FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report under section 13 or 15(d)
of the Securities Exchange Act of 1934
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File number 0-14183
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ENERGY WEST INCORPORATED
- ------------------------
(Exact name of registrant as specified in its charter)
Montana 81-0141785
- --------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 First Avenue South, Great Falls, MT. 59401
- ------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (406)-791-7500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 31, 1999
- --------------------------------------
(Common stock, $.15 par value) 2,457,115
- ----------------------------------------
ENERGY WEST INCORPORATED
INDEX TO FORM 10-Q
Page No.
Part I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1999 and June 30, 1999 1
Condensed Consolidated Statements of Income -
three months and six months ended December 31, 1999 and 1998 2
Condensed Consolidated Statements of cash flows -
six months ended December 31, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4-6
Item 2 - Management's discussion and analysis of
financial condition and results of operations 7-15
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 16
Part II Other Information
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities 18
Item 3 - Defaults upon Senior Securities 18
Item 4 - Submission of Matters to a Vote of Security Holders 18
Item 5 - Other Information 18
Item 6 - Reports on Form 8-K 18
Signatures
I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31 June 30
1999 1999
---------------- ----------------
Current Assets:
Cash $226,850 $225,970
Accounts Receivable (net) 10,552,041 6,033,820
Natural Gas and Propane Inventory 3,854,201 1,423,910
Materials and Supplies 573,933 627,046
Prepayments and other 427,404 154,643
Refundable Income Tax Payments 865,214 122,202
Recoverable Cost of Gas Purchases 3,710,913 2,840,975
---------------- ----------------
Total Current Assets 20,210,556 11,428,566
---------------- ----------------
Notes Receivable Due After One Year 174,105 188,446
Property, Plant and Equipment-Net 31,343,798 29,371,726
Deferred Charges 3,334,660 3,212,233
---------------- ----------------
Total Assets $55,063,119 $44,200,971
================ ================
CAPITALIZATION AND LIABILITIES
Current Liabilities:
Note payable to bank $10,837,982 $0
Long-term debt due within one year 250,723 430,723
Accounts Payable - Gas and Electric Purchases 3,681,040 3,522,655
Other Current and Accrued Liabilities 3,692,735 3,276,383
---------------- ----------------
Total Current Liabilities 18,462,480 7,229,761
---------------- ----------------
Deferred Credits 6,819,705 6,599,195
Long-term Debt (less amounts due within one year) 16,765,000 16,840,000
Stockholders' Equity
Preferred Stock 0 0
Common Stock (2,457,115 shares and
2,433,740 shares were outstanding at December
31, 1999 and June 30, 1999 respectively) 368,572 365,065
Capital in Excess of Par Value 3,760,816 3,560,541
Retained Earnings 8,886,546 9,606,409
---------------- ----------------
Total Stockholder's Equity 13,015,934 13,532,015
---------------- ----------------
Total Capitalization and Liabilities $55,063,119 $44,200,971
================ ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-1-
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
December 31 December 31
1999 1998 1999 1998
---------------------------------------------------------------
Operating revenue:
Regulated utilities $7,854,909 $9,051,560 $11,535,287 $12,175,532
Propane operations 1,533,525 828,146 2,246,238 1,353,176
Gas and electric trading 10,157,630 4,096,349 17,669,309 8,673,644
Other 162,467 24,375 265,508 48,750
---------------------------------------------------------------
Total Revenue 19,708,531 14,000,430 31,716,342 22,251,102
---------------------------------------------------------------
Operating Expenses
Gas purchased 5,828,390 5,951,333 8,335,186 7,916,735
Cost of gas and electric trading 9,949,217 4,065,019 17,443,473 8,577,376
Distribution, general and administrative 2,035,037 1,921,792 4,183,862 3,882,868
Maintenance 78,355 125,230 201,257 237,494
Depreciation and amortization 451,086 439,016 898,806 877,272
Taxes other than Income 165,672 183,210 333,977 337,169
---------------------------------------------------------------
Total Operating Expenses 18,507,757 12,685,600 31,396,561 21,828,914
---------------------------------------------------------------
Operating Income 1,200,774 1,314,830 319,781 422,188
Other Income - Net 54,353 296,674 252,491 496,749
---------------------------------------------------------------
Income Before Interest Charges & IncomeTaxes 1,255,127 1,611,504 572,272 918,937
---------------------------------------------------------------
Interest Charges:
Long-Term Debt 324,502 315,931 623,351 627,800
Other 142,216 107,337 192,254 172,493
---------------------------------------------------------------
Total Interest Charges 466,718 423,268 815,605 800,293
---------------------------------------------------------------
Net Income (Loss) Before Income Taxes 788,409 1,188,236 (243,333) 118,644
Income Taxes (Benefits) 288,743 437,102 (77,172) 52,161
---------------------------------------------------------------
Net Income (Loss) $499,666 $751,134 $(166,161) $66,483
===============================================================
Basic Earnings and diluted income (loss) per common share $0.20 $0.31 $(0.07) $0.03
---------------------------------------------------------------
Dividends per common share $0.1200 $0.1150 $0.2400 $0.2300
---------------------------------------------------------------
Basic Weighted Average Shares 2,457,067 2,420,611 2,445,770 2,411,940
Diluted Weighted Average Shares 2,457,067 2,423,516 2,445,770 2,414,845
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-2-
FORM 10Q
ENERGY WEST INCORPORATED
Condensed Consolidated Statements of Cash Flows
Six Months Ended
December 31
1999 1998
---------------------------------
