Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

 

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2010

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File Number 001-32671

 

 

INTERCONTINENTALEXCHANGE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   58-2555670
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification Number)

2100 RiverEdge Parkway, Suite 500, Atlanta, Georgia 30328

(Address of principal executive offices) (Zip Code)

(770) 857-4700

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether 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 reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant 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. (Check one):

 

Large accelerated filer   þ    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  þ

As of May 3, 2010, the number of shares of the registrant’s Common Stock outstanding was 73,944,474 shares.

 

 

 


Table of Contents

IntercontinentalExchange, Inc.

Form 10-Q

Quarterly Period Ended March 31, 2010

Table of Contents

 

          Page

Part I.

   Financial Information   

Item 1.

   Consolidated Financial Statements (Unaudited):   
   Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009    2
   Consolidated Statements of Income for the three months ended March 31, 2010 and 2009    3
   Consolidated Statements of Changes in Equity for the three months ended March 31, 2010 and for the year ended December 31, 2009    4
   Consolidated Statements of Comprehensive Income for the three months ended March 31, 2010 and 2009    5
   Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009    6
   Notes to Consolidated Financial Statements    7

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    16

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    31

Item 4.

   Controls and Procedures    33

Part II.

   Other Information   

Item 1.

   Legal Proceedings    33

Item 1A.

   Risk Factors    33

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    33

Item 3.

   Defaults Upon Senior Securities    33

Item 4.

   [RESERVED]    33

Item 5.

   Other Information    33

Item 6.

   Exhibits    33

Signature

   35


Table of Contents

Part I. Financial Information

 

Item 1. Consolidated Financial Statements (Unaudited)

IntercontinentalExchange, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except per share amounts)

(Unaudited)

 

     March 31,
2010
    December 31,
2009
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 612,294      $ 552,465   

Short-term restricted cash

     80,829        81,970   

Short-term investments

     2,005        2,005   

Customer accounts receivable, net of allowance for doubtful accounts of $1,387 and $1,710 at March 31, 2010 and December 31, 2009, respectively

     140,578        109,068   

Margin deposits and guaranty funds

     20,556,597        18,690,238   

Prepaid expenses and other current assets

     25,837        24,105   
                

Total current assets

     21,418,140        19,459,851   
                

Property and equipment, net

     91,091        91,735   
                

Other noncurrent assets:

    

Goodwill

     1,452,972        1,465,831   

Other intangible assets, net

     687,541        702,460   

Long-term restricted cash

     123,823        123,823   

Long-term investments

     17,246        23,492   

Cost method investments

     7,501        7,501   

Other noncurrent assets

     15,477        10,182   
                

Total other noncurrent assets

     2,304,560        2,333,289   
                

Total assets

   $ 23,813,791      $ 21,884,875   
                

LIABILITIES AND EQUITY

    

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 51,272      $ 57,288   

Accrued salaries and benefits

     24,095        52,185   

Current portion of licensing agreement

     15,922        15,223   

Current portion of long-term debt

     102,000        99,000   

Income taxes payable

     37,754        23,327   

Margin deposits and guaranty funds

     20,556,597        18,690,238   

Other current liabilities

     41,522        30,571   
                

Total current liabilities

     20,829,162        18,967,832   
                

Noncurrent liabilities:

    

Noncurrent deferred tax liability, net

     167,062        181,102   

Long-term debt

     183,000        208,500   

Noncurrent portion of licensing agreement

     70,461        73,441   

Other noncurrent liabilities

     19,204        20,353   
                

Total noncurrent liabilities

     439,727        483,396   
                

Total liabilities

     21,268,889        19,451,228   
                

Commitments and contingencies

    

EQUITY

    

IntercontinentalExchange, Inc. shareholders’ equity:

    

Preferred stock, $0.01 par value; 25,000 shares authorized; no shares issued or outstanding at March 31, 2010 and December 31, 2009

     —          —     

Common stock, $0.01 par value; 194,275 shares authorized; 78,064 and 77,573 shares issued at March 31, 2010 and December 31, 2009, respectively; 73,913 and 73,489 shares outstanding at March 31, 2010 and December 31, 2009, respectively

     781        776   

Treasury stock, at cost; 4,151 and 4,084 shares at March 31, 2010 and December 31, 2009, respectively

     (356,803     (349,646

Additional paid-in capital

     1,696,792        1,674,919   

Retained earnings

     1,150,288        1,049,125   

Accumulated other comprehensive income

     18,468        24,558   
                

Total IntercontinentalExchange, Inc. shareholders’ equity

     2,509,526        2,399,732   

Noncontrolling interest in consolidated subsidiaries

     35,376        33,915   
                

Total equity

     2,544,902        2,433,647   
                

Total liabilities and equity

   $ 23,813,791      $ 21,884,875   
                

See accompanying notes.

 

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Table of Contents

IntercontinentalExchange, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended  
     March 31,  
     2010     2009  

Revenues:

    

Transaction and clearing fees, net

   $ 251,062      $ 203,478   

Market data fees

     26,853        26,114   

Other

     3,705        1,961   
                

Total revenues

     281,620        231,553   
                

Operating expenses:

    

Compensation and benefits

     58,240        54,706   

Professional services

     8,549        7,229   

Acquisition-related transaction costs

     545        5,610   

Selling, general and administrative

     22,257        22,906   

Depreciation and amortization

     28,214        27,303   
                

Total operating expenses

     117,805        117,754   
                

Operating income

     163,815        113,799   
                

Other income (expense):

    

Interest and investment income

     726        610   

Interest expense

     (7,110     (5,254

Other expense, net

     (696     (79
                

Total other expense, net

     (7,080     (4,723
                

Income before income taxes

     156,735        109,076   

Income tax expense

     53,217        36,854   
                

Net income

   $ 103,518      $ 72,222   
                

Net income attributable to noncontrolling interest

     (2,355     —     
                

Net income attributable to IntercontinentalExchange, Inc.

   $ 101,163      $ 72,222   
                

Earnings per share attributable to IntercontinentalExchange, Inc. common shareholders:

    

Basic

   $ 1.37      $ 0.99   
                

Diluted

   $ 1.36      $ 0.98   
                

Weighted average common shares outstanding:

    

Basic

     73,676        72,671   
                

Diluted

     74,527        73,606   
                

See accompanying notes.

 

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Table of Contents

IntercontinentalExchange, Inc. and Subsidiaries

Consolidated Statements of Changes in Equity

(In thousands)

(Unaudited)

 

    IntercontinentalExchange Inc. Shareholders’ Equity     Noncontrolling
Interest in
Consolidated
Subsidiaries
    Total
Equity
 
              Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated Other
Comprehensive Income (Loss) from
     
    Common
Stock
  Treasury Stock         Foreign
Currency
Translation
  Available-
For-Sale
Securities
    Cash
Flow
Hedges
     
    Shares   Value   Shares     Value                

Balance, January 1, 2009

  76,502   $ 765   (4,138   $ (355,520   $ 1,608,344      $ 732,752      $ 22,389   $ (49   $ (2,450   $ 5,949      $ 2,012,180   

Other comprehensive income (loss)

  —       —     —          —          —          —          6,869     (435     (1,766     —          4,668   

Exercise of common stock options

  653     6   —          —          12,698        —          —       —          —          —          12,704   

Issuance of shares for acquisitions

  50     1   —          —          5,894        —          —       —          —          —          5,895   

Change in fair value of redeemable stock put

  —       —     —          —          —          385        —       —          —          —          385   

Treasury shares received for restricted stock and stock option tax payments

  —       —     (157     (12,220     —          —          —       —          —          —          (12,220

Stock-based compensation

  —       —     —          —          57,477        —          —       —          —          —          57,477   

Issuance of restricted stock

  368     4   211        18,094        (18,098     —          —       —          —          —          —     

Tax benefits from stock option plans

  —       —     —          —          8,604        —          —       —          —          —          8,604   

Noncontrolling interest issued in connection with an acquisition

  —       —     —          —          —          —          —       —          —          29,800        29,800   

Net loss attributable to noncontrolling interest

  —       —     —          —          —          1,834        —       —          —          (1,834     —     

Net income

  —       —     —          —          —          314,154        —       —          —          —          314,154   
                                                                             

Balance, December 31, 2009

  77,573     776   (4,084     (349,646     1,674,919        1,049,125        29,258     (484     (4,216     33,915        2,433,647   

Other comprehensive income (loss)

  —       —     —          —          —          —          734     (6,365     (459     —          (6,090

Exercise of common stock options

  289     3   —          —          6,965        —          —       —          —          —          6,968   

Treasury shares received for restricted stock and stock option tax payments

  —       —     (67     (7,164     —          —          —       —          —          —          (7,164

Stock-based compensation

  —       —     —          —          12,455        —          —       —          —          —          12,455   

Issuance of restricted stock

  202     2   —          7        (9     —          —       —          —          —          —     

Tax benefits from stock option plans

  —       —     —          —          2,462        —          —       —          —          —          2,462   

Noncontrolling interest issued in connection with an acquisition

  —       —     —          —          —          —          —       —          —          (894     (894

Net income attributable to noncontrolling interest

  —       —     —          —          —          (2,355     —       —          —          2,355        —     

Net income

  —       —     —          —          —          103,518        —       —          —          —          103,518   
                                                                             

Balance, March 31, 2010

  78,064   $ 781   (4,151   $ (356,803   $ 1,696,792      $ 1,150,288      $ 29,992   $ (6,849   $ (4,675   $ 35,376      $ 2,544,902   
                                                                             

See accompanying notes.

 

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Table of Contents

IntercontinentalExchange, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

     Three Months Ended  
     March 31,  
     2010     2009  

Net income

   $ 103,518      $ 72,222   

Other comprehensive income (loss):

    

Change in foreign currency translation adjustments, net of tax

     734        (1,890

Change in fair value of cash flow hedges, net of tax

     (459     —     

Change in available-for-sale securities, net of tax

     (6,365     30   
                

Comprehensive income

   $ 97,428      $ 70,362   
                

Comprehensive income attributable to noncontrolling interest

     (2,355     —     
                

Comprehensive income attributable to IntercontinentalExchange, Inc.

   $ 95,073      $ 70,362   
                

See accompanying notes.

 

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Table of Contents

IntercontinentalExchange, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     Three Months Ended
March 31,
 
     2010     2009  

Operating activities

    

Net income

   $ 103,518      $ 72,222   
                

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     28,214        27,303   

Amortization of debt issuance costs

     1,523        650   

Provision for doubtful accounts

     (323     877   

Net realized gains on sales of available-for-sale investments

     (1     (4

Stock-based compensation

     11,945        9,780   

Deferred taxes

     (6,225     (13,449

Excess tax benefits from stock-based compensation

     (2,082     (2,249

Changes in assets and liabilities:

    

Customer accounts receivable

     (31,189     (29,676

Prepaid expenses and other current assets

     (2,353     8,036   

Noncurrent assets

     349        3,330   

Income taxes payable

     19,487        18,721   

Accounts payable, accrued salaries and benefits, and other liabilities

     (21,303     (27,821
                

Total adjustments

     (1,958     (4,502
                

Net cash provided by operating activities

     101,560        67,720   
                

Investing activities

    

Capital expenditures

     (4,865     (3,728

Capitalized software development costs

     (5,883     (4,201

Cash paid for acquisitions, net of cash acquired

     —          (39,842

Proceeds from sale of cost method investment

     —          2,700   

Proceeds from sales of available-for-sale investments

     2,000        2,668   

Purchases of available-for-sale investments

     (1,999     (1,997

Increase in restricted cash

     (555     (61,215
                

Net cash used in investing activities

     (11,302     (105,615
                

Financing activities

    

Repayments of credit facilities

     (22,500     (9,375

Issuance costs for credit facilities

     (7,485     —     

Excess tax benefits from stock-based compensation

     2,082        2,249   

Payments relating to treasury shares received for restricted stock and stock option tax payments

     (7,164     (7,256

Payments on capital lease obligations

     (1,561     (1,568

Proceeds from exercise of common stock options

     6,968        886   
                

Net cash used in financing activities

     (29,660     (15,064
                

Effect of exchange rate changes on cash and cash equivalents

     (769     (967
                

Net increase (decrease) in cash and cash equivalents

     59,829        (53,926

Cash and cash equivalents, beginning of period

     552,465        283,522   
                

Cash and cash equivalents, end of period

   $ 612,294      $ 229,596   
                

Supplemental cash flow disclosure

    

Cash paid for income taxes

   $ 36,646      $ 31,103   
                

Cash paid for interest

   $ 2,599      $ 3,159   
                

Supplemental noncash investing activities

    

Common stock issued for acquisitions

   $ —        $ 5,894   
                

See accompanying notes.

