SPIRE MISSOURI INC - FORM 10-Q

Attached files

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EX-32 - EXHIBIT 32 - SPIRE MISSOURI INC	ex32.htm
EX-31 - EXHIBIT 31 - SPIRE MISSOURI INC	ex31.htm
EX-12 - EXHIBIT 12 - SPIRE MISSOURI INC	ex12.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

[ X ]

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF

1934 For the Quarter Ended March 31, 2011

[ ]	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 1-1822

LACLEDE GAS COMPANY

(Exact name of registrant as specified in its charter)

Missouri (State of Incorporation)	43-0368139 (I.R.S. Employer Identification number)
720 Olive Street St. Louis, MO 63101 (Address and zip code of principal executive offices) 314-342-0500 (Registrant’s telephone number, including area code)

Indicate by check mark if the registrant:

(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. Yes [ X ] No [ ]

has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]

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.

	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). Yes [ ] No [ X ]

As of April 28, 2011, there were 11,694 shares of the registrant’s Common Stock, par value $1.00 per share, outstanding, 100% of which were owned by The Laclede Group, Inc.

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TABLE OF CONTENTS			Page No.

PART I. FINANCIAL INFORMATION

Item 1	Financial Statements:
		Statements of Income	4
		Statements of Comprehensive Income	5
		Balance Sheets	6-7
		Statements of Cash Flows	8
		Notes to Financial Statements	9-20

Item 2	Management’s Discussion and Analysis of Financial Condition and
		Results of Operations	21-31

Item 3	Quantitative and Qualitative Disclosures About Market Risk		32

Item 4	Controls and Procedures		32

PART II. OTHER INFORMATION

Item 1	Legal Proceedings		33

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		33

Item 6	Exhibits		33

SIGNATURE			34

INDEX TO EXHIBITS			35

FILING FORMAT

The Laclede Group, Inc. (Laclede Group or the Company) and Laclede Gas Company (Laclede Gas or the Utility) previously filed joint Forms 10-K and 10-Q, with the Utility’s Financial Statements, Notes to Financial Statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Exhibit 99.1 in the combined reports. Beginning with the quarter ended December 31, 2010, the Company and the Utility are each filing separate reports with the SEC. Laclede Gas’ Form 10-Q should be read in conjunction with the joint Form 10-K of Laclede Gas and Laclede Group, including Exhibit 99.1.

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PART I. FINANCIAL INFORMATION

The interim financial statements included herein have been prepared by Laclede Gas, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the financial statements and the notes thereto included in Exhibit 99.1 of The Laclede Group Inc.’s Form 10-K for the fiscal year ended September 30, 2010.

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Item 1. Financial Statements

LACLEDE GAS COMPANY

STATEMENTS OF INCOME

(UNAUDITED)

	Three Months Ended						Six Months Ended
	March 31,						March 31,
(Thousands)		2011			2010			2011		2010

Operating Revenues:
Utility	$	388,375		$	373,520		$	665,818	$	656,449
Other		—			1			—		10,326
Total Operating Revenues		388,375			373,521			665,818		666,775
Operating Expenses:
Utility
Natural and propane gas		260,706			250,238			434,071		432,238
Other operation expenses		39,500			37,779			74,362		75,242
Maintenance		6,441			7,219			12,581		13,393
Depreciation and amortization		9,739			9,385			19,377		18,748
Taxes, other than income taxes		24,686			26,050			40,434		42,274
Total Utility Operating Expenses		341,072			330,671			580,825		581,895
Other		(5	)		(2	)		—		4,326
Total Operating Expenses		341,067			330,669			580,825		586,221
Operating Income		47,308			42,852			84,993		80,554
Other Income and (Income Deductions) – Net		485			383			2,300		1,893
Interest Charges:
Interest on long-term debt		5,740			6,145			11,682		12,291
Other interest charges		592			526			1,369		1,089
Total Interest Charges		6,332			6,671			13,051		13,380
Income Before Income Taxes		41,461			36,564			74,242		69,067
Income Tax Expense		15,229			13,148			26,555		24,585
Net Income	$	26,232		$	23,416		$	47,687	$	44,482

See Notes to Financial Statements.

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LACLEDE GAS COMPANY

STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended						Six Months Ended
	March 31,						March 31,
(Thousands)		2011			2010			2011			2010

Net Income	$	26,232		$	23,416		$	47,687		$	44,482
Other Comprehensive Income (Loss), Before Tax:
Net gains (losses) on cash flow hedging derivative instruments:
Net hedging gain arising during period		267			60			440			226
Reclassification adjustment for gains included in net income		(72	)		(74	)		(121	)		(136	)
Net unrealized gains (losses) on cash flow hedging derivative instruments		195			(14	)		319			90
Amortization of actuarial loss included in net periodic
pension and postretirement benefit cost		106			99			213			197
Other Comprehensive Income, Before Tax		301			85			532			287
Income Tax Expense Related to Items of Other
Comprehensive Income		116			33			205			111
Other Comprehensive Income, Net of Tax		185			52			327			176
Comprehensive Income	$	26,417		$	23,468		$	48,014		$	44,658

See Notes to Financial Statements.

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LACLEDE GAS COMPANY

BALANCE SHEETS

(UNAUDITED)


	March 31,			Sept. 30,			March 31,
(Thousands)	2011			2010			2010

ASSETS
Utility Plant	$	1,351,293		$	1,326,284		$	1,301,013
Less: Accumulated depreciation and amortization		453,271			442,200			435,205
Net Utility Plant		898,022			884,084			865,808
Other Property and Investments		49,362			45,864			44,870

Current Assets:
Cash and cash equivalents		1,708			1,009			3,020
Accounts receivable:
Utility		146,821			70,053			130,460
Non-utility		666			848			1,149
Associated companies		310			310			314
Other		6,616			7,277			5,973
Allowance for doubtful accounts		(10,991	)		(10,176	)		(12,413	)
Delayed customer billings		32,398			—			38,955
Inventories:
Natural gas stored underground at LIFO cost		40,225			113,576			43,757
Propane gas at FIFO cost		16,927			15,625			15,625
Materials, supplies, and merchandise at average cost		4,276			3,741			4,212
Derivative instrument assets		8,035			9,288			10,789
Unamortized purchased gas adjustments		6,470			23,718			—
Deferred income taxes		2,208			—			—
Prepayments and other		5,334			7,101			5,672
Total Current Assets		261,003			242,370			247,513

Deferred Charges:
Regulatory assets		420,733			479,462			467,078
Other		6,293			6,672			6,434
Total Deferred Charges		427,026			486,134			473,512
Total Assets	$	1,635,413		$	1,658,452		$	1,631,703

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LACLEDE GAS COMPANY

BALANCE SHEETS (Continued)

(UNAUDITED)

