FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
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
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MONTANA 81-0141785
---------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1 FIRST AVENUE SOUTH, GREAT FALLS, MT. 59401
---------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (406)-791-7500
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT DECEMBER 31, 1997
(COMMON STOCK, $.15 PAR VALUE) 2,395,091
ENERGY WEST INCORPORATED
INDEX TO FORM 10-Q
PAGE NO.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1997 AND JUNE 30, 1997 1
CONDENSED CONSOLIDATED STATEMENTS OF INCOME -
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1997
AND 1996 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4-11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-17
PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 18
ITEM 2 - CHANGES IN SECURITIES 19
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5 - OTHER INFORMATION 19
ITEM 6 - REPORTS ON FORM 8-K 19
SIGNATURES
I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31 June 30
1997 1997
----------- -----------
Current Assets:
Cash $ 187,367 $ 148,665
Accounts Receivable (net) 8,326,364 3,402,528
Natural Gas and Propane Inventory 4,330,817 5,792,517
Materials and Supplies 529,419 561,112
Prepayments and other 367,732 518,504
Refundable Income Tax Payments 121,951 301,711
Recoverable Cost of Gas Purchases 1,821,180 1,673,285
Deferred income taxes - current 184,597 -
----------- -----------
Total Current Assets 15,869,426 12,398,322
----------- -----------
Investments 0 257,560
Notes Receivable Due After One Year 200,000 2,537
Property, Plant and Equipment-Net 28,205,441 27,397,780
Deferred Charges 3,965,629 2,828,650
----------- -----------
Total Assets $48,240,496 $42,884,849
----------- -----------
----------- -----------
CAPITALIZATION AND LIABILITIES
Current Liabilities:
Note payable to bank $ 6,430,000 $11,380,000
Long-term debt due within one year 242,392 361,959
Accounts Payable - Gas Purchases 2,847,245 1,158,700
Other Current and Accrued Liabilities 2,591,313 2,416,226
----------- -----------
Total Current Liabilities 12,110,951 15,316,885
----------- -----------
Deferred Credits 6,774,488 5,887,275
Long-term Debt (less amounts due
within one year) 17,443,755 9,683,755
Stockholders' Equity
Preferred Stock 0 0
Common Stock (2,395,091 shares and
2,357,740 shares were outstanding at
December 31, 1997 and June 30, 1997
respectively) 359,542 353,623
Capital in Excess of Par Value 3,231,422 2,932,962
Retained Earnings 8,320,338 8,710,349
----------- -----------
Total Stockholder's Equity 11,911,301 11,996,934
----------- -----------
Total Capitalization and Liabilities $48,240,496 $42,884,849
----------- -----------
----------- -----------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-1-
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
December 31 December 31
(RESTATED) (RESTATED)
1997 1996 1997 1996
-------------------------------------------------------
Operating revenue:
Regulated utilities $ 8,927,312 $ 8,891,736 $12,040,598 $11,769,113
Nonregulated operations 2,722,558 3,050,496 3,876,198 4,107,577
Gas trading 2,991,710 1,719,415 3,949,299 2,376,761
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Total Revenue 14,641,580 13,661,647 19,866,095 18,253,451
-------------------------------------------------------
Operating Expenses
Gas Purchased 7,578,800 7,621,001 10,088,641 9,749,288
Cost of gas trading 2,778,291 1,665,813 3,654,606 2,254,161
Distribution, general and administrative 2,040,574 2,115,836 4,028,517 4,139,147
Depreciation and Amortization 452,359 462,423 900,840 927,566
Taxes other than Income 176,371 185,530 322,712 331,493
-------------------------------------------------------
Total Operating Expenses 13,026,395 12,050,603 18,995,316 17,401,655
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Operating Income 1,615,185 1,611,044 870,779 851,796
Other Income - Net 119,771 228,338 208,994 319,741
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Income Before Interest Charges & IncomeTaxes 1,734,956 1,839,382 1,079,773 1,171,537
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Interest Charges:
Long-Term Debt 319,007 171,046 569,045 345,409
Other 137,032 240,326 317,717 404,596
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Total Interest Charges 456,039 411,372 886,762 750,005
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Net Income Before Income Taxes 1,278,917 1,428,010 193,011 421,532
Income Taxes 463,111 507,742 58,004 134,746
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Net Income $ 815,806 $ 920,268 $ 135,007 $ 286,786
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Basic Earnings Per Share $0.35 $0.39 $0.06 $0.12
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Diluted Earnings Per Share $0.34 $0.39 $0.06 $0.12
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Dividends per common share $0.1050 $0.1050 $0.2200 $0.2100
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Basic Weighted Average Shares 2,363,917 2,346,675 2,364,410 2,322,862
Diluted Weighted Average Shares 2,367,101 2,356,738 2,367,594 2,346,532
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-2-
FORM 10Q
ENERGY WEST INCORPORATED
Condensed Consolidated Statements of Cash Flows
Six Months Ended
December 31
(RESTATED)
1997 1996
---------------------------
Operating Activities:
Net Income $ 135,006 $ 286,877
Adjustments to Reconcile Net Income to Cash Flow
Depreciation and Amortization 1,013,704 1,041,731
(Gain) Loss on Sale of Marketable Equity Securities 0 (100,526)
(Gain) Loss on Sale of Property, Plant & Equipment (710) (11,309)
Deferred Gain on Sale of Assets (11,814) (11,814)
Investment Tax Credit (10,531) (10,531)
Deferred Income Taxes 135,593 428,538
Changes in Operating Assets and Liabilities (1,644,783) (3,962,332)
---------------------------
Net Cash Provided by (Used In) Operating Activities (383,535) (2,339,366)
Investing Activities:
Construction Expenditures (1,643,511) (1,591,715)
Collection of Long-Term Notes Receivable 2,537 929
Proceeds from Contributions in Aid of Construction 116,153 29,822
Proceeds from Sale of Marketable Equity Securities 0 273,572
Increase in Notes Receivable (200,000) 0
Proceeds from Sale of Property, Plant & Equipment 15,200 18,942
---------------------------
Net Cash Provided by (Used In) Investing Activities (1,709,621) (1,268,450)
Financing Activities:
Proceeds from Long-Term Debt 8,000,000 0
Debt Issuance and Reacquisition Costs (457,503) 0
Proceeds from Notes Payable 17,385,000 9,352,000
Repayment of Long-Term Debt (240,000) (360,240)
Repayment of Notes Payable (22,335,000) (5,875,000)
Sale of Common Stock 187,224 3,785
Dividends paid (407,863) (195,762)
---------------------------
Net Cash Provided by (Used In) Financing Activities 2,131,858 2,924,783
---------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 38,702 (683,033)
Cash and Cash Equivalents at Beginning of Year 148,665 721,093
---------------------------
Cash and Cash Equivalents at End of Period $ 187,367 $ 38,060
---------------------------
---------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-3-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1997
NOTE 1 - BASIS OF PRESENTATION
THE ACCOMPANYING UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS HAVE
BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
FOR INTERIM FINANCIAL INFORMATION AND WITH THE INSTRUCTIONS TO FORM 10-Q AND
ARTICLE 10 OF REGULATION S-X. ACCORDINGLY, THEY DO NOT INCLUDE ALL OF THE
INFORMATION AND FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES FOR COMPLETE FINANCIAL STATEMENTS. IN THE OPINION OF MANAGEMENT,
ALL ADJUSTMENTS (CONSISTING ONLY OF NORMAL RECURRING ACCRUALS) CONSIDERED
NECESSARY FOR A FAIR PRESENTATION HAVE BEEN INCLUDED. OPERATING RESULTS
FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 1997 ARE NOT NECESSARILY
INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR THE YEAR ENDED JUNE 30,
1998 DUE TO SEASONAL FACTORS AFFECTING GAS UTILITY, CONSTRUCTION AND
OTHER OPERATIONS. FOR FURTHER INFORMATION, REFER TO THE CONSOLIDATED
FINANCIAL STATEMENTS AND FOOTNOTES THERETO INCLUDED IN THE ENERGY WEST
INCORPORATED (THE COMPANY) ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
JUNE 30, 1997.
