plan assets implemented prospectively over a four-year period. Gains and losses not yet includible in postretirement benefit cost are amortized only to the extent that such gain or loss exceeds 10% of the greater of the accumulated postretirement benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. The recovery in rates for the Utility’s postretirement benefit plans is based on an annual allowance of $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.
The Utility's 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 2014 contributions to the postretirement plans through March 31, 2014 were $4.8 million. Contributions to the postretirement plans for the remaining six months of fiscal year 2014 are anticipated to be $14.4 million to the qualified trusts and $0.3 million paid directly to participants from the Utility's funds.

4. STOCK-BASED COMPENSATION

Awards of stock-based compensation are made pursuant to The Laclede Group 2006 Equity Incentive Plan (2006 Plan). Refer to Note 4 of the Consolidated Financial Statements included in the Company’s Form 10-K for the fiscal year ended September 30, 2013 for descriptions of the plan.

Restricted Stock Awards
During the six months ended March 31, 2014, the Company granted 123,252 performance-contingent restricted stock units to executive officers and key employees at a weighted average grant date fair value of $37.20 per share. The number of stock units granted represents the maximum shares that can be earned pursuant to the terms of the awards. Most of these stock units have a performance period ending September 30, 2016. While the participants have no interim voting rights on these stock units, dividends accrue during the performance period and are paid to the participants upon vesting, but are subject to forfeiture if the underlying stock units do not vest.

11


The number of stock units that will ultimately vest is dependent upon the attainment of certain levels of earnings and other strategic goals, as well as the Company’s level of total shareholder return (TSR) during the performance period relative to a comparator group of companies. This TSR provision is considered a market condition under GAAP.
Activity of restricted stock and restricted stock units subject to performance and/or market conditions during the six months ended March 31, 2014 is presented below:
 
Restricted Stock/
Stock Units
 
Weighted
Average
Grant Date
Fair Value
Nonvested at September 30, 2013
242,268

 
$
34.15

Granted (maximum shares that can be earned)
123,252

 
$
37.20

Vested
(52,954
)
 
$
32.16

Forfeited
(22,022
)
 
$
29.35

Nonvested at March 31, 2014
290,544

 
$
36.17

During the six months ended March 31, 2014, the Company granted 71,768 shares of time-vested restricted stock and stock units to executive officers, key employees, and directors at a weighted average grant date fair value of $45.65 per share. Of the 71,768 shares, 15,200 shares will vest on July 14, 2014, 12,168 shares vest on December 2, 2014, and the remaining 44,400 shares will vest during FY 2017. In the interim, participants receive full voting rights and dividends, which are not subject to forfeiture.
Time-vested restricted stock and stock unit activity for the six months ended March 31, 2014 is presented below:
 
Restricted Stock/
Stock Units
 
Weighted
Average
Grant Date
Fair Value
Nonvested at September 30, 2013
119,404

 
$
38.64

Granted
71,768

 
$
45.65

Vested
(17,999
)
 
$
36.37

Forfeited
(16,950
)
 
$
38.04

Nonvested at March 31, 2014
156,223

 
$
42.19

During the six months ended March 31, 2014, 70,953 shares of restricted stock and stock units (performance-contingent and time-vested), awarded on December 1, 2010 and October 17, 2012 vested. The Company withheld 22,983 of the vested shares at a weighted average price of $45.83 per share pursuant to elections by employees to satisfy tax withholding obligations.

Stock Option Awards
Stock option activity for the six months ended March 31, 2014 is presented below:
 
Stock
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(Years)
 
Aggregate
Intrinsic
Value
($000)
Outstanding at September 30, 2013
133,500

 
$
31.87

 
 
 
 
Granted

 
$

 
 
 
 
Exercised
(23,250
)
 
$
30.96

 
 
 
 
Forfeited

 
$

 
 
 
 
Expired

 
$

 
 
 
 
Outstanding at March 31, 2014
110,250

 
$
32.07

 
1.4
 
$
1,663

Fully Vested and Expected to Vest at March 31, 2014
110,250

 
$
32.07

 
1.4
 
$
1,663

Exercisable at March 31, 2014
110,250

 
$
32.07

 
1.4
 
$
1,663


The closing price of the Company’s common stock was $47.15 on March 31, 2014.

