Spire (SR) 10-K 2010 FY Annual report

Exhibit 99.1
Selected Financial Data
Laclede Gas Company
	Fiscal Years Ended September 30
(Thousands)	2010			2009			2008			2007			2006
Summary of Operations
Operating Revenues:
Utility	$	864,297		$	1,053,993		$	1,128,287		$	1,131,554		$	1,141,011
Other		10,327			2,246			2,693			3,415			2,305
Total Operating Revenues		874,624			1,056,239			1,130,980			1,134,969			1,143,316
Operating Expenses:
Utility
Natural and propane gas		519,905			699,984			770,097			797,924			821,721
Other operation expenses		141,995			146,542			144,611			131,798			128,180
Maintenance		27,244			27,818			25,827			24,306			21,198
Depreciation and amortization		37,572			36,751			35,303			34,080			30,904
Taxes, other than income taxes		61,407			68,639			69,023			68,361			71,038
Total Utility Operating Expenses		788,123			979,734			1,044,861			1,056,469			1,073,041
Other		4,343			2,238			2,641			2,914			2,316
Total Operating Expenses		792,466			981,972			1,047,502			1,059,383			1,075,357
Operating Income		82,158			74,267			83,478			75,586			67,959
Allowance for Funds Used During Construction		(112	)		(152	)		(72	)		(17	)		(45	)
Other Income and (Income Deductions) – Net		2,681			3,280			1,278			4,565			4,163
Interest Charges:
Interest on long-term debt		24,583			24,583			19,851			22,502			22,329
Other interest charges		2,269			5,770			10,363			11,101			10,236
Total Interest Charges		26,852			30,353			30,214			33,603			32,565
Income Before Income Taxes		57,875			47,042			54,470			46,531			39,512
Income Tax Expense		18,150			13,859			15,264			14,047			10,632
Net Income		39,725			33,183			39,206			32,484			28,880
Dividends on Redeemable Preferred Stock		—			15			35			43			48
Earnings Applicable to Common Stock	$	39,725		$	33,168		$	39,171		$	32,441		$	28,832

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Selected Financial Data (continued)
Laclede Gas Company
	Fiscal Years Ended September 30
(Thousands)	2010			2009			2008			2007			2006
Dividends Declared –
Common Stock	$	35,195		$	34,108		$	32,811		$	31,520		$	30,049
Utility Plant
Gross Plant – End of Period	$	1,326,284		$	1,280,238		$	1,229,174		$	1,187,828		$	1,149,104
Net Plant – End of Period		884,084			855,929			823,197			793,794			763,827
Capital Expenditures		56,234			51,384			55,304			56,434			57,925
Property Retirements		10,946			9,732			15,629			16,331			22,588
Total Assets – End of Period	$	1,658,452		$	1,600,287		$	1,625,815		$	1,431,203		$	1,385,140
Capitalization – End of Period
Common Stock and Paid-In Capital	$	208,154		$	203,754		$	157,883		$	151,510		$	145,527
Retained Earnings		205,980			201,450			202,535			195,728			194,807
Accumulated Other Comprehensive Loss		(2,875	)		(2,619	)		(1,790	)		(1,727	)		(834	)
Common Stock Equity		411,259			402,585			358,628			345,511			339,500
Redeemable Preferred Stock		—			—			467			627			787
Long-Term Debt		364,298			389,240			389,181			309,122			349,041
Total Capitalization	$	775,557		$	791,825		$	748,276		$	655,260		$	689,328

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LACLEDE GAS COMPANY

INTRODUCTION

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

• regulatory assets

• franchise renewals

• environmental or safety matters, including the potential impact of legislative and regulatory actions related to climate change

• taxes

• pension and other postretirement benefit liabilities and funding obligations

• accounting standards, including the effect of potential changes relative to adoption of or convergence with international 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.

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LACLEDE GAS COMPANY

RESULTS OF OPERATIONS

Overview

Laclede Gas is regulated by the Missouri Public Service Commission (MoPSC or Commission) and serves the City of St. Louis and parts of ten 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.

Based on the nature of the business of the Utility, as well as current economic conditions, management focuses on the following key variables in evaluating the financial condition and results of operations and managing the business:

• the Utility’s ability to recover the costs of purchasing and distributing natural gas from its customers;

• the impact of weather and other factors, such as customer conservation, on revenues and expenses;

• changes in the regulatory environment at the federal, state, and local levels, as well as decisions by regulators, that impact the Utility’s ability to earn its authorized rate of return;

• the Utility’s ability to access credit markets and maintain working capital sufficient to meet operating requirements; and,

• the effect of natural gas price volatility on the business.

Further information regarding how management seeks to manage these key variables is discussed below.

The Utility’s strategy focuses on improving performance and mitigating the impact of weather fluctuations on Laclede Gas’ customers while improving the ability to recover its authorized distribution costs and return. The Utility’s distribution costs are the essential, primarily fixed expenditures it must incur to operate and maintain more than 16,000 miles of mains and services comprising its natural gas distribution system and related storage facilities. The Utility’s distribution costs include wages and employee benefit costs, depreciation and maintenance expenses, and other regulated utility operating expenses, excluding natural and propane gas expense. Distribution costs are considered in the ratemaking process, and recovery of these types of costs is included in revenues generated t hrough the Utility’s tariff rates, as approved by the MoPSC. In addition, Laclede Gas is working 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 rate case in 2010 retained 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 and capacity release remains subject to fluctuations in market conditions. 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. See the Regulatory and Other Matters section on page 11 of this report for additional information on regulatory issues.

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Laclede Gas works actively to reduce the impact of wholesale natural gas prices on its costs by strategically structuring its natural gas supply portfolio to increase its gas supply availability and pricing alternatives and through the use of derivative instruments to protect its customers from significant changes in the commodity price of natural gas. 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. The price of natural gas supplies 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. Long-term increases in the wholesale cost of natural gas supplies may adversely impact the Utility’s competitive position compared with alternative energy sources.

The Utility relies on both short-term credit and long-term capital markets, as well as cash flows from operations, to satisfy its seasonal cash requirements and fund its cost of capital expenditures. Laclede Gas’ ability to issue commercial paper supported by lines of credit, to issue long-term bonds, or to obtain new lines of credit is dependent on current conditions in the credit and capital markets. Management focuses on maintaining a strong balance sheet and believes it currently has adequate access to credit and capital markets and will have sufficient capital resources to meet its foreseeable obligations. See the Liquidity and Capital Resources section on page 14 for additional information.

EARNINGS

2010 vs. 2009

Laclede Gas’ earnings applicable to common stock for fiscal year 2010 were $39.7 million, an increase of $6.5 million, compared with fiscal year 2009. The increase in net income was primarily due to the following factors (quantified on a pre-tax basis):

• income from a non-regulated propane transaction in the wholesale market totaling $6.0 million;

• decreases in operation and maintenance expenses totaling $5.1 million, including a lower provision for uncollectible accounts totaling $3.4 million;

• higher Infrastructure System Replacement Surcharge (ISRS) revenues totaling $3.2 million; and,

• the benefit of the general rate increase, effective September 1, 2010, totaling $2.5 million.

These factors were partially offset by:

• lower income from off-system sales and capacity release totaling $4.3 million; and,

• the effect of lower system gas sales volumes and other variations totaling $2.8 million.

2009 vs. 2008

Laclede Gas’ earnings applicable to common stock for fiscal year 2009 were $33.2 million, a decrease of $5.9 million, compared with fiscal year 2008. The decrease in net income was primarily due to the following factors (quantified on a pre-tax basis, except for the income tax item):

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

• the effect of lower system gas sales volumes and other variations totaling $2.0 million;

• the effect of the recognition of previously unrecognized tax benefits and the reversal of related expenses recorded during fiscal year 2008, totaling $1.6 million; and,

• an increase in depreciation and amortization expense totaling $1.4 million.

These factors were partially offset by higher ISRS revenues totaling $3.8 million.

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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.

2010 vs. 2009

Utility Operating Revenues for fiscal year 2010 decreased $189.7 million compared to fiscal year 2009, primarily due to lower wholesale gas costs. Temperatures experienced in the Utility’s service area during 2010 were 1.6% warmer than the same period last year and 2.5% warmer than normal. Total system therms sold and transported were 894.5 million for fiscal year 2010 compared with 908.0 million for fiscal year 2009. Total off-system therms sold and transported were 71.0 million for fiscal year 2010 compared with 163.0 million for fiscal year 2009. The decrease in Utility Operating Revenues was primarily attributable to the following factors:

(Millions)
Lower wholesale gas costs passed on to Utility customers (subject to prudence review by the MoPSC)	$	(141.1	)
Lower off-system sales volumes (reflecting less favorable market conditions as described in greater detail in the   Results of Operations)		(42.8	)
Lower system sales volumes and other variations		(10.2	)
Higher ISRS revenues		3.2
General rate increase, effective September 1, 2010		2.5
Lower prices charged for off-system sales		(1.3	)
Total Variation	$	(189.7	)

2009 vs. 2008

Utility Operating Revenues for fiscal year 2009 decreased $74.3 million compared to fiscal year 2008, primarily due to lower gas prices charged for off-system sales. Temperatures experienced in the Utility’s service area during 2009 were 1.8% warmer than fiscal year 2008 and 1.5% warmer than normal. Total system therms sold and transported were 908.0 million for fiscal year 2009 compared with 934.6 million for fiscal year 2008. Total off-system therms sold and transported were 163.0 million for fiscal year 2009 compared with 143.7 million for fiscal year 2008. The decrease in Utility Operating Revenues was primarily attributable to the following factors:

(Millions)
Lower prices charged for off-system sales	$	(64.2	)
Lower wholesale gas costs passed on to Utility customers (subject to prudence review by the MoPSC)		(19.0	)
Higher off-system sales volumes (reflecting more favorable market conditions as described in greater   detail in the Results of Operations)		16.6
Lower system sales volumes and other variations		(11.5	)
Higher ISRS revenues		3.8
Total Variation	$	(74.3	)

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Utility Operating Expenses

2010 vs. 2009

Utility Operating Expenses in fiscal year 2010 decreased $191.6 million, or 19.6%, from fiscal year 2009. Natural and propane gas expense decreased $180.1 million from last year’s level, primarily attributable to lower rates charged by our suppliers and lower off-system gas expense. Other operation and maintenance expenses decreased $5.1 million, or 2.9%, primarily due to a lower provision for uncollectible accounts, reduced distribution and maintenance expenses, a lower provision for injuries and damages, and decreased charges for outside services. These factors were partially offset by the effect of a gain on the disposal of assets recorded in fiscal year 2009 and an increase in pension expense. Depreciation and amortization expense increased $0.8 million, or 2.2%, primarily due to additional depreciabl e property. Taxes, other than income taxes, decreased $7.2 million, or 10.5%, primarily due to decreased gross receipts taxes (attributable to the decreased revenues).

2009 vs. 2008

Utility Operating Expenses in fiscal year 2009 decreased $65.1 million, or 6.2%, from fiscal year 2008. Natural and propane gas expense decreased $70.1 million from fiscal year 2008, primarily attributable to lower off-system gas expense, decreased rates charged by our suppliers, and lower volumes purchased for sendout. Other operation and maintenance expenses increased $3.9 million, or 2.3%, primarily due to increases in compensation expenses, higher maintenance charges, and increased injuries and damages expense, partially offset by a decrease in distribution charges, a lower provision for uncollectible accounts, and a gain on the disposal of assets in fiscal year 2009. Depreciation and amortization expense increased $1.4 million, or 4.1%, primarily due to additional depreciable property.

Other Operating Revenues and Operating Expenses

Other Operating Revenues increased $8.1 million in fiscal year 2010 (compared to fiscal year 2009) primarily due to a propane transaction in the wholesale market by Laclede Gas during the quarter ended December 31, 2009. This non-regulated transaction resulted from an inventory exchange that the counterparty settled in cash instead of through a return of inventory. The increase in Other Operating Expenses, totaling $2.1 million in fiscal year 2010 (compared to fiscal year 2009), was primarily due to expenses associated with this propane transaction.

Other Income and (Income Deductions) - Net

Other Income and (Income Deductions) - Net decreased $0.6 million in fiscal year 2010 (compared to fiscal year 2009), primarily due to lower income associated with carrying costs applied to under-recoveries of gas costs and other minor variations, partially offset by higher net investment gains. Carrying costs on under-recoveries of gas costs are recovered through the Utility’s PGA Clause.

Other Income and (Income Deductions) - Net increased $1.9 million in fiscal year 2009 (compared to fiscal year 2008), primarily due to higher net investment gains and increased income associated with carrying costs applied to under-recoveries of gas costs, partially offset by additional proceeds received during fiscal year 2008 related to the Utility’s interest, as a policyholder, in the sale of a mutual insurance company.

Interest Charges

The $3.5 million decrease in interest charges in fiscal year 2010 (over fiscal year 2009) was primarily due to lower interest on short-term debt. The $0.1 million increase in interest charges in fiscal year 2009 (over fiscal year 2008) was primarily due to higher 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. This increase was largely offset by lower interest on short-term debt. Average short-term interest rates were 0.3% this year compared with 1.6% in fiscal year 2009 and 4.0% in fiscal year 2008. Average short-term borrowings were $107.9 million, $232.7 million, and $203.9 million for fiscal years 2010, 2009, and 2008, respectively.

