<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report under section 13 or 15(d)
of the Securities Exchange Act of 1934
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER 0-14183
ENERGY WEST INCORPORATED
- ------------------------
(Exact name of registrant as specified in its charter)
Montana 81-0141785
- ---------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 First Avenue South, Great Falls, Mt. 59401
- ----------------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (406)-791-7500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT SEPTEMBER 30, 1997
(COMMON STOCK, $.15 PAR VALUE) 2,377,755
<PAGE>
ENERGY WEST INCORPORATED
INDEX TO FORM 10-Q
Page No.
Part I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1997 and June 30, 1997 1
Condensed Consolidated Statements of Income -
three months ended September 30, 1997 and 1996 2
Condensed Consolidated Statements of cash flows
three months ended September 30, 1997 and 1996 3
Notes to Condensed Consolidated Financial Statements 4-11
Item 2 - Management's discussion and analysis of
financial condition and results of operations 12-15
Part II Other Information
Item 1 - Legal Proceedings 16
Item 2 - Changes in Securities 17
Item 3 - Defaults upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Reports on Form 8-K 17
Signatures
<PAGE>
I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30 June 30
1997 1997
------------- -----------
<S> <C> <C>
Current Assets:
Cash $ 15,938 $ 148,665
Restricted Deposit with Trustee - -
Accounts Receivable (net) 3,226,402 3,402,528
Natural Gas and Propane Inventory 6,314,167 5,792,517
Materials and Supplies 551,649 561,112
Prepayments and other 840,823 518,504
Refundable Income Tax Payments 582,399 301,711
Recoverable Cost of Gas Purchases 1,921,919 1,673,285
Deferred income taxes - current 184,597 -
------------- -----------
Total Current Assets 13,637,894 12,398,322
------------- -----------
Investments 257,560 257,560
Notes Receivable Due After One Year 2,537 2,537
Property, Plant and Equipment-Net 27,903,141 27,397,780
Deferred Charges 3,606,495 2,828,650
------------- -----------
Total Assets $45,407,627 $42,884,849
------------- -----------
------------- -----------
CAPITALIZATION AND LIABILITIES
Capitalization and liabilities:
Current Liabilities:
Note payable to bank $ 6,160,000 $11,380,000
Long-term debt due within one year 244,694 361,959
Accounts Payable - Gas Purchases 1,206,447 1,158,700
Other Current and Accrued Liabilities 2,426,344 2,416,226
------------- -----------
Total Current Liabilities 10,037,485 15,316,885
Deferred Credits 6,711,409 5,887,275
Long-term obligations 17,443,755 9,683,755
Stockholders' Equity
Preferred Stock $0 $0
Common Stock (2,377,755 and
2,357,470 shares were outstanding at September
30, 1997 and June 30, 1997 respectively) 356,666 353,623
Capital in Excess of Par Value 3,090,315 2,932,962
Retained Earnings 7,767,997 8,710,349
------------- -----------
Total Stockholder's Equity 11,214,978 11,996,934
------------- -----------
Total Capitalization and Liabilities $45,407,627 $42,884,849
------------- -----------
------------- -----------
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
-1-
<PAGE>
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months and
Year-To-Date
September 30
(Restated)
1997 1996
--------------------------
Operating revenue:
Regulated utilities $ 3,113,286 $ 2,877,377
Nonregulated operations 1,153,640 1,057,081
Gas trading 957,589 657,346
--------------------------
Total Revenue 5,224,515 4,591,804
--------------------------
--------------------------
Operating Expenses
Gas Purchased 2,509,841 2,128,287
Cost of gas trading 876,315 588,348
Distribution, general and administrative 1,864,069 1,921,857
Maintenance 123,874 101,454
Depreciation and Amortization 448,481 465,143
Other Taxes 146,341 145,963
--------------------------
Total Operating Expenses 5,968,921 5,351,052
--------------------------
--------------------------
Operating Loss (744,406) (759,248)
Other Income (Loss) - Net 89,223 91,403
--------------------------
Loss before interest charges and
income tax benefit (655,183) (667,845)
--------------------------
Interest Charges:
Long-Term Debt 250,038 174,363
Other 180,685 164,270
--------------------------
Total Interest Charges 430,723 338,633
--------------------------
--------------------------
Loss before income tax benefit (1,085,906) (1,006,478)
Provision for Income tax benefit (405,107) (372,996)
--------------------------
Net Loss ($680,799) ($633,482)
--------------------------
--------------------------
Loss Per Share of Common and
Common Equivalent Stock:
Loss per share ($0.29) ($0.27)
--------------------------
--------------------------
Dividends per common share 0.1100 0.1000
Weighted Average Common
Shares Outstanding 2,375,899 2,335,652
The accompanying notes are an integral part of these condensed
financial statements.
