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, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 0-14183
- ------------------------------
ENERGY WEST INCORPORATED
- ------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MONTANA 81-0141785
- ---------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1 FIRST AVENUE SOUTH, GREAT FALLS, MT. 59401
- ----------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (406)-791-7500
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT DECEMBER 31, 1998
- ---------------------------------------
(COMMON STOCK, $.15 PAR VALUE) 2,421,077
- ----------------------------------------
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, 1998 AND JUNE 30, 1998 1
CONDENSED CONSOLIDATED STATEMENTS OF INCOME -
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31,
1998 AND 1997 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4-7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-15
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 16
PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 17
ITEM 2 - CHANGES IN SECURITIES 18
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5 - OTHER INFORMATION 18
ITEM 6 - REPORTS ON FORM 8-K 18
SIGNATURES
I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31 June 30
1998 1998
------------------- -------------------
Current Assets:
Cash $223,700 $58,006
Accounts Receivable (net) 7,663,567 4,504,235
Natural Gas and Propane Inventory 4,032,879 4,669,933
Materials and Supplies 458,473 556,077
Prepayments and other 340,814 147,091
Refundable Income Tax Payments 631,632 464,155
Recoverable Cost of Gas Purchases 2,225,334 1,926,749
Deferred income taxes - current 183,875 -
------------------- -------------------
Total Current Assets 15,760,274 12,326,246
------------------- -------------------
Investments 0 3,365
Notes Receivable Due After One Year 197,187 192,192
Property, Plant and Equipment-Net 28,454,312 27,571,904
Deferred Charges 4,346,217 3,241,178
------------------- -------------------
Total Assets $48,757,990 $43,334,885
------------------- -------------------
------------------- -------------------
CAPITALIZATION AND LIABILITIES
Current Liabilities:
Note payable to bank $5,809,982 $1,442,982
Long-term debt due within one year 426,523 413,032
Accounts Payable - Gas Purchases 2,727,821 2,029,703
Other Current and Accrued Liabilities 3,200,872 2,859,116
------------------- -------------------
Total Current Liabilities 12,165,198 6,744,833
------------------- -------------------
Deferred Credits 7,205,908 6,500,730
Long-term Debt (less amounts due within one year) 17,015,723 17,278,033
Stockholders' Equity
Preferred Stock 0 0
Common Stock (2,421,077 shares and
2,403,190 shares were outstanding at December
31, 1998 and June 30, 1998 respectively) 360,990 360,481
Capital in Excess of Par Value 3,316,768 3,286,228
Retained Earnings 8,693,403 9,164,580
------------------- -------------------
Total Stockholder's Equity 12,371,161 12,811,289
------------------- -------------------
Total Capitalization and Liabilities $48,757,990 $43,334,885
------------------- -------------------
------------------- -------------------
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
1998 1997 1998 1997
----------------------------------------------------------------------
Operating revenue:
Regulated utilities $9,051,559 $8,927,312 $12,175,532 $12,040,598
Nonregulated operations 2,148,962 2,722,558 3,037,557 3,876,198
Gas trading 5,914,851 2,991,710 10,963,491 3,949,299
----------------------------------------------------------------------
Total Revenue 17,115,372 14,641,580 26,176,580 19,866,095
----------------------------------------------------------------------
Operating Expenses
Gas purchased 7,247,773 7,578,800 9,552,367 10,088,641
Cost of gas trading 5,883,519 2,778,291 10,867,220 3,654,606
Distribution, general and administrative 1,921,794 1,922,455 3,882,870 3,786,524
Maintenance 125,230 118,119 237,494 241,993
Depreciation and amortization 439,016 452,359 877,272 900,840
Taxes other than Income 183,210 176,371 337,169 322,712
----------------------------------------------------------------------
Total Operating Expenses 15,800,542 13,026,395 25,754,392 18,995,316
----------------------------------------------------------------------
Operating Income 1,314,830 1,615,185 422,188 870,779
Other Income - Net 296,674 119,771 496,749 208,994
----------------------------------------------------------------------
Income Before Interest Charges & IncomeTaxes 1,611,504 1,734,956 918,937 1,079,773
----------------------------------------------------------------------
Interest Charges:
Long-Term Debt 315,931 319,007 627,800 569,045
Other 107,337 137,032 172,493 317,717
----------------------------------------------------------------------
Total Interest Charges 423,268 456,039 800,293 886,762
----------------------------------------------------------------------
Net Income Before Income Taxes 1,188,236 1,278,917 118,644 193,011
Income Taxes 437,102 463,111 52,161 58,004
----------------------------------------------------------------------
Net Income $751,134 $815,806 $66,483 $135,007
----------------------------------------------------------------------
