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, 1996 and
1995, and the related consolidated statements of income, stockholders
equity, and cash flows for each of the three years in the period ended
June 30, 1996. 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, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended June 30, 1996, in conformity with generally accepted
accounting principles.
As described in Notes 4 and 5 to the consolidated financial statements, the
Company changed its method of accounting for postretirement benefits other
than pensions and for income taxes, respectively, in 1994.
\s\ ERNST & YOUNG LLP
Denver, Colorado
August 15, 1996
F-1
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Energy West Incorporated and Subsidiaries
Consolidated Balance Sheets
June 30
1996 1995
-------------------------------
Assets
Current assets:
Cash and cash equivalents $ 893,301 $ 507,450
Temporary cash investments (at cost which
approximates market) - 59,556
Accounts receivable, less allowances for
uncollectible accounts of $208,106
($191,168 at June 30, 1995) 3,486,328 3,042,603
Natural gas and propane inventory 2,200,778 1,686,704
Materials and supplies 543,316 458,596
Prepayments and other 602,427 59,761
Refundable income tax payments 412,662 241,798
Recoverable costs of gas purchases 953,392 125,410
Deferred income taxes current - 81,398
-------------------------------
Total current assets 9,092,204 6,263,276
Investments 12,476 12,476
Notes receivable due after one year 9,190 15,984
Property, plant and equipment 43,919,358 39,697,080
Less accumulated depreciation and amortization 17,829,528 16,146,743
-------------------------------
Net property, plant and equipment 26,089,830 23,550,337
Deferred charges:
Net unamortized debt issue costs 974,876 1,042,155
Regulatory assets for income taxes 443,918 519,484
Unrecognized postretirement obligation 332,800 352,380
Other 539,379 618,689
-------------------------------
Total deferred charges 2,290,973 2,532,708
-------------------------------
Total assets $37,494,673 $32,374,781
===============================
F-2
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Energy West Incorporated and Subsidiaries
Consolidated Balance Sheets
June 30
1996 1995
-------------------------------
Capitalization and liabilities
Current liabilities:
Long-term debt due within one year $ 348,044 $ 365,833
Notes payable 7,175,000 2,620,000
Accounts payable gas purchases 1,226,508 1,535,736
Accounts payable other 826,885 735,810
Payable to employee benefit plans 508,890 443,430
Accrued vacation 327,897 267,350
Other current liabilities 420,954 817,834
Deferred income taxes current 253,385 -
-------------------------------
Total current liabilities 11,087,563 6,785,993
Other:
Deferred Income Taxes 2,796,084 2,674,928
Deferred investment tax credits 502,841 523,903
Contributions in aid of construction 834,917 771,702
Accumulated postretirement obligation 507,386 467,274
Regulatory liability for income taxes 162,121 176,530
Other 17,799 6,736
-------------------------------
Total other 4,821,148 4,621,073
Long-term debt (less amounts due within
one year) 10,045,714 10,434,957
Commitments and contingencies (Note 10)
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 - 2,321,314 shares
(2,254,138 shares at June 30, 1995) 348,198 338,121
Capital in excess of par value 2,635,540 2,117,730
Retained earnings 8,556,510 8,076,907
-------------------------------
Total stockholders' equity 11,540,248 10,532,758
-------------------------------
Total Capitalization 21,585,962 20,967,715
-------------------------------
Total capitalization and liabilities $37,494,673 $32,374,781
===============================
See accompanying notes.
