FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report under section 13 or 15(d)
of the Securities Exchange Act of 1934
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File number 0-14183
ENERGY WEST INCORPORATED
(Exact name of registrant as specified in its charter)
Montana 81-0141785
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 First Avenue South, Great Falls, Mt. 59401
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (406)-791-7500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at March 31, 1997
(Common stock, $.15 par value) 2,357,471<PAGE>
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ENERGY WEST INCORPORATED
INDEX TO FORM 10-Q
Page No.
Part I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1997 and June 30, 1996 1
Condensed Consolidated Statements of Income -
three months and nine months
ended March 31, 1997 and 1996 2
Condensed Consolidated Statements of Cash
Flows - nine months ended March 31, 1997 and 1996 3
Notes to Condensed Consolidated Financial
Statements 4-8
Item 2 - Management's discussion and analysis of
financial condition and results of operations 9-14
Part II Other Information
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Defaults upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of Security
Holders 15
Item 5 - Other Information 15
Item 6 - Reports on Form 8-K 15
Signatures
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I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORM 10-Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31 June 30
1997 1996
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $79,630 $893,301
Accounts Receivable (net) 6,348,364 3,486,328
Natural Gas and Propane Inventory 4,859,758 2,200,778
Materials and Supplies 441,621 543,316
Prepayments and Other 590,888 602,427
Refundable Income Tax Payments 0 412,662
Recoverable Cost of Gas Purchases 1,455,388 953,392
Deferred Income Taxes - current 189,723 0
Total Current Assets 13,965,372 9,092,204
Investments 0 12,476
Notes Receivable Due After One Year 8,261 9,190
Property, Plant and Equipment-Net 26,926,402 26,089,830
Deferred Charges 3,142,911 2,290,973
Total Assets $44,042,946 $37,494,673
</TABLE>
<TABLE>
<CAPTION>
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
Capitalization and Liabilities:
Current Liabilities:
Note Payable to bank $10,050,000 $7,175,000
Long-term Debt due within one year 356,968 348,044
Accounts Payable - Gas Purchases 2,256,538 1,226,508
Other Current and Accrued Liabilities 3,333,455 2,338,011
Total Current Liabilities 15,996,961 11,087,563
Deferred Credits 5,890,281 4,821,148
Long-term Debt (less amounts
due within one year) 9,685,474 10,045,714
Stockholders' Equity
Preferred Stock 0 0
Common Stock ( 2,357,471 and
2,321,314 shares were outstanding
March 31, 1997 and June 30, 1996,
respectively) 353,623 348,198
Capital in Excess of Par Value 2,932,962 2,635,540
Retained Earnings 9,183,645 8,556,510
Total Stockholders' Equity 12,470,230 11,540,248
Total Capitalization and Liabilities $44,042,945 $37,494,673
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
-1-
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FORM 10-Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Operating revenue:
Regulated utilities $10,225,740 $9,752,152 $21,994,853 $19,469,916
Nonregulated operations 3,655,501 1,220,371 7,763,078 3,033,039
Gas trading 2,040,786 1,157,509 4,417,547 3,184,483
Total Revenue 15,922,027 12,130,032 34,175,478 25,687,438
Operating Expenses
Gas Purchased 9,335,727 6,519,567 19,085,015 12,764,238
Cost of gas trading 1,841,406 982,986 4,095,567 2,761,284
Distribution, general and administrative 2,020,640 2,052,668 6,159,787 5,702,953
Depreciation and Amortization 450,127 424,023 1,377,693 1,292,188
Other Taxes 170,480 195,544 501,973 506,042
Total Operating Expenses 13,818,380 10,174,788 31,220,035 23,026,705
Operating Income 2,103,647 1,955,244 2,955,443 2,660,733
Other Income (Loss) - Net 5,675 (17,360) 313,689 142,425
Income Before Interest Charges & Taxes 2,109,322 1,937,884 3,269,132 2,803,158
Interest Charges:
Long-Term Debt 172,704 173,316 518,113 515,228
Other 228,260 181,560 632,856 432,711
Total Interest Charges 400,964 354,876 1,150,969 947,939
Net Income Before Income Taxes 1,708,358 1,583,008 2,118,163 1,855,219
Income Taxes 621,852 569,279 751,804 656,781
Net Income $1,086,506 $1,013,729 $1,366,359 $1,198,438
Earnings Per Share of Common and
Common Equivalent Stock:
Earnings per Share $0.46 $0.44 $0.58 $0.52
Dividends per common share $0.1050 $0.1000 $0.3150 $0.3000
Weighted Average Common
Shares Outstanding 2,353,541 2,288,870 2,353,541 2,288,870
