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 September 30, 2004
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 December 15, 2004
(Common stock, $.15 par value) 2,599,438 shares
ENERGY WEST, INCORPORATED
INDEX TO FORM 10-Q
Page No.
Part I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2004, September 30, 2003 (As Restated)
and June 30, 2004 2
Condensed Consolidated Statements of Operations -
three months ended September 30, 2004 and 2003 (As Restated) 3
Condensed Consolidated Statements of Cash Flows -
three months ended September 30, 2004 and 2003 (As Restated) 4
Notes to Condensed Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 34
Item 4 - Controls and Procedures 35
Part II - Other Information
Item 1 - Legal Proceedings 37
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 3 - Defaults upon Senior Securities 37
Item 4 - Submission of Matters to a Vote of Security Holders 37
Item 5 - Other Information 37
Item 6 - Exhibits 37
Signatures 38
1
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
ENERGY WEST, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED), SEPTEMBER 30, 2004 AND 2003
AND JUNE 30, 2004
SEPTEMBER 30, JUNE 30,
2004 2003 2004
----------- ------------ -----------
(AS RESTATED)
(SEE NOTE 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,731,446 $ 1,791,264 $ 1,322,702
Restricted cash 2,600,000
Accounts and notes receivable, less $312,911 and $187,466
and $300,814, respectively, allowance for bad debts 4,836,062 5,886,681 6,729,020
Derivative assets 66,799 216,437 199,248
Natural gas and propane inventories 9,910,169 6,240,812 5,183,046
Materials and supplies 404,736 376,084 350,764
Prepayments and other 1,219,797 747,762 370,379
Deferred income taxes 658,225 1,076,518 526,899
Income tax receivable 1,957,211 2,240,768 1,268,243
Recoverable cost of gas purchases 1,117,334 1,205,071 788,407
----------- ----------- -----------
Total current assets 21,901,779 22,381,397 16,738,708
PROPERTY, PLANT AND EQUIPMENT, NET 38,569,083 38,557,024 38,605,644
NOTE RECEIVABLE 332,301 461,060 407,538
DEFERRED CHARGES 5,209,144 4,828,244 5,488,415
OTHER ASSETS 184,561 263,266 204,772
----------- ----------- -----------
TOTAL ASSETS $66,196,868 $66,490,991 $61,445,077
=========== =========== ===========
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES:
Current portion of long-term debt $ 872,706 $ 537,451 $ 972,706
Line of credit 13,129,304 16,601,548 6,729,304
Accounts payable 2,856,198 6,756,185 3,611,080
Derivative liabilities 2,067,018 689,758 1,684,676
Accrued and other current liabilities 3,498,779 3,529,909 3,726,982
----------- ----------- -----------
Total current liabilities 22,424,005 28,114,851 16,724,748
----------- ----------- -----------
OTHER OBLIGATIONS:
Deferred income taxes 4,664,269 4,949,615 4,529,381
Deferred investment tax credits 329,079 350,141 334,344
Other long-term liabilities 4,803,498 4,918,910 4,758,893
----------- ----------- -----------
Total 9,796,846 10,218,666 9,622,618
----------- ----------- -----------
LONG-TERM DEBT 21,697,286 14,694,349 21,697,286
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 4 AND 8)
STOCKHOLDERS' EQUITY:
Common stock; $.15 par value, 3,500,000 shares authorized,
2,598,506 and 2,595,250 shares outstanding at September 30,
2004 and 2003, respectively 389,783 389,295 389,783
Preferred stock; $.15 par value, 1,500,000 shares authorized,
no shares outstanding -- -- --
Capital in excess of par value 5,077,687 5,056,425 5,077,687
Retained earnings 6,811,261 8,017,405 7,932,955
----------- ----------- -----------
Total stockholders' equity 12,278,731 13,463,125 13,400,425
----------- ----------- -----------
TOTAL CAPITALIZATION 33,976,017 28,157,474 35,097,711
----------- ----------- -----------
TOTAL LIABILITIES AND CAPITALIZATION $66,196,868 $66,490,991 $61,445,077
=========== =========== ===========
The accompanying notes are an integral part of these condensed (unaudited)
consolidated financial statements.
2
ENERGY WEST, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2004 2003
(AS RESTATED)
(SEE NOTE 1)
REVENUES:
Natural gas operations $ 5,207,676 $ 4,663,008
Propane operations 852,611 1,181,901
Gas and electricity -- wholesale 5,722,507 6,533,191
Pipeline operations 84,355 109,350
------------ ------------
Total revenues 11,867,149 12,487,450
------------ ------------
EXPENSES:
Gas purchased 3,859,356 3,743,982
Gas and electricity -- wholesale 5,783,668 5,687,031
Distribution, general, and administrative 2,295,684 2,573,725
Maintenance 132,794 109,334
Depreciation and amortization 594,316 617,632
Taxes other than income 383,809 263,862
------------ ------------
Total expenses 13,049,627 12,995,566
------------ ------------
OPERATING LOSS (1,182,478) (508,116)
OTHER INCOME 66,175 192,617
INTEREST EXPENSE (752,244) (446,097)
------------ ------------
LOSS BEFORE INCOME TAX BENEFIT (1,868,547) (761,596)
INCOME TAX BENEFIT 746,853 267,976
------------ ------------
NET LOSS $ (1,121,694) $ (493,620)
============ ============
LOSS PER COMMON SHARE:
Basic $ (0.43) $ (0.19)
Diluted $ (0.43) $ (0.19)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 2,598,506 2,595,250
Diluted 2,598,506 2,595,250
The accompanying notes are an integral part of these condensed (unaudited)
consolidated financial statements.
3
ENERGY WEST, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
THREE MONTHS ENDED
SEPTEMBER
---------------------------
2004 2003
(AS RESTATED)
(SEE NOTE 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,121,694) $ (493,620)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization, including deferred 881,518 668,660
charges and financing costs
Gain on sale of assets -- (338,204)
Investment tax credit (5,265) (5,265)
Deferred gain on sale of assets (5,907) (5,907)
Deferred income taxes 3,562 80,229
Changes in assets and liabilities:
Accounts and notes receivable 2,043,432 1,984,946
Derivative assets 132,449 407,199
Natural gas and propane inventories (4,727,123) (5,202,122)
Accounts payable (754,881) (2,085,591)
Derivative liabilities 382,342 (175,172)
Recoverable/refundable cost of gas purchases (328,927) (137,962)
Prepayments and other (849,418) (2,994,780)
Other assets & liabilities (906,597) (2,590,760)
----------- ------------
Net cash used in operating activities (5,256,509) (10,888,349)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (585,925) (466,239)
Proceeds from sale of assets -- 828,940
Customer advances received for construction 29,173 13,600
Decrease from contributions in aid of
construction (2,000) (400)
----------- ------------
Net cash (used in) provided by investing activities (633,989) 375,901
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (100,000) (132,016)
Proceeds from lines of credit 7,400,000 21,197,090
Repayments of lines of credit (1,000,758) (10,700,130)
----------- ------------
Net cash provided by financing activities 6,299,242 10,364,944
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 408,744 (147,504)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,322,702 1,938,768
----------- ------------
End of period $ 1,731,446 $ 1,791,264
=========== ============
The accompanying notes are an integral part of these condensed (unaudited)
consolidated financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (As Restated) (UNAUDITED)
September 30, 2004
Note 1 - Restatement of Financial Results and Summary of the Business
Restatement
On September 29, 2004, the Company announced that it was delaying the filing of
its Annual Report on Form 10-K in order to complete a review of the accounting
for certain contracts. Based on the results of its review, the Company has
corrected its accounting and previous valuation of certain of EWR's contracts
and has restated its earnings for the Condensed Consolidated financial
statements as of September 30, 2003 and the three months ended September 30,
2003.
