THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED PURSUANT
TO RULE
901 (d) OF REGULATION S-T
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
Common Stock - Par Value $.15 NASDAQ
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
[X] No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (229.45 of this chapter) is not
contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X].
The aggregate market value of the voting stock held by non-
affiliates of the registrant as of September 20, 1996 Common Stock,
$.15 Par Value - $11,997,032. The number of shares outstanding of
the issuer's classes of common stock as of September 20, 1996 Common
Stock, $.15 Par Value - 2,336,245 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders' report for the year ended June
30, 1996 are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual shareholders meeting
to be held November 21, 1996 are incorporated by reference into
Part III. PART I
Item 1. - Business
ENERGY WEST INCORPORATED ("the Company") is a regulated
public utility, with certain non-utility operations conducted
through its subsidiaries. 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. Since January 1993, the Company's regulated utility
operations have also included the distribution of propane to the
public through an underground propane vapor system in the Payson,
Arizona area, and since 1995, the distribution of natural gas
through an underground system in West Yellowstone, Montana, that is
supplied by liquified natural gas ("LNG").
The Company conducts certain non-regulated non-utility
operations through its three wholly-owned subsidiaries, Rocky
Mountain Fuels, Inc. ("RMF"), Energy West Resources, Inc. ("EWR"),
[formerly Vesta, Inc.] and Montana Sun, Inc. ("Montana Sun"). RMF
is engaged in the distribution of bulk propane in Northwestern
Wyoming, the Payson, Arizona area and the Cascade, Montana area.
EWR is involved in gas storage, a small amount of oil and gas
development and the marketing of gas in Montana and Wyoming.
Montana Sun owns two real estate properties in Great Falls,
Montana.
Utility Operations
The Company's primary business is the distribution and sale
of natural gas and propane to residential, commercial and
industrial customers. The natural gas distribution operations
consist of two divisions, the Great Falls division and the Cody
division. The Cody division is also involved in the transportation
of natural gas. In addition, since January 1993 the Company has
been involved in the regulated distribution of propane in Arizona
through the Broken Bow division. Generally, residential customers
use natural gas and propane for space heating and water heating,
commercial customers use natural gas and propane for space heating
and cooking, and industrial customers use natural gas as a fuel in
industrial processing and space heating. The Company's revenues
from utility operations are generated under tariffs regulated by
the respective state utility commissions.
Great Falls Division
The Great Falls division provides natural gas service to
Great Falls, Montana and much of suburban Great Falls within
approximately 11 miles of the city limits. The service area has a
population base of approximately 65,000. The Company has a
franchise to distribute natural gas within the city of Great Falls.
The franchise was renewed for 50 years by the city of Great Falls
in 1971. As of June 30, 1996, the Great Falls division provided
service to over 25,000 customers, including approximately 22,000
residential customers, approximately 3,000 commercial customers, an
oil refinery through a transportation agreement and Malmstrom Air
Force Base ("Malmstrom"). The following table shows the Great Falls
division's revenues by customer class for the year ended June 30, 1996
and the past two fiscal years:
Gas Revenues
(in thousands)
Years
Ended June 30,
1996 1995 1994
Residential.................$8,648 $8,996 $9,016
Commercial.................. 6,146 6,350 6,360
Malmstrom................... 0 1,393 1,437
Transportation.............. 468 73 88
Total............... $15,262 $16,812 $16,901
The following table shows the volumes of natural gas,
expressed in millions of cubic feet ("MMcf") at 13.28 P.S.I.A.,
sold by the Great Falls division for the year ended June 30, 1996
and the past two fiscal years:
Gas Volumes
(MMcf)
Years Ended June 30,
1996 1995 1994
Residential..................2,540 2,297 2,315
Commercial...................1,822 1,646 1,655
Malmstrom.................... 0 464 478
Total Gas Sales........4,362 4,407 4,448
Transportation 1,294 714 521
Malmstrom, now a transportation customer and the Great Falls
division's largest customer, accounted for approximately 8% of the
revenues of the division and approximately 5% of the consolidated
revenues of the Company in fiscal 1996. Malmstrom purchases gas
for space heating and water heating for buildings and residential
housing, to supplement its coal-fired central heating system.
Malmstrom, which is located near Great Falls, is an air force base
with intercontinental nuclear missiles and KC-135 refueling
tankers. Malmstrom Air Force Base represents approximately one
third of the Great Falls economy. The base employed approximately
4,400 military personnel and 550 civilian personnel as of June 30,
1996. As of this date, a current realignment plan by the federal
government, calls for the base to receive additional Minuteman III
missiles from North Dakota, and the refueling unit to move to
Florida. The plan is now final and when both changes take place,
the base will not suffer substantially.
Beginning in three years, Malmstrom has been selected as the
site where 13 of 15 test flight of NASA's X-33 space shuttle will
land during 1999, assuring that Malmstrom's runways and flight
facilities will be maintained through the balance of this decade.
No assurance can be given as to the future level of activity at
Malmstrom. On July 1, 1995, Malmstrom became a transport customer
of the Great Falls division, purchasing its gas load from EWR, a
wholly-owned subsidiary of ENERGY WEST INCORPORATED. The Great
Falls division will experience no loss of margin as a result of
this new contract.
The Great Falls division's other transport customer is an oil
refinery located in the city. The Company provides gas to the
customer for processing use in its refining business. In fiscal
1995, the refinery accounted for approximately 1% of the division's
revenues and less than 1% of the consolidated revenues of the
Company. Historically, this customer's gas load has remained
relatively constant during the year because the gas is used in the
customer's business and is therefore not weather-sensitive. On
June 1, 1993, the refinery became a transport customer of the Great
Falls division, purchasing its gas load from EWR, a wholly-owned
subsidiary of ENERGY WEST INCORPORATED. The Great Falls division
experienced no loss of margin as a result of this new contract.
In July, 1996 it was announced that a $20 million pasta plant
will be built in Great Falls. Construction is expected to begin in
the fall of 1996 and is estimated to use approximately 60,000
Mcf/year of natural gas annually.
The Great Falls division's gas distribution operations are
subject to regulation by the Montana Public Service Commission
("MPSC"). The MPSC regulates rates, adequacy of service,
accounting, issuance of securities and other matters.
In November, 1994, the Company filed for a rate increase to
recover the cost of increased operating expenses, increases in
financing expenses due to additional investments in utility plant,
and other costs of doing business. Included with the filing was a
new surcharge to recover costs associated with the environmental
assessment and remediation of its service center, which was
formerly a manufactured gas plant site. The Montana Consumer
Counsel ("MCC") intervened in the rate case and in January, 1995,
the Company and the MCC filed a Joint Motion for Suspension of the
Procedural Order, in order to allow both parties to negotiate
toward a stipulated settlement. On May 30, 1995, the MPSC approved
the revenue requirement stipulation executed between the Company
and the MCC as filed in March, 1995, which reduced base rates by
$250,000 and allowed a new surcharge associated with the
manufactured gas plant site with an initial balance of
approximately $183,000, with the surcharge calculated on a two-year
recovery of the average annual basis. The effective date of the
rate decrease and surcharge was the beginning of Fiscal 1996 or
July 1, 1995. The rate decrease reduces earnings per share by
approximately 1.8 cents on normalized volumes.
In June, 1996, the Great Falls division filed a rate
adjustment application with the MPSC of approximately $386,000, to
recover increased gas supply costs, as part of an annual filing
made by the Great Falls division to balance gas supply costs
against gas revenues. This filing does not increase the Great
Falls division's margins.
On July 8, 1996, the Great Falls division filed a general
rate increase with the MPSC, which reflects increased operating,
maintenance and depreciation costs as well as a change in the cost
of capital. The Great Falls division has applied for and expects
interim relief no later than November, 1996. The Rate Hearing will
be held in late Fiscal 1997 and no assurance can be given as to the
amount of rate relief that will be granted to the Company.
Historically, the Great Falls division has purchased all of
its gas from Montana Power Company ("MPC"), a publicly owned
electric and gas utility serving much of Montana. In 1991 the MPSC
ordered MPC to become an open access transporter of natural gas
over a phase-in period ending on August 31, 1993. Since the 1991
order, the Company has been able to purchase gas from sources other
than MPC and transport supplies on MPC's system. The Company has
increased its gas purchases from suppliers other than MPC, as open
access transportation has been phased in. The Great Falls division
currently purchases approximately forty percent of its gas from a
Canadian producer under a long-term contract expiring in 2007, and
approximately twenty percent of its gas from two Montana producers
under long-term contracts expiring between 1998 and 2005 and
fifteen percent of its gas from short-term contracts with Montana
producers. The division also makes spot market purchases from time
to time to fill its storage capacity in the spring and summer.
The price of gas under the contract with the Canadian
producer is negotiated annually between the parties. The prices of
gas under the contracts with the two independent producers can be
negotiated bi-annually by either party. Gas purchased from the
division's suppliers is transported through pipelines owned by MPC
and is delivered to the division's distribution system at two city
gates. The Company pays transportation tariffs to MPC at rates
approved by the MPSC.
Open access for the division's customers was negotiated
between the division, MPC and the MPSC during 1991, which called
for a three year phase-in of open access gas supplies, with gas
costs tracking filings every six months. The three year phase-in
period began in November, 1991, with two-thirds of supply purchased
from MPC under the "Firm Utility Gas Cost" ("FUGC") rate and one-
third directly from other gas suppliers. The regulatory mechanism
used to track the phase-in resulted in additional costs in 1994
that offset an increase in gross margins associated with the change
in contract terms with the refinery customer, which changed from a
gas supply contract to a transportation contract. On September 1,
1993, the Great Falls division became a full open access customer
of MPC. The division secured the balance of its long-term gas
supplies, to replace gas which was previously being supplied by
MPC, on terms satisfactory to the Company.
The Great Falls division contracts for gas storage from MPC
in MPC-owned gas storage areas and pays storage tariffs at rates
approved by the MPSC. The division uses this storage capacity to
provide for seasonal peaking needs and to take advantage of lower
priced gas generally available during the summer months.
During 1996, the Company was a party to gas financial swap
agreements for its regulated operations, including the Great Falls
and Cody divisions. Under these agreements, the Company is
required to pay the counterparty (an entity making a market in gas
futures) a cash settlement equal to the excess of the stated index
price over an agreed upon fixed price for gas purchases. The
Company receives cash from the counterparty when the stated index
price falls below the fixed price. These swap agreements are made
to minimize exposure to gas price fluctuations. Any cash
settlements or receipts are included in gas purchased.
Cody Division
The Cody division provides natural gas service in
Northwestern Wyoming to the city of Cody and the towns of Meeteetse
and Ralston and the surrounding areas. The service area has a
population base of approximately 12,000. The Cody division has a
franchise granted by the Wyoming Public Service Commission (the
"WPSC") for gas purchasing, transportation and distribution
covering the west side of the Big Horn Basin, which stretches
approximately 70 miles north and south and 40 miles east and west
from Cody. The franchise is effective until 2002. As of June 30,
1996, the Cody division provided service to approximately 5,200
customers, including 4,500 residential customers, 700
commercial customers and one industrial customer. The division
also provides transportation service to two customers.
The following table shows the Cody division's revenues by
customer class for the year ended June 30, 1996 and the past two
fiscal years:
Gas Revenues
(in thousands)
Years Ended June 30,
1996 1995 1994
Residential.................$2,353 $2,176 $2,219
Commercial..................$1,922 $1,887 $2,034
Industrial..................$1,360 $1,375 $1,331
Transportation..............$ 305 $ 172 $ 228
Total................. $5,940 $5,610 $5,812
The following table shows the volumes of natural gas,
expressed in millions of cubic feet ("MMcf") at 13.28 P.S.I.A.,
sold by the Cody division for the year ended June 30, 1996 and the
past two fiscal years:
Gas Volumes
(MMcf)
Years Ended June 30,
1996 1995 1994
Residential.................. 536 486 474
Commercial................... 565 539 559
Industrial................... 552 517 473
Total Gas Sales....... 1,653 1,542 1,506
Transportation 642 1,484 2,533
The industrial sale in the Cody division is to Celotex, a
manufacturer of gypsum wallboard, under a long-term contract
expiring in 2000. Sales to the customer are made pursuant to a
special industrial customer tariff which fluctuates with the cost
of gas. In fiscal 1996 this customer accounted for approximately
23% of the revenues of the division and approximately 4% of the
consolidated revenues of the Company. The division's sales to
Celotex, whose business is cyclical and dependent on the level of
national housing starts, increased by 7% over previous year's
volumes. Celotex and its parent company Jim Walters Corporation,
have been operating under Chapter 11 bankruptcy since October,
1990. The bankruptcy stems from potential asbestos claims.
Approximately $132,000 was due the Cody division prior to the
bankruptcy filing. During 1995 the division increased its
allowance for uncollectible accounts to $52,000. Celotex has filed
a plan for reorganization. On July 12, 1996, a joint Plan of
Reorganization was filed by Celotex. The Bankruptcy Court has also
scheduled a confirmation hearing on the Plans to begin October 7,
1996. If the Plan is confirmed, the distribution will equal
between 94% and 95% of the principal amount of the claim and
distribution could be made prior to the end of 1996.
