1
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 March 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File number 0-14183
- ------------------------------
ENERGY WEST INCORPORATED
- ------------------------
(Exact name of registrant as specified in its charter)
Montana 81-0141785
- ---------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 First Avenue South, Great Falls, Mt. 59401
- ----------------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (406)-791-7500
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 March 31, 2000
(Common stock, $.15 par value) 2,463,944
2
ENERGY WEST INCORPORATED
INDEX TO FORM 10-Q
Page No.
Part I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2000 and June 30, 1999 1
Condensed Consolidated Statements of Income -
three months and nine months ended March 31, 2000 and 1999 2
Condensed Consolidated Statements of cash flows -
Nine months ended March 31, 2000 and 1999 3
Notes to Condensed Consolidated Financial Statements 4-6
Item 2 - Management's discussion and analysis of
financial condition and results of operations 7-16
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 17
Part II Other Information
Item 1 - Legal Proceedings 18
Item 2 - Changes in Securities 19
Item 3 - Defaults upon Senior Securities 19
Item 4 - Submission of Matters to a Vote of Security Holders 19
Item 5 - Other Information 19
Item 6 - Reports on Form 8-K 19
Signatures
3
I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31 June 30
2000 1999
------------ -----------
Current Assets:
Cash $ 148,948 $ 225,970
Accounts Receivable (net) 9,069,534 6,033,820
Natural Gas and Propane Inventory 922,342 1,423,910
Materials and Supplies 630,382 627,046
Prepayments and other 440,726 154,643
Refundable Income Tax Payments 0 122,202
Recoverable Cost of Gas Purchases 3,739,653 2,840,975
----------- -----------
Total Current Assets 14,951,585 11,428,566
----------- -----------
Notes Receivable Due After One Year 168,333 188,446
Property, Plant and Equipment-Net 31,834,427 29,371,726
Deferred Charges 3,271,050 3,212,233
----------- -----------
Total Assets $50,225,395 $44,200,971
=========== ===========
CAPITALIZATION AND LIABILITIES
Current Liabilities:
Note payable to bank $ 4,837,982 $ 0
Long-term debt due within one year 250,723 430,723
Accounts Payable - Gas and Electric Purchases 3,376,653 3,522,655
Other Current and Accrued Liabilities 3,896,887 3,276,383
----------- -----------
Total Current Liabilities 12,362,245 7,229,761
----------- -----------
Deferred Credits 6,880,267 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 (2,463,944 shares and
2,433,740 shares were outstanding at March
31, 2000 and June 30, 1999 respectively) 369,077 365,065
Capital in Excess of Par Value 3,787,694 3,560,541
Retained Earnings 10,061,112 9,606,409
----------- -----------
Total Stockholder's Equity 14,217,883 13,532,015
----------- -----------
Total Capitalization and Liabilities $50,225,395 $44,200,971
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
March 31 March 31
2000 1999 2000 1999
-------------------------------------------------------------
Operating revenue:
Regulated utilities $10,926,820 $10,186,782 $22,462,107 $22,362,315
Propane operations 1,760,310 1,132,214 4,006,548 2,485,391
Gas and electric trading 11,130,321 6,405,812 28,799,630 15,112,249
Other 43,797 24,376 309,305 73,125
-------------------------------------------------------------
Total Revenue 23,861,248 17,749,184 55,577,590 40,033,080
-------------------------------------------------------------
Operating Expenses
Gas purchased 7,966,763 6,665,490 16,301,949 14,582,225
Cost of gas and electric trading 10,641,377 5,876,869 28,084,850 14,487,036
Distribution, general and administrative 1,838,580 2,124,272 6,022,446 6,007,096
Maintenance 106,277 142,741 307,535 383,377
Depreciation and amortization 447,485 441,025 1,346,290 1,318,297
Taxes other than Income 172,688 230,346 506,664 567,515
-------------------------------------------------------------
Total Operating Expenses 21,173,170 15,480,743 52,569,734 37,345,546
-------------------------------------------------------------
