DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Laclede Group

Laclede Gas has a risk management policy to utilize various derivatives, including futures contracts, exchange-traded options, swaps and over-the-counter instruments, for the explicit purpose of managing price risk associated with purchasing and delivering natural gas on a regular basis to customers in accordance with its tariffs. The objective of this policy is to limit the Missouri Utilities' exposure to natural gas price volatility and to manage, hedge and mitigate substantial price risk. This policy strictly prohibits speculation and permits the Missouri Utilities to hedge current physical natural gas purchase commitments or forecasted or anticipated future peak (maximum) physical need for natural gas delivered. Costs and cost reductions, including carrying costs, associated with the Missouri Utilities' use of natural gas derivative instruments are allowed to be passed on to the Missouri Utilities’ customers through the operation of their PGA clauses, through which the MoPSC allows the Missouri Utilities to recover gas supply costs, subject to prudence review by the MoPSC. Accordingly, the Missouri Utilities do not expect any adverse earnings impact as a result of the use of these derivative instruments. In prior years, Alagasco entered into cash flow derivative commodity instruments to hedge its exposure to price fluctuations on its gas supply. Alagasco recognizes all derivatives at fair value as either assets or liabilities on the balance sheet. Any realized gains or losses are passed through to customers using the mechanisms of the GSA rider in accordance with Alagasco’s APSC approved tariff. At September 30, 2015, Alagasco had no open derivative positions. The Utilities do not designate these instruments as hedging instruments for financial reporting purposes because gains or losses associated with the use of these derivative instruments are deferred and recorded as regulatory assets or regulatory liabilities pursuant to ASC Topic 980, “Regulated Operations,” and, as a result, have no direct impact on the statements of income. The timing of the operation of the PGA clause and GSA rider may cause interim variations in short-term cash flows, because the Utilities are subject to cash margin requirements associated with changes in the values of these instruments. Nevertheless, carrying costs associated with such requirements are recovered through the PGA clauses and GSA rider.

From time to time, Laclede Gas purchases NYMEX futures and options contracts to help stabilize operating costs associated with forecasted purchases of gasoline and diesel fuels used to power vehicles and equipment used in the course of its business. At September 30, 2015, Laclede Gas held 1.8 million gallons of gasoline futures contracts at an average price of $1.63 per gallon. Most of these contracts, the longest of which extends to December 2016, are designated as cash flow hedges of forecasted transactions pursuant to ASC Topic 815. The gains or losses on these derivative instruments are not subject to Laclede Gas’ PGA clause.

In the course of its business, Laclede Group’s gas marketing subsidiary, LER, which includes its 100% owned subsidiary LER Storage Services, Inc., enters into commitments associated with the purchase or sale of natural gas. Certain of LER’s derivative natural gas contracts are designated as normal purchases or normal sales and, as such, are excluded from the scope of ASC Topic 815 and are accounted for as executory contracts on an accrual basis. Any of LER’s derivative natural gas contracts that are not designated as normal purchases or normal sales are accounted for at fair value. At September 30, 2015, the fair values of 104.7 million MMBtu of non-exchange traded natural gas commodity contracts were reflected in the Consolidated Balance Sheet. Of these contracts, 88.0 million MMBtu will settle during fiscal year 2016, and 14.9 million MMBtu, 1.7 million MMBtu, and 0.1 million MMBtu will settle during 2017, 2018, and 2019, respectively. These contracts have not been designated as hedges; therefore, changes in the fair value of these contracts are reported in earnings each period.

Furthermore, LER manages the price risk associated with its fixed-priced commitments by either closely matching the offsetting physical purchase or sale of natural gas at fixed prices or through the use of NYMEX or ICE Clear Europe (ICE) futures, swap, and option contracts to lock in margins.

At September 30, 2015, LER’s unmatched fixed-price positions were not material to Laclede Group’s financial position or results of operations. LER’s NYMEX and ICE natural gas futures, swap, and option contracts used to lock in margins may be designated as cash flow hedges of forecasted transactions for financial reporting purposes.

On April 14, 2014, as amended on July 8, 2014, Laclede Group entered into certain interest rate swap agreements, with a notional amount $375.0, to effectively lock in interest rates on a portion of the long-term debt it anticipated issuing to finance its acquisition of Alagasco.

These derivative instruments were designated as cash flow hedges of forecasted transactions. These forward starting swaps involved the payment of a fixed interest rate and the receipt of a floating interest rate (the London Interbank Offered Rate, also known as LIBOR) over the terms specified in the contracts. On August 6, 2014, the interest rate swap agreements were terminated and the settlement resulted in a $19.0 loss by Laclede Group, which assigned the loss as a regulatory asset since the interest rate swaps were entered into to hedge the interest payments on the $625.0 of long-term debt issued on August 19, 2014 by Laclede Group.

