Exhibit
      99.1Selected
      Financial DataLaclede
      Gas CompanyFiscal
      Years Ended September 30(Thousands)
            
            2009
            
            2008
            
            2007
            
            2006
            
            2005Summary
      of OperationsOperating
      Revenues:Utility
            
            $
            1,053,993
            
            $
            1,128,287
            
            $
            1,131,554
            
            $
            1,141,011
            
            $
            978,195Other
            
            
            2,246
            
            
            2,693
            
            
            3,415
            
            
            2,305
            
            
            2,288Total
      Operating Revenues
            
            
            1,056,239
            
            
            1,130,980
            
            
            1,134,969
            
            
            1,143,316
            
            
            980,483Operating
      Expenses:UtilityNatural
      and propane gas
            
            
            699,984
            
            
            770,097
            
            
            797,924
            
            
            821,721
            
            
            676,931Other
      operation expenses
            
            
            146,542
            
            
            144,611
            
            
            131,798
            
            
            128,180
            
            
            125,364Maintenance
            
            
            27,818
            
            
            25,827
            
            
            24,306
            
            
            21,198
            
            
            19,226Depreciation
      and amortization
            
            
            36,751
            
            
            35,303
            
            
            34,080
            
            
            30,904
            
            
            23,036Taxes,
      other than income taxes
            
            
            68,639
            
            
            69,023
            
            
            68,361
            
            
            71,038
            
            
            62,859Total
      Utility Operating Expenses
            
            
            979,734
            
            
            1,044,861
            
            
            1,056,469
            
            
            1,073,041
            
            
            907,416Other
            
            
            2,238
            
            
            2,641
            
            
            2,914
            
            
            2,316
            
            
            2,318Total
      Operating Expenses
            
            
            981,972
            
            
            1,047,502
            
            
            1,059,383
            
            
            1,075,357
            
            
            909,734Operating
      Income
            
            
            74,267
            
            
            83,478
            
            
            75,586
            
            
            67,959
            
            
            70,749Allowance
      for Funds Used During Construction
            
            
            (152
            )
            
            (72
            )
            
            (17
            )
            
            (45
            )
            
            (100
            )Other
      Income and (Income Deductions) – Net
            
            
            3,280
            
            
            1,278
            
            
            4,565
            
            
            4,163
            
            
            1,443Interest
      Charges:Interest
      on long-term debt
            
            
            24,583
            
            
            19,851
            
            
            22,502
            
            
            22,329
            
            
            22,835Other
      interest charges
            
            
            5,770
            
            
            10,363
            
            
            11,101
            
            
            10,236
            
            
            4,076Total
      Interest Charges
            
            
            30,353
            
            
            30,214
            
            
            33,603
            
            
            32,565
            
            
            26,911Income
      Before Income Taxes
            
            
            47,042
            
            
            54,470
            
            
            46,531
            
            
            39,512
            
            
            45,181Income
      Tax Expense
            
            
            13,859
            
            
            15,264
            
            
            14,047
            
            
            10,632
            
            
            14,550Net
      Income
            
            
            33,183
            
            
            39,206
            
            
            32,484
            
            
            28,880
            
            
            30,631Dividends
      on Redeemable Preferred Stock
            
            
            15
            
            
            35
            
            
            43
            
            
            48
            
            
            55Earnings
      Applicable to Common Stock
            
            $
            33,168
            
            $
            39,171
            
            $
            32,441
            
            $
            28,832
            
            $
            30,576
































1





Selected
      Financial Data (continued)Laclede
      Gas CompanyFiscal
      Years Ended September 30(Thousands)
            
            2009
            
            2008
            
            2007
            
            2006
            
            2005Dividends
      Declared –Common
      Stock
            
            $
            34,108
            
            $
            32,811
            
            $
            31,520
            
            $
            30,049
            
            $
            29,003Utility
      PlantGross
      Plant – End of Period
            
            $
            1,280,238
            
            $
            1,229,174
            
            $
            1,187,828
            
            $
            1,149,104
            
            $
            1,105,733Net
      Plant – End of Period
            
            
            855,929
            
            
            823,197
            
            
            793,794
            
            
            763,827
            
            
            728,481Capital
      Expenditures
            
            
            51,384
            
            
            55,304
            
            
            56,434
            
            
            57,925
            
            
            54,621Property
      Retirements
            
            
            9,732
            
            
            15,629
            
            
            16,331
            
            
            22,588
            
            
            19,410Total
      Assets – End of Period
            
            $
            1,600,287
            
            $
            1,625,815
            
            $
            1,431,203
            
            $
            1,385,140
            
            $
            1,275,515Capitalization
      – End of PeriodCommon
      Stock and Paid-In Capital
            
            $
            203,754
            
            $
            157,883
            
            $
            151,510
            
            $
            145,527
            
            $
            140,381Retained
      Earnings
            
            
            201,450
            
            
            202,535
            
            
            195,728
            
            
            194,807
            
            
            196,024Accumulated
      Other Comprehensive Loss
            
            
            (2,619
            )
            
            (1,790
            )
            
            (1,727
            )
            
            (834
            )
            
            (1,127
            )Common
      Stock Equity
            
            
            402,585
            
            
            358,628
            
            
            345,511
            
            
            339,500
            
            
            335,278Redeemable
      Preferred Stock
            
            
            —
            
            
            467
            
            
            627
            
            
            787
            
            
            948Long-Term
      Debt
            
            
            389,240
            
            
            389,181
            
            
            309,122
            
            
            349,041
            
            
            294,033Total
      Capitalization
            
            $
            791,825
            
            $
            748,276
            
            $
            655,260
            
            $
            689,328
            
            $
            630,259
































2


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





LACLEDE
GAS COMPANY





INTRODUCTION





This
management’s discussion analyzes the financial condition and results of
operations of Laclede Gas Company (Laclede Gas or the Utility). It includes
management’s view of factors that affect its business, explanations of past
financial results including changes in earnings and costs from the prior year
periods, and their effects on the Utility’s overall financial condition and
liquidity.





Certain
matters discussed in this report, excluding historical information, include
forward-looking statements. Certain words, such as “may,” “anticipate,”
“believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” and similar words and
expressions identify forward-looking statements that involve uncertainties and
risks. Future developments may not be in accordance with our expectations or
beliefs and the effect of future developments may not be those anticipated.
Among the factors that may cause results to differ materially from those
contemplated in any forward-looking statement are:





•
            weather
      conditions and catastrophic events, particularly severe weather in the
      natural gas producing areas of the country;•
            volatility
      in gas prices, particularly sudden and sustained changes in natural gas
      prices, including the related impact of margin deposits associated with
      the use of natural gas derivative instruments;•
            the
      impact of higher natural gas prices on our competitive position in
      relation to suppliers of alternative heating sources, such as
      electricity;•
            changes
      in gas supply and pipeline availability; particularly those changes that
      impact supply for and access to our service area;•
            legislative,
      regulatory and judicial mandates and decisions, some of which may be
      retroactive, including those affecting•
            allowed
      rates of return•
            incentive
      regulation•
            industry
      structure•
            purchased
      gas adjustment provisions•
            rate
      design structure and implementation•
            regulatory
      assets•
            franchise
      renewals•
            environmental
      or safety matters•
            taxes•
            pension
      and other postretirement benefit liabilities and funding
      obligations•
            accounting
      standards;•
            the
      results of litigation;•
            retention
      of, ability to attract, ability to collect from, and conservation efforts
      of, customers;•
            capital
      and energy commodity market conditions, including the ability to obtain
      funds with reasonable terms for necessary capital expenditures and general
      operations and the terms and conditions imposed for obtaining sufficient
      gas supply;•
            discovery
      of material weakness in internal controls; and•
            employee
      workforce issues.





Readers
are urged to consider the risks, uncertainties, and other factors that could
affect our business as described in this report. All forward-looking statements
made in this report rely upon the safe harbor protections provided under the
Private Securities Litigation Reform Act of 1995. We do not, by including this
statement, assume any obligation to review or revise any particular
forward-looking statement in light of future events.





The
Management’s Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Utility’s financial statements
and the notes thereto.




















3


RESULTS
OF OPERATIONS





Overview





Laclede
Gas is regulated by the Missouri Public Service Commission (MoPSC or Commission)
and serves the City of St. Louis and parts of ten counties in eastern
Missouri. Laclede Gas delivers natural gas to retail customers at rates and in
accordance with tariffs authorized by the MoPSC. The Utility’s earnings are
primarily generated by the sale of heating energy. The Utility’s weather
mitigation rate design lessens the impact of weather volatility on Laclede Gas
customers during cold winters and stabilizes the Utility’s earnings by
recovering fixed costs more evenly during the heating season. Due to the
seasonal nature of the business of Laclede Gas, earnings are typically
concentrated in the November through April period, which generally corresponds
with the heating season.





Based
on the nature of the business of the Utility, as well as current economic
conditions, management focuses on the following key variables in evaluating the
financial condition and results of operations and managing the
business:





•
            the
      Utility’s ability to recover the costs of distribution of natural gas to
      its customers;•
            the
      impact of weather and other factors, such as customer conservation, on
      revenues and expenses;•
            changes
      in the regulatory environment at the federal, state, and local levels, as
      well as decisions by regulators, that impact the Utility’s ability to earn
      its authorized rate of return;•
            the
      Utility’s ability to access credit markets and maintain working capital
      sufficient to meet operating requirements; and,•
            the
      effect of natural gas price volatility on the
  business.









Improving
performance and mitigating the impact of weather fluctuations on Laclede Gas’
customers while improving the ability to recover its authorized distribution
costs and return continue to be fundamental components of Laclede Gas’ strategy.
The Utility’s distribution costs are the essential, primarily fixed expenditures
it must incur to operate and maintain more than 16,000 miles of mains and
services comprising its natural gas distribution system and related storage
facilities. The Utility’s distribution costs include wages and employee benefit
costs, depreciation and maintenance expenses, and other regulated utility
operating expenses, excluding natural and propane gas expense. Distribution
costs are considered in the ratemaking process and recovery of these types of
costs is included in revenues generated through the Utility’s tariff rates, as
approved by the MoPSC. As previously reported, Laclede Gas has undertaken an
evaluation of the Utility’s natural gas storage field, which was developed more
than 50 years ago, to assess the field’s current and future capabilities. While
not yet complete, the assessment has provided information that should result in
improved efficiencies in managing the operation of the field. Based on this
initial assessment, inventory balances included in the Balance Sheet as of
September 30, 2009 have been reclassified consistent with the results
of the evaluation and management’s expectations regarding the future operation
of the storage field. In addition, Laclede Gas is working continually to improve
its ability to provide reliable natural gas service at a reasonable cost, while
maintaining and building a secure and dependable infrastructure. The settlement
of the Utility’s 2007 rate case resulted in enhancements to the Utility’s
weather mitigation rate design that better ensure the recovery of its fixed
costs and margins despite variations in sales volumes due to the impacts of
weather and other factors that affect customer usage.





The
Utility’s income from off-system sales and capacity release remains subject to
fluctuations in market conditions. Effective October 1, 2007, the
Utility is allowed to retain 15% to 25% of the first $6 million in annual income
earned (depending on the level of income earned) and 30% of income exceeding $6
million annually. Some of the factors impacting the level of off-system sales
include the availability and cost of the Utility’s natural gas supply, the
weather in its service area, and the weather in other markets. When Laclede Gas’
service area experiences warmer-than-normal weather while other markets
experience colder weather or supply constraints, some of the Utility’s natural
gas supply is available for off-system sales and there may be a demand for such
supply in other markets. See the Regulatory
Matters section on page 11 of this report for additional information on
regulatory issues.


4


While
the price of natural gas has moderated recently, Laclede Gas continues to work
actively to reduce the impact of wholesale natural gas prices on its costs by
strategically structuring its natural gas supply portfolio to increase its gas
supply availability and pricing alternatives and through the use of derivative
instruments to protect its customers from significant changes in the commodity
price of natural gas. Nevertheless, the overall cost of purchased gas remains
subject to fluctuations in market conditions. The Utility’s Purchased Gas
Adjustment (PGA) Clause allows Laclede Gas to flow through to customers, subject
to prudence review, the cost of purchased gas supplies, including costs, cost
reductions, and related carrying costs associated with the use of derivative
instruments to hedge the purchase price of natural gas, as well as gas inventory
carrying costs. The Utility believes it will continue to be able to obtain
sufficient gas supply. The price of natural gas supplies and other economic
conditions may affect sales volumes, due to the conservation efforts of
customers, and cash flows associated with the timing of collection of gas costs
and related accounts receivable from customers. Long-term increases in the
wholesale cost of natural gas supplies may adversely impact the Utility’s
competitive position compared with alternative energy sources.





The
Utility relies on both short-term credit and long-term capital markets, as well
as cash flows from operations, to satisfy its seasonal cash requirements and
fund its cost of capital expenditures. Laclede Gas’ ability to issue commercial
paper supported by lines of credit, to issue long-term bonds, or to obtain new
lines of credit is dependent on current conditions in the credit and capital
markets. Management continues to focus on maintaining a strong balance sheet and
believes it currently has adequate access to credit and capital markets and will
have sufficient capital resources to meet its foreseeable obligations. See the
Liquidity and Capital Resources section on page 13 for
additional information.





EARNINGS





2009 vs.
2008





Laclede
Gas’ earnings applicable to common stock for fiscal year 2009 were $33.2
million, a decrease of $5.9 million, compared with fiscal year 2008. The
decrease in net income was primarily due to the following factors (quantified on
a pre-tax basis, except for the income tax item):





•
            increases
      in operation and maintenance expenses, excluding the provision for
      uncollectible accounts, totaling $4.9 million;•
            the
      effect of lower system gas sales volumes and other variations totaling
      $2.0 million;•
            the
      effect of the recognition of previously unrecognized tax benefits and the
      reversal of related expenses recorded during fiscal year 2008, totaling
      $1.6 million; and,•
            an
      increase in depreciation and amortization expense totaling $1.4
      million.





These
factors were partially offset by higher Infrastructure System Replacement
Surcharge (ISRS) revenues totaling $3.8 million.





2008 vs.
2007





Laclede
Gas’ earnings applicable to common stock for fiscal year 2008 were $39.2
million, an increase of $6.7 million, compared with fiscal year 2007. The
increase in net income was primarily due to the following factors (quantified on
a pre-tax basis, except for the income tax item):





•
            the
      benefit of the general rate increase, effective August 1, 2007, totaling
      $32.9 million;•
            the
      recognition of previously unrecognized tax benefits and the reversal of
      related expenses, totaling $1.6 million; and,•
            the
      effect of higher system gas sales volumes and other variations totaling
      $1.1 million.





These
factors were partially offset by:





•
            lower
      income from off-system sales and capacity release, totaling $10.2 million,
      primarily due to a reduction in the Utility’s share of such income
      (pursuant to the 2007 rate case);•
            increases
      in operation and maintenance expenses, excluding the provision for
      uncollectible accounts, totaling $8.3 million; and,•
            an
      increase in the provision for uncollectible accounts, totaling $6.0
      million.


5





Utility
Operating Revenues





2009 vs.
2008





Laclede
Gas passes on to Utility customers (subject to prudence review) increases and
decreases in the wholesale cost of natural gas in accordance with its PGA
Clause. The volatility of the wholesale natural gas market results in
fluctuations from period to period in the recorded levels of, among other items,
revenues and natural gas cost expense. Nevertheless, increases and decreases in
the cost of gas associated with system gas sales volumes have no direct effect
on net revenues and net income.





Utility
Operating Revenues for fiscal year 2009 decreased $74.3 million compared to
fiscal year 2008. Temperatures experienced in the Utility’s service area during
2009 were 1.8% warmer than the same period last year and 1.5% warmer than
normal. Total system therms sold and transported were 0.91 billion for fiscal
year 2009 compared with 0.93 billion for fiscal year 2008. Total off-system
therms sold and transported were 0.16 billion for fiscal year 2009 compared with
0.14 billion for fiscal year 2008. The decrease in Utility Operating Revenues
was primarily attributable to the following factors:





(Millions)Lower
      prices charged for off-system sales
            
            $
            (64.2
            )Lower
      wholesale gas costs passed on to Utility customers (subject to prudence
      review by the MoPSC)
            
            
            (19.0
            )Higher
      off-system sales volumes (reflecting more favorable market conditions as
      described in greater
              detail
      in the Results of Operations)
            
            
            16.6Lower
      system sales volumes and other variations
            
            
            (11.5
            )Higher
      ISRS revenues
            
            
            3.8Total
      Variation
            
            $
            (74.3
            )





2008 vs.
2007





Utility
Operating Revenues for fiscal year 2008 decreased $3.3 million compared to
fiscal year 2007. Temperatures experienced in the Utility’s service area during
2008 were 6.8% colder than fiscal year 2007, but 1.1% warmer than normal. Total
system therms sold and transported were 0.93 billion for fiscal year 2008
compared with 0.91 billion for fiscal year 2007. Total off-system therms sold
and transported were 0.14 billion for fiscal year 2008 compared with 0.21
billion for fiscal year 2007. The decrease in Utility Operating Revenues was
primarily attributable to the following factors:





(Millions)Lower
      off-system sales volumes
            
            $
            (47.9
            )Lower
      wholesale gas costs passed on to Utility customers (subject to prudence
      review by the MoPSC)
            
            
            (38.2
            )General
      rate increase, effective August 1, 2007
            
            
            32.9Higher
      system sales volumes, primarily due to colder weather and other
      variations
            
            
            27.3Higher
      prices charged for off-system sales
            
            
            24.0Lower
      ISRS revenues
            
            
            (1.4
            )Total
      Variation
            
            $
            (3.3
            )





Utility
Operating Expenses





2009 vs.
2008





Utility
Operating Expenses in fiscal year 2009 decreased $65.1 million, or 6.2%, from
fiscal year 2008. Natural and propane gas expense decreased $70.1 million from
last year’s level, primarily attributable to lower off-system gas expense,
decreased rates charged by our suppliers, and lower volumes purchased for
sendout. Other operation and maintenance expenses increased $3.9 million, or
2.3%, primarily due to increases in compensation expenses, higher maintenance
charges, and increased injuries and damages expense, partially offset by a
decrease in distribution charges, a lower provision for uncollectible accounts,
and a gain on the disposal of assets in fiscal year 2009. Depreciation and
amortization expense increased $1.4 million, or 4.1%, primarily due to
additional depreciable property.


6





2008 vs.
2007





Utility
Operating Expenses in fiscal year 2008 decreased $11.6 million, or 1.1%, from
fiscal year 2007. Natural and propane gas expense decreased $27.8 million from
fiscal year 2007, primarily attributable to lower rates charged by our suppliers
and lower off-system gas expense, partially offset by higher system volumes
purchased for sendout. Other operation and maintenance expenses increased $14.3
million, or 9.2%, primarily due to a higher provision for uncollectible
accounts, increased maintenance and distribution expenses, increased wage rates,
higher legal fees, increased pension costs, and the effect of a gain on the
disposal of assets recorded during fiscal year 2007. Depreciation and
amortization expense increased $1.2 million, or 3.6%, primarily due to
additional depreciable property.








