<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, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-14183
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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, 1998
(COMMON STOCK, $.15 PAR VALUE) 2,406,785
<PAGE>
<TABLE>
<CAPTION>
ENERGY WEST INCORPORATED
INDEX TO FORM 10-Q
Page No.
Part I - Financial Information
<S> <C>
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1998 and June 30, 1998 1
Condensed Consolidated Statements of Income -
three months ended September 30, 1998 and 1997 2
Condensed Consolidated Statements of cash flows
three months ended September 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4-6
Item 2 - Management's discussion and analysis of
financial condition and results of operations 7-10
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk 11
Part II Other Information
Item 1 - Legal Proceedings 12
Item 2 - Changes in Securities 13
Item 3 - Defaults upon Senior Securities 13
Item 4 - Submission of Matters to a Vote of Security Holders 13
Item 5 - Other Information 13
Item 6 - Reports on Form 8-K 13
Signatures
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30 June 30
1998 1998
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<S> <C> <C>
Current Assets:
Cash $ 84,813 $ 58,006
Accounts Receivable (net) 5,599,163 4,504,235
Natural Gas and Propane Inventory 4,766,120 4,669,933
Materials and Supplies 451,766 556,077
Prepayments and other 477,287 147,091
Refundable Income Tax Payments 747,793 464,155
Recoverable Cost of Gas Purchases 2,576,087 1,926,749
Deferred income taxes - current 183,875 -
----------- -----------
Total Current Assets 14,886,903 12,326,246
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Investments 3,365 3,365
Notes Receivable Due After One Year 202,159 192,192
Property, Plant and Equipment-Net 28,039,561 27,571,904
Deferred Charges 3,664,650 3,241,178
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Total Assets $46,796,637 $43,334,885
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CAPITALIZATION AND LIABILITIES
Capitalization and liabilities:
Current Liabilities:
Note payable to bank $4,728,000 $ 1,442,982
Long-term debt due within one year 426,523 413,032
Accounts Payable - Gas Purchases 2,618,616 2,029,703
Other Current and Accrued Liabilities 3,001,177 2,859,116
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Total Current Liabilities 10,774,317 6,744,833
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Deferred Credits 7,129,959 6,500,730
Long-term obligations 17,015,723 17,278,033
Stockholders' Equity
Preferred Stock $ 0 $ 0
Common Stock (2,406,785 and
2,403,190 shares were outstanding at September
30, 1998 and June 30, 1998 respectively) 360,990 360,481
Capital in Excess of Par Value 3,316,768 3,286,228
Retained Earnings 8,198,880 9,164,580
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Total Stockholder's Equity 11,876,638 12,811,289
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Total Capitalization and Liabilities $46,796,637 $43,334,885
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</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
<TABLE>
<CAPTION>
Three Months Ended
and Year-To-Date
September 30
1998 1997
-----------------------------
<S> <C> <C>
Operating revenue:
Regulated utilities $3,123,973 $3,113,286
Nonregulated operations 888,595 1,153,640
Gas trading 5,048,640 957,589
---------- ----------
Total Revenue 9,061,208 5,224,515
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Operating Expenses
Gas Purchased 2,304,594 2,509,841
Cost of gas trading 4,983,701 876,315
Distribution, general and administrative 1,961,076 1,864,069
Maintenance 112,264 123,874
Depreciation and Amortization 438,256 448,481
Other Taxes 153,959 146,341
---------- ----------
Total Operating Expenses 9,953,850 5,968,921
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Operating Loss (892,642) (744,406)
Other Income - Net 200,075 89,223
---------- ----------
Loss before interest charges and
income tax benefit (692,567) (655,183)
---------- ----------
Interest Charges:
Long-Term Debt 311,869 250,038
Other 65,156 180,685
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Total Interest Charges 377,025 430,723
---------- ----------
Loss before income tax benefit (1,069,592) (1,085,906)
Provision for Income tax benefit (384,941) (405,107)
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Net Loss ($684,651) ($680,799)
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---------- ----------
Basic and diluted loss per common share ($0.28) ($0.29)
---------- ----------
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Dividends per common share $ 0.1150 $ 0.1100
