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 December 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 February 13, 2001
- --------------------------------------
(Common stock, $.15 par value) 2,503,613
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ENERGY WEST INCORPORATED
INDEX TO FORM 10-Q
PAGE NO.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
December 31, 2000 and June 30, 2000 1
Condensed Consolidated Statements of Income -
three months and six months ended December 31, 2000 and 1999 2
Condensed Consolidated Statements of cash flows -
six months ended December 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 7-14
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 16
ITEM 2 - CHANGES IN SECURITIES 17
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5 - OTHER INFORMATION 17
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES
3
I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31 December 31 June 30
2000 1999 2000
(Unaudited) (Unaudited)
----------------------------------------------------
Current Assets:
Cash and Cash Equivalents $214,352 $226,850 $112,174
Accounts Receivable (net) 18,458,106 10,552,041 7,729,841
Natural Gas and Propane Inventory 3,479,971 4,023,018 1,913,701
Materials and Supplies 478,505 405,116 586,130
Prepayments and other 513,423 427,404 360,828
Refundable Income Tax Payments 778,206 865,214 871,155
Recoverable Cost of Gas Purchases 6,754,684 3,710,913 4,713,395
----------------------------------------------------
Total Current Assets 30,677,247 20,210,556 16,287,224
----------------------------------------------------
Notes Receivable Due After One Year 148,769 174,105 162,385
Property, Plant and Equipment-Net 32,669,205 31,343,798 31,804,133
Deferred Charges 3,131,628 3,334,660 3,293,188
----------------------------------------------------
Total Assets $66,626,849 $55,063,119 $51,546,930
====================================================
CAPITALIZATION AND LIABILITIES
Current Liabilities:
Note payable to bank $12,441,429 $10,837,982 $4,855,000
Long-term debt due within one year 354,000 250,723 445,000
Accounts Payable - Gas and Electric Purchases 9,609,487 3,681,040 5,769,485
Other Current and Accrued Liabilities 6,991,942 3,440,017 3,771,294
----------------------------------------------------
Total Current Liabilities 29,396,858 18,209,762 14,840,779
----------------------------------------------------
Deferred Credits 6,505,050 6,819,705 6,349,525
Long-term obligations 16,395,000 16,765,000 16,395,000
Stockholders' Equity
Common Stock (2,498,122 shares and
2,475,435 shares were outstanding at December
31, 2000 and June 30, 2000 respectively) 375,548 368,572 371,321
Capital in Excess of Par Value 4,111,803 3,760,816 3,906,401
Retained Earnings 9,842,590 9,139,264 9,683,904
----------------------------------------------------
Total Stockholder's Equity 14,329,941 13,268,652 13,961,626
----------------------------------------------------
Total Capitalization and Liabilities $66,626,849 $55,063,119 $51,546,930
====================================================
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
December 31 Six Months Ended
-------------------------------------------------- December 31
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------------------------------------------------------------
Operating revenue:
Natural Gas Operations $12,853,382 $7,173,894 $16,245,189 $10,608,202
Propane operations 3,132,138 1,833,438 4,084,209 2,603,834
Gas, Electric and Propane Trading 19,777,806 13,356,679 32,325,385 21,728,473
-------------------------------------------------------------------
Total Revenue 35,763,326 22,364,011 52,654,783 34,940,509
-------------------------------------------------------------------
Operating Expenses
Gas & Propane Purchased 11,874,709 5,627,217 14,357,153 7,946,595
Cost of Gas, Electric & Propane Trading 17,720,846 12,805,868 29,129,084 21,056,231
Distribution, general and administrative 2,973,498 2,035,040 5,092,883 4,183,863
Maintenance 92,871 78,355 190,933 201,257
Depreciation and amortization 513,909 451,086 1,028,233 898,806
Other Taxes 159,992 165,672 312,863 333,977
-------------------------------------------------------------------
Total Operating Expenses 33,335,825 21,163,238 50,111,149 34,620,729
-------------------------------------------------------------------
Operating Income 2,427,501 1,200,773 2,543,634 319,780
Other Income (Loss) - Net (342,458) 54,353 (193,253) 252,491
-------------------------------------------------------------------
Income Before Interest Charges & Income Taxes 2,085,043 1,255,126 2,350,381 572,271
-------------------------------------------------------------------
Interest Charges:
Long-Term Debt 306,168 324,502 613,367 623,351
Other 288,218 142,216 504,388 192,254
-------------------------------------------------------------------
Total Interest Charges 594,386 466,718 1,117,755 815,605
-------------------------------------------------------------------
