-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K55mwO6FQQZA0fAQz0rKOpigsf9bLbk1sX5NkaQndjnpNz5jrXU4eImXgVXN9k+e b6xSZ0e4SjIZhnSUwnZvbg== 0000043350-95-000008.txt : 19951005 0000043350-95-000008.hdr.sgml : 19951005 ACCESSION NUMBER: 0000043350-95-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENERGY WEST INC CENTRAL INDEX KEY: 0000043350 STANDARD INDUSTRIAL CLASSIFICATION: 4924 IRS NUMBER: 810141785 STATE OF INCORPORATION: MT FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14183 FILM NUMBER: 95577127 BUSINESS ADDRESS: STREET 1: 1 FIRST AVE SOUTH STREET 2: PO BOX 2229 CITY: GREAT FALLS STATE: MT ZIP: 59401 BUSINESS PHONE: 4067917500 MAIL ADDRESS: STREET 1: ENERGY WEST INC STREET 2: 1 FIRST AVE SOUTH PO BOX 2229 CITY: GREAT FALLS STATE: MT ZIP: 59401 FORMER COMPANY: FORMER CONFORMED NAME: GREAT FALLS GAS CO DATE OF NAME CHANGE: 19920703 10-K 1 THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE 901 (d) OF REGULATION S-T 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, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File number 0-14183 ENERGY WEST INCORPORATED (Exact name of registrant as specified in its charter) Montana 81-0141785 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1 First Avenue South, Great Falls, Mt. 59401 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code (406)-791-7500 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 20, 1995 Common Stock, $.15 Par Value - $11,657,000 The number of shares outstanding of the issuer's classes of common stock as of September 20, 1995 Common Stock, $.15 Par Value - 2,254,138 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual shareholders' report for the year ended June 30, 1995 are incorporated by reference into Parts I and II. Portions of the proxy statement for the annual shareholders meeting to be held November 6, 1995 are incorporated by reference into Part III. 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"), Vesta, Inc. ("Vesta") 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. Vesta is involved in gas storage, a small amount of oil and gas development and the marketing of gas in Montana and Wyoming. 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 withinapproximately 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, 1995, 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 through a transportation agreement and Malmstrom Air Force Base ("Malmstrom"). The following table shows the Great Falls division's revenues by customer class for the year ended June 30, 1995 and the past two fiscal years: Gas Revenues (in thousands) Years Ended June 30, 1995 1994 1993 Residential.................$8,996 $9,016 $9,454 Commercial..................$6,350 $6,360 $6,633 Malmstrom...................$1,393 $1,437 $1,462 Industrial..................$ 0 $ 0 $ 606 Transportation..............$ 73 $ 88 $ 8 Total................$16,812 $16,901 $18,163 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, 1995 and the past two fiscal years; billing degree days (weighted) showed a decrease over the three years and was 7,516 in 1995, 7,540 in 1994 and 7,972 in 1993. Gas Volumes (MMcf) Years Ended June 30, 1995 1994 1993 Residential..................2,297 2,315 2,455 Commercial...................1,646 1,655 1,729 Malmstrom.................... 464 478 490 Industrial................... 0 0 280 Total Gas Sales.........4,407 4,448 4,954 Transportation 714 521 14 Malmstrom, the Great Falls division's largest customer, accounted for approximately 8% of the revenues of the division and approximately 5% of the consolidated revenues of the Company in fiscal 1995. 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 intercontinental nuclear missiles and KC-135 refueling tankers. Malmstrom Air Force Base represents approximately one third of the Great Falls economy. The base employed approximately 4,400 military personnel and 550 civilian personnel as of June 30, 1995. As of this date, a current realignment plan by the federal government, calls for the base to receive additional Minuteman III missiles from North Dakota, and the refueling unit to move to Florida. The plan is now final and when both changes take place, the base will not suffer substantially. No assurance can be given as to the future level of activity at Malmstrom. On July 1, 1995, Malmstrom will become a transport customer of the Great Falls division, purchasing its gas load from Transenergy, a division of Vesta, Inc., a wholly-owned subsidiary of ENERGY WEST INCORPORATED. The Great Falls division will experience no loss of margin as a result of this new contract. The Great Falls division's sole 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 1995, the refinery accounted for approximately 1% of the division's revenues and 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, however, in January, 1994, the refinery completed construction of a desulferization plant, which uses additional natural gas and gas volumes have increased 50% over last year, reflecting the impact of the plant for a full year. On June 1, 1993, the refinery became a transport customer of the Great Falls division, purchasing its gas load from Transenergy, a division of Vesta, Inc., a wholly- owned subsidiary of ENERGY WEST INCORPORATED. The Great Falls division experienced no loss of margin as a result of this new contract. 