Exhibit
99.1











LACLEDE
      GAS COMPANYSTATEMENTS
      OF INCOME(UNAUDITED)Three
      Months Ended
            
            
            
            Nine
      Months EndedJune
      30,
            
            
            
            June
      30,(Thousands)
            
            
            2008
            
            
            2007
            
            
            
            
            2008
            
            
            2007Operating
      Revenues:Utility
            
            $
            189,598
            
            $
            185,696
            
            
            
            $
            1,017,579
            
            $
            1,027,777Other
            
            
            630
            
            
            1,128
            
            
            
            
            2,156
            
            
            2,568Total
      Operating Revenues
            
            
            190,228
            
            
            186,824
            
            
            
            
            1,019,735
            
            
            1,030,345Operating
      Expenses:UtilityNatural
      and propane gas
            
            
            112,896
            
            
            121,490
            
            
            
            
            713,263
            
            
            746,589Other
      operation expenses
            
            
            34,285
            
            
            29,283
            
            
            
            
            108,487
            
            
            99,779Maintenance
            
            
            6,543
            
            
            5,830
            
            
            
            
            18,592
            
            
            17,488Depreciation
      and amortization
            
            
            8,819
            
            
            8,565
            
            
            
            
            26,295
            
            
            25,630Taxes,
      other than income taxes
            
            
            14,549
            
            
            13,360
            
            
            
            
            60,485
            
            
            60,467Total
      Utility Operating Expenses
            
            
            177,092
            
            
            178,528
            
            
            
            
            927,122
            
            
            949,953Other
            
            
            569
            
            
            1,080
            
            
            
            
            2,099
            
            
            2,515Total
      Operating Expenses
            
            
            177,661
            
            
            179,608
            
            
            
            
            929,221
            
            
            952,468Operating
      Income
            
            
            12,567
            
            
            7,216
            
            
            
            
            90,514
            
            
            77,877Other
      Income and (Income Deductions) – Net
            
            
            (152
            )
            
            551
            
            
            
            
            1,357
            
            
            3,752Interest
      Charges:Interest
      on long-term debt
            
            
            4,876
            
            
            5,626
            
            
            
            
            14,877
            
            
            16,877Other
      interest charges
            
            
            1,306
            
            
            1,813
            
            
            
            
            8,042
            
            
            8,160Total
      Interest Charges
            
            
            6,182
            
            
            7,439
            
            
            
            
            22,919
            
            
            25,037Income
      Before Income Taxes
            
            
            6,233
            
            
            328
            
            
            
            
            68,952
            
            
            56,592Income
      Tax Expense (Benefit)
            
            
            687
            
            
            (558
            )
            
            
            
            22,311
            
            
            19,313Net
      Income
            
            
            5,546
            
            
            886
            
            
            
            
            46,641
            
            
            37,279Dividends
      on Redeemable Preferred Stock
            
            
            8
            
            
            10
            
            
            
            
            27
            
            
            33Earnings
      Applicable to Common Stock
            
            $
            5,538
            
            $
            876
            
            
            
            $
            46,614
            
            $
            37,246See
      Notes to Financial Statements.




















1







LACLEDE
      GAS COMPANYSTATEMENTS
      OF COMPREHENSIVE INCOME(UNAUDITED)Three
      Months Ended
            
            
            
            Nine
      Months EndedJune
      30,
            
            
            
            June
      30,(Thousands)
            
            
            2008
            
            
            2007
            
            
            
            
            2008
            
            
            2007Net
      Income
            
            $
            5,546
            
            $
            886
            
            
            
            $
            46,641
            
            $
            37,279Other
      Comprehensive Income (Loss), Before Tax:Amortization
      of actuarial loss included in net periodicpension
      cost
            
            
            43
            
            
            —
            
            
            
            
            129
            
            
            —Income
      Tax Expense Related to Items of OtherComprehensive
      Income
            
            
            17
            
            
            —
            
            
            
            
            50
            
            
            —Other
      Comprehensive Income, Net of Tax
            
            
            26
            
            
            —
            
            
            
            
            79
            
            
            —Comprehensive
      Income
            
            $
            5,572
            
            $
            886
            
            
            
            $
            46,720
            
            $
            37,279See
      Notes to Financial Statements.























2







LACLEDE
      GAS COMPANYBALANCE
      SHEETS(UNAUDITED)June
      30,
            
            
            
            Sept.
      30,
            
            
            
            June
      30,(Thousands)
            
            2008
            
            
            
            2007
            
            
            
            2007ASSETSUtility
      Plant
            
            $
            1,215,336
            
            
            
            $
            1,187,828
            
            
            
            $
            1,176,954Less:  Accumulated
      depreciation and amortization
            
            
            402,229
            
            
            
            
            394,034
            
            
            
            
            392,250Net
      Utility Plant
            
            
            813,107
            
            
            
            
            793,794
            
            
            
            
            784,704Other
      Property and Investments
            
            
            37,514
            
            
            
            
            36,933
            
            
            
            
            36,661Current
      Assets:Cash
      and cash equivalents
            
            
            3,022
            
            
            
            
            2,454
            
            
            
            
            2,623Accounts
      receivable:Gas
      customers – billed and unbilled
            
            
            103,602
            
            
            
            
            102,224
            
            
            
            
            104,038Associated
      companies
            
            
            168
            
            
            
            
            253
            
            
            
            
            412Other
            
            
            9,305
            
            
            
            
            8,973
            
            
            
            
            7,606Allowances
      for doubtful accounts
            
            
            (13,836
            )
            
            
            
            (10,961
            )
            
            
            
            (15,320
            )Delayed
      customer billings
            
            
            18,389
            
            
            
            
            —
            
            
            
            
            11,621Inventories:Natural
      gas stored underground at LIFO cost
            
            
            84,186
            
            
            
            
            138,198
            
            
            
            
            55,280Propane
      gas at FIFO cost
            
            
            19,907
            
            
            
            
            19,950
            
            
            
            
            19,950Materials,
      supplies, and merchandise at average cost
            
            
            5,573
            
            
            
            
            4,864
            
            
            
            
            5,531Derivative
      instrument assets
            
            
            14,694
            
            
            
            
            26,296
            
            
            
            
            19,798Unamortized
      purchased gas adjustments
            
            
            3,341
            
            
            