F-3
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Energy West Incorporated and Subsidiaries
Consolidated Statements of Income
Year ended June 30
1996 1995 1994
---------------------------------------
Operating revenue:
Regulated utilities $23,672,186 $24,363,446 $24,421,153
Nonregulated operations 3,297,583 2,946,114 2,961,433
Gas trading 4,348,239 3,238,839 1,964,866
---------------------------------------
Total operating revenue 31,318,008 30,548,399 29,347,452
Operating expenses:
Gas purchased 14,972,454 16,116,688 16,742,903
Cost of gas trading 3,751,053 2,500,363 1,667,182
Distribution, general and
administrative 6,924,391 6,379,651 5,979,621
Maintenance 408,590 306,077 330,762
Depreciation and amortization 1,667,256 1,558,755 1,464,078
Taxes other than income 629,428 594,569 527,142
---------------------------------------
Total operating expenses 28,353,172 27,456,103 26,711,688
---------------------------------------
Operating income 2,964,836 3,092,296 2,635,764
Gain on sale of assets 236,291 - -
Other income, net 214,902 174,878 199,014
---------------------------------------
Income before interest charges
and income taxes 3,416,029 3,267,174 2,834,778
Interest charges:
Long-term debt 709,872 735,813 741,866
Short-term and other 532,866 202,770 220,317
---------------------------------------
Total interest charges 1,242,738 938,583 962,183
---------------------------------------
Income before income taxes 2,173,291 2,328,591 1,872,595
Provision for income taxes 765,925 815,688 613,964
---------------------------------------
Income before cumulative effect
of change in accounting principle 1,407,366 1,512,903 1,258,631
Cumulative effect on prior years
of change in accounting for
income taxes - - 92,365
---------------------------------------
Net income $ 1,407,366 $ 1,512,903 $ 1,350,996
=======================================
Income per share of common
equivalent stock:
Income before cumulative effect
of change in accounting principle $.61 $.68 $.57
Cumulative effect of change in
accounting for income taxes - - .04
---------------------------------------
Net income per common share $.61 $.68 $.61
=======================================
See accompanying notes.
F-4
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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, 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
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 - - 1,407,366 1,407,366
Cash dividends on common stock
$.405 per share - - (927,763) (927,763)
----------------------------------------------
Balance at June 30, 1996 $348,198 $2,635,540 $8,556,510 $11,540,248
==============================================
See accompanying notes.
F-5
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Energy West Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Year ended June 30
1996 1995 1994
------------------------------------------
Operating activities
Net income $ 1,407,366 $ 1,512,903 $ 1,350,996
Adjustments to reconcile net
income to cash flow from
operations:
Depreciation and amortization 1,833,511 1,777,559 1,529,310
(Gain) on sale lease of
assets (247,697) (4,174) (25,276)
Investment tax credit (21,062) (21,062) (21,062)
Deferred income taxes 495,105 4,197 306,026
Cumulative effect of change
in accounting method - - 92,365
Changes in operating assets
and liabilities:
Accounts receivable (443,725) (415,072) 92,638
Natural gas and propane
inventory (514,074) (987,081) 506,099
Accounts payable (218,153) 778,999 (616,316)
Recoverable costs of gas
purchases (827,982) 275,556 (134,502)
Prepaid gas (523,212) - -
Other assets and liabilities (333,878) 682,896 (243,278)
------------------------------------------
Net cash provided by operating
activities 606,199 3,604,721 2,837,000
Investing activities
Construction expenditures (4,590,609) (4,705,868) (2,626,221)
Restricted deposit - 204,550 619,367
Proceeds from sale of assets 552,160 79,749 64,820
Collection of long-term notes
receivable 6,794 78,737 36,526
Proceeds from contributions in
aid of construction 63,215 81,177 88,276
------------------------------------------
Net cash used in investing
activities (3,968,440) (4,261,655) (1,817,232)
F-6
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Energy West Incorporated and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended June 30
1996 1995 1994
------------------------------------------
Financing activities
Proceeds from long-term debt $ - $ 117,808 $ 20,000
Debt issuance and reacquisition
costs - - (65,000)
Payment of long-term debt (407,032) (335,000) (333,872)
Proceeds from notes payable 20,965,000 19,926,854 17,428,000
Repayment of notes payable (16,410,000) (18,625,000) (17,491,000)
Sale of common stock 74,970 80,479 15,262
Dividends paid (474,846) (453,586) (706,785)
------------------------------------------
Net cash provided by (used in)
financing activities 3,748,092 711,555 (1,133,395)
------------------------------------------
Net increase (decrease) in cash
and cash equivalents 385,851 54,621 (113,627)
Cash and cash equivalents at
beginning of year 507,450 452,829 566,456
------------------------------------------
Cash and cash equivalents at
end of year $ 893,301 $ 507,450 $ 452,829
==========================================
Supplemental disclosures of cash
flow information:
Cash paid for:
Interest $ 1,242,035 $ 942,221 $ 932,159
Income taxes 498,461 870,327 369,000
Noncash financing activities:
Dividend reinvestment plan 325,800 299,037 73,557
ESOP shares issued 127,117 103,820 -
See accompanying notes.
