Spire (SR) 10-Q 2008 Q3 Quarterly report

Exhibit 99.1

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

1

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

2

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

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

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

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LACLEDE GAS COMPANY

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These notes are an integral part of the accompanying financial statements of Laclede Gas Company (Laclede Gas or the Utility). In the opinion of Laclede Gas, this interim report includes all adjustments (consisting of only normal recurring accruals) necessary for the fair presentation of the results of operations for the periods presented. This Form 10-Q should be read in conjunction with the Notes to Financial Statements contained in Laclede Gas’ Fiscal Year 2007 Form 10-K.

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

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

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

REVENUE RECOGNITION - Laclede Gas reads meters and bills its customers on monthly cycles. The Utility records its utility operating revenues from gas sales and transportation services on an accrual basis that includes estimated amounts for gas delivered, but not yet billed. The accruals for unbilled revenues are reversed in the subsequent accounting period when meters are actually read and customers are billed. The amounts of accrued unbilled revenues at June 30, 2008 and 2007, for the Utility, were $10.9 million and $7.2 million, respectively. The amount of accrued unbilled revenue at September 30, 2007 was $11.9 million.

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

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

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

GROSS RECEIPTS TAXES - Gross receipts taxes associated with Laclede Gas’ natural gas utility service are imposed on the Utility and billed to its customers. These amounts are recorded gross in the Statements of Income. Amounts recorded in Utility Operating Revenues for the quarters ended June 30, 2008 and 2007 were $9.0 million and $8.1 million, respectively. Amounts recorded in Utility Operating Revenues for the nine months ended June 30, 2008 and 2007 were $47.2 million and $46.9 million, respectively. Gross receipts taxes are expensed by the Utility and included in the Taxes, Other Than Income Taxes line.

STOCK-BASED COMPENSATION - Officers and employees of Laclede Gas, as determined by the Compensation Committee of Laclede Group’s Board of Directors, are eligible to be selected for awards under The Laclede Group 2006 Equity Incentive Plan. For Laclede Group’s non-employee directors, shares are awarded under the Restricted Stock Plan for Non-Employee Directors. Refer to Note 1 of the Financial Statements included in the Utility’s Form 10-K for the fiscal year ended September 30, 2007 for descriptions of these plans. For awards made to its employees, the Utility records its allocation of compensation cost from Laclede Group with a corresponding increase to additional paid-in capital.

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The amounts of compensation cost allocated to the Utility for share-based compensation arrangements are presented below:

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

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

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

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The Statement applies to fair value measurements required under other accounting guidance that require or permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements. The guidance in this Statement does not apply to the Laclede Group’s stock-based compensation plans accounted for in accordance with SFAS No. 123(R), “Share-Based Payment.” Except as described below, SFAS No. 157 is effective for the Utility as of the beginning of fiscal year 2009. In February 2008, the FASB issued two Staff Positions that amend SFAS No. 157. The first FASB Staff Position (FSP), No. FAS 157-1, excludes from the scope of SFAS No. 157 accounting pronouncements that address fair value measurements for purposes of lease classification and measurement. The second FSP, No. FAS 157-2, delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Application of SFAS No. 157 to these items will be effective for Laclede Gas as of the beginning of fiscal year 2010. The Utility is currently evaluating the potential impact of this Statement, as amended by these Staff Positions, on its financial statements.

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

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

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

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

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

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

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

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

2. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

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

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

The net periodic pension costs include the following components:

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

Pursuant to the provisions of the Laclede Gas pension plans, pension obligations may be satisfied by lump-sum cash payments. Pursuant to a Missouri Public Service Commission (MoPSC or Commission) Order, lump-sum payments are recognized as settlements (which can result in gains or losses) only if the total of such payments exceeds 100% of the sum of service and interest costs. No lump sum payments were recognized as settlements during the nine months ended June 30, 2008. Lump sum payments recognized as settlements during the nine months ended June 30, 2007 were $2.8 million.

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

Laclede Gas provides certain life insurance benefits at retirement. Medical insurance is available after early retirement until age 65. The transition obligation not yet includible in postretirement benefit cost is being amortized over 20 years. Postretirement benefit costs for the quarters ended June 30, 2008 and 2007 were $1.9 million and $2.0 million, respectively, including amounts charged to construction. Postretirement benefit costs for the nine months ended June 30, 2008 and 2007 were $5.7 million and $5.9 million, respectively, including amounts charged to construction.

