FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes | | No |X|
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 May 15, 2003
(Common stock, $.15par value) 2,594,258 shares
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
March 31, 2003, March 31, 2002, and June 30, 2002 1
Condensed Consolidated Statements of Operations -
three months and nine months ended March 31, 2003 and 2002 2
Condensed Consolidated Statements of Cash Flows -
nine months ended March 31, 2003 and 2002 3
Notes to Condensed Consolidated Financial Statements 4-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-22
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 22-23
Item 4 - Controls and Procedures 23
Part II Other Information
Item 1 - Legal Proceedings 24
Item 2 - Changes in Securities 25
Item 3 - Defaults upon Senior Securities 25
Item 4 - Submission of Matters to a Vote of Security Holders 25
Item 5 - Other Information 25
Item 6 - Exhibits and Reports on Form 8-K 25
Signatures 26-30
Item 1. Financial Statements
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31 March 31 June 30
2003 2002 2002
(Unaudited) (Unaudited) (Unaudited)
----------- ------------ -----------
Current assets
Cash and cash equivalents $ 1,532,886 $ (26,656) $ 367,657
Accounts receivable (net) 13,282,926 14,666,308 8,244,239
Derivative assets 2,770,684 4,165,217 2,867,717
Natural gas and propane inventories 465,051 2,877,627 5,640,660
Materials and supplies 472,960 671,644 593,674
Prepayments and other 287,443 521,309 445,652
Deferred tax assets 53,370 931,147
Deferred purchase gas costs 769,266 148,209
Prepaid income tax payments 847,362 223,083
----------- ------------ -----------
Total current assets 20,481,948 23,246,741 19,090,746
----------- ------------ -----------
Notes receivable 3,300 3,300
Property, plant and equipment, net 39,211,269 34,970,546 36,518,908
Deferred charges 2,331,692 2,007,860 1,935,263
Other assets 313,998 348,093 320,830
----------- ------------ -----------
Total assets $62,338,907 $ 60,576,540 $57,869,047
=========== ============ ===========
Capitalization and liabilities
Current liabilities:
Lines of credit $ 5,694,152 $ 7,879,841 $ 3,500,000
Current portion of long term debt 507,219 470,000 502,072
Accounts payable 10,714,784 7,158,378 7,413,693
Income tax payable 1,005,975
Deferred tax liabilities 492,508
Derivative liabilities 404,117
Refundable cost of gas purchases 2,024,159
Accrued and other current liabilities 5,524,123 5,894,534 5,453,304
----------- ------------ -----------
Total current liabilities 22,844,395 21,895,261 19,899,203
----------- ------------ -----------
Long-term liabilities:
Deferred tax liabilities 4,618,134 3,919,810 4,043,038
Deferred investment tax credits 360,672 381,734 376,468
Other long-term liabilities 2,968,898 2,052,644 1,910,571
----------- ------------ -----------
Total $ 7,947,704 $ 6,354,188 6,330,077
Long term debt $15,280,075 $ 15,776,000 15,367,424
Stockholders' equity
Preferred stock --- $.15 par value
Authorized --- 1,500,000
Outstanding --- none
Common stock --- $.15 par value 389,024 385,721 $ 385,964
Authorized --- 3,500,000
Outstanding --- 2,593,444 shares outstanding
at March 31, 2003; 2,570,805 shares outstanding
March 31, 2002; 2,573,046 at June 30, 2002
Capital in excess of par value 5,044,507 4,847,663 4,863,113
Retained earnings 10,833,202 11,317,707 11,023,266
----------- ------------ -----------
Total stockholders' equity 16,266,733 16,551,091 16,272,343
----------- ------------ -----------
Total capitalization $31,546,808 $ 32,327,091 $31,639,767
----------- ------------ -----------
Total capitalization and liabilities $62,338,907 $ 60,576,540 $57,869,047
=========== ============ ===========
The accompanying notes are an integral part of these condensed
financial statements.
-1-
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
March 31 March 31
2003 2002 2003 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
Revenues:
Natural gas operations $12,642,279 $15,309,586 $25,107,458 $32,330,763
Propane operations $ 5,527,215 $ 5,006,358 10,858,859 8,764,215
Gas and electric-wholesale $13,320,994 $16,619,220 32,832,364 39,107,412
Pipeline $ 101,481 254,759
----------- ----------- ----------- -----------
Total revenues 31,591,969 36,935,164 69,053,440 80,202,390
----------- ----------- ----------- -----------
Expenses:
Gas & propane purchased $13,055,302 $14,750,002 24,641,892 29,642,978
Gas and electric-wholesale $11,771,871 $16,867,159 30,265,266 37,825,423
Distribution, general and administrative $ 2,537,595 $ 2,314,652 8,918,162 7,095,762
Maintenance $ 118,586 $ 130,484 411,194 342,183
Depreciation and amortization $ 554,747 $ 503,855 1,665,022 1,533,336
Taxes other than income $ 209,222 $ 223,043 647,800 629,358
----------- ----------- ----------- -----------
Total operating expenses 28,247,323 34,789,195 66,549,336 77,069,040
----------- ----------- ----------- -----------
Operating income 3,344,646 2,145,969 2,504,104 3,133,350
Non-operating income $ 55,243 $ 114,721 217,263 276,753
Interest expense:
Long-term debt $ 291,453 $ 299,096 875,517 898,348
Lines of credit $ 143,552 $ 189,628 352,012 470,549
----------- ----------- ----------- -----------
Total interest expense 435,005 488,724 1,227,529 1,368,897
----------- ----------- ----------- -----------
Income before income tax expense 2,964,884 1,771,966 1,493,838 2,041,206
Income tax expense $ 1,185,726 $ 598,228 614,444 678,270
----------- ----------- ----------- -----------
Net income $ 1,779,158 $ 1,173,738 $ 879,394 $ 1,362,936
=========== =========== =========== ===========
Earnings per common share:
Basic and diluted earnings per common share $ 0.69 $ 0.46 $ 0.34 $ 0.54
Dividends per common share $ 0.135 $ 0.130 $ 0.395 $ 0.390
Weighted average common shares outstanding:
Basic 2,583,935 2,541,867 2,583,935 2,541,867
Diluted 2,583,935 2,549,039 2,583,935 2,549,039
The accompanying notes are an integral part of these condensed
financial statements.
-2-
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
March 31
2003 2002
(Unaudited) (Unaudited)
------------ ------------
Cash flow from operating activities:
Net income $ 879,394 $ 1,362,936
Adjustment to reconcile net income to net cash flows
provided by (used in) operating activities
Depreciation and amortization, including deferred charges and
financing costs 1,788,367 1,599,880
Gain on sale of property, plant & equipment (13,436) (139,167)
Deferred gain on sale of assets (17,721) (17,721)
Investment tax credit - net (15,796) (15,796)
Deferred income taxes - net 1,452,873 (54,500)
Change in operating assets and liabilities
Accounts receivable - net (5,038,687) (4,334,905)
Derivative assets 97,033 714,174
Natural gas and propane inventory 5,175,609 1,889,919
Prepayments and other 158,209 (120,167)
Recoverable/refundable cost of gas purchases (2,793,425) 6,676,011
Accounts payable 1,301,091 (2,146,742)
Derivative liabilities 404,117 (5,355,884)
Other assets and liabilities 1,061,488 (302,127)
------------ ------------
Net cash provided (used) in operating activities 4,439,116 (244,089)
Cash flow from investing activities:
Construction expenditures (4,419,691) (3,925,807)
Proceeds from sale of property, plant & equipment 14,458 549,630
Collection of long term notes receivable 3,300 134,627
Customer advances for construction (2,131) (28,078)
Proceeds from contributions in aid of construction 21,288 (2,901)
------------ ------------
Net cash used in investing activities (4,382,776) (3,272,529)
Cash flow from financing activities:
Repayment of long term debt (82,202) (100,000)
Proceeds from lines of credit with bank 37,267,406 42,934,447
Repayment of lines of credit to bank (35,073,254) (38,840,595)
Sale of common stock 204,574
Dividends on common stock (1,003,061) (929,131)
------------ ------------
Net cash provided by financing activities 1,108,889 3,269,295
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,165,229 (247,323)
Cash and cash equivalents at beginning of year 367,657 220,667
------------ ------------
Cash and cash equivalents at end of period $ 1,532,886 ($ 26,656)
============ ============
The accompanying notes are an integral part of these condensed
financial statements.
-3-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2003
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Energy West Incorporated and its subsidiaries (the Company) have been prepared
in accordance with accounting principles generally accepted in the United States
of America 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 of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the nine month
period ended March 31, 2003 are not necessarily indicative of the results that
may be expected for the fiscal year ending June 30, 2003. The financial
statements should be read in conjunction with the audited consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the fiscal year ended June 30, 2002.
The Company's reporting segments are: Natural Gas Operations, Propane
Operations, Energy Marketing and Wholesale Operations and Pipeline Operations.