F-7
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1996
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, Energy West Resources,
Inc. ("EWR") (formerly Vesta, Inc.), 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's activities include a gas marketing operation and oil and gas
exploration and development. Its principal assets are capitalized oil and
gas development costs, storage field costs and equipment, and inventory. EWR
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.
F-8
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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.
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 3.93%,
4.15% and 4.32% during the years ended June 30, 1996, 1995 and 1994,
respectively. During the fourth quarter of 1996, the estimated useful lives
for certain propane properties were increased from twelve and fifteen years
to twenty years to better reflect their estimated useful lives. This
change in estimate reduced depreciation expense by approximately $83,000 in
1996.
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
F-9
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Principal Accounting Policies (continued)
============================================
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 the buying and selling of natural
gas. The Company recognizes revenue and costs on gas trading transactions
when gas is delivered to the purchaser.
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.
Financial Instruments
- ---------------------
All of the Company's financial instruments requiring fair value disclosure
were recognized in the consolidated balance sheet as of June 30, 1996.
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, 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.
F-10
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Principal Accounting Policies (continued)
============================================
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 99% of the carrying value.
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 such shares at June 30 was 2,298,734 in 1996,
2,235,413 in 1995, and 2,205,050 in 1994.
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 recoverability, 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.
F-11
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Principal Accounting Policies (continued)
============================================
SFAS No. 123, Accounting for Stock-Based Compensation, was issued in October
1995. This standard addresses the timing and measurement of stock-based
compensation expense. The Company has elected to retain the approach of
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock
Issued to Employees (the intrinsic value method), for recognizing stock-based
expense in the consolidated financial statements. The Company will adopt SFAS
No. 123 in 1997 with respect to the disclosure requirements set forth therein
for companies retaining the intrinsic value approach of APB No. 25.
Effects of Regulation
- ---------------------
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 approximates the economic lives for GAAP.
Reclassifications
- -----------------
Certain reclassifications have been made to the fiscal 1995 and 1994
consolidated financial statements to conform to the fiscal 1996 presentation.
2. Notes Payable
================
At June 30, 1996, the Company maintained a line of credit totaling
$11,000,000 with interest calculated at prime less 1/4 percent. A total of
$7,175,000, $2,620,000 and $1,275,000 had been borrowed under line of credit
agreements at June 30, 1996, 1995, and 1994, respectively. Borrowings on
lines of credit, based upon daily loan balances, averaged $6,166,380,
$2,397,175 and $2,369,671 during the years ended June 30, 1996, 1995 and
1994, respectively. The maximum borrowings outstanding on this line at any
month end were $9,415,000, $4,983,000 and $4,267,000 during these same
periods. The daily weighted average interest rate was 8.5%, 8.2% and 6.4%
for the years ended June 30, 1996, 1995 and 1994, respectively. This line of
credit expires January 15, 1997. Management expects this line of credit to
be renewed for another year.
F-12
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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
1996 1995
--------------------------
Series 1993 notes payable $ 7,800,000 $ 7,800,000
Industrial development revenue obligations:
Series 1992A 935,000 1,200,000
Series 1992B 1,635,000 1,690,000
Other 23,758 110,790
--------------------------
Total long-term obligations 10,393,758 10,800,790
Less portion due within one year 348,044 365,833
--------------------------
Long-term obligations due after one year $10,045,714 $10,434,957
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% (6.20% at June
30, 1996), 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.
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%.