No assurance can be given that Celotex will continue to be a
significant customer of the Cody division.
The Cody division's primary transportation customer is
Interenergy Corporation, a regional aggregator, producer and
marketer of gas and the division's primary supplier of natural gas.
The parameters of the transportation tariff (currently between $.08
and $.30 per Mcf) are established by the WPSC. Agreements between
the Company and the customer are negotiated periodically within the
parameters.
The division's revenues are generated under regulated tariffs
that are
designed to recover a base cost of gas, administrative and
operating expenses and provide sufficient return to cover interest
and profit. The division also services customers under separate
contract rates that were individually approved by the WPSC. The
division's tariffs include a purchased gas adjustment clause which
allows an adjustment of rates charged to customers in order to
recover changes in gas costs from base gas costs. A Wyoming
statute permits the WPSC to allow gas utilities to retain 10% of
its cost of gas savings over a base period level. In fiscal 1996
this gas cost incentive improved gross margin for the division by
approximately $139,000. The amount of gas cost incentive if any,
fluctuates with the market price of natural gas.
The Cody division's last general rate order was effective in
1989. The Company does not contemplate filing an application for a
general rate increase for the division in the foreseeable future.
The division's allowed return on common equity on normalized
earnings, calculated in accordance with the WPSC order, has been
13.01% since the last general rate order.
The Cody division has a five-year agreement with Interenergy
Corporation, a regional aggregator, producer and marketer of gas,
to supply natural gas to the division. The contract has been
renewed and renegotiated annually since 1989. The contract
requires Interenergy to deliver gas to various points on the
division's transmission system. Most of the gas purchased by the
division is transported on the division's own transportation system
and the balance is transported on Interenergy's transportation
system. The division also has several small supply contracts with
small producers in the Cody transportation network. (The
division's service area is located in a gas producing region.) In
addition, the division has a backup contract to purchase natural
gas from Coastal Gas Marketing, but has never purchased gas under
this contract.
The Cody division does not own storage facilities, however
has contracted with a gas supply company in fiscal 1996 for storage
capacity of approximately 500,000 Mcf of natural gas to allow more
flexibility in the timing of its gas purchases. Historically, the
division has been able to purchase gas from its suppliers to meet
peak demands.
During 1996, the Company was a party to gas financial swap
agreements for its regulated operations, including the Great Falls
and Cody divisions (see detail explanation under the Great Falls
division).
Broken Bow Division
The Broken Bow division is involved in the regulated
distribution of propane in the Payson, Arizona area. The division
was formed following the Company's acquisition of Broken Bow Gas's
underground propane vapor distribution system in January 1993. The
acquisition was effective as of November 1, 1992. The service area
of the Broken Bow division includes approximately 575 square miles
and has a population base of approximately 30,000. As of June 30,
1996, the Broken Bow division provided service to approximately
4,000 customers, including approximately 3,500 residential
customers and approximately 500 commercial customers. The Broken Bow
division's operations are subject to
regulation by the Arizona Corporation Commission, which regulates
rates, adequacy of service, issuance of securities and other
matters. The Broken Bow division's properties include
approximately 90 miles of underground distribution pipeline,
propane storage facilities and an office building leased from
Petrogas, an affiliated bulk propane distributor in the Payson
area. The division purchases its propane supplies from Petrogas
under terms reviewed periodically by the Arizona Corporation
Commission.
In September, 1996, the Broken Bow division will file a
general rate increase with the Arizona Corporation Commission,
which reflects increased operating, maintenance and depreciation
costs as well as a change in the cost of capital. The Arizona
Corporation Commission does not provide interim rate relief and the
earliest the rate case would be heard is one year from the filing,
in Fiscal 1998 or in September, 1997.
Non-Utility Operations
The Company conducts its non-utility operations through its
three wholly-owned subsidiaries: RMF, EWR (formerly Vesta) and
Montana Sun. RMF is engaged in the bulk sale of propane
through its three divisions: Wyo L-P, which serves Northwestern
Wyoming and Cooke City, Montana, Petrogas, which serves the
Payson, Arizona area and Missouri River Propane, which sells bulk
propane in the Cascade area, immediately southwest of Great Falls,
Montana. RMF acquired assets and operations comprising its Wyo L-P
divisions through acquisitions of existing propane distribution
businesses in August 1991 and May 1992. RMF acquired the assets
and operations of its Petrogas division through an acquisition of
an existing propane distribution business in January 1993. The
aggregate purchase price for RMF's acquisitions were approximately
$2.79 million. RMF had approximately 3,500 customers as of June
30, 1996, of which the Wyo L-P division had approximately 2,500
customers and the Petrogas division and Missouri River Propane had
approximately 1,000 customers. RMF purchases propane from various
suppliers under short-term contracts and on the spot market, and
sells propane to residential and commercial customers, primarily
for use in space heating and cooking. Petrogas also supplies
propane to the Broken Bow division, while Missouri River Propane
supplies propane to Cascade Gas, an underground propane-vapor
system serving the city of Cascade, Montana. For the twelve months
ended June 30, 1996, RMF's revenues (excluding approximately
$1,112,000 sales by Petrogas to the Broken Bow division and
approximately $101,000 sales by Missouri River Propane to Cascade
Gas Company, an operating district of the Great Falls division)
were approximately $3,139,000, of which approximately $2,404,000
was attributable to the Wyo L-P division, $650,000 was attributable
to the Petrogas division and the balance attributable to the
Missouri River Propane division.
On June 28, 1996, Petrogas sold real property, consisting of
land and office and warehouse building, for $525,000 in cash
resulting in a gain of $236,000 in fiscal 1996. Concurrent with
the sale, the Company leased the property back for a period of ten
years at an annual rental of $51,975. Petrogas sub-leases the
property to the Broken Bow division.
On July 1, 1996, the Company entered into a take or pay
propane contract which expires June 30, 1997. The contract
generally requires the Company to purchase all propane quantities
produced by a propane producer in Wyoming (approximately 182,500
gallons per month) tied to the Billings, Montana spot price.
Beginning on September 1, 1996, the Company is a party to two
gas swap agreements, for its nonregulated operations, to hedge
4,400 MMBTU of its daily gas purchases. This contract represents
approximately 92% of the supply received for the Company's
customers who have selected fixed price service. The hedges were
made to minimize the Company's exposure to price fluctuations and
to secure a known margin for the purchase and resale of gas in
marketing activities.
RMF faces competition from other propane distributors and
suppliers of the same fuels that compete with natural gas.
Competition is based primarily on price and there is a high degree
of competition with other propane distributors in the service
areas.
EWR is involved in a small amount of oil and gas development
and the marketing of gas in Montana and Wyoming. EWR currently has
varying working interests in four oil and nine gas producing
properties. Volumes of oil and gas produced are not significant
and did not result in significant net income in fiscal 1996. The
Company believes that the ordering of MPC to provide open access on
its gas transportation system in Montana presents an opportunity
for EWR to do business as a broker of natural gas using the MPC and
other systems. EWR presently has eight customers for those
services, plus the State of Montana, which includes several units
of the State of Montana. EWR also purchased an underground storage
facility near Havre, Montana and leased additional storage capacity
from Montana Power Company, to allow more flexibility in the timing
of its gas purchases.
Montana Sun owns a commercial real estate property and a
parcel of undeveloped land in Great Falls, Montana. Montana Sun
leases the commercial property to a federal governmental agency.
The Company is presently seeking to sell the commercial property,
but is otherwise inactive at this time.
Additional information with respect to the nonutility
operation of the Company is set forth in Notes 1, 6, 9 and 10 to
the Company's consolidated financial statements.
Capital Expenditures
The Company generally conducts a continuing construction
program and has completed expansion of its gas pipeline in areas
around metropolitan Great Falls as well as an underground propane-
vapor system in the town of Cascade, Montana, southwest of Great
Falls. In the Cody division, expansion of the gas system in that
area was completed and in the Broken Bow division, construction is
still being completed, as a result of growth. The Company has
completed construction of a natural gas system in West Yellowstone,
Montana started in May of 1994. West Yellowstone Gas Company
transports liquefied natural gas from southwestern Wyoming for
revaporization into the system; operations started in May of 1995.
The Great Falls division has also added an underground propane
vapor system to service customers in the Hardy area, 30 miles
southwest of Great Falls, Montana. In fiscal years 1996, 1995 and
1994, total capital expenditures were $4,590,608, $4,705,868 and
$2,626,221 respectively.
Other Business Information
The principal competition faced by the Company in its
distribution of natural gas is from other suppliers of competitive
fuels, including electricity, oil, propane and coal. The principal
competition faced by the Company in its distribution and sales of
propane is from other propane distributors and suppliers of the
same energy sources that compete with natural gas and electricity.
Competition is based primarily on price and there is a high degree
of competition with other propane distributors in the service
areas. The principal considerations affecting a customer's
selection of utility gas service over competing energy sources
include service, price, equipment costs, reliability and ease of
delivery. In addition, the type of equipment already installed in
businesses and residences significantly affects the customer's
choice of energy. However, where previously installed equipment is
not an issue, households in recent years have consistently
preferred the installation of gas heat. The Great Falls division's
statistics indicate that approximately 95% of the houses and
businesses in the service area use natural gas for space heating
fuel, approximately 91% use gas for water heating and approximately
99% of the new homes built on or near the Great Falls division's
service mains in recent years have selected natural gas as their
energy source. The Cody division believes that approximately 95%
of the houses and businesses in the service area use natural gas
for space heating fuel, approximately 90% use gas for water
heating, and approximately 99% of the new homes built on or near
the division's service mains in recent years have selected gas as
their energy source. The Broken Bow division concludes that
approximately 59% of the houses and businesses adjacent to the
division's distribution pipeline use the division's propane for
space heating or water heating.
The Company had approximately 141 employees as of June 30,
1996, of which 125 were full-time. Twenty-six of the employees
were with the Cody division, 22 employees were with RMF and 15 were
with the Broken Bow division. The other 78 employees were with the
Great Falls division, including Cascade Gas and West Yellowstone
Gas and at corporate headquarters. Approximately 13 full-time and
3 seasonal hourly employees in the Great Falls division are
represented by two collective bargaining units, the United
Association of Journeymen and Apprentices of the Plumbing and
Pipefitting Industry of the USA and the Construction and General
Laborer's Union. The Company's two labor contracts were
renegotiated through April 30, 1997. The Company considers its
relationship with its employees to be satisfactory.
The Company has instituted an extensive customer-related
energy conservation program which encourages the efficient use of
energy through proper conservation measures. The Company provides
inspection services to homeowners and businesses and recommends
appropriate conservation projects. The Company also is
concentrating on increasing load in existing residential structures
by the addition of gas appliances and conversion of homes with all
electric appliances. The Company has started a natural gas and
propane appliance showroom to aggressively market gas appliances in
the Great Falls and Cody divisions with future plans to market
appliances in the propane offices of the Company.
In addition, the Company encourages converting commercial
food service equipment to natural gas through a developed
commercial equipment efficiency program, both in Great Falls and
Cody. The Company's field marketing personnel are paid through an
incentive plan geared to how much load they add to the system.
Since 1982 the Company has conducted strategic corporate
planning at about three year intervals. It uses outside resources
to bring light to new areas of potential development and defines
key results areas for the organization to focus on for the next
three years. This has been a effective process for the
organization.
The Company has implemented management and employee incentive
programs tied to bottom-line performance of the corporation.
Officers and management, down to first-line supervisors,
participate in a pay-for-performance program. If the Company meets
a minimum earnings per share for the consolidated corporation for
25% and a minimum rank on the comparison of utilities published by
Edward D. Jones & Co. for an additional 25% funding and individual
divisions meet their allocated consolidated earnings per share for
the other 50%, or in the case of senior officers and corporate
staff the corporation meets a minimum rank on the comparison of
utilities published by Edward D. Jones & Co. for the other 50%;
then the incentive pool is triggered; then whether the incentive
is actually earned depends on whether the individuals in the
program achieve individual specific performance objectives set at
the beginning of the year. Incentives vary from .8% on up of base
wages. All officers and eligible employees participate in the
Company's Employee Stock Ownership Plan, in which payout is based
on pre-tax earnings of the Company and approved by the Board each
year.
The Company has implemented a deferred compensation plan for
directors, which provides a deferral of directors' fees and
incentive awards until such time as the director ceases to be a
director of the Company by retirement or otherwise. The plan
provides an incentive compensation based on the total fees earned
by each Director for that year multiplied by the highest percentage
incentive award for that year to any employee under the Company's
management incentive compensation plan, which In fiscal 1996 was
38.91%. Fees (either cash or stock) and incentive compensation
(stock only) can be received either currently, as they are earned,
or on a deferred basis. Elections to defer receipts are subject to
timing requirements. The deferred compensation plan for directors
is subject to approval of the shareholders at the Annual
Shareholders Meeting of Energy West, Incorporated November 21,
1996.