To reflect management and business changes, the Company realigned its reporting
segments effective July 1, 2002. The Company's wholly owned subsidiary, Energy
West Development, Inc. (EWD), owns a renovated pipeline located in Wyoming and
Montana. An application has been granted by the Federal Energy Regulatory
Commission (FERC) and it is anticipated that EWD will begin operations of this
pipeline as a transmission pipeline on or about July 1, 2003. The revenue and
expenses associated with this transmission pipeline will be included in the
"Pipeline Operations" segment for financial reporting purposes. EWD also owns a
gathering system pipeline in Wyoming and recently purchased natural gas
production reserves in north central Montana. The revenue and expenses
associated with EWD's gathering system pipeline were reported as part of the
"Energy Marketing and Wholesale Operations" segment for periods prior to fiscal
year 2003. Beginning with fiscal year 2003, such revenue and expenses are
reported as part of the "Pipeline Operations" segment as are the revenues and
expenses associated with the recently purchased production properties. Also
beginning with fiscal year 2003, the operations of a regulated propane
distribution system located in Cascade, Montana are reported as part of the
"Natural Gas Operations" segment. The Cascade, Montana system was reported as
part of the Company's "Propane Operations" segment prior to fiscal year 2003.
Segment information for prior periods has been restated to reflect the
realignment of the Company's reporting segments.
NOTE 2 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY
Management of Risks Related to Derivatives--The Company and its
subsidiaries are subject to certain risks related to changes in certain
commodity prices and risks of counter-party performance. The Company has
established certain policies and procedures to manage such risks. The Company
has a Risk Management Committee (RMC), comprised of Company officers and
management to oversee the Company's risk management program as defined in its
risk management policy. The purpose of the risk management program is to
minimize adverse impacts on earnings resulting from volatility of energy prices,
counter-party credit risks, and other risks related to the energy commodity
business. The RMC is overseen by the Audit Committee of the Company's Board of
Directors.
General--From time to time the Company or its subsidiaries may use
financial derivative contracts to mitigate the risk of commodity price
volatility related to firm commitments to purchase and sell natural gas or
electricity. The Company may use such arrangements to protect its profit margin
on future obligations to deliver quantities of a commodity at a fixed price.
Conversely, such arrangements may be used to hedge against future market price
declines where the Company or a subsidiary enters into an obligation to purchase
a commodity at a fixed price in the future. The Company accounts for such
financial instruments in accordance with Statement of Financial Accounting
Standard (SFAS) 133, Accounting for
-4-
Derivative Instruments and Hedging Activities, as amended by SFAS 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities.
In accordance with SFAS 133, contracts that do not qualify as normal
purchase and sale contracts must be reflected in the Company's financial
statements at fair value, determined as of the date of the balance sheet. This
accounting treatment is also referred to as "mark-to-market" accounting.
Mark-to-market accounting treatment can result in a disparity between reported
earnings and realized cash flow, because changes in the value of the financial
instrument are reported as income or loss even though no cash payment may have
been made between the parties to the contract. If such contracts are held to
maturity, the cash flow from the contracts, and their hedges, is realized over
the life of the contract.
Quoted market prices for natural gas derivative contracts of the Company
or its subsidiaries generally are not available. Therefore, to determine the
fair value of natural gas derivative contracts, the Company uses internally
developed valuation models that incorporate independently available current and
historical pricing information.
During the third quarter of fiscal year 2002, Energy West Resources, Inc.
(EWR) terminated its existing derivative contracts with Enron Canada Corporation
(ECC), a subsidiary of Enron Corp. Most of these contracts were commodity swaps
that EWR had entered into to mitigate the effects of fluctuations in the market
price of natural gas. The derivative contracts with ECC were entered into at
various times in order to lock in margins on certain contracts under which EWR
had commitments to other parties to sell natural gas at fixed prices (the
"Future Supply Agreements"). EWR made the decision to terminate these ECC
contracts because of concerns relating to the bankruptcy of Enron Corp. At the
date of termination, the market price of natural gas was substantially lower
than the price had been when EWR entered into the contracts, resulting in a net
amount due from EWR to ECC of approximately $5,400,000. EWR paid this amount to
ECC upon the termination of the contracts, and thereby discharged the liability
related to the contracts. The costs related to such termination were reflected
in the Company's consolidated statement of income as adjustments to gas
purchased for the fiscal year ended June 30, 2002. At the time the Company
terminated the ECC derivative contracts, the Company entered into new gas
purchase contracts (the "Future Purchase Agreements") at prices much lower than
those provided for under the ECC contracts. The Company recognized income as a
result of the mark-to-market accounting treatment of the Future Purchase
Agreements, and therefore the termination of the ECC derivative contracts did
not have a material impact on the Company's consolidated statement of income.
The Future Purchase Agreements and the Future Supply Agreements continue
to be valued on a mark-to market basis. As of March 31, 2003, these agreements
were reflected on the Company's consolidated balance sheet as derivative assets
and liabilities at an approximate fair value as follows:
Assets Liabilities
------ -----------
Contracts maturing during fiscal year 2003: $ 245,188 $ 78,438
Contracts maturing during fiscal years 2004 and 2005: 1,705,123 266,785
Contracts maturing during fiscal years 2006 and 2007: 679,892 12,755
Contracts maturing from fiscal years 2008 and beyond: 140,481 46,139
---------- --------
Total $2,770,684 $404,117
========== ========
During the first nine months of fiscal year 2003, the Company did not
enter into any new contracts that would be accounted for using mark-to-market
accounting under SFAS 133.
Natural Gas and Propane Operations--In the case of the Company's regulated
divisions, gains or losses resulting from the derivative contracts are subject
to deferral under regulatory procedures approved by the public service
regulatory commissions of the States of Montana, Wyoming and Arizona. Therefore,
related derivative assets and liabilities are offset with corresponding
regulatory liability and asset amounts included in "Recoverable Cost of Gas
Purchases", pursuant to SFAS 71, Accounting for the Effects of Certain Types of
Regulation.
-5-
NOTE 3 - INCOME TAXES
Income tax expense differs from the amount computed by applying the
federal statutory rate to pre-tax income as demonstrated in the following table:
Three Months Ended Nine Months Ended
March 31 March 31
------------------------ ----------------------
2003 2002 2003 2002
----------- --------- --------- ---------
Tax expense at statutory rates - 34% .......... $ 1,008,973 $ 602,468 $ 511,239 $ 694,010
State tax expense, net of federal tax benefit . 116,925 36,130 79,543 37,001
Amortization of deferred investment tax credits (5,266) (5,265) (15,797) (15,797)
Other ......................................... 65,094 (35,105) 39,459 (36,944)
----------- --------- --------- ---------
Total income tax expense ...................... $ 1,185,726 $ 598,228 $ 614,444 $ 678,270
=========== ========= ========= =========
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 an office facility for Company
field personnel and storage location for certain equipment and materials. 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 of a proposed remediation plan 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 has
completed its remediation of soil contaminants and in April of 2002 received a
closure letter from MDEQ approving the completion of such remediation program.
The Company and its consultants continue their work with the MDEQ relating
to the remediation plan for water contaminants. The Company expects to file a
proposal relating to such remediation, including a request for waivers of
certain standards on the grounds of technical impracticability. There is no
assurance that such proposal will be approved.
As of March 31, 2003, the costs incurred by the Company in evaluating and
beginning the remediation have totaled approximately $1,964,000. On May 30,
1995, the Company received an order from the Montana Public Service Commission
(MPSC) allowing for the recovery of the costs associated with the evaluation and
remediation of the site through a surcharge on customer bills. As of March 31,
2003, the Company has recovered approximately $1,410,000 of such costs. The
Company expects to recover the full amount of such costs through the surcharge.
The MPSC's decision calls for ongoing review by the MPSC of any costs incurred.
The Company will submit a report for review by the MPSC when the water
contaminants remediation plan is approved by the MDEQ. Future costs are not
estimable at this time.
-6-
LEGAL PROCEEDINGS
EWR currently is involved in a lawsuit with PPL Montana, LLC (PPLM) which
is pending in the United States District Court for the District of Montana. The
lawsuit was filed on July 2, 2001, and involves a wholesale electricity supply
contract between EWR and PPLM dated March 17, 2000 and a confirmation letter
thereunder dated June 13, 2000 (together, the "Contract"). EWR received
substantial imbalance payments as a result of the amount of power that it
scheduled and purchased from PPLM under the Contract. PPLM claims that, as a
result of EWR's scheduling under the Contract, PPLM was deprived of the fair
market value of energy which PPLM contends it could have sold for its own
account. PPLM estimates the fair market value of the excess energy scheduled by
EWR to be approximately $18.0 million. EWR has denied that it breached the
Contract, and contends that, in any event, PPLM did not sustain any damages.
