**Exhibit
      99.1**








**Selected
      Financial Data**





Laclede
      Gas Company











**Fiscal
                Years Ended September 30**(Thousands)
            
            **2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**Summary
                of OperationsOperating
                Revenues:Utility
            
            $
            1,131,554
            
            $
            1,141,011
            
            $
            978,195
            
            $
            868,905
            
            $
            774,772Other
            
            
            3,415
            
            
            2,305
            
            
            2,288
            
            
            2,577
            
            
            2,391Total
                Operating Revenues
            
            
            1,134,969
            
            
            1,143,316
            
            
            980,483
            
            
            871,482
            
            
            777,163Operating
                Expenses:UtilityNatural
                and propane gas
            
            
            797,924
            
            
            821,721
            
            
            676,931
            
            
            575,691
            
            
            483,742Other
                operation expenses
            
            
            131,798
            
            
            128,180
            
            
            125,364
            
            
            121,596
            
            
            118,550Maintenance
            
            
            24,306
            
            
            21,198
            
            
            19,226
            
            
            18,705
            
            
            18,759Depreciation
                and amortization
            
            
            34,080
            
            
            30,904
            
            
            23,036
            
            
            22,385
            
            
            22,229Taxes,
                other than income taxes
            
            
            68,361
            
            
            71,038
            
            
            62,859
            
            
            60,077
            
            
            56,102Total
                Utility Operating Expenses
            
            
            1,056,469
            
            
            1,073,041
            
            
            907,416
            
            
            798,454
            
            
            699,382Other
            
            
            2,914
            
            
            2,316
            
            
            2,318
            
            
            2,456
            
            
            2,386Total
                Operating Expenses
            
            
            1,059,383
            
            
            1,075,357
            
            
            909,734
            
            
            800,910
            
            
            701,768Operating
                Income
            
            
            75,586
            
            
            67,959
            
            
            70,749
            
            
            70,572
            
            
            75,395Allowance
                for Funds Used During Construction
            
            
            (17
            )
            
            (45
            )
            
            (100
            )
            
            (123
            )
            
            (107
            )Other
                Income and (Income Deductions) – Net
            
            
            4,565
            
            
            4,163
            
            
            1,443
            
            
            3,507
            
            
            986Interest
                Charges:Interest
                on long-term debt
            
            
            22,502
            
            
            22,329
            
            
            22,835
            
            
            22,010
            
            
            20,169Other
                interest charges
            
            
            11,101
            
            
            10,236
            
            
            4,076
            
            
            3,192
            
            
            3,752Total
                Interest Charges
            
            
            33,603
            
            
            32,565
            
            
            26,911
            
            
            25,202
            
            
            23,921Income
                Before Income Taxes
            
            
            46,531
            
            
            39,512
            
            
            45,181
            
            
            48,754
            
            
            52,353Income
                Tax Expense
            
            
            14,047
            
            
            10,632
            
            
            14,550
            
            
            16,555
            
            
            18,011Net
                Income
            
            
            32,484
            
            
            28,880
            
            
            30,631
            
            
            32,199
            
            
            34,342Dividends
                on Redeemable Preferred Stock
            
            
            43
            
            
            48
            
            
            55
            
            
            62
            
            
            62Earnings
                Applicable to Common Stock
            
            $
            32,441
            
            $
            28,832
            
            $
            30,576
            
            $
            32,137
            
            $
            34,280










1





**Selected
      Financial Data (continued**)





Laclede
      Gas Company








**Fiscal
                Years Ended September 30**(Thousands)
            
            **2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**Dividends
                Declared –Common
                Stock
            
            $
            31,520
            
            $
            30,049
            
            $
            29,003
            
            $
            27,183
            
            $
            25,492Utility
                PlantGross
                Plant – End of Period
            
            $
            1,187,828
            
            $
            1,149,104
            
            $
            1,105,733
            
            $
            1,070,522
            
            $
            1,030,665Net
                Plant – End of Period
            
            
            793,794
            
            
            763,827
            
            
            728,481
            
            
            699,144
            
            
            676,696Capital
                Expenditures
            
            
            56,434
            
            
            57,925
            
            
            54,621
            
            
            49,130
            
            
            49,926Property
                Retirements
            
            
            16,331
            
            
            22,588
            
            
            19,410
            
            
            9,276
            
            
            8,007Total
                Assets – End of Period
            
            
            1,431,203
            
            
            1,385,140
            
            
            1,275,515
            
            
            1,208,250
            
            
            1,168,458Capitalization
                – End of PeriodCommon
                Stock and Paid-In Capital
            
            $
            151,510
            
            $
            145,527
            
            $
            140,381
            
            $
            136,052
            
            $
            82,589Retained
                Earnings
            
            
            195,728
            
            
            194,807
            
            
            196,024
            
            
            194,451
            
            
            189,497Accumulated
                Other Comprehensive Loss
            
            
            (1,727
            )
            
            (834
            )
            
            (1,127
            )
            
            (371
            )
            
            (582
            )Common
                Stock Equity
            
            
            345,511
            
            
            339,500
            
            
            335,278
            
            
            330,132
            
            
            271,504Redeemable
                Preferred Stock
            
            
            627
            
            
            787
            
            
            948
            
            
            1,108
            
            
            1,258Long-Term
                Debt
            
            
            309,122
            
            
            349,041
            
            
            294,033
            
            
            333,936
            
            
            259,625Total
                Capitalization
            
            $
            655,260
            
            $
            689,328
            
            $
            630,259
            
            $
            665,176
            
            $
            532,387




























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 in natural
                gas
                prices;•
            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 market 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 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. 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 a Stipulation & Agreement
      (Agreement) approved by the MoPSC on July 19, 2007, (as discussed in
      the Regulatory Matters section on page 10), that further enhances the Utility’s
      weather mitigation rate design. The enhancements 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 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 30% 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.





Wholesale
      natural gas prices for the 2005-2006 heating season rose to unprecedented levels
      across the nation. Laclede Gas continues to work to reduce the impact of higher
      costs by strategically structuring its natural gas supply portfolio and through
      the use of financial instruments. Nevertheless, the cost of purchased gas
      remains high, relative to historical levels. 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. While wholesale natural gas prices declined for the
      2006-2007 heating season, the generally higher price 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).





**EARNINGS**





**2007
      vs. 2006**


Laclede
      Gas’ earnings applicable to common stock for fiscal 2007 was $32.4 million, an
      increase of $3.6 million compared with fiscal 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.





4





**2006
      vs. 2005**


Laclede
      Gas’ earnings applicable to common stock for fiscal year 2006 was $28.8 million,
      compared with $30.6 million for fiscal year 2005. The decrease in earnings
      of
      $1.8 million was primarily attributable to the following factors, quantified
      on
      a pre-tax basis:





•
            increases
                in operation and maintenance expenses, excluding the provision for
                uncollectible accounts, totaling $9.3 million;•
            higher
                depreciation expense totaling $7.9 million resulting from the
                implementation of new rates effective February 1, 2005 and
                January 1, 2006, as authorized by the MoPSC, and additional
                depreciable property;•
            net
                lower ISRS totaling $4.5 million. These surcharges were reset to
                zero
                effective October 1, 2005, as the ISRS-related costs were being
                recovered through base rates effective on that same date. A new ISRS
                was
                subsequently implemented June 15, 2006; and,•
            the
                net effect of lower system gas sales volumes totaling $2.7 million,
                primarily due to conservation efforts of our
                customers.





These
      factors were partially offset by:





•
            the
                benefit of the general rate increase, effective October 1, 2005,
                totaling $9.7 million;•
            the
                recovery of gas inventory carrying costs through the Utility’s PGA Clause,
                effective October 1, 2005, totaling $5.6 million;
                and,•
            a
                lower provision for uncollectible accounts totaling $4.5
                million.





**Utility
      Operating Revenues**





**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 the
      same period last year, 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 (reflecting more favorable market conditions
                as
                described in greaterdetail
                in the Results of Operations)
            
            
            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
            )





**2006
      vs. 2005**


Utility
      operating revenues for fiscal year 2006 increased $162.8 million, or 16.6%,
      above fiscal year 2005 due primarily to higher wholesale gas costs. Temperatures
      experienced in the Utility’s service area during 2006 were 12.4% warmer than
      normal but essentially the same as fiscal 2005. Total system therms sold and
      transported were 0.87 billion for fiscal year 2006 compared with 0.91 billion
      for fiscal year 2005. Total off-system therms sold and transported were 0.16
      billion for fiscal year 2006 compared with 0.20 billion for fiscal year 2005.
      The increase in utility operating revenues was primarily attributable to the
      following factors:


5





**Millions**Higher
                wholesale gas costs passed on to Utility customers (subject to prudence
                review by the MoPSC)
            
            $
            196.0Lower
                system sales volumes and other variations, primarily due to the
                conservation efforts of
              customers
                due to higher natural gas prices
            
            
            (36.4
            )Lower
                off-system sales volumes
            
            
            (32.5
            )Higher
                prices charged for off-system sales
            
            
            27.2Net
                effect of the general rate increase, recovery of gas inventory carrying
                costs, and resetting the
              ISRS
                to zero, effective October 1, 2005, combined with the subsequent
                implementation of a
              new
                ISRS effective June 15, 2006
            
            
            8.5Total
                Variation
            
            $
            162.8





**Utility
      Operating Expenses**





**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
      last year’s level, 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, decreased $2.7 million, or 3.8%, primarily due to
      lower property taxes and decreased gross receipts taxes (attributable to the
      decreased revenues).





**2006
      vs. 2005**


Utility
      operating expenses in fiscal year 2006 increased $165.6 million, or 18.3%,
      from
      fiscal year 2005. Natural and propane gas expense increased $144.8 million
      above
      last year’s level primarily due to higher rates charged by our suppliers,
      partially offset by lower volumes purchased for sendout and slightly lower
      off-system gas expense. Other operation and maintenance expenses increased
      $4.8
      million, or 3.3%, primarily due to implementation costs related to the automated
      meter reading deployment, higher costs associated with low income energy
      assistance and energy efficiency programs implemented October 1, 2005,
      compensation expense associated with The Laclede Group Inc.’s (Laclede Group or
      the Company) implementation of Statement of Financial Accounting Standards
      (SFAS) No. 123(R), increased pension costs, and higher wage rates. These factors
      were partially offset by a lower provision for uncollectible accounts, lower
      group insurance charges, and a reduction in costs to remove retired utility
      plant that were previously charged to expense as incurred. An accrual for such
      costs is currently being provided for in depreciation rates. Depreciation and
      amortization expense increased $7.9 million, or 34.2%, primarily due to higher
      rates effective February 1, 2005 and January 1, 2006, and
      additional depreciable property. Taxes, other than income, increased $8.2
      million, or 13.0%, primarily due to higher gross receipts taxes (attributable
      to
      the increased revenues).





**Other
      Income and Income Deductions-Net**





Other
      income and income deductions-net increased $0.4 million in fiscal year 2007,
      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. Such carrying costs are recovered through the Utility’s PGA Clause. The
      $2.8 million increase in other income and income deductions-net in fiscal year
      2006 from fiscal year 2005 was primarily attributable to additional income
      resulting from Laclede Gas’ 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, as approved by the MoPSC effective
      October 1, 2005. Previously, carrying costs were applicable only to
      certain gas cost components exceeding a predetermined threshold. Such income
      is
      recovered through the PGA Clause. This additional income was partially offset
      by
      the Utility’s receipt and recognition in April 2005 of proceeds related to
      its interest, as a policyholder, in the sale of a mutual insurance company
      totaling $0.5 million.





