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SPIRE INC 10-K 2008
groupform10-k.htm















The Laclede Group, Inc. Logo



SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.


FORM 10-K

ANNUAL REPORT

For the Fiscal Year Ended September 30, 2008
 
 
 

Laclede Gas Company Logo

 









 

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K

[ X ]
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended September 30, 2008
OR
[     ]
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Transition Period from ­__________ to __________


 
 
Commission File Number
 
 
Registrant
 
 
State of Incorporation
I.R.S.
Employer Identification
Number
1-16681
The Laclede Group, Inc.
Missouri
74-2976504
1-1822
Laclede Gas Company
Missouri
43-0368139

720 Olive Street
St. Louis, MO 63101
314-342-0500

Securities registered pursuant to Section 12(b) of the Act

 
 
Name of Registrant
 
 
Title of Each Class
 
Name of Each Exchange On
 Which Registered
The Laclede Group, Inc.
Common Stock $1.00 par value
New York Stock Exchange
The Laclede Group, Inc.
Preferred Share Purchase Rights
New York Stock Exchange
Laclede Gas Company
None
 

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant:

is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

The Laclede Group, Inc.:
Yes
[ X ]
No
[     ]
         
Laclede Gas Company:
Yes
[     ]
No
[ X ]

is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

The Laclede Group, Inc.:
Yes
[     ]
No
[ X ]
         
Laclede Gas Company:
Yes
[     ]
No
[ X ]

(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report) and (2) has been subject to such filing requirements for the past 90 days.

The Laclede Group, Inc.:
Yes
[ X ]
No
[     ]
         
Laclede Gas Company:
Yes
[ X ]
No
[     ]




Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)

Indicate by check mark whether the registrant:

is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act

The Laclede Group, Inc.:
       
           
 
Large accelerated filer
[ X ]
 
Accelerated filer
[     ]
 
Non-accelerated filer
[     ]
 
Smaller reporting company
[     ]
           
Laclede Gas Company:
       
           
 
Large accelerated filer
[     ]
 
Accelerated filer
[     ]
 
Non-accelerated filer
[ X ]
 
Smaller reporting company
[     ]

is a shell company (as defined in Rule 12b-2 of the Exchange Act).

The Laclede Group, Inc.:
Yes
[     ]
No
[ X ]
         
Laclede Gas Company:
Yes
[     ]
No
[ X ]


The aggregate market value of the voting stock held by non-affiliates of The Laclede Group, Inc.
amounted to $727,641,668 as of March 31, 2008.

Number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

   
Shares Outstanding At
Registrant
Description of Common Stock
November 20, 2008
The Laclede Group, Inc.:
Common Stock ($1.00 Par Value)
22,114,409
Laclede Gas Company:
Common Stock ($1.00 Par Value)
11,577*

*  100% owned by The Laclede Group, Inc.

Document Incorporated by Reference:
    Portions of Proxy Statement dated December 22, 2008 Part III
Index to Exhibits is found on page 89.









This combined Form 10-K is separately filed by The Laclede Group, Inc. and Laclede Gas Company. Each registrant hereto is filing on its own behalf all of the information contained in this annual report that relates to such registrant. Each registrant hereto is not filing any information that does not relate to such registrant, and therefore makes no representation as to any such information.

Note: Laclede Gas Company Selected Financial Data, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Notes to Financial Statements, Management Report on Internal Control over Financial Reporting, and Reports of Independent Registered Public Accounting Firm are included as Exhibit 99.1.


Page No.
     
PART I
   
   
Forward-Looking Statements
5
     
Item 1
5
Item 1A
11
Item 1B
15
Item 2
15
Item 3
15
Item 4
15
     
16
     
PART II
   
     
Item 5
 
19
Item 6
20
Item 7
 
22
Item 7A
36
Item 8
37
Item 9
 
81
Item 9A
81
Item 9B
81
     
PART III
   
     
Item 10
82
Item 11
82
Item 12
 
 
82
Item 13
83
Item 14
83
     
PART IV
   
     
Item 15
84
     
 
85
     
87
     
89




Part I

FORWARD-LOOKING STATEMENTS

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

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



Overview

The Laclede Group, Inc. (Laclede Group or the Company) is a public utility holding company formed through a corporate restructuring that became effective October 1, 2001. Laclede Group is committed to providing reliable natural gas service through its regulated core utility operations while engaging in non-regulated activities that provide sustainable growth. All of Laclede Group’s subsidiaries are wholly owned. The Regulated Gas Distribution segment includes Laclede Gas Company (Laclede Gas or the Utility), Laclede Group’s largest subsidiary and core business unit. Laclede Gas is a public utility engaged in the retail distribution and sale of natural gas. Laclede Gas is the largest natural gas distribution utility in Missouri, serving approximately 630,000 residential, commercial, and industrial customers in the City of St. Louis and parts of ten other counties in eastern Missouri. The Non-Regulated Gas Marketing segment includes Laclede Energy Resources, Inc. (LER), a wholly-owned subsidiary engaged in the non-regulated marketing of natural gas and related activities. LER markets natural gas to both on-system Utility transportation customers and customers outside of Laclede Gas’ traditional service territory, including large retail and wholesale customers. As such, LER’s operations and customer base are subject to fluctuations in market conditions. Other subsidiaries provide less than 10% of consolidated revenues.



On March 31, 2008, the Company completed the sale of 100% of its interest in its wholly-owned subsidiary SM&P Utility Resources, Inc. (SM&P) to Stripe Acquisition, Inc. (an affiliate of Kohlberg Management VI, LLC) for $85 million in cash, subject to certain closing and post-closing adjustments. SM&P is an underground facilities locating and marking business that comprised Laclede Group’s Non-Regulated Services operating segment. The sales agreement included representations, warranties, and indemnification provisions customary for such transactions and was filed as an exhibit to the March 31, 2008 Form 10-Q. In accordance with generally accepted accounting principles, the results of operations for SM&P are reported as discontinued operations in the Consolidated Statements of Income and its associated assets and liabilities are classified separately in the Consolidated Balance Sheets.

Operating Revenues (from continuing operations) contributed by each segment for the last three fiscal years are presented below. For more detailed financial information regarding the segments, see Note 14 to the Consolidated Financial Statements.
 
(Thousands)
 
2008
 
2007
 
2006
 
Regulated Gas Distribution
 
$
1,128,287
 
$
1,131,554
 
$
1,141,011
 
Non-Regulated Gas Marketing
   
1,075,845
   
718,704
   
689,572
 
Other
   
4,841
   
5,603
   
4,445
 
Total Operating Revenues
 
$
2,208,973
 
$
1,855,861
 
$
1,835,028
 

The Consolidated Financial Statements included in this report present the consolidated financial position, results of operations, and cash flows of Laclede Group. The financial statements, notes to financial statements, and management’s discussion and analysis for Laclede Gas are included in this report as Exhibit 99.1.

The following chart illustrates the organization structure of The Laclede Group, Inc. at September 30, 2008:
 
Organization Structure
 
       
 
The Laclede
Group, Inc.
 
       
                       
                       
Laclede Gas
Company 
 
Laclede
 Investment
 LLC
   
Laclede
 Development
Company
 
Laclede
Pipeline
Company
                       
     
Laclede
Energy
 Resources,
 Inc.
   
 
Laclede
 Venture Corp.
     
                       
     
Laclede Gas
 Family
 Services,
 Inc.
             
                       
 
Laclede Group common stock is listed on The New York Stock Exchange and trades under the ticker symbol “LG”. Laclede Gas continues to pay dividends on all serial preferred stock issued.



During fiscal year 2008, Laclede Group issued 106,436 shares of common stock under its Dividend Reinvestment and Stock Purchase Plan and 241,400 shares of common stock (including 62,650 shares of restricted stock) under its Equity Incentive Plan. During fiscal year 2007, Laclede Group issued 116,973 shares of common stock under its Dividend Reinvestment and Stock Purchase Plan and 167,025 shares of common stock (including 59,000 shares of restricted stock) under its Equity Incentive Plan.

