THE PURPOSE OF THIS AMENDED 10-K IS TO INCLUDE
SUPPLEMENTAL INFORMATION REQUESTED BY THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION, FEBRUARY 28, 1997.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KA
[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
held November 21, 1996 are incorporated by reference into Part III.
PART I
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, results of operations and net cash
flows.
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.
14
*****************************************************************************
ITEM 7
Energy West Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS
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. The following summary describes
the components of the change between years.
Revenue
Operating revenues increased approximately 3%. Regulated
revenues decreased 3% compared to the prior year due to a rate
decrease in the Great Falls division in Montana, effective July 1,
1995. This decrease in rates was partially offset by colder weather
this year than one year ago in the Great Falls and Cody utility
divisions, increased transport revenues in the Cody division
operations and the West Yellowstone revenues in this start-up
operation. Nonregulated revenues increased approximately 6%, from
increased bulk propane sales 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 Energy West Resources decreased
by 20% however gas trading revenues increased by 34% due to 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 in 1996.
Regulatory gross margins increased approximately $740,000 because of
higher margins from natural gas sales in the Great Falls and Cody
divisions. Margins were tempered by the effects of a rate reduction
in the Great Falls division of approximately $260,000 annually,
ordered by the Montana Public Service Commission which went into
effect on July 1, 1995. In addition, margins of 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.
1
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Revenues
Regulated revenues decreased from $24,363,000 in fiscal 1995 to
$23,672,000 in fiscal 1996 or 3%, primarily due to a decrease in the
revenues of the Great Falls division of approximately $1,550,000, due
to a $260,000 rate decrease ordered by the Montana Public Service
Commission and a reduction in gas costs reducing rates by
approximately $290,000 and the shift of Malmstrom Air Force Base
revenues to a transportation customer, further reducing revenues by
approximately $1,000,000. This was offset by the inclusion of West
Yellowstone revenues of approximately $300,000 and increased Cody
division revenues of approximately $330,000, due to increased volumes
sold due to customer growth and weather and higher transportation
revenues and increases in the Broken Bow and Cascade divisions, due
to customer growth. Gas purchases decreased from $15,077,500 in
fiscal 1995 to $13,646,200 in fiscal 1996 or 10%, primarily due to a
reduction in natural gas costs.
Operating Income
Regulated operating income increased approximately $65,000 in
fiscal 1996 or 3%, primarily due to increased gross margins of
approximately $740,000, due to customer growth, colder weather and
higher transportation sales and the inclusion of West Yellowstone
margins. This was offset by increases in distribution, general,
administrative and general expenses of approximately $490,000, due to
operations growth and inflation, increases in depreciation and
amortization expenses of approximately $153,000, due to additional
utility plant and increases in taxes other than income of
approximately $29,000, due to higher property taxes in all three
states served by Energy West.
Nonregulated operating income decreased approximately $190,000
in fiscal 1996 or 20%, due to smaller margins in Energy West
Resources' gas marketing operations of approximately $84,000, higher
operating and maintenance expenses of approximately $156,000 due to
inflation and growth of nonregulated operations, offset partially by
lower depreciation and amortization costs.
2
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Other Expenses
Operating expenses (excluding cost of gas sales) increased
approximately $2,042,000 or 18% in 1996. The primary reason for this
increase was due to normal inflationary trends, lower capitalized
payroll since the completion of the West Yellowstone system as well
as the addition of West Yellowstone's utility operating expenses this
fiscal year.
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.
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.
3
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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
approximately $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.
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 1996 Compared to Fiscal 1995
4
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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 higher margins from natural gas sales in the Great Falls and Cody
divisions and propane sales in the Broken Bow division because of 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, in
this start-up operation. The winter heating season in the Great Falls
division in fiscal 1996 was approximately 10% colder than fiscal 1995 and
8% 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.
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
$257,000 this fiscal year in this start-up operation.
Interest Charges
Interest charges allocable to the Company's utility divisions were
approximately $1,146,000 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 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.