Operating Activities:
Net Income (Loss) $(166,161) $66,483
Adjustments to Reconcile Net Income to Cash Flow
Depreciation and Amortization 1,027,340 1,049,460
Unrealized Gain on Gas Marketing Activities 0 (145,514)
Gain on Sale of Property, Plant & Equipment (5,901) (34,452)
Deferred Gain on Sale of Assets (11,814) (11,814)
Investment Tax Credit (10,531) (10,530)
Deferred Income Taxes 507,445 291,942
Changes in Operating Assets and Liabilities (8,665,754) (2,988,078)
---------------------------------
Net Cash Used In Operating Activities (7,325,376) (1,782,503)
Investing Activities:
Construction Expenditures (2,824,611) (1,747,950)
Collection of Long-Term Notes Receivable 14,341 0
Proceeds from Contributions in Aid of Construction 48,473 30,812
Increase in Notes Receivable 0 (4,995)
Proceeds from Sale of Property, Plant & Equipment 8,650 80,250
---------------------------------
Net Cash Used In Investing Activities (2,753,147) (1,641,883)
Financing Activities:
Proceeds from Notes Payable 25,328,748 20,302,001
Repayment of Long-Term Debt (255,000) (255,000)
Repayment of Notes Payable (14,490,766) (15,935,000)
Dividends paid (503,579) (521,921)
---------------------------------
Net Cash Provided by Financing Activities 10,079,403 3,590,080
---------------------------------
Net Increase in Cash and Cash Equivalents 880 165,694
Cash and Cash Equivalents at Beginning of Year 225,970 58,006
---------------------------------
Cash and Cash Equivalents at End of Period $226,850 $223,700
=================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-3-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1999
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six month period ended December
31, 1999 are not necessarily indicative of the results that may be expected for
the year ended June 30, 2000 due to seasonal factors affecting gas utility,
construction and other operations. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Energy
West Incorporated (the Company) annual report on Form 10-K for the year ended
June 30, 1999.
Note 2 - Risk Management
Gas Trading Derivatives
In July 1998 the Company signed a basis swap agreement, between the NYMEX and
AECO price indexes. The contract period for the 5,000 MMBTU per day began
November 1, 1999 and ends October 31, 2000. The swap compares the index prices
of natural gas quoted on the NYMEX gas exchange with the AECO gas exchange on a
daily basis. The original basis differential was at $.62 per MMBTU. The Company
settled this basis differential at $.38, in fiscal 1999, resulting in a gain of
$390,000 which is included as other income in fiscal 1999. The Company has
designated this basis swap as a trading commodity derivative.
In August 1999 the Company signed a basis swap agreement, between the NYMEX and
AECO price indexes. The contract period for the 5,000 MMBTU per day began
November 1, 1999 and ends March 31, 2000. The swap compares the index prices of
natural gas quoted on the NYMEX gas exchange with the AECO gas exchange on a
daily basis. The original basis differential was at $.45 per MMBTU. The Company
settled this basis differential at $.38 in September 1999, resulting in a gain
of $53,000 which is included as other income in fiscal 2000. The Company has
designated this basis swap as a trading commodity derivative.
The Company entered into two swap agreements with a market maker which requires
the market maker to pay a fixed price to the Company and for the Company to pay
the AECO index price for the contracted volumes. The Company entered into two
reciprocal agreements with a counter party whereby the counter party pays the
AECO index price to the Company and the Company pays the AECO fixed price to the
counter party. The first agreement was from June 1, 1999 to October 31, 1999 at
a fixed price of $1.925 for 2,500 MMBTU per day. The second agreement is from
November 1, 1999 to October 31, 2001 for 1,200 MMBTU per day at a fixed price of
$2.06. The AECO index price at December 31, 1999 was $2.16. These reciprocal
agreements have offsetting terms, resulting in no gain or loss. In the event the
counter-party fails to perform under it's obligation, and the AECO index price
exceeds the fixed prices of these swaps, the Company would be liable to the
market maker. The Company's contingent liability based on the current AECO index
price is $80,000.
Note 3 - Income Taxes
Income tax expense from operations differs from the amount computed by applying
the federal statutory rate to pre-tax income for the following reasons:
Tax benefit at statutory rates - 34%................ $(82,733)
State tax benefit, net of federal tax benefit....... (14,627)
Amortization of deferred investment tax credits..... (10,531)
Other............................................... 30,719
--------
Total income tax benefit............................. $(77,172)
========
4
Note 4 - Contingencies
Environmental Contingency
The Company owns property on which it operated a manufactured gas plant from
1909 to 1928. The site is currently used as a service center where certain
equipment and materials are stored. The coal gasification process utilized in
the plant resulted in the production of certain by-products, which have been
classified by the federal government and the State of Montana as hazardous to
the environment. Several years ago the Company initiated an assessment of the
site to determine if remediation of the site was required. That assessment
resulted in a submission to the Montana Department of Environmental Quality
(MDEQ) formerly known as the Montana Department of Health and Environmental
Science ("MDHES") in 1994. The Company has worked with the MDEQ since that time
to obtain the data that would lead to a remediation action acceptable to the
MDEQ. In the summer of 1999 the Company received final approval from the MDEQ
for its plan for remediation of soil contaminants. The Company is in the process
of implementing that plan. The Company and its consultants continue their work
with the MDEQ relating to the remediation plan for water contaminants.