-2-
<PAGE>
FORM 10Q
ENERGY WEST INCORPORATED
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
September 30
(Restated)
1997 1996
--------------------------
<S> <C> <C>
Operating Activities:
Net Loss ($680,799) ($633,482)
Adjustment to Reconcile Net Loss to Cash Flows:
Depreciation and Amortization 501,375 550,340
(Gain) Loss on Sale of Marketable Equity Securities 0 (100,526)
(Gain) Loss on Sale of Property, Plant & Equipment (10,234) 232
Deferred Gain on Sale of Assets (5,907) (5,907)
Investment Tax Credit - Net (5,266) (5,266)
Deferred Income Taxes - Net 126,574 401,974
Change in Operating Assets and Liabilities
Accounts Receivable 176,126 195,375
Gas Inventory (385,605) (689,638)
Accounts Payable 41,828 (24,389)
Recoverable Cost of Gas Purchases (248,633) (803,152)
Prepaids (322,319) (221,404)
Other Assets and Liabilities (583,622) (450,173)
--------------------------
Net Cash Provided by (Used In) Operating Activities (1,396,482) (1,786,016)
Investing Activities:
Construction Expenditures (855,592) (960,718)
Collection of Long-Term Notes Receivable 0 696
Proceeds from Contributions in Aid of Construction 116,978 30,160
Proceeds from Sale of Property, Plant & Equipment 14,250 1,811
Proceeds from Sale of Mkt Equity Securities 0 273,572
--------------------------
Net Cash Provided by (Used In) Investing Activities (724,364) (654,479)
Financing Activities:
Proceeds from Long-Term Debt 8,000,000 -
Debt Issuance and Reacquisition Costs (335,724) -
Repayment of Long-Term Debt (355,000) (355,000)
Proceeds from Notes Payable 7,760,000 5,085,000
Repayment of Short-Term Borrowings (12,980,000) (2,900,000)
Proceeds from Sale of Common Stock 160,396 124,492
Dividends on Common Stock (261,553) (158,308)
--------------------------
Net Cash Provided by (Used In) Financing Activities 1,988,119 1,796,184
--------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (132,727) (644,311)
Cash and Cash Equivalents at Beginning of Year 148,665 721,093
--------------------------
Cash and Cash Equivalents at End of Period $15,938 $76,782
--------------------------
--------------------------
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
-3-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to form 10-q and
article 10 of regulation s-x. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended september 30, 1997 are not
necessarily indicative of the results that may be expected for the year
ended june 30, 1998 due to seasonal factors affecting gas utility,
construction and other operations. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
energy west incorporated (The company) annual report on form 10-k for the
year ended june 30, 1997.
Prior Period Adjustment
The company has restated its previously issued fiscal 1997 condensed
consolidated statements of income for the three months ended september 30,
1996, to reflect the deferral of the gain on sale-leaseback of assets
totalling $236,000, which occurred in june 1996. The gain is being amortized
ratably into income over the initial ten-year lease term. The effect of the
amortization on results of operations for the above mentioned condensed
consolidated statements of income is as follows:
September 30, 1996
Net Income (loss): three months ended
------------------
As previously reported ($636,811)
As restated ($633,482)
Net income per common share:
As previously reported ($.27)
As restated ($.27)
4
<PAGE>
Note 2 - Earnings Per Common and Common Equivalent Share
Earnings per common share are computed based on the weighted average number
of common shares issued and outstanding and common stock equivalents, if
dilutive. In february 1997, the financial accounting standards board (sfas)
issued statement of financial accounting standards no. 128, earnings per
share. The overall objective of statement 128 is to simplify the calculation
of earnings per share (eps) and achieve comparability with the recently
issued international accounting standard no. 33, earnings per share.