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
-2-
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FORM 10-Q
ENERGY WEST INCORPORATED
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
March 31
1997 1996
<S> <C> <C>
Operating Activities:
Net Income $1,366,359 $1,198,438
Adjustments to Reconcile Net Income to Cash Flow
Depreciation and Amortization 1,610,949 1,597,531
(Gain) Loss on Sale of Property, Plant & Equipment (18,026) (4,484)
Investment Tax Credit - Net (15,797) (15,797)
Deferred Income Taxes - Net 339,543 111,872
Changes in Operating Assets and Liabilities (4,133,914) (2,110,533)
Net Cash Provided by (Used In) Operating Activities (850,886) 777,027
Investing Activities:
Construction Expenditures (2,174,185) (3,506,545)
Collection of Long-Term Notes Receivable 929 4,179
Proceeds from Contributions in Aid of Construction 98,790 32,905
Proceeds from Sale of Property, Plant & Equipment 33,297 24,089
Net Cash Provided by (Used In) Investing
Activies (2,041,169) (3,445,372)
Financing Activities:
Proceeds from Notes Payable 24,977,000 15,255,000
Repayment of Long-Term Debt (360,240) (405,852)
Repayment of Notes Payable (22,102,000) (12,385,000)
Sale of Common Stock 6,922 59,295
Dividends Paid (443,298) (317,838)
Net Cash Provided by (Used In) Financing
Activities 2,078,384 2,205,605
Net Increase (Decrease) in Cash and Cash
Equivalents (813,671) (462,740)
Cash and Cash Equivalents at Beginning of Year 893,301 567,006
Cash and Cash Equivalents at End of Period $79,630 $104,266
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
-3-
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1997
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended March 31,
1997 are not necessarily indicative of the results that may be
expected for the year ended June 30, 1997 due to seasonal
factors affecting gas utility, construction and other operations.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Energy West
Incorporated (the Company) annual report on Form 10-KA for the
year ended June 30, 1996 filed March 24, 1997.
Note 2 - Earnings Per Common and Common Equivalent Share
Earnings per common share are computed based on the weighted
average number of common shares issued and outstanding and common
stock equivalents, if dilutive. In February 1997, the Financial
Accounting Standards Board (SFAS) issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share. The overall
objective of Statement 128 is to simplify the calculation of
earnings per share (EPS) and achieve comparability with the
recently issued International Accounting Standard No. 33, Earnings
Per Share. Statement 128 is effective for both interim and annual
financial statements for periods ending after December 15, 1997.
Earlier application is not permitted. As a result, calendar year
end companies will first report on the new EPS basis in the fourth
quarter ended December, 1997. Subsequent to the effective date,
all prior-period EPS amounts (including EPS information in interim
financial statements, earnings summaries, and selected financial
data) are required to be restated to conform to the provisions of
Statement 128. Under Statement 128, primary EPS will be replaced
with a new simpler calculation called basic EPS. Basic EPS will
be calculated by dividing income available to common stockholders
(i.e., net income less preferred stock dividends) by the weighted
average common shares outstanding. Thus, in the most significant
change in current practice, options, warrants, and convertible
securities will be excluded from the calculation. Further,
contingently issuable shares will be included in basic EPS only if
all the necessary conditions have been satisfied by the end of the
period and it is only a matter of time before they are issued.
Basic EPS under Statement 128 will result in higher earnings per
share because common stock equivalents will not be included.
Thus, the basic EPS calculation will be less complex and easier to
prepare. The Company has not calculated Basic Earnings per Share
at the end of March 31, 1997, but will adopt this standard in the
second quarter of Fiscal 1998.
***********************************************************************
Note 3 - Principal Accounting Policies
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
established the procedures for review of recoverability, and
measurement of impairment if necessary, of long-lived assets and
certain identifiable intangibles to be held and used by an
entity. The financial effect of adopting the new standard are not
expected to be material to the Company's financial position or
operations.