Operating Income 2,688,078 2,268,441 3,007,856 2,687,534
Other Income - Net 41,454 182,527 293,944 679,114
-------------------------------------------------------------
Income Before Interest Charges & Income Taxes 2,729,532 2,450,968 3,301,800 3,366,648
-------------------------------------------------------------
Interest Charges:
Long-Term Debt 309,977 315,931 933,328 943,731
Other 158,580 101,838 350,834 274,331
-------------------------------------------------------------
Total Interest Charges 468,557 417,769 1,284,162 1,218,062
-------------------------------------------------------------
Net Income Before Income Taxes 2,260,975 2,033,199 2,017,638 2,148,586
Income Taxes 819,618 740,287 742,444 792,446
-------------------------------------------------------------
Net Income $1,441,357 $1,292,912 $1,275,194 $1,356,140
=============================================================
Basic Earnings and diluted income per common share $0.59 $0.53 $0.52 $0.56
=============================================================
Dividends per common share $0.1200 $0.1150 $0.3600 $0.3450
=============================================================
Basic Weighted Average Shares 2,461,235 2,421,462 2,450,888 2,415,134
Diluted Weighted Average Shares 2,461,235 2,424,206 2,450,888 2,417,875
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
March 31
2000 1999
------------------------------
Operating Activities:
Net Income $ 1,275,194 $ 1,356,140
Adjustments to Reconcile Net Income to Cash Flow
Depreciation and Amortization 1,568,777 1,566,292
Gain on Sale of Property, Plant & Equipment (5,901) (34,452)
Deferred Gain on Sale of Assets (17,721) (17,721)
Investment Tax Credit (15,797) (15,796)
Deferred Income Taxes 574,870 614,311
Changes in Operating Assets and Liabilities (3,593,225) (132,945)
------------------------------
Net Cash Provided by (Used In) Operating Activities (213,803) 3,335,829
Investing Activities:
Construction Expenditures (3,787,716) (2,566,042)
Collection of Long-Term Notes Receivable 20,113 19,429
Proceeds from Contributions in Aid of Construction 55,738 227,190
Increase in Notes Receivable 0 (13,200)
Proceeds from Sale of Property, Plant & Equipment 8,650 80,250
------------------------------
Net Cash Used In Investing Activities (3,703,215) (2,252,373)
Financing Activities:
Proceeds from Notes Payable 35,293,748 26,317,000
Repayment of Long-Term Debt (255,000) (255,000)
Repayment of Notes Payable (30,455,766) (26,287,000)
Sale of Common Stock 0 900
Dividends paid (742,986) (760,169)
------------------------------
Net Cash Provided by (Used In) Financing Activities 3,839,996 (984,269)
------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (77,022) 99,187
Cash and Cash Equivalents at Beginning of Year 225,970 58,006
------------------------------
Cash and Cash Equivalents at End of Period $ 148,948 $ 157,193
==============================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2000
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 nine month period ended March 31,
2000 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 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
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 5,000 MMBTU per day began November
1, 1999 and ended 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
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 March 31, 2000 was $2.66. These reciprocal
agreements have offsetting terms, resulting in no gain or loss. In the event the
counter-party fails to perform under its 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 $420,000.
In March 2000 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 April
1, 2000 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 $.26 per MMBTU. The Company
settled the April basis differential at $.32 resulting in a $9,000 gain and the
May basis differential at $.38 resulting in a gain of $19,000. The June to
October basis differentials were settled in May at $.28 and resulted in a gain
of $15,000. The Company has designated this basis swap as a trading commodity
derivative.