5
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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.
6
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OPERATING RESULTS OF EACH OF THE COMPANY'S NON-UTILITY SUBSIDIARIES
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 $ 285 $ 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 $ 47 $ 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.]
7
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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 $76,000 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 its 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 $285,000 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 power marketing
investigations, salary and expenses for an EWR specific employee,
increased direct charges and overheads allocated to EWR from EWST
management in connection with efforts to enhance EWR operations.
For fiscal 1995, EWR net income was $427,000 compared to
$198,000 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 as a result from adoption of SFAS
No.109.
Montana Sun
For fiscal 1996, Montana Sun's net income was approximately
$47,000 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.
8
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Liquidity and Capital Resources
The Company's operating capital needs, as well as dividend
payments and capital expenditures, are generally funded through cash
flow from operating activities, short-term borrowing and liquidation
of temporary cash investments. Historically, to the extent cash flow
has not been sufficient to fund capital expenditures, the Company has
borrowed short-term or issued equity securities to fund capital
expansion projects or reduce short-term borrowing.
The Company's short-term borrowing requirements vary according
to the seasonal nature of its sales and expense activity. The
Company has greater need for short-term borrowing during periods when
internally generated funds are not sufficient to cover all capital
and operating requirements, including costs of gas purchases and
capital expenditures. In general, the company's short-term borrowing
needs for purchases of gas inventory and capital expenditures are
greatest during the summer months and the Company's short-term
borrowing needs for financing of customer accounts receivable are
greatest during the winter months. In addition during the past two
years, the Company has used short-term borrowing to finance the
acquisition of propane operations and LNG for West Yellowstone Gas.
Short-term borrowing utilized for construction or property
acquisitions generally has been on an interim basis and converted to
long-term debt and equity when it becomes economical and feasible to
do so.
At June 30, 1996, the Company had a $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 $547,000 as compared to $3,605,000 for
fiscal 1995. This change from fiscal 1995 is attributed to a
$106,000 decrease in net income, a $236,000 gain on sale-leaseback, a
reduction in accounts payable of approximately $1,000,000, an
increase in recoverable costs of gas purchases and prepaid gas of
approximately $1,627,000 and other miscellaneous working capital
changes of approximately $1,170,000 offset by approximately $491,000
increase in deferred income taxes, an increase in gas inventory of
approximately $470,000 and an increase in accounts receivable of
approximately $80,000. 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 was
approximately $4,591,000, primarily 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.
9
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The Company generated net cash from operating activities for
fiscal 1995 of approximately $3,605,000 as compared to $2,851,000 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 administrative
needs. The Company's capital expenditures were approximately $4.6
million in fiscal 1996 and approximately $4.7 million for fiscal 1995
and $2.6 million in fiscal 1994, including RMF's expenditures for the
acquisition of propane operations. 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 for the
Broken Bow division, with the balance for maintenance and other
special system expansion projects in the Great Falls and Cody
divisions. The Company continues to evaluate opportunities to expand
its existing businesses from time to time.
The major factors which will affect the Company's future
results include general and regional economic conditions, weather,
customer retention and growth, the ability to meet competitive
pressures and to contain costs, changes in the competitive
environment in the Company's non-regulated segment, the adequacy and
timeliness of rate relief, cost recovery and necessary regulatory
approvals, and continued access to capital markets.
10
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The regulatory structure which has historically embraced the
gas industry has been in the process of transition. Legislative and
regulatory initiatives, at both the federal and state levels, are
designed to promote competition and will continue to impose
additional pressure on the Company's ability to retain customers and
to maintain current rate levels. The changes in the gas industry
have allowed commercial and industrial customers to negotiate their
own gas purchases directly with producers or brokers. To date, the
changes in the gas industry have not had a negative impact on
earnings or cash flow of the Company's regulated segment.
