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 September 30, 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
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(Exact name of registrant as specified in its charter)
Montana 81-0141785
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 First Avenue South, Great Falls, Mt. 59401
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(Address of principal executive (Zip Code)
offices)
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 September 30, 1999
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(Common Stock, $.15 Par Value) 2,456,239
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ENERGY WEST INCORPORATED
INDEX TO FORM 10-Q
Page No.
Part I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1999 and June 30, 1999 1
Condensed Consolidated Statements of Income -
three months ended September 30, 1999 and 1998 2
Condensed Consolidated Statements of cash flows
three months ended September 30, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4-7
Item 2 - Management's discussion and analysis of
financial condition and results of operations 8-12
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 13
Part II Other Information
Item 1 - Legal Proceedings 14
Item 2 - Changes in Securities 15
Item 3 - Defaults upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 5 - Other Information 15
Item 6 - Reports on Form 8-K 15
Signatures
Item 1. Financial Statements
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30 June 30
1999 1999
------------------ -------------------
Current Assets:
Cash $562,554 $225,970
Accounts Receivable (net) 6,897,355 6,033,820
Natural Gas and Propane Inventory 2,623,509 1,423,910
Materials and Supplies 507,075 627,046
Prepayments and other 566,683 154,643
Refundable Income Tax Payments 867,898 122,202
Recoverable Cost of Gas Purchases 3,012,562 2,840,975
Deferred income taxes - current 197,928 -
------------------ -------------------
Total Current Assets 15,235,564 11,428,566
------------------ -------------------
Notes Receivable Due After One Year 179,708 188,446
Property, Plant and Equipment-Net 30,555,231 29,371,726
Deferred Charges 4,108,851 3,212,233
------------------ -------------------
Total Assets $50,079,354 $44,200,971
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CAPITALIZATION AND LIABILITIES
Capitalization and liabilities:
Current Liabilities:
Note payable to bank $4,752,982 $0
Long-term debt due within one year 175,723 430,723
Accounts Payable - Gas and Electric Purchases 4,478,961 3,522,655
Other Current and Accrued Liabilities 3,646,429 3,276,383
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Total Current Liabilities 13,054,095 7,229,761
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Deferred Credits 7,560,390 6,599,195
Long-term obligations 16,840,000 16,840,000
Stockholders' Equity
Common Stock (2,456,239 and
2,433,740 shares were outstanding at September
30, 1999 and June 30, 1999 respectively) $365,489 $365,065
Capital in Excess of Par Value 3,584,102 3,560,541
Retained Earnings 8,675,278 9,606,409
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Total Stockholders' Equity 12,624,869 13,532,015
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Total Capitalization and Liabilities $50,079,354 $44,200,971
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------------------ -------------------
The accompanying notes are an integral part of these condensed
financial statements.
-1-
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended and
Year-To-Date
September 30
1999 1998
------------------------------------
Operating Revenue:
Regulated utilities $3,680,378 $3,123,973
Propane operations 712,713 525,029
Gas & electric trading 7,511,679 4,577,295
Other 103,040 24,375
------------------------------------
Total Revenue 12,007,810 8,250,672
------------------------------------
Operating Expenses:
Gas purchased 2,506,795 1,965,403
Cost of gas & electric trading 7,494,256 4,512,356
Distribution, general and administrative 2,148,825 1,961,076
Maintenance 122,902 112,264
Depreciation and Amortization 447,720 438,256
Other Taxes 168,305 153,959
------------------------------------
Total Operating Expenses 12,888,803 9,143,314
------------------------------------
Operating Loss (880,993) (892,642)
Other Income - Net 198,138 200,075
------------------------------------
Loss before interest charges and
income tax benefit (682,855) (692,567)
------------------------------------
Interest Charges:
Long-Term Debt 298,849 311,869
Other 50,038 65,156
------------------------------------
Total Interest Charges 348,887 377,025
------------------------------------
Loss before income tax benefit (1,031,742) (1,069,592)
Provision for Income tax benefit (365,915) (384,941)
------------------------------------
Net Loss ($665,827) ($684,651)
------------------------------------
------------------------------------
Basic and diluted loss per common share ($0.27) ($0.28)
------------------------------------
------------------------------------
Dividends per common share $0.1200 $0.1150
Basic Weighted Average Common Shares 2,434,474 2,403,268
Diluted Weighted Average Common Shares 2,434,474 2,406,173
The accompanying notes are an integral part of these condensed
financial statements.