During the second quarter of fiscal year 2015, Alagasco entered into certain interest rate swap transactions to protect itself against adverse movement in interest rates in anticipation of its issuance of $115.0 of long-term debt. Alagasco received prior approval from the APSC to enter into these hedges. The notional amount of interest rate swaps outstanding was $80.5 with stated maturities ranging from 2025 to 2045 and fixed interest rates ranging between 2.18% and 2.85%. In April 2015, Alagasco entered into an additional hedge with a notional amount of $24.0 and terms within the same range. These derivative instruments were designated as cash flow hedges of forecasted transactions. These forward starting swaps involved the payment of a fixed interest rate and the receipt of a floating interest rate (the London Interbank Offered Rate, also known as LIBOR) over the terms specified in the contracts. On May 21, 2015, the interest rate swap agreements were terminated and the settlement resulted in a $2.7 gain which was recorded as a regulatory liability. Of the total anticipated issuance of long-term debt, $35.0 was issued on September 15, 2015 and the remaining $80.0 will be issued on December 1, 2015.

The Company’s and Laclede Gas' exchange-traded/cleared derivative instruments consist primarily of NYMEX, OTCBB, and ICE positions. The NYMEX and OTCBB is the primary national commodities exchange on which natural gas derivatives are traded. Open NYMEX/ICE and OTCBB natural gas futures and swap positions at September 30, 2015 were as follows:



	Gas Utility			Gas Marketing
	MMBtu (millions)	Avg. Price Per MMBtu		MMBtu (millions)	Avg. Price Per MMBtu
NYMEX/ICE Open short futures positions
Fiscal 2016	—	$	—	13.34	$	3.26
Fiscal 2017	—	—		2.13	3.42
NYMEX/ICE Open long futures/swap positions
Fiscal 2016	29.02	3.19		7.06	3.17
Fiscal 2017	1.57	3.04		2.77	3.43
Fiscal 2018	—	—		0.12	3.37
ICE Open long basis swap positions
Fiscal 2016	—	—		23.29	0.27
Fiscal 2017	—	—		9.04	0.45
Fiscal 2018	—	—		1.09	0.50
ICE Open short basis swap positions
Fiscal 2016	—	—		10.62	0.17
Fiscal 2017	—	—		1.40	0.20
OTC Open long futures/swap positions
Fiscal 2016	4.43	3.99		—	—
Fiscal 2017	0.32	3.64		—	—

At September 30, 2015, Laclede Gas also had 20.3 million MMBtu of other price mitigation in place through the use of NYMEX and OTCBB natural gas option-based strategies while LER had none.

Derivative instruments designated as cash flow hedges of forecasted transactions are recognized on the balance sheets of the Company at fair value and the change in the fair value of the effective portion of these hedge instruments is recorded, net of tax, in other comprehensive income (OCI). Accumulated other comprehensive income (AOCI) is a component of Total Common Stock Equity. Amounts are reclassified from AOCI into earnings when the hedged items affect net income, using the same revenue or expense category that the hedged item impacts. Based on market prices at September 30, 2015, it is expected that an immaterial amount of unrealized gains will be reclassified into the Consolidated Statements of Income of the Company during the next twelve months. Cash flows from hedging transactions are classified in the same category as the cash flows from the items that are being hedged in the Consolidated Statements of Cash Flows.



Effect of Derivative Instruments on the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income
	Location of Gain (Loss)
	Recorded in Income	2015			2014			2013
Derivatives in Cash Flow Hedging Relationships
Effective portion of gain (loss) recognized in OCI on derivatives:
Gas Marketing natural gas contracts		$	(4.3	)	$	(4.6	)	$	4.9
Gas Utility gasoline and heating oil contracts		(1.2		)	0.1			0.1
Total		$	(5.5	)	$	(4.5	)	$	5.0
Effective portion of gain (loss) reclassified from AOCI to income:
Natural gas contracts	Gas Marketing Operating Revenues	$	1.7		$	4.2		$	—
	Gas Marketing Operating Expenses	(5.2		)	(1.5		)	(0.5		)
Subtotal		(3.5		)	2.7			(0.5		)
Gasoline and heating oil contracts	Gas Utility Other Operating Expenses	(0.9		)	(0.2		)	0.2
Total		$	(4.4	)	$	2.5		$	(0.3	)
Ineffective portion of gain (loss) on derivatives recognized in income:
Natural gas contracts	Gas Marketing Operating Revenues	$	—		$	(0.1	)	$	(0.4	)
	Gas Marketing Operating Expenses	(0.5		)	0.1			(0.3		)
Subtotal		(0.5		)	—			(0.7		)
Gasoline and heating oil contracts	Gas Utility Other Operating Expenses	0.1			(0.2		)	(0.1		)
Total		$	(0.4	)	$	(0.2	)	$	(0.8	)
Derivatives Not Designated as Hedging Instruments*
Gain (loss) recognized in income on derivatives:
Natural gas commodity contracts	Gas Marketing Operating Revenues	$	(1.3	)	$	(8.7	)	$	(0.9	)
NYMEX / ICE natural gas contracts	Gas Marketing Operating Revenues	(9.6		)	3.0			—
Gasoline and heating oil contracts	Other Income and (Income Deductions) - Net	(0.2		)	—			0.1
Total		$	(11.1	)	$	(5.7	)	$	(0.8	)