----------------------------------------------------------------------
Basic Earnings and diluted income per common share $0.31 $0.35 $0.03 $0.06
----------------------------------------------------------------------
Dividends per common share $0.1150 $0.1050 $0.2300 $0.2200
----------------------------------------------------------------------
Basic Weighted Average Shares 2,420,611 2,363,917 2,411,940 2,364,410
Diluted Weighted Average Shares 2,423,516 2,367,101 2,414,845 2,367,594
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
1998 1997
-----------------------------------
Operating Activities:
Net Income $66,483 $135,007
Adjustments to Reconcile Net Income to Cash Flow
Depreciation and Amortization 1,049,460 1,013,704
Unrealized Gain on Gas Marketing Activities (145,514) 0
Gain on Sale of Property, Plant & Equipment (34,452) (710)
Deferred Gain on Sale of Assets (11,814) (11,814)
Investment Tax Credit (10,530) (10,531)
Deferred Income Taxes 291,942 135,593
Changes in Operating Assets and Liabilities (2,988,078) (1,644,784)
-----------------------------------
Net Cash Provided by (Used In) Operating Activities (1,782,503) (383,535)
Investing Activities:
Construction Expenditures (1,747,950) (1,643,511)
Collection of Long-Term Notes Receivable 0 2,537
Proceeds from Contributions in Aid of Construction 30,812 116,153
Increase in Notes Receivable (4,995) (200,000)
Proceeds from Sale of Property, Plant & Equipment 80,250 15,200
-----------------------------------
Net Cash Provided by (Used In) Investing Activities (1,641,883) (1,709,621)
Financing Activities:
Proceeds from Long-Term Debt 0 8,000,000
Debt Issuance and Reacquisition Costs 0 (457,503)
Proceeds from Notes Payable 20,302,001 17,385,000
Repayment of Long-Term Debt (255,000) (240,000)
Repayment of Notes Payable (15,935,000) (22,335,000)
Sale of Common Stock 0 187,224
Dividends paid (521,921) (407,863)
-----------------------------------
Net Cash Provided by (Used In) Financing Activities 3,590,080 2,131,858
-----------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 165,694 38,702
Cash and Cash Equivalents at Beginning of Year 58,006 148,665
-----------------------------------
Cash and Cash Equivalents at End of Period $223,700 $187,367
-----------------------------------
-----------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1998
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, 1998 are not necessarily indicative
of the results that may be expected for the year ended June 30, 1999 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, 1998.
Note 2 - Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," became effective as of the
first quarter of fiscal 1998. This statement requires companies to report
and display comprehensive income and its components (revenues, expenses,
gains and losses). Comprehensive income includes all changes in equity during
a period except those resulting from investments by owners and distributions
to owners. For the Company, comprehensive income is the same as net income
reported in the statements of consolidated income, since there were no other
items of comprehensive income for the periods presented.
4
Note 3 - Risk Management
Gas Hedging
For the period ended December 31, 1997, the Company was a party to one gas
hedge agreement for a regulated operation made to minimize the Company's
exposure, for gas purchases, to gas price fluctuations. For the period ended
December 31, 1998, the Company is a party to three gas hedge agreements for
nonregulated operations. Hedge's #1 and #2, for fiscal 1999, were entered
into to convert AECO index priced gas purchase contracts to NYMEX based
prices. Hedge #3 is being used to fix a margin for indexed priced sales
contracts being supplied by fixed price purchased contracts.
Fiscal Volume (MMBTU) Effective Termination Unrealized
Year Date Date Gain or
(Loss)
on Value of
Remaining
Contract at
Dec 31
- ------------------------------------------------------------------------------------------
1998 Hedge Purchase of 5,000/day 11/1/97 3/31/98 ($15,750)
1999 Hedge #1 Purchase of 50,000/month 11/1/98 3/31/99 ($84,700)
1999 Hedge #2 Purchase of 10,000/day 11/1/98 3/31/99 $157,500
1999 Hedge #3 Purchase and sale of 11/1/98 3/31/99 $254,200
5,000/day
Gas Trading Derivative
In July 1998, the Company signed a basis swap agreement between the NYMEX and
AECO price indices. The contract period for the 5,000 MMBTU per day swap
begins November 1, 1999 and ends October 31, 2000. The swap compares the
index prices of natural gas quoted on the NYMEX gas exchange with the AECO
gas exchange on a daily basis. When the basis differential is less than $.62
per MMBTU, the Company is in a positive position. When the basis differential
is greater than $.62 per MMBTU, the Company is in a negative position. When
this swap is settled, if it is in a positive position the Company will
receive a cash payment from the counterparty and if it is in a negative
position the Company must make a cash payment to the counterparty. The
Company has designated this basis swap as a trading commodity derivative.
This derivative was closed on February 5, 1999 at a gain of approximately
$365,000.