The accounts and rates of the Company's regulated segment are
subject, in certain respects, to the requirements of the Montana,
Wyoming and Arizona public utilities commissions. As a result, the
Company's regulated segment maintains its accounts in accordance with
the requirements of those regulators. The application of generally
accepted accounting principles by the Company's regulated segments
differ in certain respects from application by the non-regulated
segment and other non-regulated businesses. The regulated segment
prepares its financial statements in accordance with Statement of
Accounting Standards No. 71 --"Accounting for the Effects of Certain
Types of Regulation" (SFAS 71). In general, SFAS 71 recognizes that
accounting for rate-regulated enterprises should reflect the
relationship of costs and revenues. As a result, a regulated utility
may defer recognition of cost (a regulatory asset) or recognize an
obligation (a regulatory liability) if it is probable that, through
the rate-making process, there will be a corresponding increase or
decrease in revenues. Accordingly, the Company has deferred certain
costs, which will be amortized over various periods of time. The
costs deferred are further described in the Company's financial
statements and the notes thereto. To the extent that collection of
such costs or payment of liabilities is no longer probable as a
result of changes in regulation and/or the Company's competitive
position, the associated regulatory asset or liability will be
reversed with a charge or credit to income. If the Company's
regulated segment were to discontinue the application of SFAS 71, the
accounting impact would be an extraordinary, non-cash charge to
operations that could be material to the financial position and
results of operation of the Company. However, the Company is unaware
of any circumstances or events in the foreseeable future that would
cause it to discontinue the application of SFAS 71.
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.
11
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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.
12
***********************************************************************
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. However, management believes that regardless of the
alternative selected, the costs incurred will not materially affect
the Company's results of operations and net cash flows.
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. However, the Company cannot give assurance that
such costs will be recovered in that regulatory process.
13
***********************************************************************
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 file a general rate
increase with the Montana Public Service Commission for approximately
$963,000, 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 interim rate relief of
approximately $530,000 and the division expects interim relief no
later than November, 1996. If the Montana Public Service Commission
approves the Great Falls division's rate filing, the impact of rate
relief would increase earnings per share on an annual basis of
approximately $.26 per share and would increase Fiscal 1997 earnings
by approximately $.07 per share. The Rate Hearing will be held in
late Fiscal 1997.
14
***********************************************************************
Exhibit 24 Consent of Independent Auditors
We consent to the use of our report dated August 15, 1996,
incorporated by reference in the Annual Report (Form 10-K) of Energy
West Incorporated for the year ended June 30, 1996, with respect to
the consolidated financial statements, as amended, and the related
financial statement schedule, as amended, included in this Form 10-
K/A.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Denver, Colorado
March 21, 1997
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.
\s\ ERNST & YOUNG LLP
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
******************************************************************************
Energy West Incorporated and Subsidiaries
Consolidated Balance Sheets
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 of common 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 cash flow from
operations:
Depreciation and amortization 1,833,511 1,777,559 1,529,310
(Gain) on sale lease 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 (333,878) 682,896 (243,278)
------------------------------------------
Net cash provided by operating
activities 606,199 3,604,721 2,837,000
Investing activities
Construction expenditures (4,590,609) (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 (3,968,440) (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 385,851 54,621 (113,627)
Cash and cash equivalents at
beginning of year 507,450 452,829 566,456
------------------------------------------
Cash and cash equivalents at
end of year $ 893,301 $ 507,450 $ 452,829
==========================================
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
******************************************************************************
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
******************************************************************************
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 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 effects of
adopting the new standard are not expected to be material to the Company's
financial position or operations.
F-11
******************************************************************************
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.
Effects of Regulation
- ---------------------
All regulatory assets have been formally approved by the applicable
regulator, although other than environmental cleanup costs, no return on
assets is allowed by the regulators.
The Company uses the lives for depreciation as defined by the regulators
which approximates the economic lives for GAAP.
