<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, 1999
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
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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 MARCH 31, 1999
(COMMON STOCK, $.15 PAR VALUE) 2,427,482
<PAGE>
ENERGY WEST INCORPORATED
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1999 and June 30, 1998 1
Condensed Consolidated Statements of Income -
three months and nine months ended March 31, 1999 and 1998 2
Condensed Consolidated Statements of cash flows -
nine months ended March 31, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4-6
Item 2 - Management's discussion and analysis of
financial condition and results of operations 7-14
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 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
</TABLE>
<PAGE>
I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31 June 30
1999 1998
----------------- ----------------
<S> <C> <C>
Current Assets:
Cash $157,193 $58,006
Accounts Receivable (net) 7,898,505 4,504,235
Natural Gas and Propane Inventory 1,545,833 4,669,933
Materials and Supplies 537,924 556,077
Prepayments and other 178,410 147,091
Refundable Income Tax Payments 96,025 464,155
Recoverable Cost of Gas Purchases 2,688,700 1,926,749
Deferred income taxes - current 183,875 --
----------------- ----------------
Total Current Assets 13,286,465 12,326,246
----------------- ----------------
Investments 0 3,365
Notes Receivable Due After One Year 193,771 192,192
Property, Plant and Equipment-Net 28,806,234 27,571,904
Deferred Charges 3,908,731 3,241,178
----------------- ----------------
Total Assets $46,195,201 $43,334,885
----------------- ----------------
----------------- ----------------
CAPITALIZATION AND LIABILITIES
Current Liabilities:
Note payable to bank $1,472,982 $1,442,982
Long-term debt due within one year 426,523 413,032
Accounts Payable 3,193,414 2,029,703
Other Current and Accrued Liabilities 3,087,089 2,859,116
----------------- ----------------
Total Current Liabilities 8,180,007 6,744,833
----------------- ----------------
Deferred Credits 7,448,100 6,500,730
Long-term Debt (less amounts due within one year) 17,015,723 17,278,033
Stockholders' Equity
Preferred Stock 0 0
Common Stock (2,427,482 shares and
2,403,190 shares were outstanding at March
31, 1999 and June 30, 1998 respectively) 363,955 360,481
Capital in Excess of Par Value 3,498,189 3,286,228
Retained Earnings 9,689,227 9,164,580
----------------- ----------------
Total Stockholder's Equity 13,551,371 12,811,289
----------------- ----------------
Total Capitalization and Liabilities $46,195,201 $43,334,885
----------------- ----------------
----------------- ----------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-1-
<PAGE>
FORM 10Q
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
1999 1998 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenue:
Regulated utilities $10,186,783 $10,856,147 $22,362,315 $22,896,745
Nonregulated operations 1,156,590 1,412,832 2,558,516 3,314,680
Gas and electric trading 6,405,812 3,651,678 15,112,249 7,079,850
-------------------------------------------------------------------
Total Revenue 17,749,185 15,920,657 40,033,080 33,291,275
-------------------------------------------------------------------
Operating Expenses
Gas purchased 6,665,489 7,473,986 14,582,225 15,588,277
Cost of gas and electric trading 5,876,870 3,368,838 14,487,036 6,502,317
Distribution, general and administrative 2,124,227 1,882,922 6,007,097 5,669,446
Maintenance 145,883 131,383 383,377 373,376
Depreciation and amortization 441,025 459,180 1,318,297 1,360,020
Taxes other than Income 230,346 167,086 567,515 489,798
-------------------------------------------------------------------
Total Operating Expenses 15,483,840 13,483,395 37,345,547 29,983,234
-------------------------------------------------------------------
Operating Income 2,265,345 2,437,262 2,687,533 3,308,041
Other Income - Net 182,365 204,109 679,114 413,103
-------------------------------------------------------------------
Income Before Interest Charges & IncomeTaxes 2,447,710 2,641,371 3,366,647 3,721,144
-------------------------------------------------------------------
Interest Charges:
Long-Term Debt 315,931 319,008 943,731 888,053
Other 101,838 60,254 274,331 377,971
-------------------------------------------------------------------
Total Interest Charges 417,769 379,262 1,218,062 1,266,024
-------------------------------------------------------------------
Net Income Before Income Taxes 2,029,941 2,262,109 2,148,585 2,455,120