Trial in the case began in December, 2002. On March 7, 2003, the court
issued a ruling to the effect that EWR has breached the Contract with PPLM. The
court did not rule on the issue of whether PPLM is entitled to recover any
damages from EWR. Trial on the issue of whether PPLM sustained any damages has
been scheduled for June 18, 2003. There is no assurance as to when the court
will rule on such issue. If the court rules that PPLM sustained damages, further
proceedings will be required in order to determine the amount of such damages.
Any final order of the court will be subject to appeal by the
non-prevailing party. Any appeal by EWR could include an appeal of the court's
March 7, 2003, ruling that EWR breached the Contract.
The Company believes that it has established adequate reserves with
respect to the litigation with PPLM; however, there can be no assurance that any
liability will not exceed such reserves. A liability in excess of the recorded
reserves could have a material adverse effect on the Company and its financial
statements.
By letter dated August 30, 2002, the Montana Department of Revenue (DOR)
notified the Company that the DOR's property tax audit of the Company for the
period January 1, 1997 through and including December 31, 2001 had concluded.
The notification stated that the DOR had determined that the Company had
willfully under-reported its personal property and that additional property
taxes and penalties should be assessed. The Company estimates that if the
additional assessment stands, it would owe approximately $3.9 million in
additional property taxes and penalties. The Company believes it has valid
defenses to the assessment of tax and penalties and plans to vigorously contest
the proposed assessment.
In the event that any tax deficiency related to the DOR assessment is
imposed on the Company, the Company will seek to recover the portion of such
deficiency related to regulated property through the rate making process with
the MPSC. The portion of the assessment related to unregulated assets is
immaterial. No assurance can be given as to whether the Company will recover all
or part of such deficiency, and any related interest charges, through rates. The
Company does not anticipate that any penalty would be recoverable through rates.
The Company has accounted for the potential tax liability by accruing a
liability for taxes and corresponding regulatory asset on its books. The tax
accrual has no effect on the Company's consolidated income. An adverse outcome
in the matter resulting in the imposition of penalties or the failure of the
Company to obtain relief through the rate making process for any taxes (and
related interest) imposed, could have a material adverse effect on the Company
and its financial statements.
In addition to the legal proceedings discussed above, from time to time
the Company is involved in litigation relating to claims arising from its
operations in the normal course of business none of which the Company believes
is material to the Company's business or financial statements. The Company
utilizes various risk management strategies, including maintaining liability
insurance against certain risks, employee education and safety programs and
other processes intended to reduce liability risk.
-7-
NOTE 5 - OPERATIONS BY LINE OF BUSINESS
Three Months Ended Nine Months Ended
March 31 March 31
------------------------- ----------------------------
2003 2002 2003 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Gross Margin (Operating
Revenue Less Gas and
Power Purchased):
Natural Gas Operations $3,495,044 $ 3,546,170 $ 7,948,835 $ 7,844,989
Propane Operations 1,619,148 2,019,772 3,375,590 3,607,011
Energy Marketing &
Wholesale 1,549,123 (247,939) 2,567,098 1,281,989
Pipeline Operations 101,481 254,759
---------- ------------ ------------ ------------
$6,764,796 $ 5,318,003 $ 14,146,282 $ 12,733,989
---------- ------------ ------------ ------------
Operating Income (Loss):
Natural Gas Operations $1,587,350 $ 1,709,081 $ 1,714,213 $ 2,130,786
Propane Operations 748,069 1,158,130 739,842 1,015,992
Energy Marketing &
Wholesale 954,597 (711,471) (68,198) (2,400)
Pipeline Operations 54,630 (9,771) 118,247 (11,028)
---------- ------------ ------------ ------------
$3,344,646 $ 2,145,969 $ 2,504,104 $ 3,133,350
---------- ------------ ------------ ------------
Net Income (Loss):
Natural Gas Operations $ 831,995 $ 927,489 $ 600,803 $ 921,391
Propane Operations 375,600 746,814 331,892 567,675
Energy Marketing &
Wholesale 539,549 (494,038) (123,922) (117,270)
Pipeline Operations 32,014 (6,527) 70,621 (8,860)
---------- ------------ ------------ ------------
$1,779,158 $ 1,173,738 $ 879,394 $ 1,362,936
---------- ------------ ------------ ------------
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
143, Accounting for Asset Retirement Obligations, which requires asset
retirement obligations to be recognized when they are incurred and recorded as
liabilities. The Company adopted this statement effective July 1, 2002, and has
recorded an estimated asset retirement obligation on its Condensed Consolidated
Balance Sheet in "Other long-term liabilities", and in "Property, plant and
equipment". The asset retirement obligation of $502,915 represents the Company's
estimated future liability as of March 31, 2003, to plug and abandon existing
oil and gas wells owned by EWR and EWD. EWR and EWD will depreciate the asset
amount and increase the liability over the estimated useful life of these
assets. In the future, the Company may have other asset retirement obligations
arising from its business operations. The majority of the Company's assets
consists of transmission and distribution assets and have indeterminate useful
lives. Therefore, potential asset retirement obligations for such indeterminate
useful life assets cannot be estimated at this time.
-8-
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 addresses accounting and reporting for
the impairment or disposal of long-lived assets, including the disposal of a
segment of business. The Company adopted SFAS 144 on July 1, 2002. Management
has determined there is no current impact of SFAS 144 on the consolidated
financial statements of the Company.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement eliminates the required classification of gain or loss on
extinguishment of debt as an extraordinary item of income and states that such
gain or loss be evaluated for extraordinary classification under the criteria of
Accounting Principles Board No. 30 "Reporting Results of Operations." This
statement also requires sale-leaseback accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions, and makes various other technical corrections to existing
pronouncements. The Company adopted SFAS 145 on July 1, 2002, and has determined
there is no current impact of SFAS 145 on the consolidated financial statements
of the Company.
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). This statement requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred rather than the date of an entities commitment to an exit
plan. The provisions of SFAS 146 are effective for exit or disposal activities
that are initiated after December 31, 2002. Management has determined there is
no current impact of SFAS 146 on the consolidated financial statements of the
Company.
NOTE 7 - STOCK OPTIONS
The Company has elected to follow Accounting Principals Board Opinion
(APB) No. 25 in accounting for its stock options. Pro forma information
regarding net income and earnings per share is required by SFAS No. 123, as
amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure. The stock-based employee compensation cost that would have been
included in net income if the fair value method had been applied to all awards
is not significant for the quarter ended March 31, 2003, and the nine month
period ended March 31, 2003.
NOTE 8 - SUBSEQUENT EVENTS
On April 30, 2003, the Company reached an agreement with its lender to
extend its credit facility through June 2, 2003. Previously, the credit facility
had been scheduled to expire on May 1, 2003. Under the terms of the extension,
the Company has approximately $6,100,000 of total borrowing capacity, of which
the Company currently has borrowed approximately $5,900,000 as of May 13, 2003.
In addition, the Company does not have the ability to request new letters of
credit from its lender during the extension period. The Company believes that it
will have sufficient liquidity to fund its operations through the extension
period.
The Company continues to negotiate with its current bank lender for a
longer-term credit facility. No assurance can be given, however, that such a
facility will be obtained, or with respect to the possible terms of such a
facility, which may include, without limitation: (i) restrictions on Company
operations and capital investments; (ii) increased interest rates on amounts
borrowed and other increases in fees; (iii) restrictions on the Company's
ability to pay dividends. The Company's present lender also has indicated that
it will require the Company to pledge all of its assets to secure the line of
credit. In the event that the Company is unable to secure an extension of its
credit facility, the Company would need to obtain financing from alternative
sources in order to continue to fund its operations. There is no assurance that
such financing could be obtained from alternate sources, or as to the terms
under which such financing could be obtained.
-9-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing Management's Discussion and Analysis and other portions of
this report on Form 10-Q contain various "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Sections
21E of the Securities Exchange Act of 1934, as amended, which represent the
Company's expectations or beliefs concerning future events. Forward-looking
statements such as "anticipates," "believes," "expects," "planned," "scheduled"
or similar expressions and statements regarding our operating capital
requirements, negotiations with our lender, the litigation with PPLM, the DOR
property tax audit, beginning operations of the Shoshone interstate pipeline,
completion of regulatory rate cases in process, the Company's environmental
remediation plans, and similar statements that are not historical are forward
looking statements that involve risks and uncertainties. Although the Company
believes these forward-looking statements are based on reasonable assumptions,
statements made regarding future results are subject to a number of assumptions,
uncertainties and risks that could cause future results to be materially
different from the results stated or implied in this document.
Such forward-looking statements, as well as other oral and written
forward-looking statements made by or on behalf of the Company from time to
time, including statements contained in the Company's filings with the
Securities and Exchange Commission and its reports to shareholders, involve
known and unknown risks and other factors which may cause the Company's actual
results in future periods to differ materially from those expressed in any
forward looking statements. See "Risk Factors" below. Any such forward looking
statement is qualified by reference to these risk factors. The Company cautions
that these risks and factors are not exclusive. The Company does not undertake
to update any forward looking statements that may be made from time to time by
or on behalf of the Company except as required by law.