Fiscal Year Volume Effective Termination Contract Market Mark-to-
(MMBTU) Date Date Price Price at Market
Dec 31 Gain
At Dec 31
1998
- ---------------------------------------------------------------------------------------------
Derivative #1 5,000/day 11/1/99 10/31/2000 $.62 $.45 $310,000
5
Note 4 - Income Taxes
Income tax expense from operations differs from the amount computed by
applying the federal statutory rate to pre-tax income for the following
reasons:
Tax expense (benefit) at statutory rates - 34% . . . . . . . . . $42,316
State income taxes (benefit), net of federal income taxes. . . . 1,806
Amortization of deferred investment tax credits. . . . . . . . . (10,531)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,570
--------
Total income taxes (benefits). . . . . . . . . . . . . . . . . . $52,161
--------
--------
Note 5 - Contingencies
Environmental Contingency
The Company owns property on which it operated a manufactured gas plant from
1909 to 1928. The site is currently used as a service center where certain
equipment and materials are stored. The coal gasification process utilized
in the plant resulted in the production of certain by-products which have
been classified by the federal government and the State of Montana as
hazardous to the environment. Several years ago the Company initiated an
assessment of the site to determine if remediation of the site was required.
That assessment resulted in a submission, in 1994, to the Montana department
of Environmental Quality ("MDEQ"), formerly known as the Montana Department
of Health and Environmental Science ("MDHES. The Company has worked with the
MDEQ since that time to obtain the data that would lead to a remediation plan
acceptable to the MDEQ. The Company's environmental consultant filed a
report, with a proposed plan of remediation, on June 11, 1997. The MDEQ has
evaluated the report and responded to the Company on August 31, 1998 that it
has identified additional data they require before taking further action.
The Company has submitted the additional data, and is awaiting the outcome of
the review by MDEQ. The Company expects that, at a minimum it will be
required to remove contaminated soils from the site. Therefore in the fall
of 1998, The Company, under the direction of its environmental consultant,
removed the contaminated soils to a qualified, off-site location.
At December 31, 1998, the costs incurred in evaluating and remediating this
site have totaled approximately $1,321,000. 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, 1998, that
recovery mechanism had generated approximately $657,000. The Company expects
to fully recover its costs through the surcharge. The Commission's decision
calls for ongoing review by the Commission of the costs incurred for this
matter. The Company will submit an application for review by the Commission
when the remediation plan is approved by the MDEQ.
Legal Proceedings
From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. Neither the
Company nor any of its subsidiaries is a party to any legal proceedings,
other than as described in Part II -Other information, Item 1., the adverse
outcome of which individually or in the aggregate, in the Company's view,
would have no material adverse effect on the Company's results of operations,
financial position or liquidity.
6
Note 6 - Operating Revenues and Expenses,
Regulated utility and non-regulated non-utility operating revenues and
expenses were as follows:
Three Months Ended Six Months Ended
December 31 December 31
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
Operating Revenues:
Regulated Utilities $9,051,559 $8,927,312 $12,175,532 $12,040,598
Non-regulated operations 2,148,962 2,722,558 3,037,557 3,876,198
Gas trading 5,914,851 2,991,710 10,963,491 3,949,299
----------- ----------- ----------- -----------
$17,115,372 $14,641,580 $26,176,580 $19,866,095
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Operating Expenses:
Gas Purchased:
Regulated $5,599,173 $5,596,671 $7,276,052 $7,289,809
Non-regulated 1,648,600 1,984,148 2,276,315 2,798,832
Cost of gas trading 5,883,519 2,778,291 10,867,220 3,654,606
----------- ----------- ----------- -----------
$13,131,292 $10,359,110 $20,419,587 $13,743,247
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Distribution, general and administrative:
Regulated $1,549,890 $1,454,448 $3,124,698 $2,904,835
Non-regulated 371,904 468,007 758,172 881,689
----------- ----------- ----------- -----------
$1,921,794 $1,922,455 $3,882,870 $3,786,524
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Maintenance:
Regulated $105,763 $86,786 $200,344 $184,028
Non-regulated 19,467 31,333 37,150 57,965
----------- ----------- ----------- -----------
$125,230 $118,119 $237,494 $241,993
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Depreciation and amortization:
Regulated $372,354 $366,908 $744,468 $730,950
Non-regulated 66,662 85,451 132,804 169,890
----------- ----------- ----------- -----------
$439,016 $452,359 $877,272 $900,840
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Taxes other than income:
Regulated $162,033 $145,017 $288,165 $266,125
Non-regulated 21,177 31,354 49,004 56,587
----------- ----------- ----------- -----------
$183,210 $176,371 $337,169 $322,712
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income taxes (benefits):
Regulated $349,205 $358,064 ($4,330) $ 13,385
Non-regulated 87,897 105,046 56,491 44,619
----------- ----------- ----------- -----------
$437,102 $463,110 $52,161 $58,004
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
7
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 liquefied natural gas.
