Exhibit
99.1








LACLEDE
GAS COMPANY


STATEMENTS
OF INCOME


(UNAUDITED)





Three
      Months Ended
                
                
                
                Six
      Months EndedMarch
      31,
                
                
                
                March
      31,(Thousands)
                
                
                2009
                
                
                2008
                
                
                
                
                2009
                
                
                2008Operating
      Revenues:Utility
                
                $
                440,468
                
                $
                507,089
                
                
                
                $
                798,569
                
                $
                827,981Other
                
                
                599
                
                
                740
                
                
                
                
                1,196
                
                
                1,526Total
      Operating Revenues
                
                
                441,067
                
                
                507,829
                
                
                
                
                799,765
                
                
                829,507Operating
      Expenses:UtilityNatural
      and propane gas
                
                
                313,506
                
                
                377,526
                
                
                
                
                568,403
                
                
                600,367Other
      operation expenses
                
                
                40,251
                
                
                38,989
                
                
                
                
                76,552
                
                
                74,202Maintenance
                
                
                7,261
                
                
                5,814
                
                
                
                
                13,795
                
                
                12,049Depreciation
      and amortization
                
                
                9,180
                
                
                8,763
                
                
                
                
                18,299
                
                
                17,476Taxes,
      other than income taxes
                
                
                28,216
                
                
                29,255
                
                
                
                
                46,574
                
                
                45,936Total
      Utility Operating Expenses
                
                
                398,414
                
                
                460,347
                
                
                
                
                723,623
                
                
                750,030Other
                
                
                585
                
                
                805
                
                
                
                
                1,115
                
                
                1,530Total
      Operating Expenses
                
                
                398,999
                
                
                461,152
                
                
                
                
                724,738
                
                
                751,560Operating
      Income
                
                
                42,068
                
                
                46,677
                
                
                
                
                75,027
                
                
                77,947Other
      Income and (Income Deductions) – Net
                
                
                36
                
                
                (523
                )
                
                
                
                646
                
                
                1,509Interest
      Charges:Interest
      on long-term debt
                
                
                6,145
                
                
                4,875
                
                
                
                
                12,291
                
                
                10,001Other
      interest charges
                
                
                1,232
                
                
                2,720
                
                
                
                
                4,421
                
                
                6,736Total
      Interest Charges
                
                
                7,377
                
                
                7,595
                
                
                
                
                16,712
                
                
                16,737Income
      Before Income Taxes
                
                
                34,727
                
                
                38,559
                
                
                
                
                58,961
                
                
                62,719Income
      Tax Expense
                
                
                12,541
                
                
                13,259
                
                
                
                
                20,578
                
                
                21,624Net
      Income
                
                
                22,186
                
                
                25,300
                
                
                
                
                38,383
                
                
                41,095Dividends
      on Redeemable Preferred Stock
                
                
                7
                
                
                9
                
                
                
                
                15
                
                
                19Earnings
      Applicable to Common Stock
                
                $
                22,179
                
                $
                25,291
                
                
                
                $
                38,368
                
                $
                41,076See
      Notes to Financial Statements.






























1


LACLEDE
GAS COMPANY


STATEMENTS
OF COMPREHENSIVE INCOME


(UNAUDITED)





Three
      Months Ended
              
              
              
              Six
      Months EndedMarch
      31,
              
              
              
              March
      31,(Thousands)
              
              
              2009
              
              
              2008
              
              
              
              
              2009
              
              
              2008Net
      Income
              
              $
              22,186
              
              $
              25,300
              
              
              
              $
              38,383
              
              $
              41,095Other
      Comprehensive Income, Before Tax:Net
      hedging gain arising during period
              
              
              106
              
              
              —
              
              
              
              
              106
              
              
              —Amortization
      of actuarial loss included in net periodicpension
      cost
              
              
              50
              
              
              43
              
              
              
              
              100
              
              
              86Other
      Comprehensive Income, Before Tax
              
              
              156
              
              
              43
              
              
              
              
              206
              
              
              86Income
      Tax Expense Related to Items of OtherComprehensive
      Income
              
              
              63
              
              
              16
              
              
              
              
              80
              
              
              33Other
      Comprehensive Income, Net of Tax
              
              
              93
              
              
              27
              
              
              
              
              126
              
              
              53Comprehensive
      Income
              
              $
              22,279
              
              $
              25,327
              
              
              
              $
              38,509
              
              $
              41,148See
      Notes to Financial Statements.















































2


LACLEDE
GAS COMPANY


BALANCE
SHEETS


(UNAUDITED)




March
      31,
              
              
              
              Sept.
      30,
              
              
              
              March
      31,(Thousands)
              
              2009
              
              
              
              2008
              
              
              
              2008ASSETSUtility
      Plant
              
              $
              1,247,921
              
              
              
              $
              1,229,174
              
              
              
              $
              1,204,984Less:  Accumulated
      depreciation and amortization
              
              
              414,956
              
              
              
              
              405,977
              
              
              
              
              398,661Net
      Utility Plant
              
              
              832,965
              
              
              
              
              823,197
              
              
              
              
              806,323Other
      Property and Investments
              
              
              37,822
              
              
              
              
              37,570
              
              
              
              
              37,585Current
      Assets:Cash
      and cash equivalents
              
              
              2,879
              
              
              
              
              3,163
              
              
              
              
              4,850Accounts
      receivable:Utility
              
              
              166,854
              
              
              
              
              98,708
              
              
              
              
              218,674Non-utility
              
              
              1,694
              
              
              
              
              1,601
              
              
              
              
              1,571Associated
      companies
              
              
              371
              
              
              
              
              3,028
              
              
              
              
              204Other
              
              
              4,689
              
              
              
              
              4,852
              
              
              
              
              5,068Allowances
      for doubtful accounts
              
              
              (12,297
              )
              
              
              
              (12,476
              )
              
              
              
              (13,478
              )Delayed
      customer billings
              
              
              35,213
              
              
              
              
              —
              
              
              
              
              40,417Inventories:Natural
      gas stored underground at LIFO cost
              
              
              69,940
              
              
              
              
              206,194
              
              
              
              
              31,730Propane
      gas at FIFO cost
              
              
              19,861
              
              
              
              
              19,911
              
              
              
              
              19,904Materials,
      supplies, and merchandise at average cost
              
              
              5,375
              
              
              
              
              5,176
              
              
              
              
              5,283Derivative
      instrument assets
              
              
              28,903
              
              
              
              
              54,578
              
              
              
              
              13,773Unamortized
      purchased gas adjustments
              
              
              8,891
              
              
              
              
              33,411
              
              
              
              
              4,365Deferred
      income taxes
              
              
              1,747
              
              
              
              
              —
              
              
              
              
              4,114Prepayments
      and other
              
              
              5,295
              
              
              
              
              6,635
              
              
              
              
              5,469Total
      Current Assets
              
              
              339,415
              
              
              
              
              424,781
              
              
              
              
              341,944Deferred
      Charges:Regulatory
      assets
              
              
              395,869
              
              
              
              
              334,755
              
              
              
              
              265,495Other
              
              
              5,572
              
              
              
              
              5,512
              
              
              
              
              4,836Total
      Deferred Charges
              
              
              401,441
              
              
              
              
              340,267
              
              
              
              
              270,331Total
      Assets
              
              $
              1,611,643
              
              
              
              $
              1,625,815
              
              
              
              $
              1,456,183
































3





LACLEDE
GAS COMPANY


BALANCE
SHEETS (Continued)


(UNAUDITED)





