<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                                    FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 1998
                                       OR
[ ] 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, Mt. 59401
                  --------------------------------------------
                   (Address of principal executive (Zip Code)
                                    offices)

        Registrant's telephone number, including area code (406)-791-7500
          Securities registered pursuant to Section 12(b) of the Act:

        Title of each class             Name of Exchange on which registered 
      Common Stock - Par Value $.15                   NASDAQ
      -----------------------------                   ------

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. Yes [X] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.45 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X].

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 15, 1998: Common Stock, $.15 Par Value - $14,532,434
The number of shares outstanding of the issuer's classes of common stock as of
September 15, 1998: Common Stock, $.15 Par Value - 2,403,190 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the annual shareholders meeting to be held
November 19, 1998 are incorporated by reference into Part III.


                                        1

<PAGE>



PART I
Item 1. - Business

         ENERGY WEST INCORPORATED ("the Company") is a regulated public utility,
with certain non-utility operations conducted through its subsidiaries. The
Company's regulated utility operations primarily involve the distribution and
sale of natural gas to the public in the Great Falls, Montana and Cody, Wyoming
areas. Since January 1993, the Company's regulated utility operations have also
included the distribution of propane to the public through an underground
propane vapor system in the Payson, Arizona area, and since 1995, the
distribution of natural gas through an underground system in West Yellowstone,
Montana, that is supplied by liquified natural gas ("LNG").

         The Company conducts certain non-regulated non-utility operations
through its three wholly-owned subsidiaries, Rocky Mountain Fuels, Inc. ("RMF"),
Energy West Resources, Inc. ("EWR"), and Montana Sun, Inc. ("Montana Sun"). RMF
is engaged in the distribution of retail and wholesale bulk propane in Wyoming,
South Dakota, Nebraska, Colorado, the Payson, Arizona area and the Cascade,
Montana area. EWR is involved in gas storage and the marketing of gas in
Montana. Montana Sun owns two real estate properties in Great Falls, Montana.

UTILITY OPERATIONS

         The Company's primary business is the distribution and sale of natural
gas and propane to residential, commercial and industrial customers. The natural
gas distribution operations consist of two divisions, the Great Falls division
and the Cody division. The Cody division is also involved in the transportation
of natural gas. In addition, since January 1993 the Company has been involved in
the regulated distribution of propane in Arizona through the Broken Bow
division. Generally, residential customers use natural gas and propane for space
heating and water heating, commercial customers use natural gas and propane for
space heating and cooking, and industrial customers use natural gas as a fuel in
industrial processing and space heating. The Company's revenues from utility
operations are generated under tariffs regulated by the respective state utility
commissions.

GREAT FALLS DIVISION

         The Great Falls division provides natural gas service to Great Falls,
Montana and much of suburban Great Falls within approximately 11 miles of the
city limits. The service area has a population base of approximately 65,000. The
Company has a franchise to distribute natural gas within the city of Great
Falls. The franchise was renewed for 50 years by the City of Great Falls in
1971. As of June 30, 1998, the Great Falls division provided service to over
25,000 customers, including approximately 22,600 residential customers,
approximately 2,600 commercial customers. An oil refinery and Malmstrom Air
Force Base ("Malmstrom"), are served through distribution transportation
agreements.

                                        2

<PAGE>



The following table shows the Great Falls division's revenues by customer class
for the year ended June 30, 1998 and the past two fiscal years:

<TABLE>
<CAPTION>
                                                    Gas Revenues
                                                   (in thousands)

                                                  Years Ended June 30,
                                         ---------------------------------------
                                           1998            1997           1996
                                         -------         -------         -------
<S>                                      <C>             <C>             <C>    
Residential ....................         $ 9,162         $ 9,267         $ 8,648
Commercial .....................           5,521           6,631           6,146
Transportation .................           1,457             431             468
                                         -------         -------         -------
     Total .....................         $16,140         $16,329         $15,262
                                         -------         -------         -------
                                         -------         -------         -------
</TABLE>

               The following table shows the volumes of natural gas, expressed
in millions of cubic feet ("MMcf") at 13.28 P.S.I.A., sold by the Great Falls
division for the year ended June 30, 1998 and the past two fiscal years:

<TABLE>
<CAPTION>
                                                         Gas Volumes
                                                            (MMcf)
                                                     Years Ended June 30,
                                               ---------------------------------
                                               1998          1997          1996
                                               -----         -----         -----
<S>                                            <C>           <C>           <C>  
Residential ..........................         2,206         2,614         2,540
Commercial ...........................         1,329         1,881         1,822
                                               -----         -----         -----
     Total Gas Sales .................         3,535         4,495         4,362
                                               -----         -----         -----
                                               -----         -----         -----
Transportation .......................         1,282         1,171         1,294
                                               -----         -----         -----
                                               -----         -----         -----
</TABLE>

         Malmstrom, now a transportation customer, the Great Falls division's
largest customer, accounted for approximately 4% of the revenues of the division
in fiscal 1998. On July 1, 1995, Malmstrom became a transport customer of the
Great Falls division. The gas load of Malmstrom annually rebids its gas supply
and is open to gas marketing firms in the State of Montana. Malmstrom purchases
gas for space heating and water heating for buildings and residential housing,
to supplement its coal-fired central heating system. Malmstrom, which is located
near Great Falls, is an air force base with several wings of Minute III
intercontinental nuclear missiles. The base employed approximately 4,400
military personnel and 550 civilian personnel as of June 30, 1998.


                                        3

<PAGE>



         Beginning in three years, Malmstrom has been selected as the site where
13 of 15 test flight of NASA's X-33 space shuttle will land during 1999.
Malmstrom is currently one of the sites, the State of Montana and the City of
Great Falls has submitted to Lockheed Martin, as the location for the
VentureStar Spaceport, which would be used to launch an experimental space
vehicle [the X-33], a single-stage-to-orbit-spacecraft. It is anticipated that
the decision by Lockheed for the location of the Spaceport will be made by
September of 1999. No assurance can be given as to the future level of activity
at Malmstrom.

         The Great Falls division has 109 transport customers including an oil
refinery located in the city. The Company provides gas to the customer for
processing use in its refining business. In fiscal 1998, the refinery accounted
for less than 1% of the consolidated revenues of the Company. Historically, this
customer's gas load has remained relatively constant during the year because the
gas is used in the customer's business and is therefore not weather-sensitive.
On June 1, 1993, the refinery became a transport customer of the Great Falls
division.

         In July, 1996 it was announced that a $20 million pasta plant would be
built in Great Falls. Construction is now complete and it is estimated that the
pasta plant will use approximately 60,000 Mcf/year of natural gas.

         The Great Falls division's gas distribution operations are subject to
regulation by the Montana Public Service Commission ("MPSC"). The MPSC regulates
rates, adequacy of service, accounting, issuance of securities and other
matters.

         In November, 1994, the Company filed for a rate increase to recover the
cost of increased operating expenses, increases in financing expenses due to
additional investments in utility plant, and other costs of doing business.
Included with the filing was a new surcharge to recover costs associated with
the environmental assessment and remediation of its service center, which was
formerly a manufactured gas plant site. The Montana Consumer Counsel ("MCC")
intervened in the rate case and in January, 1995, the Company and the MCC filed
a Joint Motion for Suspension of the Procedural Order, in order to allow both
parties to negotiate toward a stipulated settlement. On May 30, 1995, the MPSC
approved the revenue requirement stipulation executed between the Company and
the MCC as filed in March, 1995, which reduced base rates by $250,000 and
allowed a new surcharge associated with the manufactured gas plant site with an
initial balance of approximately $183,000, with the surcharge calculated on a
two-year recovery of the average annual basis. The effective date of the rate
decrease and surcharge was the beginning of fiscal 1996 or July 1, 1995. The
rate decrease reduces earnings per share by approximately 1.8 cents on
normalized volumes.


                                        4

<PAGE>



         In June, 1996, the Great Falls division filed a rate adjustment
application with the MPSC of approximately $386,000, to recover increased gas
supply costs, as part of an annual filing made by the Great Falls division to
balance gas supply costs against gas revenues. This filing does not increase the
Great Falls division's margins. On November 8, 1996, the MPSC granted interim
relief of approximately $386,000.

         On July 8, 1996, the Great Falls division filed a general rate increase
with the MPSC, which reflects increased operating, maintenance and depreciation
costs as well as a change in the cost of capital. The Great Falls division
applied for and received interim relief on November 8, 1996 of approximately
$274,000 to cover increases in operating costs and taxes. The MPSC issued a
final order on April 7, 1997, which granted the Great Falls division
approximately $386,000 to reflect the gas tracking increase to recover wholesale
gas costs and approximately $295,000 for operating costs and taxes, an increase
of $20,000 from the interim, due to the allowance of an overall rate of return
increase.

         On March 24, 1998, the Great Falls division filed with the MPSC, the
utility's plan to allow customers to choose a natural gas supplier other than
the utility. The plan would give all its customers the option to purchase its
natural gas supply from third party marketing firms, while the utility will
continue to offer delivery service and also allows customers, who do not want to
choose another supplier, to remain full service customers of the division. The
final hearing is scheduled for September, 1998. The Great Falls division would
not experience a loss of margin as a result of customer choice.

         Since an order by the MPSC in 1991, the Company has been able to
purchase gas from any supplier and transport supplies on MPC's system. The Great
Falls division, as of June 30, 1998, purchases 100% of its gas supply from EWR,
a subsidiary of Energy West, Inc. under a long-term contract expiring in 2002.

         The price of gas under the contract with EWR is fixed for the first two
years of the contract and will be renegotiated in the third year and each year
for the remaining two years. Gas purchased from EWR is transported through
pipelines owned by MPC and is delivered to the division's distribution system at
two city gates. The Company pays transportation tariffs to MPC at rates approved
by the MPSC.


                                        5

<PAGE>



         The Great Falls division contracted for gas storage from MPC in
MPC-owned gas storage areas and paid storage tariffs at rates approved by the
MPSC through October 1997. This storage was assigned to EWR when a five year gas
supply contract was signed with EWR effective November 1, 1997. The division
uses this storage capacity to provide for seasonal peaking needs.


CODY DIVISION

         The Cody division provides natural gas service in Northwestern Wyoming
to the city of Cody and the towns of Meeteetse and Ralston and the surrounding
areas. The service area has a population base of approximately 12,000. The Cody
division has a certificate of public convenience and necessity granted by the
Wyoming Public Service Commission (the "WPSC") for gas purchasing,
transportation and distribution covering the west side of the Big Horn Basin,
which stretches approximately 70 miles north and south and 40 miles east and
west from Cody. As of June 30, 1998, the Cody division provided service to
approximately 5,500 customers, including 4,700 residential customers, 800
commercial customers and one industrial customer. The division also provides
transportation service to two customers.

         The following table shows the Cody division's revenues by customer
class for the year ended June 30, 1998 and the past two fiscal years:

<TABLE>
<CAPTION>
                                                       Gas Revenues
                                                      (in thousands)

                                                    Years Ended June 30,
                                            ------------------------------------
                                             1998           1997           1996
                                            ------         ------         ------
<S>                                         <C>            <C>            <C>   
Residential .......................         $2,576         $2,669         $2,353
Commercial ........................          2,206          2,242          1,922
Industrial ........................          1,999          1,819          1,360
Transportation ....................            304            304            305
                                            ------         ------         ------
               Total ..............         $7,085         $7,034         $5,940
                                            ------         ------         ------
                                            ------         ------         ------
</TABLE>



                                        6

<PAGE>



         The following table shows the volumes of natural gas, expressed in
millions of cubic feet ("MMcf") at 13.28 P.S.I.A., sold by the Cody division for
the year ended June 30, 1998 and the past two fiscal years:

<TABLE>
<CAPTION>
                                                           Gas Volumes
                                                              (MMcf)

                                                        Years Ended June 30,
                                                   -----------------------------
                                                    1998        1997       1996
                                                   -----       -----       -----
<S>                                                <C>         <C>         <C>
Residential ................................         506         541         536
Commercial .................................         540         573         565
Industrial .................................         640         636         552
                                                   -----       -----       -----
               Total Gas Sales .............       1,686       1,750       1,653
                                                   -----       -----       -----
                                                   -----       -----       -----
Transportation .............................         354         295         642
                                                   -----       -----       -----
                                                   -----       -----       -----
</TABLE>

         The industrial sale in the Cody division is to Celotex, a manufacturer
of gypsum wallboard, under a long-term contract expiring in 2000. Sales to the
customer are made pursuant to a special industrial customer tariff which
fluctuates with the cost of gas. In fiscal 1998 this customer accounted for
approximately 28% of the revenues of the division and approximately 5% of the
consolidated revenues of the Company. The division's sales to Celotex, whose
business is cyclical and dependent on the level of national housing starts,
increased by approximately 1% over previous year's volumes. Celotex and its
parent company Jim Walters Corporation, have been operating under Chapter 11
bankruptcy since October, 1990. The bankruptcy stems from potential asbestos
claims. Approximately $132,000 was due the Cody division prior to the bankruptcy
filing. During 1995 the division increased its allowance for uncollectible
accounts to $52,000. On July 12, 1996, a joint Plan of Reorganization was filed
by Celotex. The Bankruptcy Court held a confirmation hearing on the Plans
beginning on October 7, 1996. A settlement was reached and on June 20, 1997, the
Cody division received 90% of the amount due or approximately $118,000. The
effect of the settlement was to decrease bad debt expense by approximately
$39,000, which increased the Cody division and consolidated earnings by
approximately $26,000 for fiscal 1997. No assurance can be given that Celotex
will continue to be a significant customer of the Cody division.

         The Cody division's primary transportation customer is K-N Energy, an
aggregator, producer and marketer of gas and the division's primary supplier of
natural gas. The parameters of the transportation tariff (currently between $.08
and $.30 per Mcf) are established by the WPSC. Agreements between the Company
and the customer are negotiated periodically within the parameters.

         During fiscal 1998, the Company was a party to gas financial swap
agreements for its regulated operations in the Cody division. Under these
agreements, the Company is required to pay the counterparty (an entity making a
market in gas futures) a cash settlement equal to the excess of the stated index
price over an agreed upon fixed price for gas purchases. The Company receives
cash from the counterparty when the stated index price falls below the fixed
price. These swap agreements are made to minimize exposure to gas price
fluctuations. Any cash settlements or receipts are included in gas purchased.



                                        7

<PAGE>



         The division's revenues are generated under regulated tariffs that are
designed to recover a base cost of gas, administrative and operating expenses
and provide sufficient return to cover interest and profit. The division also
services customers under separate contract rates that were individually approved
by the WPSC. The division's tariffs include a purchased gas adjustment clause
which allows an adjustment of rates charged to customers in order to recover
changes in gas costs from base gas costs. A Wyoming statute permitted the WPSC
to allow gas utilities to retain 10% of its cost of gas savings over a base
period level through fiscal 1996. In fiscal 1996 this gas cost incentive
improved gross margin for the division by approximately $139,000. The amount of
gas cost incentive if any, fluctuates with the market price of natural gas. In
fiscal 1997, the WPSC lowered the target amount in the gas cost incentive and
the Cody division currently does not earn an incentive on its gas costs.

         The Cody division's last general rate order was effective in 1989. The
Company does not contemplate filing an application for a general rate increase
for the division in the foreseeable future. The division's allowed return on
common equity on normalized earnings, calculated in accordance with the WPSC
order, has been 13.01% since the last general rate order.

         In January, 1997 the Cody division received a 19% increase in rates as
a rate adjustment filed with the WPSC, to recover increased gas supply costs.
This rate increase does not increase the Cody division's margins.

         The Cody division has a five-year agreement, expiring in 1999, with K-N
Energy, an aggregator, producer and marketer of gas, to supply natural gas to
the division. The contract has been renewed and renegotiated annually since
1989. The contract requires K-N Energy to deliver gas to various points on the
division's transmission system. Most of the gas purchased by the division is
transported on the division's own transportation system and the balance is
transported on K-N Energy's transportation system. The division also has several
small supply contracts with small producers in the Cody transportation network.
(The division's service area is located in a gas producing region.) In addition,
the division has a backup contract to purchase natural gas from Coastal Gas
Marketing, but has never purchased gas under this contract.


BROKEN BOW DIVISION

         The Broken Bow division is involved in the regulated distribution of
propane in the Payson, Arizona area. The division was formed following the
Company's acquisition of Broken Bow Gas's underground propane vapor distribution
system in January 1993. The acquisition was effective as of November 1, 1992.
The service area of the Broken Bow division includes approximately 575 square
miles and has a population base of approximately 30,000. As of June 30, 1998,
the Broken Bow division provided service to approximately 5,100 customers.

                                        8

<PAGE>



         The Broken Bow division's operations are subject to regulation by the
Arizona Corporation Commission, which regulates rates, adequacy of service,
issuance of securities and other matters. The Broken Bow division's properties
include approximately 100 miles of underground distribution pipeline and an
office building leased from a third party. The division purchases its propane
supplies from Petrogas under terms reviewed periodically by the Arizona
Corporation Commission.

         In September, 1996, the Broken Bow division filed a general rate
increase with the Arizona Corporation Commission, which reflects increased
operating, maintenance and depreciation costs as well as a change in the cost of
capital. On August 29, 1997, the Arizona Corporation Commission approved a rate
increase of $390,000 effective October 1, 1997.

NON-UTILITY OPERATIONS

         The Company conducts its non-utility operations through its three
wholly-owned subsidiaries: RMF, EWR and Montana Sun. RMF is engaged in the bulk
sale of propane through its three divisions: Petrogas of Wyoming (formerly Wyo
L-P), which serves Northwestern Wyoming, Petrogas of Arizona, which serves the
Payson, Arizona area and Missouri River Propane, which sells bulk propane in the
Cascade County area, surrounding Great Falls, Montana. RMF had approximately
2,410 customers as of June 30, 1998, of which the Petrogas of Wyoming division
had approximately 620 customers, the Petrogas of Arizona division 1,575
customers and Missouri River Propane approximately 215 customers. RMF purchases
propane from various suppliers under short- term contracts and on the spot
market, and sells propane to residential and commercial customers, primarily for
use in space heating and cooking. Petrogas of Arizona also supplies propane to
the Broken Bow division, while Missouri River Propane supplies propane to
Cascade Gas, an underground propane-vapor system serving the city of Cascade,
Montana and the Hardy Creek area located southwest of Cascade through a
satellite tank system. For the twelve months ended June 30, 1998, RMF's revenues
(excluding approximately $2,762,000 sales by Rocky Mountain Fuels Wholesale to
Petrogas of Wyoming, Petrogas of Arizona and Missouri River Propane, $2,017,000
sales by Petrogas of Arizona to the Broken Bow division and approximately
$107,000 sales by Missouri River Propane to Cascade Gas Company, an operating
district of the Great Falls division) were approximately $3,756,000, of which
approximately $1,499,000 was attributable to the Petrogas of Wyoming division,
$894,000 was attributable to the Petrogas of Arizona division, $124,000
attributable to the Missouri River Propane division and approximately $1,238,000
to the Rocky Mountain Wholesale operation, which markets propane to propane
distributors in Wyoming, South Dakota, Colorado and Missouri River Propane in
Montana and Petrogas of Arizona, in Payson, Arizona.




                                        9

<PAGE>



         On June 28, 1996, Petrogas of Arizona sold real property, consisting of
land and office and warehouse building, for $525,000 in cash resulting in a gain
of $236,000. The gain will be amortized ratably into income over the initial
ten-year lease term. Concurrent with the sale, the Company leased the property
back for a period of ten years at an annual rental of $51,975. Petrogas
sub-leases the property to the Broken Bow division.