            
            12,813
            
            
            
            
            13,387Deferred
      income taxes
            
            
            4,676
            
            
            
            
            275
            
            
            
            
            6,255Prepayments
      and other
            
            
            8,293
            
            
            
            
            6,970
            
            
            
            
            8,699Total
      Current Assets
            
            
            261,320
            
            
            
            
            312,309
            
            
            
            
            239,880Deferred
      Charges:Prepaid
      pension cost
            
            
            —
            
            
            
            
            —
            
            
            
            
            55,101Regulatory
      assets
            
            
            267,574
            
            
            
            
            285,054
            
            
            
            
            168,458Other
            
            
            4,234
            
            
            
            
            3,113
            
            
            
            
            4,652Total
      Deferred Charges
            
            
            271,808
            
            
            
            
            288,167
            
            
            
            
            228,211Total
      Assets
            
            $
            1,383,749
            
            
            
            $
            1,431,203
            
            
            
            $
            1,289,456









3










LACLEDE
      GAS COMPANYBALANCE
      SHEETS (Continued)(UNAUDITED)June
      30,
            
            
            
            Sept.
      30,
            
            
            
            June
      30,(Thousands,
      except share amounts)
            
            2008
            
            
            
            2007
            
            
            
            2007CAPITALIZATION
      AND LIABILITIESCapitalization:Common
      stock and Paid-in capital (10,391, 10,307, and
              10,279
      shares issued, respectively)
            
            $
            156,343
            
            
            
            $
            151,510
            
            
            
            $
            150,036Retained
      earnings
            
            
            218,226
            
            
            
            
            195,728
            
            
            
            
            208,433Accumulated
      other comprehensive loss
            
            
            (1,648
            )
            
            
            
            (1,727
            )
            
            
            
            (834
            )Total
      Common Stock Equity
            
            
            372,921
            
            
            
            
            345,511
            
            
            
            
            357,635Redeemable
      preferred stock (less current sinking fund
              requirements)
            
            
            467
            
            
            
            
            627
            
            
            
            
            627Long-term
      debt (less current portion)
            
            
            309,167
            
            
            
            
            309,122
            
            
            
            
            309,101Total
      Capitalization
            
            
            682,555
            
            
            
            
            655,260
            
            
            
            
            667,363Current
      Liabilities:Notes
      payable
            
            
            58,600
            
            
            
            
            211,400
            
            
            
            
            102,100Notes
      payable – associated companies
            
            
            44,426
            
            
            
            
            —
            
            
            
            
            —Accounts
      payable
            
            
            73,382
            
            
            
            
            45,084
            
            
            
            
            53,653Accounts
      payable – associated companies
            
            
            9,021
            
            
            
            
            4,065
            
            
            
            
            8,805Advance
      customer billings
            
            
            —
            
            
            
            
            25,440
            
            
            
            
            —Current
      portion of long-term debt and preferred stock
            
            
            160
            
            
            
            
            40,160
            
            
            
            
            40,160Wages
      and compensation accrued
            
            
            13,267
            
            
            
            
            11,532
            
            
            
            
            9,811Dividends
      payable
            
            
            8,371
            
            
            
            
            7,974
            
            
            
            
            7,953Customer
      deposits
            
            
            14,923
            
            
            
            
            15,899
            
            
            
            
            17,322Interest
      accrued
            
            
            6,204
            
            
            
            
            10,806
            
            
            
            
            6,297Taxes
      accrued
            
            
            25,372
            
            
            
            
            19,210
            
            
            
            
            35,227Other
            
            
            5,106
            
            
            
            
            5,342
            
            
            
            
            4,979Total
      Current Liabilities
            
            
            258,832
            
            
            
            
            396,912
            
            
            
            
            286,307Deferred
      Credits and Other Liabilities:Deferred
      income taxes
            
            
            232,974
            
            
            
            
            223,192
            
            
            
            
            224,300Unamortized
      investment tax credits
            
            
            4,030
            
            
            
            
            4,200
            
            
            
            
            4,259Pension
      and postretirement benefit costs
            
            
            71,164
            
            
            
            
            63,678
            
            
            
            
            20,471Asset
      retirement obligations
            
            
            27,226
            
            
            
            
            26,054
            
            
            
            
            25,867Regulatory
      liabilities
            
            
            84,436
            
            
            
            
            39,589
            
            
            
            
            37,100Other
            
            
            22,532
            
            
            
            
            22,318
            
            
            
            
            23,789Total
      Deferred Credits and Other Liabilities
            
            
            442,362
            
            
            
            
            379,031
            
            
            
            
            335,786Total
      Capitalization and Liabilities
            
            $
            1,383,749
            
            
            
            $
            1,431,203
            
            
            
            $
            1,289,456See
      Notes to Financial Statements.

















4







LACLEDE
      GAS COMPANYSTATEMENTS
      OF CASH FLOWS(UNAUDITED)Nine
      Months EndedJune
      30,(Thousands)
            
            2008
            
            
            
            2007Operating
      Activities:Net
      Income
            
            $
            46,641
            
            
            
            $
            37,279Adjustments
      to reconcile net income to net cash
              provided
      by (used in) operating activities:Depreciation
      and amortization
            
            
            26,295
            
            
            
            
            25,630Deferred
      income taxes and investment tax credits
            
            
            (5,329
            )
            
            
            
            (20,237
            )Other
      – net
            
            
            1,446
            
            
            
            
            954Changes
      in assets and liabilities:Accounts
      receivable – net
            
            
            1,250
            
            
            
            
            1,486Unamortized
      purchased gas adjustments
            
            
            9,472
            
            
            
            
            30,994Deferred
      purchased gas costs
            
            
            72,856
            
            
            
            
            38,022Accounts
      payable
            
            
            33,741
            
            
            
            
            6,693Delayed
      customer billings - net
            
            
            (43,829
            )
            
            
            
            (43,064
            )Taxes
      accrued
            
            
            6,162
            
            
            
            
            19,682Natural
      gas stored underground
            
            
            54,012
            
            
            
            
            82,137Other
      assets and liabilities
            
            
            7,444
            
            
            
            
            (12,574
            )Net
      cash provided by operating activities
            
            
            210,161
            
            
            
