Gas Natural 10-Q 2007 Q4 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedDecember 31, 2007

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File number 0-14183

ENERGY WEST, INCORPORATED

(Exact name of registrant as specified in its charter)

Montana	81-0141785
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
1 First Avenue South, Great Falls, Montana	59401
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:(406) 791-7500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.þ Yeso No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company ý
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o Yesþ No

The number of shares outstanding of the registrant’s common stock as of February 11, 2008 was 4,345,425 shares.

As used in this Form 10-Q, the terms “company”, “Energy West”, “Registrant”, “we”, “us”, and “our” mean Energy West, Incorporated and its consolidated subsidiaries as a whole, unless the context indicates otherwise. Except as otherwise stated, the information in this Form 10-Q is as of December 31, 2007.

ENERGY WEST, INCORPORATED
INDEX TO FORM 10-Q

	Page No.
Part I — Financial Information
Item 1 — Financial Statements
Condensed Consolidated Balance Sheets (unaudited) as of December 31, 2007, December 31, 2006 and June 30, 2007		3
Condensed Consolidated Statements of Operations (unaudited)- three months ended December 31, 2007 and 2006, and six months ended December 31, 2007 and 2006		4
Condensed Consolidated Statements of Cash Flows – (unaudited) six months ended December 31, 2007 and 2006		5
Notes to Condensed Consolidated Financial Statements		6
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3 — Quantitative and Qualitative Disclosures about Market Risk		30
Item 4 — Controls and Procedures		31
Part II — Other Information
Item 4 — Submission of Matters to a Vote of Security Holders		31
Item 6 — Exhibits		32
Signatures
EX-3.1(E)
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

1

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS.

2

ENERGY WEST INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 2007 AND 2006, AND JUNE 30, 2007

	December 31,				June 30,
	(unaudited)				(audited)
	2007		2006		2007
ASSETS
Current Assets:
Cash	$	1,905,261	$	1,039,846	$	7,010,020
Accounts and notes receivable less $135,899, $176,359 and $64,054, respectively, allowance for bad debt		7,605,078		6,305,159		3,532,083
Unbilled gas		3,273,336		2,189,049		649,939
Derivative assets		64,186		117,617		57,847
Natural gas and propane inventories		8,070,605		7,280,772		5,474,309
Materials and supplies		864,025		447,668		377,296
Prepayments and other		637,856		194,411		142,964
Income tax receivable		—		—		162,432
Recoverable cost of gas purchases		383,985		252,245		307,899
Deferred tax asset		18,403		221,088		53,370
Assets held for sale		—		13,224,369		—
Total current assets		22,822,735		31,272,224		17,768,159
Property, Plant and Equipment, Net		30,966,742		30,480,742		30,473,991
Deferred Charges		2,962,069		3,817,757		3,031,425
Deferred Tax Asset Long Term		6,956,272		—		—
Other Investments		644,777		—		—
Other Assets		183,797		341,791		560,463
TOTAL ASSETS	$	64,536,392	$	65,912,514	$	51,834,038
LIABILITIES AND CAPITALIZATION
Current Liabilities:
Accounts payable	$	6,798,004	$	5,519,515	$	4,543,525
Current portion of long-term debt		—		1,061,509		—
Line of credit		6,525,495		5,050,000		—
Derivative liabilities		64,357		60,582		58,018
Accrued income taxes		86,315		627,428		—
Accrued and other current liabilities		4,913,992		4,084,047		3,092,726
Liabilities held for sale		—		1,311,791		—
Total current liabilities		18,388,163		17,714,872		7,694,269
Other Obligations:
Deferred income taxes		—		6,293,307		4,585,170
Deferred investment tax credits		260,627		281,689		271,158
Other long-term liabilities		3,785,001		4,500,945		3,987,731
Total		4,045,628		11,075,941		8,844,059
Long-Term Debt		13,000,000		17,318,333		13,000,000
Commitments and Contingencies (see note 7)
Stockholders’ Equity:
Preferred stock; $.15 par value, 1,500,000 shares authorized, no shares outstanding		—		—		—
Common stock; (a) $.15 par value, 15,000,000 shares authorized, 4,312,803, 4,438,766 and 4,288,656 shares outstanding at December 31, 2007 and 2006, and June 30, 2007 respectively		646,920		665,815		643,298
Capital in excess of par value		5,953,433		7,620,923		5,867,727
Retained earnings		22,502,248		11,516,630		15,784,685
Total stockholders’ equity		29,102,601		19,803,368		22,295,710
TOTAL CAPITALIZATION		42,102,601		37,121,701		35,295,710
TOTAL LIABILITIES AND CAPITALIZATION	$	64,536,392	$	65,912,514	$	51,834,038

(a) On February 1, 2008 a 3:2 stock split was effectuated. Outstanding common shares have been restated to reflect the stock split.

The accompanying notes are an integral part of these condensed financial statements.

3

ENERGY WEST, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2007			2006			2007			2006
REVENUES:
Natural gas operations	$	16,097,073		$	14,465,754		$	21,118,295		$	20,193,756
Gas and electric—wholesale		4,629,434			3,475,766			7,008,122			6,104,721
Pipeline operations		93,390			99,753			186,855			199,191
Total revenues		20,819,897			18,041,273			28,313,272			26,497,668
EXPENSES:
Gas purchased		11,140,775			10,612,702			13,972,427			14,141,400
Gas and electric—wholesale		3,936,280			2,867,333			5,922,616			5,036,927
Total cost of sales		15,077,055			13,480,035			19,895,043			19,178,327
GROSS MARGIN		5,742,842			4,561,238			8,418,229			7,319,341
Distribution, general, and administrative		2,998,927			1,552,405			4,601,908			3,101,275
Maintenance		171,497			121,704			325,915			244,435
Depreciation and amortization		456,682			420,717			889,371			850,202
Taxes other than income		495,718			344,869			863,613			675,415
Total expenses		4,122,824			2,439,695			6,680,807			4,871,327
OPERATING INCOME		1,620,018			2,121,543			1,737,422			2,448,014
OTHER INCOME		102,343			77,382			190,093			138,348
INTEREST (EXPENSE)		(329,468	)		(427,594	)		(529,711	)		(803,905	)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX		1,392,893			1,771,331			1,397,804			1,782,457
INCOME TAX (EXPENSE)		(343,726	)		(658,958	)		(273,828	)		(665,287	)
INCOME FROM CONTINUING OPERATIONS		1,049,167			1,112,373			1,123,976			1,117,170
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations		—			255,514			—			(67,196	)
Income tax benefit (expense)		—			(98,142	)		—			25,263
INCOME FROM DISCONTINUED OPERATIONS:		—			157,372			—			(41,933	)
INCOME BEFORE EXTRAORDINARY GAIN		1,049,167			1,269,745			1,123,976			1,075,237
EXTRAORDINARY GAIN		6,819,182			—			6,819,182			—
NET INCOME	$	7,868,349		$	1,269,745		$	7,943,158		$	1,075,237
BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations	$	0.24		$	0.25		$	0.26		$	0.25
Income (loss) from discontinued operations	$	0.00		$	0.04		$	0.00		$	(0.01	)
Extraordinary gain	$	1.59		$	0.00		$	1.59		$	0.00
	$	1.83		$	0.29		$	1.85		$	0.24
DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations	$	0.24		$	0.25		$	0.26		$	0.25
Income (loss) from discontinued operations	$	0.00		$	0.04		$	0.00		$	(0.01	)
Extraordinary gain	$	1.58		$	0.00		$	1.58		$	0.00
	$	1.83		$	0.28		$	1.85		$	0.24
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: (a)
Basic		4,292,487			4,429,082			4,287,437			4,419,197
Diluted		4,309,401			4,478,508			4,304,559			4,467,768

(a) On February 1, 2008, a 3:2 stock split was effectuated. Weighted average shares and earning per share have been restated to reflect the stock split.

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

ENERGY WEST, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended
	December 31,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,943,158		$	1,075,237
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization, including deferred charges and financing costs		934,567			1,164,459
Derivative assets		(6,339	)		20,248
Derivative liabilities		6,339			17,918
Deferred gain		120,758			(122,760	)
Investment tax credit		(10,531	)		(10,531	)
Deferred income taxes		(6,701,691	)		(32,830	)
Changes in assets and liabilities:
Accounts receivable		(5,650,941	)		(3,802,292	)
Natural gas and propane inventories		(2,596,296	)		(2,422,173	)
Accounts payable		563,691			1,947,459
Recoverable/refundable cost of gas purchases		(111,595	)		(172,734	)
Prepayments and other		(419,585	)		67,353
Net assets held for sale		—			(1,078,250	)
Other assets & liabilities		1,823,636			(682,194	)
Net cash used in operating activities		(4,104,829	)		(4,031,090	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures		(1,384,540	)		(1,093,444	)
Purchase of stock — Frontier Utilities and Penobscot Natural Gas		(4,601,599	)		—
Other investments		(644,777	)		—
Customer advances received for construction		65,972			195,152
Increase from contributions in aid of construction		38,874			—
Net cash used in investing activities		(6,526,070	)		(898,292	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt		—			(283,371	)
Proceeds from lines of credit		8,475,495			6,100,000
Repayments of lines of credit		(1,950,000	)		(1,050,000	)
Proceeds from other short-term borrowings		—			212,275
Repurchase of common stock		(150,911	)		—
Sale of common stock		221,890			—
Dividends paid		(1,070,334	)		(649,254	)
Net cash provided by financing activities		5,526,140			4,329,650
NET DECREASE IN CASH AND CASH EQUIVALENTS		(5,104,759	)		(599,732	)
CASH AND CASH EQUIVALENTS:
Beginning of period		7,010,020			1,639,578
End of period	$	1,905,261		$	1,039,846

5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2007

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Energy West, Incorporated and its subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended December 31, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2008. The financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007.

Energy West, Incorporated is a regulated public utility, with certain non-utility operations conducted through its subsidiaries. We were originally incorporated in Montana in 1909. We currently have five reporting segments:

•	Natural Gas Operations	Distributes approximately 23 billion cubic feet of natural gas to approximately 36,000 customers through regulated utilities operating in and around Great Falls and West Yellowstone, Montana, Cody, Wyoming, Elkin, North Carolina and Bangor, Maine. The approximate population of the service territories is 398,000. The operation in Elkin, North Carolina was added October 1, 2007. The operation in Bangor, Maine was added December 1, 2007.
•	Marketing and ProductionOperations	Markets approximately 1.6 billion cubic feet of natural gas to commercial and industrial customers in Montana and Wyoming and manages midstream supply and production assets for transportation customers and utilities through its subsidiary, Energy West Resources (“EWR”). EWR has an ownership interest in 165 natural gas producing wells and gas gathering assets. Missouri River Propane (“MRP”), our small Montana wholesale distribution company that sells propane to our affiliated utility, had been reported in Propane Operations. It is now being reported in marketing and production operations. In addition, during fiscal year 2008, EWR invested in 19.8% of the membership interests of Kykuit Resources, LLC (“Kykuit”), a developer and operator of oil, gas and mineral leasehold estates located in Montana. The cost method of accounting is used to account for income and losses from this investment. There was no material gain or loss in the first six months of fiscal year 2008. There is certain common ownership and management between Kykuit and the Company.
•	Pipeline Operations (EWD)	Owns the Shoshone interstate and the Glacier gathering natural gas pipelines located in Montana and Wyoming. Certain natural gas producing wells owned by our pipeline operations are being managed and reported under its marketing and production operations.