PRIOR PERIOD ADJUSTMENT
THE COMPANY HAS RESTATED ITS PREVIOUSLY ISSUED FISCAL 1997 CONDENSED
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED DECEMBER
31, 1996, TO REFLECT THE DEFERRAL OF THE GAIN ON SALE-LEASEBACK OF ASSETS
TOTALLING $236,000, WHICH OCCURRED IN JUNE 1996. THE GAIN IS BEING AMORTIZED
RATABLY INTO INCOME OVER THE INITIAL TEN-YEAR LEASE TERM. THE EFFECT OF THE
AMORTIZATION ON RESULTS OF OPERATIONS FOR THE ABOVE MENTIONED CONDENSED
CONSOLIDATED STATEMENTS OF INCOME IS AS FOLLOWS:
DECEMBER 31, 1996 DECEMBER 31, 1996
NET INCOME (LOSS): THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ------------------
AS PREVIOUSLY REPORTED $916,664 $279,853
AS RESTATED $920,268 $286,786
NET INCOME PER COMMON SHARE:
AS PREVIOUSLY REPORTED $.39 $.12
AS RESTATED $.39 $.12
4
NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
EARNINGS PER COMMON SHARE ARE COMPUTED BASED ON THE WEIGHTED AVERAGE
NUMBER OF COMMON SHARES ISSUED AND OUTSTANDING AND COMMON STOCK EQUIVALENTS,
IF DILUTIVE. IN FEBRUARY 1997, THE FINANCIAL ACCOUNTING STANDARDS BOARD
(SFAS) ISSUED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS
PER SHARE. THE OVERALL OBJECTIVE OF STATEMENT 128 IS TO SIMPLIFY THE
CALCULATION OF EARNINGS PER SHARE (EPS) AND ACHIEVE COMPARABILITY WITH THE
RECENTLY ISSUED INTERNATIONAL ACCOUNTING STANDARD NO. 33, EARNINGS PER SHARE.
STATEMENT 128 IS EFFECTIVE FOR BOTH INTERIM AND ANNUAL FINANCIAL STATEMENTS
FOR PERIODS ENDING AFTER DECEMBER 15, 1997. EARLIER APPLICATION IS NOT
PERMITTED. AS A RESULT, CALENDAR YEAR END COMPANIES WILL FIRST REPORT ON THE
NEW EPS BASIS IN THE FOURTH QUARTER ENDED DECEMBER, 1997. SUBSEQUENT TO THE
EFFECTIVE DATE, ALL PRIOR-PERIOD EPS AMOUNTS (INCLUDING EPS INFORMATION IN
INTERIM FINANCIAL STATEMENTS, EARNINGS SUMMARIES, AND SELECTED FINANCIAL
DATA) ARE REQUIRED TO BE RESTATED TO CONFORM TO THE PROVISIONS OF STATEMENT
128. UNDER STATEMENT 128, PRIMARY EPS WILL BE REPLACED WITH A NEW SIMPLER
CALCULATION CALLED BASIC EPS. BASIC EPS WILL BE CALCULATED BY DIVIDING
INCOME AVAILABLE TO COMMON STOCKHOLDERS (I.E., NET INCOME LESS PREFERRED
STOCK DIVIDENDS) BY THE WEIGHTED AVERAGE COMMON SHARES OUTSTANDING. THUS, IN
THE MOST SIGNIFICANT CHANGE IN CURRENT PRACTICE, OPTIONS, WARRANTS, AND
CONVERTIBLE SECURITIES WILL BE EXCLUDED FROM THE CALCULATION. FURTHER,
CONTINGENTLY ISSUABLE SHARES WILL BE INCLUDED IN BASIC EPS ONLY IF ALL THE
NECESSARY CONDITIONS HAVE BEEN SATISFIED BY THE END OF THE PERIOD AND IT IS
ONLY A MATTER OF TIME BEFORE THEY ARE ISSUED. BASIC EPS UNDER STATEMENT 128
WILL RESULT IN HIGHER EARNINGS PER SHARE BECAUSE COMMON STOCK EQUIVALENTS
WILL NOT BE INCLUDED. THUS, THE BASIC EPS CALCULATION WILL BE LESS COMPLEX
AND EASIER TO PREPARE. THE COMPANY HAS CALCULATED BASIC EARNINGS PER SHARE
AT THE END OF THE SECOND QUARTER ENDING DECEMBER 31, 1997.
5
NOTE 3 - PRINCIPAL ACCOUNTING POLICIES
THE COMPANY HAS ELECTED TO FOLLOW ACCOUNTING PRINCIPLES BOARD OPINION ("APB")
NO. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (THE INTRINSIC VALUE
METHOD), FOR ITS STOCK OPTIONS RATHER THAN THE ALTERNATIVE FAIR VALUE METHOD
PROVIDED FOR BY SFAS NO. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
ACCOUNTING FOR STOCK OPTIONS USING APB NO. 25 RESULTS IN NO COMPENSATION
EXPENSE TO THE COMPANY BECAUSE THE EXERCISE PRICE FOR THE STOCK OPTIONS
EQUALS THE MARKET PRICE OF THE UNDERLYING STOCK ON THE DATE OF THE GRANT.
SINCE THE COMPANY HAS ELECTED TO USE APB NO. 25, PRO FORMA INFORMATION
REGARDING NET INCOME AND EARNINGS PER SHARE IS REQUIRED BY SFAS NO. 123 AS IF
THE COMPANY HAD ACCOUNTED FOR ITS STOCK OPTIONS UNDER THE FAIR VALUE METHOD
OF THAT STATEMENT. FOR THE FISCAL YEAR THROUGH DECEMBER 31, 1997, NO OPTIONS
WERE GRANTED AND FOR THE FISCAL YEAR ENDED JUNE 30, 1997 ONLY A LIMITED
NUMBER OF OPTIONS WERE GRANTED, RESULTING IN NO MATERIAL IMPACT ON PRO FORMA
NET INCOME OR EARNINGS PER SHARE. THE FAIR VALUE FOR THESE OPTIONS WAS
ESTIMATED AT THE DATE OF GRANT USING THE BLACK-SCHOLES OPTION PRICING MODEL
WITH THE FOLLOWING WEIGHTED AVERAGE ASSUMPTIONS:
1997
-------
RISK-FREE INTEREST RATE--LENGTH OF EXERCISE PERIOD 6.3%
DIVIDEND YIELDS 5.2%
VOLATILITY FACTORS OF THE EXPECTED MARKET PRICE OF
THE COMPANY'S COMMON STOCK .187
WEIGHTED-AVERAGE EXPECTED LIFE OF THE EMPLOYEE
STOCK OPTIONS 5 YEARS
THE WEIGHTED-AVERAGE FAIR VALUE OF OPTIONS GRANTED $1.20
THE BLACK-SCHOLES OPTION VALUATION MODEL WAS DEVELOPED FOR USE IN ESTIMATING
THE FAIR VALUE OF TRADED OPTIONS WHICH HAVE NO VESTING RESTRICTIONS AND ARE
FULLY TRANSFERABLE. IN ADDITION, OPTION VALUATION MODELS REQUIRE THE INPUT
OF HIGHLY SUBJECTIVE ASSUMPTIONS, INCLUDING THE EXPECTED STOCK PRICE
VOLATILITY. BECAUSE THE COMPANY'S STOCK OPTIONS HAVE CHARACTERISTICS
SIGNIFICANTLY DIFFERENT FROM THOSE OF TRADED OPTIONS, AND BECAUSE CHANGES IN
THE SUBJECTIVE INPUT ASSUMPTIONS CAN MATERIALLY AFFECT THE FAIR VALUE
ESTIMATE, IN MANAGEMENT'S OPINION, THE EXISTING MODELS DO NOT NECESSARILY
PROVIDE A RELIABLE SINGLE MEASURE OF THE FAIR VALUE OF THE COMPANY'S STOCK
OPTIONS.
NOTE 4 - DEFERRED GAIN ON SALE OF ASSETS
ON JUNE 28, 1996, ONE OF THE COMPANY'S NONREGULATED SUBSIDIARIES SOLD REAL
PROPERTY, CONSISTING OF LAND AND OFFICE AND WAREHOUSE BUILDINGS, FOR $525,000
IN CASH. CONCURRENT WITH THE SALE, THE COMPANY LEASED THE PROPERTY BACK FOR
A PERIOD OF TEN YEARS AT AN ANNUAL RENTAL OF $51,975. THE INITIAL TEN-YEAR
TERM OF THE LEASE EXTENDS AUTOMATICALLY FOR TWO SUCCESSIVE FIVE-YEAR PERIODS
UNLESS THE COMPANY PROVIDES AT LEAST SIX MONTHS NOTICE OF NON-RENEWAL PRIOR
TO THE END OF EITHER THE INITIAL TERM OR THE FIRST SUCCESSIVE FIVE-YEAR TERM.
