SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q

[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended December 31, 2009
OR
[     ]
TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
 
Commission File Number
 
 
Registrant
 
 
State of Incorporation
I.R.S.
Employer Identification
Number
1-16681
The Laclede Group, Inc.
Missouri
74-2976504
1-1822
Laclede Gas Company
Missouri
43-0368139

720 Olive Street
St. Louis, MO 63101
314-342-0500

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.

The Laclede Group, Inc.:
Yes
[ X ]
No
[     ]
         
Laclede Gas Company:
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).

The Laclede Group, Inc.:
Yes
[     ]
No
[     ]
         
Laclede Gas Company:
Yes
[     ]
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.

The Laclede Group, Inc.:
       
           
 
Large accelerated filer
[ X ]
 
Accelerated filer
[     ]
 
Non-accelerated filer
[     ]
 
Smaller reporting company
[     ]
           
Laclede Gas Company:
       
           
 
Large accelerated filer
[     ]
 
Accelerated filer
[     ]
 
Non-accelerated filer
[ X ]
 
Smaller reporting company
[     ]


 

is a shell company (as defined in Rule 12b-2 of the Exchange Act):

The Laclede Group, Inc.:
Yes
[     ]
No
[ X ]
         
Laclede Gas Company:
Yes
[     ]
No
[ X ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

   
Shares Outstanding At
    Registrant
Description of Common Stock
January 28, 2010
    The Laclede Group, Inc.:
Common Stock ($1.00 Par Value)
22,262,436
    Laclede Gas Company:
Common Stock ($1.00 Par Value)
11,644  *

* 100% owned by The Laclede Group, Inc.

 




2
 


Page No.
       
       
 
       
 
The Laclede Group, Inc.:
 
   
   
   
   
   
       
   
   
Statements of Income
Ex. 99.1, p. 1
   
Statements of Comprehensive Income
Ex. 99.1, p. 2
   
Balance Sheets
Ex. 99.1, p. 3-4
   
Statements of Cash Flows
Ex. 99.1, p. 5
   
Notes to Financial Statements
Ex. 99.1, p. 6-16
       
 
   
 
Management’s Discussion and Analysis of Financial Condition and
 
   
Results of Operations (Laclede Gas Company)
Ex. 99.1, p. 17-26
       
       
       
 
       
       
       
    Item 6
       
       
       

 
FILING FORMAT
This Quarterly Report on Form 10-Q is a combined report being filed by two separate registrants: The Laclede Group, Inc. (Laclede Group or the Company) and Laclede Gas Company (Laclede Gas or the Utility).




3
 


 
PART 1. FINANCIAL INFORMATION

 
The interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Form 10-K for the fiscal year ended September 30, 2009.





Item 1. Financial Statements

 
  THE LACLEDE GROUP, INC.
  STATEMENTS OF CONSOLIDATED INCOME
 (UNAUDITED)
 
 
   
Three Months Ended
 
   
December 31,
 
(Thousands, Except Per Share Amounts)
 
2009
 
2008
 
               
Operating Revenues:
             
  Regulated Gas Distribution
 
$
282,929
 
$
358,101
 
  Non-Regulated Gas Marketing
   
197,525
   
315,040
 
  Other
   
10,712
   
1,115
 
        Total Operating Revenues
   
491,166
   
674,256
 
Operating Expenses:
             
  Regulated Gas Distribution
             
    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 Regulated Gas Distribution Operating Expenses
   
251,224
   
325,209
 
  Non-Regulated Gas Marketing
   
194,730
   
291,601
 
  Other
   
4,548
   
758
 
        Total Operating Expenses
   
450,502
   
617,568
 
Operating Income
   
40,664
   
56,688
 
Other Income and (Income Deductions) – Net
   
1,587
   
739
 
Interest Charges:
             
  Interest on long-term debt
   
6,146
   
6,146
 
  Other interest charges
   
563
   
2,646
 
        Total Interest Charges
   
6,709
   
8,792
 
Income Before Income Taxes and Dividends
             
  on Laclede Gas Redeemable Preferred Stock
   
35,542
   
48,635
 
Income Tax Expense
   
12,656
   
17,321
 
Dividends on Laclede Gas Redeemable Preferred Stock
   
   
8
 
Net Income
 
$
22,886
 
$
31,306
 
               
Average Number of Common Shares Outstanding:
             
  Basic
   
21,957
   
21,857
 
  Diluted
   
22,001
   
21,959
 
               
Basic Earnings Per Share of Common Stock
 
$
1.03
 
$
1.42
 
               
Diluted Earnings Per Share of Common Stock
 
$
1.03
 
$
1.41
 
               
Dividends Declared Per Share of Common Stock
 
$
0.395
 
$
0.385
 
               
             



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

   
Three Months Ended
 
   
December 31,
 
(Thousands) 
   
2009
   
2008
 
               
Net Income
 
$
22,886
 
$
31,306
 
Other Comprehensive Income (Loss), Before Tax:
             
  Net gains (losses) on cash flow hedging derivative instruments:
             
    Net hedging gain arising during the period
   
3,743
   
2,039
 
    Reclassification adjustment for gains included in net income
   
(4,051
)
 
(8,272
)
        Net unrealized losses on cash flow hedging derivative instruments
   
(308
)
 
(6,233
)
   Amortization of actuarial loss included in net periodic pension and
             
     postretirement benefit cost
   
98
   
50
 
Other Comprehensive Loss, Before Tax
   
(210
)
 
(6,183
)
Income Tax Benefit Related to Items of Other Comprehensive Loss
   
(81
)
 
(2,380
)
Other Comprehensive Loss, Net of Tax
   
(129
)
 
(3,803
)
Comprehensive Income
 
$
22,757
 
$
27,503
 
               
             














THE LACLEDE GROUP, INC.
(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
 
                             
Non-utility property
   
4,123
       
4,061
       
4,055
 
Other investments
   
46,321
       
44,973
       
42,995
 
        Other Property and Investments
   
50,444
       
49,034
       
47,050
 
                             
Current Assets:
                           
  Cash and cash equivalents
   
80,029
       
74,591
       
30,080
 
  Accounts receivable:
                           
    Utility
   
159,423
       
81,262
       
208,744
 
    Non-utility
   
75,317
       
42,382
       
115,290
 
    Other
   
15,781
       
7,511
       
10,629
 
    Allowances for doubtful accounts
   
(8,297
)
     
(11,160
)
     
(8,479
)
  Inventories:
                           
    Natural gas stored underground at LIFO cost
   
88,204
       
93,313
       
197,423
 
    Propane gas at FIFO cost
   
15,649
       
19,847
       
19,871
 
    Materials, supplies, and merchandise at average cost
   
4,162
       
4,158
       
5,353
 
  Natural gas receivable
   
25,026
       
28,344
       
5,129
 
  Derivative instrument assets
   
11,234
       
17,178
       
25,381
 
  Unamortized purchased gas adjustments
   
       
       
24,149
 
  Deferred income taxes
   
       
1,707
       
 
  Prepayments and other
   
10,171
       
9,650
       
6,331
 
        Total Current Assets
   
476,699
       
368,783
       
639,901
 
                             
Deferred Charges:
                           
  Regulatory assets
   
467,130
       
482,999
       
354,274
 
  Other
   
6,785
       
5,273
       
6,020
 
        Total Deferred Charges
   
473,915
       
488,272
       
360,294
 
Total Assets
 
$
1,860,028
     
$
1,762,018
     
$
1,875,646
 
                             

 
 

 
 
 
 




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

   
Dec. 31,
     
Sept. 30,
     
Dec. 31,
 
(Thousands, except share amounts)
 
2009
     
2009
     
2008
 
                             
CAPITALIZATION AND LIABILITIES
                           
Capitalization:
                           
  Common stock (70,000,000 shares authorized, 22,252,467
    22,168,120, and 22,129,166 shares issued, respectively)
 
$
22,252
     
$
22,168
     
$
22,129
 
  Paid-in capital
   
154,697
       
154,218
       
150,166
 
  Retained earnings
   
356,910
       
342,810
       
335,598
 
  Accumulated other comprehensive income (loss)
   
(2,295
)
     
(2,166
)
     
633
 
      Total Common Stock Equity
   
531,564
       
517,030
       
508,526
 
  Laclede Gas redeemable preferred stock
    (less current sinking fund requirements)
   
       
 
       
467
 
  Long-term debt – Laclede Gas
   
364,254
       
389,240
       
389,196
 
      Total Capitalization
   
895,818
       
906,270
       
898,189
 
                             
Current Liabilities:
                           
  Notes payable
   
145,150
       
129,800
       
263,500
 
  Accounts payable
   
135,108
       
72,765
       
175,285
 
  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
   
8,928
       
8,687
       
8,674
 
  Customer deposits
   
12,163
       
12,400
       
13,772
 
  Interest accrued
   
6,217
       
9,943
       
6,825
 
  Taxes accrued
   
25,148
       
15,951
       
37,557
 
  Unamortized purchased gas adjustments
   
4,741
       
3,130
       
 
  Deferred income taxes current
   
1,873
       
       
7,624
 
  Other
   
21,297
       
12,642
       
16,680
 
      Total Current Liabilities
   
407,761
       
299,140
       
560,718
 
                             
Deferred Credits and Other Liabilities:
                           
  Deferred income taxes
   
256,051
       
256,196
       
216,234
 
  Unamortized investment tax credits
   
3,700
       
3,754
       
3,918
 
  Pension and postretirement benefit costs
   
201,659
       
202,681
       
103,507
 
  Asset retirement obligations
   
25,885
       
25,503
       
27,236
 
  Regulatory liabilities
   
44,681
       
44,225
       
42,639
 
  Other
   
24,473
       
24,249
       
23,205
 
      Total Deferred Credits and Other Liabilities
   
556,449
       
556,608
       
416,739
 
Total Capitalization and Liabilities
 
$
1,860,028
     
$
1,762,018
     
$
1,875,646
 
                             
                           
                             
                             




THE LACLEDE GROUP, INC.
(UNAUDITED)
 
   
Three Months Ended
 
   
December 31,
 
(Thousands)
   
2009
     
2008
 
                   
Operating Activities:
                 
  Net Income
 
$
22,886
     
$
31,306
 
  Adjustments to reconcile net income to net cash provided by (used in)
      operating activities:
                 
    Depreciation, amortization, and accretion
   
9,434
       
9,193
 
    Deferred income taxes and investment tax credits
   
(4,184
)
     
(11,566
)
    Other – net
   
615
       
2,113
 
    Changes in assets and liabilities:
                 
      Accounts receivable – net
   
(122,229
)
     
(127,225
)
      Unamortized purchased gas adjustments
   
1,611
       
9,262
 
      Deferred purchased gas costs
   
23,609
       
(14,832
)
      Accounts payable
   
63,176
       
17,473
 
      Advance customer billings - net
   
(10,719
)
     
(8,970
)
      Taxes accrued
   
9,101
       
26,170
 
      Natural gas stored underground
   
5,109
       
8,844
 
      Other assets and liabilities
   
1,562
       
41,002
 
          Net cash used in operating activities
   
(29
)
     
(17,230
)
                   
Investing Activities:
                 
  Capital expenditures
   
(11,198
)
     
(14,332
)
  Other investments
   
(972
)
     
(837
)
          Net cash used in investing activities
   
(12,170
)
     
(15,169
)
                   
Financing Activities:
                 
  Issuance of short-term debt – net
   
15,350
       
47,600
 
  Changes in book overdrafts
   
11,028
       
6,115
 
  Issuance of common stock
   
338
       
2,245
 
  Dividends paid
   
(8,535
)
     
(8,240
)
  Employees’ taxes paid associated with restricted shares withheld upon vesting
   
(576
)
     
(675
)
  Excess tax benefits from stock-based compensation
   
32
       
650
 
  Other
   
       
(115
)
          Net cash provided by financing activities
   
17,637
       
47,580
 
                   
Net Increase in Cash and Cash Equivalents
   
5,438
       
15,181
 
Cash and Cash Equivalents at Beginning of Period
   
74,591
       
14,899
 
Cash and Cash Equivalents at End of Period
 
$
80,029
 
 
 
$
30,080
 
                   
 
                 
Supplemental Disclosure of Cash Paid (Refunded) During the Period for:
                 
    Interest
 
$
10,294
     
$
11,961
 
    Income taxes
   
606
       
(503
)
                   
 See Notes to Consolidated Finanical Statements .                  