March
      31,
                    
                    
                    
                    Sept.
      30,
                    
                    
                    
                    March
      31,(Thousands,
      except share amounts)
                    
                    2009
                    
                    
                    
                    2008
                    
                    
                    
                    2008CAPITALIZATION
      AND LIABILITIESCapitalization:Common
      stock and Paid-in capital (11,614, 10,416, and
                      10,365
      shares issued, respectively)
                    
                    $
                    201,441
                    
                    
                    
                    $
                    157,883
                    
                    
                    
                    $
                    154,560Retained
      earnings
                    
                    
                    223,860
                    
                    
                    
                    
                    202,535
                    
                    
                    
                    
                    220,917Accumulated
      other comprehensive loss
                    
                    
                    (1,664
                    )
                    
                    
                    
                    (1,790
                    )
                    
                    
                    
                    (1,674
                    )Total
      Common Stock Equity
                    
                    
                    423,637
                    
                    
                    
                    
                    358,628
                    
                    
                    
                    
                    373,803Redeemable
      preferred stock (less current sinking fund
                      requirements)
                    
                    
                    —
                    
                    
                    
                    
                    467
                    
                    
                    
                    
                    467Long-term
      debt
                    
                    
                    389,211
                    
                    
                    
                    
                    389,181
                    
                    
                    
                    
                    309,152Total
      Capitalization
                    
                    
                    812,848
                    
                    
                    
                    
                    748,276
                    
                    
                    
                    
                    683,422Current
      Liabilities:Notes
      payable
                    
                    
                    238,800
                    
                    
                    
                    
                    215,900
                    
                    
                    
                    
                    171,650Notes
      payable – associated companies
                    
                    
                    —
                    
                    
                    
                    
                    89,216
                    
                    
                    
                    
                    —Accounts
      payable
                    
                    
                    37,172
                    
                    
                    
                    
                    58,483
                    
                    
                    
                    
                    92,422Accounts
      payable – associated companies
                    
                    
                    4,348
                    
                    
                    
                    
                    —
                    
                    
                    
                    
                    4,563Advance
      customer billings
                    
                    
                    —
                    
                    
                    
                    
                    25,548
                    
                    
                    
                    
                    —Current
      portion of preferred stock
                    
                    
                    —
                    
                    
                    
                    
                    160
                    
                    
                    
                    
                    160Wages
      and compensation accrued
                    
                    
                    12,304
                    
                    
                    
                    
                    12,197
                    
                    
                    
                    
                    11,880Dividends
      payable
                    
                    
                    8,677
                    
                    
                    
                    
                    8,407
                    
                    
                    
                    
                    8,306Customer
      deposits
                    
                    
                    13,045
                    
                    
                    
                    
                    14,020
                    
                    
                    
                    
                    13,960Interest
      accrued
                    
                    
                    10,333
                    
                    
                    
                    
                    10,094
                    
                    
                    
                    
                    9,888Taxes
      accrued
                    
                    
                    32,957
                    
                    
                    
                    
                    10,434
                    
                    
                    
                    
                    33,345Deferred
      income taxes current
                    
                    
                    —
                    
                    
                    
                    
                    7,781
                    
                    
                    
                    
                    —Other
                    
                    
                    8,983
                    
                    
                    
                    
                    8,720
                    
                    
                    
                    
                    6,804Total
      Current Liabilities
                    
                    
                    366,619
                    
                    
                    
                    
                    460,960
                    
                    
                    
                    
                    352,978Deferred
      Credits and Other Liabilities:Deferred
      income taxes
                    
                    
                    232,099
                    
                    
                    
                    
                    222,379
                    
                    
                    
                    
                    234,122Unamortized
      investment tax credits
                    
                    
                    3,863
                    
                    
                    
                    
                    3,973
                    
                    
                    
                    
                    4,086Pension
      and postretirement benefit costs
                    
                    
                    103,226
                    
                    
                    
                    
                    98,513
                    
                    
                    
                    
                    67,515Asset
      retirement obligations
                    
                    
                    27,622
                    
                    
                    
                    
                    26,817
                    
                    
                    
                    
                    26,835Regulatory
      liabilities
                    
                    
                    42,506
                    
                    
                    
                    
                    42,191
                    
                    
                    
                    
                    64,027Other
                    
                    
                    22,860
                    
                    
                    
                    
                    22,706
                    
                    
                    
                    
                    23,198Total
      Deferred Credits and Other Liabilities
                    
                    
                    432,176
                    
                    
                    
                    
                    416,579
                    
                    
                    
                    
                    419,783Total
      Capitalization and Liabilities
                    
                    $
                    1,611,643
                    
                    
                    
                    $
                    1,625,815
                    
                    
                    
                    $
                    1,456,183See
      Notes to Financial Statements.
















4





LACLEDE
GAS COMPANY


STATEMENTS
OF CASH FLOWS


(UNAUDITED)




Six
      Months EndedMarch
      31,(Thousands)
                                          
                                          2009
                                          
                                          
                                          
                                          2008Operating
      Activities:Net
      Income
                                          
                                          $
                                          38,383
                                          
                                          
                                          
                                          $
                                          41,095Adjustments
      to reconcile net income to net cash
                                            provided
      by (used in) operating activities:Depreciation
      and amortization
                                          
                                          
                                          18,299
                                          
                                          
                                          
                                          
                                          17,476Deferred
      income taxes and investment tax credits
                                          
                                          
                                          (4,999
                                          )
                                          
                                          
                                          
                                          (2,971
                                          )Other
      – net
                                          
                                          
                                          3,091
                                          
                                          
                                          
                                          
                                          1,097Changes
      in assets and liabilities:Accounts
      receivable – net
                                          
                                          
                                          (65,598
                                          )
                                          
                                          
                                          
                                          (111,550
                                          )Unamortized
      purchased gas adjustments
                                          
                                          
                                          24,520
                                          
                                          
                                          
                                          
                                          8,448Deferred
      purchased gas costs
                                          
                                          
                                          (54,990
                                          )
                                          
                                          
                                          
                                          53,094Accounts
      payable
                                          
                                          
                                          (15,081
                                          )
                                          
                                          
                                          
                                          47,836Delayed
      customer billings – net
                                          
                                          
                                          (60,761
                                          )
                                          
                                          
                                          
                                          (65,857
                                          )Taxes
      accrued
                                          
                                          
                                          22,491
                                          
                                          
                                          
                                          
                                          14,135Natural
      gas stored underground
                                          
                                          
                                          136,254
                                          
                                          
                                          
                                          
                                          106,468Other
      assets and liabilities
                                          
                                          
                                          26,575
                                          
                                          
                                          
                                          
                                          13,300Net
      cash provided by operating activities
                                          
                                          
                                          68,184
                                          
                                          
                                          
                                          
                                          122,571Investing
      Activities:Capital
      expenditures
                                          
                                          
                                          (25,653
                                          )
                                          
                                          
                                          
                                          (26,407
                                          )Other
      investments
                                          
                                          
                                          (1,279
                                          )
                                          
                                          
                                          
                                          237Net
      cash used in investing activities
                                          
                                          
                                          (26,932
                                          )
                                          
                                          
                                          
                                          (26,170
                                          )Financing
      Activities:Maturity
      of First Mortgage Bonds
                                          
                                          
                                          —
                                          
                                          
                                          
                                          
                                          (40,000
                                          )Repayment
      of short-term debt - net
                                          
                                          
                                          (66,316
                                          )
                                          
                                          
                                          
                                          (39,750
                                          )Changes
      in book overdrafts
                                          
