Exhibit
      99.1Selected
      Financial DataLaclede
      Gas CompanyFiscal
      Years Ended September 30(Thousands)
            
            2008
            
            2007
            
            2006
            
            2005
            
            2004Summary
      of OperationsOperating
      Revenues:Utility
            
            $
            1,128,287
            
            $
            1,131,554
            
            $
            1,141,011
            
            $
            978,195
            
            $
            868,905Other
            
            
            2,693
            
            
            3,415
            
            
            2,305
            
            
            2,288
            
            
            2,577Total
      Operating Revenues
            
            
            1,130,980
            
            
            1,134,969
            
            
            1,143,316
            
            
            980,483
            
            
            871,482Operating
      Expenses:UtilityNatural
      and propane gas
            
            
            770,097
            
            
            797,924
            
            
            821,721
            
            
            676,931
            
            
            575,691Other
      operation expenses
            
            
            144,611
            
            
            131,798
            
            
            128,180
            
            
            125,364
            
            
            121,596Maintenance
            
            
            25,827
            
            
            24,306
            
            
            21,198
            
            
            19,226
            
            
            18,705Depreciation
      and amortization
            
            
            35,303
            
            
            34,080
            
            
            30,904
            
            
            23,036
            
            
            22,385Taxes,
      other than income taxes
            
            
            69,023
            
            
            68,361
            
            
            71,038
            
            
            62,859
            
            
            60,077Total
      Utility Operating Expenses
            
            
            1,044,861
            
            
            1,056,469
            
            
            1,073,041
            
            
            907,416
            
            
            798,454Other
            
            
            2,641
            
            
            2,914
            
            
            2,316
            
            
            2,318
            
            
            2,456Total
      Operating Expenses
            
            
            1,047,502
            
            
            1,059,383
            
            
            1,075,357
            
            
            909,734
            
            
            800,910Operating
      Income
            
            
            83,478
            
            
            75,586
            
            
            67,959
            
            
            70,749
            
            
            70,572Allowance
      for Funds Used During Construction
            
            
            (72
            )
            
            (17
            )
            
            (45
            )
            
            (100
            )
            
            (123
            )Other
      Income and (Income Deductions) – Net
            
            
            1,278
            
            
            4,565
            
            
            4,163
            
            
            1,443
            
            
            3,507Interest
      Charges:Interest
      on long-term debt
            
            
            19,851
            
            
            22,502
            
            
            22,329
            
            
            22,835
            
            
            22,010Other
      interest charges
            
            
            10,363
            
            
            11,101
            
            
            10,236
            
            
            4,076
            
            
            3,192Total
      Interest Charges
            
            
            30,214
            
            
            33,603
            
            
            32,565
            
            
            26,911
            
            
            25,202Income
      Before Income Taxes
            
            
            54,470
            
            
            46,531
            
            
            39,512
            
            
            45,181
            
            
            48,754Income
      Tax Expense
            
            
            15,264
            
            
            14,047
            
            
            10,632
            
            
            14,550
            
            
            16,555Net
      Income
            
            
            39,206
            
            
            32,484
            
            
            28,880
            
            
            30,631
            
            
            32,199Dividends
      on Redeemable Preferred Stock
            
            
            35
            
            
            43
            
            
            48
            
            
            55
            
            
            62Earnings
      Applicable to Common Stock
            
            $
            39,171
            
            $
            32,441
            
            $
            28,832
            
            $
            30,576
            
            $
            32,137
































1





Selected
      Financial Data (continued)Laclede
      Gas CompanyFiscal
      Years Ended September 30(Thousands)
            
            2008
            
            2007
            
            2006
            
            2005
            
            2004Dividends
      Declared –Common
      Stock
            
            $
            32,811
            
            $
            31,520
            
            $
            30,049
            
            $
            29,003
            
            $
            27,183Utility
      PlantGross
      Plant – End of Period
            
            $
            1,229,174
            
            $
            1,187,828
            
            $
            1,149,104
            
            $
            1,105,733
            
            $
            1,070,522Net
      Plant – End of Period
            
            
            823,197
            
            
            793,794
            
            
            763,827
            
            
            728,481
            
            
            699,144Capital
      Expenditures
            
            
            55,304
            
            
            56,434
            
            
            57,925
            
            
            54,621
            
            
            49,130Property
      Retirements
            
            
            15,629
            
            
            16,331
            
            
            22,588
            
            
            19,410
            
            
            9,276Total
      Assets – End of Period
            
            $
            1,625,815
            
            $
            1,431,203
            
            $
            1,385,140
            
            $
            1,275,515
            
            $
            1,208,250Capitalization
      – End of PeriodCommon
      Stock and Paid-In Capital
            
            $
            157,883
            
            $
            151,510
            
            $
            145,527
            
            $
            140,381
            
            $
            136,052Retained
      Earnings
            
            
            202,535
            
            
            195,728
            
            
            194,807
            
            
            196,024
            
            
            194,451Accumulated
      Other Comprehensive Loss
            
            
            (1,790
            )
            
            (1,727
            )
            
            (834
            )
            
            (1,127
            )
            
            (371
            )Common
      Stock Equity
            
            
            358,628
            
            
            345,511
            
            
            339,500
            
            
            335,278
            
            
            330,132Redeemable
      Preferred Stock
            
            
            467
            
            
            627
            
            
            787
            
            
            948
            
            
            1,108Long-Term
      Debt
            
            
            389,181
            
            
            309,122
            
            
            349,041
            
            
            294,033
            
            
            333,936Total
      Capitalization
            
            $
            748,276
            
            $
            655,260
            
            $
            689,328
            
            $
            630,259
            
            $
            665,176
































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 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 spikes or declines in
      natural gas prices, including the related impact of margin deposits
      associated with the use of natural gas financial
    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•
            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





Laclede
Gas is regulated by the Missouri Public Service Commission (MoPSC or Commission)
and serves the City of St. Louis and parts of ten other 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 innovative
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.





Mitigating
the impact of weather fluctuations on Laclede Gas customers while improving the
ability to recover its authorized distribution costs and return continues to be
a fundamental component of Laclede Gas’ strategy. The Utility’s distribution
costs are the essential, primarily fixed expenditures it must incur to operate
and maintain a more than 16,000 mile natural gas distribution system and related
storage facilities. With regard to the storage facilities owned by Laclede Gas,
management is currently undertaking 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. In addition, Laclede Gas is working to
continually 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 remains subject to fluctuations in market
conditions. 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. The Stipulation &
Agreement approved by the MoPSC in the Utility’s 2007 rate case increases the
portion of pre-tax income from off-system sales and capacity release revenues
that is shared with customers. 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.





Laclede
Gas continues to work actively to reduce the impact of higher costs associated
with wholesale natural gas prices by strategically structuring its natural gas
supply portfolio and through the use of financial instruments. 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 financial 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
generally higher price levels, relative to historical levels, may continue to
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).


4


EARNINGS





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:





•
            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.





2007 vs.
2006





Laclede
Gas’ earnings applicable to common stock for fiscal year 2007 were $32.4
million, an increase of $3.6 million compared with fiscal year 2006. The
increase in earnings was primarily due to the following factors, quantified on a
pre-tax basis:





•
            the
      effect of higher system gas sales volumes, primarily due to colder weather
      and other variations totaling $6.7 million;•
            the
      benefit of the general rate increase, effective August 1, 2007, totaling
      $5.3 million; and,•
            higher
      Infrastructure System Replacement Surcharge (ISRS) revenues totaling $2.6
      million.





These
factors were partially offset by:





•
            increases
      in operation and maintenance expenses totaling $6.7 million;
      and,•
            higher
      depreciation and amortization expense totaling $3.2 million resulting from
      the implementation of new depreciation rates effective
      January 1, 2006, as authorized by the MoPSC, and additional
      depreciable property.





Utility
Operating Revenues





2008 vs.
2007





Utility
Operating Revenues for fiscal year 2008 decreased $3.3 million compared to
fiscal year 2007 due in part to lower wholesale gas costs. Temperatures
experienced in the Utility’s service area during 2008 were 6.8% colder than the
same period last year, 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 (reflecting less favorable market conditions as
      described in greaterdetail
      in the Results of Operations)
            
            $
            (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
            )


5





2007 vs.
2006





Utility
Operating Revenues for fiscal year 2007 decreased $9.5 million compared to
fiscal year 2006 due in part to lower wholesale gas costs. Temperatures
experienced in the Utility’s service area during 2007 were 5.7% colder than
fiscal year 2006, but 7.4% warmer than normal. Total system therms sold and
transported were 0.91 billion for fiscal year 2007 compared with 0.87 billion
for fiscal year 2006. Total off-system therms sold and transported were 0.21
billion for fiscal year 2007 compared with 0.16 billion for fiscal year 2006.
The decrease in Utility Operating Revenues was primarily attributable to the
following factors:





(Millions)Lower
      wholesale gas costs passed on to Utility customers (subject to prudence
      review by the MoPSC)
            
            $
            (111.6
            )Higher
      system sales volumes, primarily due to colder weather and other
      variations
            
            
            80.6Higher
      off-system sales volumes
            
            
            48.1Lower
      prices charged for off-system sales
            
            
            (34.5
            )General
      rate increase, effective August 1, 2007
            
            
            5.3Higher
      ISRS revenues implemented June 15, 2006,
      January 2, 2007, and June 16, 2007
            
            
            2.6Total
      Variation
            
            $
            (9.5
            )





Utility
Operating Expenses





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
last year’s level, 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 last year. Depreciation and
amortization expense increased $1.2 million, or 3.6%, primarily due to
additional depreciable property.





2007 vs.
2006





Utility
operating expenses in fiscal year 2007 decreased $16.6 million, or 1.5%, from
fiscal year 2006. Natural and propane gas expense decreased $23.8 million from
fiscal year 2006, primarily attributable to lower rates charged by our
suppliers, which was partially offset by higher system volumes purchased for
sendout and increased off-system gas expense. Other operation and maintenance
expenses increased $6.7 million, or 4.5%, primarily due to increased maintenance
and distribution charges, increased group insurance charges, higher wage rates,
and a higher provision for uncollectible accounts. These factors were partially
offset by decreased injuries and damages expense as well as a gain on the
disposal of assets. Depreciation and amortization expense increased $3.2
million, or 10.3%, primarily due to higher rates authorized in the 2005 rate
case effective January 1, 2006 and additional depreciable property.
Taxes, other than income taxes, decreased $2.7 million, or 3.8%, primarily due
to lower property taxes and decreased gross receipts taxes (attributable to the
decreased revenues).





