EXHIBIT 13 - FINANCIAL STATEMENTS AND SCHEDULES
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, 1995 and 1994, and the related
consolidated statements of income, stockholders equity, and cash flows for
each of the three years in the period ended June 30, 1995. These financial
statements are the responsibility of the Company s management. Our
responsibility is to express an opinion on these financial statements 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,
1995 and 1994, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended June 30, 1995, in
conformity with generally accepted accounting principles.
As described in Notes 4 and 5 to the consolidated financial statements, in
1994 the Company changed its method of accounting for postretirement benefits
other than pensions and for income taxes, respectively.
Denver, Colorado
August 25, 1995
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Energy West Incorporated and Subsidiaries
Consolidated Balance Sheets
June 30
1995 1994
Assets
Current assets:
Cash $ 507,450 $ 452,829
Temporary cash investments (at cost which
approximates market) 59,556 59,384
Restricted deposit - 204,550
Accounts receivable, less allowances for
uncollectible accounts of $191,168 ($189,300
at June 30, 1994) 3,042,603 2,627,531
Natural gas and propane inventory 1,686,704 699,623
Materials and supplies 458,596 388,547
Prepayments and other 59,761 199,380
Refundable income tax payments 241,798 237,023
Recoverable costs of gas purchases 125,410 400,966
Deferred income taxes-current 81,398 -
Total current assets 6,263,276 5,269,833
Investments 12,476 12,476
Notes receivable due after one year 15,984 94,721
Property, plant and equipment 39,697,080 35,158,559
Less accumulated depreciation and amortization 16,146,743 14,595,743
Net property, plant and equipment 23,550,337 20,562,816
Deferred charges:
Net unamortized debt issue costs 1,042,155 1,109,600
Regulatory assets for income taxes 519,484 600,867
Unrecognized postretirement obligation 352,380 372,000
Other 618,689 763,663
Total deferred charges 2,532,708 2,846,130
Total assets $32,374,781 $28,785,976
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June 30
1995 1994
Capitalization and liabilities
Current liabilities:
Long-term debt due within one year $ 365,833 $ 343,064
Notes payable 2,620,000 1,275,000
Accounts payable-gas purchases 1,535,736 1,263,839
Accounts payable-other 735,810 228,708
Payable to employee benefit plans 443,430 188,490
Accrued vacation 267,350 267,868
Other current liabilities 817,834 580,732
Deferred income taxes-current - 44,952
Total current liabilities 6,785,993 4,192,653
Other:
Deferred income taxes 2,674,928 2,611,008
Deferred investment tax credits 523,903 544,965
Contributions in aid of construction 771,702 690,525
Accumulated postretirement obligation 467,274 439,800
Regulatory liability for income taxes 176,530 191,286
Other 6,736 4,713
Total other 4,621,073 4,482,297
Commitments and contingencies (Note 10)
Long-term debt (less amounts due within
one year) 10,434,957 10,718,064
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 - 2,254,138 shares (2,191,478 shares
at June 30, 1994) 338,121 328,722
Capital in excess of par value 2,117,730 1,643,793
Retained earnings 8,076,907 7,420,447
Total stockholders' equity 10,532,758 9,392,962
Total capitalization 20,967,715 20,111,026
Total capitalization and liabilities $32,374,781 $28,785,976
See accompanying notes.
