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 September 30, 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 offices) (Zip Code)
Registrant's telephone number, including area code (406)-791-7500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 2000
(Common stock, $.15 par value) 2,495,824
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
September 30, 2000 and June 30, 2000 (Unaudited) 1
Condensed Consolidated Statements of Income - three
months ended September 30, 2000 and 1999 (Unaudited) 2
Condensed Consolidated Statements of Cash Flows - three
months ended September 30, 2000 and 1999 (Unaudited) 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 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 14-15
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 - Exhibits and Reports on Form 8-K 15
Signatures
3
Item 1. Financial Statements
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30 June 30
2000 2000
(Unaudited) (Unaudited)
------------------ ------------------
Current Assets:
Cash and Cash Equivalents $ -- $ 112,174
Accounts Receivable (Net) 7,908,394 7,729,841
Natural Gas and Propane Inventory 4,254,581 1,913,701
Materials and Supplies 500,276 586,130
Prepayments and Other 631,104 360,828
Refundable Income Tax Payments 1,381,361 871,155
Recoverable Cost of Gas Purchases 5,850,705 4,713,395
------------------ ------------------
Total Current Assets 20,526,421 16,287,224
------------------ ------------------
Notes Receivable Due After One Year 155,020 162,385
Property, Plant and Equipment (Net) 32,594,495 31,804,133
Deferred Charges 3,235,196 3,293,188
------------------ ------------------
Total Assets $ 56,511,132 $ 51,546,930
================== ==================
CAPITALIZATION AND LIABILITIES
Capitalization and Liabilities:
Current Liabilities:
Checks Outstanding in Excess of Cash Balances $ 491,194 $ --
Note Payable to Bank 10,585,000 4,855,000
Long-Term Debt Due Within One Year 445,000 445,000
Accounts Payable - Gas and Electric Purchases 4,724,166 5,769,485
Other Current and Accrued Liabilities 3,831,356 3,771,294
------------------ ------------------
Total Current Liabilities 20,076,716 14,840,779
------------------ ------------------
Deferred Credits 6,478,945 6,349,525
Long-term obligations 16,320,000 16,395,000
Stockholders' Equity
Common Stock (2,495,824 and
2,475,435 shares were outstanding at September
30, 2000 and June 30, 2000 respectively) $ 374,380 $ 371,321
Capital in Excess of Par Value 4,070,912 3,906,401
Retained Earnings 9,190,179 9,683,904
------------------ ------------------
Total Stockholders' Equity 13,635,471 13,961,626
------------------ ------------------
Total Capitalization and Liabilities $ 56,511,132 $ 51,546,930
================== ==================
The accompanying notes are an integral part of these condensed financial
statements.
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FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
and Year-To-Date
September 30
2000 1999
(Unaudited) (Unaudited)
-------------------------------------
Operating Revenue:
Natural Gas Operations $3,391,807 $3,434,308
Propane Operations 952,071 770,396
Gas, Electric and Propane Trading 12,547,579 8,371,794
---------------------------------
Total Revenue 16,891,457 12,576,498
---------------------------------
Operating Expenses:
Gas & Propane Purchased 2,482,444 2,319,378
Cost of Gas, Electric & Propane Trading 11,408,238 8,250,363
Distribution, General and Administrative 2,119,385 2,148,823
Maintenance 98,062 122,902
Depreciation and Amortization 514,324 447,720
Other Taxes 152,871 168,305
---------------------------------
Total Operating Expenses 16,775,324 13,457,491
---------------------------------
Operating Income (Loss) 116,133 (880,993)
Other Income - Net 149,205 198,138
---------------------------------
Income (Loss) Before Interest Charges
and Income Tax Benefit 265,338 (682,855)
---------------------------------
Interest Charges:
Long-Term Debt 307,199 298,849
Other 216,170 50,038
---------------------------------
Total Interest Charges 523,369 348,887
---------------------------------
Loss Before Income Tax Benefit (258,031) (1,031,742)
Provision for Income Tax Benefit (85,613) (365,915)
---------------------------------
Net Loss ($172,418) ($665,827)
=================================
Basic and Diluted Loss Per Common Share ($0.07) ($0.27)
=================================
Dividends Per Common Share $0.1250 $0.1200
Basic Weighted Average Common Shares 2,476,130 2,434,474
Diluted Weighted Average Common Shares 2,476,130 2,434,474
The accompanying notes are an integral part of these condensed financial
statements.
