YEAR TO DATE DECEMBER 31, 2008 OVERVIEW AND FUTURE OUTLOOK

For the six months ended December 31, 2008, consolidated net income per share of $0.46 decreased $0.04 per share as compared to the $0.50 net income per share for the six months ended December 31, 2007. The decrease is attributable to a non-recurring inventory adjustment to record a reserve against our gas in storage of $1,350,000 ($838,000 net of income tax benefit), as further discussed in Note 12 of the Notes to Consolidated Financial Statements. The decrease was substantially offset by increased gross margins for both our regulated and non-regulated segments.

Our 2009 results will be dependent on the winter weather and the extent to which our customers choose to conserve their natural gas usage or discontinue their natural gas service, a trend we have experienced for the last several fiscal years.

We expect our non-regulated segment to continue to contribute to our consolidated net income in fiscal 2009, as in recent years, based on contracts currently in place. Future profitability of the non-regulated segment, though, is dependent on the business plans of a few large customers and the market prices of natural gas, which are both out of our control. If natural gas prices increase, we would expect to experience a corresponding increase in our non-regulated segment margins related to our natural gas production activities. However, if natural gas prices

LIQUIDITY AND CAPITAL RESOURCES

Operating activities provide our primary source of cash. Cash provided by operating activities consists of net income adjusted for non-cash items, including depreciation, amortization, deferred income taxes and changes in working capital.

Our ability to maintain liquidity depends on our bank line of credit, shown as notes payable on the accompanying Consolidated Balance Sheets. Notes payable increased to $28,653,000 at December 31, 2008, compared with $6,829,000 at June 30, 2008 and $23,798,000 at December 31, 2007. This increase reflects the seasonal nature of our sales and cash needs. Our cash requirements during the six months ended December 31, 2008 and 2007 exceeded cash provided by operations, primarily due to the purchase of natural gas which is injected into storage for use during the heating months. Additionally, our liquidity is impacted by the fact that we sometimes generate internally only a portion of the cash necessary for our capital expenditure requirements. We made capital expenditures of $3,846,000 and $6,571,000 during the six and twelve months ended December 31, 2008, respectively. We finance the balance of our capital expenditures on an interim basis through our bank line of credit.

Long-term debt decreased to $58,063,000 at December 31, 2008, compared with $58,318,000 at June 30, 2008 and $58,402,000 at December 31, 2007. These decreases resulted from provisions in the Debentures and Insured Quarterly Notes allowing limited redemptions to be made to certain holders or their beneficiaries.

Cash and cash equivalents were $325,000 at December 31, 2008, compared with $250,000 at June 30, 2008 and $681,000 at December 31, 2007. The changes in cash and cash equivalents for six and twelve months ended December 31, 2008 are summarized in the following table:

                                            Six Months Ended      Twelve Months Ended
                                              December 31,            December 31,
($000)                                       2008       2007       2008         2007

Provided by (used in) operating
activities                                  (16,250 )  (14,449 )     4,777        4,277
Used in investing activities                 (3,420 )   (2,639 )    (6,032 )     (6,799 )
Provided by financing activities             19,745     17,581         899        2,817
Increase (decrease) in cash and cash
equivalents                                      75        493        (356 )        295

For the six months ended December 31, 2008, cash used in operating activities increased $1,801,000 (12%), as compared with the six months ended December 31, 2007. Cash paid for taxes increased $889,000 due to the timing of property tax payments between years. We also used an additional $796,000 in operating activities due to the timing of contributions to our pension plan, increased payroll, increased cost of removal and increases in other operating expenses.

For the twelve months ended December 31, 2008, cash provided by operating activities increased $500,000 (12%), as compared with the twelve months ended December 31, 2007, due to an increase in cash received from customers due to higher sales prices and increased volumes sold and transported. This increase was partially offset by an increase in cash paid for gas due to higher natural gas prices and increases in cash paid for other operating expenses.

Changes in cash used in investing activities result primarily from the changes in capital expenditures between periods.

For the six months ended December 31, 2008, cash provided by financing activities increased $2,164,000 (12%) due to increased net borrowings on our bank line of credit.

For the twelve months ended December 31, 2008, cash provided by financing activities decreased $1,918,000 (68%) due to increased net repayments on our bank line of credit.

Our capital expenditures result in a continued need for capital. These capital expenditures are being made for system extensions and for the replacement and improvement of existing transmission, distribution, gathering, storage and general facilities. We expect our capital expenditures for fiscal 2009 to be $7.9 million.

