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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER 0-14183
ENERGY WEST INCORPORATED
------------------------
(Exact name of registrant as specified in its charter)
Montana 81-0141785
---------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 First Avenue South, Great Falls, Mt. 59401
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (406)-791-7500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
Common Stock - Par Value $.15 NASDAQ
----------------------------- ------
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.45 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 3, 1997: Common Stock, $.15 Par Value -
$12,920,951
The number of shares outstanding of the issuer's classes of common stock as of
September 3, 1997: Common Stock, $.15 Par Value - 2,362,516 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be held
November 20, 1997 are incorporated by reference into Part III.
1
PART I
Item 1. - Business
ENERGY WEST INCORPORATED ("the Company") is a regulated public utility,
with certain non-utility operations conducted through its subsidiaries. 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. Since January 1993, the Company's regulated utility operations have also
included the distribution of propane to the public through an underground
propane vapor system in the Payson, Arizona area, and since 1995, the
distribution of natural gas through an underground system in West Yellowstone,
Montana, that is supplied by liquified natural gas ("LNG").
The Company conducts certain non-regulated non-utility operations through
its three wholly-owned subsidiaries, Rocky Mountain Fuels, Inc. ("RMF"), Energy
West Resources, Inc. ("EWR"), and Montana Sun, Inc. ("Montana Sun"). RMF is
engaged in the distribution of bulk propane in Northwestern Wyoming, the Payson,
Arizona area and the Cascade, Montana area. EWR is involved in gas storage and
the marketing of gas in Montana. Montana Sun owns two real estate properties in
Great Falls, Montana.
UTILITY OPERATIONS
The Company's primary business is the distribution and sale of natural gas
and propane to residential, commercial and industrial customers. The natural
gas distribution operations consist of two divisions, the Great Falls division
and the Cody division. The Cody division is also involved in the transportation
of natural gas. In addition, since January 1993 the Company has been involved
in the regulated distribution of propane in Arizona through the Broken Bow
division. Generally, residential customers use natural gas and propane for
space heating and water heating, commercial customers use natural gas and
propane for space heating and cooking, and industrial customers use natural gas
as a fuel in industrial processing and space heating. The Company's revenues
from utility operations are generated under tariffs regulated by the respective
state utility commissions.
GREAT FALLS DIVISION
The Great Falls division provides natural gas service to Great Falls,
Montana and much of suburban Great Falls within approximately 11 miles of the
city limits. The service area has a population base of approximately 65,000.
The Company has a franchise to distribute natural gas within the city of Great
Falls. The franchise was renewed for 50 years by the city of Great Falls in
1971. As of June 30, 1996, the Great Falls division provided service to over
25,000 customers, including approximately 22,000 residential customers,
approximately 3,000 commercial customers, an oil refinery and Malmstrom Air
Force Base ("Malmstrom") through transportation agreements.
2
The following table shows the Great Falls division's revenues by customer class
for the year ended June 30, 1997 and the past two fiscal years:
Gas Revenues
(in thousands)
Years Ended June 30,
--------------------
1997 1996 1995
---- ---- ----
Residential................. $9,267 $8,648 $8,996
Commercial.................. 6,631 6,146 6,350
Malmstrom................... 0 0 1,393
Transportation.............. 431 468 73
----- ----- -----
$16,329 $15,262 $16,812
------- ------- -------
------- ------- -------
Total...............
The following table shows the volumes of natural gas, expressed in millions
of cubic feet ("MMcf") at 13.28 P.S.I.A., sold by the Great Falls division for
the year ended June 30, 1997 and the past two fiscal years:
Gas Volumes
(Mmcf)
Years Ended June 30,
--------------------
1997 1996 1995
---- ---- ----
Residential................. 2,614 2,540 2,297
Commercial.................. 1,881 1,822 1,646
Malmstrom.................... 0 0 464
----- ----- -----
4,495 4,362 4,407
----- ----- ------
----- ----- ------
Total Gas Sales.......
Transportation 1,171 1,294 714
----- ----- -----
----- ----- -----
Malmstrom, now a transportation customer, the Great Falls division's
largest customer, accounted for approximately 2% of the revenues of the
division. Including revenues received by EWR, Malmstrom accounted for
approximately 3% of the consolidated revenues of the Company in fiscal 1997. On
July 1, 1995, Malmstrom became a transport customer of the Great Falls division,
purchasing its gas load from EWR, a wholly-owned subsidiary of ENERGY WEST
INCORPORATED. The Great Falls division experienced no loss of margin in fiscal
1997 and 1996 as a result of this contract. Malmstrom purchases gas for space
heating and water heating for buildings and residential housing, to supplement
its coal-fired central heating system. Malmstrom, which is located near Great
Falls, is an air force base with several wings of intercontinental nuclear
missiles. The base employed approximately 4,400 military personnel and 550
civilian personnel as of June 30, 1997.
3
Beginning in three years, Malmstrom has been selected as the site where 13
of 15 test flight of NASA's X-33 space shuttle will land during 1999. No
assurance can be given as to the future level of activity at Malmstrom.
The Great Falls division's other transport customer is an oil refinery
located in the city. The Company provides gas to the customer for processing
use in its refining business. In fiscal 1997, the refinery accounted for less
than 1% of the consolidated revenues of the Company. Historically, this
customer's gas load has remained relatively constant during the year because the
gas is used in the customer's business and is therefore not weather-sensitive.
On June 1, 1993, the refinery became a transport customer of the Great Falls
division, purchasing its gas load from EWR, a wholly-owned subsidiary of ENERGY
WEST INCORPORATED. The Great Falls division has not experienced a loss of
margin as a result of this contract.
In July, 1996 it was announced that a $20 million pasta plant will be built
in Great Falls. Construction is now complete and it is estimated, that the pasta
plant will use approximately 60,000 Mcf/year of natural gas.
The Great Falls division's gas distribution operations are subject to
regulation by the Montana Public Service Commission ("MPSC"). The MPSC
regulates rates, adequacy of service, accounting, issuance of securities and
other matters.
In November, 1994, the Company filed for a rate increase to recover the
cost of increased operating expenses, increases in financing expenses due to
additional investments in utility plant, and other costs of doing business.
Included with the filing was a new surcharge to recover costs associated with
the environmental assessment and remediation of its service center, which was
formerly a manufactured gas plant site. The Montana Consumer Counsel ("MCC")
intervened in the rate case and in January, 1995, the Company and the MCC filed
a Joint Motion for Suspension of the Procedural Order, in order to allow both
parties to negotiate toward a stipulated settlement. On May 30, 1995, the MPSC
approved the revenue requirement stipulation executed between the Company and
the MCC as filed in March, 1995, which reduced base rates by $250,000 and
allowed a new surcharge associated with the manufactured gas plant site with an
initial balance of approximately $183,000, with the surcharge calculated on a
two-year recovery of the average annual basis. The effective date of the rate
decrease and surcharge was the beginning of fiscal 1996 or July 1, 1995. The
rate decrease reduces earnings per share by approximately 1.8 cents on
normalized volumes.
4
In June, 1996, the Great Falls division filed a rate adjustment application
with the MPSC of approximately $386,000, to recover increased gas supply costs,
as part of an annual filing made by the Great Falls division to balance gas
supply costs against gas revenues. This filing does not increase the Great
Falls division's margins. On November 8, 1996, the MPSC granted interim relief
of approximately $386,000.
On July 8, 1996, the Great Falls division filed a general rate increase
with the MPSC, which reflects increased operating, maintenance and depreciation
costs as well as a change in the cost of capital. The Great Falls division
applied for and received interim relief on November 8, 1996 of approximately
$274,000 to cover increases in operating costs and taxes. The MPSC issued a
final order on April 7, 1997, which granted the Great Falls division
approximately $386,000 to reflect the gas tracking increase to recover wholesale
gas costs and approximately $295,000 for operating costs and taxes, an increase
of $20,000 from the interim, due to the allowance of an overall rate of return
increase.
Historically, the Great Falls division has purchased all of its gas from
Montana Power Company ("MPC"), a publicly owned electric and gas utility serving
much of Montana. In 1991 the MPSC ordered MPC to become an open access
transporter of natural gas over a phase-in period ending on August 31, 1993.
Since the 1991 order, the Company has been able to purchase gas from sources
other than MPC and transport supplies on MPC's system. The Company has
increased its gas purchases from suppliers other than MPC, as open access
transportation has been phased in. The Great Falls division, as of June 30,
1996, purchases approximately forty percent of its gas from a Canadian producer
under a long-term contract expiring in 2007, and approximately twenty percent of
its gas from three Montana producers under long-term contracts expiring between
1998 and 2002 and fifteen percent of its gas from short-term contracts with
Montana producers. The division also makes spot market purchases from time to
time to fill its storage capacity in the spring and summer.
The price of gas under the contract with the Canadian producer is
negotiated annually between the parties. The prices of gas under two of the
contracts with independent producers are fixed prices and the other contract can
be negotiated bi-annually by either party. Gas purchased from the division's
suppliers is transported through pipelines owned by MPC and is delivered to the
division's distribution system at two city gates. The Company pays
transportation tariffs to MPC at rates approved by the MPSC.
5
The Great Falls division contracts for gas storage from MPC in MPC-owned
gas storage areas and pays storage tariffs at rates approved by the MPSC. The
division uses this storage capacity to provide for seasonal peaking needs and to
take advantage of lower priced gas generally available during the summer months.
During fiscal 1996, the Company was a party to gas financial swap
agreements for its regulated operations, including the Great Falls and Cody
divisions. Under these agreements, the Company is required to pay the
counterparty (an entity making a market in gas futures) a cash settlement equal
to the excess of the stated index price over an agreed upon fixed price for gas
purchases. The Company receives cash from the counterparty when the stated
index price falls below the fixed price. These swap agreements are made to
minimize exposure to gas price fluctuations. Any cash settlements or receipts
are included in gas purchased.
CODY DIVISION
The Cody division provides natural gas service in Northwestern Wyoming to
the city of Cody and the towns of Meeteetse and Ralston and the surrounding
areas. The service area has a population base of approximately 12,000. The
Cody division has a certificate of public convenience and necessity granted by
the Wyoming Public Service Commission (the "WPSC") for gas purchasing,
transportation and distribution covering the west side of the Big Horn Basin,
which stretches approximately 70 miles north and south and 40 miles east and
west from Cody. As of June 30, 1997, the Cody division provided service to
approximately 5,400 customers, including 4,600 residential customers, 800
commercial customers and one industrial customer. The division also provides
transportation service to two customers.