            
            167,002Investing
      Activities:Capital
      expenditures
            
            
            (40,164
            )
            
            
            
            (41,457
            )Other
      investments
            
            
            168
            
            
            
            
            577Net
      cash used in investing activities
            
            
            (39,996
            )
            
            
            
            (40,880
            )Financing
      Activities:Maturity
      of first mortgage bonds
            
            
            (40,000
            )
            
            
            
            —Repayment
      of short-term debt – net
            
            
            (108,374
            )
            
            
            
            (105,200
            )Dividends
      paid
            
            
            (24,261
            )
            
            
            
            (23,350
            )Issuance
      of common stock to Laclede Group
            
            
            2,905
            
            
            
            
            2,834Preferred
      stock reacquired
            
            
            (160
            )
            
            
            
            (159
            )Other
            
            
            293
            
            
            
            
            62Net
      cash used in financing activities
            
            
            (169,597
            )
            
            
            
            (125,813
            )Net
      Increase in Cash and Cash Equivalents
            
            
            568
            
            
            
            
            309Cash
      and Cash Equivalents at Beginning of Period
            
            
            2,454
            
            
            
            
            2,314Cash
      and Cash Equivalents at End of Period
            
            $
            3,022
            
            
            
            $
            2,623Supplemental
      Disclosure of Cash Paid (Refunded) During the Period for:Interest
            
            $
            27,825
            
            
            
            $
            28,132Income
      taxes
            
            
            11,584
            
            
            
            
            (2,052
            )See
      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 2007
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 June 30, 2008 and 2007, for
the Utility, were $10.9 million and $7.2 million, respectively. The amount of
accrued unbilled revenue at September 30, 2007 was $11.9
million.


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


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


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


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 June 30, 2008 and 2007 were $9.0
million and $8.1 million, respectively. Amounts recorded in Utility Operating
Revenues for the nine months ended June 30, 2008 and 2007 were $47.2
million and $46.9 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, 2007
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 are presented below:





Three
      Months Ended
            
            Nine
      Months EndedJune
      30,
            
            June
      30,(Thousands)
            
            2008
            
            2007
            
            2008
            
            2007Total
      compensation cost
            
            $
            456
            
            $
            492
            
            $
            1,625
            
            $
            1,536Compensation
      cost capitalized
            
            
            (112
            )
            
            (127
            )
            
            (410
            )
            
            (388
            )Compensation
      cost recognized in net income
            
            
            344
            
            
            365
            
            
            1,215
            
            
            1,148Income
      tax benefit recognized in net income
            
            
            (133
            )
            
            (142
            )
            
            (470
            )
            
            (444
            )Compensation
      cost recognized in net income,net
      of income tax
            
            $
            211
            
            $
            223
            
            $
            745
            
            $
            704





As
of June 30, 2008, there was $4.1 million in unrecognized compensation
cost related to nonvested share-based compensation arrangements (options and
restricted stock) that is expected to be allocated to the Utility over a
weighted average period of 2.5 years.


NEW ACCOUNTING STANDARDS -In
June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation Number 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.”
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes.” Under FIN 48, Laclede Gas may recognize the tax
benefit from a tax position only if it is at least more likely than not that the
tax position will be sustained on examination by the taxing authorities, based
on the technical merits of the position. The tax benefits recognized in the
financial statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being
realized upon settlement with the taxing authorities. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. Laclede Gas adopted the provisions
of FIN 48 as of October 1, 2007. For details regarding the cumulative
effect of adoption and other pertinent information, see Note 3, Income
Taxes.


In
September 2006, the 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 the Laclede Group’s stock-based compensation plans
accounted for in accordance with SFAS No. 123(R), “Share-Based Payment.” Except
as described below, SFAS No. 157 is effective for the Utility as of the
beginning of fiscal year 2009. In February 2008, the FASB issued two
Staff Positions that amend SFAS No. 157. The first FASB Staff Position (FSP),
No. FAS 157-1, excludes from the scope of SFAS No. 157 accounting pronouncements
that address fair value measurements for purposes of lease classification and
measurement. The second FSP, No. FAS 157-2, delays the effective date of SFAS
No. 157 for nonfinancial assets and nonfinancial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). Application of SFAS No. 157 to these items
will be effective for Laclede Gas as of the beginning of fiscal year 2010. The
Utility is currently evaluating the potential impact of this Statement, as
amended by these Staff Positions, on its financial statements.


In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans.” As discussed in Note 2
to the Financial Statements included in the Utility’s Fiscal Year 2007 Form
10-K, Laclede Gas adopted the recognition and disclosure provisions of this
Statement effective September 30, 2007. The Statement also requires
that plan assets and benefit obligations be measured as of the date of the
employer’s fiscal year-end statement of financial position. This requirement is
effective for the Utility as of the end of fiscal year 2009. In conjunction
with adoption of this provision of SFAS No. 158, the Utility will be required to
change its valuation date for its pension and other postretirement plans from
June 30 to September 30. The Utility is currently evaluating the
impact of adoption of the change in measurement date on its financial
statements.


7





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” The Statement permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. SFAS No. 159
also establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. This Statement does not affect any
existing accounting literature that requires certain assets and liabilities to
be carried at fair value. Upon adoption of SFAS No. 159, entities are permitted
to choose, at specified election dates, to measure eligible items at fair value
(fair value option). Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings at each reporting date.
The decision about whether to elect the fair value option is applied instrument
by instrument with few exceptions. The decision is also irrevocable (unless a
new election date occurs) and must be applied to entire instruments and not to
portions of instruments. SFAS No. 159 requires that cash flows related to items
measured at fair value be classified in the statement of cash flows according to
their nature and purpose as required by SFAS No. 95, “Statement of Cash Flows”
(as amended). SFAS No. 159 is effective for the Utility as of the beginning of
fiscal year 2009. Laclede Gas is currently evaluating the provisions of this
Statement.


