DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Utility has a risk management policy that allows for the purchase of natural gas derivative instruments with the goal of managing price risk associated with purchasing natural gas on behalf of its customers. This policy prohibits speculation and permits the Utility to hedge up to 70% of its normal volumes purchased for up to a 36-month period. Costs and cost reductions, including carrying costs, associated with the Utility’s use of natural gas derivative instruments are allowed to be passed on to the Utility’s customers through the operation of its PGA Clause, through which the MoPSC allows the Utility to recover gas supply costs, subject to prudence review by the MoPSC. Accordingly, the Utility does not expect any adverse earnings impact as a result of the use of these derivative instruments. The Utility does not designate these instruments as hedging instruments for financial reporting purposes because gains or losses associated with the use of these derivative instruments are deferred and recorded as regulatory assets or regulatory liabilities pursuant to ASC Topic 980, “Regulated Operations,” and, as a result, have no direct impact on the Statements of Consolidated Income. The timing of the operation of the PGA Clause may cause interim variations in short-term cash flows, because the Utility is subject to cash margin requirements associated with changes in the values of these instruments. Nevertheless, carrying costs associated with such requirements are recovered through the PGA Clause.

From time to time, the Utility 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, 2013, Laclede Gas held 0.3 million gallons of gasoline futures contracts at an average price of $2.23 per gallon. Most of these contracts, the longest of which extends to April 2014, 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 the Utility’s PGA Clause.

In the course of its business, Laclede Group’s non-regulated gas marketing subsidiary, LER, which includes its wholly 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, 2013, the fair values of 67.4 million MMBtu of non-exchange traded natural gas commodity contracts were reflected in the Consolidated Balance Sheet. Of these contracts, 58.5 million MMBtu will settle during fiscal year 2014, 8.1 million MMBtu will settle during fiscal year 2015, while the remaining 0.8 million MMBtu will settle during fiscal year 2016. 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 futures, swap, and option contracts to lock in margins. At September 30, 2013, 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.

Derivative instruments designated as cash flow hedges of forecasted transactions are recognized on the Consolidated 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, 2013, it is expected that approximately $2.3 million of pretax losses will be reclassified into the Statements of Consolidated Income during fiscal year 2014. 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 Consolidated Cash Flows.

The Company’s exchange-traded/cleared derivative instruments consist primarily of NYMEX and ICE positions. The NYMEX 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, 2013 were as follows:



	Laclede Gas Company			Laclede Energy Resources, Inc.
	MMBtu (millions)	Avg. Price Per MMBtu		MMBtu (millions)	Avg. Price Per MMBtu
NYMEX/ICE open short futures/swap positions
Fiscal 2014	—	$	—	12.91	$	3.98
Fiscal 2015	—	—		0.06	4.21
NYMEX/ICE open long futures/swap positions
Fiscal 2014	7.26	$	3.99	1.71	$	3.94
Fiscal 2015	0.94	3.84		0.19	4.06
Fiscal 2016	—	—		0.02	4.15
OTCBB open long futures
Fiscal 2014	16.81	$	3.97	—	$	—
Fiscal 2015	7.58	4.22		—	—

At September 30, 2013, the Utility and LER also had 23.6 million MMBtu and 0.0 million MMBtu, respectively, of other price mitigation in place through the use of NYMEX and OTCBB natural gas option-based strategies.

In February 2013, Laclede Group entered into certain interest rate swap agreements, with a notional amount of $355 million, to effectively lock in interest rates on a portion of the long-term debt it anticipated issuing to finance its acquisition of Missouri Gas Energy (MGE). These derivative instruments had been designated as cash flow hedges of forecasted transactions. These forward starting swaps involve 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, 2013, the interest rate swap agreements were terminated and the settlement resulted in a $20.8 million gain by Laclede Group. The Company assigned the gain as a regulatory liability since the interest rate swaps were entered into to hedge the interest payments on the $450 million of long-term debt issued on August 13, 2013 by Laclede Gas.