The following table shows the Cody division's revenues by customer class
for the year ended June 30, 1997 and the past two fiscal years:
Gas Revenues
(in thousands)
Years Ended June 30,
--------------------
1997 1996 1995
---- ---- ----
Residential................. $2,669 $2,353 $2,176
Commercial.................. 2,242 1,922 1,887
Industrial.................. 1,819 1,360 1,375
Transportation.............. 304 305 172
------ ----- -----
Total................. $7,034 $5,940 $5,610
------ ------ ------
------ ------ ------
6
The following table shows the volumes of natural gas, expressed in millions
of cubic feet ("MMcf") at 13.28 P.S.I.A., sold by the Cody division for the year
ended June 30, 1997 and the past two fiscal years:
Gas Volumes
(Mmcf)
Years Ended June 30,
--------------------
1997 1996 1995
---- ---- ----
Residential.................. 541 536 486
Commercial................... 573 565 539
Industrial................... 636 552 517
--- --- ---
Total Gas Sales....... 1,750 1,653 1,542
----- ----- -----
----- ----- -----
Transportation 295 642 1,484
--- --- -----
--- --- -----
The industrial sale in the Cody division is to Celotex, a manufacturer of
gypsum wallboard, under a long-term contract expiring in 2000. Sales to the
customer are made pursuant to a special industrial customer tariff which
fluctuates with the cost of gas. In fiscal 1997 this customer accounted for
approximately 26% of the revenues of the division and approximately 5% of the
consolidated revenues of the Company. The division's sales to Celotex, whose
business is cyclical and dependent on the level of national housing starts,
increased by 15% over previous year's volumes. Celotex and its parent company
Jim Walters Corporation, have been operating under Chapter 11 bankruptcy since
October, 1990. The bankruptcy stems from potential asbestos claims.
Approximately $132,000 was due the Cody division prior to the bankruptcy filing.
During 1995 the division increased its allowance for uncollectible accounts to
$52,000. On July 12, 1996, a joint Plan of Reorganization was filed by Celotex.
The Bankruptcy Court held a confirmation hearing on the Plans beginning on
October 7, 1996. A settlement was reached and on June 20, 1997, the Cody
division received 90% of the amount due or approximately $118,000. The effect
of the settlement was to decrease bad debt expense by approximately $39,000,
which increased the Cody division and consolidated earnings by approximately
$26,000 for fiscal 1997. No assurance can be given that Celotex will continue to
be a significant customer of the Cody division.
The Cody division's primary transportation customer is Interenergy
Corporation, a regional aggregator, producer and marketer of gas and the
division's primary supplier of natural gas. The parameters of the
transportation tariff (currently between $.08 and $.30 per Mcf) are established
by the WPSC. Agreements between the Company and the customer are negotiated
periodically within the parameters.
7
The division's revenues are generated under regulated tariffs that are
designed to recover a base cost of gas, administrative and operating expenses
and provide sufficient return to cover interest and profit. The division also
services customers under separate contract rates that were individually approved
by the WPSC. The division's tariffs include a purchased gas adjustment clause
which allows an adjustment of rates charged to customers in order to recover
changes in gas costs from base gas costs. A Wyoming statute permitted the WPSC
to allow gas utilities to retain 10% of its cost of gas savings over a base
period level through fiscal 1996. In fiscal 1996 this gas cost incentive
improved gross margin for the division by approximately $139,000. The amount of
gas cost incentive if any, fluctuates with the market price of natural gas. In
fiscal 1997, the WPSC lowered the target amount in the gas cost incentive and
the Cody division currently does not earn an incentive on its gas costs.
The Cody division's last general rate order was effective in 1989. The
Company does not contemplate filing an application for a general rate increase
for the division in the foreseeable future. The division's allowed return on
common equity on normalized earnings, calculated in accordance with the WPSC
order, has been 13.01% since the last general rate order.
In January, 1997 the Cody division received a 19% increase in rates as a
rate adjustment filed with the WPSC, to recover increased gas supply costs.
This rate increase does not increase the Cody division's margins.
The Cody division has a five-year agreement, expiring in 1999, with
Interenergy Corporation, a regional aggregator, producer and marketer of gas, to
supply natural gas to the division. The contract has been renewed and
renegotiated annually since 1989. The contract requires Interenergy to deliver
gas to various points on the division's transmission system. Most of the gas
purchased by the division is transported on the division's own transportation
system and the balance is transported on Interenergy's transportation system.
The division also has several small supply contracts with small producers in the
Cody transportation network. (The division's service area is located in a gas
producing region.) In addition, the division has a backup contract to purchase
natural gas from Coastal Gas Marketing, but has never purchased gas under this
contract.
BROKEN BOW DIVISION
The Broken Bow division is involved in the regulated distribution of
propane in the Payson, Arizona area. The division was formed following the
Company's acquisition of Broken Bow Gas's underground propane vapor distribution
system in January 1993. The acquisition was effective as of November 1, 1992.
The service area of the Broken Bow division includes approximately 575 square
miles and has a population base of approximately 30,000. As of June 30, 1997,
the Broken Bow division provided service to approximately 4,400 customers,
including approximately 3,800 residential customers and approximately 600
commercial customers.
8
The Broken Bow division's operations are subject to regulation by the
Arizona Corporation Commission, which regulates rates, adequacy of service,
issuance of securities and other matters. The Broken Bow division's properties
include approximately 100 miles of underground distribution pipeline and an
office building leased from a third party. The division purchases its propane
supplies from Petrogas under terms reviewed periodically by the Arizona
Corporation Commission.
In September, 1996, the Broken Bow division filed a general rate increase
with the Arizona Corporation Commission, which reflects increased operating,
maintenance and depreciation costs as well as a change in the cost of capital.
On August 29, 1997, the Arizona Corporation Commission approved a rate increase
of $390,000 effective October 1, 1997.
NON-UTILITY OPERATIONS
The Company conducts its non-utility operations through its three
wholly-owned subsidiaries: RMF, EWR and Montana Sun. RMF is engaged in the
bulk sale of propane through its three divisions: Wyo L-P, which serves
Northwestern Wyoming and Cooke City, Montana, Petrogas, which serves the
Payson, Arizona area and Missouri River Propane, which sells bulk propane in the
Cascade area, immediately southwest of Great Falls, Montana. RMF acquired
assets and operations comprising its Wyo L-P divisions through acquisitions of
existing propane distribution businesses in August 1991 and May 1992. RMF
acquired the assets and operations of its Petrogas division through an
acquisition of an existing propane distribution business in January 1993. The
aggregate purchase price for RMF's acquisitions were approximately $2.79
million. RMF had approximately 3,900 customers as of June 30, 1997, of which
the Wyo L-P division had approximately 2,500 customers and the Petrogas division
and Missouri River Propane had approximately 1,400 customers. RMF purchases
propane from various suppliers under short-term contracts and on the spot
market, and sells propane to residential and commercial customers, primarily for
use in space heating and cooking. Petrogas also supplies propane to the Broken
Bow division, while Missouri River Propane supplies propane to Cascade Gas, an
underground propane-vapor system serving the city of Cascade, Montana and the
Hardy Creek area located southwest of Cascade through a satellite tank system.
For the twelve months ended June 30, 1997, RMF's revenues (excluding
approximately $1,874,000 sales by Wyo L-P Gas Wholesale to Petrogas and Missouri
River Propane, $1,677,000 sales by Petrogas to the Broken Bow division and
approximately $141,000 sales by Missouri River Propane to Cascade Gas Company,
an operating district of the Great Falls division) were approximately
$5,313,000, of which approximately $4,268,000 was attributable to the Wyo L-P
division, $937,000 was attributable to the Petrogas division and the balance
attributable to the Missouri River Propane division.
9
On June 28, 1996, Petrogas sold real property, consisting of land and
office and warehouse building, for $525,000 in cash resulting in a gain of
$236,000. The gain will be amortized ratably into income over the initial
ten-year lease term. Concurrent with the sale, the Company leased the property
back for a period of ten years at an annual rental of $51,975. Petrogas
sub-leases the property to the Broken Bow division.
On August 1, 1997, the Company entered into a take or pay propane contract
which expires July 31, 1998. The contract generally required the Company to
purchase all propane quantities produced by a propane producer in Wyoming
(approximately 200,000 gallons per month) tied to the Worland, Wyoming spot
price.
RMF faces competition from other propane distributors and suppliers of the
same fuels that compete with natural gas. Competition is based primarily on
price and there is a high degree of competition with other propane distributors
in the service areas.
EWR was involved in a small amount of oil and gas development and the
marketing of gas in Montana and Wyoming. EWR had varying working interests in
four oil and nine gas producing properties. Those properties were sold in
fiscal 1997, with no appreciable or significant gain. Volumes of oil and gas
produced were not significant and did not result in significant net income in
fiscal 1997. The Company believes that the ordering of MPC to provide open
access on its gas transportation system in Montana presents an opportunity for
EWR to do business as a broker of natural gas using the MPC and other systems.
EWR presently has ten customers for those services, plus several units of the
State of Montana. EWR has an underground storage facility near Havre, Montana,
which allows more flexibility in the timing of its gas purchases.
For the fiscal year ended June 30, 1997, the Company is a party to three
gas hedge agreements for nonregulated operations. These agreements represent
approximately 95% of the supply required for those operations. The 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.
Montana Sun owns a commercial real estate property and a parcel of
undeveloped land in Great Falls, Montana. Montana Sun leases the commercial
property to a federal governmental agency. The Company is presently seeking to
sell the commercial property, but is otherwise inactive at this time.
Additional information with respect to the nonutility operation of the
Company is set forth in Notes 1, 6, 9 and 10 to the Company's consolidated
financial statements.