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. On May 19, 1993, the MPSC issued a final order, which allowed rates to be increased, effective February 1, 1993, to provide $540,000 of additional annual revenues based on normal weather conditions and an allowed return on common equity on normalized earnings of 11.50%. 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 is the beginning of Fiscal 1996 or July 1, 1995. The rate decrease reduces earnings per share by approximately 1.8 cents on normalized volumes. 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 currently purchases approximately one-half of its gas from a Canadian producer under a long-term contract expiring in 2007, and approximately one-quarter of its gas from two Montana producers under long- term contracts expiring between 1998 and 2005 and one-quarter 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 the contracts with the three independent producers 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. Open access for the division's customers was negotiated between the division, MPC and the MPSC during 1991, which called for a three year phase-in of open access gas supplies, with gas costs tracking filings every six months. The three year phase-in period began in November, 1991, with two-thirds of supply purchased from MPC under the "Firm Utility Gas Cost" ("FUGC") rate and one-third directly from other gas suppliers. The regulatory mechanism used to track the phase-in resulted in additional costs in 1994 that offset an increase in gross margins associated with the change in contract terms with the refinery customer, which changed from a gas supply contract to a transportation contract. On September 1, 1993, the Great Falls division became a full open access customer of MPC. The division secured the balance of its long-term gas supplies, to replace gas which was previously being supplied by MPC, on terms satisfactory to the Company. 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. 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 franchise 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. The franchise is effective until 2002. As of June 30, 1995, the Cody division provided service to approximately 5,100 customers, including 4,400 residential customers, 700 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, 1995 and the past two fiscal years: Gas Revenues (in thousands) Years Ended June 30, 1995 1994 1993 Residential.................$2,176 $2,219 $2,135 Commercial..................$1,887 $2,034 $2,016 Industrial..................$1,375 $1,331 $ 890 Transportation..............$ 172 $ 228 $ 163 Total..................$5,610 $5,812 $5,204 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, 1995 and the past two fiscal years: Gas Volumes (MMcf) Years Ended June 30, 1995 1994 1993 Residential.................. 486 474 512 Commercial................... 539 559 639 Industrial................... 517 473 367 Total Gas Sales........1,542 1,506 1,518 Transportation 1,484 2,533 1,833 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 1995 this customer accounted for approximately 24% 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 9% 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. The division has increased its allowance for uncollectible accounts by $52,000. Celotex has filed a plan for reorganization. Under this plan, the Company would expect to receive approximately 60 to 75% of the receivable, however the plan has not been approved by the bankruptcy court at this time. 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. 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 permits the WPSC to allow gas utilities to retain 10% of its cost of gas savings over a base period level. In fiscal 1995 this gas cost incentive improved gross margin for the division by approximately $138,000. The amount of gas cost incentive if any, fluctuates with the market price of natural gas. 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. The Cody division has a five-year agreement 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. The Cody division does not have storage facilities. Historically, the division has been able to purchase gas from its suppliers to meet peak demands. 