Other
Income and (Income Deductions) - Net





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. Carrying
costs on under-recoveries of gas costs are recovered through the Utility’s PGA
Clause.





Other
Income and (Income Deductions) - Net increased $0.4 million in fiscal year 2007
(compared to fiscal year 2006), due to increased investment income and other
minor variations, partially offset by lower income associated with carrying
costs applied to under-recoveries of gas costs.


6


Interest
Charges





The
$3.4 million decrease in interest charges in fiscal year 2008 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. The $1.0 million increase
in interest charges in fiscal year 2007 (over fiscal year 2006) was primarily
due to higher interest on short-term debt and other minor variations. Average
short-term interest rates were 4.0% this year compared with 5.4% in fiscal year
2007 and 4.7% in fiscal year 2006. Average short-term borrowings were $203.9
million, $156.2 million, and $172.9 million for fiscal years 2008, 2007, and
2006, respectively.





Income
Taxes





The
$1.2 million increase in income taxes in fiscal year 2008 was primarily due to
higher pre-tax income, partially offset by the recognition of previously
unrecognized tax benefits recorded pursuant to Financial Accounting Standards
Board Interpretation No. (FIN) 48, and a change in estimated tax depreciation
and other property-related deductions.





The
$3.4 million increase in income tax expense for fiscal year 2007 was primarily
due to higher pre-tax income. The year-to-year variation in income tax expense
also reflects the effect of lower income tax expense in fiscal year 2006
associated with a change in estimated tax depreciation and other
property-related deductions.





Labor
Agreement





Laclede
Gas has a labor agreement with Locals 11-6 and 11-194 of the United Steel, Paper
and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial and Service
Workers International Union (Union), which represents approximately 65% of
Laclede Gas’ employees. On August 4, 2008, Laclede Gas and Union
representatives reached a new four-year labor agreement, replacing the prior
agreement that expired at midnight, July 31, 2008. The new contract
will expire at midnight on July 31, 2012. The new contract includes
revisions to the defined benefit plan pension 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.





The
Missouri Natural Division of Laclede Gas has a labor agreement with Local 11-884
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. The agreement expires on
April 15, 2009.








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
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
      years 2006 and 2007.





7





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.





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
              %
              
              
              $
              (7,610
              )
              
              $
              (171
              )(0.25
              )
              
              
              
              7,820
              
              
              
              160Rate
      of Future Compensation Increase
              
              0.25
              %
              
              
              
              5,900
              
              
              
              750(0.25
              )
              
              
              
              (5,700
              )
              
              
              (730
              )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
              %
              
              
              $
              (1,500
              )
              
              $
              (101
              )(0.25
              )
              
              
              
              1,540
              
              
              
              101Expected
      Return on Plan Assets
              
              0.25
              %
              
              
              
              —
              
              
              
              (67
              )(0.25
              )
              
              
              
              —
              
              
              
              67Annual
      Medical Cost Trend
              
              1.00
              %
              
              
              
              3,570
              
              
              
              (790
              )(1.00
              )
              
              
              
              (3,240
              )
              
              
              700*
      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.


8





Regulated Operations–Laclede
Gas accounts for its regulated operations in accordance with Statement of
Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of
Certain Types of Regulation.” This Statement sets forth the application of
accounting principles generally accepted in the United States of America for
those companies whose rates are established by or are subject to approval by an
independent third-party regulator. The provisions of SFAS No. 71 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 SFAS No. 71 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 SFAS No. 71:





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 financial 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 financial
      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 companies, and will be reflected as income or loss for
      non-regulated companies. 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 SFAS No. 143,
      “Accounting for Asset Retirement Obligations” and FIN 47, “Accounting for
      Conditional Asset Retirement Obligations.” Asset retirement obligations
      are calculated 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 SFAS No. 143 and FIN 47. The difference between removal costs
      recognized in depreciation rates and the accretion expense and
      depreciation expense recognizable under SFAS No. 143 and FIN 47 is a
      timing difference between the recovery of these costs in rates and their
      recognition for financial reporting purposes. Accordingly, consistent with
      SFAS No. 71, these differences are deferred as regulatory
      liabilities.





9





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. SFAS No. 158,
      “Employers’ Accounting for Defined Benefit Pension and Other
      Postretirement Plans,” 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 to the
Financial Statements included on page 25.








REGULATORY
MATTERS





There
have been several significant regulatory developments affecting Laclede
Gas.





During
fiscal 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 2007, the
Utility deferred for future recovery $2.7 million of costs associated with the
fiscal 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 by February 28, 2008. 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. The Non-Unanimous Stipulation & Agreement
was opposed by Public Counsel, and a hearing in this matter was held before the
Commission on March 31, 2008. 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 April 17 Order to the Cole County,
Missouri Circuit Court. Laclede Gas believes that Public Counsel’s appeal is
without merit and is vigorously opposing the appeal.





On
November 9, 2007, the Utility made an ISRS filing with the Commission
designed to increase revenues by $1.6 million annually. On
January 15, 2008, the Commission approved implementation of the
surcharge to be effective January 18, 2008. On
April 25, 2008, the Utility made an ISRS filing with the Commission
designed to increase revenues by $1.9 million annually. On
June 24, 2008, the Commission approved implementation of the surcharge
in the full amount requested, effective June 30, 2008.





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 2005. On September 14, 2007, the Staff withdrew its pursuit
of $5.5 million of the disallowance it had originally proposed. Laclede Gas
believes that the remaining $1.7 million of the MoPSC Staff’s proposed
disallowance lacks merit and is vigorously opposing the adjustment in
proceedings before the MoPSC.





On
December 31, 2007, the MoPSC Staff proposed a disallowance of $2.8
million related to Laclede Gas’ recovery of its purchased gas costs applicable
to fiscal 2006. Laclede Gas believes that the MoPSC Staff’s position lacks
merit and is vigorously opposing the adjustment in proceedings before the MoPSC.
In addition, the MoPSC’s Staff 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 Company 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, the Company 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
the Company provided on August 22, 2008 and
September 2, 2008.


10





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. Hearings are scheduled for December 8, 2008. As a
result, the Cold Weather Rule portion of the filing is now moot, but the
remainder of the filing is pending before the MoPSC.








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 to
the 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
            A3
            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.








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 financial 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 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.
Net cash used in operating activities was $71.7 million for fiscal year 2006.
The year-to-year variations are primarily attributable to the timing of the
Utility’s cash receipts and payments related to accounts payable, accounts
receivable, deferred purchased gas cost (including variations in cash payments
for margin deposits associated with the use of natural gas financial
instruments), and the cost of natural gas storage inventories, all of which were
impacted by year-to-year changes in the wholesale cost of natural
gas.


11





Net
cash used in investing activities for fiscal years 2008, 2007, and 2006 were
$56.4 million, $55.5 million, and $60.6 million, respectively. Net cash used in
investing activities primarily reflected capital expenditures in all
periods.





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.
Net cash provided by financing activities was $131.9 million for fiscal year
2006. The year-to-year variations are primarily due to the level of short-term
debt required as a result of fluctuations in cash provided by operating
activities associated with the effect of changes in natural gas prices described
previously and the increase in long-term debt in fiscal year 2008.








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 have traditionally
been met through the sale of commercial paper supported by lines of credit with
banks. Laclede Gas has a line of credit in place of $320 million from 10 banks,
with the largest portion provided by a single bank being 17.5%. During the
second quarter of fiscal 2008, the expiration of this line was extended one year
to December 2011 from December 2010. In November 2007, the
Utility established a seasonal line of credit of $40 million, which expired in
March 2008. Subsequent to the end of fiscal year 2008, Laclede Gas
established a seasonal line of credit of $75 million, which will expire in
March 2009. Including both lines of credit, the largest portion provided by
a single bank is 26.8%. 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. Short-term commercial paper
borrowings outstanding at September 30, 2008 were $61.7 million, while
outstanding bank line advances were $154.2 million. The weighted average
interest rate on these short-term borrowings was 4.0% per annum at
September 30, 2008. Based on total short-term borrowings at
September 30, 2008, a change in interest rate of 100 basis points
would increase or decrease pre-tax earnings and cash flows by approximately $2.2
million on an annual basis. Portions of such increases or decreases may be
offset through the application of PGA carrying costs. In addition, Laclede Gas
had borrowings from Laclede Group totaling $89.2 million at
September 30, 2008. The Utility had short-term borrowings (including
borrowings from Laclede Group) aggregating to a maximum of $328.8 million at any
one time during the fiscal year. Excluding borrowings from Laclede Group, the
Utility’s maximum borrowing for the year were $304.5 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, 2008, total debt was 66% of
total capitalization. For the fiscal year ended September 30, 2008,
EBITDA was 3.97 times interest expense.





Long-term
Debt





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, 2008, 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.


12





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 securities, of which
$270 million remains available to Laclede Gas at this time. The Utility has
authority from the MoPSC to issue up to $500 million in First Mortgage Bonds,
unsecured debt, and equity securities, of which $412.4 million remained
available under this authorization as of September 30, 2008, and
$372.4 million remains available as of November 20, 2008. During
fiscal year 2008, pursuant to this authority, the Utility sold 109 shares of its
common stock to Laclede Group for $3.8 million. On November 20, 2008,
the Utility sold 1,161 shares of its common stock to Laclede Group for $40.0
million. The amount, timing, and type of additional financing to be issued will
depend on cash requirements and market conditions.





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 through 2014. At September 30, 2008, the
maximum guarantees under these leases were $1.8 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, 2008, the
carrying value of the liability recognized for these guarantees was $0.3
million.





Other





Utility
capital expenditures were $55.3 million in fiscal year 2008, compared with $56.4
million and $57.9 million for fiscal years 2007 and 2006, respectively. Utility
capital expenditures are expected to be approximately $59 million in fiscal year
2009.





Capitalization
at September 30, 2008, excluding current obligations of preferred
stock, consisted of 47.9% common stock equity, 0.1% preferred stock, and 52.0%
long-term debt.