THE LACLEDE GROUP, INC.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These notes are an integral part of the accompanying 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 2009 Form 10-K .
The consolidated financial position, results of operations, and cash flows of Laclede Group are comprised primarily from the financial position, results of operations, and cash flows   of Laclede Gas Company (Laclede Gas or the Utility). Laclede Gas is a regulated natural gas distribution utility having a material seasonal cycle. As a result, these interim statements of income for Laclede Group are not necessarily indicative of annual results or representative of succeeding quarters of the fiscal year. Due to the seasonal nature of the business of Laclede Gas, earnings are typically concentrated in the November through April period, which generally corresponds with the heating season.
REVENUE RECOGNITION - Laclede Gas reads meters and bills its customers on monthly cycles. The Utility records its regulated gas distribution revenues from gas sales and transportation services on an accrual basis that includes estimated amounts for gas delivered, but not yet billed. The accruals for unbilled revenues are reversed in the subsequent accounting period when meters are actually read and customers are billed. The amounts of accrued unbilled revenues at December 31, 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.
EARNINGS PER COMMON SHARE - As discussed in the New Accounting Pronouncements section below, the Company adopted certain changes to the computation of earnings per share effective October 1, 2009. Generally accepted accounting principles in the United States of America (GAAP) require dual presentation of basic and diluted earnings per share (EPS). EPS is computed using the two-class method, which is an earnings allocation method for computing EPS that treats a participating security as having rights to earnings that would otherwise have been available to common shareholders. Certain of the Company’s stock-based compensation awards pay nonforfeitable dividends to the participants during the vesting period and, as such, are deemed participating securities. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding that are increased for additional shares that would be outstanding if potentially dilutive non-participating securities were converted to common shares, pursuant to the treasury stock method. Shares attributable to non-participating stock options and time-vested restricted stock/units are excluded from the calculation of diluted earnings per share if the effect would be antidilutive. Shares attributable to non-participating performance-contingent restricted stock awards are only included in the calculation of diluted earnings per share to the extent the underlying performance and/or market conditions are satisfied (a) prior to the end of the reporting period or (b) would be satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive. The Company’s EPS computations are set forth in Note 2 , Earnings Per Common Share.
GROSS RECEIPTS TAXES - Gross receipts taxes associated with Laclede Gas’ natural gas utility service are imposed on the Utility and billed to its customers. These amounts are recorded gross in the Statements of Consolidated Income. Amounts recorded in Regulated Gas Distribution Operating Revenues for the quarters ended December 31, 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 consolidated financial statements, the Company has evaluated subsequent events known through the time of this filing on January 29, 2010, the date the consolidated financial statements were issued.


STOCK-BASED COMPENSATION - Awards of stock-based compensation are made pursuant to The Laclede Group 2006 Equity Incentive Plan and the Restricted Stock Plan for Non-Employee Directors. Refer to Note 1 of the Consolidated Financial Statements included in the Company’s Form 10-K for the fiscal year ended September 30, 2009 for descriptions of these plans.

Restricted Stock Awards

During the quarter ended December 31, 2009, the Company granted 95,400 performance-contingent restricted shares and share units to executive officers and key employees at a weighted average grant date fair value of $25.41 per share. This number represents the maximum shares that can be earned pursuant to the terms of the awards. The shares and share units have a performance period ending September 30, 2012, during which participants are entitled to voting rights on the target level, or 63,600 shares. Dividends on these target level of shares accrue during the performance period and are paid to the participants up to the target level upon vesting, but are subject to forfeiture if the underlying shares do not vest. The number of shares and share units that will ultimately vest is dependent upon the attainment of certain levels of earnings growth and portfolio development performance goals; further, under the terms of the award, the Compensation Committee of the Board of Directors has the discretion to reduce by up to 25% the number that vest if the Company’s total shareholder return (TSR) during the performance period ranks below the median relative to a comparator group of companies. This TSR provision is considered a market condition under generally accepted accounting principles.
During the quarter ended December 31, 2009, 58,250 shares of performance-contingent restricted stock, awarded on November 2, 2006 and December 5, 2007, vested. The Company withheld 18,899 of the vested shares at a weighted average price of $30.49 per share pursuant to elections by employees to satisfy tax withholding obligations.
Performance-contingent restricted stock and performance-contingent restricted stock unit activity for the quarter ended December 31, 2009 is presented below:

           
Weighted
           
Average
     
Shares/
   
Grant Date
     
Units
   
Fair Value
                   
 
Nonvested at September 30, 2009
 
225,950
     
$
37.85
 
                   
 
Granted (maximum shares that can be earned)
 
95,400
     
$
25.41
 
 
Vested
 
(58,250
)
   
$
34.75
 
 
Forfeited
 
(3,750
)
   
$
31.27
 
                   
 
Nonvested at December 31, 2009
 
259,350
     
$
34.07
 

During the quarter ended December 31, 2009, the Company granted 27,900 shares of time-vested restricted stock to executive officers and key employees at a weighted average grant date fair value of $30.37 per share. These shares were awarded on November 4 and December 1, 2009 and vest November 4 and December 1, 2012, respectively. In the interim, participants receive full voting rights and dividends, which are not subject to forfeiture.
Time-vested restricted stock and time-vested restricted stock unit activity for quarter ended December 31, 2009 is presented below:

           
Weighted
           
Average
     
Shares/
   
Grant Date
     
Units
   
Fair Value
                   
 
Nonvested at September 30, 2009
 
90,150
     
$
39.08
 
                   
 
Granted
 
27,900
     
$
30.37
 
 
Vested
 
     
$
 
 
Forfeited
 
     
$
 
                   
 
Nonvested at December 31, 2009
 
118,050
     
$
37.02
 



Stock Option Awards

Stock option activity for the quarter ended December 31, 2009 is presented below:

                 
Weighted
       
                 
Average
       
           
Weighted
   
Remaining
   
Aggregate
 
           
Average
   
Contractual
   
Intrinsic
 
     
Stock
   
Exercise
   
Term
   
Value
 
     
Options
   
Price
   
(Years)
   
($000)
 
                               
 
Outstanding at September 30, 2009
 
356,225
   
$
30.84
               
                               
 
Granted
 
   
$
               
 
Exercised
 
   
$
               
 
Forfeited
 
   
$
               
 
Expired
 
   
$
               
                               
 
Outstanding at December 31, 2009
 
356,225
   
$
30.84
   
5.1
   
$
1,140
 
                               
 
Fully Vested and Expected to Vest
  at December 31, 2009
 
354,449
   
$
30.82
   
5.1
   
$
1,140
 
                               
 
Exercisable at December 31, 2009
 
330,850
   
$
30.53
   
5.0
   
$
1,140
 

The closing price of the Company’s common stock was $33.77 at December 31, 2009.

Equity Compensation Costs

The amounts of compensation cost recognized 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
 
$
868
 
$
842
   
 
Compensation cost capitalized
   
(138
)
 
(180
)
 
 
Compensation cost recognized in net income
   
730
   
662
   
 
Income tax benefit recognized in net income
   
(282
)
 
(256
)
 
 
Compensation cost recognized in net income, net of income tax
 
$
448
 
$
406
   

As of December 31, 2009, there was $6.8 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 2.4 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 the Company’s stock-based compensation plans accounted for in accordance with ASC Topic 718, “Compensation-Stock Compensation.” The Company 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 Company’s financial position or results of operations. For disclosures required pursuant to ASC Topic 820, see Note 5 , Fair Value Measurements. The Company adopted SFAS No. 157 for certain nonfinancial assets and nonfinancial liabilities as of October 1, 2009. Such adoption had no impact on the Company’s financial position or results of operations.
In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” as codified is ASC Topic 260, “Earnings per Share.” This FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing EPS under the two-class method described in ASC Topic 260. The guidance in this FSP states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. The FSP requires that the guidance be applied retrospectively to all prior-period EPS data presented. Certain of the Company’s stock-based compensation awards pay nonforfeitable dividends to the participants during the vesting period and, as such, are deemed participating securities under this FSP. The Company adopted this FSP effective October 1, 2009. Upon adoption of this FSP, application of the two-class method resulted in reductions to previously reported basic and diluted EPS. The effect of adoption reduced both basic and diluted EPS by $0.01 each for the quarter ended December 31, 2008, compared to originally reported amounts. On an annual basis, reductions to previously reported EPS will not be more than $0.03 per share. Reported net income and cash flows are unaffected by the adoption of this FSP. The Company’s EPS computations are set forth in Note 2 , Earnings Per Common Share.
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 Company will be required to provide the additional disclosures with its annual financial statements for fiscal year 2010. The Company 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 Group’s adoption of this ASU in the first quarter of fiscal year 2010 had no impact on the Company’s financial position or results of operations.




EARNINGS PER COMMON SHARE

As mentioned in the New Accounting Pronouncements section of Note 1, the Company adopted the provisions of FSP No. EITF 03-6-1 effective October 1, 2009. EPS and diluted shares outstanding amounts for the three months ended December 31, 2008 have been restated to reflect the retrospective application of the FSP. The effect of adoption reduced both basic and diluted EPS by $0.01 each for the quarter ended December 31, 2008, compared to originally reported amounts. Reported net income and cash flows were not affected by the adoption of the FSP. For details on the methodology used to compute EPS, see the Earnings Per Common Share section of Note 1.

     
Three Months Ended
 
     
December 31,
 
 
(Thousands, Except Per Share Amounts)
   
2009
   
2008
 
                 
 
Basic EPS:
             
 
Net Income
 
$
22,886
 
$
31,306
 
 
  Less: Income allocated to participating securities
   
228
   
320
 
 
Net Income Available to Common Shareholders
 
$
22,658
 
$
30,986
 
                 
 
Weighted Average Shares Outstanding
   
21,957
   
21,857
 
 
Earnings Per Share of Common Stock
 
$
1.03
 
$
1.42
 
                 
 
Diluted EPS:
             
 
Net Income
 
$
22,886
 
$
31,306
 
 
  Less: Income allocated to participating securities
   
227
   
319
 
 
Net Income Available to Common Shareholders
 
$
22,659
 
$
30,987
 
                 
 
Weighted Average Shares Outstanding
   
21,957
   
21,857
 
 
Dilutive Effect of Stock Options
             
 
    and Restricted Stock
   
44
   
102
 
 
Weighted Average Diluted Shares
   
22,001
   
21,959
 
                 
 
Earnings Per Share of Common Stock
 
$
1.03
 
$
1.41
 
                 
 
Outstanding Shares Excluded from the
             
 
Calculation of Diluted EPS Attributable to:
             
 
Antidilutive stock options
   
82
   
 
 
Performance-contingent restricted stock
   
148
   
60
 
 
Total
   
230
   
60
 


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 Company 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 Consolidated Income and Statements of Consolidated 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.
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 GAAP provided that such costs are funded through an independent, external funding mechanism. Laclede Gas established Voluntary Employees’ Beneficiary Association (VEBA) and Rabbi trusts as its external funding mechanisms. VEBA and Rabbi trusts’ assets consist primarily of money market securities and mutual funds invested in stocks and bonds.
Pursuant to a MoPSC Order, the return on plan assets is based on the market-related value of plan assets implemented prospectively over a four-year period. Gains and losses not yet includible in postretirement benefit cost are amortized only to the extent that such gain or loss exceeds 10% of the greater of the accumulated postretirement benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. The Commission ordered that the recovery in rates be based on an annual allowance of $7.6 million. The difference between this amount 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.


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
 
$
80,029
 
$
80,029
 
 
Marketable securities
   
11,679
   
11,679
 
 
Derivative instrument assets
   
11,234
   
11,234
 
 
Derivative instrument liabilities
   
1,159
   
1,159
 
 
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
 
$
74,591
 
$
74,591
 
 
Marketable securities
   
11,110
   
11,110
 
 
Derivative instrument assets
   
17,178
   
17,178
 
 
Derivative instrument liabilities
   
976
   
976
 
 
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, derivative instrument assets, and derivative instrument liabilities are valued as described in Note 5 , Fair Value Measurements.




