<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 March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File number 0-14183
- ------------------------------
ENERGY WEST INCORPORATED
- ------------------------
(Exact name of registrant as specified in its charter)
Montana 81-0141785
- ---------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 First Avenue South, Great Falls, Mt. 59401
- ----------------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (406)-791-7500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 31, 1998
- -----------------------------------
(Common stock, $.15 par value) 2,401,058
- ----------------------------------------
<PAGE>
ENERGY WEST INCORPORATED
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1998 and June 30, 1997 1
Condensed Consolidated Statements of Income -
three months and nine months ended March 31, 1998
and 1997 2
Condensed Consolidated Statements of cash flows -
nine months ended March 31, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4-10
Item 2 - Management's discussion and analysis of
financial condition and results of operations 11-17
Part II Other Information
Item 1 - Legal Proceedings 18
Item 2 - Changes in Securities 19
Item 3 - Defaults upon Senior Securities 19
Item 4 - Submission of Matters to a Vote of Security Holders 19
Item 5 - Other Information 19
Item 6 - Reports on Form 8-K 19
Signatures
</TABLE>
<PAGE>
I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORM 10-Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31 June 30
1998 1997
-------- -------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $200,256 $148,665
Accounts Receivable (net) 8,835,390 3,402,528
Natural Gas and Propane Inventory 1,282,170 5,792,517
Materials and Supplies 494,232 561,112
Prepayments and Other 296,620 518,504
Refundable Income Tax Payments 0 301,711
Recoverable Cost of Gas Purchases 2,368,420 1,673,285
Deferred Income Taxes - current 184,597 0
------------ -----------
Total Current Assets 13,661,685 12,398,322
------------ -----------
Investments 0 257,560
Notes Receivable Due After One Year 196,924 2,537
Property, Plant and Equipment-Net 27,272,907 27,397,780
Deferred Charges 3,869,971 2,828,650
------------ -----------
Total Assets $45,001,487 $42,884,849
------------ -----------
------------ -----------
<CAPTION>
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
Capitalization and Liabilities:
Current Liabilities:
Note Payable to bank $0 $11,380,000
Long-term Debt due within one year 240,127 361,959
Accounts Payable - Gas Purchases 3,719,878 1,158,700
Other Current and Accrued Liabilities 3,629,681 2,416,226
------------ -----------
Total Current Liabilities 7,589,686 15,316,885
------------ -----------
Deferred Credits 6,843,138 5,887,275
Long-term Debt (less amounts due within one year) 17,443,755 9,683,755
Stockholders' Equity
Preferred Stock 0 0
Common Stock ( 2,401,058 and
2,357,740 shares were outstanding at March
31, 1998 and June 30, 1997, respectively) 359,824 353,623
Capital in Excess of Par Value 3,247,761 2,932,962
Retained Earnings 9,517,322 8,710,349
------------ -----------
Total Stockholders' Equity 13,124,907 11,996,934
------------ -----------
Total Capitalization and Liabilities $45,001,487 $42,884,849
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
1
<PAGE>
FORM 10-Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
1998 1997 1998 1997
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Operating revenue:
Regulated utilities $10,856,147 $10,225,740 $22,896,745 $21,994,853
Nonregulated operations 3,501,536 3,655,501 7,377,734 7,763,078
Gas trading 4,856,812 2,040,786 8,806,111 4,417,547
----------------------------------------------------------
Total Revenue 19,214,495 15,922,027 39,080,590 34,175,478
----------------------------------------------------------
Operating Expenses
Gas Purchased 9,562,690 9,335,727 19,651,331 19,085,015
Cost of gas trading 4,573,972 1,841,406 8,228,578 4,095,567
Distribution, general and administrative 2,014,305 2,020,640 6,042,822 6,159,787
Depreciation and Amortization 459,180 450,127 1,360,020 1,377,693
Other Taxes 167,086 170,480 489,798 501,973
----------------------------------------------------------