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FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
September 30
2000 1999
(Unaudited) (Unaudited)
----------------------------------
Operating Activities:
Net Loss ($172,418) ($665,827)
Adjustment to Reconcile Net Loss to Cash Flows:
Depreciation and Amortization 593,466 516,645
Gain on Sale of Property, Plant & Equipment -- (1,889)
Deferred Gain on Sale of Assets (5,907) (5,907)
Investment Tax Credit - Net (5,266) (5,266)
Deferred Income Taxes - Net 474,802 228,885
Change in Operating Assets and Liabilities
Accounts Receivable (178,553) (863,535)
Gas Inventory (2,191,951) (1,058,377)
Accounts Payable (1,263,507) 1,003,376
Recoverable Cost of Gas Purchases (1,137,310) (171,587)
Prepaids (270,276) (412,039)
Other Assets and Liabilities (591,441) (923,982)
------------------------------
Net Cash Used In Operating Activities (4,748,361) (2,359,503)
Investing Activities:
Construction Expenditures (1,252,092) (1,564,036)
Proceeds from Sale of Property, Plant & Equipment -- 4,150
Collection of Long-Term Notes Receivable 7,365 8,738
Customer Advances for Construction (26,400) --
Proceeds from Contributions in Aid of Constructions 25,507 114
------------------------------
Net Cash Used In Investing Activities (1,245,620) (1,551,034)
Financing Activities:
Repayment of Long-Term Debt (75,000) (255,000)
Proceeds from Notes Payable 23,500,000 10,058,748
Repayment of Short-Term Borrowings (17,770,000) (5,305,766)
Dividends on Common Stock (264,387) (250,861)
------------------------------
Net Cash Provided by Financing Activities 5,390,613 4,247,121
------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (603,368) 336,584
Cash and Cash Equivalents at Beginning of Year 112,174 225,970
------------------------------
Cash and Cash Equivalents at End of Period ($491,194) $562,554
==============================
The accompanying notes are an integral part of these condensed financial
statements.
-3-
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 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. Certain reclassifications have been made to the three month
period ended September 30, 1999 to conform to the presentation of the three
month period ended September 30, 2000. Operating results for the three month
period ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ended June 30, 2001 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, 2000.
Note 2 - Risk Management
New Accounting Standard
The Company was required to adopt the accounting provisions of Statement of
Financial Accounting Standards No. 133 - Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133") beginning July 2000. The new accounting
rules require that the fair value of derivative and hedging instruments be
measured and recorded as either assets or liabilities on the balance sheet with
a regular, periodic mark-to-market adjustment.
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 May 1999, the Company signed a basis swap agreement between the NYMEX and
AECO price indexes. The contract period for the 4,000 MMBtu per day began June
1, 1999 and ended October 31, 1999. The swap compared the index price of natural
gas quoted on the NYMEX gas exchange with the AECO gas exchange on a daily
basis. The original basis differential was at $.38 per MMBtu. The Company
designated this swap as a trading commodity derivative. The Company settled the
June 1999 portion of the swap at a gain of $13,000 and settled the remaining
portion at $.36 basis differential, for an additional gain of $7,500.
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, 2000 was $3.63. 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 $748,000.
4
7
Note 2 - Risk Management (continued)
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 price of natural
gas quoted on the NYMEX gas exchange with the AECO gas exchange index. 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 designated this basis swap as a trading commodity derivative.
In May 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 June 1,
2000 and ends October 31, 2000. The swap compares the index price of natural gas
quoted on the NYMEX gas exchange with the AECO gas exchange index. The original
basis differential was $.37 per MMBtu. The Company settled the June basis
differential at $.98 resulting in a loss of $91,000. The July to October basis
differentials were settled at $.34 and resulted in a gain of $19,000. The
Company designated this basis swap as a trading commodity derivative.