 

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Table of Contents

IntercontinentalExchange, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

1. Nature of Business and Organization

IntercontinentalExchange, Inc. (the “Company”) is a leading operator of global regulated futures exchanges and over-the-counter (“OTC”) markets for commodities and derivative financial products. The Company owns ICE Futures Europe, which operates as a United Kingdom (“U.K.”) Recognized Investment Exchange for the purpose of price discovery, trading and risk management within the energy commodity futures and options markets. The Company owns ICE Futures U.S., Inc. (“ICE Futures U.S.”), which operates as a United States (“U.S.”) Designated Contract Market for the purpose of price discovery, trading and risk management within the agricultural commodity, index and currency futures and options markets. The Company owns ICE Futures Canada, Inc. (“ICE Futures Canada”), which operates as a Canadian derivatives exchange for the purpose of price discovery, trading and risk management within the agricultural futures and options markets. In addition to operating an exempt commercial market for trading OTC energy commodities and derivatives, the Company owns Creditex Group Inc. (“Creditex”), which operates in the OTC credit default swap (“CDS”) trade execution markets. The Company also owns and operates five central counterparty clearing houses, including ICE Clear U.S., Inc. (“ICE Clear U.S.”), ICE Clear Europe Limited (“ICE Clear Europe”), ICE Clear Canada, Inc. (“ICE Clear Canada”), The Clearing Corporation (“TCC”) and ICE Trust U.S. LLC (“ICE Trust”). Headquartered in Atlanta, Georgia, the Company also has offices in London, New York, Chicago, Houston, Calgary, Winnipeg, Washington, D.C. and Singapore. The Company does not take any trading positions in any contracts in its markets, except for an immaterial amount of matched, short-term facilitation trades by Creditex.

 

2. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto for the year ended December 31, 2009. The accompanying unaudited consolidated financial statements reflect all adjustments that are, in the opinion of the Company’s management, necessary for a fair presentation of results for the interim periods presented. These adjustments are of a normal recurring nature.

Preparing financial statements requires management to make estimates and assumptions that affect the amounts that are reported in the consolidated financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All intercompany balances and transactions between the Company and its wholly-owned and majority-owned subsidiaries have been eliminated in consolidation.

Certain prior period amounts have been reclassified to conform to the current period’s financial statement presentation. Acquisition-related transaction costs of $5.6 million were reclassified from professional services expenses in the accompanying consolidated statement of income for the three months ended March 31, 2009.

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (Topic 820)Fair Value Measurements and Disclosures, to add additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3. The Company adopted this guidance in January 2010, and adoption did not have a material impact on the Company’s consolidated financial statements. The portion of guidance relating to disclosures about purchases, sales, issuances and settlements in the Level 3 reconciliation are not effective until fiscal years beginning after December 15, 2010. The Company does not expect that the portion of this guidance not yet adopted will have a material impact on the Company’s consolidated financial statements.

 

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Table of Contents

In February 2010, the FASB issued Accounting Standards Update No. 2010-09, Subsequent Events (Topic 855) – Amendments to Certain Recognition and Disclosure Requirements. This update defines an SEC filer and eliminates the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. This guidance became effective and was adopted by the Company in February 2010. The adoption did not have a material impact on the Company’s consolidated financial statements.

 

3. Goodwill and Other Intangible Assets

The following is a summary of the activity in the goodwill balance for the three months ended March 31, 2010 (in thousands):

 

Goodwill balance at December 31, 2009

   $ 1,465,831   

Other activity

     (12,859
        

Goodwill balance at March 31, 2010

   $ 1,452,972   
        

The following is a summary of the activity in the other intangible assets balance for the three months ended March 31, 2010 (in thousands):

 

Other intangible assets balance at December 31, 2009

   $ 702,460   

Other activity

     980   

Amortization of other intangible assets

     (15,899
        

Other intangible assets balance at March 31, 2010

   $ 687,541   
        

The other activity in the goodwill and other intangible assets balances relates to adjustments to the purchase price and related goodwill and other intangible assets for acquisitions completed in 2009, primarily relating to adjustments for excess tax benefits on share based payments, tax adjustments due to rate changes and foreign currency translation. The Company did not recognize any impairment losses on goodwill or other intangible assets during the three months ended March 31, 2010 and 2009.

 

4. Credit Facilities

On March 31, 2010, the Company entered into new aggregate $725.0 million three-year senior unsecured revolving credit facilities (the “New Revolving Credit Facilities”) with Wells Fargo Bank, National Association (“Wells Fargo”), as Administrative Agent, Bank of America, N.A., as Syndication Agent, and the lenders named therein.

The New Revolving Credit Facilities consist of (i) an aggregate $575.0 million unsecured revolving U.S. dollar credit facility (the “Dollar Facility”), pursuant to which the Company may borrow, repay and reborrow up to $575.0 million in U.S. dollars, and (ii) an aggregate $150.0 million unsecured revolving multicurrency credit facility, pursuant to which the Company may borrow, repay and reborrow up to the equivalent of $150.0 million in either U.S. dollars, euros or pounds sterling, at the option of the Company (the “Multicurrency Facility”). No amounts were borrowed under the New Revolving Credit Facilities as of the closing of the facilities. The New Revolving Credit Facilities mature on March 31, 2013.

In connection with entering into the New Revolving Credit Facilities, on March 31, 2010, the Company terminated its existing revolving credit facilities which provided for a $300.0 million 364-day senior unsecured revolving credit facility that was scheduled to expire on April 9, 2010, and a $100.0 million senior unsecured revolving credit facility that was scheduled to expire on April 9, 2012. Two existing term loan facilities, under which $285.0 million in aggregate is outstanding as of March 31, 2010, are still outstanding.

Loans under the Dollar Facility and U.S. dollar only loans under the Multicurrency Facility would bear interest on the principal amount outstanding, at the option of the Company, at either (i) LIBOR plus an applicable margin rate or (ii) a “base rate” plus an applicable margin rate. Loans under the Multicurrency Facility that are not in U.S. dollars would bear interest on the principal amount outstanding at LIBOR plus an applicable margin rate. The “base

 

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rate” will be equal to the higher of (i) Wells Fargo’s prime rate, (ii) the federal funds rate plus 0.50%, or (iii) the one month LIBOR rate plus 1.50%. The applicable margin rate ranges from 2.00% to 3.00% on the LIBOR loans and from 1.00% to 2.00% for the base rate loans, in each case based on the Company’s total leverage ratio calculated on a trailing twelve month period.

The closing of the New Revolving Credit Facilities increased the deferred debt issuance costs to $12.7 million as of March 31, 2010. The debt issuance costs are being amortized over the remaining life of the credit facilities, including $1.5 million that was amortized during the three months ended March 31, 2010. The Company will amortize $3.9 million over the remaining nine months in 2010 and $4.7 million, $3.4 million and $757,000 in 2011, 2012 and 2013, respectively.

The New Revolving Credit Facilities include an unutilized revolving credit commitment fee that is equal to the unused maximum revolver amount multiplied by an applicable margin rate and is payable in arrears on a quarterly basis. The applicable margin rate ranges from 0.35% to 0.50% based on the Company’s total leverage ratio calculated on a trailing twelve month period. Based on this calculation, the applicable margin rate was 0.35% as of March 31, 2010.

Of the $725.0 million available under the New Revolving Credit Facilities, (i) up to $150.0 million of such amount has been reserved to provide liquidity for the clearing operations of ICE Clear Europe, (ii) up to $100.0 million of such amount has been reserved to provide liquidity for the clearing operations of ICE Trust, (iii) up to $50.0 million of such amount has been reserved to provide liquidity for the clearing operations of ICE Clear U.S., (iv) up to $3.0 million of such amount has been reserved to provide liquidity for certain of the clearing operations of ICE Clear Canada, and (v) the remaining balance may be used by the Company for working capital and general corporate purposes.

With limited exceptions, the Company may prepay any outstanding loans under the New Revolving Credit Facilities and the two term loans outstanding, in whole or in part, without premium or penalty. The credit facilities contain affirmative and negative covenants, including, but not limited to, leverage and interest coverage ratios, as well as limitations or required notices or approvals for acquisitions, dispositions of assets and certain investments in subsidiaries, the incurrence of additional debt or the creation of liens and other fundamental changes to the Company’s business. The Company has been and is currently in compliance with all applicable covenants.

The Company has entered into interest rate swap contracts to reduce its exposure to interest rate volatility on the two outstanding term loan facilities. The interest rate swaps are effective from December 31, 2009 through the maturity dates of the term loan facilities. The unrealized gain or loss is recognized in earnings when the designated interest expense under the term loans is recognized in earnings. The amounts received under the variable component of the swaps will fully offset the variable interest payments under the term loan facilities. With the two variable components offsetting, the net interest expense will equal the fixed interest component. The fair value of the interest rate swaps as of March 31, 2010 is ($3.5 million), or ($2.2 million) net of taxes, and is included in the accompanying balance sheet in non-current liabilities with the unrealized loss included under the equity section as accumulated other comprehensive loss from cash flow hedges. The Company realized $1.2 million in additional interest expense as a result of the interest rate swap contracts during the three months ended March 31, 2010. The portion of the unrealized loss expected to be reclassified into earnings within the next 12 months is not expected to be significant.

 

5. Stock-Based Compensation

The Company currently sponsors employee stock option and restricted stock plans. All stock options are granted at an exercise price equal to the fair value of the common stock on the date of grant. The grant date fair value is based on the closing stock price on the date of grant. The fair value of the stock options and restricted stock on the date of the grant is recognized as expense over the vesting period, net of estimated forfeitures. The non-cash compensation expenses recognized in the Company’s consolidated statements of income for the stock options and restricted stock were $11.9 million and $9.8 million for the three months ended March 31, 2010 and 2009, respectively.

 

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The following is a summary of stock options for the three months ended March 31, 2010:

 

     Number of Options     Weighted Average
Exercise Price
Per Option

Outstanding at December 31, 2009

   1,871,028      $ 47.68

Exercised

   (289,166     24.04

Forfeited or expired

   (50,094     48.12
        

Outstanding at March 31, 2010

   1,531,768        52.13
        

Details of stock options outstanding as of March 31, 2010 are as follows:

 

     Number of Options    Weighted  Average
Exercise
Price
   Weighted  Average
Remaining
Contractual Life
(years)
   Aggregate
Intrinsic
Value
(In thousands)

Vested or expected to vest

   1,301,997    $ 40.24    6.18    $ 94,864

Exercisable

   1,154,654    $ 42.27    5.73    $ 86,040

The total intrinsic value of stock options exercised during the three months ended March 31, 2010 and 2009 was $24.1 million and $2.7 million, respectively. As of March 31, 2010, there were $17.9 million in total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 2.0 years as the stock options vest.

In December 2009, the Company reserved a maximum of 381,110 restricted shares for potential issuance as performance-based restricted shares for certain Company employees. These restricted shares are subject to a market condition that may reduce the number of shares that are granted if the 2010 Company total shareholder return falls below that of the S&P 500 Index. These shares vest over a three-year period based on the Company’s financial performance targets set by the Company’s compensation committee for the year ending December 31, 2010. The compensation expenses to be recognized under these performance-based restricted shares are expected to be $7.8 million if the Threshold Performance Target is met and 76,222 shares vest, $15.6 million if the Target Performance Target is met and 152,444 shares vest, $27.3 million if the Above Target Performance Target is met and 266,777 shares vest, and $38.9 million if the Maximum Performance Target is met and 381,110 shares vest. Shares to be granted will be prorated on a straight-line basis between performance level targets. The Company will recognize expense on an accelerated basis over the three-year vesting period based on the Company’s quarterly assessment of the probable 2010 actual performance as compared to the 2010 financial performance targets. If the market condition is not achieved, compensation cost will not be affected since the grant date fair value of the award gave consideration to the probability of market condition achievement. As of March 31, 2010, the Company determined that it is probable that the Target performance level will be met for 2010. The Company has recorded non-cash compensation expense of $2.4 million for the three months ended March 31, 2010 related to these shares. The remaining $13.2 million in estimated non-cash compensation expense will be recorded on an accelerated basis over the remaining vesting period.

The following is a summary of the nonvested restricted shares for the three months ended March 31, 2010:

 

     Number of
Restricted Stock Shares
    Weighted Average
Grant-Date Fair
Value per Share

Nonvested at December 31, 2009

   1,108,452      $ 97.96

Granted

   135,430        104.67

Vested

   (208,513     94.28

Forfeited

   (23,781     77.60
        

Nonvested at March 31, 2010

   1,011,588        100.10
        

Restricted stock shares granted in the table above include both time-based and performance-based grants. Performance-based shares awarded in prior years have been adjusted to reflect the actual shares to be issued based on the achievement of past performance targets. Unvested performance-based restricted shares granted are presented in the table above at the maximum number of restricted shares that would vest if the maximum performance targets are met. As of March 31, 2010, there were $55.7 million in total unrecognized compensation costs related to the time-based restricted stock and the performance-based restricted stock. These costs are expected to be recognized

 

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over a weighted average period of 2.2 years as the restricted stock vests. These unrecognized compensation costs assume that a Target performance level, as discussed above, will be met on the performance-based restricted shares granted in December 2009. During the three months ended March 31, 2010 and 2009, the total fair value of restricted stock vested under all restricted stock plans was $21.8 million and $10.0 million, respectively.

 

6. Income Taxes

The Company’s effective tax rate was 34% for both the three months ended March 31, 2010 and 2009. The effective tax rates for the three months ended March 31, 2010 and 2009 are lower than the federal statutory rate primarily due to lower foreign tax rates on foreign earnings, partially offset by state taxes, net of federal benefits.

We have not recorded U.S. deferred taxes on the undistributed earnings of foreign subsidiaries that are deemed to be indefinitely reinvested in foreign jurisdictions. The undistributed earnings of the Company’s foreign subsidiaries indefinitely reinvested totaled $676.9 million and $614.7 million as of March 31, 2010 and December 31, 2009, respectively. These earnings are not subject to U.S. income tax until they are distributed to the United States.