NOTE 5 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
THE COMPANY REALIZED A GAIN OF APPROXIMATELY $100,526 PRE-TAX ON THE SALE OF
MARKETABLE EQUITY SECURITIES IN THE FIRST QUARTER OF 1997.
NOTE 5 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
FOR THE PERIOD ENDED DECEMBER 31, 1997, THE COMPANY IS A PARTY TO ONE GAS
HEDGE AGREEMENT FOR REGULATED OPERATIONS. THIS AGREEMENT REPRESENTS
APPROXIMATELY 90% OF THE SUPPLY REQUIRED FOR THOSE OPERATIONS. THE HEDGE
WAS MADE TO MINIMIZE THE RATEPAYER'S EXPOSURE TO PRICE FLUCTUATIONS.
REGULATED OPERATIONS ARE GENERALLY NOT AT RISK FOR GAS COSTS.
FAIR
INDEX VALUE OF
FISCAL VOLUME PRICE CONTRACT MARKET REMAINING
YEAR (MMBTU EFFECTIVE TERMINATION CONTRACT RANGE VALUE AT PRICE CONTRACT
PER DAY) DATE DATE PRICE FOR DEC 31 AT AT DEC 31
FISCAL DEC 31
YEAR
-----------------------------------------------------------------------------------------------
1997
------
HEDGE 5000 11/1/97 3/31/98 $2.075 $2.04 TO $933,750 $2.04 $918,000
$2.95
IN ORDER TO MITIGATE THE RISK OF WARMER THAN NORMAL WEATHER, THE COMPANY HAS
PUT A ZERO COST WEATHER HEDGE IN PLACE FOR THE MONTHS OF JANUARY, FEBRUARY
AND MARCH, 1998 FOR THE GREAT FALLS DIVISION, WHEREIN THE HEDGE WILL PAYOUT
$500 FOR EACH DEGREE DAY UNDER 2,860 (12% WARMER THAN THE 10 YEAR DEGREE DAY
AVERAGE), OR COST THE COMPANY $500 FOR EACH DEGREE DAY OVER 3,200 (NORMAL 10
YEAR DEGREE DAY AVERAGE), WITH A MAXIMUM EXPOSURE OF $250,000.
7
NOTE 6 - INCOME TAXES
UNDER THE LIABILITY METHOD PRESCRIBED BY SFAS NO. 109, DEFERRED INCOME TAXES
REFLECT THE NET TAX EFFECTS OF TEMPORARY DIFFERENCES BETWEEN THE CARRYING
AMOUNTS OF ASSETS AND LIABILITIES FOR FINANCIAL REPORTING PURPOSES AND
AMOUNTS USED FOR INCOME TAX PURPOSES. AT DECEMBER 31, 1997, COMPONENTS OF
THE COMPANY'S DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES ARE AS FOLLOWS:
DEFERRED TAX ASSETS:
ALLOWANCE FOR DOUBTFUL ACCOUNTS........................... $ 35,872
UNAMORTIZED INVESTMENT TAX CREDIT......................... 149,182
CONTRIBUTIONS IN AID OF CONSTRUCTION...................... 251,372
DEFERRED GAIN ON SALE OF ASSETS........................... 80,139
OTHER NONDEDUCTIBLE ACCRUALS.............................. 104,373
----------
TOTAL DEFERRED TAX ASSETS.............................. 620,938
----------
DEFERRED TAX LIABILITIES:
CUSTOMER REFUNDS PAYABLE.................................. 704,328
PROPERTY, PLANT AND EQUIPMENT............................. 3,372,390
UNAMORTIZED DEBT ISSUE COSTS.............................. 180,347
COVENANT NOT TO COMPETE................................... 82,677
----------
TOTAL DEFERRED TAX LIABILITIES......................... 4,339,742
----------
NET DEFERRED TAX LIABILITY.................................. $3,718,804
----------
----------
INCOME TAX EXPENSE CONSISTS OF THE FOLLOWING:
CURRENT INCOME TAXES (BENEFITS):
FEDERAL................................................... $ (15,846)
STATE.................................................... (24,279)
----------
TOTAL CURRENT INCOME TAXES (BENEFITS)....................... (40,125)
----------
DEFERRED INCOME TAXES (BENEFITS):
EXCESS TAX DEPRECIATION.................................. 140,834
EXCESS TAX (BOOK) AMORTIZATION........................... (17,311)
RECOVERABLE COST OF GAS PURCHASES........................ 46,869
CONTRIBUTIONS IN AID OF CONSTRUCTION..................... (47,150)
OTHER.................................................... (14,582)
----------
TOTAL DEFERRED INCOME TAXES................................ 108,160
INVESTMENT TAX CREDIT,...................................... (10,531)
----------
TOTAL INCOME TAXES.......................................... $ 58,004
----------
----------
INCOME TAX EXPENSE FROM OPERATIONS DIFFERS FROM THE AMOUNT COMPUTED BY
APPLYING THE FEDERAL STATUTORY RATE TO PRE-TAX INCOME FOR THE FOLLOWING
REASONS:
TAX EXPENSE (BENEFIT) AT STATUTORY RATES - 34%.............. $ 65,864
STATE INCOME TAXES (BENEFIT), NET OF FEDERAL INCOME TAXES... 3,312
AMORTIZATION OF DEFERRED INVESTMENT TAX CREDITS............. (10,531)
OTHER....................................................... (641)
----------
TOTAL INCOME TAXES (BENEFITS)............................... $ 58,004
----------
----------
8
NOTE 7 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS
THE COMPANY HAS ENTERED INTO LONG-TERM, TAKE OR PAY NATURAL GAS SUPPLY
CONTRACTS WHICH EXPIRE BEGINNING IN 1998 AND ENDING IN 2007. THE CONTRACTS
GENERALLY REQUIRE THE COMPANY TO PURCHASE SPECIFIED MINIMUM VOLUMES OF
NATURAL GAS AT A FIXED PRICE WHICH IS SUBJECT TO RENEGOTIATION EVERY TWO
YEARS. CURRENT PRICES PER MCF FOR THESE CONTRACTS RANGE FROM $1.60 TO $1.65.
BASED ON CURRENT PRICES, THE MINIMUM TAKE OR PAY OBLIGATION AT DECEMBER 31,
1997 FOR EACH OF THE NEXT FIVE YEARS AND IN TOTAL IS AS FOLLOWS:
FISCAL YEAR
-----------
1998 $ 724,000
1999 1,095,000
2000 602,250
2001 602,250
2002 164,250
THEREAFTER -0-
-----------
TOTAL $ 3,187,750
-----------
-----------
NATURAL GAS PURCHASES UNDER THESE CONTRACTS FOR THE YEARS ENDED JUNE 30,
1997, 1996 AND 1995 APPROXIMATED $1,100,000, $3,530,000, AND $4,000,000,
RESPECTIVELY.
ON AUGUST 1, 1997, THE COMPANY ENTERED INTO A TAKE OR PAY PROPANE CONTRACT
WHICH EXPIRES JULY 31, 1998. THE CONTRACT GENERALLY REQUIRES THE COMPANY TO
PURCHASE ALL PROPANE QUANTITIES PRODUCED BY A PROPANE PRODUCER IN WYOMING
(APPROXIMATELY 250,000 GALLONS PER MONTH) TIED TO THE WORLAND, WYOMING SPOT
PRICE.
9
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ENVIRONMENTAL MATTER
THE COMPANY OWNS PROPERTY ON WHICH IT OPERATED A MANUFACTURED GAS PLANT FROM
1909 TO 1928. THE SITE IS CURRENTLY USED AS A SERVICE CENTER WHERE CERTAIN
EQUIPMENT AND MATERIALS ARE STORED. THE COAL GASIFICATION PROCESS UTILIZED
IN THE PLANT RESULTED IN THE PRODUCTION OF CERTAIN BY-PRODUCTS WHICH HAVE
BEEN CLASSIFIED BY THE FEDERAL GOVERNMENT AND THE STATE OF MONTANA AS
HAZARDOUS TO THE ENVIRONMENT. SEVERAL YEARS AGO THE COMPANY INITIATED AN
ASSESSMENT OF THE SITE TO DETERMINE IF REMEDIATION OF THE SITE WAS REQUIRED.