In June 2000 the Company entered into a fixed for floating swap agreement with a
market maker which required the Company to pay a fixed price of $3.765 per MMBtu
in return for gas quoted on the AECO gas exchange. The contract period for the
10,000 MMBtu per day begins November 1, 2000 and ends March 31, 2001. The
Company settled the swap for a fixed sales price to the market maker of $3.865
per MMBtu which resulted in a gain of $151,000. The Company has designated this
swap as a trading commodity derivative.
In June 2000 the Company entered into a basis swap agreement between the NYMEX
and AECO price indexes. The contract period for the 5,000 MMBtu per day begins
November 1, 2000 and ends October 31, 2003. The swap compares the index price of
natural gas quoted on the NYMEX gas exchange with the AECO gas exchange index.
The original basis differential is at $.27 per MMBtu. At June 30, 2000 the basis
differential was $.272 which resulted in a mark-to-market gain of $8,000. The
swap was settled in July at a basis differential of $.30 resulting in a total
gain on the transaction of $164,000 of which $156,000 was recorded in the first
quarter of fiscal year 2001 in other income. The Company designated this swap as
a trading commodity derivative.
In June 2000 the Company entered into a fixed for floating swap agreement which
requires the Company to pay a fixed price of $4.09 per MMBtu in return for gas
quoted on the AECO gas exchange. The contract period for the 10,000 MMBtu per
day begins November 1, 2000 and ends March 31, 2001. At June 30, 2000 the winter
block AECO index was $4.11, which resulted in a mark-to-market gain of $30,000.
The agreement was settled during the first quarter of fiscal year 2001 when the
Company sold 1,000 MMBtu per day when the winter block AECO index was $3.61.
This resulted in a transaction loss of $72,000. The Company then sold the
remaining 9,000 MMBtu per day when the winter block AECO index was $4.10. This
resulted in a transaction gain of $14,000 for a total loss on this agreement of
$58,000. The Company recorded a loss of $88,000 in other income during the first
quarter of fiscal year 2001. The Company designated this swap as a trading
commodity derivative.
5
8
Note 3 - 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%........................... ($95,700)
State income tax benefit, net of federal income taxes.......... (5,121)
Amortization of deferred investment tax credits................ (5,266)
Other.......................................................... 20,474
----------
Total income taxes (benefits).................................. ($85,613)
==========
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 DEQ for
its plan for remediation of soil contaminants. To date, all contaminated soil
has been removed, and an asphalt cap has been placed over the site. The Company
and its consultants continue their work with the MDEQ relating to the
remediation plan for water contaminants.
At September 30, 2000, the costs incurred in evaluating this site and making
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 September 30, 2000 that recovery
mechanism had generated approximately $916,000. 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 effect on the Company's results of operations, financial position or
liquidity.
6
9
Note 5 - Operating Revenues and Expenses
Regulated natural gas operations, regulated and non-regulated propane
operations, and energy marketing and wholesale operating revenues and expenses
were as follows:
Three Months Ended
September 30
2000 1999
---- ----
Operating Revenues:
Natural Gas Operations $ 3,391,807 $ 3,434,308
Propane Operations 952,071 770,396
Energy Marketing and Wholesale 12,547,579 8,371,794
------------- ---------------
$16,891,457 $12,576,498
============= ===============
Gas and Power Purchases:
Natural Gas Operations $ 1,900,261 $ 1,903,732
Propane Operations 582,183 415,646
Energy Marketing and Wholesale 11,408,238 8,250,363
------------- ---------------
$13,890,682 $10,569,741
============= ===============
Distribution, General and Administrative:
Natural Gas Operations $ 1,332,895 $ 1,393,797
Propane Operations 465,385 507,700
Energy Marketing and Wholesale 321,105 247,326
------------- ---------------
$ 2,119,385 $ 2,148,823
============= ===============
Maintenance:
Natural Gas Operations $83,750 $ 86,313
Propane Operations 9,244 25,636
Energy Marketing and Wholesale 5,068 10,953
------------- ---------------
$ 98,062 $ 122,902
============= ===============
Depreciation and Amortization:
Natural Gas Operations $ 324,382 $ 309,878
Propane Operations 168,231 122,529
Energy Marketing and Wholesale 21,711 15,313
------------- ---------------
$ 514,324 $ 447,720
============= ===============
Taxes Other than Income:
Natural Gas Operations $ 100,753 $ 112,964
Propane Operations 36,266 37,768
Energy Marketing and Wholesale 15,852 17,573
------------- ---------------
$ 152,871 $ 168,305
============= ===============
Income Tax Expense (Benefits):
Natural Gas Operations $ (221,345) $ (203,454)
Propane Operations (147,658) (135,618)
Energy Marketing and Wholesale 283,390 (26,843)
------------- ---------------
$ (85,613) $ (365,915)
============= ===============
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10
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. On July 1, 2000, the
Company underwent a change in its reporting and management structure.