**Interest
      Charges**





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






6


$5.7
      million increase in interest charges in fiscal year 2006 was primarily due
      to
      higher interest on short-term debt. Average short-term interest rates were
      4.7%
      in fiscal 2006 compared with 2.7% in fiscal year 2005. Average short-term borrowings
      were $172.9 million and $83.2 million for fiscal years 2006 and 2005,
      respectively. Increased interest on short-term debt was slightly offset by
      lower
      interest on long-term debt due to the November 2004 maturity of $25 million
      principal amount of 8 1/2 % First Mortgage Bonds and the May 2006 maturity
      of $40 million principal amount of 8 5/8% First Mortgage Bonds. The decreased
      interest on long-term debt due to the aforementioned maturities was partially
      offset by the issuance of $55 million principal amount of 6.15% First Mortgage
      Bonds on June 9, 2006.





**Income
      Taxes**





The
      variations in income tax expense for all periods reported are primarily due
      to
      changes in pre-tax income. The year-to-year variations in income tax expense
      also reflect 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, which represent 65% of Laclede Gas’ employees. The
      agreement expires on July 31, 2008.





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
      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. Beginning in fiscal
                2006, as
                approved by the MoPSC, the Utility is allowed to defer for future
                recovery
                certain costs associated with amendments to the Cold Weather Rule.
                For
                details on the Cold Weather Rule, see the Regulatory Matters section
                on
                page 10.Employee
                benefits and postretirement obligations – Pension and postretirement
                obligations are calculated by actuarial consultants that utilize
                several
                statistical factors and other assumptions 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.





7


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





Pension
                Plan Benefits:**Estimated**
            
            
            
            **Estimated****Increase/**
            
            
            
            **Increase/****(Decrease)
                to**
            
            
            
            **(Decrease)
                to****Projected**
            
            
            
            **Annual****Benefit**
            
            
            
            **Net
                Pension****Increase/**
            
            
            
            **Obligation**
            
            
            
            **Cost*****Actuarial
                Assumptions**
            
            **(Decrease)**
            
            
            
            **(Thousands)**
            
            
            
            **(Thousands)**Discount
                Rate
            
            0.25
            %
            
            
            $
            (7,620
            )
            
            $
            (170
            )(0.25
            )
            
            
            
            7,820
            
            
            
            160Rate
                of FutureCompensation
                Increase
            
            0.25
            %
            
            
            
            5,800
            
            
            
            720(0.25
            )
            
            
            
            (5,600
            )
            
            
            (700
            )Expected
                Return on Plan Assets
            
            0.25
            %
            
            
            
            —
            
            
            
            (610
            )(0.25
            )
            
            
            
            —
            
            
            
            610Postretirement
                Benefits:**Estimated**
            
            
            
            **Estimated****Increase/**
            
            
            
            **Increase/****(Decrease)
                to**
            
            
            
            **(Decrease)
                to****Projected**
            
            
            
            **Annual
                Net****Postretirement**
            
            
            
            **Postretirement****Benefit**
            
            
            
            **Benefit****Increase/**
            
            
            
            
            **Obligation**
            
            
            
            **Cost*****Actuarial
                Assumptions**
            
            **(Decrease)**
            
            
            
            
            **(Thousands)**
            
            
            
            **(Thousands)**Discount
                Rate
            
            0.25
            %
            
            
            $
            (1,370
            )
            
            $
            (89
            )(0.25
            )
            
            
            
            1,410
            
            
            
            90Expected
                Return on Plan Assets
            
            0.25
            %
            
            
            
            —
            
            
            
            (57
            )(0.25
            )
            
            
            
            —
            
            
            
            57Annual
                Medical Cost Trend
            
            1.00
            %
            
            
            
            2,930
            
            
            
            720(1.00
            )
            
            
            
            (2,660
            )
            
            
            (630
            )*
                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.





Laclede
      Gas accounts for its regulated operations in accordance with 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 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:


8





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. 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.
                Effective
                October 1, 2007, pursuant to the 2007 rate case, 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 liability accounts. 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 Financial Accounting
                Standards Board Interpretation Number (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.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 26.




















9





**REGULATORY
      MATTERS**





At
      the
      state level, there have been several significant regulatory developments during
      the fiscal year affecting Laclede Gas. Some of these issues were impacted by
      the
      settlement of the Utility’s 2007 rate case as discussed later in this
      section.





A
      law
      became effective January 1, 2006, that authorizes the MoPSC to
      implement rules and tariff provisions through which rates can be adjusted
      between general rate case proceedings to reflect increases and decreases in
      certain costs and revenues. For gas utilities like Laclede Gas, these include
      rate adjustments to reflect revenue changes resulting from the impact of weather
      and conservation on customer usage and to reflect changes in the costs to comply
      with environmental laws, rules and regulations. Various parties have been
      meeting in an attempt to negotiate rules to implement these programs. The MoPSC
      has acted on a rule relating to the establishment of a fuel adjustment clause
      for electric utilities. While no rules have been implemented for gas utilities,
      the MoPSC has approved rate designs for three gas utilities (including Laclede
      Gas) that mitigate the effects of weather and conservation on utility margins.
      In the Utility’s 2007 rate case, the MoPSC approved rate design changes allowing
      Laclede Gas to better ensure the recovery of the Utility’s fixed costs and
      margins despite variations in sales volumes due to the impacts of weather and
      other factors that affect customer usage.





On
      October 24, 2005, the Missouri Office of Public Counsel proposed an
      emergency amendment to the MoPSC’s Cold Weather Rule (Rule) affecting the
      disconnection and reconnection practices of utilities during the winter heating
      season. On December 19, 2005, the MoPSC issued an Order approving
      certain changes to the Rule to be effective between January 1 and
      March 31, 2006. On August 11, 2006, after various appeals to
      the Cole County Circuit Court, Missouri Court of Appeals, and the Missouri
      Supreme Court by the parties, including Laclede Gas, the MoPSC approved
      permanent modifications to the Rule, including provisions to allow the Utility
      to obtain accounting authorizations and defer for future recovery the costs
      previously incurred with the emergency amendment for the fiscal 2006 heating
      season. In conjunction with the settlement of the 2007 rate case, the MoPSC
      provided for the recovery of $5.0 million in costs associated with the fiscal
      2006 heating season, during the next five-year period. During fiscal 2007,
      the
      Utility deferred for future recovery an additional $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 to submit their positions regarding the
      Utility’s filing by February 28, 2008.





On
      December 29, 2005, the MoPSC Staff proposed a disallowance of
      approximately $3.3 million related to Laclede Gas’ recovery of its purchased gas
      costs applicable to fiscal 2004. Following technical conferences, the Staff
      subsequently reduced its proposed disallowance to approximately $2.1 million.
      Laclede Gas believed that the MoPSC Staff’s position lacked merit and vigorously
      opposed the adjustment in proceedings before the MoPSC on
      January 29, 2007. On June 28, 2007, the MoPSC issued an
      Order rejecting the MoPSC Staff’s proposed disallowance and declaring that the
      Utility was not imprudent with respect to the particular gas purchasing practice
      questioned by the MoPSC Staff. This case is now closed.





On
      November 3, 2006, the Utility made an ISRS filing with the Commission
      designed to increase revenues by $1.9 million annually. On
      December 28, 2006, the MoPSC approved implementation of the Utility’s
      proposed ISRS filing effective January 2, 2007. On
      March 30, 2007, the Utility made an ISRS filing with the Commission
      designed to increase revenues by an additional $1.8 million annually. On
      June 5, 2007, the MoPSC approved implementation of the Utility’s
      March 2007 ISRS filing effective June 16, 2007. These surcharges
      were reset to zero effective August 1, 2007, as the ISRS-related costs
      are being recovered through new base rates effective on that same date (see
      the
      rate case discussion later in this section). On November 9, 2007, the Utility
      made an ISRS filing with the Commission designed to increase revenues by $1.6
      million annually, pending approval by the Commission.





Laclede
      Gas began implementation of an automated meter reading (AMR) system in
      July 2005. Through the date of this report, the AMR system has been
      deployed to more than 668,000 customer meters, representing well over 98% of
      Laclede’s total customer base population. Certain regulatory issues have arisen
      in conjunction with this implementation. The Utility has approximately 40%
      of
      customers with meters inside their premises. On February 2, 2006, the
      MoPSC Staff filed a complaint against the Utility alleging that it failed to
      adequately obtain or use actual meter readings from certain customers and failed
      to adequately respond to unauthorized gas use. In addition to seeking authority
      to pursue penalties, the Staff sought customer service accommodations for
      customers whose previous estimated bills will require adjustment to reflect
      actual usage. On May 11, 2006, the Missouri Office of Public Counsel
      also filed a complaint alleging that Laclede Gas billed customers for prior
      underestimated usage for a longer period of time than permitted by Commission
      rules. Laclede Gas filed responses generally denying the MoPSC Staff’s and
      Missouri Office of Public Counsel’s allegations. On November 7, 2006,
      Laclede Gas, the Missouri Office of Public Counsel, and other parties
      filed




10


a
      Stipulation & Agreement that resolves certain issues raised in this case.
      The MoPSC Staff neither supported nor opposed the Stipulation & Agreement.
      On December 21, 2006, the Commission approved the Stipulation &
Agreement, dismissed
      the Missouri Office of Public Counsel’s complaint, and suspended Staff’s
      complaint, subject to Laclede’s compliance with the Stipulation & Agreement.
      The primary terms of the Stipulation & Agreement include the Utility’s
      provision of bill credits totaling $0.5 million to customers who received
      billing adjustments reconciling undercharges for periods exceeding 12 months,
      a
      limit on future billing adjustments that reconcile undercharges to 12 months,
      and additional notices to customers concerning such billing
      adjustments.





The
      Utility’s labor union representing field service workers, USW Local 11-6
      (Union), also raised a number of regulatory matters with the MoPSC alleging
      safety issues associated with the installation of AMR and changes in other
      work
      practices implemented by Laclede Gas. On November 2, 2006, the MoPSC
      denied and dismissed one of these complaints. On December 11-12, 2006,
      the MoPSC held a hearing on the Union’s last remaining complaint. That hearing
      was completed on February 26, 2007. On June 22, 2007, the
      MoPSC issued an Order denying the Union’s remaining complaint and dismissing the
      case. This case is now closed.





On
      December 1, 2006, Laclede Gas filed tariff sheets designed to increase
      revenues by $52.9 million annually, or 5.6%. Although the Utility’s filing
      requested an increase of $44.9 million in non-gas revenues, $1.8 million of
      that
      amount was already being paid by customers through the current ISRS, which
      would
      no longer have been collected upon approval of the Utility’s rate request. In
      addition, Laclede Gas proposed to increase its PGA rates by $9.8 million in
      order to recover the gas cost portion of its bad debts through the PGA rather
      than through its non-gas distribution rates. The December 1 filing also
      proposed a comprehensive regulatory compact that included:


•
            a
                pilot program in which residential customers could lock in for a
                twelve-month period the cost per therm of gas included in their monthly
                bills;•
            a
                conservation program that would provide customers an opportunity
                to earn a
                rebate by conserving natural gas during the peak winter heating
                months;•
            a
                three-year base rate moratorium; and,•
            an
                earnings sharing mechanism in which the Utility would share with
                its
                customers up to 90 percent of earnings in excess of its authorized
                return,
                depending on the level of earnings achieved, to the extent that the
                Utility would achieve any such additional earnings as a result of
                its
                efforts to make utility service more efficient and sell gas in markets
                outside of its traditional service
                territory.