In
June 2007, the FASB ratified the consensus reached in Emerging Issues Task
Force (EITF) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends
on Share-Based Payment Awards.” This Issue addresses how an entity should
recognize the tax benefit received on dividends that are (a) paid to employees
holding equity-classified nonvested shares, equity-classified nonvested share
units, or equity-classified outstanding share options and (b) charged to
retained earnings under SFAS No. 123(R). The Task Force reached a consensus that
such tax benefits should be recognized as an increase in additional paid-in
capital. This EITF Issue also addresses how the accounting for these tax
benefits is affected if an entity’s estimate of forfeitures changes in
subsequent periods. This EITF Issue is effective for Laclede Gas as of the
beginning of fiscal year 2009. The Utility is currently evaluating the
provisions of this EITF Issue.


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


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


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


In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles.” SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting principles to be used in
the preparation and presentation of financial statements in accordance with
generally accepted accounting principles. This statement will be effective 60
days after the Securities and Exchange Commission approves the Public Company
Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles.” The
Utility does not anticipate that the adoption of SFAS No. 162 will have any
effect on its financial statements.


8


In
May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts-an interpretation of FASB Statement No. 60.” This Statement
provides clarification to the guidance in SFAS No. 60, “Accounting and Reporting
by Insurance Enterprises,” and expands disclosure requirements. This Statement
is effective for Laclede Gas as of the beginning of fiscal year 2010. Because
SFAS No. 163 is primarily applicable to insurance enterprises that issue
financial guarantee insurance contracts, the Utility does not anticipate that
the adoption of this Statement will have any effect on its financial
statements.








2.
            PENSION
      PLANS AND OTHER POSTRETIREMENT
BENEFITS





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 the quarters ending June 30, 2008 and 2007 were $1.5 million
and $1.4 million, respectively, including amounts charged to construction.
Pension costs for the nine months ended June 30, 2008 and 2007 were
$4.6 million and $4.1 million, respectively, including amounts charged to
construction.


The
net periodic pension costs include the following components:





Three
      Months Ended
            
            Nine
      Months EndedJune
      30,
            
            June
      30,(Thousands)
            
            2008
            
            2007
            
            2008
            
            2007Service
      cost – benefits earnedduring
      the period
            
            $
            3,243
            
            $
            3,106
            
            $
            9,728
            
            $
            9,317Interest
      cost on projectedbenefit
      obligation
            
            
            4,670
            
            
            4,482
            
            
            14,010
            
            
            13,447Expected
      return on plan assets
            
            
            (5,162
            )
            
            (5,074
            )
            
            (15,487
            )
            
            (15,222
            )Amortization
      of prior service cost
            
            
            272
            
            
            284
            
            
            816
            
            
            851Amortization
      of actuarial loss
            
            
            791
            
            
            920
            
            
            2,373
            
            
            2,761Sub-total
            
            
            3,814
            
            
            3,718
            
            
            11,440
            
            
            11,154Loss
      on lump sum settlement
            
            
            —
            
            
            —
            
            
            —
            
            
            945Regulatory
      adjustment
            
            
            (2,280
            )
            
            (2,364
            )
            
            (6,840
            )
            
            (8,037
            )Net
      pension cost
            
            $
            1,534
            
            $
            1,354
            
            $
            4,600
            
            $
            4,062





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 nine months ended
June 30, 2008. Lump sum payments recognized as settlements during the
nine months ended June 30, 2007 were $2.8 million.


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


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 the quarters ended June 30, 2008 and
2007 were $1.9 million and $2.0 million, respectively, including amounts charged
to construction. Postretirement benefit costs for the nine months ended
June 30, 2008 and 2007 were $5.7 million and $5.9 million,
respectively, including amounts charged to construction.


9


Net
periodic postretirement benefit costs consisted of the following
components:





Three
      Months Ended
            
            Nine
      Months EndedJune
      30,
            
            June
      30,(Thousands)
            
            2008
            
            2007
            
            2008
            
            2007Service
      cost – benefits earnedduring
      the period
            
            $
            1,140
            
            $
            1,016
            
            $
            3,420
            
            $
            3,047Interest
      cost on accumulatedpostretirement
      benefit obligation
            
            
            977
            
            
            899
            
            
            2,931
            
            
            2,699Expected
      return on plan assets
            
            
            (509
            )
            
            (430
            )
            
            (1,528
            )
            
            (1,292
            )Amortization
      of transition obligation
            
            
            34
            
            
            34
            
            
            102
            
            
            102Amortization
      of prior service cost
            
            
            (582
            )
            
            (582
            )
            
            (1,746
            )
            
            (1,746
            )Amortization
      of actuarial loss
            
            
            746
            
            
            811
            
            
            2,238
            
            
            2,434Sub-total
            
            
            1,806
            
            
            1,748
            
            
            5,417
            
            
            5,244Regulatory
      adjustment
            
            
            104
            
            
            222
            
            
            314
            
            
            668Net
      postretirement benefit cost
            
            $
            1,910
            
            $
            1,970
            
            $
            5,731
            
            $
            5,912





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.








3.
            INCOME
      TAXES





Laclede
Group files a consolidated federal and state tax return and allocates income
taxes to Laclede Gas and its other subsidiaries as if each entity were a
separate taxpayer. Laclede Group and Laclede Gas adopted the provisions of FIN
48, “Accounting for Uncertainty in Income Taxes,” as of
October 1, 2007. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement No. 109, “Accounting for Income Taxes.” Pursuant to FIN 48,
the Utility may recognize the tax benefit from a tax position only if it is at
least more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the
position.


Upon
adoption of FIN 48, Laclede Gas recognized an increase to beginning retained
earnings as a cumulative-effect adjustment totaling $0.4 million and
reclassified $2.1 million of income tax liabilities from current to non-current
liabilities. Total unrecognized tax benefits as of October 1, 2007
were $1.9 million, all of which would have favorably impacted the effective tax
rate, if recognized. The Utility recognizes potential accrued interest and
penalties related to its uncertain tax positions as interest expense and other
income deductions, respectively. Potential interest and penalties accrued (net
of income tax benefit) associated with the Utility’s uncertain tax positions
were $0.2 million at October 1, 2007. Unrecognized tax benefits,
accrued interest payable, and accrued penalties payable are included in the
Other line of the Deferred Credits and Other Liabilities section of the Balance
Sheets.