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



Fair Value of Derivative Instruments in the Consolidated Balance Sheet at September 30, 2015
	Asset Derivatives*			Liability Derivatives*
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Gas Utility:
Gasoline and heating oil contracts	Accounts Receivable – Other	$	—	Accounts Receivable – Other	$	0.3
Gas Marketing:
Natural gas contracts	Derivative Instrument Assets	4.1		Derivative Instrument Assets	3.2
	Deferred Charges – Other	1.1		Deferred Charges – Other	0.5
Subtotal		5.2			4.0
Derivatives not designated as hedging instruments
Gas Utility:
Natural gas contracts	Accounts Receivable – Other	1.2		Accounts Receivable – Other	16.4
	Derivative Instrument Assets	—		Derivative Instrument Assets	5.7
	Deferred Charges – Other	—		Deferred Charges – Other	0.2
Subtotal		1.2			22.3
Gas Marketing:
NYMEX / ICE natural gas contracts	Derivative Instrument Assets	4.7		Derivative Instrument Assets	0.6
	Deferred Charges – Other	0.7		Deferred Charges – Other	0.7
Natural gas commodity	Derivative Instrument Assets	1.4		Derivative Instrument Assets	0.1
	Current Liabilities – Other	0.2		Current Liabilities – Other	1.4
	Deferred Credits – Other	0.1		Deferred Credits – Other	0.7
Subtotal		7.1			3.5
Total derivatives		$	13.5		$	29.8

Fair Value of Derivative Instruments in the Consolidated Balance Sheet at September 30, 2014
	Asset Derivatives*			Liability Derivatives*
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Gas Utility:
Gasoline and heating oil contracts	Accounts Receivable – Other	$	—	Accounts Receivable – Other	$	0.2
Gas Marketing:
Natural gas contracts	Derivative Instrument Assets	0.7		Derivative Instrument Assets	0.4
	Deferred Charges – Other	0.7		Deferred Charges – Other	0.2
Subtotal		1.4			0.8
Derivatives not designated as hedging instruments
Gas Utility:
Natural gas contacts	Accounts Receivable – Other	2.4		Accounts Receivable – Other	5.2
	Derivative Instrument Assets	0.1		Derivative Instrument Assets	3.7
	Deferred Charges – Other	—		Deferred Charges – Other	0.4
Subtotal		2.5			9.3
Gas Marketing:
Natural gas contacts	Derivative Instrument Assets	3.5		Derivative Instrument Assets	1.4
	Deferred Charges – Other	0.3		Deferred Charges – Other	—
	Current Liabilities – Other	—		Current Liabilities – Other	0.5
Subtotal		3.8			1.9
Total derivatives		$	7.7		$	12.0

The fair values of Asset Derivatives and Liability Derivatives exclude the fair value of cash margin receivables or payables with counterparties subject to netting arrangements. Fair value amounts of derivative contracts (including the fair value amounts of cash margin receivables and payables) for which there is a legal right to set off are presented net on the balance sheets. As such, the gross balances presented in the table above are not indicative of the Company’s net economic exposure. Refer to Note 9, Fair Value Measurements, for information on the valuation of derivative instruments.