         On August 1, 1997, the Company entered into a take or pay propane
contract which expires July 31, 1998. The contract generally required the
Company to purchase all propane quantities produced by a propane producer in
Wyoming (approximately 250,000 gallons per month) tied to the Worland, Wyoming
spot price.

         On February 23, 1998, the Company sold four retail propane districts in
Wyoming, which was part of Wyo L-P (now Petrogas of Wyoming), resulting in a
one-time pre-tax capital gain of approximately $125,000.

         RMF faces competition from other propane distributors and suppliers of
the same fuels that compete with natural gas. Competition is based primarily on
price and there is a high degree of competition with other propane distributors
in the service areas.

         EWR was involved in a small amount of oil and gas development and the
marketing of gas in Montana and Wyoming. EWR had varying working interests in
four oil and nine gas producing properties. Those properties were sold in fiscal
1997, with no significant gain. Volumes of oil and gas produced were not
significant and did not result in significant net income in fiscal 1997. The
Company believes that the ordering of MPC to provide open access on its gas
transportation system in Montana presents an opportunity for EWR to do business
as a broker of natural gas using the MPC and other systems. EWR presently has
ten customers for those services, plus several units of the State of Montana.
EWR has an underground storage facility near Havre, Montana, which allows more
flexibility in the timing of its gas purchases.

         For the fiscal year ended June 30, 1998, the Company is a party to one
hedge agreement for non-regulated operations. For the fiscal year ended June 30,
1997, the Company was a party to three gas hedges. These agreements represented
approximately 95% of the supply required for operations during that fiscal year.
The hedges were made to minimize the Company's exposure to price fluctuations
and to secure a known margin for the purchase and resale of gas.


         Montana Sun owns a commercial real estate property and a parcel of
undeveloped land in Great Falls, Montana. Montana Sun leases the commercial
property to a federal governmental agency. The Company is presently seeking to
sell the commercial property, but is otherwise inactive at this time.

         Additional information with respect to the nonutility operation of the
Company is set forth in Notes 1, 6, 9 and 10 to the Company's consolidated
financial statements.



                                       10

<PAGE>



CAPITAL EXPENDITURES

         The Company generally conducts a continuing construction program and is
continuing expansion of its gas pipeline in areas around metropolitan Great
Falls as well as an underground propane-vapor system in the town of Cascade,
Montana, southwest of Great Falls. In the Cody division, expansion of the gas
system in that area was completed and in the Broken Bow division, construction
is still being completed, as a result of growth. West Yellowstone Gas Company
transports liquefied natural gas from southwestern Wyoming for revaporization
into the system. The Great Falls division has also added an underground propane
vapor system to service customers in the Hardy area, 30 miles southwest of Great
Falls, Montana. In fiscal years 1998, 1997 and 1996, total capital expenditures
were approximately $3,075,000,$3,207,200 and $4,591,000 respectively.

OTHER BUSINESS INFORMATION

         The principal competition faced by the Company in its distribution of
natural gas is from other suppliers of competitive fuels, including electricity,
oil, propane and coal. The principal competition faced by the Company in its
distribution and sales of propane is from other propane distributors and
suppliers of the same energy sources that compete with natural gas and
electricity. Competition is based primarily on price and there is a high degree
of competition with other propane distributors in the service areas. The
principal considerations affecting a customer's selection of utility gas service
over competing energy sources include service, price, equipment costs,
reliability and ease of delivery. In addition, the type of equipment already
installed in businesses and residences significantly affects the customer's
choice of energy. However, where previously installed equipment is not an issue,
households in recent years have consistently preferred the installation of gas
heat. The Great Falls division's statistics indicate that approximately 95% of
the houses and businesses in the service area use natural gas for space heating
fuel, approximately 91% use gas for water heating and approximately 99% of the
new homes built on or near the Great Falls division's service mains in recent
years have selected natural gas as their energy source. The Cody division
believes that approximately 95% of the houses and businesses in the service area
use natural gas for space heating fuel, approximately 90% use gas for water
heating, and approximately 99% of the new homes built on or near the division's
service mains in recent years have selected gas as their energy source. The
Broken Bow division believes that approximately 59% of the houses and businesses
adjacent to the division's distribution pipeline use the division's propane for
space heating or water heating. EWR's principal competition is from other gas
marketing firms doing business in the State of Montana, brokering natural gas
using the MPC and other systems. EWR presently has ten customers for natural gas
services. The Great Falls division and MPC have filed plans with the MPSC, to
allow customers to choose a natural gas supplier other than the utility, down to
the residential level. EWR believes that the unbundling of natural gas service
will provide future opportunity for gas marketing operations.




                                       11

<PAGE>



         The Company had approximately 122 employees as of June 30, 1998.
Twenty-two of the employees were with the Cody division, 10 employees were with
RMF and 18 were with the Broken Bow division. The other 61 employees were with
the Great Falls division, including Cascade Gas and West Yellowstone Gas and 11
at corporate headquarters. Approximately 13 full-time and 3 seasonal hourly
employees in the Great Falls division are represented by two collective
bargaining units, the United Association of Journeymen and Apprentices of the
Plumbing and Pipefitting Industry of the USA and the Construction and General
Laborer's Union. The Company's two labor contracts were renegotiated through
April 30, 2000. The Company considers its relationship with its employees to be
satisfactory.

         The Company has instituted an extensive customer-related energy
conservation program which encourages the efficient use of energy through proper
conservation measures. The Company provides inspection services to homeowners
and businesses and recommends appropriate conservation projects. The Company
also is concentrating on increasing load in existing residential structures by
the addition of gas appliances and conversion of homes with all electric
appliances. The Company has started a natural gas and propane appliance showroom
to market gas appliances in the Great Falls and Cody divisions with future plans
to market appliances in the propane offices of the Company.

         In addition, the Company encourages converting commercial food service
equipment to natural gas through a developed commercial equipment efficiency
program, both in Great Falls and Cody. The Company's field marketing personnel
are paid through an incentive plan geared to how much load they add to the
system.

         The Company has expanded its wholesale propane operations to retail
propane distributors in South Dakota, Nebraska and Colorado.

         The Company has management and employee incentive programs tied to
bottom-line performance of the corporation. Officers and management, down to
first-line supervisors, participate in a pay-for-performance program. Payout
begins at any achievement over 90% for both the return on equity and earnings
per share components with targets set by the Compensation Committee of the Board
of Directors, based on the operating budget set by the Company. The schedules
for each division are based on the budget with 40% weighting on consolidated
return on equity and the balance on division target earnings per share for
Assistant Division Managers and 25% weighting, with the balance on division
target earnings per share for Supervisors and the SPO achievement determining
65% of the payout . Whether the incentive is actually earned depends on whether
the individuals in the program achieve individual specific performance
objectives set at the beginning of the year. Incentives vary from .8% on up of
base wages. The Company is in the process of changing the incentive program
effective for fiscal 1999, which will be based on new performance criteria. All
officers and eligible employees participate in the Company's Employee Stock
Ownership Plan, in which payout is based on pre-tax earnings of the Company and
approved by the Board each year.

         The Company has implemented a deferred compensation plan for directors,
which allows a director to defer directors' fees and incentive awards until such
time as the director ceases to be a director of the Company by retirement or
otherwise. The plan provides an incentive compensation based on the total fees
earned by each Director for that year multiplied by the highest percentage
incentive award for that year to any employee under the Company's management
incentive compensation plan, which in fiscal 1998 was 53.02%. Fees (either cash
or stock) and incentive compensation (stock only) can be received either
currently, as they are earned, or on a deferred basis. Elections to defer
receipts are subject to timing requirements. The deferred compensation plan for
directors was approved by the shareholders at the Annual Shareholders Meeting of
Energy West, Incorporated November 21, 1996.




                                       12

<PAGE>



PART I
Item 2. - PROPERTIES

The Company owns all of its properties in Great Falls, including an office
building, a service and operating center, regulating stations and its
distribution system. In Wyoming, the Company owns its distribution system,
including 167 miles of transmission pipeline. Office and service buildings for
the Cody division are leased under long-term leases. RMF owns buildings, propane
tanks and related metering and regulating equipment for the Wyoming and Arizona
propane distribution operations. The Company owns mains and service lines for
the Broken Bow division's propane vapor distribution operation in Payson,
Arizona. In June, 1996, Petrogas of Arizona, a division of RMF, sold its land
and office and warehouse buildings in Payson, Arizona to an outside party and
signed a lease agreement with the same party for a period of ten (10) years,
with a provision of extension of the lease for two successive five (5) year
periods. RMF does not have an option to repurchase the real property. However,
should the lessor have a bona fide third-party offer, the Company has the right
of first refusal to buy the land and buildings under the same terms and
conditions offered.

ENVIRONMENTAL MATTERS

The Company owns property on which it operated a manufactured gas plant from
1909 to 1928. The site is currently used as a service center for the Company
where certain equipment and materials owned by the Company are stored. The coal
gasification process utilized in the plant resulted in the production of certain
by-products which have been classified by the federal government and the State
of Montana as hazardous to the environment. Several years ago the Company
initiated an assessment of the site to determine if remediation of the site was
required. That assessment resulted in a submission of a report to the Montana
Department of Environmental Quality ("MDEQ"), formerly known as the Montana
Department of Health and Environmental Sciences ("MDHES"), in 1994. The Company
has worked with the MDEQ since that time to obtain the data that would lead to a
remediation action acceptable to MDEQ. The Company's environmental consultant
filed the report with the MDEQ on June 11, 1997. The MDEQ is evaluating the
report and after completion of its review will provide for public comment
related to the remediation plan. Once the comment period has lapsed and due
consideration of any comments occurs, the plan can be finalized. Assuming
acceptance of the plan, remediation can begin by the fall of 1998.

At June 30, 1998 the costs incurred in evaluating this site have totaled
approximately $436,000. On May 30, 1995 the Company received an order from the
Montana Public Service Commission allowing for recovery of the costs associated
with evaluation and remediation of the site through a surcharge on customer
bills. As of June 30, 1998, that recovery mechanism had generated approximately
$575,000. The Company expects to spend the full amount recovered through the
surcharge. The Commission's decision calls for ongoing review by the Commission
of the costs incurred for this matter.


                                       13

<PAGE>



Item 3. - LEGAL PROCEEDINGS

From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. Neither the
Company nor any of its subsidiaries is a party to any legal proceedings, other
than as described below, the adverse outcome of which individually or in the
aggregate, in the Company's view, would have a material adverse effect on the
Company's results of operations, financial position or liquidity.

On December 20, 1996, an action was filed against the Company by Randy Hynes and
Melissa Hynes in Federal District Court in Wyoming. The action arises from a
natural gas explosion involving a four-plex apartment building which was damaged
after natural gas from a gas line leaked into the building on February 3, 1996
(which was not served by natural gas). The plaintiffs, who were tenants in the
building, sustained burns and other injuries as well as property damage. A trial
concluded February 6, 1998 and a judgement holding for the plaintiffs has been
entered. The Company was found to be 55% negligent and damages for its share of
the judgement are approximately $2,900,000.The Company's primary and excess
insurance completely indemnifies the Company against the judgement. The
judgement has been appealed to the United States Court of Appeals for the Tenth
Circuit.

A similar lawsuit involving the same explosion was filed by five other
plaintiffs in Wyoming District court, Park County, Wyoming on April 3, 1997. The
allegations are substantially the same as the allegations in the Federal
District Court case. The Company has filed an answer denying liability and is
contesting the matter vigorously. The plaintiffs, Heidl Woodward, et al., were
also tenants in the apartment building. Trial on these claims is schedule for
January, 1999. The Company is also fully indemnified by its insurance policy for
this claim.

On October 24, 1996, an action was filed against the Company by Colten and Julie
White and their three children in Superior Court in Gila County, Arizona. The
action arises from an explosion that occurred on May 3, 1995 in the plaintiffs'
new home which was serviced by the Company's propane business. The explosion
occurred in the course of the plaintiffs' attempt to light their appliances for
the first time. The plaintiffs sustained injuries and property damage in the
explosion and the fire that occurred after the explosion. The claims are for
personal injury, mental suffering and anguish, medical expenses, lost income,
property damages and punitive damages. A settlement was entered with the
plaintiff resolving all of the issues raised in the plaintiff's complaint for
approximately $700,000.

On September 4, 1998, the Company received correspondence from the Department of
Justice that a claim was being considered by the United States of America (U.S.)
against Energy West, Incorporated (the "Company"). The correspondence indicated
that a complaint has been prepared by Jack Grynberg, acting as Relator on behalf
of the U.S., alleging that the Company had utilized improper measurement
procedures in the measurement of gas which a\was produced from wells owned by
it, by its subsidiaries, or from which the Company may have acted as operator
respecting wells actually owned by others. The alleged improper measurement
procedure purportedly understated the amount of royalty revenue which would have
been paid to the U.S. as royalty revenue had a different method been used for
measurement. The complaint is substantially identical to the complaint being
made against seventy-seven other parties. The Company believes it's insurance
coverage will indemnify the company against any liability which may be assessed
as a result of the complaint as well as the cost of defending such action, and
has tendered the complaint to its insurance carrier. However, the Company at the
date of this filing, has not received verification from its carrier respecting
its position respecting this claim.

The Company carries commercial general liability insurance for bodily injury and
property damages of $1,000,000 per occurrence and $5,000,000 in the aggregate,
and has an additional $30,000,000 umbrella policy for excess claims. The
Company's general liability carrier has assumed the defense of the current
Wyoming action and conducted the defense of the Hines and White matters.

                                       14

<PAGE>



Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                   None

EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY

The following table sets forth the names and ages of, and the positions and
offices within the Company presently held by, all directors and executive
officers of the Company:

<TABLE>
<CAPTION>
     Name                      Age                        Position
     ----                      ---                        --------
<S>                            <C>              <C>
Larry D. Geske                 59               President and Director since
                                                1978; appointed Chief
                                                Executive Officer in 1979

Edward J. Bernica              48               Vice-President and Chief
                                                Financial Officer since
                                                October, 1994

William J. Quast               59               Vice-President and Manager of
                                                Montana Operations of Energy
                                                West, Inc and Assistant
                                                Secretary since July 1998,
                                                Vice-President, Treasurer,
                                                Controller and Assistant
                                                Secretary since 1988, has been
                                                Vice-President, Secretary and
                                                Treasurer since 1987,
                                                Assistant Vice-President,
                                                Secretary Controller and
                                                Assistant Treasurer since
                                                1983, Secretary since 1982 and
                                                an Assistant Treasurer of the
                                                Company since 1979

Tim A. Good                    53               Vice-President and Manager of
                                                the CGD since 1988; General
                                                Manager of Cody Gas Company, a
                                                Division of the Coastal
                                                Corporation, for five years
                                                prior to the acquisition of
                                                CGD by the Company

Sheila M. Rice                 51               Vice-President of Marketing
                                                for Energy West, Inc. since
                                                July 1998; Vice-President and
                                                Division Manager of the Great
                                                Falls division since April,
                                                1993; Vice-President Marketing
                                                and Consumer Services 1988 -
                                                1993 and has been Vice-
                                                President, Marketing and
                                                Consumer Relations 1987 -1988;
                                                Assistant Vice-President
                                                for Marketing and Customer
                                                Relations 1983-1987.
</TABLE>

                                       15

<PAGE>


<TABLE>
<CAPTION>
     Name                      Age                        Position
     ----                      ---                        --------
<S>                            <C>              <C>
John C. Allen                  47               Vice-President of Human
                                                Resources and Corporate
                                                Counsel and Secretary since
                                                1992; Corporate Counsel and
                                                Secretary since 1988; Counsel
                                                and Assistant Secretary from
                                                November 1986 to 1988 and
                                                Corporate Attorney to the
                                                Company from March 1986 to
                                                November 1986

Lynn F. Hardin                 50               Assistant Vice-President of
                                                Gas Supply and Trading since
                                                November, 1997; Assistant
                                                Division Accountant of The
                                                Coastal Corporation, for five
                                                years prior to acquisition of
                                                CGD by the Company

Earl L. Terwilliger, Jr.       50               Assistant Vice-President for
                                                Market Development for the
                                                Great Falls division since
                                                1990; has been Assistant Vice-
                                                President of Customer
                                                Accounting and Credit since
                                                1988

James E.Morin                  44               Assistant Vice-President of
                                                Commercial and Industrial
                                                Marketing of Energy West
                                                Resources since November 1997

Steven G.Powers                54               Assistant Vice-President and
                                                Manager of Energy West
                                                Resources since November 1997

Jackie D.Chesser               59               Assistant Vice-President of
                                                Wholesale Sales, Rocky
                                                Mountain Fuels, Inc. since
                                                November 1997, previously was
                                                Manager of Wyo L-P operations
                                                of Energy West, Inc.

Jed D.Henthorne                38               Assistant Vice-President and
                                                Controller of Rocky Mountain
                                                Fuels, Inc. since November,
                                                1998, Accounting Manager for
                                                the CGD and employed by
                                                Coastal Corporation,  prior to
                                                acquisition of CGD by the
                                                Company.
</TABLE>


                                       16

<PAGE>

<TABLE>
<CAPTION>
     Name                      Age                        Position
     ----                      ---                        --------
<S>                            <C>              <C>
Douglas R. Mann                51               Assistant Vice-President of
                                                Rocky Mountain Fuels,
                                                Inc. since November 1997 and
                                                Manager of Broken Bow Gas and
                                                Petrogas of Arizona divisions
                                                and Assistant Secretary, since
                                                1995, employed by Energy West,
                                                Inc. since.

Timothy P.Culliton             44               Assistant Vice-President and
                                                Controller of Energy West,
                                                Inc., since November, 1997,
                                                previously Accounting Manager
                                                and Director of Corporate
                                                Taxes and employed by Energy
                                                West, Inc. since 1989.

Ian B. Davidson                66               Director since 1969

George D. Ruff                 60               Director since 1996

Thomas N. McGowen, Jr.         72               Director since 1978

G. Montgomery Mitchell         70               Director since 1984

Dean South                     55               Director since 1996

David A. Flitner               65               Director since 1988

Richard J. Schulte             58               Director since 1997
</TABLE>

Larry D. Geske has been employed by the Company since 1975 and became President
and Director of the Company in 1978. In 1979, Mr. Geske was appointed to the
position of Chief Executive Officer. In addition, Mr. Geske is a past Director
of First Interstate Bank of Great Falls (parent Company is First Interstate Bank
Corporation) and is a Director of the Great Falls Capital Corporation and the
Great Falls Dodgers Baseball Club. He is also a Director of the American Gas
Association's Board. Mr. Geske, prior to service with the Company, was a Field
Engineer "A" with NIGAS in Aurora, Illinois and a Senior Consultant with Stone
and Webster Management Consultants, Inc. in New York.

Mr. Edward J. Bernica has been employed by the Company since October 1994 and
became Vice-President and Chief Financial Officer in November, 1994. Mr.
Bernica, prior to service with the Company, was Director of Finance at U. S.
West in Englewood, Colorado and prior to that, was employed by ENRON Corporation
in Omaha, Nebraska as Director-Financial Analysis and Planning

William J. Quast has been Vice-President, Treasurer, Controller and Assistant
Secretary since 1988 and on July 1, 1998 was appointed Vice-President and
Division Manager of the Montana Operations. He has served as Vice-President,
Secretary and Treasurer since 1987 and as Assistant Vice-President, Secretary,
Controller and Assistant Treasurer since 1983. He has served as Secretary of the
Company since 1982 and as Assistant Treasurer of the Company since 1979. Mr.
Quast, prior to service with the Company, was an accounting manager for Wyton
Oil and Gas Company, a multi-state propane distributor headquartered in Denver,
Colorado, and was Treasurer for D. A. Davidson & Co. in Great Falls, Montana.


