Exhibit
99.1








LACLEDE
GAS COMPANY


STATEMENTS
OF INCOME


(UNAUDITED)





Three
      Months EndedDecember
      31,(Thousands)
              
              2008
              
              2007Operating
      Revenues:Utility
              
              $
              358,101
              
              $
              320,892Other
              
              
              597
              
              
              786Total
      Operating Revenues
              
              
              358,698
              
              
              321,678Operating
      Expenses:UtilityNatural
      and propane gas
              
              
              254,897
              
              
              222,841Other
      operation expenses
              
              
              36,301
              
              
              35,213Maintenance
              
              
              6,534
              
              
              6,235Depreciation
      and amortization
              
              
              9,119
              
              
              8,713Taxes,
      other than income taxes
              
              
              18,358
              
              
              16,681Total
      Utility Operating Expenses
              
              
              325,209
              
              
              289,683Other
              
              
              530
              
              
              725Total
      Operating Expenses
              
              
              325,739
              
              
              290,408Operating
      Income
              
              
              32,959
              
              
              31,270Other
      Income and (Income Deductions) – Net
              
              
              610
              
              
              2,032Interest
      Charges:Interest
      on long-term debt
              
              
              6,146
              
              
              5,126Other
      interest charges
              
              
              3,189
              
              
              4,016Total
      Interest Charges
              
              
              9,335
              
              
              9,142Income
      Before Income Taxes
              
              
              24,234
              
              
              24,160Income
      Tax Expense
              
              
              8,037
              
              
              8,365Net
      Income
              
              
              16,197
              
              
              15,795Dividends
      on Redeemable Preferred Stock
              
              
              8
              
              
              10Earnings
      Applicable to Common Stock
              
              $
              16,189
              
              $
              15,785See
      Notes to Financial Statements.

































1


LACLEDE
GAS COMPANY


STATEMENTS
OF COMPREHENSIVE INCOME


(UNAUDITED)





Three
      Months EndedDecember
      31,(Thousands)
                    
                    2008
                    
                    2007Net
      Income
                    
                    $
                    16,197
                    
                    $
                    15,795Other
      Comprehensive Income, Before Tax:Amortization
      of actuarial loss included in net periodic pension cost
                    
                    
                    50
                    
                    
                    43Income
      Tax Expense Related to Items of Other Comprehensive Income
                    
                    
                    17
                    
                    
                    17Other
      Comprehensive Income, Net of Tax
                    
                    
                    33
                    
                    
                    26Comprehensive
      Income
                    
                    $
                    16,230
                    
                    $
                    15,821See
      Notes to Financial Statements.















































2


LACLEDE
GAS COMPANY


BALANCE
SHEETS


(UNAUDITED)




Dec.
      31,
              
              
              
              Sept.
      30,
              
              
              
              Dec.
      31,(Thousands)
              
              2008
              
              
              
              2008
              
              
              
              2007ASSETSUtility
      Plant
              
              $
              1,239,063
              
              
              
              $
              1,229,174
              
              
              
              $
              1,195,431Less:  Accumulated
      depreciation and amortization
              
              
              410,662
              
              
              
              
              405,977
              
              
              
              
              395,447Net
      Utility Plant
              
              
              828,401
              
              
              
              
              823,197
              
              
              
              
              799,984Other
      Property and Investments
              
              
              37,239
              
              
              
              
              37,570
              
              
              
              
              38,554Current
      Assets:Cash
      and cash equivalents
              
              
              1,821
              
              
              
              
              3,163
              
              
              
              
              4,038Accounts
      receivable:Utility
              
              
              208,744
              
              
              
              
              98,708
              
              
              
              
              211,568Non-utility
              
              
              1,640
              
              
              
              
              1,601
              
              
              
              
              1,578Associated
      companies
              
              
              3,478
              
              
              
              
              3,028
              
              
              
              
              325Other
              
              
              4,991
              
              
              
              
              4,852
              
              
              
              
              4,891Allowances
      for doubtful accounts
              
              
              (8,331
              )
              
              
              
              (12,476
              )
              
              
              
              (8,373
              )Inventories:Natural
      gas stored underground at LIFO cost
              
              
              197,360
              
              
              
              
              206,194
              
              
              
              
              132,006Propane
      gas at FIFO cost
              
              
              19,871
              
              
              
              
              19,911
              
              
              
              
              19,913Materials,
      supplies, and merchandise at average cost
              
              
              5,227
              
              
              
              
              5,176
              
              
              
              
              4,915Derivative
      instrument assets
              
              
              23,203
              
              
              
              
              54,578
              
              
              
              
              13,924Unamortized
      purchased gas adjustments
              
              
              24,149
              
              
              
              
              33,411
              
              
              
              
              8,613Deferred
      income taxes
              
              
              —
              
              
              
              
              —
              
              
              
              
              392Prepayments
      and other
              
              
              6,300
              
              
              
              
              6,635
              
              
              
              
              6,971Total
      Current Assets
              
              
              488,453
              
              
              
              
              424,781
              
              
              
              
              400,761Deferred
      Charges:Regulatory
      assets
              
              
              354,274
              
              
              
              
              334,755
              
              
              
              
              288,868Other
              
              
              5,844
              
              
              
              
              5,512
              
              
              
              
              3,525Total
      Deferred Charges
              
              
              360,118
              
              
              
              
              340,267
              
              
              
              
              292,393Total
      Assets
              
              $
              1,714,211
              
              
              
              $
              1,625,815
              
              
              
              $
              1,531,692
































3





LACLEDE
GAS COMPANY


BALANCE
SHEETS (Continued)


(UNAUDITED)





Dec.
      31,
                    
                    
                    
                    Sept.
      30,
                    
                    
                    
                    Dec.
      31,(Thousands,
      except share amounts)
                    
                    2008
                    
                    
                    
                    2008
                    
                    
                    
                    2007CAPITALIZATION
      AND LIABILITIESCapitalization:Common
      stock and Paid-in capital (11,603, 10,416, and
                      10,337
      shares issued, respectively)
                    
                    $
                    200,001
                    
                    
                    
                    $
                    157,883
                    
                    
                    
                    $
                    153,010Retained
      earnings
                    
                    
                    210,205
                    
                    
                    
                    
                    202,535
                    
                    
                    
                    
                    203,800Accumulated
      other comprehensive loss
                    
                    
                    (1,757
                    )
                    
