YEAR TO DATE SEPTEMBER 30, 2009 OVERVIEW AND FUTURE OUTLOOK

For the three months ended September 30, 2009, there was a consolidated net loss per share of $.17 compared with net income of $.08 per share for the three months ended September 30, 2008. The decrease is due to a $474,000 decrease in net income for our non-regulated segment and a $362,000 increase in the net loss for the regulated segment.

LIQUIDITY AND CAPITAL RESOURCES

Operating activities provide our primary source of cash. Cash provided by operating activities consists of net income (loss) adjusted for non-cash items, including depreciation, amortization, deferred income taxes, gains on the sale of assets 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 $9,596,000 at September 30, 2009 compared to $3,653,000 at June 30, 2009 due to gas purchased for storage and capital expenditures. Notes payable decreased to $9,596,000 at September 30, 2009 compared to $24,698,000 at September 30, 2008 due to a 64% decrease in the cost of gas purchased for storage during the three months ended September 30, 2009, as compared to the three months ended September 30, 2008.

Our liquidity is also 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 $1,693,000 and $7,710,000 during the three and twelve months ended September 30, 2009, respectively. In periods when cash provided by operating activities is not sufficient to meet our capital requirements, we finance the balance of our capital expenditures on an interim basis through the bank line of credit.

Long-term debt decreased to $57,391,000 at September 30, 2009, compared with $57,599,000 at June 30, 2009 and $58,242,000 at September 30, 2008. The decreases resulted from the redemption of the Debentures and Insured Quarterly Notes, which allow limited redemptions to be made by certain holders or their beneficiaries.

Cash and cash equivalents were $108,000 at September 30, 2009, as compared with $123,000 at June 30, 2009 and $886,000 at September 30, 2008. The changes in cash and cash equivalents are summarized in the following table:

                                Three Months Ended       Twelve Months Ended
                                   September 30,            September 30,
($000)                           2009        2008         2009         2008

Provided by (used in)
operating activities             (3,136 )    (14,489 )     26,369        3,252
Used in investing activities     (1,665 )     (1,757 )     (7,446 )     (4,887 )
Provided by (used in)
financing activities              4,786       16,882      (19,701 )      2,237
Increase (decrease) in cash
and cash equivalents                (15 )        636         (778 )        602

For the three months ended September 30, 2009, cash used in operating activities decreased $11,353,000 (78%). Cash paid for natural gas decreased $21,443,000 due to decreases in both the cost of gas purchased and the quantities purchased. The decrease was partially offset by an $11,906,000 decrease in cash received from customers due to decreases in both sales prices and volumes sold.

For the twelve months ended September 30, 2009, cash provided by operating activities increased $23,117,000 (711%). Cash paid for natural gas decreased $40,359,000 due to decreases in both the cost of gas purchased and the quantities purchased. The decrease was partially offset by a $15,592,000 decrease in cash received from customers due to decreases in both sales prices and volumes sold.

For the three months ended September 30, 2009, cash provided by financing activities decreased $12,096,000 due to decreased net borrowings on the bank line of credit.

For the twelve months ended September 30, 2009, cash used in financing activities increased $21,938,000 due to increased net repayments on the bank line of credit.

Cash Requirements

Our capital expenditures result in a continued need for capital. These capital expenditures are 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 2010 to be approximately $6.3 million.

Sufficiency of Future Cash Flows

We expect that cash provided by operations, coupled with short-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.

To the extent that internally generated cash is not sufficient to satisfy seasonal operating and capital expenditure requirements and to pay dividends, we will rely on our bank line of credit. Our current available line of credit with Branch Banking and Trust Company, shown as notes payable on the accompanying Consolidated Balance Sheets, is $40,000,000, of which $9,596,000 was borrowed at September 30, 2009. The current bank line of credit extends through June 30, 2011.

Our ability to borrow on our bank line of credit is dependent on our compliance with covenants. Our bank line of credit agreement and the Indentures relating to all of our publicly held Debentures and Insured Quarterly Notes contain defined "events of default" which, among other things, can make the obligations immediately due and payable. Of these, we consider the following covenants to be most restrictive:

· Dividend payments cannot be made unless consolidated shareholders' equity of the Company exceeds $25,800,000 (thus no retained earnings were restricted); and

· We may not assume any additional mortgage indebtedness in excess of $5,000,000 without effectively securing all Debentures and Insured Quarterly Notes equally to such additional indebtedness.

