This discussion should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this Form 10-K. Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future performance. However, future performance involves risks and uncertainties which may cause actual results to differ materially from those expressed in the forward-looking statements. See "Forward-Looking Statements."

Executive Overview

Our primary source of revenue and operating margin has been the distribution of natural gas to end-use residential, commercial, and industrial customers. We have natural gas distribution operations in Montana, Wyoming, and we recently acquired distribution operations in North Carolina and Maine. We also market and distribute natural gas in Montana and Wyoming and conduct interstate pipeline operations in Montana and Wyoming. Formerly we conducted propane operations in Arizona, but those operations were sold in 2007.

We have five reporting segments: natural gas operations, marketing and production operations, pipeline operations, discontinued operations and corporate and other. Information regarding our Arizona propane operations is reported under discontinued operations. Our corporate and other reporting segment was recently established to report various income and expense items, including a deferred tax asset we received in connection with the acquisitions of our North Carolina and Maine distribution operations.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions, and at times difficult, subjective or complex judgments. Changes in these estimates, assumptions and judgments, in and of themselves, could materially impact our financial statements. The following are the accounting estimates that we believe are the most critical in nature. See Note 1 of the Notes to Consolidated Financial Statements for a discussion of our significant accounting policies.

Regulatory Accounting

Our accounting policies historically reflect the effects of the rate-making process in accordance with Statements of Financial Accounting Standards (SFAS) No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). Our regulated natural gas segment continues to be cost-of-service rate regulated, and we believe the application of SFAS No. 71 to that segment continues to be appropriate. We must reaffirm this conclusion at each balance sheet date. If, as a result of a change in circumstances, we determine that the regulated natural gas segment no longer meets the criteria of regulatory accounting under SFAS No. 71, that segment will have to discontinue regulatory accounting and write off the respective regulatory assets and liabilities. Such a write-off could have a material impact on our consolidated financial statements.

The application of SFAS No. 71 results in recording regulatory assets and liabilities. Regulatory assets represent the deferral of incurred costs that are probable of future recovery in customer rates. In some cases, we record regulatory assets before we have received approval for recovery from the state regulatory agencies. We must use judgment to conclude that costs deferred as regulatory assets are probable of future recovery. We base this

conclusion on certain factors, including changes in the regulatory environment, recent rate orders issued by regulatory agencies, and the status of any potential new legislation. Regulatory liabilities represent revenues received from customers to fund expected costs that have not yet been incurred or for probable future refunds to customers.

We use our best judgment when recording regulatory assets and liabilities. Regulatory commissions, however, can reach different conclusions about the recovery of costs, and those conclusions could have a material impact on our consolidated financial statements. We believe it is probable that we will recover the regulatory assets that have been recorded.

Accumulated Provisions for Doubtful Accounts

We encounter risks associated with the collection of our accounts receivable. As such, we record a provision for those accounts receivable that are considered to be uncollectible. In order to calculate the appropriate provision, we primarily utilize the historical accounts receivable write-off amounts. The underlying assumptions used for the provision can change from period to period and the provision could potentially cause a material impact to our income statement and working capital. The actual weather, commodity prices, and other internal and external economic conditions, such as the mix of the customer base between residential, commercial and industrial, may vary significantly from our assumptions and may impact our operating income.

Unbilled Revenues and Gas Costs

We estimate the gas service that has been rendered from the latest date of each meter reading cycle to the month end. This estimate of unbilled usage is based on projected base load usage for each day unbilled plus projected weather sensitive usage for each degree day during the unbilled period. Unbilled revenues and gas costs are calculated from the estimate of unbilled usage multiplied by the rates in effect at month end. Actual usage patterns may vary from these assumptions and may impact our operating income.

Recoverable/Refundable Costs of Gas and Propane Purchases

We account for purchased gas costs in accordance with procedures authorized by the state regulatory agencies, under which purchased gas costs that are different from those provided for in present rates are accumulated and recovered or credited through future rate changes.