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Income Taxes

Income tax expense increased $4.3 million in fiscal year 2010 (over fiscal year 2009) and decreased $1.4 million in fiscal year 2009 (from fiscal year 2008). These variations are primarily due to changes in pre-tax income. The variation in 2009 (compared to 2008) also reflects the effect of lower income tax expense associated with the recognition of previously unrecognized tax benefits recorded during fiscal year 2008.

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 (GAAP) 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 appar ent 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:

Accounts Receivable and Allowance for Doubtful Accounts – Trade accounts receivable are recorded at the amounts due from customers, including unbilled amounts. 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. Accounts receivable are written off against the allowance for doubtful accounts when they are deemed to be uncollectible. The Utility’s provision for uncollectible accounts includes the amortization of previously deferred uncollectible expenses, as approved by the MoPSC.

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

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

Pension Plan Benefits:
			Estimated				Estimated
			Increase/				Increase/
			(Decrease) to				(Decrease) to
			Projected				Annual
			Benefit				Net Pension
	Increase/		Obligation				Cost*
Actuarial Assumptions	(Decrease)		(Thousands)				(Thousands)
Discount Rate	0.25	%	$	(9,820	)	$	199
	(0.25	)		10,120			(220	)
Rate of Future Compensation Increase	0.25	%		6,400			380
	(0.25	)		(6,300	)		(370	)
Expected Return on Plan Assets	0.25	%		—			(610	)
	(0.25	)		—			610
Postretirement Benefits:
				Estimated			Estimated
				Increase/			Increase/
				(Decrease) to			(Decrease) to
				Projected			Annual Net
				Postretirement			Postretirement
				Benefit			Benefit
	Increase/			Obligation			Cost*
Actuarial Assumptions	(Decrease)			(Thousands)			(Thousands)
Discount Rate	0.25	%	$	(2,320	)	$	(116	)
	(0.25	)		2,380			114
Expected Return on Plan Assets	0.25	%		—			(100	)
	(0.25	)		—			100
Annual Medical Cost Trend	1.00	%		5,850			1,270
	(1.00	)		(5,300	)		(1,130	)
* Excludes the impact of regulatory deferral mechanism. See Note 2, Pension Plans and Other Postretirement Benefits, of the Notes to Financial Statements for information regarding the regulatory treatment of these costs.

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Regulated Operations – Laclede Gas accounts for its regulated operations in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 980, “Regulated Operations.” This Topic sets forth the application of GAAP for those companies whose rates are established by or are subject to approval by an independent third-party regulator. The provisions of this accounting guidance 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-regulat ed 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 these regulatory accounting principles 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 this accounting guidance:

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 derivative 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 ove r- or under-recoveries of gas costs, including costs and cost reductions associated with the use of derivative instruments. The PGA Clause also provides for a portion of income from off-system sales and capacity release revenues to be flowed through to customers.

Laclede Gas records deferred tax liabilities and assets measured by enacted tax rates for the net tax effect of all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes. Changes in enacted tax rates, if any, and certain property basis differences will be reflected by entries to regulatory asset or regulatory liability accounts for regulated activities. 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 GAAP 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 GAAP. The difference between removal costs recognized in depreciation rates and the accretion expense and depreciation expense recognizable pursuant to GAAP is a timing difference between the recovery of these costs in rates and their recognition for financial re porting purposes. Accordingly, these differences are deferred as regulatory liabilities.

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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. GAAP also 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 in come. 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 of the Notes to Financial Statements included on page 28.

REGULATORY AND OTHER MATTERS

There have been several significant regulatory developments affecting Laclede Gas.

During fiscal year 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 year 2007, the Utility deferred for future recovery $2.7 million of costs associated with the fiscal year 2007 heating season. In 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, which Public Counsel opposed. The Commission approved the $2.5 million cost recovery recommended by the Utility and the MoPSC Staff, which Public Couns el appealed to the Cole County, Missouri Circuit Court. In 2009, the Court affirmed the Commission’s Order and Public Counsel appealed to the Court of Appeals for the Western District of Missouri. On December 22, 2009, the Court of Appeals also issued a judgment affirming the Commission’s Order. On January 5, 2010, Public Counsel sought rehearing of the decision or transfer to the Missouri Supreme Court. The Court subsequently denied this request.

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 year 2005, which the Staff later reduced to a $1.7 million disallowance pertaining to Laclede Gas’ purchase of gas from a marketing affiliate, Laclede Energy Resources, Inc. (LER). The MoPSC Staff has also proposed disallowances of $2.8 million and $1.5 million of gas costs relating to Laclede Gas purchases of gas supply from LER for fiscal years 2006 and 2007, respectively. On December 31, 2009, the MoPSC Staff proposed a number of non-monetary recommendations only, based on its review of gas costs for fiscal year 2008. Laclede Gas believes that the proposed disallowances lack merit and is vigorously opposing these adjustm ents in proceedings before the MoPSC. As such, no amount has been recorded in the financial statements for these proposed disallowances.

In its December 31, 2007 recommendation relating to fiscal year 2006 gas costs, 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, Inc. (Laclede Group) commenced an internal review of the questions raised by the MoPSC Staff and notified the FERC Staff that it took this action. In June 2008, as a result of the internal review, Laclede Group provided the FERC Staff with a self report regarding compliance of sales and capacity release activities with the FERC’s regulations and policies. On February 9, 2010, the FERC Staff informed Laclede Group that it has closed its investigation of the Laclede Group’s self report without taking further action.

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In connection with the affiliate transaction matters mentioned above, on July 7, 2010, the MoPSC Staff filed a complaint against Laclede Gas alleging that, by stating that it was not in possession of proprietary LER documents, Laclede Gas violated the MoPSC Order approving a 2001 Stipulation and Agreement that permitted the Company’s corporate reorganization into a holding company structure. Also, on October 6, 2010, the MoPSC Staff filed a related complaint against Laclede Gas alleging that the Utility has failed to comply with the MoPSC’s affiliate transaction rules. Laclede Gas believes that neither of the complaints have merit and intends to vigorously oppose both of them. In addition, the Company had filed a counterclaim against the MoPSC Staff in the July 7 complaint c ase alleging that the Staff has failed to adhere to the pricing provisions of the MoPSC’s affiliate transaction rules and the provisions under which the Company allocates costs among affiliated companies. However, on November 3, 2010, the MoPSC issued an order dismissing the Utility’s counterclaim for failure to state a claim upon which relief may be granted.

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. As a result of the ensuing procedural schedule, the Cold Weather Rule portion of the filing became moot. On April 15, 2009, the Commission rejected the Utility’s tariffs on the grounds that it did not have the legal authority to approve them, of which Laclede Gas sought judicial review. On January 11, 2010, the Court found that the Commission did have the legal authority to approve such tariffs, which decision the Commission appealed to the Missouri Court of Appeals, Western District. On October 19, 2010, the Western District overruled the Cole County Circuit Court’s decision, and affirmed the Commission’s April 15, 2009 Order. Laclede Gas has filed with the Western District a motion for rehearing and an application to transfer the case to the Missouri Supreme Court.

On December 4, 2009, Laclede Gas filed tariff sheets in a new general rate case proceeding designed to increase revenues by approximately $52.6 million annually, or 6.9%. On July 23, 2010 and August 3, 2010, the Utility and the other parties to the proceeding filed Stipulation and Agreements that comprised a settlement of all matters and provided for a net $20.5 million increase in annual revenues, reflecting an annual increase of $31.4 million in base rates minus $10.9 million that was being billed to customers through the ISRS. The settlement also retained the Utility’s weather mitigation rate design and provided for the funding of various low-income, weatherization, and conservation and energy efficiency programs. On August 18, 2010, the MoPSC approved the settle ment, which became effective September 1, 2010.

On January 15, 2010, the Utility made an ISRS filing with the Commission designed to increase revenues by $3.2 million annually, $2.8 million of which the MoPSC approved effective March 31, 2010. These surcharges were reset to zero effective September 1, 2010, as the ISRS-related costs are being recovered through new base rates effective on that same date. On October 29, 2010, the Utility made an ISRS filing with the Commission designed to increase revenues $2.6 million annually, pending approval by the Commission.

On June 29, 2010, the Office of Federal Contract Compliance Programs issued a Notice of Violations to Laclede Gas alleging lapses in certain employment selection procedures during a two-year period ending in February 2006. The Utility believes that the allegations lack merit and is vigorously defending its position. While the results of the claims 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 and results of operations of the Utility.

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 of the Notes to Financial Statements.

12

INFLATION

The accompanying financial statements reflect the historical costs of events and transactions, regardless of the purchasing power of the dollar at the time. Due to the capital-intensive nature of the business of Laclede Gas, the most significant impact of inflation is on the depreciation of utility plant. Rate regulation, to which Laclede Gas is subject, allows recovery through its rates of only the historical cost of utility plant as depreciation. While no plans exist to undertake replacements of plant in service other than normal replacements and those under existing replacement programs, Laclede Gas believes that any higher costs experienced upon replacement of existing facilities would be recovered through the normal regulatory process.

FINANCIAL CONDITION

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.

Net cash provided by operating activities for fiscal years 2010 and 2009 was $92.6 million and $216.4 million, respectively. Net cash used in operating activities for fiscal year 2008 was $45.6 million. The decrease in net cash provided by operating activities in fiscal year 2010 (compared to fiscal year 2009) is primarily attributable to increased cash payments for natural gas storage inventories this year. The improvement in cash flows provided by operating activities in fiscal year 2009 (over fiscal year 2008) was primarily attributable to reduced payments for natural gas storage inventories, other variations in the timing of the collection of gas costs under the PGA Clause, and reduced cash payments to Laclede Group for the Utility’s allocation of income taxes.

Net cash used in investing activities for fiscal years 2010, 2009, and 2008 was $59.8 million, $51.6 million, and $56.4 million, respectively. Net cash used in investing activities primarily reflected capital expenditures in all periods.

Net cash used in financing activities for fiscal years 2010 and 2009 was $33.2 million and $166.6 million, respectively. Net cash provided by financing activities for fiscal year 2008 was $102.7 million. The decrease in net cash used in financing activities in fiscal year 2010 (over fiscal year 2009) primarily reflects a reduction in repayments of short-term debt, partially offset by reduced sales of shares of common stock to Laclede Group. The variation in net cash used in financing activities in fiscal year 2009 (over fiscal year 2008) primarily reflects an increase in the repayments of short-term debt in fiscal year 2009 and the net effect of changes in long-term debt during fiscal year 2008, partially offset by the sale of additional shares of common stock to Laclede Group in fiscal year 2009.

13

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 or through direct use of the lines of credit. 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. During fiscal year 2010, Laclede Gas utilized only commercial paper for external short-term funding. Commercial paper borrowings ranged between $48.2 million and $178.0 million during the fiscal year, and stood at $129.7 million on September 30, 2010. The weighted average interest rate on the short-term borrowings was 0.3% per annum at S eptember 30, 2010. For the entire fiscal year, short-term borrowings averaged $107.9 million at an average interest rate of 0.3%. Based on average short-term borrowings for the year, an increase in the average interest rate of 100 basis points would decrease pre-tax earnings and cash flows by approximately $1.1 million on an annual basis. Portions of such increases or decreases may be offset through the application of PGA carrying costs. Laclede Gas borrowed a maximum of $1.2 million from Laclede Group during the fiscal year, and there were no such borrowings outstanding at the end of the fiscal year.

Laclede Gas’ lines of credit include covenants limiting total debt, including short-term debt, to no more than 70% of total capitalization and requiring earnings before interest, taxes, depreciation and amortization (EBITDA) to be at least 2.25 times interest expense. On September 30, 2010, total debt was 56% of total capitalization. For the fiscal year ended September 30, 2010, EBITDA was 4.55 times interest expense.

Long-term Debt, 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, which expires May 28, 2013. The entire amount of this shelf registration remains available to Laclede Gas at this time.

The Utility has MoPSC authority to issue debt securities and preferred stock, including on a private placement basis, as well as to issue common stock, receive paid-in capital, and enter into capital lease agreements, all for a total of up to $518 million, effective from June 30, 2010 through June 30, 2013. During fiscal year 2010, pursuant to this and previous authorities, the Utility sold 40 shares of its common stock to Laclede Group for $1.4 million. As of November 19, 2010, $517.6 million remains available under this authorization. The amount, timing, and type of additional financing to be issued will depend on cash requirements and market conditions, as well as future MoPSC authorizations.

At September 30, 2010, Laclede Gas had fixed-rate long-term debt totaling $390 million (including current maturities). On November 15, 2010, Laclede Gas paid at maturity $25 million principal amount of 6 1/2% first mortgage bonds. This maturity was funded through short-term borrowings. While the remaining long-term debt issues are fixed-rate, they are subject to changes in their 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. Under GAAP applicable to Laclede Gas’ regulated operations, losses or gains on early redemptions of long-term debt would typically be deferred as regulatory assets or regulatory liabilities and amortized over a future period. Of the Utility’s $390 million in long-term debt, $75 million have no call option, $235 million have make-whole call options, and $80 million are callable at par in 2013. None of the debt has any put options.

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 2015. At September 30, 2010, the maximum guarantees under these leases were $1.3 million. However, the Utility believes 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 September 30, 2010, the carrying value of the liability recognized for these guarantees was $0.3 million.