	March 31,			Sept. 30,			March 31,
(Thousands, except share amounts)	2011			2010			2010

CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock and Paid-in capital (11,694, 11,674, and 11,654 shares issued, respectively)	$	210,223		$	208,154		$	205,903
Retained earnings		235,533			205,980			228,344
Accumulated other comprehensive loss		(2,548	)		(2,875	)		(2,443	)
Total Common Stock Equity		443,208			411,259			431,804
Long-term debt (less current portion)		364,327			364,298			364,269
Total Capitalization		807,535			775,557			796,073

Current Liabilities:
Notes payable		—			129,650			114,950
Notes payable – associated companies		72,720			—			—
Accounts payable		44,583			36,706			38,212
Accounts payable – associated companies		5,848			652			6,868
Advance customer billings		—			16,809			—
Current portion of long-term debt		—			25,000			25,000
Wages and compensation accrued		13,504			13,410			12,893
Dividends payable		9,072			8,806			8,799
Customer deposits		10,719			11,244			11,663
Interest accrued		9,023			9,639			9,865
Taxes accrued		40,410			8,677			43,975
Unamortized purchased gas adjustments		—			—			1,148
Deferred income taxes		—			4,248			1,905
Other		9,982			11,385			10,172
Total Current Liabilities		215,861			276,226			285,450

Deferred Credits and Other Liabilities:
Deferred income taxes		293,860			292,766			249,266
Unamortized investment tax credits		3,432			3,538			3,646
Pension and postretirement benefit costs		208,727			207,607			201,643
Asset retirement obligations		26,601			25,829			26,258
Regulatory liabilities		49,077			47,365			45,088
Other		30,320			29,564			24,279
Total Deferred Credits and Other Liabilities		612,017			606,669			550,180
Commitments and Contingencies (Note 8)
Total Capitalization and Liabilities	$	1,635,413		$	1,658,452		$	1,631,703


See Notes to Financial Statements.

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LACLEDE GAS COMPANY

STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended
	March 31,
(Thousands)	2011			2010

Operating Activities:
Net Income	$	47,687		$	44,482
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		19,377			18,748
Deferred income taxes and investment tax credits		(8,905	)		(15,242	)
Other – net		(685	)		701
Changes in assets and liabilities:
Accounts receivable – net		(75,110	)		(48,272	)
Unamortized purchased gas adjustments		17,248			(1,982	)
Deferred purchased gas costs		60,725			25,323
Accounts payable		14,518			15,765
Delayed customer billings - net		(49,207	)		(60,095	)
Taxes accrued		31,721			31,443
Natural gas stored underground		73,351			49,556
Other assets and liabilities		169			936
Net cash provided by operating activities		130,889			61,363

Investing Activities:
Capital expenditures		(29,620	)		(24,697	)
Other investments		(1,421	)		(3,399	)
Net cash used in investing activities		(31,041	)		(28,096	)

Financing Activities:
Maturity of first mortgage bonds		(25,000	)		—
Repayment of short-term debt - net		(129,650	)		(14,850	)
Borrowings from Laclede Group		116,705			2,200
Repayment of borrowings from Laclede Group		(43,985	)		(2,200	)
Changes in book overdrafts		(291	)		(207	)
Dividends paid		(17,868	)		(17,325	)
Issuance of common stock to Laclede Group		716			703
Excess tax benefits from stock-based compensation		243			66
Other		(19	)		(36	)
Net cash used in financing activities		(99,149	)		(31,649	)

Net Increase in Cash and Cash Equivalents		699			1,618
Cash and Cash Equivalents at Beginning of Period		1,009			1,402
Cash and Cash Equivalents at End of Period	$	1,708		$	3,020


Supplemental Disclosure of Cash Paid (Refunded) During the Period for:
Interest	$	13,331		$	13,305
Income taxes		(4,059	)		(68	)

See Notes to Financial Statements.

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LACLEDE GAS COMPANY

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These notes are an integral part of the accompanying unaudited financial statements of Laclede Gas Company (Laclede Gas or the Utility). In the opinion of Laclede Gas, this interim report includes all adjustments (consisting of only normal recurring accruals) necessary for the fair presentation of the results of operations for the periods presented. Laclede Gas is a wholly-owned subsidiary of The Laclede Group Inc. (Laclede Group). This Form 10-Q should be read in conjunction with the Notes to Financial Statements contained in Exhibit 99.1 of Laclede Group’s Fiscal Year 2010 Form 10-K.

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

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

Laclede Gas provides administrative and general support to affiliates. All such costs, which are not material, are billed to the appropriate affiliates. Also, Laclede Group may charge or reimburse Laclede Gas for certain tax-related amounts. Unpaid balances relating to these activities are reflected in the Laclede Gas Balance Sheets as Accounts receivable-Associated companies or as Accounts payable-associated companies. Additionally, Laclede Gas may, on occasion, borrow funds from Laclede Group. Unpaid balances relating to this arrangement, if any, are reflected in Notes payable-associated companies. At March 31, 2011, Laclede Gas had outstanding borrowings from Laclede Group under a revolving credit note of $72.7 million at an interest rate of 0.3%. Advances under this note are due and payable on demand.

REVENUE RECOGNITION - Laclede Gas reads meters and bills its customers on monthly cycles. The Utility records its regulated gas distribution revenues from gas sales and transportation services on an accrual basis that includes estimated amounts for gas delivered, but not yet billed. The accruals for unbilled revenues are reversed in the subsequent accounting period when meters are actually read and customers are billed. The amounts of accrued unbilled revenues at March 31, 2011 and 2010, for the Utility, were $29.0 million and $22.6 million, respectively. The amount of accrued unbilled revenue at September 30, 2010 was $11.3 million.

GROSS RECEIPTS TAXES - Gross receipts taxes associated with Laclede Gas’ natural gas utility service are imposed on the Utility and billed to its customers. These amounts are recorded gross in the Statements of Income. Amounts recorded in Utility Operating Revenues for the quarters ended March 31, 2011 and 2010 were $20.3 million and $21.5 million, respectively. Amounts recorded in Utility Operating Revenues for the six months ended March 31, 2011 and 2010 were $31.6 million and $33.5 million, respectively. Gross receipts taxes are expensed by the Utility and included in the Taxes, other than income taxes line.

STOCK-BASED COMPENSATION – Officers and employees of Laclede Gas, as determined by the Compensation Committee of Laclede Group’s Board of Directors, are eligible to be selected for awards under the Laclede Group 2006 Equity Incentive Plan. For Laclede Group’s non-employee directors, shares are awarded under the Restricted Stock Plan for Non-Employee Directors. Refer to Note 1 of the Notes to Financial Statements included in the Exhibit 99.1 of Laclede Group’s Form 10-K for the fiscal year ended September 30, 2010 for descriptions of these plans. For awards made to its employees, the Utility records its allocation of compensation cost from Laclede Group with a corresponding increase to additional paid-in capital.