The information we file or furnish to the Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and their amendments, are available on our website, www.thelacledegroup.com, in the Investor Services section under SEC Filings as soon as reasonably practical after the information is filed or furnished to the SEC.


REGULATED GAS DISTRIBUTION

NATURAL GAS SUPPLY

The Utility focuses its gas supply portfolio around a number of large natural gas suppliers with equity ownership or control of assets strategically situated to complement Laclede’s regionally diverse firm transportation arrangements.

Laclede Gas’ fundamental gas supply strategy is to meet the two-fold objective of 1) ensuring that the gas supplies it acquires are dependable and will be delivered when needed and, 2) insofar as is compatible with that dependability, purchasing gas that is economically priced. In structuring its natural gas supply portfolio, Laclede Gas continues to focus on natural gas assets that are strategically positioned to meet the Utility’s primary objectives. Laclede Gas utilizes both Mid-Continent and Gulf Coast gas sources to provide a level of supply diversity that facilitates the optimization of pricing differentials as well as protecting against the potential of regional supply disruptions.

In fiscal 2008, Laclede Gas purchased natural gas from 27 different suppliers to meet current gas sales and storage injection requirements. In addition to working with major producers, the Utility has entered into agreements with suppliers that are taking advantage of improved drilling techniques and advancing technologies, which allow Laclede Gas to be flexible in meeting the needs of its customers. Natural gas purchased by Laclede Gas for delivery to our Utility service area through the Mississippi River Transmission Corporation (MRT) system totaled 60.9 billion cubic feet (Bcf). The Utility also holds firm transportation on several other interstate pipeline systems that provide access to gas supplies upstream of MRT. In addition to deliveries from MRT, 10.6 Bcf of gas was purchased on the Panhandle Eastern Pipe Line Company system, and 11.1 Bcf on the Southern Star Central Pipeline system. Some of the Utility’s commercial and industrial customers continued to purchase their own gas and delivered to Laclede Gas 17.3 Bcf for transportation to them through the Utility’s distribution system.

The fiscal 2008 peak day sendout of natural gas to Utility customers, including transportation customers, occurred on January 2, 2008, when the average temperature was 16 degrees Fahrenheit. On that day, our customers consumed 0.846 Bcf of natural gas. About 81% of this peak day demand was met with natural gas transported to St. Louis through the MRT, Panhandle, and Southern Star transportation systems, and the other 19% was met from the Utility’s on-system storage and peak shaving resources.


UNDERGROUND NATURAL GAS STORAGE

Laclede Gas has a contractual right to store approximately 23.1 Bcf of gas in MRT’s storage facility located in Unionville, Louisiana. MRT’s tariffs allow injections into storage from May 16 through November 15 and require the withdrawal from storage of all but 2.2 Bcf from November 16 through May 15.

In addition, Laclede Gas supplements flowing pipeline gas with natural gas withdrawn from its own underground storage field located in St. Louis and St. Charles Counties in Missouri. The field is designed to provide 0.357 Bcf of natural gas withdrawals on a peak day and annual withdrawals of approximately 5.5 Bcf of gas based on the inventory level that Laclede plans to maintain.



REGULATORY MATTERS

There were several significant regulatory developments over the past year. For more details, please see the Regulatory Matters discussion in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, on page 31 of this Form 10-K.


OTHER PERTINENT MATTERS

The business of Laclede Gas has monopoly characteristics in that it is the only distributor of natural gas within its franchised service area. The principal competition is the local electric company. Other competitors in Laclede Gas’ service area include suppliers of fuel oil, coal, propane in outlying areas, natural gas pipelines which can directly connect to large volume customers, and in a portion of downtown St. Louis, a district steam system.

Laclede Gas’ residential, commercial, and small industrial markets represent more than 85% of the Utility’s revenue. Given the current adequate level of natural gas supply and market conditions, Laclede believes that the relative comparison of natural gas equipment and operating costs with those of competitive fuels will not change significantly in the foreseeable future, and that these markets will continue to be supplied by natural gas. In the new multi-family and commercial rental markets, Laclede Gas’ competitive exposure is presently limited to space and water heating applications. Certain alternative heating systems can be cost competitive in traditional markets, but the performance and reliability of natural gas systems have contained the growth of these alternatives.

Coal is price competitive as a fuel source for very large boiler plant loads, but environmental requirements for coal have shifted the economic advantage to natural gas. Oil and propane can be used to fuel boiler loads and certain direct-fired process applications, but these fuels require on-site storage, thus limiting their competitiveness. In certain cases, district steam has been competitive with gas for downtown St. Louis area heating users. Laclede Gas offers gas transportation service to its large user industrial and commercial customers. The tariff approved for that type of service produces a margin similar to that which Laclede Gas would have received under its regular sales rates.

*****

Laclede Gas is subject to various environmental laws and regulations that, to date, have not materially affected the Company’s financial position and results of operations. For a detailed discussion of environmental matters, see Note 15 to the Consolidated Financial Statements on page 77.

*****

Laclede Gas has a labor agreement with Locals 11-6 and 11-194 of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial and Service Workers International Union (Union), which represent approximately 65% of Laclede Gas’ employees. On August 4, 2008, Laclede Gas and Union representatives reached a new four-year labor agreement, replacing the prior agreement that expired at midnight, July 31, 2008. The new contract will expire at midnight on July 31, 2012. The new contract includes revisions to the defined benefit plan pension formula, changes in wage rates and work rules, and other modifications that enable the Utility to provide high quality service to its customers and control operating costs while continuing to provide competitive wages, pension, and healthcare benefits to its employees.

The Missouri Natural Division of Laclede Gas has a labor agreement with Local 11-884 of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial and Service Workers International Union, which represents approximately 5% of Laclede Gas’ employees. The agreement expires on April 15, 2009.

*****

As of September 30, 2008, Laclede Gas had 1,807 employees, including 12 part-time employees.

*****

The business of Laclede Gas is subject to seasonal fluctuations with the peak period occurring in the winter season.



Revenues and customers of Laclede Gas for the last three fiscal years are as follows:

Regulated Gas Distribution Operating Revenues
 
               
(Thousands)
 
2008
 
2007
 
2006
 
Residential
 
$
696,919
 
$
675,756
 
$
689,347
 
Commercial & Industrial
   
267,639
   
271,872
   
284,174
 
Interruptible
   
4,704
   
3,771
   
5,644
 
Transportation
   
16,008
   
15,601
   
15,257
 
Off-System and Capacity Release
   
132,145
   
156,103
   
139,501
 
Provision for Refunds and Other
   
10,872
   
8,451
   
7,088
 
     Total
 
$
1,128,287
 
$
1,131,554
 
$
1,141,011
 
                     
Regulated Gas Distribution Customers (End of Period)
       
                     
     
2008
   
2007
   
2006
 
Residential
   
588,228
   
590,337
   
590,392
 
Commercial & Industrial
   
40,801
   
41,062
   
40,909
 
Interruptible
   
17
   
15
   
17
 
Transportation
   
144
   
145
   
148
 
     Total Customers
   
629,190
   
631,559
   
631,466
 

*****

Laclede Gas has franchises in the more than 90 communities where it provides service with initial terms varying from five years to an indefinite duration. Generally, a franchise allows Laclede Gas, among other things, to install pipes and construct other facilities in the community. The Utility has franchises for all but one of the communities in which it serves. All of the franchises are free from unduly burdensome restrictions and are adequate for the conduct of Laclede Gas’ current public utility business in the State of Missouri. The Utility is currently working with the affected community to renew its expired franchise and does not anticipate any interruption in service to this community.