THAT ASSESSMENT RESULTED IN A SUBMISSION TO THE MONTANA DEPARTMENT OF
ENVIRONMENTAL QUALITY ("MDEQ"), FORMERLY KNOWN AS THE MONTANA DEPARTMENT OF
HEALTH AND ENVIRONMENTAL SCIENCE ("MDHES"), IN 1994. THE COMPANY HAS WORKED
WITH THE MDEQ SINCE THAT TIME TO OBTAIN THE DATA THAT WOULD LEAD TO A
REMEDIATION ACTION ACCEPTABLE TO THE MDEQ. THE COMPANY'S ENVIRONMENTAL
CONSULTANT FILED THE REPORT WITH THE MDEQ ON JUNE 11, 1997. THE MDEQ IS
EVALUATING THE REPORT AND AFTER COMPLETION OF ITS REVIEW WILL PROVIDE FOR
PUBLIC COMMENT RELATED TO THE REMEDIATION PLAN. ONCE THE COMMENT PERIOD HAS
LAPSED AND DUE CONSIDERATION OF ANY COMMENTS OCCURS, THE PLAN CAN BE
FINALIZED. ASSUMING ACCEPTANCE OF THE PLAN, REMEDIATION COULD BE IN PLACE BY
THE FALL OF 1998.
AT DECEMBER 31, 1997, THE COSTS INCURRED IN EVALUATING THIS SITE HAVE TOTALED
APPROXIMATELY $442,000. ON MAY 30, 1995, THE COMPANY RECEIVED AN ORDER FROM
THE MONTANA PUBLIC SERVICE COMMISSION ALLOWING FOR RECOVERY OF THE COSTS
ASSOCIATED WITH EVALUATION AND REMEDIATION OF THE SITE THROUGH A SURCHARGE ON
CUSTOMER BILLS. AS OF DECEMBER 31, 1997, THAT RECOVERY MECHANISM HAD
GENERATED APPROXIMATELY $471,000, OR ABOUT WHAT HAD BEEN EXPENDED. THE
COMMISSION'S DECISION CALLS FOR ONGOING REVIEW BY THE COMMISSION OF THE COSTS
INCURRED FOR THIS MATTER. THE COMPANY WILL SUBMIT AN APPLICATION FOR REVIEW
BY THE COMMISSION WHEN THE REMEDIATION PLAN IS APPROVED BY THE MDEQ.
LEGAL PROCEEDINGS
FROM TIME TO TIME THE COMPANY IS INVOLVED IN LITIGATION RELATING TO CLAIMS
ARISING FROM ITS OPERATIONS IN THE NORMAL COURSE OF BUSINESS. NEITHER THE
COMPANY NOR ANY OF ITS SUBSIDIARIES IS A PARTY TO ANY LEGAL PROCEEDINGS,
OTHER THAN AS DESCRIBED IN PART 11 -OTHER INFORMATION, ITEM 1., THE ADVERSE
OUTCOME OF WHICH INDIVIDUALLY OR IN THE AGGREGATE, IN THE COMPANY'S VIEW,
WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S RESULTS OF OPERATIONS,
FINANCIAL POSITION OR LIQUIDITY.
10
Note 8 - Operating Revenues and Expenses,
Regulated utility and non-regulated non-utility operating revenues and
expenses were as follows:
Three Months Six Months
Ended Ended
December 31 December 31
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Operating Revenues:
Regulated utilities $ 8,927,312 $ 8,891,736 $12,040,598 $11,769,113
Non-regulated operations 2,722,558 3,088,438 3,876,198 4,145,519
Gas trading 2,991,710 1,719,415 3,949,299 2,376,761
----------- ----------- ----------- -----------
$14,641,580 $13,699,589 $19,866,095 $18,291,393
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Operating Expenses:
Gas Purchased:
Regulated $ 5,596,671 $ 5,362,438 $ 7,289,809 $ 6,792,296
Non-regulated 1,984,148 2,296,506 2,798,832 2,994,851
Cost of gas trading 2,778,291 1,665,813 3,654,606 2,254,161
----------- ----------- ----------- -----------
$10,359,110 $ 9,324,757 $13,743,247 $12,041,308
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Distribution, general and administrative:
Regulated $ 1,454,459 $ 1,586,018 $ 2,904,835 $ 3,133,164
Non-regulated 468,007 405,029 881,689 779,740
----------- ----------- ----------- -----------
$ 1,922,466 $ 1,991,047 $ 3,786,524 $ 3,912,904
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Maintenance:
Regulated $ 86,786 $ 99,039 $ 184,028 $ 177,000
Non-regulated 31,333 25,752 57,965 49,243
----------- ----------- ----------- -----------
$ 118,119 $ 124,791 $ 241,993 $ 226,243
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Depreciation and amortization:
Regulated $ 366,908 $ 376,109 $ 730,950 $ 749,893
Non-regulated 85,451 86,314 169,890 177,672
----------- ----------- ----------- -----------
$ 452,359 $ 462,423 $ 900,840 $ 927,565
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Taxes other than income:
Regulated $ 145,017 $ 153,539 $ 266,125 $ 273,886
Non-regulated 31,354 31,989 56,587 57,606
----------- ----------- ----------- -----------
$ 176,371 $ 185,528 $ 322,712 $ 331,492
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income taxes:
Regulated $ 358,064 $ 362,164 $ 13,385 $ 18,047
Non-regulated 105,046 145,576 44,619 116,698
----------- ----------- ----------- -----------
$ 463,110 $ 507,740 $ 58,004 $ 134,745
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
11
FORM 10-Q
ENERGY WEST INCORPORATED
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL STATEMENTS
THE FOLLOWING DISCUSSION REFLECTS RESULTS OF OPERATIONS OF THE COMPANY AND
ITS CONSOLIDATED SUBSIDIARIES FOR THE PERIODS INDICATED. THE COMPANY'S
REGULATED UTILITY OPERATIONS PRIMARILY INVOLVE THE DISTRIBUTION AND SALE OF
NATURAL GAS TO THE PUBLIC IN THE GREAT FALLS, MONTANA AND CODY, WYOMING AREAS
AND THE DISTRIBUTION OF PROPANE TO THE PUBLIC THROUGH UNDERGROUND PROPANE
VAPOR SYSTEMS IN THE PAYSON, ARIZONA AND CASCADE, MONTANA AREAS. SINCE 1995,
THE COMPANY'S REGULATED UTILITY OPERATIONS HAVE ALSO INCLUDED THE
DISTRIBUTION OF NATURAL GAS THROUGH AN UNDERGROUND SYSTEM IN WEST
YELLOWSTONE, MONTANA THAT IS SUPPLIED BY LIQUIFIED NATURAL GAS.
THE COMPANY CONDUCTS CERTAIN NON-UTILITY OPERATIONS THROUGH ITS THREE
WHOLLY-OWNED SUBSIDIARIES: ROCKY MOUNTAIN FUELS, INC. (RMF), A
DISTRIBUTOR OF BULK PROPANE IN NORTHWESTERN WYOMING, CASCADE, MONTANA AND
THE PAYSON, ARIZONA AREA; ENERGY WEST RESOURCES, INC. WHICH IS INVOLVED IN
THE MARKETING OF NATURAL GAS IN MONTANA AND WYOMING AND GAS STORAGE; MONTANA
SUN, INC., WHICH OWNS TWO REAL ESTATE PROPERTIES IN GREAT FALLS, MONTANA,
ALONG WITH CERTAIN OTHER INVESTMENTS.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY'S OPERATING CAPITAL NEEDS, AS WELL AS DIVIDEND PAYMENTS AND
CAPITAL EXPENDITURES, ARE GENERALLY FUNDED THROUGH CASH FLOW FROM OPERATING
ACTIVITIES, SHORT-TERM BORROWING AND LIQUIDATION OF TEMPORARY CASH
INVESTMENTS. HISTORICALLY, TO THE EXTENT CASH FLOW HAS NOT BEEN SUFFICIENT TO
FUND CAPITAL EXPENDITURES, THE COMPANY HAS BORROWED SHORT-TERM OR ISSUED
EQUITY SECURITIES TO FUND CAPITAL EXPANSION PROJECTS OR REDUCE SHORT-TERM
BORROWING.