Laclede
Gas’ ratio of earnings to fixed charges was 2.7 for fiscal year 2008, 2.3 for
fiscal year 2007, and 2.2 for fiscal year 2006.





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
anticipated capital requirements.








CONTRACTUAL
OBLIGATIONS





As
of September 30, 2008, 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
            
            
            533.9
            
            
            24.5
            
            
            48.3
            
            
            45.1
            
            
            416.0Operating
      Leases (a)
            
            
            11.2
            
            
            4.8
            
            
            5.3
            
            
            1.1
            
            
            —Purchase
      Obligations – Natural Gas (b)
            
            
            422.2
            
            
            137.4
            
            
            150.1
            
            
            100.7
            
            
            34.0Purchase
      Obligations – Other (c)
            
            
            113.7
            
            
            15.9
            
            
            25.3
            
            
            17.5
            
            
            55.0Total
      (d)
            
            $
            1,471.0
            
            $
            182.6
            
            $
            254.0
            
            $
            189.4
            
            $
            845.0





13





(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, 2008 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 applicable amounts of
      contractual obligations under these categories. 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 $2.2 million in fiscal year 2009. Laclede
      Gas anticipates a $1.5 million contribution relative to its non-qualified
      pension plans during fiscal year 2009. With regard to the postretirement
      benefits, the Utility anticipates it will contribute $9.7 million to the
      qualified trusts and $0.4 million directly to participants from Laclede
      Gas’ funds during fiscal year 2009. 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 has a risk management policy that allows for the purchase of natural gas
financial instruments with the goal of managing 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 financial 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.
Accordingly, Laclede Gas does not expect any adverse earnings impact as a result
of the use of these financial 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 are recovered through the PGA Clause. At
September 30, 2008, the Utility held 42.7 million MMBtu of futures
contracts at an average price of $8.93 per MMBtu. Additionally, 16.0 million
MMBtu of other price risk mitigation was in place through the use of
option-based strategies. These positions have various expiration dates, the
longest of which extends through October 2011.








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 12 to the Financial Statements.








OFF-BALANCE
SHEET ARRANGEMENTS





Laclede
Gas has no off-balance sheet arrangements.


14


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, 2008. 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, 2008. 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.





15


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, 2008, 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
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, 2008,
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, 2008, of the Company and our report dated
November 21, 2008, 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, effective
October 1  2007, and Statement of Financial Accounting Standards
No. 158, Employer’s
Accounting for Defined Benefit Pension and Other Postretirement Plans — an
amendment of FASB Statements No. 87, 88, 106 and 132(R), effective
September 30, 2007.




/s/
DELOITTE & TOUCHE LLP







St.
Louis, Missouri


November
21, 2008


16


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, 2008 and 2007, 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, 2008. 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, 2008
and 2007, and the results of its operations and cash flows for each of the three
years in the period ended September 30, 2008, 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, present fairly, in all
material respects, the information set forth therein.




As
discussed in Notes 1 and 2 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, effective
October 1, 2007, and Statement of Financial Accounting Standards
No. 158, Employer’s
Accounting for Defined Benefit Pension and Other Postretirement Plans — an
amendment of FASB Statements No. 87, 88, 106 and 132(R), effective
September 30, 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, 2008, 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 21, 2008 expressed an unqualified opinion on the Company's
internal control over financial reporting.











/s/
DELOITTE & TOUCHE LLP





St.
Louis, Missouri


November
21, 2008








17





LACLEDE
      GAS COMPANYSTATEMENTS
      OF INCOME(Thousands)Years
      Ended September 30
            
            
            
            2008
            
            
            
            2007
            
            
            
            2006Operating
      Revenues:Utility
            
            
            
            $
            1,128,287
            
            
            
            $
            1,131,554
            
            
            
            $
            1,141,011Other
            
            
            
            
            2,693
            
            
            
            
            3,415
            
            
            
            
            2,305Total
      Operating Revenues
            
            
            
            
            1,130,980
            
            
            
            
            1,134,969
            
            
            
            
            1,143,316Operating
      Expenses:UtilityNatural
      and propane gas
            
            
            
            
            770,097
            
            
            
            
            797,924
            
            
            
            
            821,721Other
      operation expenses
            
            
            
            
            144,611
            
            
            
            
            131,798
            
            
            
            
            128,180Maintenance
            
            
            
            
            25,827
            
            
            
            
            24,306
            
            
            
            
            21,198Depreciation
      and amortization
            
            
            
            
            35,303
            
            
            
            
            34,080
            
            
            
            
            30,904Taxes,
      other than income taxes
            
            
            
            
            69,023
            
            
            
            
            68,361
            
            
            
            
            71,038Total
      Utility Operating Expenses
            
            
            
            
            1,044,861
            
            
            
            
            1,056,469
            
            
            
            
            1,073,041Other
            
            
            
            
            2,641
            
            
            
            
            2,914
            
            
            
            
            2,316Total
      Operating Expenses
            
            
            
            
            1,047,502
            
            
            
            
            1,059,383
            
            
            
            
            1,075,357Operating
      Income
            
            
            
            
            83,478
            
            
            
            
            75,586
            
            
            
            
            67,959Other
      Income and (Income Deductions) - Net
            
            
            
            
            1,206
            
            
            
            
            4,548
            
            
            
            
            4,118Interest
      Charges:Interest
      on long-term debt
            
            
            
            
            19,851
            
            
            
            
            22,502
            
            
            
            
            22,329Other
      interest charges
            
            
            
            
            10,363
            
            
            
            
            11,101
            
            
            
            
            10,236Total
      Interest Charges
            
            
            
            
            30,214
            
            
            
            
            33,603
            
            
            
            
            32,565Income
      Before Income Taxes
            
            
            
            
            54,470
            
            
            
            
            46,531
            
            
            
            
            39,512Income
      Tax Expense
            
            
            
            
            15,264
            
            
            
            
            14,047
            
            
            
            
            10,632Net
      Income
            
            
            
            
            39,206
            
            
            
            
            32,484
            
            
            
            
            28,880Dividends
      on Redeemable Preferred Stock
            
            
            
            
            35
            
            
            
            
            43
            
            
            
            
            48Earnings
      Applicable to Common Stock
            
            
            
            $
            39,171
            
            
            
            $
            32,441
            
            
            
            $
            28,832See
      the accompanying Notes to Financial Statements.

















18





LACLEDE
      GAS COMPANYSTATEMENTS
      OF COMPREHENSIVE INCOME(Thousands)Years
      Ended September 30
            
            
            
            2008
            
            
            
            2007
            
            
            
            2006Net
      Income
            
            
            
            $
            39,206
            
            
            
            $
            32,484
            
            
            
            $
            28,880Other
      Comprehensive Income (Loss) Before Tax:Defined
      benefit pension and other postretirement benefit plans:Minimum
      pension liability adjustment
            
            
            
            
            —
            
            
            
            
            377
            
            
            
            
            479Net
      actuarial loss arising during period
            
            
            
            
            (271
            )
            
            
            
            —
            
            
            
            
            —Amortization
      of actuarial loss included in net periodic pensionand
      other postretirement benefit cost
            
            
            
            
            171
            
            
            
            
            —
            
            
            
            
            —Net
      defined benefit pension and postretirement benefit plans
            
            
            
            
            (100
            )
            
            
            
            377
            
            
            
            
            479Income
      tax expense (benefit) related to items of othercomprehensive
      income (loss)
            
            
            
            
            (37
            )
            
            
            
            146
            
            
            
            
            186Other
      Comprehensive Income (Loss), Net of Tax
            
            
            
            
            (63
            )
            
            
            
            231
            
            
            
            
            293Comprehensive
      Income
            
            
            
            $
            39,143
            
            
            
            $
            32,715
            
            
            
            $
            29,173See
      the accompanying Notes to Financial Statements.

















19





LACLEDE
      GAS COMPANYBALANCE
      SHEETS(Thousands)September
      30
            
            
            
            2008
            
            
            
            2007ASSETSUtility
      Plant
            
            
            
            $
            1,229,174
            
            
            
            $
            1,187,828Less
      – Accumulated depreciation and amortization
            
            
            
            
            405,977
            
            
            
            
            394,034Net
      Utility Plant
            
            
            
            
            823,197
            
            
            
            
            793,794Other
      Property and Investments
            
            
            
            
            37,570
            
            
            
            
            36,933Current
      Assets:Cash
      and cash equivalents
            
            
            
            
            3,163
            
            
            
            
            2,454Accounts
      receivable:Utility
            
            
            
            
            98,708
            
            
            
            
            103,050Non-utility
            
            
            
            
            1,601
            
            
            
            
            1,527Associated
      companies
            
            
            
            
            3,028
            
            
            
            
            253Other
            
            
            
            
            4,852
            
            
            
            
            6,620Allowances
      for doubtful accounts
            
            
            
            
            (12,476
            )
            
            
            
            (10,961
            )Inventories:Natural
      gas stored underground at LIFO cost
            
            
            
            
            206,194
            
            
            
            
            138,198Propane
      gas at FIFO cost
            
            
            
            
            19,911
            
            
            
            
            19,950Materials,
      supplies and merchandise at average cost
            
            
            
            
            5,176
            
            
            
            
            4,864Derivative
      instrument assets
            
            
            
            
            54,578
            
            
            
            
            26,296Unamortized
      purchased gas adjustments
            
            
            
            
            33,411
            
            
            
            
            12,813Deferred
      income taxes
            
            
            
            
            —
            
            
            
            
            275Prepayments
      and other
            
            
            
            
            6,635
            
            
            
            
            6,970Total
      Current Assets
            
            
            
            
            424,781
            
            
            
            
            312,309Deferred
      Charges:Regulatory
      assets
            
            
            
            
            334,755
            
            
            
            
            285,054Other
            
            
            
            
            5,512
            
            
            
            
            3,113Total
      Deferred Charges
            
            
            
            
            340,267
            
            
            
            
            288,167Total
      Assets
            
            
            
            $
            1,625,815
            
            
            
            $
            1,431,203

















20





LACLEDE
      GAS COMPANYBALANCE
      SHEETS (continued)(Thousands)September
      30
            
            
            
            2008
            
            
            