Finally,
      Laclede Gas proposed several modifications to its weather mitigation rate design
      in order to better ensure the Utility’s recovery of its fixed costs. Initially,
      the MoPSC suspended implementation of the Utility’s proposed rates until
      November 1, 2007. However, on July 9, 2007, as a result of a
      June 2007 settlement conference, the parties to the case filed a Unanimous
      Stipulation & Agreement (Agreement) with the MoPSC resolving all matters in
      the proceeding. The MoPSC approved the Agreement on July 19, 2007. The
      Agreement includes, among other things:


•
            an
                increase of $38.6 million in non-gas revenues effective
                August 1, 2007, including $5.5 million already being billed to
                customers through an ISRS which would no longer be collected, although
                the
                Utility retains the right to file for authorization to reinstate
                an ISRS
                based on future eligible infrastructure-related costs;•
            enhancements
                to the Utility’s weather mitigation rate design to further stabilize the
                impact of weather fluctuations on its customers and its ability to
                better
                ensure 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;•
            a
                provision, effective October 1, 2007, for the Utility to retain
                a share in the pre-tax income from off-system sales and capacity
                release
                revenues ranging from 15% to 30% of the first $6 million in annual
                income
                earned (depending on the level of income earned) and 30% of income
                over $6
                million each year, along with reduced PGA rates beginning in
                November 2007 to facilitate the timely flow-through of the customer
                share of such income;•
            modifications
                to provisions that afford the Utility an opportunity to retain a
                portion
                of any savings it may achieve in connection with the procurement
                of gas
                supplies; and,•
            low
                income and energy efficiency/conservation programs for customers,
                in which
                the Utility will fund $1.1 million annually, and invest up to an
                additional $5.3 million over the next three-year period to be collected
                in
                future rates.


The
      base
      rate moratorium, the earnings sharing mechanism, and certain other items
      included in the comprehensive regulatory compact, as proposed by Laclede Gas,
      were not included in the Agreement; however, some of the Utility’s proposals
      regarding customer programs will be discussed and developed in the future
      through a collaborative effort with the parties to the proceeding.





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, largely on the same grounds as it had proposed regarding the
      disallowance of the Utility’s recovery of purchased gas cost applicable to
      fiscal 2004. 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 remainder of the




11


MoPSC
      Staff’s proposed disallowance lacks merit and intends to vigorously oppose the
      adjustment in proceedings before the MoPSC.


At
      the
      federal level, Laclede Pipeline Company (Pipeline), a wholly-owned subsidiary
      of
      Laclede Group, filed a tariff with the Federal Energy Regulatory Commission
      (FERC) on March 1, 2006, requesting approval to transport liquefied
      petroleum gas under the Interstate Commerce Act. Historically, Pipeline has
      supplied propane to Laclede Gas to supplement the Utility’s natural gas supplies
      during peak consumption periods. Prior to April 1, 2006, in various
      Utility rate proceedings over the years, the MoPSC approved Laclede Gas’ rates
      that were intended to include the recovery of Pipeline’s costs. Pipeline made
      the March 1 tariff filing due to changes in the types of transactions
      Pipeline conducts with third parties during those periods when Laclede Gas
      is
      not fully utilizing Pipeline’s capacity. The MoPSC filed a protest to Pipeline’s
      filing, to which Pipeline responded, and on March 31, 2006, the FERC
      accepted Pipeline’s tariff, effective April 1, 2006. On
      May 1, 2006, the MoPSC filed a request for rehearing of the FERC’s
      Order approving Pipeline’s tariff, and on May 31, 2006, the FERC
      issued a “tolling order” in connection with the MoPSC’s request for rehearing
      which extended the 30-day statutory time period for the FERC to rule on the
      MoPSC’s request. On June 5, 2007, the FERC denied the MoPSC’s request
      for rehearing of the FERC’s March 31, 2006 Order approving Pipeline’s
      FERC tariff. On August 3, 2007, the MoPSC filed with the United States
      Court of Appeals for the District of Columbia Circuit a petition for review
      of
      the FERC’s March 31, 2006 and June 5, 2007 Orders. On
      August 31, 2007, Pipeline filed a motion to intervene in the court
      proceeding. On September 18, 2007, the FERC filed a motion to dismiss,
      maintaining that Section 15 of the Interstate Commerce Act precludes judicial
      review of the FERC’s Orders. On October 3, 2007, the MoPSC filed a
      response opposing the FERC’s motion. On November 13, 2007, the United
      States Court of Appeals for the District of Columbia Circuit dismissed the
      MoPSC’s petition for review of the FERC’s Orders accepting Pipeline’s tariffs.
      Pipeline is providing liquid propane transportation service to Laclede Gas
      pursuant to an approved FERC tariff and a contractual arrangement between
      Pipeline and Laclede Gas. In accordance with the terms of that agreement,
      Laclede Gas is obligated to pay Pipeline approximately $1.0 million annually,
      at
      current rates, 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.





**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**





As
      of
      September 30, 2007, credit ratings for outstanding securities for Laclede
      Gas issues were as follows:





**Type
                of Facility**
            **S&P**
            **Moody’s**
            **Fitch**Laclede
                Gas First Mortgage Bonds
            A
            A3
            A+Laclede
                Gas Commercial Paper
            A-1
            P-2





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
      it 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, variations in the timing of collections of gas cost under the Utility’s PGA
      Clause, the seasonality of




12


accounts
      receivable balances, and the utilization of storage gas inventories cause
      short-term cash requirements to vary during the year, and can cause significant
      variations in the Utility’s cash provided by or used in operating
      activities.


Net
      cash
      provided by operating activities for the fiscal year ended 2007 was $79.1
      million, compared with net cash used in operating activities of $71.7 million
      for fiscal year 2006 and net cash provided by operating activities of $113.4
      million for fiscal year 2005. 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, 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.





Net
      cash
      used in investing activities for fiscal years 2007, 2006 and 2005 were $55.5
      million, $60.6 million, and $55.2 million, respectively. Net cash used in
      investing activities primarily reflected capital expenditures in all
      periods.





Net
      cash
      used in financing activities was $23.4 million for fiscal year 2007. Net cash
      provided by financing activities was $131.9 million for fiscal year 2006 and
      net
      cash used in financing activities was $57.8 million for fiscal 2005. 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. Effective October 1, 2005, the Utility applies carrying
      costs to all over- and under-recoveries of gas costs, including costs and cost
      reductions associated with the use of financial instruments, and gas storage
      inventories.








**LIQUIDITY
      AND CAPITAL RESOURCES**





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. Throughout this fiscal year, Laclede Gas had a line of credit in place
      of
      $320 million, which expires in December 2010. In November 2007, the
      Utility established a seasonal line of credit of $40 million, which will expire
      in March 2008. The Utility had short-term borrowings aggregating to a
      maximum of $262.1 million at any one time during the fiscal year. Due to
      disruptions in the commercial paper market, Laclede Gas drew on its bank line
      during the fourth quarter to replace higher-cost commercial paper, up to a
      maximum of $70 million. All such borrowings were repaid prior to
      September 30, 2007, as the commercial paper market returned to more
      normal conditions. Short-term commercial paper borrowings outstanding at
      September 30, 2007 were $211.4 million at a weighted average interest
      rate of 5.5% per annum. Based on short-term borrowings at
      September 30, 2007, a change in interest rates of 100 basis points
      would increase or decrease pre-tax earnings and cash flows by approximately
      $2.1
      million on an annual basis. Portions of such increases or decreases may be
      offset through the application of PGA carrying costs.





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, 2007, total debt was 62% of
      total capitalization. For the fiscal year ended September 30, 2007,
      EBITDA was 3.40 times interest expense.





On
      March 20, 2007, Laclede Gas filed a shelf registration on Form S-3
      with the Securities and Exchange Commission for issuance of $350 million of
      securities, which filing became effective April 10, 2007. This filing
      also deregistered $65 million of securities under the Utility’s previous shelf
      registration statement. The full amount of this new shelf registration remains
      available to Laclede Gas at this time. On March 6, 2007, the Utility
      received authority from the MoPSC to issue up to $500 million in first mortgage
      bonds, unsecured debt, and equity securities. During fiscal year 2007, pursuant
      to this authority, the Utility sold 110 shares of its common stock to Laclede
      Group for $3.8 million, leaving $496.2 million remaining under this
      authorization as of the date of this filing. The amount, timing and type of
      additional financing to be issued will depend on cash requirements and market
      conditions.





At
      September 30, 2007, Laclede Gas had fixed-rate long-term debt,
      including current obligations, totaling $350 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. While the remaining long-term debt issues are fixed-rate,
      they are subject to changes in fair value as market interest rates change.
      However, increases or decreases in fair value would impact earnings and cash
      flows only if Laclede Gas were to reacquire any of these issues in the open
      market prior to maturity.





Laclede
      Gas has 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, 2007, the
      maximum guarantees under these leases are $1.9 million. However, the Utility
      estimates that the residual value of the leased vehicles will be adequate to
      satisfy most of the




13


guaranteed
      amounts. At September 30, 2007, the carrying value of the liability
      recognized for these guarantees was $0.3 million.


Utility
      capital expenditures were $56.4 million in fiscal year 2007, compared with
      $57.9
      million and $54.6 million for the fiscal years 2006 and 2005, respectively.
      Utility capital expenditures are expected to be approximately $59 million in
      fiscal year 2008.





Capitalization
      at September 30, 2007, excluding current obligations of long-term debt
      and preferred stock, consisted of 52.7% common stock equity, 0.1% preferred
      stock, and 47.2% long-term debt.





Laclede
      Gas’ ratio of earnings to fixed charges was 2.3 for fiscal year 2007, 2.2 for
      fiscal year 2006, and 2.6 for fiscal year 2005.





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, 2007, Laclede Gas had contractual obligations with
      payments due as summarized below (in millions):





**Payments
                due by period****Less
                than**
            
            **1-3**
            
            **3-5**
            
            **More
                than****Contractual
                Obligations**
            
            **Total**
            
            **1
                Year**
            
            **Years**
            
            **Years**
            
            **5
                Years**Principal
                Payments on Long-Term Debt
            
            $
            350.0
            
            $
            40.0
            
            $
            —
            
            $
            25.0
            
            $
            285.0Interest
                Payments on Long-Term Debt
            
            
            402.2
            
            
            21.0
            
            
            39.0
            
            
            36.6
            
            
            305.6Operating
                Leases (a)
            
            
            12.6
            
            
            4.8
            
            
            6.3
            
            
            1.5
            
            
            —Purchase
                Obligations – Natural Gas (b)
            
            
            307.0
            
            
            150.4
            
            
            64.9
            
            
            44.4
            
            
            47.3Purchase
                Obligations – Other (c)
            
            
            113.1
            
            
            15.2
            
            
            18.5
            
            
            16.3
            
            
            63.1Total
                (d)
            
            $
            1,184.9
            
            $
            231.4
            
            $
            128.7
            
            $
            123.8
            
            $
            701.0





(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, 2007 New York Mercantile Exchange futures
                prices. Laclede Gas recovers the costs related to its purchases,
                transportation, and storage of natural gas through the operating
                of its
                Purchased Gas Adjustment 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 $0.8 million in fiscal year 2008.
                Laclede
                Gas anticipates a $0.4 million contribution relative to its non-qualified
                pension plans during fiscal year 2008. With regard to the postretirement
                benefits, the Utility anticipates it will contribute $8.2 million
                to the
                qualified trusts and $0.3 million directly to participants from Laclede
                Gas’ funds during fiscal year 2008. 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.







14


**MARKET
      RISK**





Laclede
      Gas adopted a risk management policy that provides 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 Purchased Gas
      Adjustment 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. At
      September 30, 2007, the Utility held 38.6 million MMBtu of futures
      contracts at an average price of $8.45 per MMBtu. Additionally, 3.0 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 2008.





**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 the 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.


15


**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 the Laclede Gas’
internal control over financial reporting as of September 30, 2007. 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
      the
      Laclede Gas’ internal control over financial reporting was effective as of
      September 30, 2007. 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.







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 internal control over financial reporting of Laclede Gas Company
      (a
      wholly-owned subsidiary of The Laclede Group, Inc.) (the “Company”) as of
      September 30, 2007, 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, 2007, 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, 2007 of
      the Company and our report dated November 28, 2007 expressed an
      unqualified opinion on those financial statements and financial statement
      schedule and included an explanatory paragraph regarding the Company’s adoption
      of Statement of Financial Accounting Standards No. 158, *Employers’
Accounting for Defined Benefit Pension and Other Postretirement Benefit
      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
      28, 2007


17







**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**






To
      the
      Board of Directors and Shareholder of


Laclede
      Gas Company


St.
      Louis, Missouri






We
      have
      audited the 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, 2007 and 2006, 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, 2007. 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, 2007 and
      2006, and the results of its operations and cash flows for each of the three
      years in the period ended September 30, 2007, in conformity with
      accounting principles generally accepted in the United States of America. Also,
      in our opinion, such financial statement schedules, 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 Note 2 to the financial statements, the Company adopted the
      provisions of Statement of Financial Accounting Standards No. 158,
*Employers’ Accounting for Defined Benefit Pension and Other Postretirement
      Benefit 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, 2007, 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 28, 2007 expressed an unqualified opinion on the Company's
      internal control over financial reporting.