Basic Weighted Average Common Shares 2,403,268 2,368,601
Diluted Weighted Average Common Shares 2,406,173 2,375,899
</TABLE>
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
1998 1997
-------------------------------
<S> <C> <C>
Operating Activities:
Net Loss ($684,651) ($680,799)
Adjustment to Reconcile Net Loss to Cash Flows:
Depreciation and Amortization 506,964 501,375
(Gain) Loss from Gas Marketing Activities 10,875 0
(Gain) Loss on Sale of Property, Plant & Equipment (21,147) (10,234)
Deferred Gain on Sale of Assets (5,907) (5,907)
Investment Tax Credit - Net (5,266) (5,266)
Deferred Income Taxes - Net 300,047 126,574
Change in Operating Assets and Liabilities
Accounts Receivable (1,094,928) 176,126
Gas Inventory 41,055 (385,605)
Accounts Payable 482,759 41,828
Recoverable Cost of Gas Purchases (649,338) (248,633)
Prepaids (330,196) (322,319)
Other Assets and Liabilities (480,454) (583,622)
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Net Cash Used In Operating Activities (1,930,187) (1,396,482)
Investing Activities:
Construction Expenditures (859,234) (855,592)
Proceeds from Sale of Property, Plant & Equipment 61,500 14,250
Increase in Long-Term Notes Receivable (9,967) 0
Proceeds from Contributions in Aid of Constructions 4 116,978
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Net Cash Used In Investing Activities (807,697) (724,364)
Financing Activities:
Proceeds from Long-Term Debt 0 8,000,000
Debt Issuance and Reacquisition Costs 0 (335,724)
Repayment of Long-Term Debt (255,000) (355,000)
Proceeds from Notes Payable 8,415,001 7,760,000
Repayment of Short-Term Borrowings (5,130,000) (12,980,000)
Proceeds from Sale of Common Stock 0 160,396
Dividends on Common Stock (265,310) (261,553)
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Net Cash Provided by (Used In) Financing Activities 2,764,691 1,988,119
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Net Increase (Decrease) in Cash and Cash Equivalents 26,807 (132,727)
Cash and Cash Equivalents at Beginning of Year 58,006 148,665
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Cash and Cash Equivalents at End of Period $84,813 $15,938
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</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
3
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 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 three month period ended September 30, 1998 are not necessarily indicative
of the results that may be expected for the year ended June 30, 1999 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, 1998.
NOTE 2 - COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," became effective as of the first
quarter of fiscal 1998. This statement requires companies to report and display
comprehensive income and its components (revenues, expenses, gains and losses).
Comprehensive income includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. For the
Company, comprehensive income is the same as net income reported in the
statements of consolidated income, since there were no other items of
comprehensive income for the periods presented.
NOTE 3 - RISK MANAGEMENT
GAS HEDGING
For the period ended September 30, 1998, the Company is a party to two gas hedge
agreements for nonregulated operations. These hedges were made to minimize the
Company's exposure to price fluctuations and to secure a known margin for the
purchase and resale of gas.
<TABLE>
<CAPTION>
Fiscal Volume Effective Termination Contract Contract Market Fair
Year (MMBTU) Date Date Price Value at Price Value of
Sep 30 at Remaining
Sep 30 Contract at
Sep 30
1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Hedge #1 5,000/day 5/1/98 10/31/98 $1.33 $206,000 $1.11 $172,050
Hedge #2 50,000/month 11/1/98 3/31/99 $2.26 $565,000 $2.47 $617,500
</TABLE>
4
<PAGE>
GAS TRADING DERIVATIVE
In July 1998, the Company signed a basis swap agreement between the NYMEX and
AECO price indices. The contract period for the 5,000 MMBTU per day swap begins
November 1, 1999 and ends October 31, 2000. The swap compares the index prices
of natural gas quoted on the NYMEX gas exchange with the AECO gas exchange on a
daily basis. When the basis differential is less than $.62 per MMBTU, the
Company is in a positive position. When the basis differential is greater than
$.62 per MMBTU, the Company is in a negative position. When this swap is
settled, if it is in a positive position the Company will receive a cash payment
from the counterparty and if its in a negative position the Company must make a
cash payment to the counterparty. The Company has designated this basis swap as
a trading commodity derivative.