                                       17

<PAGE>



Tim A. Good has been Vice-President and Division Manager of the CGD since 1988.
He served as General Manager of Cody Gas Company, a Division of The Coastal
Corporation for five years prior to the acquisition of the Cody Gas Company by
EWST in 1988.

Sheila M. Rice has been Vice-President and Division Manager of the Great Falls
division since April, 1993 and effective July 1, 1998, was appointed
Vice-President of Marketing. Prior to that, she was Vice-President of Marketing
and Consumer Services since 1988. She served as Vice-President, Marketing and
Consumer Relations from 1987 to 1988, Assistant Vice-President for
Marketing/Customer Relations from 1983 to 1987 and as Consumer Service
Representative/Conservation Specialist for the Company from 1979 to 1983.

John C. Allen has been Vice-President of Human Resources and Corporate Counsel
since 1992 and previously served as Corporate Counsel and Secretary of the
Company since 1988. He served as Corporate Counsel and Assistant Secretary from
November 1986 until 1988 and as Corporate Attorney of the Company (March,
1986-November 1986). From 1979 to 1986, Mr. Allen was employed
as a staff attorney with the Montana Consumer Counsel.

Lynn F. Hardin has been Assistant Vice-President of Gas Supply since June 1,
1993. Prior to that, he was Assistant Vice-President of Division Administration
since 1989. He was Manager of Accounting and Administration of Cody Gas Company,
a Division of The Coastal Corporation for five years prior to the acquisition of
the Cody Gas Company by the Company in 1988.

Earl L. Terwilliger, Jr. has been Assistant Vice-President for Market
Development since 1990. He served as Assistant Vice-President of Customer
Accounting and Credit from 1988 to 1990 and Manager of Customer Accounting and
Credit for the previous four years. Prior to that time, Mr. Terwilliger was
office manager.

James E. Morin has been Assistant Vice-President of Commercial and Industrial
Marketing of Energy West Resources since November 1997.

Steven G.Powers has been Assistant Vice-President and Manager of Energy West
Resources since November 1997.

Jackie D.Chesser has been Assistant Vice-President of Wholesale Sales, Rocky
Mountain Fuels, Inc. since November 1997, previously was Manager of Wyo L-P
operations of Energy West, Inc.

Jed D.Henthorne has been Assistant Vice-President and Controller of Rocky
Mountain Fuels, Inc. since November, 1998, Accounting Manager for the CGD and
employed by Coastal Corporation, prior to acquisition of CGD by the Company.

Douglas R. Mann has been Assistant Vice-President of Rocky Mountain Fuels, Inc.
since November 1997 and Manager of Broken Bow Gas and Petrogas of Arizona
divisions and Assistant Secretary, since 1995, employed by Energy West, Inc.
since April 1983.

Timothy P.Culliton has been Assistant Vice-President and Controller of Energy
West, Inc., since November, 1997, previously Accounting Manager and Director of
Corporate Taxes and employed by Energy West, Inc. since 1989.

Ian B. Davidson has been a Director of the Company since 1969. Mr. Davidson
serves as Chairman and CEO of DADCO, a holding company which owns D. A. Davidson
& Co., Davidson Trust Co., Financial Aims Corp. and DADCO Travel since October
1970. Mr. Davidson is also a Director of Plum Creek Management Company of
Seattle, Washington and is a past Chairman of the National Association of
Securities Dealers.

George D. Ruff has been a Director of the Company since 1996. Mr. Ruff retired
as Vice-President of Montana Operations for U.S. West, Inc. He held that
position from June of 1983 until his retirement in 1996. He is a director of
Norwest Bank, the Montana Taxpayers Association and is a Director of the Montana
Chamber Foundation Board.

                                       18

<PAGE>



Thomas N. McGowen, Jr. has been a Director of the Company since 1978. Mr.
McGowen is a retired attorney and is past President and Chairman of the Board of
Pabst Brewing Company. Mr. McGowen is a Director of Federal Signal Corporation
and Ribi Immunochem Corporation.

G. Montgomery Mitchell has been a Director of the Company since 1984. Mr.
Mitchell was a Senior Vice-President and Director of Stone and Webster
Management Consultants, Inc. from August 1980 until his retirement in 1993 and
continues with Stone and Webster as a senior advisor and consultant. Mr.
Mitchell is a Director of Mobile Gas Service Corporation (Alabama).

Dean South has been a Director of the Company since 1996. Mr. South currently
ranches north of Helena, Montana. Mr. South has been active in the management of
propane distribution companies for most of his career. In 1991, Mr. South
retired from the propane distribution industry having served as Vice President
of Western Operations for Heritage Propane Corporation from October of 1989
until his retirement in 1991. From 1986 until 1989 he served as President and
Chief Operating Officer of Louis Dreyfus Propane Corporation. From 1981 until
1986 he served as President of Northern Energy Company which subsequently merged
with Louis Dreyfus Propane. He was appointed in August, 1996 to fill the
unexpired term of Mr. Moylan as a Director for ENERGY WEST, Inc.

David A. Flitner has been a Director of the Company since 1988. Mr. Flitner is
owner of the Flitner Ranch and Hideout Adventures, Inc., a recreational
enterprise.

Richard J. Schulte has been a Director of the Company since 1997. Mr. Schulte is
Special Advisor on standards development and product certification practices to
the Canadian Standards Association (CSA) and its new subsidiary, International
Approval Services, Inc. (IAS). Mr. Schulte was formerly President of IAS and
Senior Vice-President, American Gas Association Laboratories. He is a director
of the American Society for Testing and Materials (ASTM), and a member of the
Joint Oversight Board for the U.S. National Accreditation Program for
Environmental and Quality System Registrars.

                                       19

<PAGE>



                                     PART II

Item 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Common Stock Prices and Dividend Comparison - Fiscal 1998 and Shares of the
Company's Class A Common Stock are traded in the over-the-counter market on the
NASDAQ (National Association of Securities Dealers Automated Quotation)
system-symbol: EWST. The over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent the actual transactions. Prices are shown as a result of a 2-for-1
stock split, effective June 24, 1994.


<TABLE>
<CAPTION>
Price Range - Fiscal 1998                                      High             Low
-------------------------                                      -----           -----
<S>                                                            <C>             <C> 
First Quarter ..................................               9.125           8.25
Second Quarter .................................               9.125           8.75
Third Quarter ..................................               9.125           8.625
Fourth Quarter .................................               8.938           8.375
Year ...........................................               9.125           8.25

Price Range - Fiscal 1997 ......................              High             Low
-------------------------                                     -----           -----

First Quarter ..................................               8.75            7.875
Second Quarter .................................               8.75            8.125
Third Quarter ..................................               8.625           8.125
Fourth Quarter .................................               8.625           8.125
Year ...........................................               8.75            7.875
</TABLE>




Dividends: The Board of Directors normally consider approving common stock
dividends for payments in March, June, September and January. Quarterly dividend
payments per common share for Fiscal Years 1998 and 1997 were:

<TABLE>
<CAPTION>
                                                        Fiscal 1998         Fiscal 1997
                                                        -----------         -----------
<S>                                                        <C>                 <C>   
September ..............................                   $.1100              $.1050
January ................................                   $.1100              $.1050
March ..................................                   $.1100              $.1050
June ...................................                   $.1150              $.1100
</TABLE>





                                       20

<PAGE>



Item 6. - SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                          Selected Financial Data (1998-1994)
                                           --------------------------------------------------------------
                                                 (dollar amounts in thousands, except per share data)

                                              1998         1997         1996         1995         1994
                                           ----------   ----------   ----------   ----------   ----------
<S>                                        <C>          <C>          <C>          <C>          <C>       
Operating results:
   Operating revenue ...................   $   43,064   $   38,215   $   31,318   $   30,548   $   29,347
   Operating expenses
        Gas purchased ..................       28,757       24,675       18,724       18,616       18,410
        General  administrative ........        7,697        7,498        6,924        6,380        5,979
        Maintenance ....................          497          497          409          306          331
        Depreciation and amortization ..        1,732        1,689        1,667        1,559        1,464
        Taxes other than income ........          628          660          629          595          527
                                           ----------   ----------   ----------   ----------   ----------

        Total operating expenses .......       39,311       35,019       28,353       27,456       26,711


Operating income .......................        3,753        3,196        2,965        3,092        2,636
                                           ----------   ----------   ----------   ----------   ----------
Other income - net .....................          142          325          215          175          199
                                           ----------   ----------   ----------   ----------   ----------

Income before interest charges .........        3,895        3,521        3,180        3,267        2,835

Total interest charges .................        1,583        1,525        1,243          938          962
                                           ----------   ----------   ----------   ----------   ----------

Income before taxes ....................        2,312        1,996        1,937        2,329        1,873

Income taxes ...........................          792          703          670          816          614


Income before a cumulative effect of
    a change in accounting principal ...        1,520        1,293        1,267        1,513        1,259
Cumulative effect of change as of
   July 1, 1993 from adoption of
    FASB 109 ...........................            0            0            0            0           92


Net income .............................   $    1,520   $    1,293   $    1,267   $    1,513   $    1,351
                                           ----------   ----------   ----------   ----------   ----------
                                           ----------   ----------   ----------   ----------   ----------
Earnings per Share
Earnings per Share before cumulative 
  effect of FASB 109 ...................          .64          .55         0.55         0.68         0.57
Earnings per common share ..............          .64         0.55         0.55         0.68         0.61

Dividends per common share .............          .45         0.43         0.41         0.39         0.36

Weighted average common shares
Outstanding ............................    2,390,814    2,356,624    2,298,734    2,235,413    2,205,050

At year end:
        Current assets .................   $   12,326   $   12,398   $    9,092   $    6,263   $    5,270
        Total assets ...................       43,335       42,885       37,495       32,375       28,786

        Current liabilities ............        6,745       15,317       11,088        6,786        4,193
        Total long-term obligations ....       17,278        9,684       10,046       10,435       10,718
        Total stockholders' equity .....       12,811       11,997       11,400       10,533        9,393
                                           ----------   ----------   ----------   ----------   ----------
        Total capitalization ...........   $   30,089   $   21,681   $   21,446   $   20,968   $   20,111
                                           ----------   ----------   ----------   ----------   ----------
                                           ----------   ----------   ----------   ----------   ----------
</TABLE>



                                       21

<PAGE>





Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF CONSOLIDATED OPERATIONS

RESULTS OF CONSOLIDATED OPERATIONS

Fiscal 1998 Compared to Fiscal 1997

Net Income

         The Company's net income for fiscal 1998 was $1,520,000 compared to
$1,293,000 in fiscal 1997, an increase of $227,000 or 18%, due primarily to an
increase in net income of the non-utility divisions as a result of a one-time
capital gain on the sale of four retail propane districts in Wyoming and
increased gas trading margins in Energy West Resources, Inc., due to favorable
natural gas prices in Canada and Montana. Partially offsetting these increases
was a write-off of an investment by Montana Sun, Inc., in American Gas Finance
Company, LLC, a financing operation of the American Gas Association, which
discontinued its operation. In addition, the utility operations increased its
net income, due to higher other income and lower short-term interest charges.

Revenue

         Operating revenues increased approximately 13%. Regulated revenues
increased approximately 4% compared to the prior year due to rate increases and
customer growth in the West Yellowstone and Broken Bow utility divisions.
Nonregulated revenues increased approximately 34% primarily from increased gas
trading revenues of approximately 90%, due to decreased natural gas prices and
expanded markets and customer growth. Partially offsetting this increase was a
decrease in sales, due to the sale of four retail propane districts in Wyoming
in fiscal 1998.

Gross Margin

         Gross margins (operating revenues less cost of gas purchased and cost
of gas trading) increased approximately $768,000 in 1998. Regulatory gross
margins increased approximately $88,000 because of higher margins from propane
vapor sales in the Broken Bow division, due to a 17% rate increase and customer
growth and higher margins from natural gas sales in the West Yellowstone
district, similarly due to customer growth and a rate increase. Partially
offsetting this increase was a decrease in margins in the Great Falls and Cody
divisions, due to warmer weather than one year ago. Nonregulated gross margins
increased approximately $683,000 primarily due to increased gas trading margins
of Energy West Resources, partially offset by lower margins in Rocky Mountain
Fuels, because of the sale of four of the retail propane outlets in Wyoming in
fiscal 1998, as well as warmer weather than one year ago.

Regulated Revenues

         Regulated revenues increased from $26,882,000 in fiscal 1997 to
$27,824,000 in fiscal 1998 or 4%, primarily due to increases in the Broken Bow
division of approximately $997,000 because of increased propane vapor sales, due
to colder weather than one year ago and customer growth, as well as a 17% rate
increase; a 2% rate increase and customer growth in the West Yellowstone
district, partially offset by lower revenues in the Great Falls and Cody
divisions, due to warmer weather than one year ago. Gas purchased increased from
approximately $16,193,000 in fiscal 1997 to $17,047,000 in fiscal 1998 or 5%,
primarily due to an increase in natural gas prices .

Regulated Operating Income

         Regulated operating income decreased approximately $30,000 in fiscal
1998 or 1%, primarily due to higher distribution, general and administrative
expenses, due to normal inflationary trends and higher depreciation costs, due
to expansion of property, plant and equipment, partially offset by higher
margins in the Broken Bow division and the West Yellowstone district.

Nonregulated Operating Income

         Nonregulated operating income increased approximately $586,000 in
fiscal 1998 or 89%, due to increases in gas trading margins of approximately
$683,000 in Energy West Resources, partially offset by higher general,
administrative and maintenance expenses, due to staff expansion and training
required, to service the growth in gas marketing operations.




                                       22

<PAGE>



         Operating expenses (excluding cost of gas sales) increased
approximately $200,000 or 2% in 1998. The primary reason for this increase was
due to normal inflationary trends and increased depreciation due to expansion of
property, plant and equipment.

         As a result of the above changes, operating income increased 17% from
$3,195,000 in 1997 to $3,753,000 in 1998. Total interest expense for the Company
was $1,583,000 for fiscal 1998, up from $1,525,000 in fiscal 1997, primarily due
to an $8,000,000 debt issuance on August 15, 1997, which was used to pay down
short-term debt. Other income net, decreased 56% from $325,000 in fiscal 1997 to
$143,000 in fiscal 1998, primarily due to the write-off of the investment in
American Gas Finance Company, LLC of approximately $248,000, offset partially by
the one-time gain on the sale of four retail propane districts in Wyoming of
approximately $136,000.


Fiscal 1997 Compared to Fiscal 1996

Net Income

         The Company's net income for fiscal 1997 was $1,293,000 compared to
$1,267,000 in fiscal 1996, an increase of $26,000 or 2%. The following summary
describes the components of the change between years.

Revenue

         Operating revenues increased approximately 22%. Regulated revenues
increased approximately 14% compared to the prior year due to a rate and gas
tracker increase in the Great Falls division, effective November 4, 1996, and a
gas tracker increase in the Cody division effective January 1997, in addition to
colder weather this year than one year ago in the Great Falls, Cody, West
Yellowstone and Broken Bow utility divisions. Nonregulated revenues increased
approximately 48%, from increased bulk propane sales in the areas served by Wyo
L-P gas in Wyoming, Missouri River Propane in Montana and Petrogas in Arizona,
as well as increased wholesale propane sales in Wyo L-P in Wyoming. Both
Missouri River Propane and Petrogas sell propane to related regulated utilities
Cascade Gas Company and Broken Bow Gas Company, respectively. Operating revenues
in Energy West Resources decreased by 31%; however, gas trading revenues
increased by 38% due to customer growth and an increase in volumes.

Gross Margin

         Gross margins (operating revenues less cost of gas purchased and cost
of gas trading) increased approximately $944,000 in 1997. Regulatory gross
margins increased approximately $663,000 because of higher margins from natural
gas sales in the Great Falls and Cody divisions and in the West Yellowstone area
and higher margins from propane vapor sales in the Broken Bow division, due to
colder weather than one year ago and customer growth in all utility operations,
as well as a 1.86% interim rate increase in the Great Falls division, effective
November 4, 1996, which contributed to increased margins by approximately
$112,000. Nonregulated gross margins increased approximately $283,000, primarily
due to larger margins in the Wyo L-P division for wholesale propane sales
partially offset by lower gas trading margins in Energy West Resources.

Regulated Revenues

         Regulated revenues increased from $23,672,000 in fiscal 1996 to
$26,882,000 in fiscal 1997 or 14%, primarily due to increases in the revenues of
the Great Falls division of approximately $1,397,000, the Cody division of
approximately $1,094,000 and the Broken Bow division of approximately $720,000
because of increased natural gas and propane vapor sales, due to colder weather
than one year ago and customer growth in all utility operations, as well as a
1.86% interim rate increase in the Great Falls division, effective November 4,
1996 and a 19% increase in the Cody division effective January, 1997 and
increased sales in Cody to an industrial customer who increased production,
requiring more natural gas. Gas purchased increased from approximately
$13,646,000 in fiscal 1996 to $16,193,000 in fiscal 1997 or 19%, primarily due
to a 35% increase in natural gas costs from one year ago and increased volumes
of natural gas purchased, due to colder weather than one year ago as well as
increases in customers.

Regulated Operating Income

         Regulated operating income increased approximately $317,000 in fiscal
1997 or 14%, primarily due to increased gross margins of approximately $663,000,
due to customer growth, colder weather than one year ago, as well as a 1.86%
rate increase in the Great Falls division, effective November, 1996, partially
offset by higher utility operating expenses and taxes other than income of
approximately $345,000, due to normal inflationary trends and less payroll,
payroll taxes and other expenses capitalized to projects as well as higher
property taxes in all three states served by Energy West.

Nonregulated Operating Income

         Nonregulated operating income decreased approximately $87,000 in fiscal
1997 or 11%, due to higher operating and maintenance expenses of approximately
$328,000 due to inflation and growth of nonregulated operations, higher
depreciation and amortization costs of approximately $32,000, higher property
taxes of approximately $9,000, offset partially by higher margins on gas and
propane sales of approximately $283,000.


                                       23

<PAGE>



OPERATING RESULTS OF THE COMPANY'S UTILITY OPERATIONS

<TABLE>
<CAPTION>
                                            Years Ended June 30
                                     --------------------------------
                                       1998        1997        1996
                                     --------    --------    --------
<S>                                  <C>         <C>         <C>     
                                        (IN THOUSANDS)
Operating revenues:
   Great Falls division ..........   $ 17,028    $ 17,133    $ 15,737
   Cody division .................      7,085       7,034       5,940
   Broken Bow division ...........      3,712       2,715       1,995
                                     --------    --------    --------
Total operating revenues .........     27,825      26,882      23,672
Gas purchased ....................     17,047      16,193      13,646
                                     --------    --------    --------
Gross Margin .....................     10,778      10,689      10,026
Operating expenses ...............      8,273       8,155       7,810
Interest charges [SEE NOTE BELOW]       1,343       1,477       1,145
Other utility (income) expense-net       (177)       (125)       (118)
Federal and state income taxes ...        439         377         385
                                     --------    --------    --------
Net utility income ...............   $    900    $    805    $    804
                                     --------    --------    --------
                                     --------    --------    --------
</TABLE>

[INTEREST CHARGES FOR UTILITY AND NON-UTILITY OPERATIONS DO NOT EQUAL TOTAL
INTEREST CHARGES FOR THE COMPANY, DUE TO ELIMINATING ENTRIES BETWEEN ENTITIES.]