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, 1995, the Broken Bow division provided service to approximately 3,400 customers, including approximately 3,000 residential customers and approximately 400 commercial customers. 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 90 miles of underground distribution pipeline, propane storage facilities and an office building leased from Petrogas, an affiliated bulk propane distributor in the Payson area. The division purchases its propane supplies from Petrogas under terms reviewed periodically by the Arizona Corporation Commission. Non-Utility Operations The Company conducts its non-utility operations through its three wholly-owned subsidiaries: RMF, Vesta 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 3,500 customers as of June 30, 1995, of which the Wyo L-P division had approximately 3,100 customers and the Petrogas division and Missouri River Propane had approximately 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. For the twelve months ended June 30, 1995, RMF's revenues (excluding approximately $1,063,000 sales by Petrogas to the Broken Bow division and approximately $69,000 sales by Missouri River Propane to Cascade Gas Company, an operating district of the Great Falls division) were approximately $2,771,000, of which approximately $2,131,000 was attributable to the Wyo L-P division, $585,000 was attributable to the Petrogas division and the balance attributable to the Missouri River Propane division. 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. Vesta is involved in a small amount of oil and gas development and the marketing of gas in Montana and Wyoming. Vesta currently has varying working interests in four oil and nine gas producing properties. Volumes of oil and gas produced are not significant and did not result in significant net income in fiscal 1995. Vesta conducts its gas marketing through its Transenergy affiliate. The Company believes that the ordering of MPC to provide open access on its gas transportation system in Montana presents an opportunity for Transenergy to do business as a broker of natural gas using the MPC and other systems. Transenergy presently has four customers for those services, plus the State of Montana, which includes several units of the State of Montana. Vesta also purchased an underground storage facility near Havre, Montana and leased additional storage capacity from Montana Power Company, to allow more flexibility in the timing of its gas purchases. In 1993, Vesta retroactively changed from the full cost method to the successful efforts method of accounting for its oil and gas operations effective June 30, 1990. Accordingly, all financial statements have been restated to reflect the new method. The change was not material to net income for the year ended June 30, 1993, and did not change the per common share amount previously reported. The accounting change reduced retained earnings by $220,856 as of June 30, 1990. Management believes the conversion to the successful efforts method is appropriate because it better reflects the economics of Vesta's reduced exploration efforts. 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 and 8 to the Company's consolidated financial statements. Capital Expenditures The Company generally conducts a continuing construction program and has completed 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 started construction of a natural gas system in West Yellowstone, Montana, 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 1995, 1994 and 1993, total capital expenditures were $4,705,868, $2,626,221 and $2,468,463 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 concludes 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. The Company had approximately 140 employees as of June 30, 1995, of which 124 were full-time. Twenty-five of the employees were with the Cody division, 24 employees were with RMF and 13 were with the Broken Bow division. The other 78 employees were with the Great Falls division 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, 1997. 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 aggressively 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. Since 1982 the Company has conducted strategic corporate planning at about three year intervals. It uses outside resources to bring light to new areas of potential development and defines key results areas for the organization to focus on for the next three years. This has been a effective process for the organization. The Company has implemented 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 50% funding and individual divisions meet their allocated of 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. 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. 