6

•	Propane Operations (Discontinued Operations)	Annually distributed approximately 5.4 million gallons of propane to approximately 8,000 customers through utilities operating underground vapor systems in and around Payson, Pine, and Strawberry, Arizona and retail distribution of bulk propane to approximately 2,300 customers in the same Arizona communities. The Arizona assets were sold during fiscal year 2007, and the results of operations for the propane assets related to this sale have been reclassified as income from discontinued operations. The associated assets and liabilities are shown on the consolidated balance sheet as “Assets held for sale” and “Liabilities held for sale.” See Note 5. MRP, our small Montana wholesale distribution company that sells propane to our affiliated utility, had been reported in propane operations. It is now being reported in its marketing and production operations.
•	Corporate and Other	Not previously reported, Corporate and Other was primarily established to encompass the results of Corporate acquisitions and other equity transactions. The extraordinary gain of $6.8 million from the acquisition of properties in the second quarter of fiscal year 2008 has been reported in Corporate and Other.

NOTE 1 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY

Management of Risks Related to Derivatives — The Company and its subsidiaries are subject to certain risks related to changes in certain commodity prices and risks of counterparty performance. The Company has established policies and procedures to manage such risks. The Company has a Risk Management Committee, comprised of Company officers and management to oversee the Company’s risk management program as defined in its risk management policy. The purpose of the risk management program is to minimize adverse impacts on earnings resulting from volatility of energy prices, counterparty credit risks, and other risks related to the energy commodity business.

In order to mitigate the risk of natural gas market price volatility related to firm commitments to purchase or sell natural gas, from time to time the Company and its subsidiaries have entered into hedging arrangements. Such arrangements may be used to protect profit margins on future obligations to deliver gas at a fixed price, or to protect against adverse effects of potential market price declines on future obligations to purchase gas at fixed prices.

Quoted market prices for natural gas derivative contracts of the Company and its subsidiaries are generally not available. Therefore, to determine the net present value of natural gas derivative contracts, the Company uses internally developed valuation models that incorporate independently available current and forecasted pricing information.

During the first six months of fiscal 2008, the Company has not entered into any new contracts requiring mark-to-market accounting under Statement of Financial Accounting Standards (“SFAS”) No. 133Accounting for Derivative Instruments and Hedging Activities(“SFAS No. 133”). However, existing derivatives as of December 31, 2007 were reflected on the Company’s consolidated balance sheet as derivative assets and liabilities at an approximate fair value as follows:

	Assets		Liabilities
Contracts maturing during fiscal year 2009	$	64,186	$	64,357

Natural Gas and Propane Operations — In the case of the Company’s regulated divisions, gains or losses resulting from derivative contracts are subject to deferral under regulatory procedures of the public service regulatory commissions of Montana, Wyoming, North Carolina and Maine. Therefore, related derivative assets and liabilities

7

are offset with corresponding regulatory liability and asset amounts included in “Recoverable Cost of Gas Purchases” pursuant to SFAS No. 71,Accounting for the Effects of Certain Types of Regulation. As of December 31, 2007, the Company’s regulated operations have no contracts meeting the mark-to-market accounting requirements.

NOTE 2 — INCOME TAX EXPENSE

Income tax expense differs from the amount computed by applying the federal statutory rate to pre-tax income or loss as demonstrated in the following table:

	Three Months Ended						Six Months Ended
	December 31						December 31
	(unaudited)						(unaudited)
	2007			2006			2007			2006
Income tax from continuing operations:
Tax expense at statutory rate of 34%	$	473,584		$	602,253		$	475,253		$	606,035
State income tax expense, net of federal tax expense		64,909			82,544			65,138			83,062
Amortization of deferred investment tax credits		(5,265	)		(5,265	)		(10,530	)		(10,530	)
Other		(189,501	)		(20,574	)		(256,033	)		(13,281	)
Total income tax expense from continuing operations		343,726			658,958			273,828			665,287
Income tax from discontinued operations:
Tax expense (benefit) at statutory rate of 34%		—			86,875			—			(22,847	)
State income tax expense (benefit) net of federal tax expense (benefit)		—			11,907			—			(3,131	)
Other		—			(640	)		—			715
Total income tax expense (benefit) from discontinued operations		—			98,142			—			(25,263	)
Total income tax expense	$	343,726		$	757,099		$	273,828		$	640,024

Other tax benefit for fiscal year 2008 includes an adjustment for prior year actual tax expense from amounts that had been estimated and accrued.

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with SFAS No. 109,“Accounting for Income Taxes.”Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 is effective for fiscal years beginning after December 15, 2006 and the provisions of FIN 48 are to be applied to all tax positions upon initial adoption of the Interpretation. Upon adopting FIN 48, the Company had no unrecognized tax benefits that would have a material impact to the Company’s financial statements for any open tax years. During the first six months of fiscal year 2008, no adjustments were recognized for uncertain tax positions.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expense. No interest and penalties related to unrecognized tax benefits were accrued at December 31, 2007.

The tax years 2002 through 2006 remain open to examination by the major taxing jurisdictions in which we operate, although no material changes to unrecognized tax positions are expected within the next twelve months.

NOTE 3 — LINES OF CREDIT AND LONG-TERM DEBT

We fund our operating cash needs, as well as dividend payments and capital expenditures, primarily through cash flow from operating activities and short-term borrowing. Historically, to the extent cash flow has not been sufficient

8

to fund these expenditures, we have used the working capital line of credit portion of the credit facility with LaSalle Bank, N.A. (“LaSalle”). We have greater need for short-term borrowing during periods when internally generated funds are not sufficient to cover all capital and operating requirements, including costs of gas purchased and capital expenditures. In general, our short-term borrowing needs for purchases of gas inventory and capital expenditures are greatest during the summer and fall months and our short-term borrowing needs for financing customer accounts receivable are greatest during the winter months.

LaSalle Line of Credit— On June 29, 2007, the Company established its new five-year unsecured credit facility with LaSalle, replacing a previous $20.0 million one-year facility with LaSalle which was scheduled to expire in November 2007. The new credit facility includes an annual commitment fee equal to 0.20% of the unused portion of the facility and interest on amounts outstanding at the London Interbank Offered Rate, plus 120 to 145 basis points, for interest periods selected by the Company.

Long-term Debt — $13.0 million 6.16% Senior Unsecured Notes— On June 29, 2007, the Company issued 6.16% Senior Unsecured Notes in the aggregate principal amount of $13.0 million, due June 29, 2017. The proceeds of these notes were used to refinance our existing notes. With this refinancing, we expensed the remaining debt issue costs of $991,000 in fiscal 2007, and incurred approximately $400,000 in new debt issue costs to be amortized over the life of the new note.

Debt Covenants— The Company’s 6.16% Senior Unsecured Note and LaSalle credit facility agreements contain various covenants, which include, among others, limitations on total dividends and distributions made in the immediately preceding 60-month period to 75% of aggregate consolidated net income for such period, restrictions on certain indebtedness, limitations on asset sales, and maintenance of certain debt-to-capital and interest coverage ratios. At December 31, 2007, the Company believes it was in compliance with the financial covenants under its new debt agreements.

At December 31, 2007, the Company had approximately $1.9 million of cash on hand. In addition, at December 31, 2007, the Company had $6.5 million in borrowings under the LaSalle Credit Facility revolving line of credit. The Company��s net availability at December 31, 2007, was $13.5 million under the LaSalle Facility revolving line of credit.

The total amount outstanding under all of the Company’s long-term debt obligations was $13.0 million and approximately $17.3 million at December 31, 2007, and December 31, 2006, respectively. The portion of such obligations due within one year was $0 and $1.1 million at December 31, 2007, and December 31, 2006, respectively.

NOTE 4 — ACQUISITIONS AND EXTRAORDINARY GAIN

On October 1, 2007, the Company completed the acquisition of Frontier Utilities of North Carolina, Inc. (“Frontier Utilities”), which operates a natural gas utility in and around Elkin, North Carolina through its subsidiary, Frontier Energy, LLC. The purchase price was $4.5 million in cash, plus adjustment for taxes and working capital, resulting in a total purchase price of approximately $4.9 million. On December 1, 2007, the Company completed the acquisition of Penobscot Natural Gas Company, Inc. (“Penobscot Natural Gas”) for a purchase price of approximately $285,000, plus adjustment for working capital, resulting in a total purchase price of approximately $435,000. Penobscot Natural Gas is the parent company of Bangor Gas Company LLC, which operates a natural gas utility in and around Bangor, Maine.

The results of operations for Frontier Utilities and Penobscot Natural Gas have been included in the consolidated financial statements since the dates of acquisition.

Under Financial Accounting Standards (“FAS”) 141, the Company has recorded these stock acquisitions as if the net assets of the targets were acquired. For income tax purposes, the Company is permitted to “succeed” to the operations of the acquired companies, whereby the Company may continue to depreciate the assets at their historical tax cost bases. As a result, the Company may continue to depreciate approximately $79.0 million of capital assets using the useful lives and rates employed by both Frontier Utilities and Penobscot Natural Gas. This treatment results in a potential future federal and state income tax benefit of approximately $16.9 million over a 24-year period using applicable federal and state income tax rates. Under Internal Revenue Code Section 382, our ability to recognize tax deductions as a result of this tax benefit will be limited during the first 5 years following the acquisitions.

9

Following FAS 109, our balance sheet at December 31, 2007 reflects a gross deferred tax asset of approximately $16.9 million, offset by a valuation allowance of approximately $5.3 million, resulting in a net deferred tax asset associated with the acquisition of approximately $11.5 million.

The excess of the net deferred tax assets received in the transactions over the total purchase consideration has been reflected as an extraordinary gain of approximately $6.8 million on the accompanying statement of income in accordance with the provisions of FAS 141.

The preparation of the Company’s financial statements requires management to make significant estimates. The deferred tax asset, valuation allowance and related extraordinary gain requires a significant amount of judgment and is a significant estimate. The estimate is based on projected future tax deductions, future taxable income, estimated limitations under the Internal Revenue Code, an estimated valuation allowance, and other assumptions. It is possible that this estimate could change and the change could be material.