            2007CAPITALIZATION
      AND LIABILITIESCapitalization:Common
      stock equity
            
            
            
            $
            358,628
            
            
            
            $
            345,511Redeemable
      preferred stock (less current sinking fund requirements)
            
            
            
            
            467
            
            
            
            
            627Long-term
      debt (less current portion)
            
            
            
            
            389,181
            
            
            
            
            309,122Total
      Capitalization
            
            
            
            
            748,276
            
            
            
            
            655,260Current
      Liabilities:Notes
      payable
            
            
            
            
            215,900
            
            
            
            
            211,400Notes
      payable – associated companies
            
            
            
            
            89,216
            
            
            
            
            —Accounts
      payable
            
            
            
            
            58,483
            
            
            
            
            45,084Accounts
      payable - associated companies
            
            
            
            
            —
            
            
            
            
            4,065Advance
      customer billings
            
            
            
            
            25,548
            
            
            
            
            25,440Current
      portion of long-term debt and preferred stock
            
            
            
            
            160
            
            
            
            
            40,160Wages
      and compensation accrued
            
            
            
            
            12,197
            
            
            
            
            11,532Dividends
      payable
            
            
            
            
            8,407
            
            
            
            
            7,974Customer
      deposits
            
            
            
            
            14,020
            
            
            
            
            15,899Interest
      accrued
            
            
            
            
            10,094
            
            
            
            
            10,806Taxes
      accrued
            
            
            
            
            10,434
            
            
            
            
            19,210Deferred
      income taxes current
            
            
            
            
            7,781
            
            
            
            
            —Other
            
            
            
            
            8,720
            
            
            
            
            5,342Total
      Current Liabilities
            
            
            
            
            460,960
            
            
            
            
            396,912Deferred
      Credits and Other Liabilities:Deferred
      income taxes
            
            
            
            
            222,379
            
            
            
            
            223,192Unamortized
      investment tax credits
            
            
            
            
            3,973
            
            
            
            
            4,200Pension
      and postretirement benefit costs
            
            
            
            
            98,513
            
            
            
            
            63,678Asset
      retirement obligations
            
            
            
            
            26,817
            
            
            
            
            26,054Regulatory
      liabilities
            
            
            
            
            42,191
            
            
            
            
            39,589Other
            
            
            
            
            22,706
            
            
            
            
            22,318Total
      Deferred Credits and Other Liabilities
            
            
            
            
            416,579
            
            
            
            
            379,031Commitments
      and Contingencies (Note 12)Total
      Capitalization and Liabilities
            
            
            
            $
            1,625,815
            
            
            
            $
            1,431,203See
      the accompanying Notes to Financial Statements.

















21





LACLEDE
      GAS COMPANYSTATEMENTS
      OF CAPITALIZATION(Thousands,
      Except for Shares and Per Share Amounts)September
      30
            
            
            
            2008
            
            
            
            2007Common
      Stock Equity:Common
      stock, par value $1 per share and Paid-in Capital:Authorized
      – 2008 and 2007, 50,000,000 sharesIssued
      – 2008, 10,416 shares; and 2007, 10,307 shares
            
            
            $
            157,883
            
            
            $
            151,510Retained
      earnings
            
            
            
            202,535
            
            
            
            195,728Accumulated
      other comprehensive loss
            
            
            
            (1,790
            )
            
            
            (1,727
            )Total
      Common Stock Equity
            
            
            
            358,628
            
            
            
            345,511Redeemable
      Preferred Stock, par value$25
      per share (1,480,000 shares authorized)Issued
      and outstanding:5%
      Series B – 2008, 19,200 shares, 2007, 25,600 shares
            
            
            
            320
            
            
            
            4804.56%
      Series C – 2008 and 2007, 5,894 shares
            
            
            
            147
            
            
            
            147Total
      Redeemable Preferred Stock
            
            
            
            467
            
            
            
            627Long-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
            
            
            
            —Total
            
            
            
            390,000
            
            
            
            310,000Unamortized
      discount, net of premium, on long-term debt
            
            
            
            (819
            )
            
            
            (878
            )Total
      Long-Term Debt
            
            
            
            389,181
            
            
            
            309,122Total
            
            
            $
            748,276
            
            
            $
            655,260Long-term
      debt and preferred stock dollar amounts are exclusive of current
      portion.See
      the accompanying Notes to Financial Statements.

















22








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, 2005
            
            10,089
            
            $
            10
            
            $
            140,371
            
            $
            196,024
            
            $
            (1,127
            )
            $
            335,278Net
      income
            
            —
            
            
            —
            
            
            —
            
            
            28,880
            
            
            —
            
            
            28,880Dividends
      declared:Common
      stock
            
            —
            
            
            —
            
            
            —
            
            
            (30,049
            )
            
            —
            
            
            (30,049
            )Preferred
      stock
            
            —
            
            
            —
            
            
            —
            
            
            (48
            )
            
            —
            
            
            (48
            )Stock-based
      compensation costs
            
            —
            
            
            —
            
            
            1,351
            
            
            —
            
            
            —
            
            
            1,351Tax
      benefit – stock compensation
            
            —
            
            
            —
            
            
            73
            
            
            —
            
            
            —
            
            
            73Other
      comprehensive income, net of tax
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            293
            
            
            293Issuance
      of common stock to Laclede Group
            
            108
            
            
            —
            
            
            3,722
            
            
            —
            
            
            —
            
            
            3,722BALANCE
      SEPTEMBER 30, 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, 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 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 income (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
            )
            $
            358,628See
      the accompanying Notes to Financial Statements.

















23





LACLEDE
      GAS COMPANYSTATEMENTS
      OF CASH FLOWS(Thousands)Years
      Ended September 30
            
            2008
            
            2007
            
            2006Operating
      Activities:Net
      Income
            
            $
            39,206
            
            $
            32,484
            
            $
            28,880Adjustments
      to reconcile net income to net cash provided by(used
      in) operating activities:Depreciation
      and amortization
            
            
            35,303
            
            
            34,080
            
            
            30,904Deferred
      income taxes and investment tax credits
            
            
            6,635
            
            
            (11,545
            )
            
            24,809Other
      – net
            
            
            3,553
            
            
            1,359
            
            
            1,491Changes
      in assets and liabilities:Accounts
      receivable – net
            
            
            4,776
            
            
            (2,267
            )
            
            (24,851
            )Unamortized
      purchased gas adjustments
            
            
            (20,598
            )
            
            31,568
            
            
            (13,120
            )Deferred
      purchased gas costs
            
            
            (19,614
            )
            
            13,381
            
            
            (114,686
            )Accounts
      payable
            
            
            8,024
            
            
            (6,616
            )
            
            (20,573
            )Advance
      customer billings – net
            
            
            108
            
            
            (6,003
            )
            
            755Taxes
      accrued
            
            
            (6,126
            )
            
            3,665
            
            
            (9,445
            )Natural
      gas stored underground
            
            
            (67,996
            )
            
            (781
            )
            
            22,162Other
      assets and liabilities
            
            
            (28,860
            )
            
            (10,253
            )
            
            1,939Net
      cash (used in) provided by operating activities
            
            
            (45,589
            )
            
            79,072
            
            
            (71,735
            )Investing
      Activities:Capital
      expenditures
            
            
            (55,304
            )
            
            (56,434
            )
            
            (57,925
            )Other
      investments
            
            
            (1,119
            )
            
            921
            
            
            (2,671
            )Net
      cash used in investing activities
            
            
            (56,423
            )
            
            (55,513
            )
            
            (60,596
            )Financing
      Activities:Issuance
      of first mortgage bonds
            
            
            80,000
            
            
            —
            
            
            55,000Maturity/redemption
      of first mortgage bonds
            
            
            (40,000
            )
            
            —
            
            
            (40,000
            )Issuance
      of short-term debt - net
            
            
            93,716
            
            
            4,100
            
            
            143,700Dividends
      paid
            
            
            (32,497
            )
            
            (31,245
            )
            
            (29,811
            )Issuance
      of common stock to Laclede Group
            
            
            3,803
            
            
            3,808
            
            
            3,722Preferred
      stock reacquired
            
            
            (160
            )
            
            (159
            )
            
            (63
            )Other
            
            
            (2,141
            )
            
            77
            
            
            (606
            )Net
      cash provided by (used in) financing activities
            
            
            102,721
            
            
            (23,419
            )
            
            131,942Net
      Increase (Decrease) in Cash and Cash Equivalents
            
            
            709
            
            
            140
            
            
            (389
            )Cash
      and Cash Equivalents at Beginning of Year
            
            
            2,454
            
            
            2,314
            
            
            2,703Cash
      and Cash Equivalents at End of Year
            
            $
            3,163
            
            $
            2,454
            
            $
            2,314Supplemental
      Disclosure of Cash Paid During the Year for:Interest
            
            $
            30,992
            
            $
            31,776
            
            $
            32,298Income
      taxes
            
            
            21,178
            
            
            6,734
            
            
            6,987See
      the accompanying Notes to Financial Statements.

















24


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, transactions between
Laclede Gas and its affiliates as well as intercompany balances on Laclede Gas’
Balance Sheet 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 or lend funds to
affiliated companies. Unpaid balances relating to these arrangements, if any,
are reflected in Notes Receivable-Associated Companies or 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
other counties in eastern Missouri. As an adjunct to its gas distribution
business, Laclede Gas operates underground natural gas storage
fields.


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.


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. Annual depreciation and
amortization in 2008, 2007, and 2006 averaged 3.1%, 3.1%, and 3.0%,
respectively, of the original cost of depreciable and amortizable
property.


Pursuant
to the terms of the 2005 rate case settlement, higher depreciation rates became
effective January 1, 2006, reflecting, in part, an accrual for future
removal costs, including costs related to interim retirements. Concurrent with
implementation of new depreciation rates on January 1, 2006, Laclede
Gas ceased expensing all removal costs, net of salvage, as incurred and
discontinued an annual $3.4 million negative amortization of a portion of the
Utility’s depreciation reserve, as previously ordered by the MoPSC. Consistent
with Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for
the Effects of Certain Types of Regulation,” the Utility records accruals for
asset removal costs that are provided for through depreciation expense with
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 regulatory liability for accrued asset
removal costs represents amounts recovered through rates in excess of actual
costs incurred. 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
Utility’s capital expenditures were $55.3 million, $56.4 million, and $57.9
million for fiscal years 2008, 2007, and 2006, respectively. Additionally, at
September 30, 2008, the Utility had recorded accruals for capital
expenditures totaling approximately $2.3 million. Accrued capital expenditures
at September 30, 2007 and 2006 were not material. Accrued capital
expenditures are excluded from the Statements of Cash Flows.