Deferred Tax Asset

We have a net deferred tax asset of $11.6 million. The net deferred tax asset is the result of our recent acquisitions of Frontier Natural Gas and Bangor Gas Company. We may continue to depreciate approximately $79.0 million of their capital assets using the useful lives and rates employed by those companies, resulting in a potential future federal and state income tax benefit of approximately $17.2 million over the 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.

Following Financial Accounting Standard (FAS) 109, our balance sheet at December 31, 2007 reflects a gross deferred tax asset of approximately $17.2 million, offset by a valuation allowance of approximately $5.6 million, resulting in a net deferred tax asset associated with the acquisition of approximately $11.6 million. The excess of the net deferred tax assets received in the transactions over their respective purchase prices has been reflected as an extraordinary gain of approximately $6.8 million on our income statement for the twelve months ended June 30, 2008 in accordance with the provisions of FAS 141.

We cannot guarantee that we will be able to generate sufficient future taxable income to realize the $11.6 million net deferred tax asset over the next 24 years. Management will reevaluate the valuation allowance each year on completion of updated estimates of taxable income for future periods, and will further reduce the deferred tax asset by the new valuation allowance if, based on the weight of available evidence, it is more likely than not that we will not realize some portion or all of the deferred tax assets. If the estimates indicate that we are unable to use all or a portion of the net deferred tax asset balance, we will record and charge a greater valuation allowance to income tax expense.

Failure to achieve projected levels of profitability could lead to a writedown in the deferred tax asset if the recovery period becomes uncertain or longer than expected and could also lead to the expiration of the deferred tax asset between now and 2032, either of which would adversely affect our operating results and financial position.

Results of Consolidated Operations

The following discussion of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto and other financial information included elsewhere in this Annual Report.

Fiscal Year Ended June 30, 2008 Compared to Fiscal Year Ended June 30, 2007

Net Income - Our net income for fiscal 2008 was approximately $10.1 million compared to net income of $6.2 million for fiscal 2007, an increase of $3.9 million or 63%. 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 companies. (See Note 4 to our Consolidated Financial Statements for further discussion of the deferred tax asset.) Coupled with the extraordinary gain were increases due to net income from the recently acquired gas operations in North Carolina of $831,000, from existing natural gas operations of $476,000 and from our gas marketing and production operation of $246,000. These improvements were partially offset by a net loss from the recently acquired gas operations in Maine of $166,000. In addition, net income of $6.2 million in 2007 included $4.0 million of income from discontinued operations.

The principal changes that contributed to the improvement in net income from fiscal 2007 to fiscal 2008 are explained below.

Revenues - Our revenues for fiscal 2008 were approximately $76.8 million compared to $59.4 million in fiscal 2007, an increase of $17.4 million or 29%. The increase was primarily attributable to: (1) a natural gas revenue increase of $12.9 million, of which $10.0 million was due to revenue from the recently acquired gas operations in Maine and North Carolina, with the remaining $2.9 million being caused by higher natural gas commodity prices passed through in rates in our existing natural gas operations and (2) an increase in our marketing and production operation's revenue of $4.6 million, due primarily to higher sales volumes in our Wyoming market, offset by a decrease in electricity revenue of $180,000.

Gross Margin - Gross margin was approximately $20.7 million in fiscal 2008 compared to $15.6 million in fiscal 2007, an increase of $5.1 million or 33%. Gross margin from our marketing and production operations increased $10,000, due to a $210,000 increase in margin from gas production, offset by decreases in margins from gas marketing and electricity sales of $157,000 and $43,000 respectively. Our natural gas operation's margins increased $5.1 million, of which $4.8 million was contributed by the recently acquired gas operations in Maine and North Carolina.