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. The Broken Bow division leases building space from Petrogas for its propane vapor distribution operations in Payson. 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 and to store certain equipment and materials and supplies. 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. After management became aware of the potential of contamination on this site, it initiated an assessment of the property through the assistance of a qualified consulting firm. That assessment revealed the presence of certain hazardous material in quantities exceeding tolerances established for such material by regulatory authorities. After making required notifications of that condition to federal and state regulatory authorities, a report summarizing the assessment was filed with the State of Montana Department of Health and Environmental Science (MDHES). Subsequent to that submittal a meeting was held with a representative of the MDHES wherein a process was agreed upon to arrive at appropriate remediation of the site. The costs incurred by the Company to date approximate $263,500 and have been capitalized as other deferred charges. Until further work is done regarding remediation alternatives, no further estimate of the costs of remediation can be made. However, management believes that regardless of the alternative selected, the costs incurred will not materially affect the Company's financial position. The Company received formal approval from MPSC to recover the costs associated with the cleanup of this site. The Company will begin recovery of costs incurred at June 30, 1995 over two years through a surcharge in billing rates effective July 1, 1995. Management intends to request that future costs be recovered over a similar time period. Item 3. - Legal Proceedings The Company is not a party to any litigation other than that arising out of the normal course of business. In the aggregate, such litigation is not considered material in relation to the financial position of the Company. Item 4. - Submission of Matters to a Vote of Security Holders None 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 56 President and Director since 1978; appointed Chief Executive Officer in 1979 Edward J. Bernica 45 Vice-President and Chief Financial Officer since October, 1994 William J. Quast 56 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 50 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 48 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 Name Age Position John C. Allen 44 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 47 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. 47 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 63 Director since 1969 Timothy J. Moylan 39 Director since 1991 Thomas N. McGowen, Jr. 69 Director since 1978 G. Montgomery Mitchell 67 Director since 1984 John Reichel 69 Director since 1984 David A. Flitner 62 Director since 1988 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 was re-elected in 1993 and is currently serving as Trustee for the Great Falls Public School system. Mr. Quast, prior to service with the Company, was an accounting manager for Wyton Oil and Gas Company, a propane distributor 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. 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, Great Falls Capital Corporation and serves on the Board of Governors of the Pacific Coast Stock Exchange and the National Association of Securities Dealers. Timothy J. Moylan has been a Director of the Company since 1991. Mr. Moylan is President of the BelRad Group, South Pacific, Inc., and Natural Resources Group, Inc. These Companies are primarily involved in the natural gas brokerage business and related information processing services. 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 Services Corporation (Alabama). John Reichel has been a Director of the Company since 1984. Prior to his retirement he was Managing Director of the Montana Region of First Bank System, Inc. From 1983 to 1985, Mr. Reichel was Managing Director of the Western Montana Region of First Bank System, Inc. and from 1975 to 1983 served as President of First Bank Great Falls. Mr. Reichel retired from First Bank System, Inc. in 1987. David A. Flitner has been a Director of the Company since 1988. MR. Flitner is owner of David Flitner Ranch and David Flitner Packing and Outfitting (Wyoming Companies) and Hideout Adventures, Inc., a recreational enterprise. PART II Item 5. - Market for registrant's common equity and related stockholder matters. Common Stock Prices and Dividend Comparison - Fiscal 1995 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 1995 High Low First Quarter 9 1/4 8 1/2 Second Quarter 9 1/4 8 Third Quarter 8 1/2 7 1/2 Fourth Quarter 8 1/4 7 1/2 Year 9 1/4 7 1/2 Price Range - Fiscal 1994 High Low First Quarter 8 1/2 7 7/8 Second Quarter 9 1/4 8 Third Quarter 9 1/8 8 5/8 Fourth Quarter 9 1/4 7 3/8 Year 9 1/4 7 3/8 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 1995 and 1994 were: Fiscal 1995 Fiscal 1994 September $.0950 $.0875 January $.0950 $.0875 March $.0950 $.0875 June $.1000 $.0950 Item 6. - Selected Financial Data Set forth below is the historical financial data with respect to the Company for the years ended June 30, 1995, 1994, 1993, 1992 and 1991, and has been derived from, and should be read in conjunction with, the audited financial statements which appear elsewhere in this report. All information is expressed in thousands of dollars except share and per share information.