The Company's review of EWR's contracts included an evaluation of a gas purchase
agreement and a gas sales agreement entered into during fiscal year 2002
involving counterparties who are affiliated with each other. The gas purchase
agreement has previously been reflected in the Company's financial statements as
a derivative asset. The gas sales agreement was previously classified by the
Company as a normal sales contract, and therefore was not reflected on the
Company's financial statements as a derivative liability. The Company determined
that a shorter period similar to that of the gas sales agreement should have
been used in the determination of the fair value of the gas purchase agreement
and that the gas sales agreement does not qualify for the "normal purchase and
sale" exception. As a result the condensed consolidated financial statements for
the period ended September 30, 2003 have been restated to reflect a significant
reduced fair value for the gas purchase agreement and the gas sales agreement as
a derivative liability at its estimated fair value.
5
None of the adjustments affects the Company's cash flows or cash balances.
The Company's cumulative gain (loss) in the portfolio of contracts valued on
a mark-to-market basis will be realized in later periods as contracts settle or
are performed and/or as natural gas prices change.
As discussed in the table that follows, the condensed consolidated balance sheet
at September 30, 2003, and the condensed consolidated statement of operations
for the quarter ended September 30, 2003, have been restated from amounts
previously reported to reflect the reclassification and revaluation of the gas
purchase and gas sale contracts discussed above.
6
<Table>
THREE MONTHS ENDED
SEPTEMBER 30, 2003
---------------------------
AS
PREVIOUSLY
REPORTED AS RESTATED
---------------------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA
REVENUES:
Gas and electric - wholesale $ 6,325,300 $ 6,533,191
Total revenues 12,279,559 12,487,450
Operating loss (716,007) (508,116)
Loss before taxes (969,487) (761,596)
Income tax benefit (347,931) (297,976)
Net loss (621,556) (493,620)
Loss per common share:
Basic (0.24) (0.19)
Diluted (0.24) (0.19)
AS OF SEPTEMBER 30, 2003
--------------------------
AS
PREVIOUSLY
REPORTED AS RESTATED
--------------------------
CONSOLIDATED BALANCE SHEET DATA
ASSETS
Derivative assets $ 2,135,647 $ 216,437
Deferred income taxes 317,957 1,076,518
Total current assets 23,542,051 22,381,397
LIABILITIES AND CAPITALIZATION
Derivative liabilities 636,628 689,758
Total current liabilities 28,027,218 28,114,851
Retained earnings 9,231,183 8,017,405
Total stockholders' equity 14,676,903 13,463,125
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Energy
West, Incorporated and its subsidiaries (collectively, 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 considered necessary for a fair presentation have
been included. Operating results for the three month period ended September 30,
2004 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2005. 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, 2004.
7
Certain non-regulated, non-utility operations are conducted by three wholly
owned subsidiaries of the Company: Energy West Propane, Inc. ("EWP"); EWR; and
Energy West Development, Inc. ("EWD"). EWP is engaged in wholesale and retail
distribution of bulk propane in Arizona. EWR markets gas and, on a limited
basis, electricity in Montana and Wyoming, and owns certain natural gas
production properties in Montana. EWD owns a natural gas gathering system that
is located in both Montana and Wyoming and an interstate natural gas
transportation pipeline that runs between Montana and Wyoming. EWD also owns
natural gas production properties in Montana. The Company's reporting segments
are: Natural Gas Operations, Propane Operations, EWR and Pipeline Operations. An
application was granted by the Federal Energy Regulatory Commission ("FERC") and
EWD began operations of an interstate natural gas pipeline as a transmission
pipeline on July 1, 2003. The revenue and expenses associated with this
transmission pipeline are included in the Pipeline Operations segment.
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 counterparty performance. The Company has established policies and
procedures to manage such risks. The Company has a Risk Management Committee,
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, counterparty credit risks, and other risks
related to the energy commodity business.
In order to mitigate the risk of natural gas market price volatility related to
firm commitments to purchase or sell natural gas or electricity, from time to
time the Company and its subsidiaries have entered into hedging arrangements.
Such arrangements may be used to protect profit margins on future obligations to
deliver gas at a fixed price, or to protect against adverse effects of potential
market price declines on future obligations to purchase gas at fixed prices.
8
Quoted market prices for natural gas derivative contracts of the Company and its
subsidiaries are generally not available. Therefore, to determine the net
present value of natural gas derivative contracts, the Company uses internally
developed valuation models that incorporate independently available current and
forecasted pricing information.
As of September 30, 2004, 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 2005 $ 66,799 $1,214,847
Contracts maturing during fiscal years 2006 and 2007 - 823,039
Contracts maturing during fiscal years 2008 and 2009 - 29,132
-------- ----------
Total $ 66,799 $2,067,018
======== ==========
During the first three months of fiscal 2005, the Company has not entered into
any new contracts that have required mark-to-market accounting under SFAS No.
133.
Natural Gas and Propane Operations -- In the case of the Company's regulated
divisions, gains or losses resulting from derivative contracts are subject to
deferral under regulatory procedures of 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
No. 71, Accounting for the Effects of Certain Types of Regulation. As of
September 30, 2004, the Company's regulated operations have no contracts meeting
the mark-to-market accounting requirements.
9
NOTE 3 - INCOME TAX BENEFITS
Income tax benefit differs from the amount computed by applying the federal
statutory rate to pre-tax loss as demonstrated in the following table:
THREE MONTHS ENDED
SEPTEMBER
---------------------------
2004 2003
Tax benefit at statutory rate of 35% $ 652,151 $ 264,719
State income tax benefit, net of federal tax benefit 90,000 43,014
Amortization of deferred investment tax credits 5,266 5,266
Other (564) (45,023)
--------- ---------
Total income tax benefit $ 746,853 $ 267,976
========= =========
NOTE 4 - LINES OF CREDIT AND LONG-TERM DEBT
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 and
fall months and the Company's short-term borrowing needs for financing customer
accounts receivable are greatest during the winter months.
The Company substantially restructured its credit facilities during fiscal year
2004. On September 30, 2003, the Company established a $23.0 million revolving
credit facility with LaSalle Bank National Association, as Agent for certain
banks (collectively, the "Lender"), replacing a previous short-term line of
credit. The Montana Public Service Commission ("MPSC") order granting approval
of the $23.0 million credit facility imposes restrictions on the use of the
proceeds to utility purposes, and requires the Company to provide monthly
reports to the MPSC with respect to the financial condition of the Company. The
Company continues to be subject to these MPSC requirements.
On March 31, 2004, the Company entered into a restated credit agreement with the
Lender. Pursuant to the restated credit agreement, the previous $23.0 million
revolving credit facility was replaced with a $15.0 million revolving credit
facility, a $6.0 million term loan maturing on March 31, 2009, and a $2.0
million term loan maturing on September 30, 2004 (collectively referred to as
the "LaSalle Facility").
10
As of August 30, 2004, the Company and its lender under the LaSalle Facility
amended certain covenants as follows: (1) increased the total debt to capital
ratio from .65 to .70, (2) allowed the exclusion of extraordinary expenses
incurred by the Company for legal fees and costs of the PPLM litigation,
expenses and costs associated with the credit facilities, proxy contest costs,
and the costs of adoption of the shareholder rights plan, in determining the
interest coverage ratio, and (3) waived compliance with the ratios referred to
in (1) and (2) above as of June 30, 2004 in addition to a shareholder's
acquisition of more than 15% of the outstanding common stock of the Company.
As of November 30, 2004, the Company executed an agreement with its lender
providing for (i) an extension of the revolving facility until November 28,
2005; (ii) an extension of the date to consummate infusions of new equity of at
least $2.0 million and to repay the $2.0 million term loan to October 1, 2005;
(iii) a conditional waiver of the deadline to deliver audited financial
statements for fiscal year 2004 and the deadline to deliver financial statements
for the fiscal quarter ended September 30, 2004; (iv) a waiver of the technical
default that otherwise would have been caused by the restatement of financial
results of prior periods; (v) modification of interest rates applicable to the
$2.0 million term loan; (vi) a limitation of $1.0 million on total loans and
additional capital investment from the Company to EWR; and (vii) waivers of
certain financial covenant defaults as of September 30, 2004.
Borrowings under the LaSalle Facility are secured by liens on substantially all
of the assets of the Company and its subsidiaries. The Company's obligations
under certain other notes and industrial development revenue obligations are
secured on an equal and ratable basis with the Lender in the collateral granted
to secure the borrowings under the LaSalle Facility with the exception of the
first $1.0 million of debt under the LaSalle Facility.