F-13
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Long-Term Debt Obligations (continued)
=========================================
Aggregate Annual Maturities
- ---------------------------
--IDR Obligations--
Fiscal Series ------------------- Total
Year Ending 1993 Series Series Long-Term
June 30 Notes 1992A 1992B Other Obligations
- ---------------------------------------------------------------------------
1997 $ - $280,000 $ 60,000 $ 8,044 $ 348,044
1998 - 295,000 60,000 6,959 361,959
1999 165,000 175,000 65,000 8,032 413,032
2000 175,000 185,000 70,000 723 430,723
2001 370,000 - 75,000 - 445,000
Thereafter 7,090,000 - 1,305,000 - 8,395,000
-------------------------------------------------------------
7,800,000 935,000 1,635,000 23,758 10,393,758
Less current
portion - 280,000 60,000 8,044 348,044
-------------------------------------------------------------
$ 7,800,000 $ 655,000 $ 1,575,000 $15,714 $ 10,045,714
=============================================================
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, 1996, 1995 and 1994
were $383,018, $336,589 and $279,668, 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,
1996 and 1995 was
F-14
******************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Retirement Plans (continued)
===============================
$332,800 and $352,380, respectively, of which $288,600 in 1996 and $327,400
in 1995 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 $70,900 and $71,200 in fiscal years 1996 and 1995,
respectively. Included in these amounts were $58,100 in 1996 and $62,600 in
1995 relating to regulatory operations. The MPSC allowed 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 will allow
recovery of these costs based upon recent industry rate decisions addressing
this issue. The Company has 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 1996 is $61,750.
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 and has been
reflected in the 1996 financial statements. The Company expects regulators
in Montana and Wyoming to allow recovery of the additional costs associated
with the plan change.
F-15
******************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Retirement Plans (continued)
===============================
The following table presents the amounts recognized at June 30, 1996 and 1995
in the consolidated financial statements.
1996 1995
-------------------
Accumulated postretirement benefit obligation:
Retirees $128,500 $154,400
Fully eligible active plan participants 80,500 53,700
Other active plan participants 522,900 259,174
-------------------
$731,900 $467,274
Net periodic postretirement benefit cost:
Service cost $ 19,300 $ 19,400
Interest cost 32,000 32,200
Actual return on plan assets (1,500) -
Amortization of transition obligation 19,600 19,600
-------------------
Net periodic postretirement benefit cost $ 69,400 $ 71,200
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation at June 30, 1996 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 11.0 percent for the
1996-97 fiscal year and is assumed to decrease gradually to 5.5 percent after
6 years and remain at that level thereafter. At June 30, 1995, the weighted-
average discount rate used in determining the accumulated postretirement
benefit obligation was 7.5 percent. The weighted-average health care cost
trend rate was 12.5 percent for the 1995-96 fiscal year and was assumed to
decrease gradually to 6.5 percent after 7 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, 1996 by $45,700. The
aggregate of interest and service cost for the year ended June 30, 1996 is
not affected by this increase due to the minimal number of retirees receiving
benefits that are not fixed and the large number of retirees receiving
benefits that were not affected by the trend rate during the 1995-96 fiscal
year.
F-16
******************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 No. 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 No. 109. For the year ended June 30, 1996,
amortization of certain liabilities resulted in a decrease in regulatory
assets of $75,566 and in regulatory liabilities of $14,409 for regulated
entities, resulting in ending balances of $443,918 and $162,121,
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.