                    
                    
                    (1,790
                    )
                    
                    
                    
                    (1,701
                    )Total
      Common Stock Equity
                    
                    
                    408,449
                    
                    
                    
                    
                    358,628
                    
                    
                    
                    
                    355,109Redeemable
      preferred stock (less current sinking fund
                      requirements)
                    
                    
                    467
                    
                    
                    
                    
                    467
                    
                    
                    
                    
                    627Long-term
      debt
                    
                    
                    389,196
                    
                    
                    
                    
                    389,181
                    
                    
                    
                    
                    309,138Total
      Capitalization
                    
                    
                    798,112
                    
                    
                    
                    
                    748,276
                    
                    
                    
                    
                    664,874Current
      Liabilities:Notes
      payable
                    
                    
                    263,500
                    
                    
                    
                    
                    215,900
                    
                    
                    
                    
                    294,450Notes
      payable – associated companies
                    
                    
                    52,594
                    
                    
                    
                    
                    89,216
                    
                    
                    
                    
                    —Accounts
      payable
                    
                    
                    71,584
                    
                    
                    
                    
                    58,483
                    
                    
                    
                    
                    83,575Accounts
      payable – associated companies
                    
                    
                    6
                    
                    
                    
                    
                    —
                    
                    
                    
                    
                    3,341Advance
      customer billings
                    
                    
                    16,578
                    
                    
                    
                    
                    25,548
                    
                    
                    
                    
                    27,382Current
      portion of preferred stock
                    
                    
                    160
                    
                    
                    
                    
                    160
                    
                    
                    
                    
                    160Wages
      and compensation accrued
                    
                    
                    14,063
                    
                    
                    
                    
                    12,197
                    
                    
                    
                    
                    13,262Dividends
      payable
                    
                    
                    8,676
                    
                    
                    
                    
                    8,407
                    
                    
                    
                    
                    8,280Customer
      deposits
                    
                    
                    13,772
                    
                    
                    
                    
                    14,020
                    
                    
                    
                    
                    15,128Interest
      accrued
                    
                    
                    6,825
                    
                    
                    
                    
                    10,094
                    
                    
                    
                    
                    6,073Taxes
      accrued
                    
                    
                    30,118
                    
                    
                    
                    
                    10,434
                    
                    
                    
                    
                    16,130Deferred
      income taxes current
                    
                    
                    5,791
                    
                    
                    
                    
                    7,781
                    
                    
                    
                    
                    —Other
                    
                    
                    16,386
                    
                    
                    
                    
                    8,720
                    
                    
                    
                    
                    5,664Total
      Current Liabilities
                    
                    
                    500,053
                    
                    
                    
                    
                    460,960
                    
                    
                    
                    
                    473,445Deferred
      Credits and Other Liabilities:Deferred
      income taxes
                    
                    
                    215,860
                    
                    
                    
                    
                    222,379
                    
                    
                    
                    
                    230,840Unamortized
      investment tax credits
                    
                    
                    3,918
                    
                    
                    
                    
                    3,973
                    
                    
                    
                    
                    4,143Pension
      and postretirement benefit costs
                    
                    
                    103,507
                    
                    
                    
                    
                    98,513
                    
                    
                    
                    
                    67,648Asset
      retirement obligations
                    
                    
                    27,220
                    
                    
                    
                    
                    26,817
                    
                    
                    
                    
                    26,445Regulatory
      liabilities
                    
                    
                    42,639
                    
                    
                    
                    
                    42,191
                    
                    
                    
                    
                    39,687Other
                    
                    
                    22,902
                    
                    
                    
                    
                    22,706
                    
                    
                    
                    
                    24,610Total
      Deferred Credits and Other Liabilities
                    
                    
                    416,046
                    
                    
                    
                    
                    416,579
                    
                    
                    
                    
                    393,373Total
      Capitalization and Liabilities
                    
                    $
                    1,714,211
                    
                    
                    
                    $
                    1,625,815
                    
                    
                    
                    $
                    1,531,692See
      Notes to Financial Statements.
















4





LACLEDE
GAS COMPANY


STATEMENTS
OF CASH FLOWS


(UNAUDITED)




Three
      Months EndedDecember
      31,(Thousands)
                                        
                                        2008
                                        
                                        
                                        
                                        2007Operating
      Activities:Net
      Income
                                        
                                        $
                                        16,197
                                        
                                        
                                        
                                        $
                                        15,795Adjustments
      to reconcile net income to net cash
                                          provided
      by (used in) operating activities:Depreciation
      and amortization
                                        
                                        
                                        9,119
                                        
                                        
                                        
                                        
                                        8,713Deferred
      income taxes and investment tax credits
                                        
                                        
                                        (11,900
                                        )
                                        
                                        
                                        
                                        1,914Other
      – net
                                        
                                        
                                        1,950
                                        
                                        
                                        
                                        
                                        426Changes
      in assets and liabilities:Accounts
      receivable – net
                                        
                                        
                                        (114,809
                                        )
                                        
                                        
                                        
                                        (109,500
                                        )Unamortized
      purchased gas adjustments
                                        
                                        
                                        9,262
                                        
                                        
                                        
                                        
                                        4,200Deferred
      purchased gas costs
                                        
                                        
                                        (14,832
                                        )
                                        
                                        
                                        
                                        1,943Accounts
      payable
                                        
                                        
                                        14,875
                                        
                                        
                                        
                                        
                                        37,767Advance
      customer billings – net
                                        
                                        
                                        (8,970
                                        )
                                        
                                        
                                        
                                        1,942Taxes
      accrued
                                        
                                        
                                        19,660
                                        
                                        
                                        
                                        
                                        (3,080
                                        )Natural
      gas stored underground
                                        
                                        
                                        8,834
                                        
                                        
                                        
                                        
                                        6,192Other
      assets and liabilities
                                        
                                        
                                        33,907
                                        
                                        
                                        
                                        
                                        13,251Net
      cash used in operating activities
                                        
                                        
                                        (36,707
                                        )
                                        
                                        
                                        
                                        (20,437
                                        )Investing
      Activities:Capital
      expenditures
                                        
                                        
                                        (13,997
                                        )
                                        
                                        
                                        
                                        (13,012
                                        )Other
      investments
                                        
                                        
                                        (824
                                        )
                                        
                                        
                                        