 

7. Clearing Organizations

ICE Clear U.S. performs the clearing and settlement of every futures and options contract traded through ICE Futures U.S., ICE Clear Canada performs the same function for every futures and options contract traded through ICE Futures Canada, ICE Trust performs the same function for North American CDS contracts and ICE Clear Europe performs the same function for every futures and options contract traded through ICE Futures Europe, as well as for all of the Company’s cleared OTC energy contracts and cleared OTC European CDS contracts. TCC performs clearing and settlement services to its participants for trades in futures contracts, options contracts and OTC transactions executed on various exchanges and marketplaces. ICE Clear U.S., ICE Clear Europe, ICE Clear Canada, ICE Trust and TCC are referred to herein collectively as the “ICE Clearing Houses”.

Each of the ICE Clearing Houses requires all clearing members to maintain on deposit or pledge certain assets, which may include cash, government obligations, money market mutual fund shares, certificates of deposit, letters of credit, or emissions allowances to secure payment of risk-based margin as may become due and such amounts in total are known as original margin. The daily payment of profits and losses from and to the ICE Clearing Houses in respect of relevant contracts is known as variation margin. The ICE Clearing Houses mark all outstanding contracts to market, and therefore pays and collects variation margin, at least once daily, and in some cases throughout the day. Our Clearing Houses may make multiple intraday original margin calls in circumstances where market conditions require they take additional protection.

Each of the ICE Clearing Houses requires that each clearing member make deposits into a fund known as a guaranty or clearing fund (“Guaranty Fund”), which is maintained by the relevant ICE Clearing House. These amounts serve to secure the obligations of a clearing member to the ICE Clearing House to which it has made the Guaranty Fund deposits and may be used to cover losses sustained by the respective ICE Clearing House in the event of a default of a clearing member. For ICE Clear U.S. and ICE Clear Canada, all income earned from investing clearing members’ cash deposits in the Guaranty Fund, and for ICE Clear U.S., all income earned from the cash variation margin deposits, belongs to the respective ICE Clearing House and is included in interest income in the accompanying consolidated statements of income. All other interest earned on the cash margin deposits, less costs incurred by the ICE Clearing Houses, belongs to the clearing members. ICE Clear Europe has agreed to pay energy clearing members all interest earned on their cash margin deposits plus an additional 115 basis points on cash deposits made to the Guaranty Fund and an additional 10 basis points for cash deposits made for original margin requirements. These additional basis point amounts paid to the energy clearing members are recorded net against revenue in the accompanying consolidated statements of income.

Each of the ICE Clearing Houses has equal and offsetting claims to and from their respective clearing members on opposite sides of each contract, standing as the central financial counterparty on every contract cleared. To the extent that funds are not otherwise available to satisfy an obligation under an applicable contract, each ICE Clearing House bears financial counterparty credit risk in the event that future market movements create conditions that could lead to its clearing members failing to meet their obligations to that ICE Clearing House. Accordingly, the ICE Clearing Houses account for this central counterparty guarantee as a performance guarantee. Given that each contract is settled on at least a daily basis for each clearing member, the ICE Clearing Houses’ maximum exposure for this guarantee, excluding the risk management program discussed below, is approximately $25.0 billion as of March 31, 2010, which represents the maximum estimated

 

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value by the ICE Clearing Houses of a hypothetical one to five day movement in pricing of the underlying unsettled contracts. This amount is based on calculations determined using proprietary software that simulates gains and losses based on historical market prices, volatility and other factors present at that point in time for those particular unsettled contracts. Future actual market price volatility could result in the exposure being significantly different than the amount estimated by the ICE Clearing Houses. The net notional value of the unsettled contracts was approximately $634.6 billion as of March 31, 2010.

The ICE Clearing Houses seek to reduce their exposure through a risk management program that includes initial and ongoing financial standards for clearing firm admission and ongoing membership, original and variation margin requirements, and mandatory deposits to the Guaranty Fund. As of March 31, 2010 and December 31, 2009, the ICE Clearing Houses have received or have been pledged $34.1 billion and $31.3 billion, respectively, in cash and non-cash collateral in original margin, variation margin, performance collateral for delivery and Guaranty Fund deposits to cover movements in the pricing of the underlying contracts. The ICE Clearing Houses also have powers of assessment that provide the ability to collect additional funds from their clearing members to cover a defaulting member’s remaining obligations up to the limits established under the terms of each ICE Clearing House’s rules.

Should a particular clearing member fail to deposit original margin, or to make a variation margin payment, when and as required, the relevant ICE Clearing House may liquidate or hedge the clearing member’s open positions and use the clearing member’s original margin and Guaranty Fund deposits to make up the amount owed. In the event that those deposits are not sufficient to pay that owed amount in full, the ICE Clearing Houses may utilize the respective Guaranty Fund deposits of all clearing members pro rata for that purpose. In addition, ICE Clear Europe and ICE Trust have contributed $110.0 million and $10.0 million, respectively, to their respective Guaranty Funds as of March 31, 2010.

As of March 31, 2010, original margin, unsettled variation margin, Guaranty Fund and performance collateral for delivery cash deposits are as follows for the ICE Clearing Houses (in thousands):

 

     ICE Clear U.S.    ICE Clear
Europe
   ICE Clear
Canada
   ICE Trust    TCC    Total

Original margin

   $ 888,323    $ 11,294,883    $ 5,591    $ 4,583,662    $ 30,506    $ 16,802,965

Variation margin

     22,310      —        —        —        1,162      23,472

Guaranty Fund

     15,035      1,722,965      3,987      1,968,620      8,728      3,719,335

Performance collateral for delivery

     —        9,973      852      —        —        10,825
                                         

Total

   $ 925,668    $ 13,027,821    $ 10,430    $ 6,552,282    $ 40,396    $ 20,556,597
                                         

The Company has recorded these cash deposits in the accompanying consolidated balance sheets as current assets with corresponding current liabilities to the clearing members of the relevant ICE Clearing House. Beginning February 1, 2010, ICE Trust began holding all cash deposits in the ICE Trust Federal Reserve account. All cash, securities and letters of credit are only available to meet the financial obligations of that clearing firm to the relevant ICE Clearing House. ICE Clear U.S., ICE Clear Europe, ICE Clear Canada, ICE Trust and TCC are separate legal entities and are not subject to the liabilities of the other ICE Clearing Houses or the obligations of the members of the other ICE Clearing Houses. The amount of these cash deposits may fluctuate due to the types of margin collateral choices available to clearing members and the change in the amount of deposits required. As a result, these assets and corresponding liabilities may vary significantly over time.

In addition to the cash deposits for original margin, variation margin, and Guaranty Fund made to the relevant ICE Clearing House, clearing members also pledge assets, including government obligations, money market mutual funds, certificates of deposit, letters of credit or emission allowances to the relevant ICE Clearing House to mitigate its credit risk. These assets are not reflected in the accompanying consolidated balance sheets as the ICE Clearing Houses do not take legal ownership of the assets as the risks and rewards remain with the clearing members. The ICE Clearing Houses have the ability to access the accounts where these assets are held at the financial institutions and depositories in the event of a clearing member default. These assets are held in safekeeping and any interest and gain or loss accrues to the clearing member. ICE Clear Europe pays energy clearing members all interest earned on their non-cash margin deposits plus an additional 50 basis points on non-cash deposits made to the Guaranty Fund

 

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and ICE Clear Europe charges energy clearing members 5 basis points for non-cash deposits made for original margin requirements. ICE Clear Europe pays CDS clearing members all interest earned on their non-cash margin deposits and charges CDS clearing members 5 basis points for all non-cash deposits, including original margin and Guaranty Fund requirements. The amounts paid to the clearing members are recorded net against revenue in the accompanying consolidated statements of income.

As of March 31, 2010, the non-cash assets pledged by the clearing members for ICE Clear U.S., ICE Clear Europe, ICE Clear Canada and TCC were $8.5 billion, $4.9 billion, $47.8 million and $96.3 million, respectively. As of March 31, 2010, there were only cash deposits and no assets were pledged for ICE Trust.

 

8. Russell Licensing Agreement

The Company has an exclusive licensing agreement (the “Licensing Agreement”) with the Russell Investment Group (“Russell”) to offer futures and options on futures contracts based on the full range of Russell’s benchmark U.S. equity indexes. These rights became exclusive on September 19, 2008, and subject to achieving specified trading volume beginning in June 2010 for the various indexes, will remain exclusive throughout the remainder of the Licensing Agreement through June 2014.

In exchange for the license rights, the Company paid Russell $50.0 million in 2007 and will also make annual cash payments based on the annual contract trade volumes, subject to certain minimum annual royalty payments. The Company has recorded the license rights as intangible assets, which were valued based on the net present value of all minimum annual royalty payments that the Company is required to make to Russell throughout the term of the agreement. As of March 31, 2010 and December 31, 2009, the net assets related to the Licensing Agreement are $110.1 million and $116.6 million, respectively, and are included in other intangible assets in the accompanying consolidated balance sheets. The intangible assets are being amortized over their contractual life. For both the three months ended March 31, 2010 and 2009, amortization expense related to the Licensing Agreement was $6.5 million.

The Company currently believes that the projected cash flows from the Russell contracts will be greater than the current carrying value of the intangible assets and no impairment has occurred. The Company will continue to monitor the intangible assets if events or changes in circumstances indicate that the carrying amount may not be fully recoverable.

 

9. Fair Value Measurements

The Company’s financial instruments consist primarily of cash and cash equivalents, short-term and long-term restricted cash, short-term and long-term investments, customer accounts receivable, margin deposits and guaranty funds, cost method investments, short-term and long-term debt and other short-term assets and liabilities. The fair value of our financial instruments are measured based on a three-level hierarchy:

 

   

Level 1 inputs — quoted prices for identical assets or liabilities in active markets.

 

   

Level 2 inputs — observable inputs other than Level 1 inputs such as quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are directly observable.

 

   

Level 3 inputs — unobservable inputs supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In general, the Company uses Level 1 and 2 inputs to determine the fair value of investments. The Level 1 investments include U.S. Treasury securities and equity securities. If quoted prices are not available to determine fair value, the Company uses other inputs that are observable either directly or indirectly. The Company determined the fair value of the interest rate swap contracts using Level 2 inputs, consisting of standard valuation models that are based on market-based observable inputs including interest rate curves. The fair value of interest rate swap contracts is included in other noncurrent liabilities in the accompanying consolidated balance sheet as of March 31, 2010. All other financial instruments are determined to approximate carrying value due to the short period of time to their maturities.

 

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Financial assets and liabilities recorded in the accompanying consolidated balance sheet as of March 31, 2010 are classified in their entirety based on the lowest level of input that is significant to the asset or liability’s fair value measurement. Financial instruments measured at fair value on a recurring basis as of March 31, 2010 are as follows (in thousands):

 

     Level 1    Level 2    Level 3    Total

Assets at fair value:

           

Short-term investments:

           

U.S. Treasury securities

   $ 1,999    $ —      $ —      $ 1,999

Equity securities

     6      —        —        6
                           

Total short-term investments

     2,005      —        —        2,005

Long-term investments in equity securities

     17,246      —        —        17,246
                           

Total assets at fair value

   $ 19,251    $ —      $ —      $ 19,251
                           

Liabilities at fair value:

           

Interest rate swap contracts

   $ —      $ 3,515    $ —      $ 3,515
                           

The Company did not use Level 3 inputs to determine the fair value of assets or liabilities measured at fair value on a recurring basis during the three months ended March 31, 2010. The Company measures certain assets, such as intangible assets, at fair value on a non-recurring basis. These assets are recognized at fair value if they are deemed to be impaired. During the three months ended March 31, 2010, there were no assets that were required to be recorded at fair value since no impairment indicators were present.

 

10. Segment Reporting

The Company’s principal business segments consist of its global OTC segment, its futures segment and its market data segment. The operations of ICE Futures Europe, ICE Futures U.S. and ICE Futures Canada, and the respective clearing of the futures contracts that trade at each of these exchanges, make up the futures segment and the operations of ICE Data make up the market data segment. The remaining companies and operations have been included in the global OTC segment as they primarily support the Company’s OTC business operations. Intersegment revenues and transactions attributable to the performance of services are recorded at cost plus an agreed market percentage intercompany profit. Intersegment revenues attributable to licensing transactions have been priced in accordance with comparable third party agreements. Financial data for the Company’s business segments are as follows:

 

     Global
OTC
Segment
   Futures
Segment
   Market
Data
Segment
   Total
     (In thousands)

Three Months Ended March 31, 2010:

           

Revenues from external customers

   $ 141,880    $ 124,669    $ 15,071    $ 281,620

Intersegment revenues

     14,774      7,684      8,331      30,789

Depreciation and amortization

     20,003      8,172      39      28,214

Interest and investment income

     437      230      59      726

Interest expense

     5,327      1,783      —        7,110

Income tax expense

     22,274      25,884      5,059      53,217

Net income attributable to IntercontinentalExchange, Inc.

     25,083      65,162      10,918      101,163

Total assets

     9,076,894      14,672,876      64,021      23,813,791

Revenues from four clearing members of the futures segment comprised 18%, 12%, 10% and 10% of the Company’s futures revenues for the three months ended March 31, 2010. These clearing members are primarily intermediaries and represent a broad range of principal trading firms. If a clearing member ceased its operations, the Company believes that the trading firms would continue to conduct transactions and would clear those transactions through another clearing member firm. No additional members or customers accounted for more than 10% of the Company’s segment revenues or consolidated revenues during the three months ended March 31, 2010.