10
CAPITAL EXPENDITURES
The Company generally conducts a continuing construction program and is
continuing expansion of its gas pipeline in areas around metropolitan Great
Falls as well as an underground propane-vapor system in the town of Cascade,
Montana, southwest of Great Falls. In the Cody division, expansion of the gas
system in that area was completed and in the Broken Bow division, construction
is still being completed, as a result of growth. The Company has completed
construction of a natural gas system in West Yellowstone, Montana started in May
of 1994. West Yellowstone Gas Company transports liquefied natural gas from
southwestern Wyoming for revaporization into the system; operations started in
May of 1995. The Great Falls division has also added an underground propane
vapor system to service customers in the Hardy area, 30 miles southwest of Great
Falls, Montana. In fiscal years 1997, 1996 and 1995, total capital expenditures
were $3,207,200, $4,590,608 and $4,705,868 respectively.
OTHER BUSINESS INFORMATION
The principal competition faced by the Company in its distribution of
natural gas is from other suppliers of competitive fuels, including electricity,
oil, propane and coal. The principal competition faced by the Company in its
distribution and sales of propane is from other propane distributors and
suppliers of the same energy sources that compete with natural gas and
electricity. Competition is based primarily on price and there is a high degree
of competition with other propane distributors in the service areas. The
principal considerations affecting a customer's selection of utility gas service
over competing energy sources include service, price, equipment costs,
reliability and ease of delivery. In addition, the type of equipment already
installed in businesses and residences significantly affects the customer's
choice of energy. However, where previously installed equipment is not an
issue, households in recent years have consistently preferred the installation
of gas heat. The Great Falls division's statistics indicate that approximately
95% of the houses and businesses in the service area use natural gas for space
heating fuel, approximately 91% use gas for water heating and approximately 99%
of the new homes built on or near the Great Falls division's service mains in
recent years have selected natural gas as their energy source. The Cody
division believes that approximately 95% of the houses and businesses in the
service area use natural gas for space heating fuel, approximately 90% use gas
for water heating, and approximately 99% of the new homes built on or near the
division's service mains in recent years have selected gas as their energy
source. The Broken Bow division believes that approximately 59% of the houses
and businesses adjacent to the division's distribution pipeline use the
division's propane for space heating or water heating.
11
The Company had approximately 143 employees as of June 30, 1997, of which
131 were full-time. Twenty-four of the employees were with the Cody division,
23 employees were with RMF and 17 were with the Broken Bow division. The other
79 employees were with the Great Falls division, including Cascade Gas and West
Yellowstone Gas and at corporate headquarters. Approximately 13 full-time and 3
seasonal hourly employees in the Great Falls division are represented by two
collective bargaining units, the United Association of Journeymen and
Apprentices of the Plumbing and Pipefitting Industry of the USA and the
Construction and General Laborer's Union. The Company's two labor contracts
were renegotiated through April 30, 2000. The Company considers its
relationship with its employees to be satisfactory.
The Company has instituted an extensive customer-related energy
conservation program which encourages the efficient use of energy through proper
conservation measures. The Company provides inspection services to homeowners
and businesses and recommends appropriate conservation projects. The Company
also is concentrating on increasing load in existing residential structures by
the addition of gas appliances and conversion of homes with all electric
appliances. The Company has started a natural gas and propane appliance
showroom to market gas appliances in the Great Falls and Cody divisions with
future plans to market appliances in the propane offices of the Company.
In addition, the Company encourages converting commercial food service
equipment to natural gas through a developed commercial equipment efficiency
program, both in Great Falls and Cody. The Company's field marketing personnel
are paid through an incentive plan geared to how much load they add to the
system.
12
The Company has management and employee incentive programs tied to
bottom-line performance of the corporation. Officers and management, down to
first-line supervisors, participate in a pay-for-performance program. If the
Company meets a minimum earnings per share for the consolidated corporation for
25% and a minimum rank on the comparison of utilities published by Edward D.
Jones & Co. for an additional 25% funding and individual divisions meet their
allocated consolidated earnings per share for the other 50%, or in the case of
senior officers and corporate staff the corporation meets a minimum rank on the
comparison of utilities published by Edward D. Jones & Co. for the other 50%;
then the incentive pool is triggered; then whether the incentive is actually
earned depends on whether the individuals in the program achieve individual
specific performance objectives set at the beginning of the year. Incentives
vary from .8% on up of base wages. The Company is in the process of changing the
incentive program effective for fiscal 1998, which will be based on new
performance criteria. All officers and eligible employees participate in the
Company's Employee Stock Ownership Plan, in which payout is based on pre-tax
earnings of the Company and approved by the Board each year.
The Company has implemented a deferred compensation plan for directors,
which allows a director to defer directors' fees and incentive awards until such
time as the director ceases to be a director of the Company by retirement or
otherwise. The plan provides an incentive compensation based on the total fees
earned by each Director for that year multiplied by the highest percentage
incentive award for that year to any employee under the Company's management
incentive compensation plan, which in fiscal 1997 was 48.33%. Fees (either cash
or stock) and incentive compensation (stock only) can be received either
currently, as they are earned, or on a deferred basis. Elections to defer
receipts are subject to timing requirements. The deferred compensation plan for
directors was approved by the shareholders at the Annual Shareholders Meeting of
Energy West, Incorporated November 21, 1996.
13
PART I
Item 2. - PROPERTIES
The Company owns all of its properties in Great Falls, including an office
building, a service and operating center, regulating stations and its
distribution system. In Wyoming, the Company owns its distribution system,
including 167 miles of transmission pipeline. Office and service buildings for
the Cody division are leased under long-term leases. RMF owns buildings,
propane tanks and related metering and regulating equipment for the Wyoming and
Arizona propane distribution operations. The Company owns mains and service
lines for the Broken Bow division's propane vapor distribution operation in
Payson, Arizona. In June, 1996, Petrogas a division of RMF sold its land and
office and warehouse buildings in Payson, Arizona to an outside party and signed
a lease agreement with the same party for a period of ten (10) years, with a
provision of extension of the lease for two successive five (5) year periods.
RMF does not have an option to repurchase the real property. However, should
the lessor have a bona fide third-party offer, the Company has the right of
first refusal to buy the land and buildings under the same terms and conditions
offerred.
ENVIRONMENTAL MATTERS
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 for the Company
where certain equipment and materials owned by the Company 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 of a report to the Montana
Department of Environmental Quality (MDEQ), formerly known as the Montana
Department of Health and Environmental Sciences (MDHES), in 1994. The Company
has worked with the MDEQ since that time to obtain the data that would lead to a
remediation action acceptable to MDEQ. The Company's environmental consultant
filed the report with the MDEQ on June 11, 1997. The MDEQ is evaluating the
report and after completion of its review will provide for public comment
related to the remediation plan. Once the comment period has lapsed and due
consideration of any comments occurs, the plan can be finalized. Assuming
acceptance of the plan, remediation can begin by the fall of 1998.
At June 30, 1997 the costs incurred in evaluating this site have totalled
approximately $430,000. 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 June 30, 1997, that recovery mechanism had generated approximately
$410,000, or about what had been expended. The Commission's decision calls for
ongoing review by the Commission of the costs incurred for this matter. The
Company will submit an application for review by the Commission when the
remediation plan is approved by the MDEQ.
14
Item 3. - LEGAL PROCEEDINGS
From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. Neither the
Company nor any of its subsidiaries is a party to any legal proceedings, other
than as described below, the adverse outcome of which individually or in the
aggregate, in the Company's view, would have a material adverse effect on the
Company's results of operations, financial position or liquidity.
On December 20, 1996, an action was filed against the Company by Randy Hynes and
Melissa Hynes in Federal District Court in Wyoming. The action arises from a
natural gas explosion involving a four-plex apartment building which was damaged
after natural gas from a gas line leaked into the building on February 3, 1996
(which was not served by natural gas). The plaintiffs, who were tenants in the
building, sustained burns and other injuries as well as property damage. The
plaintiffs allege that the Company was negligent in that it failed to maintain
the natural gas line consistent with its duty to do so and failed to properly
odorize the gas which caused the explosion. The action also asserts claims of
product liability, willful and wanton conduct and breach of warranty. The
plaintiffs are seeking damages for personal injury, pain and suffering,
emotional distress, loss of earnings, medical expenses, physical disability and
property damage as well as punitive damages. A dollar amount has not been set
forth in the pleadings. The Company denies responsibility for the damages and
is vigorously contesting the matter. The Company believes the gas leak resulted
from damage caused to the pipeline by an unknown third party. Discovery is
proceeding at this time. A trial has been scheduled for October 27, 1997.
A similar lawsuit involving the same explosion was filed by five other
plaintiffs in Wyoming District court, Park County, Wyoming on April 3, 1997.
The allegations are substantially the same as the allegations in the Federal
District Court case. The Company has filed an answer denying liability and is
contesting the matter vigorously. Only limited discovery has occurred to date.
The plaintiffs, Heidl Woodward, et al., were also tenants in the apartment
building.
On October 24, 1996, an action was filed against the Company by Colten and Julie
White and their three children in Superior Court in Gila County, Arizona. The
action arises from an explosion that occurred on May 3, 1995 in the plaintiffs'
new home which was serviced by the Company's propane business. The explosion
occurred in the course of the plaintiffs' attempt to light their appliances for
the first time. The plaintiffs sustained injuries and property damage in the
explosion and the fire that occurred after the explosion. The claims are for
personal injury, mental suffering and anguish, medical expenses, lost income,
property damages and punitive damages. Plaintiffs' claims are based on a strict
liability claim that the propane was defective, breach of warranty in that the
propane was not fit for the purpose for which it was intended and negligence for
failure to assure that the propane was properly odorized. The dollar value of
the claims has not been set forth in the pleadings of the plaintiffs.
The Company carries commercial general liability insurance for bodily injury and
property damages of $1,000,000 per occurrence and $5,000,000 in the aggregate,
and has an additional $30,000,000 umbrella policy for excess claims. The
Company's general liability carrier has assumed the defense of both Wyoming
actions and the Arizona action. The Company believes it has insurance coverage
for these matters. However, no assurance can be given that insurance will cover
these matters in the event that the company is held liable. In the event of an
adverse result for the Company, and if the Company's insurance does not cover
the matters or is not sufficient to cover the matters, such result could have a
material adverse effect on the Company's results of operations, financial
position and liquidity (depending on the amount of the judgment or judgments).