NOTE 5 — DISCONTINUED OPERATIONS

On July 17, 2006, we entered into an Asset Purchase Agreement among our company, our subsidiary Energy West Propane, Inc. (EWP), and SemStream, L.P. Pursuant to the Asset Purchase Agreement, our company and EWP agreed to sell, and SemStream agreed to buy, (i) all of the assets and business operations associated with our regulated propane gas distribution system operated in the cities and outlying areas of Payson, Pine, and Strawberry, Arizona (the “Regulated Business”), and (ii) all of the assets and business operations of EWP that are associated with certain “non-regulated” propane assets in the same geographic area (the “Non-Regulated Business,” and together with the Regulated Business, the “Business”).

Pursuant to the Purchase and Sale Agreement, the sale was conditioned on approval by the Arizona Corporation Commission, or “ACC”, with the closing to occur on the first day of the month after receipt of ACC approval. This approval was received on March 13, 2007, and the closing date of the transaction was April 1, 2007.

SemStream purchased only the assets and business operations of our Company and EWP that pertain to the Business within the state of Arizona, and that also pertain to the Energy West Propane - Arizona division of our company and/or EWP (collectively, the “Arizona Assets”). Pursuant to the Asset Purchase Agreement, SemStream paid a cash purchase price of $15.0 million for the Arizona Assets, plus final working capital adjustments of approximately $3.0 million.

The assets and liabilities of the discontinued operations are presented separately under the captions “Assets Held for Sale” and “Liabilities Held for Sale”, respectively, in the accompanying Balance Sheets at December 31, 2006 and consist of the following:

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Assets and Liabilities Held for Sale

	December 31, 2006
	(unaudited)
Assets held for sale:
Accounts receivable	$	1,011,455
Unbilled gas		904,263
Propane inventory		704,222
Materials and supplies		118,418
Prepayments		268,395
Recoverable cost of gas purchases		1,015,982
Property, plant and equipment, net		9,201,634
Total assets held for sale		13,224,369
Liabilities held for sale:
Accounts payable		139,355
Other current liabilities		531,848
Contributions in aid of construction		640,588
Total liabilities held for sale		1,311,791
Net assets held for sale	$	11,912,578

The following table details the line item “Income from Discontinued Operations” that appears on the face of the Statements of Operations for the three and six month periods ending December 31, 2006, as well as for the Propane Operations data appearing in Item 2.

	Three Months Ended			Six Months Ended
	December 31, 2006			December 31, 2006
	(unaudited)			(unaudited)
DISCONTINUED OPERATIONS:
REVENUES:
Propane operations	$	3,276,628		$	4,450,492
COST OF SALES:
Gas purchased		2,271,423			3,003,694
GROSS MARGIN		1,005,205			1,446,798
EXPENSES:
Distribution, general, and administrative		469,156			976,054
Maintenance		21,125			38,582
Depreciation and amortization		121,362			242,069
Taxes other than income		38,687			75,449
Total expenses		650,330			1,332,154
OPERATING INCOME		354,875			114,644
OTHER INCOME		19,893			37,140
INTEREST (EXPENSE)		(119,254	)		(218,980	)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES		255,514			(67,196	)
INCOME TAX BENEFIT (EXPENSE)		(98,142	)		25,263
INCOME (LOSS) FROM DISCONTINUED OPERATIONS	$	157,372		$	(41,933	)

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NOTE 6 — DEFERRED CHARGES

Deferred Charges consist of the following:

	Six Months Ended				Year Ended
	December 31,				June 30,
	(unaudited)				(audited)
	2007		2006		2007
Regulatory asset for property taxes	$	1,860,497	$	2,186,862	$	2,013,623
Regulatory asset for income taxes		452,646		458,753		452,646
Regulatory asset for deferred environmental remediation costs		216,242		287,708		247,617
Other regulatory assets		—		17,953		—
Unamortized debt issue costs		432,684		866,481		317,539
Total	$	2,962,069	$	3,817,757	$	3,031,425

Regulatory assets will be recovered over a period of approximately seven to twenty years.

The property tax asset does not earn a return in the rate base; however the property tax is recovered in rates over a ten-year period starting January 1, 2004. The income taxes and environmental remediation costs earn a return equal to that of the Company’s rate base. No other assets earn a return or are recovered in the rate structure. Other regulatory assets include rate case costs to be amortized over the period approved by the appropriate regulatory agency.

NOTE 7 — CONTINGENCIES

Environmental Contingency— We own property on which we operated a manufactured gas plant from 1909 to 1928. We currently use this site as an office facility for field personnel and storage location for certain equipment and materials. The coal gasification process utilized in the plant resulted in the production of certain by-products that have been classified by the Federal government and the State of Montana as hazardous to the environment.

We have completed our remediation of soil contaminants at the plant site. In April 2002 we received a closure letter from the Montana Department of Environmental Quality, or “MDEQ,” approving the completion of such remediation program.

We and our consultants worked with the MDEQ relating to the remediation plan for water contaminants. The MDEQ has established regulations that allow water contaminants at a site to exceed standards if it is technically impracticable to achieve those standards. Although the MDEQ has not established guidance respecting the attainment of a technical waiver, the U.S. Environmental Protection Agency (the “EPA”) has developed such guidance. The EPA guidance lists factors that render remediation technically impracticable. We have filed with the MDEQ a request for a waiver from complying with certain standards.

At December 31, 2007, we had incurred cumulative costs of approximately $2.1 million in connection with our evaluation and remediation of the site. On May 30, 1995, we received an order from the Montana Public Service Commission (“MPSC”) allowing for recovery of the costs associated with the evaluation and remediation of the site through a surcharge on customer bills. As of December 31, 2007, we had recovered approximately $1.9 million through such surcharges. As of December 31, 2007, the cost remaining to be recovered through the on-going rate is $216,000.

We are required to file with the MPSC every two years for approval to continue the recovery of these costs through a surcharge. During fiscal 2007, the MPSC approved the continuation of the recovery of these costs with its order dated May 15, 2007.

Derivative Contingencies— Among the risks involved in natural gas marketing is the risk of nonperformance by counterparties to contracts for purchase and sale of natural gas. Our marketing and production operation’s subsidiary

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is party to certain contracts for purchase or sale of natural gas at fixed prices for fixed time periods. Some of these contracts are recorded as derivatives, valued on a mark-to-market basis.

Legal Proceedings—We are party to certain legal proceedings in the normal course of our business, that, in the opinion of management, are not material to our business or financial condition.

NOTE 8 — SEGMENTS OF OPERATIONS

Income from continuing operations is summarized in the table below:

	Three Months Ended				Six Months Ended
	December 31				December 31
	2007		2006		2007		2006
Gross margin (operating revenue less cost of gas sold):
Natural gas operations	$	4,956,298	$	3,853,052	$	7,145,868	$	6,052,356
Marketing and production operations		693,154		608,433		1,085,506		1,067,794
Pipeline operations		93,390		99,753		186,855		199,191
		5,742,842		4,561,238		8,418,229		7,319,341
Operating income:
Natural gas operations		1,044,828		1,609,038		898,768		1,549,037
Marketing and production operations		528,401		481,804		764,813		808,529
Pipeline operations		46,789		30,701		73,841		90,448
		1,620,018		2,121,543		1,737,422		2,448,014
Net income from continuing operations:
Natural gas operations		618,201		828,719		507,494		623,944
Marketing and production operations		401,033		271,300		570,374		449,159
Pipeline operations		29,933		12,354		46,108		44,067
	$	1,049,167	$	1,112,373	$	1,123,976	$	1,117,170

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NOTE 9 — ACCRUED AND OTHER CURRENT LIABILITIES

     Accrued and other current liabilities consist of the following:

	December 31,				June 30,
	(unaudited)				(audited)
	2007		2006		2007
Property tax settlement—current portion	$	243,000	$	243,000	$	243,000
Payable to employee benefit plans		65,872		130,748		132,131
Accrued vacation		284,299		264,525		224,588
Customer deposits		443,519		402,113		394,128
Accrued interest		355,676		160,668		9,069
Accrued taxes other than income		523,539		401,696		506,448
Deferred short-term gain		202,821		243,519		243,519
Customer prepayments from levelized billing		1,609,986		1,193,842		605,031
Other		1,185,280		1,043,936		734,812
Total	$	4,913,992	$	4,084,047	$	3,092,726

December 31, 2006 information presented differs from prior presentations due to the reclassification of certain propane items from “Accrued and other current liabilities” to “Liabilities held for sale.”

NOTE 10 — OTHER LONG TERM LIABILITIES

     Other long-term liabilities consist of the following:

	December 31,				June 30,
	(unaudited)				(audited)
	2007		2006		2007
Asset retirement obligation	$	707,301	$	668,663	$	688,371
Contributions in aid of construction		1,351,338		1,714,093		1,313,907
Customer advances for construction		671,193		472,997		605,221
Accumulated postretirement obligation		—		144,201		—
Deferred gain — long-term *		—		202,822		82,063
Regulatory liability for income taxes		83,161		83,161		83,161
Property tax settlement		972,008		1,215,008		1,215,008
Total	$	3,785,001	$	4,500,945	$	3,987,731

December 31, 2006 information presented differs from prior presentations due to the reclassification of certain propane items from “Other long term liabilities” to “Liabilities held for sale.”

* In January 2005, two long-term contracts were designated as “normal purchases and sales”. The derivative liability as of January 2005 is being amortized over the remaining monthly volumes of the contract at a rate of $1.21 per million British Thermal Units (MMBtu).

NOTE 11 — STOCK OPTIONS AND SHAREHOLDER RIGHTS PLANS

2002 Stock Option Plan— The Energy West Incorporated 2002 Stock Option Plan (the “Option Plan”) provides for the issuance of up to 300,000 shares of our common stock to certain key employees. As of December 31, 2007, there are 67,500 options outstanding, 169,500 shares issued under this plan have been exercised, and 63,000 shares are available for future grants under this plan. Additionally, our 1992 Stock Option Plan (the “1992 Option Plan”), which expired in September 2002, provided for the issuance of up to 150,000 shares of our common stock pursuant to options issuable to certain key employees. Under the 2002 Option Plan and the 1992 Option Plan (collectively, “the Option Plans”), the option price may not be less than 100% of the common stock fair market value on the date of grant (in the event of incentive stock options, 110% of the fair market value if the employee owns more than 10% of our outstanding common stock). Pursuant to the Option Plans, the options vest over four to five years and are

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exercisable over a five to ten-year period from date of issuance. When the 1992 Option Plan expired in September 2002, 18,900 shares remained unissued and were no longer available for issuance.

SFAS No. 123 Disclosures— Effective July 1, 2005, we have adopted the provisions of SFAS No. 123Accounting for Stock-Based Compensation. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing.