Other
Income and (Income Deductions) - Net





Other
Income and (Income Deductions) - Net increased $1.9 million in fiscal year 2009
(compared to fiscal year 2008), primarily due to higher net investment income
and increased income associated with carrying costs applied to under-recoveries
of gas costs, partially offset by additional proceeds received during fiscal
year 2008 related to the Utility’s interest, as a policyholder, in the sale of a
mutual insurance company. Carrying costs on under-recoveries of gas costs are
recovered through the Utility’s PGA Clause.





Other
Income and (Income Deductions) - Net decreased $3.3 million in fiscal year 2008
(compared to fiscal year 2007), due to higher investment losses and lower income
associated with carrying costs applied to under-recoveries of gas costs. These
factors were partially offset by additional proceeds related to Laclede Gas’
interest, as a policyholder, in the sale of a mutual insurance
company.








Interest
Charges





The
$0.1 million increase in interest charges in fiscal year 2009 (over fiscal year
2008) was primarily due to higher interest on long-term debt, primarily
attributable to the issuance of $80.0 million principal amount of 6.35% First
Mortgage Bonds on September 23, 2008. This increase was largely offset
by lower interest on short-term debt. The $3.4 million decrease in interest
charges in fiscal year 2008 (over fiscal year 2007) was primarily due to a
reduction in interest on long-term debt resulting from the November 2007
maturity of $40 million principal amount of 7 1/2% First Mortgage Bonds, and
lower interest on short-term debt. Average short-term interest rates were 1.6%
this year compared with 4.0% in fiscal year 2008 and 5.4% in fiscal year 2007.
Average short-term borrowings were $232.7 million, $203.9 million, and $156.2
million for fiscal years 2009, 2008, and 2007, respectively.





Income
Taxes





Income
tax expense decreased $1.4 million in fiscal year 2009 (from fiscal year 2008)
and increased $1.2 million in fiscal year 2008 (from fiscal year 2007). These
variations are primarily due to changes in pre-tax income. The year-to-year
variations also reflect the effect of lower income tax expense associated with
the recognition of previously unrecognized tax benefits recorded during fiscal
year 2008.





Labor
Agreement





Laclede
Gas has labor agreements with Locals 11-6 and 11-194 of the United Steel, Paper
and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial and Service
Workers International Union, which represent approximately 64% of Laclede Gas’
employees. The agreements expire at midnight on
July 31, 2012.





The
Missouri Natural Division of Laclede Gas has labor agreements with Local 884 of
the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy,
Allied-Industrial and Service Workers International Union, which represents
approximately 5% of Laclede Gas’ employees. On April 15, 2009, new
four-year labor agreements were reached replacing the prior agreements which
expired on that same date. The new agreements, which expire at midnight on
April 14, 2013, include revisions to the defined benefit pension plan
formula, changes in wage rates and work rules, and other modifications that
enable the Utility to provide high quality service to its customers and control
operating costs while continuing to provide competitive wages, pension, and
healthcare benefits to its employees.








7


CRITICAL
ACCOUNTING POLICIES





Our
discussion and analysis of our financial condition, results of operations,
liquidity, and capital resources is based upon our financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. Generally accepted accounting principles (GAAP)
require that we make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. We evaluate our estimates on an ongoing basis. We base
our estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates. We believe the following represent the more significant items
requiring the use of judgment and estimates in preparing our financial
statements:





Allowances for Doubtful
      Accounts – Estimates of the collectibility of trade accounts
      receivable are based on historical trends, age of receivables, economic
      conditions, credit risk of specific customers, and other factors. The
      Utility’s provision for uncollectible accounts is dependent on the
      regulatory treatment provided for such costs. As approved by the MoPSC,
      the Utility was allowed to defer for future recovery uncollectible
      expenses associated with amendments to the Cold Weather Rule for fiscal
      year 2007.





Employee Benefits and
      Postretirement Obligations – Pension and postretirement obligations
      are calculated by actuarial consultants that utilize several statistical
      factors and other assumptions provided by Management related to future
      events, such as discount rates, returns on plan assets, compensation
      increases, and mortality rates. For the Utility, the amount of expense
      recognized and the amounts reflected in other comprehensive income are
      dependent upon the regulatory treatment provided for such costs, as
      discussed further below. Certain liabilities related to group medical
      benefits and workers’ compensation claims, portions of which are
      self-insured and/or contain “stop-loss” coverage with third-party insurers
      to limit exposure, are established based on historical
    trends.





8





The
table below reflects the sensitivity of Laclede’s plans to potential changes in
key assumptions:





Pension
      Plan Benefits:Estimated
            
            
            
            EstimatedIncrease/
            
            
            
            Increase/(Decrease)
      to
            
            
            
            (Decrease)
      toProjected
            
            
            
            AnnualBenefit
            
            
            
            Net
      PensionIncrease/
            
            
            
            Obligation
            
            
            
            Cost*Actuarial
      Assumptions
            
            (Decrease)
            
            
            
            (Thousands)
            
            
            
            (Thousands)Discount
      Rate
            
            0.25
            %
            
            
            $
            (9,420
            )
            
            $
            (1
            )(0.25
            )
            
            
            
            9,620
            
            
            
            (20
            )Rate
      of Future Compensation Increase
            
            0.25
            %
            
            
            
            6,700
            
            
            
            590(0.25
            )
            
            
            
            (6,600
            )
            
            
            (570
            )Expected
      Return on Plan Assets
            
            0.25
            %
            
            
            
            —
            
            
            
            (630
            )(0.25
            )
            
            
            
            —
            
            
            
            630Postretirement
      Benefits:Estimated
            
            
            
            EstimatedIncrease/
            
            
            
            Increase/(Decrease)
      to
            
            
            
            (Decrease)
      toProjected
            
            
            
            Annual
      NetPostretirement
            
            
            
            PostretirementBenefit
            
            
            
            BenefitIncrease/
            
            
            
            
            Obligation
            
            
            
            Cost*Actuarial
      Assumptions
            
            (Decrease)
            
            
            
            
            (Thousands)
            
            
            
            (Thousands)Discount
      Rate
            
            0.25
            %
            
            
            $
            (1,960
            )
            
            $
            (97
            )(0.25
            )
            
            
            
            2,010
            
            
            
            97Expected
      Return on Plan Assets
            
            0.25
            %
            
            
            
            —
            
            
            
            (85
            )(0.25
            )
            
            
            
            —
            
            
            
            85Annual
      Medical Cost Trend
            
            1.00
            %
            
            
            
            4,870
            
            
            
            1,090(1.00
            )
            
            
            
            (4,390
            )
            
            
            (970
            )*
      Excludes the impact of regulatory deferral mechanism. See Note 2, Pension Plans and Other Postretirement Benefits,
      of the Notes to Financial Statements for information regarding the
      regulatory treatment of these
costs.





9





Regulated Operations–Laclede
Gas accounts for its regulated operations in accordance with Financial
Accounting Standards Board (FASB) Accounting Standards Codification (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). Management believes that the current regulatory environment
supports the continued use of these regulatory accounting principles and that
all regulatory assets and regulatory liabilities are recoverable or refundable
through the regulatory process. Management believes the following represent the
more significant items recorded through the application of this accounting
guidance:





The
      Utility’s PGA Clause allows Laclede Gas to flow through to customers,
      subject to prudence review, the cost of purchased gas supplies, including
      the costs, cost reductions, and related carrying costs associated with the
      Utility’s use of natural gas derivative instruments to hedge the purchase
      price of natural gas. The difference between actual costs incurred and
      costs recovered through the application of the PGA are recorded as
      regulatory assets and regulatory liabilities that are recovered or
      refunded in a subsequent period. The PGA Clause also authorizes the
      Utility to recover costs it incurs to finance its investment in gas
      supplies that are purchased during the storage injection season for sale
      during the heating season. The PGA Clause also permits the application of
      carrying costs to all over- or under-recoveries of gas costs, including
      costs and cost reductions associated with the use of derivative
      instruments. Effective October 1, 2007, the PGA Clause also
      provides for a portion of income from off-system sales and capacity
      release revenues to be flowed through to customers.Laclede
      Gas records deferred tax liabilities and assets measured by enacted tax
      rates for the net tax effect of all temporary differences between the
      carrying amounts of assets and liabilities for financial reporting
      purposes, and the amounts used for income tax purposes. Changes in enacted
      tax rates, if any, and certain property basis differences will be
      reflected by entries to regulatory asset or regulatory liability accounts
      for regulated activities. Pursuant to the direction of the MoPSC, Laclede
      Gas’ provision for income tax expense for financial reporting purposes
      reflects an open-ended method of tax depreciation. Laclede Gas’ provision
      for income tax expense also records the income tax effect associated with
      the difference between overheads capitalized to construction for financial
      reporting purposes and those recognized for tax purposes without recording
      an offsetting deferred income tax expense. These two methods are
      consistent with the regulatory treatment prescribed by the
      MoPSC.Asset
      retirement obligations are recorded in accordance with GAAP using various
      assumptions related to the timing, method of settlement, inflation, and
      profit margins that third parties would demand to settle the future
      obligations. These assumptions require the use of judgment and estimates
      and may change in future periods as circumstances dictate. As authorized
      by the MoPSC, Laclede Gas accrues future removal costs associated with its
      property, plant and equipment through its depreciation rates, even if a
      legal obligation does not exist as defined by GAAP. The difference between
      removal costs recognized in depreciation rates and the accretion expense
      and depreciation expense recognizable pursuant to GAAP is a timing
      difference between the recovery of these costs in rates and their
      recognition for financial reporting purposes. Accordingly, these
      differences are deferred as regulatory
  liabilities.





10





The
      amount of net periodic pension and other postretirement benefit cost
      recognized in the financial statements related to the Utility’s qualified
      pension plans and other postretirement benefit plans is based upon
      allowances, as approved by the MoPSC, which have been established in the
      rate-making process for the recovery of these costs from customers. The
      differences between these amounts and actual pension and other
      postretirement benefit costs incurred for financial reporting purposes are
      deferred as regulatory assets or regulatory liabilities. GAAP also
      requires that changes that affect the funded status of pension and other
      postretirement benefit plans, but that are not yet required to be
      recognized as components of pension and other postretirement benefit cost,
      be reflected in other comprehensive income. For the Utility’s qualified
      pension plans and other postretirement benefit plans, amounts that would
      otherwise be reflected in other comprehensive income are deferred with
      entries to regulatory assets or regulatory
  liabilities.





For
further discussion of significant accounting policies, see Note
1 of the Notes to Financial Statements included on page 27.








REGULATORY MATTERS





There
have been several significant regulatory developments affecting Laclede
Gas.





During
fiscal year 2006, the MoPSC approved permanent modifications to the Cold Weather
Rule affecting the disconnection and reconnection practices of utilities during
the winter heating season. Those modifications included provisions to allow the
Utility to obtain accounting authorizations and defer for future recovery
certain costs incurred with the modifications. During fiscal year 2007, the
Utility deferred for future recovery $2.7 million of costs associated with the
fiscal year 2007 heating season. On October 31, 2007, the Utility
filed for determination and subsequent recovery of the deferred amount. On
November 16, 2007, the MoPSC directed the MoPSC Staff and the Missouri
Office of Public Counsel (Public Counsel) to submit their positions regarding
the Utility’s filing and on February 28, 2008, the Utility and the
MoPSC Staff filed a Non-Unanimous Stipulation & Agreement in which these
parties agreed to a recovery of $2.5 million of costs. Public Counsel opposed
the Non-Unanimous Stipulation & Agreement and a hearing in this matter was
held before the Commission. On April 17, 2008, the Commission issued
its Report and Order approving the $2.5 million cost recovery recommended by the
Utility and the MoPSC Staff. Consistent with the approved amount, the Utility
recorded a reduction in its deferral totaling $0.2 million during the quarter
ended March 31, 2008. On May 29, 2008, Public Counsel
appealed the MoPSC’s Order to the Cole County, Missouri Circuit Court and on
January 6, 2009, the Court issued its judgment affirming the
Commission’s Order approving the Cold Weather Rule compliance cost amount that
the Utility and Staff had recommended over Public Counsel’s objection. On
February 9, 2009, Public Counsel appealed the Circuit Court’s
affirmation of the MoPSC’s April 17, 2008 Order to the Court of
Appeals for the Western District of Missouri.





On
December 28, 2006, the MoPSC Staff proposed a disallowance of $7.2
million related to Laclede Gas’ recovery of its purchased gas costs applicable
to fiscal year 2005. On September 14, 2007, the Staff withdrew its
pursuit of $5.5 million of the disallowance it had originally proposed. The
remaining $1.7 million pertains to Laclede Gas’ purchase of gas from a marketing
affiliate, Laclede Energy Resources (LER). Laclede Gas believes that the
remaining portion of the proposed disallowance lacks merit and is vigorously
opposing the adjustment in proceedings before the MoPSC. As such, no amount has
been recorded in the financial statements for this proposed
disallowance.





The
MoPSC Staff has also proposed disallowances of gas costs relating to Laclede Gas
purchases of gas supply from LER for fiscal years 2006 and 2007. On
December 31, 2007, the MoPSC Staff proposed a disallowance of $2.8
million applicable to fiscal year 2006, and on December 31, 2008, the
MoPSC Staff proposed a disallowance of $1.5 million applicable to fiscal year
2007. Laclede Gas believes that these proposed disallowances also lack merit and
is vigorously opposing them in proceedings before the MoPSC. As such, no amount
has been recorded in the financial statements for these proposed
disallowances.


11


In
the December 31, 2007 filing, the MoPSC Staff also raised questions
regarding whether certain sales and capacity release transactions, subject to
the Federal Energy Regulatory Commission (FERC)’s oversight, were consistent
with the FERC’s regulations and policies regarding capacity release. The Laclede
Group Inc. (Laclede Group) commenced an internal review of the questions raised
by the MoPSC Staff and notified the FERC Staff that it took this action.
Subsequently, as a result of the internal review, Laclede Group has provided the
FERC Staff with a report regarding compliance of sales and capacity release
activities with the FERC’s regulations and policies. On July 23, 2008,
the FERC Staff requested additional information, which Laclede Group provided
and on February 11, 2009, the FERC Staff submitted follow-up questions
to which Laclede Group responded on February 25, 2009. On
March 2, 2009, FERC Staff requested clarification of certain aspects
of Laclede Group’s February 25, 2009 response, which Laclede Group
clarified on March 4, 2009.





On
July 9, 2008, Laclede Gas made a tariff filing with the MoPSC that
would make the payment provisions for the restoration of gas service under the
Utility’s Cold Weather Rule available to customers in the summer of 2008 and
enable the Utility to increase or decrease its PGA rates to correct for any
shortfall or surplus created by the difference between the gas cost portion of
the Utility’s actual net bad debt write-offs and the amount of such cost that is
embedded in its existing rates. The MoPSC suspended the tariff on
August 5, 2008 and established a procedural schedule to consider the
Utility’s filing. As a result, the Cold Weather Rule portion of the filing is
now moot. A formal hearing pertaining to the bad debt portion of the filing was
held on January 5, 2009. On April 15, 2009, the Commission
issued its Order rejecting the Utility’s tariffs. On May 28, 2009,
Laclede Gas filed for a petition with the Circuit Court of Cole County seeking
judicial review of the Commission’s decision.





On
November 21, 2008, the Utility made an ISRS filing with the Commission
designed to increase revenues by $1.9 million annually. After the Utility
updated the filing, on February 4, 2009, the MoPSC approved an annual
increase of $2.1 million that became effective February 6, 2009. On
April 28, 2009, the Utility made an ISRS filing with the Commission
designed to increase revenues by an additional $2.5 million annually. On
July 15, 2009, the MoPSC approved the increase, which became effective
July 16, 2009.








ACCOUNTING
PRONOUNCEMENTS





Laclede
Gas has evaluated or is in the process of evaluating the impact that recently
issued accounting standards will have on the Utility’s financial position or
results of operations upon adoption. For disclosures related to the adoption of
new accounting standards, see the New Accounting Standards section of Note 1 of the Notes to Financial Statements.








INFLATION





The
accompanying financial statements reflect the historical costs of events and
transactions, regardless of the purchasing power of the dollar at the time. Due
to the capital-intensive nature of the business of Laclede Gas, the most
significant impact of inflation is on the depreciation of utility plant. Rate
regulation, to which Laclede Gas is subject, allows recovery through its rates
of only the historical cost of utility plant as depreciation. While no plans
exist to undertake replacements of plant in service other than normal
replacements and those under existing replacement programs, Laclede Gas believes
that any higher costs experienced upon replacement of existing facilities would
be recovered through the normal regulatory process.








CREDIT
RATINGS





Current
credit ratings for Laclede Gas issues are as follows:





Type
      of Facility
            S&P
            Moody’s
            FitchLaclede
      Gas Issuer Rating
            A
            
            A-Laclede
      Gas First Mortgage Bonds
            A
            A2
            A+Laclede
      Gas Commercial Paper
            A-1
            P-2
            F1





The
Utility has investment grade ratings and believes that it will have adequate
access to the financial markets to meet its capital requirements. These ratings
remain subject to review and change by the rating agencies.





12





CASH
FLOWS





Laclede
Gas’ short-term borrowing requirements typically peak during colder months when
Laclede Gas borrows money to cover the lag between when it purchases its natural
gas and when its customers pay for that gas. Changes in the wholesale cost of
natural gas (including cash payments for margin deposits associated with the
Utility’s use of natural gas derivative instruments), variations in the timing
of collections of gas cost under the Utility’s PGA Clause, the seasonality of
accounts receivable balances, and the utilization of storage gas inventories
cause short-term cash requirements to vary during the year and from year to
year, and can cause significant variations in the Utility’s cash provided by or
used in operating activities.





Net
cash provided by operating activities for fiscal year 2009 was $216.4 million.
Net cash used in operating activities for fiscal year 2008 was $45.6 million.
Net cash provided by operating activities for fiscal year 2007 was $79.1
million. The improvement in cash flows provided by operating activities in
fiscal year 2009 (over fiscal year 2008) was primarily attributable to reduced
payments for natural gas storage inventories, other variations in the timing of
the collection of gas costs under the PGA Clause, and reduced cash payments to
Laclede Group for the Utility’s allocation of income taxes. The reduction in
cash flows from operating activities in fiscal year 2008 (over fiscal year 2007)
was primarily attributable to increased payments for natural gas storage
inventories, other variations in the timing of the collection of gas costs under
the PGA Clause, and increased cash payments to Laclede Group for the Utility’s
allocation of income taxes.





Net
cash used in investing activities for fiscal years 2009, 2008, and 2007 were
$51.6 million, $56.4 million, and $55.5 million, respectively. Net cash used in
investing activities primarily reflected capital expenditures in all
periods.





Net
cash used in financing activities for fiscal year 2009 was $166.6 million. Net
cash provided by financing activities for fiscal year 2008 was $102.7 million.
Net cash used in financing activities for fiscal year 2007 was $23.4 million.
The variation in net cash used in financing activities in fiscal year 2009 (over
fiscal year 2008) primarily reflects an increase in repayments of short-term
debt this year and the net effect of changes in long-term debt during fiscal
year 2008, partially offset by the sale of additional shares of common stock to
Laclede Group this year. The variation in net cash flows provided by financing
activities in fiscal year 2008 (over fiscal year 2007) was primarily
attributable to the issuance of additional short-term and long-term debt,
partially offset by the maturity of long-term debt.