RISK FACTORS
The major factors which affect the Company's future results include
general and regional economic conditions, weather, customer retention and
growth, the ability to meet competitive pressures and to contain costs, the
adequacy and timeliness of rate relief, cost recovery and necessary regulatory
approvals, and continued access to capital markets. In addition, changes in the
competitive environment, particularly related to the Company's wholesale propane
and energy marketing segments, could have a significant impact on the
performance of the Company.
The regulatory structure is in transition. Legislative and regulatory
initiatives, at both the federal and state levels, are designed to promote
competition. Changes in regulation of the gas industry have allowed certain
customers to negotiate their own gas purchases directly with producers or
brokers. To date, the regulatory changes affecting the gas industry have not had
a negative impact on earnings or cash flow of the Company's natural gas
operations.
The Company's regulated natural gas and propane vapor operations follow
SFAS 71 "Accounting for the Effects of Certain Types of Regulation," and its
financial statements reflect the effects of the different rate making principles
followed by the various jurisdictions regulating the Company. The economic
effects of regulation can result in regulated companies recording costs that
have been or are expected to be allowed in the ratemaking process in a period
different from the period in which the costs would be charged to expense by an
unregulated enterprise. When this occurs, costs are deferred as assets in the
balance sheet (regulatory assets) and recorded as expenses in the periods when
those same amounts are reflected in rates. Additionally, regulators can impose
liabilities upon a regulated company for amounts previously collected from
customers and for amounts that are expected to be refunded to customers
(regulatory liabilities). If the Company's natural gas and propane vapor
operations were to discontinue the application of SFAS 71, the accounting impact
would be an extraordinary, non-cash charge to operations that could be material
to the financial position and results of operation of the Company.
-10-
However, the Company is unaware of any circumstances or events that would
cause it to discontinue the application of SFAS 71 in the foreseeable future.
In addition to the factors discussed above, the following are important
factors that could cause actual results to differ materially from any results
projected, forecasted, estimated or budgeted:
- Fluctuating energy commodity prices, including prices for fuel and
purchased power;
- The possibility that regulators may not permit the Company to pass
through all such increased costs to customers;
- Fluctuations in wholesale margins due to uncertainty in the
wholesale propane and power markets;
- Changes in general economic conditions in the United States and
changes in the industries in which the Company conducts business;
- Changes in federal or state laws and regulations to which the
Company is subject, including tax, environmental and employment laws
and regulations;
- The impact of FERC and state public service commission statutes and
regulations, including allowed rates of return, the pace of
deregulation in retail natural gas and electricity markets, and the
resolution of other regulatory matters;
- The ability of the Company and its subsidiaries to obtain
governmental and regulatory approval of various expansion or other
projects;
- The costs and effects (including the possibility of adverse
outcomes) of legal and administrative claims and proceedings against
the Company or its subsidiaries;
- Conditions of the capital markets the Company utilizes to access
capital to finance operations;
- The ability to raise capital in a cost-effective way;
- The effect of changes in accounting policies, if any;
- The ability to manage growth of the Company;
- The ability to control costs;
- The ability of each business unit to successfully implement key
systems, such as service delivery systems;
- The ability of the Company and its subsidiaries to develop expanded
markets and product offerings as well as their ability to maintain
existing markets;
- The ability of customers of the energy marketing and trading
business to obtain financing for various projects;
- The ability of customers of the energy marketing and trading
business to obtain governmental and regulatory approval of various
projects;
- Future utilization of pipeline capacity, which can depend on energy
prices, competition from alternative fuels, the general level of
natural gas and propane demand, decisions by customers not to renew
expiring natural gas, electricity or propane contracts, and weather
conditions; and
- Global and domestic economic repercussions from terrorist activities
and the government's response thereto.
GENERAL BUSINESS DESCRIPTION
The following discussion generally reflects results of operations of the
Company and its consolidated subsidiaries for the periods indicated.
On July 1, 2002, certain oil and gas gathering system and natural gas
transmission pipeline assets were transferred from EWR to EWD. The results of
operations related to these assets are reported under the Pipeline Operations
Segment. On March 31, 2003, EWD completed the purchase of a 75% interest in
certain natural gas production reserves in north central Montana. EWD's portion
of the estimated natural gas production from the newly purchased reserves is
approximately 350 Mcf per day.
On April 2, 2003, the FERC issued to EWD a Certificate of Public
Convenience and Necessity (subject to compliance with certain conditions) to
operate its Shoshone Pipeline as an open access interstate pipeline system. The
Company anticipates that EWD will begin operations of the refurbished
transmission pipeline on or about July 1, 2003.
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. Also included in the
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natural gas operations for reporting purposes is Cascade Gas, a small regulated
propane operation. The results of Cascade Gas had formerly been reported as part
of the propane segment.
On December 10, 2002, the Company received an interim increase in annual
revenues in the amount of $600,000 from the Montana Public Service Commission
(MPSC). The Company subsequently entered into a stipulation with the Montana
Consumer Counsel, the only other party to the rate application investigation,
for a permanent increase in the amount of approximately $687,000. That
stipulation resolved all differences with the Montana Consumer Counsel in this
rate application filing. The MPSC has scheduled a public hearing to consider the
stipulation of the parties for May 28, 2003. The Company expects its rates to be
adjusted on or about June 1, 2003 to reflect the additional $87,000 above the
amount granted by the MPSC in December, 2002.
On December 24, 2002, the Company's Wyoming division filed an application
with the Wyoming Public Service Commission (WPSC) for an increase in annual
revenues of approximately $756,000. A hearing on the application is scheduled
before the WYPSC on May 22, 2003 in Cody, Wyoming. The Consumer Advocate Staff
of the WYPSC submitted testimony in the case recommending an increase of
$721,877 subject to certain conditions which have been satisfied since the
filing of the testimony. The Company anticipates the new rates to be
implemented, resulting from its application, on or about June 1, 2003.
The Company's propane operations include the regulated distribution of
propane to the public through an underground propane vapor system in Payson,
Arizona as well as unregulated retail and wholesale propane operations, operated
by its wholly owned subsidiary Energy West Propane, Inc. (EWP). EWP currently
markets propane in Wyoming, Montana, Arizona, Colorado, South Dakota, North
Dakota, Washington and Nebraska.
EWR conducts marketing and distribution activities involving the sale of
natural gas and electricity mainly in Montana and Wyoming. EWR also owns natural
gas production reserves in north central Montana.
CASH FLOW ANALYSIS
For the nine months ended March 31, 2003, the consolidated operations of
the Company provided $4,439,000 of cash compared to a cash usage of $244,000 for
the nine months ended March 31, 2002. This increase in cash of $4,683,000 was
primarily due to reductions in natural gas and propane inventories of
$3,300,000, an increase in the Company's other assets and liabilities of
$1,200,000, an increase in deferred taxes of $1,500,000 primarily related to the
recoverable gas costs and $5,000,000 related to net derivative assets and
liabilities. Also contributing to the increase in cash provided by operations
was an increase in accounts payable of $3,600,000 primarily due to higher gas
prices experienced in March 2003.
The increases are offset by $9,500,000 in decreased collections of
recoverable cost of gas purchases, a decrease in net income of $480,000 and a
decrease in other miscellaneous cash paid out of $63,000.
Cash used in investing activities was $4,383,000 for the nine months ended
March 31, 2003, compared to $3,273,000 for the nine months ended March 31, 2002.
This increase of $1,110,000 was due to an increase in construction expenditures
of $494,000, primarily due to the purchase of production properties, a reduction
in the proceeds generated from the sale of property of $535,000, a reduction in
the collection of a long term notes receivable of $131,000, and other
miscellaneous regulatory asset and liability increases of $50,000.
Cash provided from financing activities was $1,109,000 for the nine months
ended March 31, 2003, compared to $3,269,000 for the nine months ended March 31,
2002. This decrease of $2,160,000 was due primarily to a reduction in short term
borrowing requirements as a result of increased cash provided from operations.
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 and administrative needs. The Company's
capital expenditures are expected to be approximately $4,600,000 in fiscal year
-12-
2003. These capital expenditures are expected to be generally for routine system
expansion and operating needs. The Company continues to evaluate opportunities
to expand its existing business and continues to evaluate new business
opportunities, which could result in additional capital expenditures.
LIQUIDITY AND CAPITAL RESOURCES
The Company's utility operations are subject to regulation by the MPSC,
WYPSC, and the Arizona Corporation Commission (ACC). The actions of such
regulatory bodies play a significant role in determining the Company's return on
equity. The various commissions approve rates that are intended to permit a
specified rate of return on investment. The Company's tariffs allow the cost of
gas to be passed through to customers. The pass through causes some delay,
however, between the time that the gas costs are incurred by the Company and the
time that the Company recovers such costs from customers.