Significant components of the Company's deferred tax assets and liabilities
as of June 30, 1996 and 1995 are as follows:
1996 1995
---------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 54,065 $ 55,987
Unamortized investment tax credit 162,343 175,983
Contributions in aid of construction 115,876 102,458
Other nondeductible accruals 189,935 156,096
Other 47,093 42,318
---------------------------
Total deferred tax assets 569,312 532,842
F-17
******************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Income Tax Expense (continued)
=================================
1996 1995
---------------------------
Deferred tax liabilities:
Customer refunds payable $ 399,255 $ 84,525
Property, plant and equipment 2,908,836 2,615,597
Unamortized debt issue costs 201,635 215,827
Unamortized environmental study costs - 101,330
Covenant not to compete 89,041 93,283
Other 20,014 15,810
---------------------------
Total deferred tax liabilities 3,618,781 3,126,372
---------------------------
Net deferred tax liabilities $3,049,469 $2,593,530
Income tax expense consists of the following:
Year ended June 30
1996 1995 1994
------------------------------
Current income taxes:
Federal $244,777 $705,420 $490,698
State 21,819 120,074 12,331
------------------------------
Total current income taxes 266,596 825,494 503,029
Deferred income taxes (benefits):
Tax depreciation in excess of book 341,217 179,794 139,564
Book amortization in excess of tax (35,958) (56,981) (73,435)
Recoverable cost of gas purchases 322,479 (98,479) 86,341
Environmental study cleanup costs - 20,539 81,442
Regulatory surcharges (44,830) - -
Other (25,362) 17,813 (62,016)
------------------------------
Total deferred income taxes 557,546 62,686 171,896
Investment tax credit, net (21,062) (21,062) (21,062)
------------------------------
Total income taxes $803,080 $867,118 $653,863
==============================
Income taxes - operations $765,925 $815,688 $613,964
Income taxes - other income 37,155 51,430 39,899
------------------------------
Total income taxes $803,080 $867,118 $653,863
==============================
F-18
******************************************************************************
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:
1996 1995 1994
------------------------------
Tax expense at statutory rate - 34% $747,269 $799,582 $607,394
State income tax, net of federal tax
benefit 60,271 77,377 38,693
Amortization of deferred investment
tax credits (21,062) (21,062) (21,062)
Other 16,602 11,221 28,838
------------------------------
Total income taxes $803,080 $867,118 $653,863
==============================
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:
F-19
******************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Regulated and Nonregulated Operations (continued)
====================================================
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Note: These two tables were originally in side-by-side format. The format
was changed to meet the EDGAR file width limitations.
****************** JUNE 30, 1996 *****************
REG. NONREG. ADJ. CONSOL.
--------------------------------------------------
CAPITAL EXPENDITURES $3,910,000 $680,609 $4,590,609
--------------------------------------------------
PROPERTY,PLANT AND EQUIPMENT,
NET
REGULATED UTILITIES $22,362,130 $22,362,130
NONREGULATED PROPANE 2,971,174 2,971,174
OIL AND GAS OPERATIONS 274,352 274,352
REAL ESTATE HELD FOR
INVESTMENT 482,173 1 482,174
--------------------------------------------------
TOTAL P P & E 22,362,130 3,727,699 1 26,089,830
CURRENT ASSETS 7,663,566 2,385,186 (956,548) 9,092,204
OTHER ASSETS 3,669,404 590,542 (1,947,307) 2,312,639
--------------------------------------------------
TOTAL ASSETS $33,695,100 $6,703,427 ($2,903,854) $37,494,673
==================================================
EQUITY $9,303,596 $3,308,651 $(1,071,999) $11,540,248
LONG-TERM DEBT 8,257,090 1,788,624 10,045,714
CURRENT LIABILITIES 10,452,787 1,192,271 (557,495) 11,087,563
DEFERRED INCOME TAXES 3,207,968 366,716 (778,600) 2,796,084
OTHER LIABILITIES 2,473,659 47,165 (495,760) 2,025,064
--------------------------------------------------
TOTAL CAPITALIZATION AND
LIABILITIES $33,695,100 $6,703,427 ($2,903,854) $37,494,673
==================================================
****************** JUNE 30,1995 ******************
REG. NONREG. ADJ. CONSOL.
