TWST: Would you start with a brief introduction to Energy West, Inc., and Gas Natural, including some highlights from its history and then an overview of the company's primary operations?

Mr. Degenstein: Gas Natural (EGAS) is a holding company in that it holds a series of public utilities that provide natural gas to various customers in six different states. A little history of Gas Natural: the holding company was formed in 2009. Prior to that, it was a small group of utilities in Wyoming and Montana with about 36,000 customers. Today, we're approximately 70,000 customers. We've put together a growth strategy to build around our core expertise and acquire underperforming small utilities. So we expanded from Montana and Wyoming into the state of Ohio, the state of Maine, the state of North Carolina and the state of Pennsylvania. That makes up the six states that we operate utilities in today.

In addition, we have production and gathering pipelines in our nonregulated business unit. We also have two pipelines, of which one is FERC regulated.

However, Gas Natural is really defined by its natural gas distribution utilities. They are approximately 90% of net income, and approximately 96% of revenue. So our core business is defined by being a natural gas distributor in six different states.

TWST: You have mentioned the markets Gas Natural has expanded into. What are the remaining tenants of your growth strategy for those markets you're targeting, but haven't yet entered?

Mr. Degenstein: Our initial growth strategy started in 2007. As we looked at opportunities around our core business and our core operations, we brought in a management team that has utility expertise with both small and large utilities. We focused on growing around those operations and getting them cost effective, understanding rates and getting them to a position where they earn what they are allowed to earn through their respective regulatory bodies.

In addition to looking at core business growth, cost control and efficiencies, we began looking at bolt-on acquisitions to the utilities in Montana and Wyoming. We were able to add Cut Bank Gas, which fit into the Montana operations - an underperforming small utility, which had difficulties with earnings for many, many years. This was a bolt-on acquisition where we instituted our operational efficiencies and controls.

In addition to that bolt-on strategy, we asked ourselves, "Are there new market acquisitions? Are there areas where there isn't much natural gas saturation? Are there existing utilities that are available in small markets where they really haven't had much saturation and natural gas isn't used as the primary fuel?" We found those types of acquisitions - one in Bangor, Maine, that would be Bangor Gas, and one in North Carolina, which is Frontier Natural Gas. Small utilities with very small customer bases, but a large amount of infrastructure built out by large utilities that found them not fitting into their core business. So we were able to acquire utilities with significant infrastructure, small customer counts, which were ripe for growth by expanding and growing, running services off existing facilities, and converting both fuel oil and propane customers. Those new market acquisitions have worked out very well for us, and we continue to look for those types of acquisitions.

Then of course, we were looking for major acquisitions of utilities that were either close to our size or larger so we could significantly increase our size. In 2009, we found a significant acquisition in Ohio, which added approximately 24,000 customers when we acquired Northeast Ohio Natural Gas and Orwell Natural Gas. These were relatively large acquisitions for Gas Natural. It wasn't what I would consider major, but it was significant for Gas Natural. We continue to look for acquisitions of that size today.

TWST: In your last interview with us, you talked about this new market acquisition strategy, and you said you wanted to make natural gas the fuel of choice in these markets. How do you make natural gas the fuel of choice in markets where it currently is not?

Mr. Degenstein: It seems like it would be a simple process because natural gas pricing is at the level it was 25 years ago in a market where natural gas is extremely competitive and natural gas at such a low cost. Fuel oil end-use cost for the customer is approximately four times as high as natural gas. Propane, depending upon the part of the country you're in, is approximately two or three times the end-use cost to the customer. So pricing in itself should drive the market, and in many cases it does.