LIQUIDITY AND CAPITAL RESOURCES





Short-term
Debt





As
indicated above, the Utility’s short-term borrowing requirements typically peak
during the colder months. These short-term cash requirements can be met through
the sale of commercial paper supported by lines of credit with banks. Laclede
Gas has a syndicated line of credit in place of $320 million from 10 banks, with
the largest portion provided by a single bank being 17.5%. This line expires in
December 2011. In November 2008, the Utility established a seasonal
line of credit of $75 million, which expired in March 2009. Including both
lines of credit, the largest portion provided by a single bank was 26.8%. During
fiscal year 2009, Laclede Gas utilized both its syndicated line of credit and
commercial paper for short-term funding. Commercial paper outstanding at
September 30, 2009 was $129.8 million, and there were no outstanding
bank line advances. The weighted average interest rate on the short-term
borrowings was 0.24% per annum at September 30, 2009. Based on total
short-term borrowings at September 30, 2009, an increase in interest
rate of 100 basis points would decrease pre-tax earnings and cash flows by
approximately $1.3 million on an annual basis. Portions of such increases or
decreases may be offset through the application of PGA carrying costs. Although
Laclede Gas borrowed funds from Laclede Group from time to time within fiscal
year 2009, there were no such borrowings outstanding at
September 30, 2009. The Utility had short-term borrowings (including
borrowings from Laclede Group) aggregating to a maximum of $386.4 million at any
one time during the fiscal year. Excluding borrowings from Laclede Group, the
Utility’s maximum borrowings for the year were $309.9 million.





Laclede
Gas’ lines of credit include covenants limiting total debt, including short-term
debt, to no more than 70% of total capitalization and requiring earnings before
interest, taxes, depreciation, and amortization (EBITDA) to be at least 2.25
times interest expense. On September 30, 2009, total debt was 56% of
total capitalization. For the fiscal year ended September 30, 2009,
EBITDA was 3.76 times interest expense.


13





Long-term
Debt





At
September 30, 2009, Laclede Gas had fixed-rate long-term debt totaling
$390 million. While these long-term debt issues are fixed-rate, they are subject
to changes in fair value as market interest rates change. However, increases or
decreases in fair value would impact earnings and cash flows only if Laclede Gas
were to reacquire any of these issues in the open market prior to
maturity.





Equity
and Shelf Registration





Laclede
Gas has on file with the Securities and Exchange Commission an effective shelf
registration on Form S-3 for issuance of $350 million of First Mortgage Bonds,
unsecured debt, and preferred stock, of which $270 million remains available to
Laclede Gas at this time. The Utility has authority from the MoPSC until
February 15, 2010 to issue up to $500 million in First Mortgage Bonds,
unsecured debt, and equity securities, of which $370.4 million remains available
under this authorization as of November 20, 2009. During fiscal year
2009, pursuant to this authority, the Utility sold 1,218 shares of its common
stock to Laclede Group for $42.0 million. On June 30, 2009, the
Utility filed an application with the MoPSC requesting authority to issue debt
securities and preferred stock, including on a private placement basis, as well
as to issue common stock, receive paid-in capital, and enter into capital lease
agreements, all for a total of up to $600 million over the next three years.
This application is under review by the Commission at this time. The amount,
timing, and type of additional financing to be issued will depend on cash
requirements and market conditions, as well as future MoPSC
authorizations.





On
March 31, 2009, Laclede Gas redeemed all of its outstanding 5% Series
B and 4.56% Series C preferred stock, totaling $0.6 million, at its par value of
$25 per share in addition to the dividend paid on that same date.





Guarantees





Laclede
Gas has several operating leases for the rental of vehicles that contain
provisions requiring Laclede Gas to guarantee certain amounts related to the
residual value of the leased property. These leases have various terms, the
longest of which extends into 2014. At September 30, 2009, the maximum
guarantees under these leases were $1.7 million. However, the Utility estimates
that the residual value of the leased vehicles will be adequate to satisfy most
of the guaranteed amounts. At September 30, 2009, the carrying value
of the liability recognized for these guarantees was $0.4 million.





Other





Utility
capital expenditures were $51.4 million in fiscal year 2009, compared with $55.3
million and $56.4 million for fiscal years 2008 and 2007, respectively. Utility
capital expenditures are expected to be approximately $67 million in fiscal year
2010. The increase in capital expenditures expected for fiscal year 2010,
compared with prior periods, is primarily attributable to anticipated additional
purchases associated with software and technology enhancements, as well as other
planned improvements to the Utility’s natural gas storage
facilities.





Capitalization
at September 30, 2009, consisted of 50.8% common stock equity and
49.2% long-term debt.





Laclede
Gas’ ratio of earnings to fixed charges was 2.5 for fiscal year 2009, 2.7 for
fiscal year 2008, and 2.3 for fiscal year 2007.





It
is management’s view that Laclede Gas has adequate access to capital markets and
will have sufficient capital resources, both internal and external, to meet its
anticipated capital requirements, which primarily include capital expenditures,
scheduled maturities of long-term debt, short-term seasonal needs, and
dividends.





14





CONTRACTUAL
OBLIGATIONS





As
of September 30, 2009, Laclede Gas had contractual obligations with
payments due as summarized below (in millions):





Payments
      due by periodLess
      than
            
            1-3
            
            3-5
            
            More
      thanContractual
      Obligations
            
            Total
            
            1
      Year
            
            Years
            
            Years
            
            5
      YearsPrincipal
      Payments on Long-Term Debt
            
            $
            390.0
            
            $
            —
            
            $
            25.0
            
            $
            25.0
            
            $
            340.0Interest
      Payments on Long-Term Debt
            
            
            509.5
            
            
            24.6
            
            
            46.7
            
            
            43.5
            
            
            394.7Operating
      Leases (a)
            
            
            15.4
            
            
            5.1
            
            
            6.7
            
            
            3.2
            
            
            0.4Purchase
      Obligations – Natural Gas (b)
            
            
            514.7
            
            
            289.9
            
            
            154.2
            
            
            49.1
            
            
            21.5Purchase
      Obligations – Other (c)
            
            
            98.0
            
            
            16.1
            
            
            20.7
            
            
            16.7
            
            
            44.5Total
      (d)
            
            $
            1,527.6
            
            $
            335.7
            
            $
            253.3
            
            $
            137.5
            
            $
            801.1





(a)
            Operating
      lease obligations are primarily for office space, vehicles, and power
      operated equipment. Additional payments will be incurred if renewal
      options are exercised under the provisions of certain
      agreements.(b)
            These
      purchase obligations represent the minimum payments required under
      existing natural gas transportation and storage contracts and natural gas
      supply agreements. These amounts reflect fixed obligations as well as
      obligations to purchase natural gas at future market prices, calculated
      using September 30, 2009 New York Mercantile Exchange futures
      prices. Laclede Gas recovers the costs related to its purchases,
      transportation, and storage of natural gas through the operation of its
      PGA Clause, subject to prudence review; however, variations in the timing
      of collections of gas costs from customers affect short-term cash
      requirements. Additional contractual commitments are generally entered
      into prior to or during the heating season.(c)
            These
      purchase obligations reflect miscellaneous agreements for the purchase of
      materials and the procurement of services necessary for normal
      operations.(d)
            The
      categories of Capital Leases and Other Long-Term Liabilities have been
      excluded from the table above because there are no material amounts of
      contractual obligations under these categories. Long-term liabilities
      associated with unrecognized tax benefits, totaling $1.4 million, have
      been excluded from the table above because the timing of future cash
      outflows, if any, cannot be reasonably estimated. Also, commitments
      related to pension and postretirement benefit plans have been excluded
      from the table above. Laclede Gas expects to make contributions to its
      qualified, trusteed pension plans totaling $1.6 million in fiscal year
      2010. Laclede Gas anticipates a $1.9 million contribution relative to its
      non-qualified pension plans during fiscal year 2010. With regard to the
      postretirement benefits, the Utility anticipates it will contribute $11.6
      million to the qualified trusts and $0.4 million directly to participants
      from Laclede Gas’ funds during fiscal year 2010. For further discussion of
      the Utility’s pension and postretirement benefit plans, refer to Note 2, Pension Plans and Other Postretirement Benefits,
      of the Notes to Financial
Statements.








MARKET
RISK





Laclede
Gas’ commodity price risk, which arises from market fluctuations in the price of
natural gas, is primarily managed through the operation of its PGA Clause. The
PGA Clause allows Laclede Gas to flow through to customers, subject to prudence
review, the cost of purchased gas supplies. The Utility is allowed the
flexibility to make up to three discretionary PGA changes during each year, in
addition to its mandatory November PGA change, so long as such changes are
separated by at least two months. The Utility is able to mitigate, to some
extent, changes in commodity prices through the use of physical storage supplies
and regional supply diversity. Laclede Gas also has a risk management policy
that allows for the purchase of natural gas derivative instruments with the goal
of managing its price risk associated with purchasing natural gas on behalf of
its customers. This policy prohibits speculation. 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. Accordingly, Laclede Gas does not
expect any adverse earnings impact as a result of the use of these derivative
instruments. However, the timing of recovery for cash payments related to margin
requirements may cause short-term cash requirements to vary. Nevertheless,
carrying costs associated with such requirements, as well as other variations in
the timing of collections of gas costs, are recovered through the PGA Clause.
For more information about the Utility’s natural gas derivative instruments, see
Note 9, Derivative Instruments and Hedging Activities, of
the Notes to Financial Statements.


15





The
Utility is also subject to interest rate risk associated with its long-term and
short-term debt issuances. Refer to the Liquidity and Capital Resources section
of this Management’s Discussion and Analysis of Financial Condition and Results
of Operations for information about the effect of changes in interest
rates.








ENVIRONMENTAL
MATTERS





Laclede
Gas owns and operates natural gas distribution, transmission, and storage
facilities, the operations of which are subject to various environmental laws,
regulations, and interpretations. While environmental issues resulting from such
operations arise in the ordinary course of business, such issues have not
materially affected Laclede Gas’ financial position and results of operations.
As environmental laws, regulations, and their interpretations change, however,
Laclede Gas may be required to incur additional costs. For a description of
environmental matters, see Note 14, Commitments and
Contingencies, of the Notes to Financial Statements.








OFF-BALANCE
SHEET ARRANGEMENTS





Laclede
Gas has no off-balance sheet arrangements.


16


Management
Report on Internal Control Over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal controls over
financial reporting. Laclede Gas’ internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements and can provide
only reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future
periods are subject to the risks that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.





Laclede
Gas’ management, including our Chief Executive Officer and Chief Financial
Officer, conducted an assessment of the effectiveness of Laclede Gas’ internal
control over financial reporting as of September 30, 2009. In making
this assessment, management used the criteria in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on that assessment, management concluded that Laclede
Gas’ internal control over financial reporting was effective as of
September 30, 2009. Deloitte & Touche LLP, an independent
registered public accounting firm, has issued an attestation report on the
Laclede Gas’ internal control over financial reporting, which is included
herein.





17


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
the Board of Directors and Shareholder of


Laclede
Gas Company


St.
Louis, Missouri





We
have audited the internal control over financial reporting of Laclede Gas
Company (a wholly owned subsidiary of The Laclede Group, Inc.) (The “Company”)
as of September 30, 2009, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.





In
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of September 30, 2009,
based on the criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.





We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the financial statements and
financial statement schedule as of and for the year ended
September 30, 2009 of the Company and our report dated
November 20, 2009, expressed an unqualified opinion on those financial
statements and financial statement schedule and included an explanatory
paragraph regarding the Company’s adoption of Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement No. 109 (ASC 740, Income
Taxes), effective October 1, 2007.





/s/
DELOITTE & TOUCHE LLP


St.
Louis, Missouri


November
20, 2009


18


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
the Board of Directors and Shareholder of


Laclede
Gas Company


St.
Louis, Missouri




We
have audited the accompanying balance sheets and statements of capitalization of
Laclede Gas Company (a wholly-owned subsidiary of The Laclede Group, Inc.) (the
“Company”) as of September 30, 2009 and 2008, and the related
statements of income, common shareholder’s equity, comprehensive income, and
cash flows for each of the three years in the period ended
September 30, 2009. Our audits also included the financial statement
schedule listed in the Index at Part IV, Item 15(a) 2. These financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our
audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In
our opinion, such financial statements present fairly, in all material respects,
the financial position of Laclede Gas Company as of September 30, 2009
and 2008, and the results of its operations and cash flows for each of the three
years in the period ended September 30, 2009, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.




As
discussed in Note 11 to the financial statements, the Company adopted
the provisions of Financial Accounting Standards Board Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes — an Interpretation of FASB Statement
No. 109 (ASC 740, Income Taxes), effective
October 1, 2007.




We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company’s internal control over
financial reporting as of September 30, 2009, based on the criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
November 20, 2009 expressed an unqualified opinion on the Company's
internal control over financial reporting.











/s/
DELOITTE & TOUCHE LLP


St.
Louis, Missouri


November
20, 2009








19





LACLEDE
      GAS COMPANYSTATEMENTS
      OF INCOME(Thousands)Years
      Ended September 30
            
            
            
            2009
            
            
            
            2008
            
            
            
            2007Operating
      Revenues:Utility
            
            
            
            $
            1,053,993
            
            
            
            $
            1,128,287
            
            
            
            $
            1,131,554Other
            
            
            
            
            2,246
            
            
            
            
            2,693
            
            
            
            
            3,415Total
      Operating Revenues
            
            
            
            
            1,056,239
            
            
            
            
            1,130,980
            
            
            
            
            1,134,969Operating
      Expenses:UtilityNatural
      and propane gas
            
            
            
            
            699,984
            
            
            
            
            770,097
            
            
            
            
            797,924Other
      operation expenses
            
            
            
            
            146,542
            
            
            
            
            144,611
            
            
            
            
            131,798Maintenance
            
            
            
            
            27,818
            
            
            
            
            25,827
            
            
            
            
            24,306Depreciation
      and amortization
            
            
            
            
            36,751
            
            
            
            
            35,303
            
            
            
            
            34,080Taxes,
      other than income taxes
            
            
            
            
            68,639
            
            
            
            
            69,023
            
            
            
            
            68,361Total
      Utility Operating Expenses
            
            
            
            
            979,734
            
            
            
            
            1,044,861
            
            
            
            
            1,056,469Other
            
            
            
            
            2,238
            
            
            
            
            2,641
            
            
            
            
            2,914Total
      Operating Expenses
            
            
            
            
            981,972
            
            
            
            
            1,047,502
            
            
            
            
            1,059,383Operating
      Income
            
            
            
            
            74,267
            
            
            
            
            83,478
            
            
            
            
            75,586Other
      Income and (Income Deductions) - Net
            
            
            
            
            3,128
            
            
            
            
            1,206
            
            
            
            
            4,548Interest
      Charges:Interest
      on long-term debt
            
            
            
            
            24,583
            
            
            
            
            19,851
            
            
            
            
            22,502Other
      interest charges
            
            
            
            
            5,770
            
            
            
            
            10,363
            
            
            
            
            11,101Total
      Interest Charges
            
            
            
            
            30,353
            
            
            
            
            30,214
            
            
            
            
            33,603Income
      Before Income Taxes
            
            
            
            
            47,042
            
            
            
            
            54,470
            
            
            
            
            46,531Income
      Tax Expense
            
            
            
            
            13,859
            
            
            
            
            15,264
            
            
            
            
            14,047Net
      Income
            
            
            
            
            33,183
            
            
            
            
            39,206
            
            
            
            
            32,484Dividends
      on Redeemable Preferred Stock
            
            
            
            
            15
            
            
            
            
            35
            
            
            
            
            43Earnings
      Applicable to Common Stock
            
            
            
            $
            33,168
            
            
            
            $
            39,171
            
            
            
            $
            32,441See
      the accompanying Notes to Financial
      Statements.

















20





LACLEDE
      GAS COMPANYSTATEMENTS
      OF COMPREHENSIVE INCOME(Thousands)Years
      Ended September 30
            
            
            
            2009
            
            
            
            2008
            
            
            
            2007Net
      Income
            
            
            
            $
            33,183
            
            
            
            $
            39,206
            
            
            
            $
            32,484Other
      Comprehensive Income (Loss) Before Tax:Net
      gains (losses) on cash flow hedging derivative
instruments:Net
      hedging gains arising during the period
            
            
            
            
            248
            
            
            
            
            —
            
            
            
            
            —Reclassification
      adjustment for gains included in net income
            
            
            
            
            (119
            )
            
            
            
            —
            
            
            
            
            —Net
      unrealized gains on cash flow hedging derivative
              instruments
            
            
            
            
            129
            
            
            
            
            —
            
            
            
            
            —Defined
      benefit pension and other postretirement benefit plans:Minimum
      pension liability adjustment
            
            
            
            
            —
            
            
            
            
            —
            
            
            
            
            377Net
      actuarial loss arising during the period
            
            
            
            
            (1,728
            )
            
            
            
            (271
            )
            
            
            
            —Amortization
      of actuarial loss included in net periodic pension
              and
      other postretirement benefit cost
            
            
            
            
            199
            
            
            
            
            171
            
            
            
            
            —Net
      defined benefit pension and postretirement benefit plans
            
            
            
            
            (1,529
            )
            
            
            
            (100
            )
            
            
            
            377Other
      Comprehensive Income (Loss), Before Tax
            
            
            
            
            (1,400
            )
            
            
            
            (100
            )
            
            
            
            377Income
      tax expense (benefit) related to items of other
              comprehensive
      income (loss)
            
            
            
            
            (540
            )
            
            
            
            (37
            )
            
            
            
            146Other
      Comprehensive Income (Loss), Net of Tax
            
            
            
            
            (860
            )
            
            
            
            (63
            )
            
            
            
            231Comprehensive
      Income
            
            
            
            $
            32,323
            
            
            
            $
            39,143
            
            
            
            $
            32,715See
      the accompanying Notes to Financial
      Statements.

