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. Borrowings 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
******************************************************************************
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
******************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Long-Term Debt Obligations (continued)
=========================================
Aggregate Annual Maturities
- ---------------------------
--IDR Obligations--
Fiscal Series ------------------- 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
******************************************************************************
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
******************************************************************************
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
******************************************************************************
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:
F-19
******************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Regulated and Nonregulated Operations (continued)
====================================================
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Note: These two tables were originally in side-by-side format. The format
was changed to meet the EDGAR file width limitations.
****************** JUNE 30, 1996 *****************
REG. NONREG. ADJ. CONSOL.
--------------------------------------------------
CAPITAL EXPENDITURES $3,910,000 $680,609 $4,590,609
--------------------------------------------------
PROPERTY,PLANT AND EQUIPMENT,
NET
REGULATED UTILITIES $22,362,130 $22,362,130
NONREGULATED PROPANE 2,971,174 2,971,174
OIL AND GAS OPERATIONS 274,352 274,352
REAL ESTATE HELD FOR
INVESTMENT 482,173 1 482,174
--------------------------------------------------
TOTAL P P & E 22,362,130 3,727,699 1 26,089,830
CURRENT ASSETS 7,663,566 2,385,186 (956,548) 9,092,204
OTHER ASSETS 3,669,404 590,542 (1,947,307) 2,312,639
--------------------------------------------------
TOTAL ASSETS $33,695,100 $6,703,427 ($2,903,854) $37,494,673
==================================================
EQUITY $9,303,596 $3,308,651 $(1,071,999) $11,540,248
LONG-TERM DEBT 8,257,090 1,788,624 10,045,714
CURRENT LIABILITIES 10,452,787 1,192,271 (557,495) 11,087,563
DEFERRED INCOME TAXES 3,207,968 366,716 (778,600) 2,796,084
OTHER LIABILITIES 2,473,659 47,165 (495,760) 2,025,064
--------------------------------------------------
TOTAL CAPITALIZATION AND
LIABILITIES $33,695,100 $6,703,427 ($2,903,854) $37,494,673
==================================================
****************** JUNE 30,1995 ******************
REG. NONREG. ADJ. CONSOL.
--------------------------------------------------
CAPITAL EXPENDITURES $3,933,828 $772,040 $4,705,868
--------------------------------------------------
PROPERTY,PLANT AND EQUIPMENT,
NET
REGULATED UTILITIES $19,907,237 $19,907,237
NONREGULATED PROPANE 2,811,913 2,811,913
OIL AND GAS OPERATIONS 334,704 334,704
REAL ESTATE HELD FOR
INVESTMENT 496,483 496,483
--------------------------------------------------
TOTAL P P & E 19,907,237 3,643,100 23,550,337
CURRENT ASSETS 4,458,594 2,420,839 (616,157) 6,263,276
OTHER ASSETS 3,884,006 496,360 (1,819,198) 2,561,168
--------------------------------------------------
TOTAL ASSETS $28,249,837 $6,560,299 ($2,435,355) $32,374,781
==================================================
EQUITY $8,903,740 $2,701,018 $(1,072,000) $10,532,758
LONG-TERM DEBT 8,533,074 1,901,883 10,434,957
CURRENT LIABILITIES 6,304,063 1,493,087 (1,011,157) 6,785,993
DEFERRED INCOME TAXES 2,727,782 299,343 (352,197) 2,674,928
OTHER LIABILITIES 1,781,178 164,968 (1) 1,946,145
--------------------------------------------------
TOTAL CAPITALIZATION AND
LIABILITIES $28,249,837 $6,560,299 ($2,435,355) $32,374,781
==================================================
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Note: These three tables were originally in side-by-side format. The format
was changed to meet the EDGAR file width limitations.
********************** 1996 **********************
REG. NONREG. ADJ. CONSOL.