14

Other

The Utility’s access to capital markets, including the commercial paper market, and its financing costs, may depend on its credit rating. These ratings, which are indicated below, were unchanged over the past fiscal year, but remain subject to review and change by the rating agencies.

Type of Facility	S&P	Moody’s	Fitch
Laclede Gas Issuer Rating	A		A-
Laclede Gas First Mortgage Bonds	A	A2	A+
Laclede Gas Commercial Paper	A-1	P-2	F1

Utility capital expenditures were $56.2 million in fiscal year 2010, compared with $51.4 million and $55.3 million for fiscal years 2009 and 2008, respectively. Utility capital expenditures are expected to be approximately $64 million in fiscal year 2011. The increase in capital expenditures expected for fiscal year 2011, compared with prior periods, is primarily attributable to anticipated additional expenditures for distribution plant, as well as other planned improvements to the Utility’s natural gas storage facilities and general plant purchases.

Capitalization at September 30, 2010, consisted of 53.0% common stock equity and 47.0% long-term debt.

Laclede Gas’ ratio of earnings to fixed charges was 3.0 for fiscal year 2010, 2.5 for fiscal year 2009, and 2.7 for fiscal year 2008.

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, which primarily include capital expenditures, scheduled maturities of long-term debt, short-term seasonal needs, and dividends.

15

CONTRACTUAL OBLIGATIONS

As of September 30, 2010, Laclede Gas had contractual obligations with payments due as summarized below (in millions):

			Payments due by period
			Less than		1-3		3-5		More than
Contractual Obligations	Total		1 Year		Years		Years		5 Years
Principal Payments on Long-Term Debt	$	390.0	$	25.0	$	25.0	$	—	$	340.0
Interest Payments on Long-Term Debt		484.9		23.8		45.1		42.7		373.3
Operating Leases (a)		15.0		5.1		6.9		3.0		—
Purchase Obligations – Natural Gas (b)		410.1		259.2		116.8		19.7		14.4
Purchase Obligations – Other (c)		89.1		17.4		18.2		16.6		36.9
Total (d)	$	1,389.1	$	330.5	$	212.0	$	82.0	$	764.6

(a)	Operating lease obligations are primarily for office space, vehicles, and power operated equipment. Additional payments will be incurred if renewal options are exercised under the provisions of certain agreements.
(b)	These purchase obligations represent the minimum payments required under existing natural gas transportation and storage contracts and natural gas supply agreements. These amounts reflect fixed obligations as well as obligations to purchase natural gas at future market prices, calculated using September 30, 2010 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 by the MoPSC; 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 material amounts of contractual obligations under these categories. Long-term liabilities associated with unrecognized tax benefits, totaling $6.4 million, have been excluded from the table above because the timing of future cash outflows, if any, cannot be reasonably estimated. Also, commitments related to pension and postretirement benefit plans have been excluded from the table above. Laclede Gas expects to make contributions to its qualified, trusteed pension plans totaling $10.6 million in fiscal year 2011. Laclede Gas anticipates a $2.4 million contribution relative to its non-qualified pension plans during fiscal year 2011. With regard to the postretirement benefits, the Utility a nticipates it will contribute $13.3 million to the qualified trusts and $0.3 million directly to participants from Laclede Gas’ funds during fiscal year 2011. 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.

16

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 as sociated 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 8, Derivative Instruments and Hedging Activities, of the Notes to Financial Statements.

The Utility is subject to interest rate risk associated with its long-term and short-term debt issuances. In fiscal year 2010, an increase of 100 basis points in the underlying average interest rate for short-term debt would have caused an increase in interest expense of approximately $1.1 million. Portions of such increases may be offset through the application of PGA carrying costs. At September 30, 2010, Laclede Gas had fixed-rate long-term debt, including current obligations, 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. Under GAAP applicable to Laclede Gas’ regulated operations, losses or gains on early redemptions of long-term debt would typically be deferred as regulatory assets or regulatory liabilities and amortized over a future period.

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, Commitments and Contingencies, of the Notes to Financial Statements.

OFF-BALANCE SHEET ARRANGEMENTS

Laclede Gas has no off-balance sheet arrangements.

17

Management Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal controls over financial reporting. Laclede Gas’ internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in condit ions, or that the degree of compliance with the policies or procedures may deteriorate.

Laclede Gas’ management, including our Chief Executive Officer and Chief Financial Officer, conducted an assessment of the effectiveness of Laclede Gas’ internal control over financial reporting as of September 30, 2010. In making this assessment, management used the criteria in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that Laclede Gas’ internal control over financial reporting was effective as of September 30, 2010. Deloitte & Touche LLP, an independent registered public accounting firm, has issued an attestation report on the Laclede Gas’ internal control over financial report ing, which is included herein.

18

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

Laclede Gas Company

St. Louis, Missouri

We have audited the internal control over financial reporting of Laclede Gas Company (a wholly-owned subsidiary of The Laclede Group, Inc.) (the “Company”) as of September 30, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial report ing based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assur ance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the financial statements and financial statement schedule as of and for the year ended September 30, 2010 of the Company and our report dated November 19, 2010 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/ DELOITTE & TOUCHE LLP

St. Louis, Missouri

November 19, 2010

19

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

Laclede Gas Company

St. Louis, Missouri

We have audited the accompanying balance sheets and statements of capitalization of Laclede Gas Company (a wholly-owned subsidiary of The Laclede Group, Inc.) (the “Company”) as of September 30, 2010 and 2009, and the related statements of income, common shareholder’s equity, comprehensive income, and cash flows for each of the three years in the period ended September 30, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of Laclede Gas Company as of September 30, 2010 and 2009, and the results of its operations and cash flows for each of the three years in the period ended September 30, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 30, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 19, 2010 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

St. Louis, Missouri

November 19, 2010

20

LACLEDE GAS COMPANY
STATEMENTS OF INCOME
(Thousands)
Years Ended September 30	2010		2009		2008
Operating Revenues:
Utility	$	864,297	$	1,053,993	$	1,128,287
Other		10,327		2,246		2,693
Total Operating Revenues		874,624		1,056,239		1,130,980
Operating Expenses:
Utility
Natural and propane gas		519,905		699,984		770,097
Other operation expenses		141,995		146,542		144,611
Maintenance		27,244		27,818		25,827
Depreciation and amortization		37,572		36,751		35,303
Taxes, other than income taxes		61,407		68,639		69,023
Total Utility Operating Expenses		788,123		979,734		1,044,861
Other		4,343		2,238		2,641
Total Operating Expenses		792,466		981,972		1,047,502
Operating Income		82,158		74,267		83,478
Other Income and (Income Deductions) - Net		2,569		3,128		1,206
Interest Charges:
Interest on long-term debt		24,583		24,583		19,851
Other interest charges		2,269		5,770		10,363
Total Interest Charges		26,852		30,353		30,214
Income Before Income Taxes		57,875		47,042		54,470
Income Tax Expense		18,150		13,859		15,264
Net Income		39,725		33,183		39,206
Dividends on Redeemable Preferred Stock		—		15		35
Earnings Applicable to Common Stock	$	39,725	$	33,168	$	39,171
See the accompanying Notes to Financial Statements.

21

LACLEDE GAS COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
(Thousands)
Years Ended September 30	2010				2009			2008
Net Income	$	39,725			$	33,183		$	39,206
Other Comprehensive Income (Loss) Before Tax:
Net gains (losses) on cash flow hedging derivative instruments:
Net hedging gains arising during the period		160				248			—
Reclassification adjustment for gains included in net income		(264	)			(119	)		—
Net unrealized (losses) gains on cash flow hedging derivative
instruments		(104	)			129			—
Defined benefit pension and other postretirement benefit plans:
Net actuarial loss arising during the period		(1,783	)			(1,728	)		(271	)
Amortization of actuarial loss included in net periodic pension       and other postretirement benefit cost		1,471				199			171
Net defined benefit pension and other postretirement benefit plans		(312	)			(1,529	)		(100	)
Other Comprehensive Loss, Before Tax		(416	)			(1,400	)		(100	)
Income Tax Benefit Related to Items of Other Comprehensive Loss		(160	)			(540	)		(37	)
Other Comprehensive Loss, Net of Tax		(256	)			(860	)		(63	)
Comprehensive Income	$	39,469			$	32,323		$	39,143
				��
See the accompanying Notes to Financial Statements.

22

LACLEDE GAS COMPANY
BALANCE SHEETS
(Thousands)
September 30	2010			2009
ASSETS
Utility Plant	$	1,326,284		$	1,280,238
Less – Accumulated depreciation and amortization		442,200			424,309
Net Utility Plant		884,084			855,929
Other Property and Investments		45,864			40,549
Current Assets:
Cash and cash equivalents		1,009			1,402
Accounts receivable:
Utility		70,053			81,262
Non-utility		848			1,634
Associated companies		310			375
Other		7,277			4,731
Allowance for doubtful accounts		(10,176	)		(10,791	)
Inventories:
Natural gas stored underground at LIFO cost		113,576			93,313
Propane gas at FIFO cost		15,625			19,847
Materials, supplies and merchandise at average cost		3,741			4,032
Derivative instrument assets		9,288			12,369
Unamortized purchased gas adjustments		23,718			—
Prepayments and other		7,101			7,547
Total Current Assets		242,370			215,721
Deferred Charges:
Regulatory assets		479,462			482,999
Other		6,672			5,089
Total Deferred Charges		486,134			488,088
Total Assets	$	1,658,452		$	1,600,287

23

LACLEDE GAS COMPANY
BALANCE SHEETS (continued)
(Thousands)
September 30	2010		2009
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity	$	411,259	$	402,585
Long-term debt		364,298		389,240
Total Capitalization		775,557		791,825
Current Liabilities:
Notes payable		129,650		129,800
Accounts payable		36,706		30,220
Accounts payable – associated companies		652		—
Advance customer billings		16,809		21,140
Current portion of long-term debt		25,000		—
Wages and compensation accrued		13,410		12,682
Dividends payable		8,806		8,535
Customer deposits		11,244		12,400
Interest accrued		9,639		9,943
Taxes accrued		8,677		12,414
Unamortized purchased gas adjustments		—		3,130
Deferred income taxes		4,248		912
Other		11,385		10,737
Total Current Liabilities		276,226		251,913
Deferred Credits and Other Liabilities:
Deferred income taxes		292,766		256,381
Unamortized investment tax credits		3,538		3,754
Pension and postretirement benefit costs		207,607		202,681
Asset retirement obligations		25,829		25,495
Regulatory liabilities		47,365		44,225
Other		29,564		24,013
Total Deferred Credits and Other Liabilities		606,669		556,549
Commitments and Contingencies (Note 12)
Total Capitalization and Liabilities	$	1,658,452	$	1,600,287
See the accompanying Notes to Financial Statements.

24

LACLEDE GAS COMPANY
STATEMENTS OF CAPITALIZATION
(Thousands, Except for Shares and Per Share Amounts)
September 30		2010			2009
Common Stock Equity:
Common stock, par value $1 per share and Paid-in Capital:
Authorized – 2010 and 2009, 50,000,000 shares
Issued – 2010, 11,674 shares; and 2009, 11,634 shares	$	208,154		$	203,754
Retained earnings		205,980			201,450
Accumulated other comprehensive loss		(2,875	)		(2,619	)
Total Common Stock Equity		411,259			402,585
Long-Term Debt:
First Mortgage Bonds:
6-1/2% Series, due November 15, 2010		—			25,000
6-1/2% Series, due October 15, 2012		25,000			25,000
5-1/2% Series, due May 1, 2019		50,000			50,000
7% Series, due June 1, 2029		25,000			25,000
7.90% Series, due September 15, 2030		30,000			30,000
6% Series, due May 1, 2034		100,000			100,000
6.15% Series, due June 1, 2036		55,000			55,000
6.35% Series, due October 15, 2038		80,000			80,000
Total		365,000			390,000
Unamortized discount, net of premium, on long-term debt		(702	)		(760	)
Total Long-Term Debt		364,298			389,240
Total Capitalization	$	775,557		$	791,825
Long-term debt dollar amounts are exclusive of current portion.
	��
See the accompanying Notes to Financial Statements.