                                          
                                          419
                                          
                                          
                                          
                                          
                                          —Dividends
      paid
                                          
                                          
                                          (16,782
                                          )
                                          
                                          
                                          
                                          (16,079
                                          )Issuance
      of common stock to Laclede Group
                                          
                                          
                                          41,256
                                          
                                          
                                          
                                          
                                          1,967Excess
      tax benefits from stock-based compensation
                                          
                                          
                                          630
                                          
                                          
                                          
                                          
                                          17Preferred
      stock reacquired
                                          
                                          
                                          (627
                                          )
                                          
                                          
                                          
                                          (160
                                          )Other
                                          
                                          
                                          (116
                                          )
                                          
                                          
                                          
                                          —Net
      cash used in financing activities
                                          
                                          
                                          (41,536
                                          )
                                          
                                          
                                          
                                          (94,005
                                          )Net
      (Decrease) Increase in Cash and Cash Equivalents
                                          
                                          
                                          (284
                                          )
                                          
                                          
                                          
                                          2,396Cash
      and Cash Equivalents at Beginning of Period
                                          
                                          
                                          3,163
                                          
                                          
                                          
                                          
                                          2,454Cash
      and Cash Equivalents at End of Period
                                          
                                          $
                                          2,879
                                          
                                          
                                          
                                          $
                                          4,850Supplemental
      Disclosure of Cash Paid (Refunded) During the Period for:Interest
                                          
                                          $
                                          16,375
                                          
                                          
                                          
                                          $
                                          17,880Income
      taxes
                                          
                                          
                                          (5,513
                                          )
                                          
                                          
                                          
                                          6,925See
      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 Exhibit
99.1 of the Laclede Group’s Fiscal Year 2008 Form 10-K.


Laclede
Gas is a regulated natural gas distribution utility having a material seasonal
cycle. As a result, these interim statements of income for Laclede Gas are not
necessarily indicative of annual results or representative of succeeding
quarters of the fiscal year. Due to the seasonal nature of the business of
Laclede Gas, earnings are typically concentrated in the November through April
period, which generally corresponds with the heating season.


BASIS OF PRESENTATION - In
compliance with generally accepted accounting principles, transactions between
Laclede Gas and its affiliates as well as intercompany balances on Laclede Gas’
Balance Sheet have not been eliminated from the Laclede Gas financial
statements.


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


REVENUE RECOGNITION - Laclede
Gas reads meters and bills its customers on monthly cycles. The Utility records
its utility operating revenues from gas sales and transportation services on an
accrual basis that includes estimated amounts for gas delivered, but not yet
billed. The accruals for unbilled revenues are reversed in the subsequent
accounting period when meters are actually read and customers are billed. The
amounts of accrued unbilled revenues at March 31, 2009 and 2008, for
the Utility, were $26.2 million and $31.9 million, respectively. The amount of
accrued unbilled revenue at September 30, 2008 was $13.5
million.


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


GROSS RECEIPTS TAXES - Gross
receipts taxes associated with Laclede Gas’ natural gas utility service are
imposed on the Utility and billed to its customers. These amounts are recorded
gross in the Statements of Income. Amounts recorded in Utility Operating
Revenues for the quarters ended March 31, 2009 and 2008 were $23.8
million, and $25.2 million, respectively. Amounts recorded in Utility Operating
Revenues for the six months ended March 31, 2009 and 2008 were $38.6
million and $38.2 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
Exhibit
99.1 of the Laclede Group’s Form 10-Kfor the fiscal year ended September 30, 2008 for descriptions of
these plans. In January 2009, shareholders of Laclede Group approved an
amendment to the Restricted Stock Plan for Non-Employee Directors (Plan),
increasing the number of shares of common stock available under the Plan to
150,000 from 50,000. For awards made to its employees, the Utility records its
allocation of compensation cost from Laclede Group with a corresponding increase
to additional paid-in capital.


6


The
amounts of compensation cost recognized for share-based compensation
arrangements are presented below:





Three
      Months Ended
                              
                              Six
      Months EndedMarch
      31,
                              
                              March
      31,(Thousands)
                              
                              2009
                              
                              2008
                              
                              2009
                              
                              2008Total
      compensation cost
                              
                              $
                              1,093
                              
                              $
                              628
                              
                              $
                              1,832
                              
                              $
                              1,168Compensation
      cost capitalized
                              
                              
                              (253
                              )
                              
                              (162
                              )
                              
                              (433
                              )
                              
                              (297
                              )Compensation
      cost recognized in net income
                              
                              
                              840
                              
                              
                              466
                              
                              
                              1,399
                              
                              
                              871Income
      tax benefit recognized in net income
                              
                              
                              (324
                              )
                              
                              (181
                              )
                              
                              (539
                              )
                              
                              (337
                              )Compensation
      cost recognized in net income,net
      of income tax
                              
                              $
                              516
                              
                              $
                              285
                              
                              $
                              860
                              
                              $
                              534





As
of March 31, 2009, there was $6.2 million in unrecognized compensation
cost related to nonvested share-based compensation arrangements that is expected
to be allocated to the Utility over a weighted average period of
2.5 years.


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


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


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


7


In
June 2007, the FASB ratified the consensus reached in Emerging Issues Task
Force (EITF) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends
on Share-Based Payment Awards.” This Issue addresses how an entity should
recognize the tax benefit received on dividends that are (a) paid to employees
holding equity-classified nonvested shares, equity-classified nonvested share
units, or equity-classified outstanding share options and (b) charged to
retained earnings under SFAS No. 123(R). The Task Force reached a consensus that
such tax benefits should be recognized as an increase in additional paid-in
capital. This EITF Issue also addresses how the accounting for these tax
benefits is affected if an entity’s estimate of forfeitures changes in
subsequent periods. With the adoption of this EITF issue on
October 1, 2008, the Utility now records these income tax benefits as
increases to additional paid-in capital. Previously, the Utility recorded these
income tax benefits as reductions to income tax expense. Adoption of this EITF
issue did not have a material effect on the Utility’s financial position or
results of operations.


In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities.” This Statement amends SFAS No. 133,
“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 SFAS No. 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 is effective for
the Utility’s interim and annual financial statements beginning with the second
quarter of fiscal year 2009. The adoption of this standard had no effect on
the Utility’s financial position or results of operations. For disclosures
required pursuant to SFAS No. 161, see Note 4, Derivative
Instruments and Hedging Activities.


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


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


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








2.
            PENSION
      PLANS AND OTHER POSTRETIREMENT
BENEFITS





Pension
Plans





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


Pension
costs for both the quarters ending March 31, 2009 and 2008 were $1.5
million, including amounts charged to construction. Pension costs for both the
six months ended March 31, 2009 and 2008 were $3.1 million, including
amounts charged to construction.