The Company conducts certain non-utility operations through its three wholly
owned subsidiaries: Energy West Propane, Inc. (EWP), (formerly known as
Rocky Mountain Fuels, Inc.), a retail and wholesale distributor of propane
in Wyoming, Montana, Arizona, Colorado, South Dakota and Nebraska; Energy
West Resources, Inc. (EWR) which is involved in the marketing of natural gas
in Montana and gas storage; Energy West Development , (formerly known as
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. As the
short-term debt balance significantly exceeds working capital requirements
the Company issues long-term debt or equity securities to pay down short-term
debt.
The Company's short-term borrowing requirements vary according to the
seasonal nature of its sales and expense activity. The Company has greater
need for short-term borrowing during periods when internally generated funds
are not sufficient to cover all capital and operating requirements, including
costs of gas purchases and capital expenditures. In general, the Company's
short-term borrowing needs for purchases of gas inventory and capital
expenditures are greatest during the summer months and the Company's
short-term borrowing needs for financing of customer accounts receivable are
greatest during the winter months. Short-term borrowing utilized for
construction or property acquisitions generally has been on an interim basis
and converted to long-term debt and equity when it becomes economical and
feasible to do so.
At December 31, 1998, the Company had $19,000,000 in bank lines of credit, of
which $5,810,000 had been borrowed under the credit agreement.
The Company used net cash in operating activities for the six months ended
December 31, 1998 in the amount of approximately $1,783,000 as compared to
approximately $384,000 for the six months ended December 31, 1997. The
difference in cash used for operating activities of approximately $1,399,000
was primarily due to higher working capital requirements of approximately
$1,343,000. The greater working capital requirement were from higher gas
inventory of $800,000, lower accounts payable of $1,000,000, higher prepaid
expenses of $350,000 and greater amounts expended for environmental clean-up
of 800,000. These increases were offset by lower accounts receivable of
$1,800,000.
Cash used in investing activities was approximately $1,642,000 for the six
months ended December 31, 1998, as compared to approximately $1,710,000 for
the six months ended December 31, 1997 a decrease of $68,000. The difference
is due to lower amounts loaned to customers, as notes receivable, of about
$195,000 and higher proceeds from the sale of property, plant and equipment
of about $65,000. These were offset by higher construction expenditures of
about $105,000 and lower proceeds from Contributions in Aid of Construction
of $85,000.
8
Cash provided by financing activities was approximately $3,590,000 for the
six months ended December 31, 1998, as compared to approximately $2,132,000
for the three months ended December 31, 1997. The increase in cash provided
by financing activities of approximately $1,458,000 resulted primarily from
an increase in net proceeds from short-term debt of about $9,317,000
partially offset by a decrease in proceeds from the sale of common stock of
$187,000, a decrease in the net proceeds from a long-term debt issue of
approximately $7,564,000 and higher dividends paid of about $114,000.
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 $3.0 million in fiscal 1998 and
approximately $3.2 million for fiscal 1997. During fiscal 1998,
approximately $1.5 million was expended for the construction and maintenance
of the natural gas systems in Great Falls, Cascade and West Yellowstone,
Montana and Cody, Wyoming and approximately $1.1 million was expended for
operations and maintenance and gas system expansion projects for new
subdivisions in the Broken Bow division's service area in Arizona. In
addition, approximately $520,000 was expended for additions to the propane
operations of the Company in Wyoming, Montana and Arizona. Capital
expenditures are expected to be approximately $3.2 million in fiscal 1999,
including approximately $1.2 million for continued expansion for the Broken
Bow division, with approximately $1.4 million for maintenance and other
special system expansion projects in the Great Falls, West Yellowstone and
Cody divisions and the balance of approximately $600,000 for the Company's
propane operations in the three states it serves. As of December 31, 1998,
approximately $1,748,000 of that amount had been expended.
9
RESULTS OF CONSOLIDATED OPERATIONS
COMPARISON OF SECOND QUARTER OF FISCAL 1999 ENDED DECEMBER 31, 1998 AND
FISCAL 1998 ENDED DECEMBER 31, 1997
The Company's net income for the second quarter of fiscal 1999, ended
December 31, 1998 was $751,134 compared to $815,806 for the quarter of fiscal
1998, ended December 31, 1997.
Margins decreased from approximately $4,284,000 in fiscal 1998 to $3,984,000
in fiscal 1999 or $300,000 primarily due to reduced sales in Petrogas of
Wyoming, as a result of the sale of four retail propane districts.
Distribution, general and administrative expenses were approximately the same
for the second quarter of both fiscal years. The margin decrease was offset
by higher other income of $178,000 primarily due to mark-to-market accounting
for derivatives held by the Company.