-2-
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
September 30
1999 1998
-------------------------------------
Operating Activities:
Net Loss ($665,827) ($684,651)
Adjustment to Reconcile Net Loss to Cash Flows:
Depreciation and Amortization 516,645 506,964
(Gain) Loss from Gas Marketing Activities 0 10,875
(Gain) Loss on Sale of Property, Plant & Equipment (1,889) (21,147)
Deferred Gain on Sale of Assets (5,907) (5,907)
Investment Tax Credit - Net (5,266) (5,266)
Deferred Income Taxes - Net 228,885 300,047
Change in Operating Assets and Liabilities
Accounts Receivable (863,535) (1,094,928)
Gas Inventory (1,058,377) 41,055
Accounts Payable 1,003,376 482,759
Recoverable Cost of Gas Purchases (171,587) (649,338)
Prepaids (412,039) (330,196)
Other Assets and Liabilities (923,982) (480,454)
-------------------------------------
Net Cash Used In Operating Activities (2,359,503) (1,930,187)
Investing Activities:
Construction Expenditures (1,564,036) (859,234)
Proceeds from Sale of Property, Plant & Equipment 4,150 61,500
Increase in Long-Term Notes Receivable 0 (9,967)
Collection of Long-Term Notes Receivable 8,738 0
Proceeds from Contributions in Aid of Constructions 114 4
-------------------------------------
Net Cash Used In Investing Activities (1,551,034) (807,697)
Financing Activities:
Repayment of Long-Term Debt (255,000) (255,000)
Proceeds from Notes Payable 10,058,748 8,415,001
Repayment of Short-Term Borrowings (5,305,766) (5,130,000)
Dividends on Common Stock (250,861) (265,310)
-------------------------------------
Net Cash Provided by (Used In) Financing Activities 4,247,121 2,764,691
-------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 336,584 26,807
Cash and Cash Equivalents at Beginning of Year 225,970 58,006
-------------------------------------
Cash and Cash Equivalents at End of Period $562,554 $84,813
-------------------------------------
-------------------------------------
The accompanying notes are an integral part of these condensed
financial statements.
-3-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 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 three month period ended
September 30, 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 - Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," became effective as of the first
quarter of fiscal 1999. This statement requires companies to report and display
comprehensive income and its components (revenues, expenses, gains and losses).
Comprehensive income includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. For the
Company, comprehensive income is the same as net income reported in the
statements of consolidated income, since there were no other items of
comprehensive income for the periods presented.
Note 3 - 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 begins
November 1, 1999 and ends October 31, 2000. The swap compares the index prices
of natural gas quoted on the NYMEX gas exchange with the AECO gas exchange on a
daily basis. 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 begins
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.
4
Note 3 - Risk Management (continued)
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 for 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 is 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 September 30, 1999 was $2.19. 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 $135,000.
Note 4 - Income Taxes
Income tax benefit 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% ............................ $(350,185)
State income tax benefit, net of federal income taxes ........... (27,274)
Amortization of deferred investment tax credits ................. (5,266)
Other ........................................................... 16,810
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Total income taxes (benefits) ................................... $ 365,915
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---------
5
Note 5 - 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 DEQ 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 DEQ relating to the remediation plan for water contaminants.
At September 30, 1999 the costs incurred in evaluating this site and beginning
to make remediation have totaled approximately $1,626,000. 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 September 30, 1999 that recovery
mechanism had generated approximately $756,000. 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 have a
material adverse effect on the Company's results of operations, financial
position or liquidity.