In the fiscal quarters ended December 31, 2007 and 2006, 30,000 and 15,000 options were granted, respectively. At December 31, 2007 and 2006, a total of 67,500 and 225,750 options were outstanding, respectively.

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2007			2006			2007			2006
Expected dividend rate		4.52	%		4.20	%		4.52	%		4.20	%
Risk free interest rate		4.24	%		5.00	%		4.24	%		5.00	%
Weighted average expected lives, in years		1.75			2.90			1.75			2.90
Price volatility		31.16	%		31.38	%		31.16	%		31.38	%
Total intrinsic value of options exercised	$	211,038		$	35,500		$	255,287		$	60,000
Total cash received from options exercised	$	408,950		$	106,125		$	449,791		$	212,250

A summary of the status of our stock option plans as of December 31, 2007, and June 30, 2007 and 2006 and changes during the periods ended on these dates is presented below.

				Weighted		Aggregate
	Number of			Average		Intrinsic
	Shares			Exercise Price		Value
Outstanding June 30, 2005		189,000		$	5.57
Granted		72,750		$	6.74
Exercised		(3,750	)	$	5.66
Expired		(39,750	)	$	0.00
Outstanding June 30, 2006		218,250		$	5.56
Granted		45,000		$	7.03
Exercised		(93,750	)	$	5.47
Expired		(4,500	)	$	0.00
Outstanding June 30, 2007		165,000		$	5.98
Granted		30,000		$	9.88
Exercised		(75,750	)	$	5.94
Expired		(51,750	)	$	0.00
Outstanding December 31, 2007		67,500		$	6.43	$	209,800
Exerciseable December 31, 2007		37,500		$	5.74	$	140,025

The weighted average fair value of options granted during the quarters ending December 31, 2007 and 2006 was $2.34 and $1.45, respectively. There were 15,000 new options granted in each of the first and second quarters of fiscal year 2008.

The following information applies to options outstanding at December 31, 2007:

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			Remaining
			Contractual
Grant	Number		Life		Number		Exercise
Date	Outstanding		(Years)		Exercisable		Price
4/1/2005		30,000		7.3		22,500	$	4.41
10/4/2005		15,000		7.8		11,250	$	7.01
1/6/2006		7,500		3.0		0	$	6.35
12/1/2007		15,000		9.9		3,750	$	9.93
		67,500				37,500

NOTE 12 — NEW ACCOUNTING PRONOUNCEMENTS

In March 2006, the FASB issued SFAS No. 156,Accounting for Servicing of Financial Assets—an amendment to FASB Statement No. 140(“SFAS 156”). SFAS 156 requires that all separately recognized servicing rights be initially measured at fair value, if practicable. In addition, this statement permits an entity to choose between two measurement methods (amortization method or fair value measurement method) for each class of separately recognized servicing assets and liabilities. This new accounting standard is effective January 1, 2007. We do not expect the adoption of SFAS 156 to have an impact on our results of operations or financial condition.

In July 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109(“FIN 48”). This interpretation clarifies the application of SFAS 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods and disclosure. FIN 48 is effective for our fiscal year commencing July 1, 2007. We have completed our review and assessment of the impact of adoption of FIN 48. This is discussed in Note 2 — Income Tax Expense.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact of adopting SFAS 157 on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS 159”). SFAS 159 provides the option to report certain financial assets and liabilities at fair value, with the intent to mitigate volatility in financial reporting that can occur when related assets and liabilities are recorded on different bases. SFAS 159 also amends SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities,” by providing the option to record unrealized gains and losses on held-for-sale and held-to-maturity securities currently. The effective date of SFAS 159 is for fiscal years beginning after November 15, 2007. The implementation of SFAS 159 is not expected to have a material impact on our results of operations or financial position.

In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations,(“SFAS 141R”). SFAS 141R provides standards that will improve, simplify, and converge internationally the accounting for business combinations in consolidated financial statements. The effective date of SFAS 141R is for fiscal years beginning after December 15, 2008. We are currently evaluating the impact of adopting SFAS 141R on our consolidated financial statements.

We have reviewed all other recently issued, but not yet effective, accounting pronouncements and do not believe any such pronouncements will have a material impact on our financial statements.

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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This quarterly report on Form 10-Q contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our company’s expectations or beliefs concerning future events. Forward-looking statements generally include words such as “anticipates,” “believes,” “expects,” “planned,” “scheduled” or similar expressions and statements concerning our operating capital requirements, negotiations with our lender, recovery of property tax payments, our environmental remediation plans, and similar statements that are not historical are forward-looking statements that involve risks and uncertainties. Although we believe these forward-looking statements are based on reasonable assumptions, statements made regarding future results are subject to a number of assumptions, uncertainties and risks that could cause future results to be materially different from the results stated or implied in this document.

Such forward-looking statements, as well as other oral and written forward-looking statements made by or on behalf of us from time to time, including statements contained in filings with the Securities and Exchange Commission and its reports to shareholders, involve known and unknown risks and other factors that may cause our company’s actual results in future periods to differ materially from those expressed in any forward-looking statements. See “Risk Factors” in the our Annual Report on Form 10-K for the fiscal year ended June 30, 2007 filed with the Securities and Exchange Commission. Any such forward looking statement is qualified by reference to these risk factors. We caution that these risk factors are not exclusive. We do not undertake to update any forward looking statements that may be made from time to time by or on behalf of us except as required by law.

Executive Overview

Energy West is a natural gas utility with operations in Montana, Wyoming, North Carolina and Maine. We distribute 23 billion cubic feet (bcf) of natural gas to approximately 36,000 residential, commercial and industrial customers. In addition to our core natural gas distribution business, we also market approximately 1.6 bcf of natural gas to commercial and industrial customers in Montana and Wyoming and we own the Shoshone interstate and the Glacier gathering pipelines located in Montana and Wyoming. We also have an ownership interest in 165 natural gas producing wells and gas gathering assets that provide our marketing and production operations a natural hedge when gas prices are greater than the cost of production.

Our primary source of revenue and operating margin has been derived from the distribution of natural gas and propane to end-use residential, commercial and industrial customers. We also derive revenues by providing gas supply and load management services to certain industrial and commercial customers through our gas marketing and production subsidiary on an “unregulated” basis.

We continue to focus on expanding and improving our core business — utility service, pipelines, and natural gas production. Significant cost reductions have helped us strengthen our balance sheet, increase net income, restore dividends to our shareholders and keep rates to our customers low. Net income for the first six months of fiscal year 2008 was $7.9 million, compared to net income of $1.1 million for the first six months of fiscal year 2007. The $7.9 million included an extraordinary gain of $6.8 million. This gain was a one-time event associated with the acquisition of Penobscot Natural Gas in Maine, and Frontier Utilities of North Carolina. (See Note 4 in “Notes to Consolidated Financial Statements.”)

Earnings from continuing operations increased from $1,117,000 during the first six months of fiscal year 2007 to $1,124,000 during the first six months of fiscal year 2008. This was the result of savings in several areas, including interest and income tax expense. Earnings also benefited from the acquisition of Frontier Utilities, which was included in income starting October 1, 2007, and Penobscot Natural Gas, starting December 1, 2007. These improvements were offset by one-time charges of approximately $500,000 associated with the realignment of our management team.

We strive to mitigate the effect of higher commodity prices through increased use of both underground storage and our pipeline network. Our utility business has been concentrating on enhancing productivity in our operations and reducing our general, administrative, and overhead expenses. Our improved profitability has afforded us the opportunity to keep rates to our customers low and to increase the dividend payments to our shareholders since resuming dividend payments in October 2005.

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In July 2006, we entered into an agreement to sell certain of our assets related to our Arizona propane business for cash of approximately $15.0 million plus net working capital. This sale was complete on April 1, 2007. We used the proceeds from this transaction to reduce our outstanding debt and strengthen our balance sheet. We believe that this will enable us to take advantage of opportunities to enhance or expand our existing operations and to acquire additional businesses or assets on favorable terms as and when those opportunities arise such as the recent acquisitions of Frontier Utilities and Penobscot Natural Gas. Additionally, we recently announced the pending purchase of Cut Bank Gas Company.

Recent Events

During the past three months, we have continued our efforts to expand our distribution operations by completing two important acquisitions. On October 1, 2007, we completed our acquisition of Frontier Utilities and on December 1, 2007, we completed our acquisition of Penobscot Natural Gas. We are now in the process of integrating oversight of those utility operations with management of our Montana and Wyoming distribution operations.

Further, on December 20, 2007 we announced the execution of a stock purchase agreement among Energy West and certain shareholders of Cut Bank Gas Company, a natural gas utility serving Cut Bank, Montana, for the sale of 83.16% of the outstanding shares of Cut Bank Gas Company for a purchase price of $500,000 in shares of common stock of Energy West. In addition, Energy West will offer to purchase the remaining shares of Cut Bank Gas Company for a purchase price of $66.44 per share or approximately $100,000 in shares of common stock of Energy West. The acquisition is subject to the approval of the MPSC and is expected to be completed in three to six months. The acquisition is scheduled to close on the last business day of the month after all closing conditions have been satisfied, including MPSC approval, as the case may be. However, there can be no assurances the acquisition will be closed in this timeframe, or at all.

During the first six months of fiscal year 2008, our Marketing and Production Operations segment invested a total of approximately $576,000 for a 19.8% ownership interest in Kykuit Resources, LLC (“Kykuit”), a developer and operator of oil, gas and mineral leasehold estates located in Montana. Richard M. Osborne, our Chairman of the Board, and Steven A. Calabrese, one of our directors, also own interests in Kykuit. John D. Oil and Gas Company, a publicly-held oil and gas exploration company of which Mr. Osborne is the Chairman of the Board and Chief Executive Officer and Mr. Calabrese is a director, is an owner and the managing member of Kykuit. Kykuit holds a 75% interest in certain oil, gas and mineral leasehold estates located in Montana, and has entered a Joint Venture Development Agreement with the 25% owner, Hemus, Ltd., to develop and operate those leasehold estates.

Notwithstanding our investment in Kykuit, our primary focus continues to be our Natural Gas Operations segment. Our acquisitions of Frontier Utilities and Penobscot Natural Gas, pending acquisition of Cut Bank Gas Company and sale of our Arizona propane operations are representative of our focus on expanding our gas utility operations by identifying additional local distribution companies for potential acquisition. Other than Kykuit, we have no plans for additional investments in our marketing and production operations.

In summary, in future periods we intend to maintain the increased earnings that we have built during the last three years and we will continue to sharpen our focus on opportunities and strategies that improve shareholder value.

QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS

Fiscal Quarter Ended December 31, 2007 Compared to Fiscal Quarter Ended December 31, 2006

The following discussion of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto and other financial information included elsewhere in this report and our Annual Report on Form 10-K for the fiscal year ended June 30, 2007. The following gives effect to the unaudited Condensed Consolidated Financial Statements as of December 31, 2007 and for the three month period ended December 31, 2007. Results of operations for interim periods are not necessarily indicative of results to be attained for any future period.

Net Income— Our net income for the second quarter of fiscal year 2008 was approximately $7.9 million compared to net income of approximately $1.3 million in the second quarter of fiscal year 2007, an improvement of $6.6 million, or 500%. This improvement was primarily due to the recognition of an extraordinary gain of $6.8 million in the second quarter of fiscal year 2008. This gain resulted from the recognition of a net deferred tax asset (after

18

valuation reserve) of $11.5 million from the purchase of Frontier Utilities in North Carolina and Penobscot Natural Gas in Maine. We expect to realize tax benefits in future years, and therefore recorded a deferred tax asset, and a corresponding gain, reduced by the total purchase consideration paid for the companies. (See Note 4 to our Condensed Consolidated Financial Statements for further discussion of the deferred tax asset and the acquisition.) Coupled with the extraordinary gain were decreases in interest expense of $98,000, increases in margin of $1.2 million and reductions in tax expense of $315,000. These improvements were partially offset by an increase in operating expenses of $1.7 million and elimination of the net income in propane or discontinued operations of approximately $157,000.

Revenues— Our revenues for the second quarter of fiscal year 2008 were approximately $20.8 million compared to approximately $18.0 million in the second quarter of fiscal year 2007, an increase of $2.8 million, or 16%. The increase was primarily attributable to: (1) an increase in our marketing and production operation’s production revenue of $1.1 million due primarily to higher sales volumes in our Wyoming market, (2) a natural gas revenue increase of $1.6 million, of which $2.6 million was due to the acquisition of gas operations in Maine and North Carolina, offset by a $1.0 million decrease in the existing natural gas operations from lower volumes and prices, and (3) decreased revenues in our pipeline operations of $6,000 due to a decrease in gathering volumes on the Glacier line.

Gross Margin— Gross margin increased $1.2 million, from approximately $4.6 million in the second quarter of fiscal year 2007 to approximately $5.7 million in the second quarter of fiscal year 2008. Our marketing and production operation’s margin decreased $87,000 due to a $44,000 increase in margin from gas production as a result of higher volumes produced, and a $68,000 increase due to increased sales in our Wyoming market. This was offset partially by a decrease of $26,000 in electricity sales, due to the expiration of our last remaining electricity sales contract.

Our pipeline operations’ margins decreased $6,000 due to lower volumes on the Glacier line. Our natural gas operations’ margins increased $1.1 million, of which $1.3 million was due to the acquisition of gas operations in Maine and North Carolina, offset by an $186,000 decrease in the existing natural gas operations from lower volumes and prices.

Expenses Other Than Cost of Goods Sold— Expenses other than cost of sales increased by $1.7 million in the second quarter of fiscal year 2008 as compared to the second quarter of fiscal year 2007. The primary reasons for this increase were (1) increases in the Company’s distribution, general and administrative costs of $1.4 million, of which approximately $850,000 was related to operations in Maine and North Carolina, and approximately $550,000 was attributable to expenses associated with the realignment of the Energy West management team and other outside legal and consultant fees, (2) increases in depreciation and amortization of $37,000, (3) increases in maintenance of $50,000, and (4) increases of $150,000 for taxes other than income.

Other Income— Other income increased by $25,000 from $77,000 in the second quarter of fiscal year 2007 to $102,000 in the second quarter of fiscal year 2008, all attributable to our natural gas operations.

Interest Expense— Interest expense decreased by approximately $98,000 during the second quarter of fiscal year 2008 from the second quarter of fiscal year 2007 due to a decrease in both short-term and long-term borrowings, a decrease in interest rates, and a decrease in amortization of debt issue costs due to the refinancing of our long-term debt.

Income Tax Expense— Income tax expense decreased $315,000 in the second quarter of fiscal year 2008 as compared to the second quarter of fiscal year 2007 due to a decrease in taxable income, coupled with adjustments to tax expense for prior year actual tax expense from amounts that had been estimated and accrued.

Discontinued Operations

Formerly reported as our propane operations, we sold our Arizona propane assets as of April 1, 2007. A small portion of our propane operations was income and expense associated with MRP, our unregulated Montana wholesale operation that supplies propane to our affiliated company reported in our natural gas operations. MRP is now being reported in our marketing and production operations.

Income from discontinued operations before income tax— There was no gain or loss from propane operations in fiscal year 2008 due to the timing of the sale of propane assets. In fiscal year 2007, there was income before income taxes of approximately $255,000 from propane operations.

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Income Tax Expense— Income tax expense decreased by $98,000 due to the timing of the sale of propane assets.

Extraordinary Gain— The extraordinary gain of $6.8 million reported in the second quarter of fiscal year 2008 related to the acquisitions of Frontier Utilities and Penobscot Natural Gas. We recognized a deferred tax asset, net of valuation allowance, from these acquisitions. The difference between the estimated deferred tax asset (net of valuation reserve) and the total purchase consideration resulted in the non-taxable extraordinary gain (See Note 4 to our Condensed Consolidated Financial Statements).

Six Months Ended December 31, 2007 Compared To Six Months Ended December 31, 2006

The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto and other financial information included elsewhere in this report and the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007. The following gives effect to the unaudited Condensed Consolidated Financial Statements as of December 31, 2007 and for the six month period ended December 31, 2007. Results of operations for interim periods are not necessarily indicative of results to be attained for any future period.

Net Income— The Company’s net income for the six months ended December 31, 2007 was approximately $7.9 million compared to net income of approximately $1.1 million for the six months ended December 31, 2006, an increase of $6.8 million, or 618%. This improvement was primarily due to the recognition of an extraordinary gain of $6.8 million in the second quarter of fiscal year 2008. This gain resulted from the recognition of a deferred tax asset of $11.5 million from the purchase of assets in Maine and North Carolina. We expect to realize tax benefits in future years, and therefore recorded a deferred tax asset, (net of valuation reserve) and a corresponding gain, reduced by the total consideration paid for the assets. (See Note 4 for further discussion of the deferred tax asset.) Coupled with the extraordinary gain were decreases in interest expense of $274,000, increases in margin of $1.1 million and reductions in tax expense of $391,000. These improvements were partially offset by an increase in operating expenses of $1.8 million.

Revenues— The Company’s revenues for the six months ended December 31, 2007 were approximately $28.3 million compared to approximately $26.5 in the six months ended December 31, 2006, an increase of $1.8 million, or 7%. The increase was primarily attributable to: (1) an increase in our marketing and production operation’s production revenue of $1.1 million due primarily to higher sales volumes in our Wyoming market, offset by decreases in production and electricity revenue of $83,000 and $90,000 respectively, (2) a natural gas revenue increase of $925,000, of which $2.6 million was due to the acquisition of gas operations in Maine and North Carolina, offset by a $1.7 million decrease in the existing natural gas operations from lower volumes and prices, and (3) decreased revenues in our pipeline operations of $12,000 due to a decrease in gathering volumes on the Glacier line.

Gross Margin— Gross margin increased $1.1 million, from approximately $7.3 million in the first six months of fiscal year 2007 to approximately $8.4 million in the first six months of fiscal year 2008. Our marketing and production operations’ margin increased $17,000 due to an $184,000 increase in retail gas sales from increased volumes in our Wyoming market. This increase was offset by a decrease of $33,000 in electricity sales due to the expiration of our last remaining electricity sales contract, and a $129,000 decrease in margin from gas production as a result of higher production costs.

Our pipeline operation’s margins decreased $12,000 due to lower volumes on the Glacier line. Our natural gas operation’s margins increased $1.1 million, of which $1.3 million was due to the acquisition of gas operations in Maine and North Carolina, offset by a $196,000 decrease in the existing natural gas operations from lower volumes and prices.

Expenses Other Than Cost of Goods Sold— Expenses other than cost of sales increased by $1.8 million in the first six months of fiscal year 2008 as compared to the first six months of fiscal year 2007. The primary reasons for this increase were (1) increases in the Company’s distribution, general and administrative costs of $1.5 million, of which approximately $850,000 was related to operations in Maine and North Carolina, and approximately $650,000 was attributable to expenses associated with the realignment of the Energy West management team and other outside legal and consultant fees; (2) increases of $49,000 in depreciation and amortization, (3) increases of $81,000 in maintenance, and (4) increases of $188,000 in taxes other than income taxes.

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Other Income— Other income increased by $52,000 from $138,000 in the first six months of fiscal year 2007 to $190,000 in the first six months of fiscal year 2008, all attributable to our natural gas operations.

Interest Expense— Interest expense decreased by approximately $274,000 during the first six months of fiscal year 2008 from the first six months of fiscal year 2007 due to a decrease in both short-term and long-term borrowings, a decrease in interest rates, and a decrease in amortization of debt issue costs due to the refinancing of our long-term debt.

Income Tax Expense— Income tax expense decreased $391,000 in the first six months of fiscal year 2008 as compared to the first six months of fiscal year 2007 due to a decrease in taxable income, coupled with adjustments to tax expense for prior year actual tax expense from amounts that had been estimated and accrued.

Discontinued Operations

Formerly reported as propane operations, we sold our Arizona propane assets as of April 1, 2007. A small portion of our propane operations was income and expense associated with MRP, our unregulated Montana wholesale operation that supplies propane to our affiliated company reported in our natural gas operations. MRP is now being reported in our marketing and production operations.

Income from discontinued operations before income tax— There was no gain or loss from propane operations in fiscal year 2008 due to the timing of the sale of propane assets. In fiscal year 2007, there was a loss before income taxes of approximately $67,000 from propane operations.

Income Tax Benefit— Income tax benefit decreased by $25,000 due to the timing of the sale of propane assets.

Extraordinary Gain—The extraordinary gain of $6.8 million reported in the first six months of fiscal year 2008 is related to the acquisitions of Frontier Utilities and Penobscot Natural Gas. We recognized a deferred tax asset, net of valuation allowance, from these acquisitions. The difference between the deferred tax asset, net of a valuation reserve, and our total purchase consideration resulted in the non-taxable extraordinary gain (See Note 4 to our Condensed Consolidated Financial Statements).

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Operating Results of our Natural Gas Operations

For comparative purposes, the following table separates results of operations for our recent acquisitions in Maine and North Carolina from the other natural gas operations. Energy West’s ownership of Frontier Utilities of North Carolina began October 1, 2007. Our ownership of Penobscot Utilities in Bangor, Maine began December 1, 2007. The results of these two operations are combined in the New Acquisitions column below. The Total Less New Acquisitions is comparable to 2006 results.

