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 SEC and our 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/T for the fiscal year ended December 31, 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 26 billion cubic feet (bcf) of natural gas annually to approximately 37,000 residential, commercial and industrial customers. In addition to our core natural gas distribution business, we market approximately 2.3 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 160 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.
Pending Acquisitions
As previously disclosed, 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 $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 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 half 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.
On December 18, 2007, we entered into a stock purchase agreement with certain shareholders of Cut Bank Gas Company, a natural gas utility serving Cut Bank, Montana, to acquire 83.16% of the outstanding shares of Cut Bank Gas for a purchase price of $500,000 paid in shares of common stock of Energy West. In addition, we will offer to purchase the remaining shares of Cut Bank Gas Company for a purchase price of $100,000 paid 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 the second half of 2009. 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 time frame, or at all. New Holding Company Structure
We filed applications with the Montana Public Service Commission ("MPSC") and the Wyoming Public Service Commission ("WPSC") to reorganize our operations into a holding company structure. We have received approval from the WPSC and expect a response from the MPSC in the next few months. We believe that a holding company structure will provide us the flexibility to make future acquisitions through subsidiaries of the holding company rather than Energy West or our subsidiaries.
If the reorganization is approved, Energy West would become a holding company that would indirectly conduct the businesses of all of our operating subsidiaries and our operating subsidiaries would become wholly-owned subsidiaries of Energy West. In addition, the number of shares of common stock of the holding company outstanding immediately after the merger would be equal to the number of shares of common stock of Energy West outstanding prior to the merger. After the merger, each shareholder of common stock of Energy West would own a corresponding percentage of shares of common stock of the holding company with identical designations, preferences, limitations, and rights.
QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS
Quarter Ended March 31, 2009 Compared to Quarter Ended March 31, 2008 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/T for the transition period ended December 31, 2008. The following gives effect to the unaudited Condensed Consolidated Financial Statements as of March 31, 2009 and for the three month period ended March 31, 2009. 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 March 31, 2009 was approximately $2.0 million compared to net income of approximately $2.3 million for the three months ended March 31, 2008, a decrease of $300,000. This reduction was primarily due to a decrease in net income from our gas marketing and production operation of $248,000, lower net income from our natural gas operations of $72,000 and the net loss from our corporate and other segment of $28,000.
Revenues - Our revenues for the three months ended March 31, 2009 were approximately $31.3 million compared to approximately $30.9 million for the three months ended March 31, 2008, an increase of $400,000. The increase was primarily attributable to: (1) a natural gas revenue increase of $1.9 million, due primarily to sales growth in our Maine market and (2) an offsetting decrease in our marketing and production operation's revenue of $1.5 million caused primarily by significantly lower index prices for natural gas.
Gross Margin - Gross margin increased $200,000, to approximately $7.8 million in the three months ended March 31, 2009 from approximately $7.6 million in three months ended March 31, 2008. Our natural gas operation's margins increased $200,000, due primarily to sales growth in our Maine market. Our marketing and production operation's margin decreased by $100,000 due to higher natural gas production costs and a decrease in mark to market revenue.
Expenses Other Than Cost of Goods Sold - Expenses other than cost of sales increased by $100,000 to $4.2 million in the three months ended March 31, 2009 as compared to $4.1 million in the three months ended March 31, 2008. The $100,000 increase is due to increases in distribution, general and administrative expenses, and depreciation, and offset by decreases in maintenance expense and taxes other than income taxes.
Other Income - Other income (loss) decreased by $73,000 to a loss of $25,000 in the three months ended March 31, 2009 from income of $48,000 in three months ended March 31, 2008. Corporate and other operations accounted for $48,000 of this change, with the remaining being attributable to our natural gas operations.
Interest Expense - Interest expense increased by approximately $58,000 during the three months ended March 31, 2009 from the three months ended March 31, 2008, due to an increase in short-term borrowings, caused primarily by the higher natural gas commodity prices during the summer and fall of 2008. Income Tax Expense - Income tax expense increased by $200,000 to $1.2 million in the three months ended March 31, 2009 as compared to $1.0 million in the three months ended March 31, 2008. Tax expense increased in 2009 because the three months ended March 31, 2008 included a negative adjustment to tax expense related to prior year tax and adjustments in the manner in which taxable income was apportioned to various states. This was partially offset by lower pre-tax income in the three months ended March 31, 2009.