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7
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 expense at statutory rates - 34% .......... $ 685,997
State tax expense, net of federal tax benefit.. 43,640
Amortization of deferred investment tax credits (15,797)
Other ......................................... 28,604
---------
Total income tax expense ...................... $ 742,444
=========
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 March 31, 2000 the costs incurred in evaluating this site and beginning
remediation have totaled approximately $1,800,000. 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 March 31, 2000 that recovery
mechanism had generated approximately $870,000. 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
8
Note 5 - Operating Revenues and Expenses
Regulated utility, propane, energy marketing and other operating revenues and
expenses were as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
March 31 March 31
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
OPERATING REVENUES:
Regulated Utilities $10,926,820 $ 10,186,782 $22,462,107 $22,362,315
Propane Operations 1,760,310 1,132,214 4,006,548 2,485,391
Energy Marketing 11,130,321 6,405,812 28,799,630 15,112,249
Other 43,797 24,376 309,305 73,125
------------- -------------- ------------- -------------
$23,861,248 $ 17,749,184 $55,577,590 $40,033,080
============= ============== ============= =============
GAS AND POWER PURCHASES:
Regulated Utilities $ 6,976,366 $ 6,263,319 $13,773,737 $13,539,371
Propane Operations 987,189 402,171 2,356,777 1,042,854
Energy Marketing 10,641,377 5,876,869 28,084,850 14,487,036
Other 3,208 0 171,435 0
------------- -------------- ------------- -------------
$18,608,140 $ 12,542,359 $44,386,799 $29,069,261
============= ============== ============= =============
DISTRIBUTION, GENERAL AND ADMINISTRATIVE:
Regulated Utilities $ 1,343,892 $ 1,679,256 $ 4,574,149 $ 4,803,953
Propane Operations 294,089 279,939 880,690 762,927
Energy Marketing 183,944 161,913 516,295 420,966
Other 16,655 3,164 51,312 19,250
------------- -------------- ------------- -------------
$ 1,838,580 $ 2,124,272 $ 6,022,446 $ 6,007,096
============= ============== ============= =============
MAINTENANCE:
Regulated Utilities $ 96,651 $ 131,040 $ 265,281 $ 331,385
Propane Operations 9,626 11,701 42,254 48,852
Energy Marketing 0 0 0 3,140
Other 0 0 0 0
------------- --------------- ------------- -------------
$ 106,277 $ 142,741 $ 307,535 $ 383,377
============= ============== ============== =============
DEPRECIATION AND AMORTIZATION:
Regulated Utilities $ 381,371 $ 373,336 $ 1,146,111 $ 1,117,803
Propane Operations 58,066 59,642 176,037 176,352
Energy Marketing 4,470 4,470 13,410 13,410
Other 3,578 3,577 10,732 10,732
------------- -------------- ------------- -------------
$ 447,485 $ 441,025 $ 1,346,290 $ 1,318,297
============= ============== ============= =============
TAXES OTHER THAN INCOME:
Regulated Utilities $ 145,645 $ 196,049 $ 420,672 $ 484,214
Propane Operations 17,227 28,878 53,260 61,668
Energy Marketing 7,115 2,719 24,632 13,533
Other 2,701 2,700 8,100 8,100
------------- -------------- ------------- -------------
$ 172,688 $ 230,346 $ 506,664 $ 567,515
============= ============== ============= =============
INCOME TAXES:
Regulated Utilities $ 583,322 $ 452,934 $ 493,816 $ 448,604
Propane Operations 134,944 120,043 155,036 134,261
Energy Marketing 96,833 164,763 73,091 205,311
Other 4,519 2,547 20,501 4,270
------------- -------------- ------------- -------------
$ 819,618 $ 740,287 $ 742,444 $ 792,446
============= ============== ============= =============
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9
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 March 31, 2000, the Company had $19,000,000 in bank lines of credit, of which
$4,840,000 had been borrowed under the credit agreement. The Company had
outstanding letters of credit totaling $4,640,000 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 $14,360,000.