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Energy West Incorporated and Subsidiaries
Consolidated Statements of Income
Year ended June 30
1995 1994 1993
Operating revenue:
Regulated utilities $23,300,606 $23,443,438 $24,565,127
Nonregulated operations 4,008,954 3,939,148 3,036,772
Gas trading 3,238,839 1,964,866 332,798
Total revenue 30,548,399 29,347,452 27,934,697
Operating expenses:
Gas purchased 16,116,688 16,742,903 17,232,138
Cost of gas trading 2,500,363 1,667,182 305,980
Distribution, general and
administrative 6,379,651 5,979,621 5,453,770
Maintenance 306,077 330,762 376,420
Depreciation and amortization 1,558,755 1,464,078 1,285,632
Taxes other than income 594,569 527,142 540,187
Total operating expenses 27,456,103 26,711,688 25,194,127
Operating income 3,092,296 2,635,764 2,740,570
Other income, net 174,878 199,014 138,736
Income before interest charges and
income taxes 3,267,174 2,834,778 2,879,306
Interest charges:
Long-term debt 735,813 741,866 779,701
Other 202,770 220,317 178,822
Total interest charges 938,583 962,183 958,523
Income before income taxes 2,328,591 1,872,595 1,920,783
Provision for income taxes 815,688 613,964 637,115
Income before cumulative effect of
change in accounting principle 1,512,903 1,258,631 1,283,668
Cumulative effect on prior years of
change in accounting for income
taxes - 92,365 -
Net income $ 1,512,903 $ 1,350,996 $ 1,283,668
Income per share of common
equivalent stock:
Income before cumulative effect
of change in accounting
principle $0.68 $0.57 $0.59
Cumulative effect of change in
accounting for income taxes - 0.04 -
Net income per common share $0.68 $0.61 $0.59
See accompanying notes.
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Energy West Incorporated and Subsidiaries
Consolidated Statements of Stockholders Equity
Capital in
Common Excess of Retained
Stock Par Value Earnings Total
Balance at June 30, 1992 $161,178 $1,519,323 $6,265,210 $ 7,945,711
Exercise of stock options into 5,200
shares of common stock at $3.64
per share 390 18,548 - 18,938
Sale of 25,174 shares of common
stock at $6.88 to $7.94 per share
under the Company's dividend
reinvestment plan 1,888 182,369 - 184,257
Net income for the year ended June
30, 1993 - - 1,283,668 1,283,668
Cash dividends on common stock-
$.32 per share - - (699,085) (699,085)
Balance at June 30, 1993 163,456 1,720,240 6,849,793 8,733,489
Exercise of stock options into 3,800
shares of common stock at $7.13
to $8.19 per share 285 14,977 - 15,262
Sale of 8,293 shares of common
stock at $8.87 per share under the
Company's dividend reinvestment
plan 1,244 72,313 - 73,557
Net income for the year ended June
30, 1994 - - 1,350,996 1,350,996
Common stock dividend, 2-for-1
stock split 163,737 (163,737) - -
Cash dividends on common stock-
$.36 per share - - (780,342) (780,342)
Balance at June 30, 1994 328,722 1,643,793 7,420,447 9,392,962
Exercise of stock options into 14,410
shares of common stock at $4.94
to $8.75 per share 2,161 78,318 - 80,479
Sale of 36,720 shares of common
stock at $7.50 to $9.00 per share
under the Company's dividend
reinvestment plan 5,508 293,529 - 299,037
Issuance of 11,535 shares of common
stock to ESOP at estimated fair
value of $9.00 per share 1,730 102,090 - 103,820
Net income for the year ended June
30, 1995 - - 1,512,903 1,512,903
Cash dividends on common stock -
$.385 per share - - (856,443) (856,443)
Balance at June 30, 1995 $338,121 $2,117,730 $8,076,907 $10,532,758
See accompanying notes.