Income Taxes 740,285 820,585 792,446 878,589
-------------------------------------------------------------------
Net Income $1,289,656 $1,441,524 $1,356,139 $1,576,531
-------------------------------------------------------------------
-------------------------------------------------------------------
Basic Earnings and diluted income per common share $0.53 $0.60 $0.56 $0.66
-------------------------------------------------------------------
Dividends per common share $0.1150 $0.1050 $0.3450 $0.3300
-------------------------------------------------------------------
Basic Weighted Average Shares 2,421,465 2,398,461 2,415,134 2,384,343
Diluted Weighted Average Shares 2,424,206 2,401,415 2,417,875 2,387,297
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-2-
<PAGE>
FORM 10Q
ENERGY WEST INCORPORATED
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
March 31
1999 1998
----------------------------------
<S> <C> <C>
Operating Activities:
Net Income $1,356,139 $1,576,529
Adjustments to Reconcile Net Income to Cash Flow
Depreciation and Amortization 1,566,292 1,526,642
Unrealized Gain on Gas Marketing Activities (390,000) 0
Gain on Sale of Property, Plant & Equipment (34,452) (200,268)
Deferred Gain on Sale of Assets (17,721) (17,721)
Investment Tax Credit (15,796) (15,797)
Deferred Income Taxes 614,311 436,758
Changes in Operating Assets and Liabilities 257,056 2,316,799
----------------------------------
Net Cash Provided by Operating Activities 3,335,829 5,622,942
Investing Activities:
Construction Expenditures (2,566,042) (2,217,251)
Collection of Long-Term Notes Receivable 19,429 5,614
Proceeds from Contributions in Aid of Construction 80,250 122,643
Increase in Notes Receivable (13,200) (200,000)
Proceeds from Sale of Property, Plant & Equipment 227,190 1,243,701
----------------------------------
Net Cash (Used In) Investing Activities (2,252,373) (1,045,293)
Financing Activities:
Proceeds from Long-Term Debt 0 8,000,000
Debt Issuance and Reacquisition Costs 0 (457,503)
Proceeds from Notes Payable 26,317,000 20,550,000
Repayment of Long-Term Debt (255,000) (240,000)
Repayment of Notes Payable (26,287,000) (31,930,000)
Sale of Common Stock 900 187,224
Dividends paid (760,169) (635,779)
----------------------------------
Net Cash (Used In) Financing Activities (984,269) (4,526,058)
----------------------------------
Net Increase in Cash and Cash Equivalents 99,187 51,591
Cash and Cash Equivalents at Beginning of Year 58,006 148,665
----------------------------------
Cash and Cash Equivalents at End of Period $157,193 $200,256
----------------------------------
----------------------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-3-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1999
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,
1999 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 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. The original basis differential was at $.62 per MMBTU. The Company
settled this basis differential at $.38 resulting in a gain of $390,000 which is
recorded as a mark-to-market gain in other income. The Company has designated
this basis swap as a trading commodity derivative.
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>
<S> <C>
Tax expense at statutory rates - 34%....................................... $732,997
State income taxes, net of federal income taxes............................ 52,446
Amortization of deferred investment tax credits............................ (15,797)
Other...................................................................... (29,361
-------
Total income taxes......................................................... $740,285
-------
-------
</TABLE>
4
<PAGE>
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 has submitted the
additional data, and is awaiting the outcome of the review by MDEQ. The Company
expects that, at a minimum it will 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 March 31, 1999, the costs incurred in evaluating and remediating this site
have totaled approximately $1,362,000. On May 30, 1995, the Company received an
order from the Montana Public Service commission allowing for recovery of the
costs associated with evaluation and remediation of the site through a surcharge
on customer bills. As of March 31, 1999, that recovery mechanism had generated
approximately $728,000. The Company expects to fully recover its costs 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.
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 no
material adverse effect on the Company's results of operations, financial
position or liquidity.