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

	Three Months Ended						Six Months Ended
	March 31,						March 31,
(Thousands)	2011			2010			2011			2010

Total equity compensation cost	$	699		$	905		$	1,312		$	1,663
Compensation cost capitalized		(177	)		(219	)		(331	)		(357	)
Compensation cost recognized in net income		522			686			981			1,306
Income tax benefit recognized in net income		(202	)		(265	)		(379	)		(504	)
Compensation cost recognized in net income,
net of income tax	$	320		$	421		$	602		$	802

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As of March 31, 2011, there was $4.2 million in unrecognized compensation cost related to nonvested share-based compensation arrangements that is expected to be allocated to the Utility over a weighted average period of 2.5 years.

2.	PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

Pension Plans

Laclede Gas has non-contributory, defined benefit, trusteed forms of pension plans covering substantially all employees. Plan assets consist primarily of corporate and U.S. government obligations and equity market exposure achieved through derivative investments.

Similar to modifications made to Laclede Gas’ primary plan in 2009, effective January 1, 2010, the Utility modified the calculation of future benefits under its Missouri Natural Gas division plan from a career 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.

Pension costs for all of Laclede Gas' defined-benefit pension plans for the quarters ended March 31, 2011 and 2010 were $4.2 million and $1.6 million, respectively, including amounts charged to construction. Pension costs for the six months ended March 31, 2011 and 2010 were $5.8 million and $3.2 million, respectively, including amounts charged to construction.

The net periodic pension costs include the following components:

	Three Months Ended						Six Months Ended
	March 31,						March 31,
(Thousands)	2011			2010			2011			2010

Service cost – benefits earned during the period	$	2,388		$	2,189		$	4,776		$	4,463
Interest cost on projected benefit obligation		4,705			4,924			9,410			9,881
Expected return on plan assets		(4,712	)		(5,075	)		(9,424	)		(10,107	)
Amortization of prior service cost		160			172			320			411
Amortization of actuarial loss		2,557			2,025			5,114			4,059
Sub-total		5,098			4,235			10,196			8,707
Regulatory adjustment		(862	)		(2,657	)		(4,395	)		(5,550	)
Net pension cost	$	4,236		$	1,578		$	5,801		$	3,157

Pursuant to the provisions of the Laclede Gas pension plans, pension obligations may be satisfied by lump-sum cash payments. Pursuant to a Missouri Public Service Commission (MoPSC or Commission) Order, lump-sum payments are recognized as settlements (which can result in gains or losses) only if the total of such payments exceeds 100% of the sum of service and interest costs. No lump-sum payments were recognized as settlements during the six months ended March 31, 2011 and March 31, 2010.

Pursuant to a MoPSC Order, the return on plan assets is based on the market-related value of plan assets implemented prospectively over a four-year period. Gains or losses not yet includible in pension cost are amortized only to the extent that such gain or loss exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. The recovery in rates for the Utility’s qualified pension plans is based on an allowance of $4.8 million annually effective August 1, 2007 and $15.5 million annually effective January 1, 2011. The difference between these amounts 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 regulatory liability.

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. Fiscal year 2011 contributions to the pension plans through March 31, 2011 were $4.9 million to the qualified trusts and approximately $1.1 million to the non-qualified plans. Contributions to the pension plans for the remaining six months of fiscal year 2011 are anticipated to be at least $11.9 million to the qualified trusts and $1.6 million to the non-qualified plans.

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Postretirement Benefits

Laclede Gas provides certain life insurance benefits at retirement. Medical insurance is available after early retirement until age 65. The transition obligation not yet includible in postretirement benefit cost is being amortized over 20 years. Postretirement benefit costs for the quarters ended March 31, 2011 and 2010 were $2.4 million and $1.9 million, respectively, including amounts charged to construction. Postretirement benefit costs for the six months ended March 31, 2011 and 2010 were $4.3 million and $3.8 million, respectively, including amounts charged to construction.

Net periodic postretirement benefit costs consisted of the following components:

	Three Months Ended						Six Months Ended
	March 31,						March 31,
(Thousands)	2011			2010			2011			2010

Service cost – benefits earned during the period	$	1,919		$	1,611		$	3,838		$	3,221
Interest cost on accumulated
postretirement benefit obligation		1,211			1,129			2,422			2,258
Expected return on plan assets		(912	)		(758	)		(1,823	)		(1,516	)
Amortization of transition obligation		34			34			68			68
Amortization of prior service credit		(582	)		(582	)		(1,164	)		(1,164	)
Amortization of actuarial loss		1,111			995			2,221			1,990
Sub-total		2,781			2,429			5,562			4,857
Regulatory adjustment		(400	)		(518	)		(1,271	)		(1,036	)
Net postretirement benefit cost	$	2,381		$	1,911		$	4,291		$	3,821

Missouri state law provides for the recovery in rates of costs accrued pursuant to generally accepted accounting principles (GAAP) provided that such costs are funded through an independent, external funding mechanism. Laclede Gas established Voluntary Employees’ Beneficiary Association (VEBA) and Rabbi trusts as its external funding mechanisms. VEBA and Rabbi trusts’ assets consist primarily of money market securities and mutual funds invested in stocks and bonds.

Pursuant to a MoPSC Order, the return on plan assets is based on the market-related value of plan assets implemented prospectively over a four-year period. Gains and losses not yet includible in postretirement benefit cost are amortized only to the extent that such gain or loss exceeds 10% of the greater of the accumulated postretirement benefit obligation or the market-related value of plan assets. Such excess is amortized over the average remaining service life of active participants. The Commission ordered that the recovery in rates be based on an annual allowance of $7.6 million effective August 1, 2007 and $9.5 million effective January 1, 2011. The difference between these amounts 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 as a regulatory asset or regulatory liability.

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. Fiscal year 2011 contributions to the postretirement plans through March 31, 2011 were $2.8 million to the qualified trusts and approximately $0.1 million paid directly to participants from Laclede Gas funds. Contributions to the postretirement plans for the remaining six months of fiscal year 2011 are anticipated to be $8.3 million to the qualified trusts and $0.2 million paid directly to participants from Laclede Gas funds.

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3.	FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of financial instruments are as follows:

(Thousands)	Carrying Amount		Fair Value
As of March 31, 2011
Cash and cash equivalents	$	1,708	$	1,708
Marketable securities		17,022		17,022
Derivative instrument assets		8,700		8,700
Short-term debt		72,720		72,720
Long-term debt		364,327		391,877

As of September 30, 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

As of March 31, 2010
Cash and cash equivalents	$	3,020	$	3,020
Marketable securities		12,083		12,083
Derivative instrument assets		10,789		10,789
Short-term debt		114,950		114,950
Long-term debt, including current portion		389,269		408,429

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 values of marketable securities, derivative instrument assets, and derivative instrument liabilities are valued as described in Note 4, Fair Value Measurements.

