SR

Business Context and Reporting Period

This Form 10-Q is a combined quarterly report for The Laclede Group, Inc. (the Company) and its primary subsidiary, Laclede Gas Company (the Utility), for the period ended March 31, 2009. The Company operates as a regulated natural gas distribution utility serving eastern Missouri, including St. Louis, alongside non-regulated gas marketing activities through its affiliate, Laclede Energy Resources, Inc. (LER). The business is highly seasonal, with earnings typically concentrated in the November through April heating season.

Key Financial Metrics

Revenue and Profit (Three Months Ended March 31, 2009):

• Total Operating Revenues: $659.1 million (down from $747.7 million in Q1 2008).
• Operating Income: $55.2 million (up from $51.9 million in Q1 2008).
• Net Income: $30.8 million (down from $51.4 million in Q1 2008, primarily due to the absence of a one-time gain from discontinued operations in the prior year).
• Income from Continuing Operations: $30.8 million (up from $30.1 million in Q1 2008).
• Diluted Earnings Per Share (EPS): $1.40 (down from $2.37 in Q1 2008).

Revenue and Profit (Six Months Ended March 31, 2009):

• Total Operating Revenues: $1.33 billion (up from $1.25 billion in the prior six months).
• Net Income: $62.1 million (down from $72.3 million in the prior six months).
• Income from Continuing Operations: $62.1 million (up from $51.6 million in the prior six months).
• Diluted EPS: $2.82 (down from $3.34 in the prior six months).

Cash Flow and Liquidity:

• Net Cash Provided by Operating Activities (6 months): $98.8 million (down from $130.8 million in the prior period).
• Cash and Cash Equivalents (March 31, 2009): $93.6 million (up from $14.9 million at Sept 30, 2008).
• Short-Term Debt: Notes payable totaled $238.8 million. The Company maintains a $320 million syndicated line of credit and commercial paper program.
• Long-Term Debt: Laclede Gas long-term debt totaled $389.2 million.
• Capitalization Ratio: Total debt was 60% of total capitalization for the Utility and 54% for the consolidated Group.

Material Changes Versus Prior Period

Discontinued Operations: The significant decrease in Net Income compared to the prior year is primarily attributable to the sale of SM&P Utility Resources, Inc. in March 2008. The prior year included a one-time gain of $44.5 million and operating income of $21.3 million from this discontinued segment, which are absent in the current period.

Segment Performance:

• Regulated Gas Distribution: Revenues decreased due to warmer weather (9.3% warmer than the prior year quarter) and lower wholesale gas costs passed through to customers. However, operating income remained relatively stable due to lower gas costs and higher off-system sales.
• Non-Regulated Gas Marketing (LER): Reported a significant increase in earnings ($8.5 million vs. $4.9 million in Q1 2008). This was driven by higher sales volumes (up 53.5% in Q1) and improved margins resulting from depressed supply prices in the Mid-continent region due to increased shale gas production.

Expense Trends: Natural gas expenses decreased significantly ($64.0 million in Q1) due to lower volumes and supplier rates. However, other operation and maintenance expenses increased by $2.7 million due to higher maintenance, compensation, and insurance costs.

Guidance, Outlook, Risks, and Contingencies

Management Commentary and Outlook: Management expects to maintain adequate access to capital markets. The Company continues to focus on improving the core Utility's performance while developing non-regulated businesses. A new four-year labor agreement was reached in April 2009 to control operating costs.

Regulatory Matters and Risks:

• MoPSC Disallowances: The Missouri Public Service Commission (MoPSC) Staff has proposed disallowances totaling approximately $6.0 million related to gas costs for fiscal years 2005, 2006, and 2007. The Company believes these lack merit and is vigorously opposing them; no amounts have been recorded.
• FERC Inquiry: The Federal Energy Regulatory Commission (FERC) Staff has requested information regarding capacity release transactions. The Company is cooperating with the inquiry.
• Weather and Price Volatility: Earnings remain sensitive to weather conditions and natural gas price volatility. The Company utilizes derivative instruments to manage price risk, with costs passed through to customers via the Purchased Gas Adjustment (PGA) Clause.

Contingencies: The Company has guarantees totaling $88.5 million (as of April 29, 2009) for wholesale gas supply purchases by LER. Management believes the probability of payment under these guarantees is low.

Key Facts for Investor Verification

• Exclusion of Discontinued Operations: Verify that year-over-year comparisons of Net Income exclude the $21.3 million gain from the sale of SM&P in 2008 to accurately assess ongoing operational performance.
• Regulatory Disallowances: Monitor the status of the MoPSC proposed disallowances (~$6 million) and FERC inquiries, as adverse outcomes could impact future earnings.
• Non-Regulated Segment Growth: Assess the sustainability of LER's margin improvements, which were driven by specific market conditions (shale gas supply) and increased pipeline capacity.
• Liquidity Position: Confirm the Company's ability to manage short-term borrowing needs during peak heating seasons, noting the current utilization of commercial paper and lines of credit.
• Derivative Exposure: Review the Company's hedging strategy and margin deposit requirements, as fluctuations in gas prices can impact short-term cash flows despite the PGA Clause.