NON-REGULATED GAS MARKETING

LER, a wholly-owned subsidiary of Laclede Investment, LLC, is engaged in the non-regulated marketing of natural gas and other services to both on-system Utility transportation customers and customers outside of Laclede Gas’ traditional service area, and related activities. LER currently utilizes 12 interstate pipelines and 60 suppliers to market natural gas to its customers, including large retail and wholesale customers in the Midwest. LER currently serves more than 100 retail customers and approximately 60 wholesale customers. Through its retail operations, LER offers natural gas marketing services to large industrial customers, while its wholesale business consists of buying and selling natural gas to other marketers, producers, local distribution companies, pipelines, and municipalities. LER’s wholesale business, which continues to grow, currently represents approximately 85% of LER’s revenues. In fiscal year 2008, LER reported a 15% increase in natural gas sales volumes compared to fiscal year 2007. In fiscal year 2007, it reported a 30% increase in sales volumes compared to the previous fiscal year. These increases were primarily attributable to higher wholesale sales volumes. LER has recently negotiated several long-term supply, sales, and transportation contracts to facilitate the growth of its business. LER reported operating revenues of $1.1 billion in fiscal year 2008 and $0.7 billion per year in fiscal years 2007 and 2006.




OTHER SUBSIDIARIES

Laclede Pipeline Company, a wholly-owned subsidiary of Laclede Group, operates a pipeline under Federal Energy Regulatory Commission (FERC) jurisdiction that connects the propane storage and vaporization facilities of Laclede Gas to third-party propane supply terminal facilities located in Illinois. Laclede Gas vaporizes the propane to supplement its natural gas supply and meet peak demands on its distribution system.

Laclede Investment LLC, a wholly-owned subsidiary of Laclede Group, invests in other enterprises and has made loans to several joint ventures engaged in real estate development.

Laclede Gas Family Services, Inc., a wholly-owned subsidiary of Laclede Energy Resources, Inc., is a registered insurance agency in the State of Missouri.

Laclede Development Company, a wholly-owned subsidiary of Laclede Group, participates in real estate development, primarily through joint ventures.

Laclede Venture Corp., a wholly-owned subsidiary of Laclede Development Company, offers services for the compression of natural gas to third parties who desire to use or to sell compressed natural gas for use in vehicles.

The lines of business that constitute the Other activities of the corporate family are not considered separately reportable operating segments as defined by current accounting standards.




Laclede Group’s business and financial results are subject to a number of risks and uncertainties, including those set forth below. The risks described below are those the Company considers to be the most material.

RISKS AND UNCERTAINTIES THAT RELATE TO THE BUSINESS AND FINANCIAL RESULTS OF LACLEDE GROUP AND ITS SUBSIDIARIES

As a holding company, Laclede Group depends on its operating subsidiaries to meet its financial obligations.

Laclede Group is a holding company with no significant assets other than cash investments and the stock of its operating subsidiaries. Laclede Group, and Laclede Gas prior to Laclede Group’s formation, have paid dividends continuously since 1946. However, Laclede Group relies exclusively on dividends from its subsidiaries, on intercompany loans from its non-regulated subsidiaries, and on the repayments of principal and interest from intercompany loans made to its subsidiaries for its cash flows. Laclede Group’s ability to pay dividends to its shareholders is dependent on the ability of its subsidiaries, particularly Laclede Gas, to generate sufficient net income and cash flows to pay upstream dividends and make loans or loan repayments to Laclede Group. Laclede Group’s cash flows for fiscal 2008 included proceeds from the sale of its wholly-owned subsidiary, SM&P.

A downgrade in Laclede Group’s credit rating could negatively affect its ability to access capital.

Currently, Laclede Group’s corporate rating is A by Standard & Poor’s and A- by Fitch. Laclede Group has working capital lines of credit to meet the short-term liquidity needs of its subsidiaries. If the rating agencies lowered Laclede Group’s credit rating, particularly below investment grade, it might significantly limit its ability to borrow and would increase its costs of borrowing. Laclede Group’s ability to borrow and costs of borrowing have a direct impact on its subsidiaries’ ability to execute operating strategies.

Risk of unexpected losses may adversely affect Laclede Group’s financial position and results of operations.

As with most businesses, there are operations and business risks inherent in the activities of Laclede Group’s subsidiaries. If, in the normal course of business, Laclede Group becomes a party to litigation, such litigation could result in substantial monetary judgments, fines, or penalties or be resolved on unfavorable terms. In accordance with customary practice, Laclede Group and its subsidiaries maintain insurance against a significant portion of, but not all, risks and losses. To the extent a loss is not fully covered by insurance, that loss could adversely affect the Company’s financial position and results of operations.


RISKS THAT RELATE TO THE REGULATED GAS DISTRIBUTION SEGMENT

Risks related to the regulation of the Utility business could impact rates it is able to charge, costs, and profitability.

The Missouri Public Service Commission (MoPSC or Commission) regulates many aspects of its distribution operations, including construction and maintenance of facilities, operations, safety, the rates that the Utility may charge customers, the terms of service to its customers, and the rate of return that it is allowed to realize; as well as the accounting treatment for certain aspects of its operations. For further discussion of these accounting matters, see Critical Accounting Policies pertaining to Laclede Gas, beginning on page 28. Laclede Gas’ ability to obtain rate increases and rate supplements to maintain the current rate of return depends upon regulatory discretion. There can be no assurance that it will be able to obtain rate increases or rate supplements or continue earning the current authorized rates of return. In addition, the FERC regulates the interstate transportation of natural gas from the wellhead to the Utility’s city gate and establishes the terms and conditions under which it may use interstate gas pipeline and storage capacity to purchase, store, and transport natural gas.



Laclede Gas’ liquidity and, in certain circumstances, its results of operations could be adversely affected by the cost of purchasing natural gas during periods in which natural gas prices are rising significantly.

Laclede Gas’ tariff rate schedules contain Purchased Gas Adjustment (PGA) Clauses that permit the Utility to file for rate adjustments to recover the cost of purchased gas. Changes in the cost of purchased gas are flowed through to customers and may affect uncollectible amounts and cash flows and can therefore impact the amount of capital resources. Currently, Laclede Gas is allowed to adjust the gas cost component of its rates up to four times each year. The Utility must make a mandatory gas cost adjustment at the beginning of the winter, in November, and during the next twelve months it may make up to three additional discretionary gas cost adjustments, so long as each of these adjustments is separated by at least two months.

The MoPSC typically approves the Utility’s PGA changes on an interim basis, subject to refund and the outcome of a subsequent audit and prudence review. Due to such review process, there is a risk of a disallowance of full recovery of these costs. Any material disallowance of purchased gas costs would adversely affect revenues. Increases in the prices the Utility charges for gas may also adversely affect revenues because they could lead customers to reduce usage and cause some customers to have trouble paying the resulting higher bills. These higher prices may increase bad debt expenses and ultimately reduce earnings. Laclede Gas has used short-term borrowings in the past to finance storage inventories and purchased gas costs, and expects to do so in the future.

Laclede Gas may be adversely affected by economic conditions.

Periods of slowed economic activity, such as that currently being experienced, generally result in decreased energy consumption, particularly by industrial and large commercial companies. As a consequence, national or regional recessions or other downturns in economic activity could adversely affect Laclede Gas’ revenues and cash flows or restrict its future growth. Economic conditions in its service territory may also adversely impact the Utility’s ability to collect its accounts receivable resulting in an increase to bad debt expenses.

Hedging procedures may not fully protect Laclede Gas sales and results of operations from volatility, and the use of derivative contracts in the normal course of business could result in financial losses.

To lower financial exposure to commodity price fluctuations, Laclede Gas enters into contracts to hedge the forward commodity price of its natural gas supplies. As part of this strategy, the Utility may use fixed-price, forward, physical purchase contracts, futures, and option contracts traded on the New York Mercantile Exchange. However, the Utility does not hedge the entire exposure of energy assets or positions to market price volatility, and the coverage will vary over time. Any costs, gains, or losses experienced through hedging procedures, including carrying costs, generally flow through the PGA Clause, thereby limiting the Utility’s exposure to earnings volatility. However, variations in the timing of collections of such gas costs under the PGA Clause and the effect of cash payments for margin deposits associated with the Utility’s use of natural gas financial instruments may cause short-term cash requirements to vary. These procedures remain subject to prudence review by the MoPSC.