1995 1994 1993 1992 1991 Operating Results: Operating Revenues $ 30,548 $ 29,347 $27,629 $ 22,951 $23,850 Operating Expenses: Gas Purchased 18,616 18,410 17,232 14,935 16,212 Other 6,380 5,979 5,454 4,399 3,815 Maintenance 306 331 376 259 275 Depreciation and Amortization 1,559 1,464 1,286 976 745 Taxes Other Than Income 595 527 540 464 390 Total Operating Expenses 27,456 26,711 24,888 21,033 21,437 Operating Income: 3,092 2,636 2,741 1,918 2,413 Other Income Net 175 199 139 113 116 Income Before Interest Charges 3,267 2,835 2,880 2,031 2,529 Total Interest Charges 938 962 959 815 774 Income Before Income Taxes 2,329 1,873 1,921 1,216 1,755 Income Taxes 816 614 637 384 683 Income Before Cumulative Effect of Change in Acctg. Principle 1,513 1,259 1,284 832 1,072 Cumulative Effect of Change as of July 1, 1993 from Adoption of FASB 109 0 92 Net Income EPS Before Cumulative Effect of FASB 109 0.68 0.57 0.59 0.39 0.51 Earnings Per Common Share 0.68 0.61 0.59 0.39 0.51 Dividends per Common Share 0.39 0.36 0.32 0.31 0.28 Weighted Ave. Common Shares Outstanding 2,235,413 2,205,050 2,171,448 2,159,092 2,122,246 At Year End: Total Assets $ 32,375 $ 28,786 $ 28,036 $ 22,375 19,663 Current Liabilities $ 6,786 $ 4,193 $ 4,881 $ 4,806 $ 2,215 Total Long-Term Obligations $ 10,435 $ 10,718 $ 11,050 $ 6,735 $ 6,956 Total Stockholder s Equity $ 10,533 $ 9,393 $ 8,733 $ 7,946 $ 7,759 Total Capitilization $ 20,968 $ 20,111 $ 19,783 $ 14,681 $ 14,724
Supplementary Data (Unaudited) First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal Year 1995 Revenues $ 3,297 $ 9,322 $ 10,000 $7,929 Operating Income (Loss) (484) 1,486 1,829 261 Net Income (Loss) (386) 802 1,046 51 Net Income(Loss) Per Share (0.17) 0.36 0.47 0.02 Fiscal Year 1994 Revenues $ 3,978 $ 9,172 $ 9,768 $4,762 Operating Income (Loss) (397) 1,146 1,833 54 Net Income Before a Cum. Effect (320) 621 1,090 (132) Net Income (Loss) (227) 621 1,090 (133) Net Income Before Cum. Effect (0.15) 0.28 0.50 (0.06) Net income (Loss) Per Share (0.11) 0.28 0.50 (0.06) Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Consolidated Operations RESULTS OF CONSOLIDATED OPERATIONS Fiscal 1995 Compared to Fiscal 1994 Net Income The Company's net income for fiscal 1995 was $1,513,000 compared to $1,351,000 in fiscal 1994, an increase of $162,000 or 12% over 1994. However fiscal 1994 net income included an accounting change of $92,365 due to the cumulative effect on prior years of the change in accounting for income taxes. Before the effect of the accounting change, net income increased $254,000 or 20% in 1995 over 1994. The notes to the financial statements further describe this accounting change. The following summary describes the components of the change between years. Revenue Operating revenues increased approximately 4%, primarily due to gas trading revenues; regulated utility revenues declined slightly as compared to the prior year, represented 76% of total revenues in 1995 versus 80% in fiscal 1994. Nonregulated revenues increased slightly due to growth in the nonregulated Arizona customer base, served by the Petrogas division. Gross Margin Gross margins (operating revenues less cost of gas sold and cost of gas trading) increased approximately $994,000 in 1995. Regulatory gross margins increased approximately $530,000, due to the Great Falls and Broken Bow divisions. The Great Falls division realized higher margins due to a timing difference in purchased gas costs. The Broken Bow gross margin increased due to customer growth in the Payson, Arizona area. The Cody gross margins remained relatively unchanged, even though sales were down. Nonregulated gross margins increased approximately $464,000, primarily due to additional gas trading activity. Other Expenses Operating expenses (excluding cost of gas sales) increased approximately $538,000 in 1995. The primary reasons for this increase was increased depreciation and amortization of approximately $95,000 reflecting the addition or acquisition of property, plant and equipment, while the remaining increase was due to inflation and additional personnel required in the growing operations of the Company. As a result of the