	Three Months Ended December 31,
	2007									2006
							Total Less
				New			New
	Total			Acquisitions			Acquisitions			Total
Natural Gas Operations
Operating revenues	$	16,097,073		$	2,612,145		$	13,484,928		$	14,465,754
Gas purchased		11,140,775			1,322,811			9,817,964			10,612,702
Gross margin		4,956,298			1,289,334			3,666,964			3,853,052
Operating expenses		3,911,470			957,730			2,953,740			2,244,014
Operating income		1,044,828			331,604			713,224			1,609,038
Other income		102,240			(1,350	)		103,590			77,402
Income before interest and taxes		1,147,068			330,254			816,814			1,686,440
Interest (expense)		(274,170	)		(946	)		(273,224	)		(379,041	)
Income before income taxes		872,898			329,308			543,590			1,307,399
Income tax (expense)		(254,697	)		(126,894	)		(127,803	)		(478,680	)
Net income	$	618,201		$	202,414		$	415,787		$	828,719

Fiscal Quarter Ended December 31, 2007 Compared to Fiscal Quarter Ended December 31, 2006

Natural Gas Revenues and Gross Margins— The Natural Gas Operation’s revenues without new acquisitions in the second quarter of fiscal year 2008 decreased to approximately $13.5 million from approximately $14.5 million in the second quarter of fiscal year 2007. This $1.0 million decrease was primarily due to lower volumes in the second quarter of fiscal year 2008 compared to the second quarter of fiscal year 2007, coupled with overall lower rates.

Gas purchases in Natural Gas Operations (without new acquisitions) decreased by $795,000 from approximately $10.6 million in the second quarter of fiscal year 2007 to approximately $9.8 million in the second quarter of fiscal year 2008. The decrease in gas cost reflects lower commodity prices during the current fiscal year, coupled with slightly lower volumes.

Gross margin (without new acquisitions) was approximately $3.7 million for the second quarter of fiscal year 2008 compared to approximately $3.9 million in the second quarter of fiscal year 2007. The decrease of $186,000 is primarily due to slightly lower volumes in the current fiscal year.

Natural Gas Operating Expenses— Natural Gas Segment’s operating expenses (without new acquisitions) were approximately $3.0 million for the second quarter of fiscal year 2008 as compared to approximately $2.2 million for second quarter of fiscal year 2007. The $710,000 increase is due to a $626,000 increase in payroll and other distribution, general and administrative expenses, including expenses associated with the realignment of our management team, and increases in outside legal and consulting fees. Depreciation and taxes other than income taxes increased $28,000 and $55,000, respectively.

Natural Gas Other Income— Other income increased by $27,000 from $77,000 in the second quarter of fiscal year 2007 to $104,000 in the second quarter of fiscal year 2008. This was due primarily to increased service sales in Great Falls, Montana and Cody, Wyoming.

Natural Gas Interest Expense— Interest expense was $106,000 lower in the second quarter of fiscal year 2008 due to a decrease in both short-term and long-term borrowings, a decrease in interest rates, and a decrease in amortization of debt issue costs due to the refinancing of our long-term debt.

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Natural Gas Income Tax Expense— Income tax expenses (without new acquisitions) are $351,000 lower in the second quarter of fiscal year 2008 due to lower taxable income, coupled with an adjustment to tax expense for prior year actual tax expense from amounts that had been estimated and accrued.

Six Months Ended December 31, 2007 Compared to Six Months Ended December 31, 2006

For comparative purposes, the following table separates results of operations for our new acquisitions in Maine and North Carolina from the other natural gas operations. Energy West’s ownership of Frontier Utilities of North Carolina began October 1, 2007. Our ownership of Penobscot Natural Gas in Bangor, Maine began December 1, 2007. The results of these two operations are combined in the New Acquisitions column below. The Total Less New Acquisitions is comparable to 2006 results.

	Six Months Ended December 31,
	2007									2006
							Total Less
				New			New
	Total			Acquisitions			Acquisitions			Total
Natural Gas Operations
Operating revenues	$	21,118,295		$	2,612,145		$	18,506,150		$	20,193,756
Gas purchased		13,972,427			1,322,811			12,649,616			14,141,400
Gross margin		7,145,868			1,289,334			5,856,534			6,052,356
Operating expenses		6,247,100			957,730			5,289,370			4,503,319
Operating income		898,768			331,604			567,164			1,549,037
Other income		189,990			(1,350	)		191,340			138,368
Income before interest and taxes		1,088,758			330,254			758,504			1,687,405
Interest (expense)		(461,980	)		(946	)		(461,034	)		(710,652	)
Income before income taxes		626,778			329,308			297,470			976,753
Income tax benefit (expense)		(119,284	)		(126,894	)		7,610			(352,809	)
Net income	$	507,494		$	202,414		$	305,080		$	623,944

Natural Gas Revenues and Gross Margins— The Natural Gas Operation’s operating revenues without new acquisitions in the first six months of fiscal year 2008 decreased to approximately $18.5 million from approximately $20.2 million in the first six months of fiscal year 2007. This $1.7 million decrease was primarily due to lower volumes in the first six months of fiscal year 2008 compared to the first six months of fiscal year 2007, coupled with overall lower rates.

Gas purchases in Natural Gas Operations (without new acquisitions) decreased by $1.4 million from approximately $14.1 million in the first six months of fiscal year 2007 to approximately $12.7 million in the first six months of fiscal year 2008. The decrease in gas cost reflects lower commodity prices during the current fiscal year, coupled with slightly lower volumes.

Gross margin (without new acquisitions) was approximately $5.9 million for the first six months of fiscal year 2008 compared to approximately $6.1 million in the first six months of fiscal year 2007. The decrease of $196,000 is primarily due to slightly lower volumes in the current fiscal year.

Natural Gas Operating Expenses— Natural Gas Segment’s operating expenses (without new acquisitions) were approximately $5.3 million for the first six months of fiscal year 2008 as compared to approximately $4.5 million for the first six months of fiscal year 2007. The $786,000 decrease is due to a $636,000 increase in payroll and other distribution, general and administrative expenses, including expenses associated with the realignment of our management team, and increases in outside legal and consulting fees. Depreciation, maintenance, and taxes other than income taxes increased $28,000, $29,000 and $93,000, respectively.

Natural Gas Other Income— Other income increased by $52,000 from $138,000 in the first six months of fiscal year 2007 to $190,000 in the first six months of fiscal year 2008. This was due primarily to increased service sales in Great Falls, Montana and Cody, Wyoming.

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Natural Gas Interest Expense— Interest expense was $360,000 lower in the first six months of fiscal year 2008 due to a decrease in both short-term and long-term borrowings, a decrease in interest rates, and a decrease in amortization of debt issue costs due to the refinancing of our long-term debt.

Natural Gas Income Tax Expense— Income tax expenses are $233,000 lower in the first six months of fiscal year 2008 due to lower taxable income, coupled with an adjustment to tax expense for prior year actual tax expense from amounts that had been estimated and accrued.

Operating Results of our Marketing and Production Operations

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2007			2006			2007			2006
Energy West Resources
Operating revenues	$	4,629,434		$	3,475,766		$	7,008,122		$	6,104,721
Gas purchased		3,936,280			2,867,333			5,922,616			5,036,927
Gross margin		693,154			608,433			1,085,506			1,067,794
Operating expenses		164,753			126,629			320,693			259,265
Operating income		528,401			481,804			764,813			808,529
Other income (expense)		67			(20	)		67			(20	)
Income before interest and taxes		528,468			481,784			764,880			808,509
Interest (expense)		(50,626	)		(39,903	)		(59,054	)		(76,382	)
Income before income taxes		477,842			441,881			705,826			732,127
Income tax (expense)		(76,809	)		(170,581	)		(135,452	)		(282,968	)
Net income	$	401,033		$	271,300		$	570,374		$	449,159

Fiscal Quarter Ended December 31, 2007 Compared to Fiscal Quarter Ended December 31, 2006

Marketing and Production Revenues and Gross Margins— Revenues in Marketing and Production Operations increased $1.1 million from approximately $3.5 million in the second quarter of fiscal year 2007 to approximately $4.6 million in the second quarter of fiscal year 2008. Retail gas revenues increased by $1.2 million due primarily to higher sales volumes in our Wyoming market. Revenue from electricity sales decreased by $51,000 due to the expiration of our last remaining electricity customer contract.

The gross margin in our marketing and production operation’s second quarter of fiscal year 2008 of $693,000 represents an increase of $85,000, or 14%, from gross margin earned in the second quarter of fiscal year 2007. Gross margin from gas production increased by $44,000 due to an increase in volumes produced in the second quarter of fiscal year 2008 as compared to the second quarter of fiscal year 2007. Gross margin from retail gas sales increased by $68,000 due to higher sales volumes in our Wyoming market. Offsetting these increases is a decrease in margin from electricity sales of $26,000 due to the expiration of our last remaining electricity customer contract.

Marketing and Production Operating Expenses— Operating expenses in Marketing and Production Operations increased approximately $38,000 from $127,000 for the second quarter of fiscal year 2007 to $165,000 for the second quarter of fiscal year 2008. This change is caused primarily by increases in depreciation and increases in administrative expenses associated with the realignment of the Energy West management team.

Marketing and Production Interest Expense— Interest expense increased by $11,000 due to change in the method of allocation of short term interest. Marketing and Production Operation’s borrowings to purchase stored gas resulted in these short-term interest charges. This increase in borrowings was offset by a decrease in company wide short-term and long-term borrowings, a decrease in interest rates, and a decrease in amortization of debt issue costs due to the refinancing of our long-term debt.

Marketing and Production Income Tax Expense— Income tax expense in the second quarter of fiscal year 2008 is $77,000, a $94,000 decrease from $171,000 in the second quarter of fiscal year 2007 due to adjustment to tax expense for prior year actual tax expense from amounts that had been estimated and accrued.

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Six Months Ended December 31, 2007 Compared to Six Months Ended December 31, 2006

Marketing and Production Revenues and Gross Margins— Revenues increased $900,000 from approximately $6.1 million in the six months ended December 31, 2006 to approximately $7.0 million in the six months ended December 31, 2007. Retail gas revenues increased by $1,060,000 due primarily to higher sales volumes in our Wyoming market. This is offset by a decrease in production revenue of $83,000 and a decrease in electricity revenue of $90,000 due to the expiration of our last remaining electricity customer contract.

Gross margin increased $17,000 from approximately $1.07 million in the first six months of fiscal 2007 to approximately $1.09 million in the first six months of fiscal 2008. Gross margin from gas production decreased by $129,000 due to higher production costs and margin from electricity sales decreased by $33,000 due to the expiration of our last remaining electricity sales contract. These decreases are offset by an increase in gross margin from retail gas sales of $184,000 due primarily to higher sales volumes in our Wyoming market.

