REGULATORY MATTERS

Laclede Gas and Alagasco account for regulated operations in accordance with ASC Topic 980, "Regulated Operations." This Topic sets forth the application of GAAP for those companies whose rates are established by or are subject to approval by an independent third-party regulator. The provisions of this accounting guidance require, among other things, that financial statements of a regulated enterprise reflect the actions of regulators, where appropriate. These actions may result in the recognition of revenues and expenses in time periods that are different than non-regulated enterprises. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses when those amounts are reflected in rates. Also, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for recovery of costs that are expected to be incurred in the future (regulatory liabilities).

The following regulatory assets and regulatory liabilities were reflected in the Balance Sheets as of September 30, 2015 and 2014. Unamortized Purchased Gas Adjustments are also included below, which are reported separately in the current assets and liabilities sections of each balance sheet.



	Laclede Group				Laclede Gas				Alagasco
	2015		2014		2015		2014		2015		2014
Regulatory Assets:
Current:
Pension and postretirement benefit costs	$	22.0	$	21.4	$	15.5	$	15.0	$	6.5	$	6.4
Unamortized purchased gas adjustments	12.9		54.0		12.9		54.0		—		—
Other	5.6		5.4		0.7		3.0		4.9		2.4
Total Current Regulatory Assets	40.5		80.8		29.1		72.0		11.4		8.8
Noncurrent:
Future income taxes due from customers	134.5		117.0		134.5		117.0		—		—
Pension and postretirement benefit costs	448.7		431.5		368.0		365.4		80.7		66.1
Cost of removal	78.9		21.2		—		—		78.9		21.2
Purchased gas costs	24.1		4.3		24.1		4.3		—		—
Energy efficiency	22.3		18.9		22.3		18.9		—		—
Other	29.1		21.4		24.7		18.1		4.0		3.3
Total Noncurrent Regulatory Assets	737.6		614.3		573.6		523.7		163.6		90.6
Total Regulatory Assets	$	778.1	$	695.1	$	602.7	$	595.7	$	175.0	$	99.4

Regulatory Liabilities:
Current:
RSE adjustment	12.2		19.8		—		—		12.2		19.8
Unbilled service margin	6.4		5.2		—		—		6.4		5.2
Refundable negative salvage	10.8		13.4		—		—		10.8		13.4
Unamortized purchased gas adjustments	28.2		22.4		—		—		28.2		22.4
Other	3.0		2.9		0.6		0.6		2.4		2.3
Total Current Regulatory Liabilities	60.6		63.7		0.6		0.6		60.0		63.1
Noncurrent:
Postretirement liabilities	28.9		26.2		—		—		28.9		26.2
Refundable negative salvage	16.2		26.8		—		—		16.2		26.8
Accrued cost of removal	58.7		60.5		58.7		60.5		—		—
Other	15.5		12.3		11.9		11.6		3.6		0.7
Total Noncurrent Regulatory Liabilities	119.3		125.8		70.6		72.1		48.7		53.7
Total Regulatory Liabilities	179.9		189.5		71.2		72.7		108.7		116.8

Regulatory assets are expected to be recovered in rates charged to customers.

A portion of the Company's regulatory assets are not earning a return and are shown in the schedule below:



	Laclede Group				Laclede Gas
	2015		2014		2015		2014
Regulatory Assets Not Earning a Return:
Future income taxes due from customers	$	134.5	$	117.0	$	134.5	$	117.0
Pension and postretirement benefit costs	223.7		240.9		223.7		240.9
Other	14.2		16.0		14.2		16.0
Total Regulatory Assets Not Earning a Return	$	372.4	$	373.9	$	372.4	$	373.9

All of Alagasco's regulatory assets currently earn a return.

These regulatory assets are expected to be recovered from customers in future rates. Excluding deferred income taxes and purchased gas adjustment items, as of September 30, 2015 and 2014, approximately $372.4 and $373.9, respectively, of regulatory assets were not earning a rate of return. The Company expects these items to be recovered over a period not to exceed 15 years consistent with precedent set by the MoPSC. The portion of the regulatory asset related to pensions and other postemployment benefits that relates to unfunded differences between the projected benefit obligation and plan assets also does not earn a rate of return.

As authorized by the MoPSC, Laclede Gas discontinued deferring certain costs for future recovery, as expenses associated with those specific areas were included in approved rates effective December 27, 1999. Previously deferred costs of $10.5 were recovered and amortized on a straight-line basis over a fifteen-year period ended in December 2014, without return on investment.