above changes in gross margins and offsetting increases in operation expenses and depreciation and amortization, operating income increased 17% from $2,636,000 in 1994 to $3,092,000 in 1995. Total interest expense for the Company was approximately $939,000 for fiscal 1995, down slightly from $962,000 in fiscal 1994. Other additions to or deductions from operating income in determining net income remained comparable between the two years. Fiscal 1994 Compared to Fiscal 1993 Net Income The Company's net income for fiscal 1994 was $1,351,000 compared to $1,284,000 in fiscal 1993. The following summary describes the components of the change between years. Operating revenues were approximately the same as the prior year. However, regulatory revenues, representing 80% of total revenues in 1994, declined primarily due to warmer than normal weather in the Great Falls and Cody markets. The weather related declines in revenue were partially offset by the addition of a new gas transportation contract and increased production at a manufacturing plant served by the Cody division, as well as the increased customer base in the Arizona market, which is served by the Broken Bow division. The decline in regulated revenues was offset by a comparable increase in the nonregulated revenues. Nonregulated revenues increased due to growth in the nonregulated Arizona customer base, served by the Petrogas division and increase gas marketing activities. Gross margins (operating revenues less cost of gas sold) increased approximately $540,000. Regulatory gross margins remained relatively constant in both the Great Falls and Cody divisions, despite the decline in revenues, and reflected a $140,000 increase in the the Broken Bow division. The Cody gross margins remained relatively unchanged due to the addition of a transportation contract. The addition of the transportation contract offset the lower sales price and lower gross margin but increased usage by the manufacturing plant customer. The gross margins at the Great Falls division were also relatively constant due to changing a refinery customer from a gas supply contract to a transportation contract and the end of the three year phase-in period for open access gas supplies. The regulatory mechanism used to track the phase-in resulted in additional costs in 1994 that offset the increase in gross margins associated with the change in contract terms with the refinery customer. The Broken Bow division gross margins increased due to an expansion of the customer base. Nonregulated gross margins increased due to an increase in the customer base inthe Arizona market, and increased gas marketing activities, which contributed to the remaining increase in gross margins of approximately $400,000. However, the increases in gross margin were offset by an increase in operation and maintenance expenses and depreciation and amortization expenses of approximately $645,000. These increases were the result of additional maintenance activities and the addition of personnel. Of the total increase of $645,000, approximately $180,000 was the result of additional depreciation and amortization in 1994. This increase reflects the addition or acquisition of property, plant and equipment during thepast two years. As a result of the above changes in gross margins and operation and maintenance expenses, operating income declined from $2,741,000 in 1993 to $2,636,000 in 1994. Other additions to or deductions from operating income in determining net income remained comparable between the two years. However, net income for 1994 was $1,350,000 an increase of $68,000 over 1993 due primarily to the cumulative effect on prior years of the change in accounting for income taxes. The notes to the financial statements further describe this accounting change. OPERATING RESULTS OF THE COMPANY'S UTILITY OPERATIONS Years Ended June 30 1995 1994 1993 (in thousands) Operating revenues: Great Falls division $16,812 $16,900 $18,163 Cody division 5,609 5,813 5,204 Broken Bow division 1,942 1,708 1,199 Total operating revenues 24,363 24,421 24,566 Gas purchased 15,077 15,667 15,927 Gross Margin 9,286 8,754 8,639 Operating expenses 7,136 6,673 6,322 Interest charges [see note below] 908 895 809 Other utility (income) expense-net (126) (106) (68) Federal and state income taxes 454 410 508 Net utility income $ 914 $ 882 $1,068 [interest charges for utility and non-utility operations do not equal total interest charges for the Company, due to eliminating entries between entities.] Fiscal 1995 Compared to Fiscal 1994 Revenues and Gross Margins Utility operating revenues in fiscal 1995 were $24,363,000 compared to $24,421,000 in fiscal 1994. Gross margin, which is defined as operating revenues less gas purchased, was $9,286,000 for fiscal 1995 compared to $8,754,000 in fiscal 