10


Laclede
Group and/or Laclede Gas are subject to U.S. federal income tax as well as
income tax of state and local jurisdictions. These companies are no longer
subject to examination for fiscal years prior to 2005. The federal statute of
limitations remains open until June 15, 2009 and 2010 for fiscal years
2005 and 2006, respectively. However, during the quarter ended
March 31, 2008, Laclede Group effectively settled an audit with the
Internal Revenue Service for those periods. Completion of the audit represents
an event requiring the Utility to re-evaluate its uncertain tax positions. As a
result, the Utility recognized fiscal years 2005 and 2006 unrecognized tax
benefits of $1.0 million, which favorably impacted the effective tax rate, and
reversed $0.2 million of accrued interest and penalties (net of income tax
benefit). During the quarter ended June 30, 2008, the statute of
limitations for Laclede Group’s fiscal year 2004 expired. As a result,
previously unrecognized tax benefits of $0.3 million were recognized by the
Utility, which favorably impacted the effective tax rate, and $0.1 million of
related accrued interest and penalties were reversed (net of income tax
benefit).


Total
FIN 48 unrecognized tax benefits at June 30, 2008 were $0.9 million,
all of which would favorably impact the effective tax rate, if recognized.
Potential interest and penalties associated with these liabilities were
immaterial. The Utility does not expect to make any significant tax payment
related to any of the above obligations within the next twelve
months.








4.
            OTHER
      INCOME AND (INCOME DEDUCTIONS) –
NET





Three
      Months Ended
            
            Nine
      Months EndedJune
      30,
            
            June
      30,(Thousands)
            
            2008
            
            2007
            
            2008
            
            2007Allowance
      for funds used during construction
            
            $
            (21
            )
            $
            (2
            )
            $
            (46
            )
            $
            (18
            )Interest
      income
            
            
            71
            
            
            359
            
            
            1,615
            
            
            2,483Other
      income
            
            
            472
            
            
            376
            
            
            1,012
            
            
            791Other
      income deductions
            
            
            (674
            )
            
            (182
            )
            
            (1,224
            )
            
            496Other
      Income and (Income Deductions) – Net
            
            $
            (152
            )
            $
            551
            
            $
            1,357
            
            $
            3,752





The
decrease in Other Income and (Income Deductions) – Net for the nine months ended
June 30, 2008, compared with the nine months ended
June 30, 2007, was primarily due to higher investment losses, lower
income associated with carrying costs applied to under-recoveries of gas costs,
and reduced income associated with changes in the cash surrender value of life
insurance policies. These factors were partially offset by additional proceeds
related to Laclede Gas’ interest, as a policyholder, in the sale of a mutual
insurance company. Carrying costs on under-recoveries of gas costs are recovered
through the Utility’s Purchased Gas Adjustment (PGA) Clause.





11





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 EndedJune
      30, 2008Operating
      revenues
            
            $
            189,598
            
            $
            630
            
            $
            —
            
            $
            190,228Net
      income
            
            
            5,509
            
            
            37
            
            
            —
            
            
            5,546Total
      assets
            
            
            1,382,002
            
            
            1,747
            
            
            —
            
            
            1,383,749Nine
      Months EndedJune
      30, 2008Operating
      revenues
            
            $
            1,017,579
            
            $
            2,156
            
            $
            —
            
            $
            1,019,735Net
      income
            
            
            46,606
            
            
            35
            
            
            —
            
            
            46,641Total
      assets
            
            
            1,382,002
            
            
            1,747
            
            
            —
            
            
            1,383,749Three
      Months EndedJune
      30, 2007Operating
      revenues
            
            $
            185,696
            
            $
            1,128
            
            $
            —
            
            $
            186,824Net
      income
            
            
            856
            
            
            30
            
            
            —
            
            
            886Total
      assets
            
            
            1,288,098
            
            
            1,358
            
            
            —
            
            
            1,289,456Nine
      Months EndedJune
      30, 2007Operating
      revenues
            
            $
            1,027,777
            
            $
            2,568
            
            $
            —
            
            $
            1,030,345Net
      income
            
            
            37,247
            
            
            32
            
            
            —
            
            
            37,279Total
      assets
            
            
            1,288,098
            
            
            1,358
            
            
            —
            
            
            1,289,456








6.
            COMMITMENTS
      AND 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 2007 Form 10-K
for information relative to environmental matters generally. There have been no
significant changes relative to environmental matters during the nine months
ended June 30, 2008.


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


On
December 31, 2007, the MoPSC Staff filed a memorandum with the
Commission proposing 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’s memorandum 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
will be provided by Laclede Group.


12


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.


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 June 30, 2008, the maximum
guarantees under these leases were $1.7 million. However, the Utility estimates
that the residual value of the leased vehicles will be adequate to satisfy most
of the guaranteed amounts. At June 30, 2008, the carrying value of the
liability recognized for these guarantees was $0.3 million.


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 June 30, 2008 are estimated at
approximately $437 million. Additional contracts are generally entered into
prior to or during the heating season.









13


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




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




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








14





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 to
continually improve its ability to provide reliable natural gas service at a
reasonable cost, while maintaining and building a secure and dependable
infrastructure. The settlement of the Utility’s 2007 rate case resulted in
enhancements to the Utility’s weather mitigation rate design that better ensure
the recovery of its fixed costs and margins despite variations in sales volumes
due to the impacts of weather and other factors that affect customer usage. The
Utility’s income from off-system sales remains subject to fluctuations in market
conditions. In conjunction with the settlement of the 2005 rate case, effective
October 1, 2005, the Utility retained all pre-tax income from
off-system sales and capacity release revenues up to $12 million annually.
Pre-tax amounts in excess of $12 million were shared with customers, with the
Utility retaining 50% of amounts exceeding that threshold. The Stipulation &
Agreement approved by the MoPSC in the Utility’s 2007 rate case increases the
portion of pre-tax income from off-system sales and capacity release revenues
that is shared with customers. Effective October 1, 2007, the Utility
is allowed to retain 15% to 25% of the first $6 million in annual income earned
(depending on the level of income earned) and 30% of income exceeding $6 million
annually. Some of the factors impacting the level of off-system sales include
the availability and cost of the Utility’s natural gas supply, the weather in
its service area, and the weather in other markets. When Laclede Gas’ service
area experiences warmer-than-normal weather while other markets experience
colder weather or supply constraints, some of the Utility’s natural gas supply
is available for off-system sales and there may be a demand for such supply in
other markets.