FAIR VALUE MEASUREMENTS

The following table categorizes the assets and liabilities in the Consolidated Balance Sheets that are accounted for at fair value on a recurring basis in periods subsequent to initial recognition.


 
(Thousands)
   
Quoted
Prices in
Active
Markets
(Level 1)
   
Significant
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Effects of Netting and Cash Margin Receivables
/Payables
   
Total
 
 
As of December 31, 2009
                               
 
Assets
                               
 
  Marketable securities
 
$
11,679
 
$
 
$
 
$
 
$
11,679
 
 
  Derivative instruments
   
3,839
   
292
   
327
   
6,776
   
11,234
 
 
        Total
 
$
15,518
 
$
292
 
$
327
 
$
6,776
 
$
22,913
 
                                   
 
Liabilities
                               
 
  Derivative instruments
 
$
51,563
 
$
1,027
 
$
536
 
$
(51,967
)
$
1,159
 
                                   
 
As of September 30, 2009
                               
 
Assets
                               
 
  Marketable securities
 
$
11,110
 
$
 
$
 
$
 
$
11,110
 
 
  Derivative instruments
   
11,081
   
1,688
   
558
   
3,851
   
17,178
 
 
        Total
 
$
22,191
 
$
1,688
 
$
558
 
$
3,851
 
$
28,288
 
                                   
 
Liabilities
                               
 
  Derivative instruments
 
$
55,170
 
$
522
 
$
659
 
$
(55,375
)
$
976
 
                                   
 
As of December 31, 2008
                               
 
Assets
                               
 
  Marketable securities
 
$
8,918
 
$
 
$
 
$
 
$
8,918
 
 
  Derivative instruments
   
8,560
   
384
   
   
16,437
   
25,381
 
 
        Total
 
$
17,478
 
$
384
 
$
 
$
16,437
 
$
34,299
 
                                   
 
Liabilities
                               
 
  Derivative instruments
 
$
101,738
 
$
7
 
$
 
$
(101,738
)
$
7
 

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. Derivative instruments included in Level 2 are valued using broker or dealer quotation services or by using observable market inputs. Derivative instruments included in Level 3 are valued using generally unobservable inputs that are based upon the best information available and reflect management’s assumptions about how market participants would price the asset or liability. At October 1, 2009, the beginning net balance of derivatives measured using Level 3 inputs was $(101,000). During the quarter ended December 31, 2009, the balance decreased by $139,000 due to settlements and increased $31,000 due to net gains included in earnings, leaving a net balance of $(209,000) at December 31, 2009.
Marketable securities are included in the Other investments line of the Consolidated Balance Sheets. Liabilities for derivative instruments, if any, are included in the Other line of the Current Liabilities section 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.




DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Laclede Gas has a risk management policy that allows for the purchase of natural gas derivative instruments with the goal of managing price risk associated with purchasing natural gas on behalf of its customers. This policy prohibits speculation and permits the Utility to hedge up to 70% of its normal volumes purchased for up to a 36-month period. Costs and cost reductions, including carrying costs, associated with the Utility’s use of natural gas derivative instruments are allowed to be passed on to the Utility’s customers through the operation of its Purchased Gas Adjustment (PGA) Clause, through which the MoPSC allows the Utility to recover gas supply costs, subject to prudence review. Accordingly, Laclede Gas does not expect any adverse earnings impact as a result of the use of these derivative instruments. The Utility does not designate these instruments as hedging instruments for financial reporting purposes because gains or losses associated with the use of these derivative instruments are deferred and recorded as regulatory assets or regulatory liabilities pursuant to ASC Topic 980, “Regulated Operations,” and, as a result, have no direct impact on the Statements of Consolidated Income. The timing of the operation of the PGA clause may cause interim variations in short-term cash flows because the Utility is subject to cash margin requirements associated with changes in the values of these instruments. Nevertheless, carrying costs associated with such requirements are recovered through the PGA Clause.
From time to time, Laclede Gas purchases NYMEX futures contracts to help stabilize operating costs associated with forecasted purchases of gasoline and diesel fuels used to power vehicles and equipment used in the course of its business. At 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.
In the course of its business, Laclede Group’s non-regulated gas marketing affiliate, Laclede Energy Resources, Inc. (LER), enters into commitments associated with the purchase or sale of natural gas. Many of LER’s derivative natural gas contracts are designated as normal purchases or normal sales and, as such, are excluded from the scope of ASC Topic 815 and are accounted for as executory contracts on an accrual basis. Any of LER’s derivative natural gas contracts that are not designated as normal purchases or normal sales are accounted for at fair value. At December 31, 2009, LER had 31.2 million MMBtu of non-exchange traded natural gas commodity contracts for which the normal purchases and normal sales scope exception was not elected. Of these contracts, 29.6 million MMBtu will settle during fiscal year 2010, while the remaining 1.6 million MMBtu will settle during fiscal year 2011. These contracts have not been designated as hedges; therefore, changes in the fair value of these contracts are reported in earnings each period. Furthermore, LER manages the price risk associated with its fixed-priced commitments by either closely matching the offsetting physical purchase or sale of natural gas at fixed prices or through the use of NYMEX futures contracts to lock in margins. At December 31, 2009, LER’s unmatched fixed-price positions were not material to Laclede Group’s financial position or results of operations. LER’s NYMEX natural gas futures contracts used to lock in margins are generally designated as cash flow hedges of forecasted transactions for financial reporting purposes.
Derivative instruments designated as cash flow hedges of forecasted transactions are recognized on the Consolidated Balance Sheets at fair value and the change in the fair value of the effective portion of these hedge instruments is recorded, net of tax, in other comprehensive income (OCI). Accumulated other comprehensive income (AOCI) is a component of Total Common Stock Equity. Amounts are reclassified from AOCI into earnings when the hedged items affect net income, using the same revenue or expense category that the hedged item impacts. Based on market prices at December 31, 2009, it is expected that approximately $1.4 million of pre-tax unrealized gains will be reclassified into the Statements of Consolidated Income during the next twelve months. The net amount of pre-tax gains (losses) recognized in earnings for the ineffective portion of cash flow hedges was $(1.9) million and $2.2 million for the quarters ended December 31, 2009 and 2008, respectively. Cash flows from hedging transactions are classified in the same category as the cash flows from the items that are being hedged in the Statements of Consolidated Cash Flows.




The Company’s exchange-traded/cleared derivative instruments consist primarily of NYMEX positions. The NYMEX is the primary national commodities exchange on which natural gas derivatives are traded. NYMEX-traded contracts are supported by the financial and credit quality of the clearing members of the NYMEX and have nominal credit risk. Open NYMEX natural gas futures positions at December 31, 2009 were as follows:

     
Laclede Gas Company
 
Laclede Energy
Resources, Inc.
 
     
MMBtu
(millions)
 
Avg. Price
Per
MMBtu
 
MMBtu
(millions)
 
Avg. Price
Per
MMBtu
 
 
Open short futures positions
                         
 
    Fiscal 2010
 
 
$
   
6.87
 
$
5.79
   
 
    Fiscal 2011
 
   
   
0.53
   
6.11
   
                             
 
Open long futures positions
                         
 
    Fiscal 2010
 
9.77
 
$
8.71
   
1.28
 
$
5.29
   
 
    Fiscal 2011
 
6.58
   
8.55
   
3.88
   
6.54
   
 
    Fiscal 2012
 
0.60
   
8.31
   
1.37
   
7.19
   

At December 31, 2009, Laclede Gas also had 8.65 million MMBtu of other price mitigation in place through the use of NYMEX natural gas option-based strategies.



The Effect of Derivative Instruments on the Statements of Consolidated Income and Statements of Consolidated Comprehensive Income
 
(Thousands)
Location of Gain (Loss) Recorded in Income
 
Three Months Ended
Dec. 31, 2009
 
               
Derivatives in ASC Topic 815 Cash Flow Hedging
Relationships
             
               
     Effective portion of gain (loss) recognized in OCI
             
        on derivatives:
             
             NYMEX natural gas contracts
     
$
3,577
   
             NYMEX gasoline and heating oil contracts
       
166
   
          Total
     
$
3,743
   
               
     Effective portion of gain (loss) reclassified from
             
        accumulated OCI to income:
             
             NYMEX natural gas contracts
Non-Regulated Gas Marketing Operating Revenues
   
$
4,525
   
 
Non-Regulated Gas Marketing Operating Expenses
     
(536
)
 
                    Sub-total
       
3,989
   
               
             NYMEX gasoline and heating oil contracts
Other Regulated Gas Distribution Operating Expenses
     
62
   
          Total
     
$
4,051
   
               
     Ineffective portion of gain (loss) on derivatives
             
        recognized in income:
             
             NYMEX natural gas contracts
Non-Regulated Gas Marketing Operating Revenues
   
$
525
   
 
Non-Regulated Gas Marketing Operating Expenses
     
(2,349
)
 
                    Sub-total
       
(1,824
)
 
               
             NYMEX gasoline and heating oil contracts
Other Regulated Gas Distribution Operating Expenses
     
(56
)
 
          Total
     
$
(1,880
)
 
               
Derivatives Not Designated as Hedging Instruments
             
Under ASC Topic 815 *
             
               
     Gain (loss) recognized in income on derivatives:
             
               
             Natural gas commodity contracts
Non-Regulated Gas Marketing Operating Revenues
   
$
3,994
   
 
Non-Regulated Gas Marketing Operating Expenses
     
(3,514
)
 
             NYMEX natural gas contracts
Non-Regulated Gas Marketing Operating Expenses
     
(554
)
 
          Total
     
$
(74
)
 

*
Gains and losses on Laclede Gas’ NYMEX natural gas derivative instruments, which are not designated as hedging instruments for financial reporting purposes, are deferred pursuant to the Utility’s PGA Clause and recorded as regulatory assets or regulatory liabilities. These gains and losses are excluded from the table above because they have no direct impact on the Statements of Consolidated Income.




 
Fair Value of Derivative Instruments in the Consolidated Balance Sheet at 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 natural gas contracts
 
Derivative Instrument Assets
$
2,351
 
Derivative Instrument Assets
$
3,355
 
 
  NYMEX gasoline and
    heating oil contracts
 
Derivative Instrument Assets
 
289
 
Derivative Instrument Assets
 
 
 
        Sub-total
     
2,640
     
3,355
 
                     
 
Derivatives not designated as hedging instruments under
ASC Topic 815
                 
                     
 
  NYMEX natural gas contracts
 
Derivative Instrument Assets
 
1,199
 
Derivative Instrument Assets
 
48,208
 
 
  Natural gas commodity contracts
 
Derivative Instrument Assets
 
246
 
Other Current Liabilities
 
1,532
 
     
Other Current Liabilities
 
373
 
Derivative Instrument Assets
 
31
 
 
        Sub-total
     
1,818
     
49,771
 
 
  Total derivatives
   
$
4,458
   
$
53,126
 
                     
 
Fair Value of Derivative Instruments in the Consolidated 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 natural gas contracts
 
Derivative Instrument Assets
$
3,001
 
Derivative Instrument Assets
$
2,019
 
 
  NYMEX gasoline and
    heating oil contracts
 
Derivative Instrument Assets
 
278
 
Derivative Instrument Assets
 
 
 
        Sub-total
     
3,279
     
2,019
 
                     
 
Derivatives not designated as hedging instruments under
ASC Topic 815
                 
                     
 
  NYMEX natural gas contracts
 
Derivative Instrument Assets
 
7,802
 
Derivative Instrument Assets
 
53,151
 
 
  Natural gas commodity contracts
 
Derivative Instrument Assets
 
2,062
 
Other Current Liabilities
 
1,160
 
     
Other Current Liabilities
 
184
 
Derivative Instrument Assets
 
21
 
 
        Sub-total
     
10,048
     
54,332
 
 
  Total derivatives
   
$
13,327
   
$
56,351
 

*
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 $58.7 million and $59.2 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 Consolidated Balance Sheets. As such, the gross balances presented in the table above are not indicative of the Company’s net economic exposure. Refer to Note 5 , Fair Value Measurements, for information on the valuation of derivative instruments.