                                        (1,122
                                        )Net
      cash used in investing activities
                                        
                                        
                                        (14,821
                                        )
                                        
                                        
                                        
                                        (14,134
                                        )Financing
      Activities:Maturity
      of First Mortgage Bonds
                                        
                                        
                                        —
                                        
                                        
                                        
                                        
                                        (40,000
                                        )Issuance
      of short-term debt – net
                                        
                                        
                                        10,978
                                        
                                        
                                        
                                        
                                        83,050Changes
      in book overdrafts
                                        
                                        
                                        6,115
                                        
                                        
                                        
                                        
                                        —Dividends
      paid
                                        
                                        
                                        (8,255
                                        )
                                        
                                        
                                        
                                        (7,909
                                        )Issuance
      of common stock to Laclede Group
                                        
                                        
                                        40,868
                                        
                                        
                                        
                                        
                                        1,006Excess
      tax benefits from stock-based compensation
                                        
                                        
                                        595
                                        
                                        
                                        
                                        
                                        8Other
                                        
                                        
                                        (115
                                        )
                                        
                                        
                                        
                                        —Net
      cash provided by financing activities
                                        
                                        
                                        50,186
                                        
                                        
                                        
                                        
                                        36,155Net
      Increase (Decrease) in Cash and Cash Equivalents
                                        
                                        
                                        (1,342
                                        )
                                        
                                        
                                        
                                        1,584Cash
      and Cash Equivalents at Beginning of Period
                                        
                                        
                                        3,163
                                        
                                        
                                        
                                        
                                        2,454Cash
      and Cash Equivalents at End of Period
                                        
                                        $
                                        1,821
                                        
                                        
                                        
                                        $
                                        4,038Supplemental
      Disclosure of Cash Paid During the Period for:Interest
                                        
                                        $
                                        12,503
                                        
                                        
                                        
                                        $
                                        14,360Income
      taxes
                                        
                                        
                                        76
                                        
                                        
                                        
                                        
                                        4,119See
      Notes to Financial Statements.












5


LACLEDE
GAS COMPANY


NOTES
TO FINANCIAL STATEMENTS








1.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING
POLICIES





These
notes are an integral part of the accompanying financial statements of Laclede
Gas Company (Laclede Gas or the Utility). In the opinion of Laclede Gas, this
interim report includes all adjustments (consisting of only normal recurring
accruals) necessary for the fair presentation of the results of operations for
the periods presented. This Form 10-Q should be read in conjunction with the
Notes to Financial Statements contained in Laclede Gas’ Fiscal Year 2008
Form 10-K.


Laclede
Gas is a regulated natural gas distribution utility having a material seasonal
cycle. As a result, these interim statements of income for Laclede Gas are not
necessarily indicative of annual results or representative of succeeding
quarters of the fiscal year. 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.


BASIS OF PRESENTATION - 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 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.


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 December 31, 2008 and 2007,
for the Utility, were $69.0 million and $50.7 million, respectively. The amount
of accrued unbilled revenue at September 30, 2008 was $13.5
million.


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


GROSS RECEIPTS 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 for the quarters ended December 31, 2008 and 2007 were $14.8
million, and $13.0 million, respectively. Gross receipts taxes are expensed by
the Utility and included in the Taxes, Other Than Income Taxes
line.


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. For Laclede Group’s
non-employee directors, shares are awarded under the Restricted Stock Plan for
Non-Employee Directors. Refer to Note 1 of the Financial Statements included in
the Utility’s Form 10-K for the fiscal year ended September 30, 2008
for descriptions of these plans. 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.


6





The
amounts of compensation cost allocated to the Utility for share-based
compensation arrangements for the quarters ended December 31, 2008 and
2007 are presented below:





Three
      Months EndedDecember
      31,(Thousands)
                        
                        
                        2008
                        
                        
                        2007Total
      compensation cost
                        
                        $
                        739
                        
                        $
                        540Compensation
      cost capitalized
                        
                        
                        (180
                        )
                        
                        (135
                        )Compensation
      cost recognized in net income
                        
                        
                        559
                        
                        
                        405Income
      tax benefit recognized in net income
                        
                        
                        (215
                        )
                        
                        (156
                        )Compensation
      cost recognized in net income, net of income tax
                        
                        $
                        344
                        
                        $
                        249





As
of December 31, 2008, there was $6.4 million in unrecognized
compensation cost related to nonvested share-based compensation arrangements
that is expected to be allocated to the Utility over a weighted average period
of 2.5 years.


NEW ACCOUNTING STANDARDS– In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value
Measurements.” This Statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. The Statement applies to fair value
measurements required under other accounting guidance that require or permit
fair value measurements. Accordingly, this Statement does not require any new
fair value measurements. The guidance in this Statement does not apply to
Laclede Group’s stock-based compensation plans accounted for in accordance with
SFAS No. 123(R), “Share-Based Payment.” The Utility partially adopted SFAS No.
157 on October 1, 2008 and elected the one-year deferral allowed by
FASB Staff Position (FSP) No. FAS 157-2, which permits delayed application of
SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for
those recognized or disclosed at fair value on a recurring basis. The partial
adoption of SFAS No. 157 had no impact on the Utility’s financial position or
results of operations. For disclosures required pursuant to SFAS No. 157, see
Note 3, Fair Value Measurements. The Utility will adopt SFAS No. 157 for certain
nonfinancial assets and nonfinancial liabilities (primarily asset retirement
obligations) as of the beginning of fiscal year 2010 and does not anticipate
that such adoption will have a material impact on the Utility’s financial
position or results of operations.


In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans.” Laclede Gas adopted the
recognition and disclosure provisions of this Statement effective
September 30, 2007. The Statement also requires that plan assets and
benefit obligations be measured as of the date of the employer’s fiscal year-end
statement of financial position. 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 will adopt this provision on
September 30, 2009. Adoption will require certain adjustments to
retained earnings and other comprehensive income, the total amounts of which
will not be known until the September 30, 2009 actuarial valuation of
the plans is complete. However, the majority of these adjustments, attributable
to the Utility’s qualified pension plans and other postretirement benefit plans,
are expected to be deferred with entries to regulatory assets.