Laclede Gas is dependent on bank lines of credit and continued access to capital markets to successfully execute its operating strategies.

In addition to longer term debt that is issued to the public by the Utility under its mortgage and deed of trust dated February 1, 1945, Laclede Gas has relied, and continues to rely, upon shorter term bank borrowings or commercial paper supported by bank lines of credit to finance the execution of a portion of its operating strategies. The Utility is dependent on these capital sources to purchase its natural gas supply and maintain its properties. The availability and cost of these credit sources is cyclical and these capital sources may not remain available to the Utility, or it may not be able to obtain funds at a reasonable cost in the future. Laclede Gas’ ability to borrow under its existing lines of credit depends on its compliance with the Utility’s obligations under the lines of credit. Laclede Gas’ ability to issue commercial paper supported by its lines of credit, to issue long-term bonds, or to obtain new lines of credit also depends on current conditions in the credit markets.



A downgrade in the Utility’s credit rating could negatively affect its ability to access capital.

Standard & Poor’s rating group, Moody’s Investors Service, and Fitch Ratings from time to time implement new requirements for various ratings levels. To maintain its current credit ratings in light of any new requirements, Laclede Gas may find it necessary to take steps to change its business plans in ways that may affect its results of operations.

The following table shows the current ratings assigned by S&P, Moody’s, and Fitch to certain of our outstanding debt:

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

If the rating agencies lowered the Utility’s ratings, particularly below investment grade, it could significantly limit its access to the commercial paper market and would increase its costs of borrowing. In addition, Laclede Gas would likely be required to pay a higher interest rate in future financings and the Utility’s potential pool of investors and funding sources would likely decrease. Credit ratings are an independent assessment of the Utility’s ability to pay its obligations. Consequently, real or anticipated changes in credit ratings will generally affect the market value of the specific debt instruments that are rated.

Transporting, distributing, and storing natural gas involves numerous risks that may result in accidents and other operating risks and costs.

There are inherent in gas distribution activities a variety of hazards and operations risks, such as leaks, accidental explosions, and mechanical problems, that could cause substantial financial losses. In addition, these risks could result in loss of human life, significant damage to property, environmental pollution, impairment of operations, and substantial losses to Laclede Gas. The location of pipelines and storage facilities near populated areas, including residential areas, commercial business centers, and industrial sites, could increase the level of damages resulting from these risks. These activities may subject the Utility to litigation or administrative proceedings from time to time. Such litigation or proceedings could result in substantial monetary judgments, fines, or penalties against the Utility or be resolved on unfavorable terms. In accordance with customary industry practices, Laclede Gas maintains insurance against a significant portion, but not all, of these risks and losses. To the extent that the occurrence of any of these events is not fully covered by insurance, it could adversely affect the Utility’s financial position and results of operations.

Increases in the wholesale costs of purchased natural gas supplies may adversely impact the Utility’s competitive position compared with alternative energy sources.

Laclede Gas is the only distributor of natural gas within its franchised service area. Nevertheless, rising wholesale natural gas prices compared with prices for electricity, fuel oil, coal, propane, or other energy sources may affect the Utility’s retention of natural gas customers and adversely impact its financial position and results of operations.

Significantly warmer-than-normal weather conditions, the effects of global warming and climate change, and other factors that influence customer usage may affect the Utility’s sale of heating energy and adversely impact its financial position and results of operations.

Laclede Gas’ earnings are primarily generated by the sale of heating energy. The Utility has a weather mitigation rate design, approved by the MoPSC, that provides better assurance of the recovery of the Utility’s fixed costs and margins during winter months despite variations in sales volumes due to the impacts of weather and other factors that affect customer usage. However, significantly warmer-than-normal weather conditions in the Utility’s service area and other factors may result in reduced profitability and decreased cash flows attributable to lower gas sales levels. Furthermore, continuation of the weather mitigation rate design is subject to regulatory discretion.



Regional supply/demand fluctuations and changes in national pipeline infrastructure may, as well as regulatory discretion, adversely affect Laclede Gas’ ability to profit from off-system sales and capacity release.

Laclede Gas’ income from off-system sales and capacity release is subject to fluctuations in market conditions and changing supply and demand conditions in areas the Utility holds pipeline capacity rights. Specific factors impacting the Utility’s income from off-system sales and capacity release include the availability of attractively-priced natural gas supply, availability of pipeline capacity, and market demand. Income from off-system sales and capacity release is shared with customers. Effective October 1, 2007, the Utility is allowed to retain 15% to 25% of the first $6 million in annual income earned (depending on the level of income earned) and 30% of income exceeding $6 million annually. The Utility’s ability to retain such income in the future is subject to regulatory discretion in a base rate proceeding.

Workforce risks could affect Laclede Gas’ financial results.

Laclede Gas is subject to various workforce risks, including but not limited to, the risk that it will be unable to attract and retain qualified personnel; that it will be unable to effectively transfer the knowledge and expertise of an aging workforce to new personnel as those workers retire; and that it will be unable to reach collective bargaining arrangements with the unions that represent certain of its workers, which could result in work stoppages.

Catastrophic events could adversely affect Laclede Gas’ facilities and operations.

Catastrophic events such as fires, earthquakes, explosions, floods, tornados, terrorists acts, or other similar occurrences could adversely affect Laclede Gas’ facilities, operations, financial condition, and results of operations.


RISKS THAT RELATE TO THE NON-REGULATED GAS MARKETING SEGMENT

Risks of increased competition, regional fluctuations in natural gas commodity prices, and new national pipeline infrastructure projects may adversely impact LER’s future profitability.

Competition in the marketplace and regional fluctuations in natural gas commodity prices have a direct impact on LER’s business. Changing market conditions caused by new pipeline infrastructure may adversely impact LER’s sales margins or affect LER’s ability to serve certain wholesale customers, thereby increasing certain credit requirements and/or reducing wholesale sales volumes and profitability. The FERC regulates the interstate transportation of natural gas and establishes the terms and conditions under which LER may use interstate gas pipeline capacity to purchase and transport natural gas.


Risks of reduced access to credit and/or capital markets may prevent LER from executing operating strategies.>

In addition to its cash flows, LER relies on parental guarantees and loans to cover the lag between when it purchases natural gas and when its customers pay for that gas. Although LER’s uncollectible amounts are closely monitored and have not been significant, increased uncollectible amounts from customers are possible and may result in financial losses and/or capital limitations. Typically, a major portion of LER’s receivables are from customers in the energy industry.

Risk management policies and the use of cash flow hedging may not fully protect LER’s sales and results of operations from volatility and may result in financial losses.

LER manages the price risk associated with fixed-price commitments for the purchase or sale of natural gas by either closely matching the offsetting physical purchase or sale of natural gas at fixed prices or through the use of exchange-traded futures contracts to lock in margins. However, market conditions and regional price changes may cause ineffective portions of matched positions to result in financial losses.





None.



The principal utility properties of Laclede Gas consist of more than 16,000 miles of gas main and related service pipes, meters, and regulators. Other physical properties include regional office buildings and holder stations. Extensive underground natural gas and propane storage facilities and equipment are located in an area in North St. Louis County extending under the Missouri River into St. Charles County. Substantially all of Laclede Gas’ utility plant is subject to the liens of its mortgage.

All of the utility properties of Laclede Gas are held in fee or by easement or under lease agreements. The principal lease agreements include underground storage rights that are of indefinite duration and the headquarters office building. The current lease on the headquarters office building extends through February 2010 with options to renew for up to 10 additional years.

For further information on Laclede Gas’ leases see Note 15 to the Consolidated Financial Statements on page 77.

Other properties of Laclede Group, including LER, do not constitute a significant portion of its properties.