8





The
net periodic pension costs include the following components:





Three
      Months Ended
                      
                      Six
      Months EndedMarch
      31,
                      
                      March
      31,(Thousands)
                      
                      2009
                      
                      2008
                      
                      2009
                      
                      2008Service
      cost – benefits earnedduring
      the period
                      
                      $
                      1,817
                      
                      $
                      3,243
                      
                      $
                      5,302
                      
                      $
                      6,485Interest
      cost on projectedbenefit
      obligation
                      
                      
                      5,229
                      
                      
                      4,670
                      
                      
                      10,497
                      
                      
                      9,340Expected
      return on plan assets
                      
                      
                      (5,234
                      )
                      
                      (5,163
                      )
                      
                      (10,469
                      )
                      
                      (10,325
                      )Amortization
      of prior service cost
                      
                      
                      259
                      
                      
                      272
                      
                      
                      518
                      
                      
                      544Amortization
      of actuarial loss
                      
                      
                      774
                      
                      
                      791
                      
                      
                      1,548
                      
                      
                      1,582Sub-total
                      
                      
                      2,845
                      
                      
                      3,813
                      
                      
                      7,396
                      
                      
                      7,626Regulatory
      adjustment
                      
                      
                      (1,296
                      )
                      
                      (2,280
                      )
                      
                      (4,298
                      )
                      
                      (4,560
                      )Net
      pension cost
                      
                      $
                      1,549
                      
                      $
                      1,533
                      
                      $
                      3,098
                      
                      $
                      3,066





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 six months ended
March 31, 2009 and March 31, 2008.


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





Postretirement
Benefits





Laclede
Gas provides certain life insurance benefits at retirement. Medical insurance is
available after early retirement until age 65. The transition obligation not yet
includible in postretirement benefit cost is being amortized over 20 years.
Postretirement benefit costs for both the quarters ended
March 31, 2009 and 2008 were $1.9 million, including amounts charged
to construction. Postretirement benefit costs for both the six months ended
March 31, 2009 and 2008 were $3.8 million, including amounts charged
to construction.


Net
periodic postretirement benefit costs consisted of the following
components:





Three
      Months Ended
                  
                  Six
      Months EndedMarch
      31,
                  
                  March
      31,(Thousands)
                  
                  2009
                  
                  2008
                  
                  2009
                  
                  2008Service
      cost – benefits earnedduring
      the period
                  
                  $
                  1,283
                  
                  $
                  1,140
                  
                  $
                  2,566
                  
                  $
                  2,280Interest
      cost on accumulatedpostretirement
      benefit obligation
                  
                  
                  1,170
                  
                  
                  977
                  
                  
                  2,340
                  
                  
                  1,954Expected
      return on plan assets
                  
                  
                  (594
                  )
                  
                  (509
                  )
                  
                  (1,188
                  )
                  
                  (1,019
                  )Amortization
      of transition obligation
                  
                  
                  34
                  
                  
                  34
                  
                  
                  68
                  
                  
                  68Amortization
      of prior service cost
                  
                  
                  (582
                  )
                  
                  (582
                  )
                  
                  (1,164
                  )
                  
                  (1,164
                  )Amortization
      of actuarial loss
                  
                  
                  877
                  
                  
                  746
                  
                  
                  1,754
                  
                  
                  1,492Sub-total
                  
                  
                  2,188
                  
                  
                  1,806
                  
                  
                  4,376
                  
                  
                  3,611Regulatory
      adjustment
                  
                  
                  (277
                  )
                  
                  105
                  
                  
                  (555
                  )
                  
                  210Net
      postretirement benefit cost
                  
                  $
                  1,911
                  
                  $
                  1,911
                  
                  $
                  3,821
                  
                  $
                  3,821





9





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.
            FAIR
      VALUE MEASUREMENTS





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


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





As
      of March 31, 2009(Thousands)
              
              
              Quoted
                Prices
      in
                Active
                Markets
                (Level
      1)
              
              
              Significant
                Observable
                Inputs
                (Level
      2)
              
              
              Significant
                Unobservable
                Inputs
                (Level
      3)
              
              
              Effects
      of Netting and Cash Margin Receivables
                /Payables
              
              
              TotalAssetsMarketable
      securities
              
              $
              8,325
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              8,325Derivative
      instruments
              
              
              5,243
              
              
              —
              
              
              —
              
              
              23,660
              
              
              28,903Total
              
              $
              13,568
              
              $
              —
              
              $
              —
              
              $
              23,660
              
              $
              37,228LiabilitiesDerivative
      instruments
              
              $
              112,215
              
              $
              —
              
              $
              —
              
              $
              (112,215
              )
              $
              —





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





10








4.
            DERIVATIVE
      INSTRUMENTS AND HEDGING ACTIVITIES





Laclede
Gas has a risk management policy that allows for the purchase of natural gas
derivative instruments with the goal of managing price risk associated with
purchasing natural gas on behalf of its customers. This policy prohibits
speculation. The policy permits the Utility to hedge up to 70% of its normal
volumes purchased for up to a 36-month period. Costs and cost reductions,
including carrying costs, associated with the Utility’s use of natural gas
derivative instruments are allowed to be passed on to the Utility’s customers
through the operation of its Purchased Gas Adjustment (PGA) Clause, through
which the MoPSC allows the Utility to recover gas supply costs, subject to
prudence review. Accordingly, Laclede Gas does not expect any adverse earnings
impact as a result of the use of these derivative instruments. The Utility does
not designate these instruments as hedging instruments under SFAS No. 133
because gains or losses associated with the use of these derivative instruments
are deferred and recorded as regulatory assets or regulatory liabilities
pursuant to SFAS No. 71, “Accounting for the Effects of Certain Types of
Regulation,” and, as a result, have no direct impact on the Statements of
Income. The timing of the operation of the PGA clause may cause interim
variations in short-term cash flows because the Utility is subject to cash
margin requirements associated with changes in the values of these instruments.
Nevertheless, carrying costs associated with such requirements are recovered
through the PGA Clause.


From
time to time, Laclede Gas purchases NYMEX futures contracts to help stabilize
operating costs associated with forecasted purchases of gasoline and diesel
fuels used to power vehicles and equipment used in the course of its business.
At March 31, 2009, Laclede Gas held 0.8 million gallons of gasoline
futures contracts at an average price of $1.32 per gallon and 0.1 million
gallons of heating oil futures contracts (to hedge diesel fuel purchases) at an
average price of $1.26 per gallon. Most of these futures contracts, the longest
of which extends to 2010, are designated as cash flow hedges of forecasted
transactions pursuant to SFAS No. 133. The gains or losses on these derivative
instruments are not subject to the Utility’s PGA Clause.


Derivative
instruments designated as cash flow hedges of forecasted transactions are
recognized on the Balance Sheets at fair value and the change in the fair value
of the effective portion of these hedge instruments is recorded, net of tax, in
Other Comprehensive Income (OCI). Accumulated Other Comprehensive Income (AOCI)
is a component of Total Common Stock Equity. Amounts are reclassified from AOCI
into earnings when the hedged items affect net income, using the same revenue or
expense category that the hedged item impacts. Based on market prices at
March 31, 2009, it is expected that approximately $0.1 million of
pre-tax unrealized gains will be reclassified into the Statement of Income
during the next twelve months. Cash flows from hedging transactions are
classified in the same category as the cash flows from the items that are being
hedged in the Statements of Cash Flows.


The
Utility’s derivative instruments consist primarily of NYMEX positions. The NYMEX
is the primary national commodities exchange on which natural gas derivatives
are traded. NYMEX-traded contracts are supported by the financial and credit
quality of the clearing members of the NYMEX and have nominal credit risk. Open
NYMEX natural gas futures positions at March 31, 2009 were as
follows:





MMBtu
                    (millions)
                  
                  Avg.
      Price
                    Per
                    MMBtuOpen
      long futures positionsFiscal
      2009
                  
                  8.53
                  
                  $
                  8.59Fiscal
      2010
                  
                  14.55
                  
                  
                  8.78Fiscal
      2011
                  
                  6.58
                  
                  
                  8.55Fiscal
      2012
                  
                  0.60
                  
                  
                  8.31





11





At
March 31, 2009, Laclede Gas also had 17.5 million MMBtu of other price risk
mitigation in place through the use of NYMEX natural gas option-based
strategies.