Expenses Other Than Cost of Sales - Expenses other than cost of sales increased by approximately $5.1 million from fiscal 2007 to fiscal 2008. On-going expenses related to operations in Maine and North Carolina account for $3.7 million of this increase. The remaining $1.3 million is due to increases in our distribution, general and administrative costs, including expenses related to the realignment of our management team and other outside legal and consultant fees.

Other Income - Other income increased by $74,000 from $242,000 in fiscal 2007 to $316,000 in fiscal 2008. Other income in our natural gas operations increased $16,000, primarily due to increased income generated in fiscal 2008 for services to customers compared to what had been provided in prior years. Other income in our marketing and production operations remained consistent with last year. Pipeline operations other income decreased $11,000. In fiscal 2008, other income also included $9,000 of dividends from marketable securities and $61,000 of gains from the sale of marketable securities.

Interest Expense - Interest expense decreased by $1.0 million from approximately $2.1 million in fiscal year 2007 to $1.1 million in fiscal year 2008. This decrease is primarily due to the write-off in fiscal 2007 of debt issue costs associated with the refinancing of long term debt, combined with a decrease in both short-term and long-term borrowings in fiscal 2008.

Income Tax Expense - Income tax expense from continuing operations increased by $60,000 from $1.27 million in fiscal 2007 to $1.33 million in fiscal 2008 due to increased pre-tax income from continuing operations.

Extraordinary Gain

The extraordinary gain of $6.8 million reported in 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).

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 income before income taxes of approximately $975,000 from propane operations.

Gain from Disposal of Operations - There was no gain from disposal of operations in fiscal year 2008 due to the timing of the sale of the propane assets. On April 1, 2007 we sold our Arizona propane assets for $15.0 million plus working capital, resulting in a pre-tax gain of approximately $5.5 million during fiscal 2007.

Income Tax Expense from discontinued operations- Income tax expense decreased by approximately $2.5 million from fiscal 2007 to fiscal 2008, due to the timing of the sale of propane assets.

Fiscal Year Ended June 30, 2007 Compared to Fiscal Year Ended June 30, 2006

Net Income - Our net income for fiscal 2007 was approximately $6.2 million compared to net income of $2.3 million for fiscal 2006, an improvement of $3.9 million. The improvement was the result of an increase in margin from continuing operations of $1.3 million, and an increase in income from discontinued operations of $3.5 million. These increases were offset in part by a decrease in other income of $149,000, and increases in operating expenses, interest expense and income taxes of $135,000, $475,000, and $164,000, respectively. The principal changes that contributed to the improvement in net income from fiscal 2006 to fiscal 2007 are explained below.

Revenues - Our revenues for fiscal 2007 were approximately $59.4 million compared to $74.7 million in fiscal 2006, a decrease of $15.3 million. This decrease was primarily attributable to a decrease in commodity prices. Revenues in our natural gas operations decreased $9.0 million due to lower commodity prices that are passed through to customers, and revenues in our marketing and production operations decreased $6.3 million due to the loss of two large customers and lower commodity prices. Revenue from our pipeline operations decreased $23,000 as a result of lower transport volumes.

Gross Margin - Gross margins (revenues less cost of sales) were approximately $15.6 million in fiscal 2007 compared to $14.3 million in fiscal 2006, an increase of $1.3 million. Gross margin in the Natural Gas segment increased by $606,000 due to higher volumes sold because of a colder winter. Gross margin in our marketing and production operations increased by $686,000, due to new business in our Wyoming market and the renegotiation of expiring contracts on more favorable terms, offset in part by a decrease in mark-to-market revenue and the loss of two large customers. Our pipeline operations' margin decreased by $13,000 due to lower transport volumes.

Expenses Other Than Costs of Sales - Expenses other than costs of sales increased by $135,000 from fiscal 2006 to fiscal 2007 due to an increase in property tax expense of $244,000, an increase in maintenance expense of $62,000, and an increase in depreciation expense of $21,000. These increases were partly offset by a $192,000 decrease in distribution, general and administrative expenses. This decrease was related to cost savings measures in payroll and other associated costs, including a $139,000 reduction due to the curtailment of additional contributions to the Retiree Health Plan.