/s/
      DELOITTE & TOUCHE LLP


St.
      Louis, Missouri


November
      28, 2007




18


LACLEDE
      GAS COMPANY


STATEMENTS
      OF INCOME








(Thousands)


Years
                Ended September 30
            
            
            
            **2007**
            
            
            
            **2006**
            
            
            
            **2005**Operating
                Revenues:Utility
            
            
            
            $
            1,131,554
            
            
            
            $
            1,141,011
            
            
            
            $
            978,195Other
            
            
            
            
            3,415
            
            
            
            
            2,305
            
            
            
            
            2,288Total
                Operating Revenues
            
            
            
            
            1,134,969
            
            
            
            
            1,143,316
            
            
            
            
            980,483Operating
                Expenses:UtilityNatural
                and propane gas
            
            
            
            
            797,924
            
            
            
            
            821,721
            
            
            
            
            676,931Other
                operation expenses
            
            
            
            
            131,798
            
            
            
            
            128,180
            
            
            
            
            125,364Maintenance
            
            
            
            
            24,306
            
            
            
            
            21,198
            
            
            
            
            19,226Depreciation
                and amortization
            
            
            
            
            34,080
            
            
            
            
            30,904
            
            
            
            
            23,036Taxes,
                other than income taxes
            
            
            
            
            68,361
            
            
            
            
            71,038
            
            
            
            
            62,859Total
                Utility Operating Expenses
            
            
            
            
            1,056,469
            
            
            
            
            1,073,041
            
            
            
            
            907,416Other
            
            
            
            
            2,914
            
            
            
            
            2,316
            
            
            
            
            2,318Total
                Operating Expenses
            
            
            
            
            1,059,383
            
            
            
            
            1,075,357
            
            
            
            
            909,734Operating
                Income
            
            
            
            
            75,586
            
            
            
            
            67,959
            
            
            
            
            70,749Other
                Income and (Income Deductions) - Net
            
            
            
            
            4,548
            
            
            
            
            4,118
            
            
            
            
            1,343Interest
                Charges:Interest
                on long-term debt
            
            
            
            
            22,502
            
            
            
            
            22,329
            
            
            
            
            22,835Other
                interest charges
            
            
            
            
            11,101
            
            
            
            
            10,236
            
            
            
            
            4,076Total
                Interest Charges
            
            
            
            
            33,603
            
            
            
            
            32,565
            
            
            
            
            26,911Income
                Before Income Taxes
            
            
            
            
            46,531
            
            
            
            
            39,512
            
            
            
            
            45,181Income
                Tax Expense
            
            
            
            
            14,047
            
            
            
            
            10,632
            
            
            
            
            14,550Net
                Income
            
            
            
            
            32,484
            
            
            
            
            28,880
            
            
            
            
            30,631Dividends
                on Redeemable Preferred Stock
            
            
            
            
            43
            
            
            
            
            48
            
            
            
            
            55Earnings
                Applicable to Common Stock
            
            
            
            $
            32,441
            
            
            
            $
            28,832
            
            
            
            $
            30,576

















See
      the
      accompanying Notes to Financial Statements.













19





LACLEDE
      GAS COMPANY


STATEMENTS
      OF COMPREHENSIVE INCOME





(Thousands)


Years
                Ended September 30
            
            
            
            **2007**
            
            
            
            **2006**
            
            
            
            **2005**Net
                Income
            
            
            
            $
            32,484
            
            
            
            $
            28,880
            
            
            
            $
            30,631Other
                Comprehensive Income (Loss) Before Tax:Minimum
                pension liability adjustment
            
            
            
            
            377
            
            
            
            
            479
            
            
            
            
            (1,232
            )Income
                tax expense (benefit) related to items of othercomprehensive
                income (loss)
            
            
            
            
            146
            
            
            
            
            186
            
            
            
            
            (476
            )Other
                Comprehensive Income (Loss), Net of Tax
            
            
            
            
            231
            
            
            
            
            293
            
            
            
            
            (756
            )Comprehensive
                Income
            
            
            
            $
            32,715
            
            
            
            $
            29,173
            
            
            
            $
            29,875








See
      the
      accompanying Notes to Financial Statements.


20





LACLEDE
      GAS COMPANY


BALANCE
      SHEETS








(Thousands)


September
                30
            
            
            
            **2007**
            
            
            
            **2006**ASSETSUtility
                Plant
            
            
            
            $
            1,187,828
            
            
            
            $
            1,149,104Less
                – Accumulated depreciation and amortization
            
            
            
            
            394,034
            
            
            
            
            385,277Net
                Utility Plant
            
            
            
            
            793,794
            
            
            
            
            763,827Other
                Property and Investments
            
            
            
            
            36,933
            
            
            
            
            35,066Current
                Assets:Cash
                and cash equivalents
            
            
            
            
            2,454
            
            
            
            
            2,314Accounts
                receivable:Gas
                customers – billed and unbilled
            
            
            
            
            102,224
            
            
            
            
            91,519Associated
                companies
            
            
            
            
            253
            
            
            
            
            10,849Other
            
            
            
            
            8,973
            
            
            
            
            8,652Allowances
                for doubtful accounts
            
            
            
            
            (10,961
            )
            
            
            
            (12,798
            )Inventories:Natural
                gas stored underground at LIFO cost
            
            
            
            
            138,198
            
            
            
            
            137,417Propane
                gas at FIFO cost
            
            
            
            
            19,950
            
            
            
            
            19,385Materials,
                supplies and merchandise at average cost
            
            
            
            
            4,864
            
            
            
            
            5,848Derivative
                instrument assets
            
            
            
            
            26,296
            
            
            
            
            16,076Unamortized
                purchased gas adjustments
            
            
            
            
            12,813
            
            
            
            
            44,381Deferred
                income taxes
            
            
            
            
            275
            
            
            
            
            —Prepayments
                and other
            
            
            
            
            6,970
            
            
            
            
            7,416Total
                Current Assets
            
            
            
            
            312,309
            
            
            
            
            331,059Deferred
                Charges:Prepaid
                pension cost
            
            
            
            
            —
            
            
            
            
            65,794Regulatory
                assets
            
            
            
            
            285,054
            
            
            
            
            185,644Other
            
            
            
            
            3,113
            
            
            
            
            3,750Total
                Deferred Charges
            
            
            
            
            288,167
            
            
            
            
            255,188Total
                Assets
            
            
            
            $
            1,431,203
            
            
            
            $
            1,385,140







21








LACLEDE
      GAS COMPANY


BALANCE
      SHEETS (continued)





(Thousands)


September
                30
            
            
            
            **2007**
            
            
            
            **2006**CAPITALIZATION
                AND LIABILITIESCapitalization:Common
                stock equity
            
            
            
            $
            345,511
            
            
            
            $
            339,500Redeemable
                preferred stock (less current sinking fund requirements)
            
            
            
            
            627
            
            
            
            
            787Long-term
                debt (less current portion)
            
            
            
            
            309,122
            
            
            
            
            349,041Total
                Capitalization
            
            
            
            
            655,260
            
            
            
            
            689,328Current
                Liabilities:Notes
                payable
            
            
            
            
            211,400
            
            
            
            
            207,300Accounts
                payable
            
            
            
            
            45,084
            
            
            
            
            55,765Accounts
                payable - associated companies
            
            
            
            
            4,065
            
            
            
            
            —Advance
                customer billings
            
            
            
            
            25,440
            
            
            
            
            31,443Current
                portion of long-term debt and preferred stock
            
            
            
            
            40,160
            
            
            
            
            159Wages
                and compensation accrued
            
            
            
            
            11,532
            
            
            
            
            11,151Dividends
                payable
            
            
            
            
            7,974
            
            
            
            
            7,662Customer
                deposits
            
            
            
            
            15,899
            
            
            
            
            16,833Interest
                accrued
            
            
            
            
            10,806
            
            
            
            
            10,166Taxes
                accrued
            
            
            
            
            19,210
            
            
            
            
            15,545Deferred
                income taxes current
            
            
            
            
            —
            
            
            
            
            7,049Other
            
            
            
            
            5,342
            
            
            
            
            4,596Total
                Current Liabilities
            
            
            
            
            396,912
            
            
            
            
            367,669Deferred
                Credits and Other Liabilities:Deferred
                income taxes
            
            
            
            
            223,192
            
            
            
            
            221,523Unamortized
                investment tax credits
            
            
            
            
            4,200
            
            
            
            
            4,437Pension
                and postretirement benefit costs
            
            
            
            
            63,678
            
            
            
            
            20,302Asset
                retirement obligations
            
            
            
            
            26,054
            
            
            
            
            25,988Regulatory
                liabilities
            
            
            
            
            39,589
            
            
            
            
            33,182Other
            
            
            
            
            22,318
            
            
            
            
            22,711Total
                Deferred Credits and Other Liabilities
            
            
            
            
            379,031
            
            
            
            
            328,143Commitments
                and Contingencies (Note 12)Total
                Capitalization and Liabilities
            
            
            
            $
            1,431,203
            
            
            
            $
            1,385,140

















See
      the
      accompanying Notes to Financial Statements.


22


LACLEDE
      GAS COMPANY


STATEMENTS
      OF CAPITALIZATION








(Thousands,
      Except for Shares and Per Share Amounts)


September
                30
            
            
            
            **2007**
            
            
            
            **2006**Common
                Stock Equity:Common
                stock, par value $1 per share and Paid-in Capital:Authorized
                – 2007 and 2006, 50,000,000 sharesIssued
                – 2007, 10,307 shares; and 2006, 10,197 shares
            
            
            $
            151,510
            
            
            $
            145,527Retained
                earnings
            
            
            
            195,728
            
            
            
            194,807Accumulated
                other comprehensive loss
            
            
            
            (1,727
            )
            
            
            (834)Total
                Common Stock Equity
            
            
            
            345,511
            
            
            
            339,500Redeemable
                Preferred Stock, par value$25
                per share (1,480,000 shares authorized)Issued
                and outstanding:5%
                Series B – 2007, 25,600 shares, 2006, 31,951 shares
            
            
            
            480
            
            
            
            6404.56%
                Series C – 2007 and 2006, 5,894 shares
            
            
            
            147
            
            
            
            147Total
                Redeemable Preferred Stock
            
            
            
            627
            
            
            
            787Long-Term
                Debt:First
                mortgage bonds:7-1/2%
                Series, due November 1, 2007
            
            
            
            —
            
            
            
            40,0006-1/2%
                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
            
            
            
            55,000Total
            
            
            
            310,000
            
            
            
            350,000Unamortized
                discount, net of premium, on long-term debt
            
            
            
            (878
            )
            
            
            (959
            )Total
                Long-Term Debt
            
            
            
            309,122
            
            
            
            349,041Total
            
            
            $
            655,260
            
            
            $
            689,328




















Long-term
      debt and preferred stock dollar amounts are exclusive of current
      portion.





See
      the
      accompanying Notes to Financial Statements.