<TABLE>
<CAPTION>
Fiscal Year Volume Effective Termination Contract Market Mark-to-
(MMBTU) Date Date Price Price at Market
Sep 30 Gain
1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Derivative #1 5,000/day 11/1/99 10/31/2000 $.62 $.575 $82,125
</TABLE>
NOTE 4 - INCOME TAXES
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>
<CAPTION>
<S> <C>
Tax expense (benefit) at statutory rates - 34% . . . . . . . . ($361,871)
State income taxes (benefit), net of federal income taxes. . . (27,239)
Amortization of deferred investment tax credits. . . . . . . . (5,266)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,435
---------
Total income taxes (benefits). . . . . . . . . . . . . . . . . $384,941
---------
---------
</TABLE>
NOTE 5 - CONTINGENCIES
ENVIRONMENTAL CONTINGENCY
The Company owns property on which it operated a manufactured gas plant from
1909 to 1928. The site is currently used as a service center where certain
equipment and materials are stored. The coal gasification process utilized in
the plant resulted in the production of certain by-products which have been
classified by the federal government and the State of Montana as hazardous to
the environment. Several years ago the Company initiated an assessment of the
site to determine if remediation of the site was required. That assessment
resulted in a submission, in 1994, to the Montana department of Environmental
Quality ("MDEQ"), formerly known as the Montana Department of Health and
Environmental Science ("MDHES. The Company has worked with the MDEQ since that
time to obtain the data that would lead to a remediation plan acceptable to the
MDEQ. The Company's environmental consultant filed a report, with a proposed
plan of remediation, on June 11, 1997. The MDEQ has evaluated the report and
responded to the Company on August 31, 1998 that it has identified additional
data they require before taking further action. The Company is in the process
of obtaining and submitting the additional data. The Company expects that, at a
minimum it would be required to remove contaminated soils from the site.
Therefore in the fall of 1998, The Company, under the direction of its
environmental consultant, removed the contaminated soils to a qualified,
off-site location.
At September 30, 1998, the costs incurred in evaluating this site have totaled
approximately $450,000. 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, 1998, that recovery mechanism had generated
approximately $587,000. The Company expects to spend the full amount recovered
through the surcharge. 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.
5
<PAGE>
LEGAL PROCEEDINGS
From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. Neither the
Company nor any of its subsidiaries is a party to any legal proceedings, other
than as described in Part II -Other information, 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.
NOTE 6 - OPERATING REVENUES AND EXPENSES,
Regulated utility and non-regulated non-utility operating revenues and expenses
were as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Operating Revenues:
Regulated utilities $3,123,973 $3,113,286
Non-regulated operations 888,595 1,153,640
Gas trading 5,048,640 957,589
---------- ----------
$9,061,208 $5,224,515
---------- ----------
---------- ----------
Operating Expenses:
Gas Purchased:
Regulated $1,676,879 $1,695,157
Non-regulated 627,715 814,684
Cost of gas trading 4,983,701 876,315
---------- ----------
$7,288,295 $3,386,156
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Distribution, general and administrative:
Regulated $1,574,808 $1,450,376
Non-regulated 386,268 413,693
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$1,961,076 $1,864,069
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Maintenance:
Regulated $ 94,581 $ 97,242
Non-regulated 17,683 26,632
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$ 112,264 $ 123,874
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---------- ----------
Depreciation and amortization:
Regulated $ 372,114 $ 360,923
Non-regulated 66,142 87,558
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$ 438,256 $ 448,481
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---------- ----------
Taxes other than income:
Regulated $ 126,132 $ 121,108
Non-regulated 27,827 25,233
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$ 153,959 $ 146,341
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Income taxes (benefits):
Regulated ($353,536) ($340,680)
Non-regulated (31,405) (64,427)
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($384,941) ($405,107)
---------- ----------
---------- ----------
</TABLE>
6
<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 liquefied natural gas.
The Company conducts certain non-utility operations through its three wholly
owned subsidiaries: Energy West Propane, Inc. (EWP), (formerly known as
Rocky Mountain Fuels, Inc.), a retail and wholesale distributor of propane in
Wyoming, Montana, Arizona, Colorado, South Dakota and Nebraska; Energy West
Resources, Inc. which is involved in the marketing of natural gas in Montana
and gas storage; Energy West Development, (formerly known as 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 September 30, 1998, the Company had $19,000,000 in bank lines of credit, of
which $4,728,000 had been borrowed under the credit agreement.
The Company used net cash in operating activities for the three months ended
September 30, 1998 in the amount of $1,930,187 as compared to $1,396,481 for
the three months ended September 30, 1997. This increase in cash used in
operating activities of approximately $534,000 was primarily due to higher
working capital requirements of approximately $707,000 partially offset by
higher deferred income taxes of approximately $173,000. The higher working
capital requirements of approximately $707,000 is primarily due to higher
accounts receivable and recoverable cost of gas purchases partially offset by
higher accounts payable and lower gas inventory and other assets and
liabilities.