Other Income - Other income decreased by $149,000 from $391,000 in fiscal 2006 to $242,000 in fiscal 2007. Other income in our natural gas operations decreased $129,000, primarily due to decreased income generated in fiscal 2007 for services to customers compared to what had been provided in prior years. Our marketing and production operations had other income of $32,000 in fiscal 2006 compared to $1,000 in fiscal 2007 primarily generated from payments related to the final settlement of a contract dispute. Our pipeline operations' other income increased $11,000.

Interest Expense - In fiscal year 2007, we refinanced our long term debt, resulting in the expensing of $991,000 of unamortized debt issue costs. This was $742,000 more than the amount amortized in fiscal 2006. This increase in interest due to amortization of debt issue costs was offset by decreased short-term interest expense due to lower short-term borrowings, and resulted in a net increase in interest expense of $475,000, or 29%, from $1.6 million in fiscal 2006 to $2.1 million in fiscal 2007.

Income Tax Expense - Income tax expense from continuing operations increased by $164,000 from $1.1 million in fiscal 2006 to $1.3 million in fiscal 2007 due to increased pre-tax income from continuing operations.

Discontinued Operations

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 Missouri River Propane, (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 - Income from operations increased $304,000, from $671,000 in fiscal year 2006 to $975,000 in fiscal year 2007 primarily due to the timing of the sale of the Arizona assets. Fiscal 2006 included a full year of revenues and associated expense, while fiscal 2007 included only nine months of revenue and associated expenses. Since the utility business is weather sensitive and cyclical, we typically experience losses in the fourth quarter of our fiscal year. If we had not disposed of the Arizona assets, it is likely that net income before income taxes would have been comparable to prior years.

Gain from Disposal of Operations - On April 1, 2007 we sold our Arizona propane assets for $15.0 million plus working capital, resulting in a pre-tax gain of approximately $5.5 million.

Income Tax (Expense) - Income tax expense increased by $2.2 million from $266,000 in fiscal 2006 to $2.5 million in fiscal 2007 due to higher pre-tax income, including the gain on sale of assets.

Operating Results of our Natural Gas Operations

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. Our 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 fiscal year 2007 results.

                                                                  Years Ended June 30,
                                                            2008                             2007          2006
                                                                         Total Less
                                                          New                New
                                        Total        Acquisitions       Acquisitions
                                                                     (In thousands)

Natural Gas Operations
Operating revenues                     $ 59,339      $       9,960      $      49,379      $ 46,439      $ 55,453
Gas Purchased                            41,337              5,159             36,178        33,542        43,161

Gross Margin                             18,002              4,801             13,201        12,897        12,292
Operating expenses                       13,954              3,681             10,273         9,307         9,160

Operating income                          4,048              1,120              2,928         3,590         3,132
Other (income)                             (245 )                7               (252 )        (229 )        (358 )

Income before interest and taxes          4,293              1,113              3,180         3,819         3,490
Interest expense                            933                 30                903         1,897         1,425

Income before income taxes                3,360              1,083              2,277         1,922         2,065
Income tax (expense)                     (1,091 )             (417 )             (674 )        (653 )        (741 )

Net income                             $  2,269      $         666      $       1,603      $  1,269      $  1,324

Fiscal Year Ended June 30, 2008 Compared to Fiscal Year Ended June 30, 2007

Natural Gas Revenues and Gross Margins - Operating revenues without new acquisitions in fiscal 2008 increased to approximately $49.4 million from $46.4 million in fiscal 2007. This $3.0 million increase is caused by higher gas commodity costs passed through as increased rates.

Gas purchases in the natural gas operations (without new acquisitions) increased to $36.2 million in fiscal 2008 from $33.5 million in fiscal 2007. This $2.7 million increase results from higher gas commodity prices, primarily during the 4th quarter of fiscal 2008.