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 effective with the year ended June 30, 1997, with
respect to the disclosure requirements set forth therein for
companies retaining the intrinsic value approach of APB No. 25.
Note 4 - Gain on Sale of Assets
On June 28, 1996, one of the Company's nonregulated subsidiaries
sold real property, consisting of land and office and warehouse
buildings, for $525,000 in cash. Concurrent with the sale, the
Company leased the property back for a period of ten years at an
annual rental of $51,975. The initial ten-year term of the lease
extends automatically for two successive five-year periods unless
the Company provides at least six months notice of non-renewal
prior to the end of either the initial term or the first
successive five-year term.
Note 5 - Financial Instruments and Risk Management
Effective September 1, 1996, the Company was a party to two gas
swap agreements, for its nonregulated operations, to hedge 4,400
MMBTU of its daily gas purchases. These contracts represent
approximately 92% of the supply required for the Company's
customers who have selected fixed price service. Also, beginning
on January 1, 1997, the Company has hedged 500 MMBTU per day,
which is 100% of the Liquid Natural Gas feedstock required for the
supply of the West Yellowstone Gas operation. 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.
***********************************************************************
Note 6 - Income Taxes
Under the liability method prescribed by SFAS No. 109, deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and amounts used for income tax
purposes. At March 31, 1997, components of the Company's
deferred tax assets and deferred tax liabilities are as follows:
Deferred tax assets:
Allowance for doubtful accounts........................ $28,428
Unamortized Investment Tax Credit...................... 162,343
Contributions in Aid of Construction................... 135,743
Other nondeductible accruals.......................... 136,571
Total deferred tax assets.......................... 463,085
Deferred tax liabilities:
Customer refunds payable............................... 567,056
Property, Plant and Equipment.........................3,008,189
Unamortized Debt Issue Costs........................... 190,991
Covenant Not to Compete............................. 85,859
Total deferred tax liabilities.................. 3,852,095
Net deferred tax liability............................ $3,389,010
Income tax expense consists of the following:
Current income taxes (benefits):
Federal...............................................$367,328
State................................................ 58,849
Total current income taxes (benefits).................. 426,177
Deferred income taxes (benefits):
Excess tax depreciation................................212,271
Excess tax (book) amortization.........................(13,826)
Recoverable cost of gas purchases......................167,801
Regulatory Assets ................................... (21,029)
Other................................................. (3,793)
Total deferred income taxes..............................341,424
Investment tax credit, net................................(15,797)
Total income taxes (benefits)............................$751,804
Income tax expense from operations differs from the amount
computed by applying the federal statutory rate to pre-tax income
for the following reasons:
Tax expense (benefit) at statutory rates - 34%.......... $721,229
State income taxes (benefit), net of federal income taxes..50,203
Amortization of deferred investment tax credits...........(15,797)
Other................................................. (3,831)
Total income taxes (benefits)........................... $751,804
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Note 7 - Commitments and Contingencies
Commitments
The Company has entered into long-term, take or pay natural gas
supply contracts which expire at various times from 1999 to
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 $1.75.
Based on current prices, the minimum take or pay obligation at
March 31, 1997 for each of the next five years and in total is as
follows:
Fiscal Year
1997 $1,250,000
1998 1,510,000
1999 1,510,000
2000 810,000
2001 810,000
Thereafter 1,285,000
-----------
Total $ 7,175,000
===========
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.
Environmental Contingency
The Company owns property on which it operated a manufactured gas
plant from 1909 to 1928. The site is currently used as a service
center where certain equipment and materials are stored. The coal
gasification process utilized in the plant resulted in the
production of certain by-products which have been classified by
the federal government and the State of Montana as hazardous to
the environment. Several years ago the Company initiated an
assessment of the site to determine if remediation of the site was
required. That assessment resulted in a submission to the Montana
Department of Environmental Quality (MDEQ) formerly known as
Montana Department of Health and Environmental Science ("MDHES")
in 1994. The Company has worked with the MDEQ since that time to
obtain the data that would lead to a remediation action acceptable
to MDEQ. The Company's environmental consultant advises the
Company that it expects to have the report filed with the MDEQ by
approximately mid-summer. MDEQ would then provide for public
comment on the remediation plan. Once the comment period has
lapsed and due consideration of any comments occurs, the plan can
be finalized. Assuming acceptance of the plan, remediation could
be in place by the fall of 1998.
