8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Laclede Gas has a risk management policy that allows for the purchase of natural gas derivative instruments with the goal of managing price risk associated with purchasing natural gas on behalf of its customers. This policy prohibits speculation and permits the Utility to hedge up to 70% of its normal volumes purchased for up to a 36-month period. Costs and cost reductions, including carrying costs, associated with the Utility’s use of natural gas derivative instruments are allowed to be passed on to the Utility’s customers through the operation of its Purchased Gas Adjustment (PGA) Clause, through which the MoPSC allows the Utility to recover gas supply costs, subject to prudence review by the MoPSC. Accordingly, Laclede Gas does not expect any adverse earnings impact as a result of the use of these derivative instruments. The Utility does not designate these instruments as hedging instruments for financial reporting purposes because gains or losses associated with the use of these derivative instruments are deferred and recorded as regulatory assets or regulatory liabilities pursuant to ASC Topic 980, “Regulated Operations,” and, as a result, have no direct impact on the Statements of Consolidated Income. The timing of the operation of the PGA Clause may cause interim variations in short-term cash flows, because the Utility is subject to cash margin requirements associated with changes in the values of these instruments. Nevertheless, carrying costs associated with such requirements are recovered through the PGA Clause.

From time to time, Laclede Gas purchases NYMEX futures and options contracts to help stabilize operating costs associated with forecasted purchases of gasoline and diesel fuels used to power vehicles and equipment used in the course of its business. At June 30, 2013, Laclede Gas held 0.4 million gallons of gasoline futures contracts at an average price of $2.25 per gallon. Most of these contracts, the longest of which extends to April 2014, are designated as cash flow hedges of forecasted transactions pursuant to ASC Topic 815. The gains or losses on these derivative instruments are not subject to the Utility’s PGA Clause.

In the course of its business, Laclede Group’s gas marketing subsidiary, LER, which includes its wholly owned subsidiary LER Storage Services, Inc., enters into commitments associated with the purchase or sale of natural gas. Certain of LER’s derivative natural gas contracts are designated as normal purchases or normal sales and, as such, are excluded from the scope of ASC Topic 815 and are accounted for as executory contracts on an accrual basis. Any of LER’s derivative natural gas contracts that are not designated as normal purchases or normal sales are accounted for at fair value. At June 30, 2013, the fair values of 57.7 million MMBtu of non-exchange traded natural gas commodity contracts were reflected in the Consolidated Balance Sheet. Of these contracts, 34.3 million MMBtu will settle during fiscal year 2013, 21.6 million MMBtu will settle during fiscal year 2014, while the remaining 1.8 million MMBtu will settle during fiscal year 2015. These contracts have not been designated as hedges; therefore, changes in the fair value of these contracts are reported in earnings each period. Furthermore, LER manages the price risk associated with its fixed-priced commitments by either closely matching the offsetting physical purchase or sale of natural gas at fixed prices or through the use of NYMEX or Ice Clear Europe (ICE) futures, swap, and option contracts to lock in margins. At June 30, 2013, LER’s unmatched fixed-price positions were not material to Laclede Group’s financial position or results of operations. LER’s NYMEX and ICE natural gas futures, swap, and option contracts used to lock in margins may be designated as cash flow hedges of forecasted transactions for financial reporting purposes.

The Company’s exchange-traded/cleared derivative instruments consist primarily of NYMEX and ICE positions. The NYMEX is the primary national commodities exchange on which natural gas derivatives are traded. Open NYMEX/ICE natural gas futures and swap positions at June 30, 2013 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 2013	—	$	—	5.00	$	4.03
Fiscal 2014	—	—		6.04	3.84
Fiscal 2015	—	—		0.28	4.18
Open long futures positions
Fiscal 2013	3.42	$	3.42	0.63	$	3.82
Fiscal 2014	4.87	3.97		0.01	4.03
Fiscal 2015	—	—		2.42	3.91

At June 30, 2013, Laclede Gas had 17.0 million MMBtu of other price mitigation in place through the use of NYMEX natural gas option-based strategies while LER had none.

In February 2013, Laclede Group entered into certain interest rate swap agreements to effectively lock in interest rates on a portion of the long-term debt it anticipates issuing to finance its pending acquisition of Missouri Gas Energy (MGE). These derivative instruments have been designated as cash flow hedges of forecasted transactions. These forward starting swaps involve the payment of a fixed interest rate and the receipt of a floating interest rate (the London Interbank Offered Rate, also known as LIBOR) over the terms specified in the contracts. At June 30, 2013, the notional amount of interest rate swaps outstanding was $355 million with stated maturities ranging from 2018 to 2043 and fixed interest rates ranging between 1.28% and 3.14%.