The Company used net cash in operating activities for the first nine months of
fiscal 2000 of approximately $210,000 as compared to generating approximately
$3,340,000 for the first nine months of fiscal 1999. The difference in cash used
for operating activities of approximately $3,550,000 was due to greater working
capital requirements of approximately $3,460,000. The higher working capital
requirements were primarily due to a greater reduction in gas inventory, of
approximately $2,780,000, during the first nine months of fiscal 1999 compared
to fiscal 2000. Other items contributing to the difference were lower accounts
payable primarily related to lower commodity purchases partially offset by a
lower change in accounts receivable and greater deferred revenues related to
energy marketing operations.
Cash used in investing activities was approximately $3,700,000 for the first
nine months of fiscal 2000 compared to approximately $2,250,000 for the first
nine months of fiscal 1999. This increase of $1,450,000 was primarily due to an
increase in capital expenditures, of $1,220,000, 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. In addition proceeds from contributions in
aid of construction decreased by $170,000.
7
10
Cash provided by financing activities was approximately $3,840,000 for the first
nine months of fiscal 2000, as compared to a reduction of approximately $980,000
for the nine months ended March 31, 1999. The increase in cash provided by
financing activities of approximately $4,820,000 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 March 31, 2000, approximately $4,280,000 of that amount had been
expended.
8
11
Comparison of Third Quarter and Nine Months of Fiscal 2000 Ended March 31, 2000
and Fiscal 1999 Ended March 31, 1999
Quarterly Results for Consolidated Operations
The Company's net income for the third quarter of fiscal 2000, ended March 31,
2000 was approximately $1,440,000 compared to approximately $1,290,000 for the
third quarter of fiscal 1999, ended March 31, 1999.
Operating income increased from approximately $2,270,000 in fiscal 1999 to
$2,690,000 in fiscal 2000,or $420,000 primarily due to operating expense
reductions. Gross margins increased approximately $50,000 for the third quarter
of fiscal 2000 compared to the third quarter of fiscal 1999. The increase was
from higher margins of $70,000 in utility and retail propane operations,
primarily due to customer growth between the third quarter of fiscal 2000 and
fiscal 1999. This was partially offset by overall lower energy marketing margins
of $40,000. Although electric marketing margins increased $180,000, gas
marketing margin decreased by $220,000 due to significantly higher costs
associated with natural gas purchases. Operating expenses decreased
approximately $370,000 for the third quarter of fiscal 2000 due to several
factors. These factors include lower discretionary spending related to travel,
training, general office expenses and maintenance; lower salary costs and
benefit costs related to less overtime paid and lower accruals associated with
pay-for-performance incentive plans. In addition, the Company enacted a
temporary moratorium for health insurance premiums beginning January 2000
because of an over-funding related to the Company's health insurance trust fund.
Other income decreased by approximately $140,000 in the quarter primarily due to
lower mark-to-market gains for derivatives held by the Company.
Nine Month Results for Consolidated Operations
The Company's net income for the nine months ended March 31, 2000 was
approximately $1,280,000 compared to net income of approximately $1,360,000 for
the nine months ended March 31, 1999.
Operating income increased from approximately $2,690,000 in fiscal 1999 to
$3,010,000 in fiscal 2000,or $320,000 due to higher gross margins of $230,000
and lower operating expenses of $100,000. The gross margin increase was due to
higher margins in wholesale propane operations of $210,000, from greater volumes
sold and a higher margin per gallon sold. In addition, energy marketing margins
increased by $90,000. This resulted from an increase in electric marketing
margins of $270,000 from increased customers, offset by a decrease in gas
marketing margins of $180,000, due to significantly higher costs associated with
natural gas purchases. The primary reasons for the operating expense reductions
were lower discretionary spending related to travel, training, general office
expenses and maintenance and lower health insurance premiums. Other income
decreased by approximately $390,000 in the nine months primarily due to lower
mark-to-market gains for derivatives held by the Company.
