THE LACLEDE GROUP, INC.

INTRODUCTION

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

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

RESULTS OF OPERATIONS

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

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

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

Other subsidiaries provide less than 10% of consolidated revenues.

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

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

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

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

EARNINGS

Overview - Net Income by Operating Segment

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

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

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

Income from Continuing Operations

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

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

2008 vs. 2007

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

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

These factors were partially offset by:

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

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

2007 vs. 2006

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

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

These factors were partially offset by:

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

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

Regulated Gas Distribution Operating Revenues

2008 vs. 2007

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

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

2007 vs. 2006

Regulated Gas Distribution Operating Revenues for fiscal year 2007 decreased $9.5 million compared to fiscal year 2006 due in part to lower wholesale gas costs. Temperatures experienced in the Utility's service area during 2007 were 5.7% colder than fiscal year 2006, but 7.4% warmer than normal. Total system therms sold and transported were 0.91 billion for fiscal year 2007 compared with 0.87 billion for fiscal year 2006. Total off-system therms sold and transported were 0.21 billion for fiscal year 2007 compared with 0.16 billion for fiscal year 2006. The decrease in Regulated Gas Distribution Operating Revenues was primarily attributable to the following factors:

(Millions)
Lower wholesale gas costs passed on to Utility customers
(subject to prudence review by the MoPSC) $ (111.6 )

Higher system sales volumes, primarily due to colder
weather and other variations                                   80.6
Higher off-system sales volumes                                48.1
Lower prices charged for off-system sales                     (34.5 )
General rate increase, effective August 1, 2007                 5.3
Higher ISRS revenues implemented June 15, 2006,
January 2, 2007, and June 16, 2007                              2.6
   Total Variation                                         $   (9.5 )

Regulated Operating Expenses

2008 vs. 2007

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

2007 vs. 2006

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

Non-Regulated Gas Marketing Operating Revenues and Operating Expenses

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

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

Other Income and (Income Deductions)-Net

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

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

Interest Charges

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

Income Taxes

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

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

Income from Discontinued Operations

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

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

Labor Agreement

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

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

CRITICAL ACCOUNTING POLICIES

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

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

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

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

Pension Plan
Benefits:

                                                Estimated                    Estimated
                                                Increase/                    Increase/
                                              (Decrease) to                (Decrease) to
                                                Projected                      Annual
                                                 Benefit                    Net Pension
                     Increase/                  Obligation                     Cost*
Actuarial
Assumptions          (Decrease)                (Thousands)                  (Thousands)

Discount Rate              0.25 %           $           (7,610 )       $             (171 )
                          (0.25 )                        7,820                        160

Rate of Future
Compensation
Increase                   0.25 %                        5,900                        750
                          (0.25 )                       (5,700 )                     (730 )

Expected Return
on Plan Assets             0.25 %                            -                       (630 )
                          (0.25 )                            -                        630

Postretirement
Benefits:

                                                  Estimated                  Estimated
                                                  Increase/                  Increase/
                                                (Decrease) to              (Decrease) to
                                                  Projected                  Annual Net
                                                Postretirement             Postretirement
                                                   Benefit                    Benefit
                     Increase/                    Obligation                   Cost*
. . .