23


LACLEDE
      GAS COMPANY


STATEMENTS
      OF COMMON SHAREHOLDER’S EQUITY







**Common
                Stock Issued**
            
            **Paid-in**
            
            **Retained**
            
            **Accum.**
              **Other**
              **Comp.**(Thousands,
                Except for Shares)
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Earnings**
            
            **Income**
            
            **Total**BALANCE
                OCTOBER 1, 2004
            
            10,000
            
            $
            10
            
            $
            136,042
            
            $
            194,451
            
            $
            (371
            )
            $
            330,132Net
                income
            
            —
            
            
            —
            
            
            —
            
            
            30,631
            
            
            —
            
            
            30,631Dividends
                declared:Common
                stock
            
            —
            
            
            —
            
            
            —
            
            
            (29,003
            )
            
            —
            
            
            (29,003
            )Preferred
                stock
            
            —
            
            
            —
            
            
            —
            
            
            (55
            )
            
            —
            
            
            (55
            )Tax
                benefit – stock compensation
            
            —
            
            
            —
            
            
            227
            
            
            —
            
            
            —
            
            
            227Other
                comprehensive income (loss)
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (756
            )
            
            (756
            )Issuance
                of common stock to and paid-in
              capital
                contributions from Laclede Group
            
            89
            
            
            —
            
            
            4,102
            
            
            —
            
            
            —
            
            
            4,102BALANCE
                SEPTEMBER 30, 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 (loss)
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            293
            
            
            293Issuance
                of common stock to and paid-incapital
                contributions from 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 (loss)
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            231
            
            
            231Issuance
                of common stock to and paid-in
              capital
                contributions from 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
            )
            $
            345,511





See
      the
      accompanying Notes to Financial Statements.


24





LACLEDE
      GAS COMPANY


STATEMENTS
      OF CASH FLOWS







(Thousands)Years
                Ended September 30
            
            **2007**
            
            **2006**
            
            **2005**Operating
                Activities:Net
                Income
            
            $
            32,484
            
            $
            28,880
            
            $
            30,631Adjustments
                to reconcile net income to net cash provided by(used
                in) operating activities:Depreciation
                and amortization
            
            
            34,080
            
            
            30,904
            
            
            23,036Deferred
                income taxes and investment tax credits
            
            
            (11,545
            )
            
            24,809
            
            
            1,220Other
                – net
            
            
            1,359
            
            
            1,491
            
            
            500Changes
                in assets and liabilities:Accounts
                receivable – net
            
            
            (2,267
            )
            
            (24,851
            )
            
            4,408Unamortized
                purchased gas adjustments
            
            
            31,568
            
            
            (13,120
            )
            
            (11,643
            )Deferred
                purchased gas costs
            
            
            13,381
            
            
            (114,686
            )
            
            44,575Accounts
                payable
            
            
            (6,616
            )
            
            (20,573
            )
            
            30,999Advance
                customer billings – net
            
            
            (6,003
            )
            
            755
            
            
            7,068Taxes
                accrued
            
            
            3,665
            
            
            (9,445
            )
            
            7,321Natural
                gas stored underground
            
            
            (781
            )
            
            22,162
            
            
            (27,854
            )Other
                assets and liabilities
            
            
            (10,253
            )
            
            1,939
            
            
            3,155Net
                cash provided by (used in) operating activities
            
            
            79,072
            
            
            (71,735
            )
            
            113,416Investing
                Activities:Capital
                expenditures
            
            
            (56,434
            )
            
            (57,925
            )
            
            (54,621
            )Other
                investments
            
            
            921
            
            
            (2,671
            )
            
            (614
            )Net
                cash used in investing activities
            
            
            (55,513
            )
            
            (60,596
            )
            
            (55,235
            )Financing
                Activities:Issuance
                of first mortgage bonds
            
            
            —
            
            
            55,000
            
            
            —Maturity/redemption
                of first mortgage bonds
            
            
            —
            
            
            (40,000
            )
            
            (25,000
            )Issuance
                (repayment) of short-term debt - net
            
            
            4,100
            
            
            143,700
            
            
            (7,780
            )Dividends
                paid
            
            
            (31,245
            )
            
            (29,811
            )
            
            (28,896
            )Issuance
                of common stock to and paid-in capital contributionsfrom
                Laclede Group
            
            
            3,808
            
            
            3,722
            
            
            4,102Preferred
                stock reacquired
            
            
            (159
            )
            
            (63
            )
            
            (244
            )Other
            
            
            77
            
            
            (606
            )
            
            —Net
                cash (used in) provided by financing activities
            
            
            (23,419
            )
            
            131,942
            
            
            (57,818
            )Net
                Increase (Decrease) in Cash and Cash Equivalents
            
            
            140
            
            
            (389
            )
            
            363Cash
                and Cash Equivalents at Beginning of Year
            
            
            2,314
            
            
            2,703
            
            
            2,340Cash
                and Cash Equivalents at End of Year
            
            $
            2,454
            
            $
            2,314
            
            $
            2,703Supplemental
                Disclosure of Cash Paid During the Year for:Interest
            
            $
            31,776
            
            $
            32,298
            
            $
            26,848Income
                taxes
            
            
            6,734
            
            
            6,987
            
            
            3,184





See
      the
      accompanying Notes to Financial Statements.







25


**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 2007, 2006 and 2005 averaged 3.1%, 3.0% and 2.5%, respectively,
      of the original cost of depreciable and amortizable property.


Effective
      December 1, 2001, the MoPSC ordered the cost of removing retired
      utility plant to be recovered as an expense when incurred rather than being
      included in depreciation rates. Prior to December 1, 2001, the
      Utility’s removal costs, net of salvage, were charged to accumulated
      depreciation. As ordered by the MoPSC, Laclede Gas instituted lower depreciation
      rates effective December 1, 2001 and began expensing all removal
      costs, net of salvage, as incurred. These costs were included in the Other
      Operation Expenses line on the income statement. Effective
      July 1, 2002, the MoPSC ordered the negative amortization on a
      straight-line basis of a portion of the Utility’s depreciation reserve,
      amounting to $3.4 million annually. In January 2005, the Commission issued
      an Order in the Utility’s 1999 rate case relative to the calculation of its
      depreciation rates with regard to cost of removal. In accordance with the
      provisions of the Order, Laclede Gas increased certain of its depreciation
      rates
      effective February 1, 2005, resulting in higher annual depreciation
      expense totaling $2.3 million. That same Order also required that operating
      expenses related to actual removal costs, which the Utility began expensing
      as
      incurred in fiscal year 2002, be reduced by $2.3 million annually. As such,
      the
      Order had no effect on income or the recovery of depreciation expenses between
      February 2005 and the subsequent settlement of the Utility’s 2005 rate
      proceeding that fully implemented Laclede Gas’ depreciation method that was
      confirmed by the Commission in January 2005.


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 SFAS No. 71, 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




26
 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.


**ASSET
      RETIREMENT OBLIGATIONS –** In accordance with SFAS No. 143, “Accounting
      for Asset Retirement Obligations,” and 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. Had FIN 47 been applied to prior periods, the asset
      retirement obligations as of September 30, 2005 would have been $24.4
      million.


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
            
            $
            26,054





**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).




27


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





(Thousands)
            
            **2007**
            
            **2006**Regulatory
                Assets:Future
                income taxes due from customers
            
            $
            85,476
            
            $
            79,061Pension
                and postretirement benefit costs
            
            
            151,163
            
            
            46,319Unamortized
                purchased gas adjustments
            
            
            12,813
            
            
            44,381Purchased
                gas costs
            
            
            29,457
            
            
            42,838Compensated
                absences
            
            
            7,104
            
            
            6,944Cold
                weather rule
            
            
            6,952
            
            
            4,700Other
            
            
            4,902
            
            
            5,782Total
                Regulatory Assets
            
            $
            297,867
            
            $
            230,025Regulatory
                Liabilities:Unamortized
                investment tax credits
            
            $
            4,200
            
            $
            4,437Accrued
                cost of removal
            
            
            33,238
            
            
            28,928Other
            
            
            6,351
            
            
            4,254Total
                Regulatory Liabilities
            
            $
            43,789
            
            $
            37,619





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$5.4 million from December 27, 1999 through
      September 30, 2007. 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$1.6 million
      from December 27, 1999 through
      September 30, 2007.


**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, 2007 exceeded the
      LIFO cost by $4.3 million and at September 30, 2006 exceeded the LIFO
      cost by $39.3 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, 2007 and 2006, for the Utility, were $11.9 million
      and $13.8 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
      provides 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:


**•**
            Previously,
                the Utility’s tariffs allowed for scheduled gas cost adjustments in the
                months of November, January, March and June. Effective October 1,
                2005,
                the tariffs allow the Utility flexibility to make up to three
                discretionary PGA changes during each year, in addition to its mandatory
                November PGA change, so long as such changes are separated by at
                least two
                months.**•**
            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.**•**
            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


28
   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. Laclede Gas did not record any income under the
                plan during the past three years. Income recorded under the plan,
                if any,
                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, will be 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 will be 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 will be
      recovered from or credited to customers over an annual period commencing in
      the
      subsequent November.




**Pre-tax
                Income**
            **Customer
                Share**
            
            **Company
                Share**First
                $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. The provision for current income taxes reflects the tax
      treatment of these items. 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 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 current
      and
      deferred 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.


**GROSS
      RECEIPTS AND SALES TAXES -** Gross receipts taxes associated with Laclede
      Gas’ natural gas utility service are imposed on the Utility and billed to its
      customers. These amounts are recorded gross in the Statements of Income. Amounts
      recorded in Utility Operating Revenues were $51.8 million, $53.0 million, and
      $44.2 million for fiscal years 2007, 2006, and 2005, respectively. Gross
      receipts taxes are expensed by the Utility and included in the Taxes Other
      Than
      Income 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. Beginning in fiscal 2006, as approved by
      the
      MoPSC, the Utility is allowed to defer for future recovery uncollectible
      expenses associated with amendments to the Cold Weather Rule.


**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.






29


**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,
      which replaced the Laclede Group 2003 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. Through fiscal year 2005, Laclede Group accounted for the plans in
      accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting
      for Stock Issued to Employees,” and provided disclosures in accordance with SFAS
      No. 123, “Accounting for Stock-Based Compensation.” Pursuant to this guidance,
      Laclede Group only recorded compensation cost related to restricted stock.
      Laclede Group was not required to recognize compensation cost (or allocate
      compensation cost to the Utility) for stock options because all options granted
      under the Equity Incentive Plan had an exercise price equal to the market value
      of Laclede Group’s common stock on the date of the grant. Laclede Group
      implemented SFAS No. 123(R) on a modified prospective basis effective October
      1,
      2005.


Total
      compensation cost for share-based awards that has been allocated to the Utility
      and charged against net income was $1.5 million and $1.0 million for fiscal
      years 2007 and 2006, respectively. Compensation cost capitalized as part of
      fixed assets was $0.5 million and $0.4 million for fiscal years 2007 and 2006,
      respectively. The total income tax benefit recognized in the income statement
      for share-based payment arrangements was approximately $0.6 million and $0.4
      million for fiscal years 2007 and 2006, respectively. Compensation cost charged
      against net income and the related income tax benefits recorded in fiscal year
      2005 were not material. As of September 30, 2007, there was approximately $3.0
      million in unrecognized compensation cost related to nonvested share-based
      compensation arrangements (options and restricted stock) that is expected to
      be
      allocated to the Utility over a weighted average period of 2.2
      years.


**NEW
      ACCOUNTING STANDARDS –** In May 2005, the Financial Accounting
      Standards Board (FASB) issued SFAS No. 154, “Accounting Changes and Error
      Corrections.” This Statement replaces Accounting Principles Board (APB) Opinion
      No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in
      Interim Financial Statements.” SFAS No. 154 sets forth new guidelines on
      accounting for voluntary changes in accounting principle and requires certain
      disclosures. It also applies to the unusual situation in which an accounting
      pronouncement is issued but does not include specific transition guidelines.
      This Statement requires such accounting principle changes to be applied
      retrospectively to all prior periods presented as an adjustment to the balances
      of assets or liabilities affected along with an offsetting adjustment to
      retained earnings for the cumulative effect on periods prior to those presented.
      This Statement carries forward without change the guidance in APB Opinion No.
      20
      for reporting the correction of an error and a change in accounting estimate.
      Adoption of SFAS No. 154 on October 1, 2006 had no effect on the
      Utility’s financial position or results of operations.