Net Income (Loss) Before Income Taxes 1,490,657 788,408 1,232,626 (243,334)
Income Taxes (Benefits) 551,987 288,743 466,374 (77,172)
-------------------------------------------------------------------
Net Income (Loss) $938,670 $499,665 $766,252 ($166,162)
===================================================================
Basic Earnings and diluted income (loss) per common share $0.38 $0.20 $0.31 ($0.07)
-------------------------------------------------------------------
Dividends per common share $0.1250 $0.1200 $0.2500 $0.2400
-------------------------------------------------------------------
Basic Weighted Average Shares 2,486,139 2,442,516 2,486,139 2,442,516
Diluted Weighted Average Shares 2,491,674 2,442,516 2,491,674 2,442,516
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
Six Months Ended
December 31
------------------------------
2000 1999
(Unaudited) (Unaudited)
------------------------------
Operating Activities:
Net Income (Loss) $ 766,252 ($166,162)
Adjustments to Reconcile Net Income to Cash Flow
Depreciation and Amortization 1,226,247 1,027,340
(Gain) Loss on Sale of Property, Plant & Equipment 0 (5,901)
Deferred Gain on Sale of Assets (11,814) (11,814)
Investment Tax Credit (10,532) (10,531)
Deferred Income Taxes 859,864 507,445
Changes in Operating Assets and Liabilities (7,870,913) (8,918,471)
------------------------------
Net Cash Used In Operating Activities (5,040,896) (7,578,094)
Investing Activities:
Construction Expenditures (1,856,014) (2,824,611)
Collection of Long-Term Notes Receivable 13,616 14,341
Proceeds from Contributions in Aid of Construction 25,030 48,473
Proceeds from Sale of Property, Plant & Equipment 0 8,650
Customer Advances for Construction (26,400) 0
------------------------------
Net Cash Used In Investing Activities (1,843,768) (2,753,147)
Financing Activities:
Proceeds from Notes Payable 46,509,505 25,328,748
Repayment of Long-Term Debt (91,000) (255,000)
Sale of Common Stock 20,700 0
Repayment of Notes Payable (38,923,076) (14,490,766)
Dividends paid (529,287) (250,861)
------------------------------
Net Cash Provided by Financing Activities 6,986,842 10,332,121
------------------------------
Net Increase in Cash and Cash Equivalents 102,178 880
Cash and Cash Equivalents at Beginning of Year 112,174 225,970
------------------------------
Cash and Cash Equivalents at End of Period $ 214,352 $ 226,850
==============================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 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 six month period ended December
31, 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 -- DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY
Effective July 1, 2000, the Company adopted Statement of Financial Accounting
Standard No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities," as amended, which requires that all derivative instruments be
reported on the balance sheet at fair value and establishes criteria for
designation and effectiveness of hedging relationships. The cumulative effect of
adopting SFAS as of July 1, 2000 was not material to the Company's financial
statements.
The Company is exposed to market risk as the energy commodities purchased and
sold by the Company are subject to price volatility caused by weather, supply
conditions and other unpredictable factors. The principal commodity hedged by
the Company is natural gas. The Company uses exchange traded futures and options
contracts to manage the volatility related to firm commitments to purchase and
sell. These market instruments are designated as fair value hedges. Designation
is performed on a specific exposure basis to support hedge accounting. The
changes in fair value of these hedging instruments are offset in part or in
whole by corresponding changes in the fair value of the underlying exposures
being hedged.
The Company formally documents its hedge relationships, including
identification of the hedging instruments and the hedged items, as well as its
risk management objectives and strategies for undertaking the hedge
transaction. Derivatives are recorded in the Condensed Consolidated Balance
Sheets at fair value in other assets and other liabilities. This process
includes linking derivatives that are designated as hedges of specific assets,
liabilities, firm commitments or forecasted transactions. The Company also
formally assesses both at inception and at least quarterly thereafter, whether
the derivatives that are used in hedging transactions are highly effective in
offsetting changes in either the fair value of cash flows of the hedged item.
The assessment of effectiveness for option contracts is based on changes in the
intrinsic value of the option due to changes in the spot exchange rate. Changes
in the time value of option contracts are reported currently in earnings. When
it is determined that a derivative ceases to be a highly effective hedge, the
Company discontinues hedge accounting.