Total Operating Expenses 16,777,233 13,818,380 35,772,549 31,220,035
----------------------------------------------------------
Operating Income 2,437,262 2,103,647 3,308,041 2,955,443
Other Income - Net 204,109 11,582 413,103 331,410
----------------------------------------------------------
Income Before Interest Charges & Taxes 2,641,371 2,115,229 3,721,144 3,286,853
----------------------------------------------------------
Interest Charges:
Long-Term Debt 319,008 172,704 888,053 518,113
Other 60,254 228,260 377,971 632,856
----------------------------------------------------------
Total Interest Charges 379,262 400,964 1,266,024 1,150,969
----------------------------------------------------------
Net Income Before Income Taxes 2,262,109 1,714,265 2,455,120 2,135,884
Income Taxes 820,585 624,209 878,589 758,875
----------------------------------------------------------
Net Income $1,441,524 $1,090,056 $1,576,531 $1,377,009
----------------------------------------------------------
----------------------------------------------------------
Basic Earnings per Share $0.60 $0.46 $0.66 $0.59
----------------------------------------------------------
Diluted Earnings per Share $0.60 $0.46 $0.66 $0.59
----------------------------------------------------------
Dividends per common share $0.1100 $0.1050 $0.3300 $0.3150
----------------------------------------------------------
Basic Weighted Average Shares 2,398,461 2,357,112 2,384,343 2,342,782
Diluted Weighted Average Shares 2,401,415 2,367,872 2,387,297 2,353,541
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
2
<PAGE>
FORM 10-Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
1998 1997
--------------------------
<S> <C> <C>
Operating Activities: [RESTATED]
Net Income $1,576,529 $1,377,009
Adjustments to Reconcile Net Income to Cash Flow
Depreciation and Amortization 1,526,642 1,610,111
(Gain) Loss on Sale of Marketable Equity Securities 0 (100,526)
(Gain) Loss on Sale of Property, Plant & Equipment (200,268) (18,026)
Deferred Gain on Sale of Assets (17,721) (17,721)
Investment Tax Credit - Net (15,797) (15,797)
Deferred Income Taxes - Net 436,758 346,614
Changes in Operating Assets and Liabilities 2,316,799 (4,133,914)
--------------------------
Net Cash Provided by (Used In) Operating Activities 5,622,942 (952,250)
Investing Activities:
Construction Expenditures (2,217,251) (2,174,185)
Collection of Long-Term Notes Receivable 5,614 929
Increase in Notes Receivable (200,000) 0
Proceeds from Contributions in Aid of Construction 122,643 98,790
Proceeds from Sale of Marketable Equity Securities 0 273,572
Proceeds from Sale of Property, Plant & Equipment 1,243,701 33,297
--------------------------
Net Cash Used In Investing Activities (1,045,293) (1,767,597)
Financing Activities:
Proceeds from Long-term Debt 8,000,000 0
Debt Issuance and Reacquisition Costs (457,503) 0
Proceeds from Notes Payable 20,550,000 24,977,000
Repayment of Long-Term Debt (240,000) (360,240)
Repayment of Notes Payable (31,930,000) (22,102,000)
Sale of Common Stock 187,224 6,922
Dividends Paid (635,779) (443,298)
--------------------------
Net Cash Provided by (Used In) Financing Activities (4,526,058) 2,078,384
--------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 51,591 (641,463)
Cash and Cash Equivalents at Beginning of Year 148,665 721,093
--------------------------
Cash and Cash Equivalents at End of Period $200,256 $79,630
--------------------------
--------------------------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1998
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine month period ended March 31, 1998 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 and nine months ended March 31,
1997, to reflect the deferral of the gain on sale-leaseback of assets totaling
$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:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1997
Net Income (loss): three months ended nine months ended
------------------ -----------------
<S> <C> <C>
As previously reported $1,086,506 $1,366,359
As restated $1,090,056 $1,377,009
Net income per common share:
As previously reported $.46 $.58
As restated $.46 $.59
</TABLE>
Sale of Assets
In February, 1998, the Company sold four retail propane districts in Wyoming.