At March 31, 1997 the costs incurred in evaluating this site have
totalled approximately $400,000. On May 30, 1995 the Company
received an order from the Montana Public Service Commission
allowing for recovery of the costs associated with evaluation and
remediation of the site through a surcharge on customer bills. As
of March 31, 1997 that recovery mechanism had generated
approximately the same $400,000 as had been expended. The
Commission's decision calls for ongoing review by the Commission
of the costs incurred for this matter by periodic approvals of the
costs incurred for this matter. The Company intends to submit an
application for such review by approximately July 1, 1997.
Legal Proceedings
From time to time the Company is involved in litigation relating
to claims arising from its operations in the normal course of
business. Neither the Company nor any of its subsidiaries is a
party to any legal proceedings, other than as described in Part
II- Other Information, Item1., the adverse outcome of which
individually or in the aggregate, in the Company's view, would
have a material adverse effect on the Company's results of
operations, financial position or liquidity.
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Note 8 - Operating Revenues and Expenses,
Regulated utility and non-regulated non-utility operating
revenues and expenses were as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31 March 31
1997 1996 1997 1996
<C> <S> <S> <S> <S>
Operating Revenues:
Regulated utilities $10,225,740 $9,752,152 $21,994,853 $19,469,916
Non-regulated operations 3,655,501 1,220,371 7,763,078 3,033,039
Gas trading 2,040,786 1,157,509 4,417,547 3,184,483
----------- ----------- ----------- -----------
$15,922,027 $12,130,032 $34,175,478 $25,687,438
=========== =========== =========== ===========
Operating Expenses:
Gas Purchased:
Regulated $6,512,236 $6,007,311 $13,304,619 $11,324,248
Non-regulated 2,823,491 512,256 5,780,396 1,439,990
Cost of gas trading 1,841,406 982,986 4,095,567 2,761,284
----------- ----------- ----------- -----------
$11,177,133 $7,502,553 $23,180,582 $15,525,522
=========== =========== =========== ===========
Distribution, general
and administrative:
Regulated $1,470,698 $1,560,305 $4,601,642 $4,402,144
Non-regulated 409,233 343,871 1,191,193 979,467
----------- ----------- ----------- -----------
$1,879,931 $1,904,176 $5,792,835 $5,381,611
=========== =========== =========== ===========
Maintenance:
Regulated $118,843 $130,587 $295,843 $270,706
Non-regulated 21,866 17,905 71,109 50,636
----------- ----------- ----------- -----------
$140,709 $148,492 $366,952 $321,342
=========== =========== =========== ===========
Depreciation and
amortization:
Regulated $372,832 $325,483 $1,122,726 $1,004,456
Non-regulated 77,295 98,540 254,967 287,732
----------- ----------- ----------- -----------
$450,127 $424,023 $1,377,693 $1,292,188
=========== =========== =========== ===========
Taxes other than income:
Regulated $143,760 $159,493 $417,646 $400,352
Non-regulated 26,720 36,051 84,327 105,690
----------- ----------- ----------- -----------
$170,480 $195,544 $501,973 $506,042
=========== =========== =========== ===========
Income taxes:
Regulated $430,087 $432,546 $448,134 $446,921
Non-regulated 191,765 136,733 303,670 209,860
----------- ----------- ----------- -----------
$621,852 $569,279 $751,804 $656,781
=========== =========== =========== ===========
</TABLE>
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FORM 10-Q
ENERGY WEST INCORPORATED
Item 2 - Management's Discussion and Analysis of Interim Financial
Statements
The following discussion reflects results of operations of the
Company and its consolidated subsidiaries for the periods
indicated. The Company's regulated utility operations primarily
involve the distribution and sale of natural gas to the public in
the Great Falls, Montana and Cody, Wyoming areas and the
distribution of propane to the public through underground propane
vapor systems in the Payson, Arizona and Cascade, Montana areas.
Since 1995, the Company's regulated utility operations have also
included the distribution of natural gas through an underground
system in West Yellowstone, Montana that is supplied by liquified
natural gas.