THE COMPANY'S SHORT-TERM BORROWING REQUIREMENTS VARY ACCORDING TO THE
SEASONAL NATURE OF ITS SALES AND EXPENSE ACTIVITY. THE COMPANY HAS GREATER
NEED FOR SHORT-TERM BORROWING DURING PERIODS WHEN INTERNALLY GENERATED FUNDS
ARE NOT SUFFICIENT TO COVER ALL CAPITAL AND OPERATING REQUIREMENTS, INCLUDING
COSTS OF GAS PURCHASES AND CAPITAL EXPENDITURES. IN GENERAL, THE COMPANY'S
SHORT-TERM BORROWING NEEDS FOR PURCHASES OF GAS INVENTORY AND CAPITAL
EXPENDITURES ARE GREATEST DURING THE SUMMER MONTHS AND THE COMPANY'S
SHORT-TERM BORROWING NEEDS FOR FINANCING OF CUSTOMER ACCOUNTS RECEIVABLE ARE
GREATEST DURING THE WINTER MONTHS. IN ADDITION DURING THE PAST THREE YEARS,
THE COMPANY HAS USED SHORT-TERM BORROWING TO FINANCE THE ACQUISITION OF
PROPANE OPERATIONS AND LNG FOR WEST YELLOWSTONE GAS. SHORT-TERM BORROWING
UTILIZED FOR CONSTRUCTION OR PROPERTY ACQUISITIONS GENERALLY HAS BEEN ON AN
INTERIM BASIS AND CONVERTED TO LONG-TERM DEBT AND EQUITY WHEN IT BECOMES
ECONOMICAL AND FEASIBLE TO DO SO.
AT DECEMBER 31, 1997, THE COMPANY HAD $19,000,000 IN BANK LINES OF CREDIT, OF
WHICH $6,430,000 HAD BEEN BORROWED UNDER THE CREDIT AGREEMENT.
THE COMPANY CLOSED AN $8,000,000 DEBT ISSUANCE ON AUGUST 15, 1997. THE NET
PROCEEDS RECEIVED, AFTER PAYMENT OF ISSUANCE COSTS, WERE APPROXIMATELY
$7,600,000 AND WERE USED TO PAY DOWN SHORT-TERM DEBT. THE INTEREST RATE FOR
THESE BONDS IS 7.5% FOR A TERM OF FIFTEEN YEARS TO BE PAID OFF BY JUNE 1,
2012.
12
THE COMPANY USED NET CASH IN OPERATING ACTIVITIES FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 IN THE AMOUNT OF $383,535 AS COMPARED TO $2,339,366 FOR
THE SIX MONTHS ENDED DECEMBER 31, 1996. THIS DECREASE IN CASH USED IN
OPERATING ACTIVITIES OF APPROXIMATELY $1,956,000 WAS PRIMARILY DUE TO LOWER
WORKING CAPITAL REQUIREMENTS OF APPROXIMATELY $2,317,000, PARTIALLY OFFSET BY
A REDUCTION IN THE GAIN ON SALE OF MARKETABLE EQUITY SECURITIES OF
APPROXIMATELY $100,000, LOWER NET INCOME OF APPROXIMATELY $152,000, LOWER
DEPRECIATION OF APPROXIMATELY $28,000 AND LOWER DEFERRED INCOME TAXES OF
APPROXIMATELY $293,000. THE LOWER WORKING CAPITAL REQUIREMENTS OF
APPROXIMATELY $2,317,000 IS PRIMARILY DUE TOP SMALLER INCREASES IN GAS
INVENTORY AND RECOVERABLE COST OF GAS PURCHASES.
CASH USED IN INVESTING ACTIVITIES WAS APPROXIMATELY $1,710,000 FOR THE SIX
MONTHS ENDED DECEMBER 31, 1997, AS COMPARED TO APPROXIMATELY $1,268,000 FOR
THE SIX MONTHS ENDED DECEMBER 31, 1996, AN INCREASE OF APROXIMATELY $442,000
PRIMARILY DUE TO LOWER PROCEEDS FROM THE SALE OF MARKETABLE EQUITY SECURITIES
OF APPROXIMATELY $274,000, A LOAN MADE TO ENERGY WEST RESOURCES, A SUBSIDIARY
OF ENERGY WEST, INC., OF $200,000 AND INCREASED CONSTRUCTION EXPENDITURES OF
APPROXIMATELY $52,000, PARTIALLY OFFSET BY INCREASES IN CONTRIBUTINS IN AID
OF CONSTRUCTION OF APPROXIMATELY $86,000.
CASH PROVIDED BY FINANCING ACTIVITIES WAS APPROXIMATELY $2,132,000 FOR THE
SIX MONTHS ENDED DECEMBER 31, 1997, AS COMPARED TO APPROXIMATELY $2,925,000
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996. THE DECREASE IN CASH PROVIDED BY
FINANCING ACTIVITIES OF APPROXIMATELY $793,000 RESULTED PRIMARILY FROM AN
INCREASE IN REPAYMENT OF SHORT-TERM DEBT OF APPROXIMATELY $8,427,000 AND AN
INCREASE IN DIVIDENDS PAID OF APPROXIMATELY $212,000, PARTIALLY OFFSET BY NET
PROCEEDS FROM A LONG-TERM DEBT ISSUE OF APPROXIMATELY $7,542,000, AN INCREASE
IN PROCEEDS FROM THE SALE OF COMMON STOCK OF APPROXIMATELY $183,000 AND A
DECREASE IN REPAYMENT OF LONG-TERM DEBT OF $120,000.
CAPITAL EXPENDITURES OF THE COMPANY ARE PRIMARILY FOR EXPANSION AND
IMPROVEMENT OF ITS GAS UTILITY PROPERTIES. TO A LESSER EXTENT, FUNDS ARE
ALSO EXPENDED TO MEET THE EQUIPMENT NEEDS OF THE COMPANY'S OPERATING
SUBSIDIARIES AND TO MEET THE COMPANY'S ADMINISTRATIVE NEEDS. THE COMPANY'S
CAPITAL EXPENDITURES WERE APPROXIMATELY $3.2 MILLION IN FISCAL 1997 AND
APPROXIMATELY $4.6 MILLION FOR FISCAL 1996. DURING FISCAL 1997,
APPROXIMATELY $1.7 MILLION HAS BEEN EXPENDED FOR THE CONSTRUCTION AND
MAINTENANCE OF THE NATURAL GAS SYSTEMS IN GREAT FALLS, CASCADE AND WEST
YELLOWSTONE, MONTANA AND CODY, WYOMING AND APPROXIMATELY $1.2 MILLION HAD
BEEN EXPENDED FOR GAS SYSTEM EXPANSION PROJECTS FOR NEW SUBDIVISIONS IN THE
BROKEN BOW DIVISION'S SERVICE AREA IN ARIZONA AND APPROXIMATELY $400,000 FOR
ADDITIONS TO THE PROPANE OPERATIONS OF THE COMPANY IN WYOMING, MONTANA AND
ARIZONA. CAPITAL EXPENDITURES ARE EXPECTED TO BE APPROXIMATELY $3.6 MILLION
IN FISCAL 1998, INCLUDING APPROXIMATELY $915,000 FOR CONTINUED EXPANSION FOR
THE BROKEN BOW DIVISION, $116,000 IN THE CODY DIVISION AND APPROXIMATELY $1.9
MILLION FOR MAINTENANCE AND OTHER SPECIAL SYSTEM EXPANSION PROJECTS IN THE
GREAT FALLS AND WEST YELLOWSTONE DIVISIONS AND THE BALANCE OF APPROXIMATELY
$700,000 FOR THE COMPANY'S PROPANE OPERATIONS IN THE THREE STATES IT SERVES.
AS OF DECEMBER 31, 1997, APPROXIMATELY $1,716,000 OF THAT AMOUNT HAD BEEN
EXPENDED.
13
RESULTS OF CONSOLIDATED OPERATIONS
COMPARISON OF SECOND QUARTER OF FISCAL 1998 ENDED DECEMBER 31, 1997 AND FISCAL
1996 ENDED DECEMBER 31, 1996
THE COMPANY'S NET INCOME FOR THE SECOND QUARTER ENDED DECEMBER 31, 1997 WAS
$815,806 COMPARED TO $920,268 FOR THE QUARTER ENDED DECEMBER 31, 1996.
THE DECREASED NET INCOME IN THE SECOND QUARTER OF FISCAL 1998 WAS DUE
PRIMARILY TO HIGHER INTEREST COSTS, DUE TO FACILITY EXPANSION AND INCREASED
GAS STORAGE REQUIREMENTS AND A ONE-TIME CAPITAL GAIN ON THE SALE OF
MARKETABLE EQUITY SECURITIES LAST YEAR.