25

LACLEDE GAS COMPANY
STATEMENTS OF COMMON SHAREHOLDER’S EQUITY
	Common Stock Issued			Paid-in		Retained			Accum. Other Comp.
(Thousands, Except for Shares)	Shares	Amount		Capital		Earnings			Income			Total
BALANCE OCTOBER 1, 2007	10,307	$	10	$	151,500	$	195,728		$	(1,727	)	$	345,511
Adoption of FIN 48, as codified in     ASC Topic 740, as of October 1, 2007	—		—		—		447			—			447
Net income	—		—		—		39,206			—			39,206
Dividends declared:
Common stock	—		—		—		(32,811	)		—			(32,811	)
Preferred stock	—		—		—		(35	)		—			(35	)
Stock-based compensation costs	—		—		2,036		—			—			2,036
Tax benefit – stock compensation	—		—		534		—			—			534
Other comprehensive loss, net of tax	—		—		—		—			(63	)		(63	)
Issuance of common stock to Laclede Group	109		—		3,803		—			—			3,803
BALANCE SEPTEMBER 30, 2008	10,416		10		157,873		202,535			(1,790	)		358,628
Net income	—		—		—		33,183			—			33,183
Dividends declared:
Common stock	—		—		—		(34,108	)		—			(34,108	)
Preferred stock	—		—		—		(15	)		—			(15	)
Stock-based compensation costs	—		—		3,228		—			—			3,228
Tax benefit – stock compensation	—		—		663		—			—			663
Other comprehensive loss, net of tax	—		—		—		—			(860	)		(860	)
Issuance of common stock to Laclede Group	1,218		2		41,978		—			—			41,980
Adoption of SFAS No. 158, as codified in     ASC Topic 715, net of tax	—		—		—		(145	)		31			(114	)
BALANCE SEPTEMBER 30, 2009	11,634		12		203,742		201,450			(2,619	)		402,585
Net income	—		—		—		39,725			—			39,725
Dividends declared:
Common stock	—		—		—		(35,195	)		—			(35,195	)
Stock-based compensation costs	—		—		2,956		—			—			2,956
Tax benefit – stock compensation	—		—		6		—			—			6
Other comprehensive loss, net of tax	—		—		—		—			(256	)		(256	)
Issuance of common stock to Laclede Group	40		—		1,438		—			—			1,438
BALANCE SEPTEMBER 30, 2010	11,674	$	12	$	208,142	$	205,980		$	(2,875	)	$	411,259
See the accompanying Notes to Financial Statements.

26

LACLEDE GAS COMPANY
STATEMENTS OF CASH FLOWS
(Thousands)
Years Ended September 30	2010			2009			2008
Operating Activities:
Net Income	$	39,725		$	33,183		$	39,206
Adjustments to reconcile net income to net cash provided by       (used in) operating activities:
Depreciation and amortization		37,572			36,751			35,303
Deferred income taxes and investment tax credits		31,454			21,404			6,635
Other – net		1,812			1,557			3,553
Changes in assets and liabilities:
Accounts receivable – net		8,899			18,502			4,776
Unamortized purchased gas adjustments		(26,848	)		36,541			(20,598	)
Deferred purchased gas costs		20,265			(45,234	)		(19,614	)
Accounts payable		6,764			(27,631	)		8,024
Advance customer billings – net		(4,331	)		(4,408	)		108
Taxes accrued		(3,860	)		1,938			(6,126	)
Natural gas stored underground		(20,263	)		102,795			(67,996	)
Other assets and liabilities		1,391			41,044			(28,860	)
Net cash provided by (used in) operating activities		92,580			216,442			(45,589	)
Investing Activities:
Capital expenditures		(56,234	)		(51,384	)		(55,304	)
Other investments		(3,535	)		(261	)		(1,119	)
Net cash used in investing activities		(59,769	)		(51,645	)		(56,423	)
Financing Activities:
Issuance of first mortgage bonds		—			—			80,000
Maturity of first mortgage bonds		—			—			(40,000	)
(Repayment) issuance of short-term debt - net		(150	)		(175,316	)		93,716
Changes in book overdrafts		358			652			—
Dividends paid		(34,925	)		(33,837	)		(32,497	)
Issuance of common stock to Laclede Group		1,438			41,980			3,803
Excess tax benefits from stock-based compensation		131			706			387
Preferred stock redeemed/reacquired		—			(627	)		(160	)
Other		(56	)		(116	)		(2,528	)
Net cash (used in) provided by financing activities		(33,204	)		(166,558	)		102,721
Net (Decrease) Increase in Cash and Cash Equivalents		(393	)		(1,761	)		709
Cash and Cash Equivalents at Beginning of Year		1,402			3,163			2,454
Cash and Cash Equivalents at End of Year	$	1,009		$	1,402		$	3,163
Supplemental Disclosure of Cash Paid (Refunded) During the Year for:
Interest	$	26,393		$	29,873		$	30,992
Income taxes		(15,163	)		(13,088	)		21,178
See the accompanying Notes to Financial Statements.

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LACLEDE GAS COMPANY

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION - The financial statements include the accounts of Laclede Gas Company (Laclede Gas or the Utility).

In compliance with generally accepted accounting principles in the United States of America (GAAP), transactions between Laclede Gas and its affiliates as well as intercompany balances on Laclede Gas’ Balance Sheets have not been eliminated from the Laclede Gas financial statements.

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

NATURE OF OPERATIONS - Laclede Gas is a public utility engaged in the retail distribution of natural gas. Laclede Gas serves an area in eastern Missouri, with a population of approximately 2.1 million, including the City of St. Louis and parts of ten counties in eastern Missouri. As an adjunct to its gas distribution business, Laclede Gas operates an underground natural gas storage field.

USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

SYSTEM OF ACCOUNTS - The accounts of Laclede Gas are maintained in accordance with the Uniform System of Accounts prescribed by the Missouri Public Service Commission (MoPSC or Commission), which system substantially conforms to that prescribed by the Federal Energy Regulatory Commission (FERC).

UTILITY PLANT, DEPRECIATION AND AMORTIZATION - Utility plant is stated at original cost. The cost of additions to utility plant includes contracted work, direct labor and materials, allocable overheads, and an allowance for funds used during construction. The costs of units of property retired, replaced, or renewed are removed from utility plant and are charged to accumulated depreciation. Maintenance and repairs of property and replacement and renewal of items determined to be less than units of property are charged to maintenance expenses.

Utility plant is depreciated on a straight-line basis at rates based on estimated service lives of the various classes of property. In fiscal years 2010, 2009, and 2008, annual depreciation and amortization expense averaged 3.1% of the original cost of depreciable and amortizable property.

The Utility’s capital expenditures were $56.2 million, $51.4 million, and $55.3 million for fiscal years 2010, 2009, and 2008, respectively. Additionally, the Utility had recorded accruals for capital expenditures totaling $2.2 million at September 30, 2010, $1.7 million at September 30, 2009, and $2.3 million at September 30, 2008. Accrued capital expenditures are excluded from the Statements of Cash Flows.

ASSET RETIREMENT OBLIGATIONS - Laclede Gas records legal obligations associated with the retirement of long-lived assets in the period in which the obligations are incurred, if sufficient information exists to reasonably estimate the fair value of the obligations. Obligations are recorded as both a cost of the related long-lived asset and as a corresponding liability. Subsequently, the asset retirement costs are depreciated over the life of the asset and the asset retirement obligations are accreted to the expected settlement amounts. The Utility has recorded asset retirement obligations associated with certain safety requirements to purge and seal gas distribution mains upon retirement, the plugging and abandonment of storage wells and other storage faci lities, specific service line obligations, and certain removal and disposal obligations related to components of Laclede Gas’ distribution system and general plant. As authorized by the MoPSC, Laclede Gas accrues future asset removal costs associated with its property, plant and equipment even if a legal obligation does not exist. Such accruals are provided for through depreciation expense and are recorded with corresponding credits to regulatory liabilities. When Laclede Gas retires depreciable utility plant and equipment, it charges the associated original costs to accumulated depreciation and amortization, and any related removal costs incurred are charged to regulatory liabilities. The difference between removal costs recognized in depreciation rates and the accretion expense and depreciation expense recognized for financial reporting purposes is a timing difference between recovery of these costs in rates and their recognition for financial reporting purposes. Accordingly, these differences are de ferred as regulatory liabilities. In the rate setting process, the regulatory liability is deducted from the rate base upon which the Utility has the opportunity to earn its allowed rate of return.

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The following table presents a reconciliation of the beginning and ending balances of Asset retirement obligations at September 30 as reported in the Balance Sheets:

(Thousands)	2010			2009
Asset retirement obligations, beginning of year	$	25,495		$	26,817
Liabilities incurred during the period		208			415
Liabilities settled during the period		(904	)		(2,767	)
Accretion		1,526			1,566
Revisions in estimated cash flows		(496	)		(536	)
Asset retirement obligations, end of year	$	25,829		$	25,495

REGULATED OPERATIONS - Laclede Gas accounts for its regulated operations in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 980, “Regulated Operations.” This Topic sets forth the application of GAAP for those companies whose rates are established by or are subject to approval by an independent third-party regulator. The provisions of this accounting guidance 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 s heet (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).

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

(Thousands)	2010		2009
Regulatory Assets:
Future income taxes due from customers	$	100,624	$	91,782
Pension and postretirement benefit costs		288,077		280,939
Unamortized purchased gas adjustments		23,718		—
Purchased gas costs		74,040		94,305
Compensated absences		7,885		7,425
Cold weather rule		4,275		5,264
Other		4,561		3,284
Total Regulatory Assets	$	503,180	$	482,999
Regulatory Liabilities:
Unamortized purchased gas adjustments	$	—	$	3,130
Unamortized investment tax credits		3,538		3,754
Accrued cost of removal		45,441		41,590
Other		1,924		2,635
Total Regulatory Liabilities	$	50,903	$	51,109

As authorized by the MoPSC, Laclede Gas discontinued deferring certain costs for future recovery, as expenses associated with those specific areas were included in approved rates effective December 27, 1999. Previously deferred costs of $10.5 million are being recovered and amortized on a straight-line basis over a fifteen-year period, without return on investment. Amortization of these costs totaled $7.6 million from December 27, 1999 through September 30, 2010.

Certain previously deferred costs, totaling $2.6 million, are being recovered and amortized on a straight-line basis over a period of approximately two years, without return on investment. Amortization of these costs totaled $0.1 million from September 1, 2010 through September 30, 2010.

NATURAL GAS STORED UNDERGROUND - Inventory of Utility natural gas in storage is priced on a last-in, first-out (LIFO) basis. The replacement cost of natural gas stored underground for current use at September 30, 2010 and September 30, 2009 was less than the LIFO cost by $26.5 million and $33.1 million, respectively. The inventory carrying value is not adjusted to the lower of cost or market prices because, pursuant to the Laclede Gas Purchased Gas Adjustment (PGA) Clause, actual gas costs are recovered in customer rates.

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REVENUE RECOGNITION - Laclede Gas reads meters and bills its customers on monthly cycles. The Utility records its utility operating revenues from gas sales and transportation services on an accrual basis that includes estimated amounts for gas delivered, but not yet billed. The accruals for unbilled revenues are reversed in the subsequent accounting period when meters are actually read and customers are billed. The amounts of accrued unbilled revenues at September 30, 2010 and 2009, for the Utility, were $11.3 million and $12.7 million, respectively.

PURCHASED GAS ADJUSTMENTS AND DEFERRED ACCOUNT –As authorized by the MoPSC, the PGA Clause allows Laclede Gas to flow through to customers, subject to prudence review, the cost of purchased gas supplies. To better match customer billings with market natural gas prices, the Utility is allowed to file to modify, on a periodic basis, the level of gas costs in its PGA. Laclede Gas has a risk management policy that 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. The MoPSC clarified that costs, cost reduction s, and carrying costs associated with the Utility’s use of natural gas derivative instruments are gas costs recoverable through the PGA mechanism. Certain other provisions of the PGA Clause are included below:

• The tariffs allow the Utility flexibility to make up to three discretionary PGA changes during each year, in addition to its mandatory November PGA change, so long as such changes are separated by at least two months.

• The Utility is authorized to recover gas inventory carrying costs through its PGA rates to recover costs it incurs to finance its investment in gas supplies that are purchased during the storage injection season for sale during the heating season. The Utility is also authorized to apply carrying costs to all over- or under-recoveries of gas costs, including costs and cost reductions associated with the use of derivative instruments, including cash payments for margin deposits.

• The MoPSC approved a plan applicable to the Utility’s gas supply commodity costs under which it retains a portion of cost savings associated with the acquisition of natural gas below an established benchmark level of gas cost. This gas supply cost management program allows the Utility to retain 10% of cost savings, up to a maximum of $3.0 million annually. The Utility recorded $0.6 million in pre-tax income under the plan in fiscal year 2008. Laclede Gas did not record any income under the plan during fiscal years 2009 and 2010. Income recorded under the plan is included in Utility Operating Revenues on the Statements of Income.

Pursuant to the provisions of the PGA Clause, the difference between actual costs incurred and costs recovered through the application of the PGA (including costs and cost reductions associated with the use of derivative instruments and gas inventory carrying costs), amounts due to or from customers related to operation of the gas supply cost management program, refunds received from the Utility’s suppliers in connection with gas supply, transportation, and storage services, and carrying costs on such over- or under-recoveries are reflected as a deferred charge or credit until fiscal year end. At that time, the balance is classified as a current asset or current liability and recovered from, or credited to, customers over an annual period commencing in November. The balance in the current account is amort ized as amounts are reflected in customer billings. The PGA Clause also provides for the treatment of income from off-system sales and capacity release revenues, as described below.

OFF-SYSTEM SALES - Pre-tax income from off-system sales and capacity release revenues is shared with customers, with an estimated amount assumed in PGA rates. The customer share of such income is determined in accordance with the table below. The difference between the actual amount allocated to customers for each fiscal year and the estimated amount assumed in PGA rates is recovered from, or credited to, customers over an annual period commencing in the subsequent November.

Pre-tax Income	Customer Share	Company Share
First $2 million	85%	15%
Next $2 million	80%	20%
Next $2 million	75%	25%
Amounts exceeding $6 million	70%	30%

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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. GAAP permits 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 temporar y 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 regulatory 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.

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 in the Current Liabilities section of the Balance Sheets. Changes in book overdrafts between periods are reflected as Financing Activities in the Statements of Cash Flows.