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Net periodic postretirement benefit costs consisted of the following components:

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

Missouri state law provides for the recovery in rates of SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” accrued costs provided that such costs are funded through an independent, external funding mechanism. Laclede Gas established Voluntary Employees’ Beneficiary Association (VEBA) and Rabbi trusts as its external funding mechanisms. VEBA and Rabbi trusts’ assets consist primarily of money market securities and mutual funds invested in stocks and bonds.

Pursuant to a MoPSC Order, the return on plan assets is based on the market-related value of plan assets implemented prospectively over a four-year period. Gains and losses not yet includible in postretirement benefit cost are amortized only to the extent that such gain or loss exceeds 10% of the greater of the accumulated postretirement benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. Previously, the recovery in rates for the postretirement benefit costs was based on an alternative methodology for amortization of unrecognized gains and losses as ordered by the MoPSC. The Commission ordered that the recovery in rates be based on an annual allowance of $7.6 million, effective August��1, 2007. The difference between this amount and postretirement benefit cost based on the above and that otherwise would be included in the Statements of Income and Comprehensive Income is deferred as a regulatory asset or regulatory liability.

3. INCOME TAXES

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

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

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

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

4. OTHER INCOME AND (INCOME DEDUCTIONS) – NET

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

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

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5. INFORMATION BY OPERATING SEGMENT

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

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

6. COMMITMENTS AND CONTINGENCIES

Laclede Gas owns and operates natural gas distribution, transmission, and storage facilities, the operations of which are subject to various environmental laws, regulations, and interpretations. While environmental issues resulting from such operations arise in the ordinary course of business, such issues have not materially affected Laclede Gas’ financial position and results of operations. As environmental laws, regulations, and their interpretations change, however, Laclede Gas may be required to incur additional costs. See Note 12 to the Financial Statements included in Laclede Gas’ Fiscal Year 2007 Form 10-K for information relative to environmental matters generally. There have been no significant changes relative to environmental matters during the nine months ended June 30, 2008.

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

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

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

Laclede Gas has several operating leases for the rental of vehicles that contain provisions requiring Laclede Gas to guarantee certain amounts related to the residual value of the leased property. These leases have various terms, the longest of which extends through 2014. At June 30, 2008, the maximum guarantees under these leases were $1.7 million. However, the Utility estimates that the residual value of the leased vehicles will be adequate to satisfy most of the guaranteed amounts. At June 30, 2008, the carrying value of the liability recognized for these guarantees was $0.3 million.

Laclede Gas has entered into various contracts, expiring on dates through 2017, for the storage, transportation, and supply of natural gas. Minimum payments required under the contracts in place at June 30, 2008 are estimated at approximately $437 million. Additional contracts are generally entered into prior to or during the heating season.

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

LACLEDE GAS COMPANY

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

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

• weather conditions and catastrophic events, particularly severe weather in the natural gas producing areas of the country;

• volatility in gas prices, particularly sudden and sustained spikes in natural gas prices;

• the impact of higher natural gas prices on our competitive position in relation to suppliers of alternative heating sources, such as electricity;

• changes in gas supply and pipeline availability; particularly those changes that impact supply for and access to our market area;

• legislative, regulatory and judicial mandates and decisions, some of which may be retroactive, including those affecting

• allowed rates of return

• incentive regulation

• industry structure

• purchased gas adjustment provisions

• rate design structure and implementation

• franchise renewals

• environmental or safety matters

• taxes

• pension and other postretirement benefit liabilities and funding obligations

• accounting standards;

• the results of litigation;

• retention of, ability to attract, ability to collect from and conservation efforts of customers;

• capital and energy commodity market conditions, including the ability to obtain funds for necessary capital expenditures and general operations and the terms and conditions imposed for obtaining sufficient gas supply;

• discovery of material weakness in internal controls; and

• employee workforce issues.