Statement 128 is effective for both interim and annual financial statements
for periods ending after december 15, 1997. Earlier application is not
permitted. As a result, calendar year end companies will first report on the
new eps basis in the fourth quarter ended december, 1997. Subsequent to the
effective date, all prior-period eps amounts (including eps information in
interim financial statements, earnings summaries, and selected financial
data) are required to be restated to conform to the provisions of statement
128. Under statement 128, primary eps will be replaced with a new simpler
calculation called basic eps. Basic eps will be calculated by dividing
income available to common stockholders (i.e., net income less preferred
stock dividends) by the weighted average common shares outstanding. Thus, in
the most significant change in current practice, options, warrants, and
convertible securities will be excluded from the calculation. Further,
contingently issuable shares will be included in basic eps only if all the
necessary conditions have been satisfied by the end of the period and it is
only a matter of time before they are issued. Basic eps under statement 128
will result in higher earnings per share because common stock equivalents
will not be included. Thus, the basic eps calculation will be less complex
and easier to prepare. The company has not calculated basic earnings per
share at the end of september 30, 1997, but will adopt this standard in the
second quarter of fiscal 1998.
5
<PAGE>
Note 3 - Principal Accounting Policies
The company has elected to follow accounting principles board opinion ("apb")
no. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (the intrinsic value
method), for its stock options rather than the alternative fair value method
provided for by sfas no. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
Accounting for stock options using apb no. 25 results in no compensation
expense to the company because the exercise price for the stock options
equals the market price of the underlying stock on the date of the grant.
Since the company has elected to use apb no. 25, pro forma information
regarding net income and earnings per share is required by sfas no. 123 as if
the company had accounted for its stock options under the fair value method
of that statement. For the fiscal year through september 30, 1997, no
options were granted and for the fiscal year ended june 30, 1997 only a
limited number of options were granted, resulting in no material impact on
pro forma net income or earnings per share. The fair value for these options
was estimated at the date of grant using the black-scholes option pricing
model with the following weighted average assumptions:
1997
--------
Risk-free interest rate--length of exercise period 6.3%
Dividend yields 5.2%
Volatility factors of the expected market price of
the Company's common stock .187
Weighted-average expected life of the employee
stock options 5 years
The weighted-average fair value of options granted $1.20
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions, including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of the Company's stock
options.
Note 4 - Deferred Gain on Sale of Assets
On June 28, 1996, one of the Company's nonregulated subsidiaries sold real
property, consisting of land and office and warehouse buildings, for $525,000 in
cash. Concurrent with the sale, the Company leased the property back for a
period of ten years at an annual rental of $51,975. The initial ten-year term
of the lease extends automatically for two successive five-year periods unless
the Company provides at least six months notice of non-renewal prior to the end
of either the initial term or the first successive five-year term.
Note 5 - Financial Instruments and Risk Management
The Company realized a gain of approximately $100,526 pre-tax on the sale of
marketable equity securities in the first quarter of 1997.
6
<PAGE>
Note 5 - Financial Instruments and Risk Management (Continued)
For the period ended September 30, 1997, the Company is a party to one gas
hedge agreement for nonregulated operations. This agreement represents
approximately 95% of the supply required for those operations. The hedge
was made to minimize the Company's exposure to price fluctuations and to
secure a known margin for the purchase and resale of gas.
<TABLE>
<CAPTION>
Fair
Index Price Value of
Volume Range for Contract Market Remaining
Fiscal Year (MMBTU Per Effective Termination Contract Fiscal Value at Price at Contract
1997 Day) Date Date Price Year Sep 30 Sep 30 at Sep 30
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hedge #3 500 1/1/97 6/30/98 $2.08 $1.44 to $1.47 $283,920 $1.85 $252,525 (1)
</TABLE>
In July 1997 the Company signed a gas hedge agreement beginning November 1,
1997 and ending March 31, 1998 for 5,000 MMBTU per day at $2.075 per MMBTU
for one of its regulated operations. This hedge was entered into to minimize
the Companys exposure to price fluctuations.
(1) On October 20, 1997, this hedge was sold at a market price of $2.14 per
MMBTU, which resulted in a small gain.