Item 2. - Properties
The Company owns all of its properties in Great Falls,
including an office building, a service and operating center,
regulating stations and its distribution system. In Wyoming, the
Company owns its distribution system, including 167 miles of
transmission pipeline. Office and service buildings for the Cody
division are leased under long-term leases. RMF owns buildings,
propane tanks and related metering and regulating equipment for the
Wyoming and Arizona propane distribution operations. The Company
owns mains and service lines for the Broken Bow division's propane
vapor distribution operation in Payson, Arizona. In June, 1996,
Petrogas a division of RMF sold its buildings and improvements in
Payson, Arizona to an outside party and signed a lease agreement
with the same party for a period of ten (10) years, with a
provision of extension of the lease for two successive five (5)
year periods. RMF has the right of first refusal to purchase the
property back at the end of the initial term or either extension
term. The Broken Bow division leases building space from Petrogas
for its propane vapor distribution operations in Payson.
Environmental Matters
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 and to store certain equipment and materials and
supplies. 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. After management became aware of the
potential of contamination on this site, it initiated an assessment
of the property through the assistance of a qualified consulting
firm. That assessment revealed the presence of certain hazardous
material in quantities exceeding tolerances established for such
material by regulatory authorities. After making required
notifications of that condition to federal and state regulatory
authorities, a report summarizing the assessment was filed with the
State of Montana Department of Health and Environmental Science
(MDHES). Subsequent to that submittal a meeting was held with a
representative of the MDHES wherein a process was agreed upon to
arrive at appropriate remediation of the site. The costs incurred
by the Company to date approximate $320,000 and have been
capitalized as other deferred charges. Until further work is done
regarding remediation alternatives, no further estimate of the
costs of remediation can be made. However, management believes
that regardless of the alternative selected, the costs incurred
will not materially affect the Company's financial position.
The Company received formal approval from MPSC to recover the
costs associated with the cleanup of this site. The Company will
begin recovery of costs incurred at June 30, 1995 over two years
through a surcharge in billing rates effective July 1, 1995.
Management intends to request that future costs be recovered over a
similar time period. The total recoveries collected through June
30, 1996 is $214,000. Item 3. - Legal Proceedings
The Company is not a party to any litigation other than that
arising out of the normal course of business. In the aggregate,
such litigation is not considered material in relation to the
financial position of the Company.
Item 4. - Submission of Matters to a Vote of Security Holders
None
Executive Officers and Directors of the Company
The following table sets forth the names and ages of, and the
positions and offices within the Company presently held by, all
directors and executive officers of the Company:
Name Age Position
Larry D. Geske 57 President and Director since
1978; appointed Chief
Executive Officer in 1979
Edward J. Bernica 46 Vice-President and Chief
Financial Officer since
October, 1994
William J. Quast 57 Vice-President, Treasurer,
Controller and Assistant
Secretary since 1988, has been
Vice-President, Secretary and
Treasurer since 1987,
Assistant Vice-President,
Secretary Controller and
Assistant Treasurer since
1983, Secretary since 1982 and
an Assistant Treasurer of the
Company since 1979
Tim A. Good 51 Vice-President and Manager of
the CGD since 1988; General
Manager of Cody Gas Company, a
Division of the Coastal
Corporation, for five years
prior to the acquisition of
CGD by the Company
Sheila M. Rice 49 Vice-President and Division
Manager of the Great Falls
division since April, 1993;
Vice-President Marketing and
Consumer Services since 1988
and has been Vice-President,
Marketing and Consumer Relations
since 1987; was Assistant
Vice-President for Marketing and
Customer Relations 1983-1987
Name Age Position
John C. Allen 45 Vice-President of Human Resources
and Corporate Counsel and
Secretary since 1992; Corporate
Counsel and Secretary since 1988;
Counsel and Assistant Secretary
from November 1986 to 1988 and
Corporate Attorney to the Company
from March 1986 to November 1986
Lynn F. Hardin 48 Assistant Vice-President of Gas
Supply for the Great Falls
division since June 1, 1993;
Assistant Vice-President of
Division Administration since
1989; was manager of Accounting
and Administration for Cody Gas
Company, a Division of The Coastal
Corporation, for five years prior
to acquisition of CGD by the Company
Earl L. Terwilliger, Jr. 48 Assistant Vice-President for
Market Development for the Great
Falls division since 1990; has been
Assistant Vice-President of Customer
Accounting and Credit since 1988
Ian B. Davidson 64 Director since 1969
Timothy J. Moylan (deceased) 40 Director since 1991
Thomas N. McGowen, Jr. 70 Director since 1978
G. Montgomery Mitchell 68 Director since 1984
John Reichel 70 Director since 1984
David A. Flitner 63 Director since 1988
Larry D. Geske has been employed by the Company since 1975 and
became President and Director of the Company in 1978. In 1979, Mr.
Geske was appointed to the position of Chief Executive Officer. In
addition, Mr. Geske is a past Director of First Interstate Bank of
Great Falls (parent Company is First Interstate Bank Corporation)
and is a Director of the Great Falls Capital Corporation and the
Great Falls Dodgers Baseball Club. He is also a Director of the
American Gas Association's Board. Mr. Geske, prior to service with
the Company, was a Field Engineer "A" with NIGAS in Aurora,
Illinois and a Senior Consultant with Stone and Webster Management
Consultants, Inc. in New York.
Mr. Edward J. Bernica has been employed by the Company since
October 1994 and became Vice-President and Chief Financial Officer
in November, 1994. Mr. Bernica, prior to service with the Company,
was Director of Finance at U. S. West in Englewood, Colorado and
prior to that, was employed by ENRON Corporation in Omaha, Nebraska
as Director-Financial Analysis and Planning
William J. Quast has been Vice-President, Treasurer, Controller and
Assistant Secretary since 1988. He has served as Vice-President,
Secretary and Treasurer since 1987 and as Assistant Vice-President,
Secretary, Controller and Assistant Treasurer since 1983. He has
served as Secretary of the Company since 1982 and as Assistant
Treasurer of the Company since 1979. Mr. Quast was re-elected in
1993 and served as Trustee for the Great Falls Public School system
for most of fiscal 1996. Mr. Quast, prior to service with the
Company, was an accounting manager for Wyton Oil and Gas Company, a
multi-state propane distributor headquartered in Denver, Colorado
and was Treasurer for D. A. Davidson & Co. in Great Falls, Montana.
Tim A. Good has been Vice-President and Division Manager of the CGD
since 1988. He served as General Manager of Cody Gas Company, a
Division of The Coastal Corporation for five years prior to the
acquisition of the Cody Gas Company by EWST in 1988.
Sheila M. Rice has been Vice-President and Division Manager of the
Great Falls division since April, 1993. Prior to that, she was
Vice-President of Marketing and Consumer Services since 1988. She
served as Vice-President, Marketing and Consumer Relations from
1987 to 1988, Assistant Vice-President for Marketing/Customer
Relations from 1983 to 1987 and as Consumer Service
Representative/Conservation Specialist for the Company from 1979 to
1983.
John C. Allen has been Vice-President of Human Resources and
Corporate Counsel since 1992 and previously served as Corporate
Counsel and Secretary of the Company since 1988. He served as
Corporate Counsel and Assistant Secretary from November 1986 until
1988 and as Corporate Attorney of the Company (March, 1986-November
1986). From 1979 to 1986, Mr. Allen was employed as a staff
attorney with the Montana Consumer Counsel.
Lynn F. Hardin has been Assistant Vice-President of Gas Supply
since June 1, 1993. Prior to that, he was Assistant Vice-President
of Division Administration since 1989. He was Manager of
Accounting and Administration of Cody Gas Company, a Division of
The Coastal Corporation for five years prior to the acquisition of
the Cody Gas Company by the Company in 1988.
Earl L. Terwilliger, Jr. has been Assistant Vice-President for
Market Development since 1990. He served as Assistant Vice-
President of Customer Accounting and Credit from 1988 to 1990 and
Manager of Customer Accounting and Credit for the previous four
years. Prior to that time, Mr. Terwilliger was office manager.
Ian B. Davidson has been a Director of the Company since 1969. Mr.
Davidson has been Chairman and Chief Executive Officer of D. A.
Davidson & Co. since October, 1970. Mr. Davidson also is a
Director of Plum Creek Management Company, a member of the 1996
Nominating Committee for District 3 of the National Association of
Securities Dealers and a member of the C. M. Russell Museum
Advisory Board.
Timothy J. Moylan (deceased) was a Director of the Company since
1991. On August 1, 1996, Mr. Moylan became deceased, due to a
drowning accident, while vacationing in Mexico. Mr. Moylan was
President of the BelRad Group, South Pacific, Inc., and Natural
Resources Group, Inc. Mr. Dean South, a former Vice-President of
Western Operation of Heritage Propane Corporation, was appointed to
fill the unexpired term of Mr. Moylan on August 29, 1996.
Thomas N. McGowen, Jr. has been a Director of the Company since
1978. Mr. McGowen is past President and Chairman of the Board of
Pabst Brewing Company. Mr. McGowen is a Director of Federal Signal
Corporation and Ribi Immunochem Corporation.
G. Montgomery Mitchell has been a Director of the Company since
1984. Mr. Mitchell was a Senior Vice-President and Director of
Stone and Webster Management Consultants, Inc. until his retirement
in 1993. Mr. Mitchell was responsible for Stone and Webster's
services provided to natural gas utility and pipeline companies and
managed their Houston, Texas office. He is presently retained by
Stone and Webster for advisory and senior consulting services. Mr.
Mitchell also is a Director of Mobile Gas Service Corporation
(Alabama).
John Reichel has been a Director of the Company since 1984. Prior
to his retirement he was Managing Director of the Montana Region of
First Bank System, Inc. From 1983 to 1985, Mr. Reichel was
Managing Director of the Western Montana Region of First Bank
System, Inc. and from 1975 to 1983 served as President of First
Bank Great Falls. Mr. Reichel retired from First Bank System, Inc.
in 1987. Mr. Reichel has elected not to run for re-election as a
Director in November, 1996.
David A. Flitner has been a Director of the Company since 1988.
Mr. Flitner is owner of the Flitner Ranch and Dave Flitner Packing
and Outfitting (Wyoming Companies) and Hideout Adventures, Inc., a
recreational enterprise.
PART II
Item 5. - Market for registrant's common equity and related
stockholder matters
Common Stock Prices and Dividend Comparison - Fiscal 1995 and
Shares of the Company's Class A Common Stock are traded in the
over-the-counter market on the NASDAQ (National Association of
Securities Dealers Automated Quotation) system-symbol: EWST. The
over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not
necessarily represent the actual transactions. Prices are shown as
a result of a 2-for-1 stock split, effective June 24, 1994.
Price Range - Fiscal 1996 High Low
First Quarter 8 1/4 7 3/4
Second Quarter 9 1/2 7 3/4
Third Quarter 9 3/4 7 3/4
Fourth Quarter 9 8
Year 9 3/4 7 3/4
Price Range - Fiscal 1995 High Low
First Quarter 9 1/4 8 1/2
Second Quarter 9 1/4 8
Third Quarter 8 1/2 7 1/2
Fourth Quarter 8 1/4 7 1/2
Year 9 1/4 7 1/2
Dividends: The Board of Directors normally consider approving
common stock dividends for payments in March, June, September and
January. Quarterly dividend payments per common share for Fiscal
Years 1996 and 1995 were:
Fiscal 1996 Fiscal 1995
September $.1000 $.0950
January $.1000 $.0950
March $.1000 $.0950
June $.1050 $.1000
Item 6. - Selected Financial Data
Selected Financial Data on page 8 of the 1996 Annual Report to
Shareholders is incorporated herein by reference.
Selected Financial Data (1996-1992)
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Operating Results:
Operating Revenue $31,318 $30,548 $29,347 $27,629 $22,951
Operating Expenses
Gas Purchased 18,724 18,616 18,410 17,232 14,935
General and Administrative 6,924 6,380 5,979 5,454 4,399
Maintenance 409 306 331 376 259
Depreciation and Amortization 1,667 1,559 1,464 1,286 976
Taxes Other than Income 629 595 527 540 464
Total Operating Expenses 28,353 27,456 26,711 24,888 21,033
Operating Income 2,965 3,092 2,636 2,741 1,918
Gain on Sale Leaseback 236 - - - -
Other Income - Net 215 175 199 139 113
Income Before Interest Charges 3,416 3,267 2,835 2,880 2,031
Total Interest Charges 1,243 938 962 959 815
Income Before Income Taxes 2,173 2,329 1,873 1,921 1,216
Income Taxes 766 816 614 637 384
Income Before a Cumulative Effect of a Change
In Accounting Principle 1,407 1,513 1,259 1,284 832
Cumulative Effect of Change as July 1, 1993
From Adoption of Fasb 109 0 0 92 - -
Net Income $1,407 $1,513 $1,351 $1,284 $832
Eps Before Cumulative Effect of Fasb 109 0.61 0.68 0.57 0.59 0.39
Earnings per Common Share 0.61 0.68 0.61 0.59 0.39
Dividends per Common Share 0.41 0.39 0.36 0.32 0.31
Weighted Average Common Shares
Outstanding 2,298,734 2,235,413 2,205,050 2,171,448 2,159,092
At Year End:
Current Assets 9,092 6,263 5,270 6,761 4,232
Total Assets 37,495 32,375 28,786 28,036 22,375
Current Liabilities 11,088 6,786 4,193 4,881 4,806
Total Long-Term Obligations 10,046 10,435 10,718 11,050 6,735
Total Stockholders' Equity 11,540 10,533 9,393 8,733 7,946
Total Capitalization $21,586 $20,968 $20,111 $19,783 $14,681
</TABLE>
Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Consolidated Operations
Management's Discussion and Analysis of Financial Condition and
Results of Operations is presented on pages 9 through 17 of the
1996 Annual Report to Shareholders and is incorporated herein by
reference.