                                       24

<PAGE>



Fiscal 1998 Compared to Fiscal 1997

Revenues and Gross Margins

         Utility operating revenues in fiscal 1998 were approximately
$27,825,000 compared to $26,882,000 in fiscal 1997. Regulated gross margin,
which is defined as operating revenues less gas purchased, was approximately
$10,778,000 for fiscal 1998 compared to approximately $10,689,000 in fiscal
1997.

         Overall revenues increased approximately $943,000 from fiscal 1997 due
primarily to a 17% rate increase in the Broken Bow division, as well as colder
weather than one year ago and customer growth and a 2% rate increase and
customer growth in the West Yellowstone district, partially offset by lower
revenues in the Great Falls and Cody divisions, due to warmer weather than one
year ago. Utility margins increased minimally by $89,000 or 1%, because of
higher margins from propane vapor sales in the Broken Bow division and natural
gas sales in the West Yellowstone district, but were mostly offset by lower
margins from natural gas sales in the Great Falls division and Cody divisions
due to the warmer weather. The winter heating season was 12% colder than one
year ago in the Broken Bow division, but 17% warmer in the Great Falls and 6%
warmer in the Cody division, than the same period one year ago.

Operating Expenses

         Utility operating expenses, exclusive of the cost of gas purchased and
federal and state income taxes, were approximately $8,273,000 for fiscal 1998,
as compared to approximately $8,155,000 for fiscal 1997. The 1% increase in the
period is due to normal inflationary trends and higher depreciation costs, due
to expansion of utility property, plant and equipment.

Interest Charges

         Interest charges allocable to the Company's utility divisions were
approximately $1,343,000 in fiscal 1998, as compared to approximately $1,477,000
in fiscal 1997. Long term debt increased and was used to pay down short-term
debt, which decreased from the same period one year ago.

Income Taxes

         State and federal income taxes of the Company's utility divisions was
approximately $505,000 in fiscal 1998, as compared to approximately $426,000 in
fiscal 1997.

Fiscal 1997 Compared to Fiscal 1996

Revenues and Gross Margins

         Utility operating revenues in fiscal 1997 were approximately
$26,882,000 compared to $23,672,000 in fiscal 1996. Regulated gross margin,
which is defined as operating revenues less gas purchased, was approximately
$10,689,000 for fiscal 1997 compared to approximately $10,026,000 in fiscal
1996.

         Overall revenues increased approximately $3,210,000 from fiscal 1996
due primarily to a rate and gas tracker increase in the Great Falls division and
a tracker increase in the Cody division, in addition to colder weather this year
than one year ago in all utility divisions. Utility margins increased
approximately $662,000 or 7% because of higher margins from natural gas sales in
the Great Falls and Cody divisions and in the West Yellowstone area and higher
margins from propane vapor sales in the Broken Bow division, due to colder
weather than one year ago and customer growth in all utility operations, as well
as a 1.86% rate increase in the Great Falls division, effective November, 1996.
The winter heating season was 3% colder than one year ago in the Great Falls
division and 13% colder than the same period one year ago in the Broken Bow
division and about equivalent to one year ago in the Cody division.

Operating Expenses

         Utility operating expenses, exclusive of the cost of gas purchased and
federal and state income taxes, were approximately $8,155,000 for fiscal 1997,
as compared to approximately $7,810,000 for fiscal 1996. The 4% increase in the
period is due to normal inflationary trends, less payroll and other expenses
capitalized to projects.

Interest Charges

         Interest charges allocable to the Company's utility divisions were
approximately $1,477,000 in fiscal 1997, as compared to approximately $1,145,000
in fiscal 1996. Long term debt interest decreased; however, short-term interest
increased primarily due to facility expansion, which has been temporarily
financed with short-term debt. Income Taxes

         State and federal income taxes of the Company's utility divisions was
approximately $426,000 in fiscal 1997, as compared to approximately $427,000 in
fiscal 1996.




                                       25

<PAGE>



OPERATING RESULTS OF EACH OF THE COMPANY'S NON-UTILITY SUBSIDIARIES

<TABLE>
<CAPTION>
                                                  Years Ended June 30
                                                 --------------------
                                                   1998        1997       1996
                                                 --------    --------    --------
                                                     (IN THOUSANDS)
<S>                                              <C>         <C>         <C>     
ROCKY MOUNTAIN FUELS (RMF)
      Operating revenues .....................   $  8,642    $  9,004    $  4,352
      Cost of propane ........................      6,405       6,747       2,540
      Operating expenses .....................      1,669       1,875       1,548
      Other (income) expense-net .............       (204)        (92)        (64)
      Interest expense [SEE NOTE BELOW] ......        198         171         112
      Federal and state income taxes .........        208         106          85
                                                 --------    --------    --------
              Net income .....................   $    366    $    197    $    131
                                                 --------    --------    --------
                                                 --------    --------    --------
ENERGY WEST RESOURCES
      Operating revenues .....................   $      0    $     42    $     61
      Gas trading revenue ....................     11,383       5,993       4,348
      Operating expenses .....................        570         251         201
      Cost of gas trading ....................     10,185       5,560       3,773
      Other (income) expense-net .............         (4)       (120)        (20)
      Federal and state income taxes .........        234         154         169
                                                 --------    --------    --------
              Net income .....................   $    398    $    190    $    286
                                                 --------    --------    --------
                                                 --------    --------    --------
MONTANA SUN
      Operating revenues .....................   $     98    $     97    $     97
      Operating expenses .....................         47          43          48
      Other (income) expense-net .............        284        (113)        (24)
      Interest expense [SEE NOTE BELOW] ......          0           0          (0)
      Federal and state income taxes (benefit)        (89)         67          27
                                                 --------    --------    --------
              Net income (loss) ..............   ($   144)   $    100    $     46
                                                 --------    --------    --------
                                                 --------    --------    --------
      Total Non-Utility Net Income ...........   $    620    $    487    $    463
                                                 --------    --------    --------
                                                 --------    --------    --------
</TABLE>

[INTEREST CHARGES FOR UTILITY AND NON-UTILITY OPERATIONS DO NOT EQUAL TOTAL
INTEREST CHARGES FOR THE COMPANY, DUE TO ELIMINATING ENTRIES BETWEEN ENTITIES.]

                                       26

<PAGE>



Non-Utility Operations

Rocky Mountain Fuels

         For the fiscal year ended June 30, 1998, Rocky Mountain Fuels (RMF)
generated net income of approximately $366,000 compared to $197,000 for fiscal
1997. Approximately $125,000 of RMF's net income for fiscal 1998 was
attributable to the one-time capital gain on the sale of four district retail
propane offices of Petrogas of Wyoming (formerly Wyo L-P Gas division), $248,000
to the Petrogas of Arizona operation, $20,000 to Petrogas of Wyoming, with the
balance of ($38,000) net loss attributable to Missouri River Propane in Montana.
RMF's gross margins decreased approximately 1% or $18,000 in fiscal 1998
compared to the same period one year ago. Margins decreased in the Petrogas of
Wyoming division approximately $250,000 or 16% due to warmer weather than last
year and the sale of four retail propane districts in Wyoming, which also
resulted in a pre-tax gain of approximately $125,000. Margins in the Petrogas
division in Arizona increased $215,000 or 36% due to customer growth and colder
weather than one year ago and Missouri River Propane in Montana margins
increased approximately $16,000 or 21% due to customer growth. RMF experienced
lower operating expenses, due to the sale of the four retail propane districts
in Wyoming, however higher short-term interest costs resulted, due mainly to
increased propane gas inventory, as a result of the growth in Rocky Mountain
Fuels Wholesale operations in Wyoming. State and federal income taxes increased
to approximately $208,000 for fiscal 1998 from $106,000 due to higher pre-tax
income in RMF this year of approximately $271,000.

         For the fiscal year ended June 30, 1997, Rocky Mountain Fuels (RMF)
generated net income of approximately $197,000 compared to $131,000 for fiscal
1996. Approximately $127,000 of RMF's net income for fiscal 1997 was
attributable to the Wyo L-P Gas division in Wyoming, $111,000 to the Petrogas
division in Arizona, with the balance of ($40,000) net loss attributable to
Missouri River Propane in Montana. RMF's gross margins increased approximately
24% or $443,000 in fiscal 1997 compared to the same period last year, primarily
due to increased wholesale propane sales in the Wyo L-P Gas division in Wyoming.
Margins this fiscal 1997 increased approximately $257,000 for wholesale propane
sales, due to customer growth and colder weather and decreased approximately
$44,000, or 4%, for retail propane sales due to higher propane prices and
competitive market conditions, while margins in the Petrogas division in Arizona
increased from a year ago by approximately $118,000, or 25%, due to customer
growth and weather, while Missouri River Propane in Montana margins increased
from a year ago by approximately $13,000, or 20%, due to weather and customer
growth. RMF experienced higher operating expenses, due to normal inflationary
trends experienced and increased use of staff, due to customer growth, as well
as higher short-term interest costs due to expansion of plant in Montana and
Wyoming, which was financed by short-term debt. State and federal income taxes
increased to approximately $106,000 for fiscal 1997 from $85,000 due to higher
pre-tax income in RMF this year of approximately $89,000.

Energy West Resources

         For fiscal 1998, Energy West Resources' (EWR) net income was
approximately $398,000 compared to $190,000 for fiscal 1997, primarily due to
higher gas trading margins. Gas trading margins increased approximately
$765,000, or 154%, due to decreased natural gas prices in Canada and Montana and
expanded markets and customer growth, however operating expenses increased
approximately $320,000 or 127% due to staff expansion and training required to
serve the growth in marketing activity Interest charges increased approximately
$116,000, due to increased gas storage inventory purchases in fiscal 1998. State
and federal income taxes increased in fiscal 1998 to approximately $234,000 from
$154,000 in fiscal 1997, due to increased pre-tax income of approximately
$288,000.

         For fiscal 1997, Energy West Resources' (EWR) net income was
approximately $190,000 compared to $286,000 for fiscal 1996, primarily due to
lower gas trading margins. Gas trading margins decreased approximately $142,000,
or 24%. Although gas trading revenues are up approximately $1,646,000 in fiscal
1997 from one year ago, cost of gas trading was up approximately $1,788,000, due
to increased natural gas prices in Canada and Montana and increased competition,
requiring lower margins in order to retain or secure new Energy West Resource
customers. EWR expenses were also higher than 1996 because of power marketing
investigations, salary and expenses for an EWR specific employee, increased
direct charges and overheads allocated to EWR from EWST management in connection
with efforts to enhance EWR operations. State and federal income taxes decreased
in fiscal 1997 to approximately $154,000 from $169,000 in fiscal 1996, due to
lower pre-tax income.

Montana Sun, Inc.

         For fiscal 1998, Montana Sun's net loss was approximately ($144,000) as
compared to net income of $100,000 for fiscal 1997, due primarily to the
write-off of an investment of $250,000 pre-tax in Gas Finco, a financing
subsidiary of the American Gas Association.

         For fiscal 1997, Montana Sun's net income was approximately $100,000 as
compared to $46,000 for fiscal 1996, due primarily to the sale of mutual fund
investments at a capital gain.



                                       27

<PAGE>



Liquidity and Capital Resources

         The Company's operating capital needs, as well as dividend payments and
capital expenditures, are generally funded through cash flow from operating
activities, short-term borrowing and liquidation of temporary cash investments.
Historically, to the extent cash flow has not been sufficient to fund capital
expenditures, the Company has borrowed short-term or issued equity securities to
fund capital expansion projects or reduce short-term borrowing.

         The Company's short-term borrowing requirements vary according to the
seasonal nature of its sales and expense activity. The Company has 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 purchases and capital expenditures. In general, the Company's short-term
borrowing needs for purchases of gas inventory and capital expenditures are
greatest during the summer months and the Company's short-term borrowing needs
for financing of customer accounts receivable are greatest during the winter
months. In addition during the past three years, the Company has used short-term
borrowing to finance the acquisition of propane operations and LNG for West
Yellowstone Gas. Short-term borrowing utilized for construction or property
acquisitions generally has been on an interim basis and converted to long-term
debt and equity when it becomes economical and feasible to do so.

               At June 30, 1998, the Company had $19,000,000 in bank lines of
credit, of which $1,443,000 had been borrowed under the credit agreement. The
short-term borrowings bear a daily weighted average interest rate of 7.85% as of
June 30, 1998.

         The Company provided net cash in operating activities for fiscal 1998
of approximately $4,959,000 as compared to net cash used in operating activities
of approximately $901,000 for fiscal 1997. This increase in cash provided by
operating activities of approximately $5,860,000 was primarily due to lower
working capital requirements of approximately $5,652,000 due to the following:
1) decreased purchases of natural gas inventory, 2) higher gas purchases
payable, 3) smaller increase in utility unrecovered gas costs due to gas tracker
increases in fiscal 1998, 4) reduced prepaid items primarily related to a
prepaid gas contract, 5) and in other assets and liabilities increased working
capital due to increased incentives in fiscal 1998, higher accrued interest,
higher employee benefits and accrued vacation, offset partially by a change in
refundable income tax payments, an increase in regulatory assets and an increase
in accounts receivable.

         Higher net income of approximately $227,000, higher depreciation and
amortization costs of $93,000, the gain on the sale of marketable securities
last year of approximately $100,000 and the write-off of an investment in
American Gas Finance Co. of $250,000, increased cash provided by operating
activities, offset partially by a decrease in the gain and deferred gain on the
sale of assets of approximately $187,000 and lower deferred income taxes of
approximately $277,000.



                                       28

<PAGE>



         Cash used in investing activities was approximately $1,587,000 in
fiscal 1998, as compared to approximately $2,819,000 in fiscal 1997, a decrease
of approximately $1,232,000 primarily due to lower construction expenditures for
capital projects of approximately $193,000, an investment of $250,000 in a
financing operation of the American Gas Association in 1997, the sale of
property, plant & equipment in Wyoming of approximately $1,094,000 this year and
increased proceeds from customer advances for and contributions in aid of
construction of approximately $165,000, partially offset by the proceeds of the
sale of marketable equity securities in 1997 of approximately $274,000 and an
increase in notes receivable of approximately $200,000. Cash used in financing
activities was approximately $3,463,000 in fiscal 1998, as compared to cash
provided by financing activities of approximately $3,147,000 in fiscal 1997, a
decrease of approximately $6,600,000 primarily due to an increase in dividends
paid of approximately $164,000, increased principal payments on notes payable of
approximately $14,142,000, partially offset by proceeds of long-term debt of
approximately $7,541,000 and increased sale of common stock through the
Company's Dividend Reinvestment Plan and the Company's Incentive Stock Option
Plan of approximately $154,000.

         The Company used net cash in operating activities for fiscal 1997 of
approximately $901,000 as compared to $606,000 net cash generated from operating
activities for fiscal 1996. This change from fiscal 1996 is attributed to higher
working capital requirements of approximately $1,686,000, an increase in the
gain and deferred gain on the sale of assets of approximately $37,000 and the
gain on sale of marketable securities of approximately $ $100,000, offset by
approximately $26,000 increase in net income, an increase in depreciation and
amortization costs of $59,000 and higher deferred income taxes of approximately
$231,000. Cash used in investing activities was approximately $ $2,819,000 in
fiscal 1997, as compared to approximately $ $3,989,000, primarily due to lower
construction expenditures for capital projects of approximately $1,384,000 and
the proceeds from the sale of marketable equity securities of approximately
$274,000 and increased proceeds from contributions in aid of constructions of
approximately $140,000, partially offset by reduced proceeds from the sale of
property, plant and equipment of approximately $400,000, because of the
sale-leaseback of the Payson, Arizona properties in fiscal 1996 and an
investment of $250,000 in a financing operation of the American Gas Association.
Cash provided by financing activities was approximately $3,100,000 in fiscal
1997, as compared to approximately $$3,740,000 in fiscal 1996, a decrease of
approximately $640,000 primarily due to an increase in dividends paid and
increased principal payments on notes payable.

         Capital expenditures of the Company are primarily for expansion and
improvement of its gas utility properties. To a lesser extent, funds are also
expended to meet the equipment needs of the Company's operating subsidiaries and
to meet the Company's administrative needs. The Company's capital expenditures
were approximately $3.0 million in fiscal 1998 and approximately $3.2 million
for fiscal 1997 and $4.6 million in fiscal 1996. During fiscal 1998,
approximately $1.5 million has been expended for the construction and
maintenance of the natural gas systems in Great Falls, Cascade and West
Yellowstone, Montana and Cody, Wyoming and approximately $1.1 million had been
expended for operations and maintenance and gas system expansion projects for
new subdivisions in the Broken Bow division's service area in Arizona and
approximately $520,000 for additions to the propane operations of the Company in
Wyoming, Montana and Arizona. Capital expenditures are expected to be
approximately $3.2 million in fiscal 1999, including approximately $1.2 million
for continued expansion for the Broken Bow division, with approximately $1.4
million for maintenance and other special system expansion projects in the Great
Falls, West Yellowstone and Cody divisions and the balance of approximately
$600,000 for the Company's propane operations in the three states it serves. The
Company continues to evaluate opportunities to expand its existing businesses
from time to time.

         The major factors which will affect the Company's future results
include general and regional economic conditions, weather, customer retention
and growth, the ability to meet competitive pressures and to contain costs,
changes in the competitive environment in the Company's non-regulated segment,
the adequacy and timeliness of rate relief, cost recovery and necessary
regulatory approvals, and continued access to capital markets.



                                       29

<PAGE>



         The regulatory structure which has historically embraced the gas
industry has been in the process of transition. Legislative and regulatory
initiatives, at both the federal and state levels, are designed to promote
competition and will continue to impose additional pressure on the Company's
ability to retain customers and to maintain current rate levels. The changes in
the gas industry have allowed commercial and industrial customers to negotiate
their own gas purchases directly with producers or brokers. To date, the changes
in the gas industry have not had a negative impact on earnings or cash flow of
the Company's regulated segment.

         The accounts and rates of the Company's regulated segment are subject,
in certain respects, to the requirements of the Montana, Wyoming and Arizona
public utilities commissions. As a result, the Company's regulated segment
maintains its accounts in accordance with the requirements of those regulators.
The application of generally accepted accounting principles by the Company's
regulated segments differs in certain respects from application by the
non-regulated segment and other non-regulated businesses. The regulated segment
prepares its financial statements in accordance with Statement of Accounting
Standards No. 71, Accounting for the Effects of Certain Types of Regulation
("SFAS 71"). In general, SFAS 71 recognizes that accounting for rate-regulated
enterprises should reflect the relationship of costs and revenues. As a result,
a regulated utility may defer recognition of cost (a regulatory asset) or
recognize an obligation (a regulatory liability) if it is probable that, through
the rate-making process, there will be a corresponding increase or decrease in
revenues. Accordingly, the Company has deferred certain costs, which will be
amortized over various periods of time. The costs deferred are further described
in the Company's financial statements and the notes thereto. To the extent that
collection of such costs or payment of liabilities is no longer probable as a
result of changes in regulation and/or the Company's competitive position, the
associated regulatory asset or liability will be reversed with a charge or
credit to income. If the Company's regulated segment were to discontinue the
application of SFAS 71, the accounting impact would be an extraordinary,
non-cash charge to operations that could be material to the financial position
and results of operation of the Company. However, the Company is unaware of any
circumstances or events in the foreseeable future that would cause it to
discontinue the application of SFAS 71.