Under the LaSalle Facility the Company may elect to pay interest on portions of
the amounts outstanding under the $15.0 million revolving line of credit at the
London interbank offered rate (LIBOR), plus 250 basis points, for interest
periods selected by the Company. For all other balances outstanding under the
$15.0 million revolving line of credit, the Company pays interest at the rate
publicly announced from time to time by LaSalle Bank as its "prime rate" (the
"Prime Rate"). For the $6.0 million term loan under the LaSalle Facility, the
Company may elect to pay interest at either the applicable LIBOR rate plus 350
basis points or at the Prime Rate plus 200 basis points. For the $2.0 million
term loan under the LaSalle Facility, the Company pays interest at the Prime
Rate plus 200 basis points through March 31, 2005; the Prime Rate plus 300 bps
from April 1, 2005 through June 30, 2005; and the Prime Rate plus 400 bps from
and after July 1, 2005. The Company also pays a commitment fee of 35 basis
points for the daily unutilized portion of the $15.0 million revolving credit
facility.
11
The LaSalle Facility requires the Company to maintain compliance with a number
of financial covenants, including meeting limitations on annual capital
expenditures, maintaining a total debt to total capital ratio of not more than
..70 to 1.00 and an interest coverage ratio of no less than 2.00 to 1.00. At
September 30, 2004, the Company was in compliance with the financial covenants
under the LaSalle Facility. The LaSalle Facility also restricts the Company's
ability to pay dividends during any period to a certain percentage of cumulative
earnings of the Company over that period, and restricts open positions and Value
at Risk (VaR) in the Company's wholesale operations.
At September 30, 2004, the Company had approximately $1.7 million of cash on
hand. In addition, at September 30, 2004, the Company had borrowed approximately
$13.1 million under the LaSalle Facility revolving line of credit. The Company's
short-term borrowings under its lines of credit during the three months ended
September 30, 2004 had a daily weighted average interest rate of 5.14% per
annum. The Company's net availability at September 30, 2004, was approximately
$1.9 million under the LaSalle Facility revolving line of credit.
In addition to the LaSalle Facility, the Company has outstanding certain notes
and industrial development revenue obligations (collectively "Long Term Notes
and Bonds"). The Company's Long Term Notes and Bonds are made up of three
separate debt issues: $8.0 million of Series 1997 notes bearing interest at an
annual rate of 7.5%; $7.8 million of Series 1993 notes bearing interest at
annual rates ranging from 6.20% to 7.60%; and Cascade County, Montana Series
1992B Industrial Development Revenue Obligations in the amount of $1.8 million
bearing interest at annual rates ranging from 6.0% to 6.5%. The Company's
obligations under the Long Term Notes and Bonds are secured on an equal and
ratable basis with the Lender in the collateral granted to secure the LaSalle
Facility with the exception of the first $1.0 million of debt under the LaSalle
Facility.
Under the terms of the Long Term Notes and Bonds, the Company is subject to
certain restrictions, including restrictions on total dividends and
distributions, liens and secured indebtedness, and asset sales, and is
restricted from incurring additional long-term indebtedness if it does not meet
certain debt to interest and debt to capital ratios.
The total amount outstanding under all of the Company's long-term debt
obligations was approximately $22.6 million and $15.2 million, at September 30,
2004 and September 30, 2003, respectively. The portion of such obligations due
within one year was approximately $870,000 and $540,000 at September 30, 2004,
and September 30, 2003, respectively.
12
NOTE 5 - RESTRICTED CASH
The Company was required to establish a cash reserve of $2,600,000 for letters
of credit that were outstanding with Wells Fargo at the time of completing the
new short term line of credit facility with LaSalle Bank. The cash reserve was
returned to the Company by Wells Fargo at the expiration date of the individual
letters of credit.
NOTE 6 - NOTE RECEIVABLE
On August 21, 2003, EWP sold the majority of its wholesale propane assets in
Montana and Wyoming consisting of approximately $782,000 in storage and other
related assets and approximately $352,000 in inventory and accounts receivable.
The Company received cash of $750,000 and a promissory note for approximately
$620,000 to be repaid over a four year period, which is secured by the wholesale
propane assets sold. The balance due on the promissory note as of September 30,
2004 was approximately $489,000 of which $332,000 is included in Long-Term Notes
Receivable and the balance is included in Current Assets.
13
NOTE 7 -- DEFERRED CHARGES
Deferred Charges consist of the following:
THREE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
-------------------------- ----------
2004 2003 2004
Regulatory asset for property taxes $2,748,583 $2,609,865 $2,806,660
Regulatory asset for income taxes 458,753 458,753 458,753
Regulatory asset for deferred environmental
remediation costs 489,693 433,554 485,066
Other regulatory assets 84,850 91,302 77,858
Unamortized debt issue costs 1,427,265 1,234,770 1,660,078
---------- ---------- ----------
Total $5,209,144 $4,828,244 $5,488,415
========== ========== ==========
NOTE 8 - 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.
The Company has completed its remediation of soil contaminants at the plant site
and in April of 2002 received a closure letter from Montana Department of
Environmental Quality ("MDEQ") approving the completion of such remediation
program.
The Company and its consultants continue to work with the MDEQ relating to the
remediation plan for water contaminants. The MDEQ has established regulations
that allow water contaminants at a site to exceed standards if it is technically
impracticable to achieve those standards. Although the MDEQ has not established
guidance respecting the attainment of a technical waiver, the U.S. Environmental
Protection Agency ("EPA") has developed such guidance. The EPA guidance lists
factors which render mediations technically impracticable. The Company has filed
a request for a waiver from complying with certain standards with the MDEQ.
At September 30, 2004, the Company had incurred cumulative costs of
approximately $1,933,000 in connection with its evaluation and remediation of
the site. On May 30, 1995, the Company received an order from the MPSC allowing
for recovery of the costs associated with
14
the evaluation and remediation of the site through a surcharge on customer
bills. As of September 30, 2004, the Company had recovered approximately
$1,443,000 through such surcharges.
On April 15, 2003, the MPSC issued an Order to Show Cause Regarding the
Environmental Surcharge. The MPSC determined that the initial order allowing the
collection of the surcharge was intended by the MPSC to cover only a two year
collection period, after which it would contemplate additional filings by the
Company, if necessary. The Company responded to the Show Cause Order and the
MPSC subsequently ordered the termination of the Environmental Surcharge on
August 20, 2003. The Company filed a request with the commission to continue the
collection of the surcharge until all expenses have been recovered. This request
was approved by the MPSC and the surcharge was reinstated in September 2004. The
Company is required, under the Commission's most recent order, to file with the
MPSC every two years for approval to continue the recovery of the surcharge.
LEGAL PROCEEDINGS
From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. The Company
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.
In addition to other litigation referred to above, the Company or its
subsidiaries are involved in the following described litigation.
On June 17, 2003, EWR and PPL Montana, LLC ("PPLM") reached agreement on a
settlement of a lawsuit involving a wholesale electricity supply contract. Under
the terms of the settlement, EWR paid PPLM a total of $3,200,000, consisting of
an initial payment of $1,000,000 on June 17, 2003, and a second payment of
$2,200,000 on September 30, 2003, terminating all proceedings in the case. EWR
had established reserves and accruals in fiscal year 2001 of approximately
$3,032,000 to pay a potential settlement with PPLM and the remaining $168,000
was charged to operating expenses in fiscal year 2003.
On August 8, 2003, the Company reached agreement with the Montana Department of
Revenue ("DOR") to settle a claim that the Company had under-reported its
personal property for the years 1997 - 2002 and that additional property taxes
and penalties should be assessed. The settlement amount is being paid in ten
annual installments of $243,000 each, and began November 30, 2003.
The Company initially determined that it was entitled to recover the amounts
paid in connection with the DOR settlement through future rate adjustments as a
result of legislation permitting "automatic adjustments" to rates to recover
such property tax increases. The MPSC, however, interpreted the new legislation
as allowing recovery of only a portion of the higher property taxes. Rates
recovering the portion of the higher taxes permitted under the MPSC's
interpretation of the legislation went into effect on January 1, 2004. The
Company has since obtained interim rate relief which includes full recovery of
the property tax associated with the DOR settlement.