UTILITY OPERATIONS -
UTILITY OPERATING REVENUES IN THE SECOND QUARTER OF FISCAL 1998 WERE
APPROXIMATELY $8,927,000 COMPARED TO APPROXIMATELY $8,892,000 FOR THE SECOND
QUARTER OF FISCAL 1997. OPERATING INCOME WAS APPROXIMATELY THE SAME IN THE
SECOND QUARTER OF FISCAL 1998, WHEN COMPARED TO FISCAL 1997. GROSS MARGIN,
WHICH IS DEFINED AS OPERATING REVENUES LESS GAS PURCHASED, WAS APPROXIMATELY
$3,330,000 FOR THE SECOND QUARTER OF FISCAL 1998 COMPARED TO GROSS MARGIN OF
APPROXIMATELY $3,530,000 FOR THE SECOND QUARTER OF FISCAL 1997. GROSS
MARGINS DECREASED 6% BECAUSE OF LOWER MARGINS FROM NATURAL GAS SALES IN THE
GREAT FALLS AND CODY DIVISIONS, DUE TO WARMER WEATHER THAN ONE YEAR AGO,
OFFSET BUY PARTIALLY BY HIGHER MARGINS FROM PROPANE VAPOR SALES IN THE BROKEN
BOW DIVISION, DUE TO A RATE INCREASE AND CUSTOMER GROWTH.
OPERATING EXPENSES -
UTILITY OPERATING EXPENSES, EXCLUDING THE COST OF GAS PURCHASED AND FEDERAL
AND STATE INCOME TAXES, WERE APPROXIMATELY $2,053,000 FOR THE SECOND
QUARTER OF FISCAL 1998 AS COMPARED TO $2,213,000 FOR THE SAME PERIOD IN
FISCAL 1997. THE 7% DECREASE IN THE PERIOD WAS GENERALLY DUE TO REDUCED
PERSONNEL IN THE UTILITY DIVISIONS.
INTEREST CHARGES -
INTEREST CHARGES ALLOCABLE TO THE COMPANY'S UTILITY DIVISIONS WERE
APPROXIMATELY $380,000 FOR THE SECOND QUARTER OF FISCAL 1998, AS COMPARED
TO $390,000 IN THE COMPARABLE PERIOD IN FISCAL 1997. LONG-TERM DEBT INTEREST
INCREASED DUE TO AN$8,000,000 DEBT ISSUANCE ON AUGUST 15, 1997, WHICH WAS
USED TO PAY DOWN SHORT-TERM DEBT, HOWEVER OVERALL INTEREST CHARGES INCREASED
PRIMARILY DUE TO FACILITY EXPANSION AND INCREASES IN GAS STORAGE.
INCOME TAXES -
STATE AND FEDERAL INCOME TAXES OF THE COMPANY'S UTILITY DIVISIONS WERE
APPROXIMATELY $358,000 FOR THE SECOND QUARTER OF FISCAL 1998, APPROXIMATELY
THE SAME FOR THE SECOND QUARTER IN FISCAL 1997. PRE-TAX INCOME OF THE
UTILITY DIVISIONS WAS APPROXIMATELY THE SAME FOR THE SECOND QUARTER OF FISCAL
1998 AND 1997.
14
NON-REGULATED OPERATIONS -
NON-REGULATED OPERATING REVENUES FOR THE SECOND QUARTER ENDED DECEMBER 31,
1997 WERE APPROXIMATELY $5,715,000 COMPARED TO $4,769,000 FOR THE SECOND
QUARTER OF FISCAL 1997. NON-REGULATED OPERATING REVENUES FOR FISCAL 1998
CONSISTED OF $2,698,000 FOR RMF, $2,991,000 FOR ENERGY WEST RESOURCES, INC.
AND $24,000 FOR MONTANA SUN, INC. OPERATING INCOME, WHICH IS DEFINED AS
OPERATING REVENUES LESS GAS PURCHASED, DISTRIBUTION, GENERAL, ADMINISTRATIVE,
MAINTENANCE, DEPRECIATION, AMORTIZATION AND TAXES OTHER THAN INCOME,
INCREASED APPROXIMATELY 15% OF $44,000 FRO FISCAL 1997 AND WAS APPROXIMATELY
$336,000 FOR THE SECOND QUARTER OF FISCAL 1998 COMPARED TO $292,000 FOR THE
SECOND QUARTER OF FISCAL 1997. OPERATING INCOME FOR RMF WAS APPROXIMATELY
$232,000 FOR THE SECOND QUARTER OF FISCAL 1998, DOWN FROM THE SECOND QUARTER
OF FISCAL 1997 OF $261,000 , DUE TO REDUCED MARGINS BECAUSE OF WARMER WEATHER
IN WYO L-P GAS IN WYOMING. ENERGY WEST RESOURCES, INC'S OPERATING INCOME OF
APPROXIMATELY $89,000 COMPARED TO $18,000 IN FISCAL 1997 INCREASE THE
OPERATING INCOME IN NON-REGULATED OPERATIONS. THE REASON FOR ENERGY WEST
RESOURCES, INC'S INCREASE IN OPERATING INCOME IS PRIMARILY DUE TO HIGHER GAS
MARKETING MARGINS BECAUSE OF DECREASED NATURAL GAS PRICES FOR PURCHASES,
PARTIALLY OFFSET BY HIGHER GENERAL AND ADMINISTRATIVE COSTS DUE TO STAFF
EXPANSION AND TRAINING REQUIRED TO SERVE THE GROWTH IN MARKETING ACTIVITY.
ROCKY MOUNTAIN FUELS -
FOR THE SECOND QUARTER ENDED DECEMBER 31, 1997, RMF GENERATED NET INCOME OF
APPROXIMATELY $131,000 COMPARED TO NET INCOME OF APPROXIMATELY $154,000 FOR
THE SECOND QUARTER ENDED DECEMBER 31, 1996. APPROXIMATELY $60,000 OF RMF'S
NET INCOME FOR THE SECOND QUARTER OF FISCAL 1998 WAS ATTRIBUTABLE TO THE WYO
L-P GAS DIVISION IN WYOMING, APPROXIMATELY $74,000 TO THE PETROGAS DIVISION
IN ARIZONA, WITH THE BALANCE OF APPROXIMATELY ($3,000) NET LOSS ATTRIBUTABLE
TO MISSOURI RIVER PROPANE IN MONTANA. RMF'S GROSS MARGINS WERE APPROXIMATELY
$714,000, FOR THE SECOND QUARTER ENDED DECEMBER 31, 1997, DOWN 4% FROM
$746,000 IN THE SAME PERIOD LAST YEAR. MARGINS THIS QUARTER DECREASED INT HE
WYO L-P DIVISION FROM THE SAME QUARTER LAST YEAR FROM APPROXIMATELY $567,000
TO $475,000 DUE TO DECREASED PROPANE SALES BECAUSE OF WARMER WEATHER, THAN
ONE YEAR AGO. MARGINS IN THE PETROGAS DIVISION IN ARIZONA INCREASED THIS
QUARTER FROM APPROXIMATELY $153,000 TO $210,000, DUE TO CUSTOMER GROWTH,
WHILE MISSOURI RIVER PROPANE IN MONTANA MARGINS REMAINED RELATIVELY SIMILAR
TO THE SAME QUARTER ONE YEAR AGO. RMF EXPERIENCED HIGHER SHORT-TERM INTEREST
COSTS DUE TO EXPANSION OF PLANT IN MONTANA AND WYOMING. STATE AND FEDERAL
INCOME TAXES DECREASED TO APPROXIMATELY $71,000 FOR THIS QUARTER FROM $85,000
LAST YEAR, DUE TO LOWER PRE-TAX INCOME OF ROCKY MOUNTAIN FUELS, INC.