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



	2015			2014
Fair value of asset derivatives presented above	$	13.5		$	7.7
Fair value of cash margin receivables offset with derivatives	13.9			3.0
Netting of assets and liabilities with the same counterparty	(22.2		)	(7.9		)
Total	$	5.2		$	2.8
Derivative Instrument Assets, per Consolidated Balance Sheets:
Derivative instrument assets	$	4.6		$	3.2
Deferred Charges – Other	0.6			(0.4		)
Total	$	5.2		$	2.8

Fair value of liability derivatives presented above	$	29.8		$	12.0
Netting of assets and liabilities with the same counterparty	(22.2		)	(7.9		)
Total	$	7.6		$	4.1
Derivative Instrument Liabilities, per Consolidated Balance Sheets:
Current Liabilities – Other	$	6.8		$	—
Deferred Credits – Other	0.8			4.1
Total	$	7.6		$	4.1

Additionally, at September 30, 2015 and 2014, the Company had $5.9 and $4.4, respectively, in cash margin receivables not offset with derivatives, which are presented in Accounts Receivable – Other.

Laclede Gas

Laclede Gas has a risk management policy to utilize various derivatives, including futures contracts, exchange-traded options, swaps and over-the-counter instruments for the explicit purpose of managing price risk associated with purchasing and delivering natural gas on a regular basis to customers in accordance with its tariffs. The objective of this policy is to limit Laclede Gas' exposure to natural gas price volatility and to manage, hedge and mitigate substantial price risk. This policy strictly prohibits speculation and permits Laclede Gas to hedge current physical natural gas purchase commitments or forecasted or anticipated future peak (maximum) physical need for natural gas delivered. Costs and cost reductions, including carrying costs, associated with Laclede Gas’ use of natural gas derivative instruments are allowed to be passed on to Laclede Gas customers through the operation of its PGA clause, through which the MoPSC allows Laclede Gas to recover gas supply costs, subject to prudence review by the MoPSC. Accordingly, Laclede Gas does not expect any adverse earnings impact as a result of the use of these derivative instruments.

Laclede Gas does not designate these instruments as hedging instruments for financial reporting purposes because gains or losses associated with the use of these derivative instruments are deferred and recorded as regulatory assets or regulatory liabilities pursuant to ASC Topic 980, “Regulated Operations,” and, as a result, have no direct impact on the statements of income.

The timing of the operation of the PGA clause may cause interim variations in short-term cash flows, because Laclede Gas is subject to cash margin requirements associated with changes in the values of these instruments. Nevertheless, carrying costs associated with such requirements are recovered through the PGA clause.

From time to time, Laclede Gas purchases NYMEX futures and options contracts to help stabilize operating costs associated with forecasted purchases of gasoline and diesel fuels used to power vehicles and equipment used in the course of its business. At September 30, 2015, Laclede Gas held 1.8 million gallons of gasoline futures contracts at an average price of $1.63 per gallon. Most of these contracts, the longest of which extends to December 2016, are designated as cash flow hedges of forecasted transactions pursuant to ASC Topic 815, “Derivatives and Hedging.” The gains or losses on these derivative instruments are not subject to Laclede Gas’ PGA clause.

Derivative instruments designated as cash flow hedges of forecasted transactions are recognized on the balance sheets at fair value and the change in the fair value of the effective portion of these hedge instruments is recorded, net of tax, in other comprehensive income (OCI). Accumulated other comprehensive income (AOCI) is a component of Total Common Stock Equity. Amounts are reclassified from AOCI into earnings when the hedged items affect net income, using the same revenue or expense category that the hedged item impacts. Based on market prices at September 30, 2015, it is expected that an immaterial amount of pre-tax gains will be reclassified into the statements of income during fiscal year 2016. Cash flows from hedging transactions are classified in the same category as the cash flows from the items that are being hedged in the statements of cash flows.

Laclede Gas’ derivative instruments consist primarily of NYMEX and OTCBB positions. The NYMEX is the primary national commodities exchange on which natural gas derivatives are traded. Open NYMEX and OTCBB natural gas futures positions at September 30, 2015 were as follows:



	MMBtu (millions)	Avg. Price Per MMBtu
NYMEX/ICE Open long futures/swap positions
Fiscal 2016	29.02	$	3.19
Fiscal 2017	1.57	3.04
OTC Open long futures/swap positions
Fiscal 2016	4.43	$	3.99
Fiscal 2017	0.32	3.64

At September 30, 2015, Laclede Gas also had 20.3 million MMBtu of other price mitigation in place through the use of NYMEX and OTCBB natural gas option-based strategies.