UTILITY OPERATIONS -
Utility operating revenues in the second quarter of fiscal 1999 were
approximately $9,052,000 compared to approximately $8,927,000 for the second
quarter of fiscal 1998. Gross margin, which is defined as operating revenues
less gas purchased, was approximately $3,452,000 for the second quarter of
fiscal 1999 compared to a gross margin of $3,331,000 for the second quarter
of fiscal 1998 or an increase of 3.5%. This increased margin resulted
primarily from rate increases in various utility divisions after the second
quarter of fiscal 1998. Operating income was approximately the same in the
second quarter of fiscal 1999, when compared with fiscal 1998.
Operating Expenses -
Utility operating expenses, excluding the cost of gas purchased and federal
and state income taxes, were approximately $2,190,000 for the second quarter
of fiscal 1999 compared to $2,053,000 for the same period in fiscal 1998.
This increase of $137,000 or 7% was generally due to inflationary trends and
additional staff added for the safety operations of the Company.
Interest Charges -
Interest charges allocable to the Company's utility divisions was
approximately $352,000 for the second quarter of fiscal 1999, as compared to
$380,000 in the comparable period in fiscal 1998. This 7% reduction in
interest expense, for the quarter was due to lower working capital
requirements for utility operations.
Income Taxes -
State and federal income taxes of the Company's utility divisions were
approximately $350,000 for the second quarter of fiscal 1999 which was
approximately the same as the second quarter of fiscal 1998. This occurred
because the pre-tax income was approximately the same for the second quarter
of both fiscal years.
10
NON-REGULATED OPERATIONS -
Non-regulated operating revenues for the second quarter of fiscal 1999 were
approximately $8,064,000 compared to approximately $5,714,000 for the second
quarter of fiscal 1998. Non-regulated operating revenues through December
1998 consisted of $2,125,000 for EWP, $5,915,000 for EWR and $24,000 for
Energy West Development, Inc. Operating income, which is defined as
operating revenues less gas purchased, distribution, general, administrative,
maintenance, depreciation, amortization and taxes other than income, was
approximately $52,000 for the second quarter of fiscal 1999. This compares
to operating income of approximately $336,000 for the second quarter of
fiscal 1998. Operating income for EWP was approximately $125,000 for the
second quarter of fiscal 1999, compared to approximately $232,000 in the
second quarter of fiscal 1998. The decrease in operating income of
approximately $107,000 was primarily due to decreases in gross margin from
warmer weather and slightly higher operating expenses in all propane
divisions. EWR's operating loss of approximately ($69,000), for the second
quarter of fiscal 1999 compared to an operating income for the same period in
fiscal 1998 of approximately $71,000, increased the operating loss in
non-regulated operations this fiscal year. The reason EWR had an operating
loss for the second quarter of fiscal 1999, compared to operating income in
fiscal 1998, is primarily due to lower gas marketing margins because of
increased natural gas prices for purchases.
Energy West Propane, Inc. -
For the second quarter of fiscal 1999, EWP generated net income of
approximately $61,000 compared to net income of approximately $131,000 for
the second quarter of fiscal 1998. EWP's gross margin of approximately
$476,000, for the second quarter of fiscal 1999, was down about $238,000 from
$714,000 for the second quarter of fiscal 1998. EWP's operating expenses
decreased approximately $132,000 in the second quarter of fiscal 1999 as
compared to the second quarter of last fiscal year. The lower gross margin
and operating expenses is primarily due to Petrogas of Wyoming which sold
four retail propane districts in Wyoming in February 1998. However, gross
margins were further eroded by lower margin from EWP's wholesale and
remaining retail operations primarily due to warmer weather in the second
quarter of fiscal 1999 compared to the same quarter in fiscal 1998. Also
each of EWP's operating units experienced higher operating expenses primarily
due to inflationary increases. EWP experienced lower short-term interest
costs due to lower short-term borrowing. State and federal income tax expense
decreased by approximately $37,000 for this quarter compared to the same
quarter last year, due to the lower pre-tax income.
Energy West Resources, Inc. -
For the second quarter of fiscal 1999, EWR net income was approximately
$85,000 compared to a net income of approximately $52,000 for the second
quarter of fiscal 1998. Although margin decreased by about $183,000 for the
second quarter of fiscal 1999 compared to fiscal 1998, this was offset by a
mark-to-market gain of $228,000, recorded as other income, in fiscal 1999.
The decrease in margin was primarily due to increased natural gas prices.
Operating expenses declined by $28,000 in the second quarter of fiscal 1999
compared to the same period in fiscal 1998. This reduction occurred because
certain legal and consulting fees incurred in fiscal 1998 were one-time
expenses related to EWR's intervention in a Montana Power Company electric
open access case. State and federal income tax expense increased
approximately $23,000 for the second quarter of fiscal 1999 compared to
fiscal 1998 due to a higher pre-tax income of approximately $53,000 for the
same time period.