Derivative instruments designated as cash flow hedges of forecasted transactions are recognized on the Consolidated Balance Sheets at fair value and the change in the fair value of the effective portion of these hedge instruments is recorded, net of tax, in other comprehensive income (OCI). Accumulated other comprehensive income (AOCI) is a component of Total Common Stock Equity. Amounts are reclassified from AOCI into earnings when the hedged items affect net income, using the same revenue or expense category that the hedged item impacts. Based on market prices at June 30, 2013, it is expected that approximately $5.3 million of pre-tax unrealized gains will be reclassified into the Statements of Consolidated Income during the next twelve months. Cash flows from hedging transactions are classified in the same category as the cash flows from the items that are being hedged in the Statements of Consolidated Cash Flows.



The Effect of Derivative Instruments on the Statements of Consolidated Income and Statements of Consolidated Comprehensive Income
		Three Months Ended						Nine Months Ended
	Location of Gain (Loss)	June 30,						June 30,
(Thousands)	Recorded in Income	2013			2012			2013			2012
Derivatives in Cash Flow Hedging Relationships
Effective portion of gain (loss) recognized in OCI on derivatives:
NYMEX/ICE natural gas contracts		$	5,501		$	(1,802	)	$	3,646		$	6,218
NYMEX gasoline and heating oil contracts		(125		)	69			79			202
Interest rate swaps		22,238			—			17,689			—
Total		$	27,614		$	(1,733	)	$	21,414		$	6,420
Effective portion of gain (loss) reclassified from AOCI to income:
NYMEX/ICE natural gas contracts	Gas Marketing Operating Revenues	$	(1,570	)	$	7,646		$	(3,229	)	$	18,434
	Gas Marketing Operating Expenses	199			(1,492		)	(453		)	(9,861		)
Sub-total		(1,371		)	6,154			(3,682		)	8,573
NYMEX gasoline and heating oil contracts	Gas Utility Other Operations and Maintenance Expenses	53			17			138			20
Total		$	(1,318	)	$	6,171		$	(3,544	)	$	8,593
Ineffective portion of gain (loss) on derivatives recognized in income:
NYMEX/ICE natural gas contracts	Gas Marketing Operating Revenues	$	16		$	(84	)	$	(396	)	$	(15	)
	Gas Marketing Operating Expenses	(22		)	(95		)	(151		)	(291		)
Sub-total		(6		)	(179		)	(547		)	(306		)
NYMEX gasoline and heating oil contracts	Gas Utility Other Operations and Maintenance Expenses	5			(46		)	(127		)	(12		)
Total		$	(1	)	$	(225	)	$	(674	)	$	(318	)

Derivatives Not Designated as Hedging Instruments *
Gain (loss) recognized in income on derivatives:
Natural gas commodity contracts	Gas Marketing Operating Revenues	$	(993	)	$	2,641		$	(218	)	$	3,431
	Gas Marketing Operating Expenses	—			—			—			687
NYMEX/ICE natural gas contracts	Gas Marketing Operating Revenues	1,163			(1,123		)	551			425
	Gas Marketing Operating Expenses	—			(655		)	—			(625		)
NYMEX gasoline and heating oil contracts	Other Income and (Income Deductions) - Net	(5		)	(11		)	41			2
Total		$	165		$	852		$	374		$	3,920

Gains and losses on Laclede Gas’ natural gas derivative instruments, which are not designated as hedging instruments for financial reporting purposes, are deferred pursuant to the Utility’s PGA Clause and initially recorded as regulatory assets or regulatory liabilities. These gains and losses are excluded from the table above because they have no direct impact on the Statements of Consolidated Income. Such amounts are recognized in the Statements of Consolidated Income as a component of Gas Utility Natural and Propane Gas operating expenses when they are recovered through the PGA Clause and reflected in customer billings.



Fair Value of Derivative Instruments in the Consolidated Balance Sheet at June 30, 2013
	Asset Derivatives				Liability Derivatives
(Thousands)	Balance Sheet Location	Fair Value		*	Balance Sheet Location	Fair Value		*
Derivatives designated as hedging instruments
NYMEX/ICE natural gas contracts	Derivative Instrument Assets	$	4,574		Derivative Instrument Assets	$	437
NYMEX/ICE natural gas contracts	Other Deferred Charges	77			Other Deferred Charges	9
NYMEX gasoline and heating oil contracts	Accounts Receivable – Other	136			Accounts Receivable – Other	—
Interest rate swaps	Derivative Instrument Assets	17,689			Derivative Instrument Assets	—
Sub-total		22,476				446
Derivatives not designated as hedging instruments
NYMEX/ICE natural gas contracts	Derivative Instrument Assets	859			Derivative Instrument Assets	146
	Accounts Receivable – Other	1,956			Accounts Receivable – Other	3,688
Natural gas commodity contracts	Derivative Instrument Assets	944			Derivative Instrument Assets	89
	Other Deferred Charges	14			Other Deferred Charges	—
	Other Current Liabilities	122			Other Current Liabilities	836
	Other Deferred Credits	33			Other Deferred Credits	159
Sub-total		3,928				4,918
Total derivatives		$	26,404			$	5,364