7
<PAGE>
Note 6 - Income Taxes
Under the liability method prescribed by SFAS No. 109, deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and
amounts used for income tax purposes. At September 30, 1997, components of
the Company's deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtfulaccounts............................................... $ 42,234
Unamortized Investment Tax Credit............................................ 149,182
Contributions in Aid of Construction......................................... 248,277
Deferred Gain on Sale of Assets.............................................. 84,853
Other nondeductible accruals................................................. 117,261
----------
Total deferred tax assets................................................. 641,807
----------
Deferred tax liabilities:
Customer refunds payable..................................................... 756,008
Property, Plant and Equipment................................................ 3,327,952
Unamortized Debt Issue Costs................................................. 183,895
Covenant Not to Compete...................................................... 83,737
----------
Total deferred tax liabilities............................................ 4,351,592
----------
Net deferred tax liability..................................................... $3,709,785
----------
----------
Income tax expense consists of the following:
Current income taxes (benefits):
Federal..................................................................... ($460,857)
State....................................................................... (70,894)
----------
Total current income taxes (benefits) ....................................... (531,751)
----------
Deferred income taxes (benefits):
Excess tax depreciation..................................................... 92,561
Excess tax (book) amortization.............................................. (4,609)
Recoverable cost of gas purchases........................................... 98,549
Contributions in Aid of Construction........................................ (43,239)
----------
Other....................................................................... (11,352)
Total deferred income taxes................................................... 131,910
Investment tax credit, net..................................................... (5,266)
----------
Total income taxes (benefits).................................................. ($405,107)
----------
----------
</TABLE>
Income tax expense from operations differs from the amount computed by
applying the federal statutory rate to pre-tax income for the following
reasons:
<TABLE>
<S> <C>
Tax expense (benefit) at statutory rates - 34%................................. ($369,650)
State income taxes (benefit), net of federal income taxes...................... (28,370)
Amortization of deferred investment tax credits................................ (5,266)
Other.......................................................................... (1,821)
----------
Total income taxes (benefits).................................................. ($405,107)
----------
----------
</TABLE>
8
<PAGE>
Note 7 - Commitments and Contingencies
Commitments
The Company has entered into long-term, take or pay natural gas supply
contracts which expire beginning in 1998 and ending in 2007. The contracts
generally require the Company to purchase specified minimum volumes of
natural gas at a fixed price which is subject to renegotiation every two
years. Current prices per Mcf for these contracts range from $1.60 to $1.65.
Based on current prices, the minimum take or pay obligation at September 30,
1997 for each of the next five years and in total is as follows:
Fiscal Year
-----------
1998 $1,564,513
1999 1,260,913
2000 822,913
2001 555,713
2002 164,250
Thereafter 821,250
----------
Total 5,189,552
----------
----------
Natural gas purchases under these contracts for the years ended June 30,
1997, 1996 and 1995 approximated $1,100,000, $3,530,000, and $4,000,000,
respectively.
On August 1, 1997, the Company entered into a take or pay propane contract
which expires July 31, 1998. The contract generally requires the Company to
purchase all propane quantities produced by a propane producer in Wyoming
(approximately 250,000 gallons per month) tied to the Worland, Wyoming spot
price.
9
<PAGE>
Note 7 - Commitments and Contingencies (Continued)
ENVIRONMENTAL MATTER
The Company owns property on which it operated a manufactured gas plant from
1909 to 1928. The site is currently used as a service center where certain
equipment and materials are stored. The coal gasification process utilized
in the plant resulted in the production of certain by-products which have
been classified by the federal government and the State of Montana as
hazardous to the environment. Several years ago the Company initiated an
assessment of the site to determine if remediation of the site was required.
That assessment resulted in a submission to the Montana Department of
Environmental Quality ("MDEQ"), formerly known as the Montana Department of
Health and Environmental Science ("MDHES"), in 1994. The Company has worked
with the MDEQ since that time to obtain the data that would lead to a
remediation action acceptable to the MDEQ. The Company's environmental
consultant filed the report with the MDEQ on June 11, 1997. The MDEQ is
evaluating the report and after completion of its review will provide for
public comment related to the remediation plan. Once the comment period has
lapsed and due consideration of any comments occurs, the plan can be
finalized. Assuming acceptance of the plan, remediation could be in place by
the fall of 1998.
At September 30, 1997, the costs incurred in evaluating this site have
totaled approximately $442,000. On May 30, 1995, the Company received an
order from the Montana Public Service Commission allowing for recovery of the
costs associated with evaluation and remediation of the site through a
surcharge on customer bills. As of September 30, 1997, that recovery
mechanism had generated approximately $423,000, or about what had been
expended. The Commission's decision calls for ongoing review by the
Commission of the costs incurred for this matter. The Company will submit an
application for review by the Commission when the remediation plan is
approved by the MDEQ.