Results of Consolidated Operations
Fiscal 1996 Compared to Fiscal 1995
Net Income
The Company's net income for fiscal 1996 was $1,407,000
compared to $1,513,000 in fiscal 1995 a decrease of $106,000 or 7% from
1995. Net income in Fiscal 1996 included a gain on the sale of assets of
approximately $236,000. Earnings per share was $.61 in fiscal 1996
versus $.68 in fiscal 1995 and the Company increased its dividend from
$.39 annually in fiscal 1995 to $.41 in Fiscal 1996. The Company has
constructed a Liquid Natural Gas facility in West Yellowstone, Montana,
serving natural gas to this community for the first time in Fiscal 1996
and the Company has reflected the first year of these operations in the
Company's financial statements. The following summary describes the
components of the change between years.
Revenue
Operating revenues increased from $30,548,000 in fiscal
1995 to $31,318,000 in fiscal 1996 or 3% primarily due to increased gas
trading volumes in the Company's gas marketing entity Energy West
Resources (EWR). Regulated revenues remained relatively flat as a result
of a rate decrease in the Great Falls division offset by: colder weather
this year than one year ago in both Great Falls and Cody divisions,
increased transport revenues in Cody and the inclusion of West
Yellowstone revenues.
Nonregulated Bulk Propane revenues increased approximately
12% in the areas served by Wyo L-P gas in Wyoming, Missouri River
Propane in Montana and Petrogas in Arizona. Both Missouri River Propane
and Petrogas, sell propane to related regulated utilities Cascade Gas
Company and Broken Bow Gas Company, respectively. Operating revenues in
EWR increased by 34% due to gas trading revenues as a result of customer
growth and an increase in volumes.
Gross Margin
Gross margins (operating revenues less cost of gas
purchased and cost of gas trading) increased approximately $664,000 or
6% in 1996. Regulatory gross margins increased approximately 8% because
of higher sales volumes in the Great Falls division and increased
transport volumes in the Cody division. In addition, margins of
approximately $142,000 for West Yellowstone are reflected in 1996 this
fiscal year. Nonregulated gross margins decreased approximately $84,000,
primarily due to smaller margins in Energy West Resources gas marketing
operations.
Other Expenses
Operating expenses (excluding cost of gas purchased and
gas trading) increased approximately $791,000 or 9% in 1996. The primary
reason for this increase was due to normal inflationary trends of
approximately $265,000, the addition of West Yellowstone s utility
operating expenses of approximately $266,000 this fiscal year, growth of
the Company's operations of approximately $169,000 and lower capitalized
payroll of approximately $121,000 since the completion of the West
Yellowstone system.
As a result of the above changes, operating income
decreased 4% from $3,092,000 in 1995 to $2,965,000 in 1996. Total
interest expense for the Company was $1,243,000 for fiscal 1996, up from
$939,000 in fiscal 1995, due to higher short-term borrowing used in
expansion of the Company's utility systems. Other additions to or
deductions from operating income in determining net income remained
comparable between the two years.
Operating Results of the Company's Utility Operations
Years Ended June 30
1996 1995 1994
(in thousands)
Operating revenues:
Great Falls division $15,737 $16,812 $16,900
Cody division 5,940 5,609 5,813
Broken Bow division 1,995 1,942 1,708
Total operating revenues 23,672 24,363 24,421
Gas purchased 13,646 15,077 15,667
Gross Margin 10,026 9,286 8,754
Operating expenses 7,810 7,136 6,673
Interest charges
[see note below] 1,145 908 895
Other utility (income)
expense-net (118) (126) (106)
Federal and state
income taxes 385 454 410
Net utility income $ 804 $ 914 $ 882
[interest charges for utility and non-utility operations do not equal total
interest charges for the Company, due to eliminating entries between entities.]
Fiscal 1995 Compared to Fiscal 1994
Net Income
The Company's net income for fiscal 1995 was $1,513,000
compared to $1,351,000 in fiscal 1994, an increase of $162,000 or 12%
over 1994. However, fiscal 1994 net income included an accounting change
of $92,000 due to the cumulative effect on prior years of the change in
accounting for income taxes. Before the effect of the accounting change,
net income increased $254,000 or 20% in 1995 over 1994. The notes to the
financial statements further describe this accounting change. The
following summary describes the components of the change between years.
Revenue
Operating revenues increased approximately 4%, primarily
due to gas trading revenues; regulated utility revenues declined
slightly as compared to the prior year, representing 76% of total
revenues in 1995 versus 80% in fiscal 1994. Nonregulated revenues
increased slightly due to growth in the nonregulated Arizona customer
base served by the Petrogas division.
Gross Margin
Gross margins (operating revenues less cost of gas
purchased and cost of gas trading) increased approximately $994,000 in
1995. Regulatory gross margins increased approximately $530,000, due to
the Great Falls and Broken Bow divisions. The Great Falls division
realized higher margins due to a timing difference in purchased gas
costs. The Broken Bow gross margin increased due to customer growth in
the Payson, Arizona area. The Cody gross margins remained relatively
unchanged, even though sales were down. Nonregulated gross margins
increased approximately $464,000, primarily due to additional gas
trading activity.
Other Expenses
Operating expenses (excluding cost of gas sales) increased
approximately $538,000 in 1995. The primary reason for this increase was
increased depreciation and amortization of approximately $95,000
reflecting the addition or acquisition of property, plant and equipment,
while the remaining increase was due to inflation and additional
personnel required in the growing operations of the Company.
As a result of the above changes in gross margins and
offsetting increases in operation expenses, depreciation and
amortization, operating income increased 17% from $2,636,000 in 1994 to
$3,092,000 in 1995. Total interest expense for the Company was approx
imately $939,000 for fiscal 1995, down slightly from $962,000 in fiscal
1994. Other additions to or deductions from operating income in
determining net income remained comparable between the two years.
Fiscal 1996 Compared to Fiscal 1995
Revenues and Gross Margins
Utility operating revenues in fiscal 1996 were
approximately $23,672,000 compared to $24,363,000 in fiscal 1995. Gross
margin, which is defined as operating revenues less gas purchased, was
approximately $10,026,000 for fiscal 1996 compared to approximately
$9,286,000 in fiscal 1995.
Overall revenues decreased from fiscal 1995 due primarily
to a $250,000 rate decrease in the Great Falls division in Montana,
effective July 1, 1995. In addition, Malmstrom AFB became a transport
customer of the Great Falls division in Fiscal 1996, further reducing
operating revenues. Energy West Resources sold natural gas to Malmstrom
AFB in Fiscal 1996. This decrease in rates and the Malmstrom change to
transport was tempered by colder weather this year than one year ago in
all utility divisions and recognition of West Yellowstone revenues this
year in this start-up operation. While utility revenues decreased from
fiscal 1995, margins increased approximately 8% for fiscal 1996,
primarily due to customer growth and colder weather than one year ago in
the Great Falls and Cody divisions and the addition of West
Yellowstone s margins in fiscal 1996. The winter heating season in the
Great Falls division in fiscal 1996 was approximately 9% colder than
fiscal 1995 and 10% colder than normal (i.e., the average temperature
during the preceding 30 years). The winter heating season in the Cody
division was approximately 5% colder than fiscal 1995, and very close to
normal. The Broken Bow division experienced an 18% warmer period than
1995 and 15% warmer period than normal. However, gross margins stayed
relatively flat due to customer growth.
Operating Expenses
Utility operating expenses, exclusive of the cost of gas
purchased and federal and state income taxes, were approximately
$7,810,000 for fiscal 1996, as compared to approximately $7,136,000 for
fiscal 1995. The 9% increase in the period is due to normal inflationary
trends, less payroll capitalized since the completion of the West
Yellowstone system as well as the addition of West Yellowstone's utility
operating expenses of approximately $266,000.
Interest Charges
Interest charges allocable to the Company's utility
divisions were approximately $1,145,000 in fiscal 1996, as compared to
approximately $908,000 in fiscal 1995. Long term debt interest
decreased, however short-term interest increased primarily due to an
increase in gas in storage, other working capital requirements and to
facility expansion, which has been temporarily financed with short-term
debt.
Income Taxes
State and federal income taxes of the Company's utility
divisions was approximately $385,000 in fiscal 1996, as compared to
approximately $454,000 in fiscal 1995. The 15% decrease was primarily
attributable to a $184,000 decrease in pre-tax income of the utility
divisions.
Fiscal 1995 Compared to Fiscal 1994
Revenues and Gross Margins
Utility operating revenues in fiscal 1995 were $24,363,000
compared to $24,421,000 in fiscal 1994. Gross margin, which is defined
as operating revenues less gas purchased, was $9,286,000 for fiscal 1995
compared to $8,754,000 in fiscal 1994.
Although utility revenues remained unchanged from fiscal
1994, margins increased 6% for fiscal 1995, primarily due to higher
margins experienced by the Great Falls division when compared to margins
experienced in fiscal 1994 as a result of a timing difference in
purchased gas costs booked, as well as higher margins in the Broken Bow
division as a result of growth in the Payson, Arizona area. The winter
heating season in the Great Falls division in fiscal 1995 was
approximately 1% warmer than fiscal 1994 and 1% warmer than normal
(i.e., the average temperature during the preceding 30 years). The
winter heating season in the Cody division was approximately 1% warmer
than fiscal 1994 and 5% warmer than normal. The Broken Bow division
experienced a 14% increase in revenues and a 24% increase in margins, as
a result of growth in the Payson, Arizona area.
Operating Expenses
Utility operating expenses, exclusive of the cost of gas
purchased and federal and state income taxes, were $7,136,000 for fiscal
1995, as compared to $6,673,000 for fiscal 1994. The 7% increase in the
period is due to increased depreciation and amortization, reflecting the
addition or acquisition of property, plant and equipment, while the
remaining increase was due to inflation and additional personnel
required in the growing utility operations of the Company.
Interest Charges
Interest charges allocable to the Company's utility
divisions were $908,000 in fiscal 1995, as compared to $895,000 in
fiscal 1994. Short-term interest charges increased as a result of higher
interest rates compared to a year ago, however this was offset by lower
interest payments on long-term debt, due to repayment of principle.
Income Taxes
State and federal income taxes of the Company's utility
divisions was $454,000 in fiscal 1995, as compared to $410,000 in fiscal
1994. The 11% increase was primarily attributable to a $76,000 increase
in pre-tax income of the utility divisions.
Operating Results of Each of the Company's Non-Utility
Subsidaries
Years Ended June 30,
1996 1995 1994
(in thousands)
Rocky Mountain Fuels (RMF)
Operating revenues $4,352 $3,902 $3,759
Cost of propane 2,540 2,171 2,050
Operating expenses 1,548 1,484 1,399
Other (income) expense-net (64) (33) (67)
Gain on sale lease back (236) 0 0
Interest expense [see note below] 112 87 113
Federal and state income taxes 181 71 85
Cumulative effect on prior years
of change in accounting for
income taxes 4
Net income $ 271 $ 122 $ 183
Energy West Resources (Formerly Vesta-Transenergy)
Operating revenues $ 61 $ 76 $ 77
Gas trading revenue 4,348 3,239 1,965
Operating expenses 201 172 170
Cost of gas trading 3,773 2,500 1,667
Other (income) expense-net (20) (43) (44)
Federal and state income taxes 169 259 94
Cumulative effect on prior years
of change in accounting for
income taxes 42
Net income $ 286 $ 427 $ 197
Montana Sun
Operating revenues $ 97 $ 99 $ 100
Operating expenses 48 47 61
Other (income) expense-net (24) (16) (24)
Interest expense [see note below] 0 (14) (4)
Federal and state income taxes 27 31 26
Cumulative effect on prior years
of change in accounting for
income taxes 46
Net income $ 46 $ 51 $ 87
Total Non-Utility Net Income $ 603 $ 600 $ 467
[interest charges for utility and non-utility operations do
not equal total interest charges for the Company, due to eliminating
entries between entities.]
Non-Utility Operations
Rocky Mountain Fuels
For the fiscal year ended June 30, 1996, Rocky Mountain
Fuels (RMF) generated net income of approximately $271,000 compared to
$122,000 for fiscal 1995. Approximately $140,000 of RMF s increase in
net income for fiscal 1996 was attributable to the Petrogas division in
Arizona, because of a gain on a sale of assets of Petrogas and
approximately $50,000 was due to decreasing depreciation expense in all
of RMF s operating divisions as a result of changing the estimated
useful lives for certain propane properties from twelve and fifteen
years to twenty years, to better reflect their useful lives. Missouri
River Propane and Big Horn Answering Service had a loss for the fiscal
year.