In November 2000 the Company entered into a zero cost collar for 5,000 MMBtu's
per day beginning December 1, 2000 and ending March 31, 2001. The collar has a
call strike price of $5.20 on the AECO "C" monthly index and a put strike price
of $4.40 on the same index. This collar was entered into in order to hedge a
pool of fixed gas sales equaling 5,000 MMBtu's per day with each contract in the
pool expiring on March 31, 2001. The Company has treated this hedge as a fair
value hedge, and believes it is effective because gains experienced by the
collar will offset losses incurred by the pool of contracts. At December 31,
2000, the net effect to the Company as a result of the hedge accounting
treatment was a loss of $319,000. The Company recorded this loss in other
income.
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%..............................$422,679
State tax expense, net of federal tax expense..................... 31,042
Amortization of deferred investment tax credits................... (10,531)
Other............................................................. 23,814
---------
Total income tax expense..........................................$466,374
=========
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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) 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.
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. At December 31,
2000 the costs incurred in evaluating this site and beginning remediation have
totaled approximately $1,800,000, and the recovery mechanism had generated
approximately $970,000. 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 natural gas operations, regulated and non-regulated propane
operations, and energy marketing and wholesale operating revenues and expenses
were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
---------------------------------- -------------------------------
2000 1999 2000 1999
-------------- ------------ ------------ ----------
(IN THOUSANDS) (IN THOUSANDS)
Operating Revenues:
Natural Gas Operations $12,853 $7,174 $16,245 $10,608
Propane Operations 3,132 1,833 4,084 2,604
Energy Marketing & Wholesale 19,777 13,356 32,325 21,728
----------- ---------- ---------- ---------
$35,762 $22,363 $52,654 $34,940
=========== ========== ========== =========
Gas and Power Purchases:
Natural Gas Operations $9,782 $4,527 $11,682 $6,431
Propane Operations 2,093 1,100 2,675 1,516
Energy Marketing & Wholesale 17,721 12,806 29,129 21,056
----------- ---------- ---------- ---------
$29,596 $18,433 $43,486 $29,003
=========== ========== ========== =========
Distribution, General and Administrative:
Natural Gas Operations $1,691 $1,316 $3,022 $2,710
Propane Operations 578 409 1,043 916
Energy Marketing & Wholesale 706 309 1,027 558
----------- ---------- ---------- ---------
$2,975 $2,034 $5,092 $4,184
=========== ========== ========== =========
Maintenance:
Natural Gas Operations $75 $62 $159 $148
Propane Operations 14 8 23 34
Energy Marketing & Wholesale 4 8 9 19
----------- ---------- ---------- ---------
$93 $78 $191 $201
=========== ========== ========== =========
Depreciation and Amortization:
Natural Gas Operations $324 $315 $649 $624
Propane Operations 168 123 336 245
Energy Marketing & Wholesale 22 14 43 29
----------- ---------- ---------- ---------
$514 $452 $1,028 $898
=========== ========== ========== =========
Taxes Other than Income:
Natural Gas Operations $117 $126 $218 $239
Propane Operations 32 31 69 69
Energy Marketing & Wholesale 10 9 26 26
----------- ---------- ---------- ---------
$159 $166 $313 $334
=========== ========== ========== =========
Income Taxes (Benefits):
Natural Gas Operations $185 $186 ($35) ($17)
Propane Operations 62 48 (85) (88)
Energy Marketing & Wholesale 304 54 587 28
----------- ---------- ---------- ---------
$551 $288 $467 ($77)
=========== ========== ========== =========
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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 issues
long-term debt or equity securities to pay down short-term debt.
The Company's short-term borrowing requirements vary according to the seasonal
nature of its sales and expense activity. The Company has greater need for
short-term borrowing during periods when internally generated funds are not
sufficient to cover all capital and operating requirements, including costs of
gas purchases and capital expenditures. In general, the Company's short-term
borrowing needs for purchases of gas inventory and capital expenditures are
greatest during the summer months and the Company's short-term borrowing needs
for financing of customer accounts receivable are greatest during the winter
months. Short-term borrowing utilized for construction or property acquisitions
generally has been on an interim basis and converted to long-term debt and
equity when it becomes economical and feasible to do so.
