Summary of ENERGY WEST INC

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, (the Exchange Act) which represent our 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 (SEC) 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, 2008 filed with the SEC. 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.
Overview
We are a natural gas utility with operations in Montana, Wyoming, North Carolina and Maine. We distribute 23 billion cubic feet (bcf) of natural gas annually to approximately 36,000 residential, commercial and industrial customers. In addition to our core natural gas distribution business, we market approximately 1.6 bcf of natural gas annually to commercial and industrial customers in Montana and Wyoming. We also have an average 60% gross working interest (average 51% net revenue interest) in 162 natural gas producing wells and gas gathering assets that provide our marketing and production operation with a partial hedge when gas prices are greater than the cost of production. In addition, we own the Shoshone interstate and the Glacier gathering pipelines located in Montana and Wyoming. We have four reporting segments. Our primary segments are natural gas operations, marketing and production operations and pipeline operations. Our other segment is corporate and other.
Recent Events
On September 12, 2008, we entered into a stock purchase agreement with Richard M. Osborne, Trustee, Rebecca Howell, Stephen G. Rigo, Marty Whelan and Thomas J. Smith (collectively, the Sellers) whereby we agreed to purchase all of the common stock of Lightning Pipeline Co. (Lightning Pipeline), Great Plains Natural Gas Company (Great Plains), Brainard Gas Corp. (Brainard) and all of the membership units of Great Plains Land Development Co., Ltd. (GPL), which companies are primarily owned by an entity controlled by Mr. Osborne and wholly-owned by the Sellers, for a purchase price of $34.3 million. Pursuant to the agreement, we will acquire Orwell Natural Gas Company (Orwell), a wholly-owned subsidiary of Lightening Pipeline and Northeast Ohio Natural Gas Corp. (NEO), a wholly-owned subsidiary of Great Plains. Orwell, NEO and Brainard are natural gas distribution companies that serve approximately 21,000 customers in Northeastern Ohio and Western Pennsylvania. This acquisition will increase our customers by more than 50%.
Mr. Osborne is chairman, chief executive officer and a director, Mr. Smith is vice president, chief financial officer and a director, and Ms. Howell is secretary of Energy West. The agreement was negotiated on behalf of Energy West by a special committee comprised solely of independent directors with the assistance of independent financial and legal advisors. The special committee received a fairness opinion from Houlihan Smith & Company, Inc. The agreement was approved by our board of directors, upon unanimous recommendation of the special committee.
The $34.3 million purchase price consists of our assumption of approximately $20.9 million in debt with the remainder of the purchase price to be paid in unregistered shares of common stock of Energy West based on a price of $10.00 per share. The stock portion of the purchase price may be increased or decreased within three business