15
NOTE 9 - SEGMENTS OF OPERATIONS
THREE MONTHS ENDED
SEPTEMBER 30
-----------------------------
2004 2003
---- ----
Gross margin (operating revenue less cost of gas purchased):
Natural gas operations $ 1,753,616 $ 1,665,037
Propane operations 447,315 435,890
EWR (61,161) 846,160
Pipeline operations 84,355 109,350
----------- -----------
$ 2,224,125 $ 3,056,437
=========== ===========
Operating income (loss):
Natural gas operations $ (555,035) $ (900,442)
Propane operations (274,395) (172,382)
EWR (390,581) 506,745
Pipeline operations 37,533 57,963
----------- -----------
$(1,182,478) $ (508,116)
=========== ===========
Net income (loss):
Natural gas operations $ (638,253) $ (708,012)
Propane operations (200,736) (143,846)
EWR (292,965) 263,421
Pipeline operations 10,260 94,817
----------- -----------
$(1,121,694) $ (493,620)
=========== ===========
NOTE 10 - ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consists of the following:
SEPTEMBER 30, JUNE 30,
-------------------------- ----------
2004 2003 2004
Property tax settlement -- current portion (Note 8) $ 243,000 $ 243,000 $ 243,000
Payable to employee benefit plans 170,862 730,761 545,375
Accrued vacation 398,472 433,720 394,219
Customer deposits 410,406 393,657 407,635
Accrued incentives 532,189 710,304 524,642
Accrued interest 386,102 355,264 103,047
Accrued taxes other than income 710,666 346,027 520,536
Deferred payments from levelized billing 496,897
Other 647,082 317,176 491,631
---------- ---------- ----------
Total $3,498,779 $3,529,909 $3,726,982
========== ========== ==========
16
NOTE 11 - OTHER LONG TERM LIABILITIES
Other long-term liabilities consist of the following:
SEPTEMBER 30, JUNE 30,
-------------------------- ----------
2004 2003 2004
Asset retirement obligation $ 594,290 $ 563,306 $ 586,229
Contribution in aid of construction 1,223,539 1,066,404 1,225,539
Customer advances for construction 632,762 551,610 603,589
Accumulated postretirement obligation 284,378 222,576 269,100
Deferred gain on sale leaseback of assets 41,360 64,988 47,267
Regulatory liability for income taxes 83,161 83,161 83,161
Property tax settlement (Note 8) 1,944,008 2,366,865 1,944,008
---------- ---------- ----------
Total $4,803,498 $4,918,910 $4,758,893
========== ========== ==========
17
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following gives effect to the restatement of the Company's Condensed
Consolidated Financial Statements as discussed in Note 1.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
18
FORWARD-LOOKING STATEMENTS
The following Management's Discussion and Analysis and other portions of this
quarterly 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
Section 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 the required restructuring of
our debt, our operating capital requirements, negotiations with our lender,
recovery of property tax
19
payments, 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 risk 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 will 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 propane and energy marketing
segments could have a significant impact on the performance of the Company.
The regulatory structure in which the Company operates is in transition.
Legislative and regulatory initiatives, at both the federal and state levels,
are designed to promote competition. The changes in the gas industry have
allowed certain customers to negotiate gas purchases directly with producers or
brokers. To date, open access in the gas industry has not had a negative impact
on earnings or cash flow of the Company's regulated segment. The Company's
regulated natural gas and propane vapor operations follow Statement of
Accounting Standards (SFAS) No. 71 "Accounting for the Effects of Certain Types
of Regulation," and 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 No. 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. However, the Company is unaware of any circumstances
20
or events in the foreseeable future that would cause it to discontinue the
application of SFAS No. 71.
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.
Among the risks involved in natural gas marketing is the risk of nonperformance
by counterparties to contracts for purchase and sale of natural gas. EWR is
party to certain contracts for purchase or sale of natural gas at fixed prices
for fixed time periods. Some of these contracts are recorded as derivatives,
valued on a mark-to-market basis. At September 30, 2004, the net fair value of
the contracts was a derivative liability of approximately $2,000,000.
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
regulation, including allowed rates of return, 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 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 ability to meet financial covenants imposed by lenders to be able to draw
down on revolving lines of credit;
- - 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 or
propane contracts, and weather conditions; and
- - Global and domestic economic repercussions from terrorist activities and the
government's response thereto.
21
GENERAL BUSINESS DESCRIPTION
Energy West, Incorporated (the "Company") is a regulated public utility, with
certain non-utility operations conducted through its subsidiaries. The Company
was originally incorporated in Montana in 1909. The Company has four business
segments:
Natural Gas Operations Distribute natural gas to approximately 33,000
customers through regulated utilities operating in
and around Great Falls and West Yellowstone,
Montana, and Cody, Wyoming. The approximate
population of the service territories is 100,000.
Propane Operations Distribute propane to approximately 7,600
customers through regulated utilities operating
underground vapor systems in and around Payson,
Pine and Strawberry, Arizona. Non-regulated
operations include retail distribution of bulk
propane to approximately 2,200 customers in the
same Arizona communities. The approximate
population of the service territories is 40,000.
Energy West Resources, Inc. Market approximately 3 billion cubic feet ("BCF")
(EWR) of natural gas to commercial and industrial
customers in Montana and Wyoming and manage
midstream supply and production assets for
transportation customers and utilities. EWR also
has an ownership interest in production and
gathering assets.
Pipeline Operations (Energy Owns the Shoshone interstate and the Glacier
West Development, Inc. gathering pipeline assets located in Montana and
(EWD)) Wyoming. Certain natural gas producing wells owned
by EWD are being operated, managed, and reported
in EWR.
22
ENERGY WEST, INCORPORATED AND SUBSIDIARIES
SEPTEMBER 30, 2004
QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS.
FISCAL QUARTER ENDED SEPTEMBER 30, 2004 COMPARED TO FISCAL QUARTER ENDED
SEPTEMBER 30, 2003
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Condensed Consolidated
Financial Statements and Notes thereto and other financial information included
elsewhere in this report and the Company's Annual Report on Form 10-K for the
year ended June 30, 2004. The following gives effect to the restatement of the
unaudited Condensed Consolidated Financial Statements as of September 30, 2003
and for the three month period ended September 30, 2003 as described in Note 1
to the Consolidated Financial Statements. Results of operations for interim
periods are not necessarily indicative of results to be attained for any future
period.
Net Loss
The Company's net loss for the first quarter of fiscal year 2005 was $1,122,000
compared to a net loss of $494,000 in the first quarter of fiscal year 2004, an
increase of $628,000. The increase in the Company's net loss from the first
quarter of fiscal year 2005 to the first quarter of fiscal year 2004 was
primarily due to lower gross margins primarily in EWR, less other income and an
increase in interest expense, which were partially offset by a decrease in
operating expenses and an increase in income tax benefits.
Revenues
The Company's revenues for the first quarter of fiscal year 2005 were
$11,867,000 compared to $12,487,000 in the first quarter of fiscal year 2004, a
decrease of $620,000. The decrease was primarily attributable to: (1) EWR
experienced decreases in marketing revenue of $423,000 as a result of lower
volumes in addition to decreases of $283,000 due to a decline in derivative
values under mark-to-market accounting and decreases in electric and production
revenue of $105,000, (2) propane revenue decreases of $329,000 due to lower
volumes sold resulting from the sale of RMF's wholesale propane business in
Montana in August 2003 partially offset by higher propane sales in Arizona, due
to slightly higher volumes and higher sales prices, and (3) decreased revenues
in Pipeline operations of $25,000 due to the Glacier line being down. The lower
consolidated revenues were partially offset by a $544,000 increase in revenues
from the Natural Gas Operations resulting primarily from increased commodity gas
pricing and increased customer rates that were in effect in Great Falls compared
to the same quarter last year.
Gross Margin
Gross margin, which is defined as revenue less gas purchased and costs of gas
and electricity (wholesale), decreased $832,000, from $3,056,000 in the first
quarter of fiscal year 2004 to $2,224,000 in the first quarter of fiscal year
2005. EWR margins decreased $907,000 due to the $811,000 decrease in revenues
described above and a $96,000 increase in gas cost related to higher gas prices,
in the first quarter of fiscal year 2005 compared to the same quarter last year.