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Energy West Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Year ended June 30
1995 1994 1993
Operating activities
Net income $ 1,512,903 $ 1,350,996 $ 1,283,668
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,777,559 1,529,310 1,332,432
Gain on sale of property,
plant and equipment (4,174) (25,276) (2,061)
Investment tax credit (21,062) (21,062) (21,062)
Deferred income taxes 4,197 306,026 423,076
Cumulative effect of change in
accounting method - 92,365 -
Changes in operating assets and
liabilities:
Accounts receivable (415,072) 92,638 (1,060,221)
Gas inventory (987,081) 506,099 (123,359)
Accounts payable 778,999 (616,316) 18,977
Other assets and liabilities 958,624 (437,164) (387,346)
Net cash provided by operating
activities 3,604,893 2,777,616 1,464,104
Investing activities
Construction expenditures (4,705,868) (2,626,221) (2,468,463)
Acquisition of propane distribution
assets and operations - - (1,202,062)
Restricted deposit 204,550 619,367 (823,917)
Proceeds from sale of property,
plant and equipment 79,749 64,820 12,218
Long-term notes receivable - - (25,000)
Collection of long-term notes
receivable 78,737 36,526 17,615
Proceeds from contributions in aid
of construction 81,177 88,276 44,292
Net cash used in investing activities (4,261,655) (1,817,232) (4,445,317)
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Energy West Incorporated and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended June 30
1995 1994 1993
Financing activities
Proceeds from long-term debt $ 117,808 $ 20,000 $11,300,000
Debt issuance and reacquisition costs - (65,000) (976,692)
Payment of long-term debt (335,000) (333,872) (6,890,000)
Proceeds from notes payable 19,926,854 17,428,000 22,529,000
Repayment of notes payable (18,625,000) (17,491,000) (22,899,943)
Sale of common stock 80,479 15,262 18,938
Dividends paid (453,586) (706,785) (514,828)
Net cash provided by (used in)
financing activities 711,555 (1,133,395) 2,566,475
Net increase (decrease) in cash and
cash equivalents 54,793 (173,011) (414,738)
Cash and cash equivalents at
beginning of year 512,213 685,224 1,099,962
Cash and cash equivalents at
end of year $ 567,006 $ 512,213 $ 685,224
Supplemental disclosures of cash
flow information:
Cash paid for:
Interest $ 942,221 $ 932,159 $ 928,465
Income taxes 870,327 369,000 576,000
Noncash financing activities:
Dividend reinvestment plan $ 299,037 $ 73,557 $ 184,257
ESOP shares issued 103,820 - -
See accompanying notes.
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1995
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. Natural gas and propane vapor distribution
operations (regulated utilities) are regulated by the Montana Public Service
Commission (MPSC), the Wyoming Public Service Commission (WPSC) and the
Arizona Corporation Commission. 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, Vesta, Incorporated
(Vesta), 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.
Vesta's activities include a gas marketing division doing business as
Transenergy and oil and gas exploration and development. Its principal assets
are capitalized oil and gas development costs, storage field costs and
equipment, and inventory. The Transenergy division currently markets gas to
large industrial customers (businesses using over 60,000 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 began operations in fiscal 1992 following the Company s acquisition of
the assets and operations of six Wyoming propane distribution entities. In
fiscal 1993 these operations were expanded through the acquisition of an
Arizona propane distribution entity. Principal assets of RMF include bulk
storage and customer tanks, delivery trucks and related equipment.
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Principal Accounting Policies (continued)
Natural Gas and Propane Inventory
Natural gas inventory is stated at the lower of weighted average cost or net
realizable value. Propane inventory is stated at the lower of first-in, first-
out or net realizable value.
Recoverable Costs of Gas Purchases
Differences between the costs of gas considered in the Company's rate
structure and actual 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 4.15%, 4.32%
and 4.17% during the years ended June 30, 1995, 1994 and 1993, respectively.
Oil and Gas Activities
Oil and gas operations are accounted for under the successful efforts method.
Exploratory drilling costs are capitalized pending determination of proved
reserves; all other exploration costs are expensed. All development and
lease acquisition costs are capitalized. Provision for depreciation and
amortization, including estimated future dismantlement and restoration costs,
is determined on a field-by-field basis using the units-of-production method.
When properties are sold, the asset cost and related accumulated depreciation
and amortization are eliminated, with any gain or loss reflected in income.
Gas Trading
The Company s business activities include buying and selling of natural gas.
The Company recognizes revenue and costs on gas trading transactions at the
point in time when gas is delivered to the purchaser.
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Principal Accounting Policies (continued)
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.
Statement of Cash Flows
For purposes of this statement, all highly liquid investments with original
maturities of three months or less are considered to be cash equivalents.
Financial Instruments
All of the Company s financial instruments requiring fair value disclosure
were recognized in the consolidated balance sheet as of June 30, 1995. 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, temporary cash investments, restricted deposit, 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 less than carrying value by approximately
three percent.