Effect of Derivative Instruments on the Statements of Income and Statements of Comprehensive Income
	Location of Gain (Loss)
	Recorded in Income	2015			2014			2013
Derivatives in Cash Flow Hedging Relationships
Effective portion of gain (loss) recognized in OCI on derivatives:
Gasoline and heating oil contracts		$	(1.2	)	$	0.1		$	0.1
Effective portion of gain (loss) reclassified from AOCI to income:
Gasoline and heating oil contracts	Gas Utility Other Operating Expenses	$	(0.9	)	$	(0.2	)	$	0.2
Ineffective portion of gain (loss) on derivatives recognized in income:
Gasoline and heating oil contracts	Gas Utility Other Operating Expenses	$	0.1		$	(0.2	)	$	(0.1	)
Derivatives Not Designated as Hedging Instruments*
Gain (loss) recognized in income on derivatives:
Gasoline and heating oil contracts	Other Income and (Income Deductions) - Net	$	(0.2	)	$	—		$	0.1

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



Fair Value of Derivative Instruments in the Balance Sheet at September 30, 2015
	Asset Derivatives*				Liability Derivatives*
	Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Gasoline and heating oil contracts	Accounts Receivable – Other	$	—		Accounts Receivable – Other	$	0.3
Subtotal		—				0.3
Derivatives not designated as hedging instruments
Natural gas contracts	Accounts Receivable – Other	1.2			Accounts Receivable – Other	16.4
OTCBB natural gas contracts	Derivative Instrument Assets	—			Derivative Instrument Assets	5.7
	Deferred Charges – Other	—			Deferred Charges – Other	0.2
Subtotal		1.2				22.3
Total derivatives		$	1.2			$	22.6

Fair Value of Derivative Instruments in the Balance Sheet at September 30, 2014
	Asset Derivatives				Liability Derivatives*
	Balance Sheet Location	Fair Value		*	Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Gasoline and heating oil contracts	Accounts Receivable – Other	$	—		Accounts Receivable – Other	$	0.2
Subtotal		—				0.2
Derivatives not designated as hedging instruments
Natural gas contacts	Accounts Receivable – Other	2.4			Accounts Receivable – Other	5.2
	Derivative Instrument Assets	0.1			Derivative Instrument Assets	3.7
Gasoline and heating oil contracts	Accounts Receivable – Other	—			Accounts Receivable – Other	0.4
Subtotal		2.5				9.3
Total derivatives		$	2.5			$	9.5

The fair values of Asset Derivatives and Liability Derivatives exclude the fair value of cash margin receivables or payables with counterparties subject to netting arrangements. Fair value amounts of derivative contracts (including the fair value amounts of cash margin receivables and payables) for which there is a legal right to set off are presented net on the Balance Sheets. As such, the gross balances presented in the table above are not indicative of Laclede Gas' net economic exposure. Refer to Note 9, Fair Value Measurements, for information on the valuation of derivative instruments.

Following is a reconciliation of the amounts in the tables above to the amounts presented in Laclede Gas' Balance Sheets:



	2015			2014
Fair value of asset derivatives presented above	$	1.2		$	2.5
Fair value of cash margin receivables offset with derivatives	15.5			3.0
Netting of assets and liabilities with the same counterparty	(16.7		)	(5.9		)
Total	$	—		$	(0.4	)
Derivative Instrument Assets, per Balance Sheets:
Derivative instrument assets	$	—		$	(0.4	)
Total	$	—		$	(0.4	)

Fair value of liability derivatives presented above	$	22.6		$	9.5
Netting of assets and liabilities with the same counterparty	(16.7		)	(5.9		)
Total	$	5.9		$	3.6
Derivative Instrument Liabilities, per Balance Sheets:
Current Liabilities – Other	$	5.7		$	—
Deferred Credits – Other	0.2			3.6
Total	$	5.9		$	3.6

Additionally, at September 30, 2015 and 2014, Laclede Gas had $5.9 and $4.4, respectively, in cash margin receivables not offset with derivatives, which are presented in Accounts Receivable – Other.

Alagasco

During the second quarter of fiscal 2015, Alagasco entered into certain interest rate swap transactions to protect against adverse movement in interest rates in anticipation of the issuance of $115.0 of long-term debt. Alagasco received prior approval from the APSC to enter into these hedges. The notional amount of interest rate swaps outstanding was $80.5 with stated maturities ranging from 2025 to 2045 and fixed interest rates ranging between 2.18% and 2.85%. In April 2015, Alagasco entered into an additional hedge with a notional amount of $24.0 and terms within the same range. These derivative instruments were designated as cash flow hedges of forecasted transactions. These forward starting swaps involved the payment of a fixed interest rate and the receipt of a floating interest rate (the London Interbank Offered Rate, also known as LIBOR) over the terms specified in the contracts. On May 21, 2015, the interest rate swap agreements were terminated and the settlement resulted in a $2.7 gain which was recorded as a regulatory liability since the interest rate swaps were entered into to hedge the interest payments on the $115.0 of long-term debt, of which $35.0 was issued on September 15, 2015, with the remaining $80.0 to be issued on December 1, 2015.