21





LACLEDE
      GAS COMPANYBALANCE
      SHEETS(Thousands)September
      30
            
            
            
            2009
            
            
            
            2008ASSETSUtility
      Plant
            
            
            
            $
            1,280,238
            
            
            
            $
            1,229,174Less
      – Accumulated depreciation and amortization
            
            
            
            
            424,309
            
            
            
            
            405,977Net
      Utility Plant
            
            
            
            
            855,929
            
            
            
            
            823,197Other
      Property and Investments
            
            
            
            
            40,549
            
            
            
            
            37,570Current
      Assets:Cash
      and cash equivalents
            
            
            
            
            1,402
            
            
            
            
            3,163Accounts
      receivable:Utility
            
            
            
            
            81,262
            
            
            
            
            98,708Non-utility
            
            
            
            
            1,634
            
            
            
            
            1,601Associated
      companies
            
            
            
            
            375
            
            
            
            
            3,028Other
            
            
            
            
            4,731
            
            
            
            
            4,852Allowances
      for doubtful accounts
            
            
            
            
            (10,791
            )
            
            
            
            (12,476
            )Inventories:Natural
      gas stored underground at LIFO cost
            
            
            
            
            93,313
            
            
            
            
            206,194Propane
      gas at FIFO cost
            
            
            
            
            19,847
            
            
            
            
            19,911Materials,
      supplies and merchandise at average cost
            
            
            
            
            4,032
            
            
            
            
            5,176Derivative
      instrument assets
            
            
            
            
            12,369
            
            
            
            
            54,578Unamortized
      purchased gas adjustments
            
            
            
            
            —
            
            
            
            
            33,411Prepayments
      and other
            
            
            
            
            7,547
            
            
            
            
            6,635Total
      Current Assets
            
            
            
            
            215,721
            
            
            
            
            424,781Deferred
      Charges:Regulatory
      assets
            
            
            
            
            482,999
            
            
            
            
            334,755Other
            
            
            
            
            5,089
            
            
            
            
            5,512Total
      Deferred Charges
            
            
            
            
            488,088
            
            
            
            
            340,267Total
      Assets
            
            
            
            $
            1,600,287
            
            
            
            $
            1,625,815

















22





LACLEDE
      GAS COMPANYBALANCE
      SHEETS (continued)(Thousands)September
      30
            
            
            
            2009
            
            
            
            2008CAPITALIZATION
      AND LIABILITIESCapitalization:Common
      stock equity
            
            
            
            $
            402,585
            
            
            
            $
            358,628Redeemable
      preferred stock (less current sinking fund requirements)
            
            
            
            
            —
            
            
            
            
            467Long-term
      debt
            
            
            
            
            389,240
            
            
            
            
            389,181Total
      Capitalization
            
            
            
            
            791,825
            
            
            
            
            748,276Current
      Liabilities:Notes
      payable
            
            
            
            
            129,800
            
            
            
            
            215,900Notes
      payable – associated companies
            
            
            
            
            —
            
            
            
            
            89,216Accounts
      payable
            
            
            
            
            30,220
            
            
            
            
            58,483Advance
      customer billings
            
            
            
            
            21,140
            
            
            
            
            25,548Current
      portion of preferred stock
            
            
            
            
            —
            
            
            
            
            160Wages
      and compensation accrued
            
            
            
            
            12,682
            
            
            
            
            12,197Dividends
      payable
            
            
            
            
            8,535
            
            
            
            
            8,407Customer
      deposits
            
            
            
            
            12,400
            
            
            
            
            14,020Interest
      accrued
            
            
            
            
            9,943
            
            
            
            
            10,094Taxes
      accrued
            
            
            
            
            12,414
            
            
            
            
            10,434Unamortized
      purchased gas adjustments
            
            
            
            
            3,130
            
            
            
            
            —Deferred
      income taxes current
            
            
            
            
            912
            
            
            
            
            7,781Other
            
            
            
            
            10,737
            
            
            
            
            8,720Total
      Current Liabilities
            
            
            
            
            251,913
            
            
            
            
            460,960Deferred
      Credits and Other Liabilities:Deferred
      income taxes
            
            
            
            
            256,381
            
            
            
            
            222,379Unamortized
      investment tax credits
            
            
            
            
            3,754
            
            
            
            
            3,973Pension
      and postretirement benefit costs
            
            
            
            
            202,681
            
            
            
            
            98,513Asset
      retirement obligations
            
            
            
            
            25,495
            
            
            
            
            26,817Regulatory
      liabilities
            
            
            
            
            44,225
            
            
            
            
            42,191Other
            
            
            
            
            24,013
            
            
            
            
            22,706Total
      Deferred Credits and Other Liabilities
            
            
            
            
            556,549
            
            
            
            
            416,579Commitments
      and Contingencies (Note 14)Total
      Capitalization and Liabilities
            
            
            
            $
            1,600,287
            
            
            
            $
            1,625,815See
      the accompanying Notes to Financial
      Statements.

















23





LACLEDE
      GAS COMPANYSTATEMENTS
      OF CAPITALIZATION(Thousands,
      Except for Shares and Per Share Amounts)September
      30
            
            
            
            2009
            
            
            
            2008Common
      Stock Equity:Common
      stock, par value $1 per share and Paid-in Capital:Authorized
      – 2009 and 2008, 50,000,000 sharesIssued
      – 2009, 11,634 shares; and 2008, 10,416 shares
            
            
            $
            203,754
            
            
            $
            157,883Retained
      earnings
            
            
            
            201,450
            
            
            
            202,535Accumulated
      other comprehensive loss
            
            
            
            (2,619
            )
            
            
            (1,790
            )Total
      Common Stock Equity
            
            
            
            402,585
            
            
            
            358,628Redeemable
      Preferred Stock, par value$25
      per share (1,480,000 shares authorized)Issued
      and outstanding:5%
      Series B – 2008, 19,200 shares
            
            
            
            —
            
            
            
            3204.56%
      Series C – 2008, 5,894 shares
            
            
            
            —
            
            
            
            147Total
      Redeemable Preferred Stock
            
            
            
            —
            
            
            
            467Long-Term
      Debt:First
      Mortgage Bonds:6-1/2%
      Series, due November 15, 2010
            
            
            
            25,000
            
            
            
            25,0006-1/2%
      Series, due October 15, 2012
            
            
            
            25,000
            
            
            
            25,0005-1/2%
      Series, due May 1, 2019
            
            
            
            50,000
            
            
            
            50,0007%
      Series, due June 1, 2029
            
            
            
            25,000
            
            
            
            25,0007.90%
      Series, due September 15, 2030
            
            
            
            30,000
            
            
            
            30,0006%
      Series, due May 1, 2034
            
            
            
            100,000
            
            
            
            100,0006.15%
      Series, due June 1, 2036
            
            
            
            55,000
            
            
            
            55,0006.35%
      Series, due October 15, 2038
            
            
            
            80,000
            
            
            
            80,000Total
            
            
            
            390,000
            
            
            
            390,000Unamortized
      discount, net of premium, on long-term debt
            
            
            
            (760
            )
            
            
            (819
            )Total
      Long-Term Debt
            
            
            
            389,240
            
            
            
            389,181Total
      Capitalization
            
            
            $
            791,825
            
            
            $
            748,276Long-term
      debt and preferred stock dollar amounts are exclusive of current
      portion.See
      the accompanying Notes to Financial
      Statements.

















24








LACLEDE
      GAS COMPANYSTATEMENTS
      OF COMMON SHAREHOLDER’S EQUITYCommon
      Stock Issued
            
            Paid-in
            
            Retained
            
            Accum.
              Other
              Comp.(Thousands,
      Except for Shares)
            
            Shares
            
            Amount
            
            Capital
            
            Earnings
            
            Income
            
            TotalBALANCE
      OCTOBER 1, 2006
            
            10,197
            
            $
            10
            
            $
            145,517
            
            $
            194,807
            
            $
            (834
            )
            $
            339,500Net
      income
            
            —
            
            
            —
            
            
            —
            
            
            32,484
            
            
            —
            
            
            32,484Dividends
      declared:Common
      stock
            
            —
            
            
            —
            
            
            —
            
            
            (31,520
            )
            
            —
            
            
            (31,520
            )Preferred
      stock
            
            —
            
            
            —
            
            
            —
            
            
            (43
            )
            
            —
            
            
            (43
            )Stock-based
      compensation costs
            
            —
            
            
            —
            
            
            1,912
            
            
            —
            
            
            —
            
            
            1,912Tax
      benefit – stock compensation
            
            —
            
            
            —
            
            
            263
            
            
            —
            
            
            —
            
            
            263Other
      comprehensive income, net of tax
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            231
            
            
            231Issuance
      of common stock to Laclede Group
            
            110
            
            
            —
            
            
            3,808
            
            
            —
            
            
            —
            
            
            3,808Adoption
      of SFAS No. 158, as codified in
              ASC
      Topic 715, net of tax
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,124
            )
            
            (1,124
            )BALANCE
      SEPTEMBER 30, 2007
            
            10,307
            
            
            10
            
            
            151,500
            
            
            195,728
            
            
            (1,727
            )
            
            345,511Adoption
      of FIN 48, as codified in
              ASC
      Topic 740, as of October 1, 2007
            
            —
            
            
            —
            
            
            —
            
            
            447
            
            
            —
            
            
            447Net
      income
            
            —
            
            
            —
            
            
            —
            
            
            39,206
            
            
            —
            
            
            39,206Dividends
      declared:Common
      stock
            
            —
            
            
            —
            
            
            —
            
            
            (32,811
            )
            
            —
            
            
            (32,811
            )Preferred
      stock
            
            —
            
            
            —
            
            
            —
            
            
            (35
            )
            
            —
            
            
            (35
            )Stock-based
      compensation costs
            
            —
            
            
            —
            
            
            2,036
            
            
            —
            
            
            —
            
            
            2,036Tax
      benefit – stock compensation
            
            —
            
            
            —
            
            
            534
            
            
            —
            
            
            —
            
            
            534Other
      comprehensive loss, net of tax
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (63
            )
            
            (63
            )Issuance
      of common stock to Laclede Group
            
            109
            
            
            —
            
            
            3,803
            
            
            —
            
            
            —
            
            
            3,803BALANCE
      SEPTEMBER 30, 2008
            
            10,416
            
            
            10
            
            
            157,873
            
            
            202,535
            
            
            (1,790
            )
            
            358,628Net
      income
            
            —
            
            
            —
            
            
            —
            
            
            33,183
            
            
            —
            
            
            33,183Dividends
      declared:Common
      stock
            
            —
            
            
            —
            
            
            —
            
            
            (34,108
            )
            
            —
            
            
            (34,108
            )Preferred
      stock
            
            —
            
            
            —
            
            
            —
            
            
            (15
            )
            
            —
            
            
            (15
            )Stock-based
      compensation costs
            
            —
            
            
            —
            
            
            3,228
            
            
            —
            
            
            —
            
            
            3,228Tax
      benefit – stock compensation
            
            —
            
            
            —
            
            
            663
            
            
            —
            
            
            —
            
            
            663Other
      comprehensive loss, net of tax
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (860
            )
            
            (860
            )Issuance
      of common stock to Laclede Group
            
            1,218
            
            
            2
            
            
            41,978
            
            
            —
            
            
            —
            
            
            41,980Adoption
      of SFAS No. 158, as codified in
              ASC
      Topic 715, net of tax
            
            —
            
            
            —
            
            
            —
            
            
            (145
            )
            
            31
            
            
            (114
            )BALANCE
      SEPTEMBER 30, 2009
            
            11,634
            
            $
            12
            
            $
            203,742
            
            $
            201,450
            
            $
            (2,619
            )
            $
            402,585See
      the accompanying Notes to Financial
      Statements.

















25





LACLEDE
      GAS COMPANYSTATEMENTS
      OF CASH FLOWS(Thousands)Years
      Ended September 30
            
            2009
            
            2008
            
            2007Operating
      Activities:Net
      Income
            
            $
            33,183
            
            $
            39,206
            
            $
            32,484Adjustments
      to reconcile net income to net cash provided by
              (used
      in) operating activities:Depreciation
      and amortization
            
            
            36,751
            
            
            35,303
            
            
            34,080Deferred
      income taxes and investment tax credits
            
            
            21,404
            
            
            6,635
            
            
            (11,545
            )Other
      – net
            
            
            1,557
            
            
            3,553
            
            
            1,359Changes
      in assets and liabilities:Accounts
      receivable – net
            
            
            18,502
            
            
            4,776
            
            
            (2,267
            )Unamortized
      purchased gas adjustments
            
            
            36,541
            
            
            (20,598
            )
            
            31,568Deferred
      purchased gas costs
            
            
            (45,234
            )
            
            (19,614
            )
            
            13,381Accounts
      payable
            
            
            (27,631
            )
            
            8,024
            
            
            (6,616
            )Advance
      customer billings – net
            
            
            (4,408
            )
            
            108
            
            
            (6,003
            )Taxes
      accrued
            
            
            1,938
            
            
            (6,126
            )
            
            3,665Natural
      gas stored underground
            
            
            102,795
            
            
            (67,996
            )
            
            (781
            )Other
      assets and liabilities
            
            
            41,044
            
            
            (28,860
            )
            
            (10,253
            )Net
      cash provided by (used in) operating activities
            
            
            216,442
            
            
            (45,589
            )
            
            79,072Investing
      Activities:Capital
      expenditures
            
            
            (51,384
            )
            
            (55,304
            )
            
            (56,434
            )Other
      investments
            
            
            (261
            )
            
            (1,119
            )
            
            921Net
      cash used in investing activities
            
            
            (51,645
            )
            
            (56,423
            )
            
            (55,513
            )Financing
      Activities:Issuance
      of First Mortgage Bonds
            
            
            —
            
            
            80,000
            
            
            —Maturity
      of First Mortgage Bonds
            
            
            —
            
            
            (40,000
            )
            
            —(Repayment)
      issuance of short-term debt - net
            
            
            (175,316
            )
            
            93,716
            
            
            4,100Changes
      in book overdrafts
            
            
            652
            
            
            —
            
            
            —Dividends
      paid
            
            
            (33,837
            )
            
            (32,497
            )
            
            (31,245
            )Issuance
      of common stock to Laclede Group
            
            
            41,980
            
            
            3,803
            
            
            3,808Excess
      tax benefits from stock-based compensation
            
            
            706
            
            
            387
            
            
            77Preferred
      stock redeemed/reacquired
            
            
            (627
            )
            
            (160
            )
            
            (159
            )Other
            
            
            (116
            )
            
            (2,528
            )
            
            —Net
      cash (used in) provided by financing activities
            
            
            (166,558
            )
            
            102,721
            
            
            (23,419
            )Net
      (Decrease) Increase in Cash and Cash Equivalents
            
            
            (1,761
            )
            
            709
            
            
            140Cash
      and Cash Equivalents at Beginning of Year
            
            
            3,163
            
            
            2,454
            
            
            2,314Cash
      and Cash Equivalents at End of Year
            
            $
            1,402
            
            $
            3,163
            
            $
            2,454Supplemental
      Disclosure of Cash Paid (Refunded) During the Year for:Interest
            
            $
            29,873
            
            $
            30,992
            
            $
            31,776Income
      taxes
            
            
            (13,088
            )
            
            21,178
            
            
            6,734See
      the accompanying Notes to Financial
      Statements.

















26


LACLEDE
GAS COMPANY


NOTES TO FINANCIAL STATEMENTS





1.
            SUMMARY OF SIGNIFICANT ACCOUNTING
  POLICIES





BASIS OF PRESENTATION - The
financial statements include the accounts of Laclede Gas Company (Laclede Gas or
the Utility).


In
compliance with generally accepted accounting principles (GAAP), transactions
between Laclede Gas and its affiliates as well as intercompany balances on
Laclede Gas’ Balance Sheets have not been eliminated from the Laclede Gas
financial statements.


Laclede
Gas is a wholly-owned subsidiary of The Laclede Group, Inc. (Laclede Group or
the Company). Laclede Gas provides administrative and general support to
affiliates. All such costs, which are not material, are billed to the
appropriate affiliates. Also, Laclede Group may charge or reimburse Laclede Gas
for certain tax-related amounts. Unpaid balances relating to these activities
are reflected in the Laclede Gas Balance Sheets as Accounts
receivable-Associated companies or as Accounts payable-associated companies.
Additionally, Laclede Gas may, on occasion, borrow funds from affiliated
companies. Unpaid balances relating to these arrangements, if any, are reflected
in Notes payable-associated companies.


NATURE OF OPERATIONS - Laclede
Gas is a public utility engaged in the retail distribution of natural gas.
Laclede Gas serves an area in eastern Missouri, with a population of
approximately 2.1 million, including the City of St. Louis and parts of ten
counties in eastern Missouri. As an adjunct to its gas distribution business,
Laclede Gas operates an underground natural gas storage field.


USE OF ESTIMATES - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.


SYSTEM OF ACCOUNTS - The
accounts of Laclede Gas are maintained in accordance with the Uniform System of
Accounts prescribed by the Missouri Public Service Commission (MoPSC or
Commission), which system substantially conforms to that prescribed by the
Federal Energy Regulatory Commission (FERC).


UTILITY PLANT, DEPRECIATION AND
AMORTIZATION - Utility plant is stated at original cost. The cost of
additions to utility plant includes contracted work, direct labor and materials,
allocable overheads, and an allowance for funds used during construction. The
costs of units of property retired, replaced, or renewed are removed from
utility plant and are charged to accumulated depreciation. Maintenance and
repairs of property and replacement and renewal of items determined to be less
than units of property are charged to maintenance expenses.


Utility
plant is depreciated on a straight-line basis at rates based on estimated
service lives of the various classes of property. In fiscal years 2009, 2008,
and 2007, annual depreciation and amortization expense averaged 3.1% of the
original cost of depreciable and amortizable property.


The
Utility’s capital expenditures were $51.4 million, $55.3 million, and $56.4
million for fiscal years 2009, 2008, and 2007, respectively. Additionally, the
Utility had recorded accruals for capital expenditures totaling $1.7 million for
September 30, 2009 and $2.3 million for September 30, 2008.
Accrued capital expenditures at September 30, 2007 were not material.
Accrued capital expenditures are excluded from the Statements of Cash
Flows.


27


ASSET RETIREMENT OBLIGATIONS -
Laclede Gas records legal obligations associated with the retirement of
long-lived assets in the period in which the obligations are incurred, if
sufficient information exists to reasonably estimate the fair value of the
obligations. Obligations are recorded as both a cost of the related long-lived
asset and as a corresponding liability. Subsequently, the asset retirement costs
are depreciated over the life of the asset and the asset retirement obligations
are accreted to the expected settlement amounts. The Utility has recorded asset
retirement obligations associated with certain safety requirements to purge and
seal gas distribution mains upon retirement, the plugging and abandonment of
storage wells and other storage facilities, specific service line obligations,
and certain removal and disposal obligations related to components of Laclede
Gas’ distribution system and general plant. As authorized by the MoPSC, Laclede
Gas accrues future asset removal costs associated with its property, plant and
equipment even if a legal obligation does not exist. Such accruals are provided
for through depreciation expense and are recorded with corresponding credits to
regulatory liabilities. When Laclede Gas retires depreciable utility plant and
equipment, it charges the associated original costs to accumulated depreciation
and amortization, and any related removal costs incurred are charged to
regulatory liabilities. The difference between removal costs recognized in
depreciation rates and the accretion expense and depreciation expense recognized
for financial reporting purposes is a timing difference between recovery of
these costs in rates and their recognition for financial reporting purposes.
Accordingly, these differences are deferred as regulatory liabilities. In the
rate setting process, the regulatory liability is deducted from the rate base
upon which the Utility has the opportunity to earn its allowed rate of
return.


The
following table presents a reconciliation of the beginning and ending balances
of Asset retirement obligations at September 30 as reported in the Balance
Sheets:





(Thousands)
            
            2009
            
            2008Asset
      retirement obligations, beginning of year
            
            $
            26,817
            
            $
            26,054Liabilities
      incurred during the period
            
            
            415
            
            
            235Liabilities
      settled during the period
            
            
            (2,767
            )
            
            (1,035
            )Accretion
            
            
            1,566
            
            
            1,563Revisions
      in estimated cash flows
            
            
            (536
            )
            
            —Asset
      retirement obligations, end of year
            
            $
            25,495
            
            $
            26,817





REGULATED OPERATIONS - Laclede
Gas accounts for its regulated operations in accordance with Financial
Accounting Standards Board (FASB) Accounting Standards Codification (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).