At December 31, 1999 the costs incurred in evaluating this site and beginning
remediation have totaled approximately $1,780,000. On May 30, 1995 the Company
received an order from the Montana Public Service Commission allowing for
recovery of the costs associated with evaluation and remediation of the site
through a surcharge on customer bills. As of December 31, 1999 that recovery
mechanism had generated approximately $800,000. The Company expects to recover
the full amount expended through the surcharge. The Commission's decision calls
for ongoing review by the Commission of the costs incurred for this matter. The
Company will submit an application for review by the Commission when the
remediation plan is approved by the MDEQ for its water remediation.
Legal Proceedings
From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. Neither the
Company nor any of its subsidiaries is a party to any legal proceedings, other
than as described in Part II -Other information, Item 1., the adverse outcome of
which individually or in the aggregate, in the Company's view, would not have a
material adverse effect on the Company's results of operations, financial
position or liquidity.
5
Note 5 - Operating Revenues and Expenses,
Regulated utility, propane, energy marketing and other operating revenues and
expenses were as follows:
Three Months Ended Six Months Ended
December 31 December 31
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
OPERATING REVENUES:
Regulated Utilities $7,854,909 $9,051,560 $11,535,287 $12,175,533
Propane Operations 1,533,525 828,146 2,246,238 1,353,175
Energy Marketing 10,157,630 4,096,349 17,669,309 8,673,644
Other 162,467 24,375 265,508 48,750
--------------------- ------------------ --------------- ----------------
$19,708,531 $14,000,430 $31,716,342 $22,251,102
===================== ================== =============== ================
GAS AND POWER PURCHASES:
Regulated Utilities $4,820,133 $5,599,174 $6,797,371 $7,276,053
Propane Operations 907,526 352,159 1,369,588 640,683
Energy Marketing 9,949,217 4,065,019 17,443,473 8,577,375
Other 100,731 --- 168,227 ---
--------------------- ------------------ --------------- ----------------
$15,777,607 $10,016,352 $25,778,659 $16,494,111
===================== ================== =============== ================
DISTRIBUTION, GENERAL AND ADMINISTRATIVE:
Regulated Utilities $1,520,832 $1,549,886 $3,230,257 $3,124,697
Propane Operations 298,445 256,358 586,600 483,031
Energy Marketing 193,373 105,236 332,351 259,054
Other 22,387 10,312 34,654 16,086
--------------------- ------------------ --------------- ----------------
$2,035,037 $1,921,792 $4,183,862 $3,882,868
===================== ================== =============== ================
MAINTENANCE:
Regulated Utilities $67,160 $105,762 $168,630 $200,343
Propane Operations 11,195 19,468 32,627 37,151
Energy Marketing --- --- --- ---
Other --- --- --- ---
--------------------- ------------------ --------------- ----------------
$78,355 $125,230 $201,257 $237,494
===================== ================== =============== ================
DEPRECIATION AND AMORTIZATION:
Regulated Utilities $384,842 $372,353 $764,740 $744,468
Propane Operations 58,196 58,615 117,971 116,709
Energy Marketing 4,470 4,470 8,940 8,940
Other 3,578 3,578 7,155 7,155
--------------------- ------------------ --------------- ----------------
$451,086 $439,016 $898,806 $877,272
===================== ================== =============== ================
TAXES OTHER THAN INCOME:
Regulated Utilities $141,316 $162,033 $275,027 $288,165
Propane Operations 16,977 16,993 36,033 32,789
Energy Marketing 4,679 1,484 17,517 10,815
Other 2,700 2,700 5,400 5,400
--------------------- ------------------ --------------- ----------------
$165,672 $183,210 $333,977 $337,169
===================== ================== =============== ================
INCOME TAXES (BENEFITS):
Regulated Utilities $210,621 $349,206 $(89,506) $(4,330)
Propane Operations 73,851 34,518 20,092 14,218
Energy Marketing (8,886) 53,569 (23,742) 40,548
Other 13,157 (191) 15,984 1,725
--------------------- ------------------ --------------- ----------------
$288,743 $437,102 $(77,172) $52,161
===================== ================== =============== ================
6
FORM 10-Q
ENERGY WEST INCORPORATED
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL STATEMENTS
The following discussion reflects results of operations of the Company and its
consolidated subsidiaries for the periods indicated. The Company's regulated
utility operations involve the distribution of natural gas to the public in the
Great Falls, Montana and Cody, Wyoming areas, the distribution of propane to the
public through underground propane vapor systems in the Payson, Arizona and
Cascade, Montana areas. The Company also operates a liquefied natural gas
storage facility and uses it to distribute natural gas to the West Yellowstone,
Montana area.
The Company conducts certain non-utility operations through its three wholly
owned subsidiaries: Energy West Propane, Inc. (EWP), a retail and wholesale
distributor of propane in Wyoming, Montana, Arizona, Colorado, South Dakota and
Nebraska; Energy West Resources, Inc. (EWR), a marketer of natural gas and
electricity in Montana; Energy West Development, Inc. (EWD) which owns two real
estate properties in Great Falls, Montana, along with certain other investments.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating capital needs, as well as dividend payments and capital
expenditures, are generally funded through cash flow from operating activities,
short-term borrowing and liquidation of temporary cash investments.
Historically, to the extent cash flow has not been sufficient to fund capital
expenditures, the Company has borrowed short-term. As the short-term debt
balance significantly exceeds working capital requirements the Company issues
long-term debt or equity securities to pay down short-term debt.