LEGAL PROCEEDINGS
From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. Neither the
Company nor any of its subsidiaries is a party to any legal proceedings,
other than as described in Part 11 -Other information, Item 1., the adverse
outcome of which individually or in the aggregate, in the Company's view,
would have a material adverse effect on the Company's results of operations,
financial position or liquidity.
10
<PAGE>
Note 8 - Operating Revenues and Expenses,
Regulated utility and non-regulated non-utility operating revenues and
expenses were as follows:
Three Months
Ended
September 30
-----------------------
1997 1996
---------- ----------
Operating Revenues:
Regulated utilities $3,113,286 $2,877,377
Non-regulated operations 1,153,640 1,057,081
Gas trading 957,589 657,346
---------- ----------
$5,224,515 $4,591,804
---------- ----------
---------- ----------
Operating Expenses:
Gas Purchased:
Regulated $1,695,157 $1,429,943
Non-regulated 814,684 698,344
Cost of gas trading 876,315 588,348
---------- ----------
$3,386,156 $2,716,635
---------- ----------
---------- ----------
Distribution, general and administrative:
Regulated $1,450,376 $1,547,146
Non-regulated 413,693 374,711
---------- ----------
$1,864,069 $1,921,857
---------- ----------
---------- ----------
Maintenance:
Regulated $97,242 $77,963
Non-regulated 26,632 23,491
---------- ----------
$123,874 $101,454
---------- ----------
---------- ----------
Depreciation and amortization:
Regulated $360,923 $370,665
Non-regulated 87,558 94,478
---------- ----------
$448,481 $465,143
---------- ----------
---------- ----------
Taxes other than income:
Regulated $121,108 $120,346
Non-regulated 25,233 25,617
---------- ----------
$146,341 $145,963
---------- ----------
---------- ----------
Income taxes (benefit):
Regulated ( $340,680) ( $344,118)
Non-regulated (64,427) (28,878)
---------- ----------
($405,107) ($372,996)
---------- ----------
---------- ----------
11
<PAGE>
FORM 10-Q
ENERGY WEST INCORPORATED
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL STATEMENTS
The following discussion reflects results of operations of the Company and
its consolidated subsidiaries for the periods indicated. The Company's
regulated utility operations primarily involve the distribution and sale of
natural gas to the public in the Great Falls, Montana and Cody, Wyoming areas
and the distribution of propane to the public through underground propane
vapor systems in the Payson, Arizona and Cascade, Montana areas. Since 1995,
the Company's regulated utility operations have also included the
distribution of natural gas through an underground system in West
Yellowstone, Montana that is supplied by liquified natural gas.
The Company conducts certain non-utility operations through its three
wholly-owned subsidiaries: Rocky Mountain Fuels, Inc. (RMF), a
distributor of bulk propane in northwestern Wyoming, Cascade, Montana and
the Payson, Arizona area; Energy West Resources, Inc. Which is involved in
the marketing of natural gas in Montana and Wyoming and gas storage; Montana
Sun, Inc., which owns two real estate properties in Great Falls, Montana,
along with certain other investments.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating capital needs, as well as dividend payments and
capital expenditures, are generally funded through cash flow from operating
activities, short-term borrowing and liquidation of temporary cash
investments. Historically, to the extent cash flow has not been sufficient to
fund capital expenditures, the Company has borrowed short-term or issued
equity securities to fund capital expansion projects or reduce short-term
borrowing.
The Company's short-term borrowing requirements vary according to the
seasonal nature of its sales and expense activity. The Company has greater
need for short-term borrowing during periods when internally generated funds
are not sufficient to cover all capital and operating requirements, including
costs of gas purchases and capital expenditures. In general, the Company's
short-term borrowing needs for purchases of gas inventory and capital
expenditures are greatest during the summer months and the Company's
short-term borrowing needs for financing of customer accounts receivable are
greatest during the winter months. In addition during the past three years,
the Company has used short-term borrowing to finance the acquisition of
propane operations and LNG for West Yellowstone Gas. Short-term borrowing
utilized for construction or property acquisitions generally has been on an
interim basis and converted to long-term debt and equity when it becomes
economical and feasible to do so.
At September 30, 1997, the Company had $19,000,000 in bank lines of credit,
of which $6,160,000 had been borrowed under the credit agreement.