However, when you are in a market where fuel oil and propane have been dominant for years, you do have political resistance. You obviously get some resistance from the propane industry and the fuel oil industry, and consumers are not familiar with natural gas. You get resistance because of perceived and unfounded safety concerns. The customer may believe natural gas piped into the home is dangerous, yet they have a fuel tank in the basement. So there can be a negative perception of natural gas that can be passed on by the public, local business and the competition. However, I think you'll find both in Maine and North Carolina there is a real push to bring natural gas to the end user. This is because of the convenience, the pricing, the safety, just the nature of natural gas and how it's been delivered for the last 100 years. So the push is there.

The difficulty for expansion is finding enough capital funds to expand as fast as you'd like to. This clearly has been more of a hurdle than getting people to convert, but funding can be found for accretive projects. I also think because of the pricing mechanisms we're in today, in markets where you don't have natural gas infrastructure, it's opened the door to looking at the economics of liquefied natural gas, LNG, and compressed natural gas, CNG. With natural gas at this pricing level, you can displace on-site fuels with on-site CNG and LNG, which wasn't economical in the past, per se. Today, I believe those markets are opening up based on the competitive pricing of natural gas. So that's something we're also looking at from a small entry point to see if it's right for Gas Natural.

TWST: What does the rate environment look like right now, and what's the outlook for 2012 in your markets?

Mr. Degenstein: I believe the rate environment has evolved to a point of mutual understanding and a cooperation between the public service commissions and the utility. By nature, there are a few things that make it difficult in this environment. The cost of capital is a lot less than it used to be; the cost of debt is a lot less than it used to be. So as you're working with your commissions to build rate structures, you need to work from a standpoint of getting a proper return on equity and getting a proper return on debt such that you can establish a rate of return which is reasonable for the utility, which allows it to continue and grow as a utility. If you can get a return on equity of 10.5%, and your existing debt is at 6% and 7%, you can still get 9% to 10% return on rate base, which is reasonable.

I think public service commissions understand the need for reasonable returns because my belief and Gas Natural's belief is that there are three core principles to running a natural gas utility. Those core principles in my mind have not changed since the day I entered this business 30 years ago, and they are: you need to operate a safe pipeline that protects the public, that delivers our product per code, per safety regulations, therefore you need to maintain and operate that system and you need to invest back into that system; second, you need to have fair and competitive rates, you need to have reasonable rates, and you need to have rates that encourage people to want to use your product; third, you need to make a profit, you need to have earnings and make a profit so that you can do number one and number two. If you're not earning at a reasonable rate, you cannot continue to invest back into your system. You cannot continue to provide reasonable rates. You get into the dilemma of aging infrastructure that hasn't been replaced, and you end up with systems that are in poor condition.

I think commissions today, especially with regulatory pressure and the things that have happened in this country recently, recognize the need for reasonable returns. So it's always a balance. They're going to push one direction. We're going to push the other. I think there is an understanding of the need for safe systems, reasonable rates, and utilities have to make a profit or the first two principles suffer. I believe the rate environment is receptive to change.

TWST: What do you see as the current need for repair and maintenance of the natural gas infrastructure and how does that impact Gas Natural?

Mr. Degenstein: Bangor and Frontier have relatively new infrastructure. They are high-pressure coated and wrapped steel, and are in good condition. The distribution systems are polyethylene pipe and also in good condition. These systems were built out since the late 1990s. Ohio is very similar. Both Orwell Natural Gas and Northeast Ohio Natural Gas are newer systems that consist of polyethylene pipe. Montana and Wyoming, on the other hand, are older systems. Montana is 102 years old. Cody, Wyo., is very close to the same age. We do have some aging infrastructure and have put programs in place to replace and address our aging infrastructure.

We don't have a lot of the headaches that are common in the natural gas industry. We do not have copper or cast iron in our systems. Our issues are more with compression couplings and bare steel. Since 2006, we've been very aggressive. We've replaced a lot of that infrastructure and continue to build rate base at a rate slightly higher than depreciation. We've had good earnings. We've been able to invest back. We've been able to operate safely and replace. We've got some of the lowest rates in the country, but we've been able to maintain the three principles, and I feel very comfortable with where we're at today.
Throughout the United States, as I understand it, you have aging infrastructure from bridges to buildings to roads to natural gas systems, and over time, we need to address those things. As an industry, I think you'll see that both regulatory agencies and companies are working toward addressing the infrastructure in this country.