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
15
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The following table sets forth the names and ages of, and the positions and
offices within the Company presently held by, all directors and executive
officers of the Company:
NAME AGE POSITION
---- --- --------
Larry D. Geske 58 President and Director since
1978; appointed Chief
Executive Officer in 1979
Edward J. Bernica 47 Vice-President and Chief
Financial Officer since
October, 1994
William J. Quast 58 Vice-President, Treasurer,
Controller and Assistant
Secretary since 1988, has been
Vice-President, Secretary and
Treasurer since 1987,
Assistant Vice-President,
Secretary Controller and
Assistant Treasurer since
1983, Secretary since 1982 and
an Assistant Treasurer of the
Company since 1979
Tim A. Good 52 Vice-President and Manager of
the CGD since 1988; General
Manager of Cody Gas Company, a
Division of the Coastal
Corporation, for five years
prior to the acquisition of
CGD by the Company
Sheila M. Rice 50 Vice-President and Division
Manager of the Great Falls
division since April, 1993;
Vice-President Marketing and
Consumer Services since 1988
and has been Vice-President,
Marketing and Consumer
Relations since 1987; was
Assistant Vice-President for
Marketing and Customer
Relations 1983-1987
16
NAME AGE POSITION
---- --- --------
John C. Allen 46 Vice-President of Human
Resources and Corporate
Counsel and Secretary since
1992; Corporate Counsel and
Secretary since 1988; Counsel
and Assistant Secretary from
November 1986 to 1988 and
Corporate Attorney to the
Company from March 1986 to
November 1986
Lynn F. Hardin 49 Assistant Vice-President of
Gas Supply for the Great Falls
division since June 1, 1993;
Assistant Vice-President of
Division Administration since
1989; was manager of
Accounting and Administration
for Cody Gas Company, a
Division of The Coastal
Corporation, for five years
prior to acquisition of CGD by
the Company
Earl L. Terwilliger, Jr. 49 Assistant Vice-President for
Market Development for the
Great Falls division since
1990; has been Assistant Vice-
President of Customer
Accounting and Credit since
1988
Ian B. Davidson 65 Director since 1969
George D. Ruff 59 Director since 1996
Thomas N. McGowen, Jr. 71 Director since 1978
G. Montgomery Mitchell 69 Director since 1984
Dean South 54 Director since 1996
David A. Flitner 64 Director since 1988
17
Larry D. Geske has been employed by the Company since 1975 and became President
and Director of the Company in 1978. In 1979, Mr. Geske was appointed to the
position of Chief Executive Officer. In addition, Mr. Geske is a past Director
of First Interstate Bank of Great Falls (parent Company is First Interstate Bank
Corporation) and is a Director of the Great Falls Capital Corporation and the
Great Falls Dodgers Baseball Club. He is also a Director of the American Gas
Association's Board. Mr. Geske, prior to service with the Company, was a Field
Engineer "A" with NIGAS in Aurora, Illinois and a Senior Consultant with Stone
and Webster Management Consultants, Inc. in New York.
Mr. Edward J. Bernica has been employed by the Company since October 1994 and
became Vice-President and Chief Financial Officer in November, 1994. Mr.
Bernica, prior to service with the Company, was Director of Finance at U. S.
West in Englewood, Colorado and prior to that, was employed by ENRON Corporation
in Omaha, Nebraska as Director-Financial Analysis and Planning
William J. Quast has been Vice-President, Treasurer, Controller and Assistant
Secretary since 1988. He has served as Vice-President, Secretary and Treasurer
since 1987 and as Assistant Vice-President, Secretary, Controller and Assistant
Treasurer since 1983. He has served as Secretary of the Company since 1982 and
as Assistant Treasurer of the Company since 1979. Mr. Quast, prior to service
with the Company, was an accounting manager for Wyton Oil and Gas Company, a
multi-state propane distributor headquartered in Denver, Colorado, and was
Treasurer for D. A. Davidson & Co. in Great Falls, Montana.
Tim A. Good has been Vice-President and Division Manager of the CGD since 1988.
He served as General Manager of Cody Gas Company, a Division of The Coastal
Corporation for five years prior to the acquisition of the Cody Gas Company by
EWST in 1988.
Sheila M. Rice has been Vice-President and Division Manager of the Great Falls
division since April, 1993. Prior to that, she was Vice-President of Marketing
and Consumer Services since 1988. She served as Vice-President, Marketing and
Consumer Relations from 1987 to 1988, Assistant Vice-President for
Marketing/Customer Relations from 1983 to 1987 and as Consumer Service
Representative/Conservation Specialist for the Company from 1979 to 1983.
John C. Allen has been Vice-President of Human Resources and Corporate Counsel
since 1992 and previously served as Corporate Counsel and Secretary of the
Company since 1988. He served as Corporate Counsel and Assistant Secretary from
November 1986 until 1988 and as Corporate Attorney of the Company (March,
1986-November 1986). From 1979 to 1986, Mr. Allen was employed as a staff
attorney with the Montana Consumer Counsel.
18
Lynn F. Hardin has been Assistant Vice-President of Gas Supply since June 1,
1993. Prior to that, he was Assistant Vice-President of Division Administration
since 1989. He was Manager of Accounting and Administration of Cody Gas
Company, a Division of The Coastal Corporation for five years prior to the
acquisition of the Cody Gas Company by the Company in 1988.
Earl L. Terwilliger, Jr. has been Assistant Vice-President for Market
Development since 1990. He served as Assistant Vice-President of Customer
Accounting and Credit from 1988 to 1990 and Manager of Customer Accounting and
Credit for the previous four years. Prior to that time, Mr. Terwilliger was
office manager.
Ian B. Davidson has been a Director of the Company since 1969. Mr. Davidson has
been Chairman and Chief Executive Officer of D. A. Davidson & Co. since October,
1970. Mr. Davidson also is a Director of Plum Creek Management Company, a
member of the 1996 Nominating Committee for District 3 of the National
Association of Securities Dealers and a member of the C. M. Russell Museum
Advisory Board.
George D. Ruff has been a Director of the Company since 1996. Mr. Ruff is
currently Vice President of Montana Operations for U. S. West, Incorporated. He
has held that position since June of 1983. He has been employed in the
telecommunications industry for over thirty years. He is also a director of
Norwest Bank, the Political Education Council of Montana, the Montana Taxpayers
Association and the Montana Tech Foundation.
Thomas N. McGowen, Jr. has been a Director of the Company since 1978. Mr.
McGowen is past President and Chairman of the Board of Pabst Brewing Company.
Mr. McGowen is a Director of Federal Signal Corporation and Ribi Immunochem
Corporation.
G. Montgomery Mitchell has been a Director of the Company since 1984. Mr.
Mitchell was a Senior Vice-President and Director of Stone and Webster
Management Consultants, Inc. until his retirement in 1993. Mr. Mitchell was
responsible for Stone and Webster's services provided to natural gas utility and
pipeline companies and managed their Houston, Texas office. He is presently
retained by Stone and Webster for advisory and senior consulting services. Mr.
Mitchell also is a Director of Mobile Gas Service Corporation (Alabama).
Dean South has been a Director of the Company since 1996. Mr. South currently
ranches north of Helena, Montana. In 1991, Mr. South retired from the propane
distribution industry having served as Vice President of Western Operations for
Heritage Propane Corporation from October 1989 through 1991. From 1986 until
1989 he served as President and Chief Operating Officer of Louis Dreyfus Propane
Corporation. From 1981 until 1986 he served as President of Northern Energy
Company which subsequently merged with Louis Dreyfus Propane.
David A. Flitner has been a Director of the Company since 1988. Mr. Flitner is
owner of the Flitner Ranch and Dave Flitner Packing and Outfitting (Wyoming
Companies) and Hideout Adventures, Inc., a recreational enterprise.
19
PART II
Item 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock Prices and Dividend Comparison - Fiscal 1997 and Shares of the
Company's Class A Common Stock are traded in the over-the-counter market on the
NASDAQ (National Association of Securities Dealers Automated Quotation)
system-symbol: EWST. The over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent the actual transactions. Prices are shown as a result
of a 2-for-1 stock split, effective June 24, 1994.
PRICE RANGE - FISCAL 1997 HIGH LOW
- ------------------------- ---- ---
First Quarter 8 3/4 7 7/8
Second Quarter 8 3/4 8 1/8
Third Quarter 8 5/8 8 1/8
Fourth Quarter 8 5/8 8 1/8
Year 8 5/8 7 7/8
PRICE RANGE - FISCAL 1996 HIGH LOW
- ------------------------- ---- ---
First Quarter 8 1/4 7 3/4
Second Quarter 9 1/2 7 3/4
Third Quarter 9 3/4 8 3/4
Fourth Quarter 9 3/8 8
Year 9 3/8 7 3/4
Dividends: The Board of Directors normally consider approving common stock
dividends for payments in March, June, September and January. Quarterly
dividend payments per common share for Fiscal Years 1997 and 1996 were:
FISCAL 1997 FISCAL 1996
----------- -----------
September $.1050 $.1000
January $.1050 $.1000
March $.1050 $.1000
June $.1100 $.1050
20
Item 6. - SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA (1997-1993)
--------------------------------------------------------------------------------------------------------------------------
(dollar amounts in thousands, except per share data)
1997 1996 1995 1994 1993
Operating results:
Operating revenue $ 38,215 $ 31,318 $30,548 $ 29,347 $27,629
Operating expenses
Gas purchased 24,675 18,724 18,616 18,410 17,232
General administrative 7,498 6,924 6,380 5,979 5,454
Maintenance 497 409 306 331 376
Depreciation and amortization 1,689 1,667 1,559 1,464 1,286
T axes other than income 660 629 595 527 540
--------------------------------------------------------------------------------------------------------------------------
Total operating expenses 35,019 28,353 27,456 26,711 24,888
Operating income 3,196 2,965 3,092 2,636 2,741
--------------------------------------------------------------------------------------------------------------------------
Other income - net 325 215 175 199 139
--------------------------------------------------------------------------------------------------------------------------
Income before interest charges 3,521 3,180 3,267 2,835 2,880
Total interest charges 1,525 1,243 938 962 959
--------------------------------------------------------------------------------------------------------------------------
Income before taxes 1, 996 1,937 2,329 1,873 1,921
Income taxes 703 670 816 614 637
Income before a cumulative effect of
a change in accounting principal 1,293 1,267 1,513 1,259 1,284
Cumulative effect of change as of
July 1, 1993 from adoption of
FASB 109 0 0 0 92 0
- - - -- -
Net income $1,293 $ 1,267 $ 1,513 $ 1,351 $ 1,284
------ ------- ------- ------- -------
------ ------- ------- ------- -------
Eps before cumulative effect of FASB 109 0.55 0.55 0.68 0.57 0.59
Earnings per common share 0.55 0.55 0.68 0.61 0.59
Dividends per common share 0. 43 0.41 0.39 0.36 0.32
Weighted average common shares Outstanding 2,356,624 2,298,734 2,235,413 2,205,050 2,171,448
At year end:
Current assets 12,398 9,092 6,263 5,270 6,761
Total assets 42,885 37,495 32,375 28,786 28,036
Current liabilities 15,317 11,088 6,786 4,193 4,881
Total long-term obligations 9,684 10,046 10,435 10,718 11,050
Total stockholders' equity 11, 997 11,400 10,533 9,393 8,733
- ----------------------------------------------------------------------------------------------------------------------------------
Total capitalization $ 21,681 $ 21,446 $ 20,968 $ 20,111 $ 19,783
- ----------------------------------------------------------------------------------------------------------------------------------
21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS
RESULTS OF CONSOLIDATED OPERATIONS
Fiscal 1997 Compared to Fiscal 1996
Net Income
The Company's net income for fiscal 1997 was $1,293,000 compared to
$1,267,000 in fiscal 1996, an increase of $26,000 or 2%. The following summary
describes the components of the change between years.