 

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     Global
OTC
Segment
   Futures
Segment
   Market
Data
Segment
   Total
     (In thousands)

Three Months Ended March 31, 2009:

           

Revenues from external customers

   $ 119,450    $ 98,110    $ 13,993    $ 231,553

Intersegment revenues

     10,777      7,652      8,439      26,868

Depreciation and amortization

     18,226      9,042      35      27,303

Interest and investment income

     111      486      13      610

Interest expense

     3,544      1,710      —        5,254

Income tax expense

     11,563      20,742      4,549      36,854

Net income attributable to IntercontinentalExchange, Inc.

     18,741      44,486      8,995      72,222

Revenues from three clearing members of the futures segment comprised 17%, 11% and 10% of the Company’s futures revenues for the three months ended March 31, 2009. No additional members or customers accounted for more than 10% of the Company’s segment revenues or consolidated revenues during the three months ended March 31, 2009.

 

11. Earnings Per Common Share

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations for the three months ended March 31, 2010 and 2009:

 

     Three Months Ended
     March 31,
     2010    2009
     (In thousands, except per
share amounts)

Basic:

     

Net income attributable to IntercontinentalExchange, Inc.

   $ 101,163    $ 72,222
             

Weighted average common shares outstanding

     73,676      72,671
             

Basic earnings per common share

   $ 1.37    $ 0.99
             

Diluted:

     

Weighted average common shares outstanding

     73,676      72,671

Effect of dilutive securities:

     

Stock options and restricted shares

     851      935
             

Diluted weighted average common shares outstanding

     74,527      73,606
             

Diluted earnings per common share

   $ 1.36    $ 0.98
             

Basic earnings per common share is calculated using the weighted average common shares outstanding during the period. Common equivalent shares from stock options and restricted stock awards, using the treasury stock method, are also included in the diluted per share calculations unless their effect of inclusion would be antidilutive. During the three months ended March 31, 2010 and 2009, 232,000 and 715,000 outstanding stock options, respectively, were not included in the computation of diluted earnings per common share, because to do so would have had an antidilutive effect because the outstanding stock option exercise prices were greater than the average market price of the common shares during the relevant periods.

 

12. Subsequent Events

On April 30, 2010, the Company announced that it had agreed on terms to acquire Climate Exchange plc (“CLE”), a leader in the development of traded emissions markets. CLE operates the European Climate Exchange (“ECX”), the Chicago Climate Exchange (“CCX”) and the Chicago Climate Futures Exchange (“CCFE”).

Under the terms of the acquisition, CLE shareholders will receive 7.50 pounds sterling in cash for each share in CLE, valuing the entire existing issued and to be issued share capital of CLE at £395 million, or $604 million based on the 1.52993 pound sterling to the U.S. dollar foreign currency exchange rate as of April 30, 2010. The transaction consideration will include $220 million that has been drawn from the New Revolving Credit Facilities for these purposes and the remainder from existing cash resources of the Company. The $604 million in cash is currently being held in separate escrow accounts and is restricted per U.K law. The transaction is expected to close by the end of July 2010. The transaction is subject to relevant regulatory approvals. The Company currently owns a 4.8% stake in CLE which it purchased in June 2009 for 6.45 pounds sterling a share.

        The Company and its affiliates currently have multiple contracts in place with CLE and its affiliates to provide technology and clearing services. These contracts include a cooperation and licensing agreement to provide an electronic trading platform and clearing to ECX for European emissions trading, a licensing technology agreement to provide an electronic trading platform to CCX and CCFE for U.S. emissions trading and a clearing services agreement to provide clearing for CCX and CCFE’s U.S. emissions markets. Pursuant to these contracts, the Company charges fees to CLE for the services provided and shares in the revenue with respect to the trading and clearing of emissions contracts.

The Company has entered into a foreign currency hedge related to the $604 million consideration to be paid to acquire CLE in order to mitigate the risk of currency fluctuations between the announcement and closing of the acquisition as the cash consideration is currently held in U.S. dollars and it is required to be paid in pounds sterling.

The Company has evaluated subsequent events and determined that other than the item discussed above, no events or transactions met the definition of a subsequent event for purposes of recognition or disclosure in the accompanying consolidated financial statements.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q, including the sections entitled “Notes to Consolidated Financial Statements”, “Legal Proceedings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 that are based on our present beliefs and assumptions and on information currently available to us. You can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “targets,” “goal,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology. These statements relate to future events or our future financial performance and involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. These risks and other factors include those set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009.

Forward-looking statements and other risks and factors that may affect our performance include, but are not limited to: our business environment and trends in our industry; general economic conditions and conditions in global financial market; increasing competition and consolidation in our industry; volatility in commodity prices; our ability to identify and effectively pursue acquisitions and strategic alliances and successfully integrate the companies we acquire; minimizing the risks associated with operating multiple clearing houses in multiple jurisdictions; changes in domestic and foreign regulations or government policy; the success of our clearing initiative for the credit default swap market; the success of our global clearing strategy; technological developments, including clearing developments; the accuracy of our cost estimates and expectations; our belief that cash flows will be sufficient to fund our working capital needs and capital expenditures at least through the end of 2011; our ability to increase the connectivity to our marketplace; our ability to develop new products and services and pursue strategic acquisitions and alliances on a timely, cost-effective basis; maintaining existing market participants and attracting new ones; protecting our intellectual property rights; not violating the intellectual property rights of others; proposed or pending litigation and adverse litigation results; our belief in our electronic platform and disaster recovery system technologies; and our ability to gain access to comparable products and services if our key technology contracts were terminated. We caution you not to place undue reliance on these forward-looking statements as they speak only as of the date on which such statements were made, and we undertake no obligation to update any forward-looking statement or to reflect the occurrence of an unanticipated event. New factors emerge from time to time, and it is not possible for management to predict all factors that may affect our business and prospects. Further, management cannot assess the impact of each factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

In this Quarterly Report on Form 10-Q, unless otherwise indicated, the terms “IntercontinentalExchange”, “ICE”, “we”, “us”, “our”, “our company” and “our business” refer to IntercontinentalExchange, Inc., together with its consolidated subsidiaries. Due to rounding, figures may not sum exactly.

Overview and Our Business Environment

We are a leading operator of regulated global futures exchanges, over-the-counter, or OTC, markets and derivatives clearing houses. We operate the leading electronic futures and OTC marketplace for trading and clearing a broad array of energy and agricultural commodities, credit default swaps, or CDS, equity indexes and foreign exchange contracts. Currently, we are the only marketplace to offer an integrated electronic platform for side-by-side trading of products in both futures and OTC markets, together with clearing services. Through our widely-distributed electronic markets, we bring together buyers and sellers of derivative and physical commodities and financial contracts and offer a range of services to support our participants’ risk management and trading activities.

We conduct our regulated U.K.-based energy futures exchange through our wholly-owned subsidiary, ICE Futures Europe. We conduct our regulated U.S.-based futures exchange through our wholly-owned subsidiary, ICE Futures U.S. We conduct our regulated Canadian futures exchange through our wholly-owned subsidiary, ICE Futures Canada. We conduct our OTC energy markets primarily through our electronic platform. ICE Futures Europe, as well as our OTC energy and European CDS markets, clears contracts through ICE Clear Europe, ICE Futures U.S. clears its contracts through ICE Clear U.S. and ICE Futures Canada clears its contracts through ICE Clear Canada. We conduct our OTC CDS trade execution markets through Creditex Group Inc., or Creditex, and clear our OTC North American CDS markets through ICE Trust U.S. LLC, or ICE Trust.

 

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Our business is primarily transaction-based, and our revenues and profitability relate directly to the level of trading activity in our markets. Trading volume is driven by a number of factors, including the degree of price volatility of commodities and financial instruments such as equity indexes and foreign exchange, as well as economic conditions, new product introductions, fees, regulation and competition. Price volatility increases the need to hedge price risk and creates opportunities for the exchange of risk between market participants. Changes in our futures trading volume and OTC average daily commissions have also been driven by varying levels of volatility and liquidity in our markets and in the broader commodities markets, which influence trading volume across all of the markets we operate.

Since our business is primarily transaction-based, declines in trading volumes and market liquidity could adversely affect our business and profitability. Market liquidity is one of the primary keys to attracting and maintaining customers and is an important indicator of a market’s strength.

We operate our futures and OTC markets primarily on our electronic platform and we offer ICE Futures U.S.’s options markets on both our electronic platform and our New York-based trading floor. We also operate certain of our OTC markets through voice brokering. As market participation continues to increase and as participants continue to employ more sophisticated risk management strategies and products to manage their price exposure, we believe there remains opportunity for further growth in the trading and clearing of derivatives globally.

Financial Highlights

 

   

Our consolidated revenues increased by 22% to $281.6 million for the three months ended March 31, 2010, compared to the same period in 2009. This revenue growth was primarily due to higher trading volume in the ICE Brent Crude and ICE Gas Oil futures contracts, sugar and cotton futures and options contracts, OTC North American natural gas, power and global oil contracts, and an increase in CDS clearing revenues.

 

   

Our consolidated operating expenses were $117.8 million for both the three months ended March 31, 2010 and 2009. Our compensation and benefits expenses increased $3.5 million from the comparable period in 2009 primarily due to employee headcount increases. Our professional services expenses increased $1.3 million from the comparable period in 2009 primarily due to the continued development of our new global CDS clearing business. These increases were offset by $5.6 million in transaction costs incurred related to our acquisition of The Clearing Corporation, or TCC, during the three months ended March 31, 2009.

 

   

Our consolidated operating margin increased to 58% for the three months ended March 31, 2010, compared to 49% for the same period in 2009.

 

   

Our consolidated net income attributable to ICE increased by 40% to $101.2 million for the three months ended March 31, 2010, compared to net income attributable to ICE of $72.2 million in the same period in 2009.

 

   

Our consolidated cash flows from operations increased by 50% to $101.6 million for the three months ended March 31, 2010, compared to the same period in 2009.

 

   

During the three months ended March 31, 2010, 78.7 million contracts were traded in our futures markets, up 26% from 62.6 million contracts traded during the three months ended March 31, 2009. During the three months ended March 31, 2010, 79.0 million contract equivalents were traded in our OTC energy markets, up 63% from 48.5 million contract equivalents traded during the three months ended March 31, 2009.

Regulatory Update

We are primarily subject to the jurisdiction of regulatory agencies in the United States, the United Kingdom and Canada. In the United States, the Obama administration and Congress have introduced several financial reform proposals to further regulate or modify existing regulations in the U.S. derivatives markets. While individual proposals vary significantly, a common component of many of these proposals is a broad mandate that OTC derivatives be cleared and/or exchange traded, which could be beneficial to us. However, structural changes to the

 

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current derivatives markets and/or restrictions on participation in such markets by segments of the U.S. financial industry could also have negative consequences for our business, such as decreased trading volumes, decreased liquidity in regulated markets and/or encouraging business to move overseas to non-U.S. exchanges and clearing houses. Furthermore, legislation passed by the House of Representatives, the Senate Banking Committee and the Senate Agriculture Committee requires open access to clearing houses for swap execution platforms and/or fungible clearing. Currently, futures execution and clearing are vertically integrated, which means that to close out a position established in a clearing house, a market participant must execute an offsetting transaction on the related exchange or execution platform. The open access provisions of these proposed bills would require OTC clearing houses to allow access to other OTC platforms to clear swaps transactions and treat swaps executed on qualifying execution platforms as fungible within the clearing house. If enacted, these provisions could result in negative consequences for our business by diminishing the revenues that we realize from the execution of swaps transactions. In addition, the Department of Justice, or DOJ, Antitrust Division and the European Commission Competition Directorate are examining the credit derivatives industry and the role of various market participants, including data providers and central counterparties, in the CDS market. Currently, we are a market leader in clearing CDS transactions and any actions by either the DOJ or the European Commission to significantly alter market structure could impair our leadership position in this area or diminish revenues from our CDS business.

Earlier this year, the Obama administration proposed banning investment banks from trading for their own accounts. In addition, in a legislative proposal introduced by the Senate Agriculture Committee, investment banks would be required to divest their proprietary trading desks in order to access the discount window. This provision could hurt liquidity in the derivatives markets and diminish trading on our exchanges.