Previously, operations were organized and managed according to geographic
location and the regulated or non-regulated nature of the business. After
July 1, operations were organized according to similarities in the
business--regulated natural gas operations, regulated and non-regulated propane
operations, marketing and wholesale operations, and other non-regulated
activities.
The Company's natural gas operations involve the distribution of regulated
natural gas to the public in the Great Falls and West Yellowstone, Montana and
the Cody, Wyoming areas.
The Company's propane operations, operated by its wholly owned subsidiary Energy
West Propane, Inc. (EWP), include the distribution of regulated propane to the
public through underground propane vapor systems in the Payson, Arizona and
Cascade, Montana areas as well as non-utility retail propane operations in
Wyoming, Montana and Arizona.
The Company's wholly owned subsidiary, Energy West Resources, Inc. (EWR)
conducts certain marketing and trading activities as well as wholesale
distribution activities involving the sale of natural gas, electricity and
propane in Montana, Wyoming, Arizona, Colorado, South Dakota, North Dakota and
Nebraska.
The Company's wholly owned subsidiary, Energy West Development, Inc. (EWD) owns
real estate 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 funds. 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, 2000, the Company had $22,000,000 in bank lines of credit, of
which $10,585,000 had been borrowed under the credit agreement. The Company had
outstanding letters of credit totaling $5,012,000 related to electric and gas
purchase contracts. These letters of credit, when netted against the total bank
lines of credit, result in a total remaining borrowing capacity of $6,400,000.
8
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The Company used net cash in operating activities for the three months ended
September 30, 2000 in the amount of approximately $4,748,000 as compared to
approximately $2,360,000 for the three months ended September 30, 1999. This
increase in cash used in operating activities of $2,388,000 was primarily due to
a lower net loss of approximately $494,000 compared to fiscal year 2000 as well
as higher working capital requirements. Approximately $1,134,000 of the
increased working capital requirement was due to higher gas inventory related to
natural gas and propane purchases for sale during the heating season, and
$966,000 related to the under-recovered position of the Company's regulated
operations.
Cash used in investing activities was approximately $1,246,000 for the three
months ended September 30, 2000, as compared to approximately $1,551,000 for the
three months ended September 30 1999. This increase of $305,000 was primarily
due to expenditures incurred in the prior year for system expansion in utility
operations, a new billing system, and propane storage tanks.
Cash provided by financing activities was approximately $5,391,000 for the three
months ended September 30, 2000, as compared to approximately $4,247,000 for the
three months ended September 30, 1999. The increase in cash provided by
financing activities of $1,144,000 is primarily due to an increase in net
short-term borrowing of approximately $977,000.
Capital expenditures of the Company are primarily for expansion and improvement
of its regulated 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 $4,600,000 in fiscal 2000 and approximately $3,700,000 for fiscal
1999. During fiscal 2000, approximately $2,630,000 was expended for system
expansion, construction and maintenance of the natural gas operations.
Approximately $1,500,000 was expended for the propane operations including
customer tanks and equipment. The Company's wholesale and marketing operations
expended approximately $590,000. Included in these expenditures was
approximately $700,000 for the development and implementation of a new billing
system. Capital expenditures are expected to be nearly $3,400,000 in fiscal
2001. This includes approximately $1,500,000 for continued system expansion,
construction and maintenance for the natural gas operations, $1,500,000 for the
propane operations, and $400,000 for wholesale and marketing operations. As of
September 30, 2000, approximately $1,400,000 of that amount had been expended.