Earnings Per Share
Earnings per common share were computed based on the weighted average number of
common shares outstanding and common stock equivalents, if dilutive. The
weighted average number of shares has been restated for 1993 as the Company's
Board of
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Principal Accounting Policies (continued)
Directors approved a 2-for-1 stock split effective June 24, 1994 for
stockholders of record on May 31, 1994. The weighted average number of such
shares at June 30 was 2,235,413 in 1995, 2,205,050 in 1994, and 2,171,448 in
1993.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, effective
for financial statements for fiscal years beginning after December 15, 1995.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable and long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. SFAS No. 121 also
establishes the procedures for review of recoverablity, and measurement of
impairment if necessary, of long-lived assets and certain identifiable
intangibles to be held and used by an entity. The financial effects of
adopting the new standard are not expected to be material to the Company's
financial position or operations.
Reclassifications
Certain reclassifications have been made to the fiscal 1994 and 1993
consolidated financial statements to conform to the fiscal 1995 presentation.
2. Notes Payable
At June 30, 1995, the Company maintained a line of credit totaling $8,000,000
with interest calculated at prime less 1/4 percent. A total of $2,620,000,
$1,275,000 and $1,338,000 had been borrowed under line of credit agreements
at June 30, 1995, 1994, and 1993, respectively. Borrowings on lines of
credit, based upon daily loan balances, averaged $2,397,175, $2,369,671 and
$2,960,151 during the years ended June 30, 1995, 1994 and 1993, respectively.
The maximum borrowings outstanding on this line at any month end were
$4,983,000, $4,267,000 and $4,000,000 during these same periods. The daily
weighted average interest rate was 8.2%, 6.4% and 6.3% for the years ended
June 30, 1995, 1994 and 1993, respectively. This line of credit expires
January 1, 1996. Management expects this line of credit to be renewed for
another year.
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Long-Term Debt Obligations
Long-term debt consists of the following:
June 30
1995 1994
Series 1993 notes payable $ 7,800,000 $ 7,800,000
Industrial development revenue obligations:
Series 1992A 1,200,000 1,455,000
Series 1992B 1,690,000 1,745,000
Other 110,790 61,128
Total long-term obligations 10,800,790 11,061,128
Less portion due within one year 365,833 343,064
Long-term obligations due after one year $10,434,957 $10,718,064
Series 1993 Notes Payable
On June 24, 1993, the Company issued $7,800,000 of Series 1993 unsecured notes
bearing interest rates ranging from 6.20% to 7.60% (6.20% at June 30, 1995),
payable semiannually on June 1 and December 1 of each year, commencing
December 1, 1993. Maturity dates began 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.
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 3.354% to 6.50%.
The restricted deposit in the consolidated balance sheet is proceeds from the
Series 1992A bonds deposited in a construction fund with the trustee, Trust
Corp., an entity whose Chairman and Chief Executive Officer is a significant
shareholder and a member of the Company's Board of Directors. The deposit
can only be drawn for specific capital projects under the terms of the
related indenture. All Capital projects were completed in fiscal year 1995.
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Long-Term Debt Obligations (continued)
of the Company's Board of Directors. The deposit can only be drawn for
specific capital projects under the terms of the related indenture. All
capital projects were completed in fiscal year 1995.
Aggregate Annual Maturities
Fiscal Series IDR Obligations Total
Year Ending 1993 Series Series Long-Term
June 30 Bonds 1992A 1992B Other Obligations
1996 $ $ 265,000 $ 55,000 $ 45,833 $ 365,833
1997 - 280,000 60,000 15,340 355,340
1998 - 295,000 60,000 17,202 372,202
1999 165,000 175,000 65,000 19,299 424,299
2000 175,000 185,000 70,000 13,116 443,116
Thereafter 7,460,000 - 1,380,000 - 8,840,000
7,800,000 1,200,000 1,690,000 110,790 10,800,790
Less current portion - 265,000 55,000 45,833 365,833
$7,800,000 $ 935,000 $1,635,000 $ 64,957 $10,434,957
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.
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, 1995, 1994 and 1993
were $336,589, $279,668 and $264,160, respectively.
In addition to providing benefits under the Plan, the Company provides certain
health and life insurance benefits for eligible retired employees. Through
June 30, 1993, the cost of these benefits was recognized as an expense when
paid. The cost of these benefits for 1993 was $6,429.