6
Note 6 - Operating Revenues and Expenses,
Regulated utility, propane operations, energy marketing and other operating
revenues and expenses were as follows:
THREE MONTHS ENDED
--------------------
SEPTEMBER 30
--------------
1999 1998
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OPERATING REVENUES:
Regulated Utilities $3,680,378 $3,123,973
Propane Operations 712,713 525,029
Energy Marketing 7,511,679 4,577,295
Other 103,040 24,375
----------------- -------------------
12,007,810 8,250,672
GAS AND POWER PURCHASES:
Regulated Utilities 1,977,238 1,676,879
Propane Operations 462,061 288,524
Energy Marketing 7,494,256 4,512,356
Other 67,496 0
----------------- -------------------
10,001,051 6,477,759
DISTRIBUTION, GENERAL AND ADMINISTRATIVE:
Regulated Utilities 1,709,425 1,574,811
Propane Operations 288,155 226,673
Energy Marketing 138,978 153,818
Other 12,267 5,774
----------------- -------------------
2,148,825 1,961,076
MAINTENANCE:
Regulated Utilities 101,470 94,581
Propane Operations 21,432 17,683
Energy Marketing 0 0
Other 0 0
----------------- -------------------
122,902 112,264
DEPRECIATION AND AMORTIZATION:
Regulated Utilities 379,898 372,115
Propane Operations 59,775 58,094
Energy Marketing 4,470 4,470
Other 3,577 3,577
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447,720 438,256
TAXES OTHER THAN INCOME:
Regulated Utilities 133,711 126,132
Propane Operations 19,056 15,796
Energy Marketing 12,838 9,331
Other 2,700 2,700
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168,305 153,959
INCOME TAX BENEFITS:
Regulated Utilities 300,127 353,536
Propane Operations 53,758 20,300
Energy Marketing 14,857 13,021
Other (2,827) (1,916)
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365,915 (384,941)
7
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 has
issued 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 a 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 September 30, 1999, the Company had $19,000,000 in bank lines of credit, of
which $4,753,000 had been borrowed under the credit agreement. The Company had
outstanding letters of credit totaling $2,880,000 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 $16,120,000.
The Company used net cash in operating activities for the three months ended
September 30, 1999 in the amount of approximately $2,360,000 as compared to
approximately $1,930,000 for the three months ended September 30, 1998. This
increase in cash used in operating activities of $430,000 was primarily due to
higher working capital requirements. The higher working capital requirements of
approximately $333,000 is primarily due to higher gas inventory related to
natural gas and propane purchases for sale during the heating season and higher
other assets and liabilities due to expenditures for environmental clean up in
the Company's Great Falls utility operations. These were partially offset by
lower changes in accounts receivable and recoverable cost of gas purchases and
from higher accounts payable due to electric purchases.
8
Cash used in investing activities was approximately $1,551,000 for the three
months ended September 30, 1999, as compared to approximately $808,000 for the
three months ended September 30 1998. This increase of $743,000 was primarily
due 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.
Cash provided by financing activities was approximately $4,247,000 for the three
months ended September 30, 1999, as compared to approximately $2,765,000 for the
three months ended September 30, 1998. The increase in cash provided by
financing activities of $1,482,000 is primarily due to net short-term borrowing
of approximately $1,467,000.
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 September 30, 1999, approximately $1,600,000 of that amount had
been expended.
9
RESULTS OF CONSOLIDATED OPERATIONS
COMPARISON OF FIRST QUARTER OF FISCAL 2000 ENDED SEPTEMBER 30, 1999 AND FISCAL
1999 ENDED SEPTEMBER 30, 1998
The Company's net loss for the first quarter ended September 30, 1999 was
$665,827 compared to $684,651 for the quarter ended September 30, 1998.
Margins increased from approximately $1,773,000 in fiscal 1999 to $2,006,000 in
fiscal 2000 or $233,000 primarily due to increased margin from utility
operations related to customer growth and a rate design change for the Great
Falls operations. Offsetting the increased margin was an increase in
distribution, general and administrative expenses from approximately $1,961,000
in fiscal 1999 to $2,149,000 in fiscal 2000. This increase was primarily due to
inflationary trends, additional staff for expanded marketing activities, system
expansion and higher maintenance costs related to the utility operations.
UTILITY OPERATIONS -
Utility operating revenues in the first three months of fiscal 2000 were
approximately $3,680,000 compared to approximately $3,124,000 for the first
three months of fiscal 1999. Operating loss decreased approximately 14% or
$100,000 from fiscal 1999 and was approximately $621,000 for the first three
months of fiscal 2000 compared to approximately $721,000 for the first three
months of fiscal 1999. The decrease in operating loss was due to higher gross
margin of approximately $256,000 from customer growth and a rate design change,
which results in greater margin in non-heating months, for the Great Falls
utility operations. Gross margin, which is defined as operating revenues less
gas purchased, was approximately $1,703,000 for the first three months of fiscal
2000 compared to a gross margin of approximately $1,447,000 for the first three
months of fiscal 1999. The increase in gross margin was partially offset by
higher operating expenses, in fiscal 2000, of approximately $157,000.