OPERATING RESULTS OF THE COMPANY'S UTILITY OPERATIONS
Third Quarter Nine Months
Ended March 31 Ended March 31
2000 1999 2000 1999
(In thousands) (In thousands)
Operating revenues $10,927 $10,187 $22,462 $22,362
Gas purchased 6,977 6,263 13,774 13,539
-----------------------------------------------------------------
Gross Margin 3,950 3,924 8,688 8,823
Operating expenses 1,968 2,380 6,406 6,737
------------------------------------------------------------------
Operating Income 1,982 1,544 2,282 2,086
Interest charges (see note below) 384 357 1,057 1,015
Other utility (income) - net (21) (68) (117) (162)
Income taxes 583 453 494 449
------------------------------------------------------------------
Net utility income $ 1,036 $ 802 $ 848 $ 784
==================================================================
[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
12
Quarterly Results for Utility Operations
Utility operating income in the third quarter of fiscal 2000 increased
approximately $440,000 compared to the third quarter of fiscal 1999 primarily
due to expense reductions during the third quarter for fiscal 2000. Although
revenue increased $740,000, gas purchased also increased by $710,000 resulting
in a $30,000 margin increase. The increase in revenue and natural gas purchases
was due to higher commodity costs for gas purchases. The volumes sold and degree
days were approximately the same for the third quarter of fiscal 2000 and fiscal
1999. Operating expenses decreased approximately $410,000 for the third quarter
of fiscal 2000 compared to fiscal 1999.
Operating Expenses -
The significant decrease in operating expenses for the third quarter of fiscal
2000 compared to the same quarter in fiscal 1999 is due to several factors. The
most significant factor is a reduction of $130,000 in pay for performance
accruals and salaries, because of lower year-to-date utility earnings due to
weather being approximately 14% warmer than normal for the first nine months of
fiscal 2000. In addition, health insurance premiums were approximately $60,000
lower in the third quarter of fiscal 2000 due to the health premium moratorium.
Other factors contributing to the reduction in expenses are lower vacation
accruals, after calculating the annual accruals, of $40,000, lower pension and
ESOP accruals due to lower salaries of $30,000, lower discretionary expenses for
travel, training and general office expenses of approximately $50,000 and lower
maintenance costs associated with general plant of $30,000. A final reduction in
operating expense in the third quarter of fiscal 2000 compared to fiscal 1999 is
related to a sales and use tax audit in fiscal 1999 related to the Company's
Arizona operations which resulted in a one-time charge of $50,000 in the third
quarter of fiscal 1999.
Other Income -
The $50,000 decrease in other income for the third quarter of fiscal 2000
compared to fiscal 1999 is related to lower service sales and lower carrying
cost recovery due to lower regulatory asset balances related to the Company's
Montana operations.
Interest Charges -
Interest charges allocable to the Company's utility divisions was approximately
$30,000 higher for the third 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 third quarter of
fiscal 2000.
Income Taxes -
Income taxes for the Company's utility operations increased approximately
$130,000 for the third quarter of fiscal 2000 compared to the third quarter of
fiscal 1999. This occurred because pre-tax income was approximately $360,000
higher for the same comparable time periods.
Nine Month Results for Utility Operations
Utility operating income for the first nine months of fiscal 2000 increased
approximately $200,000 compared to the first nine months of fiscal 1999.
Although gross margin decreased by approximately $140,000, primarily due to 3%
warmer weather in fiscal 2000, a significant reduction in operating expenses of
approximately $330,000 resulted in the improvement in operating income. The
weather impact was partially offset by customer growth and a rate design change
for the Great Falls utility operations.
10
13
Operating Expenses -
The decrease in operating expenses for the first nine months of fiscal 2000
compared to the first nine months of fiscal 1999 was primarily achieved in the
third quarter. The decrease was due to several factors. These factors include
lower salary expenses of $40,000, lower pension and ESOP accruals, due to lower
salaries, of $10,000. In addition, health insurance premiums were approximately
$60,000. Other factors contributing to the reduction in expenses were lower
discretionary expenses for travel, training, general office and promotional and
advertising expenses of approximately $80,000 and lower maintenance costs
primarily associated with general plant of $70,000. A final reduction in
operating expense for the first nine months of fiscal 2000 compared to fiscal
1999 is related to a sales and use tax audit in fiscal 1999 related to the
Company's Arizona operation, which resulted in a one-time charge of $50,000 in
fiscal 1999.