28


The
following regulatory assets and regulatory liabilities were reflected in the
Balance Sheets as of September 30:





(Thousands)
            
            2009
            
            2008Regulatory
      Assets:Future
      income taxes due from customers
            
            $
            91,782
            
            $
            85,456Pension
      and postretirement benefit costs
            
            
            280,939
            
            
            182,890Unamortized
      purchased gas adjustments
            
            
            —
            
            
            33,411Purchased
      gas costs
            
            
            94,305
            
            
            49,071Compensated
      absences
            
            
            7,425
            
            
            7,253Cold
      weather rule
            
            
            5,264
            
            
            6,074Other
            
            
            3,284
            
            
            4,011Total
      Regulatory Assets
            
            $
            482,999
            
            $
            368,166Regulatory
      Liabilities:Unamortized
      purchased gas adjustments
            
            $
            3,130
            
            $
            —Unamortized
      investment tax credits
            
            
            3,754
            
            
            3,973Accrued
      cost of removal
            
            
            41,590
            
            
            35,922Other
            
            
            2,635
            
            
            6,269Total
      Regulatory Liabilities
            
            $
            51,109
            
            $
            46,164





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 million are being recovered and amortized on a straight-line
basis over a fifteen-year period, without return on investment. Amortization of
these costs totaled $6.9 million from December 27, 1999 through
September 30, 2009. Previously deferred costs of $2.1 million are
being recovered and amortized on a straight-line basis over a 10 year period,
without return on investment. Amortization of these costs totaled $2.0 million
from December 27, 1999 through
September 30, 2009.


NATURAL GAS STORED UNDERGROUND
- Inventory of Utility natural gas in storage is priced on a last-in,
first-out (LIFO) basis. The replacement cost of natural gas stored underground
for current use at September 30, 2009 and September 30, 2008
was less than the LIFO cost by $33.1 million and $21.8 million, respectively.
The inventory carrying value is not adjusted to the lower of cost or market
prices because, pursuant to the Laclede Gas Purchased Gas Adjustment (PGA)
Clause, actual gas costs are recovered in customer rates.


REVENUE RECOGNITION - Laclede
Gas reads meters and bills its customers on monthly cycles. The Utility records
its utility operating revenues from gas sales and transportation services on an
accrual basis that includes estimated amounts for gas delivered, but not yet
billed. The accruals for unbilled revenues are reversed in the subsequent
accounting period when meters are actually read and customers are billed. The
amounts of accrued unbilled revenues at September 30, 2009 and 2008,
for the Utility, were $12.7 million and $13.5 million,
respectively.


PURCHASED GAS ADJUSTMENTS AND
DEFERRED ACCOUNT–As authorized by the
MoPSC, the PGA Clause allows Laclede Gas to flow through to customers, subject
to prudence review, the cost of purchased gas supplies. To better match customer
billings with market natural gas prices, the Utility is allowed to file to
modify, on a periodic basis, the level of gas costs in its PGA. Laclede Gas 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. The MoPSC clarified that costs, cost
reductions, and carrying costs associated with the Utility’s use of natural gas
derivative instruments are gas costs recoverable through the PGA mechanism.
Certain other provisions of the PGA Clause are included below:


•
            The
      tariffs allow the Utility flexibility to make up to three discretionary
      PGA changes during each year, in addition to its mandatory November PGA
      change, so long as such changes are separated by at least two
      months.•
            The
      Utility is authorized to recover gas inventory carrying costs through its
      PGA rates to recover costs it incurs to finance its investment in gas
      supplies that are purchased during the storage injection season for sale
      during the heating season. The Utility is also authorized to apply
      carrying costs to all over- or under-recoveries of gas costs, including
      costs and cost reductions associated with the use of derivative
      instruments, including cash payments for margin
  deposits.





29





•
            Previously,
      the MoPSC approved a plan applicable to the Utility’s gas supply commodity
      costs under which it could retain up to 10% of cost savings associated
      with the acquisition of natural gas below an established benchmark level
      of gas cost. This gas supply cost management program required that if
      Laclede Gas’ retention of cost savings reached $5 million, the Utility
      would retain 1% of any remaining cost savings. The settlement of the
      Utility’s 2007 rate case provides certain modifications to the plan,
      including a provision that allows the Utility to retain 10% of cost
      savings, up to a maximum of $3.0 million annually, commencing
      October 1, 2007. The Utility recorded $0.6 million in pre-tax
      income under the plan in fiscal year 2008. Laclede Gas did not record any
      income under the plan during fiscal years 2009 and 2007. Income recorded
      under the plan is included in Utility Operating Revenues on the Statements
      of Income.


Pursuant
to the provisions of the PGA Clause, the difference between actual costs
incurred and costs recovered through the application of the PGA (including costs
and cost reductions associated with the use of derivative instruments and gas
inventory carrying costs), amounts due to or from customers related to operation
of the gas supply cost management program, refunds received from the Utility’s
suppliers in connection with gas supply, transportation, and storage services,
and carrying costs on such over- or under-recoveries are reflected as a deferred
charge or credit until fiscal year end. At that time, the balance is classified
as a current asset or current liability and recovered from or credited to
customers over an annual period commencing in November. The balance in the
current account is amortized as amounts are reflected in customer billings.
Effective October 1, 2007, the PGA Clause also provides for the
treatment of income from off-system sales and capacity release revenues, as
described below.


OFF-SYSTEM SALES - In
conjunction with the settlement of the 2005 rate case, effective
October 1, 2005, the Utility retained all pre-tax income from
off-system sales and capacity release revenues up to $12 million annually.
Pre-tax amounts in excess of $12 million were shared with customers, with the
Utility retaining 50% of amounts exceeding that threshold. Pursuant to the
settlement of the 2007 rate case, the pre-tax amounts in excess of $12 million
to be shared with customers resulting from amounts earned in fiscal years 2006
and 2007, totaling approximately $7 million, were flowed back to customers over
an annual period commencing in November 2007. In addition, the portion of
pre-tax income to be shared with customers was increased beginning
October 1, 2007. The customer share of such income is determined in
accordance with the table below. The difference between the actual amount
allocated to customers for each fiscal year and the estimated amount assumed in
PGA rates is recovered from or credited to customers over an annual period
commencing in the subsequent November.





Pre-tax
      Income
            Customer
      Share
            
            Company
      ShareFirst
      $2 million
            85%
            
            15%Next
      $2 million
            80%
            
            20%Next
      $2 million
            75%
            
            25%Amounts
      exceeding $6 million
            70%
            
            30%





INCOME TAXES - Laclede Gas has
elected, for tax purposes only, various accelerated depreciation provisions of
the Internal Revenue Code. In addition, certain other costs are expensed
currently for tax purposes while being deferred for book purposes. Effective
October 1, 2007, generally accepted accounting principles require that
tax benefits be recognized in the financial statements as determined by new
recognition and measurement provisions. These provisions permit the benefit from
a tax position to be recognized only if, and to the extent that, it is more
likely than not that the tax position will be sustained upon examination by the
taxing authority, based on the technical merits of the position. Unrecognized
tax benefits and related interest and penalties, if any, are recorded as
liabilities or as a reduction to deferred tax assets. Laclede Gas records
deferred tax liabilities and assets measured by enacted tax rates for the net
tax effect of all temporary differences between the carrying amounts of assets
and liabilities in the financial statements, and the related tax basis. Changes
in enacted tax rates, if any, and certain property basis differences will be
reflected by entries to regulatory asset or regulatory liability
accounts.


Laclede
Gas’ investment tax credits utilized prior to 1986 have been deferred and are
being amortized in accordance with regulatory treatment over the useful life of
the related property.


Laclede
Group files a consolidated federal income tax return and allocates income taxes
to Laclede Gas and its other subsidiaries as if each entity were a separate
taxpayer.


CASH AND CASH EQUIVALENTS -
All highly liquid debt instruments purchased with original maturities of three
months or less are considered to be cash equivalents. Such instruments are
carried at cost, which approximates market value. Outstanding checks on the
Utility’s controlled disbursement bank accounts in excess of funds on deposit
create book overdrafts (which are funded at the time checks are presented for
payment) and are classified as Other in the Current Liabilities section of the
Balance Sheets. Changes in book overdrafts between periods are reflected as
Financing Activities in the Statements of Cash Flows.


30


GROSS RECEIPTS AND SALES TAXES
- Gross receipts taxes associated with Laclede Gas’ natural gas utility
service are imposed on the Utility and billed to its customers. These amounts
are recorded gross in the Statements of Income. Amounts recorded in Utility
Operating Revenues were $51.6 million, $52.5 million, and $51.8 million for
fiscal years 2009, 2008, and 2007, respectively. Gross receipts taxes are
expensed by the Utility and included in the Taxes, other than income taxes
line.


Sales
taxes imposed on applicable Utility sales are billed to customers. These amounts
are not recorded in the Statements of Income, but are recorded as tax
collections payable and included in the Other line of the Current Liabilities
section of the Balance Sheets.


ALLOWANCES FOR DOUBTFUL ACCOUNTS
- Estimates of the collectibility of trade accounts receivables are based
on historical trends, age of receivables, economic conditions, credit risk of
specific customers, and other factors. The Utility’s provision for uncollectible
accounts is dependent on the regulatory treatment provided for such costs. The
Utility was allowed to defer for future recovery uncollectible expenses
associated with amendments to the Cold Weather Rule for fiscal year 2007, as
approved by the MoPSC.


GROUP MEDICAL AND WORKERS’
COMPENSATION RESERVES - Laclede Gas self-insures its group medical and
workers’ compensation costs and carries stop-loss coverage in relation to
medical claims and workers’ compensation claims. Reserves for amounts incurred
but not reported are established based on historical cost levels and lags
between occurrences and reporting.


SUBSEQUENT EVENTS - The
preparation of financial statements in accordance with generally accepted
accounting principles requires the consideration of events or transactions that
occur after the balance sheet date but before the financial statements are
issued. Depending on the nature of the subsequent event, financial statement
recognition or disclosure of the subsequent event is required. In preparing its
financial statements, Laclede Gas has evaluated subsequent events known through
the time of this filing on November 20, 2009, the date the financial
statements were issued.


STOCK-BASED COMPENSATION -
Officers and employees of Laclede Gas, as determined by the Compensation
Committee of Laclede Group’s Board of Directors, are eligible to be selected for
awards under the Laclede Group 2006 Equity Incentive Plan. Grants of awards may
be earned by achieving performance objectives and/or other criteria as
determined by the Compensation Committee. Awards may include restricted stock,
restricted stock units, qualified and non-qualified stock options, stock
appreciation rights, and performance shares payable in stock, cash, or a
combination of both. The 2006 Plan generally provides a minimum vesting period
of at least three years for each type of award. For Laclede Group’s non-employee
directors, shares are awarded under the Restricted Stock Plan for Non-Employee
Directors. These awards vest depending upon the participant’s age upon entering
the plan and years of service as a director. Shares of Laclede Gas common stock,
which are 100% owned by Laclede Group, are not transacted under the plans.
Laclede Group accounts for awards under these plans in accordance with GAAP, and
allocates applicable compensation costs to its subsidiaries. In
January 2009, shareholders of Laclede Group approved an amendment to the
Restricted Stock Plan for Non-Employee Directors (Plan), increasing the number
of shares of common stock available under the Plan to 150,000 from 50,000. For
awards made to its employees, the Utility records its allocation of compensation
cost from Laclede Group with a corresponding increase to additional paid-in
capital.


The
amounts of compensation cost allocated to the Utility for share-based
compensation arrangements are presented below:





(Thousands)
            
            2009
            
            2008
            
            2007Total
      compensation cost
            
            $
            3,483
            
            $
            2,263
            
            $
            2,029Compensation
      cost capitalized
            
            
            (815
            )
            
            (578
            )
            
            (524
            )Compensation
      cost recognized in net income
            
            
            2,668
            
            
            1,685
            
            
            1,505Income
      tax benefit recognized in net income
            
            
            (1,029
            )
            
            (650
            )
            
            (582
            )Compensation
      cost recognized in net income, net of income tax
            
            $
            1,639
            
            $
            1,035
            
            $
            923





As
of September 30, 2009, there was $4.5 million in unrecognized
compensation cost related to nonvested share-based compensation arrangements
that is expected to be allocated to the Utility over a weighted average period
of 2.3 years.


31


NEW ACCOUNTING STANDARDS-In September 2006, the
FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair
Value Measurements,” as codified in ASC Topic 820, “Fair Value Measurements and
Disclosures.” This Statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. The Statement applies to fair value
measurements required under other accounting guidance that require or permit
fair value measurements. Accordingly, this Statement does not require any new
fair value measurements. The guidance in this Statement does not apply to
Laclede Group’s stock-based compensation plans accounted for in accordance with
ASC Topic 718, “Compensation-Stock Compensation.” The Utility partially adopted
SFAS No. 157 on October 1, 2008 and elected the one-year deferral
allowed by FASB Staff Position (FSP) No. FAS 157-2, which permits delayed
application of this Statement for nonfinancial assets and nonfinancial
liabilities, except for those recognized or disclosed at fair value on a
recurring basis. The partial adoption of this Statement had no impact on the
Utility’s financial position or results of operations. For disclosures required
pursuant to ASC Topic 820, see Note 8, Fair Value
Measurements. The Utility will adopt SFAS No. 157 for certain nonfinancial
assets and nonfinancial liabilities (primarily asset retirement obligations) as
of the beginning of fiscal year 2010 and does not anticipate that such adoption
will have a material impact on the Utility’s financial position or results of
operations.


In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans,” as codified in ASC
Topic 715, “Compensation-Retirement Benefits.” Laclede Gas adopted the
recognition and disclosure provisions of this Statement effective
September 30, 2007. The Statement also requires that plan assets and
benefit obligations be measured as of the date of the employer’s fiscal year-end
statement of financial position. As a result of adopting this provision on
September 30, 2009, the Utility changed the measurement date for its
pension and other postretirement benefit plans from June 30 to
September 30. Adoption required certain adjustments to retained earnings
and accumulated other comprehensive income. However, the majority of these
adjustments, attributable to the Utility’s qualified pension plans and other
postretirement benefit plans, were deferred with entries to regulatory assets.
For details on the effect of adoption, refer to Note 2,
Pension Plans and Other Postretirement Benefits.


In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” as codified in ASC Topic 825,
“Financial Instruments.” The Statement permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The Statement also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. This Statement does not affect any existing
accounting literature that requires certain assets and liabilities to be carried
at fair value. Upon adoption, entities are permitted to choose, at specified
election dates, to measure eligible items at fair value (fair value option).
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings at each reporting date. The decision about
whether to elect the fair value option is applied instrument by instrument with
few exceptions. The decision is also irrevocable (unless a new election date
occurs) and must be applied to entire instruments and not to portions of
instruments. SFAS No. 159 requires that cash flows related to items measured at
fair value be classified in the statement of cash flows according to their
nature and purpose as required by ASC Topic 230, “Statement of Cash Flows.” The
Utility adopted SFAS No. 159 on October 1, 2008. The Utility did not
elect the fair value option for any instruments not currently reported at fair
value. Therefore, the adoption of this Statement had no effect on the Utility’s
financial position or results of operations.


In
June 2007, the FASB ratified the consensus reached in Emerging Issues Task
Force (EITF) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends
on Share-Based Payment Awards.” This EITF Issue is codified in ASC Topic 718.
This Issue addresses how an entity should recognize the tax benefit received on
dividends that are (a) paid to employees holding equity-classified nonvested
shares, equity-classified nonvested share units, or equity-classified
outstanding share options and (b) charged to retained earnings. The Task Force
reached a consensus that such tax benefits should be recognized as an increase
in additional paid-in capital. This Issue also addresses how the accounting for
these tax benefits is affected if an entity’s estimate of forfeitures changes in
subsequent periods. With the adoption of this EITF Issue on
October 1, 2008, the Utility now records these income tax benefits as
increases to additional paid-in capital. Previously, the Utility recorded these
income tax benefits as reductions to income tax expense. Adoption of this EITF
Issue did not have a material effect on the Utility’s financial position or
results of operations.


32


In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities.” This Statement is codified in ASC Topic
815, “Derivatives and Hedging,” and requires enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under ASC Topic 815, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This Statement was effective
for the Utility’s interim and annual financial statements beginning with the
second quarter of fiscal year 2009. The Statement does not require
disclosures for periods prior to initial adoption. The adoption of this standard
had no effect on the Utility’s financial position or results of operations. For
disclosures required pursuant to ASC Topic 815, see Note 9,
Derivative Instruments and Hedging Activities.


In
December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’
Disclosures about Postretirement Benefit Plan Assets,” as codified in ASC Topic
715. This FSP provides guidance on an employer’s disclosures about plan assets
of a defined benefit pension or other postretirement plan. The FSP requires
disclosure of information regarding investment policies and strategies, the
categories of plan assets, fair value measurements of plan assets, and
significant concentrations of risk. The Utility will be required to provide the
additional disclosures with its annual financial statements for fiscal year
2010. The Utility is currently evaluating the provisions of this
FSP.


In
April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” as codified in ASC Topic
820 and ASC Topic 270, “Interim Reporting.” This FSP requires entities to
provide disclosure of the fair value of all financial instruments for which it
is practicable to estimate that value, whether recognized or not recognized in
the balance sheet, in interim reporting periods. Prior to the issuance of this
FSP, such disclosures were required only in annual reporting periods. The FSP
does not require disclosures for earlier periods presented for comparative
purposes at initial adoption. The Utility adopted this FSP in the third quarter
of fiscal year 2009.


In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” as codified in
ASC Topic 855, “Subsequent Events.” Subsequent events are events or transactions
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. The Statement carries forward the guidance
on this topic that is currently contained in the auditing literature with
certain minor changes that are not expected to significantly affect current
practice. The Utility adopted the Statement on a prospective basis in the third
quarter of fiscal year 2009. The adoption of this Statement had no effect on the
Utility’s financial statements. For disclosure of the date through which the
Utility has evaluated subsequent events, see the Subsequent Events section
above.


In
June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles.”
This Statement, also known as Accounting Standards Update (ASU) No. 2009-01, is
a replacement of SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles,” which the Utility previously adopted on November 15, 2008
without any effect on the financial statements. SFAS No. 168 establishes the
FASB Accounting Standards CodificationTM (Codification) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with GAAP. Laclede Gas adopted SFAS No. 168 in the fourth quarter of
fiscal year 2009. The Codification does not change GAAP, but it reorganizes the
guidance into approximately 90 different topics using a consistent structure.
Accordingly, the Utility’s adoption of SFAS No. 168 had no effect on its
financial position, results of operations, or cash flows. Upon adoption of SFAS
No. 168, essentially all existing non-Securities and Exchange Commission (SEC)
accounting guidance not included in the Codification was superseded and deemed
nonauthoritative. As such, the Utility has modified certain references to
specific accounting standards included in this filing.