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4.	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 March 31, 2011
Assets
U. S. Stock/Bond Mutual Funds	$	17,022	$	—	$	—	$	—		$	17,022
NYMEX natural gas contracts		5,019		—		—		3,350			8,369
NYMEX gasoline and heating
oil contracts		369		—		—		(38	)		331
Total	$	22,410	$	—	$	—	$	3,312		$	25,722

Liabilities
NYMEX natural gas contracts	$	16,854	$	—	$	—	$	(16,854	)	$	—

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 March 31, 2010
Assets
U. S. Stock/Bond Mutual Funds	$	12,083	$	—	$	—	$	—		$	12,083
NYMEX natural gas contracts		2,885		—		—		7,677			10,562
NYMEX gasoline and heating
oil contracts		233		—		—		(6	)		227
Total	$	15,201	$	—	$	—	$	7,671		$	22,872

Liabilities
NYMEX natural gas contracts	$	70,170	$	—	$	—	$	(70,170	)	$	—

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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 the six months ended March 31, 2011 and March 31, 2010, there were no transfers between the levels of the fair value hierarchy. The Utility’s policy is to recognize such transfers, if any, as for 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 legally enforceable netting agreement exists between Laclede Gas and the counterparty to a derivative contract. For additional information on derivative instruments, see Note 5, Derivative Instruments and Hedging Activities.

5.	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 Purchased Gas Adjustment (PGA) Clause, through which the MoPSC allows the Utility to recover gas supply costs, subject to prudence review. Accordingly, Laclede Gas does not expect any adverse earnings impact as a result of the use of these derivative instruments. The Utility does not designate these instruments as hedging instruments 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, “Regulated Operations,” and, as a result, have no direct impact on the Statements of Income. The timing of the operation of the PGA Clause may cause interim variations in short-term cash flows, because the Utility is subject to cash margin requirements associated with changes in the values of these instruments. Nevertheless, carrying costs associated with such requirements are recovered through the PGA Clause.

From time to time, Laclede Gas purchases NYMEX futures contracts to help stabilize operating costs associated with forecasted purchases of gasoline and diesel fuels used to power vehicles and equipment used in the course of its business. At March 31, 2011, Laclede Gas held 0.5 million gallons of gasoline futures contracts at an average price of $2.38 per gallon and 0.1 million gallons of heating oil futures contracts (to hedge diesel fuel purchases) at an average price of $2.44 per gallon. Most of these futures contracts, the longest of which extends to February 2012, 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 Clause.

Derivative instruments designated as cash flow hedges of forecasted transactions are recognized on the Balance Sheets at fair value and the change in the fair value of the effective portion of these hedge instruments is recorded, net of tax, in other comprehensive income (OCI). Accumulated other comprehensive income (AOCI) is a component of Total Common Stock Equity. Amounts are reclassified from AOCI into earnings when the hedged items affect net income, using the same revenue or expense category that the hedged item impacts. Based on market prices at March 31, 2011, it is expected that approximately $0.3 million of pre-tax unrealized gains will be reclassified into the Statements of Income during the next twelve months. Cash flows from hedging transactions are classified in the same category as the cash flows from the items that are being hedged in the Statements of Cash Flows.

The Utility’s derivative instruments consist primarily of NYMEX positions. The NYMEX is the primary national commodities exchange on which natural gas derivatives are traded. NYMEX-traded contracts are supported by the financial and credit quality of the clearing members of the NYMEX and have nominal credit risk. Open NYMEX natural gas futures positions at March 31, 2011 were as follows:

	MMBtu (millions)	Avg. Price Per MMBtu
Open long futures positions
Fiscal 2011	3.76	$	7.40
Fiscal 2012	13.07		5.17
Fiscal 2013	0.47		4.80

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At March 31, 2011, Laclede Gas also had 18.96 million MMBtu of other price 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

			Three Months Ended					Six Months Ended
		Location of Gain (Loss)	March 31,					March 31,
(Thousands)		Recorded in Income		2011		2010			2011		2010

Derivatives in Cash Flow Hedging Relationships

NYMEX gasoline and heating oil contracts:
Effective portion of gain recognized in OCI on derivatives			$	267	$	60		$	440	$	226

Effective portion of gain reclassified from AOCI to income		Utility – Other Operation Expenses		72		74			121		136
Ineffective portion of gain (loss) on derivatives recognized in income		Utility – Other Operation Expenses		19		(23	)		48		(79	)

Derivatives Not Designated as Hedging Instruments *

NYMEX gasoline and heating oil contracts:
Gain recognized in income on derivative		Other Income and (Income Deductions) – Net	$	47	$	2		$	63	$	2

*	Gains and losses on Laclede Gas’ NYMEX natural gas derivative instruments, which are not designated 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 March 31, 2011

		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	$	341		Derivative Instrument Assets	$	—

Derivatives not designated as hedging instruments

NYMEX natural gas contracts		Derivative Instrument Assets		4,353		Derivative Instrument Assets		16,854
		Other Deferred Charges		666		Other Deferred Charges		—
NYMEX gasoline and heating oil contracts		Derivative Instrument Assets		28		Derivative Instrument Assets		—
Sub-total				5,047				16,854
Total derivatives			$	5,388			$	16,854

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 March 31, 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	$	231		Derivative Instrument Assets	$	—

Derivatives not designated as hedging instruments

NYMEX natural gas contracts		Derivative Instrument Assets		2,885		Derivative Instrument Assets		70,170
NYMEX gasoline and heating oil contracts		Derivative Instrument Assets		2		Derivative Instrument Assets		—
Sub-total				2,887				70,170
Total derivatives			$	3,118			$	70,170

*	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 4, Fair Value Measurements, for information on the valuation of derivative instruments.

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

		Mar. 31,			Sept. 30,			Mar. 31,
	(Thousands)	2011			2010			2010

	Fair value of asset derivatives presented above	$	5,388		$	1,968		$	3,118
	Fair value of cash margin receivables		20,205			49,580			77,847
	Netting of assets and liabilities with the same counterparty		(16,893	)		(40,574	)		(70,176	)
	Total	$	8,700		$	10,974		$	10,789

	Derivative Instrument Assets, per Balance Sheets:
	Derivative instrument assets	$	8,035		$	9,288		$	10,789
	Other deferred charges		665			1,686			—
	Total		8,700			10,974			10,789

	Fair value of liability derivatives presented above	$	16,854		$	40,574		$	70,170
	Fair value of cash margin payables		39			—			6
	Netting of assets and liabilities with the same counterparty		(16,893	)		(40,574	)		(70,176	)
	Derivative instrument liabilities, per Balance Sheet*	$	—		$	—		$	—

*	Included in the Other line of the Current Liabilities section

6.	OTHER INCOME AND (INCOME DEDUCTIONS) – NET

	Three Months Ended						Six Months Ended
	March 31,						March 31,
(Thousands)	2011			2010			2011		2010

Interest income	$	252		$	325		$	663	$	773
Net investment gain		423			297			1,167		781
Other income		61			25			74		25
Other income deductions		(251	)		(264	)		396		314
Other Income and (Income Deductions) – Net	$	485		$	383		$	2,300	$	1,893

The increase in Other Income and (Income Deductions) – Net for the six months ended March 31, 2011, compared with the six months ended March 31, 2010, was primarily due to higher net investment gains.