5
<PAGE>
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 Nine Months Ended
March 31 March 31
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues:
Regulated utilities $10,186,783 $10,856,147 $22,362,315 $22,896,745
Non-regulated operations 1,156,590 1,412,832 2,558,516 3,314,680
Gas and electric trading 6,405,812 3,651,678 15,112,249 7,079,850
----------- ----------- ----------- -----------
$17,749,185 $15,920,657 $40,033,080 $33,291,275
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Operating Expenses:
Gas and power purchased:
Regulated $ 6,263,318 $ 6,919,368 $13,539,370 $14,209,177
Non-regulated 402,171 554,618 1,042,855 1,379,100
Cost of gas and electric trading 5,876,870 3,368,838 14,487,036 6,502,317
----------- ----------- ----------- -----------
$12,542,359 $10,842,824 $29,069,261 $22,090,594
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Distribution, general and administrative:
Regulated $ 1,682,135 $ 1,448,094 $ 4,803,957 $ 4,334,510
Non-regulated 442,092 434,828 1,203,140 1,334,936
----------- ----------- ----------- -----------
$ 2,124,227 $ 1,882,922 $ 6,007,097 $ 5,669,446
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Maintenance:
Regulated $ 134,182 $ 108,540 $ 334,525 $ 292,568
Non-regulated 11,701 22,843 48,852 80,808
----------- ----------- ----------- -----------
$ 145,883 $ 131,383 $ 383,377 $ 373,376
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Depreciation and amortization:
Regulated $ 373,335 $ 382,100 $ 1,117,803 $ 1,113,050
Non-regulated 67,690 77,080 200,494 246,970
----------- ----------- ----------- -----------
$ 441,025 $ 459,180 $ 1,318,297 $ 1,360,020
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Taxes other than income:
Regulated $ 196,049 $ 142,708 $ 484,214 $ 408,834
Non-regulated 34,297 24,378 83,301 80,964
----------- ----------- ----------- -----------
$ 230,346 $ 167,086 $ 567,515 $ 489,798
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income taxes:
Regulated $ 452,933 $ 597,213 $ 448,605 $ 610,596
Non-regulated 287,352 223,372 343,842 267,993
----------- ----------- ----------- -----------
$ 740,285 $ 820,585 $ 792,447 $ 878,589
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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 involve the distribution and sale of natural gas in the Great
Falls, Montana and Cody, Wyoming areas and the distribution of propane through
underground propane vapor systems in the Payson, Arizona and Cascade, Montana
areas. The Company's regulated utility operations also include 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. (EWR) which is involved in the marketing of natural gas and electricity in
Montana; Energy West Development , Inc. (EWD), (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. As the short-term debt
balance significantly exceeds working capital requirements the Company issues
long-term debt or equity securities to pay down short-term debt.
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, 1999, the Company had $19,000,000 in bank lines of credit, of which
$1,472,982 had been borrowed under these credit agreements.
The Company generated net cash in operating activities for the nine months ended
March 31, 1999 in the amount of approximately $3,340,000 as compared to
approximately $5,620,000 for the nine months ended March 31, 1998. There are
substantial reductions to working capital during the first nine months of fiscal
1999. However, these reductions were less than during the first nine months of
fiscal 1998 by approximately $2,300,000. Gas inventory was reduced by $3,280,000
for the first nine months of fiscal 1999 compared to a reduction of $4,640,000
for the same period in fiscal 1998. In addition, accounts payable decreased by
about $2,000,000 because there were less gas purchase payables outstanding at
March 31, 1999 compared to March 31, 1998. Also, greater amounts were expended
for environmental clean-up totaling about $800,000. These decreases were offset
by lower accounts receivable of approximately $2,000,000 due to timing of
collections and less sales to customers from warmer weather than last fiscal
year.
Cash used in investing activities was approximately $2,250,000 for the nine
months ended March 31, 1999, as compared to approximately $1,050,000 for the
nine months ended March 31, 1998 an increase of $1,200,000. The primary
difference is from higher proceeds from the sale of property, plant and
equipment of about $1,020,000 in fiscal 1998 and $190,000 loans to customers
recorded as notes receivable in fiscal 1999.
7
<PAGE>
Cash used in financing activities was approximately $980,000 for the nine months
ended March 31, 1999, as compared to approximately $4,530,000 for the nine
months ended March 31, 1998. The decrease in cash used in financing activities
was approximately $3,550,000. This resulted primarily from an decrease in net
repayments of short-term debt of about $11,400,000. This was partially offset by
a decrease in proceeds from the sale of common stock of about $185,000, a
decrease in the net proceeds from a long-term debt issue of approximately
$7,560,000 and higher dividends paid of about $125,000.