In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” The Statement permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. SFAS No. 159
also establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. This Statement does not affect any
existing accounting literature that requires certain assets and liabilities to
be carried at fair value. Upon adoption of SFAS No. 159, entities are permitted
to choose, at specified election dates, to measure eligible items at fair value
(fair value option). Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings at each reporting date.
The decision about whether to elect the fair value option is applied instrument
by instrument with few exceptions. The decision is also irrevocable (unless a
new election date occurs) and must be applied to entire instruments and not to
portions of instruments. SFAS No. 159 requires that cash flows related to items
measured at fair value be classified in the statement of cash flows according to
their nature and purpose as required by SFAS No. 95, “Statement of Cash Flows”
(as amended). The Utility adopted SFAS No. 159 on October 1, 2008. The
Utility did not elect the fair value option for any instruments not currently
reported at fair value. Therefore, the adoption of this Statement had no effect
on the Utility’s financial position or results of operations.


7


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. With the adoption of this EITF issue on
October 1, 2008, the Utility now records these income tax benefits as
increases to additional paid-in capital. Previously, the Utility recorded these
income tax benefits as reductions to income tax expense. Adoption of this EITF
issue did not have a material effect on the Utility’s financial position or
results of operations.


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


In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles.” SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting principles to be used in
the preparation and presentation of financial statements in accordance with
generally accepted accounting principles. The Utility adopted this Statement
effective November 15, 2008. The adoption of SFAS No. 162 did not have
any effect on the Company’s consolidated financial statements.


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








2.
            PENSION
      PLANS AND OTHER POSTRETIREMENT
BENEFITS





Pension
Plans





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


Pension
costs for both the quarters ending December 31, 2008 and 2007 were
$1.5 million, including amounts charged to construction.


The
net periodic pension costs include the following components:





Three
      Months EndedDecember
      31,(Thousands)
                  
                  2008
                  
                  2007Service
      cost – benefits earnedduring
      the period
                  
                  $
                  3,485
                  
                  $
                  3,242Interest
      cost on projectedbenefit
      obligation
                  
                  
                  5,268
                  
                  
                  4,670Expected
      return on plan assets
                  
                  
                  (5,235
                  )
                  
                  (5,162
                  )Amortization
      of prior service cost
                  
                  
                  259
                  
                  
                  272Amortization
      of actuarial loss
                  
                  
                  774
                  
                  
                  791Sub-total
                  
                  
                  4,551
                  
                  
                  3,813Regulatory
      adjustment
                  
                  
                  (3,002
                  )
                  
                  (2,280
                  )Net
      pension cost
                  
                  $
                  1,549
                  
                  $
                  1,533





8





Pursuant
to the provisions of the Laclede Gas pension plans, pension obligations may be
satisfied by lump-sum cash payments. Pursuant to a Missouri Public Service
Commission (MoPSC or Commission) Order, lump-sum payments are recognized as
settlements (which can result in gains or losses) only if the total of such
payments exceeds 100% of the sum of service and interest costs. No lump-sum
payments were recognized as settlements during the three months ended
December 31, 2008 and December 31, 2007.


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





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 for both the quarters ended
December 31, 2008 and 2007 were $1.9 million, including amounts
charged to construction.


Net
periodic postretirement benefit costs consisted of the following
components:





Three
      Months EndedDecember
      31,(Thousands)
                
                2008
                
                2007Service
      cost – benefits earnedduring
      the period
                
                $
                1,283
                
                $
                1,140Interest
      cost on accumulatedpostretirement
      benefit obligation
                
                
                1,170
                
                
                977Expected
      return on plan assets
                
                
                (594
                )
                
                (510
                )Amortization
      of transition obligation
                
                
                34
                
                
                34Amortization
      of prior service cost
                
                
                (582
                )
                
                (582
                )Amortization
      of actuarial loss
                
                
                877
                
                
                746Sub-total
                
                
                2,188
                
                
                1,805Regulatory
      adjustment
                
                
                (278
                )
                
                105Net
      postretirement benefit cost
                
                $
                1,910
                
                $
                1,910





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
(VEBA) and Rabbi trusts as its external funding mechanisms. VEBA and Rabbi
trusts’ assets consist primarily of money market securities and mutual funds
invested in stocks and bonds.


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 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. Previously, the recovery in rates for the postretirement benefit
costs was based on an alternative methodology for amortization of unrecognized
gains and losses as ordered by the MoPSC. The Commission ordered that the
recovery in rates be based on an annual allowance of $7.6 million, effective
August 1, 2007. The difference between this amount and postretirement
benefit cost based on the above and that otherwise would be included in the
Statements of Income and Comprehensive Income is deferred as a regulatory asset
or regulatory liability.


9





3.
            FAIR
      VALUE MEASUREMENTS





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


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





As
      of December 31, 2008(Thousands)
                  
                  Total
                  
                  Quoted
                    Prices
      in
                    Active
                    Markets
                    (Level
      1)
                  
                  Significant
                    Observable
                    Inputs
                    (Level
      2)
                  
                  Significant
                    Unobservable
                    Inputs
                    (Level
      3)AssetsMarketable
      securities
                  
                  $
                  8,918
                  
                  $
                  8,918
                  
                  $
                  —
                  
                  $
                  —Derivative
      instruments
                  
                  
                  23,203
                  
                  
                  23,203
                  
                  
                  —
                  
                  
                  —Total
                  
                  $
                  32,121
                  
                  $
                  32,121
                  
                  $
                  —
                  
                  $
                  —





Marketable
securities included in Level 1 are mutual funds valued based on quoted market
prices of identical securities that are provided by the trustees of these
securities. Derivative instruments included in Level 1 are valued using quoted
market prices on the New York Mercantile Exchange. Marketable securities are
included in the Other investments line of the Balance Sheets.








4.
            OTHER
      INCOME AND (INCOME DEDUCTIONS) –
NET





Three
      Months EndedDecember
      31,(Thousands)
                
                2008
                
                2007Interest
      income
                
                $
                1,010
                
                $
                1,155Other
      income
                
                
                411
                
                
                537Other
      income deductions
                
                
                (811
                )
                
                340Other
      Income and (Income Deductions) – Net
                
                $
                610
                
                $
                2,032





The
decrease in Other Income and (Income Deductions) – Net for the quarter ended
December 31, 2008, compared with the quarter ended
December 31, 2007, was primarily due to higher investment losses and
lower interest income.


10








5.
            INFORMATION
      BY OPERATING SEGMENT





The
Regulated Gas Distribution segment consists of the regulated operations of
Laclede Gas. The Non-Regulated Other segment includes the retail sale of gas
appliances. There are no material intersegment revenues.