Furthermore, a default on the performance on any single obligation incurred in connection with our borrowings simultaneously creates an event of default with the bank line of credit and all of the Debentures and Insured Quarterly Notes. We were not in default on any of our bank line of credit, Debentures or Insured Quarterly Notes during any period presented. We are not aware of any events that would cause us to be in default in fiscal 2010.

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 requests with the Kentucky Public Service Commission for a general rate increase for our regulated services.

In October, 2007, we implemented new rates for our regulated customers after approval by the Kentucky Public Service Commission of a settlement agreement we entered into with the Kentucky Attorney General for a rate case we filed with the Kentucky Public Service Commission earlier that year. The settlement agreement provided for a 10.5% return on shareholder's equity and a $3,920,000 increase in annual revenues. The increase in rates was primarily allocated to the monthly customer charge, and therefore the increase in revenues occurred more evenly throughout the year and was not as dependent on customer usage.

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 in the Consolidated Statements of Income
(Loss) is the most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States. "Gross margin" is a "non-GAAP financial measure", as defined in accordance with SEC rules. We view gross margin as an important performance measure of the core profitability of our operations. The measure is a key component of our internal financial reporting and is used by our management in analyzing our business segments. We believe that investors benefit from having access to the same financial measures that our management uses.

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 for the impact of forward contracts.

In the following table we set forth variations in our gross margins for the three and twelve months ended September 30, 2009 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.

                                                 2009 compared to 2008
                                             Three Months    Twelve Months
                                                 Ended           Ended
($000)                                       September 30,   September 30,

Increase (decrease) in regulated gross
margins
Gas sales                                              (81 )          (239 )
On-system transportation                                 1            (367 )
Off-system transportation                             (216 )          (401 )
Other                                                   (8 )             5
Intersegment elimination (a)                           209             865
Total                                                  (95 )          (137 )

Decrease in non-regulated gross margins
Gas sales                                             (784 )        (3,471 )
Other                                                  (50 )          (171 )
Intersegment elimination (a)                          (209 )          (865 )
Total                                               (1,043 )        (4,507 )

Decrease in consolidated gross margins              (1,138 )        (4,644 )

Percentage increase (decrease) in
regulated volumes
Gas sales                                                5               3
On-system transportation                               (12 )           (16 )
Off-system transportation                              (23 )           (13 )

Percentage decrease in non-regulated gas                                   )
sales volumes                                          (49 )           (31

(a) Intersegment eliminations represent the transportation fee charged by the regulated segment to the non-regulated segment.

For the three months ended September 30, 2009, consolidated gross margins decreased $1,138,000 (20%) due to decreased non-regulated and regulated gross margins of $1,043,000 (51%) and $95,000 (3%), respectively. Our non-regulated gross margins decreased due to a 49% decrease in volumes sold and a 52% decline in sales prices. Non-regulated customers volumes are generally less sensitive to weather. The non-regulated volumes sold decreased due to a decrease in our non-regulated customers' gas requirements, which we attribute primarily to current economic conditions.

For the twelve months ended September 30, 2009, consolidated gross margins decreased $4,644,000 (13%) due to decreased non-regulated and regulated gross margins of $4,507,000 (39%) and $137,000 (1%), respectively. Our non-regulated gross margins decreased due to a 31% decrease in volumes sold and a 20% decline in sales prices. The non-regulated volumes sold decreased due to a decrease in our non-regulated customers' gas requirements, which we attribute primarily to current economic conditions.

Operation and Maintenance

For the three months ended September 30, 2009, operation and maintenance expense increased $342,000 (12%). The increase was primarily due to increased employee benefit expense ($215,000) and increased professional services expense ($113,000).

For the twelve months ended September 30, 2009, operation and maintenance expense increased $1,313,000 (9%). The increase was primarily due to an inventory adjustment for our gas in storage ($1,350,000, as further discussed in Note 11 of the Notes to Consolidated Financial Statements).

Interest Charges

For the three and twelve months ended September 30, 2009, interest charges decreased $100,000 (9%) and $280,000 (6%), respectively, due to decreases in the average interest rate on our bank line of credit and decreased borrowings on our bank line of credit.

Income Tax Expense (Benefit)

For the three and twelve months ended September 30, 2009, income tax expense
(benefit) changed as a result of corresponding changes in net income (loss)
before income taxes.

Basic and Diluted Earnings Per Common Share

For the three and twelve months ended September 30, 2009 and 2008, our basic earnings (loss) per common share changed as a result of changes in net income
(loss) 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.

We have no potentially dilutive securities. As a result, our basic earnings
(loss) per common share and our diluted earnings (loss) per common share are the same.