SEC Ratio of Earnings to Fixed Charges

         For the twelve months ended June 30, 1998, 1997 and 1996, the Company's
ratio of earnings to fixed charges was 2.25, 2.11 and 2.42 times, respectively.
Fixed charges include interest related to long-term debt, short-term borrowing,
certain lease obligations and other current liabilities.

Inflation

         Capital intensive businesses, such as the Company's natural gas
operations, are significantly affected by long-term inflation. Neither
depreciation charges against earnings nor the rate-making process reflect the
replacement cost of utility plant. However, based on past practices of
regulators, these businesses will be allowed to recover and earn on the actual
cost of their investment in the replacement or upgrade of plant. Although prices
for natural gas may fluctuate, earnings are not impacted because gas cost
tracking procedures semi-annually balance gas costs collected from customers
with the costs of supplying natural gas. The Company believes that the effects
of inflation, at currently anticipated levels, will not significantly affect
results of operations.




                                       30

<PAGE>



Accounting for Income Taxes

         Effective July 1, 1993, the Company changed its method of accounting
for income taxes from the deferred method to the liability method required by
SFAS No. 109, ACCOUNTING FOR INCOME TAXES. The cumulative effect of adopting
Statement No. 109 created a regulatory asset and a regulatory liability for
regulated operations, representing the anticipated effects on regulated rates
charged to customers which will result from the adoption of Statement No. 109.
For the Year ended June 30, 1998, changes in certain assets and liabilities
resulted in an increase in regulatory assets of $103,423 and a decrease in
regulatory liabilities of $13,160 for regulated entities, resulting in ending
balances of $590,450 and $135,801, respectively.

         Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. See Note 5 to
the Consolidated Financial Statements for additional information.

Postretirement Benefits Other Than Pensions

         The Company adopted, effective July 1, 1993, SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." This standard
requires that the projected future cost of providing postretirement benefits be
recognized as an expense as employees render service rather than when paid.
Effective for fiscal year 1994, the Company modified its plan for these benefits
and has elected to pay eligible retirees (post 65 years of age) $125 per month
in lieu of contracting for health and life insurance benefits. The amount of
this payment is fixed and will not increase with medical trends or inflation.
The Company's transition obligation at June 30, 1998 and 1997 was $293,600 and
$313,200, respectively, of which $250,800 in 1998 and $271,500 in 1997 is
related to the regulated utility operations. The transition obligation was
accrued as a deferred charge and will be amortized over 20 years. Substantially
all of the transition obligation is for the future cost of benefits to active
employees.

         The Company made a change to the plan, effective July 1, 1996 allowing
pre-65 retirees and their spouses to remain on the same medical plan as active
employees by contributing 125% of the current COBRA rate to retain this
coverage. The increased liability from this change is $269,200. The prior
service obligation associated with this plan change at June 30, 1998 and 1997
was $233,400 and $251,300, respectively, of which $193,300 in 1998 and $210,600
in 1997 is related to regulated utility operations. The prior service obligation
was accrued as a deferred charge and will be amortized over fifteen years. The
Company expects regulators in Montana and Wyoming to allow recovery of the
additional costs associated with this plan change. The adoption of SFAS No. 106
did not have a significant effect upon results of operations. See Note 4 to the
Consolidated Financial Statements for additional information.


                                       31

<PAGE>



Environmental Issues

         The Company owns property on which it operated a manufactured gas plant
from 1909 to 1928. The site is currently used as a service center where certain
equipment and materials are stored. The coal gasification process utilized in
the plant resulted in the production of certain by-products which have been
classified by the federal government and the State of Montana as hazardous to
the environment. Several years ago the Company initiated an assessment of the
site to determine if remediation of the site was required. That assessment
resulted in a submission to the Montana Department of Environmental Quality
(MDEQ) formerly known as the Montana Department of Health and Environmental
Science ("MDHES") in 1994. The Company has worked with the MDEQ since that time
to obtain the data that would lead to a remediation action acceptable to the
MDEQ. The Company's environmental consultant filed the report with the MDEQ on
June 11, 1997. The MDEQ is evaluating the report and after completion of its
review will provide for public comment related to the remediation plan. Once the
comment period has lapsed and due consideration of any comments occurs, the plan
can be finalized. Assuming acceptance of the plan, remediation could be in place
by the fall of 1998.

         At June 30, 1998 the costs incurred in evaluating this site have
totaled approximately $436,000. On May 30, 1995 the Company received an order
from the Montana Public Service Commission allowing for recovery of the costs
associated with evaluation and remediation of the site through a surcharge on
customer bills. As of June 30, 1998 that recovery mechanism had generated
approximately $575,000. The Company expects to spend the full amount recovered
through the surcharge. The Commission's decision calls for ongoing review by the
Commission of the costs incurred for this matter. The Company will submit an
application for review by the Commission when the remediation plan is approved
by the MDEQ.

Year 2000

         The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure of miscalculations causing disruptions of operations, including
inability to process transactions, send billing statements to customers, or
similar normal business activities.

         The Company has completed an assessment of its exposure to Year 2000
issues. This assessment indicated that most of the Company's internal systems
are compliant or can be made compliant with minimal costs, with the exception of
its billing system. However, the company is in the process of preparing a
request for a proposal to replace its billing systems, in order to accommodate
additional billing requirements for business reasons related to deregulation of
the energy industry and from establishing an energy marketing company. The
Company plans to have a new billing solution in place by December 1999, with
expected costs ranging between $250,000 and $500,000. In the event this is not
possible, the Company has contingency plans to replace or upgrade existing
billing systems, with an expected total cost of less than $100,000 for internal
and external costs, scheduled for completion in the early fall of 1999.

         The Company believes, that with conversions to new software and
modifications to existing software, the Year 2000 issue will not pose
significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company,
specifically related to billing its customers.

         The Company has initiated formal communications with all of its
significant suppliers, gas pipeline transmission companies and large customers,
to determine the extent to which the Company's interface systems are vulnerable
to those third parties' failure to remediate their own Year 2000 Issues. The
Company's total Year 2000 project cost and estimates to complete, include the
estimated costs and time associated with the impact of third party Year 2000
Issues based on presently available information. However, there can be no
guarantee that the systems of other companies, on which the Company's systems
rely, will be timely converted and would not have an adverse effect on the
Company's systems. The Company has determined that it has no exposure
contingencies related to the Year 2000 Issue for the products it has sold.

Market Risk

         The Company's energy-related businesses are exposed to risks relating
to changes in certain commodity prices and counterparty performance. In order to
manage the various risks relating to these exposures, the Company utilizes
natural gas derivatives and has established risk management oversight for these
risks. The Company has implemented or is in the process of implementing
procedures to manage such risk and has established a comprehensive risk
management committee, overseen by the Audit Committee of the Company's Board of
Directors, to monitor compliance with the Company's risk management policies and
procedures.
           
         The Company protects itself against price fluctuations on natural gas
by limiting the aggregate level of net open positions which are exposed to
market price changes and through the use of net open positions which are exposed
to market price changes and through the use of natural gas derivative
instruments for hedging purposes. The net open position is actively managed with
strict policies designed to limit the exposure to market risk and which require
at least weekly reporting to management of potential financial exposure. The
risk management committee has limited the types of financial instruments the
company may trade to those related to natural gas commodities. Financial
instruments generally are not held for speculative trading purposes.

                                       32

<PAGE>





Supplementary Data (Unaudited)
Consolidated Quarterly Financial Data
 ( in thousands, except per share data)


                                        FIRST     SECOND      THIRD     FOURTH
                                       QUARTER    QUARTER    QUARTER    QUARTER
                                      ---------  ---------  ---------  ---------
FISCAL YEAR 1998
Revenues .........................    $ 5,225     $14,642    $19,214    $ 3,983
Operating income (loss) ..........    $  (744)    $ 1,615    $ 2,437    $   445
Net income (loss) ................    $  (681)    $   816    $ 1,442    $   (57)
Net income (loss) per share ......    $ (0.29)    $  0.35    $  0.60    $ (0.02)

FISCAL YEAR 1997
Revenues .........................    $ 4,385     $12,346    $14,232    $ 7,252
Operating income (loss) ..........    $  (759)    $ 1,611    $ 2,104    $   240
Net income (loss) ................    $  (633)    $   920    $ 1,090    $   (84)
Net income (loss) per share ......    $ (0.27)    $  0.39    $  0.46    $ (0.03)


Cautionary Statement for Purposes of the "Safe-harbor" Provisions of the 
Private Securities Litigation Reform Act of 1995.

The foregoing Management's Discussion and Analysis and other portions of this 
annual report contain various "forward looking statements" within the meaning 
of Section 27A of the Securities Act of 1933, as amended, and Sections 21E of 
the Securities Exchange Act of 1934, as amended, which represent the Company's 
expectations or beliefs concerning future events, including the statements 
that the total cost of changes required to achieve a year 2000 date 
conversion are not expected to have a material effect on the Company's 
financial statements. In addition, statements containing expressions such as 
"believes," "anticipates," "plans" or "expects" used in the Company's 
periodic reports on Forms 10-K and 10-Q filed with the SEC are intended to 
identify forward-looking statements. The company cautions that these and 
similar statements included in this report and in previously filed periodic 
reports including reports filed on Form10-K and 10-Q are further qualified by 
important factors that could cause actual results to differ materially from 
those in the forward looking statement.


                                       33

<PAGE>



               Item 8. Financial Statements and Supplementary Data
                         Report of Independent Auditors

     The Board of Directors
     Energy West Incorporated

   We have audited the accompanying consolidated balance sheets of Energy West
   Incorporated and subsidiaries as of June 30, 1998 and 1997, and the related
   consolidated statements of income, stockholders' equity, and cash flows for
   each of the three years in the period ended June 30, 1998. Our audits also
   included the financial statement schedule listed in the Index at Item 14(a).
   These financial statements and schedule are the responsibility of the
   Company's management. Our responsibility is to express an opinion on these
   financial statements and schedule based on our audits.

   We conducted our audits in accordance with generally accepted auditing
   standards. Those standards require that we plan and perform the audit to
   obtain reasonable assurance about whether the financial statements are free
   of material misstatement. An audit includes examining, on a test basis,
   evidence supporting the amounts and disclosures in the financial statements.
   An audit also includes assessing the accounting principles used and
   significant estimates made by management, as well as evaluating the overall
   financial statement presentation. We believe that our audits provide a
   reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly, in
   all material respects, the consolidated financial position of Energy West
   Incorporated and subsidiaries at June 30, 1998 and 1997, and the consolidated
   results of their operations and their cash flows for each of the three years
   in the period ended June 30, 1998, in conformity with generally accepted
   accounting principles. Also, in our opinion, the related financial statement
   schedule, when considered in relation to the basic financial statements taken
   as a whole, presents fairly in all material respects, the information set
   forth therein.

                                             Ernst & Young LLP

     Denver, Colorado
     August 21, 1998

                                       34

<PAGE>



                    Energy West Incorporated and Subsidiaries

                           Consolidated Balance Sheets





<TABLE>
<CAPTION>
                                                               June 30
                                                         1998           1997
                                                      -----------    -----------
<S>                                                   <C>            <C>        
Assets
Current assets:
Cash and cash equivalents ........................    $    58,006    $   148,665
Accounts receivable, less allowances for
uncollectible accounts of $98,761 ($167,824
at June 30, 1997) ................................      4,504,235      3,402,528
Natural gas and propane inventory ................      4,669,933      5,792,517
Materials and supplies ...........................        556,077        561,112
Prepayments and other ............................        147,091        518,504
Refundable income tax payments ...................        464,155        301,711
Recoverable costs of gas purchases ...............      1,926,749      1,673,285
                                                      -----------    -----------
Total current assets .............................     12,326,246     12,398,322

Investments ......................................          3,365        257,560

Notes receivable due after one year ..............        192,192          2,537

Property, plant and equipment ....................     47,620,125     46,481,447
Less accumulated depreciation and amortization ...     20,048,221     19,083,667
                                                      -----------    -----------
Net property, plant and equipment ................     27,571,904     27,397,780

Deferred charges:
Net unamortized debt issue costs .................      1,232,561        888,188
Regulatory assets for income taxes ...............        590,450        487,027
Unrecognized postretirement obligation ...........        526,975        564,500
Other regulated assets ...........................        532,051        532,481
Other nonregulated assets ........................        359,141        356,454
                                                      -----------    -----------
Total deferred charges ...........................      3,241,178      2,828,650
                                                      -----------    -----------
Total assets .....................................    $43,334,885    $42,884,849
                                                      -----------    -----------
                                                      -----------    -----------
</TABLE>





                                       35

<PAGE>



                    Energy West Incorporated and Subsidiaries
                     Consolidated Balance Sheets (continued)

<TABLE>
<CAPTION>
                                                               June 30
                                                          1998          1997
                                                       -----------   -----------
<S>                                                    <C>           <C>        
Capitalization and liabilities
Current liabilities:
Long-term debt due within one year .................   $   413,032   $   361,959
Notes payable ......................................     1,442,982    11,380,000
Accounts payable--gas purchases ....................     2,029,703     1,158,700
Accounts payable--other ............................       556,311       562,854
Payable to employee benefit plans ..................       564,642       512,773
Accrued vacation ...................................       318,354       344,863
Other current liabilities ..........................       810,919       519,796
Deferred income taxes--current .....................       608,890       475,940
                                                       -----------   -----------
Total current liabilities ..........................     6,744,833    15,316,885
Other:
Deferred income taxes ..............................     3,327,760     3,107,272
Deferred investment tax credits ....................       460,716       481,779
Contributions in aid of construction ...............       894,768       872,743
Customer advances for construction .................       514,062       166,688
Accumulated postretirement obligation ..............       933,813       867,919
Regulatory liability for income taxes ..............       135,801       148,961
Deferred gain on sale-leaseback of assets ..........       189,035       212,663
Other ..............................................        44,775        29,250
                                                       -----------   -----------
Total other ........................................     6,500,730     5,887,275
Long-term debt (less amounts due within
one year) ..........................................    17,278,033     9,683,755
Commitments and contingencies
Stockholders' equity:
Preferred stock--$.15 par value:
Authorized--1,500,000 shares;
Outstanding--none ..................................          --            --
Common stock--$.15 par value:
Authorized--3,500,000 shares;
Outstanding--2,403,190 shares (2,357,470 shares
at June 30, 1997) ..................................       360,481       353,623
Capital in excess of par value .....................     3,286,228     2,932,962
Retained earnings ..................................     9,164,580     8,710,349
                                                       -----------   -----------
Total stockholders' equity .........................    12,811,289    11,996,934
                                                       -----------   -----------
Total capitalization ...............................    30,089,322    21,680,689
                                                       -----------   -----------
Total capitalization and liabilities ...............   $43,334,885   $42,884,849
                                                       -----------   -----------
                                                       -----------   -----------
</TABLE>

SEE ACCOMPANYING NOTES.


                                       36

<PAGE>

                    Energy West Incorporated and Subsidiaries

                        Consolidated Statements of Income

<TABLE>
<CAPTION>


                                                    Year ended June 30
                                             1998          1997          1996
                                         -----------   -----------   -----------
<S>                                      <C>           <C>           <C>        
Operating revenue:
Regulated utilities .................... $27,824,360   $26,882,248   $23,672,186
Nonregulated operations ................   3,856,242     5,339,553     3,297,583
Gas trading ............................  11,383,019     5,993,668     4,348,239
                                         -----------   -----------   -----------
Total operating revenue ................  43,063,621    38,215,469    31,318,008

Operating expenses:
Gas purchased ..........................  18,571,808    19,136,723    14,972,454
Cost of gas trading ....................  10,184,855     5,538,847     3,751,053
Distribution,generaland administrative .   7,696,928     7,498,467     6,924,391
Maintenance ............................     496,545       496,721       408,590
Depreciation and amortization ..........   1,732,394     1,689,082     1,667,256
Taxes other than income ................     628,183       660,133       629,428
Total operating expenses ...............  39,310,713    35,019,973    28,353,172
                                         -----------   -----------   -----------
Operating income .......................   3,752,908     3,195,496     2,964,836

Other income, net ......................     142,574       325,334       214,902
                                         -----------   -----------   -----------
Income before interest charges and
income taxes ...........................   3,895,482     3,520,830     3,179,738

Interest charges:
Long-term debt .........................   1,216,190       700,484       709,872
Short-term and other ...................     367,073       824,100       532,866
Total interest charges .................   1,583,263     1,524,584     1,242,738
                                         -----------   -----------   -----------

Income before income taxes .............   2,312,219     1,996,246     1,937,000
Provision for income taxes .............     792,129       703,472       670,025
Net income ............................. $ 1,520,090   $ 1,292,774   $ 1,266,975
                                         -----------   -----------   -----------
                                         -----------   -----------   -----------

Basic and diluted earnings per
    common share ....................... $       .64   $       .55   $       .55

</TABLE>

   SEE ACCOMPANYING NOTES.



                                       37

<PAGE>



                    Energy West Incorporated and Subsidiaries

                 Consolidated Statements of Stockholders' Equity




<TABLE>
<CAPTION>

                                                                   Capital in
                                                     Common         Excess of      Retained
                                                      Stock         Par Value      Earnings         Total
                                                   ------------   ------------   ------------    ------------
<S>                                                <C>            <C>            <C>             <C>         
Balance at June 30, 1995 ......................... $    338,121   $  2,117,730   $  8,076,907    $ 10,532,758
Exercise of stock options into 13,680 shares of
common stock at $4.875 to $7.125 per share .......        2,052         72,918           --            74,970
Sale of 37,611 shares of common stock at $8.00
to $9.50 per share under the Company's
dividend reinvestment plan .......................        5,642        320,158           --           325,800
Issuance of 15,889 shares of common stock to
ESOP at estimated fair value of $8.00 per share ..        2,383        124,734           --           127,117
Net income for the year ended June 30, 1996 ......         --             --        1,266,975       1,266,975
Dividends on common stock--$.405 per share .......         --             --         (927,763)       (927,763)
                                                   ------------   ------------   ------------    ------------
Balance at June 30, 1996 .........................      348,198      2,635,540      8,416,119      11,399,857
Exercise of stock options into 980 shares of
 common stock at $6.50 to $7.13 per share ........          147          6,773           --             6,920
Sale of 20,692 shares of common stock at $8.38
to $8.50 per share under the Company's
dividend reinvestment plan .......................        3,104        171,466           --           174,570
Issuance of 14,490 shares of common stock to .....      119,183
ESOP at estimated fair value of $8.38 per share ..        2,174           --          121,357
Net income for the year ended June 30, 1997 ......         --             --        1,292,774       1,292,774
Dividends on common stock--$.425 per share .......         --             --         (998,544)       (998,544)
                                                    ------------   ------------   ------------    ------------
Balance at June 30, 1997 .........................      353,623      2,932,962      8,710,349      11,996,934
Exercise of stock options into 22,908 shares of
common stock at $6.375 to $7.125 per share .......        3,436        157,948           --           161,384
Sale of 8,095 shares of common stock at $8.846
to $9.004 per share under the Company's
dividend reinvestment plan .......................        1,214         71,071           --            72,285
Issuance of 11,639 shares of common stock to
ESOP at estimated fair value of $8.645 per share .        1,746         98,869           --           100,615
Issuance of 3,078 shares of common stock at
$8.395 per share under the Company's deferred
board stock compensation plan ....................          462         25,378           --            25,840
Net income for the year ended June 30, 1998 ......         --             --        1,520,090       1,520,090
Dividends on common stock--$.445 per share .......         --             --       (1,065,859)     (1,065,859)
Balance at June 30, 1998 ......................... $    360,481   $  3,286,228   $  9,164,580    $ 12,811,289
                                                   ------------   ------------   ------------    ------------
                                                   ------------   ------------   ------------    ------------

</TABLE>


SEE ACCOMPANYING NOTES.