Regulated
              
              Non-
              
              AdjustmentsGas
              
              Regulated
              
              &(Thousands)
              
              Distribution
              
              Other
              
              Eliminations
              
              TotalThree
      Months EndedDecember
      31, 2008Operating
      revenues
              
              $
              358,101
              
              $
              597
              
              $
              —
              
              $
              358,698Net
      income
              
              
              16,156
              
              
              41
              
              
              —
              
              
              16,197Total
      assets
              
              
              1,712,374
              
              
              1,837
              
              
              —
              
              
              1,714,211Three
      Months EndedDecember
      31, 2007Operating
      revenues
              
              $
              320,892
              
              $
              786
              
              $
              —
              
              $
              321,678Net
      income
              
              
              15,757
              
              
              38
              
              
              —
              
              
              15,795Total
      assets
              
              
              1,529,861
              
              
              1,831
              
              
              —
              
              
              1,531,692








6.
            COMMITMENTS
      AND CONTINGENCIES





Commitments





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 December 31, 2008 are estimated at
approximately $529 million. Additional contracts are generally entered into
prior to or during the heating season. Laclede Gas recovers its costs from
customers in accordance with the PGA Clause.





Leases
and Guarantees





Laclede
Gas has several operating leases for the rental of vehicles that contain
provisions requiring Laclede Gas to guarantee certain amounts related to the
residual value of the leased property. These leases have various terms, the
longest of which extends through 2014. At December 31, 2008, the
maximum guarantees under these leases are $1.8 million. As of
December 31, 2008, the Utility believes that it is unlikely that it
will be subject to the maximum payment amount because it estimates that the
residual value of the leased vehicles will be adequate to satisfy most of the
guaranteed amounts. At December 31, 2008, the carrying value of the
liability recognized for these guarantees was $0.3 million.





Contingencies





Laclede
Gas owns and operates natural gas distribution, transmission, and storage
facilities, the operations of which are subject to various environmental laws,
regulations, and interpretations. While environmental issues resulting from such
operations arise in the ordinary course of business, such issues have not
materially affected Laclede Gas’ financial position and results of operations.
As environmental laws, regulations, and their interpretations change, however,
Laclede Gas may be required to incur additional costs. See Note 12 to the
Financial Statements included in Laclede Gas’ Fiscal Year 2008 Form 10-K
for information relative to environmental matters generally. There have been no
significant changes relative to environmental matters in the first quarter of
2009.


On
December 28, 2006, the MoPSC Staff proposed a disallowance of $7.2
million related to Laclede Gas’ recovery of its purchased gas costs applicable
to fiscal 2005. On September 14, 2007, the Staff withdrew its pursuit
of $5.5 million of the disallowance it had originally proposed. Laclede Gas
believes that the remaining $1.7 million of the MoPSC Staff’s proposed
disallowance lacks merit and is vigorously opposing the adjustment in
proceedings before the MoPSC.


11





On
December 31, 2007, the MoPSC Staff proposed a disallowance of $2.8
million related to Laclede Gas’ recovery of its purchased gas costs applicable
to fiscal 2006. Laclede Gas believes that the MoPSC Staff’s position lacks merit
and intends to vigorously oppose the adjustment in proceedings before the MoPSC.
In addition, the MoPSC’s Staff raised questions regarding whether certain sales
and capacity release transactions subject to the Federal Energy Regulatory
Commission (FERC)’s oversight were consistent with the FERC’s regulations and
policies regarding capacity release. Laclede Group commenced an internal review
of the questions raised by the MoPSC Staff and notified the FERC Staff that it
took this action. Subsequently, as a result of the internal review, Laclede
Group has provided the FERC Staff with a report regarding compliance of sales
and capacity release activities with the FERC’s regulations and policies. On
July 23, 2008, the FERC Staff requested additional information which
Laclede Group provided on August 22, 2008 and
September 2, 2008.


On
December 31, 2008, the MoPSC Staff proposed a disallowance of $1.5
million related to Laclede Gas’ recovery of its purchased gas costs applicable
to fiscal 2007. Laclede Gas believes that the MoPSC Staff’s position 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.


12


ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





LACLEDE
GAS COMPANY




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




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




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














13





LACLEDE
GAS COMPANY





RESULTS
OF OPERATIONS





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





Mitigating
the impact of weather fluctuations on Laclede Gas customers while improving the
ability to recover its authorized distribution costs and return continues to be
a fundamental component of Laclede Gas’ strategy. The Utility’s distribution
costs are the essential, primarily fixed expenditures it must incur to operate
and maintain a more than 16,000 mile natural gas distribution system and related
storage facilities. With regard to the storage facilities owned by Laclede gas,
management is currently undertaking an evaluation of the Utility’s natural gas
storage field which was developed more than 50 years ago, to assess the field’s
current and future capabilities. In addition, Laclede Gas is working continually
to improve its ability to provide reliable natural gas service at a reasonable
cost, while maintaining and building a secure and dependable infrastructure. The
settlement of the Utility’s 2007 rate case resulted in enhancements to the
Utility’s weather mitigation rate design that better ensure the recovery of its
fixed costs and margins despite variations in sales volumes due to the impacts
of weather and other factors that affect customer usage. The Utility’s income
from off-system sales remains subject to fluctuations in market conditions.
Effective October 1, 2007, the Utility is allowed to retain 15% to 25%
of the first $6 million in annual income earned (depending on the level of
income earned) and 30% of income exceeding $6 million annually. Some of the
factors impacting the level of off-system sales include the availability and
cost of the Utility’s natural gas supply, the weather in its service area, and
the weather in other markets. When Laclede Gas’ service area experiences
warmer-than-normal weather while other markets experience colder weather or
supply constraints, some of the Utility’s natural gas supply is available for
off-system sales and there may be a demand for such supply in other
markets.





Laclede
Gas continues to work actively to reduce the impact of higher costs associated
with wholesale natural gas prices by strategically structuring its natural gas
supply portfolio and through the use of financial instruments. Nevertheless, the
overall cost of purchased gas remains subject to fluctuations in market
conditions. The Utility’s Purchased Gas Adjustment (PGA) Clause allows Laclede
Gas to flow through to customers, subject to prudence review, the cost of
purchased gas supplies, including costs, cost reductions, and related carrying
costs associated with the use of financial instruments to hedge the purchase
price of natural gas, as well as gas inventory carrying costs. The Utility
believes it will continue to be able to obtain sufficient gas supply. High
natural gas prices and other economic conditions 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).