CONCENTRATIONS OF CREDIT RISK

A significant portion of LER’s transactions are with (or are associated with) energy producers, utility companies, and pipelines. These concentrations of transactions with these counterparties have the potential to affect the Company’s overall exposure to credit risk, either positively or negatively, in that each of these three groups may be affected similarly by changes in economic, industry, or other conditions. To manage this risk, as well as credit risk from large counterparties in other industries, LER has established procedures to determine the creditworthiness of its counterparties. These procedures include obtaining credit ratings and credit reports, analyzing counterparty financial statements to assess financial condition, and considering the industry environment in which the counterparty operates. This information is monitored on an ongoing basis. In some instances, LER may require credit assurances such as prepayments, letters of credit, or parental guarantees. In addition, LER may enter into netting arrangements to mitigate credit risk with counterparties in the energy industry from which LER both sells and purchases natural gas. Sales are typically made on an unsecured credit basis with payment due the month following delivery. Accounts receivable amounts are closely monitored, and provisions for uncollectible amounts are accrued when losses are probable. To date, losses have not been significant. LER records accounts receivable, accounts payable, and prepayments for physical sales and purchases of natural gas on a gross basis. The amount included in accounts receivable attributable to energy producers and their marketing affiliates amounted to $31.0 million, or 42.1% of LER’s total accounts receivable at December 31, 2009. Net receivable amounts from these customers on the same date, reflecting netting arrangements, were $15.5 million. Accounts receivable attributable to utility companies and their marketing affiliates comprised $21.8 million of LER’s total accounts receivable, or 29.6% at December 31, 2009 and net receivable amounts from these customers, reflecting netting arrangements, were $15.8 million. Additionally, LER has concentrations of credit risk with pipeline companies associated with its natural gas receivable amounts.


8.
OTHER INCOME AND (INCOME DEDUCTIONS) – NET


     
Three Months Ended
 
     
December 31,
 
 
(Thousands)
 
2009
 
2008
 
                 
 
Interest income
 
$
535
 
$
1,139
 
 
Net investment gain (loss)
   
474
   
(1,369
)
 
Other income
   
   
277
 
 
Other income deductions
   
578
   
692
 
 
Other Income and (Income Deductions) – Net
 
$
1,587
 
$
739
 

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.




9.
INFORMATION BY OPERATING SEGMENT

All of Laclede Group’s subsidiaries are wholly owned. The Regulated Gas Distribution segment consists of the regulated operations of Laclede Gas and is the core business segment of Laclede Group. Laclede Gas is a public utility engaged in the retail distribution and sale of natural gas serving an area in eastern Missouri, with a population of approximately 2.1 million, including the City of St. Louis and parts of ten counties in eastern Missouri. The Non-Regulated Gas Marketing segment includes the results of LER, a subsidiary engaged in the non-regulated marketing of natural gas and related activities. Other includes Laclede Pipeline Company’s transportation of liquid propane regulated by the Federal Energy Regulatory Commission (FERC) as well as non-regulated activities, including real estate development, the compression of natural gas, and financial investments in other enterprises. These operations are conducted through five subsidiaries. Other also includes Laclede Gas’ non-regulated merchandise sales business, which was not material, and its non-regulated sale of propane. The merchandise sales business ceased operations on September 30, 2009. Certain intersegment revenues with Laclede Gas are not eliminated in accordance with the provisions of ASC Topic 980. Those types of transactions include sales of natural gas from Laclede Gas to LER, sales of natural gas from LER to Laclede Gas, and transportation services provided by Laclede Pipeline Company to Laclede Gas. These revenues are shown on the Intersegment revenues lines in the table under Regulated Gas Distribution, Non-Regulated Gas Marketing, and Other columns, respectively.
As Laclede Group’s non-regulated subsidiary, LER, continues to expand its business, the number of transactions accounted for through fair value measurements has increased. Beginning this fiscal year, management evaluates the performance of the operating segments based on the computation of net economic earnings. Net economic earnings exclude from reported net income the after-tax impact of net unrealized gains and losses on energy-related derivative contracts. For comparative purposes, the measurement of segment performance has been presented to conform to the current-period presentation.

       
Non-
             
   
Regulated
 
Regulated
             
   
Gas
 
Gas
             
(Thousands)
 
Distribution
 
Marketing
 
Other
 
Eliminations
 
Consolidated
 
Three Months Ended
                               
December 31, 2009
                               
Revenues from external
                               
  customers
 
$
281,111
 
$
189,887
 
$
10,452
 
$
 
$
481,450
 
Intersegment revenues
   
1,818
   
7,638
   
260
   
   
9,716
 
Total Operating Revenues
   
282,929
   
197,525
   
10,712
   
   
491,166
 
Net Economic Earnings
   
17,432
   
4,612
   
3,753
   
   
25,797
 
Total assets
   
1,662,121
   
174,852
   
113,172
   
(90,117
)
 
1,860,028
 
                                 
Three Months Ended
                               
December 31, 2008
                               
Revenues from external
                               
  customers
 
$
356,623
 
$
305,133
 
$
855
 
$
 
$
662,611
 
Intersegment revenues
   
1,478
   
9,907
   
260
   
   
11,645
 
Total Operating Revenues
   
358,101
   
315,040
   
1,115
   
   
674,256
 
Net Economic Earnings
   
16,148
   
12,528
   
457
   
   
29,133
 
Total assets
   
1,712,374
   
195,707
   
114,492
   
(146,927
)
 
1,875,646
 

Reconciliation of Consolidated Net Economic Earnings to Consolidated Net Income
 
     
Three Months Ended
 
     
December 31,
 
 
(Thousands)
 
2009
 
2008
 
                 
 
Total Net Economic Earnings above
 
$
25,797
 
$
29,133
 
 
  Add: Unrealized gain (loss) on energy-related
             
 
    derivative contracts, net of tax
   
(2,911
)
 
2,173
 
 
Net Income
 
$
22,886
 
$
31,306
 




COMMITMENTS AND CONTINGENCIES

Commitments

Laclede Gas and LER have entered into various contracts, expiring on dates through 2017, for the storage, transportation, and supply of natural gas. Minimum payments required under the contracts in place at December 31, 2009 are estimated at approximately $1.3 billion. 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.
Laclede Group had guarantees totaling $95.8 million for performance and payment of certain wholesale gas supply purchases by LER, as of December 31, 2009. Since that date, total guarantees issued by Laclede Group on behalf of LER increased by $11.5 million bringing the total to $107.3 million in guarantees outstanding at January 29, 2010. No amounts have been recorded for these guarantees in the financial statements. As of December 31, 2009, management believes the probability is low that Laclede Group will be required to make payments under these guarantees.

Contingencies and Indemnifications

Laclede Gas owns and operates natural gas distribution, transmission, and storage facilities, the operations of which are subject to various environmental laws, regulations, and interpretations. While environmental issues resulting from such operations arise in the ordinary course of business, such issues have not materially affected the Company’s or Laclede Gas’ financial position and results of operations. As environmental laws, regulations, and their interpretations change, however, Laclede Gas may be required to incur additional costs.
As with other companies, Laclede Gas faces the risk of environmental liabilities. In the natural gas industry, these are typically associated with sites formerly owned or operated by gas distribution companies like Laclede Gas and/or its predecessor companies at which manufactured gas operations took place. At this time, Laclede Gas has identified three former manufactured gas plant (MGP) sites located in Missouri: one in Shrewsbury and two in the City of St. Louis.
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 or the Company.


On December 28, 2006, the MoPSC Staff proposed a disallowance of $7.2 million related to Laclede Gas’ recovery of its purchased gas costs applicable to fiscal year 2005. 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, 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 FERC’s oversight were consistent with the FERC’s regulations and policies regarding capacity release. The Company 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, the Company 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 the Company provided and on February 11, 2009, the FERC Staff submitted follow-up questions to which the Company responded on February 25, 2009. On March 2, 2009, FERC Staff requested clarification of certain aspects of the Company’s February 25, 2009 response, which the Company clarified on March 4, 2009.
Laclede Group 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 consolidated financial position, results of operations, or cash flows of the Company.



Laclede Gas Company’s Financial Statements and Notes to Financial Statements are included in Exhibit 99.1 to this report.


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE LACLEDE GROUP, INC.

This management’s discussion analyzes the financial condition and results of operations of The Laclede Group, Inc. (Laclede Group or the Company) and its subsidiaries. It includes management’s view of factors that affect its business, explanations of past financial results including changes in earnings and costs from the prior year periods, and their effects on overall financial condition and liquidity.

Certain matters discussed in this report, excluding historical information, include forward-looking statements. Certain words, such as “may,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” and similar words and expressions identify forward-looking statements that involve uncertainties and risks. Future developments may not be in accordance with our expectations or beliefs and the effect of future developments may not be those anticipated. Among the factors that may cause results to differ materially from those contemplated in any forward-looking statement are:

weather conditions and catastrophic events, particularly severe weather in the natural gas producing areas of the country;
volatility in gas prices, particularly sudden and sustained changes in natural gas prices, including the related impact on margin deposits associated with the use of natural gas derivative instruments;
the impact of 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 market 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 Company’s Consolidated Financial Statements and the Notes thereto.








THE LACLEDE GROUP, INC.

RESULTS OF OPERATIONS

Overview

Laclede Group’s earnings are primarily derived from the regulated activities of its largest subsidiary, Laclede Gas Company (Laclede Gas or the Utility), Missouri’s largest natural gas distribution company. Laclede Gas is regulated by the Missouri Public Service Commission (MoPSC or Commission) and serves the City of St. Louis and parts of ten counties in eastern Missouri. Laclede Gas delivers natural gas to retail customers at rates and in accordance with tariffs authorized by the MoPSC. The Utility’s earnings are primarily generated by the sale of heating energy. The Utility’s weather mitigation rate design lessens the impact of weather volatility on Laclede Gas customers during cold winters and stabilizes the Utility’s earnings by recovering fixed costs more evenly during the heating season. Due to the seasonal nature of the business of Laclede Gas, Laclede Group’s earnings are seasonal in nature and are typically concentrated in the November through April period, which generally corresponds with the heating season.

Laclede Energy Resources, Inc. (LER) is engaged in the marketing of natural gas and related activities on a non-regulated basis. LER markets natural gas to both on-system Utility transportation customers and customers outside of Laclede Gas’ traditional service territory, including large retail and wholesale customers. LER’s operations and customer base are more subject to fluctuations in market conditions than the Utility.

Other subsidiaries provide less than 10% of consolidated revenues.

Based on the nature of the business of the Company and its subsidiaries, as well as current economic conditions, management focuses on the following key variables in evaluating the financial condition and results of operations and managing the business:

Regulated Gas Distribution Segment:

the Utility’s ability to recover the costs of 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.

Non-Regulated Gas Marketing Segment:

the risks of competition;
regional fluctuations in natural gas prices;
new national pipeline infrastructure projects;
credit and/or capital market access;
counterparty risks; and,
the effect of natural gas price volatility on the business.
 
Further information regarding how management seeks to manage these key variables is discussed below.
 
Laclede Group’s strategy is to improve the performance of its core Utility, while developing non-regulated businesses and taking a measured approach in the pursuit of additional growth opportunities that complement the Utility business.



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 Consolidated 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 32 of this report for additional information on regulatory issues relative to the Utility.

Laclede Gas works actively to reduce the impact of wholesale natural gas prices on its costs by strategically structuring its natural gas supply portfolio to increase its gas supply availability and pricing alternatives and through the use of derivative instruments to protect its customers from significant changes in the commodity price of natural gas. Nevertheless, the overall cost of purchased gas remains subject to fluctuations in market conditions. The Utility’s Purchased Gas Adjustment (PGA) Clause allows Laclede Gas to flow through to customers, subject to prudence review, the cost of purchased gas supplies, including costs, cost reductions, and related carrying costs associated with the use of derivative instruments to hedge the purchase price of natural gas, as well as gas inventory carrying costs. The Utility believes it will continue to be able to obtain sufficient gas supply. The price of natural gas supplies and other economic conditions may affect sales volumes, due to the conservation efforts of customers, and cash flows associated with the timing of collection of gas costs and related accounts receivable from customers. Long-term increases in the wholesale cost of natural gas supplies may adversely impact the Utility’s competitive position compared with alternative energy sources.