For a description of environmental matters, see Note 15 to the Consolidated Financial Statements on page 77. For a description of pending regulatory matters of Laclede Gas, see the Regulatory Matters discussion in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, on page 31.

Laclede Group and its subsidiaries are involved in 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 the final outcome will not have a material adverse effect on the consolidated financial position or results of operations reflected in the consolidated financial statements presented herein.



There were no matters submitted to a vote of security holders during the fourth quarter of fiscal year 2008.





EXECUTIVE OFFICERS OF REGISTRANTS> – Listed below are executive officers as defined by the SEC for Laclede Group. Their ages, at September 30, 2008, and positions are listed below along with their business experience during the past five years.

Name, Age, and Position with Company *
Appointed (1)
       
D. H. Yaeger, Age 59
 
       
 
Laclede Group
   
 
Chairman, President and Chief Executive Officer
October 2000
       
 
Laclede Gas
   
 
Chairman, President and Chief Executive Officer
January 1999
       
 
LER
   
 
President
 
January 1999
       
K. J. Neises, Age 67
 
       
 
Laclede Gas
   
 
Executive Vice President
October 2007
 
Executive Vice President – Energy and Administrative Services
January 2002
       
 
LER
   
 
Vice President
February 2002
       
M. D. Waltermire, Age 50
 
       
 
Laclede Group
   
 
Chief Financial Officer
October 2007
       
 
Laclede Gas
   
 
Senior Vice President and Chief Financial Officer
October 2007
 
Vice President – Operations & Marketing
April 2003
       
 
LER
   
 
Vice President
October 2007
       
M. C. Darrell, Age 50
 
       
 
Laclede Group
   
 
General Counsel (2)
May 2004
       
 
Laclede Gas
   
 
Senior Vice President and General Counsel
October 2007
 
General Counsel
May 2004
       
R. A. Skau, Age 51
 
       
 
Laclede Gas
   
 
Senior Vice President – Human Resources
October 2007
 
Vice President – Human Resources
February 2004
 
Assistant Vice President – Human Resources
September 2001
       
M. R. Spotanski, Age 48
 
       
 
Laclede Gas
   
 
Senior Vice President – Operations and Marketing
October 2007
 
Vice President – Finance
January 2001




       
M. C. Kullman, Age 48
 
       
 
Laclede Group
   
 
Chief Governance Officer and Corporate Secretary
February 2004
 
Corporate Secretary
October 2000
       
 
Laclede Gas
   
 
Chief Governance Officer and Corporate Secretary
February 2004
 
Secretary and Associate General Counsel
February 2001
       
 
LER
   
 
Secretary
 
February 1998
       
D. P. Abernathy, Age 47
 
       
 
Laclede Gas
   
 
Vice President – Industrial Relations and Claims Management (3)
October 2007
 
Vice President – Associate General Counsel
September 2004
       
M. C. Geiselhart, Age 49
 
       
 
Laclede Group
   
 
Vice President – Strategic Development and Planning (4)
August 2006
       
 
Laclede Gas
   
 
Vice President – Strategic Development and Planning
August 2006
       
S. F. Mathews, Age 50
 
       
 
Laclede Gas
   
 
Vice President – Gas Supply
February 2003
       
M. C. Pendergast, Age 52
 
       
 
Laclede Gas
   
 
Vice President – Associate General Counsel
January 2002
       
J. A. Fallert, Age 53
 
       
 
Laclede Gas
   
 
Controller
 
February 1998
       
S. E. Jaskowiak, Age 46
 
       
 
LER
   
 
Vice President and General Manager
February 2005
 
Managing Director
May 2003
       




*
The information provided relates to the Company and its principal subsidiaries. Many of the executive officers have served or currently serve as officers or directors for other subsidiaries of the Company.

(1)
Officers of Laclede are normally reappointed at the Annual Meeting of the Board of Directors in January of each year to serve at the pleasure of the Board of Directors for the ensuing year and until their successors are elected and qualify.
(2)
Mr. Darrell served as Assistant General Counsel for NiSource, Inc. since 2002.
(3)
Mr. Abernathy served as Vice President, General Counsel and Secretary for American Water Works Company – Central Region since 2002.
(4)
Mr. Geiselhart served as the Corporate Finance Consultant for Callaway Partners, LLC since 2003. During that time, he also served as Chief Financial Officer for both TowerLink Corporation, Inc. and Transcender Telecom Acquisition Corporation, Inc. Prior to that he was the founding Chief Financial Officer and Consultant for private equity firms for Quiet Water Associates, LLC from 2002 through 2003 and Vice President, Finance and Corporate Development for Evolution Networks, Inc. from 2000 through 2002.




Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Laclede Group’s common stock trades on The New York Stock Exchange under the symbol “LG”. The high and the low sales price for the common stock for each quarter in the two most recent fiscal years are:

 
Fiscal 2008
Fiscal 2007
 
High
Low
High
Low
1st Quarter
35.72
31.48
37.51
31.60
2nd Quarter
36.45
31.86
36.03
29.32
3rd Quarter
41.96
35.36
33.24
29.29
4th Quarter
50.88
37.78
34.17
28.84

The number of holders of record as of September 30, 2008 was 4,447.

Dividends declared on the common stock for the two most recent fiscal years were:

 
Fiscal 2008
Fiscal 2007
1st Quarter
$0.375
$0.365
2nd Quarter
$0.375
$0.365
3rd Quarter
$0.375
$0.365
4th Quarter
$0.375
$0.365


Disclosures relating to securities authorized for issuance under equity compensation plans is incorporated by reference from the discussion in our 2008 proxy statement under the heading “Other Matters.”

Laclede Group periodically purchases common stock of Laclede Gas with the price set at the book value of Laclede Gas common stock as of the most recently completed fiscal quarter. The details on sales of common stock of Laclede Gas to Laclede Group during the past three fiscal years are set forth below:

   
Aggregate
     
   
Purchase Price
 
Number
 
Date of Sale
 
(millions)
 
of Shares
 
             
FY 2006
           
December 15, 2005
 
$
1.0
 
30
 
February 21, 2006
   
0.9
 
26
 
May 24, 2006
   
0.9
 
25
 
August 15, 2006
   
0.9
 
27
 
             
FY 2007
           
March 23, 2007
   
1.9
 
55
 
May 21, 2007
   
1.0
 
27
 
August 10, 2007
   
1.0
 
28
 
             
FY 2008
           
December 20, 2007
   
1.0
 
30
 
February 14, 2008
   
1.0
 
28
 
May 12, 2008
   
0.9
 
26
 
August 18, 2008
   
0.9
 
25
 

The proceeds from Laclede Gas’ sales of stock were used to reduce its short-term borrowings. Exemption from registration was claimed under Section 4(2) of the Securities Act of 1933.

For details related to Laclede Group’s purchase of Laclede Gas’ common stock subsequent to September 30, 2008, see Item 9B., Other Information, of this Form 10-K.



Item 6. Selected Financial Data


The Laclede Group, Inc.