The
      Effect of Derivative Instruments on the Statements of Income and
      Comprehensive Income(Thousands)
              Three
      Months Ended March 31, 2009Derivatives
      in SFAS No. 133 Cash Flow Hedging Relationships
              
              Amount
      of Gain/(Loss) Recognized in OCI on Derivative (Effective
      Portion)
              
              Location
      of Gain/(Loss) Reclassified from Accumulated OCI Into Income
                (Effective
      Portion)
              
              Amount
      of Gain/(Loss) Reclassified from Accumulated OCI Into Income (Effective
      Portion)
              
              Location
      of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion And
      Amount Excluded from Effectiveness Testing)
              
              Amount
      of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and
      Amount Excluded from Effectiveness Testing)NYMEX
      gasoline and heating oil contracts
              
              $
              106
              
              Other
      Regulated
                Gas
      Distribution
                Operating
      Expenses
              
              $
              —
              
              Other
      Regulated
                Gas
      Distribution
                Operating
      Expenses
              
              $
              31





Derivatives
      Not Designated as Hedging Instruments under SFAS No. 133*
              
              Location
      of Gain/(Loss) Recognized in Income on Derivative
              
              Amount
      of Gain/(Loss) Recognized in Income on DerivativeNYMEX
      gasoline and heating oil contracts
              
              Other
      Income and (Income
                Deductions)
      – Net
              
              
              $
              7





*
            Gains
      and losses on Laclede Gas’ NYMEX natural gas derivative instruments, which
      are not designated as hedging instruments under SFAS No. 133, are deferred
      and recorded as regulatory assets or regulatory liabilities pursuant to
      SFAS No. 71. These gains and losses are excluded from the table above
      because they have no direct impact on the Statement of
    Income.





12





Fair
      Value of Derivative Instruments in the Balance Sheet at March 31,
      2009Asset
      Derivatives
              
              Liability
      Derivatives(Thousands)
              
              Balance
      Sheet Location
              
              Fair
                Value
              *
              Balance
      Sheet Location
              
              Fair
                Value
              *Derivatives
      designated as hedging instruments under SFAS No. 133NYMEX
      gasoline and
                heating
      oil contracts
              
              Derivative
      Instrument Assets
              $
              137
              
              Derivative
      Instrument Assets
              $
              —Derivatives
      not designated as hedging instruments under
                SFAS
      No. 133NYMEX
      natural gas contracts
              
              Derivative
      Instrument Assets
              
              5,099
              
              Derivative
      Instrument Assets
              
              112,215NYMEX
      gasoline and
                heating
      oil contracts
              
              Derivative
      Instrument Assets
              
              7
              
              Derivative
      Instrument Assets
              
              —Sub-total
              
              
              
              5,106
              
              
              
              112,215Total
      derivatives
              
              
              $
              5,243
              
              
              $
              112,215





*
            The
      fair values of Asset Derivatives and Liability Derivatives exclude the
      fair value of cash margin receivables or payables with counterparties
      subject to netting arrangements. At March 31, 2009, the amounts
      excluded were $135.9 million in receivables, all of which were associated
      with NYMEX contracts. Fair value amounts of derivative contracts
      (including the fair value amounts of cash margin receivables and payables)
      for which there is a legal right to set off are presented net on the
      Balance Sheet. As such, the gross balances presented in the table above
      are not indicative of the Utility’s net economic exposure. Refer to Note 3, Fair Value Measurements, for information on the
      valuation of derivative
instruments.








5.
            OTHER
      INCOME AND (INCOME DEDUCTIONS) –
NET








Three
      Months Ended
                        
                        Six
      Months EndedMarch
      31,
                        
                        March
      31,(Thousands)
                        
                        2009
                        
                        2008
                        
                        2009
                        
                        2008Interest
      income
                        
                        $
                        525
                        
                        $
                        389
                        
                        $
                        1,535
                        
                        $
                        1,544Other
      income
                        
                        
                        775
                        
                        
                        3
                        
                        
                        1,186
                        
                        
                        540Other
      income deductions
                        
                        
                        (1,264
                        )
                        
                        (915
                        )
                        
                        (2,075
                        )
                        
                        (575
                        )Other
      Income and (Income Deductions) – Net
                        
                        $
                        36
                        
                        $
                        (523
                        )
                        $
                        646
                        
                        $
                        1,509





The
increase in Other Income and (Income Deductions) – Net for the quarter ended
March 31, 2009, compared with the quarter ended
March 31, 2008, was primarily due to higher net investment
income.


The
decrease in Other Income and (Income Deductions) – Net for the six months ended
March 31, 2009, compared with the six months ended
March 31, 2008, was primarily due to higher net investment losses and
the effect of proceeds received during the six months ended March 31, 2008
related to the Company’s interest, as a policyholder, in the sale of a mutual
insurance company, partially offset by other variations.


13








6.
            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 EndedMarch
      31, 2009Operating
      revenues
                
                $
                440,468
                
                $
                599
                
                $
                —
                
                $
                441,067Net
      income
                
                
                22,177
                
                
                9
                
                
                —
                
                
                22,186Total
      assets
                
                
                1,609,714
                
                
                1,929
                
                
                —
                
                
                1,611,643Six
      Months EndedMarch
      31, 2009Operating
      revenues
                
                $
                798,569
                
                $
                1,196
                
                $
                —
                
                $
                799,765Net
      income
                
                
                38,333
                
                
                50
                
                
                —
                
                
                38,383Total
      assets
                
                
                1,609,714
                
                
                1,929
                
                
                —
                
                
                1,611,643Three
      Months EndedMarch
      31, 2008Operating
      revenues
                
                $
                507,089
                
                $
                740
                
                $
                —
                
                $
                507,829Net
      income (loss)
                
                
                25,340
                
                
                (40
                )
                
                —
                
                
                25,300Total
      assets
                
                
                1,454,369
                
                
                1,814
                
                
                —
                
                
                1,456,183Six
      Months EndedMarch
      31, 2008Operating
      revenues
                
                $
                827,981
                
                $
                1,526
                
                $
                —
                
                $
                829,507Net
      income (loss)
                
                
                41,097
                
                
                (2
                )
                
                —
                
                
                41,095Total
      assets
                
                
                1,454,369
                
                
                1,814
                
                
                —
                
                
                1,456,183








7.
            COMMITMENTS
      AND CONTINGENCIES





Commitments





Laclede
Gas has entered into various contracts, expiring on dates through 2017, for the
storage, transportation, and supply of natural gas. Minimum payments required
under the contracts in place at March 31, 2009 are estimated at
approximately $381 million. Additional contracts are generally entered into
prior to or during the heating season. Laclede Gas recovers its costs from
customers in accordance with the PGA Clause.





Leases
and Guarantees





Laclede
Gas has several operating leases for the rental of vehicles that contain
provisions requiring Laclede Gas to guarantee certain amounts related to the
residual value of the leased property. These leases have various terms, the
longest of which extends into 2014. At March 31, 2009, the maximum
guarantees under these leases are $1.8 million. As of March 31, 2009,
the Utility believes that it is unlikely that it will be subject to the maximum
payment amount because it estimates that the residual value of the leased
vehicles will be adequate to satisfy most of the guaranteed amounts. At
March 31, 2009, the carrying value of the liability recognized for
these guarantees was $0.3 million.


14





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 Exhibit
99.1 of the Laclede Group’s Fiscal Year 2008 Form 10-K
for information relative to environmental matters generally.