The businesses of the Company and its subsidiaries in all segments are
temperature sensitive. In any given period, sales volumes reflect the impact of
weather, in addition to other factors, with colder temperatures generally
resulting in increased sales by the Company. The Company anticipates that this
sensitivity to seasonal and other weather conditions will continue to be
reflected in the Company's sales volumes in future periods.
The Company's operating capital needs, as well as dividend payments and
capital expenditures are generally funded through cash flow from operating
activities and short term borrowing. Historically, to the extent cash flow has
not been sufficient to fund capital expenditures, the Company has borrowed
short-term funds. When 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 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 purchased
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.
At March 31, 2003, the Company had a $15,000,000 unsecured bank credit
facility, of which $5,694,000 had been borrowed under the credit agreement. The
Company also had outstanding letters of credit under the credit facility
totaling $4,450,000 related to electric and gas purchase contracts. The
Company's other bank credit facility, in the amount of $11,000,000 expired on
January 5, 2003, and was not renewed.
Following the adverse ruling in the PPLM lawsuit on March 7, 2003, the
Company's bank lender and the Company began negotiations with respect to the
Company's credit facility, which included discussions relating to the lender's
request that the Company pledge its assets to secure the amounts outstanding
under the facility.
On April 30, 2003, the Company reached an agreement with its lender to
extend its short-term credit facility through June 2, 2003. Previously, the
credit facility had been scheduled to expire on May 1, 2003. Under the terms of
the extension, the Company has approximately $6,100,000 of total borrowing
capacity, of which the Company currently has borrowed approximately $5,900,000
as of May 13, 2003. In addition, the Company does not have the ability to
request new letters of credit from its lender during the extension period. The
Company believes that it will have sufficient liquidity to fund its operations
through the extension period.
The Company continues to negotiate with its current bank lender for a
longer-term credit facility. No assurance can be given, however, that such a
facility will be obtained, or with respect to the possible terms of such a
facility, which may include, without limitation: (i) restrictions on Company
operations and capital investments; (ii) increased interest rates on amounts
borrowed and other increases in fees; (iii) restrictions on the Company's
ability to pay dividends. The Company's present lender also has indicated that
it will require the Company to pledge all of its assets to secure the line of
credit. In the event that the Company is unable to secure an extension of its
credit facility, the Company would need to obtain financing from alternative
sources in order to continue to fund its operations. There is no assurance that
such financing could be obtained from alternate sources, or as to the terms
under which such financing could be obtained.
In addition to its short-term credit facility, the Company has outstanding
certain long-term notes and industrial development revenue obligations. The
total amount of such obligations was $15,788,000 and $16,246,000 as of March 31,
2003 and March 31, 2002, respectively. Under the terms of such long-term
obligations, the Company is subject to certain restrictions, including
restrictions on total dividends and
-13-
distributions, senior indebtedness, and asset sales, and the Company is required
to maintain certain debt and interest ratios. In addition, under certain
circumstances, including certain defaults by the Company under other debt
obligations, the long-term debt can be declared in default prior to its
maturity.
An adverse result in the litigation with PPLM or the tax dispute with DOR
also could have a material adverse effect on the Company's liquidity and capital
resources. See "Part II, Item 1, Note 4 to Condensed Consolidated Financial
Statements and Part II, Item 1 - Legal Proceedings."
ENERGY WEST INCORPORATED AND SUBSIDIARIES
MARCH 31, 2003
QUARTERLY RESULTS OF CONSOLIDATED Operations
The Company's net income for the third quarter ended March 31, 2003 was
$1,779,000 compared to $1,174,000 for the third quarter ended March 31, 2002.
The increase in earnings of $605,000 was due to an increase in net income from
the Company's wholesale and marketing activities of $1,034,000, and an increase
in the Company's pipeline operations of $38,000 offset partially by reductions
in earnings from natural gas and propane operations of $467,000.
Gross margin, which is defined as operating revenue less gas purchased,
increased $1,447,000, from $5,318,000 in the third quarter of fiscal year 2002
to $6,765,000 in the third quarter of fiscal year 2003. The majority of this
increase was due to increased margins from the Company's marketing and wholesale
operations of $1,797,000 and an increase in gross margins from the Company's
pipeline operations of $101,000. The increase in the gross margins from the
marketing and wholesale operations was due to the selling of natural gas
storage inventories.
Partially offsetting these increases was a reduction in margins from the
Company's natural gas operations of $51,000 due to lower volumes resulting from
warmer than normal temperatures. Also, the propane operations had reduced
margins of $400,000 due to an increase in the cost of propane experienced by
both the wholesale and regulated utility operations.
Distribution, general and administrative expenses increased by $223,000 in
the third quarter of fiscal year 2003 compared to the third quarter of fiscal
year 2002 primarily due to increased legal expenses related to the PPLM
litigation.
Depreciation expense increased by $51,000 during the third quarter of
fiscal year 2003 compared to the third quarter of fiscal year 2002 due to the
addition of various pipeline facilities, depletion of the recently purchased
production properties, and other new capital projects completed during the year.
Interest expense decreased by $54,000 during the third quarter of fiscal
year 2003 compared to the third quarter of fiscal year 2002 due to reduced
corporate borrowings.
NINE MONTHS RESULTS OF CONSOLIDATED OPERATIONS
The Company's net income for the nine months ended March 31, 2003, was
approximately $880,000 compared to net income of $1,363,000 for the nine months
ended March 31, 2002, a decrease of $483,000. This decrease in net income was
primarily due to an increase in distribution, general and administration
expenses.
Distribution, general and administrative expenses increased from
$7,096,000 for the nine months ended March 31, 2002, to $8,918,000 for the
period ended March 31, 2003. This increase of $1,822,000 is due primarily to
increased legal expenses related to the PPLM litigation, increased liability
insurance expense due to higher premiums, and an increase in personnel costs and
related employee benefits expense. Of these factors, the costs of the PPLM
litigation were approximately $1,351,000 in the first nine months of fiscal year
2003 compared with approximately $211,000 during the first nine months of fiscal
2002, an increase of $1,140,000.
-14-
Maintenance expense increased from $342,000 for the first nine months of
fiscal year 2002, to $411,000 for the first nine months of fiscal year 2003.
This increase of $69,000 is due primarily to increased expenses of maintaining
our natural gas facilities in both Montana and Wyoming.
Depreciation expense increased by $132,000 during the first nine months of
fiscal year 2003 compared to the first nine months of fiscal year 2002 due to
the addition of various pipeline facilities, the depletion of production
properties, and other new capital projects completed during the year.
Interest expenses were lower by $141,000 during the first nine months of
fiscal year 2003, decreasing from $1,369,000 in the first nine months of fiscal
year 2002 to $1,228,000 for the same period in fiscal year 2003. This reduction
was due primarily to reduced borrowings during the nine month period.
Income tax expense decreased from $678,000 for the nine month period ended
March 31, 2002, to $614,000 for the nine month period ending March 31, 2003.
This reduction in income tax expense of $64,000 is due to the Company's reduced
pre-tax income for the nine month period ended March 31, 2003, compared to the
same period in fiscal year 2002.
RESULTS OF THE COMPANY'S NATURAL GAS OPERATIONS
Three Months Ended Nine Months Ended
March 31 March 31
-------------------------- -------------------------
2003 2002 2003 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Natural Gas Revenue $12,642,279 $ 15,309,586 $25,107,458 $32,330,763
Natural Gas Purchased 9,147,235 11,763,416 17,158,623 24,485,774
----------- ------------ ----------- -----------
Gross Margin 3,495,044 3,546,170 7,948,835 7,844,989
Operating Expenses 1,907,694 1,837,089 6,234,622 5,714,203
----------- ------------ ----------- -----------
Operating Income 1,587,350 1,709,081 1,714,213 2,130,786
Other Income (Loss) 5,104 (18,827) 52,169 75,734
Interest Expense 244,698 313,467 757,867 883,337
Income Tax Expense 515,761 449,298 407,712 401,792
----------- ------------ ----------- -----------
Net Natural Gas Income $ 831,995 $ 927,489 $ 600,803 $ 921,391
----------- ------------ ----------- -----------
QUARTERLY RESULTS FOR NATURAL GAS OPERATIONS
The Natural Gas Operations segment's net income for the quarter ended
March 31, 2003, was $832,000 compared to net income of $927,000 for the quarter
ended March 31, 2002. The $95,000 decrease in net income was primarily due to
warmer temperatures than normal, higher operating expenses and higher income tax
expense. These increases in expenses were partially offset by a general rate
increase in the Montana operations approved by the MPSC effective December 15,
2002.
Operating Revenues
The Natural Gas Operations segment's revenues for the third quarter of
fiscal year 2003 were $12,642,000 compared to $15,310,000 for the third quarter
of fiscal year 2002, a decrease of $2,668,000. This decrease was due primarily
to the elimination of the surcharge approved by the MPSC in March of 2001 for
the recovery of increased gas costs that had been incurred prior to that period.