The operations, consisting of customers surrounding Greybull, Riverton, Lander
and Dubois, Wyoming and the rights to the Wyo L-P name were sold to Great
Western Energy, LLC of Denver, CO. at a gain on the sale of assets of
approximately $125,000. The Cody Wyoming retail propane district and wholesale
propane operations in Wyoming were retained by the Company.
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. All earnings per share amounts for all periods
have been presented, and where necessary, restated to conform to the statement
128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
March 31 March 31
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net Income $1,441,524 $1,090,056 $1,576,529 $1,377,009
Denominator:
Denominator for basic earnings per
share - weighted - average shares 2,398,461 2,357,112 2,384,343 2,342,782
Effect of dilutive securities:
Options 2,954 10,759 2,954 10,759
Denominator for diluted earnings per
share - weighted - average shares 2,401,415 2,367,871 2,387,297 2,353,541
Basic earnings per share $.60 $.46 $.66 $.59
Diluted earnings per share $.60 $.46 $.66 $.59
</TABLE>
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 March 31, 1998, 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:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
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
</TABLE>
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.
For the period ended March 31, 1998, the Company has no hedge agreements in
place.
6
<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 March 31, 1998, components of the
Company's deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts . . . . . . . . . . . . . . . $11,379
Unamortized Investment Tax Credit . . . . . . . . . . . . . . 149,182
Contributions in Aid of Construction. . . . . . . . . . . . . 253,974
Deferred Gain on Sale of Assets . . . . . . . . . . . . . . . 77,782
Other nondeductible accruals. . . . . . . . . . . . . . . . . 71,253
----------
Total deferred tax assets. . . . . . . . . . . . . . . . . . 563,570
----------
Deferred tax liabilities:
Customer refunds payable. . . . . . . . . . . . . . . . . . . 923,229
Property, Plant and Equipment . . . . . . . . . . . . . . . . 3,401,895
Unamortized Debt Issue Costs. . . . . . . . . . . . . . . . . 176,799
Covenant Not to Compete . . . . . . . . . . . . . . . . . . . 81,616
----------
Total deferred tax liabilities . . . . . . . . . . . . . . . 4,583,539
----------
Net deferred tax liability . . . . . . . . . . . . . . . . . . $4,019,969
----------
----------
Income tax expense consists of the following:
Current income taxes (benefits):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . $499,124
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,223
----------
Total current income taxes (benefits). . . . . . . . . . . . . 531,347
----------
Deferred income taxes (benefits):
Excess tax depreciation . . . . . . . . . . . . . . . . . . . 174,390
Excess tax (book) amortization. . . . . . . . . . . . . . . . (25,568)
Recoverable cost of gas purchases . . . . . . . . . . . . . . 265,770
Contributions in Aid of Construction. . . . . . . . . . . . . (49,752)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,801)
----------
Total deferred income taxes. . . . . . . . . . . . . . . . . . 363,039
Investment tax credit, net . . . . . . . . . . . . . . . . . . (15,797)
----------
Total income taxes . . . . . . . . . . . . . . . . . . . . . . $878,589
----------
----------
</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% . . . . . . . . $832,300
State income taxes (benefit), net of federal income taxes. . . 57,215
Amortization of deferred investment tax credits. . . . . . . . (15,797)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,871
--------
Total income taxes (benefits). . . . . . . . . . . . . . . . . $878,589
--------
--------
</TABLE>
7
<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 March 31, 1998 for each of the next five
years and in total is as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1998 $250,000
1999 1,095,000
2000 602,250
2001 602,250
2002 164,250
Thereafter -0-
-------------
Total $2,713,750
-------------
-------------
</TABLE>
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.
8
<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 has commented on the report and the consultant now
is preparing a remediation plan for submission to the MDEQ. MDEQ will then
evaluate the report and provide for public comment. Once the comment period has
lapsed and due consideration of any comments occurs, the plan can be finalized.
Assuming acceptance of the plan, remediation could be in place by the fall of
1998.
At March 31, 1998, the costs incurred in evaluating this site have totaled
approximately $444,443. On May 30, 1995, the Company received an order from the
Montana Public Service Commission allowing for recovery of the costs associated
with evaluation and remediation of the site through a surcharge on customer
bills. As of March 31, 1998, that recovery mechanism had generated
approximately $542,300, or about what had been expended. The Commission's
decision calls for ongoing review by the Commission of the costs incurred for
this matter.