--------------------------------------------------
CAPITAL EXPENDITURES $3,933,828 $772,040 $4,705,868
--------------------------------------------------
PROPERTY,PLANT AND EQUIPMENT,
NET
REGULATED UTILITIES $19,907,237 $19,907,237
NONREGULATED PROPANE 2,811,913 2,811,913
OIL AND GAS OPERATIONS 334,704 334,704
REAL ESTATE HELD FOR
INVESTMENT 496,483 496,483
--------------------------------------------------
TOTAL P P & E 19,907,237 3,643,100 23,550,337
CURRENT ASSETS 4,458,594 2,420,839 (616,157) 6,263,276
OTHER ASSETS 3,884,006 496,360 (1,819,198) 2,561,168
--------------------------------------------------
TOTAL ASSETS $28,249,837 $6,560,299 ($2,435,355) $32,374,781
==================================================
EQUITY $8,903,740 $2,701,018 $(1,072,000) $10,532,758
LONG-TERM DEBT 8,533,074 1,901,883 10,434,957
CURRENT LIABILITIES 6,304,063 1,493,087 (1,011,157) 6,785,993
DEFERRED INCOME TAXES 2,727,782 299,343 (352,197) 2,674,928
OTHER LIABILITIES 1,781,178 164,968 (1) 1,946,145
--------------------------------------------------
TOTAL CAPITALIZATION AND
LIABILITIES $28,249,837 $6,560,299 ($2,435,355) $32,374,781
==================================================
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Note: These three tables were originally in side-by-side format. The format
was changed to meet the EDGAR file width limitations.
********************** 1996 **********************
REG. NONREG. ADJ. CONSOL.
--------------------------------------------------
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 & 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 $0 $2,964,836
==================================================
********************** 1995 **********************
REG. NONREG. ADJ. CONSOL.
--------------------------------------------------
OPERATING REVENUE $24,363,446 $4,077,768 ($1,131,655) $27,309,559
GAS TRADING REVENUE 3,238,839 3,238,839
--------------------------------------------------
TOTAL OPERATING REVENUE 24,363,446 7,316,607 (1,131,655) 30,548,398
GAS PURCHASED 15,077,466 2,170,877 (1,131,655) 16,116,688
COST OF GAS TRADING 2,500,363 2,500,363
DISTRIBUTION, GENERAL & ADMIN 5,130,220 1,249,431 6,379,651
MAINTENANCE 304,677 1,400 306,077
DEPRECIATION AND AMORTIZATION 1,205,758 352,997 1,558,755
TAXES OTHER THAN INCOME 494,338 100,230 594,568
--------------------------------------------------
OPERATING INCOME $2,150,987 $941,309 $0 $3,092,296
==================================================
********************** 1994 ********************
REG. NONREG. ADJ. CONSOL.
------------------------------------------------
OPERATING REVENUE $24,421,153 $3,935,760 ($974,327) $27,382,586
GAS TRADING REVENUE 1,964,866 1,964,866
------------------------------------------------
TOTAL OPERATING REVENUE 24,421,153 5,900,626 (974,327) 29,347,452
GAS PURCHASED 15,666,853 2,050,377 (974,327) 16,742,903
COST OF GAS TRADING 1,667,182 1,667,182
DISTRIBUTION, GENERAL & ADMIN 4,792,531 1,187,090 5,979,621
MAINTENANCE 315,409 15,353 330,762
DEPRECIATION AND AMORTIZATION 1,134,150 329,928 1,464,078
TAXES OTHER THAN INCOME 430,446 96,696 527,142
------------------------------------------------
OPERATING INCOME $2,081,764 $554,000 $0 $2,635,764
================================================
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
F-20
******************************************************************************
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 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 the plans is as follows:
Number of Price Per
Shares Share
-------------------------------
Fiscal 1996
Outstanding at July 1, 1995 90,588 $4.875-9.125
Granted -
Exercised (13,680) $4.875-7.125
Expired (1,200) $6.50
-----------
Outstanding at June 30, 1996 75,708 $6.375-9.125
===========
At June 30, 1996
Exercisable 75,708
Available for grant 6,052
Fiscal 1995
Outstanding at July 1, 1994 106,948 $4.875-8.75
Granted 5,000 $9.125
Exercised (14,410) $4.938-8.75
Expired (6,950) $4.875-7.125
-----------
Outstanding at June 30, 1995 90,588
===========
At June 30, 1995
Exercisable 90,588
Available for grant 29,652
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 $4.875-8.75
===========
At June 30, 1994
Exercisable 106,948
Available for grant 27,702
F-21
******************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Options and Ownership Plans (continued)
================================================
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 $121,400, $129,367 and $103,820 for the years ended
June 30, 1996, 1995 and 1994, respectively. During the years ended June 30,
1996, 1995 and 1994, the ESOP acquired 15,889 shares at $8.00 per share,
11,535 shares at $9.00 per share and 11,772 shares at $9.08 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 $72,000 per
year from fiscal 1996 through fiscal 2005 for total future minimum lease
payments of $648,000. Rental expenses related to this lease were $73,808,
$70,133 and $73,933 in fiscal years 1996, 1995 and 1994, respectively.