Revenue
Operating revenues increased approximately 22%. Regulated revenues
increased approximately 14% compared to the prior year due to a rate and gas
tracker increase in the Great Falls division, effective November 4, 1996, and a
gas tracker increase in the Cody division effective January 1997, in addition to
colder weather this year than one year ago in the Great Falls, Cody, West
Yellowstone and Broken Bow utility divisions. Nonregulated revenues increased
approximately 48%, from increased bulk propane sales in the areas served by Wyo
L-P gas in Wyoming, Missouri River Propane in Montana and Petrogas in Arizona,
as well as increased wholesale propane sales in Wyo L-P in Wyoming. Both
Missouri River Propane and Petrogas sell propane to related regulated utilities
Cascade Gas Company and Broken Bow Gas Company, respectively. Operating
revenues in Energy West Resources decreased by 31%; however, gas trading
revenues increased by 38% due to customer growth and an increase in volumes.
Gross Margin
Gross margins (operating revenues less cost of gas purchased and cost of
gas trading) increased approximately $944,000 in 1997. Regulatory gross margins
increased approximately $663,000 because of higher margins from natural gas
sales in the Great Falls and Cody divisions and in the West Yellowstone area and
higher margins from propane vapor sales in the Broken Bow division, due to
colder weather than one year ago and customer growth in all utility operations,
as well as a 1.86% interim rate increase in the Great Falls division, effective
November 4, 1996, which contributed to increased margins by approximately
$112,000. Nonregulated gross margins increased approximately $283,000,
primarily due to larger margins in the Wyo L-P division for wholesale propane
sales partially offset by lower gas trading margins in Energy West Resources.
Regulated Revenues
Regulated revenues increased from $23,672,000 in fiscal 1996 to $26,882,000
in fiscal 1997 or 14%, primarily due to increases in the revenues of the Great
Falls division of approximately $1,397,000, the Cody division of approximately
$1,094,000 and the Broken Bow division of approximately $720,000 because of
increased natural gas and propane vapor sales, due to colder weather than one
year ago and customer growth in all utility operations, as well as a 1.86%
interim rate increase in the Great Falls division, effective November 4, 1996
and a 19% increase in the Cody division effective January, 1997 and increased
sales in Cody to an industrial customer who increased production, requiring more
natural gas. Gas purchased increased from approximately $13,646,000 in fiscal
1996 to $16,193,000 in fiscal 1997 or 19%, primarily due to a 35% increase in
natural gas costs from one year ago and increased volumes of natural gas
purchased, due to colder weather than one year ago as well as increases in
customers.
22
Regulated Operating Income
Regulated operating income increased approximately $317,000 in fiscal 1997
or 14%, primarily due to increased gross margins of approximately $663,000, due
to customer growth, colder weather than one year ago, as well as a 1.86% rate
increase in the Great Falls division, effective November, 1996, partially offset
by higher utility operating expenses and taxes other than income of
approximately $345,000, due to normal inflationary trends and less payroll,
payroll taxes and other expenses capitalized to projects as well as higher
property taxes in all three states served by Energy West.
Nonregulated Operating Income
Nonregulated operating income decreased approximately $87,000 in fiscal
1997 or 11%, due to higher operating and maintenance expenses of approximately
$328,000 due to inflation and growth of nonregulated operations, higher
depreciation and amortization costs of approximately $32,000, higher property
taxes of approximately $9,000, offset partially by higher margins on gas and
propane sales of approximately $283,000.
Other Expenses
Operating expenses (excluding cost of gas sales) increased approximately
$714,000 or 7% in 1997. The primary reason for this increase was due to normal
inflationary trends and less payroll and other expenses capitalized to
projects.
As a result of the above changes, operating income increased 8% from
$2,965,000 in 1996 to $3,195,000 in 1997. Total interest expense for the
Company was $1,525,000 for fiscal 1997, up from $1,243,000 in fiscal 1996,
primarily due to facility expansion and increases in gas storage, which has been
temporarily financed with short term debt. Other additions to or deductions
from operating income in determining net income remained comparable between the
two years.
Fiscal 1996 Compared to Fiscal 1995
Net Income
The Company's net income for fiscal 1996 was $1,267,000 compared to
$1,513,000 in fiscal 1995, a decrease of $246,000 or 16%. The following summary
describes the components of the change between years.
Revenue
Operating revenues increased approximately 3%. Regulated revenues
decreased 3% compared to the prior year due to a rate decrease in the Great
Falls division, effective July 1, 1995. This decrease in rates was partially
offset by colder weather this year than one year ago in the Great Falls and Cody
utility divisions, increased transport revenues in the Cody division and the
recognition of West Yellowstone revenues in this start-up operation. Both
Missouri River Propane and Petrogas sell propane to related regulated utilities
Cascade Gas Company and Broken Bow Gas Company, respectively. Operating
revenues in Energy West Resources decreased by 31%; however, gas trading
revenues increased by 38% due to customer growth and an increase in volumes.
23
Gross Margin
Gross margins (operating revenues less cost of gas purchased and cost of gas
trading) increased approximately $664,000 in 1996. Regulatory gross margins
increased approximately $740,000 because of higher margins from natural gas
sales in the Great Falls and Cody divisions. Margins were tempered by the
effects of a rate reduction in the Great Falls division of approximately
$260,000 annually, ordered by the Montana Public Service Commission, which went
into effect on July 1, 1995. In addition, margins of West Yellowstone, a new
operation in Montana, are reflected in this fiscal year. Nonregulated gross
margins decreased approximately $84,000, primarily due to smaller margins in
Energy West Resources' gas marketing operations.
Regulated Revenues
Regulated revenues decreased from $24,363,000 in fiscal 1995 to $23,672,000
in fiscal 1996 or 3%, primarily due to a decrease in the revenues of the Great
Falls division of approximately $1,550,000, due to a $260,000 rate decrease
ordered by the Montana Public Service Commission, a reduction in gas costs
reducing rates by approximately $290,000 and the shift of Malmstrom Air Force
Base revenues to a transportation customer, which further reduced revenues by
approximately $1,000,000. This was offset by the inclusion of West Yellowstone
revenues of approximately $300,000 and increased Cody division revenues of
approximately $330,000, due to increased volumes sold due to customer growth,
colder weather, higher transportation revenues and increases in Propane sales in
the Broken Bow and Cascade divisions, due to customer growth. Gas purchased
decreased from $15,077,500 in fiscal 1995 to $13,646,200 in fiscal 1996 or 10%,
primarily due to a reduction in natural gas costs.
Regulated Operating Income
Regulated operating income increased approximately $65,000 in fiscal 1996
or 3%, primarily due to increased gross margins of approximately $740,000, due
to customer growth, colder weather, higher transportation sales and the
inclusion of West Yellowstone margins. This was offset by increases in
distribution, general, administrative and general expenses of approximately
$490,000, due to operations growth and inflation, increases in depreciation and
amortization expenses of approximately $153,000, due to additional utility plant
and increases in taxes other than income of approximately $29,000, due to higher
property taxes in all three states served by Energy West.
Nonregulated Operating Income
Nonregulated operating income decreased approximately $190,000 in fiscal
1996 or 20%, due to smaller margins in Energy West Resources' gas marketing
operations of approximately $151,000 and higher operating and maintenance
expenses of approximately $156,000 due to inflation and growth of nonregulated
operations, offset partially by lower depreciation and amortization costs.
Other Expenses
Operating expenses (excluding cost of gas sales) increased approximately
$790,000 or 9% in 1996. The primary reason for this increase was due to normal
inflationary trends and lower capitalized payroll since the completion of the
West Yellowstone system, as well as the addition of West Yellowstone's utility
operating expenses this fiscal year.
As a result of the above changes, operating income decreased 4% from
$3,092,000 in 1995 to $2,965,000 in 1996. Total interest expense for the
Company was $1,243,000 for fiscal 1996, up from $939,000 in fiscal 1995, due to
higher short-term borrowing used in expansion of the Company's utility systems.
Other additions to or deductions from operating income in determining net income
remained comparable between the two years.
24
OPERATING RESULTS OF THE COMPANY'S UTILITY OPERATIONS
Years Ended June 30
-------------------
1997 1996 1995
---- ---- ----
(in thousands)
Operating revenues:
Great Falls division $17,133 $15,737 $16,812
Cody division 7,034 5,940 5,609
Broken Bow division 2,715 1,995 1,942
Total operating revenues 26,882 23,672 24,363
Gas purchased 16,193 13,646 15,077
------- ------ ------
Gross Margin 10,689 10,026 9,286
Operating expenses 8,155 7,810 7,136
Interest charges [SEE NOTE BELOW] 1,477 1,145 908
Other utility (income) expense-net (125) (118) (126)
Federal and state income taxes 377 385 454
---- --- ---
Net utility income $805 $804 $ 914
----- ---- -----
----- ---- -----
[INTEREST CHARGES FOR UTILITY AND NON-UTILITY OPERATIONS DO NOT EQUAL TOTAL
INTEREST CHARGES FOR THE COMPANY, DUE TO ELIMINATING ENTRIES BETWEEN ENTITIES.]