The Utility relies on both short-term credit and long-term capital markets, as well as cash flows from operations, to satisfy its seasonal cash requirements and fund its cost of capital expenditures. Laclede Gas’ ability to issue commercial paper supported by lines of credit, to issue long-term bonds, or to obtain new lines of credit is dependent on current conditions in the credit and capital markets. Management focuses on maintaining a strong balance sheet and believes it currently has adequate access to credit and capital markets and will have sufficient capital resources to meet its foreseeable obligations. See the Liquidity and Capital Resources section on page 34 for additional information.



LER focuses on growing its markets on a long-term and sustainable basis by providing both on-system Utility transportation customers and customers outside of Laclede Gas’ traditional service area with another choice in non-regulated natural gas suppliers. LER is working to assemble the team, technology, and resources necessary to expand its geographic service area and the range of services that it now provides. Nevertheless, income from LER’s operations is more subject to fluctuations in market conditions than the Utility’s operations. LER’s business is directly impacted by the effects of competition in the marketplace and the impact of new pipeline infrastructure on regional commodity prices of natural gas.

In the course of its business, LER enters into commitments associated with the purchase or sale of natural gas. Many of LER’s physical purchase and sale transactions are recognized in earnings when the natural gas is delivered. However, generally accepted accounting principles (GAAP) require that some of LER’s energy-related transactions be accounted for as derivatives, with the changes in their fair value (representing unrealized gains or losses) recorded in earnings in periods prior to physical delivery. Because related transactions of a purchase and sale strategy may be accounted for differently, there may be timing differences in the recognition of earnings under GAAP and economic earnings realized upon settlement.

In addition to its operating cash flows, LER relies on parental guarantees to secure its purchase and sales obligations of natural gas. A large portion of LER’s receivables are from customers in the energy industry. LER also may enter into netting arrangements with its energy counterparties to reduce overall credit and collateral exposure. Although LER’s uncollectible amounts are closely monitored and have not been significant, increases in uncollectible amounts from customers are possible and could adversely affect LER’s liquidity and results.

LER carefully monitors the creditworthiness of counterparties to its transactions. LER performs in-house credit reviews of potential customers and requires prepayments of letters of credit from non-investment grade customers. Credit limits for customers are established and monitored.


Quarter Ended December 31, 2009

The Laclede Group reports net income and earnings per share determined in accordance with GAAP. As Laclede Group’s non-regulated subsidiary, LER, continues to expand its business, the number of transactions accounted for through fair value measurements has increased. As a result, management also uses the non-GAAP measures of net economic earnings and net economic earnings per share when internally evaluating results of operations. Net economic earnings exclude from net income the after-tax impacts of net unrealized gains and losses on energy-related derivatives that are required by GAAP fair value accounting. This adjustment eliminates the impact of timing differences related to current changes in the fair value of financial and physical transactions prior to their completion and settlement. Management believes that excluding the earnings volatility caused by recognizing changes in fair value prior to settlement provides a useful representation of the economic impact of only the actual settled transactions and their effects on results of operations. These internal non-GAAP operating metrics should not be considered as an alternative to, or more meaningful than, GAAP measures such as net income. While management uses these non-GAAP measures to evaluate both Laclede Gas and LER, the net effect of unrealized gains and losses on the Utility’s earnings is minimal because gains or losses on its natural gas derivative instruments are deferred pursuant to its PGA Clause, as authorized by the MoPSC. These unrealized gains and losses result primarily from two sources:

1)
Changes in fair values of physical and/or financial derivatives prior to the period of settlement
2)
Ineffective portions of accounting hedges, required to be recorded in earnings prior to settlement, due to differences in commodity price changes between the locations of the anticipated physical purchase or sale transactions and the locations of the underlying hedge instruments

Unrealized gains or losses are recorded in each period until being replaced with the actual gains or losses realized when the associated physical transaction(s) occur.


Reconciliations of net economic earnings and net economic earnings per share to the Company’s most directly comparable GAAP measures are provided below.

(Millions, except per share amounts)
Net Economic Earnings
(Non-GAAP)
Add: Unrealized gain (loss) on energy-related derivative contracts*
Net Income
(GAAP)
                         
Quarter Ended December 31, 2009
                       
 
Regulated Gas Distribution
 
$
17.4
   
$
   
$
17.4
 
 
Non-Regulated Gas Marketing
   
4.7
     
(2.9
)
   
1.8
 
 
Other
   
3.7
     
     
3.7
 
 
    Total
 
$
25.8
   
$
(2.9
)
 
$
22.9
 
 
Per Share Amounts **
 
$
1.16
   
$
(0.13
)
 
$
1.03
 
                         
Quarter Ended December 31, 2008
                       
 
Regulated Gas Distribution
 
$
16.1
   
$
   
$
16.1
 
 
Non-Regulated Gas Marketing
   
12.5
     
2.2
     
14.7
 
 
Other
   
0.5
     
     
0.5
 
 
    Total
 
$
29.1
   
$
2.2
   
$
31.3
 
 
Per Share Amounts **
 
$
1.31
   
$
0.10
   
$
1.41
 
                           
*
Amounts presented net of income taxes. Income taxes are calculated by applying federal, state, and local income tax rates applicable to ordinary income to the amounts of unrealized gain (loss) on energy-related derivative contracts. For the quarters ended December 31, 2009 and 2008, the amounts of income tax expense (benefit) included in the reconciling items above are $(1.8) million and $1.4 million, respectively.
   
**
Net economic earnings per share is calculated by replacing consolidated net income with consolidated net economic earnings in the GAAP diluted earnings per share calculation.

Laclede Group’s net income was $22.9 million for the quarter ended December 31, 2009, compared with $31.3 million for the quarter ended December 31, 2008. Basic and diluted earnings per share for the quarter ended December 31, 2009 were $1.03 compared with basic and diluted earnings per share of $1.42 and $1.41, respectively for the quarter ended December 31, 2008. Net economic earnings were $25.8 million for the quarter ended December 31, 2009 compared with $29.1 million for the same quarter last year. Net economic earnings per share were $1.16 for the quarter ended December 31, 2009 compared with $1.31 for the quarter ended December 31, 2008. Earnings decreased compared to last year primarily due to lower income reported by Laclede Group’s Non-Regulated Gas Marketing segment, partially offset by increased Other income and improved results reported by Laclede Group’s Regulated Gas Distribution segment.

Both Regulated Gas Distribution net income and Regulated Gas Distribution net economic earnings increased by $1.3 million for the quarter ended December 31, 2009, compared with the quarter ended December 31, 2008. The increase was primarily due to the following factors, quantified on a pre-tax basis:

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.

The Non-Regulated Gas Marketing segment reported a decrease in GAAP earnings of $12.9 million compared with the same quarter last year. Net economic earnings for the three months ended December 31, 2009 decreased $7.8 million from the three months ended December 31, 2008. These decreases were primarily due to LER’s significantly reduced margins on sales of natural gas and, to a lesser extent, the effect of 7% lower sales volumes. The reduced sales margins were driven primarily by narrower regional price differentials that have recently prevailed in the marketplace, as compared to the favorable market conditions that existed a year ago. On a GAAP basis, the reduced sales margins this year also included the effect of net unrealized losses from certain of LER’s energy-related derivative contracts, totaling $2.9 million, recognized in earnings during the quarter ended December 31, 2009, compared with net unrealized gains, totaling $2.2 million, recognized during the quarter ended December 31, 2008.




Both Other net income and Other net economic earnings increased $3.2 million compared with the same quarter last year primarily due to a sale of propane in the wholesale market by Laclede Gas 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, and resulted in income, net of income taxes, totaling $3.7 million, contributing $0.16 to diluted earnings per share.

Regulated Gas Distribution Operating Revenues

Laclede Gas passes on to Utility customers (subject to prudence review) increases and decreases in the wholesale cost of natural gas in accordance with its PGA Clause. The volatility of the wholesale natural gas market results in fluctuations from period to period in the recorded levels of, among other items, revenues and natural gas cost expense. Nevertheless, increases and decreases in the cost of gas associated with system gas sales volumes have no direct effect on net revenues and net income.

Regulated Gas Distribution Operating Revenues for the quarter ended 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 Regulated Gas Distribution 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
)

Regulated Gas Distribution Operating Expenses

Regulated Gas Distribution 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).

Non-Regulated Gas Marketing Operating Revenues and Operating Expenses

Non-Regulated Gas Marketing Operating Revenues decreased $117.5 million primarily due to lower per unit gas prices charged by LER and, to a lesser extent, the effect of 7% lower sales volumes. The decrease in Non-Regulated Gas Marketing Operating Expenses totaling $96.9 million was primarily associated with lower prices charged by suppliers and decreased volumes purchased.

Other Operating Revenues and Operating Expenses

Other Operating Revenues increased $9.6 million primarily due to a sale of propane in the wholesale market by Laclede Gas 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 $0.8 million primarily due to higher net investment gains, partially offset by lower income associated with carrying costs applied to under-recoveries of gas costs. Carrying costs on under-recoveries of gas costs are recovered through the Utility’s PGA Clause.

Interest Charges

The $2.1 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 $262.6 million for the quarter ended December 31, 2008.

Income Taxes

The $4.7 million decrease in income taxes was primarily due to lower pre-tax income.


REGULATORY MATTERS

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, 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.


CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition, results of operations, liquidity, and capital resources is based upon our consolidated financial statements, which have been prepared in accordance with 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 our Consolidated Financial Statements are described in Item 7 of our Annual Report on 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 Consolidated Financial Statements included in the Company’s Form 10-K for the fiscal year ended September 30, 2009. As Laclede Group’s non-regulated subsidiary, LER, continues to expand its business, the number of transactions accounted for through fair value measurements has increased. Therefore, this quarter, the Company has included a critical accounting policy regarding certain energy contracts:

 
Non-Regulated Gas Marketing Energy Contracts – LER routinely enters into contracts for the physical purchase or sale of natural gas in a future period. To the extent LER’s contracts qualify for the normal purchases or normal sales election under GAAP, they are accounted for in the period the natural gas is delivered. Many of LER’s contracts are accounted for in this manner. However, pursuant to GAAP, certain contracts are required to be accounted for as derivatives with changes in fair value (representing unrealized gains or losses) recognized in earnings in the periods prior to physical delivery. Unrealized gains or losses on these contracts are recognized as either Non-Regulated Gas Marketing operating revenues or Non-Regulated Gas Marketing operating expenses in the Statements of Consolidated Income. In addition to these physical contracts, LER also utilizes exchange-traded/cleared New York Mercantile Exchange (NYMEX) natural gas futures and swaps contracts to manage the price risk associated with certain of its fixed-price commitments. These contracts are generally designated for hedge accounting treatment, as discussed in Note 6 of the Notes to Consolidated Financial Statements.


ACCOUNTING PRONOUNCEMENTS

The Company has evaluated or is in the process of evaluating the impact that recently issued accounting standards will have on the Company’s financial position or results of operations upon adoption. For disclosures related to the adoption of new accounting standards, see the New Accounting Standards section of Note 1 of the Notes to Consolidated Financial Statements.



FINANCIAL CONDITION


CREDIT RATINGS

As of December 31, 2009, credit ratings for outstanding securities for Laclede Group and Laclede Gas issues were as follows:

    Type of Facility
S&P
Moody’s
Fitch
    Laclede Group Issuer Rating
A
 
A-
    Laclede Gas First Mortgage Bonds
A
A2
A+
    Laclede Gas Commercial Paper
A-1
P-2
F1

The Company 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.


CASH FLOWS

The Company’s short-term borrowing requirements typically peak during colder months when Laclede Gas borrows money to cover the lag between when it purchases its natural gas and when its customers pay for that gas. Changes in the wholesale cost of natural gas (including cash payments for margin deposits associated with the Utility’s use of natural gas derivative instruments), variations in the timing of collections of gas cost under the Utility’s PGA Clause, and the utilization of storage gas inventories cause short-term cash requirements to vary during the year and from year to year, and can cause significant variations in the Utility’s cash provided by or used in operating activities.