The increased gas costs were fully recovered by June 2002, thus eliminating the
surcharge. Also contributing to the reduction in revenues was warmer than normal
temperatures resulting in lower volumes being sold of approximately 241,000 Mcf,
or a 5% reduction from prior years volumes.
-15-
Gross Margin
The Natural Gas Operations segment's gross margin decreased from
$3,546,000 for the third quarter ended March 31, 2002, to $3,495,000 for the
third quarter ended March 31, 2003. This decrease of $51,000 was due to warmer
temperatures in both the Montana and Wyoming locations and was partially offset
by the general rate increase in the Montana operations.
Operating Expenses
The Natural Gas Operations segment's operating expenses were $1,908,000
for the third quarter of fiscal year 2003 compared to $1,837,000 for the
corresponding period in fiscal year 2002. The increase in operating expenses of
$71,000 is due primarily to an increase in personnel, increased employee
benefits, an increase in general liability insurance and increased expenses
associated with maintaining the natural gas facilities in Montana.
Interest Expense
Interest charges allocable to the Company's Natural Gas Operations segment
were $245,000 for the third quarter of fiscal year 2003, compared to $313,000 in
the comparable period in fiscal year 2002. This decrease of $68,000 is due to a
reduction in overall corporate borrowings.
Income Taxes
Income tax expense increased from $449,000 for the third quarter of fiscal
2002 to $516,000 for the third quarter of fiscal year 2003. The $67,000 increase
in income tax expense is due to the collection of the deferred gas costs and
higher effective state income tax rates.
NINE MONTHS RESULTS FOR NATURAL GAS OPERATIONS
Operating Revenues
The Natural Gas Operations segment's revenues for the nine months ended
March 31, 2003, was $25,107,000 compared to $32,331,000 for the nine month
period ended March 31, 2002. The decrease of $7,224,000 was due primarily to the
elimination of the surcharge approved by the MPSC in March of 2001 for the
recovery of increased gas costs that had been incurred prior to March 2001. The
increased gas cost was fully recovered by June 2002, and the surcharge was
eliminated. Also, warmer than normal weather experienced during fiscal year 2003
resulted in lower volumes being sold of approximately 367,000 Mcf, or a 7%
reduction in volumes from the same period in fiscal year 2002.
Gross Margin
The Natural Gas Operations segment's gross margin increased from
$7,845,000 for the nine month period ended March 31, 2002, to $7,949,000 for the
nine month period ended March 31, 2003. This increase of $104,000 was due
primarily to the general rate increase in the Montana operations approved by the
MPSC effective on December 15, 2002.
Operating Expenses
The Natural Gas Operations segment's operating expenses were $6,235,000
for the nine months ended March 31, 2003, compared to $5,714,000 for the period
ended March 31, 2002. The increase in operating expenses of $521,000 was due
primarily to an increase in number of personnel, an increase in property taxes,
an increase in general liability insurance premiums, increases in employee
benefit costs and an increase in expenses associated with maintaining the
natural gas facilities in Montana.
-16-
Interest Expense
Interest expense decreased from $883,000 for the first nine months of
fiscal year 2002, to $758,000 for the first nine months of fiscal year 2003.
This decrease of $125,000 is due primarily to reduced corporate borrowings.
Income Taxes
Income tax expense increased from $402,000 for the nine months ended March
31, 2002, to $408,000 for the nine months ended March 31, 2003. The increase in
income tax expense is due to the collection of deferred gas costs and higher
effective state income tax rates experienced over the prior fiscal year.
RESULTS OF THE COMPANY'S PROPANE OPERATIONS
Three Months Ended Nine Months Ended
March 31 March 31
----------------------- ------------------------
2003 2002 2003 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Propane Revenue $5,527,215 $5,006,358 $10,858,859 $8,764,215
Propane Purchased 3,908,067 2,986,586 7,483,269 5,157,204
---------- ---------- ----------- ----------
Gross Margin 1,619,148 2,019,772 3,375,590 3,607,011
Operating Expenses 871,079 861,642 2,635,748 2,591,019
---------- ---------- ----------- ----------
Operating Income 748,069 1,158,130 739,842 1,015,992
Other Income 39,825 131,081 148,261 200,228
Interest Expense 106,576 112,856 299,753 328,627
Income Tax Expense 305,718 429,541 256,458 319,918
---------- ---------- ----------- ----------
Net Propane Income $ 375,600 $ 746,814 $ 331,892 $ 567,675
---------- ---------- ----------- ----------
QUARTERLY RESULTS FOR PROPANE OPERATIONS
Operating Revenues and Gross Margin
The Propane Operations segment's revenues for the third quarter of fiscal
2003 were $5,527,000 compared to $5,006,000 for the third quarter of fiscal year
2002, an increase of $521,000. The increase was due to increased sales prices in
the Company's wholesale operations. Average sales price for the three months
ended March 31, 2003, increased by approximately 15% compared to the same period
in fiscal year 2002 due to increased cost of propane. Gross margins decreased by
approximately $401,000 due to the increase in the cost of propane for both the
regulated utility and the wholesale operations. The average cost per gallon for
propane in the wholesale operations increased by approximately 22% compared to
the same period in fiscal year 2002, due to the high demand for propane in the
Unites States.
Operating Expenses
The Propane Operations segment's operating expenses were $871,000 for the
third quarter of fiscal year 2003 compared to $862,000 during the same period of
fiscal year 2002. The $9,000 increase was due to increased professional fees
related to the Arizona regulated utility operations.
Interest Expense
Interest charges allocable to the Company's Propane Operations segment
were $107,000 for the third quarter of fiscal year 2003, compared to $113,000 in
the comparable period in fiscal 2002. This decrease of $6,000 is due to a
reduction in overall corporate borrowings.
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Income Taxes
Income taxes decreased from approximately $430,000 in the third quarter of
fiscal year 2002 to $306,000 in the third quarter of fiscal year 2003. The
$124,000 decrease in income tax expense is due to lower taxable income.
NINE MONTHS RESULTS FOR PROPANE OPERATIONS
Operating Revenues and Gross Margin
Propane revenues for the first nine months of fiscal year 2003 were
approximately $10,859,000 compared to approximately $8,764,000 for the first
nine months of fiscal year 2002, an increase of $2,095,000. This increase is due
to increased sales prices and volumes in the Arizona and Rocky Mountain Fuel
wholesale operations. Wholesale volumes increased by approximately 3,000,000
gallons, or approximately 30%, for the first nine months of fiscal year 2003
compared to the same period in 2002. Gross margins for the first nine months of
fiscal year 2003 decreased by $231,000 from the comparable period in fiscal year
2002 primarily due to increased costs for propane in all propane operations.
Wholesale prices for the nine months ended March 31, 2003 were approximately 5%
higher compared to such prices for the period ended March 31, 2002.
Operating Expenses
Operating expenses for the first nine months of fiscal year 2003 were
$2,636,000 compared to $2,591,000 for the first nine months of fiscal year 2002.
This increase of $45,000 is due to increased professional fees related to the
Arizona regulated utility operations.
Interest Expense
Interest expense has decreased approximately $29,000, from $329,000 for
the first nine months of fiscal year 2002 to $300,000 for the first nine months
of fiscal year 2003. This decrease is due to reduced corporate borrowings.
Income Taxes
State and federal income tax expenses were approximately $256,000 for the
first nine months of fiscal year 2003 as compared to approximately $320,000 for
the first nine months of fiscal year 2002. This decrease of $64,000 is due to
lower taxable income from the Propane Operations segment.
RESULTS OF THE ENERGY MARKETING AND WHOLESALE OPERATIONS
Three Months Ended Nine Months Ended
March 31 March 31
-------------------------- ----------------------------
2003 2002 2003 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ------------ ------------ ------------
Marketing Revenue $13,320,994 $ 16,619,220 $ 32,832,364 $ 39,107,412
Purchases 11,771,871 16,867,159 30,265,266 37,825,423
----------- ------------ ------------ ------------
Gross Margin 1,549,123 (247,939) 2,567,098 1,281,989
Operating Expenses 594,526 463,532 2,635,296 1,284,389
----------- ------------ ------------ ------------
Operating Income (Loss) 954,597 (711,471) (68,198) (2,400)
Other Income 10,245 2,632 15,815 1,194
Interest Expense 81,190 61,980 165,699 154,305
Income Tax Expense (Benefit) 344,103 (276,781) (94,160) (38,241)
----------- ------------ ------------ ------------
Net Marketing Income (Loss) $ 539,549 ($ 494,038) ($ 123,922) ($ 117,270)
----------- ------------ ------------ ------------
-18-
QUARTERLY RESULTS FOR ENERGY MARKETING AND WHOLESALE OPERATIONS
Gross Margin
EWR's energy marketing and wholesale operations experienced an increase in
gross margins of $1,797,000 during the third quarter of fiscal year 2003
compared to the same period in fiscal year 2002. This increase is primarily due
to the sale of storage inventories during the third quarter of fiscal year 2003
and additional margins generated from the natural gas production properties.