Marketing and Production Operating Expenses— Operating expenses increased $61,000, from approximately $260,000 for first six months of fiscal 2007 to approximately $321,000 for the first six months of fiscal 2008. This change is caused primarily by increases in depreciation and administrative expenses associated with the realignment of the Energy West management team.

Marketing and Production Interest Expense— Interest expense decreased by $17,000 due to a decrease in short-term borrowings, a decrease in interest rates, and a decrease in amortization of debt issue costs due to the refinancing of our long-term debt.

Marketing and Production Income Tax Expense— Income tax expense in the first six months of fiscal year 2008 is $135,000, a $148,000 decrease from $283,000 in the first six months of fiscal year 2007 due primarily to adjustment to tax expense for prior year actual tax expense from amounts that had been estimated and accrued.

Operating Results of our Pipeline Operations

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2007			2006			2007			2006
Pipeline Operations
Operating revenues	$	93,390		$	99,753		$	186,855		$	199,191
Gas purchased		—			—			—			—
Gross margin		93,390			99,753			186,855			199,191
Operating expenses		46,601			69,052			113,014			108,743
Operating income		46,789			30,701			73,841			90,448
Other income		—			—			36			—
Income before interest and taxes		46,789			30,701			73,877			90,448
Interest (expense)		(4,672	)		(8,650	)		(8,677	)		(16,871	)
Income before income taxes		42,117			22,051			65,200			73,577
Income tax (expense)		(12,220	)		(9,697	)		(19,092	)		(29,510	)
Net income	$	29,897		$	12,354		$	46,108		$	44,067

There have been no material changes in pipeline operations in both the three and six months ending December 31, 2007 compared to the three and six months December 31, 2006, as illustrated in the table above

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Discontinued Operations

	Three Months Ended					Six Months Ended
	December 31,					December 31,
	2007		2006			2007		2006
Discontinued Operations:
Income (loss) from discontinued operations before income tax	$	—	$	255,514		$	—	$	(67,196	)
Income tax benefit (expense)		—		(98,142	)		—		25,263
Income (loss) from discontinued operations	$	—	$	157,372		$	—	$	(41,933	)

Fiscal Quarter Ended December 31, 2007 Compared to Fiscal Quarter Ended December 31, 2006

Formerly reported as Propane Operations, we have sold our Arizona propane assets as of April 1, 2007. A small portion of our propane operation as previously reported was income and expense associated with MRP. MRP is now being reported in our Marketing and Production Operations segment.

Income (loss) from discontinued operations before income tax— There was no gain or loss from propane operations in fiscal year 2008 due to the timing of the sale of propane assets. In fiscal year 2007, there was income before income taxes of $157,000 from propane operations during the second quarter.

Income Tax Benefit (Expense)— Income tax expense decreased by $98,000 due to the timing of the sale of propane assets.

Six Months Ended December 31, 2007 Compared to Six Months Ended December 31, 2006

Income (loss) from discontinued operations before income tax— There was no gain or loss from propane operations in fiscal year 2008 due to the timing of the sale of propane assets. In fiscal year 2007, there was a loss before income taxes of $67,000 during the six months ended December 31, 2006 from propane operations.

Income Tax Benefit (Expense)— Income tax benefit decreased by $25,000 due to the timing of the sale of assets.

Corporate and Other

Extraordinary Gain— The extraordinary gain of $6.8 million reported in the first six months of fiscal year 2008 related to the acquisitions of Frontier Utilities and Penobscot Natural Gas. We recognized a deferred tax asset from these acquisitions. The difference between the estimated deferred tax asset (after valuation reserve) and our total purchase consideration resulted in the non-taxable extraordinary gain (See Note 4 to our Condensed Consolidated Financial Statements).

Consolidated Cash Flow Analysis

Sources and Uses of Cash

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

Our ability to maintain liquidity depends upon our $20.0 million credit facility with LaSalle Bank, shown as line of credit on the accompanying balance sheets. Our use of the LaSalle revolving line of credit increased to $6.5 million at December 31, 2007, compared with $5.0 million at December 31, 2006. This $1.5 million is reflective of increased receivables and inventories while holding net income before extraordinary items at approximately $1.1 million for the first six months of both fiscal year 2007 and 2008. We finance our capital expenditures on an interim basis through the LaSalle revolving line of credit. We periodically repay our short-term borrowings under the LaSalle revolving line of credit by using the net proceeds from the sale of long-term debt and equity securities. On April 1, 2007 we sold certain of our assets related to our Arizona propane business for cash of approximately $15.0 million plus net working capital. We used the proceeds from this transaction to reduce our outstanding debt and strengthen our balance sheet. We believe that has and will continue to enable our company to take advantage of

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opportunities to enhance or expand our existing operation and to acquire additional businesses or assets on favorable terms as and when those opportunities arise.

Long-term debt decreased to $13.0 million at December 31, 2007, compared with $17.3 million at December 31, 2006. This $4.5 million decrease resulted from scheduled principal payments on our notes, and the refinancing of our debt in June 2007. We used a portion on the proceeds from the sale of propane assets to further reduce our long-term debt.

Cash decreased by $5.1 million from June 30, 2007 to December 31, 2007, compared with the $600,000 decrease in cash for the first six months ended December 31, 2006, as shown in the following table:

	December 31,
	2007			2006
Cash used in operating activities	$	(4,104,829	)	$	(4,031,090	)
Cash used in investing activities		(6,526,070	)		(898,292	)
Cash provided by financing activities		5,526,140			4,329,650
Decrease in cash	$	(5,104,759	)	$	(599,732	)

Cash used in operating activities was approximately $100,000 higher in the six months ended December 31, 2007, than the six months ended December 31, 2006. This was due to an extraordinary gain of $6.8 million offset by an increase in deferred taxes of $6.7 million, and overall increases in other assets net of liabilities.

Cash used in investing activities was approximately $5.6 million higher in the six months ended December 31, 2007, than the six months ended December 31, 2006. This was due to $4.6 million in cash paid for the stock of Frontier Utilities and Penobscot Natural Gas, a 19.8% investment interest of $576,000 in Kykuit, $68,000 in other investments, a decrease in customer advances received for construction and contributions in aid of construction of $90,000, and an increase of $291,000 for construction expenditures.

Cash provided by financing activities was approximately $1.2 million more in the six months ended December 31, 2007 than in the six months ended December 31, 2006 due to increased dividends paid of $421,000, increased net borrowings on the line of credit of 1.5 million, increased sale of common stock and adjustments for intrinsic value of options exercised of $222,000, decreased payment of long-term debt of $283,000, an increase of repurchase of common stock of $151,000, and a decrease in other short-term borrowing of $212,000.

LIQUIDITY AND CAPITAL RESOURCES

We fund our operating cash needs, as well as dividend payments and capital expenditures, primarily through cash flow from operating activities and short-term borrowing. Historically, to the extent cash flow has not been sufficient to fund these expenditures, we have used our working capital line of credit. We have greater need for short-term borrowing during periods when internally generated funds are not sufficient to cover all capital and operating requirements, including costs of gas purchased and capital expenditures. In general, our short-term borrowing needs for purchases of gas inventory and capital expenditures are greatest during the summer and fall months and our short-term borrowing needs for financing customer accounts receivable are greatest during the winter months.

On June 29, 2007, we replaced our existing credit facility and long-term notes with a new $20.0 million revolving credit facility, and issued $13.0 million of 6.16% senior unsecured notes. The prior LaSalle credit facility had been secured, on an equal and ratable basis with our previously outstanding long-term debt, by substantially all of our assets.

Long-term Debt—$13.0 million 6.16% Senior Unsecured Notes— On June 29, 2007, we issued $13.0 million aggregate principal amount of our 6.16% Senior Unsecured Notes, due June 29, 2017. The proceeds of these notes were used to refinance our existing notes. With this refinancing, we expensed the remaining debt issue costs of $991,000 in fiscal 2007, and incurred approximately $400,000 in new debt issue costs to be amortized over the life of the new note.

LaSalle Line of Credit— On June 29, 2007, we established our new five-year unsecured credit facility with LaSalle, replacing a previous $20.0 million one-year facility with LaSalle which was scheduled to expire in November 2007. The new credit facility includes an annual commitment fee equal to 0.20% of the unused portion

27

of the facility and interest on amounts outstanding at the London Interbank Offered Rate, plus 120 to 145 basis points, for interest periods selected by us.

The following table represents borrowings under the LaSalle revolving line of credit for each of the periods presented.

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
Year Ended June 30, 2008
Minimum borrowing	$	—	$	3,775,000
Maximum borrowing	$	—	$	7,525,000
Average borrowing	$	—	$	4,558,000
Year Ended June 30, 2007
Minimum borrowing	$	—	$	2,900,000	$	—	$	—
Maximum borrowing	$	2,900,000	$	6,200,000	$	3,502,000	$	6,700,000
Average borrowing	$	282,000	$	4,384,000	$	392,000	$	485,000

     Our 6.16% Senior Unsecured Note and LaSalle credit facility agreements contain various covenants, which include, among others, limitations on total dividends and distributions made in the immediately preceding 60-month period to 75% of aggregate consolidated net income for such period, restrictions on certain indebtedness, limitations on asset sales, and maintenance of certain debt-to-capital and interest coverage ratios. At December 31, 2007 and 2006, we believe we were in compliance with the financial covenants under our debt agreements.

     At December 31, 2007, we had approximately $1.9 million of cash on hand, and approximately $6.5 million in borrowings under the $20.0 million LaSalle revolving line of credit. In addition, at December 31, 2007, we had one outstanding letter of credit related to supply contracts for $500,000. This letter of credit reduces our available borrowings on our line of credit. As discussed above, our short-term borrowing needs for purchases of gas inventory and capital expenditures are greatest during the summer and fall months. Our availability normally increases in January as monthly heating bills are paid and storage related gas purchases are no longer necessary.

     The total amount outstanding under all of our long term debt obligations was $13.0 million and $17.3 million at December 31, 2007 and December 31, 2006, respectively. The portion of such obligations due within one year was $0 at December 31, 2007, and approximately $1.1 million at December 31, 2006.

Capital Expenditures

     We conduct ongoing construction activities in all of our utility service areas in order to support expansion, maintenance, and enhancement of our gas pipeline systems. In fiscal 2007, 2006 and 2005, our total capital expenditures were approximately $2.4 million, $1.9 million and $2.2 million, respectively. Expenditures for fiscal 2007, 2006 and 2005 were limited to essential needs only. We estimate future cash requirements for capital expenditures will be as follows:

					Estimated
					Future Cash
	Actual		Actual		Requirements
	FY 2007		through 12/31/07		through 6/30/08
			(In thousands)
Natural Gas Operations	$	2,024	$	1,151	$	2,716
Energy West Resources		361		197		—
Pipeline Operations		21		37		—
Acquistions		—		4,602		733
Total capital expenditures	$	2,406	$	1,385	$	2,716

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We fund our operating cash needs, as well as dividend payments and capital expenditures, primarily through cash flow from operating activities and short-term borrowing. Historically, to the extent cash flow has not been sufficient to fund these expenditures, we have used our working capital line of credit.