                                       38

<PAGE>



                    Energy West Incorporated and Subsidiaries
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                        Year ended June 30
                                                1998           1997           1996
                                            -----------    -----------    -----------
<S>                                         <C>            <C>            <C>        
   Operating activities
   Net income ............................. $ 1,520,090    $ 1,292,774    $ 1,266,975

   Adjustments to reconcile net income
   to net cash provided by (used in)
   operating activities:
   Depreciation and amortization ..........   1,986,224      1,893,368      1,833,511
   Write-off of investment in Gas Finco ...     250,000           --             --
   Gain on sale of assets .................    (211,465)       (24,484)       (11,406)
   Gain on sale of marketable equity
   securities .............................        --         (100,526)          --
   Investment tax credit ..................     (21,063)       (21,062)       (21,062)
   Deferred gain on sale of assets ........     (23,628)       (23,628)          --
   Deferred income taxes ..................     353,438        629,643        399,205
   Changes in operating assets and
   liabilities:
   Accounts receivable ....................  (1,101,707)        83,800       (443,725)
   Natural gas and propane inventory ......   1,122,584     (3,591,739)      (514,074)
   Accounts payable .......................     864,460       (331,839)      (218,153)
   Recoverable costs of gas purchases .....    (253,464)      (719,893)      (827,982)
   Prepaid gas ............................     371,413         83,923       (523,212)
   Other assets and liabilities ...........     102,488        (71,364)      (333,878)
                                            -----------    -----------    -----------
   Net cash provided by (used in) operating
   activities .............................   4,959,370       (901,027)       606,199

   Investing activities
   Construction expenditures ..............  (3,014,020)    (3,207,200)    (4,590,609)
   Increase in investments ................        --         (250,000)          --
   Increase in notes receivable ...........    (200,000)          --             --
   Proceeds from sale of assets ...........   1,247,601        153,716        552,160
   Proceeds from sale of marketable equity
   securities                                      --          273,572           --
   Increase in marketable equity securities        --             --          (20,958)
   Collection of long-term notes receivable      10,345          6,653          6,794
   Customer advances for construction .....     347,374        (23,954)        31,106
   Increase (Decrease) from contributions 
       in aid of construction .............      22,025        228,468         32,109
                                            -----------    -----------    -----------
   Net cash used in investing activities ..  (1,586,675)    (2,818,745)    (3,989,398)

</TABLE>


                                       39

<PAGE>



                    Energy West Incorporated and Subsidiaries

                Consolidated Statements of Cash Flows (continued)



<TABLE>
<CAPTION>


                                                                    Year ended June 30
                                                         1998             1997           1996
                                                     ------------    ------------    ------------
<S>                                                  <C>             <C>             <C>       
Financing activities

Proceeds from long-term debt ....................... $  8,000,000    $       --      $       --
Debt issuance and reacquisition costs ..............     (458,642)           --              --
Payment of long-term debt ..........................     (361,959)       (361,959)       (407,032)
Proceeds from notes payable ........................   22,346,120      32,512,000      20,965,000
Repayment of notes payable .........................  (32,283,139)    (28,307,000)    (16,410,000)
Sale of common stock ...............................      161,384           6,920          74,970
Dividends paid .....................................     (867,118)       (702,617)       (474,846)
                                                     ------------    ------------    ------------
Net cash provided by (used in)  financing
activities .........................................   (3,463,354)      3,147,344       3,748,092
                                                     ------------    ------------    ------------

Net increase (decrease) in cash and
cash equivalents ...................................      (90,659)       (572,428)        364,893
Cash and cash equivalents at
beginning of year ..................................      148,665         721,093         356,200
                                                     ------------    ------------    ------------
Cash and cash equivalents at
end of year ........................................ $     58,006    $    148,665    $    721,093
                                                     ------------    ------------    ------------
                                                     ------------    ------------    ------------

Supplemental disclosures of cash flow information:
Cash paid for:
Interest ........................................... $  1,536,402    $  1,528,441    $  1,242,035

Income taxes .......................................      862,000         169,546         498,461

Noncash financing activities:
Dividend reinvestment and
compensation plan ..................................       98,125         174,570         325,800
ESOP shares issued .................................      100,615         121,357         127,117

</TABLE>


SEE ACCOMPANYING NOTES.


                                       40

<PAGE>



                    Energy West Incorporated and Subsidiaries

                   Notes to Consolidated Financial Statements

                                  June 30, 1998


   1. Principal Accounting Policies

   General

   Energy West Incorporated (the "Company") operates principally in a single
   business segment as a distributor of natural gas and propane to residential
   and commercial customers. The entities falling under the Energy West
   Incorporated heading include Great Falls Gas Company, Cascade Gas Company,
   West Yellowstone Gas Company, Cody Gas Company and Broken Bow Gas Company.
   These natural gas and propane vapor distribution operations are regulated by
   the Montana Public Service Commission ("MPSC"), the Wyoming Public Service
   Commission ("WPSC") and the Arizona Corporation Commission ("ACC").
   Accordingly, most of the Company's accounting policies are subject to the
   requirements set forth in the Federal Energy Regulatory Commission's Uniform
   System of Accounts. In some cases, because of the rate making process, these
   accounting policies differ from those used by nonregulated operations. Bulk
   propane distribution is a nonregulated operation.

   Consolidated Subsidiaries

   The Company's wholly-owned nonregulated subsidiaries, Energy West Resources,
   Inc. ("EWR"), Montana Sun, Inc. ("Montana Sun") and Rocky Mountain Fuels,
   Inc. ("RMF"), are included in the consolidated financial statements. The
   results of operations of these subsidiaries constitute all of the Company's
   nonregulated operations. All significant intercompany accounts and
   transactions have been eliminated in consolidation.

   EWR is a gas marketing operation. Its principal assets are capitalized
   storage field costs and inventory. EWR primarily markets gas to industrial
   and commercial customers (businesses using over 5,000 Mcf of natural gas
   annually).

   Montana Sun's operating activities consist of commercial real estate
   development. Its significant assets consist of real estate held for future
   sale.

   RMF is a bulk retail and wholesale liquid propane sales operation. Its
   principal assets include bulk storage and customer tanks, delivery trucks and
   related equipment.




                                       41

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   1. Principal Accounting Policies (continued)

   Use of Estimates

   The preparation of financial statements in conformity with generally accepted
   accounting principles requires management to make estimates and assumptions
   that affect the amounts reported in the financial statements and accompanying
   notes. Actual results could differ from those estimates.

   Natural Gas and Propane Inventory

   Natural gas inventory and propane inventory are stated at the lower of
   weighted average cost or net realizable value except for Great Falls Gas
   Company, which is stated at the rate approved by the MPSC, which includes
   transportation costs.

   Recoverable Costs of Gas Purchases

   Differences between the costs of gas approved by regulators in the Company's
   rate structure and actual gas costs are accounted for as a current asset or
   liability, as applicable. These differences are recovered or refunded, as
   applicable, in future periods by adjustment of the Company's rates.

   Property, Plant and Equipment

   Additions to property, plant and equipment are recorded at original cost when
   placed in service. Depreciation and amortization are recorded on a
   straight-line basis over estimated useful lives or the units-of-production
   method, as applicable, at various rates averaging approximately 3.66%, 3.70%
   and 3.93% during the years ended June 30, 1998, 1997 and 1996, respectively.
   During the fourth quarter of fiscal year 1997 the Company reduced accumulated
   depreciation, which lowered depreciation expense by $109,000 due to a pending
   rate order by the Arizona Corporation Commission related to regulated
   operations in Arizona. The ACC requested that the Company change the
   estimated depreciation rates on mains, meters, services and regulators from
   3.75% to 3.25% to be in accordance with the rate case filed in 1981.


                                       42

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   1. Principal Accounting Policies (continued)

   Investments

   The Company is entering into various joint venture agreements. When the
   Company has the ability to exercise significant influence over the operations
   of these joint ventures (generally when its investment exceeds 20%), they are
   recorded as equity investments. Investments of less than 20% are recorded at
   cost.

   Gas Revenue and Cost Recognition

   The Company's business activities include the buying and selling of natural
   gas. The Company recognizes revenue and costs on gas trading transactions
   when gas is delivered to the purchaser. Any gas not purchased by the consumer
   at the end of each month is carried in inventory at cost.

   Gas Commodity Hedging

   The Company's energy-related businesses are exposed to risks relating to
   changes in certain commodity prices and counterparty performance. In order to
   manage the various risks relating to these exposures, the Company utilizes
   natural gas derivatives and has established risk management oversight for
   these risks. The Company has implemented or is in the process of implementing
   procedures to manage such risk and has established a comprehensive risk
   management committee, overseen by the Audit Committee of the Company's Board
   of Directors, to monitor compliance with the Company's risk management
   policies and procedures.

   The Company protects itself against price fluctuations on natural gas by
   limiting the aggregate level of net open positions which are exposed to
   market price changes and through the use of natural gas derivative
   instruments for hedging purposes. The net open position is actively managed
   with strict policies designed to limit the exposure to market risk and which
   require at least weekly reporting to management of potential financial
   exposure. The risk management committee has limited the types of financial
   instruments the Company may trade to those related to natural gas
   commodities. Financial instruments generally are not held for speculative
   trading purposes. Gains and losses related to derivative commodity
   instruments which qualify as hedges are recognized in the consolidated
   statements of income when the underlying hedged physical transaction


                                       43

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   1. Principal Accounting Policies (continued)

   closes (the deferral method) and are included in the same category as the
   hedged item (natural gas purchased).

   Gas Commodity Trading

   The Company may engage in natural gas commodity derivatives designated for
   trading purposes and therefore, experiences net open positions in terms of
   price, volume and specified delivery point. The open positions expose the
   Company to the risk that fluctuating market prices may adversely impact its
   financial position or results of operations. However, the net open position
   is actively managed with strict policies designed to limit the exposure to
   market risk and which require weekly reporting to management of potential
   financial exposure. Management has limited the types of derivative
   instruments the Company may trade to those related to natural gas
   commodities.

   The Company's trading activities are subject to mark-to-market accounting,
   under which changes in the market value of outstanding natural gas derivative
   instruments are recognized as gains or losses in the period of change. Gains
   and losses on commodity derivative instruments utilized for trading are
   recognized in income on a current basis (the mark-to-market method) and are
   included on the Consolidated Statements of Income in operating revenues or
   expenses (cost of sales), as appropriate, and on the Consolidated Balance
   Sheets as energy commodity assets or liabilities. Because of underlying price
   fluctuations, the mark-to-market totals may fluctuate throughout the month.
   As of June 30, 1998, the Company did not have any natural gas commodity
   derivatives designated for trading purposes.

   Debt Issuance and Reacquisition Costs

   Debt premium, discount and issuance expenses are amortized over the life of
   each issue. Debt reacquisition costs for refinanced debt are amortized over
   the remaining life of the new debt.

   Consolidated Statements of Cash Flows

   For purposes of these statements, all highly liquid investments with original
   maturities of three months or less are considered to be cash equivalents.







                                       44

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   1. Principal Accounting Policies (continued)

   Financial Instruments

   All of the Company's financial instruments requiring fair value disclosure
   were recognized in the consolidated balance sheet as of June 30, 1998. Except
   for long-term debt, their carrying values approximate the estimated fair
   values. Descriptions of the methods and assumptions used to reach this
   conclusion are as follows:

   Cash and cash equivalents, temporary cash investments, accounts receivable,
   accounts payable, and payable to employee benefit plans: These financial
   instruments have short maturities, or are invested in financial instruments
   with short maturities.

   Notes receivable: These notes generally relate to energy conservation
   incentive programs, some of which bear favorable interest rates compared to
   market for similar risks. However, due to the relatively small balances of
   these notes, any differences between carrying value and fair value are
   immaterial.

   Notes payable: Represent lines of credit, with maturities of a year or less,
   bearing interest at current market rates.

   The fair value of the Company's long-term debt, based on quoted market prices
   for the same or similar issues, is approximately 109.4% of the carrying
   value.

   Outstanding letters of credit totaled $1,030,000 at June 30, 1998. The
   letters of credit guarantee the Company's performance to third parties for
   gas purchases and gas transportation services.

   Earnings Per Share

   In February 1997, the Financial Accounting Standards Board issued Statement
   of Financial Accounting Standards No. 128, EARNINGS PER SHARE. The overall
   objective of Statement 128 is to simplify the calculation of earnings per
   share ("EPS") and achieve comparability with the recently issued
   International Accounting Standard No. 33, EARNINGS PER SHARE.

   Basic EPS is calculated by dividing net income by the weighted-average shares
   outstanding during the period. Diluted EPS is calculated by dividing net
   income by the sum of the weighted-average shares outstanding during the
   period and the additional dilutive shares resulting from the outstanding
   stock options.


                                       45

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   1. Principal Accounting Policies (continued)

   For the fiscal years ended June 30, 1998, 1997, and 1996, the calculations
   for basic EPS and diluted EPS resulted in the same earnings per share. The
   weighted average number of shares under the diluted method at each date was
   2,390,814 in 1998, 2,356,624 in 1997, and 2,298,734 in 1996.

   Stock-Based Compensation

   The Company has elected to follow Accounting Principles Board Opinion ("APB")
   No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (the intrinsic value
   method), for its stock options rather than the alternative fair value method
   provided for by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
   Accounting for stock options using APB No. 25 results in no compensation
   expense to the Company because the exercise price for the stock options
   equals the market price of the underlying stock on the date of the grant.

   Effects of Regulation

   The regulatory structure which has historically embraced the gas industry has
   been in the process of transition. Legislative and regulatory initiatives, at
   both the federal and state levels, are designed to promote competition and
   will continue to impose additional pressure on the Company's ability to
   retain customers and to maintain current rate levels. The changes in the gas
   industry have allowed commercial and industrial customers to negotiate their
   own gas purchases directly with producers or brokers. To date, the changes in
   the gas industry have not had a negative impact on earnings or cash flows of
   the Company's regulated segment.

   The accounts and rates of the Company's regulated segment are subject, in
   certain respects, to the requirements of the Montana, Wyoming and Arizona
   public utilities commissions. As a result, the Company's regulated segment
   maintains its accounts in accordance with the requirements of those
   regulators. The application of generally accepted accounting principles by
   the Company's regulated segments differs in certain respects from application
   by the nonregulated segment and other nonregulated businesses. The regulated
   segment prepares its financial statements in accordance with Statement of
   Financial Accounting Standards No. 71, ACCOUNTING FOR THE EFFECTS OF CERTAIN
   TYPES OF REGULATION ("SFAS 71"). In general, SFAS 71 recognizes that
   accounting for rate-regulated enterprises should reflect the relationship of
   costs and revenues. As a result, a regulated utility may defer recognition of
   cost (a regulatory asset) or recognize an obligation (a regulatory liability)
   if it is probable that, through the rate-making process, there will be a
   corresponding increase or decrease in revenues. Accordingly, the Company has
   deferred certain costs, which will be amortized over various periods of time.
   The costs deferred are further described in the Company's financial
   statements and the notes thereto. To the extent that collection of such costs
   or payment of liabilities


                                       46

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   1. Principal Accounting Policies (continued)

   is no longer probable as a result of changes in regulation and/or the
   Company's competitive position, the associated regulatory asset or liability
   will be reversed with a charge or credit to income. If the Company's
   regulated segment were to discontinue the application of SFAS 71, the
   accounting impact would be an extraordinary, noncash charge to operations
   that could be material to the financial position and results of operations of
   the Company.

   However, the Company is unaware of any circumstances or events in the
   foreseeable future that would cause it to discontinue the application of SFAS
   71.

   All regulatory assets have been formally approved by the applicable
   regulator, although other than environmental cleanup costs, no return on
   assets is allowed by the regulators.

   The Company uses the lives for depreciation as defined by the regulators,
   which approximate the economic lives for generally accepted accounting
   principles.

   Reclassifications

   Certain reclassifications have been made to the fiscal 1997 and 1996
   consolidated financial statements to conform to the fiscal 1998 presentation.

   2. Notes Payable

   At June 30, 1998, the Company maintained two lines of credit totaling
   $19,000,000. One line is for $11,000,000 with interest calculated at the
   lower of the London Interbank Offering Rate ("LIBOR") plus 2% or prime less
   1/2 percent, expiring January 5, 1999. The other is for $8,000,000 with
   interest calculated at the lower of LIBOR plus 2% or prime less 1/2 percent,
   expiring January 15, 1999. A total of $1,442,982, $11,380,000, and $7,175,000
   had been borrowed under the line of credit agreements at June 30, 1998, 1997
   and 1996, respectively. Borrowings on lines of credit, based upon daily loan
   balances, averaged $4,193,679, $9,390,334 and $6,166,380 during the years
   ended June 30, 1998, 1997 and 1996, respectively. The maximum borrowings
   outstanding on these lines at any month end were $11,835,000, $11,380,000 and
   $9,415,000 during these same periods. The daily weighted average interest
   rate was 7.85%, 8.0% and 8.5% for the years ended June 30, 1998, 1997 and
   1996, respectively. Management expects both lines of credit to be renewed for
   another year.


                                       47

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   3. Long-Term Debt Obligations

   Long-term debt consists of the following:

<TABLE>
<CAPTION>

                                                       June 30
                                                  1998          1997
                                              -----------   -----------
<S>                                           <C>           <C>      
Series 1997 notes payable ................... $ 8,000,000   $      --
Series 1993 notes payable ...................   7,800,000     7,800,000
Industrial development revenue obligations:
Series 1992A ................................     360,000       655,000
Series 1992B ................................   1,515,000     1,575,000
Other .......................................      16,065        15,714
                                              -----------   -----------
Total long-term obligations .................  17,691,065    10,045,714
Less portion due within one year ............     413,032       361,959
                                              -----------   -----------
 Long-term obligations due after one year ... $17,278,033   $ 9,683,755
                                              -----------   -----------
                                              -----------   -----------

</TABLE>

   Series 1997 Notes Payable

   On August 1, 1997, the Company issued $8,000,000 of Series 1997 unsecured
   notes bearing interest at the rate of 7.5%, payable semiannually on June 1
   and December 1 of each year, commencing on December 1, 1997. All principal
   outstanding, plus accrued interest, will be due and payable on June 1, 2012.
   At the Company's option, beginning June 1, 2002, notes maturing subsequent to
   2002 may be redeemed prior to maturity, in whole or part, at 100% of face
   value, plus accrued interest.

   Series 1993 Notes Payable

   On June 24, 1993, the Company issued $7,800,000 of Series 1993 unsecured
   notes bearing interest at rates ranging from 6.20% to 7.60%, payable
   semiannually on June 1 and December 1 of each year, commencing on December 1,
   1993. Maturity dates begin in 1999 and extend to 2013. At the Company's
   option, beginning June 1, 2003, notes maturing subsequent to 2003 may be
   redeemed prior to maturity, in whole or part, at redemption prices declining
   from 104% to 100% of face value, plus accrued interest.



                                       48

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   3. Long-Term Debt Obligations (continued)

   Industrial Development Revenue Obligations

   On September 15, 1992, Cascade County, Montana (the County) issued two
   Industrial Development Revenue Obligations, the Series 1992A Bonds for
   $1,700,000 and Series 1992B Bonds for $1,800,000. The Series 1992A and Series
   1992B Bonds are unsecured; however, loan agreements are maintained with the
   Company in the same amounts. Both the Series 1992A and Series 1992B Bonds
   require annual principal payments on October 1 and semiannual interest
   payments on April 1 and October 1 of each year beginning in 1993. The Series
   1992A Bonds have a final maturity in 1999 and bear interest at rates ranging
   from 3.25% to 5.30%. The Series 1992B bonds have a final maturity in 2012 and
   bear interest at rates ranging from 3.35% to 6.50%.