Due to volatile conditions in the debt and equity markets we experienced a decline in the value of the assets held by our defined benefit pension plan. Although we are not required to make any minimum contributions during the current year, in January, 2009, we elected to contribute $2,000,000 to the plan. Currently, we do not plan on making any additional contributions to the defined benefit pension plan during the remainder of fiscal 2009. We estimate that this contribution returned the plan to a fully funded status. The decrease in our plan assets could result in an increase in our fiscal 2010 net periodic benefit cost.

Sufficiency of Future Cash Flows

We expect that cash provided by operations, coupled with short and long-term borrowings, will be sufficient to satisfy our operating and normal capital expenditure requirements and to pay dividends for the next twelve months and the foreseeable future.

Current economic conditions have resulted in increased credit risk for us due to the potential for default from our customers. For the six and twelve months ended December 31, 2008, we have experienced an increase in customer accounts written off, net of recoveries of $52,000 (23%) and $142,000 (41%), respectively. Based on current outstanding receivables and expecting this trend to continue for the remainder of fiscal 2009, our allowance for doubtful accounts has increased to $852,000 from $465,000 at June 30, 2008 and $252,000 at December 31, 2007. We do not anticipate that this trend will have a materially adverse impact on our liquidity.

To the extent that internally generated cash is not sufficient to satisfy operating and capital expenditure requirements and to pay dividends, we will rely on our bank line of credit. Our current available bank line of credit is $40,000,000, of which $28,653,000 was borrowed at December 31, 2008, and was classified as notes payable in the accompanying Consolidated Balance Sheets. The current bank line of credit is with Branch Banking and Trust Company and extends through October 31, 2009. We intend to extend our line of credit prior to October 31, 2009.

Our ability to sustain acceptable earnings levels, finance capital expenditures and pay dividends is contingent on the adequate and timely adjustment of the regulated sales and transportation prices we charge our customers. The Kentucky Public Service Commission sets these prices and we continuously monitor our need to file rate requests with the Kentucky Public Service Commission for general rate increases for our regulated services.

On April 20, 2007, we filed a request for increased rates with the Kentucky Public Service commission. This general rate case, Case No. 2007-00089, requested an annual revenue increase of approximately $5,642,000, an increase of 9.3%. This rate case requested a return on common equity of 12.1%. During October, 2007, we negotiated a settlement agreement with the Kentucky Attorney General regarding this rate case. The settlement agreement provided for $3,920,000 of additional annual revenues, and stipulated for settlement purposes a 10.5% return on common shareholders' equity. The increase in rates was allocated primarily to the monthly customer charge to partially decouple revenue from volumes of gas sold. An order from the Kentucky Public Service Commission was received on October 19, 2007 approving the terms of the settlement with rates effective on or after October 20, 2007.

RESULTS OF OPERATIONS

Gross Margins

Our regulated and non-regulated revenues, other than transportation, have offsetting gas expenses. Therefore, throughout the following Results of Operations, we refer to "gross margin". With respect to our regulated and non-regulated segments, gross margin refers to operating revenues less purchased gas expense, which can be derived directly from our Consolidated Statements of Income. Operating Income as presented on the Consolidated Statements of Income, is the most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States ("GAAP"). "Gross margin" is a "non-GAAP financial measure", as defined in accordance with SEC rules. We view gross margin as an important performance

Natural gas prices are determined by an unregulated national market. Therefore, the price that we pay for natural gas fluctuates with national supply and demand. See Item 3, Quantitative and Qualitative Disclosures About Market Risk, for the impact of forward contracts.

In the following table we set forth variations in our gross margins for the three, six and twelve months ended December 31, 2008 compared with the same periods in the preceding year. The variation amounts and percentages presented in the following tables for regulated and non-regulated gross margins include intersegment transactions. These intersegment revenues and expenses are eliminated in the Consolidated Statements of Income.

                                                    2008 compared to 2007
                                         Three Months    Six Months    Twelve Months
                                            Ended          Ended           Ended
($000)                                   December 31,   December 31,   December 31,

Increase (decrease) in regulated gross
margins                                           141
Gas sales                                                        705           1,947
On-system transportation                          (16 )            9             261
Off-system transportation                          89            195             556
Other                                             140            102            (160 )
Total                                             354          1,011           2,604

Increase (decrease) in non-regulated
gross margins                                    (413
Gas sales                                             )          191           2,004
Other                                             (27 )            -              56
Total                                            (440 )          191           2,060

Increase in consolidated gross margins            (86 )        1,202           4,664
Percentage increase (decrease) in
regulated volumes
Gas sales                                          20             16               4
On-system transportation                           (7 )           (7 )            (3 )
Off-system transportation                           8              9              15

Percentage increase (decrease) in
non-regulated
gas sales volumes                                 (15 )           (7 )             3

Heating degree days were 107%, 104% and 103% of normal thirty year average temperatures for the three, six and twelve months ended December 31, 2008, respectively, as compared with 87%, 85% and 92% of normal temperatures in the 2007 periods. A "heating degree day" results from a day during which the average of the high and low temperature is at least one degree less than 65 degrees Fahrenheit.