Other Income -
The $50,000 decrease in other income for the first nine months of fiscal 2000
compared to fiscal 1999 is related to lower service sales and lower carrying
cost recovery due to lower regulatory asset balances related to the Company's
Montana operations.
Interest Charges -
Interest charges allocable to the Company's utility divisions was approximately
$40,000 higher for the first nine months of fiscal 2000 compared to the same
period in fiscal 1999. This increase is primarily related to higher construction
expenditures during the first nine months of fiscal 2000.
Income Taxes -
Income tax expense for the Company's utility divisions was approximately $40,000
higher for the first nine months of fiscal 2000 compared to fiscal 1999, because
pre-tax income increased by $110,000 for the same comparable time periods.
OPERATING RESULTS OF THE COMPANY'S PROPANE OPERATIONS
Third Quarter Nine Months
Ended March 31 Ended March 31
2000 1999 2000 1999
(In thousands) (In thousands)
ENERGY WEST PROPANE (EWP)
Operating revenues $1,760 $1,132 $4,007 $2,485
Cost of propane 987 402 2,357 1,043
-------------------------------------------------------------------
Gross Margin 773 730 1,650 1,442
Operating expenses 379 380 1,152 1,051
-------------------------------------------------------------------
Operating income 394 350 498 391
Other (income) - net (15) (26) (55) (109)
Interest expense (see note below) 40 43 126 135
Income taxes 135 120 155 134
-------------------------------------------------------------------
Net income $ 234 $ 213 $ 272 $ 231
===================================================================
[Interest charges for each of the Company's operations do not equal
total interest charges for the Company, due to eliminating entries between
entities.]
11
14
Quarterly Results for Propane Operations
Propane operating income in the third quarter of fiscal 2000 increased
approximately $40,000 compared to the third quarter of fiscal 1999 primarily due
to higher gross margin from the Company's retail propane operation. Total
propane revenue increased by $630,000 for the third quarter of which $370,000
was from wholesale propane sales. Total propane gross margin increased by
$40,000 during the quarter, primarily due to a higher margin per gallon sold in
the retail propane operations. Operating expenses were approximately the same in
the third quarter of fiscal 2000 as compared to the third quarter of fiscal
1999.
Other Income -
The decrease in other income was primarily due to one-time consulting fees
received in fiscal 1999.
Income Taxes -
Income tax expense for the Company's propane operations was approximately
$15,000 higher for the third quarter of fiscal 2000 as compared to the third
quarter of fiscal 1999. This occurred because pre-tax income was approximately
$40,000 higher in the third quarter of fiscal 2000 compared to fiscal 1999.
Nine Month Results for Propane Operations
Propane operating income for the first nine months of fiscal 2000 increased
approximately $110,000 compared to the first nine months of fiscal 1999. Total
propane revenue increased by $1,520,000 for the first nine months of fiscal 2000
of which $1,000,000 was from wholesale propane sales. Total propane gross margin
increased by $210,000 during the period of which $240,000 was an increase from
wholesale propane operations, partially offset by a decrease in gross margin of
$30,000 from retail propane operations. The increase in gross margin was
partially offset by higher operating expenses of approximately $100,000 and a
decrease in other income of approximately $50,000 for the first nine months of
fiscal 2000.
Operating Expenses -
The increase in operating expenses for the first nine 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. Also, an increase
in bad debt expense and higher fixed propane storage costs were incurred.
Other Income -
The $50,000 decrease in other income for the first nine months of fiscal 2000,
compared to the first nine 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 approximately
$20,000 higher for the first nine months of fiscal 2000 as compared to the first
nine months of fiscal 1999 because pre-tax income increased approximately
$60,000.