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

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

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LACLEDE GAS COMPANY

RESULTS OF OPERATIONS

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

Mitigating the impact of weather fluctuations on Laclede Gas customers while improving the ability to recover its authorized distribution costs and return continues to be a fundamental component of Laclede Gas’ strategy. The Utility’s distribution costs are the essential, primarily fixed expenditures it must incur to operate and maintain a more than 16,000 mile natural gas distribution system and related storage facilities. With regard to the storage facilities owned by Laclede Gas, management is currently undertaking an evaluation of the Utility’s natural gas storage field, which was developed more than 50 years ago, to assess the field’s current and future capabilities. In addition, Laclede Gas is working to continually improve its ability to provide reliable natural gas service at a reasonable cost, while maintaining and building a secure and dependable infrastructure. The settlement of the Utility’s 2007 rate case resulted in enhancements to the Utility’s weather mitigation rate design that better ensure the recovery of its fixed costs and margins despite variations in sales volumes due to the impacts of weather and other factors that affect customer usage. The Utility’s income from off-system sales remains subject to fluctuations in market conditions. In conjunction with the settlement of the 2005 rate case, effective October 1, 2005, the Utility retained all pre-tax income from off-system sales and capacity release revenues up to $12 million annually. Pre-tax amounts in excess of $12 million were shared with customers, with the Utility retaining 50% of amounts exceeding that threshold. The Stipulation & Agreement approved by the MoPSC in the Utility’s 2007 rate case increases the portion of pre-tax income from off-system sales and capacity release revenues that is shared with customers. Effective October 1, 2007, the Utility is allowed to retain 15% to 25% of the first $6 million in annual income earned (depending on the level of income earned) and 30% of income exceeding $6 million annually. Some of the factors impacting the level of off-system sales include the availability and cost of the Utility’s natural gas supply, the weather in its service area, and the weather in other markets. When Laclede Gas’ service area experiences warmer-than-normal weather while other markets experience colder weather or supply constraints, some of the Utility’s natural gas supply is available for off-system sales and there may be a demand for such supply in other markets.

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

Quarter Ended June 30, 2008

Earnings

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

• the benefit of the general rate increase, effective August 1, 2007, totaling $8.7 million; and,

• interim benefits of a rate design change, effective August 1, 2007, and other variations totaling $5.1 million.

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These factors were partially offset by:

• increases in operation and maintenance expenses, excluding the provision for uncollectible accounts, totaling $3.1 million;

• an increase in the provision for uncollectible accounts, totaling $2.6 million; and,

• lower income from off-system sales and capacity release, totaling $2.0 million, primarily due to a reduction in the Utility’s share of such income (pursuant to the 2007 rate case).

Utility Operating Revenues and Operating Expenses

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

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

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

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

Other Income and (Income Deductions) - Net

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

Interest Charges

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

Income Taxes

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

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Nine Months Ended June 30, 2008

Earnings

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

• the benefit of the general rate increase, effective August 1, 2007, totaling $30.4 million;

• the effect of higher system gas sales volumes and other variations totaling $2.3 million; and,

• the recognition of previously unrecognized tax benefits and the reversal of related expenses, totaling $1.5 million.

These factors were partially offset by:

• lower income from off-system sales and capacity release, totaling $9.5 million, primarily due to a reduction in the Utility’s share of such income (pursuant to the 2007 rate case);

• an increase in the provision for uncollectible accounts, totaling $4.9 million; and,

• increases in operation and maintenance expenses, excluding the provision for uncollectible accounts, totaling $4.9 million.