Energy West Development, Inc. -
For the second quarter of fiscal 1999, Energy West Development, Inc.'s net
income was $0 compared to approximately $3,000 for the second quarter of
fiscal 1998.
11
RESULTS OF CONSOLIDATED OPERATIONS
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1998 AND FISCAL 1998 ENDED
DECEMBER 31, 1997
The Company's net income for the six months ended December 31, 1998 was
$66,483 compared to $135,007 for the six months ended December 31, 1997.
Margins decreased from approximately $6,123,000 in fiscal 1998 to $5,757,000
in fiscal 1999 or $366,000. This decrease occurred because of reduced sales
in Petrogas of Wyoming, which sold four retail propane districts in Wyoming,
and from lower gas trading margins for EWR, the marketing subsidiary, due to
higher purchase prices for natural gas. Distribution, general and
administrative expenses increased from approximately $3,787,000 in fiscal
1998 to $3,883,000 in fiscal 1999 or $96,000 primarily due to inflationary
trends, additional staff added for the safety operations of the Company and
additional expenses in EWR because of growth in marketing activity. These
were partially offset by increased other income of approximately $288,000
primarily due to mark-to-market accounting for derivatives, held by the
Company, and decreased interest charges of approximately $87,000, due to
lower short-term borrowing.
UTILITY OPERATIONS -
Utility operating revenues for the first six months of fiscal 1999 were
approximately $12,176,000 compared to approximately $12,041,000 for the first
six months of fiscal 1998. Gross margin, which is defined as operating
revenues less gas purchased, was approximately $4,899,000 for the first six
months of fiscal 1999 compared to a gross margin of approximately $4,751,000
for the first six months of fiscal 1998. The increase in gross margin of
$148,000 results primarily from rate increases in various utility divisions
since last fiscal year. The weather for the Company's various utility
divisions is about the same or somewhat warmer than last fiscal year.
However, operating income decreased by $123,000 for the first six months of
fiscal 1999 compared to fiscal 1998 due to higher operating expenses of
$272,000.
Operating Expenses -
Utility operating expenses, excluding the cost of gas purchased and federal
and state income taxes, were approximately $4,358,000 for the first six
months of fiscal 1999 as compared to $4,085,000 for the same period in fiscal
1998. The 7% increase in the period was generally due to inflationary trends
and additional staff for safety operations.
Interest Charges -
Interest charges allocable to the Company's utility divisions were
approximately $658,000 for the first six months of fiscal 1999, as compared
to $740,000 for the comparable period in fiscal 1998. 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
decreased primarily due to lower short-term borrowing.
Income Taxes -
State and federal income tax benefits of the Company's utility divisions were
approximately ($4,000) for the first six months of fiscal 1999 compared to an
income tax expense of approximately $13,000 for the same period in fiscal
1998. This was due to a pre-tax loss for the utility divisions for the first
six months of fiscal 1999 compared to a pre-tax income for the first six
months of fiscal 1998.
12
NON-REGULATED OPERATIONS -
Non-regulated operating revenues for the first six months of fiscal 1999 were
approximately $14,000,000 compared to $7,825,000 for the first six months of
fiscal 1998. Non-regulated operating revenues through December 1998
consisted of $2,940,000 for EWP, $10,963,000 for EWR and $49,000 for Energy
West Development, Inc. Operating income, which is defined as operating
revenues less gas purchased, distribution, general, administrative,
maintenance, depreciation, amortization and taxes other than income, was a
loss of approximately ($120,000) for the first six months of fiscal 1999.
This compares to operating income of approximately $206,000 for the second
quarter of fiscal 1998. Operating income for EWP was approximately $43,000
for the first six months of fiscal 1999, compared to approximately $117,000
in the first six months of fiscal 1998. The difference of $74,000 is
primarily due to lower gross margin resulting from warmer weather in all
propane divisions. EWR's operating loss of approximately ($182,000) compared
to operating income in fiscal 1998 of approximately $42,000. The reason for
EWR's increased operating loss is primarily due to lower gas marketing
margins because of increased natural gas prices for purchases and higher
general and administrative costs due to staff expansion and training required
to serve the growth in marketing activity.
Energy West Propane, Inc. -
For the six months ended December 31, 1998, EWP generated net income of
approximately $18,000 compared to net income of approximately $33,000 for the
six months ended December 31, 1997. EWP's gross margins of approximately
$712,000, for the first six months of fiscal 1999 were down $317,000 from
$1,029,000 for the first six months of fiscal 1998. However operating
expenses decreased from approximately $912,000 for the first six months last
fiscal year to approximately $670,000 for this fiscal year, an overall
decrease of $242,000. Most of the changes in gross margin and operating
expenses were the result of the sale of four retail propane districts in
Wyoming in February 1998. Other income increased approximately $24,000 and
interest expenses decreased by $31,000 for that same time period. The net
income before income taxes through December 31, 1998 was $33,000 compared to
$52,000 for the same time period last year. This resulted in slightly lower
state and federal income tax expense in fiscal 1999 compared to fiscal 1998.