The Company closed an $8,000,000 debt issuance on august 15, 1997. The net
proceeds received, after payment of issuance costs, were approximately
$7,600,000 and were used to pay down short-term debt. The interest rate for
these bonds is 7.5% for a term of fifteen years to be paid off by june 1,
2012.
12
<PAGE>
The Company used net cash in operating activities for the three months ended
September 30, 1997 in the amount of $1,396,482 as compared to $1,786,016 for
the three months ended September 30, 1996. This decrease in cash used in
operating activities of approximately $390,000 was primarily due to lower
working capital requirements of approximately $670,000, partially offset by a
reduction in the gain on sale of marketable equity securities of
approximately $100,000, a higher net loss of approximately $50,000, higher
depreciation of approximately $50,000 and lower deferred income taxes of
approximately $275,000. The lower working capital requirements of
approximately $670,000 is primarily due to smaller increases in gas inventory
and recoverable cost of gas purchases.
Cash used in investing activities was approximately $724,000 for the three
months ended September 30, 1997, as compared to approximately $654,000 for
the three months ended September 30, 1996, an increase of approximately
$70,000 primarily due to lower proceeds from the sale of marketable equity
securities of approximately $274,000, partially offset by lower construction
expenditures of approximately $105,000, increases in Contributions in Aid of
Construction of approximately $87,000 and increases in proceeds from sale of
property, plant and equipment of approximately $12,000.
Cash provided by financing activities was approximately $1,988,000 for the
three months ended september 30, 1997, as compared to approximately
$1,796,000 for the three months ended september 30, 1996. The increase in
cash provided by financing activities of approximately $190,000 resulted
primarily from net proceeds from a long-term debt issue of approximately
$7,664,000 and an increase in proceeds from the sale of common stock of
approximately $36,000, partially offset by an increase inrepayment of
short-term debt of approximately $7,405,000 and an increase in dividends paid
of approximately $100,000.
Capital expenditures of the Company are primarily for expansion and
improvement of its gas utility properties. To a lesser extent, funds are
also expended to meet the equipment needs of the Company's operating
subsidiaries and to meet the Company's administrative needs. The Company's
capital expenditures were approximately $3.2 million in fiscal 1997 and
approximately $4.6 million for fiscal 1996. During fiscal 1997,
approximately $1.7 million has been expended for the construction and
maintenance of the natural gas systems in Great Falls, Cascade and West
Yellowstone, Montana and Cody, Wyoming and approximately $1.2 million had
been expended for gas system expansion projects for new subdivisions in the
Broken Bow division's service area in Arizona and approximately $400,000 for
additions to the propane operations of the Company in Wyoming, Montana and
Arizona. Capital expenditures are expected to be approximately $3.6 million
in fiscal 1998, including approximately $915,000 for continued expansion for
the broken bow division, $116,000 in the Cody division and approximately $1.9
million for maintenance and other special system expansion projects in the
Great Falls and West Yellowstone divisions and the balance of approximately
$700,000 for the Company's propane operations in the three states it serves.
As of September 30, 1997, approximately $933,000 of that amount had been
expended.
13
<PAGE>
RESULTS OF CONSOLIDATED OPERATIONS
COMPARISON OF FIRST QUARTER OF FISCAL 1998 ENDED SEPTEMBER 30, 1997 AND FISCAL
1996 ENDED SEPTEMBER 30, 1996
The Company's net loss for the first quarter ended September 30, 1997 was
($680,799) compared to ($633,482) for the quarter ended September 30, 1996.
The increased net loss in the first quarter of fiscal 1998 was due primarily
to higher long-term and short-term interest costs, due to facility expansion
and increased gas storage requirements.
UTILITY OPERATIONS -
Utility operating revenues in the first three months of fiscal 1998 were
approximately $3,113,000 compared to approximately $2,877,000 for the first
three months of fiscal 1997. Operating loss decreased approximately 8% or
$56,000 from fiscal 1997 and was approximately($615,000) for the first three
months of fiscal 1998 compared to operating loss of approximately ($672,000).