The Company's short-term borrowing requirements vary according to the seasonal
nature of its sales and expense activity. The Company has greater need for
short-term borrowing during periods when internally generated funds are not
sufficient to cover all capital and operating requirements, including costs of
gas purchases and capital expenditures. In general, the Company's short-term
borrowing needs for purchases of gas inventory and capital expenditures are
greatest during the summer months and the Company's short-term borrowing needs
for financing of customer accounts receivable are greatest during the winter
months. Short-term borrowing utilized for construction or property acquisitions
generally has been on an interim basis and converted to long-term debt and
equity when it becomes economical and feasible to do so.
At December 31, 1999, the Company had $19,000,000 in bank lines of credit, of
which $10,840,000 had been borrowed under the credit agreement. The Company had
outstanding letters of credit totaling $4,390,000 related to electric and gas
purchase contracts. These letters of credit, when netted against the total bank
lines of credit, result in a reduction in borrowing capacity to $14,610,000.
The Company used net cash in operating activities for the six months ended
December 31, 1999 in the amount of approximately $7,330,000 as compared to
approximately $1,780,000 for the six months ended December 31, 1998. The
difference in cash used for operating activities of approximately $5,550,000 was
due to greater working capital requirements of approximately $5,680,000. The
working capital requirements were primarily due to higher accounts receivable of
$1,360,000 from electric marketing sales, higher natural gas and propane
purchases than the prior year and lower sales to utility and retail propane
customers due to warmer weather than the prior year. Other items contributing to
the difference were lower accounts payable and higher recoverable cost of gas
purchases related to higher commodity costs.
Cash used in investing activities was approximately $2,750,000 for the six
months ended December 31, 1999, as compared to approximately $1,640,000 for the
six months ended December 31, 1998. This increase of $1,110,000 was primarily
due to an increase in capital expenditures for system expansion in utility
operations, a new billing system, to be used by all of the Company's operating
entities, and propane storage tanks.
7
Cash provided by financing activities was approximately $10,080,000 for the
six months ended December 31, 1999, as compared to approximately $3,590,000 for
the six months ended December 31, 1998. The increase in cash provided by
financing activities of approximately $6,490,000 is primarily due to net
short-term borrowing.
Capital expenditures of the Company are primarily for expansion and improvement
of its gas utility properties. To a lesser extent, funds are also expended to
meet the equipment needs of the Company's operating subsidiaries and to meet the
Company's administrative needs. The Company's capital expenditures were
approximately $3,700,000 in fiscal 1999 and approximately $3,000,000 for fiscal
1998. During fiscal 1999, approximately $2,900,000 was expended for system
expansion, construction and maintenance of the natural gas and propane vapor
systems for the regulated utility operations. In addition, approximately
$700,000 was expended for bulk tanks, customer tanks and equipment for the
propane operating entities. Capital expenditures are expected to be
approximately $4,900,000 in fiscal 2000, including approximately $3,800,000 for
continued system expansion, construction and maintenance of the natural gas and
propane vapor systems for the regulated utility operations. In addition,
approximately $700,000 is expected to be expended for bulk tanks, customer tanks
and equipment for the propane operating entities, with the balance of $400,000
to be expended for energy marketing. Included in the above expenditures is
approximately $500,000 for the development and implementation of a new billing
system. As of December 31, 1999, approximately $2,820,000 of that amount had
been expended.
8
COMPARISON OF SECOND QUARTER AND SIX MONTHS OF FISCAL 2000 ENDED DECEMBER 31,
1999 AND FISCAL 1999 ENDED DECEMBER 31, 1998
QUARTERLY RESULTS FOR CONSOLIDATED OPERATIONS
The Company's net income for the second quarter of fiscal 2000, ended December
31, 1999 was approximately $500,000 compared to approximately $750,000 for the
second quarter of fiscal 1999, ended December 31, 1998.
Margins decreased from approximately $3,980,000 in fiscal 1999 to $3,930,000 in
fiscal 2000 or $50,000. The decrease was from lower margins of $460,000 in
utility and retail propane operations due to warmer weather in the second
quarter of fiscal 2000 compared to fiscal 1999. This was partially offset by
higher gas marketing margins of $150,000 due to higher margin per MMBTU of
natural gas sold and higher wholesale propane margins of $200,000 due to more
gallons sold and higher margin per gallon sold. Operating expenses increased
approximately $60,000 for the second quarter of fiscal 2000 due to normal
inflationary trends. Other income decreased by approximately $240,000 in the
quarter primarily due to lower mark-to-market gains for derivatives held by the
Company.
SIX MONTH RESULTS FOR CONSOLIDATED OPERATIONS
The Company's net loss for the six months ended December 31, 1999 was
approximately $170,000 compared to net income of approximately $70,000 for the
six months ended December 31, 1998.
Margins increased from approximately $5,760,000 for the first six months of
fiscal 1999 to $5,940,000 for the first six months of fiscal 2000 or $180,000.
The increase in margins was due to higher wholesale propane margins of $230,000
due to more gallons and higher margin per gallon sold and margins of $90,000
generated from marketing electricity in Montana. There were no electric sales
for the first six months of fiscal 1999. However, these increases were partially
offset by lower margins of $230,000 in utility and retail propane operations due
to warmer weather for the first six months of fiscal 2000 compared to fiscal
1999. Operating expenses increased approximately $280,000 for the first six
months of fiscal 2000 compared to fiscal 1999 primarily due to normal
inflationary trends and additional staff for expanded marketing activities.
Other income decreased by approximately $240,000 for the first six months of
fiscal 2000 compared to fiscal 1999 primarily due to lower mark-to-market gains
for derivatives held by the Company.