12


Equity Compensation Costs
The amounts of compensation cost recognized for share-based compensation arrangements are presented below:
 
Three Months Ended 
 March 31,
 
Six Months Ended March 31,
(Thousands)
2014
 
2013
 
2014
 
2013
Total equity compensation cost
$
1,933

 
$
1,137

 
$
2,466

 
$
1,759

Compensation cost capitalized
(556
)
 
(356
)
 
(705
)
 
(539
)
Compensation cost recognized
$
1,377

 
$
781

 
$
1,761

 
$
1,220

 
 
 
 
 
 
 
 
Income tax benefit recognized
(527
)
 
(298
)
 
(674
)
 
(467
)
As of March 31, 2014, there was $9.8 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 2.2 years.

5. EARNINGS PER COMMON SHARE

 
Three Months Ended March 31,
 
Six Months Ended March 31,
(Thousands, Except Per Share Amounts)
2014
 
2013
 
2014
 
2013
Basic EPS:
 
 
 
 
 

 
 
Net Income
$
52,219

 
$
30,242

 
$
87,811

 
$
55,810

Less: Income allocated to participating securities
210

 
186

 
350

 
312

Net Income Available to Common Shareholders
$
52,009

 
$
30,056

 
$
87,461

 
$
55,498

Weighted Average Shares Outstanding
32,617

 
22,421

 
32,593

 
22,396

Earnings Per Share of Common Stock
$
1.59

 
$
1.34

 
$
2.68

 
$
2.48

Diluted EPS:
 

 
 

 
 

 
 

Net Income
$
52,219

 
$
30,242

 
$
87,811

 
$
55,810

Less: Income allocated to participating securities
209

 
186

 
349

 
311

Net Income Available to Common Shareholders
$
52,010

 
$
30,056

 
$
87,462

 
$
55,499

Weighted Average Shares Outstanding
32,617

 
22,421

 
32,593

 
22,396

Dilutive Effect of Stock Options, Restricted Stock
and Restricted Stock Units
39

 
77

 
59

 
70

Weighted Average Diluted Shares
32,656

 
22,498

 
32,652

 
22,466

Earnings Per Share of Common Stock
$
1.59

 
$
1.34

 
$
2.68

 
$
2.47

Outstanding Shares Excluded from the Calculation
of Diluted EPS Attributable to:
 

 
 

 
 

 
 

Restricted stock and stock units subject to
performance and/or market conditions
277

 
211

 
277

 
211



13



6. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of financial instruments not measured at fair value on a recurring basis are as follows:
 
 
 
 
 
Classification of Estimated Fair Value
(Thousands)
Carrying
Amount
 
Fair
Value
 
Quoted
Prices in Active Markets
(Level 1)
 
Significant Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
As of March 31, 2014
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
10,931

 
$
10,931

 
$
10,751

 
$
180

 
$

Short-term debt
36,000

 
36,000

 

 
36,000

 

Long-term debt
832,817

 
884,029

 

 
884,029

 

 
 
 
 
 
 
 
 
 
 
As of September 30, 2013
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
52,981

 
$
52,981

 
$
52,824

 
$
157

 
$

Short-term debt
74,000

 
74,000

 

 
74,000

 

Long-term debt
912,712

 
954,126

 

 
954,126

 

 
 
 
 
 
 
 
 
 
 
As of March 31, 2013
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
146,880

 
$
146,880

 
$
136,826

 
$
10,054

 
$

Short-term debt

 

 

 

 

Long-term debt
464,434

 
539,260

 

 
539,260

 

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. Refer to Note 7, Fair Value Measurements, for information on financial instruments measured at fair value on a recurring basis.


14


7. 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 March 31, 2014
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
U. S. Stock/Bond Mutual Funds
$
16,340

 
$
2,780

 
$

 
$

 
$
19,120

NYMEX/ICE natural gas contracts
7,495

 
1,263

 

 
(5,595
)
 
3,163

OTCBB natural gas contracts

 
6,330

 

 
(315
)
 
6,015

NYMEX gasoline and heating oil contracts
49

 

 

 

 
49

Natural gas commodity contracts

 
6,619

 
7

 
(1,184
)
 
5,442

Total
$
23,884

 
$
16,992

 
$
7

 
$
(7,094
)
 
$
33,789

Liabilities
 
 
 