Laclede
Gas continues to work actively to reduce the impact of higher costs associated
with wholesale natural gas prices by strategically structuring its natural gas
supply portfolio and through the use of financial instruments. Nevertheless, the
cost of purchased gas remains high, relative to historical levels. The Utility’s
Purchased Gas Adjustment (PGA) Clause allows Laclede Gas to flow through to
customers, subject to prudence review, the cost of purchased gas supplies,
including costs, cost reductions, and related carrying costs associated with the
use of financial instruments to hedge the purchase price of natural gas, as well
as gas inventory carrying costs. The Utility believes it will continue to be
able to obtain sufficient gas supply. The generally higher price levels may
continue to affect sales volumes (due to the conservation efforts of customers)
and cash flows (associated with the timing of collection of gas costs and
related accounts receivable from customers).





Quarter
Ended June 30, 2008





Earnings





Laclede
Gas’ net income for the quarter ended June 30, 2008 was $5.5 million,
compared with net income of $0.9 million for the same quarter last year. The
increase in net income was primarily due to the following factors, quantified on
a pre-tax basis:





•
            the
      benefit of the general rate increase, effective August 1, 2007,
      totaling $8.7 million; and,•
            interim
      benefits of a rate design change, effective August 1, 2007, and
      other variations totaling $5.1
million.





15


These
factors were partially offset by:





•
            increases
      in operation and maintenance expenses, excluding the provision for
      uncollectible accounts, totaling $3.1 million;•
            an
      increase in the provision for uncollectible accounts, totaling $2.6
      million; and,•
            lower
      income from off-system sales and capacity release, totaling $2.0 million,
      primarily due to a reduction in the Utility’s share of such income
      (pursuant to the 2007 rate case).





Utility
Operating Revenues and Operating Expenses





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 June 30, 2008 were $189.6
million, or $3.9 million more than the same quarter last year. Temperatures
experienced in the Utility’s service area during the quarter were 16.1% colder
than the same quarter last year and 28.4% colder than normal. Total system
therms sold and transported were 0.13 billion for the quarter ended
June 30, 2008, compared with 0.14 billion for the same quarter last
year. Total off-system therms sold and transported were 0.03 billion for the
quarter ended June 30, 2008, compared with 0.05 billion for the same
quarter last year. The increase in utility operating revenues was primarily
attributable to the following factors:





Quarter
      Ended(Millions)
            June
      30, 2008Lower
      off-system sales volumes
            
            $
            (15.4
            )Higher
      prices charged for off-system sales
            
            
            11.2General
      rate increase, effective August 1, 2007
            
            
            8.7Higher
      charges for system gas sales and other variations
            
            
            4.0Lower
      wholesale gas costs passed on to Utility customers (subject to prudence
      review by the MoPSC)
            
            
            (4.0
            )Lower
      Infrastructure System Replacement Surcharge (ISRS)
revenues
            
            
            (0.6
            )Total
      Variation
            
            $
            3.9





Utility
operating expenses for the quarter ended June 30, 2008 decreased $1.4
million from the same quarter last year. Natural and propane gas expense
decreased $8.6 million, or 7.1%, from last year’s level, primarily attributable
to lower rates charged by our suppliers, lower off-system gas expense, and lower
system volumes purchased for sendout. Other operation and maintenance expenses
increased $5.7 million, or 16.3%, primarily due to a higher provision for
uncollectible accounts, increased maintenance and distribution charges, higher
legal fees, and increased group insurance charges. These factors were partially
offset by decreased injuries and damages expenses. Taxes, other than income,
increased $1.2 million, or 8.9%, primarily due to higher gross receipts taxes
(attributable to the increased revenues).





Other
Income and (Income Deductions) - Net





Other
income and (income deductions) – net decreased $0.7 million, primarily due to
increased investment losses and lower income associated with carrying costs
applied to under-recoveries of gas costs. Carrying costs on under-recoveries of
gas costs are recovered through the Utility’s PGA Clause.





Interest
Charges





The
$1.3 million decrease in interest charges was primarily due to a reduction in
interest on long-term debt resulting from the November 2007 maturity of $40
million principal amount of 7 1/2% First Mortgage Bonds.





Income
Taxes





The
$1.2 million increase in income taxes was primarily due to higher pre-tax
income, partially offset by the recognition of previously unrecognized tax
benefits recorded pursuant to Financial Accounting Standards Board
Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,”
and the net effect of various property-related deductions.





16


Nine
Months Ended June 30, 2008





Earnings





Laclede
Gas’ net income for the nine months ended June 30, 2008 was $46.6
million, compared with net income of $37.2 million for the same period last
year. The increase in net income was primarily due to the following factors,
quantified on a pre-tax basis:





•
            the
      benefit of the general rate increase, effective August 1, 2007,
      totaling $30.4 million;•
            the
      effect of higher system gas sales volumes and other variations totaling
      $2.3 million; and,•
            the
      recognition of previously unrecognized tax benefits and the reversal of
      related expenses, totaling $1.5
million.





These
factors were partially offset by:





•
            lower
      income from off-system sales and capacity release, totaling $9.5 million,
      primarily due to a reduction in the Utility’s share of such income
      (pursuant to the 2007 rate case);•
            an
      increase in the provision for uncollectible accounts, totaling $4.9
      million; and,•
            increases
      in operation and maintenance expenses, excluding the provision for
      uncollectible accounts, totaling $4.9
million.