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. Capital expenditures are expected to
be approximately $3.2 million in fiscal 1999, including approximately $1.2
million for continued expansion of the Arizona utility system and approximately
$1.4 million for maintenance and other special system expansion projects in
Montana and Wyoming utility systems. The balance of capital expenditures,
approximately $600,000, will be used for the Company's propane operations in the
three states it serves. As of March 31, 1999, approximately $2.6 million of that
amount had been expended.
8
<PAGE>
RESULTS OF CONSOLIDATED OPERATIONS
COMPARISON OF THIRD QUARTER OF FISCAL 1999 ENDED MARCH 31, 1999 AND FISCAL 1998
ENDED MARCH 31, 1998 The Company's net income for the third quarter of fiscal
1999, ended March 31, 1999 was $1,289,656 compared to $1,441,524 for the third
quarter of fiscal 1998, ended March 31, 1998.
Margins were approximately the same for the third quarter of both fiscal years.
Distribution, general and administrative expenses were approximately $240,000
higher for the third quarter of fiscal 1999 compared to 1998. This increase was
from higher accruals for vacation expense, from higher salaries related to the
Company's marketing efforts and additional staff added for the safety operations
of the Company. All other expenses and other income were approximately the same
for this quarter of both fiscal years.
UTILITY OPERATIONS -
Utility operating revenues in the third quarter of fiscal 1999 were
approximately $10,190,000 compared to approximately $10,860,000 for the third
quarter of fiscal 1998. The decrease in revenue was primarily due to warmer
weather in the Company's utility divisions for the third quarter of fiscal 1999
when compared with the same quarter in fiscal 1998. Gross margin, which is
defined as operating revenues less gas purchased, was approximately $3,920,000
for the third quarter of fiscal 1999 compared to a gross margin of $3,940,000
for the third quarter of fiscal 1998. Although the weather was warmer than the
previous year, rate increases in the various utility divisions resulted in
margin being approximately the same for both quarters. Operating income was
about $330,000 lower in the third quarter of fiscal 1999, when compared with the
same quarter of fiscal 1998 primarily do to higher operating expenses.
OPERATING EXPENSES -
Utility operating expenses, excluding the cost of gas purchased and federal and
state income taxes, were approximately $2,380,000 for the third quarter of
fiscal 1999 compared to $2,070,000 for the same period of fiscal 1998, an
increase $310,000. This increase was due to higher accruals for vacation
expense, additional staff added for the safety operations of the Company and
inflationary trends in the various utility operating entities. In addition,
taxes other than income, which are included in operating expenses, increased by
about $50,000 from an unfavorable settlement of a sales and use tax audit,
during the third quarter of fiscal 1999, related to the Company's Arizona
operations.
INTEREST CHARGES -
Interest charges allocable to the Company's utility divisions was approximately
$360,000 for the third quarter of fiscal 1999, as compared to $320,000 in the
comparable period in fiscal 1998. This increase in interest expense was due to
higher working capital requirements for utility operations.
INCOME TAXES -
State and federal income taxes of the Company's utility divisions were
approximately $450,000 for the third quarter of fiscal 1999 compared to $600,000
for the third quarter of fiscal 1998. This occurred because the pre-tax income
declined by about $360,000 for the respective quarters of each fiscal year.
9
<PAGE>
NON-REGULATED OPERATIONS -
Non-regulated operating revenues for the third quarter of fiscal 1999 were
approximately $7,560,000 compared to approximately $5,060,000 for the third
quarter of fiscal 1998. Of this increase approximately $1,880,000 resulted from
EWR, the Company's marketing subsidiary, signing its first two electric
wholesale contracts during the quarter. Non-regulated operating revenues for the
fiscal 1999 quarter consisted of $1,130,000 for EWP, $6,400,000 for EWR and
$24,000 for EWD.
Operating income, which is defined as operating revenues less gas purchased,
general, administrative, maintenance, depreciation and taxes other than income,
was approximately $730,000 for the third quarter of fiscal 1999. This compares
to operating income of approximately $580,000 for the third quarter of fiscal
1998. This increase resulted from the Company's gas trading and electric
marketing efforts. Operating income for EWP was approximately $350,000 for the
third quarter of fiscal 1999, compared to approximately $410,000 in the third
quarter of fiscal 1998. The decrease in operating income of approximately
$60,000 was primarily due to decreases in gross margin from warmer weather
offset by lower operating expenses in the Company's propane divisions. EWR's
operating income of approximately 360,000, for the third quarter of fiscal 1999
compared to an operating income for the same quarter in fiscal 1998 of
approximately $160,000 This increase resulted from higher gas margins primarily
from gas trading activities and wholesale electric margins from its first two
electric contracts.