In
August 2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at
Fair Value,” to update ASC Topic 820. The guidance provides clarification on
measuring liabilities at fair value when a quoted price in an active market is
not available. In such circumstances, the ASU specifies that a valuation
technique should be applied that uses either the quote of the identical
liability when traded as an asset, the quoted prices for similar liabilities or
similar liabilities when traded as assets, or another valuation technique
consistent with existing fair value measurement guidance. This ASU is effective
for Laclede Gas in the first quarter of fiscal year 2010 and is not expected to
have a material impact on the Utility’s financial position or results of
operations.


33








2.
            PENSION PLANS AND OTHER POSTRETIREMENT
    BENEFITS





In
September 2009, the Utility adopted the measurement date provisions in ASC
Topic 715. ASC Topic 715 requires that plan assets and benefit obligations be
measured as of the date of the employer’s fiscal year-end statement of financial
position. The Utility previously used a June 30 valuation date for its
benefit plans. To change to a September 30 measurement date, the Utility
elected to use the 15-month alternative transition approach, wherein benefit
costs for the period between June 30, 2008 and
September 30, 2009 are allocated proportionately between a retained
earnings adjustment and periodic benefit cost for the period. As a result of
changing the measurement date, excluding the effect of income taxes, the Utility
recorded a one-time cumulative effect adjustment to reduce retained earnings by
$0.2 million, increase accumulated other comprehensive income by $50,000, and
pursuant to ASC Topic 980, increase net regulatory assets by $5.1 million. In
conjunction with the adoption, the Utility recorded increases to benefit
liabilities totaling $5.3 million.





Pension
Plans





Laclede
Gas has non-contributory defined benefit, trusteed forms of pension plans
covering substantially all employees. Effective January 1, 2009, the
Utility modified the calculation of future benefits under the primary plan from
a years of service and final average compensation formula to a cash balance
formula, which accrues benefits based on a percentage of compensation. Benefits
attributable to plan participation prior to January 1, 2009 will be
based on final average compensation at the date of termination of employment and
years of service earned through January 1, 2009. Plan assets consist
primarily of corporate and U.S. government obligations and equity
investments.


Pension
costs in 2009, 2008, and 2007 amounted to $6.2, $6.1, and $5.5 million,
respectively, including amounts charged to construction.


The
net periodic pension costs include the following components:





(Thousands)
            
            2009
            
            2008
            
            2007Service
      cost – benefits earned during the period
            
            $
            8,936
            
            $
            12,970
            
            $
            12,422Interest
      cost on projected benefit obligation
            
            
            20,957
            
            
            18,680
            
            
            17,929Expected
      return on plan assets
            
            
            (20,938
            )
            
            (20,650
            )
            
            (20,295
            )Amortization
      of prior service cost
            
            
            1,035
            
            
            1,088
            
            
            1,143Amortization
      of actuarial loss
            
            
            3,096
            
            
            3,165
            
            
            3,673Sub-total
            
            
            13,086
            
            
            15,253
            
            
            14,872Loss
      on lump-sum settlement
            
            
            —
            
            
            —
            
            
            803Regulatory
      adjustment
            
            
            (6,890
            )
            
            (9,120
            )
            
            (10,131
            )Net
      pension cost
            
            $
            6,196
            
            $
            6,133
            
            $
            5,544





Other
changes in plan assets and pension benefit obligations recognized in other
comprehensive income include the following:





(Thousands)
            
            
            2009
            
            2008Current
      year actuarial loss
            
            $
            84,187
            
            $
            18,050Amortization
      of actuarial loss
            
            
            (3,096
            )
            
            (3,165
            )Amortization
      of prior service cost
            
            
            (1,035
            )
            
            (1,088
            )Sub-total
            
            
            80,056
            
            
            13,797Regulatory
      adjustment
            
            
            (78,527
            )
            
            (13,697
            )Total
      recognized in other comprehensive income
            
            $
            1,529
            
            $
            100





Changes
in the minimum pension liability resulted in credits to other comprehensive
income of $0.4 million in fiscal year 2007, excluding the effect of regulatory
treatment. After the effect of regulatory treatment, credits recognized in other
comprehensive income for fiscal year 2007 were also $0.4
million.


34


Pursuant
to the provisions of the Laclede Gas pension plans, pension obligations may be
satisfied by lump-sum cash payments. Pursuant to a MoPSC Order, lump-sum
payments are recognized as settlements (which can result in gains or losses)
only if the total of such payments exceeds 100% of the sum of service and
interest costs. No lump-sum payments were recognized as settlements during
fiscal years 2009 and 2008. Lump-sum payments recognized as settlements during
fiscal year 2007 were $3.0 million.


Pursuant
to a MoPSC Order, the return on plan assets is based on the market-related value
of plan assets implemented prospectively over a four-year period. Gains or
losses not yet includible in pension cost are amortized only to the extent that
such gain or loss exceeds 10% of the greater of the projected benefit obligation
or the market-related value of plan assets. Such excess is amortized over the
average remaining service life of active participants. The recovery in rates for
the Utility’s qualified pension plans is based on an allowance of $4.1 million
annually effective October 1, 2005 and $4.8 million annually effective
August 1, 2007. The difference between this amount and pension expense
as calculated pursuant to the above and that otherwise would be included in the
Statements of Income and Statements of Comprehensive Income is deferred as a
regulatory asset or regulatory liability.


The
following table sets forth the reconciliation of the beginning and ending
balances of the pension benefit obligation at September 30:





(Thousands)
              
              2009
      *
              
              2008Benefit
      obligation at beginning of year
              
              $
              308,736
              
              $
              293,265Service
      cost
              
              
              12,371
              
              
              12,970Interest
      cost
              
              
              26,150
              
              
              18,680Actuarial
      loss (gain)
              
              
              54,769
              
              
              (19
              )Gross
      benefits paid
              
              
              (23,994
              )
              
              (16,160
              )Benefit
      obligation at end of year
              
              $
              378,032
              
              $
              308,736Accumulated
      benefit obligation at end of year
              
              $
              305,255
              
              $
              238,769
  *
              Due
      to the change in measurement date, fiscal year 2009 amounts reflect 15
      months of activity from July 1, 2008 to
      September 30, 2009.





The
following table sets forth the reconciliation of the beginning and ending
balances of the fair value of plan assets at September 30:





(Thousands)
              
              2009
      *
              
              2008Fair
      value of plan assets at beginning of year
              
              $
              248,346
              
              $
              260,280Actual
      return on plan assets
              
              
              (3,245
              )
              
              2,581Employer
      contributions
              
              
              2,581
              
              
              1,645Gross
      benefits paid
              
              
              (23,994
              )
              
              (16,160
              )Fair
      value of plan assets at end of year
              
              $
              223,688
              
              $
              248,346Funded
      status of plans
              
              $
              (154,344
              )
              $
              (60,390
              )Fourth
      quarter contribution adjustment
              
              
              —
              
              
              56Funded
      status, end of year
              
              $
              (154,344
              )
              $
              (60,334
              )
  *
              Due
      to the change in measurement date, fiscal year 2009 amounts reflect 15
      months of activity from July 1, 2008 to
      September 30, 2009.





35


The
following table sets forth the amounts recognized in the Balance Sheets at
September 30:





(Thousands)
            
            2009
            
            2008Noncurrent
      assets
            
            $
            —
            
            $
            —Current
      liabilities
            
            
            (1,920
            )
            
            (1,460
            )Noncurrent
      liabilities
            
            
            (152,424
            )
            
            (58,874
            )Total
            
            $
            (154,344
            )
            $
            (60,334
            )Pre-tax
      amounts recognized in accumulated other comprehensive
    incomenot
      yet recognized as components of net periodic pension cost consist
      of:Net
      actuarial loss
            
            $
            162,689
            
            $
            82,371Prior
      service costs
            
            
            9,950
            
            
            11,244Sub-total
            
            
            172,639
            
            
            93,615Adjustments
      for amounts included in Regulatory Assets
            
            
            (168,246
            )
            
            (90,701
            )Total
            
            $
            4,393
            
            $
            2,914





At
September 30, 2009, the following pre-tax amounts are expected to be
amortized from accumulated other comprehensive income into net periodic pension
cost during fiscal year 2010:





(Thousands)Amortization
      of net actuarial loss
            
            $
            8,139Amortization
      of prior service cost
            
            
            1,035Sub-total
            
            
            9,174Regulatory
      adjustment
            
            
            (8,781
            )Total
            
            $
            393





The
assumptions used to calculate net periodic pension costs are as
follows:





2009
            
            2008
            
            2007Weighted
      average discount rate
            6.60%
            
            6.25%
            
            6.25%Weighted
      average rate of future compensation increase
            3.75%
            
            3.50%
            
            3.50%Expected
      long-term rate of return on plan assets
            8.25%
            
            8.25%
            
            8.25%





The
weighted average discount rate is based on long-term, high quality bond indices
at the measurement date. The expected long-term rate of return on plan assets is
based on historical and projected rates of return for current and planned asset
classes in the investment portfolio. Assumed projected rates of return for each
asset class were selected after analyzing historical experience and future
expectations of the returns. The overall expected rate of return for the
portfolio was developed based on the target allocation for each class. The
expected return is a long-term assumption that generally does not change
annually.


The
assumptions used to calculate the benefit obligations are as
follows:





2009
            
            2008Weighted
      average discount rate
            5.25%
            
            6.60%Weighted
      average rate of future compensation increase
            3.25%
            
            3.75%





36


Following
are the projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for plans that have a projected benefit obligation and an
accumulated benefit obligation in excess of plan assets:





(Thousands)
            
            2009
            
            2008Projected
      benefit obligation
            
            $
            378,032
            
            $
            308,736Fair
      value of plan assets
            
            
            223,688
            
            
            248,346Accumulated
      benefit obligation
            
            
            305,255
            
            
            24,938Fair
      value of plan assets
            
            
            223,688
            
            
            12,727





Following
are the targeted and actual plan assets by category:





2010
            
            2009
            
            2008Target
            
            Actual
            
            ActualEquity
      Securities
            50%
            
            50%
            
            46%Debt
      Securities
            50%
            
            50%
            
            54%Total
            100%
            
            100%
            
            100%





Laclede
Gas’ investment policy is designed to preserve, to the extent possible, the
current funded status of the plan and minimize contributions to the trusts. The
policy seeks to maximize investment returns consistent with these objectives and
Laclede Gas’ tolerance for risk. Outside investment management specialists are
utilized in each asset class. Such specialists are provided with guidelines,
where appropriate, designed to ensure that the investment portfolio is managed
in accordance with the policy. Performance and compliance with the guidelines is
regularly monitored. Laclede Gas generally rebalances plan assets quarterly if
the actual allocation deviates from the target allocation by more than
2%.


Following
are expected pension benefit payments for the succeeding five fiscal years, and
in aggregate for the five years thereafter:





(Millions)
            
            Pensions
      from
              Qualified
      Trust
            
            Pensions
      from
              Laclede
      Gas
              Funds2010
            
            
            $
            17.3
            
            
            
            $
            1.92011
            
            
            
            18.6
            
            
            
            
            2.52012
            
            
            
            19.3
            
            
            
            
            1.22013
            
            
            
            23.0
            
            
            
            
            0.92014
            
            
            
            25.6
            
            
            
            
            0.72015
      – 2019
            
            
            
            176.6
            
            
            
            
            3.2





The
funding policy of Laclede Gas is to contribute an amount not less than the
minimum required by government funding standards, nor more than the maximum
deductible amount for federal income tax purposes. Contributions to the pension
plans in fiscal year 2010 are anticipated to be $1.6 million into the qualified
trusts, and $1.9 million into the non-qualified plans.


37





Postretirement
Benefits





Laclede
Gas provides certain life insurance benefits at retirement. Medical insurance is
available after early retirement until age 65. The transition obligation not yet
includible in postretirement benefit cost is being amortized over 20 years.
Postretirement benefit costs in 2009, 2008, and 2007 amounted to $7.6 million,
$7.6 million, and $7.8 million, respectively, including amounts charged to
construction.


Net
periodic postretirement benefit costs consisted of the following
components:





(Thousands)
            
            2009
            
            2008
            
            2007Service
      cost – benefits earned during the period
            
            $
            5,132
            
            $
            4,560
            
            $
            4,063Interest
      cost on accumulated postretirementbenefit
      obligation
            
            
            4,679
            
            
            3,909
            
            
            3,599Expected
      return on plan assets
            
            
            (2,376
            )
            
            (2,039
            )
            
            (1,723
            )Amortization
      of transition obligation
            
            
            136
            
            
            136
            
            
            136Amortization
      of prior service credit
            
            
            (2,328
            )
            
            (2,328
            )
            
            (2,328
            )Amortization
      of actuarial loss
            
            
            3,509
            
            
            2,985
            
            
            3,245Sub-total
            
            
            8,752
            
            
            7,223
            
            
            6,992Regulatory
      adjustment
            
            
            (1,110
            )
            
            419
            
            
            851Net
      postretirement benefit cost
            
            $
            7,642
            
            $
            7,642
            
            $
            7,843





Other changes in plan assets and
postretirement benefit obligations recognized in other comprehensive income
during fiscal year 2009 include the following:





(Thousands)
            
            
            2009
            
            2008Current
      year actuarial loss
            
            $
            11,137
            
            $
            9,772Amortization
      of actuarial loss
            
            
            (3,509
            )
            
            (2,985
            )Amortization
      of prior service credit
            
            
            2,328
            
            
            2,328Amortization
      of transition obligation
            
            
            (136
            )
            
            (136
            )Sub-total
            
            
            9,820
            
            
            8,979Regulatory
      adjustment
            
            
            (9,820
            )
            
            (8,979
            )Total
      recognized in other comprehensive income
            
            $
            —
            
            $
            —





Pursuant
to the Commission’s Order in the Utility’s 2002 rate case and affirmed in the
2005 and 2007 rate cases, the return on plan assets is based on the
market-related value of plan assets implemented prospectively over a four-year
period. Gains and losses not yet includible in postretirement benefit cost are
amortized only to the extent that such gain or loss exceeds 10% of the greater
of the accumulated postretirement benefit obligation or the market-related value
of plan assets. Such excess is amortized over the average remaining service life
of active participants. Also in the 2002 and 2005 rate cases, the Commission
ordered that the recovery in rates for the postretirement benefit costs be based
on the accounting methodology as ordered in the 1999 rate case, which based the
amortization of gains and losses on a five-year average of gains and losses. The
difference between this amount and postretirement benefit expense as calculated
pursuant to the above was deferred as a regulatory asset or regulatory
liability. In the 2007 rate case, the Commission recognized that the recovery in
rates is based on an annual allowance of $7.6 million, effective
August 1, 2007. The difference between this amount and postretirement
benefit cost based on the above and that otherwise would be included in the
Statements of Income and Statements of Comprehensive Income is deferred as a
regulatory asset or regulatory liability.


38


The
following table sets forth the reconciliation of the beginning and ending
balances of the postretirement benefit obligation at
September 30:





(Thousands)
              
              2009
      *
              
              2008Benefit
      obligation at beginning of year
              
              $
              69,714
              
              $
              60,111Service
      cost
              
              
              6,415
              
              
              4,560Interest
      cost
              
              
              5,848
              
              
              3,909Actuarial
      loss
              
              
              7,298
              
              
              6,356Gross
      benefits paid
              
              
              (5,644
              )
              
              (5,222
              )Benefit
      obligation at end of year
              
              $
              83,631
              
              $
              69,714
  *
              Due
      to the change in measurement date, fiscal year 2009 amounts reflect 15
      months of activity from July 1, 2008 to
      September 30, 2009.





The
following table sets forth the reconciliation of the beginning and ending
balances of the fair value of plan assets at September 30:





(Thousands)
              
              2009
      *
              
              2008Fair
      value of plan assets at beginning of year
              
              $
              26,082
              
              $
              24,997Actual
      return on plan assets
              
              
              (869
              )
              
              (1,378
              )Employer
      contributions
              
              
              13,992
              
              
              7,685Gross
      benefits paid
              
              
              (5,644
              )
              
              (5,222
              )Fair
      value of plan assets at end of year
              
              $
              33,561
              
              $
              26,082Funded
      status of plans
              
              $
              (50,070
              )
              $
              (43,632
              )Fourth
      quarter contribution adjustment
              
              
              —
              
              
              4,068Funded
      status, end of year
              
              $
              (50,070
              )
              $
              (39,564
              )
  *
              Due
      to the change in measurement date, fiscal year 2009 amounts reflect 15
      months of activity from July 1, 2008 to
      September 30, 2009.





The
following table sets forth the amounts recognized in the Balance Sheets at
September 30:





(Thousands)
            
            2009
            
            2008Noncurrent
      assets
            
            $
            —
            
            $
            —Current
      liabilities
            
            
            (280
            )
            
            (300
            )Noncurrent
      liabilities
            
            
            (49,790
            )
            
            (39,264
            )Total
            
            $
            (50,070
            )
            $
            (39,564
            )Pre-tax
      amounts recognized in accumulated other comprehensive
    incomenot
      yet recognized as components of net periodic postretirement
      costconsist
      of:Net
      actuarial loss
            
            $
            46,709
            
            $
            39,957Prior
      service credit
            
            
            (6,751
            )
            
            (9,660
            )Transition
      obligation
            
            
            501
            
            
            671Sub-total
            
            
            40,459
            
            
            30,968Adjustments
      for amounts included in Regulatory Assets
            
            
            (40,459
            )
            
            (30,968
            )Total
            
            $
            —
            
            $
            —





39


At
September 30, 2009, the following pre-tax amounts are expected to be
amortized from accumulated other comprehensive income into net periodic
postretirement benefit cost during fiscal year 2010:





(Thousands)Amortization of net actuarial loss
            
            $
            3,981Amortization of prior service credit
            
            
            (2,328
            )Amortization of transition obligation
            
            
            136Sub-total
            
            
            1,789Regulatory adjustment
            
            
            (1,789
            )Total
            
            $
            —





The
assumptions used to calculate net periodic postretirement benefit costs are as
follows:





2009
            
            2008
            
            2007Weighted
      average discount rate
            6.35%
            
            6.25%
            
            6.25%Weighted
      average rate of future compensation increase
            3.75%
            
            3.50%
            
            3.50%Expected
      long-term rate of return on plan assets
            8.25%
            
            8.25%
            
            8.25%





The
weighted average discount rate is based on long-term, high quality bond indices
at the measurement date. The expected long-term rate of return on plan assets is
based on historical and projected rates of return for current and planned asset
classes in the investment portfolio. Assumed projected rates of return for each
asset class were selected after analyzing historical experience and future
expectations of the returns. The overall expected rate of return for the
portfolio was developed based on the target allocation for each class. The
expected return is a long-term assumption that generally does not change
annually.