At December 31, 2000, the Company had $22,000,000 in bank lines of credit, of
which $12,441,429 had been borrowed under the credit agreement. The Company had
outstanding letters of credit totaling $5,850,000 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 $3,708,571.
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LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)
The Company used net cash in operating activities for the six months ended
December 31, 2000 in the amount of approximately $5,041,000 as compared to
approximately $7,578,000 for the six months ended December 31, 1999. This
decrease in cash used in operating activities of $2,537,000 was primarily due to
higher net income of approximately $932,000 compared to the same period in
fiscal 2000 as well as higher depreciation and amortization of approximately
$199,000 and greater deferred income taxes of approximately $352,000 from fiscal
2000. Also contributing to the decrease in cash used was lower working capital
requirements of approximately $1,047,000 mainly due to lower gas inventory in
the natural gas and propane operations, and the under-recovered gas cost
position of the Company's natural gas operations.
Cash used in investing activities was approximately $1,844,000 for the six
months ended December 31, 2000, as compared to approximately $2,753,000 for the
six months ended December 31, 1999. This increase of $909,000 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 $6,987,000 for the six
months ended December 31, 2000, as compared to approximately $10,332,000 for the
six months ended December 31, 1999. This decrease in cash provided by financing
activities of $3,345,000 is primarily due to a decrease in net short-term
borrowing of approximately $3,251,000.
Capital expenditures of the Company are primarily for expansion and improvement
of its gas utility properties. To a lesser extent, funds are also expended to
meet the equipment needs of the Company's operating subsidiaries and to meet the
Company's administrative needs. The Company's capital expenditures were
approximately $3,700,000 in fiscal 2000 and approximately $3,000,000 for fiscal
1999. 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
December 31, 2000, approximately $1,500,000 of that amount had been expended.
8
11
COMPARISON OF SECOND QUARTER AND SIX MONTHS OF FISCAL 2001 ENDED DECEMBER 31,
2000 AND FISCAL 2000 ENDED DECEMBER 31, 1999
QUARTERLY RESULTS FOR CONSOLIDATED OPERATIONS
The Company's net income for the second quarter of fiscal 2001, ended December
31, 2000 was approximately $939,000 compared to approximately $500,000 for the
second quarter of fiscal 2000, ended December 31, 1999.
Margins increased from approximately $3,931,000 in fiscal 2000 to $6,168,000 in
fiscal 2001 or $2,237,000, primarily due to increased margin from the marketing
and wholesale operations because of customer growth and conditions present in
the marketplace. Distribution, general and administrative expenses increased
from approximately $2,035,000 in fiscal 2000 to $2,973,000 in fiscal 2001. This
increase was primarily due to the timing of certain expenses, and higher
incentives and commissions paid in fiscal 2001 resulting from increased
earnings.
SIX MONTH RESULTS FOR CONSOLIDATED OPERATIONS
The Company's net income for the six months ended December 31, 2000 was
approximately $766,000 compared to a net loss of approximately $166,000 for the
six months ended December 31, 1999.
Margins increased from approximately $5,938,000 for the first six months of
fiscal 2000 to $9,169,000 for the first six months of fiscal 2001 or $3,231,000.
The increase in margins was due to higher propane margins of $321,000, due to
more gallons and higher margin per gallon sold, and higher energy marketing and
trading margins of approximately $2,910,000, due primarily to customer growth
and higher volumes sold as a result of colder temperatures.
Distribution, general and administrative expenses increased from approximately
$4,184,000 in fiscal 2000 to $5,093,000 in fiscal 2001. This increase was
primarily due to timing of certain expenses, and increased incentives and
commissions paid due to higher earnings.
Other income decreased by approximately $446,000 for the first six months of
fiscal 2001 compared to fiscal 2000 primarily due to the new accounting rules on
SFAS 133 requiring the Company to report fair value of derivative and hedging
instruments. The Company records all the impact of SFAS 133 in other income.