The Pipeline Operations' margins decreased $25,000 due to the Glacier line being
temporarily down from early June 2004 until the first week of November 2004. The
Natural Gas Operations' margins increased $89,000 primarily due to approved rate
increases related to personal property tax in the Great Falls area. The Propane
Operations' margins increased $11,000 due primarily to increases in Arizona
offset by margin decreases due to the sale of the RMF wholesale propane business
in August 2003.
Expense Other Than Gas Purchased
Expenses other than gas purchased decreased by $158,000 in the first quarter of
fiscal year 2005 as compared to the first quarter of fiscal year 2004. The
primary reasons for this decrease were (1) decreases in the Company's total
payroll of $331,000, (2) decreases in outside professional fees of $72,000 and
$31,000 related to Director fees and expenses and (3) decreases in depreciation
and amortization of $24,000. These decreases are offset by an increase of
$120,000 in taxes other than income mainly from personal property tax, most of
which is being recovered through rates. The decrease is further offset by the
gain on the sale of assets in the Company's Propane Operation of approximately
$232,000 in fiscal 2004.
Other Income
Other income decreased by $127,000 from $193,000 in the first quarter of fiscal
year 2004 to $66,000 in the first quarter of fiscal year 2005 primarily
resulting from a gain on sale of certain non-operating real estate assets
located in Montana in the first quarter fiscal year 2004.
Interest Expense
Interest expense increased by approximately $306,000 during the first quarter of
fiscal year 2005 from the first quarter of fiscal year 2004 due to higher
short-term borrowings and the amortization of $171,000 in debt issuance costs
related to securing the LaSalle short-term credit facility.
Income Tax Benefits
Income tax benefits increased $479,000 in the first quarter of fiscal year 2005
as compared to the first quarter of fiscal year 2004 due to the increased net
loss in the first quarter of fiscal year 2005.
23
OPERATING RESULTS OF THE COMPANY'S NATURAL GAS OPERATIONS
THREE MONTHS ENDED
SEPTEMBER 30
-----------------------------
2004 2003
---- ----
Natural Gas Revenues $ 5,207,676 $ 4,663,008
Natural Gas Purchased 3,454,060 2,997,971
----------- -----------
Gross Margin 1,753,616 1,665,037
Operating Expenses 2,308,651 2,565,479
----------- -----------
Operating Loss (555,035) (900,442)
Other Income 14,146 33,475
----------- -----------
Net Loss Before Interest and Taxes $ (540,889) $ (866,967)
=========== ===========
FISCAL QUARTER ENDED SEPTEMBER 30, 2004 COMPARED TO FISCAL QUARTER ENDED
SEPTEMBER 30, 2003
Natural Gas Revenues and Gross Margin
Operating revenues for the first quarter of fiscal year 2005 were approximately
$5,208,000 compared to approximately $4,663,000 for the first quarter of fiscal
year 2004, an increase of approximately $545,000. The increase in revenues is
due to the higher price paid for natural gas that is passed through to customers
and increased customer rates that are in effect in Great Falls to recover
personal property taxes.
Gas costs increased to $3,454,000 in the first quarter of fiscal year 2005 from
$2,998,000 in the first quarter of fiscal year 2004 an increase of approximately
$456,000 or 15% due to higher commodity cost compared to the same quarter last
year.
Gross margin, which is defined as operating revenues less gas purchased, was
approximately $1,754,000 for the first quarter of fiscal year 2005, compared to
a gross margin of approximately $1,665,000 for the first quarter of fiscal year
2004. The increase of $89,000 in gross margin is primarily due to personal
property tax rate increase in the Great Falls area.
Natural Gas Operating Expenses
Operating expenses decreased approximately $256,000, from $2,565,000 in the
first quarter of fiscal year 2004 to $2,309,000 in the first quarter of fiscal
year 2005. The decrease in operating expenses is related primarily to decreases
in corporate overhead costs of approximately $246,000 due to lower legal and
professional fees paid the first quarter of fiscal year 2005 compared to fees
related to the proxy contest and bank financing costs incurred in first quarter
of fiscal year 2004.
24
OPERATING RESULTS OF THE COMPANY'S PROPANE OPERATIONS
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------
2004 2003
---- ----
Propane Revenues $ 852,611 $ 1,181,901
Propane Purchased 405,296 746,011
--------- -----------
Gross Margin 447,315 435,890
Operating Expenses 721,710 608,272
--------- -----------
Operating Loss (274,395) (172,382)
Other Income 52,029 35,595
--------- -----------
Net Loss Before Interest and Taxes $(222,366) $ (136,787)
========= ===========
FISCAL QUARTER ENDED SEPTEMBER 30, 2004 COMPARED TO FISCAL QUARTER ENDED
SEPTEMBER 30, 2003
Propane Operating Revenues and Gross Margin
Revenues for the first quarter of fiscal year 2005 were $853,000 compared to
$1,182,000 for the first quarter of fiscal year 2004, a decrease of $329,000.
This decrease was attributable to a decrease in sales volume of 55% and
approximately $505,000 in revenue due to the August 21, 2003 the sale of the
wholesale propane assets located in Montana. The sale represented less than 8%
of the assets of EWP and less than 2% of the Company's consolidated assets. EWP
wholesale and non-utility retail propane operations continues to serve customers
in Arizona. The retail propane assets in Arizona remain a strategic fit for the
Company, and EWP has no plans to dispose of these assets at the present time.
This decrease was partially offset by increases of $177,000 in revenue in
regulated and non-regulated propane sales in Arizona, due to slightly higher
volumes and higher sales prices in that area. Cost of sales for the first
quarter of fiscal year 2005 were $406,000 compared to $746,000 for the first
quarter fiscal year 2004, a decrease of $340,000, which resulted in a gross
margin increase of approximately $11,000. Higher margins of $27,000 in Arizona,
from $411,000 in fiscal year 2004 to $438,000 in fiscal year 2005, were due to
higher retail prices and slightly higher volumes. These higher margins were
offset by lower margins of $16,000, from $22,000 in fiscal year 2004 to $6,000
in fiscal year 2005 due to lower sales in Rocky Mountain Fuels wholesale.
Propane Operating Expenses
Propane operating expenses for the first quarter of fiscal year 2005 were
$722,000. This represented an increase of $114,000 over the first quarter of
fiscal 2004 operating expenses, which were $608,000. The majority of the
$114,000 increase in fiscal 2005 is a result of $152,000 attributable to the
sale of the wholesale propane assets located in Montana, and $38,000 was
attributable to retail propane operations. Rocky Mountain Funds ("RMF") general
and administrative expenses in the first quarter of fiscal year 2005 were
$174,000 higher than the same quarter in fiscal year 2004, which benefited from
the $232,000 gain on sale of assets sold. RMF expenses in the first quarter of
fiscal year 2005 were $13,000 less for overhead and $12,000 less for
depreciation, offsetting the higher general and administrative expenses. First
quarter of fiscal year 2005 retail propane operations incurred $38,000 in lower
corporate costs for legal and financing activities.
25
Propane Other Income
Other Income increased $16,000 from $36,000 for the first quarter fiscal 2004 to
$52,000 for the first quarter fiscal 2005. This increase was due primarily to
interest on the note receivable from the sale of assets by Rocky Mountain Fuels
wholesale.
OPERATING RESULTS OF THE COMPANY'S EWR MARKETING OPERATIONS
THREE MONTHS ENDED
SEPTEMBER 30
-----------------------------
2004 2003
---- ----
EWR Revenues $ 5,722,507 $6,533,191
EWR Purchased 5,783,668 5,687,031
----------- ----------
Gross Margin (61,161) 846,160
Operating Expenses 329,420 339,415
----------- ----------
Operating Income (Loss) (390,581) 506,745
Other Income - 2,625
----------- ----------
Net Income (Loss) Before Interest and Taxes $ (390,581) $ 509,370
=========== ==========
FISCAL QUARTER ENDED SEPTEMBER 30, 2004 COMPARED TO FISCAL QUARTER ENDED
SEPTEMBER 30, 2003
EWR Revenues
Revenues decreased by $811,000 from $6,533,0000 in the first quarter of fiscal
year 2004 to $5,723,000 in the first quarter of fiscal year 2005. This decrease
is primarily due to a $423,000 decrease in volumes sold of 19% in the first
quarter of fiscal year 2005 compared to the first quarter of fiscal year 2004.
