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 Company's Consolidated Balance Sheets and Laclede Gas' Balance Sheets as of September 30, 2014 and 2013, respectively. Unamortized Purchased Gas Adjustments are also included below, which are listed in the current assets section of each balance sheet.



($ Millions)	Laclede Group				Laclede Gas
	2014		2013		2014		2013
Regulatory Assets:
Current:
Pension and postretirement benefit costs	$	1.3	$	—	$	—	$	—
Unamortized purchased gas adjustments	54.0		17.5		54.0		17.5
Other	2.4		—		—		—
Sub Total Regulatory Assets (current)	57.7		17.5		54.0		17.5
Non-current:
Future income taxes due from customers	117.0		112.9		117.0		112.9
Pension and postretirement benefit costs	451.6		381.4		380.4		381.4
Rate recovery of asset removal cost	2.8		—		—		—
Accretion and depreciation of asset retirement obligations	18.4		—		—		—
Enhanced stability reserve	3.3		—		—		—
Purchased gas costs	4.3		18.2		4.3		18.2
Compensated absences	8.2		8.0		8.2		8.0
Other	31.8		25.4		31.8		25.4
Sub Total Regulatory Assets (non-current)	637.4		545.9		541.7		545.9
Total Regulatory Assets	$	695.1	$	563.4	$	595.7	$	563.4

Regulatory Liabilities:
Current:
Pension and postretirement benefit costs	$	19.8	$	—	$	—	$	—
Refundable negative salvage	13.3		—		—		—
Other	5.2		—		—		—
Total Regulatory Liabilities (current)	38.3		—		—		—
Non-current:
Unamortized investment tax credits	2.7		2.9		2.7		2.9
Postretirement liabilities	28.4		—		—		—
Refundable negative salvage	26.8		—		—		—
Accrued cost of removal	60.5		59.1		60.5		59.0
Other	10.4		23.5		9.5		2.9
Total Regulatory Liabilities (non-current)	128.8		85.5		72.7		64.8
Total Regulatory Liabilities	$	167.1	$	85.5	$	72.7	$	64.8

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
($ Millions)	2014		2013		2014		2013
Regulatory Assets Not Earning a Return:
Future income taxes due from customers	$	117.0	$	112.9	$	117.0	$	112.9
Pension and postretirement benefit costs	312.1		259.9		240.9		259.9
Compensated absences	8.2		8.0		8.2		8.0
Other	7.8		7.6		7.8		7.6
Total Regulatory Assets Not Earning a Return	$	445.1	$	388.4	$	373.9	$	388.4

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, 2014 and 2013, approximately $445.1 and $388.4, 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 are being recovered and amortized on a straight-line basis over a fifteen-year period, without return on investment. Amortization of these costs totaled $10.4 from December 27, 1999 through September 30, 2014.

On January 17, 2014, Laclede Gas filed to re-establish an ISRS charge to recover investments made in gas safety replacement projects and public improvement projects in Laclede Gas’ eastern Missouri service territory between February 1, 2013 and December 31, 2013. Effective April 12, 2014, the MoPSC approved an ISRS charge designed to collect approximately $7.0 in annual revenues. On July 25, 2014, Laclede Gas filed for a $3.1 increase in ISRS revenues to recover the costs of gas safety replacement investments and public improvement projects over six months from March to August 2014. On October 15, 2014, the Commission approved an incremental ISRS increase of $2.8, effective on October 18, 2014, bringing the total ISRS charge to $9.8 on an annualized basis.

On September 16, 2013, MGE filed tariff sheets in a new general rate case proceeding designed to increase its total revenues by $23.4, less the current annualized Infrastructure System Replacement Surcharge (ISRS) revenues of $6.3 that were already being recovered from customers. Consistent with its normal practice, the MoPSC suspended implementation of the MGE proposed rates on September 17, 2013 and set the case for hearing in April 2014. On April 11, 2014, MGE and other parties to the rate case filed a Stipulation and Agreement resolving all issues in the case. On April 23, 2014, the MoPSC approved the Stipulation and Agreement effective May 1, 2014 for a base rate increase of $7.8. This result is essentially equivalent to incorporating MGE’s ISRS revenues into base rates. In addition, effective October 1, 2014, MGE will lower its fixed monthly charge for residential and small commercial customers and incorporate a volumetric charge in its place. After this adjustment, MGE will recover about 83% of its distribution costs from these customers through the fixed monthly charge. On December 6, 2013, MGE filed for a $1.6 increase in ISRS revenues to recover the costs of gas safety replacement investments and public improvement projects over the nine months from January to September 2013. Effective March 21, 2014, the MoPSC approved an increase in MGE’s ISRS in the amount of $1.7 annually. However, pursuant to the settlement of the MGE rate case, the ISRS rates were reset to zero effective May 1, 2014. On July 25, 2014, MGE filed for a $2.8 increase in ISRS revenues to recover the costs of gas safety replacement investments and public improvement projects over eight months from January to August 2014. On October 8, 2014, the Commission approved an incremental ISRS increase of $2.0, effective on October 18, 2014.

Alagasco

Alagasco is subject to regulation by the Alabama Public Service Commission (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 the June Consumer Price Index For All Urban Consumers each rate year plus or minus 1.75% (Index Range). If rate year O&M expense falls within the 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. For the rate year ended September 30, 2014, Alagasco’s O&M expense fell below the Index Range resulting in the Company benefiting by $2.4 pre-tax with the related impact to rates effective December 1, 2014.

Alagasco’s rate schedules for natural gas distribution charges contain a Gas Supply Adjustment (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.