There was essentially no net cash used in operating activities for the three months ended December 31, 2009 compared with $17.2 million for the three months ended December 31, 2008. 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 collections of gas cost under the Utility’s PGA Clause. This effect was partially offset by reduced operating income at LER.

Net cash used in investing activities for the three months ended December 31, 2009 was $12.2 million compared with $15.2 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 $17.6 million for the three months ended December 31, 2009 compared with $47.6 million for the three months ended December 31, 2008. The decrease primarily reflects the reduced issuance of short-term debt this year.


LIQUIDITY AND CAPITAL RESOURCES

Short-term Debt

As indicated above, the Company’s short-term borrowing requirements typically peak during the colder months. These short-term cash requirements can be met through the sale of commercial paper supported by lines of credit with banks or through direct use of the lines of credit. 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 of Laclede Group 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.

Short-term cash requirements outside of Laclede Gas have generally been met with internally-generated funds. However, Laclede Group has $50 million in working capital lines of credit which expire in October 2010, to meet short-term liquidity needs of its subsidiaries. These lines of credit have covenants limiting the total debt of the consolidated Laclede Group to no more than 70% of the Company’s total capitalization. This ratio stood at 50% on December 31, 2009. These lines have been used to provide for seasonal funding needs of various subsidiaries from time to time. There were no borrowings under Laclede Group’s lines during the quarter.

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.

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.

Laclede Group had guarantees totaling $95.8 million for performance and payment of certain wholesale gas supply purchases by LER, as of December 31, 2009. Since that date, total guarantees issued by Laclede Group on behalf of LER increased by $11.5 million bringing the total to $107.3 million in guarantees outstanding at January 29, 2010. No amounts have been recorded for these guarantees in the financial statements.

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. Non-utility capital expenditures were $0.1 million for the three months ended December 31, 2009, compared with $0.3 million for the three months ended December 31, 2008.



Consolidated capitalization at December 31, 2009 consisted of 59.3% Laclede Group common stock equity and 40.7% Laclede Gas long-term debt.

It is management’s view that the Company has adequate access to capital markets and will have sufficient capital resources, both internal and external, to meet anticipated capital requirements, which primarily include capital expenditures, scheduled maturities of long-term debt, short-term seasonal needs, and dividends.

The seasonal nature of Laclede Gas’ sales affects the comparison of certain balance sheet items at December 31, 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 Consolidated Balance Sheet at December 31, 2008 is presented to facilitate comparison of these items with the corresponding interim period of the preceding fiscal year.


CONTRACTUAL OBLIGATIONS

As of December 31, 2009, Laclede Group had contractual obligations with payments due as summarized below (in millions):

   
Payments due by period
 
       
Remaining
         
Fiscal Years
 
 
Contractual Obligations
 
Total
 
Fiscal Year
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)
   
1,338.8
   
567.4
   
605.4
   
144.5
   
21.5
 
Purchase Obligations – Other (c)
   
98.4
   
13.5
   
22.7
   
17.1
   
45.1
 
Total (d)
 
$
2,341.9
 
$
599.8
 
$
706.9
 
$
233.5
 
$
801.7
 

    (a)
Operating lease obligations are primarily for office space, vehicles, and power operated equipment in the Regulated Gas Distribution segment. Additional payments will be incurred if renewal options are exercised under the provisions of certain agreements.
    (b)
These purchase obligations represent the minimum payments required under existing natural gas transportation and storage contracts and natural gas supply agreements in the Regulated Gas Distribution and Non-Regulated Gas Marketing segments. These amounts reflect fixed obligations as well as obligations to purchase natural gas at future market prices, calculated using December 31, 2009 forward market prices. Laclede Gas recovers the costs related to its purchases, transportation, and storage of natural gas through the operation of its PGA Clause, subject to prudence review; however, variations in the timing of collections of gas costs from customers affect short-term cash requirements. Additional contractual commitments are generally entered into prior to or during the heating season.
    (c)
These purchase obligations 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 Company 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 Company anticipates Laclede Gas 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 Company’s pension and postretirement benefit plans, refer to Note 3 , Pension Plans and Other Postretirement Benefits, of the Notes to Consolidated Financial Statements.




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 6 , Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements.

In the course of its business, Laclede Group’s non-regulated gas marketing affiliate, LER, enters into fixed-price commitments associated with the purchase or sale of natural gas. As part of its risk management policy, LER manages the price risk associated with these commitments by either closely matching the offsetting physical purchase or sale of natural gas at fixed-prices or through the use of exchange-traded/cleared futures contracts and swaps contracts to lock in margins. At December 31, 2009, LER’s unmatched positions were not material to Laclede Group’s financial position or results of operations. For details related to LER’s derivatives and hedging activities, see Note 6 , Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements.

LER has concentrations of counterparty credit risk in that a significant portion of its transactions are with (or are associated with) energy producers, utility companies, and pipelines. These concentrations of counterparties have the potential to affect the Company’s overall exposure to credit risk, either positively or negatively, in that each of these three groups may be affected similarly by changes in economic, industry, or other conditions. LER closely monitors its credit exposure and, although uncollectible amounts have not been significant, increased counterparty defaults are possible and may result in financial losses and/or capital limitations. For more information on these concentrations of credit risk, including how LER manages these risks, see Note 7 , Concentrations of Credit Risk, of the Notes to Consolidated Financial Statements.

The Company 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 the Company’s or Laclede Gas’ financial position and results of operations. As environmental laws, regulations, and their interpretations change, however, Laclede Gas may be required to incur additional costs. For information relative to environmental matters, see Note 17, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in the Company's Form 10-K for the fiscal year ended September 30, 2009. For changes during the quarter ended December 31, 2009, see Note 10 , Commitments and Contingencies, of the Notes to Consolidated Financial Statements.

OFF-BALANCE SHEET ARRANGEMENTS

Laclede Group has no off-balance sheet arrangements.


Laclede Gas Company’s Management’s Discussion and Analysis of Financial Condition is included in Exhibit 99.1 of this report.
 
 


Item 3. Quantitative and Qualitative Disclosures About Market Risk

For this discussion, see Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk , on page 37 of this report.
 
 
Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15e and Rule 15d-15e under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting that occurred during our first fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.






PART II . OTHER INFORMATION

Item 1. Legal Proceedings

For a description of environmental matters and legal proceedings, see Note 17, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in the Company's Form 10-K for the fiscal year ended September 30, 2009. For changes during the quarter ended December 31, 2009, see Note 10 , Commitments and Contingencies, of the Notes to Consolidated Financial Statements. For a description of pending regulatory matters of Laclede Gas, see Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Matters , on page 32 of this report.

Laclede Group and its subsidiaries are involved in 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 consolidated financial position or results of operations of the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On December 15, 2009, the Board of Directors of Laclede Gas approved the sale of 10 shares of Laclede Gas common stock to Laclede Group. The proceeds from the sale, totaling $0.3 million were used to reduce short-term borrowings. Exemption from registration was claimed under Section 4(2) of the Securities Act of 1933.

During the quarter ended December 31, 2009, the only repurchases of our common stock were pursuant to elections by employees to have shares of stock withheld to cover employee tax withholding obligations upon the vesting of performance-based restricted stock. The following table provides information on those repurchases.

 
 
 
Period
 
 
Total No. of
Shares Purchased
 
 
Average Price Paid
Per Share
Total No. of Shares
Purchased as Part of
Publicly Announced
Plans
Maximum No. of
Shares that May
Yet be Purchased
Under the Plans
October 1, 2009 –
October 31, 2009
 
3,650
 
$30.71
 
-
 
-
November 1, 2009 –
November 30, 2009
 
15,249
 
$30.44
 
-
 
-
December 1, 2009 –
December 31, 2009
 
-
 
-
 
-
 
-
Total
18,899
-
-
-


Item 6. Exhibits

(a)












SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
 
     
The Laclede Group, Inc.
       
Dated:
 
January 29, 2010
 
By: 
/s/ Mark D. Waltermire
         
Mark D. Waltermire
         
Chief Financial Officer
         
(Authorized Signatory and Chief Financial Officer)









SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
 
     
Laclede Gas Company
       
Dated:
 
January 29, 2010
 
By: 
/s/ Mark D. Waltermire
         
Mark D. Waltermire
         
Senior Vice President and
         
Chief Financial Officer
         
(Authorized Signatory and Chief Financial Officer)









INDEX TO EXHIBITS


Exhibit No.
   
     
-
Amendment to Supplemental Pension Agreement with Kenneth J. Neises dated January 7, 2010.
     
-
Form of Performance Contingent Restricted Stock Award Agreement.
     
-
Ratio of Earnings to Fixed Charges.
     
-
CEO and CFO Certifications under Exchange Act Rule 13a – 14(a).
     
-
CEO and CFO Section 1350 Certifications.
     
-
Laclede Gas Company - Financial Statements, Notes to Financial Statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations.
     







Exhibit 10.1

AMENDMENT TO SUPPLEMENTAL PENSION AGREEMENT
With Kenneth J. Neises


This agreement (referred to herein as the “Amendment”) amends the Supplemental Pension Agreement entered into by and between Laclede Gas Company (the “Company”) and Kenneth J. Neises (“Neises”) on March 7, 2008 (such agreement referred to herein as the “Agreement”).

RECITALS

WHEREAS, the Company and Neises executed the Agreement on March 7, 2008;

WHEREAS, the Board adopted a resolution on November 19, 2009 allowing Neises to work up to December 1, 2010; and

WHEREAS, the Company and Neises desire to amend the Agreement to extend the Agreement relative to certain benefits under the Retirement Plan and SERP based upon Average Final Compensation and Years of Credited Service;

NOW, THEREFORE, in consideration of the mutual promises contained in this Amendment, the parties agree as follows:

1.
Article I of the Agreement is amended by adding the following definition as a new section 1.7 to read as follows:
       
 
1.7
Grandfathered Formula ” means the Grandfathered Formula as defined in Section 1.21 of the Retirement Plan as restated on January 1, 2009.
       
2.
Section 3.1 of the Agreement is amended and restated to read as follows:
       
 
3.1
Supplemental Pension Benefit Formula .  Upon the earliest to occur of Neises’ death, Disability, or retirement, such date being known as the Calculation Date, the Supplemental Pension Benefit under this Agreement shall be calculated and shall be in an amount equivalent to:
     
(A+B+C+D) – E
       
 
where A, B, C, D, and E are as follows:
       
   
A.
    = Neises’ monthly accrued benefit under the Plans calculated as if he had retired on November 1, 2005 converted to a lump amount calculated using the PBGC rate in effect on November 1, 2005 of 2.5% and other factors and formulas effective under the Plans for retirements on November 1, 2005;


 
 
 

   
B.
    = The difference between (i) the monthly accrued benefit calculated in A. above, and (ii) the monthly accrued benefit calculated as if he had retired on November 1, 2007; with the difference between (i) and (ii) then converted to a lump sum amount calculated using the PBGC rate in effect for retirements on December 1, 2009 of 2.5%, and other factors and formulas effective under the Plans for retirements on November 1, 2007;
   
C.
    = The difference between (I) the monthly accrued benefit calculated in B.(ii), and (II) the monthly accrued benefit under the Grandfathered Formula calculated on December 1, 2009; with the difference between (I) and (II) then converted to a lump sum amount calculated using the factors and formulas effective under the Plans for retirements on December 1, 2009, including the PBGC rate of 2.5%; and
   
D.
    = The difference between (y) the monthly accrued benefit calculated in C.(II), and (z) the monthly accrued benefit under the Grandfathered Formula calculated on Calculation Date; with the difference between (y) and (z) then converted to a lump sum amount calculated using the factors and formulas effective under the Plans for retirements on the Calculation Date; and
   
E.
    = Neises’ monthly accrued benefit under the Grandfathered Formula under the Plans converted to a lump sum amount calculated using the factors and formulas effective under the Plans for retirements on the Calculation Date.
       
 
No Supplemental Pension Benefit shall accrue under this Agreement on or after the Calculation Date.
       