ENERGY WEST RESOURCES, INC. -
FOR THE SECOND QUARTER ENDED DECEMBER 31, 1997, ENERGY WEST RESOURCES, INC'S
NET INCOME WAS APPROXIMATELY $52,000 COMPARED TO NET INCOME OF APPROXIMATELY
$23,000 FOR THE SECOND QUARTER ENDED DECEMBER 31, 1996, PRIMARILY DUE TO
HIGHER MARGINS, PARTIALLY OFFSET BY HIGHER GENERAL AND ADMINISTRATIVE
EXPENSES THAN IN THE SAME PERIOD LAST YEAR, DUE TO STAFF EXPANSION AND
TRAINING REQUIRED TO SERVE THE GROWTH IN MARKETING ACTIVITY. GAS TRADING
MARGINS INCREASED APPROXIMATELY $137,000, OR 180%, DUE TO DECREASED NATURAL
GAS PRICES IN CANADA AND MONTANA AND EXPANDED MARKETS AND CUSTOMERS. STATE
AND FEDERAL INCOME TAXES INCREASED THIS QUARTER TO APPROXIMATELY $32,000 FROM
APPROXIMATELY $16,000, THE SAME QUARTER ONE YEAR AGO, DUE TO AN INCREASE IN
PRE-TAX INCOME FROM THE SAME QUARTER ONE YEAR AGO.
MONTANA SUN, INC. -
FOR THE SECOND QUARTER ENDED DECEMBER 31, 1997, MONTANA SUN, INC.'S NET
INCOME WAS APPROXIMATELY $3,300 COMPARED TO $75,000 FOR THE SECOND QUARTER
ENDED DECEMBER 31, 1996, PRIMARILY DUE TO A ONE-TIME CAPITAL GAIN ON THE SALE
OF MARKETABLE EQUITY SECURITIES THE SECOND QUARTER OF FISCAL 1997.
15
RESULTS OF CONSOLIDATED OPERATIONS
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1997 AND FISCAL 1997 ENDED
DECEMBER 31, 1996
THE COMPANY'S NET INCOME FOR THE FIRST SIX MONTHS ENDED DECEMBER 31, 1997
WAS $135,007 COMPARED TO $286,786 FOR THE SIX MONTHS ENDED DECEMBER 31, 1996.
THE DECREASE IN THE 1998 NET INCOME WAS DUE PRIMARILY TO A ONE-TIME CAPITAL
GAIN ON THE SALE OF MARKETABLE EQUITY SECURITIES RECORDED LAST YEAR AND
INCREASES IN INTEREST COSTS, DUE TO CAPITAL ADDITIONS AND GAS STORAGE
INCREASE REQUIREMENTS.
UTILITY OPERATIONS -
UTILITY OPERATING REVENUES IN THE FIRST SIX MONTHS OF FISCAL 1998 WERE
APPROXIMATELY $12,041,000 COMPARED TO APPROXIMATELY $11,769,000 FOR THE FIRST
SIX MONTHS OF FISCAL 1997. GRROSS MARGIN, WHICH IS DEFINED AS OPERATING
REVNUES LESS GAS PURCHASED, WAS APPROXIMATELY $4,751,000 FOR THE FIRST SIX
MONTHS OF FISCAL 1998 COMPARED TO GROSS MARGIN OF APPROXIMATELY $$4,977,000
FOR THE FIRST SIX MONTHS OF FISCAL 1997. GROSS MARGINS DECREASED 5% BECAUSE
OF LOWER MARGINS FROM NATURAL GAS SALES IN THE GREAT FALLS AND CODY
DIVISIONS, DUE TO WEATHER AND HIGHER MARGINS FROM PROPANE VAPOR SALES IN THE
BROKEN BOW DIVISION, DUE TO A 17% RATE INCREASE AND CUSTOMER GROWTH.
OPERATING EXPENSES -
UTILITY OPERATING EXPENSES, EXCLUDING THE COST OF GAS PURCHASED AND FEDERAL
AND STATE INCOME TAXES, WERE APPROXIMATELY $4,085,000 FOR THE FIRST SIX
MONTHS OF FISCAL 1998 AS COMPARED TO $4,332,000 FOR THE SAME PERIOD IN FISCAL
1997. THE 6% DECREASE IN THE PERIOD WAS GENERALLY DUE TO REDUCED PERSONNEL IN
THE UTILITY DIVISIONS, THAN ONE YEAR AGO.
INTEREST CHARGES -
INTEREST CHARGES ALLOCABLE TO THE COMPANY'S UTILITY DIVISIONS WERE
APPROXIMATELY $740,000 FOR THE FIRST SIX MONTHS OF FISCAL 1998, AS COMPARED
TO $715,000 IN THE COMPARABLE PERIOD IN FISCAL 1997. LONG-TERM DEBT INTEREST
INCREASED DUE TO AN$8,000,000 DEBT ISSUANCE ON AUGUST 15, 1997, WHICH WAS
USED TO PAY DOWN SHORT-TERM DEBT, HOWEVER OVERALL INTEREST CHARGES INCREASED
PRIMARILY DUE TO FACILITY EXPANSION AND INCREASES IN GAS STORAGE.
INCOME TAXES -
STATE AND FEDERAL INCOME TAXES OF THE COMPANY'S UTILITY DIVISIONS WERE
APPROXIMATELY $13,000 FOR THE FIRST SIX MONTHS OF FISCAL 1998, AS COMPARED TO
APPROXIMATELY $18,000 FOR THE SECOND QUARTER IN FISCAL 1997. THE DECREASE IN
INCOME TAXES WAS DUE TO LOWER PRE-TAX INCOME OF THE UTILITY DIVISIONS.
16
NON-REGULATED OPERATIONS -
ROCKY MOUNTAIN FUELS -
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997, RMF GENERATED NET INCOME OF
APPROXIMATELY $33,000 COMPARED TO NET INCOME OF $66,000 FOR THE SIX MONTHS
ENDED DECEMBER 31, 1996. ABOUT $58,000 OF RMF'S NET INCOME FOR THE FIRST SIX
MONTHS OF FISCAL 1998 WAS ATTRIBUTABLE TO THE PETROGAS DIVISION IN ARIZONA,
WITH THE BALANCE OF ($17,000) NET LOSS ATTRIBUTABLE TO MISSOURI RIVER PROPANE
IN MONTANA AND A LOSS OF ($8,000) IN THE WYO L-P GAS DIVISION IN WYOMING.
RMF'S GROSS MARGINS DECREASED APPROXIMATELY $ 3% OR $32,000 FOR THE SIX
MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE SAME PERIOD LAS YEAR,
PRIMARILY DUE TO WARMER WEATHER AND FEWER CUSTOMERS DUE TO COMPETITIVE MARKET
FORCES, IN THE WYO L-P GAS DIVISION IN WYOMING. MARGINS THIS SIX MONTHS
PERIOD DECREASED IN THE WYO L-P DIVISION APPROXIMATELY $114,000 OR 14%.
MARGINS IN THE PETROGAS DIVISION IN ARIZONA INCREASED FROMA YEAR AGO BY
APPROXIMATELY $74,000 OR 35% DUE TO CUSTOMER GROWTH, WHILE MISSOURI RIVER
PROPANE IN MONTANA MARGINS INCREASED FROM A YEAR AGO BY APPROXIAMTELY $8,000
OR 25% DUE TO CUSTOMER GROWTH. RMF EXPERIENCED HIGHER INTEREST COSTS DUE TO
EXPANSION OF PLANT IN MONTANA AND WYOMING. STATE AND FEDERAL INCOME TAXES
DECREASED TO APPROXIMATELY $19,000 FOR THIS SIX MONTH PERIOD FROM $35,000
LAST YEAR, DUE TO LOWER PRE-TAX INCOME THIS YEAR VERSUS LAST YEAR IN RMF.
ENERGY WEST RESOURCES, INC. -
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997, ENERGY WEST RESOURCES, INC'S NET
INCOME WAS APPROXIMATELY $33,000 COMPARED TO NET INCOME OF APPROXIMATELY
$49,000 FOR THE SIX MONTHS ENDED DECEMBER 31, 1996, PRIMARILY DUE TO HIGHER
INTEREST CHARGES DUE TO INCREASES IN GAS STORAGE. GAS TRADING MARGINS
INCREASED APPROXIMATELY $131,000 OR 80%, DUE TO DECREASED NATURAL GAS PRICES
IN CANADA AND MONTANA AND EXPANDED MARKETS AND CUSTOMER GROWTH. STATE AND
FEDERAL INCOME TAXES DECREASED THIS SIX MONTH PERIOD TO APPROXIMATELY $21,000
FROM APPROXIMATELY $31,000, THE SAME SIX MONTH PERIOD ONE YEAR AGO, DUE TO
LOWER PRE-TAX INCOME THAN ONE YEAR AGO.