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days prior to closing of the transaction depending on the number of active customers of Orwell, Brainard and NEO. The Sellers have the right to elect to terminate the transaction, upon the payment of a $100,000 fee, if the average closing price of our common stock for the twenty consecutive trading days ending seven calendar days prior to closing is below $9.49 and if our common stock underperforms the American Gas Stock Index (as maintained by the American Gas Association) by more than 20%, as described in the agreement. However, we may prevent termination of the transaction in this instance by increasing the number of shares of our common stock paid to the Sellers as part of the purchase price. The agreement also contains customary representations, warranties, covenants and indemnification provisions.
The transaction is expected to close in the second quarter of 2009 but there can be no assurances that the transaction will be completed on the proposed terms or at all. The closing is subject to customary closing conditions, including the approval of applicable regulators. In addition, the transaction is subject to the approval of our shareholders for the issuance of shares of Energy West as part of the purchase price. We expect to hold a special meeting in early 2009 so that our shareholders may vote on the transaction.
In addition, Orwell, NEO and Brainard are parties to various agreements (i.e., leases, gas sales, transportation, etc.) with companies owned by Mr. Osborne. These agreements are filed as exhibits to our annual reports on Form 10-K for the fiscal year ending June 30, 2008.
Our annual meeting of shareholders has been set for December 11, 2008 and will be held at LaMalfa Centre, 5783 Heisley Road, Mentor, Ohio 44060 at 10:00 a.m. Eastern Standard Time.
QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS
Fiscal Quarter Ended September 30, 2008 Compared to Fiscal Quarter Ended September 30, 2007
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, 2008. The following gives effect to the unaudited Condensed Consolidated Financial Statements as of September 30, 2008 and for the three month period ended September 30, 2008. Results of operations for interim periods are not necessarily indicative of results to be attained for any future period. Net Income (Loss) - Our net income for the three months ended September 30, 2008 was approximately $386,000 compared to net income of approximately $75,000 for the three months ended September 30, 2007, an improvement of $311,000. This improvement was primarily due to an increase in net income from our gas marketing and production operation of $226,000 and net income from the recently acquired gas operations in Maine and North Carolina of $105,000. Offsetting these improvements was an increased net loss from existing natural gas operations of $49,000.
Revenues - Our revenues for the three months ended September 30, 2008 were approximately $14.0 million compared to approximately $7.5 million for the three months ended September 30, 2007, an increase of $6.5 million. The increase was primarily attributable to: (1) an increase in our marketing and production operation's revenue of $2.6 million due primarily to much higher index prices for natural gas, and (2) a natural gas revenue increase of $3.9 million, of which $2.5 million was due to the acquisition of gas operations in Maine and North Carolina, and $1.4 million was due to the significantly higher natural gas commodity prices.
Gross Margin - Gross margin increased $1.9 million, from approximately $2.7 million in the three months ended September 30, 2007 to approximately $4.5 million in three months ended September 30, 2008. Our marketing and production operation's margin increased by $442,000 due to a $282,000 increase in margin from gas production as a result of the higher index prices for natural gas, and a $227,000 increase from retail gas sales due to lower relative gas supply costs as a percentage of revenues. Our natural gas operation's margins increased $1.4 million, of which $1.4 million was due to the acquisition of gas operations in Maine and North Carolina, with the remaining $30,000 due to increased sales volumes from our existing natural gas operations. Expenses Other Than Cost of Goods Sold - Expenses other than cost of sales increased by $1.3 million in the three months ended September 30, 2008 as compared to the three months ended September 30, 2007. On-going expenses related to operations in Maine and North Carolina account for $1.2 million of this increase. The remaining

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$70,000 is due to increases in our distribution, general and administrative costs and increases in depreciation and depletion expense.
Other Income - Other income increased by $9,000 from $88,000 in the three months ended September 30, 2007 to $97,000 in three months ended September 30, 2008, all attributable to our natural gas operations.
Interest Expense - Interest expense increased by approximately $40,000 during the three months ended September 30, 2008 from the three months ended September 30, 2007, due to an increase in short-term borrowings, caused primarily by the higher natural gas commodity prices.
Income Tax Expense - Income tax expense was $180,000 in the three months ended September 30, 2008 as compared to an income tax benefit of $70,000 in the three months ended September 30, 2007. This increase in expense of $250,000 is due to higher pretax income in the current three month period, offset by adjustments made to the tax provisions from the prior year. 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.

                                                                    Three Months Ended September 30,
                                                                        2008                                      2007
                                                                      New               Total Less New
                                                 Total            Acquisitions           Acquisitions             Total
Natural Gas Operations
Operating revenues                            $ 8,863,202        $    2,462,435        $      6,400,767        $ 5,021,222
Gas purchased                                   5,271,121             1,090,094               4,181,027          2,831,652

Gross margin                                    3,592,081             1,372,341               2,219,740          2,189,570
Operating expenses                              3,589,223             1,204,778               2,384,445          2,335,630

Operating income (loss)                             2,858               167,563                (164,705 )         (146,060 )
Other income                                       88,928                13,464                  75,464             87,750


Income (loss) before interest and taxes            91,786               181,027                 (89,241 )          (58,310 )

Interest (expense)                               (233,815 )              (9,539 )              (224,276 )         (187,810 )


Income (loss) before income taxes                (142,029 )             171,488                (313,517 )         (246,120 )
Income tax benefit (expense)                       89,593               (66,544 )               156,137            135,413


Net income (loss)                             $   (52,436 )      $      104,944        $       (157,380 )      $  (110,707 )

Natural Gas Revenues and Gross Margins - Our operating revenues without new acquisitions in the three months ended September 30, 2008 increased to approximately $6.4 million from approximately $5.0 million in the three months ended September 30, 2007. This $1.4 million increase was primarily due to the very high natural gas commodity prices passed through to customers during the three months ended September 30, 2008.
Gas purchases in the natural gas operations (without new acquisitions) increased by $1.4 million from approximately $2.8 million in the three months ended September 30, 2007 to approximately $4.2 million in the three months ended September 30, 2007. The increase in gas cost reflects much higher natural gas commodity prices during the current three month period.