As
reported in the Utility’s Form 10-K
for the fiscal year ended September 30, 2008, Laclede Gas has
identified three sites on which manufactured gas plant operations took place
where the Utility faces the risk of environmental liabilities. One site is
currently owned by an agency of the City of Saint Louis (the owner agency). An
affiliated City agency (the development agency) has selected a developer with
whom it is negotiating a final site development contract which contemplates
remediation and redevelopment of the property. In conjunction with the
redevelopment, Laclede Gas and another former site owner have entered into an
agreement with the owner and development agencies as well as their parent
agency, the private developer of the property, and an environmental consultant
(Remediation Agreement). Under the Remediation Agreement, the development agency
and the private developer agreed to remediate the site, and Laclede Gas and the
other former owner are to be released by the involved City agencies, the private
developer, and the environmental consultant from certain liabilities for the
past and current environmental condition of the property. Also under that
agreement Laclede Gas and the former site owner agreed to pay, at the closing of
the transaction, a small percentage of the cost of remediation (subject to a
maximum amount). The transactions contemplated by the Remediation Agreement are
expected to close during the fourth quarter of fiscal year 2009. The amount
Laclede Gas expects to pay under the Remediation Agreement is not material and
will not have a material impact on the future financial condition or results of
operations of Laclede Gas.


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


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


In
the December 31, 2007 filing, the MoPSC Staff also raised questions
regarding whether certain sales and capacity release transactions subject to the
Federal Energy Regulatory Commission (FERC)’s oversight were consistent with the
FERC’s regulations and policies regarding capacity release. 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, the Laclede Group has provided the FERC Staff with a report
regarding compliance of sales and capacity release activities with the FERC’s
regulations and policies. On July 23, 2008, the FERC Staff requested
additional information which Laclede Group provided on August 22, 2008
and September 2, 2008. On February 11, 2009, the FERC Staff
submitted follow-up questions to the Laclede Group’s August and
September 2008 responses, to which Laclede Group responded on
February 25, 2009. On March 2, 2009, FERC Staff requested
clarification of certain aspects of Laclede Group’s February 25, 2009
response, which Laclede Group clarified on March 4, 2009.


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


15


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





LACLEDE
GAS COMPANY




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




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





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




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




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














16





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 weather
mitigation rate design lessens the impact of weather volatility on Laclede Gas
customers during cold winters and stabilizes the Utility’s earnings by
recovering fixed costs more evenly during the heating season. Due to the
seasonal nature of the business of Laclede Gas, earnings are typically
concentrated in the November through April period, which generally corresponds
with the heating season.





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





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





Quarter
Ended March 31, 2009





Earnings





Laclede
Gas’ net income for the quarter ended March 31, 2009 was $22.2
million, compared with net income of $25.3 million for the quarter ended
March 31, 2008. The decrease in net income was primarily due to the
following factors, quantified on a pre-tax basis:





•
            increases
      in operation and maintenance expenses, excluding the provision for
      uncollectible accounts, totaling $4.0 million; and,•
            the
      effect of the recognition of previously unrecognized tax benefits and the
      reversal of related expenses recorded during the quarter ended
      March 31, 2008, totaling
  $1.1 million.





17





These
factors were partially offset by:





•
            a
      lower provision for uncollectible accounts totaling $1.3
      million;•
            higher
      income from off-system sales and capacity release totaling $1.0 million;
      and,•
            higher
      Infrastructure System Replacement Surcharge (ISRS) revenues totaling $0.9
      million.





Utility
Operating Revenues





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





Utility
Operating Revenues for the quarter ended March 31, 2009 were $440.5
million, or $66.6 million less than the same period last year. Temperatures
experienced in the Utility’s service area during the quarter were 9.3% warmer
than the same quarter last year and 6.2% warmer than normal. Total system therms
sold and transported were 0.40 billion for the quarter ended
March 31, 2009 compared with 0.45 billion for the same period last
year. Total off-system therms sold and transported were 0.08 billion for the
quarter ended March 31, 2009 compared with 0.06 billion for the same
period last year. The decrease in Utility Operating Revenues was primarily
attributable to the following factors:





(Millions)Lower
      system sales volumes and other variations
                          
                          $
                          (43.8
                          )Lower
      prices charged for off-system sales
                          
                          
                          (38.3
                          )Higher
      off-system sales volumes
                          
                          
                          24.5Lower
      wholesale gas costs passed on to Utility customers (subject to prudence
      review by the MoPSC)
                          
                          
                          (9.9
                          )Higher
      ISRS revenues
                          
                          
                          0.9Total
      Variation
                          
                          $
                          (66.6
                          )





Utility
Operating Expenses





Utility
Operating Expenses for the quarter ended March 31, 2009 decreased
$61.9 million from the same quarter last year. Natural and propane gas expense
decreased $64.0 million, or 17.0%, from last year’s level, primarily
attributable to decreased volumes purchased for sendout, lower rates charged by
our suppliers, and lower off-system gas expense. Other operation and maintenance
expenses increased $2.7 million, or 6.0%, primarily due to higher maintenance
charges, increases in compensation expenses, and higher group insurance charges,
partially offset by a lower provision for uncollectible accounts. Taxes, other
than income taxes, decreased $1.0 million, or 3.6%, primarily due to decreased
gross receipts taxes (attributable to lower revenues).





Other
Income and (Income Deductions) - Net





Other
Income and (Income Deductions) – Net increased $0.6 million primarily due to
higher net investment income.





Interest
Charges





The
$0.2 million decrease in interest charges was primarily due to lower interest on
short-term debt. This decrease was largely offset by an increase in interest on
long-term debt, primarily attributable to the issuance of $80.0 million
principal amount of 6.35% First Mortgage Bonds on September 23, 2008.
Average short-term interest rates were 1.0% for the quarter ended
March 31, 2009 compared with 4.1% for the quarter ended
March 31, 2008. Average short-term borrowings were $284.1 million for
the quarter ended March 31, 2009 compared with $217.5 million for the
quarter ended March 31, 2008.


18


Income
Taxes





The
$0.7 million decrease in income taxes was primarily due to lower pre-tax income,
partially offset by the recognition of previously unrecognized tax benefits
recorded during the quarter ended March 31, 2008, pursuant to
Financial Accounting Standards Board Interpretation No. 48 (FIN 48), “Accounting
for Uncertainty in Income Taxes.”





Six
Months Ended March 31, 2009





Earnings





Laclede
Gas’ net income for the six months ended March 31, 2009 was $38.4
million, compared with net income of $41.1 million for the six months ended
March 31, 2008. The decrease in net income was primarily due to the
following factors, quantified on a pre-tax basis:





•
            increases
      in operation and maintenance expenses, excluding the provision for
      uncollectible accounts, totaling $5.2 million; and,•
            the
      effect of the recognition of previously unrecognized tax benefits and the
      reversal of related expenses recorded during the six months ended
      March 31, 2008, totaling
  $1.1 million.





These
factors were partially offset by:





•
            higher
      ISRS revenues totaling $1.7 million;•
            higher
      income from off-system sales and capacity release totaling $1.2 million;
      and,•
            a
      lower provision for uncollectible accounts totaling $1.1
      million.