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7.	INFORMATION BY OPERATING SEGMENT

The Regulated Gas Distribution segment consists of the regulated operations of Laclede Gas. The Non-Regulated Other segment includes the non-regulated propane transaction. Accounting policies are described in Note 1. There are no material intersegment revenues.

Management evaluates the performance of the 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.

	Regulated		Non-		Adjustments
	Gas		Regulated		&
(Thousands)	Distribution		Other		Eliminations		Total

Three Months Ended
March 31, 2011
Operating revenues	$	388,375	$	—	$	—	$	388,375
Net Economic Earnings		26,203		—		—		26,203
Total assets		1,634,674		739		—		1,635,413

Six Months Ended
March 31, 2011
Operating revenues	$	665,818	$	—	$	—	$	665,818
Net Economic Earnings		47,637		—		—		47,637
Total assets		1,634,674		739		—		1,635,413

Three Months Ended
March 31, 2010
Operating revenues	$	373,520	$	1	$	—	$	373,521
Net Economic Earnings		23,440		2		—		23,442
Total assets		1,630,495		1,208		—		1,631,703

Six Months Ended
March 31, 2010
Operating revenues	$	656,449	$	10,326	$	—	$	666,775
Net Economic Earnings		40,872		3,685		—		44,557
Total assets		1,630,495		1,208		—		1,631,703

Reconciliation of Net Economic Earnings to Net Income

	Three Months Ended					Six Months Ended
	March 31,					March 31,
(Thousands)	2011		2010			2011		2010

Total Net Economic Earnings above	$	26,203	$	23,442		$	47,637	$	44,557
Add: Unrealized gain (loss) on energy-related
derivative contracts, net of tax		29		(26	)		50		(75	)
Net Income	$	26,232	$	23,416		$	47,687	$	44,482

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8.	COMMITMENTS AND CONTINGENCIES

Commitments

Laclede Gas has entered into various contracts, expiring on dates through 2017, for the storage, transportation, and supply of natural gas. Minimum payments required under the contracts in place at March 31, 2011 are estimated at approximately $261 million. Additional contracts are generally entered into prior to or during the heating season. Laclede Gas recovers its costs from customers in accordance with the PGA Clause.

Leases and Guarantees

Laclede Gas has several operating leases for the rental of vehicles that contain provisions requiring Laclede Gas to guarantee certain amounts related to the residual value of the leased property. These leases have various terms, the longest of which extends into 2015. At March 31, 2011, the maximum guarantees under these leases are $1.2 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 March 31, 2011, the carrying value of the liability recognized for these guarantees was $0.3 million.

Contingencies and Indemnifications

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.

One of the sites located in the City of St. Louis is currently owned by a development agency of the City, which, together with other City development agencies, has selected a developer to redevelop the site. In conjunction with this redevelopment effort, Laclede Gas and another former owner of the site entered into an agreement (Remediation Agreement) with the City development agencies, the developer, and an environmental consultant that obligates one of the City agencies and the environmental consultant to remediate the site and obtain a No Further Action letter from the Missouri Department of Natural Resources. The Remediation Agreement also provides for a release of Laclede Gas and the other former site owner from certain liabilities related to the past and current environmental condition of the site and requires the developer and the environmental consultant to maintain certain insurance coverages, including remediation cost containment, premises pollution liability, and professional liability. The operative provisions of the Remediation Agreement were triggered on December 20, 2010, on which date Laclede Gas and the other former site owner, as full consideration under the Remediation Agreement, paid a small percentage of the cost of remediation of the site. The amount paid by Laclede Gas, which is its only monetary obligation under the Remediation Agreement, did not materially impact the financial condition, results of operations, or cash flows of Laclede Gas.

To date, amounts required for remediation at these sites have not been material. However, the amount of costs relative to future remedial actions at these and other sites is unknown and may be material. Laclede Gas has notified its insurers that it seeks reimbursement for costs incurred in the past and future potential liabilities associated with the MGP sites. While some of the insurers have denied coverage and reserved their rights, Laclede Gas continues to discuss potential reimbursements with them. In 2005, 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 of the Utility’s insurers of environmental coverage for the MGP sites. That analysis demonstrated a range of possible future expenditures to investigate, monitor, and remediate these MGP sites from $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, the successful completion of remediation efforts required by the Remediation Agreement described above, and any insurance recoveries. Costs associated with environmental remediation activities are accrued when such costs are probable and reasonably estimable.

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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. The MoPSC Staff proposed a number of non-monetary recommendations, based on its review of gas costs for fiscal years 2008 and 2009. Laclede Gas believes that the proposed disallowances lack merit and is vigorously opposing these adjustments in proceedings before the MoPSC. As such, no amount has been recorded in the financial statements for these proposed disallowances.

In connection with the affiliate transactions 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 Laclede Group’s corporate reorganization into a holding company structure. The Utility filed a counterclaim against the MoPSC Staff 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 February 4, 2011, the MoPSC issued an Order finding that the Company violated the terms of the 2001 Stipulation and Agreement pertaining to the Company’s corporate reorganization and authorizing its General Counsel to seek penalties in court against Laclede Gas. On March 30, 2011, the Company filed a petition with the Cole County Circuit Court seeking judicial review of the February 4 Order. Also, on October 6, 2010, the MoPSC Staff filed a related complaint against Laclede Gas, LER, and Laclede Group, alleging that the Utility has failed to comply with the MoPSC’s affiliate transaction rules. LER and Laclede Group both filed motions to dismiss, which were granted by the Commission on December 22, 2010. Laclede Gas also filed a motion to dismiss certain counts of the complaint, which is still pending before the Commission, as well as a counterclaim against the Staff. Laclede Gas believes that neither complaint has merit and is vigorously opposing both of them.

Laclede Gas is involved in other litigation, claims, and investigations arising in the normal course of business. Management, after discussion with counsel, believes that the final outcome of these matters will not have a material adverse effect on the financial position, results of operations, or cash flows of the Utility.