GROSS RECEIPTS AND SALES TAXES - Gross receipts taxes associated with Laclede Gas’ natural gas utility service are imposed on the Utility and billed to its customers. These amounts are recorded gross in the Statements of Income. Amounts recorded in Utility Operating Revenues were $44.1 million, $51.6 million, and $52.5 million for fiscal years 2010, 2009, and 2008, respectively. Gross receipts taxes are expensed by the Utility and included in the Taxes, other than income taxes line.

Sales taxes imposed on applicable Utility sales are billed to customers. These amounts are not recorded in the Statements of Income, but are recorded as tax collections payable and included in the Other line of the Current Liabilities section of the Balance Sheets.

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS – Trade accounts receivable are recorded at the amounts due from customers, including unbilled amounts. 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. Accounts receivable are written off against the allowance for doubtful accounts when they are deemed to be uncollectible. The Utility’s provision for uncollectible accounts includes the amortization of previously deferred uncollectible expenses, as approved by the MoPSC.

GROUP MEDICAL AND WORKERS’ COMPENSATION RESERVES - Laclede Gas self-insures its group medical and workers’ compensation costs and carries stop-loss coverage in relation to medical claims and workers’ compensation claims. Reserves for amounts incurred but not reported are established based on historical cost levels and lags between occurrences and reporting.

FAIR VALUE MEASUREMENTS – Certain assets and liabilities are recognized or disclosed at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). GAAP establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The levels of the hierarchy are described below:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Pricing inputs other than quoted prices included within Level 1, which are either directly or indirectly observable for the asset or liability as of the reporting date. These inputs are derived principally from, or corroborated by, observable market data.

Level 3 – Pricing that is based upon inputs that are generally unobservable that are based on the best information available and reflect management’s assumptions about how market participants would price the asset or liability.

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. Additional information about fair value measurements is provided in Note 2, Pension Plans and Other Postretirement Benefits, Note 6, Fair Value of Financial Instruments, and Note 7, Fair Value Measurements.

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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. Grants of awards may be earned by achieving performance objectives and/or other criteria as determined by the Compensation Committee. Awards may include restricted stock, restricted stock units, qualified and non-qualified stock options, stock appreciation rights, and performance shares payable in stock, cash, or a combination of both. The 2006 Plan generally provides a minimum vesting period of at least three years for each type of award. For Laclede Group’s non-employee directors, shares are awarded under the Restricted Stock Plan for Non-Employee Directors. These awards vest depending upon the participant’s age upon entering the plan and years of service as a director. Shares of Laclede Gas common stock, which are 100% owned by Laclede Group, are not transacted under the plans. Laclede Group accounts for awards under these plans in accordance with GAAP, and allocates applicable compensation costs to its subsidiaries. For awards made to its employees, the Utility records its allocation of compensation cost from Laclede Group with a corresponding increase to additional paid-in capital.

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

(Thousands)	2010			2009			2008
Total equity compensation cost	$	3,270		$	3,483		$	2,263
Compensation cost capitalized		(798	)		(815	)		(578	)
Compensation cost recognized in net income		2,472			2,668			1,685
Income tax benefit recognized in net income		(953	)		(1,029	)		(650	)
Compensation cost recognized in net income, net of income tax	$	1,519		$	1,639		$	1,035

As of September 30, 2010, there was $2.9 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 2.3 years.

NEW ACCOUNTING STANDARDS – In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” as codified in ASC Topic 820, “Fair Value Measurements and Disclosures.” 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 ASC Topic 718, “Compensation-Stock Compensation.” 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 this Statement for nonfinancial assets and nonfinancial liabilities, except for those recognized or disclosed at fair value on a recurring basis. The partial adoption of this Statement had no impact on the Utility’s financial position or results of operations. For disclosures required pursuant to ASC Topic 820, see Note 7, Fair Value Measurements. The Utility adopted SFAS No. 157 for certain nonfinancial assets and nonfinancial liabilities as of October 1, 2009. Such adoption had no impact on the Utility’s financial position or results of operations.

In December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” as codified in ASC Topic 715, “Compensation–Retirement Benefits.” 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 additional information regarding investment policies and strategies, the classes of plan assets, fair value measurements of plan assets, and significant concentrations of risk. The enhanced disclosures, which the Utility adopted this fiscal year, are presented in Note 2, Pension Plans and Other Postretirement Benefits. The FSP does not require disclosures for comparative periods prior to adoption.

In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, “Measuring Liabilities at Fair Value,” to update ASC Topic 820. The guidance provides clarification on measuring liabilities at fair value when a quoted price in an active market is not available. In such circumstances, the ASU specifies that a valuation technique should be applied that uses either the quote of the identical liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, or another valuation technique consistent with existing fair value measurement guidance. Laclede Gas’ adoption of this ASU in the first quarter of fiscal year 2010 had no impact on the Utility’s financial position or results of operations.

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In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which amends ASC Topic 820. The ASU requires separate disclosure of significant transfers in and out of level 1 and level 2 fair value measurements. It also requires disclosure of the policy for when transfers are recognized. Additionally, the ASU clarifies certain areas of the guidance, including the level of disaggregation required in fair value measurement disclosures. While the adoption of these updates during the quarter ended March 31, 2010 had no effect on the financial statements, the Utility modified its disclosures in Note 7, Fair Value Measurements, accordingly. The ASU also requires that certain activity in the level 3 fair value measurements recon ciliation be presented on a gross basis (instead of net). This change is effective for the Utility’s disclosures in the first quarter of fiscal year 2012.

In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements.” The ASU amends ASC Topic 855, “Subsequent Events.” Subsequent events or transactions occur after the balance sheet date, but prior to the financial statements being issued, and are required to be assessed by management for possible financial statement recognition and/or disclosure. For entities that are Securities and Exchange Commission (SEC) filers, this ASU removes the requirement to disclose the date through which subsequent events have been evaluated to alleviate potential conflicts with SEC guidance. Laclede Gas adopted this ASU during the quarter ended March 31, 2010. While the adoption of the ASU did not impact the financial statements or management& #8217;s process for assessing subsequent events, the Utility did modify its disclosures accordingly.

2. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

In September 2009, the Utility adopted the measurement date provisions in ASC Topic 715. ASC Topic 715 requires that plan assets and benefit obligations be measured as of the date of the employer’s fiscal year-end statement of financial position. The Utility previously used a June 30 valuation date for its benefit plans. To change to a September 30 measurement date, the Utility elected to use the 15-month alternative transition approach, wherein benefit costs for the period between June 30, 2008 and September 30, 2009 are allocated proportionately between a retained earnings adjustment and periodic benefit cost for the period. As a result of changing the measurement date, excluding the effect of income taxes, the Utility recorded a one-time cumulative effect adjustment to reduce retained earnings by $0.2 million, increase accumulated other comprehensive income by $50,000, and, pursuant to ASC Topic 980, increase net regulatory assets by $5.1 million. In conjunction with the adoption, the Utility recorded increases to benefit liabilities totaling $5.3 million.

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 Laclede Gas’ 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 and provides interest credits on the balance. 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 at January 1, 2009. Effective January 1, 2010, the Utility modified the calculation of future benefits under its Missouri Natural Gas division plan from a caree r average formula to a cash balance formula, which accrues benefits based on a percentage of compensation, provides interest credits on the balance, and provides certain transition credits. Benefits attributable to plan participation prior to January 1, 2010 will be based on career average compensation earned as a participant prior to January 1, 2010. Plan assets consist primarily of corporate and U.S. government obligations and equity market exposure achieved through derivative instruments.

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Pension costs in 2010, 2009, and 2008 amounted to $7.4, $6.2, and $6.1 million, respectively, including amounts charged to construction.

The net periodic pension costs include the following components:

(Thousands)	2010			2009			2008
Service cost – benefits earned during the period	$	8,841		$	8,936		$	12,970
Interest cost on projected benefit obligation		19,729			20,957			18,680
Expected return on plan assets		(20,256	)		(20,938	)		(20,650	)
Amortization of prior service cost		756			1,035			1,088
Amortization of actuarial loss		8,107			3,096			3,165
Sub-total		17,177			13,086			15,253
Loss on lump-sum settlement		1,078			—			—
Regulatory adjustment		(10,862	)		(6,890	)		(9,120	)
Net pension cost	$	7,393		$	6,196		$	6,133

Other changes in plan assets and pension benefit obligations recognized in other comprehensive income include the following:

(Thousands)	2010			2009			2008
Current year actuarial loss	$	3,822		$	84,187		$	18,050
Amortization of actuarial loss		(9,185	)		(3,096	)		(3,165	)
Current year prior service credit		(2,949	)		—			—
Amortization of prior service cost		(756	)		(1,035	)		(1,088	)
Sub-total		(9,068	)		80,056			13,797
Regulatory adjustment		9,380			(78,527	)		(13,697	)
Total recognized in other comprehensive income	$	312		$	1,529		$	100

Pursuant to the provisions of the Laclede Gas pension plans, pension obligations may be satisfied by lump-sum cash payments. Pursuant to a MoPSC Order, lump-sum payments are recognized as settlements (which can result in gains or losses) only if the total of such payments exceeds 100% of the sum of service and interest costs. Lump-sum payments recognized as settlements during fiscal 2010 were $2.3 million. No lump-sum payments were recognized as settlements during fiscal years 2009 and 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. 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 Statements of Comprehensive Income is deferred as a regulatory asset or regulator y liability.

34

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

(Thousands)	2010			2009 *
Benefit obligation at beginning of year	$	378,032		$	308,736
Service cost		8,841			12,371
Interest cost		19,729			26,150
Plan amendments		(2,949	)		—
Actuarial loss		28,437			54,769
Settlement loss		778			—
Gross benefits paid **		(34,508	)		(23,994	)
Benefit obligation at end of year	$	398,360		$	378,032
Accumulated benefit obligation at end of year	$	338,042		$	305,255

*	Due to the change in measurement date, fiscal year 2009 amounts reflect 15 months of activity from July 1, 2008 to September 30, 2009.
**	Includes $(2,293) lump-sum payments recognized as settlements in fiscal year 2010. No lump-sum payments were recognized as settlements in fiscal year 2009.

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

(Thousands)	2010			2009 *
Fair value of plan assets at beginning of year	$	223,688		$	248,346
Actual return on plan assets		45,648			(3,245	)
Employer contributions		6,094			2,581
Gross benefits paid **		(34,508	)		(23,994	)
Fair value of plan assets at end of year	$	240,922		$	223,688
Funded status of plans, end of year	$	(157,438	)	$	(154,344	)

*	Due to the change in measurement date, fiscal year 2009 amounts reflect 15 months of activity from July 1, 2008 to September 30, 2009.
**	Includes $(2,293) lump-sum payments recognized as settlements in fiscal year 2010. No lump-sum payments were recognized as settlements in fiscal year 2009.

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The following table sets forth the amounts recognized in the Balance Sheets at September 30:

(Thousands)	2010			2009
Current liabilities	$	(2,420	)	$	(1,920	)
Noncurrent liabilities		(155,018	)		(152,424	)
Total	$	(157,438	)	$	(154,344	)
Pre-tax amounts recognized in accumulated other comprehensive income
not yet recognized as components of net periodic pension cost consist of:
Net actuarial loss	$	157,327		$	162,689
Prior service costs		6,245			9,950
Sub-total		163,572			172,639
Adjustments for amounts included in Regulatory Assets		(158,867	)		(168,246	)
Total	$	4,705		$	4,393

At September 30, 2010, the following pre-tax amounts are expected to be amortized from accumulated other comprehensive income into net periodic pension cost during fiscal year 2011:

(Thousands)
Amortization of net actuarial loss	$	10,228
Amortization of prior service cost		642
Sub-total		10,870
Regulatory adjustment		(10,444	)
Total	$	426

The assumptions used to calculate net periodic pension costs are as follows:

	2010	2009	2008
Weighted average discount rate	5.25%	6.60%	6.25%
Weighted average rate of future compensation increase	3.25%	3.75%	3.50%
Expected long-term rate of return on plan assets	8.25%	8.25%	8.25%

The weighted average discount rate is based on long-term, high quality bond indices at the measurement date. The expected long-term rate of return on plan assets is based on historical and projected rates of return for current and planned asset classes in the investment portfolio. Assumed projected rates of return for each asset class were selected after analyzing historical experience and future expectations of the returns. The overall expected rate of return for the portfolio was developed based on the target allocation for each class. The expected return is a long-term assumption that generally does not change annually.