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Retirement Plans (continued)
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 $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, 1995 and 1994 was $352,380 and
$372,000, respectively, of which $327,400 in 1995 and $363,000 in 1994 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 incremental annual increases in consolidated expenses due to adoption of
SFAS No. 106 were $71,200 and $68,000 in fiscal years 1995 and 1994,
respectively. Included in these amounts were $62,600 in 1995 and $58,300 in
1994 relating to regulatory operations. The MPSC will allow recovery of these
costs beginning on July 1, 1995 for the utility operations in Montana.
Management believes it is probable that its regulators in Wyoming and Arizona
will allow recovery of these costs based upon recent industry rate decisions
addressing this issue. The Company plans to fund the related annual cost by
establishing and contributing to a trust from which future benefits would be
paid. The following table presents the amounts recognized at June 30, 1995
and 1994 in the consolidated financial statements.
1995 1994
Accumulated postretirement benefit obligation:
Retirees $154,400 $184,600
Fully eligible active plan participants 53,700 15,600
Other active plan participants 259,174 239,600
$467,274 $439,800
Net periodic postretirement benefit cost:
Service cost $ 19,400 $ 18,000
Interest cost 32,200 30,400
Amortization of transition obligation 19,600 19,600
Net periodic postretirement benefit cost $ 71,200 $ 68,000
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Retirement Plans (continued)
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation at June 30, 1995 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 12.5 percent for the
1995-96 fiscal year and is assumed to decrease gradually to 6.5 percent after
7 years and remain at that level thereafter. At June 30, 1994, the weighted-
average discount rate used in determining the accumulated postretirement
benefit obligation was 8.0 percent. The weighted-average health care cost
trend rate was 14.0 percent for the 1994-95 fiscal year and was assumed to
decrease gradually to 7.0 percent after 8 years and remain at that level
thereafter.
Due to the minimal number of retirees receiving benefits that are not fixed
and the relatively short duration of these benefits, the health care cost
trend rate assumption does not have a significant effect on the amounts
reported.
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. As permitted under the
new rules, prior years financial statements have not been restated.
The cumulative effect of adopting Statement 109 as of July 1, 1993, was to
increase net income by $92,365 for nonregulated operations and create a
regulatory asset of $600,867 and regulatory liability of $204,620 for
regulated operations. The regulatory assets and liabilities represent the
anticipated effects on regulated rates charged to customers which will result
from the adoption of Statement 109. For the year ended June 30, 1995, state
income tax rate changes in Montana and Arizona and amortization of certain
liabilities resulted in a decrease in regulatory assets of $81,383 and
regulatory liabilities of $14,756 for regulated entities, resulting in ending
balances of $519,484 and $176,530, respectively.
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Income Tax Expense (continued)
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. Significant components
of the Company s deferred tax assets and liabilities as of June 30, 1995 and
1994 are as follows:
1995 1994
Deferred tax assets:
Allowance for doubtful accounts $ 55,987 $ 44,070
Unamortized investment tax credit 175,983 191,286
Contributions in aid of construction 102,458 70,809
Other nondeductible accruals 156,096 124,260
Other 42,318 36,642
Total deferred tax assets 532,842 467,067
Deferred tax liabilities:
Customer refunds payable 84,525 189,501
Property, plant and equipment 2,615,597 2,489,331
Unamortized debt issue costs 215,827 231,874
Unamortized environmental study costs 101,330 81,442
Covenant not to compete 93,283 97,525
Other 15,810 33,354
Total deferred tax liabilities 3,126,372 3,123,027
Net deferred tax liabilities $2,593,530 $2,655,960
F-16
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Income Tax Expense (continued)
Income tax expense consists of the following:
Year ended June 30
1995 1994 1993
Liability Method Deferred Method
Current income taxes:
Federal $705,420 $490,698 $185,323
State 120,074 12,331 37,958
Total current income taxes 825,494 503,029 223,281
Deferred income taxes (benefits):
Tax depreciation in excess of book 179,794 139,564 264,098
Book amortization in excess of tax (56,981) (73,435) (42,859)
Recoverable cost of gas purchases (98,479) 86,341 75,161
Environmental study cleanup costs 20,539 81,442 -
Bond issuance costs - - 246,161
Other 17,813 (62,016) (56,368)
Total deferred income taxes 62,686 171,896 486,193
Investment tax credit, net (21,062) (21,062) (21,062)
Total income taxes $867,118 $653,863 $688,412
Income taxes-operations $815,688 $613,964 $637,115
Income taxes-other income 51,430 39,899 51,297
Total income taxes $867,118 $653,863 $688,412
Income tax expense from operations differs from the amount computed by
applying the federal statutory rate to pre-tax income for the following
reasons:
1995 1994 1993
Tax expense at statutory rate - 34% $799,582 $607,394 $567,652
State income tax, net of federal tax benefit 77,377 38,693 56,922
Amortization of deferred investment tax
credits (21,062) (21,062) (21,062)
Other 11,221 28,838 33,603
Total income taxes $867,118 $653,863 $637,115
F-17
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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:
June 30 1995 June 30 1994
Regulated Nonregulated Regulated Nonregulated
Capital expenditures $ 3,933,828 $ 772,040 $ 2,211,940 $ 414,281
Property, plant and equipment, net:
Regulated utilities $19,907,237 - $17,283,956 -
Nonregulated propane - 2,811,913 - 2,541,025
Oil and gas operations - 334,704 - 227,042
Real estate held for investment - 496,483 - 510,793
Current assets 4,458,594 2,420,839 4,967,194 1,117,233
Other assets 3,884,006 496,360 4,157,392 581,411
Total assets $28,249,837 $6,560,299 $26,408,542 $4,977,504
Equity $ 8,903,740 $2,701,018 $ 8,362,673 $2,102,290
Long-term debt 8,533,074 1,901,883 9,220,711 1,497,353
Current liabilities 6,304,063 1,493,087 4,473,446 928,799
Deferred income taxes 2,727,782 299,343 2,678,634 250,851
Other liabilities 1,781,178 164,968 1,673,078 198,211
Total capitalization and liabilities $28,249,837 $6,560,299 $26,408,542 $4,977,504
1995 1994 1993
Regulated Nonregulated Regulated Nonregulated Regulated Nonregulated
Revenue:
Operating revenue $24,363,446 $4,077,768 $24,421,153 $3,935,760 $24,565,127 $3,743,120
Gas trading revenue - 3,238,839 - 1,964,866 - 332,798
Operating expenses:
Gas purchased 15,077,466 2,170,877 15,666,853 2,050,377 15,926,510 2,011,976
Cost of gas trading - 2,500,363 - 1,667,182 - 305,980
Distribution,
general and
administrative 5,130,220 1,249,431 4,792,531 1,187,090 4,494,489 959,281
Maintenance 304,677 1,400 315,409 15,353 373,677 2,743
Depreciation and
amortization 1,205,758 352,997 1,134,150 329,928 993,046 292,586
Taxes other than
income 494,338 100,230 430,446 96,696 460,013 80,174
Operating income $ 2,150,987 $ 941,309 $ 2,081,764 $ 554,000 $ 2,317,392 $ 423,178
F-18
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Regulated and Nonregulated Operations (continued)
The significant changes between fiscal years for nonregulated operations are
due to acquisitions of propane entities described in Note 8.
7. Stock Options and Ownership Plans
Stock Options
There are two Incentive Stock Option Plans which provide for granting 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.