Fair Value of Derivative Instruments in the Consolidated Balance Sheet at September 30, 2012
	Asset Derivatives				Liability Derivatives
(Thousands)	Balance Sheet Location	Fair Value		*	Balance Sheet Location	Fair Value		*
Derivatives designated as hedging instruments
NYMEX/ICE natural gas contracts	Accounts Receivable - Other	$	405		Accounts Receivable - Other	$	3,413
NYMEX gasoline and heating oil contracts	Accounts Receivable - Other	334			Accounts Receivable - Other	—
Sub-total		739				3,413
Derivatives not designated as hedging instruments
NYMEX/ICE natural gas contracts	Accounts Receivable - Other	8,000			Accounts Receivable - Other	10,731
Natural gas commodity contracts	Derivative Instrument Assets	3,150			Derivative Instrument Assets	295
	Other Current Liabilities	4			Other Current Liabilities	137
	Other Deferred Charges	19			Other Deferred Charges	—
NYMEX gasoline and heating oil contracts	Accounts Receivable - Other	10			Accounts Receivable - Other	—
Sub-total		11,183				11,163
Total derivatives		$	11,922			$	14,576



Fair Value of Derivative Instruments in the Consolidated Balance Sheet at June 30, 2012
	Asset Derivatives				Liability Derivatives
(Thousands)	Balance Sheet Location	Fair Value		*	Balance Sheet Location	Fair Value		*
Derivatives designated as hedging instruments
NYMEX/ICE natural gas contracts	Accounts Receivable - Other	$	1,064		Accounts Receivable - Other	$	2,529
NYMEX gasoline and heating oil contracts	Accounts Receivable - Other	106			Accounts Receivable - Other	—
Sub-total		1,170				2,529
Derivatives not designated as hedging instruments
NYMEX/ICE natural gas contracts	Accounts Receivable - Other	3,449			Accounts Receivable - Other	21,202
Natural gas commodity contracts	Derivative Instrument Assets	4,356			Derivative Instrument Assets	478
	Other Current Liabilities	39			Other Current Liabilities	109
NYMEX gasoline and heating oil contracts	Accounts Receivable - Other	1			Accounts Receivable - Other	—
Sub-total		7,845				21,789
Total derivatives		$	9,015			$	24,318

The fair values of Asset Derivatives and Liability Derivatives exclude the fair value of cash margin receivables or payables with counterparties subject to netting arrangements. Fair value amounts of derivative contracts (including the fair value amounts of cash margin receivables and payables) for which there is a legal right to set off are presented net on the Consolidated Balance Sheets. As such, the gross balances presented in the table above are not indicative of the Company’s net economic exposure. Refer to , Fair Value Measurements, for information on the valuation of derivative instruments.

Following is a reconciliation of the amounts in the tables above to the amounts presented in the Consolidated Balance Sheets:



(Thousands)	June 30, 2013			Sept. 30, 2012			June 30, 2012
Fair value of asset derivatives presented above	$	26,404		$	11,922		$	9,015
Fair value of cash margin receivables offset with derivatives	1,596			5,478			19,111
Netting of assets and liabilities with the same counterparty	(6,612		)	(14,526		)	(24,247		)
Total	$	21,388		$	2,874		$	3,879

Derivative Instrument Assets, per Consolidated Balance Sheets:
Derivative instrument assets	$	21,279		$	2,855		$	3,879
Other deferred charges	109			19			—
Total	$	21,388		$	2,874		$	3,879

Fair value of liability derivatives presented above	$	5,364		$	14,576		$	24,318
Fair value of cash margin payables offset with derivatives	2,088			83			—
Netting of assets and liabilities with the same counterparty	(6,612		)	(14,526		)	(24,247		)
Total	$	840		$	133		$	71

Derivative Instrument Liabilities, per Consolidated Balance Sheets:
Other Current Liabilities	$	727		$	133		$	71
Other Deferred Credits	113			—			—
Total	$	840		$	133		$	71

Additionally, at June 30, 2013, September 30, 2012, and June 30, 2012, the Company had $3.6 million, $10.0 million, and $10.6 million, respectively, in cash margin receivables not offset with derivatives, that are presented in Accounts Receivable - Other.