OPERATING RESULTS OF THE COMPANY'S NATURAL GAS OPERATIONS
SECOND QUARTER SIX MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
---------------------------- ----------------------------
2001 2000 2001 2000
----------- ---------- ------------ ----------
(IN THOUSANDS) (IN THOUSANDS)
Natural Gas revenues $12,853 $7,174 $16,245 $10,608
Natural Gas purchased 9,782 4,527 11,682 6,431
---------- ---------- ----------- ----------
Gross Margin 3,071 2,647 4,563 4,177
Operating expenses 2,207 1,819 4,048 3,721
---------- ---------- ----------- ----------
Operating Income 864 828 515 456
Interest charges 336 327 655 583
Other utility (income) expense 9 (9) (29) (59)
Income taxes (benefits) 185 186 (35) (17)
---------- ---------- ----------- ----------
Net natural gas income (loss) $334 $324 ($76) ($51)
========== ========== =========== ==========
9
12
NATURAL GAS OPERATIONS - (CONTINUED)
QUARTERLY RESULTS FOR NATURAL GAS OPERATIONS
Natural gas operating revenues in the second quarter of fiscal 2001 were
approximately $12,853,000 compared to approximately $7,174,000 for the second
quarter of fiscal 2000, due to higher volumes of natural gas sold because of
colder weather than one year ago and higher rates, due to increases in natural
gas costs in Montana and Wyoming. Gross margin, which is defined as operating
revenues less gas purchased, was approximately $3,071,000 for the second quarter
of fiscal 2001, compared to a gross margin of approximately $2,647,000 for the
second quarter of fiscal 2000, due to colder weather experienced in fiscal 2001.
OPERATING EXPENSES -
Natural gas operating expenses, excluding the cost of gas purchased and federal
and state income taxes, were approximately $2,207,000 for the second quarter of
fiscal 2001 as compared to $1,819,000 for the same period in fiscal 2000. The
21% increase in the period was generally due to the timing of certain expenses,
and increased incentives and commissions paid due to higher earnings.
INTEREST CHARGES -
Interest charges allocable to the Company's natural gas operations were
approximately $336,000 for the second quarter of fiscal 2001, as compared to
$327,000 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 $55,000 primarily due to greater
short-term borrowing for the second 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 taxes of the Company's natural gas operations were
approximately $185,000 for both second quarters of fiscal 2001 and fiscal 2000.
SIX MONTH RESULTS FOR NATURAL GAS OPERATIONS
Natural gas operating revenues in the first six months of fiscal 2001 were
approximately $16,245,000 compared to approximately $10,608,000 for the first
six months of fiscal 2000. Operating income increased approximately 13% or
$59,000 from fiscal 2000 and was approximately $515,000 the first six months of
fiscal 2001 compared to approximately $456,000 for the first six months of
fiscal 2000. Gross margin, which is defined as operating revenues less gas
purchased, was approximately $4,563,000 for the first six months of fiscal 2001
compared to a gross margin of approximately $4,177,000 for the first six months
of fiscal 2000, primarily due to colder weather during fiscal 2001. The increase
in gross margin was partially offset by higher operating expenses in fiscal 2001
of approximately $327,000.
OPERATING EXPENSES -
Natural gas operating expenses, excluding the cost of gas purchased and federal
and state income taxes, were approximately $4,048,000 for the first six months
of fiscal 2001 as compared to $3,721,000 for the same period in fiscal 2000. The
9% increase in the period was due to the timing of certain expenses, and
increased incentives and commissions paid as a result of higher earnings.
INTEREST CHARGES -
Interest charges allocable to the Company's natural gas operation were
approximately $655,000 for the six months of fiscal 2001, as compared to
$583,000 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 $148,000 primarily due to greater
short-term borrowing for the first six months of fiscal 2001. This increase in
borrowing was related to higher unrecovered gas costs in the natural gas
operations.
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NATURAL GAS OPERATIONS - (CONTINUED)
INCOME TAXES -
State and federal income tax benefits of the Company's natural gas divisions
were approximately $35,000 for the first six months of fiscal 2001 as compared
to approximately $17,000 in fiscal 2000. This was due to a higher pre-tax loss
from natural gas operations.