25


ASSET RETIREMENT OBLIGATIONS -
In accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations,”
and Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 47,
“Accounting for Conditional 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 removal costs associated with its property, plant and equipment
through its depreciation rates, even if a legal obligation, as defined by SFAS
No. 143 and FIN 47, does not exist. The difference between removal costs
recognized in depreciation rates and the accretion expense and depreciation
expense recognizable under SFAS No. 143 and FIN 47 is a timing difference
between recovery of these costs in rates and their recognition for financial
reporting purposes. Accordingly, consistent with SFAS No. 71, these differences
are deferred as regulatory liabilities.


Laclede
Gas first adopted the provisions of FIN 47 on September 30, 2006. Upon
adoption, the Utility recorded Asset Retirement Obligations of $26.0 million and
increased the carrying value of the related assets by $3.3 million (reflecting
an increase in gross plant of $6.8 million reduced by accumulated depreciation
totaling $3.5 million). The remaining $22.7 million represents the cumulative
effect of adoption and was recorded as a reduction to Regulatory Liabilities
pursuant to SFAS No. 71.


The
following table presents a reconciliation of the beginning and ending balances
of Asset Retirement Obligations reported in the Balance Sheets:





(Thousands)Balance
      at September 30, 2006
            
            $
            25,988Liabilities
      incurred during the period
            
            
            603Liabilities
      settled during the period
            
            
            (2,372
            )Accretion
            
            
            1,504Revisions
      in estimated cash flows
            
            
            331Balance
      at September 30, 2007
            
            
            26,054Liabilities
      incurred during the period
            
            
            235Liabilities
      settled during the period
            
            
            (1,035
            )Accretion
            
            
            1,563Revisions
      in estimated cash flows
            
            
            —Balance
      at September 30, 2008
            
            $
            26,817





REGULATED OPERATIONS - Laclede
Gas accounts for its regulated operations in accordance with SFAS No. 71. This
Statement sets forth the application of accounting principles generally accepted
in the United States of America for those companies whose rates are established
by or are subject to approval by an independent third-party regulator. The
provisions of SFAS No. 71 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).


26


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





(Thousands)
            
            2008
            
            2007Regulatory
      Assets:Future
      income taxes due from customers
            
            $
            85,456
            
            $
            85,476Pension
      and postretirement benefit costs
            
            
            182,890
            
            
            151,163Unamortized
      purchased gas adjustments
            
            
            33,411
            
            
            12,813Purchased
      gas costs
            
            
            49,071
            
            
            29,457Compensated
      absences
            
            
            7,253
            
            
            7,104Cold
      weather rule
            
            
            6,074
            
            
            6,952Other
            
            
            4,011
            
            
            4,902Total
      Regulatory Assets
            
            $
            368,166
            
            $
            297,867Regulatory
      Liabilities:Unamortized
      investment tax credits
            
            $
            3,973
            
            $
            4,200Accrued
      cost of removal
            
            
            35,922
            
            
            33,238Other
            
            
            6,269
            
            
            6,351Total
      Regulatory Liabilities
            
            $
            46,164
            
            $
            43,789





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 $6.2 million from December 27, 1999 through
September 30, 2008. Previously deferred costs of $2.1 million are
being recovered and amortized on a straight-line basis over a ten-year period,
without return on investment. Amortization of these costs totaled $1.8 million
from December 27, 1999 through
September 30, 2008.


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, 2008 was less than the LIFO cost by
$21.8 million and at September 30, 2007 exceeded the LIFO cost by $4.3
million. 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, 2008 and 2007,
for the Utility, were $13.5 million and $11.9 million,
respectively.


PURCHASED GAS ADJUSTMENTS AND
DEFERRED ACCOUNT-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 financial 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 financial instruments are gas
costs recoverable through the PGA mechanism. As part of the settlements of the
Utility’s 2005 and 2007 rate cases, the following modifications were made to
Laclede Gas’ PGA Clause:


•
            Effective
      October 1, 2005, the Utility was authorized to implement the
      recovery of 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 MoPSC also approved the application of carrying costs to all
      over- or under-recoveries of gas costs, including costs and cost
      reductions associated with the use of financial instruments. Previously,
      carrying costs were applicable only to certain gas cost components
      exceeding a predetermined
threshold.





27





•
            In
      its 2002 rate case, 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 2005 rate case continued the plan, with
      certain modifications. 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 2007 and 2006. Income recorded under the plan is included in the
      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 financial instruments and gas
inventory carrying costs), amounts due to or from customers related to operation
of the gas supply cost management program, 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.


28


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 $52.5 million, $51.8 million, and $53.0 million for
fiscal years 2008, 2007, and 2006, 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 Other Current Liabilities in 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 years 2006 and
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.


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 the
recognition and measurement principles of SFAS No. 123(R), “Share-Based
Payment,” and allocates applicable compensation costs to its subsidiaries. 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)
            
            2008
            
            2007
            
            2006Total
      compensation cost
            
            $
            2,263
            
            $
            2,029
            
            $
            1,388Compensation
      cost capitalized
            
            
            (578
            )
            
            (524
            )
            
            (360
            )Compensation
      cost recognized in net income
            
            
            1,685
            
            
            1,505
            
            
            1,028Income
      tax benefit recognized in net income
            
            
            (650
            )
            
            (582
            )
            
            (397
            )Compensation
      cost recognized in net income, net of income tax
            
            $
            1,035
            
            $
            923
            
            $
            631





As
of September 30, 2008, there was $3.4 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 2.4 years.


NEW ACCOUNTING STANDARDS- In
June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income
Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.” Under FIN 48, Laclede Gas 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 tax benefits
recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than fifty percent likelihood of
being realized upon settlement with the taxing authorities. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. Laclede Gas adopted the provisions
of FIN 48 as of October 1, 2007. For details regarding the cumulative
effect of adoption and other pertinent information, see Note 9, Income
Taxes.


29


In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
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 the Laclede
Group’s stock-based compensation plans accounted for in accordance with SFAS No.
123(R), “Share-Based Payment.” Except as described below, SFAS No. 157 is
effective for the Utility as of the beginning of fiscal year 2009. In
February 2008, the FASB issued two Staff Positions that amend SFAS No. 157.
The first FASB Staff Position (FSP), No. FAS 157-1, excludes from the scope of
SFAS No. 157 accounting pronouncements that address fair value measurements for
purposes of lease classification and measurement. The second FSP, No. FAS 157-2,
delays the effective date of SFAS No. 157 for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
Application of SFAS No. 157 to these items will be effective for Laclede Gas as
of the beginning of fiscal year 2010. In October 2008, the FASB issued FSP
No. FAS 157-3, which clarifies the application of SFAS No. 157 in a market that
is not active. The Utility anticipates that the adoption of SFAS No. 157, as
amended by these Staff Positions, will not have a material impact on the
Utility’s financial position of results of operations. The Utility will,
however, be required to provide additional disclosures on certain fair value
measurements.


In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans.” As discussed in Note 2,
Pension Plans and Other Postretirement 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. This requirement is effective for the Utility
as of the end of fiscal year 2009. In conjunction with adoption of this
provision of SFAS No. 158, the Utility will be required to change its valuation
date for its pension and other postretirement plans from June 30 to
September 30. Adoption will require certain adjustments to retained
earnings and other comprehensive income, the amounts of which are not yet known.
However, the majority of these adjustments, attributable to the Utility’s
qualified pension plans and other postretirement benefit plans, are expected to
be deferred with entries to regulatory assets.


In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” 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. SFAS No. 159
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 of SFAS No. 159, 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 SFAS No. 95, “Statement of Cash Flows”
(as amended). SFAS No. 159 is effective for the Utility as of the beginning of
fiscal year 2009. The Utility does not intend to elect the fair value option for
any instruments not currently reported at fair value. Therefore, the adoption of
this Statement will have 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 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 under SFAS No. 123(R). The Task Force reached a consensus that
such tax benefits should be recognized as an increase in additional paid-in
capital. This EITF Issue also addresses how the accounting for these tax
benefits is affected if an entity’s estimate of forfeitures changes in
subsequent periods. This EITF Issue is effective for Laclede Gas as of the
beginning of fiscal year 2009. Adoption of this EITF issue will not have a
material effect on the Utility’s financial position or results of
operations.


In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements.” This Statement amends Accounting Research
Bulletin No. 51, “Consolidated Financial Statements.” A noncontrolling interest,
sometimes called a minority interest, is the portion of equity in a subsidiary
not attributable, directly or indirectly, to a parent. SFAS No. 160 clarifies
that noncontrolling interests should be separately reported as equity in the
balance sheet. Additionally, SFAS No. 160 requires certain changes in
presentation to income statements. SFAS No. 160 also addresses accounting for
changes in the parent’s ownership interest of a subsidiary, accounting for the
deconsolidation of a subsidiary, and disclosure requirements. This Statement is
effective for Laclede Gas as of the beginning of fiscal year 2010.
Currently, Laclede Gas does not have any subsidiaries and therefore adoption of
this Statement will not have any effect on the Utility’s financial
statements.


30


In
December 2007, the FASB issued SFAS No. 141 (revised 2007) (141(R)),
“Business Combinations.” This Statement revises SFAS No. 141 but retains the
fundamental requirements in SFAS No. 141 that the acquisition method
(formerly known as purchase method) of accounting be used for all business
combinations. SFAS No. 141(R) requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the Statement. SFAS 141(R) requires
acquisition-related costs to be accounted for separately instead of being
allocated to the assets acquired and liabilities assumed. SFAS No. 141(R) also
amends the guidance related to the recognition of certain assets acquired and
liabilities assumed that relate to contingencies, research and development
assets acquired that have no alternative future use, and negative goodwill
arising from a bargain purchase. Laclede Gas is required to adopt SFAS No.
141(R) prospectively to business combinations with acquisition dates on or after
October 1, 2009 (fiscal 2010). Because this Statement is only
applicable to future business combinations, existing amounts reported on the
Utility’s financial statements will not be impacted by adoption of this
Statement.