In addition, revenues decreased $283,000 due to decline in derivative values
under mark-to-market accounting. EWR also experienced a decrease in electric
revenue of $76,000 and a decrease in production revenue of $29,000.
26
EWR Purchases
Purchases increased by $96,000 from $5,687,000 in the first quarter of fiscal
year 2004 to $5,783,000 in the first quarter of fiscal year 2005. The main
reason for the increase was a rise in gas prices from the three month average
for the first quarter of fiscal year 2004 of $3.55 to a three month average of
$4.47 for the first quarter of fiscal year 2005. EWR also experienced a rise in
the cost of electricity of $15,000. The increase was offset by a decrease in
production expenses of $33,000.
EWR Operating Expenses
Operating expenses decreased by $10,000, from $339,000 in the first quarter of
fiscal year 2004 to $329,000 in the first quarter of fiscal year 2005. This
decrease is primarily due to a decrease of $37,000 in salary and employee
benefits, $32,000 in overhead, $15,000 in bad debt expense, $11,000 in
depreciation and depletion, $8,000 in cost of letters of credit, $5,500 decrease
in various general and administrative accounts and $4,500 in telephone expense.
The decrease was offset by an increase in professional services of $104,000. The
increase in professional services is related to the fiscal year 2004 audit and
legal to review the gas purchase and gas sale contracts. See Restatement of
financial results described in Note 1 of the condensed consolidated financial
statements.
OPERATING RESULTS OF THE COMPANY'S PIPELINE OPERATIONS
THREE MONTHS ENDED
SEPTEMBER 30
-----------------------
2004 2003
---- ----
Pipeline Revenues $84,355 $109,350
Pipeline Purchases - -
------- --------
Gross Margin 84,355 109,350
Operating Expenses 46,822 51,387
------- --------
Operating Income 37,533 57,963
Other Income - 120,922
------- --------
Net Income Before Interest and Taxes $37,533 $178,885
======= ========
FISCAL QUARTER ENDED SEPTEMBER 30, 2004 COMPARED TO FISCAL QUARTER ENDED
SEPTEMBER 30, 2003
27
Pipeline Gross Margin
Gross margin from Pipeline operations decreased by $25,000 from $109,000 in the
first quarter of fiscal 2004 to $84,000 in the first quarter of fiscal year
2005. This decrease is due to the Glacier line being down due to hydrocarbon and
water dew points being out of specifications. EWD has contracted with Summit
Energy to construct a processing plant that will process the gas to pipeline
specifications. The plant became operational during the first week of November.
Pipeline Operating Expenses
Operating expenses decreased by $4,000, from $51,000 in the first quarter of
fiscal year 2004 to $47,000 in the first quarter of fiscal year 2005. This
decrease was due primarily to decreases of $11,000 in salary, $8,000 in labor,
and $6,000 in corporate overhead and $1,000 in automotive. The decrease was
partially offset by an $11,000 increase in property taxes and a $9,000 increase
in maintenance on the Glacier line.
Pipeline Other Income
Other income for the first quarter of fiscal year 2004 included the gain on sale
of certain non-operating real estate assets located in Montana, which resulted
in a gain of $121,000.
CASH FLOW ANALYSIS
CASH FLOWS USED IN OPERATING ACTIVITIES
Cash flows used in operations during the quarter ended September 30, 2004 were
improved over last year's first quarter. The Company's change in operating cash
flows were driven by the following events and factors:
- Settlement payment of $2.2 million made to PPL in the first quarter
of fiscal year 2004,
- Restricted cash reserve of $2.6 million during the first quarter of
fiscal 2004,
- Offset by a larger net loss during the first quarter of fiscal 2005.
The amount of debt has substantially increased resulting in higher interest
costs, which will continue to negatively impact operating cash flows. The
Company is currently required to retire debt through the use of proceeds
generated from the sale of equity securities under the terms of the LaSalle
Facility.
The Company is attempting to improve operating cash flows by improving the
efficiency of the core businesses, increasing revenues through utility rates,
retiring debt and restructuring existing debt obligations.
CASH FLOWS USED IN INVESTING ACTIVITIES
Cash flows used in investing activities in the first quarter of fiscal year 2005
increased approximately $930,000 over cash provided from investing activities in
the first quarter of fiscal year 2004. In the first quarter of fiscal year 2004,
cash proceeds included approximately $829,000 from the sale of wholesale propane
assets. There were no sales of assets in the first quarter of fiscal year 2005.
28
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities decreased in the first quarter of fiscal
year 2005 from the first quarter fiscal year 2004 due to lower advances against
the line of credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating capital needs, as well as dividend payments and capital
expenditures, are generally funded through cash flow from operating activities
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 and
fall months and the Company's short-term borrowing needs for financing customer
accounts receivable are greatest during the winter months.
The Company substantially restructured its credit facilities during fiscal year
2004. On September 30, 2003, the Company established a $23.0 million revolving
credit facility with LaSalle Bank National Association, as Agent for certain
banks (collectively, the "Lender"), replacing a previous short-term line of
credit. The MPSC order granting approval of the $23.0 million credit facility
imposes restrictions on the use of the proceeds to utility purposes, and
requires the Company to provide monthly reports to the MPSC with respect to the
financial condition of the Company. The Company continues to be subject to these
MPSC requirements.
On March 31, 2004, the Company entered into a restated credit agreement with the
Lender. Pursuant to the restated credit agreement, the previous $23.0 million
revolving credit facility was replaced with a $15.0 million short-term revolving
credit facility, a $6.0 million term loan maturing on March 31, 2009, and a $2.0
million term loan maturing on September 30, 2004 (collectively referred to as
the "LaSalle Facility").
29
As of August 30, 2004, the Company and its lender under the LaSalle Facility
amended certain covenants as follows: (1) increased the total debt to capital
ratio from .65 to .70, (2) allowed the inclusion of extraordinary expenses
incurred by the Company for legal fees and costs of the PPLM litigation,
expenses and costs associated with the credit facilities, proxy contest costs,
and the costs of adoption of the shareholder rights plan, in determining the
interest coverage ratio, and (3) waived compliance with the ratios referred to
in (1) and (2) above as of June 30, 2004 in addition to a shareholder's
acquisition of more than 15% of the outstanding common stock of the Company.
As of November 30, 2004, the Company executed an agreement with its lender
providing for (i) an extension of the revolving facility until November 28,
2005; (ii) an extension of the date to consummate infusions of new equity of at
least $2.0 million and to repay the $2.0 million term loan to October 1, 2005;
(iii) a conditional waiver of the deadline to deliver audited financial
statements for fiscal year 2004 and the deadline to deliver financial statements
for the fiscal quarter ended September 30, 2004; (iv) a waiver of the technical
default that otherwise would have been caused by the restatement of financial
results of prior periods; (v) modification of interest rates applicable to the
$2.0 million term loan; (vi) a limitation of $1.0 million on total loans and
additional capital investment from the Company to EWR; and (vii) waivers of
certain financial covenant defaults as of September 30, 2004.
Borrowings under the LaSalle Facility are secured by liens on substantially all
of the assets of the Company and its subsidiaries. The Company's obligations
under certain other notes and industrial development revenue obligations are
secured on an equal and ratable basis with the Lender in the collateral granted
to secure the borrowings under the LaSalle Facility with the exception of the
first $1.0 million of debt under the LaSalle Facility.