The Commodity Futures Trading Commission, or CFTC, is also undertaking a review of position limits that apply to the energy futures markets and to contracts that serve as significant price discovery contracts. Implementation of the proposed position limit regime may adversely impact market liquidity and trading volumes, including on ICE Futures Europe and in our OTC energy markets. Following a hearing in July 2009, the CFTC issued in January 2010, a notice of proposed rulemaking for federal speculative limits on energy contracts. Traditionally, for energy commodity contracts traded in the United States, exchanges have held the authority to set position limits (“hard” limits that apply only in the final days of trading of the expiration month) as well as position accountability levels (“soft” levels that apply in all other months and which may be exceeded) with a goal of preventing market manipulation such as corners (securing control of an underlying commodity to control the price of the commodity) and delivery squeezes (a situation where the lack of commodity supply forces holders of short positions to cover their positions at higher prices). Under the CFTC’s new proposal, position limits would be used not just in the delivery month but across “all months” in the manner that they are presently set for agricultural commodities, and with a view to preventing “excessive speculation” in energy markets. The “all month” and “single month” position limits in the proposal would be placed on an aggregate basis across all exchanges trading economically fungible contracts (i.e., a trader could only hold a certain number of contracts across all exchanges). The all months position limit would be set at 10% of open interest across all exchanges for the first 25,000 contracts plus 2.5% of open interest above 25,000 contracts. The single month position limit would be two-thirds of the all months limit. As stated above, exchanges typically have not set position limits in energy markets on contract months other than the spot month; therefore, these limits, if adopted, could impact trading in the out months. In addition traders would be subject to an exchange specific concentration limit whereby they cannot exceed 30% of the exchange’s all months open interest in all months or 20% of the exchange’s all months open interest in any single month. A concentration limit, if adopted, could bias activity toward larger incumbent exchanges, as large traders would not be able to carry as large a position on a competing exchange with less open interest, and could reduce liquidity in certain contracts on smaller exchanges. Also, the CFTC proposes a more limited approach to hedge exemptions. For example, a commercial firm with a hedge exemption from an aggregate limit would be precluded from holding a speculative position outside of the spot month. Similarly, a bank that seeks a swaps dealer risk management exemption would not be able to hold a speculative position outside of the spot month. The CFTC has established a public comment period with respect to these revisions. We and other market participants have submitted comment letters raising issues with the proposed rules. Any of these provisions, if adopted, could reduce trading activity on our markets.

In addition, in legislation proposed by the U.S. House of Representatives, foreign boards of trade, including ICE Futures Europe, could be required to adopt new position limits which would be set according to the relative size of the exchange against a U.S. exchange for linked products. If enacted into law, such a provision could require ICE

 

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Futures Europe to have lower position limits than competing exchanges against which certain of its contracts settle. These provisions are not a part of any legislation proposed in the Senate.

Pursuant to provisions that were adopted in last year’s Farm Bill, the CFTC notified us of its intention to review 36 OTC power, oil and natural gas contracts to determine whether they serve as significant price discovery contracts. A hearing on a portion of these contracts was held on April 27, 2010. The CFTC determined that seven natural gas contracts (Houston Ship Channel, Chicago Citygate, Southern California or Socal, Northwest Rockies, Waha, PGE Citygate, and AECO basis swaps) serve a significant price discovery function. We will be required to implement futures-style regulation on these contracts, including position limits. In addition, we will be required to publicly disclose trading data for these contracts, which could adversely impact the data revenues that we currently realize from these contracts. In the legislation passed by the House of Representatives, the CFTC would be able to set aggregate position limits on any contract that serves a significant price discovery function. However, in the proposal passed by the Senate Agriculture Committee, the CFTC would be able to set aggregate position limits on any OTC contract, whether it serves a significant price discovery function or not. In addition, we would have to put futures style regulation on any swap listed on our OTC platform. These changes, if adopted, could impact trading activity on our platform.

In the European Union, or EU, The European Union Commission has commenced its financial services legislative program to respond to the financial crisis. The legislative program will cover both European clearing houses and markets and will consider such matters as the regulation of OTC derivatives; capital requirements; and the regulation of central counterparty clearing houses, or CCPs. The most relevant legislation to our European based businesses comprises:

 

   

Markets in Financial Instruments Directive, or MIFID: MIFID is currently being reviewed in various areas including the regulation of OTC derivatives markets (particularly in respect of transparency and prevention of market abuse).

 

   

A Capital Requirements Directive: The directive would set capital requirements for financial firms.

 

   

European Market Infrastructures Directive: new legislation that could set EU wide regulatory standards for EU CCPs; compel central clearing of certain instruments by EU firms; and give potentially wide ranging powers to a new EU wide regulator.

The EU legislative program is expected to conclude around the end of 2010, and the legislation should then take effect in 2012. Once in place the legislation will apply to all EU clearinghouses and markets, including those in the United Kingdom. This could affect our business if the EU legislative program bans products that we clear or places restrictive actions on trading.

Pending Acquisition

On April 30, 2010, we announced that we have agreed on terms to acquire Climate Exchange plc, or CLE, a leader in the development of traded emissions markets. Under the terms of the acquisition, CLE shareholders will receive 7.50 pounds sterling in cash for each share in CLE, valuing the entire existing issued and to be issued share capital of CLE at £395 million, or $604 million based on the 1.52993 pound sterling to the U.S. dollar foreign currency exchange rate as of April 30, 2010. The transaction consideration will include $220 million that has been drawn from our revolving credit facilities for these purposes and the remainder from our existing cash resources. The $604 million in cash is currently being held in separate escrow accounts and is restricted per U.K law. The transaction is expected to close by the end of July 2010. The transaction is subject to relevant regulatory approvals. We currently own a 4.8% stake in CLE which we purchased in June 2009 for 6.45 pounds sterling a share.

We have entered into a foreign currency hedge related to the $604 million consideration to be paid to acquire CLE in order to mitigate the risk of currency fluctuations between the announcement and closing of the acquisition as the cash consideration is currently held in U.S. dollars and it is required to be paid in pounds sterling.

Variability in Quarterly Comparisons

In addition to general economic conditions and conditions in the financial markets, particularly the commodities markets, trading volume is subject to variability due to a number of key factors. These factors include geopolitical events, weather, real and perceived supply and demand imbalances, regulatory considerations, availability of capital, the number of trading days in a period and seasonality. These and other factors could cause our revenues to fluctuate from quarter to quarter. These fluctuations may affect the reliability of quarter to quarter comparisons of our revenues and operating results when, for example, these comparisons are between quarters in different seasons. Inter-seasonal comparisons will not necessarily be indicative of our results for future periods.

Segment Reporting

Our business is currently divided into three segments: our futures segment, our global OTC segment and our market data segment. In our futures markets, we offer trading in standardized derivative contracts on our regulated exchanges. In our OTC markets, which include energy markets and credit derivatives, we offer both electronic trading and voice brokering services. Through our market data segment, we offer a variety of market data services and products for both futures and OTC market participants and observers. For a discussion of these segments and related financial disclosure, refer to Note 10 to our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

 

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Intersegment Fees

Intersegment fees include charges for developing, operating, managing and supporting the platform for electronic trading and clearing in our futures segment. Our global OTC segment provides and supports the platform for electronic trading and clearing in our futures segment. Our futures segment and our global OTC segment provide access to trading data to our market data segment. Our market data segment provides marketing and other promotional services to our global OTC segment. These internal charges are reflected as intersegment revenues and expenses. We determine the intercompany or intersegment fees to be paid by the business segments based on transfer pricing standards and independent documentation. These intersegment fees have no impact on our consolidated operating results. We expect the structure of these intersegment fees to remain unchanged and expect that they will continue to have no impact on our consolidated operating results.

Our Futures Segment

The following table presents selected statement of income data in dollars and as a percentage of revenues for our futures segment:

 

     Three Months Ended March 31,  
     2010    %     2009    %  
     (Dollar amounts in thousands)  

Revenues:

          

Transaction and clearing fees, net:

          

ICE Brent Crude futures(1)

   $ 35,144    27   $ 28,009    27

ICE WTI Crude futures

     11,530    9        12,861    12   

ICE Gas Oil futures(1)

     20,060    15        12,730    12   

Sugar futures and options(2)

     21,341    16        15,823    15   

Cotton futures and options(2)

     4,394    3        2,967    3   

Russell Index futures and options

     7,834    6        7,561    7   

Other futures and options(3)

     22,316    17        18,142    17   

Intersegment fees

     7,684    6        7,652    7   

Other

     2,050    1        17    —     
                          

Total revenues

     132,353    100        105,762    100   
                          

Operating expenses:

          

Selling, general and administrative expenses(4)(5)

     18,333    14        20,855    20   

Intersegment expenses

     13,231    10        10,230    10   

Depreciation and amortization

     8,172    6        9,042    8   
                          

Total operating expenses

     39,736    30        40,127    38   
                          

Operating income

     92,617    70        65,635    62   

Other expense, net

     1,571    1        407    —     

Income tax expense

     25,884    20        20,742    20   
                          

Net income

   $ 65,162    49   $ 44,486    42
                          

 

(1) Revenues in our ICE Brent Crude and ICE Gas Oil futures markets increased due to several factors, including relatively faster economic growth outside of the United States that benefited trading in our global oil markets and storage issues in the competing West Texas Intermediate, or WTI, crude contract which drove more demand for the Brent crude contract. Our gas oil contract gained liquidity due to its increasing role as a key refined products benchmark in Europe and Asia, as well as increased liquidity in the related Brent market.
(2) During the three months ended March 31, 2010, sugar prices rose to 30-year highs, followed by a 40% decline in prices. This price volatility led to increased trading volume in the sugar futures and options contracts. The cotton market has steadily improved since early 2009, during which time cotton volumes were down dramatically from prior periods due to a significant reduction in global exports and in the U.S. production of cotton. Improved credit conditions and increased market liquidity have also caused many traditional hedgers to return to the agricultural markets.
(3) The increase in other futures and options is primarily due to increased trading volumes in our emissions, coal and U.S. Dollar Index futures contracts.
(4) Includes compensation and benefits expenses and professional services expenses.
(5) The financial results for the three months ended March 31, 2009 include $4.1 million in employee termination costs, asset write offs and costs to vacate office space in New York City.

 

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Transaction and clearing fees are presented net of rebates. We recorded rebates in our futures segment of $36.4 million and $23.5 million for the three months ended March 31, 2010 and 2009, respectively. The increase in rebates is due primarily to an increase in the number of participants in the rebate programs offered on various futures and option contracts and from higher contract volume traded under these programs during the period. We offer rebates in certain of our markets primarily to support market liquidity and trading volume by providing qualified participants in those markets a discount to the applicable commission rate. These rebates reduce revenue that would have been generated had full commissions been charged and assuming that the same volume had been generated without the rebate program.

A futures contract is a standardized contract for a fixed quantity of the commodity underlying each contract. The following table presents trading activity in our futures markets by commodity type based on the total number of contracts traded

 

     Three Months Ended    Change  
     March 31,   
     2010    2009   
     (In thousands)       

Number of futures and option contracts traded:

        

ICE Brent Crude futures

   24,451    18,288    34

ICE WTI Crude futures

   11,547    11,523    —     

ICE Gas Oil futures

   12,992    8,160    59   

Sugar futures and options

   10,677    6,954    54   

Cotton futures and options

   1,816    1,235    47   

Russell Index futures and options

   8,778    10,183    (14

Other futures and options

   8,392    6,224    35   
                

Total

   78,653    62,567    26
                

The following table presents our quarter-end open interest for our futures contracts. Open interest is the aggregate number of contracts (long or short) that clearing members hold either for their own account or on behalf of their clients.

 

     As of March 31,    Change  
     2010    2009   
     (In thousands)       

Open interest – futures and option contracts:

        

ICE Brent Crude futures

   938    678    38

ICE WTI Crude futures

   587    514    14   

ICE Gas Oil futures

   521    470    11   

Sugar futures and options

   1,763    1,517    16   

Cotton futures and options

   433    315    37   

Coffee futures and options

   283    288    (2

Cocoa futures and options

   179    160    12   

Russell index futures and options

   406    426    (5

Other futures and options

   1,411    1,019    38   
                

Total

   6,521    5,387    21
                

 

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Our Global OTC Segment

The following table presents selected statement of income data in dollars and as a percentage of revenues for our global OTC segment:

 

     Three Months Ended March 31,  
     2010    %     2009    %  
     (Dollar amounts in thousands)  

Revenues:

          

Transaction and clearing fees, net:

          

North American natural gas(1)

   $ 51,431    33   $ 43,951    34

North American power(1)

     25,044    16        19,586    15   

Credit default swaps(2)

     42,722    27        37,969    29   

Global oil and other(3)

     7,267    5        2,405    2   

Electronic trade confirmation

     1,979    1        1,474    1   

Intersegment fees

     14,774    9        10,777    9   

Market data fees

     11,800    8        12,123    9   

Other

     1,637    1        1,942    1   
                          

Total revenues

     156,654    100        130,227    100   
                          

Operating expenses:

          

Selling, general and administrative expenses(4)

     71,131    46        68,737    53   

Intersegment expenses

     9,939    6        8,527    6   

Depreciation and amortization(5)

     20,003    13        18,226    14   
                          

Total operating expenses

     101,073    65        95,490    73   
                          

Operating income

     55,581    35        34,737    27   

Other expense, net

     5,869    4        4,433    3   

Income tax expense

     22,274    14        11,563    9   
                          

Net income

   $ 27,438    17   $ 18,741    15
                          

 

(1) Revenues in our North American natural gas and power markets increased due to several factors, including increased credit availability to market participants and increased demand for hedging and risk management as market participants became less risk averse as the global financial markets recovered throughout 2009 and into 2010.
(2) CDS revenues increased primarily due to higher CDS clearing fee revenues of $11.5 million during the three months ended March 31, 2010 compared to $1.6 million during the three months ended March 31, 2009 following the formation and launch of North American CDS clearing at ICE Trust in March 2009 and the launch of European CDS clearing at ICE Clear Europe in July 2009. This increase was partially offset by a $5.2 million reduction in CDS trading fee revenues at Creditex primarily due to reduced demand for portfolio hedging combined with fewer credit default events.
(3) The increase in other commodities markets revenues is primarily due to increased trading volumes in our global oil markets, which increased to 14.9 million contracts from 2.8 million contracts during the comparable period in 2009, primarily due to the successful launch of new cleared global oil contracts throughout 2009.
(4) Includes compensation and benefits expenses, professional services expenses and acquisition-related transaction costs.
(5) The increase in depreciation and amortization expenses was primarily driven by depreciation expenses recorded on fixed asset additions during 2009 and the three months ended March 31, 2010.