Quarter
Ended December 31, 2008





Earnings





Laclede
Gas’ net income for the quarter ended December 31, 2008 was $16.2
million, compared with net income of $15.8 million for the quarter ended
December 31, 2007. The increase in net income 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 $2.7 million;
  and,•
            higher
      Infrastructure System Replacement Surcharge (ISRS) revenues totaling $0.9
      million.





14





These
factors were partially offset by:





•
            an
      increase in investment losses totaling $1.6 million;
  and,•
            increases
      in operation and maintenance expenses totaling $1.4
    million;





Utility
Operating Revenues





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





Utility
Operating Revenues for the quarter ended December 31, 2008 were $358.1
million, or $37.2 million more than the same period last year. Temperatures
experienced in the Utility’s service area during the quarter were 12.6% colder
than the same quarter last year and 4.6% colder than normal. Total system therms
sold and transported were 0.31 billion for the quarter ended
December 31, 2008 compared with 0.27 billion for the same period last
year. Total off-system therms sold and transported were 0.04 billion for the
quarter ended December 31, 2008 compared with 0.05 billion for the
same period last year. The increase in Utility Operating Revenues was primarily
attributable to the following factors:





(Millions)Higher
      system sales volumes and other variations
                  
                  $
                  37.9Higher
      wholesale gas costs passed on to Utility customers (subject to prudence
      review by the MoPSC)
                  
                  
                  8.3Lower
      off-system sales volumes
                  
                  
                  (7.8
                  )Lower
      prices charged for off-system sales
                  
                  
                  (2.1
                  )Higher
      ISRS revenues
                  
                  
                  0.9Total
      Variation
                  
                  $
                  37.2





Utility
Operating Expenses





Utility
Operating Expenses for the quarter ended December 31, 2008 increased
$35.5 million from the same quarter last year. Natural and propane gas expense
increased $32.1 million, or 14.4%, from last year’s level, primarily
attributable to increased system volumes purchased for sendout and higher rates
charged by our suppliers, partially offset by lower off-system gas expense.
Other operation and maintenance expenses increased $1.4 million, or 3.3%,
primarily due to higher wage rates, increased charges for outside services, and
increased group insurance charges, partially offset by a decrease in injuries
and damages expense. Taxes, other than income taxes, increased $1.7 million, or
10.1%, primarily due to increased gross receipts taxes (attributable to the
increased revenues).





Other
Income and (Income Deductions) - Net





Other
Income and (Income Deductions) – Net decreased $1.4 million primarily due to
higher investment losses and lower interest income.





Interest
Charges





The
$0.2 million increase in interest charges was primarily due to an increase in
interest on long-term debt, primarily attributable to the issuance of $80.0
million First Mortgage Bonds on September 23, 2008, largely offset by
lower interest on short-term debt. Average short-term interest rates were 3.0%
for the quarter ended December 31, 2008 compared with 5.1% for the
quarter ended December 31, 2007. Average short-term borrowings were
$335.4 million for the quarter ended December 31, 2008 compared with
$255.2 million for the quarter ended
December 31, 2007.


15





REGULATORY
MATTERS





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





On
December 28, 2006, the MoPSC Staff proposed a disallowance of $7.2
million related to Laclede Gas’ recovery of its purchased gas costs applicable
to fiscal 2005. On September 14, 2007, the Staff withdrew its pursuit
of $5.5 million of the disallowance it had originally proposed. Laclede Gas
believes that the remaining $1.7 million of the MoPSC Staff’s proposed
disallowance lacks merit and is vigorously opposing the adjustment in
proceedings before the MoPSC.





On
December 31, 2007, the MoPSC Staff proposed a disallowance of $2.8
million related to Laclede Gas’ recovery of its purchased gas costs applicable
to fiscal 2006. Laclede Gas believes that the MoPSC Staff’s position lacks
merit and is vigorously opposing the adjustment in proceedings before the MoPSC.
In addition, the MoPSC’s Staff raised questions regarding whether certain sales
and capacity release transactions, subject to the Federal Energy Regulatory
Commission (FERC)’s oversight, were consistent with the FERC’s regulations and
policies regarding capacity release. Laclede Group commenced an internal review
of the questions raised by the MoPSC Staff and notified the FERC Staff that it
took this action. Subsequently, as a result of the internal review, Laclede
Group has provided the FERC Staff with a report regarding compliance of sales
and capacity release activities with the FERC’s regulations and policies. On
July 23, 2008, the FERC Staff requested additional information, which
Laclede Group provided on August 22, 2008 and
September 2, 2008.





On
July 9, 2008, Laclede Gas made a tariff filing with the MoPSC that
would make the payment provisions for the restoration of gas service under the
Utility’s Cold Weather Rule available to customers in the summer of 2008 and
enable the Utility to increase or decrease its PGA rates to correct for any
shortfall or surplus created by the difference between the gas cost portion of
the Utility’s actual net bad debt write-offs and the amount of such cost that is
embedded in its existing rates. The MoPSC suspended the tariff on
August 5, 2008 and established a procedural schedule to consider the
Utility’s filing. As a result, the Cold Weather Rule portion of the filing is
now moot. A formal hearing pertaining to the bad debt portion of the filing was
held on January 5, 2009. The matter is currently pending before the
MoPSC.





On
November 21, 2008, the Utility made an ISRS filing with the Commission
designed to increase revenues by $1.9 million annually. The filing is pending
Commission approval.





On
December 31, 2008, the MoPSC Staff proposed a disallowance of $1.5
million related to Laclede Gas’ recovery of its purchased gas costs applicable
to fiscal 2007. Laclede Gas believes that the MoPSC Staff’s position lacks merit
and intends to vigorously oppose the adjustment in proceedings before the
MoPSC.