ENERGY WEST PROPANE, INC. -
For the third quarter of fiscal 1999, EWP generated net income of approximately
$210,000 compared to net income of approximately $320,000 for the third quarter
of fiscal 1998. EWP's gross margin of approximately $730,000, for the third
quarter of fiscal 1999, was down about $100,000 from the third quarter of fiscal
1998. EWP's operating expenses decreased approximately $40,000 in the third
quarter of fiscal 1999 as compared to the third quarter of last fiscal year.
Some of the decrease in gross margin and the decline in operating expenses is
primarily due to the sale of four retail propane districts, in Wyoming, in
February 1998. Warmer weather experienced in all propane divisions, in the third
quarter of fiscal 1999 compared to the same quarter of fiscal 1998, also
contributed to the decline in gross margin. EWP experienced a decrease of
$110,000 in other income during the third quarter of fiscal 1999 compared to
fiscal 1998, because of its gain from the sale of the propane districts. State
and federal income tax expense decreased by approximately $60,000 for this
quarter compared to the same quarter last year, due to the lower pre-tax income
of about $170,000.
ENERGY WEST RESOURCES, INC. -
For the third quarter of fiscal 1999, EWR's net income was approximately
$270,000 compared to a net income of approximately $120,000 for the third
quarter of fiscal 1998. Gross margin from gas sales and trading and electric
sales increased by about $250,000 for the third quarter of fiscal 1999 compared
to fiscal 1998. This increase was primarily due to gas trading activities and
electric sales. Other income increased for the third quarter of fiscal 1999
compared to 1998 by about $80,000 from a mark-to-market gain from derivative
activity. Operating expenses increased by about $40,000 in the third quarter of
fiscal 1999 compared to the same period in fiscal 1998. This increase was
related to higher costs from EWR's marketing activities. State and federal
income tax expense increased approximately $120,000 for the third quarter of
fiscal 1999 compared to fiscal 1998 due to a higher pre-tax income of
approximately $270,000 for the same time period.
ENERGY WEST DEVELOPMENT, INC. -
For the third quarter of fiscal 1999, Energy West Development, Inc.'s net income
was $6,000 compared to approximately $3,000 for the third quarter of fiscal
1998.
10
<PAGE>
RESULTS OF CONSOLIDATED OPERATIONS
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1999 AND FISCAL 1998 ENDED MARCH 31,
1998
The Company's net income for the nine months ended March 31, 1999 was $1,356,139
compared to $1,576,531 for the nine months ended March 31, 1998.
Margins decreased from approximately $11,200,000 in fiscal 1998 to $10,960,000
in fiscal 1999 or $240,000. The decrease resulted from lower margins, in utility
and propane operations, of $290,000 in fiscal 1999 compared to fiscal 1998
primarily due to warmer weather experienced in all utility and propane
divisions. This was partially offset by increased gas trading margins, from
supply side trading, and the Company's first electric trading margins in fiscal
1999. Distribution, general and administrative expenses increased from
approximately $5,700,000 in fiscal 1998 to $6,000,000 in fiscal 1999 or $300,000
primarily due to inflationary trends, additional staff added for the safety
operations of the Company and additional expenses in EWR because of growth in
marketing activity. Taxes other than income also increased by approximately
$60,000 primarily from an unfavorable settlement of a sales and use tax audit
related to the Company's Arizona operations. These were partially offset by
increased other income of approximately $270,000 due to mark-to-market
accounting for derivatives, held by the Company, and decreased interest charges
of approximately $50,000, due to lower short-term borrowing.
UTILITY OPERATIONS -
Utility operating revenues for the first nine months of fiscal 1999 were
approximately $22,360,000 compared to approximately $22,900,000 for the first
nine months of fiscal 1998. The decrease was the result of warmer weather in
fiscal 1999 compared to 1998 in all the Company's utility operations. Although
gross margin, which is defined as operating revenues less gas purchased,
increased by $130,000 from approximately $8,690,000 for the first nine months of
fiscal 1998 to approximately $8,820,000 for the first nine months of fiscal
1999. The increase in gross margin was primarily due to rate increases in
various utility divisions since last fiscal year. However, operating income
decreased by about $450,000 for the first nine months of fiscal 1999 compared to
fiscal 1998 due to higher operating expenses of $590,000.