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Gross margin (without new acquisitions) was approximately $2.21 million for the three months ended September 30, 2008, compared to approximately $2.19 million for the three months ended September 30, 2007. The increase of $30,000 is primarily due to slightly higher volumes in the current three month period. Natural Gas Operating Expenses - Our operating expenses (without new acquisitions) were approximately $2.38 million for the three months ended September 30, 2008, compared to approximately $2.33 million for the three months ended September 30, 2007. The $50,000 increase is due to increases in depreciation and distribution, general and administrative expenses, and offset by decreases in maintenance expense and taxes other than income taxes. Natural Gas Other Income - Other income (without new acquisitions) decreased by $13,000 from $88,000 in the three months ended September 30, 2007 to $75,000 in the three months ended September 30, 2008. This was due primarily to decreased service sales in Great Falls, Montana.
Natural Gas Interest Expense - Interest expense (without new acquisitions) was $36,000 higher in the three months ended September 30, 2008 due to an increase in short-term borrowings, caused primarily by the higher natural gas commodity prices.
Natural Gas Income Tax Benefit - Income tax benefits (without new acquisitions) are $21,000 higher in the three months ended September 30, 2008 due to a higher pretax loss.
Operating Results of our Marketing and Production Operations

                                                   Three Months Ended
                                                      September 30,
                                                  2008            2007
            Energy West Resources

            Operating revenues                 $ 5,005,390     $ 2,378,688
            Gas purchased                        4,171,544       1,986,336

            Gross margin                           833,846         392,352
            Operating expenses                     194,610         155,940

            Income before interest and taxes       639,236         236,412

            Interest expense                        (1,155 )        (8,428 )


            Income before income taxes             638,081         227,984
            Income tax (expense)                  (243,036 )       (58,643 )


            Net income                         $   395,045     $   169,341

Marketing and Production Revenues and Gross Margins - Our revenues increased $2.6 million from approximately $2.4 million in the three months ended September 30, 2007 to approximately $5.0 million in the three months ended September 30, 2008. Retail gas revenues increased by $2.3 million due to significantly higher index prices for natural gas. Production revenues increased by $413,000, also due to the much higher index prices. These increases are partially offset by a $61,000 decrease in mark to market revenue.
The gross margin in our marketing and production operations increased $442,000 from approximately $392,000 in the three months ended September 30, 2007 to approximately $834,000 in the three months ended September 30, 2008. Gross margin from gas production increased by $282,000, due primarily to the large increase in index prices, and offset somewhat by higher costs of production. Gross margin from retail gas sales increased by $227,000. Gas supply costs were higher, but were a lower percentage of revenue in the three months ended September 30, 2008, compared to the three months ended September 30, 2007. These increases are partially offset by the $61,000 decrease in mark to market revenue.
Marketing and Production Operating Expenses - Our operating expenses increased approximately $39,000, from $156,000 in the three months ended September 30, 2007 to $195,000 in the three months ended September 30, 2008. Increases in depletion and salaries expense account for this change.
Marketing and Production Interest Expense - Interest expense decreased approximately $7,000 from $8,000 in the three months ended September 30, 2007 to $1,000 in the three months ended September 30, 2008.

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Marketing and Production Income Tax Expense - Income tax expense increased approximately $184,000 from $59,000 in the three months ended September 30, 2007 to $243,000 in the three months ended September 30, 2008, and is caused primarily by higher pretax income.

Operating Results of our Pipeline Operations

                                                   Three Months Ended
                                                      September 30,
                                                    2008          2007
              Pipeline Operations

              Operating revenues                 $  118,037     $ 93,465
              Gas purchased                               -            -

              Gross margin                          118,037       93,465
              Operating expenses                     49,511       66,413

              Operating income (loss)                68,526       27,052
              Other income                               94            -

              Income before interest and taxes       68,620       27,052

              Interest (expense)                     (5,602 )     (4,005 )


              Income before income taxes             63,018       23,047
              Income tax (expense)                  (23,997 )     (6,872 )