   
Fiscal Years Ended September 30
 
(Thousands, Except Per Share Amounts)
 
2008
 
2007
 
2006
 
2005
 
2004
 
Summary of Operations
                               
Operating Revenues:
                               
  Regulated Gas Distribution
 
$
1,128,287
 
$
1,131,554
 
$
1,141,011
 
$
978,195
 
$
868,905
 
  Non-Regulated Gas Marketing
   
1,075,845
   
718,704
   
689,572
   
469,559
   
270,328
 
  Other
   
4,841
   
5,603
   
4,445
   
7,800
   
6,848
 
          Total Operating Revenues
   
2,208,973
   
1,855,861
   
1,835,028
   
1,455,554
   
1,146,081
 
                                 
Operating Expenses:
                               
  Regulated
                               
    Natural and propane gas
   
770,097
   
797,924
   
821,721
   
676,931
   
575,691
 
    Other operation expenses
   
144,611
   
131,798
   
128,180
   
125,364
   
121,596
 
    Maintenance
   
25,827
   
24,306
   
21,198
   
19,226
   
18,705
 
    Depreciation and amortization
   
35,303
   
34,080
   
30,904
   
23,036
   
22,385
 
    Taxes, other than income taxes
   
69,023
   
68,361
   
71,038
   
62,859
   
60,077
 
          Total Regulated Operating Expenses
   
1,044,861
   
1,056,469
   
1,073,041
   
907,416
   
798,454
 
  Non-Regulated Gas Marketing
   
1,048,162
   
698,962
   
662,391
   
462,348
   
265,394
 
  Other
   
4,603
   
5,376
   
5,024
   
8,720
   
7,263
 
          Total Operating Expenses
   
2,097,626
   
1,760,807
   
1,740,456
   
1,378,484
   
1,071,111
 
Operating Income
   
111,347
   
95,054
   
94,572
   
77,070
   
74,970
 
Allowance for Funds Used During Construction
   
(72
 
(17
)
 
(45
)
 
(100
)
 
(123
)
Other Income and (Income Deductions) - Net
   
1,953
   
6,830
   
5,553
  
 
1,706
   
3,757
 
Interest Charges:
                               
  Interest on long-term debt
   
19,851
   
22,502
   
22,329
   
22,835
   
22,010
 
  Interest on long-term debt to unconsolidated
    affiliate trust
   
486
   
277
   
277
   
277
   
277
 
  Other interest charges
   
9,140
   
11,155
   
10,278
   
4,141
   
3,234
 
          Total Interest Charges
   
29,477
   
33,934
   
32,884
   
27,253
   
25,521
 
Income from Continuing Operations Before Income
                               
  Taxes and Dividends on Laclede Gas Redeemable
                               
    Preferred Stock
   
83,751
   
67,933
   
67,196
   
51,423
   
53,083
 
Income Tax Expense
   
26,190
   
22,146
   
21,301
   
16,914
   
18,243
 
Dividends on Laclede Gas Redeemable
                               
  Preferred Stock
   
35
   
43
   
48
   
55
   
62
 
Income from Continuing Operations
   
57,526
   
45,744
   
45,847
   
34,454
   
34,778
 
Income from Discontinued Operations, Net
                               
  of Income Tax
   
20,396
   
4,027
   
3,142
   
5,616
   
1,278
 
Net Income
 
$
77,922
 
$
49,771
 
$
48,989
 
$
40,070
 
$
36,056
 
                                 
Basic Earnings Per Share of Common Stock:
                               
  Income from Continuing Operations
 
$
2.66
 
$
2.13
 
$
2.16
 
$
1.63
 
$
1.76
 
  Income from Discontinued Operations
   
0.94
   
0.19
   
0.15
   
0.27
   
0.06
 
  Net Income
 
$
3.60
 
$
2.32
 
$
2.31
 
$
1.90
 
$
1.82
 
                                 
Diluted Earnings Per Share of Common Stock:
                               
  Income from Continuing Operations
 
$
2.64
 
$
2.12
 
$
2.15
 
$
1.63
 
$
1.76
 
  Income from Discontinued Operations
   
0.94
   
0.19
   
0.15
   
0.27
   
0.06
 
  Net Income
 
$
3.58
 
$
2.31
 
$
2.30
 
$
1.90
 
$
1.82
 








Item 6. Selected Financial Data (continued)


The Laclede Group, Inc.


     
Fiscal Years Ended September 30
   
 
(Thousands, Except Per Share Amounts)
 
2008
 
2007
 
2006
 
2005
 
2004
   
                                     
 
Dividends Declared –
                                 
 
  Common Stock
 
$
32,776
 
$
31,505
 
$
30,045
 
$
29,002
 
$
27,183
   
 
Dividends Declared Per
                                 
 
  Share of Common Stock
 
$
1.50
 
$
1.46
 
$
1.41
 
$
1.375
 
$
1.355
   
                                     
 
Utility Plant
                                 
 
  Gross Plant – End of Period
 
$
1,229,174
 
$
1,187,828
 
$
1,149,104
 
$
1,105,733
 
$
1,070,522
   
 
  Net Plant – End of Period
   
823,197
   
793,794
   
763,827
   
728,481
   
699,144
   
 
  Capital Expenditures
   
55,304
   
56,434
   
57,925
   
54,621
   
49,130
   
 
  Property Retirements
   
15,629
   
16,331
   
22,588
   
19,410
   
9,276
   
 
Non-Utility Property
   
3,793
   
4,065
   
4,263
   
3,899
   
3,993
   
 
Other Investments
   
43,314
   
43,635
   
41,354
   
36,851
   
35,357
   
 
Total Assets of Discontinued Operations
   
   
73,357
   
76,353
   
67,206
   
57,070
   
 
Total Assets – End of Period
   
1,772,655
   
1,641,153
   
1,570,160
   
1,434,101
   
1,317,564
   
                                     
 
Capitalization – End of Period
                                 
 
  Common Stock and Paid-In Capital
 
$
169,234
 
$
157,707
 
$
148,487
 
$
142,677
 
$
137,039
   
 
  Retained Earnings
   
312,808
   
268,761
   
250,495
   
231,551
   
220,483
   
 
  Accumulated Other Comprehensive Income (Loss)
   
4,437
   
1,857
   
3,655
   
(7,703
)
 
(1,607
)
 
 
        Common Stock Equity
   
486,479
   
428,325
   
402,637
   
366,525
   
355,915
   
 
  Laclede Gas Redeemable Preferred Stock
   
467
   
627
   
787
   
948
   
1,108
   
 
  Long-Term Debt to Unconsolidated Affiliate Trust
   
   
46,400
   
46,400
   
46,400
   
46,400
   
 
  Long-Term Debt – Laclede Gas
   
389,181
   
309,122
   
349,041
   
294,033
   
333,936
   
 
Total Capitalization
 
$
876,127
 
$
784,474
 
$
798,865
 
$
707,906
 
$
737,359
   
                                     
 
Shares of Common Stock
                                 
 
  Outstanding – End of Period
   
21,993
   
21,646
   
21,362
   
21,172
   
20,981
   
 
  Book Value Per Share – End of Period
 
$
22.12
 
$
19.79
 
$
18.85
 
$
17.31
 
$
16.96
   
                                     
 
Note:
Certain prior-period amounts have been reclassified to discontinued operations as a result of the sale of SM&P Utility Resources, Inc. (SM&P)
 
on March 31, 2008. Income (Loss) from Discontinued Operations does not include general corporate overhead expenses previously recorded
 
by SM&P. Associated assets are classified separately.


Laclede Gas Company’s Selected Financial Data is included in Exhibit 99.1.








ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


THE LACLEDE GROUP, INC.

INTRODUCTION

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

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


RESULTS OF OPERATIONS

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

On March 31, 2008, the Company completed the sale of 100% of its interest in its wholly-owned subsidiary SM&P Utility Resources, Inc. (SM&P) to Stripe Acquisition, Inc. (an affiliate of Kohlberg Management VI, LLC) for $85 million in cash, subject to certain closing and post-closing adjustments. SM&P is an underground facilities locating and marking business that formerly comprised Laclede Group’s Non-Regulated Services operating segment. The sales agreement included representations, warranties, and indemnification provisions customary for such transactions and was filed as an exhibit to the March 31, 2008 Form 10-Q. In accordance with generally accepted accounting principles, the results of operations for SM&P are reported as discontinued operations in the Consolidated Statements of Income and its associated assets and liabilities are classified separately in the Consolidated Balance Sheets.

Laclede Energy Resources, Inc. (LER) is engaged in the marketing of natural gas and related activities on a non-regulated basis. LER markets natural gas to both on-system Utility transportation customers and customers outside of Laclede Gas’ traditional service territory, including large retail and wholesale customers. As such, LER’s operations and customer base are subject to fluctuations in market conditions.