OPERATING RESULTS OF THE COMPANY'S UTILITY OPERATIONS
Second Quarter Six Months
Ended December 31 Ended December 31
2000 1999 2000 1999
(IN THOUSANDS) (IN THOUSANDS)
Operating revenues $7,855 $9,051 $11,535 $12,175
Gas purchased 4,820 5,599 6,797 7,276
------------------------------------------------------------
Gross Margin 3,035 3,452 4,738 4,899
Operating expenses 2,114 2,190 4,439 4,357
------------------------------------------------------------
Operating Income 921 1,262 299 542
Interest charges (SEE NOTE BELOW) 390 352 672 658
Other utility (income) expense (28) (44) (96) (94)
Income taxes (benefits) 211 349 (90) (4)
------------------------------------------------------------
Net utility income (loss) $348 $ 605 $(187) $ (18)
=============================================================
[INTEREST CHARGES FOR EACH OF THE COMPANY'S OPERATIONS DO NOT EQUAL
TOTAL INTEREST CHARGES FOR THE COMPANY, DUE TO ELIMINATING ENTRIES BETWEEN
ENTITIES.]
9
QUARTERLY RESULTS FOR UTILITY OPERATIONS
Utility operating income in the second quarter of fiscal 2000 decreased
approximately $340,000 compared to the second quarter of fiscal 1999 primarily
due to 20% warmer weather during the second quarter for fiscal 2000. The warmer
weather resulted in a revenue decrease of approximately $1,200,000 and a gross
margin decrease of approximately $420,000 or 12%, for the quarter. The weather
impact was partially offset by customer growth and a rate design change, which
results in greater gross margin for low-heating months, for the Great Falls
utility operations. Operating expenses decreased approximately $80,000 for the
second quarter of fiscal 2000 compared to fiscal 1999.
Operating Expenses -
The decrease in operating expenses for the second quarter of fiscal 2000
compared to the same quarter in fiscal 1999 was due to lower maintenance costs
for general plant and lower property and utility revenue taxes due to less
operating revenue during the quarter.
Interest Charges -
Interest charges allocable to the Company's utility divisions was approximately
$40,000 higher for the second quarter of fiscal 2000 as compared to the same
quarter in fiscal 1999. This increase is related to higher working capital
requirements and higher construction expenditures during the second quarter of
fiscal 2000.
Income Taxes -
Income taxes for the Company's utility operations decreased approximately
$140,000 for the second quarter of fiscal 2000 compared to the second quarter of
fiscal 1999. This occurred because pre-tax income was approximately $400,000
less in the second quarter of fiscal 2000 then for the same quarter in the prior
year.
SIX MONTH RESULTS FOR UTILITY OPERATIONS
Utility operating income for the first six months of fiscal 2000 decreased
approximately $240,000 compared to the first six months of fiscal 1999. This
decrease is primarily due to 10% warmer weather and an increase of $80,000 in
operating expenses for the first six months of fiscal 2000. The warmer weather
resulted in a decrease in both operating revenue, of $640,000, and gross margin
of $160,000 for the first six months of fiscal 2000 as compared to the same time
period in fiscal 1999. The weather impact was partially offset by customer
growth and a rate design change for the Great Falls utility operations.
Operating Expenses -
The increase in operating expenses for the first six months of fiscal 2000
compared to the first six months of fiscal 1999 was primarily due to higher
payroll and outside service costs related to customer growth and the
implementation of the new billing system. These higher costs were offset by
lower maintenance costs primarily related to general plant.
Interest Charges -
Interest charges allocable to the Company's utility divisions was approximately
$10,000 higher for the first six months of fiscal 2000 as for the comparable
period in fiscal 1999. This increase is primarily related to higher construction
expenditures during the first six months of fiscal 2000.
Income Taxes -
Income tax benefits of the Company's utility divisions was approximately $90,000
for the first six months of fiscal 2000 compared to approximately $5,000 for the
same period in fiscal 1999. This occurred because pre-tax loss was approximately
the $250,000 higher for the first six months of fiscal 2000 as compared to the
same time period in fiscal 1999.
10
OPERATING RESULTS OF THE COMPANY'S PROPANE OPERATIONS
Second Quarter Six Months
Ended December 31 Ended December 31
2000 1999 2000 1999
(IN THOUSANDS) (IN THOUSANDS)
ENERGY WEST PROPANE (EWP)
Operating revenues $1,534 $828 $2,246 $1,353
Cost of propane 908 352 1,369 641
---------------------------------------------------------------
Gross Margin 626 476 877 712
Operating expenses 385 351 774 670
---------------------------------------------------------------
Operating income 241 125 103 42
Other (income) expense-net (17) (18) (40) (83)
Interest expense (SEE NOTE BELOW) 44 48 85 93
Income taxes 74 34 20 14
---------------------------------------------------------------
Net income $140 $ 61 $ 38 $ 18
===============================================================
[INTEREST CHARGES FOR EACH OF THE COMPANY'S OPERATIONS DO NOT EQUAL TOTAL
INTEREST CHARGES FOR THE COMPANY, DUE TO ELIMINATING ENTRIES BETWEEN ENTITIES.]
QUARTERLY RESULTS FOR PROPANE OPERATIONS
Propane operating income in the second quarter of fiscal 2000 increased
approximately $120,000 compared to the second quarter of fiscal 1999 primarily
due to higher gross margin from the Company's wholesale propane operation. Total
propane revenue increased by $710,000 for the second quarter of which $680,000
was from wholesale propane sales. Total propane gross margin increased by
$150,000 during the quarter of which $200,000 was an increase from wholesale
propane operations partially offset by a decrease in gross margin of $50,000
from retail propane operations. Operating expenses increased approximately
$30,000 in the second quarter of fiscal 2000 as compared to the second quarter
of fiscal 1999, partially offsetting the gross margin increase.