Operating Expenses -
Utility operating expenses, excluding the cost of gas purchased and federal and
state income taxes, were approximately $2,167,000 for the first three months of
fiscal 1999 as compared to $2,324,000 for the same period in fiscal 2000. The 7%
increase in the period was generally due to inflationary trends, higher material
costs for operations and maintenance of the underground utility systems, added
staff and higher payroll and benefit costs associated with customer growth.
Interest Charges -
Interest charges allocable to the Company's utility divisions were approximately
$282,000 for the first quarter of fiscal 2000, as compared to $306,000 in the
comparable period in fiscal 1999. Long-term debt interest decreased due to lower
long-term debt resulting from debt payments. Short-term debt interest decreased
primarily due to lower average short-term borrowing for the first quarter of
fiscal 2000.
Income Taxes -
State and federal income tax benefits of the Company's utility divisions were
approximately $300,000 for the first quarter of fiscal 2000 as compared to
approximately $354,000, due to a lower pre-tax loss from utility operations.
10
PROPANE OPERATIONS -
Propane revenues in the first three months of fiscal 2000 were approximately
$713,000 compared to approximately $525,000 for the first three months of fiscal
1999. Operating loss increased approximately $56,000 from fiscal 1999 and was
approximately $138,000 for the first three months of fiscal 2000 compared to
approximately $82,000 for the first three months of fiscal 1999. This increase
in operating loss was due to higher operating expenses of approximately $70,000
offset by an increase in gross margin of approximately $14,000. The increase in
gross margin was from higher gallons sold and higher margin, per gallon,
generated by the Company's wholesale propane operations. Gross margin was
approximately $251,000 for the first three months of fiscal 2000 compared to
gross margin of approximately $237,000 for the first three months of fiscal
1999.
Operating Expenses -
Propane operating expenses, excluding the cost of propane purchased and federal
and state income taxes, were approximately $388,000 for the first three months
of fiscal 2000 as compared to $318,000 for the same period in fiscal 1999. The
increase in the period was generally due to inflationary trends, higher payroll
and operating expenses associated with the expanding wholesale operations and
higher benefit accruals associated with higher payroll costs.
Other Income -
Other income decreased by $40,000 from $63,000 for the first quarter of fiscal
1999 compared to $23,000 for the first quarter of fiscal 2000. This decreased
occurred because of capital gain income from property sales in fiscal 1999 and
because of one-time consulting fees received in fiscal 1999.
Income Taxes -
State and federal income tax benefits of the Company's propane operations were
approximately $54,000 for the first quarter of fiscal 2000 as compared to
approximately $20,000 for the first quarter of fiscal 1999, due to a higher
pre-tax loss from the propane operations.
ENERGY MARKETING OPERATIONS -
Revenues from energy marketing in the first three months of fiscal 2000 were
approximately $7,512,000 compared to approximately $4,577,000 for the first
three months of fiscal 1999. The increase in revenues for the quarter resulted
from marketing of electricity in Montana. There were no electric sales in the
first quarter of fiscal 1999 because open access for electric sales was not
allowed by the Montana Public Service Commission until January 1, 1999.
Operating loss increased approximately $36,000 from fiscal 1999 and was
approximately $139,000 for the first three months of fiscal 2000 compared to
approximately $103,000 for the first three months of fiscal 1999. This increase
in operating loss was due to lower gross margins of $48,000 partially offset by
lower operating expenses of approximately $12,000. The overall decrease in gross
margin resulted from lower gross margin from gas marketing activity of
approximately $111,000 partially offset by gross margin from electric sales of
$63,000. The decrease in gross margin generated by gas marketing was due to less
volumes sold because of greater competition in gas marketing and from
significantly higher prices for gas supply.
Operating Expenses -
Operating expenses for energy marketing, excluding the cost of gas and
electricity purchased and federal and state income taxes, were approximately
$156,000 for the first three months of fiscal 2000 as compared to $168,000 for
the same period in fiscal 1999. The minor decrease in the period was generally
due to lower outside service and professional fees paid during the period.