For the fiscal year ended June 30, 1995, RMF generated net
income of $122,000 compared to $183,000 for fiscal 1994. Approximately
$68,000 of RMF s net income for fiscal 1995 was attributable to the Wyo
L-P division and approximately $63,000 was attributable to the Petrogas
division. RMF income decreased because of higher overheads, due to
reallocation from the utility operation and normal inflationary trends
along with higher depreciation. Missouri River Propane and Big Horn
Answering Service account for the balance, which had a net loss for
fiscal 1995.
Energy West Resources (Formerly Vesta - Transenergy)
For fiscal 1996, Energy West Resources (EWR) net income
was approximately $286,000 compared to $427,000 for fiscal 1995,
primarily due to lower margins experienced by its gas marketing
operations. Although margins were lower than 1995, EWR s average margin
is outstanding and sales volumes have increased 34%. EWR expenses were
also higher than 1995 because of higher salaries due to the addition of
new employees and increased direct charges of overhead expenses.
For fiscal 1995, EWR net income was $427,000 compared to
$197,000 for fiscal 1994, primarily due to increased gas marketing
margins. In fiscal 1995, Energy West Resources gross marketing margin
in gas trading activities increased approximately 148% to approximately
$738,000 from $298,000 in fiscal 1994. This increase in margins was
partially offset by the effect of a $42,000 increase to net income in
Fiscal 1994 resulting from adoption of SFAS No.109.
Montana Sun
For fiscal 1996, Montana Sun s net income was
approximately $46,000 as compared to $51,000 for fiscal 1995.
For fiscal 1995, Montana Sun s net income was $51,000 as
compared to $87,000 for fiscal 1994, which had the effect of an
accounting change from adoption of SFAS No. 109.
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. To the extent short-term is used to finance capital
projects it is refinanced with long-term debt or equity when
economically feasible.
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
purchase of gas inventory and capital expenditures are greatest during
the summer. 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 June 30, 1996, the Company had an $11,000,000 bank line
of credit, of which $7,175,000 had been borrowed under the credit
agreement. The short-term borrowings bear interest at the rate of 8% per
annum as of June 30, 1996.
The company generated net cash from operating activities
for fiscal 1996 of approximately $674,000 as compared to $3,709,000 for
fiscal 1995. This change is primarily attributed to the following; an
increase in utility unrecovered gas costs of approximately $1,000,000
due to higher than anticipated gas commodity prices since the last
filing. These costs will be recovered over future rates. An increase in
gas storage of approximately $500,000 over last year due to the Company
taking advantage of relatively low gas prices toward the end of fiscal
year 1996. A $500,000 increase in prepaid gas, and a reduction of
approximately $250,000 in after tax operating income. Cash used in
investing activities was approximately $3,968,000 for fiscal 1996, as
compared to $4,262,000 for fiscal 1995. Capital expenditures for fiscal
1996 were approximately $4,591,000 due to system expansion in Payson,
Arizona and all other areas and continued expansion of the West
Yellowstone system. Partially offsetting these capital expenditures were
proceeds received from a sale lease-back in Payson, Arizona of
approximately $525,000, proceeds from the sale of property, plant and
equipment of $27,000 and proceeds from contributions in
aid-of-construction of approximately $63,000.
The Company generated net cash from operating activities
for fiscal 1995 of approximately $3,709,000 as compared to $2,778,000
for fiscal 1994. This change from fiscal 1994 is attributed to a
$162,000 increase in net income, $249,000 increase in depreciation and
amortization, $92,000 cumulative effect of an accounting change and
other miscellaneous working capital changes, offset by approximately
$302,000 decrease in deferred income taxes. Cash used in investing
activities was approximately $4,262,000 for fiscal 1995, as compared to
$1,817,000 for fiscal 1994. Capital expenditures for fiscal 1995 was
approximately $4,700,000, primarily due to system expansion in all areas
and construction of the West Yellowstone system. Partially offsetting
these capital expenditures were proceeds received from a restricted
deposit from the Series 1992A bonds deposited in a construction fund,
drawn for specific capital projects in the Great Falls division of
approximately $205,000, proceeds from the sale of property, plant and
equipment of $80,000, proceeds from collection of long-term notes
receivable of $79,000 and proceeds from contributions in
aid-of-construction of $81,000.
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 admini-
strative needs. The Company's capital expenditures were approximately
$4.6 million in fiscal 1996 and approximately $4.7 million for fiscal
1995. During fiscal 1996, approximately $1.3 million has been expended
for the construction of the natural gas system in West Yellowstone,
Montana and approximately $1 million had been expended for gas system
expansion projects for new subdivisions in the Broken Bow division s
service area and approximately $350,000 for additions to the office and
the east storage site of Petrogas in Payson, Arizona. Capital
expenditures are expected to be approximately $3.6 million in fiscal
1997, including approximately $1.4 million for continued expansion in
the Broken Bow division, with the balance for maintenance and other
system expansion projects in the Great Falls and Cody divisions. The
Company continues to evaluate opportunities to expand its existing
businesses.
Information on the sources and uses of cash for the
Company is included in the Consolidated Statements of Cash Flows on page
22 of the Company's 1996 Annual Report.
SEC Ratio of Earnings to Fixed Charges
For the twelve months ended June 30, 1996, 1995 and 1994,
the Company's ratio of earnings to fixed charges was 2.42, 2.93 and 2.64
times, respectively. Fixed charges include interest related to long-term
debt, short-term borrowing, certain lease obligations and other current
liabilities.
Inflation
Capital intensive businesses, such as the Company's
natural gas operations, are significantly affected by long-term
inflation. Neither depreciation charges against earnings nor the
rate-making process reflect the replacement cost of utility plant.
However, based on past practices of regulators, these businesses will be
allowed to recover and earn on the actual cost of their investment in
the replacement or upgrade of plant. Although prices for natural gas may
fluctuate, earnings are not impacted because gas cost tracking
procedures semi-annually balance gas costs collected from customers with
the costs of supplying natural gas. The Company believes that the
effects of inflation, at currently anticipated levels, will not
significantly affect results of operations.
Accounting for Income Taxes
In February 1992 the Financial Accounting Standards Board
( FASB ) issued Statement of Financial Accounting Standards ( SFAS ) No.
109, Accounting for Income Taxes. SFAS No.109 retains the current
requirement to record deferred income taxes for temporary differences
that are reported in different years for financial reporting and tax
purposes; however, the methodology for calculating and recording
deferred income taxes has changed. Under the liability method adopted by
SFAS No. 109, deferred tax liabilities or assets are computed using the
tax rate that will be in effect when the temporary differences reverse.
However, the changes in tax rates applied to accumulated deferred income
taxes may not be immediately recognized in operating results by
regulated companies because of rate-making treatment and provisions in
the Tax Reform Act of 1986. Effective July 1, 1993, the Company changed
its method of accounting for income taxes from the deferred method to
the liability method required by SFAS No. 109. As permitted under the
new rules, prior year s financial statements have not been restated. For
regulated operations, the cumulative effect of this change in accounting
method on July 1, 1993 resulted in the recording of a regulatory asset
of approximately $601,000 and a regulatory liability of approximately
$205,000. For nonregulated operations, the cumulative effect of this
change in accounting method on July 1, 1993 was to increase net income
by approximately $92,000.
Postretirement Benefits Other Than Pensions
The Company adopted, effective July 1, 1993, SFAS No. 106,
Employers Accounting for Postretirement Benefits Other Than Pensions.
This standard requires that the projected future cost of providing
postretirement benefits be recognized as an expense as employees render
service rather than when paid. Effective for fiscal year 1994, the
Company modified its plan for these benefits and has elected to pay
eligible retirees (post 65 years of age) $125 per month in lieu of
contracting for health and life insurance benefits. The amount of this
payment is fixed and will not increase with medical trends or inflation.
The Company made a change to the plan, effective July 1, 1996 allowing
pre-65 retirees and their spouses to remain on the same medical plan as
active employees by contributing 125% of the current COBRA rate to
retain this coverage. The increased liability from this change is
$269,200. The Company expects regulators in Montana and Wyoming to allow
recovery of the additional costs associated with the plan change. The
adoption of SFAS No. 106 did not have a significant effect upon results
of operations. See Note 4 to the Consolidated Financial Statement for
additional information.
Environmental Issues
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 and to store certain equipment and materials and
supplies. 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. After management became aware of the potential of
contamination on this site, it initiated an assessment of the property
through the assistance of a qualified consulting firm. That assessment
revealed the presence of certain hazardous material in quantities
exceeding tolerances established for such material by regulatory
authorities. After making required notifications of that condition to
federal and state regulatory authorities, a report summarizing the
assessment was filed with the State of Montana Department of Health and
Environment Science (MDHES). Subsequent to that submittal a meeting was
held with a representative of the MDHES wherein a process was agreed
upon to arrive at appropriate remediation of the site. The costs
incurred by the Company to date approximate $320,000 and have been
capitalized as other deferred charges. Until further work is done
regarding remediation alternative, no further estimate of the costs of
remediation can be made. Management believes that regardless of the
alternative selected, the costs incurred will not materially affect the
Company's financial position.
The Company received formal approval from MPSC to recover
the costs associated with the cleanup of this site. The Company has
begun recovery of costs incurred at June 30, 1995 over two years through
a surcharge in billing rates effective July 1, 1995. The total of
recoveries collected through June 30, 1996 is $214,000. Management
intends to request that future costs be recovered over a similar time
period. The Company cannot give assurance that such costs will be
recovered in that regulatory process.
Subsequent Event
In August, 1995, the Company announced that it had signed a
letter of intent and a definitive agreement to purchase the assets of
Jackson Vangas in Jackson, Wyoming, for approximately $1,000,000, from
Quantum Chemical (Suburban Propane Division) of Whippany, New Jersey.
Jackson Vangas operates a propane vapor system which serves
approximately 500 customers in and around Jackson, Wyoming, a city of
approximately 5,000 people. In December, 1995, the Wyoming Public
Service Commission granted a natural gas franchise to a competing
utility, which now serves electricity in the Jackson Hole area. Since
the definitive agreement is contingent upon the approval of the Wyoming
Public Service Commission to grant ENERGY WEST a natural gas franchise
to serve the Jackson Hole area, that agreement has now become nullified.
The costs of the Jackson project were written off through March 31, 1996
of approximately $113,000, which reduced earnings by approximately $.03
per share.
In June, 1996, the Great Falls division filed a rate
adjustment application with the Montana Public Service Commission of
approximately $386,000, to recover increased gas supply costs, as part
of an annual filing made by the Great Falls division to balance gas
supply costs against gas revenues. This filing does not increase the
Great Falls division s margins.
In July, 1996, the Great Falls division filed a general
rate increase with the Montana Public Service Commission, which reflects
increased operating, maintenance and depreciation costs as well as a
change in the cost of capital. The division has applied for interim rate
relief and the division expects interim relief no later than November,
1996. The Rate Hearing will be held in late Fiscal 1997.
Item 8. - Financial Statements and Supplementary Data
The consolidated financial statements included on pages 18 through
32 of the 1996 Annual Report to Shareholders are incorporated
herein by reference.
Consolidated Quarterly Financial Data on page 17 of the 1996 Annual
Report to Shareholders is incorporated herein by reference.
Item 9. - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not Applicable
PART III
Item 10. - Directors and Executive Officer of the Registrant
Information concerning the directors and executive officers is
included in Part I, on pages 16 through 19. The information
contained under the heading "Election of Directors" in the Proxy
Statement is incorporated herein by reference in response to this
item.
Item 11. - Executive Compensation
The information contained under heading "Executive Compensation" in
the Proxy Statement is incorporated herein by reference in response
to this item.
Item 12. - Security ownership of certain beneficial owners and
management
The information contained under the heading "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is
incorporated herein by reference in response to this item.
Item 13. - Certain relationships and related transactions
The information contained under the heading "Certain Transactions"
in the Proxy Statement is incorporated herein by reference in
response to this item.
PART IV
Item 14. - Exhibits, Financial Statement Schedules and Reports on Form 8K
The following consolidated financial statements of ENERGY WEST INCORPORATED and
Subsidiaries included in the Annual Report of the registrant to its
shareholders for the year ended June 30, 1996, are incorporated by reference
in item 8.
Page No.