OPERATING EXPENSES -
Utility operating expenses, excluding the cost of gas purchased and federal and
state income taxes, were approximately $6,740,000 for the first nine months of
fiscal 1999 as compared to $6,150,000 for the same period in fiscal 1998. The 9%
increase was generally due to inflationary trends, additional staff for safety
operations, the unfavorable sales and use tax audit in Arizona and costs
incurred for name changes throughout the Company.
INTEREST CHARGES -
Interest charges allocable to the Company's utility divisions were approximately
$1,010,000 for the first nine months of fiscal 1999, as compared to $1,060,000
for 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 expense for the Company's utility divisions were
approximately $450,000 for the first nine months of fiscal 1999 compared to
approximately $610,000 for the same period in fiscal 1998. This was due to lower
pre-tax income for the utility divisions of $450,000 for the first nine months
of fiscal 1999 compared the first nine months of fiscal 1998.
11
<PAGE>
NON-REGULATED OPERATIONS -
Non-regulated operating revenues for the first nine months of fiscal 1999 were
approximately $17,700,000 compared to $10,400,000 for the first nine months of
fiscal 1998. The substantial increase in revenues over the previous year
resulted from increased sales related to the Company's gas and electric trading
activities. This increase in revenue was offset by higher commodity costs for
gas and electric trading activity. Non-regulated operating revenues through
March 1999 consisted of $2,480,000 for EWP, $15,100,000 for EWR and $75,000 for
EWD.
Operating income, which is defined as operating revenues less gas purchased,
distribution, general, administrative, maintenance, depreciation, amortization
and taxes other than income, was approximately $610,000 for the first nine
months of fiscal 1999. This compares to operating income of approximately
$770,000 for the first nine months of fiscal 1998. Operating income for EWP was
approximately $390,000 for the first nine months of fiscal 1999, compared to
approximately $520,000 in the first nine months of fiscal 1998. The difference
of $130,000 is due to lower gross margin resulting from warmer weather in all
propane divisions and from lower operating income due to the sale of four retail
propane districts. EWR's operating income in fiscal 1999 was approximately
$180,000 compared to operating income in fiscal 1998 of approximately $200,000.
ENERGY WEST PROPANE, INC. -
For the nine months ended March 31, 1999, EWP generated net income of
approximately $230,000 compared to net income of approximately $360,000 for the
nine months ended March 31, 1998. EWP's gross margins of approximately
$1,440,000, for the first nine months of fiscal 1999 were down $420,000 from
$1,860,000 for the first nine months of fiscal 1998. However operating expenses
decreased from approximately $1,330,000 for the first nine months last fiscal
year to approximately $1,050,000 for this fiscal year, an overall decrease of
$280,000. Most of the changes in gross margin and operating expenses were the
result of the sale of four retail propane districts in Wyoming in February 1998.
In addition weather was much warmer than last year throughout the Company's
propane operations. Other income decreased approximately $90,000 due to the gain
recognized from the sale of the propane districts. Interest expenses decreased
by $30,000 for that same time period. State and federal income tax expense
decreased by approximately $60,000 for the first nine months of fiscal 1999
compared to fiscal 1998, due to lower pre-tax income of about $190,000.
ENERGY WEST RESOURCES, INC. -
For the first nine months of fiscal 1999, EWR's net income was approximately
$330,000 compared to net income of approximately $130,000 for the first nine
months of fiscal 1998. Gross margin from gas and electric activities increased
by about $50,000 from approximately $580,000 for the first nine months of fiscal
1998 to approximately $630,000 for the same time period in fiscal 1999. In
addition, a mark-to-market gain of $390,000 related to derivative transactions
was recorded as other income, in fiscal 1999. Operating expenses increased by
approximately $90,000 for the first nine months of fiscal 1999 compared to the
same period in fiscal 1998, due to staff expansion and training required to
serve the growth in marketing activity. Interest expenses increased by $30,000
for that same time period due to higher working capital requirements related to
the expanded marketing sales and activities. State and federal income tax
expense increased approximately $140,000 for the first nine months of fiscal
1999 compared to fiscal 1998 due to higher pre-tax income of approximately
$340,000 for the same time period.
ENERGY WEST DEVELOPMENT, INC. -
For the first nine months ended of fiscal 1999 and 1998, EWD's net income was
approximately $10,000.