Utility Operating Revenues and Operating Expenses

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

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

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

Other Income and (Income Deductions) - Net

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

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Interest Charges

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

Income Taxes

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

Labor Agreement

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

REGULATORY MATTERS

During fiscal 2006, the MoPSC approved permanent modifications to the Cold Weather Rule affecting the disconnection and reconnection practices of utilities during the winter heating season. Those modifications included provisions to allow the Utility to obtain accounting authorizations and defer for future recovery certain costs incurred with the modifications. During fiscal 2007, the Utility deferred for future recovery $2.7 million of costs associated with the fiscal 2007 heating season. On October 31, 2007, the Utility filed for determination and subsequent recovery of the deferred amount. On November 16, 2007, the MoPSC directed the MoPSC Staff and the Missouri Office of Public Counsel (Public Counsel) to submit their positions regarding the Utility’s filing by February 28, 2008.On February 28, 2008, the Utility and the MoPSC Staff filed a Non-unanimous Stipulation & Agreement in which these parties agreed to a recovery of $2.5 million of costs. The Non-unanimous Stipulation & Agreement was opposed by Public Counsel, and a hearing in this matter was held before the Commission on March 31, 2008. On April 17, 2008, the Commission issued its Report and Order approving the $2.5 million cost recovery recommended by the Utility and the MoPSC Staff. Consistent with the approved amount, the Utility recorded a reduction in its deferral totaling $0.2 million during the quarter ended March 31, 2008. On May 29, 2008, Public Counsel appealed the MoPSC’s April 17 Order to the Cole County, Missouri Circuit Court. Laclede Gas believes that Public Counsel’s appeal is without merit and intends to vigorously oppose the appeal.

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

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

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

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On July 9, 2008, Laclede Gas made a tariff filing with the MoPSC that would make the payment provisions for the restoration of gas service under the Utility’s Cold Weather Rule available to customers in the summer of 2008 and enable the Utility to increase or decrease its PGA rates to correct for any shortfall or surplus created by the difference between the gas cost portion of the Utility’s actual net bad debt write-offs and the amount of such cost that is embedded in its existing rates. Such filing is pending before the MoPSC.

CRITICAL ACCOUNTING POLICIES

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

Allowances for doubtful accounts – Estimates of the collectibility of trade accounts receivable are based on historical trends, age of receivables, economic conditions, credit risk of specific customers, and other factors. The Utility’s provision for uncollectible accounts is dependent on the regulatory treatment provided for such costs. As approved by the MoPSC, the Utility is allowed to defer for future recovery certain costs associated with amendments to the Cold Weather Rule.

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

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

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

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Laclede Gas records deferred tax liabilities and assets measured by enacted tax rates for the net tax effect of all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes. Changes in enacted tax rates, if any, and certain property basis differences will be reflected by entries to regulatory asset or liability accounts. Pursuant to the direction of the MoPSC, Laclede Gas’ provision for income tax expense for financial reporting purposes reflects an open-ended method of tax depreciation. Laclede Gas’ provision for income tax expense also records the income tax effect associated with the difference between overheads capitalized to construction for financial reporting purposes and those recognized for tax purposes without recording an offsetting deferred income tax expense. These two methods are consistent with the regulatory treatment prescribed by the MoPSC.

Asset retirement obligations are recorded in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations” and FIN 47, “Accounting for Conditional Asset Retirement Obligations.” Asset retirement obligations are calculated using various assumptions related to the timing, method of settlement, inflation, and profit margins that third parties would demand to settle the future obligations. These assumptions require the use of judgment and estimates and may change in future periods as circumstances dictate. As authorized by the MoPSC, Laclede Gas accrues future removal costs associated with its property, plant and equipment through its depreciation rates, even if a legal obligation does not exist as defined by SFAS No. 143 and FIN 47. The difference between removal costs recognized in depreciation rates and the accretion expense and depreciation expense recognizable under SFAS No. 143 and FIN 47 is a timing difference between the recovery of these costs in rates and their recognition for financial reporting purposes. Accordingly, consistent with SFAS No. 71, these differences are deferred as regulatory liabilities.

The amount of net periodic pension and other postretirement benefit cost recognized in the financial statements related to the Utility’s qualified pension plans and other postretirement benefit plans is based upon allowances, as approved by the MoPSC, which have been established in the rate-making process for the recovery of these costs from customers. The differences between these amounts and actual pension and other postretirement benefit costs incurred for financial reporting purposes are deferred as regulatory assets or regulatory liabilities. SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” requires that changes that affect the funded status of pension and other postretirement benefit plans, but that are not yet required to be recognized as components of pension and other postretirement benefit cost, be reflected in other comprehensive income. For the Utility’s qualified pension plans and other postretirement benefit plans, amounts that would otherwise be reflected in other comprehensive income are deferred with entries to regulatory assets or regulatory liabilities.

For further discussion of significant accounting policies, see Note 1 to the Financial Statements included in Exhibit 99.1 of the Laclede Group’s Form 10-K for the fiscal year ended September 30, 2007.