16





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





Regulated Operations – Laclede
Gas accounts for its regulated operations in accordance with Statement of
Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of
Certain Types of Regulation.” This Statement sets forth the application of
accounting principles generally accepted in the United States of America for
those companies whose rates are established by or are subject to approval by an
independent third-party regulator. The provisions of SFAS No. 71 require, among
other things, that financial statements of a regulated enterprise reflect the
actions of regulators, where appropriate. These actions may result in the
recognition of revenues and expenses in time periods that are different than
non-regulated enterprises. When this occurs, costs are deferred as assets in the
balance sheet (regulatory assets) and recorded as expenses when those amounts
are reflected in rates. Also, regulators can impose liabilities upon a regulated
company for amounts previously collected from customers and for recovery of
costs that are expected to be incurred in the future (regulatory liabilities).
Management believes that the current regulatory environment supports the
continued use of SFAS No. 71 and that all regulatory assets and regulatory
liabilities are recoverable or refundable through the regulatory process.
Management believes the following represent the more significant items recorded
through the application of SFAS No. 71:





The
      Utility’s PGA Clause allows Laclede Gas to flow through to customers,
      subject to prudence review, the cost of purchased gas supplies, including
      the costs, cost reductions, and related carrying costs associated with the
      Utility’s use of natural gas financial instruments to hedge the purchase
      price of natural gas. The difference between actual costs incurred and
      costs recovered through the application of the PGA are recorded as
      regulatory assets and regulatory liabilities that are recovered or
      refunded in a subsequent period. The PGA Clause also authorizes the
      Utility to recover costs it incurs to finance its investment in gas
      supplies that are purchased during the storage injection season for sale
      during the heating season. The PGA Clause also permits the application of
      carrying costs to all over- or under-recoveries of gas costs, including
      costs and cost reductions associated with the use of financial
      instruments. Effective October 1, 2007, the PGA Clause also
      provides for a portion of income from off-system sales and capacity
      release revenues to be flowed through to
  customers.





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Laclede
      Gas records deferred tax liabilities and assets measured by enacted tax
      rates for the net tax effect of all temporary differences between the
      carrying amounts of assets and liabilities for financial reporting
      purposes, and the amounts used for income tax purposes. Changes in enacted
      tax rates, if any, and certain property basis differences will be
      reflected by entries to regulatory asset or regulatory liability accounts.
      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 No. (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 in Exhibit 99.1 of the Laclede Group’s Form 10-K
for the fiscal year ended September 30, 2008.








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.





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FINANCIAL
CONDITION





CREDIT
RATINGS





As
of December 31, 2008, credit ratings for outstanding securities for
Laclede Gas issues were as follows:


Type of Facility
              S&P
              Moody’s
              FitchLaclede Gas Issuer Rating
              A
              
              A-Laclede Gas First Mortgage Bonds
              A
              A3
              A+Laclede Gas Commercial Paper
              A-1
              P-2
              F1





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





CASH
FLOWS





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





Net
cash used in operating activities for the three months ended
December 31, 2008 was $36.7 million, compared with $20.4 million for
the same period last year. The difference is primarily attributable to
variations associated with the timing of the collections of gas cost under the
Utility’s PGA Clause, including the effects of this year’s increases in net cash
payments for margin deposits associated with the Utility’s use of natural gas
financial instruments.





Net
cash used in investing activities for the three months ended
December 31, 2008 was $14.8 million compared with $14.1 million for
the three months ended December 31, 2007. Cash used in investing
activities primarily reflected capital expenditures in both
periods.





Net
cash provided by financing activities was $50.2 million for the three months
ended December 31, 2008 compared with $36.2 million for the three
months ended December 31, 2007. The increase primarily reflects the
effect of the maturity of long-term debt last year and the sale of additional
shares of common stock to Laclede Group this year, partially offset by the
reduced issuance of short-term debt this year.








LIQUIDITY
AND CAPITAL RESOURCES





Short-term
Debt





As
indicated above, the Utility’s short-term borrowing requirements typically peak
during the colder months. These short-term cash requirements have traditionally
been met through the sale of commercial paper supported by lines of credit with
banks. Laclede Gas has a line of credit in place of $320 million from 10 banks,
with the largest portion provided by a single bank being 17.5%. This line
expires in December 2011. In November 2008, the Utility established a
seasonal line of credit of $75 million, which expires in March 2009.
Including both lines of credit, the largest portion provided by a single bank is
26.8%. During the quarter ending December 31, 2008, Laclede Gas utilized both
its line of credit and commercial paper for short-term funding. Commercial paper
outstanding at December 31, 2008 was $73.5 million, while outstanding
bank line advances were $190.0 million. The weighted average interest rate on
these short-term borrowings was 1.8% per annum at December 31, 2008.
Based on total short-term borrowings at December 31, 2008, a change in
interest rate of 100 basis points would increase or decrease pre-tax earnings
and cash flows by approximately $2.6 million on an annual basis. Portions of
such increases or decreases may be offset through the application of PGA
carrying costs. In addition, Laclede Gas had borrowings from Laclede Group
totaling $52.6 million at December 31, 2008. The Utility had
short-term borrowings (including borrowings from Laclede Group) aggregating to a
maximum of $386.4 million at any one time during the quarter. Excluding
borrowings from Laclede Group, the Utility’s maximum borrowing for the quarter
were $309.9 million.


19





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 December 31, 2008, total debt was 63% of
total capitalization. For the twelve months ended December 31, 2008,
EBITDA was 3.97 times interest expense.





Long-term
Debt





At
December 31, 2008, Laclede Gas had fixed-rate long-term debt totaling
$390 million. While these long-term debt issues are fixed-rate, they are subject
to changes in fair value as market interest rates change. However, increases or
decreases in fair value would impact earnings and cash flows only if Laclede Gas
were to reacquire any of these issues in the open market prior to
maturity.





Equity
and Shelf Registration





Laclede
Gas has on file with the Securities and Exchange Commission an effective shelf
registration on Form S-3 for issuance of $350 million of First Mortgage Bonds,
unsecured debt, and preferred stock, of which $270 million remains available to
Laclede Gas at this time. The Utility has authority from the MoPSC to issue up
to $500 million in First Mortgage Bonds, unsecured debt, and equity securities,
of which $371.5 million remained available under this authorization as of
December 31, 2008. During the quarter ending December 31, 2008,
pursuant to this authority, the Utility sold 1,187 shares of its common stock to
Laclede Group for $40.9 million.  The amount, timing, and type of
additional financing to be issued will depend on cash requirements and market
conditions.