25
Fiscal 1997 Compared to Fiscal 1996
Revenues and Gross Margins
Utility operating revenues in fiscal 1997 were approximately $26,882,000
compared to $23,672,000 in fiscal 1996. Regulated gross margin, which is
defined as operating revenues less gas purchased, was approximately $10,689,000
for fiscal 1997 compared to approximately $10,026,000 in fiscal 1996.
Overall revenues increased approximately $3,210,000 from fiscal 1996 due
primarily to a rate and gas tracker increase in the Great Falls division and a
tracker increase in the Cody division, in addition to colder weather this year
than one year ago in all utility divisions. Utility margins increased
approximately $662,000 or 7% because of higher margins from natural gas sales in
the Great Falls and Cody divisions and in the West Yellowstone area and higher
margins from propane vapor sales in the Broken Bow division, due to colder
weather than one year ago and customer growth in all utility operations, as well
as a 1.86% rate increase in the Great Falls division, effective November, 1996.
The winter heating season was 3% colder than one year ago in the Great Falls
division and 13% colder than the same period one year ago in the Broken Bow
division and about equivalent to one year ago in the Cody division.
Operating Expenses
Utility operating expenses, exclusive of the cost of gas purchased and
federal and state income taxes, were approximately $8,155,000 for fiscal 1997,
as compared to approximately $7,810,000 for fiscal 1996. The 4% increase in
the period is due to normal inflationary trends, less payroll and other
expenses capitalized to projects.
Interest Charges
Interest charges allocable to the Company's utility divisions were
approximately $1,477,000 in fiscal 1997, as compared to approximately
$1,145,000 in fiscal 1996. Long term debt interest decreased; however,
short-term interest increased primarily due to facility expansion, which has
been temporarily financed with short-term debt.
Income Taxes
State and federal income taxes of the Company's utility divisions was
approximately $426,000 in fiscal 1997, as compared to approximately $427,000 in
fiscal 1996.
26
Fiscal 1996 Compared to Fiscal 1995
Revenues and Gross Margins
Utility operating revenues in fiscal 1996 were approximately $23,672,000
compared to $24,363,000 in fiscal 1995. Gross margin, which is defined as
operating revenues less gas purchased, was approximately $10,026,000 for fiscal
1996 compared to approximately $9,286,000 in fiscal 1995.
Overall revenues decreased from fiscal 1995 due primarily to a $250,000
rate decrease in the Great Falls division in Montana, effective July 1, 1995.
In addition, Malmstrom AFB became a transport customer of the Great Falls
division in fiscal 1996, further reducing operating revenues. Energy West
Resources sold natural gas to Malmstrom AFB in fiscal 1996. This decrease in
rates and the Malmstrom change to transport was tempered by colder weather this
year than one year ago in all utility divisions and recognition of West
Yellowstone revenues this year in this start-up operation. While utility
revenues decreased from fiscal 1995, margins increased approximately 8% for
fiscal 1996, primarily due to higher margins from natural gas sales in the Great
Falls and Cody divisions and propane sales in the Broken Bow division because of
customer growth and colder weather than one year ago in the Great Falls and Cody
divisions and the addition of West Yellowstone's margins in fiscal 1996, in this
new start-up operation. The winter heating season in the Great Falls division in
fiscal 1996 was approximately 10% colder than fiscal 1995 and 8% colder than
"normal" (i.e., the average temperature during the preceding 30 years). The
winter heating season in the Cody division was approximately 5% colder than
fiscal 1995, and very close to normal in fiscal 1996. The Broken Bow division
experienced an 18% warmer period than 1995 and 15% warmer period than normal.
Operating Expenses
Utility operating expenses, exclusive of the cost of gas purchased and
federal and state income taxes, were approximately $7,810,000 for fiscal 1996,
as compared to approximately $7,136,000 for fiscal 1995. The 9% increase in the
period is due to normal inflationary trends, less payroll capitalized since the
completion of the West Yellowstone system as well as the addition of West
Yellowstone's utility operating expenses of approximately $257,000 this fiscal
year from this start-up operation.
Interest Charges
Interest charges allocable to the Company's utility divisions were
approximately $1,145,000 in fiscal 1996, as compared to approximately $908,000
in fiscal 1995. Long term debt interest decreased; however, short-term interest
increased primarily due to facility expansion, which has been temporarily
financed with short-term debt.
Income Taxes
State and federal income taxes of the Company's utility divisions was
approximately $385,000 in fiscal 1996, as compared to approximately $454,000 in
fiscal 1995. The 15% decrease was primarily attributable to a $184,000
decrease in pre-tax income of the utility divisions.
27
OPERATING RESULTS OF EACH OF THE COMPANY'S NON-UTILITY SUBSIDIARIES
Years Ended June 30
-------------------
1997 1996 1995
---- ---- ----
(in thousands)
ROCKY MOUNTAIN FUELS (RMF)
Operating revenues $9,004 $4,352 $3,902
Cost of propane 6,747 2,540 2,171
Operating expenses 1,875 1,548 1,484
Other (income) expense-net (92) (64) (33)
Interest expense [see note below] 171 112 87
Federal and state income taxes 106 85 71
---- ------ -----
Net income $ 197 $ 131 $ 122
------ ------ ------
------ ------ ------
ENERGY WEST RESOURCES
Operating revenues $ 42 $ 61 $ 76
Gas trading revenue 5,993 4,348 3,239
Operating expenses 251 201 172
Cost of gas trading 5,560 3,773 2,500
Other (income) expense-net (120) (20) (43)
Federal and state income taxes 154 169 259
--- --- ------
Net income $ 190 $286 $ 427
------ ----- ------
------ ----- ------
MONTANA SUN
Operating revenues $ 97 $ 97 $ 99
Operating expenses 43 48 47
Other (income) expense-net (113) (24) (16)
Interest expense [see note below] 0 0 (14)
Federal and state income taxes 67 27 31
-- -- ---
Net income $ 100 $ 46 $ 51
------ ------ ------
------ ------ ------
Total Non-Utility Net Income $ 487 $ 463 $ 600
------ ------ ------
------ ------ ------
[INTEREST CHARGES FOR UTILITY AND NON-UTILITY OPERATIONS DO NOT EQUAL
TOTAL INTEREST CHARGES FOR THE COMPANY, DUE TO ELIMINATING ENTRIES BETWEEN
ENTITIES.]
28
Non-Utility Operations
Rocky Mountain Fuels
For the fiscal year ended June 30, 1997, Rocky Mountain Fuels (RMF)
generated net income of approximately $197,000 compared to $131,000 for fiscal
1996. Approximately $127,000 of RMF's net income for fiscal 1997 was
attributable to the Wyo L-P Gas division in Wyoming, $111,000 to the Petrogas
division in Arizona, with the balance of ($40,000) net loss attributable to
Missouri River Propane in Montana. RMF's gross margins increased approximately
24% or $443,000 in fiscal 1997 compared to the same period last year, primarily
due to increased wholesale propane sales in the Wyo L-P Gas division in Wyoming.
Margins this fiscal 1997 increased approximately $257,000 for wholesale propane
sales, due to customer growth and colder weather and decreased approximately
$44,000, or 4%, for retail propane sales due to higher propane prices and
competitive market conditions, while margins in the Petrogas division in Arizona
increased from a year ago by approximately $118,000, or 25%, due to customer
growth and weather, while Missouri River Propane in Montana margins increased
from a year ago by approximately $13,000, or 20%, due to weather and customer
growth. RMF experienced higher operating expenses, due to normal inflationary
trends experienced and increased use of staff, due to customer growth, as well
as higher short-term interest costs due to expansion of plant in Montana and
Wyoming, which was financed by short-term debt. State and federal income taxes
increased to approximately $106,000 for fiscal 1997 from $85,000 due to higher
pre-tax income in RMF this year of approximately $89,000.
For the fiscal year ended June 30, 1996, Rocky Mountain Fuels (RMF)
generated net income of approximately $131,000 compared to $122,000 for fiscal
1995. Earnings improved by approximately $76,000, due to decreasing depreciation
expense in all of RMF's operating divisions as a result of changing the
estimated useful lives for certain propane properties from twelve and fifteen
years to twenty years, to better reflect its useful lives. Missouri River
Propane and Big Horn Answering Service had a loss for the fiscal year.
Energy West Resources
For fiscal 1997, Energy West Resources' (EWR) net income was approximately
$190,000 compared to $286,000 for fiscal 1996, primarily due to lower gas
trading margins. Gas trading margins decreased approximately $142,000, or 24%.
Although gas trading revenues are up approximately $1,646,000 in fiscal 1997
from one year ago, cost of gas trading was up approximately $1,788,000, due to
increased natural gas prices in Canada and Montana and increased competition,
requiring lower margins in order to retain or secure new Energy West Resource
customers. EWR expenses were also higher than 1996 because of power marketing
investigations, salary and expenses for an EWR specific employee, increased
direct charges and overheads allocated to EWR from EWST management in connection
with efforts to enhance EWR operations. State and federal income taxes decreased
in fiscal 1997 to approximately $154,000 from $169,000 in fiscal 1996, due to
lower pre-tax income.
For fiscal 1996, Energy West Resources' (EWR) net income was approximately
$285,000 compared to $427,000 for fiscal 1995, primarily due to lower margins
experienced by its gas marketing operations. Although margins were lower than
1995, EWR's sales volumes have increased 34%. EWR expenses were also higher
than 1995 because of power marketing investigations, salary and expenses for an
EWR specific employee, increased direct charges and overheads allocated to EWR
from EWST management in connection with efforts to enhance EWR operations.
Montana Sun, Inc.
For fiscal 1997, Montana Sun's net income was approximately $100,000 as
compared to $46,000 for fiscal 1996, due primarily to the sale of mutual fund
investments at a capital gain.
For fiscal 1996, Montana Sun's net income was approximately $46,000 as
compared to $51,000 for fiscal 1995.