Other subsidiaries provide less than 10% of consolidated revenues.

Laclede Group’s strategy continues to include efforts to stabilize and improve the performance of its core Utility, while developing non-regulated businesses and taking a measured approach in the pursuit of additional growth opportunities that complement the Utility business.



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

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

Laclede Group continues to develop its other subsidiaries. LER continues to focus on growing its markets on a long-term and sustainable basis by providing both on-system Utility transportation customers and customers outside of Laclede Gas’ traditional service area with another choice in non-regulated natural gas suppliers. LER is working to assemble the team, technology, and resources necessary to expand its geographic service area and the range of services that it now provides. Nevertheless, income from LER’s operations is subject to fluctuations in market conditions. LER reported record earnings during fiscal year 2006 as a result of higher margins, caused by Gulf Coast market volatility, as well as higher wholesale sales volumes. During fiscal 2008, LER reported new record earnings, exceeding fiscal 2006, primarily due to improved margins on sales of natural gas and higher wholesale sales volumes.



EARNINGS

Overview – Net Income by Operating Segment

(Millions, After-tax )
Years Ended September 30
   
2008
     
2007
     
2006
 
Regulated Gas Distribution
   
$
39.1
     
$
32.1
     
$
28.8
 
Non-Regulated Gas Marketing
     
19.3
       
13.3
       
17.1
 
Other
     
(0.9
)
     
0.4
       
 
Income from Continuing Operations
     
57.5
       
45.8
       
45.9
 
Income from Discontinued Operations
     
20.4
       
4.0
       
3.1
 
Net Income
   
$
77.9
     
$
49.8
     
$
49.0
 

Laclede Group’s consolidated net income was $77.9 million in fiscal year 2008, compared with $49.8 million in fiscal year 2007, and $49.0 million in fiscal year 2006. Net income increased $28.1 million, or 56.4%, in fiscal year 2008 (compared with fiscal year 2007) largely due to the net effect of the one-time gain realized on the sale of Laclede Group’s wholly-owned subsidiary, SM&P, on March 31, 2008 and the impact of SM&P’s seasonal operating loss for the period prior to the sale. Earnings results reported by both Laclede Group’s Regulated Gas Distribution segment and its Non-Regulated Gas Marketing segment also increased over fiscal year 2007. Net income increased $0.8 million, or 1.6%, in fiscal year 2007 (compared with fiscal year 2006) primarily due to improved results reported by Laclede Group’s Regulated Gas Distribution segment and the effect of SM&P’s increased operating income (reported as discontinued operations), partially offset by lower earnings recorded by Laclede Group’s Non-Regulated Gas Marketing segment.

Basic and diluted earnings per share were $3.60 and $3.58, respectively, for fiscal year 2008 compared with basic and diluted earnings per share of $2.32 and $2.31, respectively, for fiscal year 2007, and $2.31 and $2.30, respectively for fiscal year 2006. The year-to-year increases in earnings per share were primarily due to the effect of higher net income in each period.

Income from Continuing Operations

Laclede Group’s income from continuing operations was $57.5 million in fiscal year 2008, compared with $45.8 million in fiscal year 2007, and $45.9 million in fiscal year 2006. Income from Continuing Operations increased $11.7 million, or 25.5%, in fiscal year 2008 (compared with fiscal year 2007) primarily due to improved results reported by both Laclede Group’s Regulated Gas Distribution segment and its Non-Regulated Gas Marketing segment. Income from Continuing Operations decreased $0.1 million in fiscal year 2007 (compared with fiscal year 2006) primarily due to lower earnings recorded by Laclede Group’s Non-Regulated Marketing Segment, largely offset by improved results reported by Laclede Group’s Regulated Gas Distribution segment.

Basic and diluted earnings per share from continuing operations were $2.66 and $2.64, respectively, for fiscal year 2008, compared with basic and diluted earnings per share of $2.13 and $2.12, respectively, for fiscal year 2007, and $2.16 and $2.15, respectively, for fiscal year 2006. Variations in income from continuing operations were primarily attributable to the factors described below.

2008 vs. 2007

Regulated Gas Distribution net income increased by $7.0 million in 2008, compared with 2007. The increase in net income was primarily due to the following factors, quantified on a pre-tax basis:

 
the benefit of the general rate increase, effective August 1, 2007, totaling $32.9 million;
 
the recognition of previously unrecognized tax benefits and the reversal of related expenses, totaling $1.6 million; and,
 
the effect of higher system gas sales volumes and other variations totaling $1.1 million.



These factors were partially offset by:

 
lower income from off-system sales and capacity release, totaling $10.2 million, primarily due to a reduction in the Utility’s share of such income (pursuant to the 2007 rate case);
 
increases in operation and maintenance expenses, excluding the provision for uncollectible accounts, totaling $8.3 million; and,
 
an increase in the provision for uncollectible accounts, totaling $6.0 million.

The Non-Regulated Gas Marketing segment reported earnings totaling $19.3 million for fiscal year 2008, an increase in earnings of $6.0 million compared with fiscal year 2007. The increased earnings were primarily due to improved margins on sales of natural gas by LER, 15% higher sales volumes, and the effect of a reversal of tax-related expenses during fiscal year 2008.

2007 vs. 2006

Regulated Gas Distribution net income increased by $3.3 million in 2007, compared with 2006. The increase in net income was primarily due to the following factors, quantified on a pre-tax basis:

 
the effect of higher system gas sales volumes, primarily due to colder weather and other variations totaling $6.7 million;
 
the benefit of the general rate increase, effective August 1, 2007, totaling $5.3 million; and,
 
higher Infrastructure System Replacement Surcharge (ISRS) revenues totaling $2.6 million.

These factors were partially offset by:

 
increases in operation and maintenance expenses totaling $6.7 million; and,
 
higher depreciation and amortization expense totaling $3.2 million resulting from the implementation of new depreciation rates effective January 1, 2006, as authorized by the MoPSC, and additional depreciable property.

The Non-Regulated Gas Marketing segment reported earnings totaling $13.3 million for fiscal 2007, a decrease in earnings of $3.8 million compared with 2006. While LER achieved increased sales volumes in fiscal year 2007 over fiscal year 2006, margins in fiscal year 2007 were reduced as volatility in Gulf Coast markets stabilized. LER’s sales volumes increased 30% over the same period last year, principally as a result of increased interstate pipeline wholesale transactions.

Regulated Gas Distribution Operating Revenues

2008 vs. 2007

Regulated Gas Distribution Operating Revenues for fiscal year 2008 decreased $3.3 million compared to fiscal year 2007 due in part to lower wholesale gas costs. Temperatures experienced in the Utility’s service area during 2008 were 6.8% colder than the same period last year, but 1.1% warmer than normal. Total system therms sold and transported were 0.93 billion for fiscal year 2008 compared with 0.91 billion for fiscal year 2007. Total off-system therms sold and transported were 0.14 billion for fiscal year 2008 compared with 0.21 billion for fiscal year 2007. The decrease in Regulated Gas Distribution Operating Revenues was primarily attributable to the following factors:

(Millions)
     
Lower off-system sales volumes (reflecting less favorable market conditions as described in greater detail
       
    in the Results of Operations)
 
$
(47.9
)
Lower wholesale gas costs passed on to Utility customers (subject to prudence review by the MoPSC)
   
(38.2
)
General rate increase, effective August 1, 2007
   
32.9
 
Higher system sales volumes, primarily due to colder weather and other variations
   
27.3
 
Higher prices charged for off-system sales
   
24.0
 
Lower ISRS revenues
    
(1.4
)
      Total Variation
 
$
(3.3
)