ACCOUNTING PRONOUNCEMENTS

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

FINANCIAL CONDITION

CREDIT RATINGS

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

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

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

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CASH FLOWS

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

Laclede Gas has on file with the Securities and Exchange Commission an effective shelf registration on Form S-3 for issuance of $350 million of securities. The full amount of this shelf registration remains available to Laclede Gas at this time. The Utility has authority from the MoPSC to issue up to $500 million in First Mortgage Bonds, unsecured debt, and equity securities. In May 2008, pursuant to this authority, the Utility sold 26 shares of its common stock to Laclede Group for $0.9 million, leaving $493.3 million remaining under this authorization as of the date of this filing. The amount, timing, and type of additional financing to be issued will depend on cash requirements and market conditions.

On November 1, 2007, Laclede Gas paid at maturity $40 million principal amount of 7 1/2% First Mortgage Bonds. This maturity was funded through short-term borrowings. At June 30, 2008, Laclede Gas had fixed-rate long-term debt totaling $310 million. While these long-term debt issues are fixed-rate, they are subject to changes in fair value as market interest rates change. However, increases or decreases in fair value would impact earnings and cash flows only if Laclede Gas were to reacquire any of these issues in the open market prior to maturity.

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Laclede Gas has several operating leases for the rental of vehicles that contain provisions requiring Laclede Gas to guarantee certain amounts related to the residual value of the leased property. These leases have various terms, the longest of which extends through 2014. At June 30, 2008, the maximum guarantees under these leases were $1.7 million. However, the Utility estimates that the residual value of the leased vehicles will be adequate to satisfy most of the guaranteed amounts. At June 30, 2008, the carrying value of the liability recognized for these guarantees was $0.3 million.

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

Capitalization at June 30, 2008, excluding current obligations of preferred stock, consisted of 54.6% common stock equity, 0.1% preferred stock, and 45.3% long-term debt.

It is management’s view that Laclede Gas has adequate access to capital markets and will have sufficient capital resources, both internal and external, to meet anticipated capital requirements.

The seasonal nature of Laclede Gas’ sales affects the comparison of certain balance sheet items at June 30, 2008 and at September 30, 2007, such as Accounts Receivable – Net, Gas Stored Underground, Notes Payable, Accounts Payable, Regulatory Assets and Regulatory Liabilities, and Delayed and Advance Customer Billings. The Balance Sheet at June 30, 2007 is presented to facilitate comparison of these items with the corresponding interim period of the preceding fiscal year.

CONTRACTUAL OBLIGATIONS

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

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

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

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MARKET RISK

Laclede Gas adopted a risk management policy that provides for the purchase of natural gas financial instruments with the goal of managing price risk associated with purchasing natural gas on behalf of its customers. This policy prohibits speculation. Costs and cost reductions, including carrying costs, associated with the Utility’s use of natural gas financial instruments are allowed to be passed on to the Utility’s customers through the operation of its PGA Clause, through which the MoPSC allows the Utility to recover gas supply costs. Accordingly, Laclede Gas does not expect any adverse earnings impact as a result of the use of these financial instruments. At June 30, 2008, the Utility held 7.4 million MMBtu of futures contracts at an average price of $9.03 per MMBtu. Additionally, 13.8 million MMBtu of other price risk mitigation was in place through the use of option-based strategies. These positions have various expiration dates, the longest of which extends through March 2009.

ENVIRONMENTAL MATTERS

Laclede Gas owns and operates natural gas distribution, transmission, and storage facilities, the operations of which are subject to various environmental laws, regulations, and interpretations. While environmental issues resulting from such operations arise in the ordinary course of business, such issues have not materially affected Laclede Gas’ financial position and results of operations. As environmental laws, regulations, and their interpretations change, however, Laclede Gas may be required to incur additional costs. For information relative to environmental matters, see Note 12 to the Financial Statements included in the Utility’s Form 10-K for the fiscal year ended September 30, 2007. There have been no significant changes relative to environmental matters during the nine months ended June 30, 2008.

OFF-BALANCE SHEET ARRANGEMENTS

Laclede Gas has no off-balance sheet arrangements.

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