Operating Expenses
Operating expenses for EWR's energy marketing and wholesale operations
were $595,000 for the third quarter of fiscal year 2003 as compared to $464,000
for the same period in fiscal year 2002. The increase in operating expenses of
$131,000 was due primarily to increased legal costs as a result of the PPLM
litigation.
Interest Expense
Interest charges for the third quarter of fiscal year 2003 increased by
$19,000 from $62,000 in the third quarter of fiscal year 2002 to $81,000 in the
third quarter of fiscal year 2003. This increase was due to increased borrowings
by EWR as a result of an increase in EWR's total asset base.
Income Taxes
State and federal income tax expense of EWR's energy marketing and
wholesale operations increased from an income tax benefit of $277,000 for the
third quarter of fiscal year 2002 to an income tax expense of $344,000 in the
third quarter of fiscal year 2003, due to an increase in pre-tax income.
NINE MONTHS RESULTS FOR ENERGY MARKETING AND WHOLESALE OPERATIONS
Gross Margin
EWR's energy marketing and wholesale operations gross margin increased
from $1,282,000 for the first nine months of fiscal year 2002 to $2,567,000 for
the same period in fiscal year 2003. The $1,285,000 increase in margins is due
primarily to the sale of storage inventories and additional margins from
production properties purchased during fiscal year 2002.
Operating Expenses
Operating expenses for the energy marketing and wholesale operations were
approximately $2,635,000 for the nine months ended March 31, 2003, compared to
approximately $1,284,000 for the nine month period ended March 31, 2002. The
increase of approximately $1,351,000 is due primarily to increased legal costs
related to the PPLM litigation. The costs of the PPLM litigation were
approximately $1,338,000 during the first nine months of fiscal year 2003,
compared to approximately $211,000 during the first nine months of fiscal year
2002.
Interest Expense
Interest expense increased from approximately $154,000 for the nine month
period ended March 31, 2002 to approximately $166,000 for the nine months ended
March 31, 2003. This increase of $12,000 was due to increased borrowings by EWR
resulting from an increase in EWR's total asset base.
-19-
Income Taxes
State and federal income tax benefit increased $56,000 from $38,000 for
the nine months ended March 31, 2002, to $94,000 for the nine months ended March
31, 2003, due to the reduction in pre tax income from the energy marketing and
wholesale operations.
RESULTS OF THE COMPANY'S PIPELINE OPERATIONS
Three Months Ended Nine Months Ended
March 31 March 31
------------------------ -------------------------
2003 2002 2003 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Transmission Revenue $101,481 $254,759
Purchases
-------- ------- -------- --------
Gross Margin 101,481 254,759
Operating Expenses 46,851 9,771 136,512 11,028
-------- ------- -------- --------
Operating Income (Loss) 54,630 (9,771) 118,247 (11,028)
Other Income (Expense) 69 (165) 1,018 (403)
Interest Expense 2,541 421 4,210 2,628
Income Tax Expense (Benefit) 20,144 (3,830) 44,434 (5,199)
-------- ------- -------- --------
Net Transmission Income (Loss) $ 32,014 ($6,527) $ 70,621 ($ 8,860)
-------- ------- -------- --------
Pipeline Operations was added as a new segment for financial reporting
purposes as of July 1, 2002. The results of this segment reflect operation of
oil and gas gathering systems placed into service in fiscal year 2002, and
transferred from EWR to EWD. For fiscal year 2002 and prior years EWD consisted
primarily of real estate holdings and incurred minimal expenses. For fiscal year
2003 the revenues reported in the Pipeline Operations segment consist of
gathering revenues related to the pipeline operations in the Wyoming and Montana
areas. Beginning with fiscal year 2003, the financial operations of EWD's
pipeline assets and real estate holdings are in the Pipeline Operations segment
for financial reporting purposes. Also included in Pipeline Operations are the
revenues and expenses associated with the recently purchased production
reserves. The Company anticipates that EWD will begin operations of its
refurbished transmission pipeline upon compliance with certain conditions in the
FERC Certificate of Public Convenience and Necessity issued on April 2, 2003.
CONTRACTS ACCOUNTED FOR AT FAIR VALUE
Management of Risks Related to Derivatives--The Company and its
subsidiaries are subject to certain risks related to changes in certain
commodity prices and risks of counter-party performance. The Company has
established certain policies and procedures to manage such risks. The Company
has a Risk Management Committee (RMC), comprised of Company officers and
management to oversee the Company's risk management program as defined in its
risk management policy. The purpose of the risk management program is to
minimize adverse impacts on earnings resulting from volatility of energy prices,
counter-party credit risks, and other risks related to the energy commodity
business. The RMC is overseen by the Audit Committee of the Company's Board of
Directors.
General--From time to time the Company or its subsidiaries may use
financial derivative contracts to mitigate the risk of commodity price
volatility related to firm commitments to purchase and sell natural gas or
electricity. The Company may use such arrangements to protect its profit margin
on future obligations to deliver quantities of a commodity at a fixed price.
Conversely, such arrangements may be used to hedge against future market price
declines where the Company or a subsidiary enters into an
-20-
obligation to purchase a commodity at a fixed price in the future. The Company
accounts for such financial instruments in accordance with Statement of
Financial Accounting Standard (SFAS) 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities.
In accordance with SFAS 133, contracts that do not qualify as normal
purchase and sale contracts must be reflected in the Company's financial
statements at fair value, determined as of the date of the balance sheet. This
accounting treatment is also referred to as "mark-to-market" accounting.
Mark-to-market accounting treatment can result in a disparity between reported
earnings and realized cash flow, because changes in the value of the financial
instrument are reported as income or loss even though no cash payment may have
been made between the parties to the contract. If such contracts are held to
maturity, the cash flow from the contracts, and their hedges, is realized over
the life of the contract.
Quoted market prices for natural gas derivative contracts of the Company
or its subsidiaries generally are not available. Therefore, to determine the
fair value of natural gas derivative contracts, the Company uses internally
developed valuation models that incorporate independently available current and
historical pricing information.
During the third quarter of fiscal year 2002, Energy West Resources, Inc.
(EWR) terminated its existing derivative contracts with Enron Canada Corporation
(ECC), a subsidiary of Enron Corp. Most of these contracts were commodity swaps
that EWR had entered into to mitigate the effects of fluctuations in the market
price of natural gas. The derivative contracts with ECC were entered into at
various times in order to lock in margins on certain contracts under which EWR
had commitments to other parties to sell natural gas at fixed prices (the
"Future Supply Agreements"). EWR made the decision to terminate these ECC
contracts because of concerns relating to the bankruptcy of Enron Corp. At the
date of termination, the market price of natural gas was substantially lower
than the price had been when EWR entered into the contracts, resulting in a net
amount due from EWR to ECC of approximately $5,400,000. EWR paid this amount to
ECC upon the termination of the contracts, and thereby discharged the liability
related to the contracts. The costs related to such termination were reflected
in the Company's consolidated statement of income as adjustments to gas
purchased for the fiscal year ended June 30, 2002. At the time the Company
terminated the ECC derivative contracts, the Company entered into new gas
purchase contracts (the "Future Purchase Agreements") at prices much lower than
those provided for under the ECC contracts. The Company recognized income as a
result of the mark-to-market accounting treatment of the Future Purchase
Agreements, and therefore the termination of the ECC derivative contracts did
not have a material impact on the Company's consolidated statement of income.
The Future Purchase Agreements and the Future Supply Agreements continue
to be valued on a mark-to market basis. As of March 31, 2003, these agreements
were reflected on the Company's consolidated balance sheet as derivative assets
and liabilities at an approximate fair value as follows:
Assets Liabilities
------ -----------
Contracts maturing during fiscal year 2003: $ 245,188 $ 78,438
Contracts maturing during fiscal years 2004 and 2005: 1,705,123 266,785
Contracts maturing during fiscal years 2006 and 2007: 679,892 12,755
Contracts maturing from fiscal years 2008 and beyond: 140,481 46,139
---------- --------
Total $2,770,684 $404,117
========== ========
During the first nine months of fiscal year 2003, the Company did not
enter into any new contracts that would be accounted for using mark-to-market
accounting under SFAS 133.
Natural Gas Operations--In the case of the Company's regulated divisions,
gains or losses resulting from the derivative contracts are subject to deferral
under regulatory procedures approved by the public service regulatory
commissions of Montana, Wyoming and Arizona. Therefore, related derivative
assets and liabilities are offset with corresponding regulatory liability and
asset amounts included in "Recoverable Cost of Gas Purchases", pursuant to SFAS
71, Accounting for the Effects of Certain Types of Regulation.
-21-
RELATED PARTY TRANSACTIONS
The Company has no material related party transactions.