2007 vs. 2006

Regulated Gas Distribution Operating Revenues for fiscal year 2007 decreased $9.5 million compared to fiscal year 2006 due in part to lower wholesale gas costs. Temperatures experienced in the Utility’s service area during 2007 were 5.7% colder than fiscal year 2006, but 7.4% warmer than normal. Total system therms sold and transported were 0.91 billion for fiscal year 2007 compared with 0.87 billion for fiscal year 2006. Total off-system therms sold and transported were 0.21 billion for fiscal year 2007 compared with 0.16 billion for fiscal year 2006. The decrease in Regulated Gas Distribution 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)
 
$
(111.6
)
Higher system sales volumes, primarily due to colder weather and other variations
   
80.6
 
Higher off-system sales volumes
   
48.1
 
Lower prices charged for off-system sales
   
(34.5
)
General rate increase, effective August 1, 2007
   
5.3
 
Higher ISRS revenues implemented June 15, 2006, January 2, 2007, and June 16, 2007
    
2.6
 
      Total Variation
 
$
(9.5
)

Regulated Operating Expenses

2008 vs. 2007

Regulated Operating Expenses in fiscal year 2008 decreased $11.6 million, or 1.1%, from fiscal year 2007. Natural and propane gas expense decreased $27.8 million from last year’s level, primarily attributable to lower rates charged by our suppliers and lower off-system gas expense, partially offset by higher system volumes purchased for sendout. Other operation and maintenance expenses increased $14.3 million, or 9.2%, primarily due to a higher provision for uncollectible accounts, increased maintenance and distribution expenses, increased wage rates, higher legal fees, increased pension costs, and the effect of a gain on the disposal of assets recorded last year. Depreciation and amortization expense increased $1.2 million, or 3.6%, primarily due to additional depreciable property.

2007 vs. 2006

Regulated Operating Expenses in fiscal year 2007 decreased $16.6 million, or 1.5%, from fiscal year 2006. Natural and propane gas expense decreased $23.8 million from fiscal year 2006, primarily attributable to lower rates charged by our suppliers, which was partially offset by higher system volumes purchased for sendout and increased off-system gas expense. Other operation and maintenance expenses increased $6.7 million, or 4.5%, primarily due to increased maintenance and distribution charges, increased group insurance charges, higher wage rates, and a higher provision for uncollectible accounts. These factors were partially offset by decreased injuries and damages expense as well as a gain on the disposal of assets. Depreciation and amortization expense increased $3.2 million, or 10.3%, primarily due to higher rates authorized in the 2005 rate case effective January 1, 2006 and additional depreciable property. Taxes, other than income taxes, decreased $2.7 million, or 3.8%, primarily due to lower property taxes and decreased gross receipts taxes (attributable to the decreased revenues).

Non-Regulated Gas Marketing Operating Revenues and Operating Expenses

Non-Regulated Gas Marketing Operating Revenues increased $357.1 million in fiscal year 2008 from those revenues for fiscal year 2007 primarily due to higher per unit gas sales prices charged by LER and increased sales volumes. The increase in Non-Regulated Gas Marketing Operating Expenses of $349.2 million was primarily associated with higher prices charged by suppliers and increased volumes purchased.

Non-Regulated Gas Marketing Operating Revenues increased $29.1 million in fiscal year 2007 from those revenues for fiscal year 2006 primarily due to increased sales volumes by LER, partially offset by lower per unit gas sales prices. The increase in Non-Regulated Gas Marketing Operating Expenses of $36.6 million was primarily associated with increased gas expense related to increased volumes purchased, partially offset by lower prices.



Other Income and (Income Deductions)-Net

Other Income and (Income Deductions)-Net decreased $4.9 million in fiscal year 2008 (compared to fiscal year 2007), due to higher investment losses, a loss on the redemption of long-term debt (primarily unamortized issuance costs), lower income associated with carrying costs applied to under-recoveries of gas costs, and increased charitable donations. These factors were partially offset by a reversal of tax-related expenses and additional proceeds related to the Company’s interest, as a policyholder, in the sale of a mutual insurance company. Carrying costs on under-recoveries of gas costs are recovered through the Utility’s PGA Clause.

The $1.3 million increase in Other Income and (Income Deductions)-Net in fiscal year 2007 from fiscal year 2006 was primarily due to increased investment income, higher interest income, and other minor variations, partially offset by lower income associated with carrying costs applied to under-recoveries of gas costs.

Interest Charges

The $4.5 million decrease in interest charges in fiscal year 2008 was primarily due to a reduction in interest on long-term debt resulting from the November 2007 maturity of $40 million principal amount of 7 1/2% First Mortgage Bonds, lower interest on short-term debt, and the reversal of tax-related expenses. The $1.1 million increase in interest charges in fiscal year 2007 (over fiscal year 2006) was primarily due to higher interest on short-term debt and other minor variations. Average short-term interest rates were 4.1% this year compared with 5.4% in fiscal year 2007 and 4.7% in fiscal year 2006. Average short-term borrowings were $180.7 million, $156.2 million, and $172.4 million for fiscal years 2008, 2007, and 2006, respectively.

Income Taxes

The $4.0 million increase in income taxes in fiscal year 2008 was primarily due to higher pre-tax income, partially offset by the recognition of previously unrecognized tax benefits recorded pursuant to Financial Accounting Standards Board Interpretation No. (FIN) 48.

The $0.8 million increase in income tax expense for fiscal year 2007 was primarily due to higher pre-tax income and the effect of lower income tax expense in fiscal year 2006 associated with a change in estimated tax depreciation and other property-related deductions.

Income from Discontinued Operations

The sale of SM&P on March 31, 2008 resulted in after-tax earnings of $25.4 million, net of associated costs of disposal. Income from discontinued operations for fiscal year 2008 was $20.4 million, consisting of the net effect of the sale and SM&P’s seasonal operating loss through the March 31 sale date. Income from discontinued operations for fiscal years 2007 and 2006 were $4.0 million and $3.1 million, respectively, reflecting SM&P’s operating income for those periods.

Basic and diluted earnings per share from discontinued operations were $0.94 for fiscal year 2008, $0.19 for fiscal year 2007, and $0.15 for fiscal year 2006.

Labor Agreement

Laclede Gas has a labor agreement with Locals 11-6 and 11-194 of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial and Service Workers International Union (Union), which represents approximately 65% of Laclede Gas’ employees. On August 4, 2008, Laclede Gas and Union representatives reached a new four-year labor agreement, replacing the prior agreement that expired at midnight, July 31, 2008. The new contract will expire at midnight on July 31, 2012. The new contract includes revisions to the defined benefit plan pension formula, changes in wage rates and work rules, and other modifications that enable the Utility to provide high quality service to its customers and control operating costs while continuing to provide competitive wages, pension, and healthcare benefits to its employees.

The Missouri Natural Division of Laclede Gas has a labor agreement with Local 11-884 of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial and Service Workers International Union, which represents approximately 5% of Laclede Gas’ employees. The agreement expires on April 15, 2009.




CRITICAL ACCOUNTING POLICIES

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

 
Allowances for Doubtful Accounts – Estimates of the collectibility of trade accounts receivable are based on historical trends, age of receivables, economic conditions, credit risk of specific customers, and other factors. The Utility’s provision for uncollectible accounts is dependent on the regulatory treatment provided for such costs. As approved by the MoPSC, the Utility was allowed to defer for future recovery uncollectible expenses associated with amendments to the Cold Weather Rule for fiscal years 2006 and 2007.

 
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.



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
%
   
$
(7,610
)
 
$
(171
)
   
(0.25
)
     
7,820
     
160
 
                         
Rate of Future Compensation Increase
 
0.25
%
     
5,900
     
750
 
   
(0.25
)
     
(5,700
)
   
(730
)
                         
Expected Return on Plan Assets
 
0.25
%
     
     
(630
)
   
(0.25
)
     
     
630
 
                         
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
%
   
$
(1,500
)
 
$
(101
)
   
(0.25
)
     
1,540
     
101
 
                         
Expected Return on Plan Assets
 
0.25
%
     
     
(67
)
   
(0.25
)
     
     
67
 
                         
Annual Medical Cost Trend
 
1.00
%