Utility
Operating Revenues





Utility
Operating Revenues for the six months ended March 31, 2009 were $798.6
million, or $29.4 million less than the same period last year. Temperatures
experienced in the Utility’s service area during the six months ended
March 31, 2009 were 0.8% warmer than the same period last year and
1.7% warmer than normal. Total system therms sold and transported were 0.71
billion for the six months ended March 31, 2009 compared with 0.72
billion for the same period last year. Total off-system therms sold and
transported were 0.12 billion for the six months ended March 31, 2009
compared with 0.11 billion for the same period last year. The decrease in
Utility Operating Revenues was primarily attributable to the following
factors:





(Millions)Lower
      prices charged for off-system sales
                            
                            $
                            (36.5
                            )Higher
      off-system sales volumes
                            
                            
                            12.8Lower
      system sales volumes and other variations
                            
                            
                            (5.8
                            )Higher
      ISRS revenues
                            
                            
                            1.7Lower
      wholesale gas costs passed on to Utility customers (subject to prudence
      review by the MoPSC)
                            
                            
                            (1.6
                            )Total
      Variation
                            
                            $
                            (29.4
                            )





19





Utility
Operating Expenses





Utility
Operating Expenses for the six months ended March 31, 2009 decreased
$26.4 million from the same period last year. Natural and propane gas expense
decreased $32.0 million, or 5.3%, from last year’s level, primarily attributable
to lower off-system gas expense, decreased volumes purchased for sendout, and
lower rates charged by our suppliers. Other operation and maintenance expenses
increased $4.1 million, or 4.7%, primarily due to higher maintenance charges,
increases in compensation expenses, and higher group insurance charges,
partially offset by a lower provision for uncollectible accounts.





Other
Income and (Income Deductions) - Net





Other
Income and (Income Deductions) – Net decreased $0.9 million primarily due to
higher net investment losses and the effect of proceeds received during the six
months ended March 31, 2008 related to the Company’s interest, as a
policyholder, in the sale of a mutual insurance company, partially offset by
other variations.





Interest
Charges





The
minor decrease in interest charges was primarily due to lower interest on
short-term debt, largely offset by an increase in interest on long-term debt,
primarily attributable to the issuance of $80.0 million principal amount of
6.35% First Mortgage Bonds on September 23, 2008. Average short-term
interest rates were 2.1% for the six months ended March 31, 2009
compared with 4.7% for the six months ended March 31, 2008. Average
short-term borrowings were $310.0 million for the six months ended
March 31, 2009 compared with $236.4 million for the six months ended
March 31, 2008.





Income
Taxes





The
$1.0 million decrease in income taxes was primarily due to lower pre-tax income
and the effect of various property-related items, partially offset by the
recognition of previously unrecognized tax benefits recorded during the six
months ended March 31, 2008 pursuant to FIN 48.





Labor
Agreement





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








20





REGULATORY
MATTERS





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





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





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





In
the December 31, 2007 filing, the MoPSC Staff also raised questions
regarding whether certain sales and capacity release transactions, subject to
the Federal Energy Regulatory Commission (FERC)’s oversight, were consistent
with the FERC’s regulations and policies regarding capacity release. Laclede
Group commenced an internal review of the questions raised by the MoPSC Staff
and notified the FERC Staff that it took this action. Subsequently, as a result
of the internal review, Laclede Group has provided the FERC Staff with a report
regarding compliance of sales and capacity release activities with the FERC’s
regulations and policies. On July 23, 2008, the FERC Staff requested
additional information, which Laclede Group provided on
August 22, 2008 and September 2, 2008. On
February 11, 2009, the FERC Staff submitted follow-up questions to the
Laclede Group’s August and September 2008 responses, to which Laclede Group
responded on February 25, 2009. On March 2, 2009, FERC Staff
requested clarification of certain aspects of Laclede Group’s
February 25, 2009 response, which Laclede Group clarified on
March 4, 2009.





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





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


21





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. Our critical accounting policies used in the preparation of our
Financial Statements are described in Exhibit
99.1 of the Laclede Group’s Form 10-K
for the fiscal year ended September 30, 2008 and include the
following:





•
            Allowances
      for doubtful accounts•
            Employee
      benefits and postretirement obligations•
            Regulated
      operations





There
were no significant changes to these critical accounting policies during the six
months ended March 31, 2009. For discussion of other significant
accounting policies, see Note 1 to the Financial Statements included in Exhibit
99.1 of the Laclede Group’s Form 10-K
for the fiscal year ended September 30, 2008.








ACCOUNTING
PRONOUNCEMENTS





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








FINANCIAL
CONDITION





CREDIT
RATINGS





As
of March 31, 2009, credit ratings for outstanding securities for
Laclede Gas issues were as follows:





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





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





CASH
FLOWS





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


22





Net
cash provided by operating activities for the six months ended
March 31, 2009 was $68.2 million, compared with $122.6 million for the
same period last year. The difference is primarily attributable to variations
associated with the timing of the collections of gas cost under the Utility’s
PGA Clause, including the effects of this year’s increases in net cash payments
for margin deposits associated with the Utility’s use of natural gas derivative
instruments. These variations were partially offset by reduced cash payments to
Laclede Group for the Utility’s allocation of income taxes this
year.





Net
cash used in investing activities for the six months ended
March 31, 2009 was $26.9 million compared with $26.2 million for the
six months ended March 31, 2008. Cash used in investing activities
primarily reflected capital expenditures in both periods.





Net
cash used in financing activities was $41.5 million for the six months ended
March 31, 2009 compared with $94.0 million for the six months ended
March 31, 2008. The variation primarily reflects the effect of the
maturity of long-term debt last year and the sale of additional shares of common
stock to Laclede Group this year, partially offset by increases in net
repayments of short-term debt this year.








LIQUIDITY
AND CAPITAL RESOURCES





Short-term
Debt





As
indicated above, the Utility’s short-term borrowing requirements typically peak
during the colder months. These short-term cash requirements can be met through
the sale of commercial paper supported by lines of credit with banks. Laclede
Gas has a syndicated line of credit in place of $320 million from 10 banks, with
the largest portion provided by a single bank being 17.5%. This line expires in
December 2011. In November 2008, the Utility established a seasonal
line of credit of $75 million, which expired in March 2009. Including both
lines of credit, the largest portion provided by a single bank was 26.8%. During
the six months ended March 31, 2009, Laclede Gas utilized both its
syndicated line of credit and commercial paper for short-term funding.
Commercial paper outstanding at March 31, 2009 was
$198.8 million, while outstanding bank line advances were $40.0 million.
The weighted average interest rate on these short-term borrowings was 0.7% per
annum at March 31, 2009. Based on total short-term borrowings at
March 31, 2009, a change in interest rate of 100 basis points would
increase or decrease pre-tax earnings and cash flows by approximately $2.4
million on an annual basis. Portions of such increases or decreases may be
offset through the application of PGA carrying costs. Although Laclede Gas
borrowed funds from Laclede Group from time to time within the six months ended
March 31, 2009, there were no such borrowings outstanding at the end
of the period. The Utility had short-term borrowings (including borrowings from
Laclede Group) aggregating to a maximum of $386.4 million at any one time during
the six months ended March 31, 2009. Excluding borrowings from Laclede
Group, the Utility’s maximum borrowings for the period were $309.9
million.





Laclede
Gas’ lines of credit include covenants limiting total debt, including short-term
debt, to no more than 70% of total capitalization and requiring earnings before
interest, taxes, depreciation, and amortization (EBITDA) to be at least 2.25
times interest expense. On March 31, 2009, total debt was 60% of total
capitalization. For the twelve months ended March 31, 2009, EBITDA was
3.88 times interest expense.