9.	SUBSEQUENT EVENT

In April 2011, Laclede Gas sold to a third party 320,000 barrels of propane from inventory that was not required to meet its foreseeable utility gas supply requirements. The sale resulted in cash receipts and revenues totaling $17.9 million and net income totaling $6.1 million that will be included in operating results for the third quarter of fiscal 2011. Laclede Gas also renegotiated a propane exchange arrangement with the counterparty and enhanced it to also provide market-based storage services.

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

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

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

•	weather conditions and catastrophic events, particularly severe weather in the natural gas producing areas of the country;
•	volatility in gas prices, particularly sudden and sustained changes in natural gas prices, including the related impact on margin deposits associated with the use of natural gas derivative instruments;
•	the impact of 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
	•	non-regulated and affiliated transactions
	•	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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RESULTS OF OPERATIONS

Overview

Laclede Gas is a wholly-owned subsidiary of The Laclede Group, Inc. (Laclede Group). 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 seasonal in nature and 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 through 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 26 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 28 for additional information.

EARNINGS

Quarter Ended March 31, 2011

Laclede Gas’ net income increased $2.8 million for the quarter ended March 31, 2011, compared with the quarter ended March 31, 2010. The increase was primarily due to the following factors, quantified on a pre-tax basis:

•	the benefit of the general rate increase, effective September 1, 2010, totaling $7.2 million.

This benefit was partially offset by the following factors:

•	lower Infrastructure System Replacement Surcharge (ISRS) revenues totaling $1.5 million; and,
•	increases in operation and maintenance expense, totaling $0.9 million.

Utility Operating Revenues

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

Utility Operating Revenues for the quarter ended March 31, 2011 were $388.4 million, or $14.9 million more than the same period last year. Temperatures experienced in the Utility’s service area during the quarter were 4.8% warmer than the same quarter last year, but 2.8% colder than normal. Total system therms sold and transported were 411.1 million for the quarter ended March 31, 2011 compared with 430.7 million for the same period last year. Total off-system therms sold and transported were 84.4 million for the quarter ended March 31, 2011 compared with 10.7 million for the same period last year. The increase in Utility Operating Revenues was primarily attributable to the following factors:

(Millions)
Higher off-system sales volumes	$	35.8
Lower system sales volumes and other variations		(14.9	)
General rate increase, effective September 1, 2010		7.2
Lower wholesale gas costs passed on to Utility customers (subject to prudence review by the MoPSC)		(5.9	)
Lower prices charged for off-system sales		(5.8	)
Lower ISRS revenues		(1.5	)
Total Variation	$	14.9

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Utility Operating Expenses

Utility Operating Expenses for the quarter ended March 31, 2011 increased $10.4 million from the same quarter last year. Natural and propane gas expense increased $10.5 million, or 4.2%, from last year’s level, primarily attributable to higher off-system gas expense, partially offset by decreased system volumes purchased for sendout and lower rates charged by our suppliers. Other operation and maintenance expenses increased $0.9 million, or 2.1%, primarily due to higher pension expense and increased group insurance charges, partially offset by decreased maintenance and distribution charges. Taxes, other than income taxes, decreased $1.4 million, or 5.2%, primarily due to decreased gross receipts taxes (attributable to decreased system sales revenues).

Interest Charges

The $0.3 million decrease in interest charges was primarily due to lower interest on long-term debt, attributable to the November 2010 maturity of $25 million principal amount of 6 1/2 % first mortgage bonds. Average short-term interest rates were 0.3% for both the quarters ended March 31, 2011 and March 31, 2010. Average short-term borrowings were $126.8 million for the quarter ended March 31, 2011 compared with $90.9 million for the quarter ended March 31, 2010.

Income Taxes

The $2.1 million increase in income taxes was primarily due to higher pre-tax income.

Six Months Ended March 31, 2011

Laclede Gas’ net income for the six months ended March 31, 2011 was $47.7 million, compared with net income of $44.5 million for the six months ended March 31, 2010. The $3.2 million increase in net income was primarily attributable to the following factors, quantified on a pre-tax basis:

•	the benefit of the general rate increase, effective September 1, 2010, totaling $14.8 million; and,
•	decreases in operation and maintenance expense totaling $1.7 million.

These factors were partially offset by:

•	the effect of income from a non-regulated propane transaction in the wholesale market recorded during the quarter ended December 31, 2009, totaling $6.0 million;
•	lower Infrastructure System Replacement Surcharge (ISRS) revenues totaling $3.5 million; and,
•	lower system gas sales volumes and other variations totaling $1.6 million.

Utility Operating Revenues

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Utility Operating Revenues for the six months ended March 31, 2011 were $665.8 million, or $9.4 million more than the same period last year. Temperatures experienced in the Utility’s service area during the six months ended March 31, 2011 were 2.9% warmer than the same period last year, but 0.9% colder than normal. Total system therms sold and transported were 697.0 million for the six months ended March 31, 2011 compared with 718.7 million for the same period last year. Total off-system therms sold and transported were 138.1 million for the six months ended March 31, 2011 compared with 39.2 million for the same period last year. The increase in Utility Operating Revenues was primarily attributable to the following factors:

(Millions)
Higher off-system sales volumes	$	46.7
Lower system sales volumes and other variations		(20.4	)
Lower wholesale gas costs passed on to Utility customers (subject to prudence review by the MoPSC)		(19.6	)
General rate increase, effective September 1, 2010		14.8
Lower prices charged for off-system sales		(8.6	)
Lower ISRS revenues		(3.5	)
Total Variation	$	9.4

Utility Operating Expenses

Utility Operating Expenses for the six months ended March 31, 2011 decreased $1.1 million from the same period last year. Natural and propane gas expense increased $1.8 million, or 0.4%, from last year’s level, primarily attributable to higher off-system gas expense, largely offset by lower rates charged by our suppliers and decreased system volumes purchased for sendout. Other operation and maintenance expenses decreased $1.7 million, or 1.9%, primarily due to reduced maintenance and distribution charges, a higher rate of overheads capitalized, a lower provision for uncollectible accounts, and a gain on the disposal of assets. These factors were partially offset by higher pension expense and increased group insurance charges. Depreciation and amortization expense increased $0.6 million, or 3.4%, primarily due to additional depreciable property. Taxes, other than income taxes, decreased $1.8 million, or 4.4%, primarily due to decreased gross receipts taxes (attributable to decreased system sales revenues).

Other Operating Revenues and Operating Expenses

Other Operating Revenues decreased $10.3 million primarily due to the effect of 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 decrease in Other Operating Expenses, totaling $4.3 million, was primarily due to expenses associated with this propane transaction.

Other Income and (Income Deductions) - Net

Other Income and (Income Deductions) – Net increased $0.4 million primarily due to higher net investment gains.

Interest Charges

The $0.3 million decrease in interest charges was primarily due to lower interest on long-term debt, attributable to the November 2010 maturity of $25 million principal amount of 6 1/2 % first mortgage bonds. Average short-term interest rates were 0.3% for the six months ended March 31, 2011 compared with 0.2% for the six months ended March 31, 2010. Average short-term borrowings were $145.8 million for the six months ended March 31, 2011 compared with $118.9 million for the six months ended March 31, 2010.