OPERATING RESULTS OF THE COMPANY'S PROPANE OPERATIONS
SECOND QUARTER SIX MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
---------------------------- --------------------------
2001 2000 2001 2000
----------- --------- ---------- --------
(IN THOUSANDS) (IN THOUSANDS)
ENERGY WEST PROPANE (EWP)
Operating revenues $3,132 $1,833 $4,084 $2,604
Cost of propane 2,093 1,100 2,675 1,516
---------- --------- --------- --------
Gross Margin 1,039 733 1,409 1,088
Operating expenses 792 571 1,471 1,264
---------- --------- --------- --------
Operating income (loss) 247 162 (62) (176)
Other (income) expense-net (34) (37) (60) (71)
Interest expense 131 94 248 156
Income taxes (benefit) 62 48 (85) (88)
---------- --------- --------- --------
Net propane income (loss) $88 $ 57 ($165) ($173)
========== ========= ========= ========
QUARTERLY RESULTS FOR PROPANE OPERATIONS
Propane revenues in the second quarter of fiscal 2001 were approximately
$3,132,000 compared to approximately$1,833,000 for the second quarter of fiscal
2000. Operating income increased approximately $85,000 from fiscal 2000 and was
$247,000 for the second quarter of fiscal 2001 compared to approximately
$162,000 for the second quarter of fiscal 2000. This increase in operating
income was due to an increase in gross margin of approximately $306,000,
partially offset by an increase in operating expenses of approximately $221,000.
The increase in gross margin was from higher propane gallons sold and higher
margins per gallon, generated by the Company's regulated and non-regulated
propane operations. Gross margin was approximately $1,039,000 for the second
quarter of fiscal 2001 compared to gross margin of approximately $733,000 for
the second quarter of fiscal 2000.
OPERATING EXPENSES -
Propane operating expenses, excluding the cost of propane purchased and federal
and state income taxes, were approximately $792,000 for the second quarter of
fiscal 2001 as compared to $571,000 the same period in fiscal 2000. The increase
in the period was generally due to the timing of certain expenses, and increased
incentives and commissions paid as a result of increased earnings.
INTEREST CHARGES -
Interest charges allocable to the Company's propane operations were
approximately $131,000 for the second quarter of fiscal 2001, as compared to
$94,000 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 $44,000 primarily due to greater
short-term borrowing for the second quarter of fiscal 2001.
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PROPANE OPERATIONS - (CONTINUED)
INCOME TAXES -
State and federal income taxes of the Company's propane operations were
approximately $62,000 for the second quarter of fiscal 2001, as compared to
approximately $48,000 for the second quarter of fiscal 2000, due to higher
pre-tax income from the propane operations.
SIX MONTH RESULTS FOR PROPANE OPERATIONS
Propane revenues in the first six months of fiscal 2001 were approximately
$4,084,000 compared to approximately $2,604,000 for the first six months of
fiscal 2000. Operating loss decreased approximately $114,000 from fiscal 2000
and was $62,000 for the first six months of fiscal 2001 compared to
approximately $176,000 for the first six months of fiscal 2000. This decrease in
operating loss was due to an increase in gross margin of approximately $321,000.
Gross margin was approximately $1,409,000 for the first six months of fiscal
2001 compared to gross margin of approximately $1,088,000 for the first six
months of fiscal 2000. 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. The decrease in operating loss was partially
offset by an increase in operating expenses of approximately $207,000.
OPERATING EXPENSES -
Propane operating expenses, excluding the cost of propane purchased and federal
and state income taxes were approximately $1,471,000 for the first six months of
fiscal 2001 as compared to $1,264,000 for the same period in fiscal 2000. The
increase in the period was generally due to the timing of certain expenses, and
increased incentives and commissions paid as a result of increased earnings.
INTEREST CHARGES -
Interest charges allocable to the Company's propane operations were
approximately $248,000 for the first six months of fiscal 2001, as compared to
$156,000 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 $84,000 primarily due to greater
short-term borrowing for the first six months of fiscal 2001.
INCOME TAXES -
State and federal income tax benefits of the Company's propane operations were
approximately $85,000 for the first six months of fiscal 2001 as compared to
approximately $88,000 for the first six months of fiscal 2000, due to a lower
pre-tax loss from the propane operations.