Energy West Resources, Inc. -
For the first six months of fiscal 1999, EWR's net income was approximately
$63,000 compared to net income of approximately $15,000 for the first six
months of fiscal 1998. Although margin decreased by about $198,000 for the
first six months of fiscal 1999 compared to fiscal 1998 this was offset by a
mark-to-market gain of $310,000, recorded as other income, in fiscal 1999.
The decrease in margin was primarily due to increased natural gas prices.
Operating expenses increased by $25,000 for the first six months of fiscal
1999 compared to the same period in fiscal 1998, due to higher general and
administrative expenses because of staff expansion and training required to
serve the growth in marketing activity. State and federal income tax
expense increased approximately $21,000 for the first six months of fiscal
1999 compared to fiscal 1998 due to higher pre-tax income of approximately
$67,000 for the same time period.
Energy West Development, Inc. -
For the six months ended December 31, 1998, Energy West Development, Inc.'s
net income was approximately $3,000 compared to $7,000 for the six months
ended December 31, 1997.
13
SAFE HARBOR FOR FORWARD LOOKING STATEMENT
The company is including the following cautionary statement in this Form 10-Q
to make applicable and to take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of the Company. Forward-looking statements
are all statements other than statements of historical fact, including
without limitation those that are identified by the use of the words
"anticipates", "estimates", "expects", "intends", "plans", "predicts", and
similar expressions. Such statements are inherently subject to a variety of
risks and uncertainties that could cause actual results to differ materially
from those expressed. Such risks and uncertainties include, among others,
changes in the utility regulatory environment, wholesale and retail
competition, weather conditions and various other matters, many of which are
beyond the Company's control These forward-looking statements speak only as
of the date of the report. The Company expressly undertakes no obligation to
update or revise any forward-looking statement contained herein to reflect
any change in the Company's expectations with regard thereto or any change in
events, conditions, or circumstances on which any such statement is based.
YEAR 2000
The Year 2000 issue relates to the ability of systems, including hardware,
software and embedded microprocessors, to properly interpret date information
relating to the year 2000 and beyond. Any of the Company's computer systems
and embedded microprocessors that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure of miscalculations causing disruptions of
operations, including inability to process transactions, send billing
statements to customers, or similar normal business activities.
The Company has formed a Year 2000 committee consisting of management,
information technology and operations personnel to address its Year 2000
compliance issues. This committee meets weekly and is charged with the task
of managing the Year 2000 compliance effort.
The Company has completed an assessment of its exposure to Year 2000 issues.
This assessment indicated that most of the Company's computer systems are
compliant or can be made compliant with minimal costs, with the exception of
one of its billing systems. However, the Company anticipates the one
non-compliant billing system will be compliant by July 1999. In addition,
the company is in the process of preparing a request for a proposal to
replace all of its billing systems, in order to accommodate additional
billing requirements for business reasons related to deregulation of the
energy industry and from establishing an energy marketing company. The
Company plans to have a new billing solution in place by December 1999, with
expected costs ranging between $250,000 and $500,000.
The Company expects, that with conversions to new software and modifications
to existing software, the Year 2000 issue will not pose significant internal
computer systems problems. However, if such modifications and conversions
are not made, or are not completed timely, the Year 2000 Issue could have a
material impact on the operations of the Company, specifically related to
billing its customers.
An inventory has been completed for all operational systems with potential
embedded microprocessors. Although a detailed inventory and assessment for
all specific components of those operational systems has not been completed.
However, of the work completed, to date, no Year 2000 non-compliance issues
have been identified, which could have a material effect on the Company's
operations. It is expected that the assessment and testing of embedded
systems will be completed by July 1999
The Company has initiated formal communications with all of its significant
suppliers, gas pipeline transmission companies and large customers, to
determine the extent to which the Company's interface systems are vulnerable
to those third parties' failure to remediate their own Year 2000 Issues. The
Company's total Year 2000 project cost and estimates to complete, include the
estimated costs and time associated with the impact of third party Year 2000
issues based on presently available information. However, there can be no
guarantee that the systems of other companies, on which the Company's systems
rely, will be timely converted and would not have an adverse effect on the
Company's systems. The Company has determined that it has no exposure
contingencies related to the Year 2000 Issue for the products it has sold.
14
Total costs incurred to date, to address the Year 2000 issue, have been
approximately $40,000. Although it is not currently possible to estimate the
total costs for any required modifications, it is not expected to exceed
$150,000, and therefore would not have a material impact on the Company's
current financial position, liquidity or results of operations.