For the three months ended December 31, 2008, consolidated gross margins decreased $86,000 (1%) due to decreased non-regulated gross margins of $440,000 (16%) offset by increased regulated gross margins of $354,000 (5%). Our non-regulated gross margins decreased $440,000 (16%) due to a 15% decrease in volumes sold. Non-regulated customers are primarily industrial or other large use customers whose volumes are less sensitive to changes in the weather. The decrease in non-regulated volumes was attributable to an overall decrease in our non-regulated customer's gas requirements. Our regulated gross margin for gas sales increased $141,000 (2%) primarily due to a 20% increase in volumes sold due to colder than normal weather which was partially offset by lower rates due to our weather normalization clause. Our regulated transportation and other gross margins increased $213,000 (19%) primarily due to an increase in regulated off-system transportation of 18%.

For the six months ended December 31, 2008, consolidated gross margins increased $1,202,000 (8%) due to increases in our regulated and non-regulated gross margins of $1,011,000 (10%) and $191,000 (5%), respectively. Our regulated gross margin for gas sales increased $705,000 (9%) primarily due to a 16% increase in volumes sold

For the twelve months ended December 31, 2008, consolidated gross margins increased $4,664,000 (14%) due to increases in our regulated and non-regulated gross margins of $2,604,000 (11%) and $2,060,000 (22%), respectively. Our regulated gross margin for gas sales increased $1,947,000 (10%) due to increased base rates which became effective October 20, 2007 as well as a 4% increase in volumes sold. Our regulated off-system transportation margins increased $556,000 (16%) due to a 15% increase in volumes transported. Our non-regulated gross margin for gas sales increased $2,004,000 (22%) due to higher sales prices.

Operations and Maintenance

For the three months ended December 31, 2008, operations and maintenance expense increased $1,966,000 (62%). The increase was due to an inventory adjustment to record a reserve against our gas in storage ($1,350,000, as further discussed in Note 12 of the Notes to Consolidated Financial Statements), increased uncollectible expense ($442,000) and increased employee benefit expense ($155,000).

For the six months ended December 31, 2008, operations and maintenance expense increased $1,896,000 (31%). The increase was due to an inventory adjustment to record a reserve against our gas in storage ($1,350,000, as further discussed in Note 12 of the Notes to Consolidated Financial Statements), increased uncollectible expense ($487,000), increased employee benefit expense ($121,000) and increased labor expense ($120,000), partially offset by $156,000 of gains on the sales of two surplus buildings.

For the twelve months ended December 31, 2008, operations and maintenance expense increased $3,085,000 (24%). The increase was due to an inventory adjustment to record a reserve against our gas in storage ($1,350,000, as further discussed in Note 12 of the Notes to Consolidated Financial Statements), increased uncollectible expense ($891,000), increased storage maintenance expense ($288,000), increased labor expense ($254,000) and increased transportation expense ($148,000).

Depreciation and Amortization

For the six and twelve months ended December 31, 2008, depreciation and amortization decreased $391,000 (17%) and $1,004,000 (21%), respectively. The decreases were due to lower depreciation rates approved by the Kentucky Public Service Commission that became effective October 20, 2007. The decreases were partially offset by increases in depreciable plant resulting from capital expenditures which relate to the replacement and improvement of our transmission, distribution, gathering, storage and general facilities.

Other Income and Deductions, Net

For the six and twelve months ended December 31, 2008, Other Income and Deductions, Net decreased $106,000 (558%) and $136,000 (120%), respectively. The decreases were due to decreases in the cash surrender value of officers' life insurance as well as decreases in the fair value of the supplemental retirement plan. The decrease in the fair value of the supplemental retirement plan was offset by a reduction in operating expenses resulting from a corresponding decrease in the liability of the plan.

Income Tax Expense

For the three and six months ended December 31, 2008, income tax expense decreased $767,000 (51%) and $138,000 (14%), respectively. For the twelve months ended December 31, 2008, income tax expense increased $1,003,000 (33%). These changes are a result of changes in net income before income taxes.

Basic and Diluted Earnings Per Common Share

For the three, six and twelve months ended December 31, 2008 and 2007, our basic earnings per common share changed as a result of changes in net income and an increase in the number of our common shares outstanding. We increased our number of common shares outstanding as a result of shares issued through our Dividend Reinvestment and Stock Purchase Plan.