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OPERATING RESULTS OF THE COMPANY'S ENERGY MARKETING AND WHOLESALE OPERATIONS
SECOND QUARTER SIX MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
-------------------------- ------------------------
2001 2000 2001 2000
---------- --------- ------------ ----------
(IN THOUSANDS) (IN THOUSANDS)
ENERGY WEST RESOURCES (EWR)
Gas, electric & propane trading $19,777 $13,356 $32,325 $21,728
Cost of gas, electric & propane trading 17,721 12,806 29,129 21,056
--------- ---------- ----------- ----------
Gross Margin 2,056 550 3,196 672
Operating expenses 742 340 1,105 632
--------- ---------- ----------- ----------
Operating income 1,314 210 2,091 40
Other (income) expense-net 299 (8) 284 (122)
Interest expense 127 45 214 77
Income taxes 304 54 587 28
--------- ---------- ----------- ----------
Net income $ 584 $ 119 $ 1,006 $ 57
========= ========== =========== ==========
QUARTERLY RESULTS FOR ENERGY MARKETING AND WHOLESALE OPERATIONS
Revenues from energy marketing and wholesale operations in the second quarter of
fiscal 2001 were approximately$19,777,000 compared to approximately $13,356,000
for the second quarter of fiscal 2000. The increase in revenues for the quarter
resulted from continued growth in market share. The Company's energy marketing
and wholesale operations experienced operating income during the second quarter
of fiscal year 2001 of $1,314,000 compared to $210,000 in fiscal 2000. This
increase in operating income of approximately $1,104,000 was due to higher gross
margins of $1,506,000 partially offset by higher operating expenses of
approximately $402,000. The overall increase in gross margin resulted from
additional growth in the commercial energy market and more competitive supply
contracts.
OPERATING EXPENSES -
Operating expenses for energy marketing and wholesale operations, excluding the
cost of gas and electricity purchased and federal and state income taxes, were
approximately $742,000 for the second quarter of fiscal 2001 as compared to
$340,000 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 $307,000 from $8,000 for the second quarter of fiscal
2000 compared to an expense of $299,000 for the second quarter of fiscal 2001.
The main reason for this decrease is due to the new requirements under SFAS 133,
the adoption of which resulted in the Company recording a loss of approximately
$319,000 at December 31, 2000.
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16
ENERGY MARKETING AND WHOLESALE OPERATIONS - (CONTINUED)
INCOME TAXES -
State and federal income tax expense of the Company's energy marketing and
wholesale operations were approximately $304,000 for the second quarter of
fiscal 2001 as compared to approximately $54,000 in fiscal 2000, due to higher
pre-tax income from the energy marketing and wholesale operations.
SIX MONTHS RESULTS FOR ENERGY MARKETING AND WHOLESALE OPERATIONS
Revenues from energy marketing and wholesale operations in the first six months
of fiscal 2001 were approximately $32,325,000 compared to approximately
$21,728,000 for the first six months of fiscal 2000. The increase in revenues
for the six-month period resulted from growth in market share. The Company's
energy marketing and wholesale operations experienced operating income during
the first six months of fiscal year 2001 of $2,091,000 compared to $40,000 in
fiscal year 2000. This increase in operating income of approximately $2,051,000
was due to higher gross margins of $2,524,000, partially offset by higher
operating expenses of approximately $473,000. The overall increase in gross
margin resulted from additional growth in the commercial energy market and more
competitive supply contracts.
OPERATING EXPENSES -
Operating expenses for energy marketing and wholesale operations, excluding the
cost of gas and electricity purchased and federal and state income taxes, were
approximately $1,105,000 for the first six months of fiscal 2001 as compared to
$632,000 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 $406,000 from $122,000 for the first six months of
fiscal 2000 compared to an expense of $284,000 for the first six months of
fiscal 2001. Other income and expense for the first six months of both fiscal
years is mainly because of mark-to-market gains from derivatives and in fiscal
2001, the new reporting requirements under SFAS 133.
INCOME TAXES -
State and federal income tax expense of the Company energy marketing and
wholesale operations were approximately $587,000 for the first six months of
fiscal 2001 as compared to approximately $28,000 in fiscal 2000, due to higher
pre-tax income from the energy marketing and wholesale operations.
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.
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17
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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18
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 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.
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.
The Company has been notified by one of its gas suppliers, Torch Energy Finance
Company (Torch), that Torch believes the Company is not complying with a natural
gas supply contract. The Company believes that the contractual provision Torch
Energy seeks to enforce is contained in an agreement that has been replaced with
a subsequent agreement. With respect to that subsequent agreement, the Company
believes Torch is in default. No litigation has been filed by either party at
this point in time.
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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. NO EXHIBITS ARE BEING FILED FOR THE QUARTER ENDED DECEMBER 31,
2000.
B. NO REPORTS ON FORM 8-K HAVE BEEN FILED DURING THE QUARTER ENDED DECEMBER 31, 2000.
17
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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
Dated February 14, 2001
/s/ Edward J. Bernica
- ---------------------------------
Edward J. Bernica, Executive Vice-President,
Chief Operating Officer and Chief Financial Officer