12
<PAGE>
SAFE HARBOR FOR FORWARD LOOKING STATEMENT
The company is including the following cautionary statement in this Form 10-Q to
make applicable and to take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of the Company. Forward-looking statements are
all statements other than statements of historical fact, including without
limitation those that are identified by the use of the words "anticipates",
"estimates", "expects", "intends", "plans", "predicts", and similar expressions.
Such statements are inherently subject to a variety of risks and uncertainties
that could cause actual results to differ materially from those expressed. Such
risks and uncertainties include, among others, changes in the utility regulatory
environment, wholesale and retail competition, weather conditions and various
other matters, many of which are beyond the Company's control. These
forward-looking statements speak only as of the date of the report. The Company
expressly undertakes no obligation to update or revise any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions, or circumstances on
which any such statement is based.
YEAR 2000
The Y2K issue relates to the ability of systems, including hardware, software
and embedded technology , to properly interpret date information relating to the
Year 2000 and beyond. Any of the Company's computer systems and embedded
microprocessors that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the Year 2000 (Y2K). This could result in a
system failure or miscalculations causing disruptions in operations. Some
possible affects include the inability to process transactions, send billing
statements to customers, or similar normal business activities.
The Company has formed a Y2K committee consisting of management, information
technology and operations personnel to address its Y2K compliance issues. This
committee meets weekly and is charged with the task of managing the Y2K
compliance effort.
The Company has completed an assessment of its exposure to Y2K issues. This
assessment indicated that most of the Company's computer systems are compliant
or can be made compliant with minimal costs, with the exception of one of its
billing systems. However, the Company anticipates the one non-compliant billing
system will be compliant by July 1999. In addition, the Company selected a new
billing system to replace all of its existing billing systems, in order to
accommodate additional billing requirements for business reasons related to
deregulation of the energy industry and from establishing an energy marketing
company. The Company plans to have a new billing solution in place by December
1999 with expected costs of approximately $500,000.
The Company expects that with conversions to new software and modifications to
existing software, the Y2K issue will not pose significant internal computer
systems problems. If such modifications and conversions are not made or are not
completed in a timely manner the Y2K issue could have a material impact on the
operations of the Company, specifically related to billing its customers.
A detailed inventory and assessment has been completed for all components of
operational systems with potential Y2K embedded technology. The inventory and
assessment revealed no Y2K non-compliance issues. However, the testing of these
components has not yet been completed. Of the tests made to date, none have
revealed any Y2K compliance problems that could have a material effect on the
Company's operations. The Company expects the testing of operational systems to
be completed in July 1999.
The Company has initiated formal communications with all of its significant
suppliers, gas and electric transmission companies and large customers, to
determine the extent to which the Company's interface systems are vulnerable to
third parties' failure to remediate their own Y2K issues. The Company's total
Y2K project costs and estimates to complete, include the estimated costs and
time associated with the impact of third party Y2K issues based on presently
available information. However, there can be no guarantee that the systems of
other companies, on which the Company's systems rely, will be timely converted
and would not have an adverse effect on the Company's systems. The Company has
determined it has no exposure contingencies related to the Y2K issue for the
products it has sold.
13
<PAGE>
Total Year 2000 assessment costs incurred to date have been approximately
$50,000. Although it is not currently possible to estimate the total costs for
any required modifications, it is not expected to exceed $150,000, and
therefore, it would not have a material impact on the Company's current
financial position, liquidity or results of operations.
The Company has begun development of contingency plans specific to the Y2K issue
which is expected to be completed by September 1999. However the Company has
emergency plans in place as part of its normal safety plans, which address
system outages. The Company plans to utilize these emergency plans as the basis
for the Y2K contingency plans.
14
<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 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. The quantitative information
related to derivative transactions is contained in footnote number three 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 in 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 occurred.
15
<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% responsible 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.
Two lawsuits arising out of the same explosion as that in the "Hynes" case but
involving other plaintiffs have recently settled. One lawsuit filed by the
building owner is still pending. The Company is indemnified under its insurance
policies for the defense of these claims, the settlement just discussed and
believes it will be completely indemnified from any judgment on the remaining
claim.
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.
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
March 31, 1999.
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 May 17, 1999
/s/ Edward J. Bernica
- ---------------------------------
Edward J. Bernica, Vice-President and
Chief Financial Officer
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