DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

6 Months Ended

Mar. 31, 2012

Notes to Financial Statements [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

5. 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 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 March 31, 2012, Laclede Gas held 0.1 million gallons of gasoline futures contracts at an average price of $2.99 per gallon and 0.3 million gallons of gasoline options contracts. Most of these contracts, the longest of which extends to September 2012, 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 March 31, 2012, it is expected that essentially no net amount 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. Open NYMEX natural gas futures positions at March 31, 2012 were as follows:

	MMBtu (millions)	Avg. Price Per MMBtu
Open long futures positions
Fiscal 2012	9.49	$	4.22
Fiscal 2013	21.86		4.16
Fiscal 2014	0.80		3.51

At March 31, 2012, Laclede Gas also had 11.8 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 Income and Statements of Comprehensive Income
			Three Months Ended					Six Months Ended
		Location of Gain (Loss)	March 31,					March 31,
(Thousands)		Recorded in Income		2012			2011		2012		2011
Derivatives in Cash Flow Hedging Relationships
NYMEX gasoline and heating oil contracts:
Effective portion of gain recognized in         OCI on derivatives			$	83		$	267	$	133	$	440
Effective portion of gain (loss) reclassified         from AOCI to income		Utility – Other Operation Expenses		(11	)		72		3		121
Ineffective portion of gain on         derivatives recognized in income		Utility – Other Operation Expenses		28			19		34		48
Derivatives Not Designated as Hedging Instruments *
NYMEX gasoline and heating oil contracts:
Gain recognized in income on derivative		Other Income and (Income Deductions) – Net	$	12		$	47	$	13	$	63
*	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 Income. Such amounts are recognized in the Statements of Income as a component of 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, 2012
	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	$	72		Accounts Receivable - Other	$	—
Derivatives not designated as hedging instruments
NYMEX natural gas contracts	Accounts Receivable – Other		709		Accounts Receivable – Other		36,437
NYMEX gasoline and heating oil contracts	Accounts Receivable – Other		9		Accounts Receivable – Other		—
Sub-total			718				36,437
Total derivatives		$	790			$	36,437
Fair Value of Derivative Instruments in the Balance Sheet at September 30, 2011
	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	$	15		Derivative Instrument Assets	$	117
Derivatives not designated as hedging instruments
NYMEX natural gas contracts	Derivative Instrument Assets		457		Derivative Instrument Assets		16,330
	Other Deferred Charges		—		Other Deferred Charges		408
NYMEX gasoline and heating oil contracts	Derivative Instrument Assets		4		Derivative Instrument Assets		7
Sub-total			461				16,745
Total derivatives		$	476			$	16,862
Fair Value of Derivative Instruments in the Balance Sheet at March 31, 2011
	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	$	341		Derivative Instrument Assets	$	—
Derivatives not designated as hedging instruments
NYMEX natural gas contracts	Derivative Instrument Assets		4,353		Derivative Instrument Assets		16,854
	Other Deferred Charges		666		Other Deferred Charges		—
NYMEX gasoline and heating oil contracts	Derivative Instrument Assets		28		Derivative Instrument Assets		—
Sub-total			5,047				16,854
Total derivatives		$	5,388			$	16,854

* 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 4, 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:

		Mar. 31,			Sept. 30,			Mar. 31,
	(Thousands)	2012			2011			2011
	Fair value of asset derivatives presented above	$	790		$	476		$	5,388
	Fair value of cash margin receivables offset with derivatives		35,647			22,088			20,205
	Netting of assets and liabilities with the same counterparty		(36,437	)		(16,862	)		(16,893	)
	Total	$	—		$	5,702		$	8,700
	Derivative Instrument Assets, per Balance Sheets:
	Derivative instrument assets	$	—		$	4,746		$	8,035
	Other deferred charges		—			956			665
	Total	$	—		$	5,702		$	8,700
	Fair value of liability derivatives presented above	$	36,437		$	16,862		$	16,854
	Fair value of cash margin payables offset with derivatives		—			—			39
	Netting of assets and liabilities with the same counterparty		(36,437	)		(16,862	)		(16,893	)
	Derivative instrument liabilities, per Balance Sheets*	$	—		$	—		$	—
*	Included in the Other line of the Current Liabilities section