11
Other Income -
Other income increased by $20,000 from $86,000 for the first quarter of fiscal
1999 compared to $106,000 for the first quarter of fiscal 2000. The other income
for the first quarter of both fiscal years is because of mark-to-market gains
from derivative activity.
Income Taxes -
State and federal income tax benefits of the Company's energy marketing
operations were approximately $15,000 for the first quarter of fiscal 2000 as
compared to approximately $13,000, due to a slightly higher pre-tax loss from
the energy marketing operations.
Energy West Development, Inc. -
For the three months ended September 30, 1999 and 1998, Energy West Development,
Inc.'s net income was approximately $3,000.
SAFE HARBOR FOR 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 technology, 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 (Y2K). This could result in a
system failure or miscalculations causing disruptions in operations. Some
possible affects include the inability to process transactions, send billing
statements to customers, or similar normal business activities.
The Company has formed a Y2K committee consisting of management, information
technology and operations personnel to address its Y2K compliance issues. This
committee meets weekly and is charged with the task of managing the Y2K
compliance effort.
The Company has completed its internal remediation and testing of
mission-critical hardware, software and embedded technology systems. For
components of mission-critical systems, which the Company could not test, the
Company has contacted those manufacturers and providers of those components with
regards to their Y2K readiness. To date, the Company's testing and remediation
efforts have not revealed any Y2K compliance problems related to
mission-critical systems. Also, to date, responses from manufacturers or
providers of mission-critical components have not indicated any Y2K compliance
problems. However, no assurance can be given that all mission-critical
components have been identified, to date. Therefore, the Company will continue
its Y2K committee weekly meetings and will continue to review mission-critical
systems for Y2K compliance well into the Year 2000.
12
The Company has had formal communications with all of its mission-critical
suppliers, gas and electric transmission companies and large customers, to
determine the extent to which the Company's interface systems are vulnerable to
third parties' failure. To date, there have been no responses, received from
these suppliers or customers, indicating their systems would not be Y2K
compliant by December 31, 1999. The Company has determined it has no exposure
contingencies related to the Y2K issue for the products it has sold.
The Company's total Y2K project costs and estimates include the estimated costs
and time associated with the impact of third party Y2K issues based on presently
available information. Total Y2K assessment, remediation and testing costs,
incurred to date, have been approximately $100,000, most of which are internal
personnel costs. Although the Y2K project costs are not completely finalized, it
is not expected to exceed $150,000, and therefore, it would not have a material
impact on the Company's current financial position, liquidity or results of
operations.
The Company expects to complete and have fully documented its contingency plans
specific to the Y2K by mid-November 1999. In addition, the Company has emergency
plans in place as part of its normal safety plans, which address system outages.
The Company plans to utilize these emergency plans as the basis for the Y2K
contingency plans. The Company plans to have emergency staff on-site or on call,
prior to and after the Y2K rollover on December 31, 1999. Emergency personnel
are also aware that vacations will not be taken around this sensitive time.
The preceding paragraph is a disclosure provided pursuant to the Year 2000
Information and Readiness Disclosure Act.
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 comprehensive risk management committee,
overseen by the Audit Committee of the Company's Board of Directors, to monitor
compliance with the Company's risk management policies and procedures.
The Company protects itself against price fluctuations on natural gas by
limiting the aggregate level of net open positions which are exposed to market
price changes through the use of natural gas derivative instruments for hedging
purposes. The net open position is actively managed with strict policies
designed to limit the exposure to market risk and which require at least weekly
reporting to management of potential financial exposure. The risk management
committee has limited the types of financial instruments the company may trade
to those related to natural gas commodities. Financial instruments generally are
not held for speculative trading purposes. The quantitative information related
to derivative transactions is contained in footnote number three to the
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 changing 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.
13
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.
14
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. The are no exhibits to this report.
B. No reports on Form 8-K have been filed during the quarter ended
September 30, 1999.
15
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
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Larry D. Geske, President and
Chief Executive Officer
Dated November 15, 1999
/s/ Edward J. Bernica
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Edward J. Bernica, Executive Vice-President,
Chief Operating Officer and Chief Financial Officer