(a) 1. Index to Financial Statements
Included in the Annual Report to Shareholders:
Report of Independent Auditors F-1
Consolidated Balance Sheets - June 30, 1996 and 1995 F-2 - F-3
Consolidated Statements of Income - Years ended
June 30, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity - Years ended
June 30, 1996, 1995 and 1994 F-5
Consolidated Statement of Cash Flows - Years ended
June 30, 1996, 1995 and 1994 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-25
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
(a) 3. Exhibits (See Exhibit Index on Page E-1)
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ENERGY WEST INCORPORATED
/S/ Larry D. Geske /s/ William J.Quast
Larry D. Geske, President and William J. Quast
Chief Executive Officer Vice-President,Treasurer,
and Chairman of the Board Controller and Assistant
Secretary
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
/s/ Larry D. Geske 9/27/96
Larry D. Geske President and Chief Executive Date
Officer and Acting Chairman of the Board
/s/ Ian B. Davidson 9/27/96
Ian B. Davidson Director Date
/s/ Thomas N. McGowen, Jr. 9/27/96
Thomas N. McGowen, Jr. Director Date
/s/ G. Montgomery Mitchell 9/27/96
G. Montgomery Mitchell Director Date
/s/ John Reichel 9/27/96
John Reichel Director Date
/s/ David A. Flitner 9/27/96
David A. Flitner Director Date
EXHIBIT INDEX
EXHIBITS
3.1 Restated Articles of Incorporation of the Company, as amended (1)
3.2 Bylaws of the Company, as amended (1)
4.2 Indenture of Trust, dated as of November 1, 1979, relating
to Series 1979 Industrial Development Revenue Bonds (1)
4.3 Loan Agreement, dated as of November 1, 1979, relating to
Series 1979 Industrial Development Revenue Bonds (1)
4.4 Indenture of Trust, dated as of October 1, 1982, relating to
Series 1982 Industrial Development Revenue Bonds (1)
4.5 Loan Agreement, dated as of October 1, 1982, relating to
Series 1982 Industrial Development Revenue Bonds (1)
4.6 First Supplemental Indenture, dated as of December 1, 1985,
relating to Series 1982-A Industrial Development Revenue
bonds (1)
4.7 First Amendment to Loan Agreement, dated as of December 1,
1985, relating to Series 1982-A Industrial Development
Revenue Bonds (1)
10.1 1984 Stock Option Plan (1)
10.2 Employee Stock Ownership Plan Trust Agreement (1)
10.3 PAYSOP Trust Agreement (1)
10.4 Gas Service Contract, dated July 11, 1985, between the
Company and Montana Refining Company (1)
10.5 Demand Promissory Note, dated January 23, 1984, between the
Company and Norwest Bank Great Falls, National Association
(1)
13 Financial Statements and Schedules
22 Subsidiaries of the Registrant (included on page E-3)
24 Consent of Independent Auditors (included on page E-4)
(1) Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 33-1672) which became
effective on January 8, 1986
E-1
EXHIBIT (22) SUBSIDIARIES OF THE REGISTRANT
The voting stock of the following subsidiaries is 100% owned by the
Registrant:
State or Sovereign
Name of Subsidiary of Incorporation
Energy West Resources, Inc. (formerly Vesta, Inc.) Montana
Montana Sun, Inc. Montana
Rocky Mountain Fuels, Inc. Montana
E-3
EXHIBIT 24 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of Energy West Incorporated or our report dated August
15, 1996, included in the 1996 Annual Report to Shareholders of
Energy West Incorporated.
ERNST & YOUNG LLP
Denver, Colorado
August 15, 1996
E-4
Report of Independent Auditors
The Board of Directors
Energy West Incorporated
We have audited the accompanying consolidated balance sheets of
Energy West Incorporated and subsidiaries as of June 30, 1996 and
1995, and the related consolidated statements of income,
stockholders equity, and cash flows for each of the three years
in the period ended June 30, 1996. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Energy West Incorporated and subsidiaries at June 30,
1996 and 1995, and the consolidated results of their operations
and their cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted
accounting principles.
As described in Notes 4 and 5 to the consolidated financial
statements, the Company changed its method of accounting for
postretirement benefits other than pensions and for income taxes,
respectively, in 1994.
Denver, Colorado
August 15, 1996
F-1
*****************************************************************************
Energy West Incorporated and Subsidiaries
Consolidated Balance Sheets
June 30
1996 1995
Assets
Current assets:
Cash and cash equivalents $893,301 $507,450
Temporary cash investments (at cost which
approximates market) - 59,556
Accounts receivable, less allowances for
uncollectible accounts of $208,106 ($191,168
at June 30, 1995) 3,486,328 3,042,603
Natural gas and propane inventory 2,200,778 1,686,704
Materials and supplies 543,316 458,596
Prepayments and other 602,427 59,761
Refundable income tax payments 412,662 241,798
Recoverable costs of gas purchases 953,392 125,410
Deferred income taxes current - 81,398
Total current assets 9,092,204 6,263,276
Investments 12,476 12,476
Notes receivable due after one year 9,190 15,984
Property, plant and equipment 43,919,358 39,697,080
Less accumulated depreciation and amortization 17,829,528 16,146,743
Net property, plant and equipment 26,089,830 23,550,337
Deferred charges:
Net unamortized debt issue costs 974,876 1,042,155
Regulatory assets for income taxes 443,918 519,484
Unrecognized postretirement obligation 332,800 352,380
Other 539,379 618,689
Total deferred charges 2,290,973 2,532,708
Total assets $37,494,673 $32,374,781
F-2
*****************************************************************************
June 30
1996 1995
Capitalization and liabilities
Current liabilities:
Long-term debt due within one year $348,044 $365,833
Notes payable 7,175,000 2,620,000
Accounts payable gas purchases 1,226,508 1,535,736
Accounts payable other 826,885 735,810
Payable to employee benefit plans 508,890 443,430
Accrued vacation 327,897 267,350
Other current liabilities 420,954 817,834
Deferred income taxes current 253,385 -
Total current liabilities 11,087,563 6,785,993
Other:
Deferred income taxes 2,796,084 2,674,928
Deferred investment tax credits 502,841 523,903
Contributions in aid of construction 834,917 771,702
Accumulated postretirement obligation 507,386 467,274
Regulatory liability for income taxes 162,121 176,530
Other 17,799 6,736
Total other 4,821,148 4,621,073
Long-term debt (less amounts due within one year) 10,045,714 10,434,957
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock $.15 par value:
Authorized 1,500,000 shares;
Outstanding none
Common stock $.15 par value:
Authorized 3,500,000 shares;
Outstanding 2,321,314 shares (2,254,138 shares
at June 30, 1995) 348,198 338,121
Capital in excess of par value 2,635,540 2,117,730
Retained earnings 8,556,510 8,076,907
Total stockholders' equity 11,540,248 10,532,758
Total capitalization 21,585,962 20,967,715
Total capitalization and liabilities $37,494,673 $32,374,781
See accompanying notes.
F-3
*****************************************************************************
Energy West Incorporated and Subsidiaries
Consolidated Statements of Income
Year ended June 30
1996 1995 1994
Operating revenue:
Regulated utilities $23,672,186 $24,363,446 $24,421,153
Nonregulated operations 3,297,583 2,946,114 2,961,433
Gas trading 4,348,239 3,238,839 1,964,866
Total operating revenue 31,318,008 30,548,399 29,347,452
Operating expenses:
Gas purchased 14,972,454 16,116,688 16,742,903
Cost of gas trading 3,751,053 2,500,363 1,667,182
Distribution, general and
administrative 6,924,391 6,379,651 5,979,621
Maintenance 408,590 306,077 330,762
Depreciation and amortization 1,667,256 1,558,755 1,464,078
Taxes other than income 629,428 594,569 527,142
Total operating expenses 28,353,172 27,456,103 26,711,688
Operating income 2,964,836 3,092,296 2,635,764
Gain on sale of assets 236,291 - -
Other income, net 214,902 174,878 199,014
Income before interest charges and
income taxes 3,416,029 3,267,174 2,834,778
Interest charges:
Long-term debt 709,872 735,813 741,866
Short-term and other 532,866 202,770 220,317
Total interest charges 1,242,738 938,583 962,183
Income before income taxes 2,173,291 2,328,591 1,872,595
Provision for income taxes 765,925 815,688 613,964
Income before cumulative effect of
change in accounting principle 1,407,366 1,512,903 1,258,631
Cumulative effect on prior years of
change in accounting for income taxes - - 92,365
Net income $1,407,366 $1,512,903 $1,350,996
Income per share of common
equivalent stock:
Income before cumulative effect
of change in accounting principle $.61 $.68 $.57
Cumulative effect of change in
accounting for income taxes - - .04
Net income per common share $.61 $.68 $.61
See accompanying notes.
F-4
*****************************************************************************
Energy West Incorporated and Subsidiaries
Consolidated Statements of Stockholders' Equity
Capital in
Common Excess of Retained
Stock Par Value Earnings Total
Balance at June 30, 1993 $163,456 $1,720,240 $6,849,793 $8,733,489
Exercise of stock options into
3,800 shares of common stock at
$7.13 to $8.19 per share 285 14,977 - 15,262
Sale of 8,293 shares of common
stock at $8.87 per share under
the Company's dividend
reinvestment plan 1,244 72,313 - 73,557
Net income for the year ended
June 30, 1994 - - 1,350,996 1,350,996
Common stock dividend, 2-for-1
stock split 163,737 (163,737) - -
Cash dividends on common
stock - $.36 per share - - (780,342) (780,342)
Balance at June 30, 1994 328,722 1,643,793 7,420,447 9,392,962
Exercise of stock options into
14,410 shares ofcommon stock
at $4.94 to $8.75 per share 2,161 78,318 - 80,479
Sale of 36,720 shares of common
stock at $7.50 to $9.00 per
share under the Company's
dividend reinvestment plan 5,508 293,529 - 299,037
Issuance of 11,535 shares of
common stock to ESOP at estimated
fair value of $9.00 per share 1,730 102,090 - 103,820
Net income for the year ended
June 30, 1995 - - 1,512,903 1,512,903
Cash dividends on common stock
$.385 per share - - (856,443) (856,443)
Balance at June 30, 1995 338,121 2,117,730 8,076,907 10,532,758
Exercise of stock options into
13,680 shares of common stock
at $4.875 to $7.125 per share 2,052 72,918 - 74,970
Sale of 37,611 shares of common
stock at $8.00 to $9.50 per
share under the Company's
dividend reinvestment plan 5,642 320,158 - 325,800
Issuance of 15,889 shares of
common stock to ESOP at estimated
fair value of $8.00 per share 2,383 124,734 - 127,117
Net income for the year ended
June 30, 1996 - - 1,407,366 1,407,366
Cash dividends on common stock
$.405 per share - - (927,763) (927,763)
Balance at June 30, 1996 $348,198 $2,635,540 $8,556,510 $11,540,248
See accompanying notes.
F-5
*****************************************************************************
Energy West Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Year ended June 30
1996 1995 1994
Operating activities
Net income $1,407,366 $1,512,903 $1,350,996
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,833,511 1,777,559 1,529,310
Gain on sale of assets (247,697) (4,174) (25,276)
Investment tax credit (21,062) (21,062) (21,062)
Deferred income taxes 495,105 4,197 306,026
Cumulative effect of change in
accounting method - - 92,365
Changes in operating assets and
liabilities:
Accounts receivable (443,725) (415,072) 92,638
Natural gas and propane
inventory (514,074) (987,081) 506,099
Accounts payable (218,153) 778,999 (616,316)
Recoverable costs of gas
purchases (827,982) 275,556 (134,502)
Prepaid gas (523,212) - -
Other assets and liabilities (393,435) 683,068 (302,662)
Net cash provided by operating
activities 546,642 3,604,893 2,777,616
Investing activities
Construction expenditures (4,590,608) (4,705,868) (2,626,221)
Restricted deposit - 204,550 619,367
Proceeds from sale of assets 552,160 79,749 64,820
Collection of long-term notes
receivable 6,794 78,737 36,526
Proceeds from contributions in aid
of construction 63,215 81,177 88,276
Net cash used in investing activities (3,968,439) (4,261,655) (1,817,232)
F-6
*****************************************************************************
Energy West Incorporated and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended June 30
1996 1995 1994
Financing activities
Proceeds from long-term debt $ - $117,808 $20,000
Debt issuance and reacquisition costs - - (65,000)
Payment of long-term debt (407,032) (335,000) (333,872)
Proceeds from notes payable 20,965,000 19,926,854 17,428,000
Repayment of notes payable (16,410,000) (18,625,000) (17,491,000)
Sale of common stock 74,970 80,479 15,262
Dividends paid (474,846) (453,586) (706,785)
Net cash provided by (used in)
financing activities 3,748,092 711,555 (1,133,395)
Net increase (decrease) in cash and
cash equivalents 326,295 54,793 (173,011)
Cash and cash equivalents at
beginning of year 567,006 512,213 685,224
Cash and cash equivalents at
end of year $893,301 $567,006 $512,213
Supplemental disclosures of cash
flow information:
Cash paid for:
Interest $1,242,035 $942,221 $932,159
Income taxes 498,461 870,327 369,000
Noncash financing activities:
Dividend reinvestment plan 325,800 299,037 73,557
ESOP shares issued 127,117 103,820 -
See accompanying notes.
F-7
*****************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1996
1. Principal Accounting Policies
General
Energy West Incorporated ("the Company") operates principally in a
single business segment as a distributor of natural gas and
propane to residential and commercial customers. Natural gas and
propane vapor distribution operations (regulated utilities) are
regulated by the Montana Public Service Commission ("MPSC"), the
Wyoming Public Service Commission ("WPSC") and the Arizona
Corporation Commission. Accordingly, most of the Company's
accounting policies are subject to the requirements set forth in
the Federal Energy Regulatory Commission's Uniform System of
Accounts. In some cases, because of the rate making process,
these accounting policies differ from those used by nonregulated
operations. Bulk propane distribution is a nonregulated
operation.
Consolidated Subsidiaries
The Company's wholly-owned nonregulated subsidiaries, Energy West
Resources, Inc. ("EWR") (formerly Vesta, Inc.), Montana Sun, Inc.