9
12
Results of Consolidated Operations
Comparison of First Quarter of Fiscal 2001 Ended September 30, 2000 and Fiscal
2000 Ended September 30, 1999
The Company's net loss for the first quarter ended September 30, 2000 was
$172,000 compared to $666,000 for the quarter ended September 30, 1999.
Margins increased from approximately $2,007,000 in fiscal 1999 to $3,000,000 in
fiscal 2000 or $993,000 primarily due to increased margin from the marketing and
wholesale operations related to customer growth and conditions present in the
marketplace. Distribution, general and administrative expenses decreased from
approximately $2,149,000 in fiscal 1999 to $2,119,000 in fiscal 2000. This
decrease was primarily due to the timing of certain expenses.
Natural Gas Operations
Natural gas operating revenues in the first three months of fiscal 2001 were
approximately $3,392,000 compared to approximately $3,434,000 for the first
three months of fiscal 2000. The operating loss decreased approximately 6% or
$22,000 from fiscal 2000 and was approximately $350,000 the first three months
of fiscal 2001 compared to approximately $372,000 for the first three months of
fiscal 2000. Gross margin, which is defined as operating revenues less gas
purchased, was approximately $1,491,000 for the first three months of fiscal
2001 compared to a gross margin of approximately $1,530,000 for the first three
months of fiscal 2000, primarily due to slightly warmer than normal weather
during fiscal 2001. The decrease in gross margin was more than offset by lower
operating expenses in fiscal 2001 of approximately $61,000.
Operating Expenses -
Natural gas operating expenses, excluding the cost of gas purchased and federal
and state income taxes, were approximately $1,842,000 for the first three months
of fiscal 2001 as compared to $1,903,000 for the same period in fiscal 2000. The
3% decrease in the period was generally due to the timing of certain expenses,
and is not expected to continue throughout the year.
Interest Charges -
Interest charges allocable to the Company's natural gas operations were
approximately $319,000 for the first quarter of fiscal 2001, as compared to
$255,000 in the comparable period in fiscal 2000. Long-term debt interest
decreased due to lower long-term debt resulting from debt payments. Short-term
debt interest increased approximately $94,000 primarily due to greater
short-term borrowing for the first quarter of fiscal 2001. This increase in
borrowing was related to higher unrecovered gas costs in the natural gas
operations.
Income Taxes -
State and federal income tax benefits of the Company's utility divisions were
approximately $221,000 for the first quarter of fiscal 2001 as compared to
approximately $203,000 in fiscal 2000. This was due to a higher pre-tax loss
from natural gas operations.
10
13
Propane Operations -
Propane revenues in the first three months of fiscal 2001 were approximately
$952,000 compared to approximately $770,000 for the first three months of fiscal
2000. Operating loss decreased approximately $30,000 from fiscal 2000 and was
$309,000 for the first three months of fiscal 2001 compared to approximately
$338,000 for the first three months of fiscal 2000. This decrease in operating
loss was due to a decrease in operating expenses of approximately $15,000 and an
increase in gross margin of approximately $15,000. The increase in gross margin
was from higher gallons sold and higher margin, per gallon, generated by the
Company's regulated and non-regulated propane operations. Gross margin was
approximately $370,000 for the first three months of fiscal 2001 compared to
gross margin of approximately $355,000 for the first three months of fiscal
2000.
Operating Expenses -
Propane operating expenses, excluding the cost of propane purchased and federal
and state income taxes, were approximately $679,000 for the first three months
of fiscal 2001 as compared to $694,000 for the same period in fiscal 2000. The
decrease in the period was generally due to the timing of certain expenses, and
is not expected to continue throughout the year.