3.
Except to the extent specifically amended by this Amendment, all of the terms, provisions, conditions, covenants, representations and warranties contained in the Agreement shall be and remain in full force and effect and the same are hereby ratified and confirmed.
       
4.
In the event of any inconsistency or conflict between this Amendment and the Agreement, the terms, provisions and conditions contained in this Amendment shall govern and control.

IN WITNESS WHEREOF, the Company and Neises have executed this Amendment this
7th day of January 2010.
 
LACLEDE GAS COMPANY
   
 
By  /s/ Douglas H. Yaeger
 
Title: Chief Executive Officer

   
   
 
/s/ Kenneth J. Neises
 
Kenneth J. Neises


 
 
 
-2-
 



Exhibit 10.2
 
The Laclede Group
 
2006 Equity Incentive Plan
Performance Contingent
Restricted Stock Award Agreement
 
THIS AGREEMENT, made as of this     day of                    20   , between The Laclede Group, Inc. (the “Company”) and [Name] (the “Participant”).
 
Pursuant to the terms of the Company’s 2006 Equity Incentive Plan, as approved by shareholders in January 2006, (the “Plan”), this Award allows the Participant to earn up to [Grant High Performance] shares of Common Stock conditioned upon the execution and delivery by the Company and the Participant of this Agreement setting forth the terms and conditions applicable to such award.
 
NOW, THEREFORE, in consideration of the mutual covenants set forth in this Agreement, the parties hereto hereby agree as follows:
 
1.    Award of Restricted Stock .  Pursuant and su bject to the terms and conditions set forth herein and in the Plan, the Company awards to the Participant, effective as of the Award Date, a maximum of [Grant High Performance] shares of Common Stock of the Company, subject to the terms, conditions and restrictions described in this Agreement and in the Plan (the “Performance Contingent Restricted Stock”).  Of the Performance Contingent Restricted Stock:
 

  ·
[Grant Target] shares (“Performance Restricted Shares”) and dividend equivalent rights in respect of such Performance Restricted Shares are issued on the Award Date, as follows:
     
   
(a) Performance Restricted Shares shall be subject to the performance contingencies in Section 5 and non-transferability restrictions in Section 7 of this Agreement, but the Participant shall have all of the rights of a shareholder in respect of such Performance Restricted Shares, including the right to vote and to receive dividends in the manner provided in clause (b) hereof;


 
1
 
 


   
(b) any dividends payable (whether in cash or stock) in respect of such Performance Restricted Shares (“Restricted Dividends”) shall be accumulated during the Performance Period for such Performance Restricted Shares and become payable, if at all, at the time the Participant’s Performance Restricted Shares are no longer subject to forfeiture pursuant to this Agreement (i.e., the Performance Restricted Shares vest).  If all or a portion of the Performance Restricted Shares are forfeited, such Restricted Dividends relating to such forfeited Performance Restricted Shares shall also be forfeited.  Restricted Dividends shall be paid as provided below in Section 5 and shall not accrue any deemed earnings or interest during the applicable restriction period.
     
  ·
[Delta] shares (“Potential Performance Restricted Shares”) represent shares, all or some of which the Participant may earn if performance exceeds Target, but as to which Participant shall have no rights of a shareholder.  Such rights shall only be obtained, if at all, once performance during the Performance Period has exceeded Target, the Board has certified to such attainment, and one or more Potential Performance Restricted Shares are delivered to the Participant.  In no event will the Participant receive dividends (including Restricted Dividends) for the period prior to delivery of the Potential Performance Restricted Shares.

 
2.    Award Date .  The Award Date of the Performance Contingent Restricted Stock awarded under this Agreement is                 ,      .
 
3.    Incorporation of Plan .  All terms, conditions and restrictions of the Plan are incorporated herein and made part hereof as if stated herein.  If there is any conflict between the terms and conditions of the Plan and this Agreement, the terms and conditions of the Plan, as interpreted by the Administrator, shall govern.  All capitalized terms used herein, but not otherwise defined, shall have the meaning given to such terms in the Plan.
 
4.    Restrictions and Conditions .  Except as otherwise provided in this Agreement, Participant shall forfeit any and all right to the Performance Contingent Restricted Stock and Restricted Dividends related thereto upon Participant’s termination of employment with the Company and its subsidiaries for any reason prior to the end of the Performance Period.
 
5.    Lapse of Restrictions .  The Participant accepts this Award and agrees that the restrictions relative to such Award shall lapse only following the conclusion of the Performance Period and only to the extent that one or more of the Performance Contingencies set forth in Appendix A have been met or exceeded.  If performance on neither Performance Contingency has been achieved at or above Threshold, then all
 

 
2
 
 

 
Performance Contingent Restricted Stock and the Restricted Dividends related thereto are forfeited.  If performance on one or more of the Performance Contingencies has been achieved between the Threshold and Target or Target and High Performance levels of performance, the Administrator shall interpolate for performance between the applicable levels and shall determine the number of shares of Performance Contingent Restricted Stock  as to which the restrictions shall lapse (and the amount of Restricted Dividends that shall be payable).  Because the Company cannot issue fractional shares, the Administrator will round down to the nearest whole number of shares of Performance Contingent Restricted Stock in such interpolations.
 
The Award (including Restricted Dividends) will be subject to forfeiture of up to 25% of the shares (and Restricted Dividends) earned based upon performance relative to the Performance Contingencies, as determined by the Administrator in its sole discretion, if the Company’s Total Shareholder Return, as defined in Appendix A, for the Performance Period is below the median relative to the defined comparator group identified by the Administrator.
 
Vesting of any Performance Restricted Shares as well as the issuance, if any, of Potential Performance Restricted Shares under this Agreement shall occur on the latter of:  (I) the third anniversary of the Award Date and (II) the business day immediately following the date of the certification by the Compensation Committee (“Certification Date”) of (a) the satisfaction of one or more of the Performance Contingencies and (b) the number of shares of Performance Contingent Restricted Stock to be vested or issued; provided , that no Performance Contingent Restricted Stock (or Restricted Dividends) shall vest or be issued if Participant is terminated with or without Cause or if the Participant voluntarily terminates employment with the Company and all of its subsidiaries prior to the Certification Date.  Any Restricted Dividends that the Committee certifies are earned in respect of Performance Restricted Shares will be paid to the Participant in no event later than March 15 of the calendar year following the end of the Performance Period.  Any Potential Performance Restricted Shares that the Committee certifies are earned will be issued and delivered to the Participant in no event later than March 15 of the calendar year following the end of the Performance Period.  Any Performance Restricted Shares (and Restricted Dividends attributable thereto) or Potential Performance Restricted Shares as to which any or all of the respective Performance Contingencies has not been satisfied shall be forfeited.
 
Notwithstanding the foregoing,
 
    (i)
In the event of a Change in Control, the Performance Contingent Restricted Stock shall be deemed earned at Target prorated based on the number of months in the Performance Period to the date of the Change in Control and all restrictions as to such number of shares shall lapse  (and Restricted Dividends attributable to the Performance Restricted Shares that become vested in accordance with this clause (i) shall be payable within 30 days following such Change in Control) if :
   
 
(a) the Award has not otherwise been forfeited and

3
 
(b) the successor or surviving corporation (or parent thereof) does not assume this Award or replace it with a comparable award, provided further that if the Award is assumed or replaced, such assumed or replaced Award shall provide that the restrictions shall lapse if Participant is involuntarily terminated without Cause within 24 months of the Change in Control (a “Change in Control Termination”);
     
     
    (ii)
if a Participant leaves the employment of the Company and its subsidiaries due to death, Disability or retirement (including early retirement and disability retirement) prior to the end of the Performance Period, the Participant will be eligible to earn a prorated Award (including Restricted Dividends), as the Administrator in its sole discretion may determine, based on the number of full months as a Participant during the Performance Period and will be eligible to receive the underlying shares (and Restricted Dividends) if the Performance Contingencies are satisfied and the restrictions lapse as outlined above.
     

 
6.    How Shares are Held.   The Performance Restricted Shares shall be held by a Company custodian until all of the restrictions have lapsed and all applicable terms and conditions have been met.  The Company shall deliver to the Participant the number of whole shares of Performance Restricted Shares, and Restricted Dividends attributable thereto, as to which the Administrator has determined the restrictions have lapsed as provided in Section 5.  Potential Performance Restricted Shares, when earned, shall be issued and delivered as provided in Section 5.   Restricted Dividends are intended to constitute an “unfunded” obligation of the Company and nothing in the Plan or this Agreement shall give the Participant any rights that are greater than those of a general unsecured creditor of the Company.  All amounts accumulated on the Participant’s behalf under this Agreement shall continue for all purposes to be part of the general assets of the Company.
 
7.    Shares Non-Transferable .  The Performance Contingent Restricted Stock (and any dividend rights thereon) shall not be transferable by Participant and may not be, sold, assigned, disposed of, or pledged or hypothecated as collateral for a loan or as security for performance of any obligation or for any other purpose until, with respect to the Performance Restricted Shares (and Restricted Dividends), after the restrictions have lapsed as provided in Section 5 and such shares have been delivered (and with respect to Restricted Dividends, such Restricted Dividends have been paid) and, with respect to the Potential Performance Restricted Shares, after such shares have been issued and delivered to the Participant.
 
8.    No Right to Continued Employment .  Nothing in this Agreement shall confer on the Participant any right to continuance of employment by the Company or a subsidiary, nor shall it interfere in any way with the right of Participant’s employer to terminate Participant’s employment at any time.
 

 
4
 
 

 

 
 
9.    Tax Withholding and Tax Election .  The Company shall not be obligated to deliver any shares of Performance Contingent Restricted Stock until Participant pays to the Company in cash, or any other form of property acceptable to the Company, the amount required to be withheld for any federal, state or local income, FICA or other taxes of any kind with respect to such shares.  The Participant may, by notice to the Company, elect to have such withholding satisfied by a reduction of the number of whole shares otherwise so deliverable, such reduction to be calculated based on the Fair Market Value of the Common Stock on the date the restrictions lapse as provided in Section 5.  The value of shares withheld will not exceed the minimum amount of tax required to be withheld by law.  The Company and its subsidiaries shall, to the extent permitted by law, have the right to deduct such taxes, from any payment of any kind otherwise due to Participant.  Restricted Dividends that become payable as provided in this Agreement shall be subject to tax withholdings in accordance with tax laws then in effect.
 
The Participant may, but is not required to, elect to apply the rules of Section 83(b) of the Internal Revenue Code, as amended, (“Code”) to the issuance of Performance Restricted Shares that is subject to a substantial risk of forfeiture.  If the Participant makes an affirmative election under Section 83(b) of the Code, the Participant must file such election within 30 days after the date of this Agreement with the Internal Revenue Service and notify the Company within 30 days after making such election.  The decision to make an affirmative election under Section 83(b) of the Internal Revenue Code depends upon a wide variety of facts and circumstances and as such the Participant should consult his or her tax advisor.  The Company will not provide guidance to Participants on determining if an affirmative election is appropriate.
 
  10.    Confidential Information and Restrictions on Soliciting Employees . Notwithstanding any provision of this Agreement to the contrary, the Participant shall pay to the Company the Fair Market Value of the Performance Contingent Restricted Stock vested and issued to Participant under this Award if, during the period beginning on the date hereof and ending eighteen months following the date the Participant’s employment with the Company and its subsidiaries terminates (provided that such termination is other than a Change in Control Termination), the Participant: (1) discloses Confidential Information, as defined below, to any person not employed by the Company or any of its subsidiaries or not engaged to render services to the Company or any of its subsidiaries; or (2) Solicits Employees, as defined below.  Fair Market Value shall be calculated on the date of the first violation of this Section 10.
 

 
5
 
 

For purposes of this Section 10, “Confidential Information” means information concerning the Company, its subsidiaries and their business that is not generally known outside the Company, and includes (A) trade secrets; (B) intellectual property; (C) methods of operation and processes; (D) information regarding present and/or future products, developments, processes and systems; (E) information on customers or potential customers, including customers’ names, sales records, prices, and other terms of sales and cost information; (F) personnel data; (G) business plans, marketing plans, financial data and projections; and (H) information received in confidence from third parties.  This provision shall not preclude the Participant from use or disclosure of information known generally to the public other than by his or her disclosure of such information or of information not considered confidential by persons engaged in the business conducted by the Company or subsidiary or from disclosure required by law or court order.
 