12
15
OPERATING RESULTS OF THE COMPANY'S ENERGY MARKETING OPERATIONS
Third Quarter Nine Months
Ended March 31 Ended March 31
2000 1999 2000 1999
(In thousands) (In thousands)
ENERGY WEST RESOURCES (EWR)
Gas & electric trading revenue $11,130 $6,406 $28,800 $15,112
Cost of gas & electric trading 10,641 5,877 28,085 14,487
--------------------------------------------------------------------
Gross Margin 489 529 715 625
Operating expenses 196 169 554 451
--------------------------------------------------------------------
Operating income 293 360 161 174
Other (income) - net (4) (87) (115) (407)
Interest expense (see note below) 35 10 80 44
Income taxes 97 165 73 205
--------------------------------------------------------------------
Net income $ 165 $ 272 $ 123 $ 332
====================================================================
[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 decreased approximately $70,000 for the
third quarter of fiscal 2000 compared to the third quarter of fiscal 1999.
Energy marketing revenue increased by approximately $4,720,000, of which
$3,200,000 is related to marketing of electricity in Montana. The increase in
electric revenue is related to an increase in wholesale and retail electric
customers. The balance of the increase in energy marketing revenue of $1,660,000
is related to wholesale and retail gas sales. The increase in gas marketing
revenue is primarily related to an increase in market prices for natural gas
which were substantially higher in the third quarter of fiscal 2000 as compared
to fiscal 1999. An increase in gross margin from electric sales of $180,000 was
offset by a decrease in gross margin from natural gas sales of $220,000. The
decrease in gross margin from natural gas sales is related to higher natural gas
costs per MMBTU associated with gas purchases during the third quarter of fiscal
2000. In addition, operating expenses increased approximately $30,000 in the
third quarter of fiscal 2000 compared to the third quarter of fiscal 1999
primarily due to increased marketing and administrative expenses associated with
retail energy marketing.
Operating Expenses -
The operating expenses associated with retail energy marketing, for the third
quarter of fiscal 2000, were $70,000 and are primarily due to increases in
payroll and benefit costs. The Company had no retail energy marketing activities
in fiscal 1999 because open-access for residential and small commercial
customers, in Montana, was not allowed until the fall of 1999. The increased
operating expenses for retail energy marketing were offset by lower
discretionary expenses of $20,000 for travel, training, marketing and general
office expenses related to wholesale energy marketing. In addition, employee
benefit costs for wholesale energy marketing were lower by $10,000, primarily
related to lower pension accruals and health insurance premiums.
Other Income -
Other income decreased approximately $80,000 in the third quarter of fiscal
2000. This decrease is completely related to gains associated with derivative
trading in the third quarter of fiscal 1999. There were no gains from derivative
trading activity in the third quarter of fiscal 2000.
13
16
Interest Charges -
Interest charges allocable to the Company's energy marketing operations were
approximately $30,000 higher for the third quarter of fiscal 2000 as compared to
the same period in fiscal 1999. This increase is primarily related to working
capital requirements during the quarter.
Income Taxes -
Income taxes related to the Company's energy marketing operations decreased
approximately $70,000 for the third quarter of fiscal 2000 compared to the third
quarter of fiscal 1999. The decrease is related to lower pre-tax earnings of
$180,000 for the same comparable periods.
Nine Months Results for Energy Marketing Operations
Operating income from energy marketing decreased approximately $10,000 for the
first nine months of fiscal 2000 compared to the first nine months of fiscal
1999. Energy marketing revenue increased by approximately $13,690,000, of which,
$12,870,000 is related to marketing of electricity in Montana. There were
minimal electric sales in the first nine months of fiscal 1999. An increase in
gross margin from electric sales of $270,000 was partially offset by a decrease
in gross margin from natural gas sales of $180,000, resulting in a net increase
in gross margin of $90,000. The decrease in gross margin from natural gas sales
is related to higher natural gas costs per MMBTU associated with gas purchases
during the third quarter of fiscal 2000. The increase in gross margin was
completely offset by higher operating expenses of approximately $100,000 for the
first nine months of fiscal 2000 compared to the first nine months of fiscal
1999.