In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities.” This Statement amends SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” by requiring
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This Statement will be
effective for Laclede Gas’s interim and annual financial statements beginning in
the second quarter of fiscal year 2009. This Statement encourages, but does not
require, comparative disclosures for earlier periods at initial adoption. The
Utility is currently evaluating the provisions of this Statement.


In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles.” SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting principles to be used in
the preparation and presentation of financial statements in accordance with
generally accepted accounting principles. This statement will be effective in
the first quarter of fiscal 2009. The adoption of SFAS No. 162 will not have any
effect on the Utility’s financial statements.


In
May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts-an interpretation of FASB Statement No. 60.” This Statement
provides clarification to the guidance in SFAS No. 60, “Accounting and Reporting
by Insurance Enterprises,” and expands disclosure requirements. This Statement
is effective for Laclede Gas as of the beginning of fiscal year 2010. Because
SFAS No. 163 is primarily applicable to insurance enterprises that issue
financial guarantee insurance contracts, the adoption of this Statement will
have no effect on the Utility’s financial statements.








2.
            PENSION
      PLANS AND OTHER POSTRETIREMENT
BENEFITS





In
September 2007, the Utility adopted SFAS No. 158. This Statement amended
FASB Statements No. 87, “Employers’ Accounting for Pensions,” No. 88,
“Employers’ Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits,” No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions,” and No. 132 (revised 2003),
“Employers’ Disclosure About Pensions and Other Postretirement Benefits.”
Statement No. 158 requires an
employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position. Prior accounting standards allowed an employer to delay recognition of
certain economic events that affected the costs of providing postretirement
benefits and to disclose the overfunded or underfunded status of a plan in the
notes to the financial statements. This Statement eliminated the delayed
recognition of actuarial gains and losses and prior service costs and credits
that arise during the period and requires employers to recognize these items as
components of other comprehensive income, net of tax. Additional minimum pension
liabilities and related intangible assets were derecognized upon adoption of
this Statement. 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. This requirement will be effective for the
Utility as of the end of fiscal year 2009. The Utility currently uses a
June 30 valuation date for its benefit plans.


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. Accordingly, consistent with SFAS No. 71, the impact of adoption of
SFAS No. 158 on accumulated other comprehensive income for the Utility’s
qualified pension plans and postretirement benefit plans was deferred with
entries to Regulatory Assets.





31


The
incremental effects of adoption of SFAS No. 158 on individual line items of the
Balance Sheet at September 30, 2007 were as follows:





(Thousands)
            
            Prior
      to
              SFAS
      No. 158
              Adoption
            
            Adjustments
            
            After
              SFAS
      No. 158
              AdoptionDeferred
      Charges:Prepaid
      pension cost
            
            $
            51,962
            
            $
            (51,962
            )
            $
            —Regulatory
      assets
            
            
            190,254
            
            
            94,800
            
            
            285,054Other
            
            
            3,636
            
            
            (523
            )
            
            3,113Common
      stock equity:Accumulated
      other comprehensive income (loss) *
            
            
            (603
            )
            
            (1,124
            )
            
            (1,727
            )Current
      Liabilities:Other
            
            
            4,642
            
            
            700
            
            
            5,342Deferred
      Credits and Other Liabilities:Deferred
      income taxes
            
            
            223,900
            
            
            (708
            )
            
            223,192Pension
      and postretirement benefit costs
            
            
            20,231
            
            
            43,447
            
            
            63,678*
      Appears on the Statements of Capitalization





Pension
Plans





Laclede
Gas has non-contributory defined benefit, trusteed forms of pension plans
covering substantially all employees. Benefits are based on years of service and
the participant’s compensation during the highest three years of the last ten
years of employment. Plan assets consist primarily of corporate and U.S.
government obligations and pooled equity funds.


Pension
costs in 2008, 2007, and 2006 amounted to $6.1, $5.5, and $5.4 million,
respectively, including amounts charged to construction.


The
net periodic pension costs include the following components:





(Thousands)
            
            2008
            
            2007
            
            2006Service
      cost – benefits earned during the period
            
            $
            12,970
            
            $
            12,422
            
            $
            14,761Interest
      cost on projected benefit obligation
            
            
            18,680
            
            
            17,929
            
            
            16,704Expected
      return on plan assets
            
            
            (20,650
            )
            
            (20,295
            )
            
            (20,782
            )Amortization
      of prior service cost
            
            
            1,088
            
            
            1,143
            
            
            1,175Amortization
      of actuarial loss
            
            
            3,165
            
            
            3,673
            
            
            6,912Sub-total
            
            
            15,253
            
            
            14,872
            
            
            18,770Loss
      on lump-sum settlement
            
            
            —
            
            
            803
            
            
            —Regulatory
      adjustment
            
            
            (9,120
            )
            
            (10,131
            )
            
            (13,417
            )Net
      pension cost
            
            $
            6,133
            
            $
            5,544
            
            $
            5,353





Other changes in plan assets and
pension benefit obligations recognized in Other Comprehensive Income during
fiscal year 2008 include the following:





(Thousands)
            
            2008Current
      year actuarial loss
            
            $
            18,050Amortization
      of actuarial loss
            
            
            (3,165
            )Amortization
      of prior service cost
            
            
            (1,088
            )Sub-total
            
            
            13,797Regulatory
      adjustment
            
            
            (13,697
            )Total
      recognized in other comprehensive income
            
            $
            100





Changes in the minimum pension
liability resulted in credits to Other Comprehensive Income of $0.4 million in
fiscal year 2007 and $3.6 million in fiscal year 2006, excluding the effect of
regulatory treatment. After the effect of regulatory treatment, credits
recognized in other comprehensive income for fiscal years 2007 and 2006 were
$0.4 million and $0.5 million, respectively.


32





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 year 2008. Lump-sum payments recognized as settlements during fiscal year
2007 were $3.0 million. No lump-sum payments were recognized as settlements in
fiscal year 2006.


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 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)
            
            2008
            
            2007Benefit
      obligation at beginning of year
            
            $
            293,265
            
            $
            282,060Service
      cost
            
            
            12,970
            
            
            12,422Interest
      cost
            
            
            18,680
            
            
            17,929Actuarial
      (gain) loss
            
            
            (19
            )
            
            1,407Gross
      benefits paid *
            
            
            (16,160
            )
            
            (20,553
            )Benefit
      obligation at end of year
            
            $
            308,736
            
            $
            293,265Accumulated
      benefit obligation at end of year
            
            $
            238,769
            
            $
            231,719*
      Includes $(3,021) in lump-sum payments recognized as settlements in fiscal
      year 2007.





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





(Thousands)
            
            2008
            
            2007Fair
      value of plan assets at beginning of year
            
            $
            260,280
            
            $
            246,136Actual
      return on plan assets
            
            
            2,581
            
            
            33,515Employer
      contributions
            
            
            1,645
            
            
            1,182Gross
      benefits paid *
            
            
            (16,160
            )
            
            (20,553
            )Fair
      value of plan assets at end of year
            
            $
            248,346
            
            $
            260,280Funded
      status of plans
            
            $
            (60,390
            )
            $
            (32,985
            )Fourth
      quarter contribution adjustment
            
            
            56
            
            
            261Funded
      status, end of year
            
            $
            (60,334
            )
            $
            (32,724
            )*
      Includes $(3,021) in lump-sum payments recognized as settlements in fiscal
      year 2007.





33


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





(Thousands)
            
            2008
            
            2007Noncurrent
      assets
            
            $
            —
            
            $
            —Current
      liabilities
            
            
            (1,460
            )
            
            (400
            )Noncurrent
      liabilities
            
            
            (58,874
            )
            
            (32,324
            )Total
            
            $
            (60,334
            )
            $
            (32,724
            )Pre-tax
      amounts recognized in Accumulated Other Comprehensive
    Incomenot
      yet recognized as components of net periodic pension cost consist
      of:Net
      actuarial loss
            
            $
            82,371
            
            $
            67,486Prior
      service costs
            
            
            11,244
            
            
            12,332Sub-total
            
            
            93,615
            
            
            79,818Adjustments
      for amounts included in Regulatory Assets
            
            
            (90,701
            )
            
            (77,004
            )Total
            
            $
            2,914
            
            $
            2,814





At
September 30, 2008, the following pre-tax amounts are expected to be
amortized from Accumulated Other Comprehensive Income into net periodic pension
cost during fiscal year 2009:





(Thousands)Amortization
      of net actuarial loss
            
            $
            3,096Amortization
      of prior service cost
            
            
            1,035Sub-total
            
            
            4,131Regulatory
      adjustment
            
            
            (3,932
            )Total
            
            $
            199





The
pension benefit obligation and the fair value of plan assets are based on a
June 30 measurement date.


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





2008
            
            2007
            
            2006Weighted
      average discount rate
            6.25%
            
            6.25%
            
            5.00%Weighted
      average rate of future compensation increase
            3.50%
            
            3.50%
            
            3.00%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:





2008
            
            2007Weighted
      average discount rate
            6.60%
            
            6.25%Weighted
      average rate of future compensation increase
            3.75%
            
            3.50%





34


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)
            
            2008
            
            2007Projected
      benefit obligation
            
            $
            308,736
            
            $
            293,265Fair
      value of plan assets
            
            
            248,346
            
            
            260,280Accumulated
      benefit obligation
            
            
            24,938
            
            
            24,431Fair
      value of plan assets
            
            
            12,727
            
            
            12,795





Following
are the targeted and actual plan assets by category:





2009
            
            2008
            
            2007Target
            
            Actual
            
            ActualEquity
      Securities
            50%
            
            46%
            
            50%Debt
      Securities
            50%
            
            54%
            
            50%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
              Funds2009
            
            
            $
            14.7
            
            
            
            $
            1.52010
            
            
            
            14.7
            
            
            
            
            1.32011
            
            
            
            16.7
            
            
            
            
            1.82012
            
            
            
            18.4
            
            
            
            
            1.02013
            
            
            
            22.8
            
            
            
            
            0.82014
      – 2018
            
            
            
            182.4
            
            
            
            
            2.7





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 2009 are anticipated to be $2.2 million into the qualified
trusts, and $1.5 million into the non-qualified plans.