In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments.” This Statement amends SFAS No. 133, “Accounting for
      Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities - a replacement of FASB Statement No. 125.” SFAS No. 155 permits the
      fair value remeasurement for any hybrid financial instrument that contains
      an
      embedded derivative that otherwise would require bifurcation. It also
      establishes a requirement to evaluate beneficial interests in securitized
      financial assets to identify interests that are freestanding derivatives or
      that
      are hybrid financial instruments that contain an embedded derivative requiring
      bifurcation. Adoption of SFAS No. 155 on October 1, 2006 had no effect
      on the Utility’s financial position or results of operations.


In
      June 2006, the FASB issued Interpretation Number 48 (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. The Utility will adopt FIN 48 as of the beginning of the first
      quarter of fiscal year 2008. The Utility is currently evaluating the provisions
      of this Interpretation.


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




30
 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.” This
        Statement will be effective for the Utility as of the beginning of fiscal
        year
        2009. Laclede Gas is currently evaluating the provisions of this
        Statement.


In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans.” This Statement amends
      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 eliminates the delayed recognition of actuarial
      gains
      and losses and the 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. Laclede Gas adopted the recognition and
      disclosure provisions of this Statement effective September 30, 2007.
      For details on the impact of adoption of this Statement and the required
      disclosures, see Note 2, “Pension Plans and Other Postretirement Benefits.” 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. 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. The Utility is
      currently evaluating the impact of adoption of the change in measurement date
      on
      its financial statements.


In
      September 2006, the Securities and Exchange Commission (SEC) staff issued
      Staff Accounting Bulletin No. 108, “Financial Statements-Concerning the Effects
      of Prior Year Misstatements when Quantifying Misstatements in Current Year
      Financial Statements” (SAB 108). SAB 108 provides guidance on the consideration
      of the effects of prior year misstatements in quantifying current year
      misstatements for the purpose of assessing materiality. SAB 108 establishes
      a
      dual approach that requires quantification of financial statement errors based
      on the effects of the error on the Utility’s financial statements and the
      related financial statement disclosures. The Utility’s adoption of SAB 108 in
      the fourth quarter of fiscal year 2007 had no effect on its financial
      statements.


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. Laclede Gas is currently evaluating the provisions of this
      Statement.


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. The Utility is currently evaluating the
      provisions of this EITF Issue.








**2.**
            **PENSION
                PLANS AND OTHER POSTRETIREMENT
                BENEFITS**





In
      September 2007, the Utility adopted SFAS No. 158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans.” This Statement amends
      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




31
 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 eliminates 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 are 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.


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





(Thousands)
            
            **Prior
                to**
              **SFAS
                No. 158**
              **Adoption**
            
            **Adjustments**
            
            **After**
              **SFAS
                No. 158**
              **Adoption**Deferred
                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





SFAS
      No.
      158 does not permit retrospective application. Accordingly, the Balance Sheet
      at
      September 30, 2006 has not been restated for the adoption of SFAS No.
      158.





**Pension
      Plans**





Laclede
      Gas has non-contributory defined benefit, trusteed forms of pension plans
      covering substantially all employees over the age of twenty-one. Benefits are
      based on years of service and the employee’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 2007, 2006 and 2005 amounted to $5.5, $5.4, and $4.5 million,
      respectively. These costs include amounts capitalized with construction
      activities.


The
      net
      periodic pension costs include the following components:





(Thousands)
            
            **2007**
            
            **2006**
            
            **2005**Service
                cost – benefits earned during the period
            
            $
            12,422
            
            $
            14,761
            
            $
            11,196Interest
                cost on projected benefit obligation
            
            
            17,929
            
            
            16,704
            
            
            15,977Expected
                return on plan assets
            
            
            (20,295
            )
            
            (20,782
            )
            
            (21,164
            )Amortization
                of prior service cost
            
            
            1,143
            
            
            1,175
            
            
            1,234Amortization
                of actuarial loss
            
            
            3,673
            
            
            6,912
            
            
            2,921Sub-total
            
            $
            14,872
            
            $
            18,770
            
            $
            10,164Loss
                on lump-sum settlement
            
            
            803
            
            
            —
            
            
            —Regulatory
                adjustment
            
            
            (10,131
            )
            
            (13,417
            )
            
            (5,635
            )Net
                pension cost
            
            $
            5,544
            
            $
            5,353
            
            $
            4,529





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. Lump sum payments recognized as settlements during the twelve
      months ended September 30, 2007 were $3.0 million. No lump-sum
      payments were recognized as settlements in fiscal years 2006 and
      2005.


Changes
      in the minimum pension liability resulted in charges/(credits) to Other
      Comprehensive Income of $(0.4) million in fiscal year 2007, $(3.6) million
      in
      fiscal year 2006, and $4.3 million in fiscal year 2005, excluding the effect
      of
      regulatory treatment.


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 annual allowance of $3.4
      million, effective July 1, 2003, $4.1 million effective
      October 1, 2005, and $4.8 million effective August 1, 2007.
      The difference between these amounts 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
      liability.


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





(Thousands)
            
            **2007**
            
            **2006**Benefit
                obligation at beginning of year
            
            $
            282,060
            
            $
            327,202Service
                cost
            
            
            12,422
            
            
            14,761Interest
                cost
            
            
            17,929
            
            
            16,704Actuarial
                (gain) loss
            
            
            1,407
            
            
            (48,453
            )Gross
                benefits paid *
            
            
            (20,553
            )
            
            (28,154
            )Benefit
                obligation at end of year
            
            $
            293,265
            
            $
            282,060Accumulated
                benefit obligation at end of year
            
            $
            231,719
            
            $
            223,327*
                Includes $(3,021) in lump-sum payments recognized as settlements
                in fiscal
                year 2007. No lump-sum payments were recognized as settlements in
                fiscal
                year 2006.





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





(Thousands)
            
            **2007**
            
            **2006**Fair
                value of plan assets at beginning of year
            
            $
            246,136
            
            $
            272,782Actual
                return on plan assets
            
            
            33,515
            
            
            (96
            )Employer
                contributions
            
            
            1,182
            
            
            1,604Gross
                benefits paid *
            
            
            (20,553
            )
            
            (28,154
            )Fair
                value of plan assets at end of year
            
            $
            260,280
            
            $
            246,136Funded
                status of plans
            
            $
            (32,985
            )
            $
            (35,924
            )Fourth
                quarter contribution adjustment
            
            
            261
            
            
            56Funded
                status, end of year
            
            $
            (32,724
            )
            $
            (35,868
            )*
                Includes $(3,021) in lump-sum payments recognized as settlements
                in fiscal
                year 2007. No lump-sum payments were recognized as settlements in
                fiscal
                year 2006.





33


The
      following table sets forth the amounts recognized in the Balance Sheet at
      September 30, 2007:





(Thousands)Noncurrent
                assets
            
            $
            —Current
                liabilities
            
            
            (400
            )Noncurrent
                liabilities
            
            
            (32,324
            )Total
            
            $
            (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
            
            $
            67,486Prior
                service costs
            
            
            12,332Sub-total
            
            
            79,818Adjustments
                for amounts included in Regulatory Assets
            
            
            (77,004
            )Total
            
            $
            2,814




At
      September 30, 2007, the following pre-tax amounts are expected to be amortized
      from Accumulated Other Comprehensive Income into net periodic pension cost
      during fiscal year 2008:





(Thousands)Amortization
                of net actuarial loss
            
            $
            3,165Amortization
                of prior service cost
            
            
            1,088Sub-total
            
            
            4,253Regulatory
                adjustment
            
            
            (4,081
            )Total
            
            $
            172





The
      following table reconciles the funded status of the plans with the amounts
      recognized in the Balance Sheet at September 30, 2006:





(Thousands)Funded
                status, end of year
            
            $
            (35,868
            )Unrecognized
                net actuarial loss
            
            
            83,776Unrecognized
                prior service cost
            
            
            13,475Net
                amount recognized
            
            $
            61,383Amounts
                recognized in the Balance Sheet consist of:Prepaid
                pension cost
            
            $
            65,794Accrued
                benefit liability
            
            
            (10,558
            )Intangible
                asset
            
            
            577Regulatory
                adjustment
            
            
            4,211Accumulated
                other comprehensive income
            
            
            1,359Net
                amount recognized at end of year
            
            $
            61,383





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:





**2007**
            **2006**
            **2005**Weighted
                average discount rate
            6.25%
            5.00%
            6.25%Weighted
                average rate of future compensation increase
            3.50%
            3.00%
            3.25%Expected
                long-term rate of return on plan assets
            8.25%
            8.25%
            8.50%





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




34
 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:





**2007**
            **2006**Weighted
                average discount rate
            6.25%
            6.25%Weighted
                average rate of future compensation increase
            3.50%
            3.50%


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)
            
            **2007**
            
            **2006**Projected
                benefit obligation
            
            $
            293,265
            
            $
            282,060Fair
                value of plan assets
            
            
            260,280
            
            
            246,136Accumulated
                benefit obligation
            
            
            24,431
            
            
            23,988Fair
                value of plan assets
            
            
            12,795
            
            
            13,769




Following
      are the targeted and actual plan assets by category:





**2008**
            **2007**
            **2006****Target**
            **Actual**
            **Actual**Equity
                Securities
            50%
            50%
            50%Debt
                Securities
            50%
            50%
            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**
              **Funds**2008
            
            
            $
            14.5
            
            
            
            $
            0.42009
            
            
            
            15.1
            
            
            
            
            0.52010
            
            
            
            16.2
            
            
            
            
            0.52011
            
            
            
            18.2
            
            
            
            
            0.62012
            
            
            
            20.0
            
            
            
            
            0.72013
                – 2017
            
            
            
            162.8
            
            
            
            
            3.5





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 2008 are anticipated to be $0.8 million into the qualified
      trusts, and $0.4 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 2007, 2006 and 2005 amounted to $7.8 million,
      $8.9 million, and $8.0 million, respectively, including amounts charged to
      construction.




35





Net
      periodic postretirement benefit costs consisted of the following
      components:





(Thousands)
            
            **2007**
            
            **2006**
            
            **2005**Service
                cost - benefits earned during the period
            
            $
            4,063
            
            $
            3,985
            
            $
            3,379Interest
                cost on accumulated postretirementbenefit
                obligation
            
            
            3,599
            
            
            2,959
            
            
            3,303Expected
                return on plan assets
            
            
            (1,723
            )
            
            (1,358
            )
            
            (1,274
            )Amortization
                of transition obligation
            
            
            136
            
            
            327
            
            
            578Amortization
                of prior service cost
            
            
            (2,328
            )
            
            (36
            )
            
            (32
            )Amortization
                of actuarial loss
            
            
            3,245
            
            
            1,273
            
            
            868Regulatory
                adjustment
            
            
            851
            
            
            1,713
            
            
            1,181Net
                postretirement benefit cost
            
            $
            7,843
            
            $
            8,863
            
            $
            8,003





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 liability. In the 2007 rate
      case, the Commission ordered 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 liability.