Contractual Obligations

Our major financial market risk exposure is to changing interest rates. Changing interest rates will affect interest paid on variable-rate debt. Our policy is to manage interest rates through the use of a combination of fixed-rate and floating-rate debt.

The table below presents contractual balances of our consolidated long-term and short-term debt at the expected maturity dates as well as the fair value of those instruments on December 31, 2007.

Payments Due by Period

			1 year						After
Contractual Obligations	Total		or less		2-3 years		4-5 years		5 years
Interest payments (a)	$	8,008,000	$	800,800	$	1,601,600	$	1,601,600	$	4,004,000
Long Term Debt (b)		13,000,000		—		—		—		13,000,000
Operating Lease Obligations		52,864		52,864		—		—		—
Transportation and Storage Obligation (c)		9,309,222		4,340,510		4,968,712		—		—
Total Obligations	$	30,370,086	$	5,194,174	$	6,570,312	$	1,601,600	$	17,004,000

(a) Our long-term debt, notes payable and customers’ deposits all require interest payments. Interest payments are projected based on debt service schedules provided at debt issuance.

(b) See Note 3 of the Notes to Consolidated Financial Statements for a description of this debt.

(c) Transportation and Storage Obligations represent annual commitments with suppliers for periods extending up to four years. These costs are recoverable in customer rates.

CONTRACTS ACCOUNTED FOR AT FAIR VALUE

Management of Risks Related to Derivatives- Our company and its subsidiaries are subject to certain risks related to changes in certain commodity prices and risks of counterparty performance. Our company has established policies and procedures to manage such risks. Our risk management committee, comprised of company officers and management, oversees our risk management program as defined in its risk management policy. The purpose of the risk management program is to minimize adverse impacts on earnings resulting from volatility of energy prices, counterparty credit risks, and other risks related to the energy commodity business.

In order to mitigate the risk of natural gas market price volatility related to firm commitments to purchase or sell natural gas, from time to time our company and its subsidiaries have entered into hedging arrangements. Such arrangements may be used to protect profit margins on future obligations to deliver gas at a fixed price, or to protect against adverse effects of potential market price declines on future obligations to purchase gas at fixed prices.

We account for certain of such purchases or sale agreements in accordance with SFAS No. 133. Under SFAS 133, such contracts are reflected in our financial statements as derivative assets or derivative liabilities and valued at “fair value,” determined as of the date of the balance sheet. Fair value accounting treatment is also referred to as “mark-to-market” accounting. Mark-to-market accounting results in disparities between reported earnings and realized cash flow, because changes in the derivative values are reported in our Consolidated Statement of Operations as an increase or (decrease) in “Revenues — Gas and Electric — Wholesale” without regard to whether any cash payments have been made between the parties to the contract. If such contracts are held to maturity, the cash flow from the contracts and their hedges are realized over the life of the contracts. SFAS No. 133 requires that contracts for purchase or sale at fixed prices and volumes must be valued at fair value (under mark-to-market accounting) unless the contracts qualify for treatment as a “normal purchase or sale.”

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Quoted market prices for natural gas derivative contracts of our company and its subsidiaries are generally not available. Therefore, to determine the net present value of natural gas derivative contracts, we use internally developed valuation models that incorporate independently available current and forecasted pricing information.

As of December 31, 2007, these agreements were reflected on our consolidated balance sheet as derivative assets and liabilities at an approximate fair value as follows:

	Assets		Liabilities
Contracts maturing during fiscal year 2009	$	64,186	$	64,357

Regulated Operations- In the case of our regulated divisions, gains or losses resulting from derivative contracts are subject to deferral under regulatory procedures approved by the public service regulatory commissions of the States of Montana, Wyoming, Maine and North Carolina. Therefore, related derivative assets and liabilities are offset with corresponding regulatory liability and asset amounts included in “Recoverable Cost of Gas Purchases,” pursuant to SFAS No. 71,Accounting for the Effects of Certain Types of Regulation.

OFF-BALANCE SHEET ARRANGEMENTS

Energy West does not have any off-balance-sheet arrangements, other than those currently disclosed that have or are reasonably likely to have a current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our company is subject to certain market risks, including commodity price risk (i.e., natural gas prices) and interest rate risk. The adverse effects of potential changes in these market risks are discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity nor do they consider additional actions management may take to mitigate our exposure to such changes. Actual results may differ. See the notes to the financial statements for a description of our accounting policies and other information related to these financial instruments.

Commodity Price Risk

We seek to protect ourselves against natural gas price fluctuations by limiting the aggregate level of net open positions that are exposed to market price changes. We manage open positions with policies designed to limit the exposure to market risk, with regular reporting to management of potential financial exposure. Our Risk Management Committee has limited the types of contracts we will consider to those related to physical natural gas deliveries. Therefore, management believes that our results of operations are not significantly exposed to changes in natural gas prices.

Interest Rate Risk

Our results of operations are affected by fluctuations in interest rates (e.g. interest expense on debt). We mitigate this risk by entering into long-term debt agreements with fixed interest rates. Some of our notes payable, however, may be subject to variable interest rates that we may mitigate by entering into interest rate swaps. A hypothetical 100 basis point change in market rates applied to the balance of the notes payable would change our interest expense by approximately $26,000 annually.

Credit Risk

Credit risk relates to the risk of loss that our company would incur as a result of non-performance by counterparties of their contractual obligations under various instruments with our company. Credit risk may be concentrated to the extent that one or more groups of counterparties have similar economic, industry or other characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in market or other conditions. In addition, credit risk includes not only the risk that a counterparty may default due to circumstances relating directly to it, but also the risk that a counterparty may default due to circumstances which relate to other market participants that have a direct or indirect relationship with such counterparty. We seek to mitigate credit risk by

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evaluating the financial strength of potential counterparties. However, despite mitigation efforts, defaults by counterparties may occur from time to time. To date, no such default has occurred.

ITEM 4 —CONTROLS AND PROCEDURES

Disclosure controls and procedures are designed with an objective of ensuring that information required to be disclosed in our periodic reports filed with the Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Disclosure controls are also designed with an objective of ensuring that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, in order to allow timely consideration regarding required disclosures.

The evaluation of our disclosure controls by our principal executive officer and principal financial officer included a review of the controls’ objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Quarterly Report. Our management, including our principal executive officer and principal financial officer, does not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of any evaluation of the disclosure controls and procedures to future periods are subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on their review and evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective at the reasonable assurance level. They are not aware of any significant changes in our disclosure controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. During the most recent fiscal period, there have not been any changes in our internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 4. — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     We held our 2007 Annual Meeting of Shareholders on November 15, 2007. The following nominees were elected to the Company’s Board of Directors to serve for a one year term unless they resign.

Name	For		Withheld
W. E. Argo		2,446,783		56,720
Steven A. Calabrese		2,442,143		62,049
David A. Cerotzke		2,448,012		56,180
Mark D. Grossi		2,443,138		61,054
Richard M. Osborne		2,433,044		71,148
James R. Smail		2,441,938		61,854
Thomas J. Smith		2,442,538		61,654
James E. Sprague		2,438,059		65,733

Additionally, the Company’s shareholders voted upon a proposal to ratify the appointment of Hein & Associates LLP as our independent auditors for the fiscal year ending June 30, 2008. The results are below.

For	Withheld	Abstain
2,479,695	22,312	1,999

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The Company’s shareholders also voted upon a proposal to amend the Company’s Articles of Incorporation to increase the authorized capitalization of the Company, thereby increasing the number of authorized shares of common stock from 5,000,000 to 15,000,000. The results of the voting are below.

For	Withheld	Abstain
2,085,305	409,473	9,228

ITEM 6 — EXHIBITS

Exhibit Number	Description
3.1(a)	Restated Articles of Incorporation. Exhibit 3.1 to Amendment No. 1 to the Registrant’s Annual Report on Form 10-K/A for the year ended June 30, 1996, as filed on July 8, 1997, is incorporated herein by reference.
3.1(b)	Articles of Amendment to the Articles of Incorporation dated June 3, 2004. Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, as filed on June 4, 2007, is incorporated herein by reference.
3.1(c)	Articles of Amendment to the Articles of Incorporation dated October 31, 2005. Exhibit 3.1(c) to the Registrant’s Annual Report, as filed on September 27, 2007, is incorporated herein by reference.
3.1(d)	Articles of Amendment to the Articles of Incorporation dated May 29, 2007. Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, as filed on June 4, 2007, is incorporated herein by reference.
3.1(e)*	Articles of Amendment to the Articles of Incorporation dated December 5, 2007.
10.1*	Amendment No. 3 to Stock Purchase Agreement, dated November 28, 2007, by and between Energy West, Incorporated and Sempra Energy, a California corporation.
10.2*	First Amendment to Amended and Restated Operating Agreement of Kykuit Resources, LLC, dated December 17, 2007.
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Furnished or filed herewith.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ENERGY WEST, INCORPORATED
February 14, 2008	/s/Thomas J. Smith
	Thomas J. Smith
	Chief Financial Officer (principal financial officer and principal accounting officer)
February 14, 2008	/s/James W. Garrett
	James W. Garrett
	Chief Operating Officer and President

INDEX TO EXHIBIT

Exhibit Number	Description
3.1(a)	Restated Articles of Incorporation. Exhibit 3.1 to Amendment No. 1 to the Registrant’s Annual Report on Form 10-K/A for the year ended June 30, 1996, as filed on July 8, 1997, is incorporated herein by reference.
3.1(b)	Articles of Amendment to the Articles of Incorporation dated June 3, 2004. Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, as filed on June 4, 2007, is incorporated herein by reference.
3.1(c)	Articles of Amendment to the Articles of Incorporation dated October 31, 2005. Exhibit 3.1(c) to the Registrant’s Annual Report, as filed on September 27, 2007, is incorporated herein by reference.
3.1(d)	Articles of Amendment to the Articles of Incorporation dated May 29, 2007. Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, as filed on June 4, 2007, is incorporated herein by reference.
3.1(e)*	Articles of Amendment to the Articles of Incorporation dated December 5, 2007.
10.1*	Amendment No. 3 to Stock Purchase Agreement, dated November 28, 2007, by and between Energy West, Incorporated and Sempra Energy, a California corporation.
10.2*	First Amendment to Amended and Restated Operating Agreement of Kykuit Resources, LLC, dated December 17, 2007.
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Furnished or filed herewith.