              Net income                         $   39,021     $ 16,175

Although net income increased $23,000 from approximately $16,000 in the three months ended September 30, 2007 to approximately $39,000 in the three months ended September 30, 2008, the overall impact to our pipeline operations was not material.
Results of our Corporate and Other Operations The corporate and other operations segment was created to accumulate revenues and expenses that are not allocable to our utilities or other operations. Therefore, it does not have standard revenues, gas purchase costs, or gross margin.
Results of corporate and other operations for the three months ended September 30, 2008 include dividends from marketable securities of approximately $8,000, offset by the applicable income tax expense of approximately $3,000. There was no activity in corporate and other operations for the three months ended September 30, 2007.
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 (loss) 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 Bank of America, shown as line of credit on the accompanying balance sheets. Our use of the Bank of America revolving line of credit increased to $11.7 million at September 30, 2008, compared with $0 at September 30, 2007. This change in our cash position is caused primarily by increased costs for gas put in storage and recoverable cost of gas purchases, increased investment in marketable securities and increased construction expenditures. In addition, for the three months ended September 30, 2007, we financed the equivalent expenditures for these items with the proceeds from the sale our Arizona propane business, which was sold on April 1, 2007. We periodically repay our short-term borrowings under the Bank of America credit facility by using the net proceeds from the sale of long-term debt and equity securities. Long-term debt was $13.0 million at September 30, 2008, and 2007.

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Cash increased by $197,000 from June 30, 2008 to September 30, 2008, compared with the $5.6 million decrease in cash for the quarter ended September 30, 2007, as shown in the following table:

                                                             September 30,
                                                         2008             2007
   Cash used in operating activities                 $ (6,196,465 )   $ (3,633,587 )
   Cash used in investing activities                   (4,779,855 )     (1,464,749 )
   Cash provided by (used in )financing activities     11,173,745         (463,081 )


   Increase (Decrease) in cash                       $    197,425     $ (5,561,417 )

Cash used in operating activities was approximately $2.6 million higher in the three months ended September 30, 2008, than the three months ended September 30, 2007. This was due to an increase in natural gas inventories of $2.1 million and an increase in recoverable gas purchases of $1.2 million, offset by a decrease in all other assets net of liabilities of $465,000 and an increase in net income of $312,000 as compared to the three months ended September 30, 2007. Cash used in investing activities was approximately $3.3 million higher in the three months ended September 30, 2008, than the three months ended September 30, 2007. This was due to an increase of $2.7 million in purchases of marketable securities, $524,000 decrease in other investments, an increase of $1.1 million for construction expenditures, and a decrease in customer advances received for construction and contributions in aid of construction of $91,000 as compared to the three months ended September 30, 2007.
Cash provided by financing activities in the three months ended September 30, 2008 was $11.3 million. This is $11.8 million more than the cash used of $463,000 in the three months ended September 30, 2007 and is due primarily to increased net borrowings on the line of credit of $11.7 million as compared to the three months ended September 30, 2007. 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.
Long-term Debt - $13.0 million 6.16% Senior Unsecured Notes - On June 29, 2007, we authorized the sale of $13.0 million aggregate principal amount of our 6.16% Senior Unsecured Notes. 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 $441,000 in new debt issue costs to be amortized over the life of the new note. Bank of America Line of Credit - On June 29, 2007, we established our new five-year unsecured credit facility with Bank of America, replacing a previous $20.0 million one-year facility with Bank of America 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 us.

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

                                    First           Second           Third        Fourth
                                   Quarter          Quarter         Quarter       Quarter
     Year Ended June 30, 2009
     Minimum borrowing          $          -
     Maximum borrowing          $ 11,685,000
     Average borrowing          $  5,286,000

     Year Ended June 30, 2008
     Minimum borrowing          $          -     $ 3,275,000     $         -       $  -
     Maximum borrowing          $          -     $ 7,525,000     $ 6,525,000       $  -
     Average borrowing          $          -     $ 4,558,000     $ 2,256,000       $  -

Our 6.16% Senior Unsecured Notes and Bank of America 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 September 30, 2008 and 2007, we believe we were in compliance with the financial covenants under our debt agreements.
At September 30, 2008, we had approximately $374,000 of cash on hand net of bank overdrafts, and $11.7 million in borrowings under the $20.0 million Bank of America revolving line of credit. In addition, at September 30, 2008, we had two outstanding letters of credit related to supply contracts totaling $1.2 million. These letters of credit reduce 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 . . .