Operating Expenses -
The increase in operating expenses for the second quarter of fiscal 2000
compared to the same quarter in fiscal 1999 was primarily due to higher payroll
costs associated with greater propane sales, higher fixed propane storage costs
and higher insurance expense.
Income Taxes -
Income tax expense for the Company's propane operations was approximately
$40,000 higher for the second quarter of fiscal 2000 as compared to the second
quarter of fiscal 1999. This occurred because pre-tax income was approximately
the $120,000 higher in second quarter of fiscal 2000 compared to fiscal 1999.
SIX MONTH RESULTS FOR PROPANE OPERATIONS
Propane operating income for the first six months of fiscal 2000 increased
approximately $60,000 compared to the first six months of fiscal 1999. Total
propane revenue increased by $890,000 for the first six months of fiscal 2000 of
which $670,000 was from wholesale propane sales. Total propane gross margin
increased by $160,000 during the period of which $230,000 was an increase from
wholesale propane operations partially offset by a decrease in gross margin of
$70,000 from retail propane operations. The increase in gross margin was mostly
offset by higher operating expenses of approximately $100,000 and a decrease in
other income of approximately $40,000 for the first six months of fiscal 2000.
11
Operating Expenses -
The increase in operating expenses for the first six months of fiscal 2000
compared to the same period in fiscal 1999 was primarily due to inflationary
trends, higher payroll and associated benefits related to the expanding
wholesale operations and customer growth in retail operations. In addition,
insurance costs were higher because of growth, in gallons sold, and higher fixed
propane storage costs were incurred.
Other Income -
The $40,000 decrease in other income for the first six months of fiscal 2000
compared to the first six months of fiscal 1999 occurred because of capital gain
income, from property sales, in fiscal 1999 and from one-time consulting fees
received in fiscal 1999.
Income Taxes -
Income tax expense for the Company's propane operations was slightly higher for
the first six months of fiscal 2000 as compared to the first six months of
fiscal 1999 because pre-tax income increased approximately $30,000.
OPERATING RESULTS OF THE COMPANY'S ENERGY MARKETING OPERATIONS
Second Quarter Six Months
Ended December 31 Ended December 31
2000 1999 2000 1999
(IN THOUSANDS) (IN THOUSANDS)
ENERGY WEST RESOURCES (EWR)
Gas & electric trading revenue $10,158 $4,096 $17,669 $8,674
Cost of gas & electric trading 9,949 4,065 17,443 8,577
----------------------------------------------------------------
Gross Margin 209 31 226 97
Operating expenses 203 113 359 282
----------------------------------------------------------------
Operating income (loss) 6 (82) (133) (185)
Other (income) expense-net (7) (234) (111) (320)
Interest expense (SEE NOTE BELOW) 25 16 44 34
Income taxes (benefits) (9) 54 (24) 41
----------------------------------------------------------------
Net income (loss) $ (3) $ 82 $ (42) $ 60
================================================================
[INTEREST CHARGES FOR EACH OF THE COMPANY'S OPERATIONS DO NOT EQUAL TOTAL
INTEREST CHARGES FOR THE COMPANY, DUE TO ELIMINATING ENTRIES BETWEEN ENTITIES.]
QUARTERLY RESULTS FOR ENERGY MARKETING OPERATIONS
Operating income from energy marketing increased approximately $90,000 for the
second quarter of fiscal 2000 compared to the second quarter of fiscal 1999.
Energy marketing revenue increased by approximately $6,060,000, of which,
$4,900,000 is related to marketing of electricity in Montana. There were no
electric sales in the second quarter of fiscal 1999. The balance of the increase
in revenue, of $1,160,000, was related to gas marketing revenue. The increase in
gas marketing revenue and the cost of gas purchases increased because market
prices for natural gas were substantially higher in the second quarter of fiscal
2000 as compared to fiscal 1999. The gross margin increase of $180,000 was
primarily related to natural gas sales, which accounted for $150,000 of the
increase. The increase in natural gas margin is primarily related to achieving a
higher margin per MMBTU of gas sold. The increase in gross margin was partially
offset by higher operating expenses of $90,000 in the second quarter of fiscal
2000 compared to the second quarter of fiscal 1999.
12
Operating Expenses -
The increase in operating expenses for the second quarter of fiscal 2000
compared to fiscal 1999 is primarily related to costs, including payroll and
benefits, associated with retail energy marketing. Those costs were
approximately $70,000. The Company started its retail energy marketing
operations early in fiscal 2000 in anticipation of open access for residential
and small commercial customers, in Montana, during the fall of 1999. An
additional $20,000 increase in operating expenses is related to the marketing of
electricity.
Other Income -
Other income decreased approximately $230,000 in the second quarter of fiscal
2000. This decrease is completely related to gains associated with derivative
trading in the second quarter of fiscal 1999. There were no gains from
derivative trading activity in fiscal 2000.
Income Taxes -
Income taxes related to the Company's energy marketing operations decreased
approximately $60,000 for the second quarter of fiscal 2000 as compared to the
second quarter of fiscal 1999. The decrease is related to having income before
taxes of approximately $140,000 in fiscal 1999 and a loss before income taxes of
approximately $10,000 in fiscal 2000.
SIX MONTHS RESULTS FOR ENERGY MARKETING OPERATIONS
Operating loss from energy marketing decreased approximately $50,000 for the
first six months of fiscal 2000 compared to the first six months of fiscal 1999.