 
 
 
 
 
 
NYMEX/ICE natural gas contracts
$
4,374

 
$
565

 
$

 
$
(4,939
)
 
$

OTCBB natural gas contracts

 
315

 

 
(315
)
 

Natural gas commodity contracts

 
3,278

 
40

 
(1,184
)
 
2,134

Total
$
4,374

 
$
4,158

 
$
40

 
$
(6,438
)
 
$
2,134

As of September 30, 2013
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
U. S. Stock/Bond Mutual Funds
$
14,500

 
$

 
$

 
$

 
$
14,500

NYMEX/ICE natural gas contracts
4,333

 
330

 

 
(2,145
)
 
2,518

OTCBB natural gas contracts

 
232

 

 
(232
)
 

NYMEX gasoline and heating oil contracts
105

 

 

 
(105
)
 

Natural gas commodity contracts

 
1,129

 
150

 
(495
)
 
784

Total
$
18,938

 
$
1,691

 
$
150

 
$
(2,977
)
 
$
17,802

Liabilities
 
 
 
 
 
 
 
 
 
NYMEX/ICE natural gas contracts
$
3,687

 
$
321

 
$

 
$
(4,008
)
 
$

OTCBB natural gas contracts

 
5,443

 

 
(232
)
 
5,211

Natural gas commodity contracts

 
1,140

 
40

 
(495
)
 
685

Total
$
3,687

 
$
6,904

 
$
40

 
$
(4,735
)
 
$
5,896

As of March 31, 2013
 

 
 

 
 

 
 

 
 

Assets
 

 
 

 
 

 
 

 
 

U. S. Stock/Bond Mutual Funds
$
13,922

 
$

 
$

 
$

 
$
13,922

NYMEX/ICE natural gas contracts
11,010

 
379

 

 
(8,209
)
 
3,180

NYMEX gasoline and heating oil contracts
322

 

 

 
(192
)
 
130

Natural gas commodity contracts

 
2,888

 
117

 
(289
)
 
2,716

Total
$
25,254

 
$
3,267

 
$
117

 
$
(8,690
)
 
$
19,948

Liabilities
 

 
 

 
 

 
 

 
 

NYMEX/ICE natural gas contracts
$
2,447

 
$
1,342

 
$

 
$
(3,789
)
 
$

Natural gas commodity contracts

 
990

 
24

 
(289
)
 
725

Interest rate swap

 
4,549

 

 

 
4,549

Total
$
2,447

 
$
6,881

 
$
24

 
$
(4,078
)
 
$
5,274



15


The mutual funds included in Level 1 are valued based on exchange-quoted market prices of individual securities. Derivative instruments included in Level 1 are valued using quoted market prices on the NYMEX. Derivative instruments classified in Level 2 include physical commodity derivatives that are valued using Over The Counter Bulletin Board (OTCBB), broker, or dealer quotation services whose prices are derived principally from, or are corroborated by, observable market inputs. Also included in Level 2 are certain derivative instruments that have values that are similar to, and correlate with, quoted prices for exchange-traded instruments in active markets. Derivative instruments included in Level 3 are valued using generally unobservable inputs that are based upon the best information available and reflect management’s assumptions about how market participants would price the asset or liability. The Company’s policy is to recognize transfers between the levels of the fair value hierarchy, if any, as of the beginning of the interim reporting period in which circumstances change or events occur to cause the transfer. The following is a reconciliation of the Level 3 beginning and ending net derivative balances:
 
Three Months Ended March 31,
 
Six Months Ended March 31,
(Thousands)
2014
 
2013
 
2014
 
2013
Beginning of period
$
7

 
$
30

 
$
110

 
$
109

Net settlements
(22
)
 
37

 
(131
)
 
(29
)
Net gains related to derivatives not held at end of period
17

 

 
3

 

Net (losses) gains related to derivatives still held at end of period
(35
)
 
26

 
(15
)
 
13

End of period
$
(33
)
 
$
93

 
$
(33
)
 
$
93

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 8, Derivative Instruments and Hedging Activities.