   Aggregate Annual Maturities

<TABLE>
<CAPTION>

   Fiscal         Series        Series           IDR Obligations                        Total
 Year Ending       1997          1993         Series        Series                    Long-Term
  June 30          Notes         Notes        1992A         1992B         Other      Obligations
               -----------   -----------   -----------   -----------   -----------   -----------
<S>            <C>           <C>           <C>           <C>           <C>           <C>        
1999 ......... $      --     $   165,000   $   175,000   $    65,000   $     8,032   $   413,032
2000 .........        --         175,000       185,000        70,000         8,033       438,033
2001 .........        --         370,000          --          75,000          --         445,000
2002 .........        --         390,000          --          75,000          --         465,000
2003 .........        --         420,000          --          80,000          --         500,000
Thereafter ...   8,000,000     6,280,000          --       1,150,000          --      15,430,000
               -----------   -----------   -----------   -----------   -----------   -----------
                 8,000,000     7,800,000       360,000     1,515,000        16,065    17,691,065
Less current          --         165,000       175,000        65,000         8,032       413,032
                                                                                         portion
               $ 8,000,000   $ 7,635,000   $   185,000   $ 1,450,000   $     8,033   $17,278,033
               -----------   -----------   -----------   -----------   -----------   -----------
               -----------   -----------   -----------   -----------   -----------   -----------
</TABLE>

   The Company's long-term debt obligation agreements contain various covenants
   including: limiting total dividends and distributions made in the immediately
   preceding 60-month period to aggregate consolidated net income for such
   period, restricting senior indebtedness, limiting asset sales, and
   maintaining certain financial debt and interest ratios.



                                       49

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   4. Retirement Plans

   The Company has a defined contribution pension plan (the Plan) which covers
   substantially all of the Company's employees. Under the Plan, the Company
   contributes 10% of each participant's eligible compensation. Total
   contributions to the Plan for the years ended June 30, 1998, 1997 and 1996
   were $405,441, $392,868 and $383,018, respectively.

   The Company adopted, effective July 1, 1993, SFAS No. 106, EMPLOYERS'
   ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. This standard
   requires that the projected future cost of providing postretirement benefits
   be recognized as an expense as employees render service rather than when
   paid. Effective for fiscal year 1994, the Company modified its plan for these
   benefits and has elected to pay eligible retirees (post-65 years of age) $125
   per month in lieu of contracting for health and life insurance benefits. The
   amount of this payment is fixed and will not increase with medical trends or
   inflation. The Company's transition obligation at June 30, 1998 and 1997 was
   $293,600 and $313,200, respectively, of which $250,800 in 1998 and $271,500
   in 1997 is related to the regulated utility operations. The transition
   obligation was accrued as a deferred charge and will be amortized over 20
   years. Substantially all of the transition obligation is for the future cost
   of benefits to active employees.

   The Company made a change to the plan, effective July 1, 1996, allowing
   pre-65 retirees and their spouses to remain on the same medical plan as
   active employees by contributing 125% of the current COBRA rate to retain
   this coverage. The increased liability from this change is $269,200. The
   prior service obligation associated with this plan change at June 30, 1998
   and 1997 was $233,400 and $251,300, respectively, of which $193,300 in 1998
   and $210,600 in 1997 is related to regulated utility operations. The prior
   service obligation was accrued as a deferred charge and will be amortized
   over fifteen years. The Company expects regulators in Montana and Wyoming to
   allow recovery of the additional costs associated with this plan change.

   The incremental annual increases in consolidated expenses due to adoption of
   SFAS No. 106 were $121,600, $126,400 and $70,900 in fiscal years 1998, 1997
   and 1996, respectively. Included in these amounts were $95,600 in 1998,
   $101,900 in 1997 and $58,100 in 1996 relating to regulatory operations. The
   MPSC allowed recovery of these costs beginning on November 4, 1997 for the
   utility operations in Montana. Management believes it is probable that its
   regulators in Wyoming will allow recovery of these costs based upon recent
   industry rate decisions addressing this issue. The Company has


                                       50

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   4. Retirement Plans (continued)

   established a VEBA trust fund and is contributing to that trust the annual
   expense of the plan. The balance in that trust after benefit payments in
   fiscal year 1998 is $284,000 and in fiscal year 1997 is $141,900.

   The following table presents the amounts recognized at June 30, 1998 and 1997
   in the consolidated financial statements.

<TABLE>
<CAPTION>

                                                         1998         1997
                                                      ---------    ---------
<S>                                                   <C>          <C>      
Accumulated postretirement benefit obligation:
Retirees ............................................ $ 176,700    $ 125,700
Fully eligible active plan participants .............   104,800       86,500
Other active plan participants ......................   555,100      604,200
                                                      ---------    ---------
                                                        836,600      816,400
Net unrecognized gains ..............................    97,213       51,519
                                                      $ 933,813    $ 867,919
                                                      ---------    ---------
                                                      ---------    ---------


Net periodic postretirement benefit cost:
Service cost ........................................ $  41,300    $  42,100
Interest cost .......................................    52,900       52,000
Actual return on plan assets ........................    (9,400)      (3,200)
Amortization of transition obligation ...............    19,600       19,600
Amortization of unrecognized (gains) losses .........    (3,700)        --
Net amortization of unrecognized prior service cost .    17,900       17,900
Deferred asset gain (loss) ..........................     3,000       (2,000)

Net periodic postretirement benefit cost ............ $ 121,600    $ 126,400
                                                      ---------    ---------
                                                      ---------    ---------

</TABLE>


   The weighted-average discount rate used in determining the accumulated
   postretirement benefit obligation at June 30, 1998 was 7.0 percent and at
   June 30, 1997 was 7.5 percent. The weighted-average annual assumed rate of
   increase in the per capita cost of covered benefits (i.e., health care cost
   trend rate) is 9.0 percent for the 1998-99 fiscal year and is assumed to
   decrease gradually to 5.5 percent after four years and remain at that level
   thereafter. The weighted-average health care cost trend rate was 10.0 percent
   for the


                                       51

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   4. Retirement Plans (continued)

   1997-98 fiscal year and was assumed to decrease gradually to 5.5 percent
   after five years and remain at that level thereafter.

   The health care cost trend rate assumption has a significant effect on the
   amounts reported. For example, increasing the assumed health care cost trend
   rate by one percentage point in each year would increase the accumulated
   postretirement benefit obligation as of June 30, 1998 by $64,300, and the
   aggregate of interest and service cost for the year ended June 30, 1998 by
   $9,200.

   5. Income Tax Expense

   Effective July 1, 1993, the Company changed its method of accounting for
   income taxes from the deferred method to the liability method required by
   FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES. The cumulative effect of
   adopting Statement No. 109 created a regulatory asset and a regulatory
   liability for regulated operations, representing the anticipated effects on
   regulated rates charged to customers which will result from the adoption of
   Statement No. 109. For the year ended June 30, 1998, changes in certain
   assets and liabilities resulted in an increase in regulatory assets of
   $103,423 and a decrease in regulatory liabilities of $13,160 for regulated
   entities, resulting in ending balances of $590,450 and $135,801,
   respectively.

   Deferred income taxes reflect the net tax effects of temporary differences
   between the carrying amounts of assets and liabilities for financial
   reporting purposes and the amounts used for income tax purposes.



                                       52

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   5. Income Tax Expense (continued)

   Significant components of the Company's deferred tax assets and liabilities
   as of June 30, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>

                                          1998          1997
                                       ----------   ----------
<S>                                    <C>          <C>       
Deferred tax assets:
Allowance for doubtful accounts ...... $   34,163   $   36,187
Unamortized investment tax credit ....    136,022      149,182
Contributions in aid of construction .    149,093      204,222
Other nondeductible accruals .........    197,114      200,990
Deferred gain on sale of assets ......     75,501       84,853
Other ................................     64,583       51,973
                                       ----------   ----------
Total deferred tax assets ............    656,476      727,407


Deferred tax liabilities:
Customer refunds payable .............    768,913      657,459
Property, plant and equipment ........  3,431,603    3,268,078
Unamortized debt issue costs .........    173,251      187,443
Unamortized deferred rate case costs .    114,113      109,540
Covenant not to compete ..............     80,556       84,798
Other ................................     24,690        3,301
                                       ----------   ----------
Total deferred tax liabilities .......  4,593,126    4,310,619
Net deferred tax liabilities ......... $3,936,650   $3,583,212
                                       ----------   ----------
                                       ----------   ----------

</TABLE>


                                       53

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   5. Income Tax Expense (continued)

   Income tax expense consists of the following:


<TABLE>
<CAPTION>

                                                  Year ended June 30
                                            1998         1997        1996
                                         ---------    ---------    ---------
<S>                                      <C>          <C>          <C>      
Current income taxes:
Federal ..............................   $ 704,914    $ 202,356    $ 244,777
State ................................      27,487       31,477       21,819
                                         ---------    ---------    ---------
     Total current income taxes ......     732,401      233,833      266,596

Deferred income taxes (benefits):
Tax depreciation in excess of book ...     285,124      364,262      341,217
Book amortization in excess of tax ...     (18,434)     (29,900)     (35,958)
Recoverable cost of gas purchases ....     111,393      255,130      322,479
Regulatory surcharges ................     (93,149)     (70,955)     (44,830)
Deferred gain (loss) on sale of assets    (215,552)       9,428      (95,900)
Contributions in aid of construction .      55,237      (88,347)        --
Deferred rate case costs .............       4,553       93,287         --
Bad debt reserves ....................      23,726         --           --
Other ................................      (5,377)       7,022      (25,362)
                                         ---------    ---------    ---------
     Total deferred income taxes .....     147,521      539,927      461,646

Investment tax credit, net ...........     (21,062)     (21,062)     (21,062)
Total income taxes ...................   $ 858,860    $ 752,698    $ 707,180
                                         ---------    ---------    ---------
                                         ---------    ---------    ---------

Income taxes--operations .............   $ 792,129    $ 703,472    $ 670,025
Income taxes--other income ...........      66,731       49,226       37,155
                                         ---------    ---------    ---------
Total income taxes ...................   $ 858,860    $ 752,698    $ 707,180
                                         ---------    ---------    ---------
                                         ---------    ---------    ---------

</TABLE>


                                       54

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   5. Income Tax Expense (continued)

   Income tax expense from operations differs from the amount computed by
   applying the federal statutory rate to pre-tax income for the following
   reasons:

<TABLE>
<CAPTION>

                                                 1998         1997          1996
                                               ---------    ---------    ---------
<S>                                            <C>          <C>          <C>      
Tax expense at statutory rate - 34% .......... $ 812,798    $ 702,989    $ 666,930
State income tax, net of federal tax benefit .    55,138       47,084       44,710
Amortization of deferred investment tax
credits ......................................   (21,062)     (21,062)     (21,062)
Other ........................................    11,986       23,687       16,602
                                               ---------    ---------    ---------
Total income taxes ........................... $ 858,860    $ 752,698    $ 707,180
                                               ---------    ---------    ---------
                                               ---------    ---------    ---------

</TABLE>

   6. Regulated and Nonregulated Operations

   Summarized financial information for the Company's regulated utility and
   nonregulated nonutility operations (before intercompany eliminations between
   regulated and nonregulated primarily consisting of gas sales from
   nonregulated to regulated entities, intercompany accounts receivable,
   accounts payable, equity, and subsidiary investment) is as follows:



                                       55

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   6. Regulated and Nonregulated Operations (continued)

<TABLE>
<CAPTION>

                                                           June 30, 1998                              
                                           Reg.        Nonreg.        Adj.         Consol.            
                                       -----------   -----------   -----------    -----------
<S>                                    <C>           <C>           <C>            <C>        
Capital expenditures ................. $ 2,475,740 $     538,280                  $ 3,014,020
                                       -----------   -----------   -----------    -----------
                                       -----------   -----------   -----------    -----------

Property, plant and equipment, net
     Regulated utilities ............. $24,708,248                                $24,708,248
      Nonregulated propane                           $ 2,410,102                    2,410,102
     Real estate held for investment .                   453,554                      453,554

Total P P & E ........................  24,708,248     2,863,656                   27,571,904

Current assets .......................   7,792,284     6,522,439   $(1,988,477)    12,326,246
Other assets .........................   4,220,331       288,403    (1,071,999)     3,436,735
                                       -----------   -----------   -----------    -----------


Total assets ......................... $36,720,863   $ 9,674,498   $(3,060,476)   $43,334,885
                                       -----------   -----------   -----------    -----------
                                       -----------   -----------   -----------    -----------

Equity ............................... $ 9,605,315   $ 4,277,064   $(1,071,090)   $12,811,289
Long-term debt .......................  15,546,350     1,731,683                   17,278,033
Current liabilities ..................   5,934,499     2,799,720    (1,989,386)     6,744,833
Deferred income taxes ................   3,103,164       224,596                    3,327,760
Other liabilities ....................   2,531,535       641,435                    3,172,970
                                       -----------   -----------   -----------    -----------

Total capitalization and liabilities . $36,720,863   $ 9,674,498   $(3,060,476)   $43,334,885
                                       -----------   -----------   -----------    -----------
                                       -----------   -----------   -----------    -----------
</TABLE>

<TABLE>
<CAPTION>

                                                           June 30, 1997                      
                                           Reg.        Nonreg.        Adj.         Consol.    
                                       -----------   -----------   -----------    -----------
<S>                                    <C>           <C>           <C>            <C>        
Capital expenditures ................. $ 1,676,401   $ 1,530,799                  $ 3,207,200
                                       -----------   -----------   -----------    -----------

Property, plant and equipment, net
     Regulated utilities ............. $23,739,918                                $23,739,918
      Nonregulated propane ...........               $ 3,189,998                    3,189,998
     Real estate held for investment .                   467,864                      467,864
                                       -----------   -----------   -----------    -----------
Total P P & E ........................  23,739,918     3,657,862                  27,397,780

Current assets .......................   9,820,008     2,790,148   $  (211,834)    12,398,322
Other assets .........................   3,823,659       337,086    (1,071,998)     3,088,747
                                       -----------   -----------   -----------    -----------

Total assets ......................... $37,383,585   $ 6,785,096   $(1,283,832)   $42,884,849
                                       -----------   -----------   -----------    -----------
                                       -----------   -----------   -----------    -----------
Equity ............................... $ 9,411,406   $ 3,656,421   $(1,070,893)   $11,996,934
Long-term debt .......................   7,952,072     1,731,683                    9,683,755
Current liabilities ..................  14,791,018       218,876       306,990     15,316,884
Deferred income taxes ................   2,746,547       360,725                    3,107,272
Other liabilities ....................   2,482,542       817,391      (519,929)     2,780,004
                                       -----------   -----------   -----------    -----------

Total capitalization and liabilities . $37,383,585   $ 6,785,096   $(1,283,832)   $42,884,849
                                       -----------   -----------   -----------    -----------
                                       -----------   -----------   -----------    -----------
</TABLE>


<TABLE>
<CAPTION>

                                                             1998                                             
                                       Reg.        Nonreg.            Adj.          Consol.     
                                  ------------   ------------    ------------    ------------   
<S>                               <C>            <C>             <C>             <C>            
Operating revenue ............... $ 27,824,360   $  8,740,964    $ (4,884,722)   $ 31,680,602   

Gas trading revenue .............                  14,488,326      (3,105,307)     11,383,019   
                                  ------------   ------------    ------------    ------------   

Total operating revenue .........   27,824,360     23,229,290      (7,990,029)     43,063,621   

Gas purchased ...................   17,046,612      6,404,939      (4,879,743)     18,571,808   

Cost of gas trading .............   13,289,205     (3,104,350)     10,184,855                   
Distribution, general and admin .    5,910,077      1,786,851                       7,696,928   
Maintenance .....................      397,512         99,033                         496,545   
Depreciation and amortization ...    1,435,936        302,394          (5,936)      1,732,394   
Taxes other than income .........      529,671         98,512                         628,183   
                                  ------------   ------------    ------------    ------------   

Operating income ................ $  2,504,552   $  1,248,356    $         --    $  3,752,908   
                                  ------------   ------------    ------------    ------------   
                                  ------------   ------------    ------------    ------------   

</TABLE>


<TABLE>
<CAPTION>

                                                               1997
                                      Reg.          Nonreg.         Adj.           Consol.    
                                  ------------   ------------   ------------    ------------  
<S>                               <C>            <C>            <C>             <C>           
Operating revenue ............... $ 26,882,248   $  9,143,144   $ (3,803,591)   $ 32,221,801  
                                                                                              
Gas trading revenue .............                   5,993,668                      5,993,668  
                                  ------------   ------------   ------------    ------------  
                                                                                              
Total operating revenue .........   26,882,248     15,136,812     (3,803,591)     38,215,469  
                                                                                              
Gas purchased ...................   16,192,875      6,747,439     (3,803,591)     19,136,723  
                                                                                              
Cost of gas trading .............    5,538,847                     5,538,847                  
Distribution, general and admin .    5,857,321      1,641,146                      7,498,467  
Maintenance .....................      403,723         92,998                        496,721  
Depreciation and amortization ...    1,348,733        340,349                      1,689,082  
Taxes other than income .........      545,448        114,685                        660,133  
                                  ------------   ------------   ------------    ------------  
                                                                                              
Operating income ................ $  2,534,148   $    661,348    $       --     $  3,195,496  
                                  ------------   ------------   ------------    ------------  
                                  ------------   ------------   ------------    ------------  
</TABLE>

<TABLE>
<CAPTION>

                                                              1996
                                        Reg.         Nonreg.          Adj.         Consol.         
                                   ------------   ------------   ------------    ------------     
<S>                                <C>            <C>            <C>             <C>              
Operating revenue ...............  $ 23,672,186   $  4,510,942   $ (1,213,359)   $ 26,969,769     
                                                                                                  
Gas trading revenue .............                    4,348,239                      4,348,239     
                                   ------------   ------------   ------------    ------------     
                                                                                                  
Total operating revenue .........    23,672,186      8,859,181     (1,213,359)     31,318,008     
                                                                                                  
Gas purchased ...................    13,646,178      2,539,635     (1,213,359)     14,972,454     
                                                                                                  
Cost of gas trading .............     3,751,053                     3,751,053                     
Distribution, general and admin .     5,578,188      1,346,203                      6,924,391     
Maintenance .....................       348,123         60,467                        408,590     
Depreciation and amortization ...     1,359,339        307,917                      1,667,256     
Taxes other than income .........       523,768        105,660                        629,428     
                                   ------------   ------------   ------------    ------------     
                                                                                                  
Operating income ................  $  2,216,590   $    748,246    $       --     $  2,964,836     
                                   ------------   ------------   ------------    ------------     
                                   ------------   ------------   ------------    ------------     

</TABLE>






                                       56

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   7. Stock Options and Ownership Plans

   Stock Options

   There are two Incentive Stock Option Plans which provide for grants of
   options to purchase up to 200,000 shares of the Company's common stock to key
   employees. The option price may not be less than 100% of the common stock
   fair market value on the date of grant (110% of the fair market value if the
   employee owns more than 10% of the Company's outstanding common stock). These
   options may not have a term exceeding five years.