TWST: Would you elaborate on the overall strength of Gas Natural's balance sheet at the moment and the company's ability to fund new growth per the growth strategy you've outlined?

Mr. Degenstein: I think we've been able to do that by maximizing our earnings, and by the fact our core utilities earn very close to our allowed returns. We've also been able to do that based on the competitive fuel rates in North Carolina and Maine. Those allow us to earn at what would be higher than traditional rates with the understanding that we're going to invest that capital back into those systems by adding services, connecting customers and getting them on a more cost-effective fuel. That has helped us be successful. Cost efficiency, good operations and earning close to our maximum potential have helped significantly.

In addition, we were able to go out and raise equity based on our business strategy, and we were able to take that equity and infuse it back into our systems. Between growth, earnings and going to the financial institutions and retail investors for help, we've been able to have a successful growth strategy.

TWST: When you look at various competitors, whether they are other natural gas providers or traditional utilities, what are some of the key advantages you believe Gas Natural has over its competitors in the markets where it operates?

Mr. Degenstein: I think one of the key advantages we have is we're small and we rely on our good employees, our operators and our general managers to react quickly. We are able to make individual decisions, allow our operators to make decisions, allow our management people to make decisions. We have the ability to step back and look at something that on the surface may be small and not have much benefit to a larger utility, and really evaluate that utility or that acquisition, and recognize that it can be accretive and it can add to the bottom line, that it can work. I think we tend to be creative and we tend to be more nimble because we're not quite as large, and frankly, we have less bureaucracy.

TWST: What is the most significant business risk or challenge Gas Natural is facing this year and what strategies do you have in place to deal with that challenge?

Mr. Degenstein: Our most significant challenge is we see a lot of opportunity out there. Opportunity takes dollars, and generating those dollars takes time. When you build infrastructure and add customers, there is a natural lag between spending and realizing revenue. It takes time to catch up. We are waiting for our recent activities to realize their revenue potential. It's probably a one- or two-year lag. But in the interim, as we see other opportunities, we will evaluate those opportunities, and act on those that are right for Gas Natural and its shareholders.

TWST: In speaking to industry analysts recently, one recurring theme that has come up in our conversations is what they see as an oversupply of natural gas. What are your thoughts on that? Additionally, how does an oversupply, if you believe there is one, impact Gas Natural?

Mr. Degenstein: Natural gas pricing is extremely low, and you could qualify that as an oversupply, and several other reasons. Natural gas utilities themselves are a straight pass through on the price they pay for natural gas. We do not make a profit on the cost of natural gas. Our natural gas utilities, which contribute approximately 90% of our revenue and our net income, are not affected by the price of natural gas. If you look at natural gas prices today, whether that's $5 or $3, it is still attractive to the consumer and it's not going to affect Gas Natural's bottom line. However, when it's $12, it's hard to market. When its $3, I can find more people that are willing to convert, connect and hook up. The pricing mechanisms today make it much easier for us to market, expand and grow. The pricing mechanism of gas itself does not affect our bottom line with the existing customers.

TWST: In summary, what do you believe are the most compelling reasons an investor would want to take a closer look at Gas Natural at this point in time?

Mr. Degenstein: I think an investor should look to see who we are. They should look at our performance since 2004. They should marry that with our business strategy and look to see if that business strategy is viable going forward, and if they believe it is, which I believe it is, then they should see the same vision we do. Obviously, I do see good things for this utility going forward.

TWST: Thank you. (MES)

Kevin Degenstein

President & COO

Gas Natural Inc.

1 First Ave. S.

Great Falls, MT 59401

(800) 570-5688 - TOLL FREE

www.ewst.com