Operating Results of our Natural Gas Operations

                                                   Three Months Ended
                                                        March 31,
           Natural Gas Operations                 2009             2008
           Operating revenues                 $ 26,141,570     $ 24,167,479
           Gas purchased                        19,434,852       17,709,457

           Gross margin                          6,706,718        6,458,022
           Operating expenses                    3,937,912        3,899,110

           Operating income                      2,768,806        2,558,912
           Other income                             19,333           43,966


           Income before interest and taxes      2,788,139        2,602,878

           Interest (expense)                     (287,347 )       (239,038 )


           Income before income taxes            2,500,792        2,363,840
           Income tax (expense)                   (961,959 )       (753,152 )


           Net income                         $  1,538,833     $  1,610,688

Natural Gas Revenues and Gross Margins - Our operating revenues in the three months ended March 31, 2009 increased to approximately $26.1 million from approximately $24.2 million in the three months ended March 31, 2008. This $1.9 million increase was primarily due to sales growth in our Maine market. Gas purchases in our natural gas operations increased by $1.7 million to approximately $19.4 million in the three months ended March 31, 2009 from approximately $17.7 million in the three months ended March 31, 2008. The increase in gas cost reflects higher sales volumes in our Maine market. Gross margin was approximately $6.7 million for the three months ended March 31, 2009, compared to approximately $6.5 million for the three months ended March 31, 2008. The increase of $200,000 is primarily due sales growth in our Maine market.
Natural Gas Operating Expenses - Our operating expenses were approximately $3.9 million for the three months ended March 31, 2009, compared to approximately $3.9 million for the three months ended March 31, 2008. The $40,000 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 decreased by $25,000 to $19,000 in the three months ended March 31, 2009 from $44,000 in the three months ended March 31, 2008. This was due primarily to decreased service sales in Great Falls, Montana.
Natural Gas Interest Expense - Interest expense was $48,000 higher in the three months ended March 31, 2009 due to an increase in short-term borrowings, caused primarily by the higher natural gas commodity prices during the summer and fall of 2008.
Natural Gas Income Tax Expense - Income tax expense is $209,000 higher in the three months ended March 31, 2009 due to higher pretax income. The three months ended March 31, 2008 included a negative adjustment to tax expense related to prior year tax and adjustments in the manner in which taxable income was apportioned to various states.

Operating Results of our Marketing and Production Operations

                                                   Three Months Ended
                                                        March 31,
            Energy West Resources                 2009            2008

            Operating revenues                 $ 5,079,587     $ 6,620,996
            Gas purchased                        4,124,894       5,529,655

            Gross margin                           954,693       1,091,341
            Operating expenses                     210,505         136,522

            Operating income                       744,188         954,819
            Other income (expense)                       -             511

            Income before interest and taxes       744,188         955,330
            Interest (expense)                     (55,343 )       (44,429 )

            Income before income taxes             688,845         910,901
            Income tax (expense)                  (265,930 )      (239,776 )

            Net income                         $   422,915     $   671,125

Marketing and Production Revenues and Gross Margins - Our revenues decreased $1.5 million to approximately $5.1 million in the three months ended March 31, 2009 from approximately $6.6 million in the three months ended March 31, 2008. Retail gas revenues decreased due to significantly lower index prices for natural gas and mark to market revenue decreased by $60,000. The decreases are partially offset by an increase in production revenues of $42,000. The gross margin in our marketing and production operations decreased $100,000 to approximately $1.0 million in the three months ended March 31, 2009 from approximately $1.1 million in the three months ended March 31, 2008. Gross margin from gas production decreased by $81,000, due primarily to higher costs of production, and mark to market revenue decreased by $60,000. These decreases were partially offset by an increase in gross margin from retail gas of $4,000. Marketing and Production Operating Expenses - Our operating expenses increased approximately $74,000, to $211,000 in the three months ended March 31, 2009 from $137,000 in the three months ended March 31, 2008. Increases in depletion, professional services and salaries expense account for this change. Marketing and Production Interest Expense - Interest expense increased approximately $11,000 to $55,000 in the three months ended March 31, 2009 from $44,000 in the three months ended March 31, 2008, due to an increase in short-term borrowings, caused primarily by the higher natural gas commodity prices during the summer and fall of 2008.
Marketing and Production Income Tax Expense - Income tax expense increased approximately $26,000 to $266,000 in the three months ended March 31, 2009 from $240,000 in the three months ended March 31, 2008. The three months ended March 31, 2008 included a negative adjustment to tax expense related to prior year tax and adjustments in the manner in which taxable income was apportioned to various states. This is offset by lower pre-tax income in the three months ended March 31, 2009.