The Effect of Derivative Instruments on the Statements of Consolidated Income and Statements of Consolidated Comprehensive Income
	Location of Gain (Loss)
(Thousands)	Recorded in Income	2013			2012			2011
Derivatives in Cash Flow Hedging Relationships
Effective portion of gain (loss) recognized in OCI on derivatives:
NYMEX/ICE natural gas contracts		$	4,923		$	4,505		$	5,226
NYMEX gasoline and heating oil contracts		123			297			355
Total		$	5,046		$	4,802		$	5,581
Effective portion of gain (loss) reclassified from AOCI to income:
NYMEX/ICE natural gas contracts	Gas Marketing Operating Revenues	$	(4	)	$	18,929		$	7,443
	Gas Marketing Operating Expenses	(509		)	(10,532		)	(9,770		)
Sub-total		$	(513	)	$	8,397		$	(2,327	)
NYMEX gasoline and heating oil contracts	Gas Utility Other Operation Expenses	211			—			466
Total		$	(302	)	$	8,397		$	(1,861	)
Ineffective portion of gain (loss) on derivatives recognized in income:
NYMEX/ICE natural gas contracts	Gas Marketing Operating Revenues	$	(420	)	$	(36	)	$	966
	Gas Marketing Operating Expenses	(239		)	(263		)	(1,322		)
Sub-total		$	(659	)	$	(299	)	$	(356	)
NYMEX gasoline and heating oil contracts	Gas Utility Other Operation Expenses	(127		)	175			12
Total		$	(786	)	$	(124	)	$	(344	)
Derivatives Not Designated as Hedging Instruments*
Gain (loss) recognized in income on derivatives:
Natural gas commodity contracts	Gas Marketing Operating Revenues	$	(78	)	$	3,782		$	(660	)
	Gas Marketing Operating Expenses	—			687			4,229
NYMEX/ICE natural gas contracts	Gas Marketing Operating Revenues	(778		)	(615		)	(115		)
	Gas Marketing Operating Expenses	—			(625		)	(3		)
NYMEX gasoline and heating oil contracts	Other Income and (Income Deductions) - Net	41			19			37
Total		$	(815	)	$	3,248		$	3,488

Gains and losses on the Utility’s natural gas derivative instruments, which are not designated as hedging instruments for financial reporting purposes, are deferred pursuant to the Utility’s PGA Clause and initially recorded as regulatory assets or regulatory liabilities. These gains and losses are excluded from the table above because they have no direct impact on the Statements of Consolidated Income. Such amounts are recognized in the Statements of Consolidated 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, 2013
	Asset Derivatives*				Liability Derivatives*
(Thousands)	Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
NYMEX/ICE natural gas contracts	Derivative Instrument Assets	$	2,222		Derivative Instrument Assets	$	440
	Other Deferred Charges	22			Other Deferred Charges	11
NYMEX gasoline and heating oil contracts	Accounts Receivable - Other	105			Accounts Receivable - Other	—
Sub-total		2,349				451
Derivatives not designated as hedging instruments
NYMEX/ICE natural gas contracts	Derivative Instrument Assets	950			Derivative Instrument Assets	100
	Accounts Receivable - Other	1,434			Accounts Receivable - Other	3,455
	Other Deferred Charges	32			Other Deferred Charges	—
OTCBB natural gas contracts	Other Current Liabilities	228			Other Current Liabilities	4,045
	Other Deferred Credits	4			Other Deferred Credits	1,398
Natural gas commodity contracts	Derivative Instrument Assets	991			Derivative Instrument Assets	90
	Other Deferred Charges	20			Other Deferred Charges	137
	Other Current Liabilities	247			Other Current Liabilities	830
	Other Deferred Credits	21			Other Deferred Credits	123
Sub-total		3,927				10,178
Total derivatives		$	6,276			$	10,629


Fair Value of Derivative Instruments in the Consolidated Balance Sheet at September 30, 2012
	Asset Derivatives				Liability Derivatives
(Thousands)	Balance Sheet Location	Fair Value		*	Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
NYMEX/ICE natural gas contracts	Accounts Receivable - Other	$	405		Accounts Receivable - Other	$	3,413

NYMEX gasoline and heating oil contracts	Accounts Receivable - Other	334			Accounts Receivable - Other	—
Sub-total		739				3,413
Derivatives not designated as hedging instruments
NYMEX/ICE natural gas contracts	Accounts Receivable - Other	8,000			Accounts Receivable - Other	10,731
	Other Deferred Charges	—			Other Deferred Charges	—
Natural gas commodity contracts	Derivative Instrument Assets	3,150			Derivative Instrument Assets	295
	Other Current Liabilities	4			Other Current Liabilities	137
	Other Deferred Charges	19			Other Deferred Charges	—
NYMEX gasoline and heating oil contracts	Accounts Receivable - Other	10			Accounts Receivable - Other	—
Sub-total		11,183				11,163
Total derivatives		$	11,922			$	14,576

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 Consolidated 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 10, 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:



(Thousands)	2013			2012
Fair value of asset derivatives presented above	6,276			11,922
Fair value of cash margin receivables offset with derivatives	1,765			5,478
Netting of assets and liabilities with the same counterparty	(4,739		)	(14,526		)
Total	3,302			2,874

Derivative Instrument Assets, per Consolidated Balance Sheets:
Derivative instrument assets	3,291			2,855
Other deferred charges	11			19
Total	3,302			2,874

Fair value of liability derivatives presented above	10,629			14,576
Fair value of cash margin payables offset with derivatives	6			83
Netting of assets and liabilities with the same counterparty	(4,739		)	(14,526		)
Derivative instrument liabilities, per Consolidated Balance Sheets	5,896			133

Derivative Instrument Liabilities, per Consolidated Balance Sheets:
Other current liabilities	$	4,400		$	133
Other deferred credits	1,496			—
Total	$	5,896		$	133

Additionally, at September 30, 2013 and 2012, the Company had $3.2 million and $10.0 million, respectively, in cash margin receivables not offset with derivatives, that are presented in Accounts Receivable – Other.