("Montana Sun") and Rocky Mountain Fuels, Inc. ("RMF"), are
included in the consolidated financial statements. The results of
operations of these subsidiaries constitute all of the Company's
nonregulated operations. All significant intercompany accounts and
transactions have been eliminated in consolidation.
EWR s activities include a gas marketing operation and oil and gas
exploration and development. Its principal assets are capitalized
oil and gas development costs, storage field costs and equipment,
and inventory. EWR currently markets gas to large industrial
customers (businesses using over 60,000 Mcf of natural gas
annually).
Montana Sun's operating activities consist of commercial real
estate development. Its significant assets consist of real estate
held for future sale.
RMF began operations in fiscal 1992 following the Company's
acquisition of the assets and operations of six Wyoming propane
distribution entities. In fiscal 1993 these operations were
expanded through the acquisition of an Arizona propane
distribution entity. Principal assets of RMF include bulk storage
and customer tanks, delivery trucks and related equipment.
F-8
*****************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Principal Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
Natural Gas and Propane Inventory
Natural gas inventory and propane inventory are stated at the
lower of weighted average cost or net realizable value.
Recoverable Costs of Gas Purchases
Differences between the costs of gas approved by regulators in the
Company's rate structure and actual gas costs are accounted for as
a current asset or liability, as applicable. These differences
are recovered or refunded, as applicable, in future periods by
adjustment of the Company's rates.
Property, Plant and Equipment
Additions to property, plant and equipment are recorded at
original cost when placed in service. Depreciation and
amortization are recorded on a straight-line basis over estimated
useful lives or the units-of-production method, as applicable, at
various rates averaging approximately 3.93%, 4.15% and 4.32%
during the years ended June 30, 1996, 1995 and 1994, respectively.
During the fourth quarter of 1996, the estimated useful lives for
certain propane properties were increased from twelve and fifteen
years to twenty years to better reflect their estimated useful
lives. This change in estimate reduced depreciation expense by
approximately $83,000 in 1996.
Oil and Gas Activities
Oil and gas operations are accounted for under the successful
efforts method.
Exploratory drilling costs are capitalized pending determination
of proved reserves; all other exploration costs are expensed. All
development and lease acquisition costs are capitalized.
Provision for depreciation and amortization, including estimated
future
F-9
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Principal Accounting Policies (continued)
dismantlement and restoration costs, is determined on a field-by-
field basis using the units-of-production method. When properties
are sold, the asset cost and related accumulated depreciation and
amortization are eliminated, with any gain or loss reflected in
income.
Gas Trading
The Company's business activities include the buying and selling
of natural gas. The Company recognizes revenue and costs on gas
trading transactions when gas is delivered to the purchaser.
Debt Issuance and Reacquisition Costs
Debt premium, discount and issuance expenses are amortized over
the life of each issue.
Debt reacquisition costs for refinanced debt are amortized over
the remaining life of the new debt.
Consolidated Statements of Cash Flows
For purposes of these statements, all highly liquid investments
with original maturities of three months or less are considered to
be cash equivalents.
Financial Instruments
All of the Company's financial instruments requiring fair value
disclosure were recognized in the consolidated balance sheet as of
June 30, 1996. Except for long-term debt, their carrying values
approximate the estimated fair values. Descriptions of the
methods and assumptions used to reach this conclusion are as
follows:
Cash, temporary cash investments, accounts receivable,
accounts payable, and payable to employee benefit plans:
These financial instruments have short maturities, or are
invested in financial instruments with short maturities.
F-10
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Principal Accounting Policies (continued)
Notes receivable: These notes generally relate to energy
conservation incentive programs, some of which bear favorable
interest rates compared to market for similar risks. However,
due to the relatively small balances of these notes, any
differences between carrying value and fair value are
immaterial.
Notes payable: Represent lines of credit, with maturities of
a year or less, bearing interest at current market rates.
The fair value of the Company's long-term debt, based on quoted
market prices for the same or similar issues, is approximately 99%
of the carrying value.
Earnings Per Share
Earnings per common share were computed based on the weighted
average number of common shares outstanding and common stock
equivalents, if dilutive.
The weighted average number of such shares at June 30 was
2,298,734 in 1996, 2,235,413 in 1995, and 2,205,050 in 1994.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of, effective for financial statements
for fiscal years beginning after December 15, 1995. SFAS No. 121
requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, and
long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of carrying amount or fair
value less cost to sell. SFAS No. 121 also establishes the
procedures for review of recoverablity, and measurement of
impairment if necessary, of long-lived assets and certain
identifiable intangibles to be held and used by an entity. The
financial effects of adopting the new standard are not expected to
be material to the Company's financial position or operations.
F-11
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Principal Accounting Policies (continued)
SFAS No. 123, Accounting for Stock-Based Compensation, was issued
in October 1995. This standard addresses the timing and
measurement of stock-based compensation expense. The Company has
elected to retain the approach of Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees
(the intrinsic value method), for recognizing stock-based expense
in the consolidated financial statements. The Company will adopt
SFAS No. 123 in 1997 with respect to the disclosure requirements
set forth therein for companies retaining the intrinsic value
approach of APB No. 25.
Reclassifications
Certain reclassifications have been made to the fiscal 1995 and
1994 consolidated financial statements to conform to the fiscal
1996 presentation.
2. Notes Payable
At June 30, 1996, the Company maintained a line of credit totaling
$11,000,000 with interest calculated at prime less 1/4 percent. A
total of $7,175,000, $2,620,000 and $1,275,000 had been borrowed
under line of credit agreements at June 30, 1996, 1995, and 1994,
respectively. Borrowing on lines of credit, based upon daily loan
balances, averaged $6,166,380, $2,397,175 and $2,369,671 during
the years ended June 30, 1996, 1995 and 1994, respectively. The
maximum borrowings outstanding on this line at any month end were
$9,415,000, $4,983,000 and $4,267,000 during these same periods.
The daily weighted average interest rate was 8.5%, 8.2% and 6.4%
for the years ended June 30, 1996, 1995 and 1994, respectively.
This line of credit expires January 15, 1997.
Management expects this line of credit to be renewed for another
year.
F-12
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Long-Term Debt Obligations
Long-term debt consists of the following:
June 30
1996 1995
Series 1993 notes payable $ 7,800,000 $ 7,800,000
Industrial development revenue obligations:
Series 1992A 935,000 1,200,000
Series 1992B 1,635,000 1,690,000
Other 23,758 110,790
Total long-term obligations 10,393,758 10,800,790
Less portion due within one year 348,044 365,833
Long-term obligations due after one year $10,045,714 $10,434,957
Series 1993 Notes Payable
On June 24, 1993, the Company issued $7,800,000 of Series 1993
unsecured notes bearing interest at rates ranging from 6.20% to
7.60% (6.20% at June 30, 1996), payable semiannually on June 1 and
December 1 of each year, commencing on December 1, 1993. Maturity
dates begin in 1999 and extend to 2013. At the Company's option,
beginning June 1, 2003, notes maturing subsequent to 2003 may be
redeemed prior to maturity, in whole or part, at redemption prices
declining from 104% to 100% of face value, plus accrued interest.
Industrial Development Revenue Obligations
On September 15, 1992, Cascade County, Montana (the County) issued
two Industrial Development Revenue Obligations, the Series 1992A
Bonds for $1,700,000 and Series 1992B Bonds for $1,800,000. The
Series 1992A and Series 1992B Bonds are unsecured; however, loan
agreements are maintained with the Company in the same amounts.
Both the Series 1992A and Series 1992B Bonds require annual
principal payments on October 1 and semiannual interest payments
on April 1 and October 1 of each year beginning in 1993. The
Series 1992A Bonds have a final maturity in 1999 and bear interest
at rates ranging from 3.25% to 5.30%. The Series 1992B bonds have
a final maturity in 2012 and bear interest at rates ranging from
3.35% to 6.50%.
F-13
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Long-Term Debt Obligations (continued)
Aggregate Annual Maturities
Fiscal Series IDR Obligations Total
Year Ending 1993 Series Series Long-Term
June 30 Notes 1992A 1992B Other Obligations
1997 $- $280,000 $60,000 $8,044 $348,044
1998 - 295,000 60,000 6,959 361,959
1999 165,000 175,000 65,000 8,032 413,032
2000 175,000 185,000 70,000 723 430,723
2001 370,000 - 75,000 - 445,000
Thereafter 7,090,000 - 1,305,000 - 8,395,000
7,800,000 935,000 1,635,000 23,758 10,393,758
Less current portion - 280,000 60,000 8,044 348,044
$7,800,000 $655,000 $1,575,000 $15,714 $10,045,714
The Company's long-term debt obligation agreements contain various
covenants including: limiting total dividends and distributions
made in the immediately preceding 60-month period to aggregate
consolidated net income for such period, restricting senior
indebtedness, limiting asset sales, and maintaining certain
financial debt and interest ratios.
4. Retirement Plans
The Company has a defined contribution pension plan (the Plan)
which covers substantially all of the Company's employees. Under
the Plan, the Company contributes 10% of each participant's
eligible compensation. Total contributions to the Plan for the
years ended June 30, 1996, 1995 and 1994 were $383,018, $336,589
and $279,668, respectively.
The Company adopted, effective July 1, 1993, SFAS No. 106,
Employers Accounting for Postretirement Benefits Other Than
Pensions. This standard requires that the projected future cost
of providing postretirement benefits be recognized as an expense
as employees render service rather than when paid. Effective for
fiscal year 1994, the Company modified its plan for these benefits
and has elected to pay eligible retirees (post-65 years of age)
$125 per month in lieu of contracting for health and life
insurance benefits. The amount of this payment is fixed and will
not increase with medical trends or inflation. The Company's
transition obligation at June 30, 1996 and 1995 was
F-14
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Retirement Plans (continued)
$332,800 and $352,380, respectively, of which $288,600 in 1996 and
$327,400 in 1995 related to the regulated utility operations. The
transition obligation was accrued as a deferred charge and will be
amortized over 20 years. Substantially all of the transition
obligation is for the future cost of benefits to active employees.
The incremental annual increases in consolidated expenses due to
adoption of SFAS No. 106 were $70,900 and $71,200 in fiscal years
1996 and 1995, respectively. Included in these amounts were
$58,100 in 1996 and $62,600 in 1995 relating to regulatory
operations. The MPSC allowed recovery of these costs beginning on
July 1, 1995 for the utility operations in Montana. Management
believes it is probable that its regulators in Wyoming will allow
recovery of these costs based upon recent industry rate decisions
addressing this issue. The Company has established a VEBA trust
fund and is contributing to that trust the annual expense of the
plan. The balance in that trust after benefit payments in fiscal
year 1996 is $61,750.
The Company made a change to the plan, effective July 1, 1996,
allowing pre-65 retirees and their spouses to remain on the same
medical plan as active employees by contributing 125% of the
current COBRA rate to retain this coverage. The increased
liability from this change is $269,200 and has been reflected in
the 1996 financial statements. The Company expects regulators in
Montana and Wyoming to allow recovery of the additional costs
associated with the plan change.
F-15
*****************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Retirement Plans (continued)
The following table presents the amounts recognized at June 30,
1996 and 1995 in the consolidated financial statements.
1996 1995
Accumulated postretirement benefit obligation:
Retirees $128,500 $154,400
Fully eligible active plan participants 80,500 53,700
Other active plan participants 522,900 259,174
$731,900 $467,274
Net periodic postretirement benefit cost:
Service cost $ 19,300 $ 19,400
Interest cost 32,000 32,200
Actual return on plan assets (1,500) -
Amortization of transition obligation 19,600 19,600
Net periodic postretirement benefit cost $ 69,400 $ 71,200
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation at June 30, 1996 was
7.5 percent. The weighted-average annual assumed rate of increase
in the per capita cost of covered benefits (i.e., health care cost
trend rate) is 11.0 percent for the 1996-97 fiscal year and is
assumed to decrease gradually to 5.5 percent after 6 years and
remain at that level thereafter. At June 30, 1995, the weighted-
average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5 percent. The weighted-
average health care cost trend rate was 12.5 percent for the 1995-
96 fiscal year and was assumed to decrease gradually to 6.5
percent after 7 years and remain at that level thereafter.
The health care cost trend rate assumption has a significant
effect on the amounts reported. For example, increasing the
assumed health care cost trend rate by one percentage point in
each year would increase the accumulated postretirement benefit
obligation as of June 30, 1996 by $45,700. The aggregate of
interest and service cost for the year ended June 30, 1996 is not
affected by this increase due to the minimal number of retirees
receiving benefits that are not fixed and the large number of
retirees receiving benefits that were not affected by the trend
rate during the 1995-96 fiscal year.
F-16
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Income Tax Expense
Effective July 1, 1993, the Company changed its method of
accounting for income taxes from the deferred method to the
liability method required by FASB Statement No. 109, Accounting
for Income Taxes. As permitted under the new rules, prior years
financial statements have not been restated.