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

	2010	2009
Weighted average discount rate	4.75%	5.25%
Weighted average rate of future compensation increase	3.00%	3.25%

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Following are the projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for plans that have a projected benefit obligation and an accumulated benefit obligation in excess of plan assets:

(Thousands)	2010		2009
Projected benefit obligation	$	398,360	$	378,032
Fair value of plan assets		240,922		223,688
Accumulated benefit obligation		338,042		305,255
Fair value of plan assets		240,922		223,688

Following are the targeted and actual plan assets by category:

	2011	2010	2009
	Target	Actual	Actual
Equity Strategy	50%	49%	50%
Debt Securities	50%	51%	50%
Total	100%	100%	100%

Laclede Gas’ investment policy is designed to maximize, to the extent possible, the funded status of the plan over time, and minimize volatility of funding and costs. The policy seeks to maximize investment returns consistent with these objectives and Laclede Gas’ tolerance for risk. The duration of plan liabilities and the impact of potential changes in asset values on the funded status are fundamental considerations in the selection of plan assets. Outside investment management specialists are utilized in each asset class. Such specialists are provided with guidelines, where appropriate, designed to ensure that the investment portfolio is managed in accordance with the policy. The policy seeks to avoid significant concentrations of risk by investing in a diversified portfolio of assets. Investmen ts in corporate, U. S. government and agencies, and, to a lesser extent, international debt securities seek to provide duration matching with plan liabilities, and typically have investment grade ratings and reflect allocations across various entities and industries. The investment policy permits the use of derivative instruments, which may be used to achieve the desired market exposure of an index, adjust portfolio duration, or rebalance the total portfolio to the target asset allocation. The Equity Strategy utilizes a combination of derivative instruments and debt securities to achieve both diversified equity market exposure while generating returns from the fixed-income investments and providing further duration matching with the liabilities. Performance and compliance with the guidelines is regularly monitored. The policy calls for increased allocations to debt securities as the funded status improves.

Following are expected pension benefit payments for the succeeding five fiscal years, and in aggregate for the five years thereafter:

(Millions)	Pensions from Qualified Trust			Pensions from Laclede Gas Funds
2011		$	22.0		$	2.4
2012			20.8			1.5
2013			23.8			1.0
2014			25.9			0.8
2015			30.1			0.7
2016 – 2020			188.2			3.7

The funding policy of Laclede Gas is to contribute an amount not less than the minimum required by government funding standards, nor more than the maximum deductible amount for federal income tax purposes. Contributions to the pension plans in fiscal year 2011 are anticipated to be $10.6 million into the qualified trusts, and $2.4 million into the non-qualified plans.

37

Postretirement Benefits

Laclede Gas provides certain life insurance benefits at retirement. Medical insurance is available after early retirement until age 65. The transition obligation not yet includible in postretirement benefit cost is being amortized over 20 years. Postretirement benefit costs in 2010, 2009, and 2008 amounted to $7.6 million per year, including amounts charged to construction.

Net periodic postretirement benefit costs consisted of the following components:

(Thousands)	2010			2009			2008
Service cost – benefits earned during the period	$	6,442		$	5,132		$	4,560
Interest cost on accumulated postretirement
benefit obligation		4,515			4,679			3,909
Expected return on plan assets		(3,032	)		(2,376	)		(2,039	)
Amortization of transition obligation		136			136			136
Amortization of prior service credit		(2,328	)		(2,328	)		(2,328	)
Amortization of actuarial loss		3,980			3,509			2,985
Sub-total		9,713			8,752			7,223
Regulatory adjustment		(2,071	)		(1,110	)		419
Net postretirement benefit cost	$	7,642		$	7,642		$	7,642

Other changes in plan assets and postretirement benefit obligations recognized in other comprehensive income include the following:

(Thousands)	2010			2009			2008
Current year actuarial loss	$	6,713		$	11,137		$	9,772
Amortization of actuarial loss		(3,980	)		(3,509	)		(2,985	)
Amortization of prior service credit		2,328			2,328			2,328
Amortization of transition obligation		(136	)		(136	)		(136	)
Sub-total		4,925			9,820			8,979
Regulatory adjustment		(4,925	)		(9,820	)		(8,979	)
Total recognized in other comprehensive income	$	—		$	—		$	—

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. The recovery in rates for the Utility’s postretirement benefit plans is based on an allowance of $7.6 million annually. 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 Statements of Comprehensive Income is deferred a s a regulatory asset or regulatory liability.

38

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

(Thousands)	2010			2009 *
Benefit obligation at beginning of year	$	83,631		$	69,714
Service cost		6,442			6,415
Interest cost		4,515			5,848
Actuarial loss		7,564			7,298
Gross benefits paid		(4,173	)		(5,644	)
Benefit obligation at end of year	$	97,979		$	83,631

* Due to the change in measurement date, fiscal year 2009 amounts reflect 15 months of activity from July 1, 2008 to September 30, 2009.

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

(Thousands)	2010			2009 *
Fair value of plan assets at beginning of year	$	33,561		$	26,082
Actual return on plan assets		3,883			(869	)
Employer contributions		11,819			13,992
Gross benefits paid		(4,173	)		(5,644	)
Fair value of plan assets at end of year	$	45,090		$	33,561
Funded status of plans, end of year	$	(52,889	)	$	(50,070	)

* Due to the change in measurement date, fiscal year 2009 amounts reflect 15 months of activity from July 1, 2008 to September 30, 2009.

The following table sets forth the amounts recognized in the Balance Sheets at September 30:

(Thousands)	2010			2009
Current liabilities	$	(300	)	$	(280	)
Noncurrent liabilities		(52,589	)		(49,790	)
Total	$	(52,889	)	$	(50,070	)
Pre-tax amounts recognized in accumulated other comprehensive income
not yet recognized as components of net periodic postretirement cost
consist of:
Net actuarial loss	$	49,442		$	46,709
Prior service credit		(4,423	)		(6,751	)
Transition obligation		365			501
Sub-total		45,384			40,459
Adjustments for amounts included in Regulatory Assets		(45,384	)		(40,459	)
Total	$	—		$	—

39

At September 30, 2010, the following pre-tax amounts are expected to be amortized from accumulated other comprehensive income into net periodic postretirement benefit cost during fiscal year 2011:

(Thousands)
Amortization of net actuarial loss	$	4,443
Amortization of prior service credit		(2,328	)
Amortization of transition obligation		136
Sub-total		2,251
Regulatory adjustment		(2,251	)
Total	$	—

The assumptions used to calculate net periodic postretirement benefit costs are as follows:

	2010	2009	2008
Weighted average discount rate	5.15%	6.35%	6.25%
Weighted average rate of future compensation increase	3.25%	3.75%	3.50%
Expected long-term rate of return on plan assets	8.25%	8.25%	8.25%

The weighted average discount rate is based on long-term, high quality bond indices at the measurement date. The expected long-term rate of return on plan assets is based on historical and projected rates of return for current and planned asset classes in the investment portfolio. Assumed projected rates of return for each asset class were selected after analyzing historical experience and future expectations of the returns. The overall expected rate of return for the portfolio was developed based on the target allocation for each class. The expected return is a long-term assumption that generally does not change annually.

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

	2010	2009
Weighted average discount rate	4.70%	5.15%
Weighted average rate of future compensation increase	3.00%	3.25%

The assumed medical cost trend rates at September 30 are as follows:

	2010	2009
Medical cost trend assumed for next year	8.00%	8.00%
Rate to which the medical cost trend rate is assumed to decline
(the ultimate medical cost trend rate)	5.00%	5.00%
Year that the rate reaches the ultimate trend	2017	2016

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

(Thousands)	1% Increase			1% Decrease
Effect on net periodic postretirement benefit cost		$	1,270		$	(1,130	)
Effect on accumulated postretirement benefit obligation			5,850			(5,300	)

Following are the targeted and actual plan assets by category:

	2011	2010	2009
	Target	Actual	Actual
Equity Securities	60%	59%	58%
Debt Securities	40%	41%	42%
Total	100%	100%	100%

40

Missouri state law provides for the recovery in rates of costs accrued pursuant to GAAP provided that such costs are funded through an independent, external funding mechanism. Laclede Gas established Voluntary Employees’ Beneficiary Association and Rabbi trusts as its external funding mechanisms. Laclede Gas’ investment policy seeks to maximize investment returns consistent with Laclede Gas’ tolerance for risk. Outside investment management specialists are utilized in each asset class. Such specialists are provided with guidelines, where appropriate, designed to ensure that the investment portfolio is managed in accordance with policy. Performance and compliance with the guidelines is regularly monitored. Laclede Gas’ current investment policy targets an asset allocation of 60% to equit y securities and 40% to debt securities, excluding cash held in short-term debt securities for the purpose of making benefit payments. Laclede Gas currently invests in a mutual fund which is rebalanced on an ongoing basis to the target allocation. The mutual fund is diversified across U.S. stock and bond markets.

Following are expected postretirement benefit payments for the succeeding five fiscal years, and in aggregate for the five years thereafter:

(Millions)	Benefits Paid from Qualified Trust			Benefits Paid from Laclede Gas Funds
2011		$	5.0		$	0.3
2012			5.3			0.3
2013			5.5			0.3
2014			5.9			0.3
2015			6.4			0.3
2016 – 2020			45.7			1.9

Laclede Gas’ funding policy is to contribute amounts to the trusts equal to the periodic benefit cost calculated pursuant to GAAP as recovered in rates. Contributions to the postretirement plans in fiscal year 2011 are anticipated to be $13.3 million to the qualified trusts, and $0.3 million paid directly to participants from Laclede Gas funds.

Other Plans

Laclede Gas sponsors 401(k) plans that cover substantially all employees. The plans allow employees to contribute a portion of their base pay in accordance with specific guidelines. Laclede Gas provides a match of such contributions within specific limits. The cost of the defined contribution plans of Laclede Gas amounted to $3.6 million, $3.5 million, and $3.1 million for fiscal years 2010, 2009, and 2008, respectively.

Fair Value Measurements of Pension and Other Postretirement Plan Assets

The table below categorizes the fair value measurements of Laclede Gas’ pension plan assets:

(Thousands)		Quoted Prices in Active Markets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
As of September 30, 2010
Cash and cash equivalents	$	1,406	$	—	$	—	$	1,406
Debt Securities
U.S. bond mutual funds		33,082		—		—		33,082
U.S. government		—		90,993		—		90,993
U.S. corporate		—		90,476		—		90,476
U.S. municipal		—		6,241		—		6,241
International		—		18,676		—		18,676
Derivative instruments (a)		—		9		—		9
Other		—		39		—		39
Total	$	34,488	$	206,434	$	—	$	240,922

(a) Derivative assets of $10,399 net of cash margin payable of $10,390.

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The table below categorizes the fair value measurements of Laclede Gas’ postretirement plan assets:

(Thousands)		Quoted Prices in Active Markets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
As of September 30, 2010
Cash and cash equivalents	$	1,021	$	—	$	—	$	1,021
U.S. stock/bond mutual fund		44,069		—		—		44,069
Total	$	45,090	$	—	$	—	$	45,090

Cash and cash equivalents include money market mutual funds valued based on quoted market prices. Fair values of derivative instruments are calculated by investment managers who use valuation models that incorporate observable market inputs. Debt securities are valued based on broker/dealer quotations or by using observable market inputs. The stock and bond mutual funds are valued at the quoted market price of the identical securities.

3. STOCKHOLDER’S EQUITY

Total shares of common stock outstanding were 11,674 and 11,634 at September 30, 2010 and 2009, respectively.

Common stock and paid-in capital increased $4.4 million and $45.9 million in 2010 and 2009, respectively. These increases were primarily due to the issuance of common stock to Laclede Group and stock-based compensation costs allocated to Laclede Gas from Laclede Group in both periods.

Laclede Gas periodically sold shares of its stock to Laclede Group at prices per share equal to book value on the last day of the quarter preceding each sale. Laclede Gas sold 40 shares to Laclede Group for $1.4 million during fiscal 2010 and 1,218 shares to Laclede Group for $42.0 million during fiscal 2009, which also represents the total number of shares issued in each year. The proceeds from all the sales were used to reduce short-term borrowings. Exemption from registration for all of the sales was claimed under Section 4(2) of the Securities Act of 1933.

Substantially all of the utility plant of Laclede Gas is subject to the liens of its first mortgage bonds. The mortgage contains several restrictions on Laclede Gas’ ability to pay cash dividends on its common stock. These provisions are applicable regardless of whether the stock is publicly held or, as has been the case since the formation of Laclede Group, held solely by the Utility’s parent company. Under the most restrictive of these provisions, no cash dividend may be declared or paid if, after the dividend, the aggregate net amount spent for all dividends after September 30, 1953, would exceed a maximum amount determined by a formula set out in the mortgage. Under that formula, the maximum amount is the sum of $8 million plus earnings applicable to common stock (adjusted for stock r epurchases and issuances) for the period from September 30, 1953, to the last day of the quarter before the declaration or payment date for the dividends. As of September 30, 2010 and 2009, the amount under the mortgage’s formula that was available to pay dividends was $280 million and $274 million, respectively. Thus, all of the Utility’s retained earnings were free from such restrictions as of those dates.

Laclede Gas has on file with the SEC an effective shelf registration on Form S-3 for issuance of $350 million of first mortgage bonds, unsecured debt, and preferred stock, all of which remains available to Laclede Gas at this time. The Utility has authority from the MoPSC until June 30, 2013 to issue up to $518 million in debt securities and preferred stock, including on a private placement basis, as well as to enter into capital leases, issue common stock and receive paid-in capital, of which $517.6 million remained under this authorization as of September 30, 2010. The amount, timing, and type of additional financing to be issued will depend on cash requirements and market conditions.

42

The components of accumulated other comprehensive income (loss), net of income taxes, recognized in the Balance Sheets at September 30 were as follows:

(Thousands)	Net Unrealized Gains (Losses) on Cash Flow Hedges				Defined Benefit Pension and Other Postretirement Benefit Plans				Total
Balance, September 30, 2008		$	—			$	(1,790	)		$	(1,790	)
Current-period change			79				(939	)			(860	)
Adoption of SFAS No. 158, as codified in   ASC Topic 715			—				31				31
Balance, September 30, 2009			79				(2,698	)			(2,619	)
Current-period change			(64	)			(192	)			(256	)
Balance, September 30, 2010		$	15			$	(2,890	)		$	(2,875	)

Income tax expense (benefit) recorded for items of other comprehensive income reported in the Statements of Comprehensive Income is calculated by applying statutory federal, state, and local income tax rates applicable to ordinary income. The tax rates applied to individual items of other comprehensive income are similar within each reporting period.