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.
9
<PAGE>
Note 8 - Operating Revenues and Expenses,
Regulated utility and non-regulated non-utility operating revenues and expenses
were as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
------------ -----------
Ended Ended
----- -----
March 31 March 31
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues:
Regulated utilities $10,856,147 $10,225,740 $22,896,745 $21,994,853
Non-regulated operations 3,501,536 3,655,501 7,377,734 7,763,078
Gas trading 4,856,812 2,040,786 8,806,111 4,417,547
----------- ----------- ----------- -----------
$19,214,495 $15,922,027 $39,080,590 $34,175,478
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Operating Expenses:
Gas Purchased:
Regulated $6,919,368 $6,512,236 $14,209,177 $13,304,619
Non-regulated 2,643,322 2,823,491 5,442,154 5,780,396
Cost of gas trading 4,573,972 1,841,406 8,228,578 4,095,567
----------- ----------- ----------- -----------
$14,136,662 $11,177,133 $27,879,909 $23,180,582
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Distribution, general and administrative:
Regulated $1,431,636 $1,470,698 $4,336,004 $4,601,642
Non-regulated 451,307 409,233 1,333,443 1,191,193
----------- ----------- ----------- -----------
$1,882,943 $1,879,931 $5,669,447 $5,792,835
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Maintenance:
Regulated $108,519 $118,843 $292,569 $295,843
Non-regulated 22,843 21,866 80,808 71,109
----------- ----------- ----------- -----------
$131,362 $140,709 $373,377 $366,952
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Depreciation and amortization:
Regulated $382,099 $372,832 $1,113,050 $1,122,726
Non-regulated 77,081 77,295 246,970 254,967
----------- ----------- ----------- -----------
$459,180 $450,127 $1,360,020 $1,377,693
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Taxes other than income:
Regulated $142,708 $143,760 $408,833 $417,646
Non-regulated 24,377 26,720 80,964 84,327
----------- ----------- ----------- -----------
$167,085 $170,480 $489,797 $501,973
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income taxes:
Regulated $597,213 $430,087 $610,596 $448,134
Non-regulated 223,374 194,122 267,993 310,741
----------- ----------- ----------- -----------
$820,587 $624,209 $878,589 $758,875
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
10
<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. he 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 and electricity in Montana 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. 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 March 31, 1998, the Company had $19,000,000 in bank lines of credit, of which
$-0- 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.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company provided net cash in operating activities for the nine months ended
March 31, 1998 in the amount of approximately $5,623,000 as compared to net cash
used of approximately $952,000 for the nine months ended March 31, 1997. This
increase in cash provided by operating activities of approximately $6,575,000
was primarily due to lower working capital requirements of approximately
$6,440,000, partially offset by a reduction in the gain on sale of marketable
equity securities of approximately $100,000, higher net income of approximately
$211,000, lower depreciation of approximately $83,000, a gain on sale of
property, plant & equipment of approximately $182,000 and higher deferred income
taxes of approximately $90,000. The lower working capital requirements of
approximately $6,440,000 is primarily due to decreases in gas inventory and gas
accounts payable offset by increases in recoverable cost of gas purchases and
accounts receivable.
Cash used in investing activities was approximately $1,045,000 for the nine
months ended March 31, 1998, as compared to approximately $1,768,000 for the
nine months ended March 31, 1997, a decrease of approximately $723,000 primarily
due to proceeds from the sale of property, plant & equipment of $1,211,000,
higher proceeds from contributions in aid of construction of approximately
$24,000, partially offset by lower proceeds from the sale of marketable equity
securities of approximately $273,000, a loan made by Energy West Resources of
$200,000 and increased construction expenditures of approximately $43,000.
Cash used in financing activities was approximately $4,526,000 for the nine
months ended March 31, 1998, as compared to cash provided by financing
activities of approximately $2,078,000 for the nine months ended March 31, 1997.