The Company conducts certain non-utility operations through its
three wholly-owned subsidiaries: Rocky Mountain Fuels, Inc.
(RMF), a distributor of bulk propane in northwestern Wyoming,
Cascade, Montana and the Payson, Arizona area; Energy West
Resources, Inc. which is involved in the marketing of natural gas
in Montana and Wyoming, gas storage and a small amount of oil and
gas production; Montana Sun, Inc., which owns two real estate
properties in Great Falls, Montana, along with certain other
investments.
Liquidity and Capital Resources
The Company's operating capital needs, as well as dividend payments
and capital expenditures, are generally funded through cash
flow from operating activities, short-term borrowing and
liquidation of temporary cash investments. Historically, to the
extent cash flow has not been sufficient to fund capital
expenditures, the Company has borrowed short-term. To the extent
short-term borrowing has been used to finance capital projects, it
has been refinanced with long-term debt or equity.
The Company's short-term borrowing requirements vary according to
the seasonal nature of its sales and expense activity. The
Company has greater need for short-term borrowing during periods
when internally generated funds are not sufficient to cover all
capital and operating requirements, including costs of gas
purchases and capital expenditures. In general, the Company's
short-term borrowing needs for purchases of gas inventory and
capital expenditures are greatest during the summer and fall,
during the construction season and when the heating season begins.
This past fiscal year and during this first nine months of fiscal
1997, the Company used short-term borrowing for construction of its
natural gas system in West Yellowstone, Montana and expansion of its
natural gas systems in Great Falls, Montana, Cody, Wyoming and
Payson, Arizona, as well as to increase its natural gas and
propane inventory. Short-term borrowing utilized for construction
or property acquisitions generally is replaced by permanent
financing when it becomes economical and practical to do so. At
March 31, 1997, the Company had a $16,000,000 bank line of
credit, of which $10,050,000 had been borrowed.
***********************************************************************
The Company used net cash in operating activities for the nine
months ended March 31, 1997 in the amount of $851,000 as compared to
net cash provided by operating activities of $777,000 for the nine
months ended March 31, 1996. This increase in cash used in
operating activities of approximately $1,600,000 was primarily due
to higher working capital requirements of approximately $1,900,000.
This increase was due to the following: 1] increased purchases of
natural gas inventory of approximately $2,500,000, 2] an increase
in utility unrecovered gas costs of approximately $375,000 due to
higher than anticipated gas commodity prices, 3] higher accounts
receivable of approximately $527,000 due to increased sales. This
increase in cash used was partially offset by an increase in
accounts payable of approximately $778,000, primarily due to
increased gas purchases, reduced prepaid items of approximately
$620,000, primarily related to a $500,000 prepaid gas contract
commitment made in fiscal 1996, higher net income of approximately
$168,000 and higher deferred income taxes of approximately
$228,000.
Cash used in investing activities was approximately $2,000,000
for the nine months ended March 31, 1997, as compared to
approximately $3,400,000 for the nine months ended March 31, 1996,
primarily due to lower construction expenditures for capital
projects. Cash provided by financing activities was approximately
$2,100,000 for the nine months ended March 31, 1997, as compared to
approximately $2,200,000 for the nine months ended March 31, 1996.
The decrease in cash provided by financing activities resulted
primarily from an increase in dividends paid of approximately
$125,000, partially offset by reduced principal payments on long-term
debt and reduced sale of common stock through the Company's
Dividend Reinvestment Plan and the Company's Incentive Stock Option
Plan.
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 subsidiaries and to meet the Company's administrative
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 was expended
for the construction of a natural gas system in West Yellowstone,
Montana, approximately $1 million was expended for gas system
expansion projects for new subdivisions in the Broken Bow division's
service area and approximately $350,000 was expended for additions
to the office and the east storage site of Petrogas in Payson,
Arizona. Capital expenditures are expected to be approximately $3.7
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. As of March 31, 1997, approximately
$2,200,000 of that amount had been expended.
***********************************************************************
Results of Consolidated Operations
Comparison of Third Quarter of Fiscal 1997 Ended March 31, 1997 and
Third Quarter of Fiscal 1996 Ended March 31, 1996
The Company's net income for the third quarter ended March 31, 1997
was $1,086,506 compared to $1,013,729 for the quarter ended March
31, 1996. The increased net income in the third quarter of fiscal
1997 was due primarily to an increase in gross margins from propane
sales in the Company's non-regulated operations, offset by increases
in short-term interest costs and depreciation costs, due to capital
additions.