9. Gain on Sale 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.
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 gain of $236,000. The land, buildings and related
accounts are no longer recognized in the accompanying financial statements.
F-22
******************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Gain on Sale of Assets (continued)
=====================================
The future minimum lease payments under the terms of the related lease
agreement require the payment of $51,975 per year from fiscal 1997 through
fiscal 2006 for total future minimum lease payments of $519,750.
10. Commitments and Contingencies
=================================
Commitments
- -----------
The Company has entered into long-term, take or pay natural gas supply
contracts which expire beginning in 1997 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 $1.17 to $1.85.
Based on current prices, the minimum take or pay obligation at June 30, 1996
for each of the next five years and in total is as follows:
Fiscal Year
-----------
1997 $1,931,088
1998 1,320,018
1999 1,099,218
2000 832,018
2001 832,018
Thereafter 1,809,672
----------
Total $7,824,032
==========
Natural gas purchases under these contracts for the years ended June 30,
1996, 1995 and 1994 approximated $5,520,000, $6,203,000, and $6,091,000,
respectively.
On July 1, 1996, the Company entered into a take or pay propane contract
which expires June 30, 1997. The contract generally requires the Company to
purchase all propane quantities produced by a propane producer in Wyoming
(approximately 182,500 gallons per month) tied to the Billings, Montana spot
price.
F-23
******************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
=============================================
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 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 $320,000
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, results of operations and net cash flows.
The Company received formal approval from the MPSC to recover the costs
associated with the cleanup of this site. The Company began 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. The total of recoveries
collected through June 30, 1996 is $214,000.
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 operations. The
revenue request is the result of increased cost of service primarily due to
inflation and higher capital investment for utility operations. The Company
intends to file for a rate increase for Broken Bow (a regulated utility
subsidiary in Payson, Arizona) in the fall of 1996.
F-24
******************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Financial Instruments and Risk Management
=============================================
During 1996, the Company was a party to gas financial swap agreements for its
regulated operations. 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. During the fiscal year
ending June 30, 1996 the company had financial swap agreements in place with
average fixed prices of $1.33 per MMBTU. The index price paid for the
volumes associated with those agreements was $1.04. This price differential
had no impact on earnings, because the effect of the difference is included
in gas costs and adjusted to recoverable cost of gas purchases for any
differences between the cost of gas allowed by the regulators and the actual
prices paid.
Beginning on September 1, 1996, the Company is a party to two gas swap
agreements, for its nonregulated operations, to hedge 4,400 MMBTU of its
daily gas purchases. This contract represents approximately 92% of the
supply required for the Company's customers who have selected fixed price
service. 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
in marketing activities.
F-25
******************************************************************************
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ENERGY WEST INC.
June 30, 1996
Balance at Charged Write-offs Balance
Beginning to Costs Net of at end of
Description of Period & Expenses Recoveries Period
Allowance for ---------- ---------- ---------- ----------
Uncollectible Accounts
- ------------------------
Year Ended June 30, 1994 $160,500 $141,590 ($121,799) $180,291
Year Ended June 30, 1995 $180,291 $81,327 ($70,450) $191,168
Year Ended June 30, 1996 $191,168 $64,509 ($47,571) $208,106
F-25
******************************************************************************