Laclede Gas

On April 17, 2015, Laclede Gas filed to increase its Infrastructure System Replacement Surcharge (ISRS) revenues by $5.5 in its Laclede Gas' eastern Missouri service territory and by $2.9 in its MGE service territory, to recover the cost of gas safety replacement investments and public improvement projects over six months from September 2014 through February 2015. Effective May 22, 2015, the MoPSC approved an increase to the ISRS tariffs in the amounts of $5.4 for Laclede Gas' eastern Missouri service territory and $2.8 for MGE's service territory.

On August 3, 2015, Laclede Gas filed applications to increase its ISRS revenues by $4.3 in its Laclede Gas eastern Missouri service territory and by $1.8 in its MGE service territory, to recover the cost of replacement investments related to gas safety and public improvement projects over six months from March through August 2015. On November 12, 2015, the MoPSC approved an incremental ISRS amount of $4.4 for Laclede Gas' eastern Missouri service territory and $1.9 for MGE, effective December 1, 2015, bringing total annualized ISRS revenue to $19.6 for Laclede Gas' eastern Missouri service territory and $6.7 for MGE's service territory.

Alagasco

Alagasco is subject to regulation by the APSC which established the Rate Stabilization and Equalization (RSE) rate-setting process in 1983. Alagasco’s current RSE order has a term extending beyond September 30, 2018, unless the APSC enters an order to the contrary in a manner consistent with law. In the event of unforeseen circumstances, whether physical or economic, of the nature of force majeure and including a change in control, the APSC and Alagasco will consult in good faith with respect to modifications, if any. Effective January 1, 2014, Alagasco’s allowed range of return on average common equity is 10.5% to 10.95% with an adjusting point of 10.8%. The previous allowed range of return on average common equity was 13.15% to 13.65% through December 31, 2013. Alagasco is eligible to receive a performance-based adjustment of 5 basis points to the return on equity adjusting point, based on meeting certain customer satisfaction criteria. Under RSE, the APSC conducts quarterly reviews to determine whether Alagasco’s return on average common equity at the end of the rate year will be within the allowed range of return. Reductions in rates can be made quarterly to bring the projected return within the allowed range; increases, however, are allowed only once each rate year, effective December 1, and cannot exceed 4% of prior-year revenues.

The inflation-based Cost Control Mechanism (CCM), established by the APSC, allows for annual increases to operations and maintenance (O&M) expense. The CCM range is Alagasco’s 2007 actual rate year O&M expense (Base Year) inflation-adjusted using an index range equal to the June Consumer Price Index For All Urban Consumers each rate year plus or minus 1.75%. If rate year O&M expense falls within this index range, no adjustment is required. If rate year O&M expense exceeds the index range, three-quarters of the difference is returned to customers through future rate adjustments. To the extent that rate year O&M is less than the index range, Alagasco benefits by one-half of the difference through future rate adjustments. Certain items that fluctuate based on situations demonstrated to be beyond Alagasco’s control may be excluded from the CCM calculation. Benefit for fiscal 2015 was $4.9 and $2.4 for 2014.

Alagasco’s rate schedules for natural gas distribution charges contain a GSA rider, established in 1993, which permits the pass-through to customers of changes in the cost of gas supply. Alagasco’s tariff provides a temperature adjustment mechanism, also included in the GSA, which is designed to moderate the impact of departures from normal temperatures on Alagasco’s earnings. The temperature adjustment applies primarily to residential, small commercial and small industrial customers. Other non-temperature weather related conditions that may affect customer usage are not included in the temperature adjustment.

The APSC approved an Enhanced Stability Reserve (ESR) in 1998, which was subsequently modified and expanded in 2010. As currently approved, the ESR provides deferred treatment and recovery for the following: (1) extraordinary O&M expenses related to environmental response costs; (2) extraordinary O&M expenses related to self-insurance costs that exceed $1 million per occurrence; (3) extraordinary O&M expenses, other than environmental response costs and self-insurance costs, resulting from a single force majeure event or multiple force majeure events greater than $0.3 and $0.4, respectively, during a rate year; and (4) negative individual large commercial and industrial customer budget revenue variances that exceed $0.4 during a rate year. Charges to the ESR are subject to certain limitations which may disallow deferred treatment and which prescribe the timing of recovery. Funding to the ESR is provided as a reduction to the refundable negative salvage balance over its nine-year term beginning December 1, 2010. Subsequent to the nine-year period and subject to APSC authorization, Alagasco expects to be able to recover underfunded ESR balances over a five-year amortization period with an annual limitation of $0.7. Amounts in excess of this limitation are deferred for recovery in future years.