The increase in cash used in financing activities of approximately $6,604,000
resulted primarily from a net reduction in short-term borrowing of approximately
$14,255,000 and an increase in dividends paid of approximately $193,000,
partially offset by net proceeds from a long-term debt issue of approximately
$7,542,000, an increase in proceeds from the sale of common stock of
approximately $180,000 and a decrease in repayment of long-term debt of
$120,000.
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 March 31,
1998, approximately $2,272,000 of that amount had been expended.
12
<PAGE>
RESULTS OF CONSOLIDATED OPERATIONS
COMPARISON OF THIRD QUARTER OF FISCAL 1998 ENDED MARCH 31, 1998 AND FISCAL 1997
ENDED MARCH 31, 1997
The Company's net income for the third quarter ended March 31, 1998 was
approximately $1,442,000 compared to approximately $1,090,000 for the quarter
ended March 31, 1997.
The increased net income in the third quarter of fiscal 1998 was due primarily
to higher margins on gas trading activity due to favorable market prices; higher
margins from propane vapor sales in Arizona, due to a regulatory rate increase
and customer growth, partially offset by lower margins from natural gas sales,
due to warmer weather experienced in Montana and Wyoming this third quarter. A
one time capital gain on the sale of four propane retail districts in Wyoming
and lower interest costs also increased net income.
UTILITY OPERATIONS -
Utility operating revenues in the third quarter of fiscal 1998 were
approximately $10,856,000 compared to approximately $10,225,000 for the third
quarter of fiscal 1997. Operating income was approximately $1,872,000 in the
third quarter of fiscal 1998 compared to $1,607,000 in fiscal 1997. Gross
margin, which is defined as operating revenues less gas purchased, was
approximately $3,937,000 for the third quarter of fiscal 1998 compared to gross
margin of approximately $3,700,000 for the third quarter of fiscal 1997. Gross
margins increased 6% because of higher margins from propane vapor sales in the
Arizona area, due to a regulatory rate increase and an increase in customers
offset by lower margins in the Great Falls and Cody divisions, due to warmer
weather than one year ago.
Operating Expenses -
Utility operating expenses, excluding the cost of gas purchased and federal and
state income taxes, were approximately $2,065,000 for the third quarter of
fiscal 1998 as compared to $2,106,000 for the same period in fiscal 1997. The
2% decrease in the period was generally due to reduced personnel in the utility
divisions.
Interest Charges -
Interest charges allocable to the Company's utility divisions decreased
approximately 18% and was approximately $322,000 for the third quarter of
fiscal 1998, as compared to $393,000 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. Proceeds from the sale of
the Wyo L-P properties in Wyoming further reduced short-term debt and interest
costs.
Income Taxes -
State and federal income taxes of the Company's utility divisions were
approximately $597,213 for the third quarter of fiscal 1998 as compared to
approximately $430,000 the third quarter in fiscal 1997. Pre-tax income of the
utility divisions was approximately $1,611,000, an increase from $1,200,000 for
the third quarter of fiscal 1997.
13
<PAGE>
NON-REGULATED OPERATIONS -
Non-regulated operating revenues for the third quarter ended March 31, 1998 were
approximately $8,358,000 compared to $5,696,000 for the third quarter of fiscal
1997. Non-regulated operating revenues for fiscal 1998 consisted of
approximately $3,476,000 for RMF, $4,857,000 for Energy West Resources, Inc. and
$25,000 for Montana Sun, Inc. Operating income, which is defined as operating
revenues less gas purchased, distribution, general, administrative, maintenance,
depreciation, amortization and taxes other than income, increased approximately
17% or $86,000 from fiscal 1997 and was approximately $583,000 for the third
quarter of fiscal 1998 compared to $497,000 for the third quarter of fiscal
1997. Operating income for RMF was approximately $410,000 for the third quarter
of fiscal 1998, up from the third quarter of fiscal 1997 of $324,000 , due to
increased margins because of colder weather and customer growth in the Arizona
area served by Petrogas of Arizona and lower operating expenses because of the
sale of 4 district offices in Petrogas of Wyoming in February, 1998. Energy
West Resources, Inc's operating income was approximately $160,000 comparable to
$159,000 in fiscal 1997. Energy West Resources, Inc's higher gas marketing
margins of $83,000 were due to decreased natural gas prices for purchases, and
was offset by higher general and administrative costs, due to staff expansion
and training required to serve the growth in marketing activity.