At
December 31, 2008, Laclede Gas had outstanding preferred stock
totaling $0.6 million, including current maturities. On
January 15, 2009, the Board of Directors of Laclede Gas approved the
final redemption of all of its outstanding 5% Series B and 4.56% Series C
preferred stock on March 31, 2009. The redemption price shall be its
par value of $25 per share, in addition to the dividend payable on
March 31, 2009.





Guarantees





Laclede
Gas has several operating leases for the rental of vehicles that contain
provisions requiring Laclede Gas to guarantee certain amounts related to the
residual value of the leased property. These leases have various terms, the
longest of which extends through 2014. At December 31, 2008, the
maximum guarantees under these leases were $1.8 million. However, the Utility
estimates that the residual value of the leased vehicles will be adequate to
satisfy most of the guaranteed amounts. At December 31, 2008, the
carrying value of the liability recognized for these guarantees was $0.3
million.





Other





Utility
capital expenditures were $14.0 million for the three months ended
December 31, 2008, compared with $13.0 million for the same period
last year.





Capitalization
at December 31, 2008, excluding current obligations of preferred
stock, consisted of 51.2% common stock equity, 0.1% preferred stock, and 48.7%
long-term debt.





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.





The
seasonal nature of Laclede Gas’ sales affects the comparison of certain balance
sheet items at December 31, 2008 and at September 30, 2008,
such as Accounts receivable – net, Gas stored underground, Notes payable,
Accounts payable, Regulatory assets and Regulatory liabilities, and Advance
customer billings. The Balance Sheet at December 31, 2007 is presented
to facilitate comparison of these items with the corresponding interim period of
the preceding fiscal year.





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CONTRACTUAL
OBLIGATIONS





As
of December 31, 2008, Laclede Gas had contractual obligations with
payments due as summarized below (in millions):





Payments
      due by periodRemaining
                        
                        
                        
                        
                        
                        Fiscal
      YearsContractual
      Obligations
                        
                        Total
                        
                        Fiscal
      Year
                          2009
                        
                        Fiscal
      Years
                          2010-2011
                        
                        Fiscal
      Years
                          2012-2013
                        
                        2014
      and
                          thereafterPrincipal
      Payments on Long-Term Debt
                        
                        $
                        390.0
                        
                        $
                        —
                        
                        $
                        25.0
                        
                        $
                        25.0
                        
                        $
                        340.0Interest
      Payments on Long-Term Debt
                        
                        
                        524.2
                        
                        
                        14.7
                        
                        
                        48.4
                        
                        
                        45.1
                        
                        
                        416.0Operating
      Leases (a)
                        
                        
                        16.4
                        
                        
                        3.9
                        
                        
                        7.7
                        
                        
                        3.4
                        
                        
                        1.4Purchase
      Obligations – Natural Gas (b)
                        
                        
                        528.7
                        
                        
                        229.7
                        
                        
                        164.2
                        
                        
                        100.8
                        
                        
                        34.0Purchase
      Obligations – Other (c)
                        
                        
                        111.0
                        
                        
                        13.1
                        
                        
                        25.4
                        
                        
                        17.5
                        
                        
                        55.0Total
      (d)
                        
                        $
                        1,570.3
                        
                        $
                        261.4
                        
                        $
                        270.7
                        
                        $
                        191.8
                        
                        $
                        846.4








(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 December 31, 2008 New York Mercantile Exchange futures
      prices. Laclede Gas recovers the costs related to its purchases,
      transportation, and storage of natural gas through the operation of its
      PGA Clause, subject to prudence review; however, variations in the timing
      of collections of gas costs from customers affect short-term cash
      requirements. Additional contractual commitments are generally entered
      into prior to or during the heating season.(c)
                These
      purchase obligations reflect miscellaneous agreements for the purchase of
      materials and the procurement of services necessary for normal
      operations.(d)
                The
      categories of Capital Leases and Other Long-Term liabilities have been
      excluded from the table above because there are no applicable amounts of
      contractual obligations under these categories. Also, commitments related
      to pension and postretirement benefit plans have been excluded from the
      table above. The Utility expects to make contributions to its qualified,
      trusteed pension plans totaling $2.0 million during the remainder of
      fiscal year 2009. Laclede Gas anticipates a $1.1 million contribution
      relative to its non-qualified pension plans during the remainder of fiscal
      year 2009. With regard to the postretirement benefits, the Utility
      anticipates it will contribute $10.0 million to the qualified trusts and
      $0.3 million directly to participants from Laclede Gas’ funds during the
      remainder of fiscal year 2009. For further discussion of the
      Utility’s pension and postretirement benefit plans, refer to Note 2,
      Pension Plans and Other Postretirement Benefits, of the Notes to Financial
      Statements.








MARKET
RISK





Laclede
Gas has a risk management policy that allows for the purchase of natural gas
financial instruments with the goal of managing price risk associated with
purchasing natural gas on behalf of its customers. This policy prohibits
speculation. Costs and cost reductions, including carrying costs, associated
with the Utility’s use of natural gas financial instruments are allowed to be
passed on to the Utility’s customers through the operation of its PGA Clause,
through which the MoPSC allows the Utility to recover gas supply costs.
Accordingly, Laclede Gas does not expect any adverse earnings impact as a result
of the use of these financial instruments. However, the timing of recovery for
cash payments related to margin requirements may cause short-term cash
requirements to vary. Nevertheless, carrying costs associated with such
requirements are recovered through the PGA Clause. At
December 31, 2008, the Utility held 35.7 million MMBtu of futures
contracts at an average price of $8.78 per MMBtu. Additionally, 10.1 million
MMBtu of other price risk mitigation was in place through the use of
option-based strategies. These positions have various expiration dates, the
longest of which extends through October 2011.





21





ENVIRONMENTAL
MATTERS





Laclede
Gas owns and operates natural gas distribution, transmission, and storage
facilities, the operations of which are subject to various environmental laws,
regulations, and interpretations. While environmental issues resulting from such
operations arise in the ordinary course of business, such issues have not
materially affected Laclede Gas’ financial position and results of operations.
As environmental laws, regulations, and their interpretations change, however,
Laclede Gas may be required to incur additional costs. For information relative
to environmental matters, see Note 12 to the Financial Statements included in
the Utility’s Form 10-K for the fiscal year ended September 30, 2008.
There have been no significant changes relative to environmental matters in the
first quarter of fiscal year 2009.








OFF-BALANCE
SHEET ARRANGEMENTS





Laclede
Gas has no off-balance sheet arrangements.




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