29
Liquidity and Capital Resources
The Company's operating capital needs, as well as dividend payments and
capital expenditures, are generally funded through cash flow from operating
activities, short-term borrowing and liquidation of temporary cash investments.
Historically, to the extent cash flow has not been sufficient to fund capital
expenditures, the Company has borrowed short-term or issued equity securities to
fund capital expansion projects or reduce short-term borrowing.
The Company's short-term borrowing requirements vary according to the
seasonal nature of its sales and expense activity. The Company has greater need
for short-term borrowing during periods when internally generated funds are not
sufficient to cover all capital and operating requirements, including costs of
gas purchases and capital expenditures. In general, the Company's short-term
borrowing needs for purchases of gas inventory and capital expenditures are
greatest during the summer months and the Company's short-term borrowing needs
for financing of customer accounts receivable are greatest during the winter
months. In addition during the past three years, the Company has used
short-term borrowing to finance the acquisition of propane operations and LNG
for West Yellowstone Gas. Short-term borrowing utilized for construction or
property acquisitions generally has been on an interim basis and converted to
long-term debt and equity when it becomes economical and feasible to do so.
At June 30, 1997, the Company had $19,000,000 in bank lines of credit, of
which $11,380,000 had been borrowed under the credit agreement. The short-term
borrowings bear a daily weighted average interest rate of 8% as of June 30,
1997.
The Company used net cash in operating activities for fiscal 1997 of
approximately $901,000 as compared to net cash provided by operating activities
of approximately $606,000 for fiscal 1996. This increase in cash used in
operating activities of approximately $1,507,000 was primarily due to higher
working capital requirements of approximately $1,686,000 due to the following:
1) increased purchases of natural gas inventory of approximately $3,078,000, 2)
lower accounts payable of approximately $100,000 primarily due to decreased gas
purchases, partially offset by a decrease in utility unrecovered gas costs of
approximately $100,000 due to gas tracker increases in fiscal 1997 in the Great
Falls and Cody divisions, lower accounts receivable of approximately $520,000
due to increased receivables in fiscal 1996 from 1995 due to increased gas
trading activity of approximately $142,000, Wyo L-P Gas wholesale increased
receivables of approximately $126,000, with the balance of receivables up
$126,000 due to colder weather in fiscal 1996 than 1995 in the Great Falls, Cody
and Broken Bow divisions, whereas the weather in fiscal 1997 was approximately
the same as fiscal 1996 and receivables were down approximately $84,000 from
fiscal 1996. Reduced prepaid items of approximately $607,000, primarily related
to a $500,000 prepaid gas contract commitment made in fiscal 1996 reduced
working capital requirements. In addition other assets and liabilities increased
working capital by approximately $262,000, due to the following: a change in
refundable income tax payments from fiscal 1997 to fiscal 1996 increasing cash
by $60,000, incentives paid in fiscal 1996 for fiscal 1995 were higher than
incentives paid in fiscal 1997 increasing cash by approximately $496,000, offset
partially by an increase in rate case costs in fiscal 1997 from fiscal 1996
resulting in a decrease in cash of approximately $221,000 and a $62,000 decrease
in cash related to a decrease in employee benefits from fiscal 1996 to fiscal
1997.
Higher net income of approximately $26,000, higher depreciation and amortization
costs of $59,000 and higher deferred income taxes of approximately $231,000,
reduced cash used in operating activities, offset partially by an increase in
the gain and deferred gain on the sale of assets of approximately $37,000 and
the gain on sale of marketable securities of approximately $ 100,000.
30
Cash used in investing activities was approximately $2,819,000 in fiscal
1997, as compared to approximately $3,989,000 in fiscal 1996, a decrease of
approximately $1,170,000 primarily due to lower construction expenditures for
capital projects of approximately $1,384,000 and the proceeds from the sale of
marketable equity securities of approximately $274,000, increased proceeds from
contributions in aid of construction of approximately $140,000, partially offset
by reduced proceeds from the sale of property, plant and equipment of
approximately $400,000, because of the sale-leaseback of the Payson, Arizona
properties in fiscal 1996 and an investment of $250,000 in a financing operation
of the American Gas Association. Cash provided by financing activities was
approximately $3,100,000 in fiscal 1997, as compared to approximately $3,740,000
in fiscal 1996, a decrease of approximately $640,000 primarily due to an
increase in dividends paid of approximately $228,000, increased principal
payments on notes payable of approximately $350,000, reduced sale of common
stock through the Company's Dividend Reinvestment Plan and the Company's
Incentive Stock Option Plan of approximately $68,000, partially offset by
reduced principal payments on long-term debt of approximately $45,000.
The Company generated net cash from operating activities for fiscal 1996 of
approximately $606,000 as compared to $3,605,000 for fiscal 1995. This change
from fiscal 1995 is attributed to a $246,000 decrease in net income, a reduction
in accounts payable of approximately $1,000,000, an increase in recoverable
costs of gas purchases and prepaid gas of approximately $1,627,000 and other
miscellaneous working capital changes of approximately $1,170,000 offset by
approximately $491,000 increase in deferred income taxes, an increase in gas
inventory of approximately $470,000 and an increase in accounts receivable of
approximately $80,000. Cash used in investing activities was approximately
$3,989,000 for fiscal 1996, as compared to $4,274,000 for fiscal 1995. Capital
expenditures for fiscal 1996 was approximately $4,591,000, primarily due to
system expansion in Payson, Arizona and all other areas and continued expansion
of the West Yellowstone system. Partially offsetting these capital expenditures
were proceeds received from a sale lease back in Payson, Arizona of
approximately $525,000, proceeds from the sale of property, plant and equipment
of $27,000 and proceeds from contributions in aid of construction of
approximately $63,000.
Capital expenditures of the Company are primarily for expansion and
improvement of its gas utility properties. To a lesser extent, funds are also
expended to meet the equipment needs of the Company's operating subsidiaries and
to meet the Company's administrative needs. The Company's capital expenditures
were approximately $3.2 million in fiscal 1997 and approximately $4.6 million
for fiscal 1996 and $4.7 million in fiscal 1995. During fiscal 1997,
approximately $1.7 million has been expended for the construction and
maintenance of the natural gas systems in Great Falls, Cascade and West
Yellowstone, Montana and Cody, Wyoming and approximately $1.2 million had been
expended for gas system expansion projects for new subdivisions in the Broken
Bow division's service area in Arizona and approximately $400,000 for additions
to the propane operations of the Company in Wyoming, Montana and Arizona.
Capital expenditures are expected to be approximately $2.8 million in fiscal
1998, including approximately $783,000 for continued expansion for the Broken
Bow division, with approximately $1.3 million for maintenance and other special
system expansion projects in the Great Falls, West Yellowstone and Cody
divisions and the balance of approximately $700,000 for the Company's propane
operations in the three states it serves. The Company continues to evaluate
opportunities to expand its existing businesses from time to time.
The major factors which will affect the Company's future results include
general and regional economic conditions, weather, customer retention and
growth, the ability to meet competitive pressures and to contain costs, changes
in the competitive environment in the Company's non-regulated segment, the
adequacy and timeliness of rate relief, cost recovery and necessary regulatory
approvals, and continued access to capital markets.
31
The regulatory structure which has historically embraced the gas industry
has been in the process of transition. Legislative and regulatory initiatives,
at both the federal and state levels, are designed to promote competition and
will continue to impose additional pressure on the Company's ability to retain
customers and to maintain current rate levels. The changes in the gas industry
have allowed commercial and industrial customers to negotiate their own gas
purchases directly with producers or brokers. To date, the changes in the gas
industry have not had a negative impact on earnings or cash flow of the
Company's regulated segment.
The accounts and rates of the Company's regulated segment are subject, in
certain respects, to the requirements of the Montana, Wyoming and Arizona public
utilities commissions. As a result, the Company's regulated segment maintains
its accounts in accordance with the requirements of those regulators. The
application of generally accepted accounting principles by the Company's
regulated segments differ in certain respects from application by the
non-regulated segment and other non-regulated businesses. The regulated segment
prepares its financial statements in accordance with Statement of Accounting
Standards No. 71 --"Accounting for the Effects of Certain Types of Regulation"
(SFAS 71). In general, SFAS 71 recognizes that accounting for rate-regulated
enterprises should reflect the relationship of costs and revenues. As a result,
a regulated utility may defer recognition of cost (a regulatory asset) or
recognize an obligation (a regulatory liability) if it is probable that, through
the rate-making process, there will be a corresponding increase or decrease in
revenues. Accordingly, the Company has deferred certain costs, which will be
amortized over various periods of time. The costs deferred are further
described in the Company's financial statements and the notes thereto. To the
extent that collection of such costs or payment of liabilities is no longer
probable as a result of changes in regulation and/or the Company's competitive
position, the associated regulatory asset or liability will be reversed with a
charge or credit to income. If the Company's regulated segment were to
discontinue the application of SFAS 71, the accounting impact would be an
extraordinary, non-cash charge to operations that could be material to the
financial position and results of operation of the Company. However, the
Company is unaware of any circumstances or events in the foreseeable future that
would cause it to discontinue the application of SFAS 71.
SEC Ratio of Earnings to Fixed Charges
For the twelve months ended June 30, 1997, 1996 and 1995, the Company's
ratio of earnings to fixed charges was 2.11, 2.28 and 3.01 times, respectively.
Fixed charges include interest related to long-term debt, short-term borrowing,
certain lease obligations and other current liabilities.
Inflation
Capital intensive businesses, such as the Company's natural gas operations,
are significantly affected by long-term inflation. Neither depreciation charges
against earnings nor the rate-making process reflect the replacement cost of
utility plant. However, based on past practices of regulators, these businesses
will be allowed to recover and earn on the actual cost of their investment in
the replacement or upgrade of plant. Although prices for natural gas may
fluctuate, earnings are not impacted because gas cost tracking procedures
semi-annually balance gas costs collected from customers with the costs of
supplying natural gas. The Company believes that the effects of inflation, at
currently anticipated levels, will not significantly affect results of
operations.
32
Accounting for Income Taxes
Effective July 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by SFAS
No. 109, ACCOUNTING FOR INCOME TAXES. The cumulative effect of adopting
Statement No. 109 created a regulatory asset and a regulatory liability for
regulated operations, representing the anticipated effects on regulated rates
charged to customers which will result from the adoption of Statement No. 109.