4. LONG-TERM DEBT

Maturities on long-term debt for the five fiscal years subsequent to September 30, 2010 are as follows:

2011	$25 million	(Paid at maturity on November 15, 2010)
2012	—
2013	$25 million
2014	—
2015	—

At September 30, 2010, Laclede Gas had fixed-rate long-term debt totaling $390 million (including current maturities). While these long-term debt issues are fixed-rate, they are subject to changes in fair value as market interest rates change. Of the Utility’s $390 million in long-term debt, $75 million have no call options, $235 million have make-whole call options, and $80 million are callable at par in 2013. None of the debt has any put options.

Laclede Gas has on file with the SEC an effective shelf registration on Form S-3 for issuance of $350 million of first mortgage bonds, unsecured debt, and preferred stock, all of which remains available to Laclede Gas at this time. The Utility has authority from the MoPSC until June 30, 2013 to issue up to $518 million in debt securities and preferred stock, including on a private placement basis, as well as to enter into capital leases, issue common stock and receive paid-in capital, of which $517.6 million remained under this authorization as of September 30, 2010. The amount, timing, and type of additional financing to be issued will depend on cash requirements and market conditions.

Substantially all of the utility plant of Laclede Gas is subject to the liens of its first mortgage bonds. The mortgage contains several restrictions on Laclede Gas’ ability to pay cash dividends on its common stock, which are described more fully in Note 3, Stockholder’s Equity.

At September 30, 2010 and 2009, Laclede Gas had preferred stock shares authorized totaling 1,480,000, but none were issued and outstanding.

5. NOTES PAYABLE AND CREDIT AGREEMENTS

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 or through direct use of the lines of credit. 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. During fiscal year 2010, Laclede Gas utilized only commercial paper for external short-term funding. Commercial paper borrowings ranged between $48.2 million and $178.0 million during the fiscal year, and stood at $129.7 million on September 30, 2010. The weighted average interest rate on the short-term borrowings was 0.3% per annum at September 30,&# 160;2010. For the entire fiscal year, short-term borrowings averaged $107.9 million at an average interest rate of 0.3%. Laclede Gas borrowed a maximum of $1.2 million from Laclede Group during the fiscal year, and there were no such borrowings outstanding at the end of the fiscal year.

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During fiscal year 2009, the Utility’s short-term borrowing requirements, which ranged between $116.9 million and $386.4 million, were generally met by the sale of commercial paper. However, due to unfavorable terms in the commercial paper markets generally in the first half of fiscal year 2009, Laclede Gas utilized its line of credit and borrowing from Laclede Group as more economical sources of short-term financing. External borrowings (which exclude borrowings from Laclede Group) ranged between $116.9 million and $309.9 million. The Utility had $129.8 million in commercial paper outstanding as of September 30, 2009, at a weighted average interest rate of 0.2% per annum, and no borrowings under its bank line or from Laclede Group.

Laclede Gas’ lines of credit include covenants limiting total debt, including short-term debt, to no more than 70% of total capitalization and requiring earnings before interest, taxes, depreciation, and amortization (EBITDA) to be at least 2.25 times interest expense. On September 30, 2010, total debt was 56% of total capitalization. For the fiscal year ended September 30, 2010, EBITDA was 4.55 times interest expense.

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of financial instruments at September 30, 2010 and 2009 are as follows:

(Thousands)	Carrying Amount		Fair Value
2010:
Cash and cash equivalents	$	1,009	$	1,009
Marketable securities		12,856		12,856
Derivative instrument assets		10,974		10,974
Short-term debt		129,650		129,650
Long-term debt, including current portion		389,298		443,959
2009:
Cash and cash equivalents	$	1,402	$	1,402
Marketable securities		11,110		11,110
Derivative instrument assets		12,369		12,369
Short-term debt		129,800		129,800
Long-term debt		389,240		423,375

The carrying amounts for cash and cash equivalents and short-term debt approximate fair value due to the short maturity of these instruments. The fair values of long-term debt are estimated based on market prices for similar issues. The fair value of marketable securities and derivative instrument assets are valued as described in Note 7, Fair Value Measurements.

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7. FAIR VALUE MEASUREMENTS

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.

(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			Total
As of September 30, 2010
Assets
U. S. Stock/Bond Mutual Funds	$	12,856	$	—	$	—	$	—		$	12,856
NYMEX natural gas contracts		1,909		—		—		8,786			10,695
NYMEX gasoline and heating     oil contracts		59		—		—		220			279
Total	$	14,824	$	—	$	—	$	9,006		$	23,830
Liabilities
NYMEX natural gas contracts	$	40,537	$	—	$	—	$	(40,537	)	$	—
NYMEX gasoline & heating     oil contracts		37		—		—		(37	)		—
Total	$	40,574	$	—	$	—	$	(40,574	)	$	—
As of September 30, 2009
Assets
U. S. Stock/Bond Mutual Funds	$	11,110	$	—	$	—	$	—		$	11,110
NYMEX natural gas contracts		6,971		—		—		5,121			12,092
NYMEX gasoline and heating     oil contracts		278		—		—		(1	)		277
Total	$	18,359	$	—	$	—	$	5,120		$	23,479
Liabilities
NYMEX natural gas contracts	$	53,144	$	—	$	—	$	(53,144	)	$	—

The mutual funds included in Level 1 are 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). During fiscal years 2010 and 2009, there were no transfers between the levels of the fair value hierarchy. The Utility’s policy is to recognize such transfers, if any, as of the beginning of the interim reporting period in which circumstances change or events occur to cause the transfer. The mutual funds are included in the Other investments line 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 l egally enforceable netting agreement exists between Laclede Gas and the counterparty to a derivative contract. For additional information on derivative instruments, see Note 8, Derivative Instruments and Hedging Activities.

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8. 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 and 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 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 d oes not designate these instruments as hedging instruments for financial reporting purposes because gains or losses associated with the use of these derivative instruments are deferred and recorded as regulatory assets or regulatory liabilities pursuant to ASC Topic 980 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 September 30, 2010, Laclede Gas held 0.6 million gallons of gasoline futures contracts at an average price of $2.10 per gallon and 0.1 million gallons of heating oil futures contracts (to hedge diesel fuel purchases) at an average price of $2.33 per gallon. Most of these futures contracts, the longest of which extends to September 2011, are designated as cash flow hedges of forecasted transactions pursuant to ASC Topic 815, “Derivatives and Hedging.” The gains or losses on these derivative instruments are not subject to the Utility’s PGA Cla use.

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 September 30, 2010, it is expected that essentially no net amounts will be reclassified into the Statements of Income during fiscal year 2011. Cash flows from hedging transactions are classified in the same category as the cash flows from the items tha t 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 September 30, 2010 were as follows:

	MMBtu (millions)	Avg. Price Per MMBtu
Open long futures positions
Fiscal 2011	13.16	$	6.19
Fiscal 2012	4.94		5.47

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At September 30, 2010, Laclede Gas also had 23.9 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 Statements of Comprehensive Income
	Location of Gain (Loss)
(Thousands)	Recorded in Income		2010			2009 (a)
Derivatives in Cash Flow Hedging Relationships
NYMEX gasoline and heating oil contracts:
Effective portion of gain (loss) recognized in     OCI on derivative		$	160		$	248
Effective portion of gain (loss) reclassified from     AOCI to income	Utility – Other Operation Expenses		264			119
Ineffective portion of gain (loss) on derivatives     recognized in income	Utility – Other Operation Expenses		(57	)		198
Derivatives Not Designated as Hedging Instruments (b)
NYMEX gasoline and heating oil contracts:
Gain (loss) recognized in income on derivative	Other Income and (Income Deductions) - Net	$	(1	)	$	17

(a)	The Utility prospectively adopted SFAS No. 161, as codified in ASC Topic 815, in the second quarter of fiscal year 2009. Accordingly, amounts disclosed in this column exclude activity prior to January 1, 2009.
(b)	Gains and losses on Laclede Gas' NYMEX natural gas derivative instruments, which are not designeated as hedging instruments for financial reporting purposes, are deferred pursuant to the Utility's PGA Clause and recorded as regulatory assets or regulatory liabilities. These gains and losses are excluded from the table above because they have no direct impact on the Statements of Income.

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Fair Value of Derivative Instruments in the Balance Sheet at September 30, 2010
	Asset Derivatives				Liability Derivatives
(Thousands)	Balance Sheet Location		Fair Value	*	Balance Sheet Location		Fair Value	*
Derivatives designated as hedging instruments
NYMEX gasoline and heating oil contracts	Derivative Instrument Assets	$	56		Derivative Instrument Assets	$	34
Derivatives not designated as hedging instruments
NYMEX natural gas contracts	Derivative Instrument Assets		1,401		Derivative Instrument Assets		37,457
	Other Deferred Charges		508		Other Deferred Charges		3,080
NYMEX gasoline and heating oil contracts	Derivative Instrument Assets		3		Derivative Instrument Assets		3
Sub-total			1,912				40,540
Total derivatives		$	1,968			$	40,574
Fair Value of Derivative Instruments in the Balance Sheet at September 30, 2009
	Asset Derivatives				Liability Derivatives
(Thousands)	Balance Sheet Location		Fair Value	*	Balance Sheet Location		Fair Value	*
Derivatives designated as hedging instruments
NYMEX gasoline and heating oil contracts	Derivative Instrument Assets	$	278		Derivative Instrument Assets	$	—
Derivatives not designated as hedging instruments
NYMEX natural gas contracts	Derivative Instrument Assets		6,971		Derivative Instrument Assets		53,144
Total derivatives		$	7,249			$	53,144

* 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. 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 Sheets. As such, the gross balances presented in the table above are not indicative of the Utility’s net economic exposure. Refer to Note 7, Fair Value Measurements, for information on the valuation of derivative instruments.

Following is a reconciliation of the amounts in the tables above to the amounts presented in the Balance Sheets:

	(Thousands)	2010			2009
	Fair value of asset derivatives presented above	$	1,968		$	7,249
	Fair value of cash margin receivables		49,580			58,264
	Netting of assets and liabilities with the same counterparty		(40,574	)		(53,144	)
	Total	$	10,974		$	12,369
	Derivative Instrument Assets, per Balance Sheets:
	Derivative instrument assets	$	9,288		$	12,369
	Other deferred charges		1,686			—
	Total	$	10,974		$	12,369
	Fair value of liability derivatives presented above	$	40,574		$	53,144
	Netting of assets and liabilities with the same counterparty		(40,574	)		(53,144	)
	Derivative instrument liabilities, per Balance Sheets*	$	—		$	—
*	Included in the Other line of the Current Liabilities section

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9. INCOME TAXES

The net provisions for income taxes charged during the fiscal years ended September 30, 2010, 2009, and 2008 are as follows:

(Thousands)	2010			2009			2008
Included in Statements of Income:
Federal
Current	$	(11,412	)	$	(6,437	)	$	7,476
Deferred		27,222			18,423			5,762
Investment tax credits		(216	)		(219	)		(227	)
State and local
Current		(1,892	)		(1,108	)		1,153
Deferred		4,448			3,200			1,100
Total Income Tax Expense	$	18,150		$	13,859		$	15,264

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

	2010			2009			2008
Federal income tax statutory rate		35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal
income tax benefits		2.9			2.9			2.7
Certain expenses capitalized on books and
deducted on tax return		(5.6	)		(5.9	)		(5.4	)
Taxes related to prior years		(0.4	)		(0.5	)		(1.4	)
Other items – net		(0.5	)		(2.0	)		(2.9	)
Effective income tax rate		31.4	%		29.5	%		28.0	%

The significant items comprising the net deferred tax liability recognized in the Balance Sheets as of September 30 are as follows:

(Thousands)	2010			2009
Deferred tax assets:
Reserves not currently deductible	$	18,808		$	19,419
Pension and other postretirement benefits		78,790			80,508
Unamortized investment tax credits		2,222			2,358
Other		7,108			10,015
Total deferred tax assets		106,928			112,300
Deferred tax liabilities:
Relating to property		255,901			221,392
Regulatory pension and other postretirement benefits		110,396			109,041
Deferred gas costs		22,126			16,609
Other		15,519			22,551
Total deferred tax liabilities		403,942			369,593
Net deferred tax liability		297,014			257,293
Net deferred tax liability – current		(4,248	)		(912	)
Net deferred tax liability – non-current	$	292,766		$	256,381

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Laclede Group files a consolidated federal and state income tax return and allocates income taxes to Laclede Gas and its other subsidiaries as if each entity were a separate taxpayer. Pursuant to GAAP, 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. The Utility records potential interest and penalties related to its uncertain tax positions as interest expense and other income deductions, respectively. 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.