Utility Operations -
Utility operating revenues in the third quarter of fiscal 1997
were approximately $10,225,000 compared to $9,750,000 for the third
quarter of fiscal 1996. Gross Margin, which is defined as
operating revenues less gas purchased, was approximately $3,700,000
for the third quarter of fiscal 1997, approximately the same as the
gross margin for the third quarter of fiscal 1996. Utility
operating revenues were up for this quarter primarily due to a gas
tracker increase in the Cody division, which does not increase
margins.
Operating Expenses -
Utility operating expenses, excluding the cost of gas purchased and
federal and state income taxes, were approximately $1,590,000 for
the third quarter of fiscal 1997 as compared to $1,690,000 for the
same period in fiscal 1996. The 5% decrease in the period is
generally due to more payroll and expenses capitalized to increased
construction of utility projects, from the same quarter one year
ago.
Interest Charges -
Interest charges allocable to the Company's utility divisions
were approximately $393,000 for the third quarter of fiscal 1997,
as compared to $324,000 in the comparable period in fiscal 1996.
Long term debt interest decreased; however, short term interest
increased primarily due to facility expansion and increases in gas
storage, which has been temporarily financed with short term debt.
Income Taxes -
State and federal income taxes of the Company's utility divisions
were approximately $430,000 for the third quarter of fiscal 1997,
approximately the same for the third quarter in fiscal 1996. Pre-tax
income of the utility divisions was approximately the same for
the third quarter of fiscal 1997 and 1996.
***********************************************************************
Non-Regulated Operations -
Rocky Mountain Fuels -
For the three months ended March 31, 1997, RMF generated net
income of approximately $183,000 compared to net income of
approximately $139,000 for the three months ended March 31, 1996.
Approximately $83,000 of RMF's net income for the third quarter of
fiscal 1997 was attributable to the Wyo L-P Gas division in Wyoming,
approximately $101,000 to the Petrogas division in Arizona, with the
balance of approximately ($1,000) net loss attributable to Missouri
River Propane in Montana. RMF's gross margins increased
approximately 21%, or $142,000, for the three months ended March 31,
1997 compared to the same period last year, primarily due to
increased wholesale propane sales in the Wyo L-P Gas division in
Wyoming. Margins this quarter increased in the Wyo L-P division
from the same quarter last year of approximately $428,000 to
$497,000 due to increased wholesale propane sales, customer growth
and colder weather. Margins in the Petrogas division in Arizona
increased this quarter from approximately $205,000 to $278,000,
while Missouri River Propane in Montana margins remained relatively
similar to the same quarter one year ago. However, RMF experienced
higher operating expenses, due to normal inflationary trends and
increased personnel expense due to customer growth, as well as
higher short-term interest costs due to expansion of plant in
Montana and Wyoming. State and federal income taxes increased to
approximately $111,000 for this quarter from $77,000 last year, due
to higher pre-tax income of Rocky Mountain Fuels, Inc.
Energy West Resources, Inc. - (formerly Vesta, Inc.) -
For the three months ended March 31, 1997, Energy West Resources,
Inc.'s net income was approximately $122,000
compared to $93,000 for the three months ended March 31, 1996,
primarily due to higher natural gas sales than in the same period
last year. Gas trading margins increased approximately $25,000, or
14%due to decreased natural gas prices in Canada and Montana. State
and federal income taxes increased this quarter to approximately
$73,000 from $53,000 the same quarter one year ago, due to higher
pre-tax income of Energy West Resources, Inc.
Montana Sun, Inc. -
For the three months ended March 31, 1997, Montana Sun, Inc.'s net
income was approximately $11,000 compared to $10,000 for the three
months ended March 31, 1996,
***********************************************************************
Results of Consolidated Operations
Comparison of Nine Months Ended March 31, 1997 and Nine Months
Ended March 31, 1996
The Company's net income for the first nine months ended March 31,
1997 was $1,366,359 compared to $1,198,438 for the nine months ended
March 31, 1996. The increase in net income in the first nine months
of 1997 was due primarily to an increase in gross margins from
natural gas and propane sales due to an interim rate increase
effective November, 1996 approved by the Montana Public Service
Commission in a rate relief filing by the Great Falls division and
colder weather than one year ago, as well as a one time capital
gain of approximately $63,000 after-tax on the sale of a temporary
cash investment, offset by increases in short-term interest costs
and depreciation costs relating to capital additions and an increase
in distribution, general, administrative and maintenance expenses
due to inflation and less salaries being capitalized to major
projects, than was the case one year ago (see below under utility
operations and non-regulated operations).