CRITICAL ACCOUNTING POLICIES
The Company believes its critical accounting policies are as follows:
Effects of Regulation--The Company follows SFAS 71, "Accounting for the
Effects of Certain Types of Regulation," and its financial statements reflect
the effects of the different rate making principles followed by the various
jurisdictions regulating the Company. The economic effects of regulation can
result in regulated companies recording costs that have been or are expected to
be allowed in the ratemaking process in a period different from the period in
which the costs would be charged to expense by an unregulated enterprise. When
this occurs, costs are deferred as assets in the balance sheet (regulatory
assets) and recorded as expenses in the periods when those same amounts are
reflected in rates. Additionally, regulators can impose liabilities upon a
regulated company for amounts previously collected from customers and for
amounts that are expected to be refunded to customers (regulatory liabilities).
Recoverable/ Refundable Costs of Gas and Propane Purchases--The Company
accounts for purchased-gas costs in accordance with procedures authorized by the
MPSC, the WPSC and the ACC under which purchased gas and propane costs that are
different from those provided for in present rates are accumulated and recovered
or credited through future rate changes.
Derivatives--The Company accounts for certain derivative contracts that
are used to manage risk in accordance with SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities", which the
Company adopted July 1, 2000.
ITEM 3 - THE QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to certain market risks, including commodity price
risk (i.e., natural gas and propane prices) and interest rate risk. The adverse
effects of potential changes in these market risks are discussed below. The
sensitivity analyses presented do not consider the effects that such adverse
changes may have on overall economic activity nor do they consider additional
actions management may take to mitigate the Company's exposure to such changes.
Actual results may differ. See the notes to the financial statements for a
description of the Company's accounting policies and other information related
to these financial instruments.
Commodity Price Risk
The Company protects itself against price fluctuations on natural gas and
electricity by limiting the aggregate level of net open positions, which are
exposed to market price changes and through the use of natural gas derivative
instruments. The net open position is actively managed with strict policies
designed to limit the exposure to market risk, and which require at least weekly
reporting to management of potential financial exposure. The risk management
committee has limited the types of financial instruments the Company may trade
to those related to natural gas commodities. The Company's results of operations
are significantly impacted by changes in the price of natural gas. During 2002
and 2001, natural gas accounted for 64% and 75% respectively, of the Company's
operating expenses. In order to provide short-term protection against a sharp
increase in natural gas prices, the Company from time to time enters into
natural gas call and put options, swap contracts and purchase commitments. The
Company's gas hedging strategy could result in the Company not fully benefiting
from certain gas price declines.
-22-
Interest Rate Risk
The Company's results of operations are affected by fluctuations in
interest rates (e.g. interest expense on debt). The Company mitigates this risk
by entering into long-term debt agreements with fixed interest rates. The
Company's notes payable, however, are subject to variable interest rates. A
hypothetical 10 percent change in market rates applied to the balance of the
notes payable would not have a material effect on the Company's earnings.
Credit Risk
Credit risk relates to the risk of loss that the Company would incur as a
result of non-performance by counterparties of their contractual obligations
under the various instruments with the Company. Credit risk may be concentrated
to the extent that one or more groups of counterparties have similar economic,
industry or other characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in market or other
conditions. In addition, credit risk includes not only the risk that a
counterparty may default due to circumstances relating directly to it, but also
the risk that a counterparty may default due to circumstances which relate to
other market participants which have a direct or indirect relationship with such
counterparty. The Company seeks to mitigate credit risk by evaluating the
financial strength of potential counterparties. However, despite mitigation
efforts, defaults by counterparties may occur from time to time. To date, no
such default has occurred.
ITEM 4. CONTROLS AND PROCEDURES
The Company's President and Chief Executive Officer, Edward J. Bernica and
the Company's Assistant Vice President and Controller (principal financial
officer) Robert B. Mease have evaluated the Company's internal controls and
disclosure controls systems within 90 days of the filing of this Quarterly
Report on Form 10-Q. Based on this evaluation, they have concluded that the
Company's disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) are effective as of the date of this Quarterly Report on Form
10-Q to provide reasonable assurance that the Company can meet its disclosure
obligations. As of the date of this Quarterly Report on Form 10-Q there have not
been any significant changes in internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
-23-
Form 10-Q
Part II - Other Information
LEGAL PROCEEDINGS
EWR currently is involved in a lawsuit with PPL Montana, LLC (PPLM) which
is pending in the United States District Court for the District of Montana. The
lawsuit was filed on July 2, 2001, and involves a wholesale electricity supply
contract between EWR and PPLM dated March 17, 2000 and a confirmation letter
thereunder dated June 13, 2000 (together, the "Contract"). EWR received
substantial imbalance payments as a result of the amount of power that it
scheduled and purchased from PPLM under the Contract. PPLM claims that, as a
result of EWR's scheduling under the Contract, PPLM was deprived of the fair
market value of energy which PPLM contends it could have sold for its own
account. PPLM estimates the fair market value of the excess energy scheduled by
EWR to be approximately $18.0 million. EWR has denied that it breached the
Contract, and contends that, in any event, PPLM did not sustain any damages.
Trial in the case began in December, 2002. On March 7, 2003, the court
issued a ruling to the effect that EWR has breached the Contract with PPLM. The
court did not rule on the issue of whether PPLM is entitled to recover any
damages from EWR. Trial on the issue of whether PPLM sustained any damages has
been scheduled for June 18, 2003. There is no assurance as to when the court
will rule on such issue. If the court rules that PPLM sustained damages, further
proceedings will be required in order to determine the amount of such damages.
Any final order of the court will be subject to appeal by the
non-prevailing party. Any appeal by EWR could include an appeal of the court's
March 7, 2003, ruling that EWR breached the Contract.
The Company believes that it has established adequate reserves with
respect to the litigation with PPLM; however, there can be no assurance that any
liability will not exceed such reserves. A liability in excess of the recorded
reserves could have a material adverse effect on the Company and its financial
statements.
By letter dated August 30, 2002, the Montana Department of Revenue (DOR)
notified the Company that the DOR's property tax audit of the Company for the
period January 1, 1997 through and including December 31, 2001 had concluded.
The notification stated that the DOR had determined that the Company had
willfully under-reported its personal property and that additional property
taxes and penalties should be assessed. The Company estimates that if the
additional assessment stands, it would owe approximately $3.9 million in
additional property taxes and penalties. The Company believes it has valid
defenses to the assessment of tax and penalties and plans to vigorously contest
the proposed assessment.
In the event that any tax deficiency related to the DOR assessment is
imposed on the Company, the Company will seek to recover the portion of such
deficiency related to regulated property through the rate making process with
the MPSC. The portion of the assessment related to unregulated assets is
immaterial. No assurance can be given as to whether the Company will recover all
or part of such deficiency, and any related interest charges, through rates. The
Company does not anticipate that any penalty would be recoverable through rates.
The Company has accounted for the potential tax liability by accruing a
liability for taxes and corresponding regulatory asset on its books. The tax
accrual has no effect on the Company's consolidated income. An adverse outcome
in the matter resulting in the imposition of penalties or the failure of the
Company to obtain relief through the rate making process for any taxes (and
related interest) imposed, could have a material adverse effect on the Company
and its financial statements.
In addition to the legal proceedings discussed above, from time to time
the Company is involved in litigation relating to claims arising from its
operations in the normal course of business none of which the Company believes
is material to the Company's business or financial statements. The Company
utilizes various risk management strategies, including maintaining liability
insurance against certain risks, employee education and safety programs and
other processes intended to reduce liability risk.
-24-
Item 2. Changes in Securities and Use of Proceeds - 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 for the quarter ended March 31, 2003.
99.1 Certification of Principal Executive Officer
99.2 Certification of Principal Financial Officer
B. The Company has filed the following Current Reports on Form 8-K
during the third quarter ended March 31, 2003.
Date Filed Item Number
March 10, 2003 Item 5 - Announcement of interim ruling in
litigation involving Energy West
Resources, Inc., and
PPL Montana, LLC
Item 7 - Press release dated March 10, 2003
March 17, 2003 Item 5 - Announcement of discussions with
lender regarding the restructuring
of credit facility
Item 7 - Press release dated March 17, 2003
-25-
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.
ENERGY WEST INCORPORATED
/s/Edward J. Bernica
- -----------------------------------------
Edward J. Bernica, President and
Chief Executive Officer
(principal executive officer)
/s/Robert B. Mease
- -----------------------------------------
Robert B. Mease, Assistant Vice-President
and Controller
(principal financial officer)
Dated May 15, 2003
-26-
CERTIFICATIONS
I, Edward J. Bernica, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Energy West
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Edward J. Bernica
-------------------------------------
Edward J. Bernica
President and Chief Executive Officer
(principal executive officer)
-27-
I, Robert B. Mease, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Energy West
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light f the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Robert B. Mease
---------------------------------------
Robert B. Mease
Assistant Vice President and Controller
(principal financial officer)
-28-