Income Taxes

The $2.0 million increase in income taxes was primarily due to higher pre-tax income.

Subsequent Event

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REGULATORY AND OTHER MATTERS

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, 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. The MoPSC Staff proposed a number of non-monetary recommendations, based on its review of gas costs for fiscal years 2008 and 2009. Laclede Gas believes that the proposed disallowances lack merit and is vigorously opposing these adjustments in proceedings before the MoPSC. As such, no amount has been recorded in the financial statements for these proposed disallowances.

In connection with the affiliate transactions 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 Laclede Group’s corporate reorganization into a holding company structure. The Utility filed a counterclaim against the MoPSC Staff 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 February 4, 2011, the MoPSC issued an Order finding that the Company violated the terms of the 2001 Stipulation and Agreement pertaining to the Company’s corporate reorganization and authorizing General Counsel to seek penalties in court against Laclede Gas. On March 30, 2011, the Company filed a petition with the Cole County Circuit Court seeking judicial review of the February 4 Order. Also, on October 6, 2010, the MoPSC Staff filed a related complaint against Laclede Gas, LER, and Laclede Group, alleging that the Utility has failed to comply with the MoPSC’s affiliate transaction rules. LER and Laclede Group both filed motions to dismiss, which were granted by the Commission on December 22, 2010. Laclede Gas also filed a motion to dismiss certain counts of the complaint, which is still pending before the Commission, as well as a counterclaim against the Staff. Laclede Gas believes that neither complaint has merit and is vigorously opposing both of them.

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 filed with the Western District a motion for rehearing and an application to transfer the case to the Missouri Supreme Court. On December 7, 2010, the Western District denied the Utility’s requests for rehearing and for transfer to the Missouri Supreme Court. On December 22, 2010, the Utility filed an application at the Missouri Supreme Court for transfer of the case to that Court. The Utility’s application was denied by the Missouri Supreme Court on January 25, 2011.

On October 29, 2010, the Utility made an ISRS filing with the Commission designed to increase revenues by $2.6 million annually, $2.5 million of which the MoPSC approved effective January 7, 2011.

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. Management, after discussion with counsel, believes that the final outcome of these matters will not have a material adverse effect on the financial position and results of operations of the Utility.

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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 generally accepted accounting principles (GAAP). GAAP requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies used in the preparation of our Financial Statements are described in Exhibit 99.1 of Laclede Group’s Form 10-K for the fiscal year ended September 30, 2010 and include the following:

	•	Accounts receivable and allowance for doubtful accounts
	•	Employee benefits and postretirement obligations
	•	Regulated operations

There were no significant changes to these critical accounting policies during the six months ended March 31, 2011. For discussion of other significant accounting policies, see Note 1 of the Notes to Financial Statements included in Exhibit 99.1 of Laclede Group’s Form 10-K for the fiscal year ended September 30, 2010.

ACCOUNTING PRONOUNCEMENTS

Laclede Gas continues to monitor the developments of the Financial Accounting Standards Board (FASB) relative to possible changes in accounting standards. Currently, the FASB is considering various changes to U. S. GAAP, some of which may be significant, as part of a joint effort with the International Accounting Standards Board to converge accounting standards. Future developments, depending on the outcome, have the potential to impact Laclede Gas’ financial condition and results of operations.

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, 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 the six months ended March 31, 2011 was $130.9 million, compared with $61.4 million for the same period last year. The variation is primarily attributable to reduced cash payments for margin deposits associated with the Utility’s use of natural gas derivative instruments and the effect of the utilization of natural gas storage inventories.

Net cash used in investing activities for the six months ended March 31, 2011 was $31.0 million, compared with $28.1 million for the six months ended March 31, 2010. Cash used in investing activities primarily reflected capital expenditures in both periods.

Net cash used in financing activities was $99.2 million for the six months ended March 31, 2011, compared with $31.6 million for the six months ended March 31, 2010. The variation primarily reflects increased repayments of short-term debt and the maturity of long-term debt this year.

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LIQUIDITY AND CAPITAL RESOURCES

Short-term Debt

As indicated in the discussion of cash flows 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. Laclede Gas’ lines of credit include covenants limiting total debt, including short-term debt, to no more than 70% of total capitalization and requiring earnings before interest, taxes, depreciation and amortization (EBITDA) to be at least 2.25 times interest expense. On March 31, 2011, total debt was 50% of total capitalization. For the twelve months ended March 31, 2011, EBITDA was 4.82 times interest expense.

Due to lower yields available to Laclede Group on its short-term investments, Laclede Group elected to provide a portion of Laclede Gas’ short-term funding through intercompany lending during the six months ended March 31, 2011. Information about the Utility’s short-term borrowings during the six months ended March 31, 2011 and as of March 31, 2011, is presented below:

	Commercial Paper Borrowings	Borrowings from Laclede Group	Total Short-Term Borrowings

Six Months Ended March 31, 2011
Weighted average borrowings outstanding	$91.5 million	$54.3 million	$145.8 million
Weighted average interest rate	0.3%	0.3%	0.3%
Range of borrowings outstanding	$0 – $172.1 million	$0 - $79.9 million	$72.6 - $193.0 million

As of March 31, 2011
Borrowings outstanding at end of period	None	$72.7 million	$72.7 million
Weighted average interest rate	N/A	0.3%	0.3%

Based on average short-term borrowings for the six months ended March 31, 2011, an increase in the average interest rate of 100 basis points would decrease the Utility’s pre-tax earnings and cash flows by approximately $1.5 million on an annual basis, portions of which may be offset through the application of PGA carrying costs.

Long-term Debt and Equity

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 through June 30, 2013. During the six months ended March 31, 2011, pursuant to this authority, the Utility sold 20 shares of its common stock to Laclede Group for $0.7 million. For more information on these sales of stock, see Part II., Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. As of April 29, 2011, $516.7 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 March 31, 2011, Laclede Gas had fixed-rate long-term debt totaling $365 million. While these 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 $365 million in long-term debt, $50 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 March 31, 2011, the maximum guarantees under these leases were $1.2 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 March 31, 2011, the carrying value of the liability recognized for these guarantees was $0.3 million.

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Other

The Utility’s access to capital markets, including the commercial paper market, and its financing costs, may depend on its credit rating. The credit ratings of the Utility remain at investment grade, but are subject to review and change by the rating agencies.

Utility capital expenditures were $29.6 million for the six months ended March 31, 2011, compared with $24.7 million for the same period last year.

Capitalization at March 31, 2011 consisted of 54.9% common stock equity and 45.1% long-term debt.