Energy marketing revenue increased by approximately $9,000,000, of which,
$8,870,000 is related to marketing of electricity in Montana. There were no
electric sales in the first six months of fiscal 1999. The gross margin increase
of $130,000 was primarily related to electric sales, which accounted for $90,000
of the increase. The increase in gross margin was partially offset by higher
operating expenses of $80,000 for the first six months of fiscal 2000 compared
to the first six months of fiscal 1999.
Operating Expenses -
The increase in operating expenses for the first six months of fiscal 2000
compared to fiscal 1999 is primarily related to costs, including payroll and
benefits, associated with retail energy marketing. Those costs were
approximately $80,000. The Company started its retail energy marketing
operations early in fiscal 2000 in anticipation of open access for residential
and small commercial customers in Montana, during the fall of 1999.
Other Income -
Other income decreased approximately $210,000 for the first six months of fiscal
2000. The decrease is completely related to the difference in gains associated
with derivative trading between the first six months of fiscal 2000 and the
first six months of fiscal 1999.
Income Taxes -
Income taxes related to the Company's energy marketing operations decreased
approximately $70,000 for the second quarter of fiscal 2000 as compared to the
second quarter of fiscal 1999. The decrease is related to having income before
taxes of approximately $100,000 in fiscal 1999 and a loss before income taxes of
approximately $70,000 in fiscal 2000.
13
OPERATING RESULTS FOR ENERGY WEST DEVELOPMENT, INC.
Second Quarter Six Months
Ended December 31 Ended December 31
2000 1999 2000 1999
(IN THOUSANDS) (IN THOUSANDS)
ENERGY WEST DEVELOPMENT (EWD)
Operating revenues $162 $24 $266 $49
----------------------------------------------------------
Gross Margin 62 24 97 49
Operating expenses 29 16 47 29
----------------------------------------------------------
Operating income 33 8 50 20
Other (income) expense-net (3) 0 (4) (1)
Interest expense (SEE NOTE BELOW) 7 8 14 16
Income taxes (benefits) 13 0 16 2
----------------------------------------------------------
Net income (loss) $ 16 $ 0 $ 24 $ 3
==========================================================
[INTEREST CHARGES FOR EACH OF THE COMPANY'S OPERATIONS DO NOT EQUAL
TOTAL INTEREST CHARGES FOR THE COMPANY, DUE TO ELIMINATING ENTRIES BETWEEN
ENTITIES.]
SECOND QUARTER AND SIX MONTHS RESULTS FOR ENERGY WEST DEVELOPMENT, INC.
The primary activity for Energy West Development, Inc. during fiscal 1999 was a
lease of commercial property in Great Falls, Montana. All revenue and costs in
fiscal 1999 were associated with that lease. The lease of that commercial
property continues in fiscal 2000. However, appliance sales operations, which
the Company has been involved in for the last seven years and had previously
been reported as other income from regulated operations, is now included with
Energy West Development, Inc. The result of that operational change is reflected
in each of the line items detailed in the table above. The net income associated
with the appliance sales operations in the second quarter and for the first six
months of fiscal 2000 is comparable to the net income from that operation for
the same time periods in fiscal 1999.
14
SAFE HARBOR FORWARD LOOKING STATEMENT
The Company is including the following cautionary statement in this Form 10-Q to
make applicable and to take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of the Company. Forward-looking statements are
all statements other than statements of historical fact, including without
limitation those that are identified by the use of the words "anticipates",
"estimates", "expects", "intends", "plans", "predicts", and similar expressions.
Such statements are inherently subject to a variety of risks and uncertainties
that could cause actual results to differ materially from those expressed. Such
risks and uncertainties include, among others, changes in the utility regulatory
environment, wholesale and retail competition, weather conditions and various
other matters, many of which are beyond the Company's control. These
forward-looking statements speak only as of the date of the report. The Company
expressly undertakes no obligation to update or revise any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions, or circumstances on
which any such statement is based.
YEAR 2000
The Y2K issue relates to the ability of systems, including hardware, software
and embedded microprocessors, to properly interpret date information relating to
the year 2000 and beyond. Any of the Company's computer systems and embedded
microprocessors that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure of miscalculations causing disruptions of operations, including
inability to process transactions, send billing statements to customers, or
similar normal business activities.
Total costs incurred for the first six months of fiscal 2000, through December
31, to address the Y2K issue, were approximately $50,000. The total costs to
address the Y2K issue, most of which were internal labor costs and were incurred
in prior fiscal years, were approximately $125,000 and therefore did not have a
material impact on the Company's current financial position, liquidity or
results of operations.
The Company did not experience any Y2K rollover incidents and has not
experienced any other Y2K related incidents since the rollover. Although it is
impossible to predict if there will be any Y2K incidents in the future, the
Company's experience, to date, and its extensive preparations prior to the
rollover, results in the Company not expecting any significant Y2K incidents to
occur in the future.
REGULATORY ACTIVITY
In October of 1999, the Company applied for recovery of approximately $2,960,000
in gas costs with the Montana Public Service Commission. This gas costs
application is similar to applications made annually as the mechanism the
Montana Public Service Commission utilizes to permit recovery of gas costs. The
Montana Consumer Counsel (MCC) has intervened in this application. The Company
has endeavored to address the MCC's concerns through informal settlement
discussions. These discussions have not proven to be fruitful and the Company
expects the MCC to recommend a substantial adjustment to the Company's
application in a filing that is expected to be made contemporaneous with this
filing. If the MCC does recommend a disallowance of gas costs in its filing, the
Company intends to vigorously defend its position before the Montana Public
Service Commission. Hearings on this matter before the Montana Public Service
Commission are expected to convene sometime in the month of April and a decision
regarding the Company's application should be issued by the end of the Company's
fiscal year (June 30, 2000) or in the first quarter of fiscal 2001 (September
30, 2000).