The cumulative effect of adopting Statement No. 109 as of July 1,
1993 was to increase net income by $92,365 for nonregulated
operations and create a regulatory asset of $600,867 and
regulatory liability of $204,620 for regulated operations. The
regulatory assets and liabilities represent the anticipated
effects on regulated rates charged to customers which will result
from the adoption of Statement No. 109. For the year ended June
30, 1996, amortization of certain liabilities resulted in a
decrease in regulatory assets of $75,566 and in regulatory
liabilities of $14,409 for regulated entities, resulting in ending
balances of $443,918 and $162,121, respectively.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes.
Significant components of the Company's deferred tax assets and
liabilities as of June 30, 1996 and 1995 are as follows:
1996 1995
Deferred tax assets:
Allowance for doubtful accounts $ 54,065 $ 55,987
Unamortized investment tax credit 162,343 175,983
Contributions in aid of construction 115,876 102,458
Other nondeductible accruals 189,935 156,096
Other 47,093 42,318
Total deferred tax assets 569,312 532,842
F-17
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Income Tax Expense (continued)
1996 1995
Deferred tax liabilities:
Customer refunds payable $ 399,255 $ 84,525
Property, plant and equipment 2,908,836 2,615,597
Unamortized debt issue costs 201,635 215,827
Unamortized environmental study costs - 101,330
Covenant not to compete 89,041 93,283
Other 20,014 15,810
Total deferred tax liabilities 3,618,781 3,126,372
Net deferred tax liabilities $3,049,469 $2,593,530
Income tax expense consists of the following:
Year ended June 30
1996 1995 1994
Current income taxes:
Federal $244,777 $705,420 $490,698
State 21,819 120,074 12,331
Total current income taxes 266,596 825,494 503,029
Deferred income taxes (benefits):
Tax depreciation in excess of book 341,217 179,794 139,564
Book amortization in excess of tax (35,958) (56,981) (73,435)
Recoverable cost of gas purchases 322,479 (98,479) 86,341
Environmental study cleanup costs - 20,539 81,442
Regulatory surcharges (44,830) - -
Other (25,362) 17,813 (62,016)
Total deferred income taxes 557,546 62,686 171,896
Investment tax credit, net (21,062) (21,062) (21,062)
Total income taxes $803,080 $867,118 $653,863
Income taxes - operations $765,925 $815,688 $613,964
Income taxes other income 37,155 51,430 39,899
Total income taxes $803,080 $867,118 $653,863
F-18
*****************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Income Tax Expense (continued)
Income tax expense from operations differs from the amount
computed by applying the federal statutory rate to pre-tax income
for the following reasons:
1996 1995 1994
Tax expense at statutory rate - 34% $747,269 $799,582 $607,394
State income tax, net of federal tax benefit 60,271 77,377 38,693
Amortization of deferred investment tax
credits (21,062) (21,062) (21,062)
Other 16,602 11,221 28,838
Total income taxes $803,080 $867,118 $653,863
6. Regulated and Nonregulated Operations
Summarized financial information for the Company's regulated
utility and nonregulated nonutility operations (before
intercompany eliminations between regulated and nonregulated
primarily consisting of gas sales from nonregulated to regulated
entities, intercompany accounts receivable, accounts payable,
equity, and subsidiary investment) is as follows:
June 30, 1996 June 30, 1995
Regulated Nonregulated Regulated Nonregulated
Capital expenditures $3,910,000 $680,609 $3,933,828 $772,040
Property, plant and
equipment, net:
Regulated utilities $22,362,130 $ - $19,907,237 $-
Nonregulated propane - 2,971,174 - 2,811,913
Oil and gas operations - 274,352 - 334,704
Real estate held for
investment - 482,173 - 496,483
Current assets 7,663,566 2,385,186 4,458,594 2,420,839
Other assets 3,669,404 590,542 3,884,006 496,360
Total assets $33,695,100 $6,703,427 $28,249,837 $6,560,299
Equity $9,303,596 $3,308,651 $8,903,740 $2,701,018
Long-term debt 8,257,090 1,788,624 8,533,074 1,901,883
Current liabilities 10,452,787 1,192,271 6,304,063 1,493,087
Deferred income taxes 3,207,968 366,716 2,727,782 299,343
Other liabilities 2,473,659 47,165 1,781,178 164,968
Total capitalization and
liabilities $33,695,100 $6,703,427 $28,249,837 $6,560,299
F-19
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Regulated and Nonregulated Operations (continued)
<TABLE>
<CAPTION>
1996 1995 1994
Regulated Nonregulated Regulated Nonregulated Regulated Nonregulated
<S>
Revenue: <C> <C> <C> <C> <C> <C>
Operating revenue $23,672,186 $4,510,942 $24,363,446 $4,077,768 $24,421,153 $3,935,760
Gas trading revenue - 4,348,239 - 3,238,839 - 1,964,866
Operating expenses:
Gas purchased 13,646,178 2,539,635 15,077,466 2,170,877 15,666,853 2,050,377
Cost of gas trading - 3,751,053 - 2,500,363 - 1,667,182
Distribution, general
and administrative 5,578,188 1,346,200 5,130,220 1,249,431 4,792,531 1,187,090
Maintenance 348,123 60,466 304,677 1,400 315,409 15,353
Depreciation and
amortization 1,359,339 307,919 1,205,758 352,997 1,134,150 329,928
Taxes other than income 523,768 105,659 494,338 100,230 430,446 96,696
Operating income $2,216,590 $748,249 $2,150,987 $941,309 $2,081,764 $554,000
</TABLE>
7. Stock Options and Ownership Plans
Stock Options
There are two Incentive Stock Option Plans which provide for
granting options to purchase up to 200,000 shares of the Company's
common stock to key employees. The option price may not be less
than 100% of the common stock fair market value on the date of
grant (110% of the fair market value if the employee owns more
than 10% of the Company's outstanding common stock). These
options may not have a term exceeding five years.
F-20
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Options and Ownership Plans (continued)
A summary of the activity under the plans is as follows:
Number of Price Per
Shares Share
Fiscal 1996
Outstanding at July 1, 1995 90,588 $4.875-9.125
Granted -
Exercised (13,680) $4.875-7.125
Expired (1,200) $6.50
Outstanding at June 30, 1996 75,708 $6.375-9.125
At June 30, 1996
Exercisable 75,708
Available for grant 6,052
Fiscal 1995
Outstanding at July 1, 1994 106,948 $4.875-8.75
Granted 5,000 $9.125
Exercised (14,410) $4.938-8.75
Expired (6,950) $4.875-7.125
Outstanding at June 30, 1995 90,588
At June 30, 1995
Exercisable 90,588
Available for grant 29,652
Fiscal 1994
Outstanding at July 1, 1993 105,048 $3.188-7.125
Granted 7,000 $7.375-8.75
Exercised (3,800) $3.188-7.125
Expired (1,300) $3.188
Outstanding at June 30, 1994 106,948 $4.875-8.75
At June 30, 1994
Exercisable 106,948
Available for grant 27,702
F-21
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Options and Ownership Plans (continued)
Employee Stock Ownership Plan
In 1984, the Company established an Employee Stock Ownership Plan
("ESOP") which covers most of the Company's employees. The
Company has contributed and recognized as expense $121,400,
$129,367 and $103,820 for the years ended June 30, 1996, 1995 and
1994, respectively. Contributions to the Plan are determined by
the Board of Directors. During the years ended June 30, 1996,
1995 and 1994, the ESOP acquired 15,889 shares at $8.00 per share,
11,535 shares at $9.00 per share and 11,772 shares at $9.08 per
share, respectively.
8. Operating Lease
The Company leases a building in Cody, Wyoming. The lease expires
on June 30, 2005. Future minimum rental payments will be
approximately $72,000 per year from fiscal 1996 through fiscal
2005 for total future minimum lease payments of $648,000. Rental
expenses related to this lease were $73,808, $70,133 and $73,933
in fiscal years 1996, 1995 and 1994, respectively.
9. 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
is extended for two successive five-year periods unless the
Company provides at least six months notice prior to the end of
either the initial term or the first successive five-year term.
The Company does not have an option to repurchase the real
property. However, should the lessor have a bona fide third-party
offer, the Company has the right of first refusal to buy the land
and buildings under the same terms and conditions. As a result,
the transaction has been recorded as a sale, resulting in a gain
of $236,000. The land, buildings and related accounts are no
longer recognized in the accompanying financial statements.
F-22
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Gain on Sale of Assets (continued)
The future minimum lease payments under the terms of the related
lease agreement require the payment of $51,975 per year from
fiscal 1997 through fiscal 2006 for total future minimum lease
payments of $519,750.
10. Commitments and Contingencies
Commitments
The Company has entered into long-term, take or pay natural gas
supply contracts which expire beginning in 1997 and ending in
2005. 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 $1.17 to $1.85. Based on current
prices, the minimum take or pay obligation at June 30, 1996 for
each of the next five years and in total is as follows:
Fiscal Year
1997 $1,931,088
1998 1,320,018
1999 1,099,218
2000 832,018
2001 832,018
Thereafter 1,809,672
Total $7,824,032
Natural gas purchases under these contracts for the years ended
June 30, 1996, 1995 and 1994 approximated $5,520,000, $6,203,000,
and $6,091,000, respectively.
On July 1, 1996, the Company entered into a take or pay propane
contract which expires June 30, 1997. The contract generally
requires the Company to purchase all propane quantities produced
by a propane producer in Wyoming (approximately 182,500 gallons
per month) tied to the Billings, Montana spot price.
F-23
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Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
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 and to store certain equipment and materials and supplies.
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. After management became aware of the potential
of contamination on this site, it initiated an assessment of the
property through the assistance of a qualified consulting firm.
That assessment revealed the presence of certain hazardous
material in quantities exceeding tolerances established for such
material by regulatory authorities. After making required
notifications of that condition to federal and state regulatory
authorities, a report summarizing the assessment was filed with
the State of Montana Department of Health and Environmental
Science ("MDHES"). Subsequent to that submittal a meeting was
held with a representative of the MDHES wherein a process was
agreed upon to arrive at appropriate remediation of the site. The
costs incurred by the Company to date approximate $320,000 and
have been capitalized as other deferred charges. Until further
work is done regarding remediation alternatives, no further
estimate of the costs of remediation can be made. However,
management believes that regardless of the alternative selected,
the costs incurred will not materially affect the Company's
financial position.
The Company received formal approval from the MPSC to recover the
costs associated with the cleanup of this site. The Company began
recovery of costs incurred at June 30, 1995 over two years through
a surcharge in billing rates effective July 1, 1995. Management
intends to request that future costs be recovered over a similar
time period. The total of recoveries collected through June 30,
1996 is $214,000.
11. Regulatory Matters
On July 8, 1996, the Company filed a general rate case with the
MPSC requesting a revenue increase for its Great Falls Gas
operations. The revenue request is the result of increased cost
of service primarily due to inflation and higher capital
investment for utility operations. The Company intends to file
for a rate increase for Broken Bow (a regulated utility subsidiary
in Payson, Arizona) in the fall of 1996.
F-24
*****************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Financial Instruments and Risk Management
During 1996, the Company was a party to gas financial swap
agreements for its regulated operations. Under these agreements,
the Company is required to pay the counterparty (an entity making
a market in gas futures) a cash settlement equal to the excess of
the stated index price over an agreed upon fixed price for gas
purchases. The Company receives cash from the counterparty when
the stated index price falls below the fixed price. These swap
agreements are made to minimize exposure to gas price
fluctuations. Any cash settlements or receipts are included in
gas purchased. At June 30, 1996, the Company had one swap
agreement in place to hedge 5,000 MMBTU of its daily gas purchases
through October 31, 1996.
Beginning on September 1, 1996, the Company is a party to two gas
swap agreements, for its nonregulated operations, to hedge 4,400
MMBTU of its daily gas purchases. This contract represents
approximately 92% of the supply required for the Company's
customers who have selected fixed price service. The hedges were
made to minimize the Company's exposure to price fluctuations and
to secure a known margin for the purchase and resale of gas in
marketing activities.
F-25
*****************************************************************************
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<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 26,089,830
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 9,092,204
<TOTAL-DEFERRED-CHARGES> 2,290,973
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<TOTAL-ASSETS> 37,494,673
<COMMON> 348,198
<CAPITAL-SURPLUS-PAID-IN> 2,635,540
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<TOTAL-COMMON-STOCKHOLDERS-EQ> 11,540,248
0
0
<LONG-TERM-DEBT-NET> 10,405,714
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<GROSS-OPERATING-REVENUE> 31,318,008
<INCOME-TAX-EXPENSE> 765,925
<OTHER-OPERATING-EXPENSES> 28,353,172
<TOTAL-OPERATING-EXPENSES> 28,353,172
<OPERATING-INCOME-LOSS> 2,964,836
<OTHER-INCOME-NET> 451,193
<INCOME-BEFORE-INTEREST-EXPEN> 3,416,029
<TOTAL-INTEREST-EXPENSE> 1,242,738
<NET-INCOME> 1,407,366
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<EARNINGS-AVAILABLE-FOR-COMM> 8,556,510
<COMMON-STOCK-DIVIDENDS> 927,763
<TOTAL-INTEREST-ON-BONDS> 709,872
<CASH-FLOW-OPERATIONS> 546,642
<EPS-PRIMARY> 0.61
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