MONTANA SUN, INC. -
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997, MONTANA SUN, INC.'S NET INCOME
WAS APPROXIMATELY $7,000 COMPARED TO $85,000 FOR THE SIX MONTHS ENDED
DECEMBER 31, 1996, PRIMARILY DUE TO A ONE-TIME CAPITAL GAIN ON THE SALE OF
MARKETABLE EQUITY SECURITIES THE SECOND QUARTER OF FISCAL 1997. STATE AND
FEDERAL INCOME TAXES DECREASED THIS SIX MONTH PERIOD TO $4,000 FROM $51,000
THE SAME SIX MONTH PERIOD ONE YEAR AGO, DUE TO LOWER PRE-TAX INCOME THIS
FISCAL SIX MONTH PERIOD.
17
FORM 10-Q
PART 11 - 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. NEITHER THE
COMPANY NOR ANY OF ITS SUBSIDIARIES IS A PARTY TO ANY LEGAL PROCEEDINGS,
OTHER THAN AS DESCRIBED BELOW, THE ADVERSE OUTCOME OF WHICH INDIVIDUALLY OR
IN THE AGGREGATE, IN THE COMPANY'S VIEW, WOULD HAVE A MATERIAL ADVERSE EFFECT
ON THE COMPANY'S RESULTS OF OPERATIONS, FINANCIAL POSITION OR LIQUIDITY.
ON DECEMBER 20, 1996, AN ACTION WAS FILED AGAINST THE COMPANY BY RANDY HYNES
AND MELISSA HYNES IN FEDERAL DISTRICT COURT IN WYOMING. THE ACTION ARISES
FROM A NATURAL GAS EXPLOSION INVOLVING A FOUR-PLEX APARTMENT BUILDING WHICH
WAS DAMAGED AFTER NATURAL GAS FROM A GAS LINE LEAKED INTO THE BUILDING ON
FEBRUARY 3, 1996 (WHICH WAS NOT SERVED BY NATURAL GAS). THE PLAINTIFFS, WHO
WERE TENANTS IN THE BUILDING, SUSTAINED BURNS AND OTHER INJURIES AS WELL AS
PROPERTY DAMAGE. THE PLAINTIFFS ALLEGE THAT THE COMPANY WAS NEGLIGENT IN
THAT IT FAILED TO MAINTAIN THE NATURAL GAS LINE CONSISTENT WITH ITS DUTY TO
DO SO AND FAILED TO PROPERLY ODORIZE THE GAS WHICH CAUSED THE EXPLOSION.
THE ACTION ALSO ASSERTS CLAIMS OF PRODUCT LIABILITY, WILLFUL AND WANTON
CONDUCT AND BREACH OF WARRANTY. THE PLAINTIFFS ARE SEEKING DAMAGES FOR
PERSONAL INJURY, PAIN AND SUFFERING, EMOTIONAL DISTRESS, LOSS OF EARNINGS,
MEDICAL EXPENSES, PHYSICAL DISABILITY AND PROPERTY DAMAGE AS WELL AS PUNITIVE
DAMAGES. A DOLLAR AMOUNT HAS NOT BEEN SET FORTH IN THE PLEADINGS. THE
COMPANY DENIES RESPONSIBILITY FOR THE DAMAGES AND IS VIGOROUSLY CONTESTING
THE MATTER. THE COMPANY BELIEVES THE GAS LEAK RESULTED FROM DAMAGE CAUSED TO
THE PIPELINE BY AN UNKNOWN THIRD PARTY. A TRIAL HAS CONCLUDED fEBRUARU 6,
1998 AND A JUDGEMENT HOLDING FOR THE PLAINTIFFS HAS BEEN ENTERED. THE
COMPANY'S PRIMARY AND EXCESS INSURANCE COMPLETERLY INDEMNIFIES THE COMPANY
AGAINST THE JUDGEMENT.
A SIMILAR LAWSUIT INVOLVING THE SAME EXPLOSION WAS FILED BY FIVE OTHER
PLAINTIFFS IN WYOMING DISTRICT COURT, PARK COUNTY, WYOMING ON APRIL 3, 1997.
THE ALLEGATIONS ARE SUBSTANTIALLY THE SAME AS THE ALLEGATIONS IN THE FEDERAL
DISTRICT COURT CASE. THE COMPANY HAS FILED AN ANSWER DENYING LIABILITY AND
IS CONTESTING THE MATTER VIGOROUSLY. ONLY LIMITED DISCOVERY HAS OCCURRED TO
DATE. THE PLAINTIFFS, HEIDL WOODWARD, ET AL., WERE ALSO TENANTS IN THE
APARTMENT BUILDING.
ON OCTOBER 24, 1996, AN ACTION WAS FILED AGAINST THE COMPANY BY COLTEN AND
JULIE WHITE AND THEIR THREE CHILDREN IN SUPERIOR COURT IN GILA COUNTY,
ARIZONA. THE ACTION ARISES FROM AN EXPLOSION THAT OCCURRED ON MAY 3, 1995 IN
THE PLAINTIFFS' NEW HOME WHICH WAS SERVICED BY THE COMPANY'S PROPANE
BUSINESS. THE EXPLOSION OCCURRED IN THE COURSE OF THE PLAINTIFFS' ATTEMPT TO
LIGHT THEIR APPLIANCES FOR THE FIRST TIME. THE PLAINTIFFS SUSTAINED INJURIES
AND PROPERTY DAMAGE IN THE EXPLOSION AND THE FIRE THAT OCCURRED AFTER THE
EXPLOSION. THE CLAIMS ARE FOR PERSONAL INJURY, MENTAL SUFFERING AND ANGUISH,
MEDICAL EXPENSES, LOST INCOME, PROPERTY DAMAGES AND PUNITIVE DAMAGES.
PLAINTIFFS' CLAIMS ARE BASED ON A STRICT LIABILITY CLAIM THAT THE PROPANE WAS
DEFECTIVE, BREACH OF WARRANTY IN THAT THE PROPANE WAS NOT FIT FOR THE PURPOSE
FOR WHICH IT WAS INTENDED AND NEGLIGENCE FOR FAILURE TO ASSURE THAT THE
PROPANE WAS PROPERLY ODORIZED. IN JANUARY 1998, THE INSURANCE COMPANY
SETTLED THE PLAINTIFF'S CLAIMS OUT OF COURT FOR APPROXIMATELY $700,000.
THE COMPANY CARRIES COMMERCIAL GENERAL LIABILITY INSURANCE FOR BODILY INJURY
AND PROPERTY DAMAGES OF $1,000,000 PER OCCURRENCE AND $5,000,000 IN THE
AGGREGATE, AND HAS AN ADDITIONAL $30,000,000 UMBRELLA POLICY FOR EXCESS
CLAIMS. THE COMPANY'S GENERAL LIABILITY CARRIER HAS ASSUMED THE DEFENSE OF
BOTH WYOMING ACTIONS AND THE ARIZONA ACTION. THE COMPANY BELIEVES IT HAS
INSURANCE COVERAGE FOR THESE MATTERS. HOWEVER, NO ASSURANCE CAN BE GIVEN
THAT INSURANCE WILL COVER THESE MATTERS IN THE EVENT THAT THE COMPANY IS HELD
LIABLE. IN THE EVENT OF AN ADVERSE RESULT FOR THE COMPANY, AND IF THE
COMPANY'S INSURANCE DOES NOT COVER THE MATTERS OR IS NOT SUFFICIENT TO COVER
THE MATTERS, SUCH RESULT COULD HAVE A MATERIAL ADVERSE EFFECT ON THE
COMPANY'S RESULTS OF OPERATIONS, FINANCIAL POSITION AND LIQUIDITY (DEPENDING
ON THE AMOUNT OF THE JUDGMENT OR JUDGMENTS).
18
FORM 10-Q
PART II - OTHER INFORMATION (CONTINUED)
ITEM 2. CHANGES IN SECURITIES - NOT APPLICABLE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NOT APPLICABLE
ITEM 5. OTHER INFORMATION - NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS (SEE EXHIBIT INDEX ON PAGE E-1)
B. NO REPORTS ON FORM 8-K HAVE BEEN FILED DURING THE QUARTER ENDED
DECEMBER 31, 1997.
19
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
/s/ LARRY D. GESKE
-------------------------------
LARRY D. GESKE, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
DATED FEBRUARY 13, 1998
/s/ WILLIAM J. QUAST
----------------------------------
WILLIAM J. QUAST, VICE-PRESIDENT, TREASURER,
AND ASSISTANT SECRETARY