Long-term
Debt





At
March 31, 2009, Laclede Gas had fixed-rate long-term debt totaling
$390 million. While these long-term debt issues are fixed-rate, they are subject
to changes in fair value as market interest rates change. However, increases or
decreases in fair value would impact earnings and cash flows only if Laclede Gas
were to reacquire any of these issues in the open market prior to
maturity.


23





Equity
and Shelf Registration





Laclede
Gas has on file with the Securities and Exchange Commission an effective shelf
registration on Form S-3 for issuance of $350 million of First Mortgage Bonds,
unsecured debt, and preferred stock, of which $270 million remains available to
Laclede Gas at this time. The Utility has authority from the MoPSC to issue up
to $500 million in First Mortgage Bonds, unsecured debt, and equity securities,
of which $371.1 million remained available under this authorization as of
March 31, 2009. During the six months ended March 31, 2009,
pursuant to this authority, the Utility sold 1,198 shares of its common stock to
Laclede Group for $41.3 million. The amount, timing, and type of additional
financing to be issued will depend on cash requirements and market
conditions.





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





Guarantees





Laclede
Gas has several operating leases for the rental of vehicles that contain
provisions requiring Laclede Gas to guarantee certain amounts related to the
residual value of the leased property. These leases have various terms, the
longest of which extends into 2014. At March 31, 2009, the maximum
guarantees under these leases were $1.8 million. However, the Utility estimates
that the residual value of the leased vehicles will be adequate to satisfy most
of the guaranteed amounts. At March 31, 2009, the carrying value of
the liability recognized for these guarantees was $0.3 million.





Other





Utility
capital expenditures were $25.7 million for the six months ended
March 31, 2009, compared with $26.4 million for the same period last
year.





Capitalization
at March 31, 2009, consisted of 52.1% common stock equity and 47.9%
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 March 31, 2009 and at September 30, 2008,
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 March 31, 2008 is
presented to facilitate comparison of these items with the corresponding interim
period of the preceding fiscal year.





24





CONTRACTUAL
OBLIGATIONS





As
of March 31, 2009, Laclede Gas had contractual obligations with
payments due as summarized below (in millions):





Payments
      due by periodRemaining
                    
                    
                    
                    
                    
                    Fiscal
      YearsContractual
      Obligations
                    
                    Total
                    
                    Fiscal
      Year
                      2009
                    
                    Fiscal
      Years
                      2010-2011
                    
                    Fiscal
      Years
                      2012-2013
                    
                    2014
      and
                      thereafterPrincipal
      Payments on Long-Term Debt
                    
                    $
                    390.0
                    
                    $
                    —
                    
                    $
                    25.0
                    
                    $
                    25.0
                    
                    $
                    340.0Interest
      Payments on Long-Term Debt
                    
                    
                    521.8
                    
                    
                    12.3
                    
                    
                    48.4
                    
                    
                    45.1
                    
                    
                    416.0Operating
      Leases (a)
                    
                    
                    15.8
                    
                    
                    2.7
                    
                    
                    8.1
                    
                    
                    3.6
                    
                    
                    1.4Purchase
      Obligations – Natural Gas (b)
                    
                    
                    381.1
                    
                    
                    88.8
                    
                    
                    157.5
                    
                    
                    100.8
                    
                    
                    34.0Purchase
      Obligations – Other (c)
                    
                    
                    107.1
                    
                    
                    9.3
                    
                    
                    25.3
                    
                    
                    17.5
                    
                    
                    55.0Total
      (d)
                    
                    $
                    1,415.8
                    
                    $
                    113.1
                    
                    $
                    264.3
                    
                    $
                    192.0
                    
                    $
                    846.4





(a)
                Operating
      lease obligations are primarily for office space, vehicles, and power
      operated equipment. Additional payments will be incurred if renewal
      options are exercised under the provisions of certain
      agreements.(b)
                These
      purchase obligations represent the minimum payments required under
      existing natural gas transportation and storage contracts and natural gas
      supply agreements. These amounts reflect fixed obligations as well as
      obligations to purchase natural gas at future market prices, calculated
      using March 31, 2009 New York Mercantile Exchange futures
      prices. Laclede Gas recovers the costs related to its purchases,
      transportation, and storage of natural gas through the operation of its
      PGA Clause, subject to prudence review; however, variations in the timing
      of collections of gas costs from customers affect short-term cash
      requirements. Additional contractual commitments are generally entered
      into prior to or during the heating season.(c)
                These
      purchase obligations reflect miscellaneous agreements for the purchase of
      materials and the procurement of services necessary for normal
      operations.(d)
                The
      categories of Capital Leases and Other Long-Term liabilities have been
      excluded from the table above because there are no applicable amounts of
      contractual obligations under these categories. Also, commitments related
      to pension and postretirement benefit plans have been excluded from the
      table above. The Utility expects to make contributions to its qualified,
      trusteed pension plans totaling $1.5 million during the remainder of
      fiscal year 2009. Laclede Gas anticipates a $0.7 million contribution
      relative to its non-qualified pension plans during the remainder of fiscal
      year 2009. With regard to the postretirement benefits, the Utility
      anticipates it will contribute $6.6 million to the qualified trusts and
      $0.2 million directly to participants from Laclede Gas’ funds during the
      remainder of fiscal year 2009. For further discussion of the
      Utility’s pension and postretirement benefit plans, refer to Note 2, Pension Plans and Other Postretirement Benefits,
      of the Notes to Financial
Statements.








MARKET
RISK





Laclede
Gas’ commodity price risk, which arises from market fluctuations in the price of
natural gas, is primarily managed through the operation of its PGA Clause. The
PGA Clause allows Laclede Gas to flow through to customers, subject to prudence
review, the cost of purchased gas supplies. The Utility is allowed the
flexibility to make up to three discretionary PGA changes during each year, in
addition to its mandatory November PGA change, so long as such changes are
separated by at least two months. The Utility is able to mitigate, to some
extent, changes in commodity prices through the use of physical storage supplies
and regional supply diversity. Laclede Gas also has a risk management policy
that allows for the purchase of natural gas derivative instruments with the goal
of managing its price risk associated with purchasing natural gas on behalf of
its customers. This policy prohibits speculation. Costs and cost reductions,
including carrying costs, associated with the Utility’s use of natural gas
derivative instruments are allowed to be passed on to the Utility’s customers
through the operation of its PGA Clause. Accordingly, Laclede Gas does not
expect any adverse earnings impact as a result of the use of these derivative
instruments. However, the timing of recovery for cash payments related to margin
requirements may cause short-term cash requirements to vary. Nevertheless,
carrying costs associated with such requirements, as well as other variations in
the timing of collections of gas costs, are recovered through the PGA Clause.
For more information about the Utility’s natural gas derivative instruments, see
Note 4 to the Financial Statements.


25





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








ENVIRONMENTAL
MATTERS





Laclede
Gas owns and operates natural gas distribution, transmission, and storage
facilities, the operations of which are subject to various environmental laws,
regulations, and interpretations. While environmental issues resulting from such
operations arise in the ordinary course of business, such issues have not
materially affected Laclede Gas’ financial position and results of operations.
As environmental laws, regulations, and their interpretations change, however,
Laclede Gas may be required to incur additional costs. For information relative
to environmental matters, see Note 12 to the Financial Statements included in Exhibit
99.1 of the Laclede Group’s Form 10-K
for the fiscal year ended September 30, 2008. For changes during the
six months ended March 31, 2009, see Note 7 to
the Financial Statements of this report.








OFF-BALANCE
SHEET ARRANGEMENTS





Laclede
Gas has no off-balance sheet arrangements.




26