Utility Operations -
Utility operating revenues in the first nine months of fiscal 1997
were approximately $22,000,000 compared to approximately $19,000,000
for the first nine months of fiscal 1996. Gross Margin, which is
defined as operating revenues less gas purchased, was approximately
$8,700,000 for the first nine months of fiscal 1997 compared to
gross margin of approximately $7,700,000 for the first nine months
of fiscal 1996. Gross margins increased 13% because of higher
margins from natural gas sales in the Great Falls and Cody
divisions and in the West Yellowstone area and higher margins from
propane vapor sales in the Broken Bow division, due to colder
weather than one year ago and customer growth in all utility
operations, as well as a 1.86% interim rate increase in the Great
Falls division, effective November 4, 1996, which contributed to
increased margins by approximately $112,000.
Operating Expenses -
Utility operating expenses, excluding the cost of gas purchased and
federal and state income taxes, were approximately $4,900,000 for
the first nine months of fiscal 1997 as compared to $4,700,000 for
the same period in fiscal 1996. The 4% increase in the period was
generally due to normal inflationary trends and less payroll and
other expenses capitalized to projects.
Interest Charges -
Interest charges allocable to the Company's utility divisions
were approximately $1,108,000 for the first nine months of fiscal
1997, as compared to $862,000 in the comparable period in fiscal
1996. Long term debt interest decreased, however and short term
interest increased primarily due to facility expansion and increases
in gas storage, which has been temporarily financed with short term
debt.
Income Taxes -
The state and federal income taxes of the Company's utility
divisions were approximately $448,000 for the first nine months of
fiscal 1997, as compared to approximately $447,000 for the same
period in fiscal 1996. Pre-tax income of the utility divisions was
approximately the same for the nine month period of fiscal 1997 and
1996.
***********************************************************************
Non-Regulated Operations -
Rocky Mountain Fuels -
For the nine months ended March 31, 1997, RMF generated net income
of approximately $242,000 compared to net income of $125,000 for
the nine months ended March 31, 1996. Approximately $163,000 of
RMF's net income for the first nine months of fiscal 1997 was
attributable to the Wyo L-P Gas division in Wyoming, $103,000 to
the Petrogas division in Arizona, with the balance of ($23,000) net
loss attributable to Missouri River Propane in Montana. RMF's
gross margins increased approximately 27%, or $398,000, for the nine
months ended March 31, 1997 compared to the same period last year,
primarily due to increased wholesale propane sales in the Wyo L-P
Gas division in Wyoming. Margins this nine month period increased
in the Wyo L-P division approximately $241,000 for wholesale
propane sales, due to customer growth and colder weather and
decreased approximately $23,000, or 3%, for retail propane sales
due to higher propane prices and competitive market conditions,
while margins in the Petrogas division in Arizona increased from a
year ago by approximately $100,000, or 27%, due to customer growth
and weather, while Missouri River Propane in Montana margins
increased from a year ago by approximately $12,000, or 24%, due to
weather and customer growth. RMF experienced higher operating
expenses, due to normal inflationary trends experienced and
increased use of staff, due to customer growth, as well as higher
short-term interest costs due to expansion of plant in Montana and
Wyoming, which was financed by short-term debt. State and federal
income taxes increased to approximately $142,000 for this nine month
period from $64,000 due to higher pre-tax income in Rocky Mountain
Fuels, Inc. this year of approximately $190,000.