Cash used in investing activities was approximately $808,000 for the three
months ended September 30, 1998, as compared to approximately $724,000 for the
three months ended September 30, 1997, an increase of approximately $84,000
primarily due to lower proceeds in Contributions in Aid of Construction of
approximately $117,000 partially offset by increases in proceeds from sale of
property, plant and equipment of approximately $48,000.
7
<PAGE>
Cash provided by financing activities was approximately $2,765,000 for the three
months ended September 30, 1998, as compared to approximately $1,988,000 for the
three months ended September 30, 1997. The increase in cash provided by
financing activities of approximately $777,000 resulted primarily from an
increase in net proceeds from short-term debt of approximately $8,505,000
partially offset by an increase in proceeds from the sale of common stock of
approximately $160,000 and a decrease in the net proceeds from a long-term debt
issue of approximately $$7,564,000.
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 $3.0 million in fiscal 1998 and approximately $3.2 million for
fiscal 1997. During fiscal 1998, approximately $1.5 million was expended for
the construction and maintenance of the natural gas systems in Great Falls,
Cascade and West Yellowstone, Montana and Cody, Wyoming and approximately $1.1
million was expended for operations and maintenance and gas system expansion
projects for new subdivisions in the Broken Bow division's service area in
Arizona. In addition, approximately $520,000 was expended for additions to the
propane operations of the Company in Wyoming, Montana and Arizona. Capital
expenditures are expected to be approximately $3.2 million in fiscal 1999,
including approximately $1.2 million for continued expansion for the Broken Bow
division, with approximately $1.4 million for maintenance and other special
system expansion projects in the Great Falls, West Yellowstone and Cody
divisions and the balance of approximately $600,000 for the Company's propane
operations in the three states it serves. As of September 30, 1998,
approximately $859,000 of that amount had been expended.
8
<PAGE>
RESULTS OF CONSOLIDATED OPERATIONS
COMPARISON OF FIRST QUARTER OF FISCAL 1999 ENDED SEPTEMBER 30, 1998 AND FISCAL
1998 ENDED SEPTEMBER 30, 1997
The Company's net loss for the first quarter ended September 30, 1998 was
($684,651) compared to ($680,799) for the quarter ended September 30, 1997.
Margins decreased from approximately $1,840,000 in fiscal 1998 to $1,773,000 in
fiscal 1999 or $67,000 primarily due to reduced sales in Petrogas of Wyoming, as
a result of the sale of four retail propane districts in Wyoming; distribution,
general and administrative expenses increased from approximately $1,864,000 in
fiscal 1998 to $1,961,000 in fiscal 1999 or $97,000 primarily due to
inflationary trends, additional staff added for the safety operations of the
Company, additional expenses in Energy West Resources, the marketing subsidiary,
because of the growth in marketing activity as well as timing of audit fees and
other expenses booked this quarter and not booked in the same quarter last year.
This was partially offset by increased other income of approximately $111,000
primarily due to mark-to-market accounting for derivatives held by the Company
and decreased interest charges of approximately $54,000, due to lower short-term
borrowing.
UTILITY OPERATIONS -
Utility operating revenues in the first three months of fiscal 1999 were
approximately $3,124,000 compared to approximately $3,113,000 for the first
three months of fiscal 1998. Operating loss increased approximately 17% or
$107,000 from fiscal 1998 and was approximately ($721,000) for the first three
months of fiscal 1999 compared to operating loss of approximately ($613,000) for
the first three months of fiscal 1998. This increase in operating loss was
primarily from higher utility operating expenses of approximately $135,000 due
to more payroll, payroll taxes and other expenses from inflationary trends and
timing of audit and other expenses booked this quarter, offset partially by
higher margins of approximately $27,000. Gross Margin, which is defined as
operating revenues less gas purchased, was approximately $1,447,000 for the
first three months of fiscal 1999 compared to gross margin of approximately
$1,420,000 for the first three months of fiscal 1998.
OPERATING EXPENSES -
Utility operating expenses, excluding the cost of gas purchased and federal
and state income taxes, were approximately $2,167,000 for the first three
months of fiscal 1999 as compared to $2,033,000 for the same period in fiscal
1998. The 7% increase in the period was generally due to inflationary trends as
well as additional staff for safety operations and timing of audit and other
expenses booked this quarter.