A summary of the activity under this plan is as follows:
Number of Price Per
Shares Share
Fiscal 1995
Outstanding at July 1, 1994 106,948 $4.938-8.75
Granted 5,000 $9.125
Exercised (14,410) $4.938-8.75
Expired (6,950) $4.938-7.125
Outstanding at June 30, 1995 90,588
At June 30, 1995
Exercisable 90,588
Available for grant 29,652
F-19
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Options and Ownership Plans (continued)
Number of Price Per
Shares Share
Fiscal 1994
Outstanding at July 1, 1993 105,048 $3.188-7.125
Granted 7,000 $7.375-8.75
Exercised (3,800) $3.188-7.125
Expired (1,300) $3.188
Outstanding at June 30, 1994 106,948 $4.938-8.75
At June 30, 1994
Exercisable 106,948
Available for grant 27,702
Fiscal 1993
Outstanding at July 1, 1992 35,700 $3.188-6.50
Granted 74,548 $6.375-7.125
Exercised (5,200) $3.188-7.125
Outstanding at June 30, 1993 105,048 $3.188-7.125
At June 30, 1993
Exercisable 105,048
Available for grant 33,402
Employee Stock Ownership Plan
In 1984, the Company established an Employee Stock Ownership Plan (ESOP) which
covers most of the Company s employees. The Company has contributed and
recognized as expense $129,367, $103,820 and $106,844 for the years ended June
30, 1995, 1994 and 1993, respectively. Contributions to the Plan are
determined by the Board of Directors. During the years ended June 30, 1995,
1994 and 1993, the ESOP acquired 11,535 shares at $9.00 per share, 11,772
shares at $9.08 per share and 9,112 shares at $7.41 per share, respectively.
F-20
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Purchase of Assets
In January 1993, the Company purchased the assets of two Arizona propane
distribution entities for an aggregate purchase price of $1,200,000. Broken
Bow Gas Company (Broken Bow) is an underground propane distribution entity
regulated by the Arizona Corporation Commission.
This acquisition was accounted for by the purchase method and the financial
statements include the results of operations of the acquired assets from their
respective dates of acquisition. The total purchase price was assigned to
assets acquired (primarily property, plant and equipment) based on the
estimated fair values of such assets at their date of acquisition.
If the above acquisitions had occurred on July 1, 1992, the consolidated
results of operations for the year ended June 30, 1993 would have been as
follows:
Year ended
June 30
1993
(Unaudited)
Pro forma basis:
Operating revenue $27,913,000
Net income 1,240,000
Earnings per share 0.57
9. Operating Lease
The Company leases a building in Cody, Wyoming. The lease expires on June 30,
2005. Future minimum rental payments will be approximately $72,000 per year
from fiscal 1996 through fiscal 2005 and total future minimum lease payments
of $720,000. Rental expenses related to this lease were $70,133, $73,933 and
$73,737 in fiscal years 1995, 1994 and 1993, respectively.
F-21
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies
Commitments
The Company has entered into long-term, take or pay natural gas supply
contracts which expire beginning in 1996 and ending in 2005. 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 $1.28 to $1.90. Based
on current prices, the minimum take or pay obligation at June 30, 1995 for
each of the next five years and in total is as follows:
Fiscal Year
1996 $ 2,630,414
1997 1,659,614
1998 1,460,894
1999 1,460,894
2000 1,460,894
Thereafter 5,188,606
Total $13,861,316
Natural gas purchases under these contracts for the years ended June 30, 1995,
1994, and 1993 approximated $6,203,000, $6,901,000, and $7,400,000,
respectively.
The Company signed a definitive purchase agreement for the acquisition of a
propane vapor system, contingent on the Company obtaining regulatory approval
for an exclusive natural gas franchise for the area where this system is
located. The purchase price is approximately $920,000.
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 and to store
certain equipment and materials and supplies. 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. After management became aware of the potential
of contamination on this site, it initiated an assessment of the property
through the assistance of a qualified consulting firm. That assessment
revealed the presence of certain hazardous material in quantities exceeding
tolerances established for such material by regulatory authorities. After
making required notifications of that condition to federal and state
regulatory authorities, a report summarizing the assessment
F-22
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
was filed with the State of Montana Department of Health and Environmental
Science (MDHES). Subsequent to that submittal a meeting was held with a
representative of the MDHES wherein a process was agreed upon to arrive at
appropriate remediation of the site. The costs incurred by the Company to
date approximate $263,500 and have been capitalized as other deferred charges.
Until further work is done regarding remediation alternatives, no further
estimate of the costs of remediation can be made. However, management
believes that regardless of the alternative selected, the costs incurred will
not materially affect the Company s financial position.
The Company received formal approval from MPSC to recover the costs associated
with the cleanup of this site. The Company will begin recovery of costs
incurred at June 30, 1995 over two years through a surcharge in billing rates
effective July 1, 1995. Management intends to request that future costs be
recovered over a similar time period.
F-23
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