Transaction and clearing fees are presented net of rebates. We recorded rebates in our global OTC segment of $11.1 million and $3.2 million for the three months ended March 31, 2010 and 2009, respectively. The increase in rebates is due primarily to an increase in the number of participants in the rebate programs offered on various OTC contracts and from higher contract volume traded under these programs during the period. Revenues in our global OTC segment are generated primarily through transaction and clearing fees earned from trades. While we charge a monthly data access fee for access to our electronic platform, we derive a substantial portion of our OTC revenues from transaction fees paid by participants for each trade that they execute or clear based on the underlying commodity volume.

Through ICE Trust, we began clearing North American CDS index contracts in March 2009 and certain North American single-name CDS contracts in December 2009. Through ICE Clear Europe, we began clearing European CDS index contracts in July 2009 and certain European single-name CDS contracts in December 2009. We launched our North American buy-side solution for CDS clearing in December 2009 through ICE Trust and we are currently working closely with European CDS market participants toward the launch of our European buy-side solution during the second quarter of 2010, subject to regulatory approval. During the three months ended March 31, 2010 and 2009, ICE Trust cleared $1.3 trillion and $257 billion, respectively, of CDS notional value. During the three months ended March 31, 2010, ICE Clear Europe cleared $1.1 trillion of CDS notional value.

 

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The following table presents the total volume of the underlying commodity or the total notional value of the underlying CDS traded in our OTC markets:

 

     Three Months Ended       
     March 31,       
     2010    2009    Change  

Total trading volume or notional value - OTC:

        

North American natural gas (in million British thermal units, or MMBtu)

     143,912      108,326    33

North American power (in million megawatt hours)

     1,789      1,419    26   

Global oil (in equivalent million barrels of oil)

     2,545      494    415   

Credit default swaps (notional value in billions of dollars)

   $ 664    $ 728    (9

The following table presents the number of contracts traded in our OTC energy markets:

 

     Three Months Ended       
     March 31,       
     2010    2009    Change  
     (In thousands)       

Number of OTC energy contracts traded:

        

North American natural gas

   57,565    43,335    33

North American power

   6,534    2,380    175   

Global oil and other

   14,916    2,801    433   
                

Total

   79,015    48,516    63
                

As of March 31, 2010, open interest of $579 billion in notional value of CDS were held at ICE Trust and ICE Clear Europe, compared to $30 billion as of March 31, 2009. The following table presents quarter-end open interest for our cleared OTC energy contracts:

 

     As of March 31,    Change  
     2010    2009   
     (In thousands)       

Open interest – cleared OTC energy contracts:

        

North American natural gas

   10,904    8,157    34

North American power

   8,602    1,644    423   

Global oil and other

   1,011    251    303   
                

Total

   20,517    10,052    104
                

Our Market Data Segment

The following table presents selected statement of income data in dollars and as a percentage of revenues for our market data segment:

 

     Three Months Ended March 31,  
     2010    %     2009    %  
     (Dollar amounts in thousands)  

Revenues:

          

Market data fees

   $ 15,053    64   $ 13,991    62

Intersegment fees

     8,331    36        8,439    38   

Other

     18    —          2    —     
                          

Total revenues

     23,402    100        22,432    100   
                          

Operating expenses:

          

Selling, general and administrative expenses(1)

     127    1        859    4   

Intersegment expenses

     7,619    32        8,111    36   

Depreciation and amortization

     39    —          35    —     
                          

Total operating expenses

     7,785    33        9,005    40   
                          

Operating income

     15,617    67        13,427    60   

Other income, net

     360    2        117    1   

Income tax expense

     5,059    22        4,549    20   
                          

Net income

   $ 10,918    47   $ 8,995    41
                          

 

(1) Includes compensation and benefits expenses and professional services expenses.

We earn terminal and license fee revenues that we receive from data vendors through the distribution of real-time and historical futures prices and other futures market data derived from trading in our futures markets. We also earn subscription fee revenues from OTC daily indexes, view only access to the OTC markets and OTC and futures end of day reports. In addition, we provide a service to independently establish market price validation curves whereby participant companies subscribe to receive consensus market valuations.

 

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Key Statistical Information

The following table presents key transaction volume information, as well as other selected operating information:

 

     Three Months Ended  
     March 31,  
     2010     2009  
     (In thousands, except for rate
per contract and percentages)
 

Operating Data:

    

Average Daily Trading and Clearing Revenues:

    

U.K. futures business average daily exchange and clearing revenues

   $ 1,298      $ 1,011   
                

U.S. and Canadian futures business average daily exchange and clearing revenues

     712        564   
                

Global credit default swaps OTC business average daily commission and clearing revenues(1)

     700        626   
                

Bilateral OTC energy average daily commission revenues

     98        70   

Cleared OTC energy average daily commission and clearing revenues

     1,275        1,011   
                

Total OTC energy average daily commission and clearing revenues

     1,373        1,081   
                

Total average daily exchange, OTC commission and clearing revenues

   $ 4,083      $ 3,282   
                

Trading Volume (in contracts):

    

Futures volume

     78,653        62,567   

Futures average daily volume

     1,289        1,005   

OTC energy volume

     79,015        48,516   

OTC energy average daily volume

     1,295        795   

Energy futures rate per contact

   $ 1.53      $ 1.57   

Agricultural commodity futures and options rate per contract

   $ 2.13      $ 2.34   

Financial futures and options rate per contract

   $ 0.92      $ 0.78   

OTC Participants Trading Commission Percentages:

    

Commercial companies (including merchant energy)

     50     49

Banks and financial institutions

     25     24

Liquidity providers

     25     27

Cleared OTC energy volume compared to total OTC energy volume

     97     96

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

Overview

Consolidated net income attributable to ICE increased $29.0 million, or 40%, to $101.2 million for the three months ended March 31, 2010 from $72.2 million for the comparable period in 2009. Net income from our futures segment increased $20.7 million, or 46%, to $65.2 million for the three months ended March 31, 2010 from $44.5 million for the comparable period in 2009. Net income from our global OTC segment increased $8.7 million, or 46%, to $27.4 million from $18.7 million for the comparable period in 2009. Net income from our market data segment increased $1.9 million, or 21%, to $10.9 million from $9.0 million for the comparable period in 2009. Consolidated operating income, as a percentage of consolidated revenues, increased to 58% for the three months ended March 31, 2010 from 49% for the comparable period in 2009. Consolidated net income attributable to ICE, as a percentage of consolidated revenues, increased to 36% for the three months ended March 31, 2010 from 31% for the comparable period in 2009.

Our consolidated revenues increased $50.1 million, or 22%, to $281.6 million for the three months ended March 31, 2010 from $231.6 million for the comparable period in 2009. As discussed below, this increase is primarily due to an increase in the trading volume in the ICE Brent Crude and ICE Gas Oil futures contracts, the sugar and cotton futures and options contracts, the OTC North American natural gas and power contracts and the OTC global oil contracts and an increase in the CDS clearing revenues.

Consolidated operating expenses remained constant at $117.8 million for both the three months ended March 31, 2010 and 2009. Our compensation and benefits expenses increased $3.5 million from the comparable period in 2009 primarily due to a 5% increase in our employee headcount from March 31, 2009 to March 31, 2010, partially offset by $2.9 million in employee termination costs incurred during the three months ended March 31, 2009. Our professional services expenses increased $1.3 million from the comparable period in 2009 primarily due to increased professional services expenses incurred relating to the development and launch of CDS clearing. Our acquisition-

 

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related transaction costs decreased $5.0 million from the comparable period in 2009 primarily due to the $5.6 million in transaction costs incurred related to our acquisition of TCC in March 2009. Our selling, general and administrative expenses decreased $649,000 from the comparable period in 2009 primarily due to $2.4 million in costs incurred to vacate office space in New York City during the three months ended March 31, 2009, partially offset by a $1.6 million increase in technology hosting expenses compared to the prior period that resulted from the growth of our trade execution and clearing businesses. Our depreciation and amortization expenses increased $911,000 from the comparable period in 2009 primarily due to depreciation expenses recorded on fixed asset additions.

Revenues

Transaction and Clearing Fees

Consolidated transaction and clearing fees increased $47.6 million, or 23%, to $251.1 million for the three months ended March 31, 2010 from $203.5 million for the comparable period in 2009. Transaction and clearing fees, as a percentage of consolidated revenues, increased to 89% for the three months ended March 31, 2010 from 88% for the comparable period in 2009.

Transaction and clearing fees generated in our futures segment increased $24.5 million, or 25%, to $122.6 million for the three months ended March 31, 2010 from $98.1 million for the comparable period in 2009, while increasing as a percentage of consolidated revenues to 44% for the three months ended March 31, 2010 from 42% for the comparable period in 2009. The increase in transaction and clearing fees was primarily due to the increase in the trading volumes in the ICE Brent Crude and ICE Gas Oil futures contracts and an increase in the agricultural commodities volumes, particularly sugar and cotton futures and options contracts. Volume in the Brent crude and gas oil markets increased due to several factors, including relatively faster economic growth outside of the United States that benefited trading in our global oil markets and storage issues in the competing WTI crude contract which drove more demand for the Brent crude contract. Our gas oil contract gained liquidity due to its increasing role as a key refined products benchmark in Europe and Asia, as well as increased liquidity in the related Brent market. During the three months ended March 31, 2010, sugar prices rose to 30-year highs, followed by a 40% price decline due to growing conditions and supply and demand forecasts. This price volatility led to increased trading volume in the sugar futures and options contracts. The cotton market has steadily improved since early 2009, during which time cotton volumes were down dramatically from prior periods due to a significant reduction in global exports and in the U.S. production of cotton. Improved credit conditions and increased market liquidity have also caused many traditional hedgers to return to the agricultural markets. For the three months ended March 31, 2010, volume in our futures segment were 78.7 million contracts, an increase of 26% from 62.6 million contracts during the comparable period in 2009. Average transaction and clearing fees per trading day increased 28% to $2.0 million per trading day for the three months ended March 31, 2010 from $1.6 million per trading day for the comparable period in 2009.

Transaction and clearing fees generated in our global OTC segment increased $23.1 million, or 22%, to $128.4 million for the three months ended March 31, 2010 from $105.4 million for the comparable period in 2009 primarily due to an increase in the trading volume of the North American natural gas and power contracts and the global oil contracts, as well as an increase in the CDS clearing revenues. Contract volume in our North American natural gas markets increased 33% to 57.6 million contracts traded during the three months ended March 31, 2010 from 43.3 million contracts traded during the comparable period in 2009 and contract volume in our North American power markets increased 175% to 6.5 million contracts from 2.4 million contracts traded during the comparable period in 2009. Volume in our North American natural gas and power markets increased due to several factors, including increased credit availability to market participants and increased demand for hedging and risk management as market participants became less risk averse as the global financial markets recovered throughout 2009 and into 2010. Volume in our global oil markets increased to 14.9 million contracts during the three months ended March 31, 2010 from 2.8 million contracts during the comparable period in 2009, primarily due to the successful launch of new cleared global oil contracts throughout 2009 following the launch of ICE Clear Europe in November 2008. CDS clearing revenues increased from $1.6 million during the three months ended March 31, 2009 to $11.5 million during the three months ended March 31, 2010, following the formation and launch of North American CDS clearing at ICE Trust in March 2009 and the launch of CDS clearing at ICE Clear Europe in July 2009. CDS execution revenues decreased from $36.4 million during the three months ended March 31, 2009 to $31.2 million during the three months ended March 31, 2010

 

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primarily due to reduced demand for portfolio hedging combined with fewer credit default events. Transaction and clearing fees in this segment, as a percentage of consolidated revenues, was 46% for both the three months ended March 31, 2010 and 2009. Average transaction and clearing fees per trading day increased 21% to $2.1 million per trading day for the three months ended March 31, 2010 from $1.7 million per trading day for the comparable period in 2009.

Market Data Fees

Consolidated market data fees increased $739,000, or 3%, to $26.9 million for the three months ended March 31, 2010 from $26.1 million for the comparable period in 2009. During both the three months ended March 31, 2010 and 2009, we recognized $12.6 million in data access fees and terminal fees in our global OTC and futures segments. During the three months ended March 31, 2010 and 2009, we recognized $11.6 million and $11.1 million, respectively, in terminal and license fees from data vendors in our market data segment. Consolidated market data fees, as a percentage of consolidated revenues, decreased to 10% for the three months ended March 31, 2010 from 11% for the comparable period in 2009.

Other Revenues

Consolidated other revenues increased $1.7 million, or 89%, to $3.7 million for the three months ended March 31, 2010 from $2.0 million for the comparable period in 2009. The increase in other revenues is primarily due to an increase in cotton certification fees associated with increased cotton volume during the current quarter. Consolidated other revenues, as a percentage of consolidated revenues, was 1% for both the three months ended March 31, 2010 and 2009.