The
assumptions used to calculate the accumulated postretirement benefit obligations
are as follows:





2009
            
            2008Weighted
      average discount rate
            5.15%
            
            6.35%Weighted
      average rate of future compensation increase
            3.25%
            
            3.75%





The
assumed medical cost trend rates at September 30 are as
follows:





2009
            
            2008Medical
      cost trend assumed for next year
            8.00%
            
            8.50%Rate
      to which the medical cost trend rate is assumed to decline(the
      ultimate medical cost trend rate)
            5.00%
            
            5.00%Year
      that the rate reaches the ultimate trend
            2016
            
            2016





The
following table presents the effect of an assumed 1% change in the assumed
medical cost trend rate:





(Thousands)
            
            1%
      Increase
            
            1%
      DecreaseEffect
      on net periodic postretirement benefit cost
            
            
            $
            1,090
            
            
            $
            (970
            )Effect
      on accumulated postretirement benefit obligation
            
            
            
            4,870
            
            
            
            (4,390
            )





Following
are the targeted and actual plan assets by category:





2010
            
            2009
            
            2008Target
            
            Actual
            
            ActualEquity
      Securities
            60%
            
            58%
            
            54%Debt
      Securities
            40%
            
            42%
            
            46%Total
            100%
            
            100%
            
            100%





40


Missouri
state law provides for the recovery in rates of costs accrued pursuant to GAAP
provided that such costs are funded through an independent, external funding
mechanism. Laclede Gas established Voluntary Employees’ Beneficiary Association
and Rabbi trusts as its external funding mechanisms. Laclede Gas’ investment
policy seeks to maximize investment returns consistent with Laclede Gas’
tolerance for risk. Outside investment management specialists are utilized in
each asset class. Such specialists are provided with guidelines, where
appropriate, designed to ensure that the investment portfolio is managed in
accordance with policy. Performance and compliance with the guidelines is
regularly monitored. Laclede Gas’ current investment policy targets an asset
allocation of 60% to equity securities and 40% to debt securities, excluding
cash held in short-term debt securities for the purpose of making benefit
payments. Laclede Gas currently invests in a mutual fund which is rebalanced on
an ongoing basis to the target allocation.


Following
are expected postretirement benefit payments for the succeeding five fiscal
years, and in aggregate for the five years thereafter:





(Millions)
            
            Benefits
      Paid
              from
              Qualified
      Trust
            
            Benefits
      Paid
              from
      Laclede Gas
              Funds2010
            
            
            $
            4.6
            
            
            
            $
            0.32011
            
            
            
            4.8
            
            
            
            
            0.32012
            
            
            
            4.9
            
            
            
            
            0.32013
            
            
            
            5.2
            
            
            
            
            0.32014
            
            
            
            5.6
            
            
            
            
            0.32015
      – 2019
            
            
            
            38.6
            
            
            
            
            1.8





Laclede
Gas’ funding policy is to contribute amounts to the trusts equal to the periodic
benefit cost calculated pursuant to GAAP as recovered in rates. Contributions to
the postretirement plans in fiscal year 2010 are anticipated to be $11.6 million
to the qualified trusts, and $0.4 million paid directly to participants from
Laclede Gas funds.





Other
Plans





Laclede
Gas sponsors 401(k) plans that cover substantially all employees. The plans
allow employees to contribute a portion of their base pay in accordance with
specific guidelines. Laclede Gas provides a match of such contributions within
specific limits. The cost of the defined contribution plans of Laclede Gas
amounted to $3.5 million, $3.1 million, and $3.0 million for fiscal years 2009,
2008, and 2007, respectively.








3.
            COMMON
      STOCK AND PAID-IN CAPITAL





Total
shares of common stock outstanding were 11,634 and 10,416 at
September 30, 2009 and 2008, respectively.


Common
stock and paid-in capital increased $45.9 million and $6.4 million in 2009 and
2008, respectively. These increases were primarily due to the issuance of common
stock to Laclede Group and stock-based compensation costs allocated to Laclede
Gas from Laclede Group in both periods.


Laclede
Gas periodically sold shares of its stock to Laclede Group at prices per share
equal to book value on the last day of the quarter preceding each sale. Laclede
Gas sold 1,218 shares to Laclede Group for $42.0 million during fiscal 2009 and
109 shares totaling $3.8 million during fiscal 2008, which also represents the
total number of shares issued in each year. The proceeds from all the sales were
used to reduce short-term borrowings. Exemption from registration for all of the
sales was claimed under Section 4(2) of the Securities Act of 1933.


Laclede
Gas has on file with the SEC an effective shelf registration on Form S-3 for
issuance of $350 million of securities, $270 million of which remains available
to Laclede Gas at this time. The Utility has authority from the MoPSC until
February 15, 2010 to issue up to $500 million in First Mortgage Bonds,
unsecured debt, and equity securities, of which $370.4 million remained
available under this authorization as of September 30, 2009. The
amount, timing, and type of additional financing to be issued will depend on
cash requirements and market conditions.





41





4.
            REDEEMABLE
      PREFERRED STOCK





Laclede
Gas preferred stock, which was non-voting except in certain circumstances, was
redeemable at the option of the Laclede Gas Board of Directors. The redemption
price was equal to par of $25.00 per share. On March 31, 2009, Laclede
Gas redeemed all of its outstanding 5% Series B and 4.56% Series C preferred
stock, totaling $0.6 million at its par value of $25 per share in addition to
the dividend paid on that same date. This redemption included 19,200 shares of
5% Series B and 5,894 shares of 4.56% Series C preferred stock.


During
fiscal year 2008, 6,400 shares of 5% Series B preferred stock were called to
meet sinking fund requirements.








5.
            LONG-TERM
      DEBT





Maturities
on long-term debt for the five fiscal years subsequent to
September 30, 2009 are as follows:





2010
            —2011
            $25
      million2012
            —2013
            $25
      million2014
            —





On
November 1, 2007, Laclede Gas paid at maturity $40 million principal
amount of 7 1/2% First Mortgage Bonds. This maturity was funded through
short-term borrowings.


On
September 23, 2008, Laclede Gas issued $80 million of First Mortgage
Bonds, due October 15, 2038, at an interest rate of 6.35%. The bonds
are callable at par at the Utility’s option on or after
October 15, 2013.


At
September 30, 2009, Laclede Gas had fixed-rate long-term debt totaling
$390 million. While these long-term debt issues are fixed-rate, they are subject
to changes in fair value as market interest rates change. However, increases or
decreases in fair value would impact earnings and cash flows only if Laclede Gas
were to reacquire any of these issues in the open market prior to
maturity.


Laclede
Gas has on file with the SEC an effective shelf registration on Form S-3 for
issuance of $350 million of First Mortgage Bonds, unsecured debt, and preferred
stock, $270 million of which remains available to Laclede Gas at this time. The
Utility has authority from the MoPSC until February 15, 2010 to issue
up to $500 million in First Mortgage Bonds, unsecured debt, and equity
securities, of which $370.4 million remained under this authorization as of
September 30, 2009. The amount, timing, and type of additional
financing to be issued will depend on cash requirements and market
conditions.


Substantially
all of the utility plant of Laclede Gas is subject to the liens of its mortgage.
The mortgage contains several restrictions on Laclede Gas’ ability to pay cash
dividends on its common stock. These provisions are applicable regardless of
whether the stock is publicly held or, as has been the case since the formation
of Laclede Group, held solely by the Utility’s parent company. Under the most
restrictive of these provisions, no cash dividend may be declared or paid if,
after the dividend, the aggregate net amount spent for all dividends after
September 30, 1953, would exceed a maximum amount determined by a
formula set out in the mortgage. Under that formula, the maximum amount is the
sum of $8 million plus earnings applicable to common stock (adjusted for stock
repurchases and issuances) for the period from September 30, 1953, to
the last day of the quarter before the declaration or payment date for the
dividends. As of September 30, 2009 and 2008, the amount under the
mortgage’s formula that was available to pay dividends was $274 million and $273
million, respectively. Thus, all of the Utility’s retained earnings were free
from such restrictions as of those dates.





42





6.
            NOTES
      PAYABLE AND CREDIT AGREEMENTS





The
Utility’s short-term borrowing requirements typically peak during the colder
months. These short-term cash requirements can be met through the sale of
commercial paper supported by lines of credit with banks or through direct use
of the lines of credit. Laclede Gas has a syndicated line of credit in place of
$320 million from 10 banks, with the largest portion provided by a single bank
being 17.5%. This line expires in December 2011. In November 2008, the
Utility established a seasonal line of credit of $75 million, which expired in
March 2009. Including both lines of credit, the largest portion provided by
a single bank was 26.8%. During fiscal year 2009, Laclede Gas utilized both its
syndicated line of credit and commercial paper for short-term funding.
Commercial paper outstanding at September 30, 2009 was $129.8 million,
and there were no outstanding bank line advances. The weighted average interest
rate on the short-term borrowings was 0.24% per annum at
September 30, 2009.


Although
Laclede Gas borrowed funds from Laclede Group from time to time within fiscal
year 2009, there were no such borrowings outstanding at
September 30, 2009. The Utility had short-term borrowings (including
borrowings from Laclede Group) aggregating to a maximum of $386.4 million at any
one time during the fiscal year. Excluding borrowings from Laclede Group, the
Utility’s maximum borrowings for the year were $309.9 million.


During
fiscal year 2008, the Utility’s short-term borrowing requirements, which peaked
at $328.8 million, were generally met by the sale of commercial paper. However,
due to unfavorable terms in the commercial paper markets near the end of fiscal
year 2008, Laclede Gas utilized its line of credit as a more economical source
of short-term financing. The Utility had $61.7 million in commercial paper and
$154.2 million of bank line advances outstanding as of
September 30, 2008, at a weighted average interest rate of 4.0% per
annum, and $89.2 million of borrowings from Laclede Group.


Laclede
Gas’ lines of credit include covenants limiting total debt, including short-term
debt, to no more than 70% of total capitalization and requiring earnings before
interest, taxes, depreciation, and amortization (EBITDA) to be at least 2.25
times interest expense. On September 30, 2009, total debt was 56% of
total capitalization.For the fiscal year ended September 30, 2009, EBITDA was 3.76
times interest expense.








7.
            FAIR
      VALUE OF FINANCIAL INSTRUMENTS





The
carrying amounts and estimated fair values of financial instruments at
September 30, 2009 and 2008 are as follows:





(Thousands)
            
            Carrying
              Amount
            
            Fair
              Value2009:Cash
      and cash equivalents
            
            $
            1,402
            
            $
            1,402Marketable
      securities
            
            
            11,110
            
            
            11,110Derivative
      instrument assets
            
            
            12,369
            
            
            12,369Short-term
      debt
            
            
            129,800
            
            
            129,800Long-term
      debt
            
            
            389,240
            
            
            423,3752008:Cash
      and cash equivalents
            
            $
            3,163
            
            $
            3,163Marketable
      securities
            
            
            10,059
            
            
            10,059Derivative
      instrument assets
            
            
            54,578
            
            
            54,578Short-term
      debt
            
            
            305,116
            
            
            305,116Long-term
      debt
            
            
            389,181
            
            
            356,421Redeemable
      preferred stock, including current sinking fund
    requirements
            
            
            627
            
            
            431





The
carrying amounts for cash and cash equivalents and short-term debt approximate
fair value due to the short maturity of these instruments. The fair values of
long-term debt and preferred stock are estimated based on market prices for
similar issues. The fair value of marketable securities and derivative
instrument assets are valued as described in Note 8,
Fair Value Measurements.





43





8.
            FAIR VALUE
MEASUREMENTS





As
discussed in the New Accounting Standards section of Note
1, effective October 1, 2008, the Utility partially adopted the
provisions of SFAS No. 157, as codified in ASC Topic 820. This Statement
establishes a three-level hierarchy for fair value measurements that prioritizes
the inputs used to measure fair value. Assessment of the significance of a
particular input to the fair value measurements may require judgment and may
affect the valuation of the asset or liability and its placement within the fair
value hierarchy.


The
following table categorizes the assets and liabilities in the Balance Sheet that
are accounted for at fair value on a recurring basis in periods subsequent to
initial recognition.





As
      of September 30, 2009(Thousands)
            
            
            Quoted
              Prices
      in
              Active
              Markets
              (Level
      1)
            
            
            Significant
              Observable
              Inputs
              (Level
      2)
            
            
            Significant
              Unobservable
              Inputs
              (Level
      3)
            
            
            Effects
      of Netting and Cash Margin Receivables
              /Payables
            
            
            TotalAssetsMarketable
      securities
            
            $
            11,110
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            11,110Derivative
      instruments
            
            
            7,249
            
            
            —
            
            
            —
            
            
            5,120
            
            
            12,369Total
            
            $
            18,359
            
            $
            —
            
            $
            —
            
            $
            5,120
            
            $
            23,479LiabilitiesDerivative
      instruments
            
            $
            53,144
            
            $
            —
            
            $
            —
            
            $
            (53,144
            )
            $
            —





Marketable
securities included in Level 1 are mutual funds valued based on quoted market
prices of identical securities that are provided by the trustees of these
securities. Derivative instruments included in Level 1 are valued using quoted
market prices on the New York Mercantile Exchange (NYMEX). Marketable securities
are included in the Other investments line of the Balance Sheets. Liabilities
for derivative instruments, if any, are included in the Other line of the
Current Liabilities section of the Balance Sheets. Derivative assets and
liabilities, including receivables and payables associated with cash margin
requirements, are presented net in the Balance Sheets when a legally enforceable
netting agreement exists between Laclede Gas and the counterparty to a
derivative contract.








9.
            DERIVATIVE INSTRUMENTS AND HEDGING
    ACTIVITIES





Laclede
Gas 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. The policy 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. Accordingly,
Laclede Gas 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 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 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, Laclede Gas purchases NYMEX futures 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, 2009, Laclede Gas held 0.5 million gallons of
gasoline futures contracts at an average price of $1.34 per gallon. Most of
these futures contracts, the longest of which extends to October 2010, 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.


44


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, 2009, it is expected that approximately $0.1 million of
pre-tax unrealized gains will be reclassified into the Statements of Income
during fiscal year 2010. 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.


The
Utility’s derivative instruments consist primarily of NYMEX positions. The NYMEX
is the primary national commodities exchange on which natural gas derivatives
are traded. NYMEX-traded contracts are supported by the financial and credit
quality of the clearing members of the NYMEX and have nominal credit risk. Open
NYMEX natural gas futures positions at September 30, 2009 were as
follows:





MMBtu
              (millions)
            
            Avg.
      Price
              Per
              MMBtuOpen
      long futures positionsFiscal
      2010
            
            12.47
            
            
            $8.78Fiscal
      2011
            
            6.58
            
            
            8.55Fiscal
      2012
            
            0.60
            
            
            8.31





At
September 30, 2009, Laclede Gas also had 19.1 million MMBtu of other
price risk mitigation in place through the use of NYMEX natural gas option-based
strategies.





The
      Effect of Derivative Instruments on the Statements of Income and
      Statements of Comprehensive Income(Thousands)
            Location
      of Gain (Loss) Recorded in Income
            
            Nine
      Months
              Ended
              Sept.
      30, 2009 (a)Derivatives
      in ASC Topic 815 Cash Flow Hedging RelationshipsNYMEX
      gasoline and heating oil contractsEffective
      portion of gain recognized in OCI
              on
      derivative
            
            
            
            $
            248Effective
      portion of gain reclassified from
              accumulated
      OCI to income
            Utility
      – Other Operation
              Expenses
            
            
            
            119Ineffective
      portion of gain on derivative
              recognized
      in income
            Utility
      – Other Operation
              Expenses
            
            
            
            198Derivatives
      Not Designated as Hedging InstrumentsUnder
      ASC Topic 815 (b)NYMEX
      gasoline and heating oil contractsGain
      recognized in income on derivative
            Other
      Income and
              (Income
      Deductions) – Net
            
            
            $
            17





(a)
            The
      Utility prospectively adopted SFAS No. 161, as codified in ASC Topic 815,
      in the second quarter of fiscal year 2009. Accordingly, amounts disclosed
      in this column exclude activity prior to
      January 1, 2009.(b)
            Gains
      and losses on Laclede Gas' NYMEX 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 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.





45





Fair
      Value of Derivative Instruments in the Balance Sheet at September 30,
      2009Asset
      Derivatives
            
            Liability
      Derivatives(Thousands)
            
            Balance
      Sheet Location
            
            Fair
              Value
            *
            Balance
      Sheet Location
            
            Fair
              Value
            *Derivatives
      designated as hedging instruments under ASC Topic 815NYMEX
      gasoline and
              heating
      oil contracts
            
            Derivative
      Instrument Assets
            $
            278
            
            Derivative
      Instrument Assets
            $
            —Derivatives
      not designated as hedging instruments under
              ASC
      Topic 815NYMEX
      natural gas contracts
            
            Derivative
      Instrument Assets
            
            6,971
            
            Derivative
      Instrument Assets
            
            53,144Total
      derivatives
            
            
            $
            7,249
            
            
            $
            53,144





*
            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. At September 30, 2009, the
      amount excluded was $58.3 million in receivables, which was associated
      with NYMEX contracts. 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 Utility’s net economic exposure. Refer to Note 8, Fair Value Measurements, for information on the
      valuation of derivative
instruments.








10.
            ACCUMULATED
      OTHER COMPREHENSIVE INCOME (LOSS)





The
components of accumulated other comprehensive income (loss), net of income
taxes, recognized in the Balance Sheets at September 30 were as
follows:





(Thousands)
            
            Net
      Unrealized Gains (Losses) on Cash Flow Hedges
            Defined
      Benefit Pension and Other
              Postretirement
              Benefit
      Plans
            TotalBalance,
      September 30, 2007
            
            
            $
            —
            
            
            $
            (1,727
            )
            
            $
            (1,727
            )Current-period
      change
            
            
            
            —
            
            
            
            (63
            )
            
            
            (63
            )Balance,
      September 30, 2008
            
            
            
            —
            
            
            
            (1,790
            )
            
            
            (1,790
            )Current-period
      change
            
            
            
            79
            
            
            
            (939
            )
            
            
            (860
            )Adoption
      of SFAS No. 158, as codified in
              ASC
      Topic 715
            
            
            
            —
            
            
            
            31
            
            
            
            31Balance,
      September 30, 2009
            
            
            $
            79
            
            
            $
            (2,698
            )
            
            $
            (2,619
            )





Income
tax expense (benefit) recorded for items of other comprehensive income reported
in the Statements of Comprehensive Income is calculated by applying statutory
federal, state, and local income tax rates applicable to ordinary income. The
tax rates applied to individual items of other comprehensive income are similar
within each reporting period.