15
Item 3 - THE QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's energy-related businesses are exposed to risks relating to changes
in certain commodity prices and counterparty performance. In order to manage the
various risks relating to these exposures, the Company utilizes natural gas
derivatives and has established risk management oversight for these risks. The
Company has implemented or is in the process of implementing procedures to
manage such risk and has established a risk management committee, overseen by
the Audit Committee of the Company's Board of Directors, to monitor compliance
with the Company's risk management policies and procedures.
The Company protects itself against price fluctuations on natural gas by
limiting the aggregate level of net open positions which are exposed to market
price changes through the use of natural gas derivative instruments for hedging
purposes. The net open position is actively managed with strict policies
designed to limit the exposure to market risk and which require at least weekly
reporting to management of potential financial exposure. The risk management
committee has limited the types of financial instruments the Company may trade
to those related to natural gas commodities. The quantitative information
related to derivative transactions is contained in footnote number two to the
condensed consolidated financial statements.
Credit risk relates to the risk of loss that the Company would incur as a result
of non-performance by counterparties of their contractual obligations under the
various instruments with the Company. Credit risk may be concentrated to the
extent that one or more groups of counterparties have similar economic, industry
or other characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in market or other conditions.
In addition, credit risk includes not only the risk that a counterparty may
default due to circumstances relating directly to it, but also the risk that a
counterparty may default due to circumstances which relate to other market
participants which have a direct or indirect relationship with such
counterparty. The Company seeks to mitigate credit risk by evaluating the
financial strength of potential counterparties. However, despite mitigation
efforts, defaults by counterparties occur from time to time. To date, no such
default has occurred.
16
FORM 10-Q
Part II - Other Information
Item 1. Legal Proceedings
From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. The Company
contracts for liability insurance through a primary insurance carrier in the
amount of $1,000,000 and an excess carrier, in the amount of $30,000,000 in
order to indemnify itself from such claims. The Company has been charged with
responsibility for certain actions, which have been litigated or are in the
process of litigation. In its judgement, there is no legal proceeding, which
could result in a material adverse effect on the Company's results of
operations, financial position or liquidity. Significant legal proceedings, most
of which are covered under its liability insurance policies, are described
below.
On February 6, 1998 a judgement was entered against the Company in the Federal
District Court for Wyoming in favor of Randy and Melissa Hynes. The Company was
found to be 55% responsible resulting in a liability of approximately $2,900,000
for which the Company is indemnified under the policies described above. The
action arose out of a natural gas explosion involving a four-plex apartment
building in Cody, Wyoming. The Company has appealed the judgement to the United
States Court of Appeals for the Tenth Circuit.
Two lawsuits arising out of the same explosion as that in the "Hynes" case but
involving other plaintiffs have been recently settled. One lawsuit filed by the
building owner is still pending. The Company is indemnified under its insurance
policies for the defense of these claims and believes it will be completely
indemnified from any judgement on the remaining claim.
On September 4, 1998, the Company received correspondence from the Department of
Justice that a claim was being considered by the United States of America (U.S.)
against Energy West, Incorporated. The correspondence indicated that a complaint
has been prepared by Jack Grynberg, acting as Relater on behalf of the U.S.,
alleging that the Company had utilized improper measurement procedures in the
measurement of gas which was produced from wells owned by it, by its
subsidiaries, or from which the Company may have acted as operator. The alleged
improper measurement procedure purportedly understated the amount of royalty
revenue, which would have been paid to the U.S. The complaint is substantially
identical to the complaint being made against seventy-seven other parties. The
Company is alleged to have been responsible for the measurement of over 150
wells during a five-year period. The Company has investigated this allegation
and believes it had measurement responsibility for four wells. The quantity of
production from those wells is small enough that the Company does not expect its
potential liability to be material from any adverse decision in any action
actually pursued by the U.S. or Mr. Grynberg. Furthermore, the Company believes
that the allegations made by Mr. Grynberg are not sustainable. In the spring of
1999 the United States declined to intervene in the action. The Company has been
served with the complaint by Mr. Grynberg and the matter is currently the
subject of preliminary motions in Federal Court. The Company intends to
vigorously contest the claims made in the complaint.
In the fall of 1999 the Company was served with a class action lawsuit. The
named plaintiff in the matter is Quinque Operating Company. This case is a
companion case to the above referenced matter. The distinction between the two
is that the complaint in this action applies to the measurement of gas on wells
located on private land. The defendants are substantially the same as in the
Grynberg case. The case was brought in Kansas State Court The company believes
that its liability in this matter is likely to be even less than in the Grynberg
matter, discussed above, since it is only aware of one well on which the company
ever performed gas measurement responsibilities. The company also has
jurisdictional defenses not available to it in the Grynberg litigation. The
Company is participating in its defense in collaboration with the other
defendants.
17
FORM 10-Q
Part II - Other Information (continued)
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits (See Exhibit Index on Page E-1)
B. No reports on Form 8-K have been filed during the quarter ended
December 31, 1999.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Larry D. Geske
- -------------------------------
Larry D. Geske, President and
Chief Executive Officer
Dated February , 2000
-----
/s/ Edward J. Bernica
- ---------------------------------
Edward J. Bernica, Executive Vice-President,
Chief Operating Officer and Chief Financial Officer