Operating Expenses

Compensation and Benefits

Consolidated compensation and benefits expenses increased $3.5 million, or 6%, to $58.2 million for the three months ended March 31, 2010 from $54.7 million for the comparable period in 2009. This increase was primarily due to an increase in employee headcount, a $2.1 million increase in non-cash compensation expenses and $270,000 in employee termination costs recognized during the three months ended March 31, 2010, partially offset by $2.9 million in employee termination costs recognized during the same period in 2009. Our employee headcount increased from 803 employees as of March 31, 2009 to 843 employees as of March 31, 2010, an increase of 5%, primarily due to the hiring of additional clearing, technology and compliance employees. Non-cash compensation expenses recognized in our consolidated financial statements for employee stock options and restricted stock were $11.9 million and $9.8 million for the three months ended March 31, 2010 and 2009, respectively. The increase was primarily due to a greater number of employees receiving non-cash awards and due to true-up accruals relating to our estimate of the forfeiture rates on the non-cash awards. Consolidated compensation and benefits expenses, as a percentage of consolidated revenues, decreased to 21% for the three months ended March 31, 2010 from 24% for the comparable period in 2009.

Professional Services

Consolidated professional services expenses increased $1.3 million, or 18%, to $8.5 million for the three months ended March 31, 2010 from $7.2 million for the comparable period in 2009. This increase was primarily due to $3.6 million in professional services expenses incurred during the three months ended March 31, 2010 relating to the continued development of CDS clearing at ICE Trust and ICE Clear Europe, compared to $1.4 million in professional services expenses incurred during the same period in 2009 relating to the establishment of ICE Trust. Consolidated professional services expenses, as a percentage of consolidated revenues, was 3% for both the three months ended March 31, 2010 and 2009.

Acquisition-Related Transaction Costs

Acquisition-related transaction costs were $545,000 for the three months ended March 31, 2010 compared to $5.6 million for the three months ended March 31, 2009. During the three months ended March 31, 2010, we incurred legal and accounting fee transaction costs as we continue to explore and pursue acquisitions and other

 

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strategic opportunities to strengthen our competitive position and support our growth. During the three months ended March 31, 2009, we expensed $5.6 million in transaction costs directly relating to the acquisition of TCC. Consolidated acquisition-related transaction costs, as a percentage of consolidated revenues, was negligible for the three months ended March 31, 2010 and 2% for the three months ended March 31, 2009.

Selling, General and Administrative

Consolidated selling, general and administrative expenses decreased $649,000, or 3%, to $22.3 million for the three months ended March 31, 2010 from $22.9 million for the comparable period in 2009. This decrease was primarily due to $2.4 million in costs incurred to vacate office space in New York City during the three months ended March 31, 2009, partially offset by a $1.6 million increase in technology hosting expenses compared to the prior period that resulted from the growth of our trade execution and clearing businesses. Consolidated selling, general and administrative expenses, as a percentage of consolidated revenues, decreased to 8% for the three months ended March 31, 2010 from 10% for the comparable period in 2009.

Depreciation and Amortization

Consolidated depreciation and amortization expenses increased $911,000, or 3%, to $28.2 million for the three months ended March 31, 2010 from $27.3 million for the comparable period in 2009. This increase was primarily due to depreciation expenses recorded on fixed asset additions incurred during 2009 and during the three months ended March 31, 2010. We recorded depreciation expenses on our fixed assets of $12.3 million and $11.1 million for the three months ended March 31, 2010 and 2009, respectively. Consolidated depreciation and amortization expenses, as a percentage of consolidated revenues, decreased to 10% for the three months ended March 31, 2010 from 12% for the comparable period in 2009.

Other Income (Expense)

Consolidated other expense increased from $4.7 million for the three months ended March 31, 2009 to $7.1 million for the three months ended March 31, 2010. This increase primarily related to an increase in interest expense from $5.3 million for the three months ended March 31, 2009 to $7.1 million for the three months ended March 31, 2010 and an increase in the foreign currency transaction losses from $79,000 for the three months ended March 31, 2009 to $696,000 for the three months ended March 31, 2010. Interest expense increased primarily due to an increase in the weighted average interest rates on the outstanding term loans from 3.36% for the three months ended March 31, 2009 to 4.32% for the three months ended March 31, 2010 and a $873,000 increase in the amortization of the debt issuance costs in connection with the new credit facilities, partially offset by a reduction in the outstanding principal amounts of the term loans during the current period due to scheduled repayments over the last year.

Income Taxes

Consolidated income tax expense increased $16.4 million to $53.2 million for the three months ended March 31, 2010 from $36.9 million for the comparable period in 2009, primarily due to the increase in our pre-tax income. Our effective tax rate was 34% for both the three months ended March 31, 2010 and 2009.

Net Income Attributable to Noncontrolling Interest

For those consolidated subsidiaries in which our ownership is less than 100%, and for which we have control over the assets, liabilities and management of the entity, the outside stockholders’ interests are shown as noncontrolling interests. Noncontrolling interest relates to our ICE Trust subsidiary in which limited partners hold a 50% net profit sharing interest, and our QW Holdings subsidiary in which we own 50.1%. Net income attributable to noncontrolling interest was $2.4 million for the three months ended March 31, 2010. There was no net income attributable to noncontrolling interest for the three months ended March 31, 2009 as the amount attributable to ICE Trust and QW Holdings was not material for separate disclosure.

Quarterly Results of Operations

The following table sets forth quarterly unaudited consolidated statements of income data. We believe that this data has been prepared on substantially the same basis as our audited consolidated financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of our consolidated results of operations for the quarters presented. The historical results for any quarter do not necessarily indicate the results expected for any future period.

 

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     Three Months Ended,  
     March 31,
2010
    December 31,
2009
   September 30,
2009
    June 30,
2009
    March 31,
2009
 
     (In thousands)  

Revenues:

           

Transaction and clearing fees, net:

           

Futures:

           

ICE Brent Crude futures

   $ 35,144      $ 28,813    $ 28,265      $ 25,717      $ 28,009   

ICE WTI Crude futures

     11,530        12,524      12,654        11,251        12,861   

ICE Gas Oil futures

     20,060        15,047      14,657        13,213        12,730   

Sugar futures and options

     21,341        13,594      19,581        22,974        15,823   

Cotton futures and options

     4,394        3,882      2,312        3,763        2,967   

Russell Index futures and options

     7,834        7,508      8,141        8,043        7,561   

Other futures products and options

     22,316        21,009      18,232        20,648        18,142   

OTC:

           

North American natural gas

     51,431        49,706      48,602        44,551        43,951   

North American power

     25,044        28,326      25,605        21,760        19,586   

Credit default swaps

     42,722        39,408      43,220        44,548        37,969   

Global oil and other

     7,267        7,575      5,896        4,853        2,405   

Electronic trade confirmation services

     1,979        1,780      1,703        1,634        1,474   

Market data fees

     26,853        25,194      24,891        25,485        26,114   

Other

     3,705        2,188      2,505        1,977        1,961   
                                       

Total revenues

     281,620        256,554      256,264        250,417        231,553   
                                       

Operating expenses:

           

Compensation and benefits(1)

     58,240        69,446      55,928        55,597        54,706   

Professional services

     8,549        9,649      9,866        8,813        7,229   

Acquisition-related transaction costs(2)

     545        —        —          529        5,610   

Selling, general and administrative

     22,257        24,982      22,613        22,938        22,906   

Depreciation and amortization

     28,214        28,607      27,868        27,579        27,303   
                                       

Total operating expenses

     117,805        132,684      116,275        115,456        117,754   
                                       

Operating income

     163,815        123,870      139,989        134,961        113,799   

Other income (expense), net(3)

     (7,080     5,531      (2,583     (17,139     (4,723

Income tax expense

     53,217        46,409      50,524        45,764        36,854   
                                       

Net income

   $ 103,518      $ 82,992    $ 86,882      $ 72,058      $ 72,222   
                                       

Net (income) loss attributable to noncontrolling interest

     (2,355     1,262      572        —          —     
                                       

Net income attributable to ICE

   $ 101,163      $ 84,254    $ 87,454      $ 72,058      $ 72,222   
                                       

 

(1) The financial results for the three months ended December 31, 2009 include $3.9 million in employee termination costs and other increases in compensation and benefits expenses based on our performance during the fourth quarter of 2009. Our performance during the historically seasonally weak fourth quarter of 2009 was much stronger than anticipated, resulting in increased bonus accruals and non-cash compensation expenses to reflect a true-up for our outperformance in 2009 versus our financial targets.
(2) We incurred incremental direct acquisition-related transaction costs of $5.6 million and $529,000 during the three months ended March 31, 2009 and June 30, 2009, respectively, related to the acquisition of TCC on March 6, 2009. We incurred $545,000 in acquisition-related transaction costs during the three months ended March 31, 2010 for various other potential acquisitions.
(3) The financial results for the three months ended December 31, 2009 include a net gain of $11.1 million relating to the sale of our LCH.Clearnet shares, partially offset by adjustments to various cost method investments. The financial results for the three months ended June 30, 2009 include an impairment loss on our investment in the National Commodity and Derivatives Exchange, Ltd of $9.3 million.

Liquidity and Capital Resources

Since our inception, we have financed our operations, growth and cash needs primarily through income from operations and borrowings under our credit facilities. Our principal capital requirements have been to fund capital expenditures, working capital, strategic acquisitions and investments, stock repurchases and the development of our electronic trading and clearing platforms. We believe that our cash on hand and cash flows from operations will be sufficient to repay our outstanding indebtedness as it matures. In the future, we may need to incur additional debt or issue additional equity in connection with strategic acquisitions or investments. See also “— Future Capital Requirements” below.

 

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We had consolidated cash and cash equivalents of $612.3 million and $552.5 million as of March 31, 2010 and December 31, 2009, respectively. We had $19.3 million and $25.5 million in short-term and long-term investments as of March 31, 2010 and December 31, 2009, respectively, and $204.7 million and $205.8 million in short-term and long-term restricted cash as of March 31, 2010 and December 31, 2009, respectively. We consider all short-term, highly liquid investments with remaining maturity dates of three months or less at the time of purchase to be cash equivalents. We classify all investments with original maturity dates in excess of three months and with maturities less than one year as short-term investments and all investments that we intend to hold for more than one year as long-term investments. Cash that is not available for general use, either due to regulatory requirements or through restrictions in specific agreements, is classified as restricted cash.

In February 2010, our board of directors authorized us to repurchase up to $300.0 million in our common stock. To date, we have not made any repurchases. We expect to fund any share repurchases with a combination of cash on hand, future cash flows and borrowing under our credit facilities. The timing and extent of the repurchases, if any, will depend upon market conditions, our stock price and our strategic plans at that time.

Cash Flow

The following tables present, for the periods indicated, the major components of net increases (decreases) in cash and cash equivalents:

 

     Three Months Ended  
     March 31,  
     2010     2009  
     (In thousands)  

Net cash provided by (used in):

    

Operating activities

   $ 101,560      $ 67,720   

Investing activities

     (11,302     (105,615

Financing activities

     (29,660     (15,064

Effect of exchange rate changes

     (769     (967
                

Net increase (decrease) in cash and cash equivalents

   $ 59,829      $ (53,926
                

Operating Activities

Consolidated net cash provided by operating activities was $101.6 million and $67.7 million for the three months ended March 31, 2010 and 2009, respectively. Net cash provided by operating activities primarily consists of net income adjusted for certain non-cash items, including depreciation and amortization and the effects of changes in working capital. Fluctuations in net cash provided by operating activities are primarily attributable to increases and decreases in our net income between periods and, to a lesser extent, due to fluctuations in working capital. The $33.8 million increase in net cash provided by operating activities for the three months ended March 31, 2010 from the comparable period in 2009 is primarily due to the $20.7 million increase in the futures segment’s net income for the three months ended March 31, 2010 from the comparable period in 2009 and the $8.7 million increase in the global OTC segment’s net income for the three months ended March 31, 2010 from the comparable period in 2009.

Investing Activities

Consolidated net cash used in investing activities was $11.3 million and $105.6 million for the three months ended March 31, 2010 and 2009, respectively. Consolidated net cash used in investing activities for the three months ended March 31, 2010 and 2009 primarily relates to cash paid for acquisitions, changes in the restricted cash balances, capital expenditures in each period for software, including internally developed software, and for computer and network equipment. We paid out cash for acquisitions, net of cash acquired, of $39.8 million for the three months ended March 31, 2009. We had a net increase in restricted cash of $555,000 and $61.2 million for the three months ended March 31, 2010 and 2009, respectively, with the 2009 increase primarily relating to the acquisition of TCC and the formation of ICE Trust and their associated regulatory requirements. We incurred capitalized software development costs of $5.9 million and $4.2 million for the three months ended March 31, 2010 and 2009, respectively, and we had additional capital expenditures of $4.9 million and $3.7 million for the three months ended March 31, 2010 and 2009, respectively. The additional capital expenditures primarily relate to hardware purchases to continue the development and expansion of our electronic platforms and clearing houses.

 

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Financing Activities

Consolidated net cash used in financing activities was $29.7 million and $15.1 million for the three months ended March 31, 2010 and 2009, respectively. Consolidated net cash used in financing activities for the three months ended March 31, 2010 primarily relates to $22.5 million in repayments under the credit facilities, $7.5 million in issuance costs for the new revolving credit facilities and $7.2 million in cash payments related to treasury shares received for restricted stock and stock option tax payments, partially offset by $7.0 million in proceeds from the exercise of common stock options. Consolidated net cash used in financing activities for the three months ended March 31, 2009 primarily relates to $9.4 million in repayments under the credit facilities and $7.3 million in cash payments related to treasury shares received for restricted stock and stock option tax payments, partially offset by $2.2 million in excess tax benefits from stock-based compensation.