Gross margin (without new acquisitions) increased to $13.2 million in fiscal 2008 from approximately $12.9 million for fiscal 2007. This $304,000 increase is due to increased sales volumes, primarily in the fourth quarter of fiscal 2008.

Natural Gas Operating Expenses - Operating expenses (without new acquisitions) increased to approximately $10.3 million in fiscal 2008 from $9.3 million in fiscal 2007. This $1.0 million increase is due primarily to increases in distribution, general and administrative expenses, including expenses associated with the realignment of our management team, and increases in outside legal and consulting fees.

Natural Gas Other Income - Other income (without new acquisitions) increased to approximately $252,000 in fiscal 2008 from $229,000 in fiscal 2007. This $23,000 increase was primarily due to increased service sales in Great Falls, Montana and Cody, Wyoming.

Natural Gas Interest Expense - Interest expense (without new acquisitions) decreased to approximately $0.9 million in fiscal 2008 from $1.9 million in fiscal 2007. This $1.0 million decrease was primarily due to the write-off in fiscal 2007 of debt issue costs associated with the refinancing of long term debt, combined with a decrease in both short-term and long-term borrowings in fiscal 2008.

Natural Gas Income Tax Benefit (Expense) - Income tax expenses (without new acquisitions) decreased to approximately $532,000 in fiscal 2008 from $653,000 in fiscal 2007, due to an adjustment to tax expense for prior year actual tax expense from amounts that had been estimated and accrued, offset by higher taxable income.

Fiscal Year Ended June 30, 2007 Compared to Fiscal Year Ended June 30, 2006

Natural Gas Revenues and Gross Margins - Operating revenues in fiscal 2007 decreased to approximately $46.4 million from $55.5 million in fiscal 2006. This $9.1 million decrease was due to lower gas commodity costs and decreased rates, even with higher volumes in the Montana market.

Gas purchases in our natural gas operations decreased to approximately $33.5 million in fiscal 2007 from $43.2 million in fiscal 2006. This $9.7 million decrease in gas cost reflects lower gas commodity prices during fiscal 2007.

Gross margin increased to approximately $12.9 million in fiscal 2007 from $12.3 million for fiscal 2006. This increase of $605,000 corresponds with the colder weather and higher volumes in the Montana regulated utility.

Natural Gas Operating Expenses - Operating expenses increased to approximately $9.3 million in fiscal 2007 from $9.2 million for fiscal 2006. The $147,000 increase is attributed to $154,000 lower general and administrative charges, including the effects of the curtailment of additional contributions to the Retiree Health Plan, offset by increased depreciation and maintenance expense of $59,000 and $20,000 respectively, and a $222,000 increase in property tax expense.

Natural Gas Other Income - Other income decreased to $229,000 in fiscal 2007 from $358,000 in fiscal 2006. This $130,000 decrease was primarily due to additional income generated in fiscal 2006 for services to customers compared to what has been provided in fiscal 2007.

Natural Gas Interest Expense - Interest expense increased to $1.9 million in fiscal 2007 from $1.4 million in fiscal 2006. This $471,000 increase was primarily due to the write-off of debt issue costs associated with the refinancing of long term debt, offset by decreased short term borrowings and the associated interest.

Natural Gas Income Tax Benefit (Expense) - Income tax expenses decreased $88,000 from $741,000 in fiscal 2006 to $653,000 in fiscal 2007, due to lower income before taxes.

Operating Results of our Marketing and Production Operations


                                                    Years Ended June 30
                                               2008         2007         2006
                                                       (In thousands)

          Energy West Resources
          Operating revenues                 $ 17,124     $ 12,545     $ 18,832
          Gas Purchased                        14,833       10,264       17,238

          Gross Margin                          2,291        2,281        1,594
          Operating expenses                      631          559          711

          Operating income                      1,660        1,722          883
          Other (income)                           (1 )         (2 )        (33 )
. . .