Utility
Operating Revenues and Operating Expenses





Utility
operating revenues for the nine months ended June 30, 2008 were $1.0
billion, or $10.2 million less than the same period last year. Temperatures
experienced in the Utility’s service area during the nine months ended
June 30, 2008 were 6.8% colder than the same period last year, but
0.6% warmer than normal. Total system therms sold and transported were 0.85
billion for the nine months ended June 30, 2008, compared with 0.82
billion for the same period last year. Total off-system therms sold and
transported were 0.14 billion for the nine months ended June 30, 2008,
compared with 0.21 billion for the same period last year. Increases and
decreases in the cost of gas associated with system gas sales volumes have no
direct effect on net revenues and net income. The decrease in utility operating
revenues was primarily attributable to the following factors:





Nine
      MonthsEnded(Millions)
            June
      30, 2008Lower
      off-system sales volumes
            
            $
            (48.6
            )Lower
      wholesale gas costs passed on to Utility customers (subject to prudence
      review by the MoPSC)
            
            
            (47.2
            )Higher
      system sales volumes, primarily due to colder weather, and other
      variations
            
            
            34.0General
      rate increase, effective August 1, 2007
            
            
            30.4Higher
      prices charged for off-system sales
            
            
            22.8Lower
      ISRS revenues
            
            
            (1.6
            )Total
      Variation
            
            $
            (10.2
            )





Utility
operating expenses for the nine months ended June 30, 2008 decreased
$22.8 million from the same period last year. Natural and propane gas expense
decreased $33.3 million, or 4.5%, from last year’s level, primarily attributable
to lower rates charged by our suppliers and lower off-system gas expense,
partially offset by increased system volumes purchased for sendout. Other
operation and maintenance expenses increased $9.8 million, or 8.4%, primarily
due to a higher provision for uncollectible accounts, increased maintenance and
distribution expenses, higher legal fees, increased pension costs, the effect of
a gain on the disposal of assets recorded last year, and higher wage rates.
Depreciation and amortization expense increased $0.7 million, or 2.6%, primarily
due to additional depreciable property.





Other
Income and (Income Deductions) - Net





Other
income and (income deductions) – net decreased $2.4 million due to higher
investment losses, lower income associated with carrying costs applied to
under-recoveries of gas costs, and reduced income associated with changes in the
cash surrender value of life insurance policies. These factors were partially
offset by additional proceeds related to Laclede Gas’ interest, as a
policyholder, in the sale of a mutual insurance company. Carrying costs on
under-recoveries of gas costs are recovered through the Utility’s PGA
Clause.


17





Interest
Charges





The
$2.1 million decrease in interest charges was primarily due to a reduction in
interest on long-term debt resulting from the November 2007 maturity of $40
million principal amount of 7 1/2% First Mortgage Bonds.





Income
Taxes





The
$3.0 million increase in income taxes was primarily due to higher pre-tax
income, partially offset by the recognition of previously unrecognized tax
benefits recorded pursuant to FIN 48.





Labor
Agreement





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








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. Laclede Gas believes that Public Counsel’s appeal is without
merit and intends to vigorously oppose the appeal.





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





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





On
December 31, 2007, the MoPSC Staff filed a memorandum with the
Commission proposing 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’s memorandum 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
will be provided by Laclede Group.


18





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. Such filing is pending before the
MoPSC.








CRITICAL
ACCOUNTING POLICIES





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





Allowances
      for doubtful accounts – Estimates of the collectibility of trade accounts
      receivable are based on historical trends, age of receivables, economic
      conditions, credit risk of specific customers, and other factors. The
      Utility’s provision for uncollectible accounts is dependent on the
      regulatory treatment provided for such costs. As approved by the MoPSC,
      the Utility is allowed to defer for future recovery certain costs
      associated with amendments to the Cold Weather Rule.Employee
      benefits and postretirement obligations – Pension and postretirement
      obligations are calculated by actuarial consultants that utilize several
      statistical factors and other assumptions related to future events, such
      as discount rates, returns on plan assets, compensation increases, and
      mortality rates. For the Utility, the amount of expense recognized and the
      amounts reflected in other comprehensive income are dependent upon the
      regulatory treatment provided for such costs, as discussed further below.
      Certain liabilities related to group medical benefits and workers’
      compensation claims, portions of which are self-insured and/or contain
      “stop-loss” coverage with third-party insurers to limit exposure, are
      established based on historical
trends.





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.





19





Laclede
      Gas records deferred tax liabilities and assets measured by enacted tax
      rates for the net tax effect of all temporary differences between the
      carrying amounts of assets and liabilities for financial reporting
      purposes, and the amounts used for income tax purposes. Changes in enacted
      tax rates, if any, and certain property basis differences will be
      reflected by entries to regulatory asset or liability accounts. Pursuant
      to the direction of the MoPSC, Laclede Gas’ provision for income tax
      expense for financial reporting purposes reflects an open-ended method of
      tax depreciation. Laclede Gas’ provision for income tax expense also
      records the income tax effect associated with the difference between
      overheads capitalized to construction for financial reporting purposes and
      those recognized for tax purposes without recording an offsetting deferred
      income tax expense. These two methods are consistent with the regulatory
      treatment prescribed by the MoPSC.Asset
      retirement obligations are recorded in accordance with SFAS No. 143,
      “Accounting for Asset Retirement Obligations” and 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, 2007.








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.








FINANCIAL
CONDITION





CREDIT
RATINGS





As
of June 30, 2008, credit ratings for outstanding securities for Laclede Gas
issues were as follows:





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





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


20


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, 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 can cause significant variations in the Utility’s cash
provided by or used in operating activities.





Net
cash provided by operating activities for the nine months ended
June 30, 2008 was $210.2 million, compared with $167.0 million for the
same period last year. The variation is primarily attributable to differences in
the timing of the collections of gas cost under the Utility’s PGA Clause,
including the effects of this year’s reduction in net cash payments associated
with the Utility’s use of natural gas financial instruments, and higher
operating income this year. These variations are partially offset by an increase
in net cash payments to Laclede Group for the Utility’s allocation of income
taxes.





Net
cash used in investing activities for the nine months ended
June 30, 2008 was $40.0 million, compared with $40.9 million for the
nine months ended June 30, 2007. Cash used in investing activities
primarily reflected capital expenditures in both periods.





Net
cash used in financing activities was $169.6 million for the nine months ended
June 30, 2008, compared with $125.8 million for the nine months ended
June 30, 2007. The variation primarily reflects this year’s maturity
of long-term debt as well as increased repayments of short-term
debt.








