DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

6 Months Ended

Mar. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

From time to time, the Utility purchases NYMEX futures and options contracts to help stabilize operating costs associated with forecasted purchases of gasoline and diesel fuels used to power vehicles and equipment used in the course of its business. At March 31, 2014, the Utility held 0.4 million gallons of gasoline futures contracts at an average price of $2.76 per gallon. Most of these contracts, the longest of which extends to September 2014, are designated as cash flow hedges of forecasted transactions pursuant to ASC Topic 815, “Derivatives and Hedging.” The gains or losses on these derivative instruments are not subject to the Utility’s PGA Clause.                

The Utility’s derivative instruments consist primarily of NYMEX and OTCBB positions. The NYMEX is the primary national commodities exchange on which natural gas derivatives are traded. Open NYMEX and OTCBB natural gas futures positions at March 31, 2014 were as follows:

	MMBtu (millions)	Avg. Price Per MMBtu
NYMEX Open long futures positions
Fiscal 2014	3.80	$	3.79
Fiscal 2015	0.94	3.84
OTCBB Open long futures positions
Fiscal 2014	9.53	$	4.00
Fiscal 2015	9.83	4.21
Fiscal 2016	0.55	4.24

At March 31, 2014, the Utility also had 28.4 million MMBtu of other price mitigation in place through the use of NYMEX and OTCBB natural gas option-based strategies.

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 March 31, 2014, it is expected that approximately $0.1 million pre-tax 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 Effect of Derivative Instruments on the Statements of Income and Statements of Comprehensive Income
		Three Months Ended						Six Months Ended
	Location of Gain (Loss)	March 31,						March 31,
(Thousands)	Recorded in Income	2014			2013			2014		2013
Derivatives in Cash Flow Hedging Relationships
NYMEX gasoline and heating oil contracts:
Effective portion of gain (loss) recognized in         OCI on derivatives		$	56		$	147		$	66	$	203
Effective portion of gain reclassified         from AOCI to income and maintenance	Utility – Other Operation and Maintenance Expenses	54			38			113		85
Ineffective portion of gain (loss) on         derivatives recognized in income and maintenance	Utility – Other Operation and Maintenance Expenses	(84		)	(31		)	36		(132		)
Derivatives Not Designated as Hedging Instruments *
NYMEX gasoline and heating oil contracts:
(Loss) gain recognized in income on          derivative	Other Income and (Income Deductions) – Net	$	(3	)	$	13		$	10	$	46

* 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 Balance Sheet at March 31, 2014
	Asset Derivatives*			Liability Derivatives*
(Thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
NYMEX gasoline and heating oil contracts	Derivative Instrument Assets	$	49	Derivative Instrument Assets	$	—
Derivatives not designated as hedging instruments
NYMEX natural gas contracts	Derivative Instrument Assets	2,516		Derivative Instrument Assets	—
	Accounts Receivable - Other	4,467		Accounts Receivable - Other	3,811
OTCBB natural gas contracts	Derivative Instrument Assets	6,266		Derivative Instrument Assets	193
	Other Deferred Credits	64		Other Deferred Credits	122
Sub-total		13,313			4,126
Total derivatives		$	13,362		$	4,126
Fair Value of Derivative Instruments in the Balance Sheet at September 30, 2013
	Asset Derivatives*			Liability Derivatives*
(Thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
NYMEX gasoline and heating oil contracts	Accounts Receivable - Other	$	105	Accounts Receivable - Other	$	—
Derivatives not designated as hedging instruments
NYMEX natural gas contracts	Accounts Receivable - Other	1,434		Accounts Receivable - Other	3,455
	Other Deferred Charges	32		Other Deferred Charges	—
OTCBB natural gas contracts	Current Liabilities - Other	228		Current Liabilities - Other	4,045
	Deferred Credits - Other	4		Deferred Credits - Other	1,398
Sub-total		1,698			8,898
Total derivatives		$	1,803		$	8,898
Fair Value of Derivative Instruments in the Balance Sheet at March 31, 2013
	Asset Derivatives*			Liability Derivatives*
(Thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
NYMEX gasoline and heating oil contracts	Derivative Instrument Assets	$	312	Derivative Instrument Assets	$	—
Derivatives not designated as hedging instruments
NYMEX natural gas contracts	Derivative Instrument Assets	10,862		Derivative Instrument Assets	339
NYMEX gasoline and heating oil contracts	Derivative Instrument Assets	10		Derivative Instrument Assets	—
Sub-total		10,872			339
Total derivatives		$	11,184		$	339

* 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 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 5, 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 Balance Sheets:

(Thousands)	March 31, 2014			September 30, 2013			March 31, 2013
Fair value of asset derivatives presented above	$	13,362		$	1,803		$	11,184
Fair value of cash margin receivables offset with derivatives	—			1,890			—
Netting of assets and liabilities with the same counterparty	(4,782		)	(3,693		)	(7,879		)
Derivative instrument assets, per Balance Sheets	$	8,580		$	—		$	3,305
Derivative Instrument Assets, per Balance Sheets:
Derivative instrument assets	$	8,639		$	—		$	3,305
Other deferred charges	(59		)	—			—
Total	$	8,580		$	—		$	3,305
Fair value of liability derivatives presented above	$	4,126		$	8,898		$	339
Fair value of cash margin payables offset with derivatives	656			6			7,540
Netting of assets and liabilities with the same counterparty	(4,782		)	(3,693		)	(7,879		)
Derivative instrument liabilities, per Balance Sheets	$	—		$	5,211		$	—
Derivative Instrument Liabilities, per Balance Sheets:
Other current liabilities	$	—		$	3,817		$	—
Other deferred credits	—			1,394			—
Total	$	—		$	5,211		$	—

Additionally, at March 31, 2014, September 30, 2013, and March 31, 2013 the Utility had $0.3 million, $2.9 million, and $8.0 million, respectively, in cash margin receivables not offset with derivatives, that are presented in Accounts Receivable - Other.