<PAGE>
FORM 10-QA
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 _______________
COMMISSION FILE NUMBER 0-14183
- ------------------------------
ENERGY WEST INCORPORATED
- ------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MONTANA 81-0141785
- ---------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1 FIRST AVENUE SOUTH, GREAT FALLS, MT. 59401
- ----------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (406)-791-7500
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT SEPTEMBER 30, 1998
- ----------------------------------------
(COMMON STOCK, $.15 PAR VALUE) 2,406,785
- ----------------------------------------
<PAGE>
ENERGY WEST INCORPORATED
INDEX TO FORM 10-QA
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I - Financial Information
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 7-12
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 13
Part II Other Information
Item 1 - Legal Proceedings 14
Item 2 - Changes in Securities 15
Item 3 - Defaults upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 5 - Other Information 15
Item 6 - Reports on Form 8-k 15
Signatures
</TABLE>
<PAGE>
Item 1. Financial Statements
FORM 10QA
ENERGY WEST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30 June 30
1998 1998
----------- -----------
<C> <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
----------- -----------
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
----------- -----------
Total Assets $46,796,637 $43,334,885
----------- -----------
----------- -----------
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
----------- -----------
Total Current Liabilities 10,774,317 6,744,833
----------- -----------
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
----------- -----------
Total Stockholder's Equity 11,876,638 12,811,289
----------- -----------
Total Capitalization and Liabilities $46,796,637 $43,334,885
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
-1-
<PAGE>
FORM 10QA
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
------------------------
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
------------------------
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
------------------------
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)
------------------------
Net Loss ($684,651) ($680,799)
------------------------
------------------------
Basic and diluted loss per common share ($0.28) ($0.29)
------------------------
------------------------
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 10QA
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)
------------------------
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
------------------------
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)
------------------------
Net Cash Provided by (Used In) Financing Activities 2,764,691 1,988,119
------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 26,807 (132,727)
Cash and Cash Equivalents at Beginning of Year 58,006 148,665
------------------------
Cash and Cash Equivalents at End of Period $84,813 $15,938
------------------------
------------------------
</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 Date Contract Contract Market Fair
Year (MMBTU) 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>
<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
---------- ----------
---------- ----------
Distribution, general and administrative:
Regulated $1,574,808 $1,450,376
Non-regulated 386,268 413,693
---------- ----------
$1,961,076 $1,864,069
---------- ----------
---------- ----------
Maintenance:
Regulated $94,581 $97,242
Non-regulated 17,683 26,632
---------- ----------
$112,264 $123,874
---------- ----------
---------- ----------
Depreciation and amortization:
Regulated $372,114 $360,923
Non-regulated 66,142 87,558
---------- ----------
$438,256 $448,481
---------- ----------
---------- ----------
Taxes other than income:
Regulated $126,132 $121,108
Non-regulated 27,827 25,233
---------- ----------
$153,959 $146,341
---------- ----------
---------- ----------
Income taxes (benefits):
Regulated ( $353,536) ($340,680)
Non-regulated (31,405) (64,427)
---------- ----------
($384,941) ($405,107)
---------- ----------
---------- ----------
</TABLE>
6
<PAGE>
FORM 10-QA
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>
SAFE HARBOR FOR FORWARD LOOKING STATEMENT
The company is including the following cautionary statement in this Form 10-QA
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 Year 2000 issue relates to the ability of systems, including hardware,
software and embedded microprocessors, 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. This could
result in a system failure of miscalculations causing disruptions of
operations, including inability to process transactions, send billing
statements to customers, or similar normal business activities.
The Company has formed a Year 2000 committee consisting of management,
information technology and operations personnel to address its Year 2000
compliance issues. This committee meets weekly and is charged with the task
of managing the Year 2000 compliance effort.
The Company has completed an assessment of its exposure to Year 2000 issues.
This assessment indicated that most of the Company's computers 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 is in the process of preparing a request for a proposal to
replace all of its 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 ranging between $250,000 and $500,000.
The Company expects, that with conversions to new software and modifications
to existing software, the Year 2000 issue will not pose significant internal
computer systems problems. However, if such modifications and conversions
are not made, or are not completed timely, the Year 2000 Issue could have a
material impact on the operations of the Company, specifically related to
billing its customers.
An inventory has been completed for all operational systems with potential
embedded microprocessors. Although a detailed inventory and assessment for
all specific components of those operational systems has not been completed.
However, of the work completed, to date, there has been no Year 2000
non-compliance issues identified, which could have a material effect on the
Company's operations. It is expected that the assessment and testing of
embedded systems will be completed by July 1999
The Company has initiated formal communications with all of its significant
suppliers, gas pipeline transmission companies and large customers, to
determine the extent to which the Company's interface systems are vulnerable
to those third parties' failure to remediate their own Year 2000 Issues. The
Company's total Year 2000 project cost and estimates to complete, include the
estimated costs and time associated with the impact of third party Year 2000
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 that it has no exposure
contingencies related to the Year 2000 Issue for the products it has sold.
11
<PAGE>
Total costs incurred to date, to address the Year 2000 issue, have been
approximately $40,000. 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 would not have a material impact on the Company's
current financial position, liquidity or results of operations.
The Company's billing systems are targeted to be compliant by July 1999.
Therefore even if a new billing system is not installed by December 1999 the
Company will be able to render bills to its customers. The Company has not
begun development of contingency plans specific to the Year 2000 issue.
However the Company has in place, as part of its normal safety plans,
emergency plans which address system outages. It is expected that these
emergency plans will be the basis for the Year 2000 contingency plans. The
Company plans to have its contingency plans related to the Year 2000 to be
completed by September 1999.
12
<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.
13
<PAGE>
FORM 10-QA
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.
14
<PAGE>
FORM 10-QA
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.
15
<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 January 20, 1999
/s/ Edward J. Bernica
- --------------------------------------
Edward J. Bernica, Vice-President and
Chief Financial Officer
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