Rocky Mountain Fuels -
For the third quarter ended March 31, 1998, RMF generated net income of
approximately $322,000 compared to net income of approximately $183,000 for the
third quarter ended March 31, 1997. Approximately $180,000 of RMF's net income
for the third quarter of fiscal 1998 was attributable to the Petrogas division
of Wyoming (formerly Wyo L-P Gas division), approximately $141,000 to the
Petrogas division in Arizona, with the balance of approximately $1,000
attributable to Missouri River Propane in Montana. RMF's gross margins were
approximately $833,000, for the third quarter ended March 31, 1998, up 3% from
$807,000 in the same period last year. Margins this quarter decreased in the
Petrogas of Wyoming division from the same quarter last year from approximately
$497,000 to $446,000 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 $278,000 to $348,000, due to customer growth, while
Missouri River Propane in Montana margins remained relatively similar to the
same quarter one year ago. RMF interest costs remained relatively the same as
the same quarter one year ago. Other income of RMF increased to approximately
$139,000 from approximately $25,000 the same quarter one year ago, due to a one
time capital gain of approximately $125,000 pre-tax on the sale of four propane
retail districts in Wyoming. State and federal income taxes increased to
approximately $179,000 for this quarter from $114,000 last year, due to higher
pre-tax income of Rocky Mountain Fuels, Inc., primarily as a result of the sale
of the four retail propane districts in Wyoming.
14
<PAGE>
Energy West Resources, Inc. -
For the third quarter ended March 31, 1998, Energy West Resources, Inc's net
income was approximately $121,000 compared to net income of approximately
$122,000 for the third quarter ended March 31, 1997. Earnings were about the
same because higher margins were offset by higher general and administrative
expenses, due to staff expansion and training required to serve the growth in
marketing activity. In addition, higher interest costs allocated, reduced
taxable income. Gas trading margins increased approximately $83,000, or 42%, due
to decreased natural gas prices in Canada and Montana and expanded markets and
customers. State and federal income taxes decreased this quarter to
approximately $43,000 from approximately $73,000, the same quarter one year ago,
due to a decrease in pre-tax income from the same quarter one year ago.
Montana Sun, Inc. -
For the third quarter ended March 31, 1998, Montana Sun, Inc.'s net income was
approximately $3,111 compared to $11,000 for the third quarter ended March 31,
1997, primarily due to higher interest charges allocated in the third quarter
of fiscal 1997.
15
<PAGE>
RESULTS OF CONSOLIDATED OPERATIONS
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1998 AND FISCAL 1997 ENDED MARCH 31,
1997
The Company's net income for the first nine months ended March 31, 1998 was
approximately $1,577,000 compared to $1,377,000 for the nine months ended March
31, 1997.
The increase in the 1998 net income was due primarily to an increase in net
income in the utility divisions, due to reduced expenses in the utility
divisions and the effect of a one-time capital gain on the sale of four retail
districts in Wyoming.
UTILITY OPERATIONS -
Utility operating revenues in the first nine months of fiscal 1998 were
approximately $22,896,000 compared to approximately $21,995,000 for the first
nine months of fiscal 1997. Gross margin, which is defined as operating
revenues less gas purchased, was approximately $8,700,000 for the first nine
months of fiscal 1998 approximately the same as the gross margin for the first
nine months of fiscal 1997. Gross margins decreased in the Great Falls and Cody
divisions due to much warmer weather, but were offset by higher margins from
propane vapor sales in the Broken Bow division, due to a 17% rate increase and
customer growth and higher margins in the West Yellowstone district due to
customer growth and a rate increase.
Operating Expenses -
Utility operating expenses, excluding the cost of gas purchased and federal and
state income taxes, were approximately $6,150,000 for the first nine months of
fiscal 1998 as compared to $6,438,000 for the same period in fiscal 1997. The
4% decrease in the period was generally due to reduced personnel in the utility
divisions, than one year ago.