Operating Expenses -
The operating expenses associated with retail energy marketing, for the first
nine months of fiscal 2000, were $150,000 and are primarily due to increased
payroll and benefit costs. The Company had no retail energy marketing activities
in fiscal 1999, because open-access for residential and small commercial
customers, in Montana, was not allowed until the fall of 1999. The increased
operating expenses for retail energy marketing were offset by lower
discretionary expenses of $20,000 for travel, training, marketing and general
office expenses related to wholesale energy marketing. In addition, employee
benefit costs for wholesale energy marketing were lower by $30,000 primarily
related to lower pension, vacation expense accruals and health insurance
premiums.
Other Income -
Other income decreased approximately $290,000 for the first nine months of
fiscal 2000. The decrease is completely related to the difference in gains
associated with derivative trading between the first nine months of fiscal 2000
and the first nine months of fiscal 1999.
Income Taxes -
Income taxes related to the Company's energy marketing operations decreased
approximately $130,000 for the first nine months of fiscal 2000 compared to the
first nine months of fiscal 1999. The decrease is related to lower pre-tax
earnings of $340,000 for the same comparable periods.
14
17
OPERATING RESULTS FOR ENERGY WEST DEVELOPMENT, INC.
Third Quarter Nine Months
Ended March 31 Ended March 31
2000 1999 2000 1999
(In thousands) (In thousands)
ENERGY WEST DEVELOPMENT (EWD)
Operating revenues $44 $24 $309 $73
-----------------------------------------------------------
Gross Margin 41 24 138 73
Operating expenses 22 9 70 38
-----------------------------------------------------------
Operating income 19 15 68 35
Other (income) expense-net (1) (2) (6) (2)
Interest expense (see note below) 7 8 21 24
Income taxes 5 3 20 4
-----------------------------------------------------------
Net income $ 8 $ 6 $ 33 $ 9
===========================================================
[Interest charges for each of the Company's operations do not equal
total interest charges for the Company, due to eliminating entries between
entities.]
Third Quarter and Nine 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 third quarter and for the first nine
months of fiscal 2000 is comparable to the net income from that operation for
the same time periods in fiscal 1999.
15
18
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 nine months of fiscal 2000, through March 31,
2000, to address the Y2K issue, were approximately $50,000. The total costs to
address the Y2K issue, most of which were internal labor costs 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 (MPSC). This gas costs
application is similar to applications made annually as the mechanism the MPSC
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. Those discussions were not
fruitful and the MCC has recommended a substantial decrease of $830,000 of gas
costs, related to the Company's application, to be amortized over a three year
period. The Company intends to vigorously defend its position before the MPSC.
Hearings on this matter before the MPSC are scheduled for May 31, 2000 and a
decision regarding the Company's application should be issued in the first
quarter of fiscal 2001 (September 30, 2000). It is not possible to estimate
either the outcome or the timing of the MPSC's ruling or whether it will have an
adverse affect on the fiscal 2000 earnings.
16
19
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.
17
20
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. 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 appealed the judgement to the United
States Court of Appeals for the Tenth Circuit which ruled in favor of the
plaintiff and upheld the original decision of the Federal District Court of
Wyoming.
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, and three additional actions have been brought
in state district court. 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 but a motion to remove
this case to the same Federal Court hearing the Grynberg matter was recently
granted. 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.
18
21
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. There are no Exhibits (See Exhibit Index on Page E-1)
B. One Form 8-K have was filed on March 3, 2000.
19
22
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 May , 2000
/s/ Edward J. Bernica
- ---------------------------------
Edward J. Bernica, Executive Vice-President,
Chief Operating Officer and Chief Financial Officer