Under the LaSalle Facility the Company may elect to pay interest on portions of
the amounts outstanding under the $15.0 million revolving line of credit at the
London interbank offered rate (LIBOR), plus 250 basis points, for interest
periods selected by the Company. For all other balances outstanding under the
$15.0 million revolving line of credit, the Company pays interest at the rate
publicly announced from time to time by LaSalle Bank as its "prime rate" (the
"Prime Rate"). For the $6.0 million term loan under the LaSalle Facility, the
Company may elect to pay interest at either the applicable LIBOR rate plus 350
basis points or at the Prime Rate plus 200
30
basis points. Pursuant to the November 30, 2004 amendment to the LaSalle
Facility, the interest rate on the $2.0 million term loan will be the Prime Rate
plus 200 basis points through March 31, 2005; the Prime Rate plus 300 basis
points from April 1, 2005 through June 30, 2005; and the Prime Rate plus 400
basis points from and after July 1, 2005. The Company also pays a commitment
fee of 35 basis points for the daily unutilized portion of the $15.0 million
revolving credit facility.
The LaSalle Facility requires the Company to maintain compliance with a number
of financial covenants, including meeting limitations on annual capital
expenditures, maintaining a total debt to total capital ratio of not more than
..70 to 1.00 and an interest coverage ratio of no less than 2.00 to 1.00. At
September 30, 2004, the Company would not have been in compliance with certain
covenants under the LaSalle Facility had the Lender not waived or modified
certain financial covenants. The LaSalle Facility also restricts the Company's
ability to pay dividends during any period to a certain percentage of cumulative
earnings of the Company over that period, and restricts open positions and Value
at Risk (VaR) in the Company's wholesale operations.
In June 2003, the Company's Board of Directors suspended the Company's dividends
to allow for strengthening of the Company's balance sheet. No determination has
been made with respect to resumption of cash dividend payments.
At September 30, 2004, the Company had approximately $1.7 million of cash on
hand. In addition, at September 30, 2004, the Company had borrowed approximately
$13.1 million under the LaSalle Facility revolving line of credit. The Company's
short-term borrowings under its lines of credit during the first quarter of
fiscal year 2005 had a daily weighted average interest rate of 5.14% per annum.
The Company's net availability at September 30, 2004, was approximately $1.9
million under the LaSalle Facility revolving line of credit. At December 1,
2004, the Company had borrowed approximately $14.6 million under the LaSalle
Facility revolving line of credit. Accordingly, the Company had net availability
at December 1, 2004, of approximately $371,000 under the LaSalle Facility
revolving line of credit. As discussed above, the Company's short-term borrowing
needs for purchases of gas inventory and capital expenditures are greatest
during the summer and fall months. The Company's availability normally increases
in January as monthly heating bills are paid and gas purchases are no longer
necessary.
In addition to the LaSalle Facility, the Company has outstanding certain notes
and industrial development revenue obligations (collectively "Long Term Notes
and Bonds"). The Company's Long Term Notes and Bonds are made up of three
separate debt issues: $8.0 million of Series 1997 notes bearing interest at an
annual rate of 7.5%; $7.8 million of Series 1993 notes bearing interest at
annual rates ranging from 6.20% to 7.60%; and Cascade County, Montana Series
1992B Industrial Development Revenue Obligations in the amount of $1.8 million
bearing interest at annual rates ranging from 6.0% to 6.5%. The Company's
obligations under the Long Term Notes and Bonds are secured on an equal and
ratable basis with the Lender in the collateral granted to secure the LaSalle
Facility with the exception of the first $1.0 million of debt under the LaSalle
Facility.
Under the terms of the Long Term Notes and Bonds, the Company is subject to
certain restrictions, including restrictions on total dividends and
distributions, liens and secured indebtedness, and asset sales, and is
restricted from incurring additional long-term indebtedness if it does not meet
certain debt to interest and debt to capital ratios.
In the event that the Company's obligations under the LaSalle Facility were
declared immediately due and payable as a result of an event of default, such
acceleration also could result in events of default under the Company's Series
1993 Notes and Series 1997 Notes. In such circumstances, an event of default
under either series of notes would occur if (a) the Company were given notice to
that effect either by the trustee under the indenture governing such series of
notes, or the holders of at least 25% in principal amount of the notes of such
series then outstanding, and (b) within 10 days after such notice from the
trustee or the note holders to the Company, the acceleration of the Company's
obligations under the LaSalle Facility has not been rescinded or annulled and
the obligations under the LaSalle Facility have not been discharged. There is no
similar cross-default provision with respect to the Cascade County, Montana
Series 1992B Industrial Development Revenue Bonds and the related Loan Agreement
between the Company and Cascade County, Montana. If the Company's obligations
were accelerated under the terms of any of the LaSalle Facility, the Series 1993
Notes or the Series 1997 Notes, such acceleration (unless rescinded or cured)
could result in a loss of liquidity and cause a material adverse effect on the
Company and its financial condition.
The total amount outstanding under all of the Company's long term debt
obligations was approximately $22.6 million at September 30, 2004. The portion
of such obligations due within one year was approximately $873,000 at September
30, 2004.
The Company would not have been in compliance with certain covenants under the
LaSalle Facility had the lender not waived or modified the covenants. The
Company is currently evaluating its options with respect to raising equity
capital to fund the repayment of the $2.0 million term loan, which matures on
October 1, 2005.
31
A table of the Company's long-term debt obligations, as well as other long-term
commitments and contingencies, as of September 30, 2004, are listed below
according to maturity dates.
Payments Due by Period
Less
Contractual than 2 - 3 4 - 5 After 5
Obligations Total 1 year Years years Years
----------- ---------- ----------- ----------- -----------
Long-Term Debt $22,569,992 $ 872,706 $ 4,071,302 $ 1,615,000 $16,010,984
Operating Lease Obligations 430,796 142,599 220,229 67,968 0
Transportation and Storage Obligation 23,286,658 4,367,715 8,626,611 8,517,792 1,774,540
----------- ---------- ----------- ----------- -----------
Total Obligations $46,287,446 $5,383,020 $12,918,142 $10,200,760 $17,785,524
=========== ========== =========== =========== ===========
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 counterparty performance. The Company has established 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, counterparty credit risks, and other risks
related to the energy commodity business.
In order to mitigate the risk of natural gas market price volatility related to
firm commitments to purchase or sell natural gas or electricity, from time to
time the Company and its subsidiaries have entered into hedging arrangements.
Such arrangements may be used to protect profit margins on future obligations to
deliver gas at a fixed price, or to protect against adverse effects of potential
market price declines on future obligations to purchase gas at fixed prices.
The Company accounts for certain of such purchases or sale agreements in
accordance with SFAS No. 133. Under SFAS 133, such contracts are reflected in
the Company's financial statements as derivative assets or derivative
liabilities and valued at "fair value," determined as of the date of the balance
sheet. Fair value accounting treatment is also referred to as "mark-to-market"
accounting. Mark-to-market accounting results in disparities between reported
earnings and realized cash flow, because changes in the derivative values are
reported in the Company's Consolidated Statement of Operations as an increase or
(decrease) in "Revenues - Gas and Electric - Wholesale" without regard to
whether any cash payments have been made between the parties to the contract. If
such contracts are held to maturity, the cash flow from the contracts
32
and their hedges are realized over the life of the contracts. SFAS No. 133
requires that contracts for purchase or sale at fixed prices and volumes must be
valued at fair value (under mark-to-market accounting) unless the contracts
qualify for treatment as a "normal purchase or sale."
Quoted market prices for natural gas derivative contracts of the Company and its
subsidiaries are generally not available. Therefore, to determine the net
present value of natural gas derivative contracts, the Company uses internally
developed valuation models that incorporate independently available current and
forecasted pricing information.
For a discussion of the restatement of results arising out of the accounting for
the Company's derivative contracts, see Restatement of Financial Results.
As of September 30, 2004, 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 2005 $66,799 $1,214,847
Contracts maturing during fiscal years 2006 and 2007 - 823,039
Contracts maturing during fiscal years 2008 and 2009 - 29,132
------- ----------
Total $66,799 $2,067,018
======= ==========
Regulated Operations -- In the case of the Company's regulated divisions, gains
or losses resulting from derivative contracts are subject to deferral under
regulatory procedures approved by the public service regulatory commissions of
the States of Montana and Wyoming. 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 No. 71,
Accounting for the Effects of Certain Types of Regulation.
CRITICAL ACCOUNTING POLICIES
The Company believes that its critical accounting policies are as follows:
Effects of Regulation -- The Company follows SFAS No. 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 rate-making 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 utility for amounts previously collected from customers and for
amounts that are expected to be refunded to customers (regulatory liabilities).