It is management’s view that Laclede Gas has adequate access to capital markets and will have sufficient capital resources, both internal and external, to meet anticipated capital requirements, which primarily include capital expenditures, scheduled maturities of long-term debt, short-term seasonal needs, and dividends.

The seasonal nature of Laclede Gas’ sales affects the comparison of certain balance sheet items at March 31, 2011 and at September 30, 2010, such as Accounts receivable - net, Gas stored underground, Notes payable, Accounts payable, Regulatory assets and Regulatory liabilities, and Advance and Delayed customer billings. The Balance Sheet at March 31, 2010 is presented to facilitate comparison of these items with the corresponding interim period of the preceding fiscal year.

CONTRACTUAL OBLIGATIONS

As of March 31, 2011, Laclede Gas had contractual obligations with payments due as summarized below (in millions):

			Payments due by period
			Remaining						Fiscal Years
Contractual Obligations	Total		Fiscal Year 2011		Fiscal Years 2012-2013		Fiscal Years 2014-2015		2016 and thereafter
Principal Payments on Long-Term Debt	$	365.0	$	—	$	25.0	$	—	$	340.0
Interest Payments on Long-Term Debt		472.6		11.5		45.1		42.7		373.3
Capital Leases (a)		0.3		0.1		0.1		0.1		—
Operating Leases (a)		13.5		2.6		7.5		3.4		—
Purchase Obligations – Natural Gas (b)		261.1		104.3		122.8		19.7		14.3
Purchase Obligations – Other (c)		92.2		13.4		23.9		17.7		37.2
Total (d)	$	1,204.7	$	131.9	$	224.4	$	83.6	$	764.8

(a)	Lease obligations are primarily for office space, office equipment, vehicles, and power operated equipment. Additional payments will be incurred if renewal options are exercised under the provisions of certain agreements.
(b)	These purchase obligations represent the minimum payments required under existing natural gas transportation and storage contracts and natural gas supply agreements. These amounts reflect fixed obligations as well as obligations to purchase natural gas at future market prices, calculated using March 31, 2011 New York Mercantile Exchange futures prices. Laclede Gas recovers the costs related to its purchases, transportation, and storage of natural gas through the operation of its PGA Clause, subject to prudence review; however, variations in the timing of collections of gas costs from customers affect short-term cash requirements. Additional contractual commitments are generally entered into prior to or during the heating season.
(c)	These purchase obligations primarily reflect miscellaneous agreements for the purchase of materials and the procurement of services necessary for normal operations.
(d)	The category of Other Long-Term Liabilities has been excluded from the table above because there are no material amounts of contractual obligations under this category. Long-term liabilities associated with unrecognized tax benefits, totaling $6.2 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. At this writing, Laclede Gas expects to make contributions to its qualified, trusteed pension plans of at least $11.9 million during the remaining six months of fiscal year 2011. Laclede Gas anticipates a $1.6 million contribution relative to its non-qualified pension plans during the remaining six months of fiscal year 2011. With regard to the postretirement benefits, the Utility anticipates it will contribute $8.3 million to the qualified trusts and $0.2 million directly to participants from Laclede Gas’ funds during the remaining six months of 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.

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MARKET RISK

Commodity Price Risk

Laclede Gas’ commodity price risk, which arises from market fluctuations in the price of natural gas, is primarily managed through the operation of its PGA Clause. The PGA Clause allows Laclede Gas to flow through to customers, subject to prudence review, the cost of purchased gas supplies. The Utility is allowed the flexibility to make up to three discretionary PGA changes during each year, in addition to its mandatory November PGA change, so long as such changes are separated by at least two months. The Utility is able to mitigate, to some extent, changes in commodity prices through the use of physical storage supplies and regional supply diversity. Laclede Gas also has a risk management policy that allows for the purchase of natural gas derivative instruments with the goal of managing its price risk associated with purchasing natural gas on behalf of its customers. This policy prohibits speculation. Costs and cost reductions, including carrying costs, associated with the Utility’s use of natural gas derivative instruments are allowed to be passed on to the Utility’s customers through the operation of its PGA Clause. Accordingly, Laclede Gas does not expect any adverse earnings impact as a result of the use of these derivative instruments. However, the timing of recovery for cash payments related to margin requirements may cause short-term cash requirements to vary. Nevertheless, carrying costs associated with such requirements, as well as other variations in the timing of collections of gas costs, are recovered through the PGA Clause. For more information about the Utility’s natural gas derivative instruments, see Note 5, Derivative Instruments and Hedging Activities, of the Notes to Financial Statements.

Interest Rate Risk

The Utility is subject to interest rate risk associated with its long-term and short-term debt issuances. Based on average short-term borrowings during the six months ended March 31, 2011, 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 $1.5 million on an annual basis. Portions of such increases may be offset through the application of PGA carrying costs. At March 31, 2011, Laclede Gas had fixed-rate long-term debt totaling $365 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.

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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 included in Exhibit 99.1 of Laclede Group’s Form 10-K for the fiscal year ended September 30, 2010. For developments during the six months ended March 31, 2011, see Note 8, Commitments and Contingencies, of the Notes to Financial Statements.

OFF-BALANCE SHEET ARRANGEMENTS

Laclede Gas has no off-balance sheet arrangements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

For this discussion, see Part I., Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk, on page 30 of this report.

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15e and Rule 15d-15e under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting that occurred during our second fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For a description of environmental matters and legal proceedings, see Note 12, Commitments and Contingencies, of the Notes to Financial Statements included in Exhibit 99.1 of Laclede Group’s Form 10-K for the fiscal year ended September 30, 2010. For developments during the six months ended March 31, 2011, see Note 8, Commitments and Contingencies, of the Notes to Financial Statements. For a description of pending regulatory matters of Laclede Gas, see Part I., Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory and Other Matters, on page 26 of this report.

Laclede Gas is involved in litigation, claims and investigations arising in the normal course of business. Management, after discussion with counsel, believes that the final outcome of these matters will not have a material adverse effect on the financial position or results of operations of the Utility.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On February 8, 2011, the Board of Directors of Laclede Gas approved the sale of 10 shares of Laclede Gas common stock to Laclede Group. The proceeds from the sale, totaling $0.4 million were used to reduce short-term borrowings. Exemption from registration was claimed under Section 4(2) of the Securities Act of 1933.

Item 6. Exhibits

(a)	See Exhibit Index

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Laclede Gas Company

Dated:	April 29, 2011	By:	/s/ Mark D. Waltermire
			Mark D. Waltermire
			Senior Vice President and
			Chief Financial Officer
			(Authorized Signatory and Chief Financial Officer)

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INDEX TO EXHIBITS

Exhibit No.

12	-	Ratio of Earnings to Fixed Charges.

31	-	CEO and CFO Certifications under Exchange Act Rule 13a – 14(a).

32	-	CEO and CFO Section 1350 Certifications.

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