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





(Thousands)
            
            
            **2007**
            
            **2006**Benefit
                obligation at beginning of year
            
            
            $
            55,584
            
            $
            57,644Service
                cost
            
            
            
            4,063
            
            
            3,985Interest
                cost
            
            
            
            3,599
            
            
            2,959Plan
                amendments
            
            
            
            —
            
            
            (15,410
            )Actuarial
                loss
            
            
            
            1,551
            
            
            10,992Gross
                benefits paid
            
            
            
            (4,686
            )
            
            (4,586
            )Benefit
                obligation at end of year
            
            
            $
            60,111
            
            $
            55,584





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





(Thousands)
            
            **2007**
            
            **2006**Fair
                value of plan assets at beginning of year
            
            $
            21,179
            
            $
            17,034Actual
                return on plan assets
            
            
            2,947
            
            
            838Employer
                contributions
            
            
            5,557
            
            
            7,893Gross
                benefits paid
            
            
            (4,686
            )
            
            (4,586
            )Fair
                value of plan assets at end of year
            
            $
            24,997
            
            $
            21,179Funded
                status of plans
            
            $
            (35,114
            )
            $
            (34,405
            )Fourth
                quarter contribution adjustment
            
            
            3,460
            
            
            1,947Funded
                status, end of year
            
            $
            (31,654
            )
            $
            (32,458
            )




36


The
      following table sets forth the amounts recognized in the Balance Sheet at
      September 30, 2007:





(Thousands)Noncurrent
                assets
            
            $
            —Current
                liabilities
            
            
            (300
            )Noncurrent
                liabilities
            
            
            (31,354
            )Total
            
            $
            (31,654
            )Pre-tax
                amounts recognized in Accumulated OtherComprehensive
                Income not yet recognized as componentsof
                net periodic postretirement benefit cost consist of:Net
                actuarial loss
            
            $
            33,170Prior
                service credit
            
            
            (11,988
            )Transition
                obligation
            
            
            807Sub-total
            
            
            21,989Adjustment
                for amounts included in Regulatory Assets
            
            
            (21,989
            )Total
            
            $
            —





At
      September
      30, 2007, the following pre-tax amounts are expected to be amortized from
      Accumulated Other Comprehensive Income into net periodic postretirement benefit
      cost during fiscal year 2008:





(Thousands)Amortization
                of net actuarial loss
            
            $
            2,984Amortization
                of prior service credit
            
            
            (2,327
            )Amortization
                of transition obligation
            
            
            136Sub-total
            
            
            793Regulatory
                adjustment
            
            
            (793
            )Total
            
            $
            —




The
      following table
      reconciles the funded status of the plans with the amounts recognized in the
      Balance Sheet at September 30, 2006:





(Thousands)Funded
                status at end of year
            
            $
            (32,458
            )Unrecognized
                net actuarial loss
            
            
            36,088Unrecognized
                prior service cost
            
            
            (14,316
            )Unrecognized
                net transition obligation
            
            
            943Net
                amount recognized at end of yearas
                postretirement benefit cost
            
            $
            (9,743
            )





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:





**2007**
            **2006**
            **2005**Weighted
                average discount rate
            6.25%
            5.00%
            6.25%Weighted
                average rate of future compensation increase
            3.50%
            3.00%
            3.25%Expected
                long-term rate of return on plan assets
            8.25%
            8.25%
            8.50%





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.




37





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





**2007**
            **2006**Weighted
                average discount rate
            6.25%
            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:





**2007**
            **2006**Medical
                cost trend assumed for next year
            8.00%
            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
            2011
            2010





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





(Thousands)
            **1%
                Increase**
            
            **1%
                Decrease**Effect
                on net periodic postretirement benefit cost
            
            
            $
            720
            
            
            
            $
            (630
            )Effect
                on accumulated postretirement benefit obligation
            
            
            
            2,930
            
            
            
            
            (2,660
            )





Following
      are the targeted and actual plan assets by category:





**2008**
            **2007**
            **2006****Target**
            **Actual**
            **Actual**Equity
                Securities
            60%
            58%
            55%Debt
                Securities
            40%
            42%
            45%Total
            100%
            100%
            100%





Missouri
      state law provides for the recovery in rates of SFAS No. 106, “Employers’
Accounting for Postretirement Benefits Other Than Pensions,” 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**
              **Funds**2008
            
            
            $
            4.0
            
            
            
            $
            0.32009
            
            
            
            4.1
            
            
            
            
            0.32010
            
            
            
            4.3
            
            
            
            
            0.32011
            
            
            
            4.3
            
            
            
            
            0.32012
            
            
            
            4.5
            
            
            
            
            0.32013
                – 2017
            
            
            
            26.8
            
            
            
            
            1.7





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 2008 are anticipated
      to
      be $8.2 million to the qualified trusts, and $0.3 million paid directly to
      participants from Laclede Gas funds.





38


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 $3.0 million, $3.0 million and $2.9 million for fiscal years 2007,
      2006 and 2005, respectively.








**3.**
            **COMMON
                STOCK AND PAID-IN CAPITAL**





Laclede
      Gas issued 110 and 108 shares of its common stock to Laclede Group during fiscal
      years 2007 and 2006, respectively, as described below. Total shares of common
      stock outstanding were 10,307 and 10,197 at September 30, 2007 and 2006,
      respectively.


Common
      stock and paid-in capital increased $6.0 million and $5.1 million in 2007 and
      2006, 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 110 shares to Laclede Group for $3.8 million during fiscal 2007, 108
      shares totaling $3.7 million during fiscal 2006, and 89 shares for $3.1 million
      during fiscal 2005. 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.


On
      March 20, 2007, Laclede Gas filed a shelf registration on Form S-3
      with the SEC for issuance of $350 million of securities, which filing became
      effective April 10, 2007. This filing also deregistered $65 million of
      securities under the Utility’s previous shelf registration statement. The full
      amount of this new shelf registration remains available to Laclede Gas at this
      time. On March 6, 2007, the Utility received authority from the MoPSC
      to issue up to $500 million in first mortgage bonds, unsecured debt, and equity
      securities. During fiscal year 2007, pursuant to this authority, the Utility
      sold 110 shares of its common stock to Laclede Group for $3.8 million, leaving
      $496.2 million remaining under this authorization as of the date of this filing.
      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
      2007, 6,351 shares of 5% Series B preferred stock were called to meet sinking
      fund requirements. During 2006, 97 shares of 5% Series B preferred stock and
      12
      shares of 4.56% Series C preferred stock were reacquired and 2,404 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, 2007 are
      $0.2 million per year in 2008 through 2011, and none in 2012.








**5.**
            **LONG-TERM
                DEBT**





Maturities
      on long-term debt, including current portion, for the five fiscal years
      subsequent to


September 30, 2007
      are as follows:





2008
            $40
                million
            (Paid
                at maturity on November 1, 2007)2009
            —2010
            —2011
            $25
                million2012
            —





On
      March 20, 2007, Laclede Gas filed a shelf registration on Form S-3
      with the SEC for issuance of $350 million of securities, which filing became
      effective April 10, 2007. This filing also deregistered $65 million of
      securities under the Utility’s previous shelf registration statement. The full
      amount of this new shelf registration remains available to Laclede Gas at this
      time. On March 6, 2007, the Utility received authority from the MoPSC
      to issue up to $500 million in first mortgage bonds, unsecured debt, and equity
      securities. During fiscal year 2007, pursuant to this authority, the Utility
      sold 110 shares of its common stock to Laclede Group for $3.8 million, leaving
      $496.2 million remaining under




39
 this
        authorization as of the date of this filing. The amount, timing and type
        of
        additional financing to be issued will depend on cash requirements and market
        conditions.


In
      June 2006, Laclede Gas sold $55 million principal amount of First Mortgage
      Bonds, 6.15% Series, due June 1, 2036. The net proceeds of
      approximately $54.4 million from this sale were used to reduce short-term debt
      (including that incurred to fund the redemption at maturity of $40 million
      of 8
      5/8% Series First Mortgage Bonds on May 15, 2006) and for general
      corporate purposes.


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 The 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, 2007 and 2006, the amount under the
      mortgage’s formula that was available to pay dividends was $263 million and $258
      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 2007, Laclede Gas had a line of credit in place of $320 million,
      which expires in December 2010. In November 2007, the Utility
      established a seasonal line of credit of $40 million, which will expire in
      March 2008.


Laclede
      Gas issues commercial paper that is supported by the bank lines of credit.
      During fiscal year 2007, the Utility’s short-term borrowing requirements, which
      peaked at $262.1 million, were generally met by the sale of commercial paper.
      During the last quarter of the fiscal year, due to disruptions in the commercial
      paper market, Laclede Gas drew on its bank line to replace higher-cost
      commercial paper, up to a maximum of $70 million. All such borrowings were
      repaid prior to September 30, 2007, as the commercial paper market
      returned to more normal conditions. Laclede Gas had $211.4 million in commercial
      paper outstanding as of September 30, 2007, at a weighted average
      interest rate of 5.5% per annum, and $207.3 million outstanding as of
      September 30, 2006, at a weighted average interest rate of 5.3% per
      annum.


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, 2007, total debt was 62% of
      total capitalization*.*For the fiscal year ended
      September 30, 2007, EBITDA was 3.40 times interest
      expense.





**7.**
            **FAIR
                VALUE OF FINANCIAL
                INSTRUMENTS**





The
      carrying amounts and estimated fair values of financial instruments at
      September 30, 2007 and 2006 are as follows:





**Carrying**
            
            **Fair**(Thousands)
            
            **Amount**
            
            **Value****2007:**Cash
                and cash equivalents
            
            $
            2,454
            
            $
            2,454Short-term
                debt
            
            
            211,400
            
            
            211,400Long-term
                debt, including current portion
            
            
            349,122
            
            
            356,964Redeemable
                preferred stock, including current sinking fund
                requirements
            
            
            787
            
            
            756**2006:**Cash
                and cash equivalents
            
            $
            2,314
            
            $
            2,314Short-term
                debt
            
            
            207,300
            
            
            207,300Long-term
                debt
            
            
            349,041
            
            
            367,471Redeemable
                preferred stock, including current sinking fund
                requirements
            
            
            946
            
            
            946





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
      long-term debt and preferred stock are estimated based on market prices for
      similar issues.




40








**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**
            **Total**Balance,
                September 30, 2005
            
            $
            (1,127
            )
            
            $
            —
            
            
            $
            (1,127
            )Current-period
                change
            
            
            293
            
            
            
            —
            
            
            
            293Balance,
                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
            )








**9.**
            **INCOME
                TAXES**





The
      net
      provisions for income taxes charged during the years ended
      September 30, 2007, 2006 and 2005 are as follows:





(Thousands)Years
                Ended September 30
            
            
            **2007**
            
            
            **2006**
            
            
            **2005**Included
                in Statements of Income:FederalCurrent
            
            $
            21,808
            
            $
            (12,238
            )
            $
            11,511Deferred
            
            
            (9,490
            )
            
            21,511
            
            
            1,188Investment
                tax credits
            
            
            (237
            )
            
            (241
            )
            
            (332
            )State
                and localCurrent
            
            
            3,784
            
            
            (1,939
            )
            
            1,819Deferred
            
            
            (1,818
            )
            
            3,539
            
            
            364Total
            
            $
            14,047
            
            $
            10,632
            
            $
            14,550


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





**2007**
            
            **2006**
            
            **2005**Federal
                income tax statutory rate
            
            35.0
            %
            35.0
            %
            35.0
            %State
                and local income taxes, net of federalincome
                tax benefits
            
            2.7
            
            2.6
            
            3.1Certain
                expenses capitalized on books and deductedon
                tax return
            
            (6.0
            )
            (5.3
            )
            (4.3
            )Taxes
                related to prior years
            
            0.5
            
            (2.6
            )
            (0.4
            )Other
                items – net
            
            (2.0
            )
            (2.8
            )
            (1.2
            )Effective
                income tax rate
            
            30.2
            %
            26.9
            %
            32.2
            %





41


The
      significant items comprising the net deferred tax liability recognized in the
      Balance Sheets as of


September 30
      are as follows:





(Thousands)
            
            **2007**
            
            **2006**Deferred
                tax assets:Reserves
                not currently deductible
            
            $
            18,364
            
            $
            21,137Unamortized
                investment tax credits
            
            
            2,644
            
            
            2,793Other
            
            
            9,875
            
            
            8,210Total
                deferred tax assets
            
            
            30,883
            
            
            32,140Deferred
                tax liabilities:Relating
                to property
            
            
            196,334
            
            
            186,239Prepaid
                pension asset
            
            
            —
            
            
            25,983Pension
                and other postretirement benefits
            
            
            31,262
            
            
            8,032Deferred
                gas cost
            
            
            8,220
            
            
            24,888Other
            
            
            17,984
            
            
            15,570Total
                deferred tax liabilities
            
            
            253,800
            
            
            260,712Net
                deferred tax liability
            
            
            222,917
            
            
            228,572Net
                deferred tax asset (liability) - current
            
            
            275
            
            
            (7,049
            )Net
                deferred tax liability - non-current
            
            $
            223,192
            
            $
            221,523








**10.**
            **OTHER
                INCOME AND INCOME DEDUCTIONS –
NET**




(Thousands)
            
            **2007**
            
            **2006**
            
            **2005**Non-recurring
                investment gains
            
            $
            —
            
            $
            —
            
            $
            540Allowance
                for funds used during construction
            
            
            (17
            )
            
            (45
            )
            
            (100
            )Interest
                income
            
            
            3,499
            
            
            4,146
            
            
            730Other
                income
            
            
            1,060
            
            
            860
            
            
            1,025Other
                income deductions
            
            
            6
            
            
            (843
            )
            
            (852
            )Other
                income and (income deductions) – net
            
            $
            4,548
            
            $
            4,118
            
            $
            1,343





Laclede
      Gas recorded the receipt of proceeds totaling $0.5 million during fiscal year
      2005 related to its interest, as a policyholder, in the sale of a mutual
      insurance company. These proceeds represent initial distributions relating
      to
      certain policies held by the Utility. Subsequent distributions, if any, are
      not
      expected to have a material impact on the financial position or results of
      operations of the Laclede Gas.