This decrease in operating loss was primarily due to lower utility operating
expenses due to more payroll, payroll taxes and other expenses capitalized to
projects of approximately $78,000, lower depreciation and amortization
expenses of approximately $10,000, offset partially by lower gross margins
of approximately 2% or $29,000, Gross Margin, which is defined as operating
revenues less gas purchased, was approximately $1,418,000 for the first three
months of fiscal 1998 compared to gross margin of approximately $1,447,000
for the first three months of fiscal 1997. Gross margins decreased 7%
because of lower margins from natural gas sales in the Great Falls and Cody
divisions and in the West Yellowstone area, due to warmer weather than one
year ago, offset partially by higher margins from propane vapor sales in the
Broken Bow division, due to a rate increase.
OPERATING EXPENSES -
Utility operating expenses, excluding the cost of gas purchased and federal
and state income taxes, were approximately $2,033,000 for the first three
months of fiscal 1998 as compared to $2,119,000 for the same period in fiscal
1997. The 4% decrease in the period was generally due to more payroll and
other expenses capitalized to projects.
INTEREST CHARGES -
Interest charges allocable to the company's utility divisions were
approximately $359,000 for the first quarter of fiscal 1998, as compared
to $324,000 in the comparable period in fiscal 1997. Long term debt interest
increased due to an $8,000,000 debt issuance on August 15, 1997, which was
used to pay down short-term debt, however overall interest charges increased
primarily due to facility expansion and increases in gas storage.
INCOME TAXES -
State and federal income tax benefits of the Company's utility divisions were
approximately ($362,000) for the first quarter of fiscal 1998, approximately
the same for the first quarter in fiscal 1997. Pre-tax loss of the utility
divisions was approximately the same for the first quarter of fiscal 1998 and
1997.
14
<PAGE>
NON-REGULATED OPERATIONS -
Non-regulated operating revenues for the first quarter ended September 30, 1997
were approximately $2,111,000 compared to $1,714,000 for the first quarter of
fiscal 1997. Non-regulated operating revenues for fiscal 1998 consisted of
$1,129,000 for RMF, $958,000 for Energy West Resources, Inc. and $24,000 for
Montana Sun, Inc. Operating loss, which is defined as operating revenues less
gas purchased, distribution, general, administrative, maintenance,
depreciation, amortization and taxes other than income, increased approximately
57% or $47,000 from fiscal 1997 and was approximately ($130,000) for the first
quarter of fiscal 1998 compared to an operating loss of approximately ($83,000)
for the first quarter of fiscal 1997. While the operating loss for RMF was
approximately ($115,000) for the first quarter of fiscal 1998, almost equivalent
to the first quarter of fiscal 1997, Energy West Resources, Inc's operating loss
of approximately ($29,000) compared to operating income in fiscal 1997 of
approximately $19,000, increased the operating loss in non-regulated
operations. The reason for Energy West Resources, Inc's increase in operating
loss is primarily due to lower gas marketing margins because of increased
natural gas prices for purchases and higher general and administrative costs due
to staff expansion and training required to serve the growth in marketing
activity.
ROCKY MOUNTAIN FUELS -
For the three months ended september 30, 1997, RMF generated a net loss of
approximately ($98,000) compared to a net loss of approximately( $88,000)
for the three months ended September 30, 1996. Approximately ($68,000) of
RMF's net loss for the first quarter of fiscal 1998 was attributable to the
Wyo L-P Gas division in Wyoming, approximately ($16,000) to the Petrogas
division in Arizona, with the balance of approximately ($14,000) net loss
attributable to Missouri River Propane in Montana. RMF's gross margins of
approximately $315,000, for the three months ended September 30, 1997 were
almost identical to the same period last year. Margins this quarter decreased
in the Wyo L-P division from the same quarter last year from approximately
$250,000 to $228,000 due to decreased propane sales because of warmer
weather, than one year ago. Margins in the Petrogas division in Arizona
increased this quarter from approximately $59,000 to $76,000, due to customer
growth, while Missouri River Propane in Montana margins remained relatively
similar to the same quarter one year ago. RMF experienced higher short-term
interest costs due to expansion of plant in Montana and Wyoming. State and
federal income tax benefits increased to approximately ($52,000) for this
quarter from ($50,000) last year, due to a higher pre-tax loss of Rocky
Mountain Fuels, Inc.