The Company's billing systems are targeted to be compliant by July 1999.
Therefore even if a new billing system is not installed by December 1999, the
Company will be able to render bills to its customers. The Company has not
begun development of contingency plans specific to the Year 2000 issue.
However the Company has in place, as part of its normal safety plans,
emergency plans which address system outages. It is expected that these
emergency plans will be the basis for the Year 2000 contingency plans. The
Company plans to have its contingency plans related to the Year 2000 to be
completed by September 1999.
15
Item 3 - THE QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's energy-related businesses are exposed to risks relating to
changes in certain commodity prices and counterparty performance. In order
to manage the various risks relating to these exposures, the Company utilizes
natural gas derivatives and has established risk management oversight for
these risks. The Company has implemented or is in the process of
implementing procedures to manage such risk and has established a risk
management committee, overseen by the Audit Committee of the Company's Board
of Directors, to monitor compliance with the Company's risk management
policies and procedures.
The Company protects itself against price fluctuations on natural gas by
limiting the aggregate level of net open positions which are exposed to
market price changes through the use of natural gas derivative instruments
for hedging purposes. The net open position is actively managed with strict
policies designed to limit the exposure to market risk and which require at
least weekly reporting to management of potential financial exposure. The
risk management committee has limited the types of financial instruments the
company may trade to those related to natural gas commodities. The
quantitative information related to derivative transactions is contained in
footnote number three to the consolidated financial statements.
Credit risk relates to the risk of loss that the Company would incur as a
result of non-performance by counterparties of their contractual obligations
under the various instruments with the Company. Credit risk may be
concentrated to the extent that one or more groups of counterparties have
similar economic, industry or other characteristics that would cause their
ability to meet contractual obligations to be similarly affected by 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 occur from
time to time. To date, no such default has occurred.
16
FORM 10-Q
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. The Company
contracts for liability insurance through a primary insurance carrier in the
amount of $1,000,000 and an excess carrier, in the amount of $30,000,000 in
order to indemnify itself from such claims. The company has been charged
with responsibility for certain actions, which have been litigated or are in
the process of litigation. In its judgement, there are no legal proceedings,
which could result in a material adverse effect on the Company's results of
operations, financial position or liquidity. Significant legal proceedings,
most of which are covered under its liability insurance policies, are
described below.
On February 6, 1998 a judgment was entered against the Company in the Federal
District Court for Wyoming in favor of Randy and Melissa Hynes. The Company
was found to be 55% responsible resulting in a liability of approximately
$2,900,000 for which the Company is indemnified under the policies described
above. The action arose out of a natural gas explosion involving a four-plex
apartment building in Cody, Wyoming. The Company has appealed the judgement
to the United States Court of Appeals for the Tenth Circuit.
Two lawsuits arising out of the same explosion as that in the "Hynes" case
but involving other plaintiffs have recently settled. One lawsuit filed by
the building owner is still pending. The Company is indemnified under its
insurance policies for the defense of these claims, the settlement just
discussed and believes it will be completely indemnified from any judgment on
the remaining claim.
A settlement was made in an action brought by Colten and Julie White and
their three children in Superior Court in Gila County, Arizona. That action
arose out of an explosion that occurred on May 3, 1994. The settlement
resolves all claims arising out of the explosion and is fully covered by the
Company's insurance policies.
On September 4, 1998, the Company received correspondence from the Department
of Justice that a claim was being considered by the United States of America
(U.S.) against the Company. The correspondence indicated that a complaint
has been prepared by Jack Grynberg, acting as Relator on behalf of the U.S.,
alleging that the Company had utilized improper measurement procedures in the
measurement of gas which was produced by wells owned by it, by its
subsidiaries, or from which the Company may have acted as operator. The
alleged improper measurement procedure purportedly understated the amount of
royalty revenue that would have been paid to the U.S.. The complaint is
substantially identical to complaints that have been prepared against
seventy-seven other parties. The Company is alleged to have been responsible
for the measurement of over 150 wells during a five-year period. The Company
has investigated this allegation and, believes it had measurement
responsibility for approximately four wells. The quantity of production from
those wells is small enough that the Company does not expect its potential
liability to be material from any adverse decision in any action actually
pursued by the U.S. or Mr. Grynberg. Furthermore, the Company believes that
the allegations made by Mr. Grynberg are not sustainable. The Company's
insurance providers have given a preliminary indication that the action would
not be indemnified under the Company's insurance policies. The Company
intends to vigorously contest the claims made in the Complaint, if it is, in
fact filed.
17
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, 1998.
18
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 16, 1999
/s/ Edward J. Bernica
- -------------------------------------
Edward J. Bernica, Vice-President and
Chief Financial Officer