Energy West Resources, Inc. - (formerly Vesta, Inc.) -
For the nine months ended March 31, 1997, Energy West Resources,
Inc.'s net income was approximately $172,000 compared to
$206,000 for the nine months ended March 31, 1996, primarily due to
lower gas trading margins. Gas trading margins decreased
approximately $102,000, or 24%. Although gas trading revenues are
up approximately $1,200,000 this nine month period from one year
ago, cost of gas trading was up approximately $1,300,000, due to
increased natural gas prices in Canada and Montana and increased
competition, requiring lower margins in order to retain or secure
new Energy West Resource customers. State and federal income
taxes decreased this nine month period to approximately $104,000
from $123,000 the same nine month period one year ago, due to lower
pre-tax income.
Montana Sun, Inc. -
For the nine months ended March 31, 1997, Montana Sun, Inc.'s net
income was approximately $97,000 compared to $42,000 for the nine
months ended March 31, 1996, due primarily to the sale of mutual
fund investments at a capital gain.
***********************************************************************
FORM 10-Q
Part II - Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders -
Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
A. There are no exhibits to this report.
B. No reports on Form 8-K have been filed during the
quarter ended March 31, 1997.
***********************************************************************
Legal Proceedings
From time to time the Company is involved in litigation relating to
claims arising from its operations in the normal course of business.
Neither the Company nor any of its subsidiaries is a party to any
legal proceedings, other than as described below, the adverse
outcome of which individually or in the aggregate, in the Company's
view, would have a material adverse effect on the Company's results
of operations, financial position or liquidity.
On December 20, 1996, an action was filed against the Company by
Randy Hynes and Melissa Hynes in Federal District Court in Wyoming.
The action arises from a natural gas explosion involving a four-plex
apartment building which was damaged after natural gas from the
customer's gas line leaked into the building (which was not serviced
by natural gas). The Plaintiffs, who were tenants in the building,
allegedly sustained burns and other injuries, as well as property
damage. The plaintiffs allege that the Company was negligent. The
action also asserts claims of product liability, willful and wanton
conduct and breach of warranty. The plaintiffs are seeking damages
for personal injury, pain and suffering, emotional distress, loss of
earnings, medical expenses, physical disability and property damage,
[as well as punitive damages.] The Company denies responsibility
for the damages and intends to contest the matter vigorously. The
Company believes the gas leak resulted from damage caused to the
pipeline by an unknown third party. Discovery is proceeding at this
time. A trial has been scheduled for the Fall of 1997.
A similar lawsuit involving the same explosion was filed by five
other plaintiffs in Wyoming District Court, Park County, Wyoming on
April 8, 1997. The allegations are substantially the same as the
allegations in the Federal District Court case. The Company has
filed an answer denying liability and intends to contest the matter
vigorously. Only minimal discovery has occurred to date. The
plaintiffs, Heidi Woodward, et al., were tenants in the apartment
building.
On the 24th of October 1996, a lawsuit was filed naming the Company
as a defendant as a result of an explosion which occurred in Payson,
Arizona in the spring of 1995. A propane tank and propane gas were
sold by the Company's subsidiary Petrogas to the Plaintiffs for use
in their new home. The explosion occurred in the course of the
Plaintiff's attempt to light their gas appliances. The Plaintiff's
consists of the husband and wife who owned the home, on their own
behalf and on behalf of their minor children, all of whom incurred
injuries in the explosion of the fire which ensued after the
explosion. The claims are for personal injuries, mental suffering
and anguish, medical expenses, lost income, property damages and
punitive damages. Plaintiffs claims are based on strict liability
in that the gas sold was defective; breach of warranty in that the
propane gas was not fit for the purpose for which it was intended
and; negligence for failure to assure that the gas was properly
odorized. The dollar value of the claims have not been asserted in
the pleadings of the Plaintiffs.
The Company carries commercial general liability insurance for
bodily injury and property damages of $1,000,000 per occurrence and
$5 million in the aggregate, and has an additional $30,000,000
umbrella policy for excess claims. The Company's general liability
carrier has assumed the defense of the two Wyoming actions and the
claim in the Arizona matter. The Company believes it has insurance
coverage for these matters and it's insurance carrier has undertaken
the defense of these cases. However, no assurance can be given that
insurance will cover these matters in the event that the Company is
held liable.
***********************************************************************
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
/s/Larry D. Geske
_______________________________
Larry D. Geske, President and
Chief Executive Officer
Dated May 14, 1997
/s/ William J. Quast
__________________________________
William J. Quast, Vice-President, Treasurer,
Controller and Assistant Secretary
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