Operating Results of our Pipeline Operations

                                                   Three Months Ended
                                                        March 31,
              Pipeline Operations                  2009          2008

              Operating revenues                 $ 112,666     $  89,797
              Gas purchased                              -             -

              Gross margin                         112,666        89,797
              Operating expenses                    61,798        50,078

              Operating income                      50,868        39,719
              Other income                               -             -

              Income before interest and taxes      50,868        39,719

              Interest (expense)                    (2,923 )      (4,281 )


              Income before income taxes            47,945        35,438
              Income tax (expense)                 (18,437 )     (13,633 )


              Net income                         $  29,508     $  21,805

Net income increased $8,000 to approximately $30,000 in the three months ended March 31, 2009 from approximately $22,000 in the three months ended March 31, 2008, and the overall impact of our pipeline operations was not material to our results of consolidated operations.
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 March 31, 2009 include costs related to acquisition activities of $88,000, offset by dividends from marketable securities of approximately $44,000 and the applicable income tax benefit of approximately $16,000, for a net loss of approximately $28,000.
Results of corporate and other operations for the three months ended March 31, 2008 included approximately $4,000 of dividend income from marketable securities.
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 $5.6 million at March 31, 2009, compared with $0 at March 31, 2008. This change in our line of credit is caused primarily by increased construction expenditures, purchases of marketable securities and increased rates paid to fill natural gas storage.
Long-term debt was $13.0 million at March 31, 2009, and 2008.

Cash increased by $354,000 from December 31, 2008 to March 31, 2009, compared with the $359,000 increase in cash for the quarter ended March 31, 2008, as shown in the following table:

                                                          March 31,
                                                    2009              2008

        Cash provided by operating activities   $  14,893,827     $  8,368,055
        Cash used in investing activities          (2,117,692 )     (1,193,169 )
        Cash used in financing activities         (12,422,162 )     (6,816,069 )


        Increase in cash                        $     353,973     $    358,817

Cash provided by operating activities was approximately $6.5 million higher in the three months ended March 31, 2009, than the three months ended March 31, 2008. This was primarily due to increases in natural gas inventories of $2.0 million, recoverable gas purchases of $1.8 million, and deferred taxes of $1.8 million, accounts receivable of $600,000 and other assets of $300,000, and decreases in other liabilities of $400,000 which were offset by reduced net income and decreases in prepaids as compared to the three months ended March 31, 2008.
Cash used in investing activities was approximately $925,000 higher in the three months ended March 31, 2009, than the three months ended March 31, 2008. This was due to an increase of $884,000 for construction expenditures, an increase of $289,000 in other investments, an increase in customer advances received for construction and contributions in aid of construction of $54,000 and a decrease of $302,000 in purchases of marketable securities as compared to the three months ended March 31, 2008.
Cash used in financing activities in the three months ended March 31, 2009 was $12.4 million. This is $5.6 million more than the cash used of $6.8 million in the three months ended March 31, 2008 and is due to increased net borrowings on the line of credit of $5.3 million, decreased net sales of common stock of $178,000, and a $54,000 increase in dividends paid as compared to the three months ended March 31, 2008.
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 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 $463,000 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 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 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.

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

Quarter Ended March 31, 2009

                   Minimum borrowing              $  5,595,000
                   Maximum borrowing              $ 18,095,000
                   Average borrowing              $ 11,987,000

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 March 31, 2009 and 2008, we believe we were in compliance with the financial covenants under our debt agreements.
At March 31, 2009, we had approximately $1.4 million of cash on hand, ($956,000 net of bank overdrafts) and $5.6 million in borrowings under the $20.0 million Bank of America revolving line of credit. In addition, at March 31, 2009, 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 $13.0 million at both March 31, 2009, and 2008. The portion of such obligations due within one year was $0 at both March 31, 2009, and 2008. 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. We are actively expanding our systems in North Carolina and Maine to meet the high customer interest in natural gas service in those two service areas. For the six months ended December 31, 2008 our total capital expenditures were approximately $4.7 million. During the three months ended March 31, 2009 and 2008 capital expenditures were $1.5 million and $1.0 million, respectively. We estimate future cash requirements for capital expenditures will be as follows:

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