   Since the Company has elected to use APB No. 25, pro forma information
   regarding net income and earnings per share is required by SFAS No. 123 as if
   the Company had accounted for its stock options under the fair value method
   of that statement. For the fiscal year ended June 30, 1998, no options were
   granted and for the fiscal year ended June 30, 1997 only a limited number of
   options were granted, resulting in no material impact on pro forma net income
   or earnings per share. The fair value for these options was estimated at the
   date of grant using the Black-Scholes option pricing model with the following
   weighted average assumptions:


<TABLE>
<CAPTION>


                                                            1997
                                                         ---------
<S>                                                      <C> 
    Risk-free interest rate--length of exercise period .        6.3%
      Dividend yields ..................................        5.2%
Volatility factors of the expected market price of
    the Company's common stock .........................       .187
      Weighted-average expected life of the employee
      stock options ....................................    5 years

 The weighted-average fair value of options granted .... $    1.20

</TABLE>

     The Black-Scholes option valuation model was developed for use in
   estimating the fair value of traded options which have no vesting
   restrictions and are fully transferable. In addition, option valuation models
   require the input of highly subjective assumptions, including the expected
   stock price volatility. Because the Company's stock options have
   characteristics significantly different from those of traded options, and
   because changes


                                       57

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   7. Stock Options and Ownership Plans (continued)

   in the subjective input assumptions can materially affect the fair value
   estimate, in management's opinion, the existing models do not necessarily
   provide a reliable single measure of the fair value of the Company's stock
   options.

   A summary of the activity under the plans is as follows:

<TABLE>
<CAPTION>

                                            Weighted
                                            Average
                              Number of     Exercise
                                Shares       Price
                               -------    ----------
<S>                            <C>        <C>       
Fiscal 1998
Outstanding at July 1, 1997 ..  89,428    $    7.533
Granted ......................    --

Exercised .................... (22,908)   $    7.045
Expired ...................... (37,920)   $    7.172
                               -------    ----------
Outstanding at June 30, 1998 .  28,600    $    8.402
                               -------    ----------

At June 30, 1998
Exercisable ..................  28,600
Available for grant ..........  42,820

Fiscal 1997
Outstanding at July 1, 1996 ..  75,708    $    7.244
Granted ......................  20,000    $    8.406
Exercised ....................    (980)   $    7.061
Expired ......................  (5,300)   $    6.783
                               -------    ----------
Outstanding at June 30, 1997 .  89,428    $    7.533
                               -------    ----------

At June 30, 1997
Exercisable ..................  89,428
Available for grant ..........   8,400

Fiscal 1996
Outstanding at July 1, 1995 ..  90,588    $    6.976
Granted ......................    --
Exercised .................... (13,680)   $    5.480

Expired ......................  (1,200)   $    6.500
Outstanding at June 30, 1996 .  75,708    $    7.244
                               -------    ----------
                               -------    ----------
At June 30, 1996

Exercisable ..................  75,708
Available for grant ..........   6,052

</TABLE>



                                       58

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   7. Stock Options and Ownership Plans (continued)

   The range of exercise prices for options outstanding at June 30, 1998 was
   $7.38 to $9.13.

   Employee Stock Ownership Plan

   In 1984, the Company established an Employee Stock Ownership Plan ("ESOP")
   which covers most of the Company's employees. The unleveraged ESOP receives
   cash contributions from the Company each year as determined by the Board of
   Directors and will buy shares of the Company's common stock from either the
   Company or the open market at the then current price per share. The ESOP has
   no allocated shares, committed-to-be-released shares or suspense shares at
   the balance sheet dates. In addition, there are no unearned shares and there
   is no repurchase obligation. The Company has contributed and recognized as
   expense $127,901, $100,615 and $121,400 for the years ended June 30, 1998,
   1997 and 1996, respectively. During the years ended June 30, 1998, 1997 and
   1996, the ESOP acquired 11,639 shares at $8.65 per share, 14,490 shares at
   $8.38 per share and 15,889 shares at $8.00 per share, respectively.

   8. Operating Lease

   The Company leases a building in Cody, Wyoming. The lease expires on June 30,
   2005. Future minimum rental payments will be approximately $79,200 per year
   from fiscal 1999 through fiscal 2005, for total future minimum lease payments
   of $554,400. Rental expenses related to this lease were $75,438, $73,599 and
   $73,808 in fiscal years 1998, 1997 and 1996, respectively.

   9. Gain on Sale-Leaseback of Assets

   On June 28, 1996, one of the Company's nonregulated subsidiaries sold real
   property, consisting of land and office and warehouse buildings, for $525,000
   in cash. Concurrent with the sale, the Company leased the property back for a
   period of ten years at an annual rental of $51,975. The initial ten-year term
   of the lease is extended for two successive five-year periods unless the
   Company provides at least six months notice prior to the end of either the
   initial term or the first successive five-year term.


                                       59

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   9. Gain on Sale-Leaseback of Assets (continued)

   The Company does not have an option to repurchase the real property. However,
   should the lessor have a bona fide third-party offer, the Company has the
   right of first refusal to buy the land and buildings under the same terms and
   conditions. As a result, the transaction has been recorded as a sale,
   resulting in a deferred gain of $236,000, which is amortized ratably into
   income over the initial lease term. The balance of the deferred gain at June
   30, 1998 is $189,035. The land, buildings and related accounts are no longer
   recognized in the accompanying financial statements.

   The future minimum lease payments under the terms of the related lease
   agreement require the payment of $51,975 per year from fiscal 1998 through
   fiscal 2006, for total future minimum lease payments of $415,800.

   10. Commitments and Contingencies

   Commitments

   The Company has entered into long-term, take or pay natural gas supply
   contracts which expire beginning in 1998 and ending in 2002. The contracts
   generally require the Company to purchase specified minimum volumes of
   natural gas at a fixed price which is subject to renegotiation every two
   years. Current prices per Mcf for these contracts range from $1.60 to $1.70.
   Based on current prices, the minimum take or pay obligation at June 30, 1998
   for each of the next five years and in total is as follows:

<TABLE>
<CAPTION>

   Fiscal Year
   -----------

<S>             <C>       
   1999 ....... $2,475,450
   2000 .......  1,562,610
   2001 .......  1,032,950
   2002 .......  1,032,950
   2003 .......    164,250
   Thereafter .    657,000
                ----------
   Total ...... $6,925,210
                ----------
                ----------
</TABLE>


   Natural gas purchases under these contracts for the years ended June 30,
   1998, 1997 and 1996 approximated $1,630,000, $1,100,000 and $3,530,000,
   respectively.


                                       60

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   10. Commitments and Contingencies (continued)

   On August 1, 1997, the Company entered into a take or pay propane contract
   which expires July 31, 1998. The contract generally requires the Company to
   purchase all propane quantities produced by a propane producer in Wyoming
   (approximately 250,000 gallons per month) tied to the Worland, Wyoming spot
   price.

   Environmental Contingency

   The Company owns property on which it operated a manufactured gas plant from
   1909 to 1928. The site is currently used as a service center where certain
   equipment and materials are stored. The coal gasification process utilized in
   the plant resulted in the production of certain by-products which have been
   classified by the federal government and the State of Montana as hazardous to
   the environment. Several years ago the Company initiated an assessment of the
   site to determine if remediation of the site was required. That assessment
   resulted in a submission to the Montana Department of Environmental Quality
   ("MDEQ"), formerly known as the Montana Department of Health and
   Environmental Science ("MDHES"), in 1994. The Company has worked with the
   MDEQ since that time to obtain the data that would lead to a remediation
   action acceptable to the MDEQ. The Company's environmental consultant filed
   the report with the MDEQ on June 11, 1997. The MDEQ is evaluating the report
   and after completion of its review will provide for public comment related to
   the remediation plan. Once the comment period has lapsed and due
   consideration of any comments occurs, the plan can be finalized. Assuming
   acceptance of the plan, remediation could be in place by the fall of 1998.

   At June 30, 1998, the costs incurred in evaluating this site have totaled
   approximately $436,000. On May 30, 1995, the Company received an order from
   the Montana Public Service Commission allowing for recovery of the costs
   associated with evaluation and remediation of the site through a surcharge on
   customer bills. As of June 30, 1998, that recovery mechanism had generated
   approximately $575,000. The Company expects to spend the full amount
   recovered through the surcharge. The Commission's decision calls for ongoing
   review by the Commission of the costs incurred for this matter. The Company
   will submit an application for review by the Commission when the remediation
   plan is approved by the MDEQ.



                                       61

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   11. Regulatory Matters

   On July 8, 1996, the Company filed a general rate case with the MPSC
   requesting a revenue increase for its Great Falls Gas Company operations. The
   MPSC approved an interim general rate increase on November 4, 1996 of
   $275,000 with a final order approved on April 7, 1997 for an additional
   $20,000. The Company filed for a general rate increase for Broken Bow (a
   regulated utility subsidiary in Payson, Arizona) on September 26, 1996 with
   the ACC. The ACC made its final ruling on August 27, 1997 approving an
   increase of $390,000.

   On March 23, 1998, the Company's Great Falls Division filed a restructuring
   application with the Montana Public Service Commission. The application
   requested permission to unbundle its gas supply function from its tariffs.
   The Company currently permits its larger customers to purchase gas from third
   party suppliers and ship the product through its distribution system for a
   fee. The utility has contracted for certain gas balancing and supply services
   with its affiliate Energy West Resources as part of its transition to open
   access. That contract will also be reviewed as part of the Company's
   application. The hearing regarding this matter is scheduled for mid-September
   1998 and an order will be issued by early winter.

   12. Financial Instruments and Risk Management

   For the fiscal year ended June 30, 1998, the Company is a party to one gas
   hedge agreement for nonregulated operations. For the fiscal year ended June
   30, 1997, the Company was a party to three gas hedges. The 1997 agreements
   represented approximately 95% of the supply required for operations during
   that fiscal year. The hedges were made to minimize the Company's exposure to
   price fluctuations and to secure a known margin for the purchase and resale
   of gas.



                                       62

<PAGE>


                    Energy West Incorporated and Subsidiaries
             Notes to Consolidated Financial Statements (continued)


   12. Financial Instruments and Risk Management (continued)


<TABLE>
<CAPTION>

                                                                                                         Fair
                                                                 Index Price                            Value of
                 Volume                                           Range for       Contract   Index     Remaining
                  (MMB    Effective   Termination   Contract        Fiscal          Value    Price at   Contract
     Fiscal        TU        Date         Date       Price           Year            at      June 30    at June
     Year          Per                                                             June 30              30
                   Day)                                                               
----------------------------------------------------------------------------------------------------------------
<S>              <C>        <C>        <C>           <C>       <C>               <C>           <C>      <C>
   1997
   Hedge #1 ...  4,000      9/1/96      8/31/97      $1.03     $  .88 to $2.11    $255,400     $1.19    $294,600
   Hedge #2 ...    400      9/1/96      8/31/97      $1.20     $  .88 to $2.11    $ 29,800     $1.19    $ 29,500
   Hedge #3 ...    500      1/1/97      6/30/98      $2.08      $1.39 to $4.19    $379,600     $1.44    $262,800

   1998
   Hedge #1 ...  5,000      5/1/98     10/31/98      $1.33      $1.32 to $1.58    $818,000     $1.32    $812,000

</TABLE>

   Hedge

   In July 1998 the Company signed a basis swap agreement, between the NYMEX and
   AECO price indices. The contract period for the 5,000 MMBTU per day swap
   begins November 1, 1999 and ends October 31, 2000. The swap compares the
   index prices of natural gas quoted on the NYMEX gas exchange with the AECO
   gas exchange on a daily basis. When the basis differential is less than $.62
   per MMBTU, the Company is in a negative position and must pay the
   counterparty. The Company has designated this basis swap as a trading
   commodity derivative.




                                       63

<PAGE>



   Item 9. - Changes in and Disagreements with Accountants on Accounting and
             Financial Disclosure

   Not Applicable




                                       64

<PAGE>



                                    PART III

   Item 10. - DIRECTORS AND EXECUTIVE OFFICER OF THE REGISTRANT

   Information concerning the directors and executive officers is included in
   Part I, on pages 15 through 19. The information contained under the heading
   "Election of Directors" in the Proxy Statement is incorporated herein by
   reference in response to this item.

   Item 11. - EXECUTIVE COMPENSATION

   The information contained under heading "Executive Compensation" in the Proxy
   Statement is incorporated herein by reference in response to this item.

   Item 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The information contained under the heading "Security Ownership of Certain
   Beneficial Owners and Management" in the Proxy Statement is incorporated
   herein by reference in response to this item.

   Item 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The information contained under the heading "Certain Transactions" in the
   Proxy Statement is incorporated herein by reference in response to this item.



                                       65

<PAGE>

                                     PART IV

   Item 14. - Exhibits, Financial Statement Schedules and Reports on Form 8K

         (a)      1.  Financial Statements included in Part II, Item 8:
                         Report of Independent Auditors
                         Consolidated Balance Sheets
                         Consolidated Statements of Income
                         Consolidated Statements of Stockholders' Equity
                         Consolidated Statements of Cash Flows
                         Notes to Consolidated Financial Statements

                  2.  Financial Statement Schedules included in Item 14 (d):
                         Schedule II - Valuation and Qualifying Accounts

   All other schedules are omitted because they are not applicable or the
   required information is shown in the financial statements or notes thereto.

                  3.  Exhibits (See Exhibit Index on Page E-1)

    (b)    Reports on Form 8-K
           none

    (d)

                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS

                                ENERGY WEST INC.

                                  JUNE 30, 1998
<TABLE>
<CAPTION>

                              Balance At     Charged     Write-Offs    Balance
                              Beginning      to Costs    Net of        at End of
   Description                of Period      & Expenses  Recoveries    Period
   -----------                ---------      ----------  ----------    ---------

ALLOWANCE FOR
UNCOLLECTIBLE ACCOUNTS

<S>                           <C>          <C>          <C>           <C>
Year Ended June 30, 1996 ..    $ 191,168    $  64,509    ($ 47,571)    $ 208,106

Year Ended June 30, 1997 ..    $ 208,106    $ 130,992    ($171,274)    $ 167,824

Year Ended June 30, 1998 ..    $ 167,824    $  69,651    ($138,714)    $  98,761



</TABLE>




                                       66
<PAGE>




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

/S/  Larry D. Geske                       /s/  William J. Quast
-------------------                       ---------------------
Larry D. Geske, President and                 William J. Quast
Chief Executive Officer                       Vice-President, Treasurer and
and Chairman of the Board                     Assistant Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<S>                                           <C>             <C>
/s/  Larry D. Geske                                           09/27/98
-------------------                                           --------
Larry D. Geske                                                Date
President and Chief Executive
Officer and Acting Chairman of the Board

/s/ Ian B. Davidson                                           09/27/98
-------------------                                           --------
Ian B. Davidson                               Director        Date

/s/ Thomas N. McGowen, Jr.                                    09/27/98
-------------------------                                     --------
Thomas N. McGowen, Jr.                        Director        Date

/s/ G. Montgomery Mitchell                                    09/27/98
--------------------------                                    --------
G. Montgomery Mitchell                        Director        Date

/s/ George D. Ruff                                            09/27/98
------------------                                            --------
George D. Ruff                                Director        Date

/s/ David A. Flitner                                          09/27/98
--------------------                                          --------
David A. Flitner                              Director        Date

/s/ Dean South                                                09/27/98
--------------                                                --------
Dean South                                    Director        Date

/s/ Richard J. Schulte                                        09/27/98
----------------------                                        --------
Richard J. Schulte                            Director        Date

</TABLE>



                                       67
<PAGE>



                                  EXHIBIT INDEX
                                  -------------
EXHIBITS
--------

<TABLE>
<S>     <C>
3.1    Restated Articles of Incorporation of the Company, as amended to
       date(previously filed).

3.2    Bylaws of the Company, as amended to date (previously filed).

4.1    Form of Indenture (including form of Note) relating to the Company's
       Series 1993 Notes (incorporated by reference to Exhibit 4.1 to the
       Company's Registration Statement on Form S-2, File No. 33-62680).

4.2    Loan Agreement, dated as of September 1, 1992, relating to the Company's
       Series 1992A and Series 1992B Industrial Development Revenue Bonds
       (incorporated by reference to Exhibit 4.2 to the Company's Registration
       Statement on Form S-2, File No.33-62680).

10.1   Credit Agreement dated as of January 18, 1995, by and between the
       Company and Norwest Bank Great Falls, National Association (previously
       filed).

10.2   Amendment dated April 17, 1996 to Credit Agreement dated as of January
       18, 1995, by and between the Company and Norwest Bank Montana,
       National Association (previously filed).

10.3   Amendment dated November 7, 1996 to Credit Agreement dated as of
       January 18, 1995, the Company and Norwest Bank Montana, National
       Association (previously filed).

10.4    Promissory Note dated November 7, 1996, issued to Norwest Bank
        Montana, National Association (previously filed).

10.5   Credit Agreement dated as of February 12, 1997, by and between the
       Company and First Bank Montana, National Association (previously
       filed).

10.6   Delivered Gas Purchase Contract dated February 23, 1997, as amended by
       that Letter Amendment Amending Gas Purchase Contract dated March 9,
       1982; that Amendment to Delivered Gas Purchase Contract applicable as
       of March 20, 1986; that Letter Agreement dated December 18, 1986; that
       Letter Agreement dated April 12, 1988; that Letter Agreement dated
       April 28, 1992; that Letter Agreement dated March 14, 1996; that Letter 
       Agreement dated April 15, 1996; a second Letter Agreement dated April 15,
       1996; that Letter dated February 18, 1997; and that Letter dated April 1,
       1997, transmitting a Notice of Assignment effective February 26, 1993
       (previously filed).


</TABLE>







                                       E-1
<PAGE>

<TABLE>

<S>     <C>
10.7   Delivered Gas Purchase Contract dated December 1, 1985, as amended by
       that Letter Agreement dated July 1, 1986; that Letter Agreement dated
       November 19, 1987; that Letter Agreement dated December 1, 1988; that
       Letter Agreement dated July 30, 1992; that Assignment Conveyance and
       Bill of Sale effective as of January 1, 1993; that Letter Agreement
       dated March 8,1993; that Letter Agreement dated October 21, 1993; that
       Letter Agreement dated October 18, 1994; that Letter Agreement dated
       January 30,1995; that Letter Agreement dated August 30, 1995; that
       Letter Agreement dated October 3, 1995; that Letter Agreement dated
       October 31, 1995; that Letter Agreement dated December 21, 1995;
       that Letter Agreement dated April 25, 1996; that Letter Agreement dated
       January 29, 1997; and that Letter dated April 11, 1997 (previously 
       filed).

10.8   Natural Gas Sale and Purchase Agreement dated July 20, 1992 between
       Shell Canada Limited and the Company, as amended by that Letter
       Agreement dated August 23, 1993; that Amending Agreement effective as
       of November 1,1994; and that Schedule A Incorporated Into and Forming
       a Part of That Natural Gas Sale and Purchase Agreement, effective as
       of November 1,1996 (previously filed).

10.9   Employee Stock Ownership Plan Trust Agreement (incorporated by
       reference to Exhibit 10.2 to Registrant's Registration Statement on
       Form S-1, File No. 33-1672).

10.10  1992 Stock Option Plan (previously filed).

10.11  Form of Incentive Stock Option under the 1992 Stock Option Plan
       (previously filed).

10.12  Management Incentive Plan (previously filed).

21.1   Subsidiaries of the Company (filed herewith).

23.1   Consent of Independent Auditors (filed herewith).

27.1   Financial Data Schedule (filed herewith).


</TABLE>


                                       E-1