“Solicits Employees” means the Participant’s direct or indirect hire of, solicit to hire, or attempt to induce (or Participant’s assisting of any third party to hire, solicit or attempt to induce) any employee of the Company or a subsidiary (who is an employee of the Company or a subsidiary as of the time of such hire or solicitation or attempt to hire) or any former employee of the Company or a subsidiary (who was employed by the Company or a subsidiary within the 12-month period immediately preceding the date of such hire or solicitation or attempt to hire) to leave the employment of the Company or a subsidiary.
 
11.    Integration .  This Agreement, and the other documents referred to herein or delivered pursuant hereto which form a part hereof, contain the entire understanding of the parties with respect to its subject matter.  There are no restrictions, agreements, promises, representations, warranties, covenants or undertakings with respect to the subject matter hereof other than those expressly set forth herein.  This Agreement, including without limitation the Plan, supersedes all prior agreements and understandings between the parties with respect to its subject matter and may only be amended by mutual written consent of the parties.
 
12.    Governing Law .  This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Missouri, without regard to the provisions governing conflict of laws.
 
13.    Compliance with Laws and Regulations .   The obligation of the Company to deliver shares of Common Stock under this Award shall be subject to all applicable federal and state laws, rules and regulations and to such approvals by any government or regulatory agency as may be required.
 
14.    Participant Acknowledgment .  By accepting these Awards, the Participant acknowledges receipt of a copy of the Plan, and acknowledges that all decisions, determinations and interpretations of the Administrator in respect of the Plan and this Agreement shall be final and conclusive.
 

 
6
 
 

In addition, the Participant expressly acknowledges that violation by the Participant of Section 10 of this Agreement will obligate the Participant to pay to the Company the Fair Market Value of the Performance Contingent Restricted Stock that becomes vested or is issued pursuant to Section 5.
 
The Laclede Group, Inc.
 
By:
 
 
D.H. Yaeger
Title:
Chairman of the Board, President and Chief
 
Executive Officer
 
 
 
 
[Name]

 
7
 
 


 
Appendix A to Stock Award
 
Performance Period .  The “Performance Period” for this Award shall be the period beginning October 1, 2009 and ending September 30, 2012.
 
Performance Contingencies .  The “Performance Contingencies” for this Award include two performance measures:  EPS Growth and Portfolio Development as specified below:
 
EPS Growth – EPS Growth is measured as the average of the annual earnings per share of Common Stock for the Company’s fiscal years 2010, 2011, and 2012.  The Threshold, Target, and High Performance levels of performance and performance contingent restricted stock (PCRS) as to which restrictions may lapse are as follows:
 
 
Threshold
Target
High Performance
Level of Performance
Average of $     per share or above
Average of $        per share or above
Average of $       per share or above
Number of PCRS as to which restrictions lapse
[1/3 of PCRS in grant x 80%]
[2/3 of PCRS in grant x 80%]
[# of PCRS in grant x 80%]
 
Portfolio Development – Portfolio Development is measured by organic earnings (other than Laclede Energy Resources or Laclede Gas Company) and/or investments or acquisitions made in new businesses entered into within the Performance Period.  The Threshold, Target and High Performance levels of performance and PCRS as to which restrictions may lapse are as follows:
 
 
Threshold
Target
High Performance
Level of Performance
Investment of $   or earnings added of      per share
 Investment of $   or earnings added of      per share
 Investment of $   or earnings added of      per share
Number of PCRS as to which restrictions lapse
[1/3 of PCRS in grant  x 20%]
[2/3 of PCRS in grant x 20%]
[# of PCRS in grant x 20%]
 
Total Shareholder Return for the Company or for a comparator company shall be calculated as follows:
 
 
Average share price for the quarter ending 9/30/2012
+
value of reinvested dividends
=
Total end of performance period value
   
-
average share price for the quarter ending 9/30/2009
=
Total value created in performance period
   
¸
average share price for the quarter ending 9/30/2009
=
Total Shareholder Return


 
8
 
 

Illustration :  If a Participant received an award of 150 shares of Performance Contingent Restricted Stock with 100 shares being Performance Restricted Shares and 50 shares being Potential Performance Restricted Shares and if the Administrator determines that the Company attained Target Performance on the EPS Performance Contingency, midway between Target and High Performance on the Portfolio Development Performance Contingency, and TSR exceeded the median of the comparator group, then upon the Committee’s certification of such performance the 100 Performance Restricted Shares would vest and 5 shares of the 50 Potential Performance Restricted Shares would be issued and delivered to the Participant.
 

 
9
 
 



Exhibit 12

THE LACLEDE GROUP, INC. AND SUBSIDIARY COMPANIES
 
SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
 
       
     
Twelve Months Ended
     
Dec. 31,
     
September 30,
 
(Thousands of Dollars)
   
2009
       
2009
   
2008
   
2007
   
2006
   
2005
                                           
 
Income from continuing
     operations before interest
                                       
 
     charges and income taxes
 
$
111,342
     
$
126,517
 
$
113,228
 
$
101,867
 
$
100,080
 
$
78,676
 
Add: One third of applicable
                                       
 
     rentals charged to operating
                                       
 
     expense (which approximates
                                       
 
     the interest factor)
   
1,839
       
1,833
   
1,691
   
1,485
   
1,291
   
938
 
         Total Earnings
 
$
113,181
     
$
128,350
 
$
114,919
 
$
103,352
 
$
101,371
 
$
79,614
                                           
                                           
 
Interest on long-term debt –
                                       
 
     Laclede Gas
 
$
24,582
     
$
24,583
 
$
19,851
 
$
22,502
 
$
22,329
 
$
22,835
 
Other interest
   
3,080
       
5,163
   
9,626
   
11,432
   
10,555
   
4,418
 
Add: One third of applicable
                                       
 
     rentals charged to operating
                                       
 
     expense (which approximates
                                       
 
     the interest factor)
   
1,839
       
1,833
   
1,691
   
1,485
   
1,291
   
938
 
          Total Fixed Charges
 
$
29,501
     
$
31,579
 
$
31,168
 
$
35,419
 
$
34,175
 
$
28,191
                                           
                                           
 
Ratio of Earnings to Fixed
                                       
 
     Charges
   
3.84
       
4.06
   
3.69
   
2.92
   
2.97
   
2.82
                                           
                                           
                                           



 
 
 
 
 


LACLEDE GAS COMPANY
 
SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
 
       
     
Twelve Months Ended
     
Dec. 31,
     
September 30,
 
(Thousands of Dollars)
   
2009
       
2009
   
2008
   
2007
   
2006
   
2005
                                           
 
Income before interest
                                       
 
     charges and income taxes
 
$
83,038
     
$
77,395
 
$
84,684
 
$
80,134
 
$
72,077
 
$
72,092
 
Add: One third of applicable
                                       
 
     rentals charged to operating
                                       
 
     expense (which approximates
                                       
 
     the interest factor)
   
1,839
       
1,833
   
1,691
   
1,485
   
1,291
   
938
 
          Total Earnings
 
$
84,877
     
$
79,228
 
$
86,375
 
$
81,619
 
$
73,368
 
$
73,030
                                           
                                           
 
Interest on long-term debt
 
$
24,582
     
$
24,583
 
$
19,851
 
$
22,502
 
$
22,329
 
$
22,835
 
Other interest
   
3,144
       
5,770
   
10,363
   
11,101
   
10,236
   
4,076
 
Add: One third of applicable
                                       
 
     rentals charged to operating
                                       
 
     expense (which approximates
                                       
 
     the interest factor)
   
1,839
       
1,833
   
1,691
   
1,485
   
1,291
   
938
 
          Total Fixed Charges
 
$
29,565
     
$
32,186
 
$
31,905
 
$
35,088
 
$
33,856
 
$
27,849
                                           
                                           
 
Ratio of Earnings to Fixed
                                       
 
     Charges
   
2.87
       
2.46
   
2.71
   
2.33
   
2.17
   
2.62
                                           
                                           
                                           





Exhibit 31
 
CERTIFICATION
 
I, Douglas H. Yaeger, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of The Laclede Group, Inc.;
   
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
     
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 Date:
 
January 29, 2010
Signature:
 
/s/ Douglas H. Yaeger
         
Douglas H. Yaeger
         
Chairman of the Board,
         
President and Chief
         
Executive Officer
 

 
 
 


CERTIFICATION
 
I, Mark D. Waltermire, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of The Laclede Group, Inc.;
   
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
     
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 Date:
 
January 29, 2010
Signature:
 
/s/ Mark D. Waltermire
         
Mark D. Waltermire
         
Chief Financial Officer
           
           
 
 

 
 
 



CERTIFICATION
 
I, Douglas H. Yaeger, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Laclede Gas Company;
   
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
     
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 Date:
 
January 29, 2010
Signature:
 
/s/ Douglas H. Yaeger
         
Douglas H. Yaeger
         
Chairman of the Board,
         
President and Chief
         
Executive Officer
 


 
 
 


 
CERTIFICATION
 
I, Mark D. Waltermire, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Laclede Gas Company;
   
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
     
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
 
January 29, 2010
Signature:
 
/s/ Mark D. Waltermire
         
Mark D. Waltermire
         
Senior Vice President and
         
    Chief Financial Officer
 




Exhibit 32

Section 1350 Certification

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, I, Douglas H. Yaeger, Chairman of the Board, President and Chief Executive Officer of The Laclede Group, Inc., hereby certify that

 
(a)
To the best of my knowledge, the accompanying report on Form 10-Q for the quarter ended December 31, 2009 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
     
 
(b)
To the best of my knowledge, the information contained in the accompanying report on Form 10-Q for the quarter ended December 31, 2009 fairly presents, in all material respects, the financial condition and results of operations of The Laclede Group, Inc.


Date:
 
January 29, 2010
   
/s/ Douglas H. Yaeger
         
Douglas H. Yaeger
         
Chairman of the Board, President
         
and Chief Executive Officer
           


 
 
 


Section 1350 Certification

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, I, Mark D. Waltermire, Chief Financial Officer of The Laclede Group, Inc., hereby certify that

 
(a)
To the best of my knowledge, the accompanying report on Form 10-Q for the quarter ended December 31, 2009 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
     
 
(b)
To the best of my knowledge, the information contained in the accompanying report on Form 10-Q for the quarter ended December 31, 2009 fairly presents, in all material respects, the financial condition and results of operations of The Laclede Group, Inc.

Date:
 
January 29, 2010
   
/s/ Mark D. Waltermire
         
Mark D. Waltermire
         
Chief Financial Officer
           
           


 
 
 


Section 1350 Certification

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, I, Douglas H. Yaeger, Chairman of the Board, President and Chief Executive Officer of Laclede Gas Company, hereby certify that

 
(a)
To the best of my knowledge, the accompanying report on Form 10-Q for the quarter ended December 31, 2009 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
     
 
(b)
To the best of my knowledge, the information contained in the accompanying report on Form 10-Q for the quarter ended December 31, 2009 fairly presents, in all material respects, the financial condition and results of operations of  Laclede Gas Company.

Date:
 
January 29, 2010
   
/s/ Douglas H. Yaeger
         
Douglas H. Yaeger
         
Chairman of the Board, President
         
and Chief Executive Officer
           


 
 
 


Section 1350 Certification

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, I, Mark D. Waltermire, Senior Vice President and Chief Financial Officer of Laclede Gas Company, hereby certify that

 
(a)
To the best of my knowledge, the accompanying report on Form 10-Q for the quarter ended December 31, 2009 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
     
 
(b)
To the best of my knowledge, the information contained in the accompanying report on Form 10-Q for the quarter ended December 31, 2009 fairly presents, in all material respects, the financial condition and results of operations of  Laclede Gas Company.

Date:
 
January 29, 2010
   
/s/ Mark D. Waltermire
         
Mark D. Waltermire
         
Senior Vice President and
         
    Chief Financial Officer
           





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.

 
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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.


 
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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.



 
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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.
 

 
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