The following table presents a reconciliation of the beginning and ending amount balances of unrecognized tax benefits at September 30 as reported in the Balance Sheets:

(Thousands)	2010		2009
Unrecognized tax benefits, beginning of year	$	1,366	$	1,033
Increases related to tax positions taken in current year		5,017		333
Unrecognized tax benefits, end of year	$	6,383	$	1,366

The amount of unrecognized tax benefits, which, if recognized, would affect the Utility’s effective tax rate were $1.7 million and $1.4 million as of September 30, 2010 and 2009, respectively. It is reasonably possible that events will occur in the next 12 months that could increase or decrease the amount of the Utility’s unrecognized tax benefits. The Utility does not expect any such change will be significant.

Interest accrued associated with the Utility’s uncertain tax positions as of September 30, 2010 and 2009 were $0.3 million and $0.1 million, respectively, and no penalties were accrued as of those dates. Interest expense accrued during fiscal year 2010 was $0.2 million and immaterial for fiscal year 2009 and 2008. During fiscal year 2008, the Utility reversed $0.2 million of accrued interest expense and $0.1 million of accrued penalties in the Statements of Income.

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 2007.

10. OTHER INCOME AND (INCOME DEDUCTIONS) – NET

(Thousands)	2010		2009		2008
Interest income	$	1,493	$	2,505	$	2,133
Net investment gain (loss)		890		229		(1,403	)
Other income		161		316		69
Other income deductions		25		78		407
Other Income and (Income Deductions) – Net	$	2,569	$	3,128	$	1,206

The decrease in Other Income and (Income Deductions) – Net in fiscal year 2010 (compared to fiscal year 2009), was primarily due to lower income associated with carrying costs applied to under-recoveries of gas costs and other minor variations, partially offset by higher net investment gains. Carrying costs on under-recoveries of gas costs are recovered through the Utility’s PGA Clause.

The increase in Other Income and (Income Deductions) – Net in fiscal year 2009 (compared to fiscal year 2008), was primarily due to higher net investment gains and increased income associated with carrying costs applied to under-recoveries of gas costs, partially offset by additional proceeds received during fiscal year 2008 related to the Utility’s interest, as a policyholder, in the sale of a mutual insurance company.

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11. INFORMATION BY OPERATING SEGMENT

The Regulated Gas Distribution segment consists of the regulated operations of Laclede Gas. Laclede Gas is a public utility engaged in the retail distribution and sale of natural gas serving an area of eastern Missouri, with a population of approximately 2.1 million, including the City of St. Louis and ten counties in eastern Missouri. The Non-Regulated Other segment includes the retail sale of gas appliances, which ceased operation September 30, 2009 and was not material, and the non-regulated propane transaction. Accounting policies are described in Note 1. There are no material intersegment revenues.

Beginning in fiscal 2010, Laclede Gas’ parent company, Laclede Group, evaluates the performance of its operating segments based on the computation of net economic earnings. Net economic earnings exclude from reported net income the after-tax impact of net unrealized gains and losses on energy-related derivative contracts. For comparative purposes, the measurement of segment performance has been presented to conform to the current-period presentation.

	Regulated Gas		Non-Regulated		Adjustments &
(Thousands)	Distribution		Other		Eliminations		Total
FISCAL 2010
Operating revenues	$	864,297	$	10,327	$	—	$	874,624
Depreciation & amortization		37,572		—		—		37,572
Interest income		1,493		—		—		1,493
Interest charges		26,852		—		—		26,852
Income tax expense		15,842		2,308		—		18,150
Net economic earnings		36,141		3,675		—		39,816
Total assets		1,657,530		922		—		1,658,452
Capital expenditures		56,234		—		—		56,234
FISCAL 2009
Operating revenues	$	1,053,993	$	2,246	$	—	$	1,056,239
Depreciation & amortization		36,751		—		—		36,751
Interest income		2,505		—		—		2,505
Interest charges		30,353		—		—		30,353
Income tax expense		13,856		3		—		13,859
Net economic earnings		33,072		6				33,078
Total assets		1,598,600		1,687		—		1,600,287
Capital expenditures		51,384		—		—		51,384
FISCAL 2008
Operating revenues	$	1,128,287	$	2,693	$	—	$	1,130,980
Depreciation & amortization		35,303		—		—		35,303
Interest income		2,133		—		—		2,133
Interest charges		30,214		—		—		30,214
Income tax expense		15,244		20		—		15,264
Net economic earnings		39,174		32				39,206
Total assets		1,624,041		1,774		—		1,625,815
Capital expenditures		55,304		—		—		55,304

Reconciliation of Net Economic Earnings to Net Income
(Thousands)	2010			2009		2008
Total Net Economic Earnings above	$	39,816		$	33,078	$	39,206
Add: Unrealized gain (loss) on energy-related     derivative contracts, net of tax		(91	)		105		—
Net Income	$	39,725		$	33,183	$	39,206

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12. COMMITMENTS AND CONTINGENCIES

Commitments

Laclede Gas estimates fiscal year 2011 utility capital expenditures at approximately $64 million. There are no material contractual commitments at September 30, 2010 related to these estimated capital expenditures.

Laclede Gas has entered into various contracts, expiring on dates through 2017, for the storage, transportation, and supply of natural gas. Minimum payments required under the contracts in place at September 30, 2010 are estimated at approximately $410 million. Additional contracts are generally entered into prior to or during the heating season. Laclede Gas estimates that it will pay approximately $86 million annually, at present rate levels, for fixed charges related to these or other contracts that are expected to be in place for the upcoming year for the reservation of gas supplies and pipeline transmission and storage capacity. The Utility recovers its costs from customers in accordance with the PGA Clause.

Laclede Pipeline Company (Pipeline), a wholly-owned subsidiary of Laclede Group, is providing liquid propane transportation service to Laclede Gas pursuant to an approved FERC tariff and a contractual arrangement between Pipeline and Laclede Gas. In accordance with the terms of that agreement, Laclede Gas is obligated to pay Pipeline approximately $1.0 million annually, at current rates. The agreement renews at the end of each contract year, unless terminated by either party upon provision of at least six months’ notice.

Leases and Guarantees

The lease agreement covering the headquarters office space of Laclede Gas extends through February 2015 with the option to renew for up to five additional years. The aggregate rental expense for fiscal years 2010, 2009, and 2008 was $909,000, $900,000, and $891,000, respectively. The annual minimum rental payment for fiscal year 2011 is anticipated to be approximately $917,000 with a maximum annual rental payment escalation of $8,800 per year for each year through fiscal year 2015. Laclede Gas has entered into various operating lease agreements for the rental of vehicles and power operated equipment. The rental costs will be approximately $3.6 million in fiscal year 2011, $2.5 million in fiscal year 2012, $1.5 million in fiscal year 2013, $0.9 million in fiscal year 2014, and $0.2 million in fiscal year 2 015. Laclede Gas has other relatively minor rental arrangements that provide for minimum rental payments.

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 2015. At September 30, 2010, the maximum guarantees under these leases are $1.3 million. However, the Utility believes 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 September 30, 2010, the carrying value of the liability recognized for these guarantees was $0.3 million.

Contingencies

Laclede Gas owns and operates natural gas distribution, transmission, and storage facilities, the operations of which are subject to various environmental laws, regulations, and interpretations. While environmental issues resulting from such operations arise in the ordinary course of business, such issues have not materially affected Laclede Gas’ financial position and results of operations. As environmental laws, regulations, and their interpretations change, however, Laclede Gas may be required to incur additional costs.

As with other companies, Laclede Gas faces the risk of environmental liabilities. In the natural gas industry, these are typically associated with sites formerly owned or operated by gas distribution companies like Laclede Gas and/or its predecessor companies at which manufactured gas operations took place. At this time, Laclede Gas has identified three former manufactured gas plant (MGP) sites located in Missouri: one in Shrewsbury and two in the City of St. Louis.

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With regard to the former MGP site located in Shrewsbury, Missouri, Laclede Gas and state and federal environmental regulators agreed upon certain remedial actions to a portion of the site in a 1999 Administrative Order on Consent (AOC), which actions have been completed. On September 22, 2008, EPA Region VII issued a letter of Termination and Satisfaction terminating the AOC. However, if after termination of the AOC, regulators require additional remedial actions, or additional claims are asserted, Laclede Gas may incur additional costs.

The site in the City of St. Louis, which is currently owned by the City, has been enrolled in the Missouri Voluntary Cleanup Program (VCP). The VCP provides potential opportunities to minimize the cost of site cleanup while maximizing possibilities for site development. The City 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 si te, 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 fiscal year 2011. 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, results of operations, or cash flows of Laclede Gas.

The third former MGP site, also located in the City of St. Louis, is not currently and has not been owned by Laclede Gas for many years. At this time, it is not known whether Laclede Gas will incur any costs in connection with environmental investigations of or remediation at the site, and if it does incur any such costs, what the amount of those costs would be.

Laclede Gas has notified its insurers that it seeks reimbursement for costs incurred in the past and future potential liabilities associated with the three MGP sites identified above. In response, the majority of insurers have reserved their rights. While some of the insurers have denied coverage, Laclede Gas continues to discuss potential reimbursements with them, with one insurer making a settlement payment in exchange for a release of claims in June 2007. The Utility’s outside consultant completed an analysis of the MGP sites to determine cost estimates for a one-time contractual transfer of risk from each insurer to the Utility of environmental coverage for the MGP sites. That analysis demonstrated a range of possible future expenditures to investigate, monitor, and remediate these MGP sites fro m $5.8 million to $36.3 million based upon then currently available facts, technology, and laws and regulations. The actual costs that Laclede Gas may incur could be materially higher or lower depending upon several factors, including whether remedial actions will be required, final selection and regulatory approval of any remedial actions, changing technologies and governmental regulations, the ultimate ability of other potentially responsible parties to pay, and any insurance recoveries. Costs associated with environmental remediation activities are accrued when such costs are probable and reasonably estimable.

The amount of costs relative to future remedial actions at these and other sites is unknown and may be material. Laclede Gas anticipates that any costs it may incur in the future to remediate these sites, less any amounts received as insurance proceeds or as contributions from other potentially responsible parties, would be deferred and recovered in rates through periodic adjustments approved by the MoPSC. Accordingly, potential liabilities associated with remediating these sites are not expected to have a material impact on the future financial position and results of operations of Laclede Gas.

On December 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 year 2005, which the Staff later reduced to a $1.7 million disallowance pertaining to Laclede Gas’ purchase of gas from a marketing affiliate, Laclede Energy Resources, Inc. (LER). The MoPSC Staff has also proposed disallowances of $2.8 million and $1.5 million of gas costs relating to Laclede Gas purchases of gas supply from LER for fiscal years 2006 and 2007, respectively. On December 31, 2009, the MoPSC Staff proposed a number of non-monetary recommendations only, based on its review of gas costs for fiscal year 2008. Laclede Gas believes that the proposed disallowances lack merit and is vigorously opposing these adjust ments in proceedings before the MoPSC. As such, no amount has been recorded in the financial statements for these proposed disallowances.

In its December 31, 2007 recommendation relating to fiscal year 2006 gas costs, the MoPSC Staff also raised questions regarding whether certain sales and capacity release transactions subject to the 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. In June 2008, as a result of the internal review, Laclede Group provided the FERC Staff with a self report regarding compliance of sales and capacity release activities with the FERC’s regulations and policies. On February 9, 2010, the FERC Staff informed Laclede Group that it has closed its investigation of Laclede Group’s self report without taking further action.

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In connection with the affiliate transaction matters mentioned above, on July 7, 2010, the MoPSC Staff filed a complaint against Laclede Gas alleging that, by stating that it was not in possession of proprietary LER documents, Laclede Gas violated the MoPSC Order approving a 2001 Stipulation and Agreement that permitted the Laclede Group’s corporate reorganization into a holding company structure. Also, on October 6, 2010, the MoPSC Staff filed a related complaint against Laclede Gas alleging that the Utility has failed to comply with the MoPSC’s affiliate transaction rules. Laclede Gas believes that neither of the complaints have merit and intends to vigorously oppose both of them. In addition, the Company had filed a counterclaim against the MoPSC Staff in the July 7 comp laint case alleging that the Staff has failed to adhere to the pricing provisions of the MoPSC’s affiliate transaction rules and the provisions under which the Company allocates costs among affiliated companies. However, on November 3, 2010, the MoPSC issued an order dismissing the Utility’s counterclaim for failure to state a claim upon which relief may be granted.

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, results of operations, or cash flows of the Utility.

13. INTERIM FINANCIAL INFORMATION (UNAUDITED)

In the opinion of Laclede Gas, the quarterly information presented below for fiscal years 2010 and 2009 includes all adjustments (consisting of only normal recurring accruals) necessary for a fair statement of the results of operations for such periods. Variations in operations reported on a quarterly basis primarily reflect the seasonal nature of the business of Laclede Gas.

(Thousands)
Three Months Ended		Dec. 31		March 31		June 30		Sept. 30
Fiscal Year 2010
Total Operating Revenues	$	293,254	$	373,521	$	124,746	$	83,103
Operating Income (Loss)		37,702		42,852		5,589		(3,985	)
Net Income (Loss)		21,066		23,416		24		(4,781	)
Three Months Ended		Dec. 31		March 31		June 30		Sept. 30
Fiscal Year 2009
Total Operating Revenues	$	358,698	$	441,067	$	160,917	$	95,557
Operating Income (Loss)		32,959		42,068		8,951		(9,711	)
Net Income (Loss)		16,197		22,186		2,347		(7,547	)

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