Effective
      October 1, 2005, Laclede Gas applies carrying costs to all over- or
      under-recoveries of gas costs, including costs and cost reductions associated
      with the use of financial instruments, as approved by the MoPSC. Previously,
      carrying costs were applicable only to certain gas cost components exceeding
      a
      predetermined threshold. Such income is recovered through the PGA Clause. These
      amounts are included in the interest income line in the table
      above.





**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.


42




**Regulated
                Gas**
            
            **Non-Regulated**
            
            **Adjustments
                &**(Thousands)
            
            **Distribution**
            
            **Other**
            
            **Eliminations**
            
            **Total****FISCAL
                2007**Operating
                revenues
            
            $
            1,131,554
            
            $
            3,415
            
            $
            —
            
            $
            1,134,969Depreciation
                & amortization
            
            
            34,080
            
            
            —
            
            
            —
            
            
            34,080Interest
                income
            
            
            3,499
            
            
            —
            
            
            —
            
            
            3,499Interest
                charges
            
            
            33,603
            
            
            —
            
            
            —
            
            
            33,603Income
                tax expense
            
            
            13,853
            
            
            194
            
            
            —
            
            
            14,047Net
                income
            
            
            32,176
            
            
            308
            
            
            —
            
            
            32,484Total
                assets
            
            
            1,429,415
            
            
            1,788
            
            
            —
            
            
            1,431,203Capital
                expenditures
            
            
            56,434
            
            
            —
            
            
            —
            
            
            56,434**FISCAL
                2006**Operating
                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**FISCAL
                2005**Operating
                revenues
            
            $
            978,195
            
            $
            2,288
            
            $
            —
            
            $
            980,483Depreciation
                & amortization
            
            
            23,036
            
            
            —
            
            
            —
            
            
            23,036Interest
                income
            
            
            730
            
            
            —
            
            
            —
            
            
            730Interest
                charges
            
            
            26,911
            
            
            —
            
            
            —
            
            
            26,911Income
                tax expense (benefit)
            
            
            14,561
            
            
            (11
            )
            
            —
            
            
            14,550Net
                income (loss)
            
            
            30,649
            
            
            (18
            )
            
            —
            
            
            30,631Total
                assets
            
            
            1,273,975
            
            
            1,540
            
            
            —
            
            
            1,275,515Capital
                expenditures
            
            
            54,621
            
            
            —
            
            
            —
            
            
            54,621








**12.**
            **COMMITMENTS
                AND CONTINGENCIES**





Laclede
      Gas estimates fiscal year 2008 utility capital expenditures at approximately
      $59
      million. There are no material contractual commitments at
      September 30, 2007 related to these estimated capital
      expenditures.


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 2007, 2006 and 2005 was $882,000,
      $874,000 and $865,000, respectively. The annual minimum rental payment for
      fiscal year 2008 is anticipated to be approximately $891,000 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 $3.5 million in fiscal year
      2008, $2.7 million in fiscal year 2009, $1.8 million in fiscal year 2010, $0.9
      million in fiscal year 2011 and $0.3 million in fiscal year 2012. 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, 2007 are estimated at
      approximately $305 million. Additional contracts are generally entered into
      prior to or during the heating season. Laclede Gas estimates that it will pay
      approximately $93 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.


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, 2007, the
      maximum guarantees under these leases are $1.9


43
 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, 2007, the carrying value of the liability recognized for
        these guarantees was $0.3 million.


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.


Environmental
      issues have arisen in the past, and may arise in the future, associated with
      sites formerly owned or operated by Laclede Gas and/or its predecessor
      companies, including facilities at which manufactured gas operations took place.
      Laclede Gas has been advised of the existence of three former manufactured
      gas
      plant (MGP) sites that may require remediation and has worked with federal
      and
      state environmental regulators to address two of the three sites.


With
      regard to a former MGP site located in Shrewsbury, Missouri, Laclede Gas and
      state and federal environmental regulators have agreed upon certain remedial
      actions and those actions are essentially complete. Laclede Gas currently
      estimates the overall cost of these actions will be approximately $2.4 million.
      As of September 30, 2007, Laclede Gas has paid for the cost of these
      actions. If regulators require additional remedial actions or assert additional
      claims, Laclede Gas will incur additional costs.


Laclede
      Gas enrolled a second former MGP site into the Missouri Voluntary Cleanup
      Program (VCP). The VCP provides potential opportunities to minimize the cost
      of
      site cleanup while maximizing possibilities for site development. This site
      is
      located in, and is presently owned by, the City of St. Louis, Missouri (City).
      The City has been exploring development options for the site and has announced
      publicly the selection of a developer with whom it will attempt to negotiate
      a
      final site development contract. In light of the City’s announcement, Laclede
      Gas continues to evaluate options concerning this site. Laclede Gas currently
      estimates the cost of site investigations, agency oversight and related legal
      and engineering consulting to be approximately $650,000. Laclede Gas has paid
      for the cost of these actions. Laclede Gas has requested that other former
      site
      owners and operators share in these costs. One party has agreed to participate
      and has reimbursed Laclede Gas to date for $190,000. Laclede Gas plans to seek
      proportionate reimbursement of all costs relative to this site from other
      potentially responsible parties to the extent practicable.


Laclede
      Gas has been advised that a third former MGP site may require remediation.
      Laclede Gas does not currently own this site, and has not owned it 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 is
      currently holding discussions with the insurers regarding potential
      reimbursement from them. In June 2007, Laclede Gas received a settlement
      payment from one insurer in exchange for a release of claims against that
      insurer. In June 2005, an outside consultant retained by Laclede Gas
      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. This analysis was 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. As of the date of this report, Laclede Gas has
      recorded all such costs. However, it is possible that future events may require
      some level of additional remedial activities that, in turn, would require
      Laclede Gas to record additional costs.


Laclede
      Gas enrolled a parcel of property located in the City of St. Louis in the VCP
      pursuant to an agreement to sell such parcel to a third party. The sale was
      completed January 8, 2007. Under the terms of the agreement, any costs
      relative to future investigations or remedial actions regulators may require
      shall be borne by the third-party buyer. Laclede Gas does not anticipate
      incurring any material costs in connection with this site.


The
      amount of costs relative to future remedial actions at these and other sites
      is
      unknown and maybe 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 29, 2005, the MoPSC Staff (Staff) proposed a disallowance of
      approximately $3.3 million related to Laclede Gas’ recovery of its purchased gas
      costs applicable to fiscal 2004. Following technical conferences, the Staff
      subsequently reduced its proposed disallowance to approximately $2.1 million.
      Laclede Gas believed that the MoPSC Staff’s position lacked merit and vigorously
      opposed the adjustment in proceedings before the MoPSC on


44
 January 29, 2007.
        On June 28, 2007, the MoPSC issued an Order rejecting the MoPSC
        Staff’s proposed disallowance and declaring that the Utility was not imprudent
        with respect to the particular gas purchasing practice questioned by the
        MoPSC
        Staff. This case is now closed.


Laclede
      Gas began implementation of an automated meter reading (AMR) system in
      July 2005. Through the date of this report, the AMR system has been
      deployed to more than 668,000 customer meters, representing well over 98% of
      Laclede’s total customer base population. Certain regulatory issues have arisen
      in conjunction with this implementation. The Utility has approximately 40%
      of
      customers with meters inside their premises. On February 2, 2006, the
      MoPSC Staff filed a complaint against the Utility alleging that it failed to
      adequately obtain or use actual meter readings from certain customers and failed
      to adequately respond to unauthorized gas use. In addition to seeking authority
      to pursue penalties, the Staff sought customer service accommodations for
      customers whose previous estimated bills will require adjustment to reflect
      actual usage. On May 11, 2006, the Missouri Office of Public Counsel
      also filed a complaint alleging that Laclede Gas billed customers for prior
      underestimated usage for a longer period of time than permitted by Commission
      rules. Laclede Gas has filed responses generally denying the MoPSC Staff’s and
      Missouri Office of Public Counsel’s allegations. On November 7, 2006,
      Laclede Gas, the Missouri Office of Public Counsel, and other parties filed
      a
      Stipulation & Agreement that resolves certain issues raised in this case.
      The MoPSC Staff neither supported nor opposed the Stipulation. On
      December 31, 2006, the Commission approved the Stipulation &
Agreement, dismissed the Missouri Office of Public Counsel’s complaint, and
      suspended Staff’s complaint, subject to Laclede’s compliance with the
      Stipulation & Agreement. The primary terms of the Stipulation &
Agreement include the Utility’s provision of bill credits totaling $0.5 million
      to customers who received billing adjustments reconciling undercharges for
      periods exceeding 12 months, a limit on future billing adjustments that
      reconcile undercharges to 12 months, and additional notices to customers
      concerning such billing adjustments. The Utility’s labor union representing
      field service workers, USW Local 11-6 (Union), also raised a number of
      regulatory matters with the MoPSC alleging safety issues associated with the
      installation of AMR and changes in other work practices implemented by Laclede
      Gas. On November 2, 2006, the MoPSC denied and dismissed one of these
      complaints. On December 11-12, 2006, the MoPSC held a hearing on the
      Union’s last remaining complaint. That hearing was completed on
      February 26, 2007. On June 22, 2007, the MoPSC issued an
      Order denying the Union’s remaining complaint and dismissing the case. This case
      is now closed.


On
      December 28, 2006, the MoPSC Staff proposed a disallowance of
      approximately $7.2 million related to Laclede Gas’ recovery of its purchased gas
      costs applicable to fiscal 2005, largely on the same grounds as it had proposed
      regarding the disallowance of the Utility’s recovery of purchased gas cost
      applicable to fiscal 2004. 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 remainder of the MoPSC Staff’s proposed
      disallowance lacks merit and intends to vigorously oppose the adjustment in
      proceedings before the MoPSC.


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.





**13.**
            **INTERIM
                FINANCIAL INFORMATION
                (UNAUDITED)**





In
      the
      opinion of Laclede Gas, the quarterly information presented below for fiscal
      years 2007 and 2006 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.
                30**2007Total
                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
            )**Three
                Months Ended**
            
            
            
            
            **Dec.
                31**
            
            
            
            
            **March
                31**
            
            
            
            
            **June
                30**
            
            
            
            
            **Sept.
                30**2006Total
                operating revenues
            
            
            
            $
            411,993
            
            
            
            $
            489,814
            
            
            
            $
            149,264
            
            
            
            $
            92,245Operating
                income (loss)
            
            
            
            
            35,537
            
            
            
            
            37,420
            
            
            
            
            (400
            )
            
            
            
            (4,598
            )Net
                income (loss)
            
            
            
            
            20,198
            
            
            
            
            18,980
            
            
            
            
            (4,078
            )
            
            
            
            (6,220
            )


45