Interest Charges -
Interest charges allocable to the Company's utility divisions were approximately
$1,062,000 for the first nine months of fiscal 1998, as compared to $1,108,000
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 and overall short-term interest charges also decreased because
of increased cash flow, resulting in lower short-term borrowing.
Income Taxes -
State and federal income taxes of the Company's utility divisions were
approximately $611,000 for the first nine months of fiscal 1998, as compared to
approximately $448,000 for the first nine months in fiscal 1997. The increase
in income taxes was due to higher pre-tax income of the utility divisions.
16
<PAGE>
NON-REGULATED OPERATIONS -
Rocky Mountain Fuels -
For the nine months ended March 31, 1998, RMF generated net income of
approximately $355,000 compared to net income of $253,000 for the nine months
ended March 31, 1997. About $199,000 of RMF's net income for the first nine
months of fiscal 1998 was attributable to the Petrogas division in Arizona and
$172,000 in the Petrogas of Wyoming division with the balance of ($16,000) net
loss attributable to Missouri River Propane in Montana. RMF's gross margins
decreased approximately $.1% or $2,000 for the nine months ended March 31, 1998
compared to the same period last year. Margins this nine month period decreased
in the Petrogas of Wyoming division approximately $165,000 or 13% due to warmer
weather than last year, however operating expenses decreased by approximately
$77,000, primarily resulting from the sale of the 4 district offices in Wyoming,
which resulted in a pre-tax gain of approximately $125,000. Margins in the
Petrogas division in Arizona increased from a year ago by approximately $144,000
or 35% due to customer growth and colder weather than one year ago, while
Missouri River Propane in Montana margins increased from a year ago by
approximately $16,000 or 26% due to customer growth. RMF experienced higher
interest costs due to expansion of plant in Montana and increased inventory from
wholesale propane operations in Wyoming. State and federal income taxes
increased to approximately $199,000 for this nine month period from $149,000
last year, due to higher pre-tax income this year versus last year in RMF.
Energy West Resources, Inc. -
For the nine months ended March 31, 1998, Energy West Resources, Inc's net
income was approximately $136,000 compared to net income of approximately
$172,000 for the nine months ended March 31, 1997, primarily due to higher
interest charges due to increases in gas storage. Gas trading margins increased
approximately $212,000 or 58%, due to decreased natural gas prices in Canada and
Montana and expanded markets and customer growth, however operating expenses
increased approximately $224,000 or 172% due to staff expansion and training
required to serve the growth in marketing activity. Interest charges increased
approximately $85,500, due to increased gas storage inventory purchases in
Fiscal 1998 . State and federal income taxes decreased this nine month period
to approximately $64,000 from approximately $104,000, the same nine month period
one year ago, due to lower pre-tax income than one year ago.
Montana Sun, Inc. -
For the nine months ended March 31, 1998, Montana Sun, Inc.'s net income was
approximately $10,000 compared to $97,000 for the nine months ended March 31,
1997, primarily due to a one-time capital gain on the sale of marketable equity
securities the second quarter of fiscal 1997. State and federal income taxes
decreased this nine month period to $5,000 from $58,000 the same nine month
period one year ago, due to lower pre-tax income this fiscal nine month period.
17
<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 sought 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 trial concluded February 6, 1998 and a
judgement holding for the plaintiffs has been entered. The Company was found to
be 55% negligent and damages for its share of the judgement are approximately
$2,900,000. The Company's primary and excess insurance completely indemnifies
the Company against the judgement. The judgement has been appealed to the
United States Court of Appeals for the Tenth Circuit.
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. A settlement was
entered with the plaintiff resolving all of the issues raised in the plaintiff's
complaint for approximately $700,000.
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 the current
Wyoming action and conducted the defense of the Hines and White matters.
18
<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
March 31, 1998.
19
<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 May 14, 1998
/s/ William J. Quast
-----------------------------------------
William J. Quast, Vice-President, Treasurer
and Assistant Secretary
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