46





11.
            INCOME
      TAXES





The
net provisions for income taxes charged during the fiscal years ended
September 30, 2009, 2008, and 2007 are as follows:





(Thousands)
            
            2009
            
            2008
            
            2007Included
      in Statements of Income:FederalCurrent
            
            $
            (6,437
            )
            $
            7,476
            
            $
            21,808Deferred
            
            
            18,423
            
            
            5,762
            
            
            (9,490
            )Investment
      tax credits
            
            
            (219
            )
            
            (227
            )
            
            (237
            )State
      and localCurrent
            
            
            (1,108
            )
            
            1,153
            
            
            3,784Deferred
            
            
            3,200
            
            
            1,100
            
            
            (1,818
            )Total
      Income Tax Expense
            
            $
            13,859
            
            $
            15,264
            
            $
            14,047





The
effective income tax rate varied from the federal statutory income tax rate for
each year due to the following:





2009
            
            2008
            
            2007Federal
      income tax statutory rate
            
            
            35.0
            %
            
            35.0
            %
            
            35.0
            %State
      and local income taxes, net of federalincome
      tax benefits
            
            
            2.9
            
            
            2.7
            
            
            2.7Certain
      expenses capitalized on books anddeducted
      on tax return
            
            
            (5.9
            )
            
            (5.4
            )
            
            (6.0
            )Taxes
      related to prior years
            
            
            (0.5
            )
            
            (1.4
            )
            
            0.5Other
      items – net
            
            
            (2.0
            )
            
            (2.9
            )
            
            (2.0
            )Effective
      income tax rate
            
            
            29.5
            %
            
            28.0
            %
            
            30.2
            %





The
significant items comprising the net deferred tax liability recognized in the
Balance Sheets as of September 30 are as follows with additional detail
provided as of September 30, 2008:





(Thousands)
            
            2009
            
            2008Deferred
      tax assets:Reserves
      not currently deductible
            
            $
            19,419
            
            $
            18,848Pension
      and other postretirement benefits
            
            
            80,508
            
            
            46,934Unamortized
      investment tax credits
            
            
            2,358
            
            
            2,495Other
            
            
            10,015
            
            
            10,789Total
      deferred tax assets
            
            
            112,300
            
            
            79,066Deferred
      tax liabilities:Relating
      to property
            
            
            221,392
            
            
            205,220Regulatory
      pension and other postretirement benefits
            
            
            109,041
            
            
            76,666Deferred
      gas costs
            
            
            16,609
            
            
            10,156Other
            
            
            22,551
            
            
            17,184Total
      deferred tax liabilities
            
            
            369,593
            
            
            309,226Net
      deferred tax liability
            
            
            257,293
            
            
            230,160Net
      deferred tax liability – current
            
            
            (912
            )
            
            (7,781
            )Net
      deferred tax liability – non-current
            
            $
            256,381
            
            $
            222,379





47





Laclede
Group files a consolidated federal and state income tax return and allocates
income taxes to Laclede Gas and its other subsidiaries as if each entity were a
separate taxpayer. Laclede Group and Laclede Gas adopted the provisions of FASB
Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes,” as
codified in ASC Topic 740, “Income Taxes,” as of October 1, 2007. This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with GAAP.
Pursuant to this Interpretation, the Utility may recognize the tax benefit from
a tax position only if it is at least more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The Utility records potential interest and
penalties related to its uncertain tax positions as interest expense and other
income deductions, respectively. Unrecognized tax benefits, accrued interest
payable, and accrued penalties payable are included in the Other line of the
Deferred Credits and Other Liabilities section of the Balance
Sheets.


A
reconciliation of the beginning and ending amount of unrecognized tax benefits
for each year is as follows:





(Thousands)Balance
      as of October 1, 2007
            
            $
            1,864Increases
      related to current year tax positions
            
            
            419Settlements
      with taxing authorities
            
            
            (986
            )Reductions
      due to lapse of applicable statute of limitations
            
            
            (264
            )Balance
      at September 30, 2008
            
            
            1,033Increases
      related to current year tax positions
            
            
            333Balance
      at September 30, 2009
            
            $
            1,366





The
entire amount of unrecognized tax benefits at September 30, 2009, if
recognized, would affect the Utility’s effective tax rate. The Utility does not
expect any significant change related to any of the above unrecognized tax
positions within the next twelve months.


Interest
accrued associated with the Utility’s uncertain tax positions as of
September 30, 2009 and 2008 were immaterial and no penalties were
accrued as of those dates. During fiscal year 2009 an immaterial amount of
interest expense was accrued, and during fiscal year 2008 the Utility reversed
$0.2 million of accrued interest expense and $0.1 million of accrued penalties
in the Statement of Income.


Laclede
Group and/or Laclede Gas are subject to U.S. federal income tax as well as
income tax of state and local jurisdictions. These companies are no longer
subject to examination for fiscal years prior to 2006. During fiscal year 2008,
Laclede Group effectively settled with the Internal Revenue Service for fiscal
years 2005 and 2006. However, the federal statute of limitations remains open
until June 15, 2010 for fiscal year 2006.








12.
            OTHER
      INCOME AND (INCOME DEDUCTIONS) –
NET





(Thousands)
            
            2009
            
            2008
            
            2007Interest
      income
            
            $
            2,505
            
            $
            2,133
            
            $
            3,499Net
      investment gain (loss)
            
            
            229
            
            
            (1,403
            )
            
            533Other
      income
            
            
            316
            
            
            69
            
            
            2Other
      income deductions
            
            
            78
            
            
            407
            
            
            514Other
      Income and (Income Deductions) – Net
            
            $
            3,128
            
            $
            1,206
            
            $
            4,548





The
increase in Other Income and (Income Deductions) – Net in fiscal year 2009
(compared to fiscal year 2008), is primarily due to higher net investment income
and increased income associated with carrying costs applied to under-recoveries
of gas costs, partially offset by additional proceeds received during fiscal
year 2008 related to the Utility’s interest, as a policyholder, in the sale of a
mutual insurance company. Carrying costs on under-recoveries of gas costs are
recovered through the Utility’s PGA Clause.


The
decrease in Other Income and (Income Deductions) – Net in fiscal year 2008
(compared to fiscal year 2007), is primarily due to net higher investment losses
and lower income associated with carrying costs applied to under-recoveries of
gas costs. These factors were partially offset by additional proceeds received
during fiscal year 2008 related to Laclede Gas’ interest, as a policyholder, in
the sale of a mutual insurance company.





48





13.
            INFORMATION
      BY OPERATING SEGMENT





The
Regulated Gas Distribution segment consists of the regulated operations of
Laclede Gas. Laclede Gas is a public utility engaged in the retail distribution
of natural gas serving an area in eastern Missouri, with a population of
approximately 2.1 million, including the City of St. Louis and parts of ten
counties in eastern Missouri. The Non-Regulated Other segment included
merchandise sales activities, which was not material. Merchandise sales
activities ceased on September 30, 2009. Accounting policies are as
described in Note 1. There are no material intersegment
revenues.





Regulated
      Gas
            
            Non-Regulated
            
            Adjustments
      &(Thousands)
            
            Distribution
            
            Other
            
            Eliminations
            
            TotalFISCAL
      2009Operating
      revenues
            
            $
            1,053,993
            
            $
            2,246
            
            $
            —
            
            $
            1,056,239Depreciation
      & amortization
            
            
            36,751
            
            
            —
            
            
            —
            
            
            36,751Interest
      income
            
            
            2,505
            
            
            —
            
            
            —
            
            
            2,505Interest
      charges
            
            
            30,353
            
            
            —
            
            
            —
            
            
            30,353Income
      tax expense
            
            
            13,856
            
            
            3
            
            
            —
            
            
            13,859Net
      income
            
            
            33,178
            
            
            5
            
            
            —
            
            
            33,183Total
      assets
            
            
            1,598,600
            
            
            1,687
            
            
            —
            
            
            1,600,287Capital
      expenditures
            
            
            51,384
            
            
            —
            
            
            —
            
            
            51,384FISCAL
      2008Operating
      revenues
            
            $
            1,128,287
            
            $
            2,693
            
            $
            —
            
            $
            1,130,980Depreciation
      & amortization
            
            
            35,303
            
            
            —
            
            
            —
            
            
            35,303Interest
      income
            
            
            2,133
            
            
            —
            
            
            —
            
            
            2,133Interest
      charges
            
            
            30,214
            
            
            —
            
            
            —
            
            
            30,214Income
      tax expense
            
            
            15,244
            
            
            20
            
            
            —
            
            
            15,264Net
      income
            
            
            39,174
            
            
            32
            
            
            —
            
            
            39,206Total
      assets
            
            
            1,624,041
            
            
            1,774
            
            
            —
            
            
            1,625,815Capital
      expenditures
            
            
            55,304
            
            
            —
            
            
            —
            
            
            55,304FISCAL
      2007Operating
      revenues
            
            $
            1,131,554
            
            $
            3,415
            
            $
            —
            
            $
            1,134,969Depreciation
      & amortization
            
            
            34,080
            
            
            —
            
            
            —
            
            
            34,080Interest
      income
            
            
            3,499
            
            
            —
            
            
            —
            
            
            3,499Interest
      charges
            
            
            33,603
            
            
            —
            
            
            —
            
            
            33,603Income
      tax expense
            
            
            13,853
            
            
            194
            
            
            —
            
            
            14,047Net
      income
            
            
            32,176
            
            
            308
            
            
            —
            
            
            32,484Total
      assets
            
            
            1,429,415
            
            
            1,788
            
            
            —
            
            
            1,431,203Capital
      expenditures
            
            
            56,434
            
            
            —
            
            
            —
            
            
            56,434





49





14.
            COMMITMENTS AND
CONTINGENCIES





Commitments





Laclede
Gas estimates fiscal year 2010 utility capital expenditures at approximately $67
million. There are no material contractual commitments at
September 30, 2009 related to these estimated capital
expenditures.


Laclede
Gas has entered into various contracts, expiring on dates through 2017, for the
storage, transportation, and supply of natural gas. Minimum payments required
under the contracts in place at September 30, 2009 are estimated at
approximately $515 million. Additional contracts are generally entered into
prior to or during the heating season. Laclede Gas estimates that it will pay
approximately $88 million annually, at present rate levels, for fixed charges
related to these or other contracts that are expected to be in place for the
upcoming year for the reservation of gas supplies and pipeline transmission and
storage capacity. The Utility recovers these costs from customers in accordance
with the PGA Clause.


Laclede
Pipeline Company (Pipeline), a wholly-owned subsidiary of Laclede Group, is
providing liquid propane transportation service to Laclede Gas pursuant to an
approved FERC tariff and a contractual arrangement between Pipeline and Laclede
Gas. In accordance with the terms of that agreement, Laclede Gas is obligated to
pay Pipeline approximately $1.0 million annually, at current rates. The
agreement renews at the end of each contract year, unless terminated by either
party upon provision of at least six months’ notice.





Leases
and Guarantees





The
lease agreement covering the headquarters office space of Laclede Gas extends
through February 2015 with the option to renew for up to five additional
years. The aggregate rental expense for fiscal years 2009, 2008, and 2007 was
$900,000, $891,000, and $882,000, respectively. The annual minimum rental
payment for fiscal year 2010 is anticipated to be approximately $909,000 with a
maximum annual rental payment escalation of $8,800 per year for each year
through fiscal year 2015. Laclede Gas has entered into various operating lease
agreements for the rental of vehicles and power operated equipment. The rental
costs will be approximately $3.7 million in fiscal year 2010, $2.6 million in
fiscal year 2011, $1.5 million in fiscal year 2012, $0.5 million in fiscal year
2013, and $0.1 million in fiscal year 2014. Laclede Gas has other relatively
minor rental arrangements that provide for minimum rental payments.


Laclede
Gas has several operating leases for the rental of vehicles that contain
provisions requiring Laclede Gas to guarantee certain amounts related to the
residual value of the leased property. These leases have various terms, the
longest of which extends through 2014. At September 30, 2009, the
maximum guarantees under these leases are $1.7 million. However, the Utility
estimates that the residual value of the leased vehicles will be adequate to
satisfy most of the guaranteed amounts. At September 30, 2009, the
carrying value of the liability recognized for these guarantees was $0.4
million.





Contingencies





Laclede
Gas owns and operates natural gas distribution, transmission, and storage
facilities, the operations of which are subject to various environmental laws,
regulations, and interpretations. While environmental issues resulting from such
operations arise in the ordinary course of business, such issues have not
materially affected Laclede Gas’ financial position and results of operations.
As environmental laws, regulations, and their interpretations change, however,
Laclede Gas may be required to incur additional costs.


As
with other companies, Laclede Gas faces the risk of environmental liabilities.
In the natural gas industry, these are typically associated with sites formerly
owned or operated by gas distribution companies like Laclede Gas and/or its
predecessor companies at which manufactured gas operations took place. At this
time, Laclede Gas has identified three former manufactured gas plant (MGP)
sites: one in Shrewsbury and two in the City of St. Louis.


50


With
regard to the former MGP site located in Shrewsbury, Missouri, Laclede Gas and
state and federal environmental regulators agreed upon certain remedial actions
to a portion of the site in a 1999 Administrative Order on Consent (AOC), which
actions have been completed. On September 22, 2008, EPA Region VII
issued a letter of Termination and Satisfaction terminating the AOC. However, if
after termination of the AOC, regulators require additional remedial actions, or
additional claims are asserted, Laclede Gas may incur additional
costs.


The
site in the City of St. Louis, which is currently owned by the City, has been
enrolled in the Missouri Voluntary Cleanup Program (VCP). The VCP provides
potential opportunities to minimize the cost of site cleanup while maximizing
possibilities for site development. The City has selected a developer with whom
it is negotiating a final site development contract which contemplates
remediation and redevelopment of the property. In conjunction with the
redevelopment, Laclede Gas and another former site owner have entered into an
agreement with the owner and development agencies as well as their parent
agency, the private developer of the property, and an environmental consultant
(Remediation Agreement). Under the Remediation Agreement, the development agency
and the private developer agreed to remediate the site, and Laclede Gas and the
other former owner are to be released by the involved City agencies, the private
developer, and the environmental consultant from certain liabilities for the
past and current environmental condition of the property. Also under that
agreement Laclede Gas and the former site owner agreed to pay, at the closing of
the transaction, a small percentage of the cost of remediation (subject to a
maximum amount). The transactions contemplated by the Remediation Agreement are
expected to close during fiscal year 2010. The amount Laclede Gas expects
to pay under the Remediation Agreement is not material and will not have a
material impact on the future financial condition, results of operations, or
cash flows of Laclede Gas.


The
third former MGP site, also located in the City of St. Louis, is not currently
and has not been owned by Laclede Gas for many years. At this time, it is not
known whether Laclede Gas will incur any costs in connection with environmental
investigations of or remediation at the site, and if it does incur any such
costs, what the amount of those costs would be.


Laclede
Gas has notified its insurers that it seeks reimbursement for costs incurred in
the past and future potential liabilities associated with the three MGP sites
identified above. In response, the majority of insurers have reserved their
rights. While some of the insurers have denied coverage, Laclede Gas continues
to discuss potential reimbursements with them, with one insurer making a
settlement payment in exchange for a release of claims in June 2007. The
Utility’s outside consultant completed an analysis of the MGP sites to determine
cost estimates for a one-time contractual transfer of risk from each insurer to
the Utility of environmental coverage for the MGP sites. That analysis
demonstrated a range of possible future expenditures to investigate, monitor,
and remediate these MGP sites from $5.8 million to $36.3 million based upon then
currently available facts, technology, and laws and regulations. The actual
costs that Laclede Gas may incur could be materially higher or lower depending
upon several factors, including whether remedial actions will be required, final
selection and regulatory approval of any remedial actions, changing technologies
and governmental regulations, the ultimate ability of other potentially
responsible parties to pay, and any insurance recoveries. Costs associated with
environmental remediation activities are accrued when such costs are probable
and reasonably estimable.


The
amount of costs relative to future remedial actions at these and other sites is
unknown and may be material. Laclede Gas anticipates that any costs it may incur
in the future to remediate these sites, less any amounts received as insurance
proceeds or as contributions from other potentially responsible parties, would
be deferred and recovered in rates through periodic adjustments approved by the
MoPSC. Accordingly, potential liabilities associated with remediating these
sites are not expected to have a material impact on the future financial
position and results of operations of Laclede Gas.


On
December 28, 2006, the MoPSC Staff proposed a disallowance of $7.2
million related to Laclede Gas’ recovery of its purchased gas costs applicable
to fiscal year 2005. On September 14, 2007, the Staff withdrew its
pursuit of $5.5 million of the disallowance it had originally proposed. The
remaining $1.7 million pertains to Laclede Gas’ purchase of gas from a marketing
affiliate, Laclede Energy Resources, Inc. (LER), Laclede Gas believes that the
remaining portion of the proposed disallowance lacks merit and is vigorously
opposing the adjustment in proceedings before the MoPSC. As such, no amount has
been recorded in the financial statements for this proposed
disallowance.


The
MoPSC Staff has also proposed disallowance of gas costs relating to Laclede Gas
purchases of gas supply from LER for fiscal years 2006 and 2007. On
December 31, 2007, the MoPSC Staff proposed a disallowance of $2.8
million applicable to fiscal year 2006, and on December 31, 2008, the
MoPSC Staff proposed a disallowance of $1.5 million applicable to fiscal year
2007. Laclede Gas believes that these proposed disallowances also lack merit and
is vigorously opposing them in proceedings before the MoPSC. As such, no amount
has been recorded in the financial statements for these proposed
disallowances.


51


In
the December 31, 2007 filing, the MoPSC Staff also raised questions
regarding whether certain sales and capacity release transactions subject to the
FERC’s oversight were consistent with the FERC’s regulations and policies
regarding capacity release. Laclede Group commenced an internal review of the
questions raised by the MoPSC Staff and notified the FERC Staff that it took
this action. Subsequently, as a result of the internal review, Laclede Group has
provided the FERC Staff with a report regarding compliance of sales and capacity
release activities with the FERC’s regulations and policies. On
July 23, 2008, the FERC Staff requested additional information which
Laclede Group provided and on February 11, 2009, the FERC Staff
submitted follow-up questions to which Laclede Group responded on
February 25, 2009. On March 2, 2009, FERC Staff requested
clarification of certain aspects of Laclede Group’s February 25, 2009
response, which Laclede Group clarified on March 4, 2009.


Laclede
Gas is involved in other litigation, claims, and investigations arising in the
normal course of business. While the results of such litigation cannot be
predicted with certainty, management, after discussion with counsel, believes
that the final outcome will not have a material adverse effect on the financial
position, results of operations, or cash flows of the Utility.








15.
            INTERIM
      FINANCIAL INFORMATION (UNAUDITED)





In
the opinion of Laclede Gas, the quarterly information presented below for fiscal
years 2009 and 2008 includes all adjustments (consisting of only normal
recurring accruals) necessary for a fair statement of the results of operations
for such periods. Variations in operations reported on a quarterly basis
primarily reflect the seasonal nature of the business of Laclede
Gas.





(Thousands)Three
      Months Ended
            
            
            
            
            Dec.
      31
            
            
            
            
            March
      31
            
            
            
            
            June
      30
            
            
            
            
            Sept.
      302009Total
      Operating Revenues
            
            
            
            $
            358,698
            
            
            
            $
            441,067
            
            
            
            $
            160,917
            
            
            
            $
            95,557Operating
      Income (Loss)
            
            
            
            
            32,959
            
            
            
            
            42,068
            
            
            
            
            8,951
            
            
            
            
            (9,711
            )Net
      Income (Loss)
            
            
            
            
            16,197
            
            
            
            
            22,186
            
            
            
            
            2,347
            
            
            
            
            (7,547
            )Three
      Months Ended
            
            
            
            
            Dec.
      31
            
            
            
            
            March
      31
            
            
            
            
            June
      30
            
            
            
            
            Sept.
      302008Total
      Operating Revenues
            
            
            
            $
            321,678
            
            
            
            $
            507,829
            
            
            
            $
            190,228
            
            
            
            $
            111,245Operating
      Income (Loss)
            
            
            
            
            31,270
            
            
            
            
            46,677
            
            
            
            
            12,567
            
            
            
            
            (7,036
            )Net
      Income (Loss)
            
            
            
            
            15,795
            
            
            
            
            25,300
            
            
            
            
            5,546
            
            
            
            
            (7,435
            )





52