Loan Agreements

On March 31, 2010, we entered into new aggregate $725.0 million three-year senior unsecured revolving credit facilities, or the New Revolving Credit Facilities. The New Revolving Credit Facilities consist of (i) an aggregate $575.0 million unsecured revolving dollar credit facility, pursuant to which we may borrow, repay and reborrow up to $575.0 million in U.S. dollars, and (ii) an aggregate $150.0 million unsecured revolving multicurrency credit facility, pursuant to which we may borrow, repay and reborrow up to the equivalent of $150.0 million in either U.S. dollars, euros or pounds sterling, at our option. No amounts were borrowed under the New Revolving Credit Facilities as of the closing of the facilities. The New Revolving Credit Facilities mature on March 31, 2013.

In connection with entering into the New Revolving Credit Facilities, on March 31, 2010, we terminated our existing revolving credit facilities that provided for a $300.0 million 364-day senior unsecured revolving credit facility, which was scheduled to expire on April 9, 2010, and a $100.0 million senior unsecured revolving credit facility, which was scheduled to expire on April 9, 2012. Two term loan facilities, under which $285.0 million in aggregate is outstanding as of March 31, 2010, are still outstanding.

Of the $725.0 million available under the New Revolving Credit Facilities, (i) up to $150.0 million of such amount has been reserved to provide liquidity for the clearing operations of ICE Clear Europe, (ii) up to $100.0 million of such amount has been reserved to provide liquidity for the clearing operations of ICE Trust, and (iii) up to $50.0 million of such amount has been reserved to provide liquidity for the clearing operations of ICE Clear U.S., (iv) up to $3.0 million of such amount has been reserved to provide liquidity for certain of the clearing operations of ICE Clear Canada, and (v) the remaining balance may be used by us for working capital and general corporate purposes.

With limited exceptions, we may prepay any outstanding loans under the New Revolving Credit Facilities and the two term loans outstanding, in whole or in part, without premium or penalty. The credit facilities contain affirmative and negative covenants, including, but not limited to, leverage and interest coverage ratios, as well as limitations or required notices or approvals for acquisitions, dispositions of assets and certain investments in subsidiaries, the incurrence of additional debt or the creation of liens and other fundamental changes to the our business. We have been and are currently in compliance with all applicable covenants.

We have entered into interest rate swap contracts to reduce our exposure to interest rate volatility related to our outstanding debt, which are effective from December 31, 2009 through the maturity dates of our term loan facilities.

Future Capital Requirements

Our future capital requirements will depend on many factors, including the rate of our trading and clearing volume growth, strategic plans and acquisitions, required technology initiatives, regulatory requirements, the timing and introduction of new products and enhancements to existing products, and the continuing market acceptance of our electronic platform. We currently expect to make aggregate capital expenditures ranging between $25 million and $30 million for the year ended December 31, 2010, which we believe will support the enhancement of our technology and the continued expansion of our futures, OTC and market data businesses. We are obligated to contribute $100.0 million in the aggregate to the ICE Trust guaranty fund and the ICE Clear Europe CDS guaranty fund over a two-year period and have already contributed $10.0 million to the ICE Trust guaranty fund and $10.0 million to the ICE Clear Europe CDS guaranty fund as of March 31, 2010. We must use the profits from the CDS clearing business that are distributed to us to fund the remaining $80.0 million, and if such profits are not sufficient to fund the remaining $80.0 million obligation, we are obligated to make up any shortfall and expect to use our cash

 

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on hand or borrow funds under our credit facilities to do so. We believe that our cash flows from operations will be sufficient to fund our working capital needs and capital expenditure requirements at least through the end of 2011. We expect our capitalized software development costs to remain relatively consistent with our 2009 capitalized software development costs.

After factoring in the $303.0 million reserved for ICE Clear Europe, ICE Trust, ICE Clear U.S. and ICE Clear Canada, we currently have $422.0 million under the New Revolving Credit Facilities available for general corporate purposes. The New Revolving Credit Facilities are currently the only significant agreements or arrangements that we have with third parties to provide us with sources of liquidity and capital resources. In the event of any strategic acquisitions or investments, or if we are required to raise capital for any reason, we may need to incur additional debt or issue additional equity to raise the necessary funds. However, we cannot provide assurance that such financing will be available or that the terms of such financing will be favorable to us, particularly given prevailing economic conditions and uncertainty in the credit markets.

Contractual Obligations and Commercial Commitments

As discussed above, we entered into the New Revolving Credit Facilities during the three months ended March 31, 2010 and no amounts have been borrowed as of March 31, 2010. In the first quarter of 2010, there were no significant changes to our contractual obligations and commercial commitments from those disclosed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10- K for the year ended December 31, 2009, or our 2009 Form 10-K.

Off-Balance Sheet Arrangements

We currently do not have any relationships to unconsolidated entities or financial partnerships that have been established for the sole purpose of facilitating off-balance sheet arrangements or other contractually limited purpose.

New and Recently Adopted Accounting Pronouncements

Refer to Note 2 to our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q for information on the new and recently adopted accounting pronouncements that are applicable to us.

Critical Accounting Policies and Estimates

In the first quarter of 2010, there were no significant changes to our critical accounting policies and estimates from those disclosed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2009 Form 10-K.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk in the ordinary course of business. This market risk consists primarily of interest rate risk associated with our cash and cash equivalents, short-term and long-term investments, short-term and long-term restricted cash, current and long-term indebtedness and foreign currency exchange rate risk.

Interest Rate Risk

We have exposure to market risk for changes in interest rates relating to our cash and cash equivalents, short-term and long-term investments, short-term and long-term restricted cash and indebtedness. As of March 31, 2010 and December 31, 2009, our cash and cash equivalents, short-term and long-term investments and short-term and long-term restricted cash were $836.2 million and $783.8 million, respectively, of which $83.3 million and $80.4 million, respectively, were denominated in pounds sterling, euros or Canadian dollars. The remaining investments are denominated in U.S. dollars. We do not use our investment portfolio for trading or other speculative purposes. A hypothetical 100 basis point decrease in long-term interest rates would decrease annual pre-tax earnings by $8.4 million, assuming no change in the amount or composition of our cash and cash equivalents, short-term and long-term investments and short-term and long-term restricted cash.

 

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As of March 31, 2010, we had $285.0 million in outstanding indebtedness, which bears interest at fluctuating rates based on LIBOR and, therefore, subjects us to interest rate risk. A hypothetical 100 basis point increase in long-term interest rates would decrease annual pre-tax earnings by $2.8 million, assuming no change in the volume or composition of our outstanding indebtedness. The interest rates on our outstanding debt are currently reset on a monthly basis. We entered into interest rate swap contracts to reduce our exposure to interest rate volatility related to our debt, which are effective from December 31, 2009 through the maturity dates of our term loan facilities. These contracts fix the interest rate at 4.26% on the $125.0 million term loan facility that is outstanding as of March 31, 2010, and at 4.36% on the $160.0 million term loan facility that is outstanding as of March 31, 2010.

Foreign Currency Exchange Rate Risk

Revenues in our businesses are denominated in U.S. dollars, except with respect to a portion of the sales through Creditex and ICE Clear Europe, all sales through ICE Futures Canada and a small number of futures contracts at ICE Futures Europe. We may experience gains or losses from foreign currency transactions in the future given that there are still net assets or net liabilities and revenues and expenses of our U.S., U.K. and Canadian subsidiaries that are denominated in pounds sterling, euros or Canadian dollars. Our U.K. operations in some instances function as a natural hedge because we generally hold an equal amount of monetary assets and liabilities that are denominated in pounds sterling. Of our consolidated revenues, 9% and 14% were denominated in pounds sterling, euros or Canadian dollars for the three months ended March 31, 2010 and 2009, respectively. Of our consolidated operating expenses, 22% and 34% were denominated in pounds sterling or Canadian dollars for the three months ended March 31, 2010 and 2009, respectively. As the pound sterling, euro or Canadian dollar exchange rate changes, the U.S. equivalent of revenues and expenses denominated in foreign currencies changes accordingly. A 10% adverse change in the underlying foreign currency exchange rates would decrease annual pre-tax earnings by $1.6 million, assuming no change in the composition of the foreign currency denominated assets, liabilities and payables.

We have foreign currency transaction risk related to the settlement of foreign currency denominated assets, liabilities and payables that occur through our operations, which are received in or paid in pounds sterling or euros, due to the increase or decrease in the foreign currency exchange rates between periods. We had foreign currency transaction losses of $696,000 and $79,000 for the three months ended March 31, 2010 and 2009, respectively, primarily attributable to the fluctuations of the pound sterling and euro relative to the U.S. dollar. We have entered into hedging transactions to hedge a portion of this exposure and may enter into additional hedging transactions in the future to help mitigate our foreign exchange risk exposure. The average exchange rate of the pound sterling to the U.S. dollar increased from 1.4351 for the three months ended March 31, 2009 to 1.5612 for the three months ended March 31, 2010. The average exchange rate of the euro to the U.S. dollar increased from 1.3030 for the three months ended March 31, 2009 to 1.3842 for the three months ended March 31, 2010.

We have foreign currency translation risk equal to our net investment in certain Canadian and U.K. subsidiaries. The revenues, expenses and financial results of these Canadian and U.K. subsidiaries are denominated in Canadian dollars or pounds sterling, which are the functional currencies of these subsidiaries. The financial statements of these subsidiaries are translated into U.S. dollars using a current rate of exchange, with gains or losses included in the cumulative translation adjustment account, a component of equity. As of March 31, 2010, the portion of our equity attributable to accumulated other comprehensive income from foreign currency translation was $30.0 million. The period-end foreign currency exchange rate for the Canadian dollar to the U.S. dollar increased from 0.9559 as of December 31, 2009 to 0.9848 as of March 31, 2010. The period-end foreign currency exchange rate for the pound sterling to the U.S. dollar decreased from 1.6167 as of December 31, 2009 to 1.5148 as of March 31, 2010. The period-end foreign currency exchange rate for the euro to the U.S. dollar decreased from 1.4332 as of December 31, 2009 to 1.3479 as of March 31, 2010.

Impact of Inflation

We have not been adversely affected by inflation as technological advances and competition have generally caused prices for the hardware and software that we use for our electronic platforms to remain constant or to decline. In the event of inflation, we believe that we will be able to pass on any price increases to our participants, as the prices that we charge are not governed by long-term contracts.

 

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Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective as of the end of the period covered by this report.

(b) Changes in internal controls. There were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. As a result, no corrective actions were taken.

Part II. Other Information

 

Item 1. Legal Proceedings

We are involved in certain legal proceedings in connection with the operation of our business. We believe, based on currently available information, that the results of such proceedings, individually or in the aggregate, will not have a material adverse effect on our financial condition.

 

Item 1A. Risk Factors

In the first quarter of 2010, there were no significant changes to our risk factors from those disclosed in Part I, Item 1A, “Risk Factors” in our 2009 Form 10-K.

 

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

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. [Removed and Reserved]

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

Exhibit

Number

       

Description of Document

10.1       Credit Agreement dated as of March 31, 2010 among IntercontinentalExchange, Inc., Wells Fargo Bank, National Association, as Administrative Agent, Bank of America, N.A., as Syndication Agent, and the lenders named therein for senior unsecured revolving credit facilities in the aggregate principal amount of $725.0 million (incorporated by reference to Exhibit 10.1 to ICE’s Current Report on Form 8-K filed with the SEC on April 2, 2010, File No. 001-32671).
10.2       First Amendment to Amended and Restated Credit Agreement dated as of March 31, 2010, amending that certain Credit Agreement, dated as of January 12, 2007, as amended by the First Amendment to Credit Agreement dated as of August 24, 2007, the Second Amendment to Credit Agreement dated as of June 13, 2008, and as amended and restated by the Amendment and Restatement Agreement, dated as of April 9, 2009, among IntercontinentalExchange, Inc., Wells Fargo Bank, National Association, as Administrative Agent, Bank of America, N.A., as Syndication Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to ICE’s Current Report on Form 8-K filed with the SEC on April 2, 2010, File No. 001-32671).

 

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10.3       First Amendment to Credit Agreement dated as of March 31, 2010, amending that certain Credit Agreement, dated as of April 9, 2009, among IntercontinentalExchange, Inc., Wells Fargo Bank, National Association, as Administrative Agent, Bank of America, N.A., as Syndication Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.3 to ICE’s Current Report on Form 8-K filed with the SEC on April 2, 2010, File No. 001-32671).
31.1       Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2       Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1       Section 1350 Certification of Chief Executive Officer
32.2       Section 1350 Certification of Chief Financial Officer
101       The following materials from IntercontinentalExchange, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Comprehensive Income, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text.*

 

* As provided in Rule 406T of Regulation S-T, this information is “furnished” and not “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 unless IntercontinentalExchange, Inc. specifically incorporates it by reference.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

INTERCONTINENTALEXCHANGE, INC.

(Registrant)

Date: May 5, 2010     By:   /s/ Scott A. Hill
        Scott A. Hill
       

Senior Vice President, Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

 

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