For the Year ended June 30, 1997, changes in certain assets and liabilities
resulted in an increase in regulatory assets of $43,109 and a decrease in
regulatory liabilities of $13,160 for regulated entities, resulting in ending
balances of $487,027 and $148,961, respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. See Note 5 to the
Consolidated Financial Statements for additional information.
Postretirement Benefits Other Than Pensions
The Company adopted, effective July 1, 1993, SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." This standard
requires that the projected future cost of providing postretirement benefits be
recognized as an expense as employees render service rather than when paid.
Effective for fiscal year 1994, the Company modified its plan for these benefits
and has elected to pay eligible retirees (post 65 years of age) $125 per month
in lieu of contracting for health and life insurance benefits. The amount of
this payment is fixed and will not increase with medical trends or inflation.
The Company's transition obligation at June 30, 1997 and 1996 was $313,200 and
$332,800, respectively, of which $271,500 in 1997 and $288,600 in 1996 is
related to the regulated utility operations. The transition obligation was
accrued as a deferred charge and will be amortized over 20 years. Substantially
all of the transition obligation is for the future cost of benefits to active
employees.
The Company made a change to the plan, effective July 1, 1996 allowing
pre-65 retirees and their spouses to remain on the same medical plan as active
employees by contributing 125% of the current COBRA rate to retain this
coverage. The increased liability from this change is $269,200. The prior
service obligation associated with this plan change at June 30, 1997 and 1996
was $251,300 and $269,200, respectively, of which $210,600 in 1997 and $225,600
in 1996 is related to regulated utility operations. The prior service
obligation was accrued as a deferred charge and will be amortized over fifteen
years. The Company expects regulators in Montana and Wyoming to allow recovery
of the additional costs associated with this plan change. The adoption of SFAS
No. 106 did not have a significant effect upon results of operations. See Note
4 to the Consolidated Financial Statements for additional information.
33
Environmental Issues
The Company owns property on which it operated a manufactured gas plant
from 1909 to 1928. The site is currently used as a service center where certain
equipment and materials are stored. The coal gasification process utilized in
the plant resulted in the production of certain by-products which have been
classified by the federal government and the State of Montana as hazardous to
the environment. Several years ago the Company initiated an assessment of the
site to determine if remediation of the site was required. That assessment
resulted in a submission to the Montana Department of Environmental Quality
(MDEQ) formerly known as Montana Department of Health and Environmental Science
("MDHES") in 1994. The Company has worked with the MDEQ since that time to
obtain the data that would lead to a remediation action acceptable to MDEQ. The
Company's environmental consultant filed the report with the MDEQ on June 11,
1997. MDEQ is evaluating the report and after completion of its review will
provide for public comment related to the remediation plan. Once the comment
period has lapsed and due consideration of any comments occurs, the plan can be
finalized. Assuming acceptance of the plan, remediation could be in place by
the fall of 1998.
At June 30, 1997 the costs incurred in evaluating this site have totalled
approximately $430,000. 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 June 30, 1997 that recovery mechanism had generated approximately
$410,000 or what had been expended. The Commission's decision calls for ongoing
review by the Commission of the costs incurred for this matter. The Company
intends to submit an application for such review when the remediation plan is
approved by the MDEQ.
Subsequent Event
The Company closed an $8,000,000 debt issuance on August 15, 1997. The net
proceeds received, after payment of issuance costs, were approximately
$7,600,000 and were used to pay down short-term debt. The interest rate for
these bonds is 7.5% for a term of fifteen years to be paid off by June 1, 2012.
34
Item 8. Financial Statements and Supplementary Data
Report of Independent Auditors
The Board of Directors
Energy West Incorporated
We have audited the accompanying consolidated balance sheets of Energy West
Incorporated and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Energy West
Incorporated and subsidiaries at June 30, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects, the information set forth
therein.
/s/ Ernst & Young LLP
Denver, Colorado
August 21, 1997
35
Energy West Incorporated and Subsidiaries
Consolidated Balance Sheets
June 30
1997 1996
-----------------------------
Assets
Current assets:
Cash and cash equivalents $ 148,665 $ 721,093
Marketable equity securities - 172,208
Accounts receivable, less allowances for
uncollectible accounts of $167,824
at June 30, 1996) 3,40,528 3,486,328
Natural gas and propane inventory 5,792,517 2,200,778
Materials and supplies 561,112 543,316
Prepayments and other 518,504 602,427
Refundable income tax payments 301,711 412,662
Recoverable costs of gas purchases 1,673,285 953,392
-----------------------------
Total current assets 12,398,322 9,092,204
Investments 257,560 12,476
Notes receivable due after one year 2,537 9,190
Property, plant and equipment 46,481,447 43,919,358
Less accumulated depreciation and amortization 19,083,667 17,829,528
-----------------------------
Net property, plant and equipment 27,397,780 26,089,830
Deferred charges:
Net unamortized debt issue costs 888,188 974,876
Regulatory assets for income taxes 487,027 443,918
Unrecognized postretirement obligation 564,500 332,800
Other regulated assets 532,481 296,526
Other nonregulated assets 356,454 242,853
-----------------------------
Total deferred charges 2,828,650 2,290,973
-----------------------------
Total assets $ 42,884,849 $ 37,494,673
-----------------------------
-----------------------------
36
June 30
1997 1996
-----------------------------
Capitalization and liabilities
Current liabilities:
Long-term debt due within one year $ 361,959 $ 348,044
Notes payable 11,380,000 7,175,000
Accounts payable--gas purchases 1,158,700 1,226,508
Accounts payable--other 562,854 826,885
Payable to employee benefit plans 512,773 508,890
Accrued vacation 344,863 327,897
Other current liabilities 519,796 420,954
Deferred income taxes--current 475,940 253,385
-----------------------------
Total current liabilities 15,316,885 11,087,563
Other:
Deferred income taxes 3,107,272 2,700,184
Deferred investment tax credits 481,779 502,841
Contributions in aid of construction 1,039,431 834,917
Accumulated postretirement obligation 867,919 507,386
Regulatory liability for income taxes 148,961 162,121
Deferred gain on sale-leaseback of assets 212,663 236,291
-----------------------------
Total other 5,887,275 4,961,539
Long-term debt (less amounts due within
one year) 9,683,755 10,045,714
Commitments and contingencies
Stockholders' equity:
Preferred stock--$.15 par value:
Authorized--1,500,000 shares;
Outstanding--none - -
Common stock--$.15 par value:
Authorized--3,500,000 shares;
Outstanding--2,357,470 shares
at June 30, 1996) 353,623 348,198
Capital in excess of par value 2,932,962 2,635,540
Retained earnings 8,710,349 8,416,119
-----------------------------
Total stockholders' equity 11,996,934 11,399,857
-----------------------------
Total capitalization 21,680,689 21,445,571
-----------------------------
Total capitalization and liabilities $ 42,884,849 $ 37,494,673
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
37
Energy West Incorporated and Subsidiaries
Consolidated Statements of Income
Year ended June 30
1997 1996 1995
----------------------------------------
Operating revenue:
Regulated utilities $ 26,882,248 $ 23,672,186 $ 24,363,446
Nonregulated operations 5,339,553 3,297,583 2,946,114
Gas trading 5,993,668 4,348,239 3,238,839
---------------------------------------
Total operating revenue 38,215,469 31,318,008 30,548,399
Operating expenses:
Gas purchased 19,136,723 14,972,454 16,116,688
Cost of gas trading 5,538,847 3,751,053 2,500,363
Distribution, general and 7,498,467 6,924,391 6,379,651
Maintenance 496,721 408,590 306,077
Depreciation and amortization 1,689,082 1,667,256 1,558,755
Taxes other than income 660,133 629,428 594,569
---------------------------------------
Total operating expenses 35,019,973 28,353,172 27,456,103
---------------------------------------
Operating income 3,195,496 2,964,836 3,092,296
Other income, net 325,334 214,902 174,878
---------------------------------------
Income before interest charges and
income taxes 3,520,830 3,179,738 3,267,174
Interest charges:
Long-term debt 700,484 709,872 735,813
Short-term and other 824,100 532,866 202,770
---------------------------------------
Total interest charges 1,524,584 1,242,738 938,583
---------------------------------------
Income before income taxes 1,996,246 1,937,000 2,328,591
Provision for income taxes 703,472 670,025 815,688
---------------------------------------
Net income $ 1,292,774 $ 1,266,975 $ 1,512,903
---------------------------------------
---------------------------------------
Net income per common share $ .55 $ .55 $ .68
---------------------------------------
---------------------------------------
SEE ACCOMPANYING NOTES.
38
Energy West Incorporated and Subsidiaries
Consolidated Statements of Stockholders' Equity
Capital in
Common Excess of Retained
Stock Par Value Earnings Total
-------------------------------------------------------
Balance at June 30, 1994 $ 328,722 $ 1,643,793 $ 7,420,447 $ 9,392,962
Exercise of stock options into 14,410
shares of common stock at $4.94 to
$8.75 per share 2,161 78,318 - 80,479
Sale of 36,720 shares of common stock at
$7.50 to $ 9.00 per share under the
Company's dividend reinvestment plan 5,508 293,529 - 299,037
Issuance of 11,535 shares of common
stock to ESOP at estimated fair value of
$9.00 per share 1,730 102,090 - 103,820
Net income for the year ended June 30,
1995 - - 1,512,903 1,512,903
Dividends on common stock--$.385 per share - - (856,443) (856,443)
-------------------------------------------------------
Balance at June 30, 1995 338,121 2,117,730 8,076,907 10,532,758
Exercise of stock options into 13,680
shares of common stock at $4.875 to $7.125
per share 2,052 72,918 - 74,970
Sale of 37,611 shares of common stock
at $8.00 to $ 9.50 per share under the
Company's dividend reinvestment plan 5,642 320,158 - 325,800
Issuance of 15,889 shares of common
stock to ESOP at estimated fair value of
$8.00 per share 2,383 124,734 - 127,117
Net income for the year ended June
30, 1996 - - 1,266,975 1,266,975
Dividends on common stock--$.405 per
share - - (927,763) (927,763)
-------------------------------------------------------
Balance at June 30, 1996 348,198 2,635,540 8,416,119 11,399,857
Exercise of stock options into 980
shares of common stock at $6.50 to $7.13