INTEREST CHARGES -
Interest charges allocable to the Company's utility divisions were
approximately $306,000 for the first quarter of fiscal 1999, as compared to
$359,000 in the comparable period in fiscal 1998. 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 decreased
primarily due to lower short-term borrowing.
INCOME TAXES -
State and federal income tax benefits of the Company's utility divisions were
approximately ($354,000) for the first quarter of fiscal 1999 as compared to
approximately ($341,000), due to a higher pre-tax loss of the utility divisions.
9
<PAGE>
NON-REGULATED OPERATIONS -
Non-regulated operating revenues for the first quarter ended September 30, 1998
were approximately $5,937,000 compared to $2,111,000 for the first quarter of
fiscal 1998. Non-regulated operating revenues for fiscal 1999 consisted of
$864,000 for EWP, $5,049,000 for Energy West Resources, Inc. and $24,000 for
Energy West Development, 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
33% or $42,000 from fiscal 1998 and was approximately ($172,000) for the first
quarter of fiscal 1999 compared to an operating loss of approximately ($130,000)
for the first quarter of fiscal 1998. Operating loss for EWP was approximately
($82,000) for the first quarter of fiscal 1999, compared to approximately
($115,000) in the first quarter of fiscal 1998, a decrease in loss of
approximately $33,000 primarily due to decreases in operating expenses in
Petrogas of Wyoming and Arizona, however Energy West Resources, Inc.'s operating
loss of approximately ($102,000) compared to operating loss in fiscal 1998 of
approximately ($29,000), 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.
ENERGY WEST PROPANE, INC. -
For the three months ended September 30, 1998, EWP generated a net loss of
approximately ($43,000) compared to a net loss of approximately( $98,000) for
the three months ended September 30, 1997. Approximately ($13,000) of EWP's net
loss for the first quarter of fiscal 1999 was attributable to the Petrogas of
Wyoming division, approximately ($28,000) to Rocky Mountain Fuels Wholesale,
approximately ($18,000) net loss attributable to Missouri River Propane in
Montana, offset partially by approximately $16,000 net income in the Petrogas
division in Arizona. EWP's gross margins of approximately $237,000, for the
three months ended September 30, 1998 were down 25% or$78,000 from $315,000 for
the three months ended September 30, 1997 however operating expenses decreased
28% from approximately $398,000 for the first quarter one year ago to
approximately $285,000 and other income increased approximately $37,000 because
of miscellaneous services rendered, thereby reducing the loss before income
taxes to approximately ($63,000) from approximately ($150,000), the same quarter
one year ago, primarily due to Petrogas of Wyoming as a result of the sale of
four retail propane districts in Wyoming after the first quarter of fiscal 1998.
Margins in the Petrogas division in Arizona increased this quarter from
approximately $76,000 to $86,000 and in Missouri River Propane from
approximately $11,000 to $15,000 due to customer growth. EWP experienced lower
short-term interest costs due to lower short-term borrowing. State and federal
income tax benefits decreased to approximately ($20,000) for this quarter from
($52,000) last year, due to the lower pre-tax loss of EWP
ENERGY WEST RESOURCES, INC. -
For the three months ended September 30, 1998, Energy West Resources, Inc.'s
net loss was approximately ($22,000) compared to a net loss of approximately
($19,000) for the three months ended September 30, 1997, 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 $17,000, or 21%due to increased
natural gas prices in Canada and Montana. Energy West Resources, Inc. recorded
a mark-to-market gain of $82,000 in other income during the quarter ended
September 30, 1998. State and federal income tax benefits increased this
quarter to approximately ($13,000) from approximately ($10,000) the same quarter
one year ago, due to a higher pre-tax loss of Energy West Resources, Inc. this
quarter as compared to pre-tax income the same quarter one year ago.
ENERGY WEST DEVELOPMENT, INC. -
For the three months ended September 30, 1998, Energy West Development, Inc.'s
net income was approximately $3,000 compared to $4,000 for the three months
ended September 30, 1997, primarily due to higher administrative and maintenance
expenses required on property owned by Energy West Development, Inc.