--------------------------------------------------
OPERATING REVENUE $23,672,186 $4,510,942 ($1,213,359) $26,969,769
GAS TRADING REVENUE 4,348,239 4,348,239
--------------------------------------------------
TOTAL OPERATING REVENUE 23,672,186 8,859,181 (1,213,359) 31,318,008
GAS PURCHASED 13,646,178 2,539,635 (1,213,359) 14,972,454
COST OF GAS TRADING 3,751,053 3,751,053
DISTRIBUTION, GENERAL & ADMIN 5,578,188 1,346,203 6,924,391
MAINTENANCE 348,123 60,467 408,590
DEPRECIATION AND AMORTIZATION 1,359,339 307,917 1,667,256
TAXES OTHER THAN INCOME 523,768 105,660 629,428
--------------------------------------------------
OPERATING INCOME $2,216,590 $748,246 $0 $2,964,836
==================================================
********************** 1995 **********************
REG. NONREG. ADJ. CONSOL.
--------------------------------------------------
OPERATING REVENUE $24,363,446 $4,077,768 ($1,131,655) $27,309,559
GAS TRADING REVENUE 3,238,839 3,238,839
--------------------------------------------------
TOTAL OPERATING REVENUE 24,363,446 7,316,607 (1,131,655) 30,548,398
GAS PURCHASED 15,077,466 2,170,877 (1,131,655) 16,116,688
COST OF GAS TRADING 2,500,363 2,500,363
DISTRIBUTION, GENERAL & ADMIN 5,130,220 1,249,431 6,379,651
MAINTENANCE 304,677 1,400 306,077
DEPRECIATION AND AMORTIZATION 1,205,758 352,997 1,558,755
TAXES OTHER THAN INCOME 494,338 100,230 594,568
--------------------------------------------------
OPERATING INCOME $2,150,987 $941,309 $0 $3,092,296
==================================================
********************** 1994 ********************
REG. NONREG. ADJ. CONSOL.
------------------------------------------------
OPERATING REVENUE $24,421,153 $3,935,760 ($974,327) $27,382,586
GAS TRADING REVENUE 1,964,866 1,964,866
------------------------------------------------
TOTAL OPERATING REVENUE 24,421,153 5,900,626 (974,327) 29,347,452
GAS PURCHASED 15,666,853 2,050,377 (974,327) 16,742,903
COST OF GAS TRADING 1,667,182 1,667,182
DISTRIBUTION, GENERAL & ADMIN 4,792,531 1,187,090 5,979,621
MAINTENANCE 315,409 15,353 330,762
DEPRECIATION AND AMORTIZATION 1,134,150 329,928 1,464,078
TAXES OTHER THAN INCOME 430,446 96,696 527,142
------------------------------------------------
OPERATING INCOME $2,081,764 $554,000 $0 $2,635,764
================================================
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
F-20
******************************************************************************
Energy West Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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.
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
******************************************************************************
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 unleveraged ESOP
receives cash contributions from the Company each year as determined by the
Board of Directors and will buy shares of the Company's common stock from
either the Company or the open market at the then current price per share.
The ESOP has no allocated shares, committed-to-be-released shares or suspense
shares at the balance sheet dates. In addition, there are no unearned shares
and there is no repurchase obligation.
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. 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
******************************************************************************
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
******************************************************************************
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, results of operations and net cash flows.
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. During the fiscal year
ending June 30, 1996 the company had financial swap agreements in place with
average fixed prices of $1.33 per MMBTU. The index price paid for the
volumes associated with those agreements was $1.04. This price differential
had no impact on earnings, because the effect of the difference is included
in gas costs and adjusted to recoverable cost of gas purchases for any
differences between the cost of gas allowed by the regulators and the actual
prices paid.
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
******************************************************************************
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ENERGY WEST INC.
June 30, 1996
Balance at Charged Write-offs Balance
Beginning to Costs Net of at end of
Description of Period & Expenses Recoveries Period
Allowance for ---------- ---------- ---------- ----------
Uncollectible Accounts
- ------------------------
Year Ended June 30, 1994 $160,500 $141,590 ($121,799) $180,291
Year Ended June 30, 1995 $180,291 $81,327 ($70,450) $191,168
Year Ended June 30, 1996 $191,168 $64,509 ($47,571) $208,106
F-25
******************************************************************************