Costs recovered through rates include income taxes, property taxes,
environmental remediation and costs of gas.
33
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 No. 133.
Contracts that are required to be valued as derivatives under SFAS No. 133 are
reflected at "fair value" under the mark-to-market method of accounting. The
market prices or fair values used in determining the value of the Company's
portfolio are management's best estimates utilizing information such as closing
exchange rates, over-the-counter quotes, historical volatility and the potential
impact on market prices of liquidating positions in an orderly manner over a
reasonable amount of time under current market conditions. As additional
information becomes available, or actual amounts are determinable, the recorded
estimates may be revised. As a result, operating results can be affected by
revisions to prior accounting estimates. Operating results can also be affected
by changes in underlying factors used in the determination of fair value of
portfolio such as the following:
- There is variability in mark-to-market earnings due to changes in
the market price for gas. The Company's portfolio is valued based on
current and expected future gas prices. Changes in these prices can
cause fluctuations in earnings.
- The Company discounts derivative assets and liabilities using
risk-free interest rates adjusted for credit standing in accordance
with SFAS No. 133, which is more fully described in Statement of
Financial Accounting Concepts No. 7, "Using Cash Flow Information
and Present Value in Accounting Measurement" (SFAS Concept 7).
Other activities consist of the purchasing of gas for utility operations, which
fall under the normal purchases and sales exception, and entering into
transactions to hedge risk associated with these purchases. These activities
require that management make certain judgments regarding election of the normal
purchases and sales exceptions and qualification of hedge accounting by
identifying hedge relationships and assessing hedge effectiveness.
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 Note 1 to the consolidated financial statements
set forth in the Company's Annual Report on Form 10-K for the year ended June
30, 2004 for a description of the Company's accounting policies and other
information related to these financial instruments.
34
COMMODITY PRICE RISK
The Company seeks to protect itself against natural gas price fluctuations by
limiting the aggregate level of net open positions that are exposed to market
price changes. Open positions are to be managed with policies designed to limit
the exposure to market risk, with regular reporting to management of potential
financial exposure. The Company's risk management committee has limited the
types of contracts the Company will consider to those related to physical
natural gas deliveries. Therefore, management believes that the Company's
results of operations are not significantly exposed to changes in natural gas
prices.
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
100 basis point change in market rates applied to the balance of the notes
payable would change interest expense by $150,000 annually.
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
Company's management has evaluated, with the participation of the Chief
Executive Officer and the Principal Financial Officer, the effectiveness of the
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report on Form 10-Q for the three months ended September 30, 2004.
Based on this evaluation, although the Company had a deficiency that gave rise
to a restatement of the consolidated financial statements (see Restatement of
Financial Results in Note 1 to the consolidated financial statements); the Chief
Executive Officer and the Principal Financial Officer have concluded that the
disclosure controls and procedures that are now in place at the Company are
effective to ensure that information we are required to disclose in reports that
we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
The Company corrected its accounting with regard to certain natural gas
agreements following a review which identified accounting treatment issues with
the agreements. The Company's independent auditors have advised the Company that
they have identified a material weakness in the Company's internal control over
financial reporting in connection with energy contracts. During fiscal year 2004
and the first quarter of fiscal year 2005, the Company has implemented changes
in the internal control over financial reporting to address the material
weakness. Those changes involved implementation of procedures respecting the
contracting for gas under natural gas purchase and sale agreements, including
establishing a separation between the deal-making function and the accounting
and contract administration functions, establishment of record systems and
procedures that require reconciliation of actual performance by the contracting
parties against the prices, quantities and other material terms specified in the
agreements, and redundant documentation for every agreement regarding its
classification pursuant to SFAS 133. The procedures are designed to make sure
that all material obligations entered into on behalf of the Company or its
subsidiaries receive proper review and that those agreements are enforced and
performed according to their terms and conditions. The procedures are also
designed to make sure that the Company complies with applicable accounting
requirements.
35
material obligations made on behalf of the Company or subsidiaries receive
proper review and to assure that those agreements are enforced and performed
according to their terms and conditions. The procedures are also designed to
assure compliance by the Company with applicable accounting requirements.
36
Form 10-Q
Part II - Other Information
Item 1 LEGAL PROCEEDINGS
From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. The Company
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.
In addition to other litigation referred to above, the Company or its
subsidiaries are involved in the following described litigation.
On June 17, 2003, EWR and PPL Montana, LLC ("PPLM") reached agreement on a
settlement of a lawsuit involving a wholesale electricity supply contract. Under
the terms of the settlement, EWR paid PPLM a total of $3,200,000, consisting of
an initial payment of $1,000,000 on June 17, 2003, and a second payment of
$2,200,000 on September 30, 2003, terminating all proceedings in the case. EWR
had established reserves and accruals in fiscal year 2001 of approximately
$3,032,000 to pay a potential settlement with PPLM and the remaining $168,000
was charged to operating expenses in fiscal year 2003.
On August 8, 2003, the Company reached agreement with the Montana Department of
Revenue ("DOR") to settle a claim that the Company had under-reported its
personal property for the years 1997 - 2002 and that additional property taxes
and penalties should be assessed. The settlement amount is being paid in ten
annual installments of $243,000 each, beginning November 30, 2003.
The Company initially determined that it was entitled to recover the amounts
paid in connection with the DOR settlement through future rate adjustments as a
result of legislation permitting "automatic adjustments" to rates to recover
such property tax increases. The MPSC, however, interpreted the new legislation
as allowing recovery of only a portion of the higher property tax rates. Rates
recovering the portion of the higher taxes permitted under the MPSC's
interpretation of the legislation went into effect on January 1, 2004. The
Company has since obtained interim rate relief which includes full recovery of
the property tax associated with the DOR settlement.
Item 2. Unregistered Sales of Equity Securities, and Use of Proceeds - Not
Applicable
Item 3. Defaults upon Senior Securities - See Liquidity and Capital
Resources above
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits
Exhibits for the first quarter ended September 30, 2004.
10.1(a) Waiver and First Amendment to Credit Agreement dated as of August 30,
2004 by and among the Company, its subsidiaries and LaSalle
(incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed with the Commission on September 3, 2004).
10.1(b) Second Amendment to Credit Agreement dated as of September 10, 2004 by
and among the Company, its subsidiaries and LaSalle (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed with
the Commission on September 16, 2004).
10.1(c) Letter Agreement to Credit Agreement entered into on October 20, 2004,
by and among the Company, its subsidiaries and LaSalle (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed
with the Commission on October 21, 2004).
10.1(d) Letter Agreement to Credit Agreement entered into on November 2, 2004,
by and among the Company, its subsidiaries and LaSalle (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed
with the Commission on November 5, 2004).
10.1(e) Third Amendment to Credit Agreement dated as of November 2, 2004, by
and among the Company, its subsidiaries and LaSalle (incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed with
the Commission on November 5, 2004).
10.1(f) Limited Waiver and Fourth Amendment to Credit Agreement dated as of
November 30, 2004, by and among the Company, its subsidiaries and
LaSalle (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed with the Commission on December 6, 2004).
10.2 Employment Agreement effective as of July 1, 2004, between the Company
and David Cerotzke (incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2004, filed with the Commission on December 17, 2004).
10.3 Employment Agreement effective as of July 1, 2004, between the Company
and John Allen (incorporated by reference to Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2004, filed with the Commission on December 17, 2004).
10.4 Option Agreement dated July 1, 2004, between the Company and David
Cerotzke (incorporated by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2004, filed with the Commission on December 17, 2004).
10.5 Option Agreement dated July 1, 2004, between the Company and John
Allen (incorporated by reference to Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2004, filed with the Commission on December 17, 2004).
31.1 Certification of the Principal Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of the Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of the Principal Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2 Certification of the Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ David A. Cerotzke
- ----------------------------
David A. Cerotzke
President and Chief Executive Officer December 17, 2004
(principal executive officer)
/s/ M. Shawn Shaw
- ----------------------------
M. Shawn Shaw December 17, 2004
(principal financial officer
and principal accounting officer)
38