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 2008, 2007, and 2006 amounted to $7.6 million,
$7.8 million, and $8.9 million, respectively, including amounts charged to
construction.


35


Net
periodic postretirement benefit costs consisted of the following
components:





(Thousands)
            
            2008
            
            2007
            
            2006Service
      cost – benefits earned during the period
            
            $
            4,560
            
            $
            4,063
            
            $
            3,985Interest
      cost on accumulated postretirementbenefit
      obligation
            
            
            3,909
            
            
            3,599
            
            
            2,959Expected
      return on plan assets
            
            
            (2,039
            )
            
            (1,723
            )
            
            (1,358
            )Amortization
      of transition obligation
            
            
            136
            
            
            136
            
            
            327Amortization
      of prior service cost
            
            
            (2,328
            )
            
            (2,328
            )
            
            (36
            )Amortization
      of actuarial loss
            
            
            2,985
            
            
            3,245
            
            
            1,273Sub-total
            
            
            7,223
            
            
            6,992
            
            
            7,150Regulatory
      adjustment
            
            
            419
            
            
            851
            
            
            1,713Net
      postretirement benefit cost
            
            $
            7,642
            
            $
            7,843
            
            $
            8,863





Other changes in plan assets and
postretirement benefit obligations recognized in Other Comprehensive Income
during fiscal year 2008 include the following:





(Thousands)
            
            2008Current
      year actuarial loss
            
            $
            9,772Amortization
      of actuarial loss
            
            
            (2,985
            )Amortization
      of prior service credit
            
            
            2,328Amortization
      of transition obligation
            
            
            (136
            )Sub-total
            
            
            8,979Regulatory
      adjustment
            
            
            (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 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 postretirement benefit obligation at
September 30:





(Thousands)
            
            2008
            
            2007Benefit
      obligation at beginning of year
            
            $
            60,111
            
            $
            55,584Service
      cost
            
            
            4,560
            
            
            4,063Interest
      cost
            
            
            3,909
            
            
            3,599Actuarial
      loss
            
            
            6,356
            
            
            1,551Gross
      benefits paid
            
            
            (5,222
            )
            
            (4,686
            )Benefit
      obligation at end of year
            
            $
            69,714
            
            $
            60,111





36


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





(Thousands)
            
            2008
            
            2007Fair
      value of plan assets at beginning of year
            
            $
            24,997
            
            $
            21,179Actual
      return on plan assets
            
            
            (1,378
            )
            
            2,947Employer
      contributions
            
            
            7,685
            
            
            5,557Gross
      benefits paid
            
            
            (5,222
            )
            
            (4,686
            )Fair
      value of plan assets at end of year
            
            $
            26,082
            
            $
            24,997Funded
      status of plans
            
            $
            (43,632
            )
            $
            (35,114
            )Fourth
      quarter contribution adjustment
            
            
            4,068
            
            
            3,460Funded
      status, end of year
            
            $
            (39,564
            )
            $
            (31,654
            )





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





(Thousands)
            
            2008
            
            2007Noncurrent
      assets
            
            $
            —
            
            $
            —Current
      liabilities
            
            
            (300
            )
            
            (300
            )Noncurrent
      liabilities
            
            
            (39,264
            )
            
            (31,354
            )Total
            
            $
            (39,564
            )
            $
            (31,654
            )Pre-tax
      amounts recognized in Accumulated Other Comprehensive
    Incomenot
      yet recognized as components of net periodic postretirement
      costconsist
      of:Net
      actuarial loss
            
            $
            39,957
            
            $
            33,170Prior
      service credit
            
            
            (9,660
            )
            
            (11,988
            )Transition
      obligation
            
            
            671
            
            
            807Sub-total
            
            
            30,968
            
            
            21,989Adjustments
      for amounts included in Regulatory Assets
            
            
            (30,968
            )
            
            (21,989
            )Total
            
            $
            —
            
            $
            —





At
September 30, 2008, the following pre-tax amounts are expected to be
amortized from Accumulated Other Comprehensive Income into net periodic
postretirement benefit cost during fiscal year 2009:





(Thousands)Amortization of net actuarial loss
            
            $
            3,509Amortization of prior service credit
            
            
            (2,328
            )Amortization of transition obligation
            
            
            136Sub-total
            
            
            1,317Regulatory adjustment
            
            
            (1,317
            )Total
            
            $
            —





The
accumulated postretirement benefit obligation and the fair value of plan assets
are based on a June 30 measurement date.


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





2008
            
            2007
            
            2006Weighted
      average discount rate
            6.25%
            
            6.25%
            
            5.00%Weighted
      average rate of future compensation increase
            3.50%
            
            3.50%
            
            3.00%Expected
      long-term rate of return on plan assets
            8.25%
            
            8.25%
            
            8.25%





37


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:





2008
            
            2007Weighted
      averagediscountrate
            6.35%
            
            6.25%Weighted
      average rate of future compensation increase
            3.75%
            
            3.50%





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





2008
            2007Medical
      cost trend assumed for next year
            8.50%
            8.00%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
            2011





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
            
            
            $
            790
            
            
            $
            (700
            )Effect
      on accumulated postretirement benefit obligation
            
            
            
            3,570
            
            
            
            (3,240
            )





Following
are the targeted and actual plan assets by category:





2009
            
            2008
            
            2007Target
            
            Actual
            
            ActualEquity
      Securities
            60%
            
            54%
            
            58%Debt
      Securities
            40%
            
            46%
            
            42%Total
            100%
            
            100%
            
            100%





Missouri
state law provides for the recovery in rates of SFAS No. 106 accrued costs
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
              Funds2009
            
            
            $
            4.6
            
            
            
            $
            0.32010
            
            
            
            4.8
            
            
            
            
            0.32011
            
            
            
            4.9
            
            
            
            
            0.32012
            
            
            
            5.0
            
            
            
            
            0.32013
            
            
            
            5.3
            
            
            
            
            0.32014
      – 2018
            
            
            
            34.5
            
            
            
            
            1.8





38


Laclede
Gas’ funding policy is to contribute amounts to the trusts equal to the periodic
benefit cost calculated pursuant to SFAS No. 106 as recovered in rates.
Contributions to the postretirement plans in fiscal year 2009 are anticipated to
be $9.7 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 $3.1 million, $3.0 million, and $3.0 million for fiscal years 2008,
2007, and 2006, respectively.








3.
            COMMON
      STOCK AND PAID-IN CAPITAL





Total
shares of common stock outstanding were 10,416 and 10,307 at
September 30, 2008 and 2007, respectively.


Common
stock and paid-in capital increased $6.4 million and $6.0 million in 2008 and
2007, 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 109 shares to Laclede Group for $3.8 million during fiscal 2008, 110
shares totaling $3.8 million during fiscal 2007, and 108 shares for $3.7 million
during fiscal 2006, 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 Securities and Exchange Commission 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 to issue up to $500 million in First Mortgage Bonds,
unsecured debt, and equity securities, of which $412.4 million remained under
this authorization as of September 30, 2008. The amount, timing, and
type of additional financing to be issued will depend on cash requirements and
market conditions.








4.
            REDEEMABLE
      PREFERRED STOCK





The
preferred stock, which is non-voting except in certain circumstances, may be
redeemed at the option of the Laclede Gas Board of Directors. The redemption
price is equal to par of $25.00 per share.


During
2008, 6,400 shares of 5% Series B preferred stock were called to meet sinking
fund requirements. During 2007, 6,351 shares of 5% Series B preferred stock were
called to meet sinking fund requirements.


Any
default in a sinking fund payment must be cured before Laclede Gas may pay
dividends on or acquire any common stock. Sinking fund requirements on preferred
stock for the next five years subsequent to September 30, 2008 are
$0.2 million per year in 2009 through 2011, and none in 2012 and
2013.








5.
            LONG-TERM
      DEBT





Maturities
on long-term debt for the five fiscal years subsequent to
September 30, 2008 are as follows:





2009
            —2010
            —2011
            $25
      million2012
            —2013
            $25
      million





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, 2008, 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.


39


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 securities, $270
million of which remains available to Laclede Gas at this time. The Utility has
authority from the MoPSC to issue up to $500 million in First Mortgage Bonds,
unsecured debt, and equity securities, of which $412.4 million remained under
this authorization as of September 30, 2008. 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, 2008 and 2007, the amount under the
mortgage’s formula that was available to pay dividends was $273 million and $263
million, respectively. Thus, all of the Utility’s retained earnings were free
from such restrictions as of those dates.








6.
            NOTES
      PAYABLE AND CREDIT AGREEMENTS





Throughout
fiscal year 2008, Laclede Gas had a line of credit in place of $320 million,
which expires in December 2011. In November 2007, the Utility
established a seasonal line of credit of $40 million, which expired in
March 2008. Subsequent to the end of fiscal year 2008, Laclede Gas
established a seasonal line of credit of $75 million, expiring in
March 2009.


Laclede
Gas issues commercial paper that is supported by the bank lines of credit.
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 the fiscal year, Laclede Gas utilized its line of credit as a more economical
source of short-term financing. Laclede Gas 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. The Utility had
$211.4 million of commercial paper outstanding as of
September 30, 2007, at a weighted average interest rate of 5.5% per
annum, and no 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, 2008, total debt was 66% of
total capitalization.For the fiscal year ended September 30, 2008, EBITDA was 3.97
times interest expense.