ENERGY WEST RESOURCES, INC. -
For the three months ended September 30, 1997, Energy West Resources, Inc.'s
net loss was approximately ($19,000) Compared to net income of approximately
$26,000 for the three months ended September 30, 1996, primarily due to
higher general and administrative expenses than in the same period last year,
due to staff expansion and training required to serve the growth in marketing
activity. Gas trading margins decreased approximately $7,000, or 8%due to
increased natural gas prices in Canada and Montana. State and federal income
taxes decreased this quarter to approximately a ($10,000) benefit from
approximately $15,000 income tax, the same quarter one year ago, due to a
pre-tax loss of Energy West Resources, Inc. This quarter as compared to
pre-tax income the same quarter one year ago.
MONTANA SUN, INC. -
For the three months ended September 30, 1997, Montana Sun, Inc.'s net income
was approximately $4,000 compared to $10,000 for the three months ended
September 30, 1996, primarily due to less interest income, because of the sale
of Montana Sun marketable equity securities,
15
<PAGE>
FORM 10-Q
PART 11 - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the company is involved in litigation relating to claims
arising from its operations in the normal course of business. Neither the
company nor any of its subsidiaries is a party to any legal proceedings,
other than as described below, the adverse outcome of which individually or
in the aggregate, in the company's view, would have a material adverse effect
on the company's results of operations, financial position or liquidity.
On december 20, 1996, an action was filed against the company by randy hynes
and melissa hynes in federal district court in wyoming. The action arises
from a natural gas explosion involving a four-plex apartment building which
was damaged after natural gas from a gas line leaked into the building on
february 3, 1996 (which was not served by natural gas). The plaintiffs, who
were tenants in the building, sustained burns and other injuries as well as
property damage. The plaintiffs allege that the company was negligent in
that it failed to maintain the natural gas line consistent with its duty to
do so and failed to properly odorize the gas which caused the explosion.
The action also asserts claims of product liability, willful and wanton
conduct and breach of warranty. The plaintiffs are seeking damages for
personal injury, pain and suffering, emotional distress, loss of earnings,
medical expenses, physical disability and property damage as well as punitive
damages. A dollar amount has not been set forth in the pleadings. The
company denies responsibility for the damages and is vigorously contesting
the matter. The company believes the gas leak resulted from damage caused to
the pipeline by an unknown third party. Discovery is proceeding at this
time. A trial has been scheduled for january 12, 1998.
A similar lawsuit involving the same explosion was filed by five other
plaintiffs in wyoming district court, park county, wyoming on april 3, 1997.
The allegations are substantially the same as the allegations in the federal
district court case. The company has filed an answer denying liability and
is contesting the matter vigorously. Only limited discovery has occurred to
date. The plaintiffs, heidl woodward, et al., were also tenants in the
apartment building.
On october 24, 1996, an action was filed against the company by colten and
julie white and their three children in superior court in gila county,
arizona. The action arises from an explosion that occurred on may 3, 1995 in
the plaintiffs' new home which was serviced by the company's propane
business. The explosion occurred in the course of the plaintiffs' attempt to
light their appliances for the first time. The plaintiffs sustained injuries
and property damage in the explosion and the fire that occurred after the
explosion. The claims are for personal injury, mental suffering and anguish,
medical expenses, lost income, property damages and punitive damages.
Plaintiffs' claims are based on a strict liability claim that the propane was
defective, breach of warranty in that the propane was not fit for the purpose
for which it was intended and negligence for failure to assure that the
propane was properly odorized. The dollar value of the claims has not been
set forth in the pleadings of the plaintiffs.
The company carries commercial general liability insurance for bodily injury
and property damages of $1,000,000 per occurrence and $5,000,000 in the
aggregate, and has an additional $30,000,000 umbrella policy for excess
claims. The company's general liability carrier has assumed the defense of
both wyoming actions and the arizona action. The company believes it has
insurance coverage for these matters. However, no assurance can be given
that insurance will cover these matters in the event that the company is held
liable. In the event of an adverse result for the company, and if the
company's insurance does not cover the matters or is not sufficient to cover
the matters, such result could have a material adverse effect on the
company's results of operations, financial position and liquidity (depending
on the amount of the judgment or judgments).
16
<PAGE>
FORM 10-Q
PART II - OTHER INFORMATION (CONTINUED)
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits (See Exhibit Index on Page E-1)
B. No reports on Form 8-K have been filed during the quarter ended
September 30, 1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Larry D. Geske
-------------------------------
Larry D. Geske, President and
Chief Executive Officer
Dated November 14, 1997
/s/ William J. Quast
-------------------------------
William J. Quast, Vice-President,
Treasurer, Controller and Assistant
Secretary
18
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