8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Utility has a risk management policy that allows for the purchase of natural gas derivative instruments with the goal of managing price risk associated with purchasing natural gas on behalf of its customers. This policy prohibits speculation and permits the Utility to hedge up to 70% of its normal volumes purchased for up to a 36 -month period. Costs and cost reductions, including carrying costs, associated with the Utility’s use of natural gas derivative instruments are allowed to be passed on to the Utility’s customers through the operation of its Purchased Gas Adjustment (PGA) Clause, through which the MoPSC allows the Utility to recover gas supply costs, subject to prudence review by the MoPSC. Accordingly, the Utility 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, the Utility purchases NYMEX futures and options contracts to help stabilize operating costs associated with forecasted purchases of gasoline and diesel fuels used to power vehicles and equipment used in the course of its business. At March 31, 2014, Laclede Gas held 0.4 million gallons of gasoline futures contracts at an average price of $2.76 per gallon. Most of these contracts, the longest of which extends to September 2014, are designated as cash flow hedges of forecasted transactions pursuant to ASC Topic 815. 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 gas marketing subsidiary, LER, which includes its wholly owned subsidiary LER Storage Services, Inc., enters into commitments associated with the purchase or sale of natural gas. Certain 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 March 31, 2014, the fair values of 149.2 million MMBtu of non-exchange traded natural gas commodity contracts were reflected in the Consolidated Balance Sheet. Of these contracts, 79.2 million MMBtu will settle during fiscal year 2014, 30.2 million MMBtu will settle during fiscal year 2015, 12.4 million MMBtu will settle during fiscal year 2016, 11.0 million MMBtu will settle during fiscal year 2017, 11.0 million MMBtu will settle during fiscal year 2018, while the remaining 5.4 million MMBtu will settle during fiscal year 2019. These contracts have not been designated as hedges; therefore, changes in the fair value of these contracts are reported in earnings each period.

16


Furthermore, LER manages the price risk associated with its fixed-priced commitments by either closely matching the offsetting physical purchase or sale of natural gas at fixed prices or through the use of NYMEX or Ice Clear Europe (ICE) futures, swap, and option contracts to lock in margins.
At March 31, 2014, LER’s unmatched fixed-price positions were not material to Laclede Group’s financial position or results of operations. LER’s NYMEX and ICE natural gas futures, swap, and option contracts used to lock in margins may be designated as cash flow hedges of forecasted transactions for financial reporting purposes.
The Company’s exchange-traded/cleared derivative instruments consist primarily of NYMEX, OTCBB, and ICE positions. The NYMEX and OTCBB is the primary national commodities exchange on which natural gas derivatives are traded. Open NYMEX/ICE and OTCBB natural gas futures and swap positions at March 31, 2014 were as follows:
 
Laclede Gas Company
 
Laclede Energy
Resources, Inc.
 
MMBtu
(millions)
 
Avg. Price
Per
MMBtu
 
MMBtu
(millions)
 
Avg. Price
Per
MMBtu
NYMEX/ICE Open short futures positions
 
 
 
 
 
 
 
Fiscal 2014

 
$

 
7.56

 
$
4.38

Fiscal 2015

 

 
1.58

 
4.46

Fiscal 2016

 

 
0.05

 
4.22

NYMEX/ICE Open long futures positions
 
 
 
 
 
 
 
Fiscal 2014
3.80

 
$
3.79

 
1.16

 
$
4.23

Fiscal 2015
0.94

 
3.84

 
0.88

 
4.35

Fiscal 2016

 

 
0.09

 
4.18

Fiscal 2017

 

 
0.02

 
4.28

ICE Open long basis swap positions
 
 
 
 
 
 
 
Fiscal 2014

 
$

 
0.92

 
$
0.39

Fiscal 2015

 

 
0.16

 
0.39

Fiscal 2016

 

 
0.92

 
0.80

Fiscal 2017

 

 
0.16

 
0.80

ICE Open short basis swap positions
 
 
 
 
 
 
 
Fiscal 2014

 
$

 
4.86

 
$
0.02

Fiscal 2015

 

 
0.62

 
(0.09
)
OTCBB Open long futures positions
 
 
 
 
 
 
 
Fiscal 2014
9.53

 
$
4.00

 

 
$

Fiscal 2015
9.83

 
4.21

 

 

Fiscal 2016
0.55

 
4.24

 

 

At March 31, 2014, the Utility had 28.4 million MMBtu of other price mitigation in place through the use of NYMEX and OTCBB natural gas option-based strategies while LER had none.
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