40





7.
            FAIR
      VALUE OF FINANCIAL INSTRUMENTS





The
carrying amounts and estimated fair values of financial instruments at
September 30, 2008 and 2007 are as follows:





(Thousands)
            
            Carrying
              Amount
            
            Fair
              Value2008: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
            
            
            4312007:Cash
      and cash equivalents
            
            $
            2,454
            
            $
            2,454Marketable
      securities
            
            
            9,196
            
            
            9,196Derivative
      instrument assets
            
            
            26,296
            
            
            26,296Short-term
      debt
            
            
            211,400
            
            
            211,400Long-term
      debt, including current position
            
            
            349,122
            
            
            356,964Redeemable preferred stock, including current sinking fund requirements
            
            
            787
            
            
            756





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








8.
            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)
            Minimum
      Pension Liability Adjustment
            Defined
      Benefit Pension and Other
              Postretirement
              Benefit
      Plans
            TotalBalance,
      September 30, 2006
            
            $
            (834
            )
            
            $
            —
            
            
            $
            (834
            )Current-period
      change
            
            
            231
            
            
            
            —
            
            
            
            231Adoption
      of SFAS No. 158
            
            
            603
            
            
            
            (1,727
            )
            
            
            (1,124
            )Balance,
      September 30, 2007
            
            
            —
            
            
            
            (1,727
            )
            
            
            (1,727
            )Current-period
      change
            
            
            —
            
            
            
            (63
            )
            
            
            (63
            )Balance,
      September 30, 2008
            
            $
            —
            
            
            $
            (1,790
            )
            
            $
            (1,790
            )





41





9.
            INCOME
      TAXES





The
net provisions for income taxes charged during the years ended
September 30, 2008, 2007, and 2006 are as follows:





(Thousands)
            
            2008
            
            2007
            
            2006Included
      in Statements of Income:FederalCurrent
            
            $
            7,476
            
            $
            21,808
            
            $
            (12,238
            )Deferred
            
            
            5,762
            
            
            (9,490
            )
            
            21,511Investment
      tax credits
            
            
            (227
            )
            
            (237
            )
            
            (241
            )State
      and localCurrent
            
            
            1,153
            
            
            3,784
            
            
            (1,939
            )Deferred
            
            
            1,100
            
            
            (1,818
            )
            
            3,539Total
      Income Tax Expense
            
            $
            15,264
            
            $
            14,047
            
            $
            10,632





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





2008
            
            2007
            
            2006Federal
      income tax statutory rate
            
            
            35.0
            %
            
            35.0
            %
            
            35.0
            %State
      and local income taxes, net of federalincome
      tax benefits
            
            
            2.7
            
            
            2.7
            
            
            2.6Certain
      expenses capitalized on books anddeducted
      on tax return
            
            
            (5.4
            )
            
            (6.0
            )
            
            (5.3
            )Taxes
      related to prior years
            
            
            (1.4
            )
            
            0.5
            
            
            (2.6
            )Other
      items – net
            
            
            (2.9
            )
            
            (2.0
            )
            
            (2.8
            )Effective
      income tax rate
            
            
            28.0
            %
            
            30.2
            %
            
            26.9
            %





The
significant items comprising the net deferred tax liability recognized in the
Balance Sheets as of September 30 are as follows:





(Thousands)
            
            2008
            
            2007Deferred
      tax assets:Reserves
      not currently deductible
            
            $
            18,848
            
            $
            18,364Unamortized
      investment tax credits
            
            
            2,495
            
            
            2,644Other
            
            
            10,789
            
            
            9,875Total
      deferred tax assets
            
            
            32,132
            
            
            30,883Deferred
      tax liabilities:Relating
      to property
            
            
            205,220
            
            
            196,334Pension
      and other postretirement benefits
            
            
            29,732
            
            
            31,262Deferred
      gas costs
            
            
            10,156
            
            
            8,220Other
            
            
            17,184
            
            
            17,984Total
      deferred tax liabilities
            
            
            262,292
            
            
            253,800Net
      deferred tax liability
            
            
            230,160
            
            
            222,917Net
      deferred tax asset (liability) – current
            
            
            (7,781
            )
            
            275Net
      deferred tax liability – non-current
            
            $
            222,379
            
            $
            223,192





42





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 FIN
48, as of October 1, 2007. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with FASB Statement No. 109. Pursuant to FIN 48, 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.


Upon
adoption of FIN 48, Laclede Gas recognized an increase to beginning retained
earnings as a cumulative-effect adjustment totaling $0.4 million and
reclassified $2.1 million of income tax liabilities from current to non-current
liabilities. The Utility records potential interest and penalties related to its
uncertain tax positions as interest expense and other income deductions,
respectively. Potential interest and penalties accrued (net of income tax
benefit) associated with the Utility’s uncertain tax positions were $0.2 million
at October 1, 2007. 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 Sheet. A
reconciliation of the beginning and ending amount of unrecognized tax benefits
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
            
            $
            1,033





The
entire amount of unrecognized tax benefits at September 30, 2008, 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, 2008 was immaterial and no penalties were accrued as of
that date. 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 2005. The federal statute of
limitations remains open until June 15, 2009 and 2010 for fiscal years
2005 and 2006, respectively. However, during fiscal 2008, Laclede Group
effectively settled with the Internal Revenue Service for those periods.
Completion of the audit represented an event requiring the Utility to
re-evaluate its uncertain tax positions. Also, during fiscal 2008, the statute
of limitations for the Company’s fiscal year 2004 expired.








10.
            OTHER
      INCOME AND (INCOME DEDUCTIONS) –
NET




(Thousands)
            
            2008
            
            2007
            
            2006Allowance
      for funds used during construction
            
            $
            (72
            )
            $
            (17
            )
            $
            (45
            )Interest
      income
            
            
            2,133
            
            
            3,499
            
            
            4,146Other
      income
            
            
            1,143
            
            
            1,060
            
            
            860Other
      income deductions
            
            
            (1,998
            )
            
            6
            
            
            (843
            )Other
      Income and (Income Deductions) – Net
            
            $
            1,206
            
            $
            4,548
            
            $
            4,118





The
decrease in Other Income and (Income Deductions) – Net in fiscal year 2008
compared with the prior years is primarily 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 during fiscal year 2008. Carrying costs on under-recoveries of gas costs
are recovered through the Utility’s PGA Clause.





43





11.
            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
other counties in eastern Missouri. The Non-Regulated Other segment includes
merchandise sales activities. Accounting policies are as described in Note 1.
There are no material intersegment revenues.





Regulated
      Gas
            
            Non-Regulated
            
            Adjustments
      &(Thousands)
            
            Distribution
            
            Other
            
            Eliminations
            
            TotalFISCAL
      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
            
            
            —
            
            
            —
            
            
            56,434FISCAL
      2006Operating
      revenues
            
            $
            1,141,011
            
            $
            2,305
            
            $
            —
            
            $
            1,143,316Depreciation
      & amortization
            
            
            30,904
            
            
            —
            
            
            —
            
            
            30,904Interest
      income
            
            
            4,146
            
            
            —
            
            
            —
            
            
            4,146Interest
      charges
            
            
            32,565
            
            
            —
            
            
            —
            
            
            32,565Income
      tax expense (benefit)
            
            
            10,636
            
            
            (4
            )
            
            —
            
            
            10,632Net
      income (loss)
            
            
            28,887
            
            
            (7
            )
            
            —
            
            
            28,880Total
      assets
            
            
            1,383,703
            
            
            1,437
            
            
            —
            
            
            1,385,140Capital
      expenditures
            
            
            57,925
            
            
            —
            
            
            —
            
            
            57,925





44





12.
            COMMITMENTS
      AND CONTINGENCIES





Commitments





Laclede
Gas estimates fiscal year 2009 utility capital expenditures at approximately $59
million. There are no material contractual commitments at
September 30, 2008 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, 2008 are estimated at
approximately $422 million. Additional contracts are generally entered into
prior to or during the heating season. Laclede Gas estimates that it will pay
approximately $95 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 Federal Energy Regulatory Commission (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, commencing April 1, 2006. 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 2010 with options to renew for up to 10 additional years.
The aggregate rental expense for fiscal years 2008, 2007, and 2006 was $891,000,
$882,000, and $874,000, respectively. The annual minimum rental payment for
fiscal year 2009 is anticipated to be approximately $900,000 with a maximum
annual rental payment escalation of $8,800 per year for each year through fiscal
year 2010. Laclede Gas has other relatively minor rental arrangements that
provide for minimum rental payments. 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
2009, $2.7 million in fiscal year 2010, $1.7 million in fiscal year 2011, $0.8
million in fiscal year 2012, and $0.2 million in fiscal year 2013.


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, 2008, the
maximum guarantees under these leases are $1.8 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, 2008, the
carrying value of the liability recognized for these guarantees was $0.3
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.


45


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. Previously, Laclede Gas
requested that other former site owners and operators share costs relative to
any remedial actions required, one of whom is participating. No significant
costs relative to this site have been incurred in recent years.


The
third former MGP site, also located in the City, 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 2005. On September 14, 2007, the Staff withdrew its pursuit
of $5.5 million of the disallowance it had originally proposed. Laclede Gas
believes that the remaining $1.7 million of the MoPSC Staff’s proposed
disallowance lacks merit and is vigorously opposing the adjustment in
proceedings before the MoPSC.


On
December 31, 2007, the MoPSC Staff proposed a disallowance of $2.8
million related to Laclede Gas’ recovery of its purchased gas costs applicable
to fiscal 2006. Laclede Gas believes that the MoPSC Staff’s position lacks merit
and intends to vigorously oppose the adjustment in proceedings before the MoPSC.
In addition, the MoPSC’s Staff 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 taken 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 the Company provided on
August 22, 2008 and September 2, 2008.


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 or results of operations of the Utility.





46





13.
            INTERIM
      FINANCIAL INFORMATION (UNAUDITED)





In
the opinion of Laclede Gas, the quarterly information presented below for fiscal
years 2008 and 2007 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.
      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
            )Three
      Months Ended
            
            
            
            
            Dec.
      31
            
            
            
            
            March
      31
            
            
            
            
            June
      30
            
            
            
            
            Sept.
      302007Total
      Operating Revenues
            
            
            
            $
            349,150
            
            
            
            $
            494,371
            
            
            
            $
            186,824
            
            
            
            $
            104,624Operating
      Income (Loss)
            
            
            
            
            30,442
            
            
            
            
            40,219
            
            
            
            
            7,216
            
            
            
            
            (2,291
            )Net
      Income (Loss)
            
            
            
            
            15,675
            
            
            
            
            20,718
            
            
            
            
            886
            
            
            
            
            (4,795
            )








14.
            SUBSEQUENT
      EVENT





On November 20, 2008, the
Board of Directors of Laclede Gas approved the sale of 1,161 shares of Laclede
Gas’ common stock to Laclede Group. The proceeds from the sale, totaling $40.0
million, were used to reduce short-term borrowings. Exemption from registration
was claimed under Section 4(2) of the Securities Act of 1933.





47