10
<PAGE>
Item 3 - THE QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's energy-related businesses are exposed to risks relating to changes
in certain commodity prices and counterparty performance. In order to manage
the various risks relating to these exposures, the Company utilizes natural gas
derivatives and has established risk management oversight for these risks. The
Company has implemented or is in the process of implementing procedures to
manage such risk and has established a comprehensive risk management committee,
overseen by the Audit Committee of the Company's Board of Directors, to monitor
compliance with the Company's risk management policies and procedures.
The Company protects itself against price fluctuations on natural gas by
limiting the aggregate level of net open positions which are exposed to market
price changes through the use of natural gas derivative instruments for hedging
purposes. The net open position is actively managed with strict policies
designed to limit the exposure to market risk and which require at least weekly
reporting to management of potential financial exposure. The risk management
committee has limited the types of financial instruments the company may trade
to those related to natural gas commodities. Financial instruments generally
are not held for speculative trading purposes. The quantitative information
related to derivative transactions is contained in footnote number five to the
consolidated financial statements.
Credit risk relates to the risk of loss that the Company would incur as a result
of non-performance by counterparties of their contractual obligations under the
various instruments with the Company. Credit risk may be concentrated to the
extent that one or more groups of counterparties have similar economic, industry
or other characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes market or other conditions. In
addition, credit risk includes not only the risk that a counterparty may default
due to circumstances relating directly to it, but also the risk that a
counterparty may default due to circumstances which relate to other market
participants which have a direct or indirect relationship with such
counterparty. The Company seeks to mitigate credit risk by evaluating the
financial strength of potential counterparties. However, despite mitigation
efforts, defaults by counterparties occur from time to time. To date, no such
default has had a material adverse effect on the Company.
11
<PAGE>
FORM 10-Q
PART II - 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. The Company
contracts for liability insurance through a primary insurance carrier in the
amount of $1,000,000 and an excess carrier, in the amount of $30,000,000 in
order to indemnify itself from such claims. The company has been charged with
responsibility for certain actions, which have been litigated or are in the
process of litigation. In its judgement, there are no legal proceedings, which
could result in a material adverse effect on the Company's results of
operations, financial position or liquidity. Significant legal proceedings,
most of which are covered under its liability insurance policies, are described
below.
On February 6, 1998 a judgment was entered against the Company in the Federal
District Court for Wyoming in favor of Randy and Melissa Hynes. The Company was
found to be 55% negligent resulting in a liability of approximately $2,900,000
for which the Company is indemnified under the policies described above. The
action arose out of a natural gas explosion involving a four-plex apartment
building in Cody, Wyoming. The Company has appealed the judgement to the United
States Court of Appeals for the Tenth Circuit.
Five other plaintiffs in the Wyoming State District Court filed a similar
lawsuit arising out of the same explosion as that in the "Hynes" case. The
Company is indemnified for the defense of this claim and any judgment that might
be entered against it therein under its liability insurance policies. Trial on
one of these claims is scheduled for April 13, 1999.
A settlement was made in an action brought by Colten and Julie White and their
three children in Superior Court in Gila County, Arizona. That action arose out
of an explosion that occurred on May 3, 1994. The settlement resolves all
claims arising out of the explosion and is fully covered by the Company's
insurance policies.
On September 4, 1998, the Company received correspondence from the Department of
Justice that a claim was being considered by the United States of America (U.S.)
against the Company. The correspondence indicated that a complaint has been
prepared by Jack Grynberg, acting as Relator on behalf of the U.S., alleging
that the Company had utilized improper measurement procedures in the measurement
of gas which was produced by wells owned by it, by its subsidiaries, or from
which the Company may have acted as operator. The alleged improper measurement
procedure purportedly understated the amount of royalty revenue that would have
been paid to the U.S.. The complaint is substantially identical to complaints
that have been prepared against seventy-seven other parties. The Company is
alleged to have been responsible for the measurement of over 150 wells during a
five-year period. The Company has investigated this allegation and, believes it
had measurement responsibility for approximately four wells. The quantity of
production from those wells is small enough that the Company does not expect its
potential liability to be material from any adverse decision in any action
actually pursued by the U.S. or Mr. Grynberg. Furthermore, the Company believes
that the allegations made by Mr. Grynberg are not sustainable. The Company's
insurance providers have given a preliminary indication that the action would
not be indemnified under the Company's insurance policies. The Company intends
to vigorously contest the claims made in the Complaint, if it is, in fact filed.
12
<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, 1998.
13
<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 13, 1998
/s/ Edward J. Bernica
- -------------------------------------
Edward J. Bernica, Vice-President and
Chief Financial Officer
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