LIQUIDITY
AND CAPITAL RESOURCES





As
indicated above, the Utility’s short-term borrowing requirements typically peak
during the colder months. These short-term cash requirements have traditionally
been met through the sale of commercial paper supported by lines of credit with
banks. Laclede Gas has a line of credit in place of $320 million. During the
second quarter, the expiration of this line was extended one year to
December 2011 from December 2010. In November 2007, the Utility
established a seasonal line of credit of $40 million, which expired in
March 2008. The Utility had short-term borrowings aggregating to a maximum
of $304.5 million at any one time during the nine months ended
June 30, 2008. Short-term commercial paper borrowings outstanding at
June 30, 2008 were $58.6 million. In addition to these borrowings, the
Utility had outstanding notes payable to Laclede Group totaling $44.4 million at
June 30, 2008. The weighted average interest rate on the total
short-term borrowings of $103.0 million was 3.1% per annum at
June 30, 2008. Based on total short-term borrowings at
June 30, 2008, a change in interest rates of 100 basis points would
increase or decrease pre-tax earnings and cash flows of Laclede Gas by
approximately $1.0 million on an annual basis. Portions of such increases or
decreases may be offset through the application of PGA carrying
costs.





Laclede
Gas’ lines of credit include covenants limiting total debt, including short-term
debt, to no more than 70% of total capitalization and requiring earnings before
interest, taxes, depreciation and amortization (EBITDA) to be at least 2.25
times interest expense. On June 30, 2008, total debt was 53% of total
capitalization. For the twelve months ended June 30, 2008, EBITDA was
3.97 times interest expense.





Laclede
Gas has on file with the Securities and Exchange Commission an effective shelf
registration on Form S-3 for issuance of $350 million of securities. The full
amount of this shelf registration 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. In May 2008,
pursuant to this authority, the Utility sold 26 shares of its common stock to
Laclede Group for $0.9 million, leaving $493.3 million remaining under this
authorization as of the date of this filing. The amount, timing, and type of
additional financing to be issued will depend on cash requirements and market
conditions.





On
November 1, 2007, Laclede Gas paid at maturity $40 million principal
amount of 7 1/2% First Mortgage Bonds. This maturity was funded through
short-term borrowings. At June 30, 2008, Laclede Gas had fixed-rate
long-term debt totaling $310 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.


21


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 June 30, 2008, the maximum
guarantees under these leases were $1.7 million. However, the Utility estimates
that the residual value of the leased vehicles will be adequate to satisfy most
of the guaranteed amounts. At June 30, 2008, the carrying value of the
liability recognized for these guarantees was $0.3 million.





Utility
capital expenditures were $40.2 million for the nine months ended
June 30, 2008, compared with $41.5 million for the same period last
year.





Capitalization
at June 30, 2008, excluding current obligations of preferred stock,
consisted of 54.6% common stock equity, 0.1% preferred stock, and 45.3%
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 June 30, 2008 and at September 30, 2007, such
as Accounts Receivable – Net, Gas Stored Underground, Notes Payable, Accounts
Payable, Regulatory Assets and Regulatory Liabilities, and Delayed and Advance
Customer Billings. The Balance Sheet at June 30, 2007 is presented to
facilitate comparison of these items with the corresponding interim period of
the preceding fiscal year.








CONTRACTUAL
OBLIGATIONS





As
of June 30, 2008, Laclede Gas had contractual obligations with payments due as
summarized below (in millions):





Payments
      due by periodRemaining
            
            
            
            
            
            Fiscal
      YearsContractual
      Obligations
            
            Total
            
            Fiscal
      Year
              2008
            
            Fiscal
      Years
              2009-2010
            
            Fiscal
      Years
              2011-2012
            
            2013
      and
              thereafterPrincipal
      Payments on Long-Term Debt
            
            $
            310.0
            
            $
            —
            
            $
            —
            
            $
            25.0
            
            $
            285.0Interest
      Payments on Long-Term Debt
            
            
            382.4
            
            
            1.2
            
            
            39.0
            
            
            36.5
            
            
            305.7Operating
      Leases (a)
            
            
            11.1
            
            
            1.3
            
            
            7.6
            
            
            2.2
            
            
            —Purchase
      Obligations – Natural Gas (b)
            
            
            436.5
            
            
            72.2
            
            
            163.6
            
            
            129.7
            
            
            71.0Purchase
      Obligations – Other (c)
            
            
            119.0
            
            
            6.4
            
            
            25.8
            
            
            19.2
            
            
            67.6Total
      (d)
            
            $
            1,259.0
            
            $
            81.1
            
            $
            236.0
            
            $
            212.6
            
            $
            729.3





(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 June 30, 2008 New York Mercantile Exchange futures prices.
      Laclede Gas recovers the costs related to its purchases, transportation,
      and storage of natural gas through the operation of its PGA Clause,
      subject to prudence review; however, variations in the timing of
      collections of gas costs from customers affect short-term cash
      requirements. Additional contractual commitments are generally entered
      into prior to or during the heating season.(c)
            These
      purchase obligations reflect miscellaneous agreements for the purchase of
      materials and the procurement of services necessary for normal
      operations.(d)
            The
      categories of Capital Leases and Other Long-Term liabilities have been
      excluded from the table above because there are no applicable amounts of
      contractual obligations under these categories. Also, commitments related
      to pension and postretirement benefit plans have been excluded from the
      table above. The Utility does not expect to make any contributions to its
      qualified, trusteed pension plans during the remainder of fiscal
      year 2008. Laclede Gas anticipates a $0.1 million contribution
      relative to its non-qualified pension plans during the remainder of fiscal
      year 2008. With regard to the postretirement benefits, the Utility
      anticipates it will contribute $4.1 million to the qualified trusts and
      $0.1 million directly to participants from Laclede Gas’ funds during the
      remainder of fiscal year 2008. For further discussion of the
      Utility’s pension and postretirement benefit plans, refer to Note 2,
      Pension Plans and Other Postretirement Benefits, of the Notes to Financial
      Statements.


22








MARKET
RISK





Laclede
Gas adopted a risk management policy that provides for the purchase of natural
gas financial instruments with the goal of managing price risk associated with
purchasing natural gas on behalf of its customers. This policy prohibits
speculation. Costs and cost reductions, including carrying costs, associated
with the Utility’s use of natural gas financial instruments are allowed to be
passed on to the Utility’s customers through the operation of its 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. At June 30, 2008, the
Utility held 7.4 million MMBtu of futures contracts at an average price of $9.03
per MMBtu. Additionally, 13.8 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
March 2009.








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, 2007.
There have been no significant changes relative to environmental matters during
the nine months ended June 30, 2008.








OFF-BALANCE
SHEET ARRANGEMENTS





Laclede
Gas has no off-balance sheet arrangements.




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