Interest Charges -
Interest charges allocable to the Company's propane operations were
approximately $117,000 for the first quarter of fiscal 2001, as compared to
$61,000 in the comparable period in fiscal 2000. Long-term debt interest
decreased due to lower long-term debt resulting from debt payments. Short-term
debt interest increased primarily due to greater short-term borrowing for the
first quarter of fiscal 2001.
Income Taxes -
State and federal income tax benefits of the Company's propane operations were
approximately $148,000 for the first quarter of fiscal 2001 as compared to
approximately $136,000 for the first quarter of fiscal 2000, due to a higher
pre-tax loss from the propane operations.
Energy Marketing and Wholesale Operations -
Revenues from energy marketing in the first three months of fiscal 2001 were
approximately $12,548,000 compared to approximately $8,372,000 for the first
three months of fiscal 2000. The increase in revenues for the quarter resulted
from continued customer growth in the electric market in Montana. The main
reason for this increase in electric revenue, is that open access for electric
sales began in January 1, 1999, and while the Company began to sell electricity
to large industrial customers at this time, it did not add any residential and
small commercial customers until the end of the first quarter of fiscal year
2000. The Company's energy marketing operations experienced operating income
during the first quarter of fiscal year 2001 of $776,000 compared to an
operating loss of $170,000 in fiscal year 2000. This increase in operating
income of approximately $946,000 was due to higher gross margins of $1,018,000
partially offset by higher operating expenses of approximately $72,000. The
overall increase in gross margin resulted from additional growth in the
commercial energy market and more competitive supply contracts.
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Energy Marketing and Wholesale Operations - (Continued)
Operating Expenses -
Operating expenses for energy marketing, excluding the cost of gas and
electricity purchased and federal and state income taxes, were approximately
$363,000 for the first three months of fiscal 2001 as compared to $291,000 for
the same period in fiscal 2000. The increase in the period was mainly due to
inflation and additional staff for expanded marketing activities.
Other Income -
Other income decreased by $30,000 from $114,000 for the first quarter of fiscal
2000 compared to $84,000 for the first quarter of fiscal 2001. The other income
for the first quarter of both fiscal years is mainly because of mark-to-market
gains from derivative activity.
Income Taxes -
State and federal income tax expense of the Company's energy marketing and
wholesale operations were approximately $283,000 for the first quarter of fiscal
2001 as compared to a tax benefit of approximately $27,000 in fiscal 2000, due
to higher pre-tax income from the energy marketing operations.
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.
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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 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 note three 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 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. To date, the
Company has experienced no such defaults.
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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 which ruled in favor of the
plaintiff and upheld the original decision of the Federal District Court of
Wyoming on May 2, 2000.
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. The costs to defend this
action are impossible to estimate at this time.
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FORM 10-Q
Part II - Other Information (continued)
Item 1. Legal Proceedings (Continued)
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
granted. The Company believes that its liability in this matter is not likely to
be material, 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. The
costs of defending this matter are impossible to approximate at this time.
On October 23, 2000, the Company received a demand letter from Torch Energy
claiming under payments on a gas supply contract in the amount of $200,000 as
of October 1, 2000 and estimated to continue at an estimated rate of $30,000
per month until the end of the contract on December 31, 2001. The Company has
evaluated the claim and does not believe that it owes this money. The Company
believes that the terms that lead to the demand amount are calculated under an
agreement that has expired and has been replaced by a contract under which the
Company continues to pay according to the terms of that new agreement. The
Company intends to respond to Torch Energy to this effect.
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.1 Energy West Incorporated Rentention Bonus Plan dated
September 14, 2000.
10.2 Memorandum of Agreement dated as of September 14, 2000
between Energy West Incorporated and Larry D. Geske.
10.3 Memorandum of Agreement dated as of September 14, 2000
between Energy West Incorporated and Edward J. Bernica.
10.4 Memorandum of Agreement dated as of September 14, 2000
between Energy West Incorporated and Tim A. Good.
27 Financial Data Schedule.
B. No reports on Form 8-K have been filed during the quarter
ended September 30, 2000.
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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
/s/ Edward J. Bernica
- ---------------------------------
Edward J. Bernica, Executive Vice-President,
Chief Operating Officer and Chief Financial Officer
Dated November 14, 2000