1994. Although utility revenues remained unchanged from fiscal 1994, margins increased 6% for fiscal 1995, primarily due to higher margins experienced by the Great Falls division when compared to margins experienced in fiscal 1994 as a result of a timing difference in purchased gas costs booked, as well as higher margins in the Broken Bow division as a result of growth in the Payson, Arizona area. The winter heating season in the Great Falls division in fiscal 1995 was approximately 1% warmer than fiscal 1994 and 1% warmer than "normal" (i.e., the average temperature during the preceding 30 years). The winter heating season in the Cody division was approximately 1% warmer than fiscal 1994 and 5% warmer than normal. The Broken Bow division experienced a 14% increase in revenues and a 24% increase in margins, as a result of growth in the Payson, Arizona area. Operating Expenses Utility operating expenses, exclusive of the cost of gas purchased and federal and state income taxes, were $7,136,000 for fiscal 1995, as compared to $6,673,000 for fiscal 1994. The 7% increase in the period is due to increased depreciation and amortization, reflecting the addition or acquisition of property, plant and equipment, while the remaining increase was due to inflation and additional personnel required in the growing utility operations of the Company. Interest Charges Interest charges allocable to the Company's utility divisions were $908,000 in fiscal 1995, as compared to $895,000 in fiscal 1994. Short-term interest charges increased as a result of higher interest rates compared to a year ago, however this was offset by lower interest payments on long-term debt, due to repayment of principle. Income Taxes State and federal income taxes of the company's utility divisions was $454,000 in fiscal 1995, as compared to $410,000 in fiscal 1994. The 11% increase was primarily attributable to a $76,000 increase in pre-tax income of the utility divisions. Fiscal 1994 Compared to Fiscal 1993 Revenues and Gross Margins Utility operating revenues in fiscal 1994 were $24,421,000 compared to $24,566,000 in fiscal 1993. Gross margin, which is defined as operating revenues less gas purchased, was $8,754,000 for fiscal 1994 compared to $8,639,000 in fiscal 1993. The .5% decrease in revenues, and yet a 1% increase in gross margin for fiscal 1994 were primarily due to the warmer heating season, and higher margins in the Broken Bow division. The winter heating season in the Great Falls division in fiscal 1994 was approximately 11% warmer than fiscal 1993 and 4% warmer than "normal" (i.e., the average temperature during the preceding 30 years). The winter heating season in the Cody division was approximately 7% warmer than fiscal 1993 and 11% warmer than normal. The Broken Bow division experienced a 154% increase in revenues and a 136% increase in margins, as a result of growth in the Payson, Arizona area. Operating Expenses Utility operating expenses, exclusive of the cost of gas purchased and federal and state income taxes, were $6,673,000 for fiscal 1994, as compared to $6,322,000 for fiscal 1993. The 7% increase in the period reflects the inclusion of the Broken Bow division operating expenses for the full year, increases in employee benefits expense and normal inflationary trends. The Broken Bow division was purchased in fiscal 1993 with operations beginning on November 1, 1992. Interest Charges Interest charges allocable to the Company's utility divisions were $895,000 in fiscal 1994, as compared to $809,000 in fiscal 1993. The stable interest charges resulted from stable interest rates most of the year on short-term borrowing and interest savings realized from refunding certain industrial development revenue bonds of the company in September 1992 and refunding certain State Board of Investment Bonds in June 1993. Income Taxes State and federal income taxes of the company's utility divisions were $407,000 in fiscal 1994, as compared to $508,000 in fiscal 1993. The 20% decrease was primarily attributable to a $281,000 decrease in pre-tax income of the utility divisions. OPERATING RESULTS OF EACH OF THE COMPANY'S NON-UTILITY SUBSIDIARIES Years Ended June 30 1995 1994 1993 (in thousands) ROCKY MOUNTAIN FUELS (RMF) Operating revenues $3,902 $3,759 $3,243 Cost of propane 2,171 2,050 1,706 Operating expenses 1,484 1,399 1,181 Other (income) expense-net (33) (67) (14) Interest expense [see note below] 87 113 146 Federal and state income taxes 71 85 84 Cumulative effect on prior years of change in accounting for income taxes 4 Net income (loss) $ 122 $ 183 $140 VESTA Operating revenues $ 76 $ 77 $400 Gas trading revenue 3,239 1,965 333 Operating expenses 172 170 419 Cost of gas trading 2,500 1,667 306 Other (income) expense-net (43) (44) (34) Federal and state income taxes 259 94 14 Cumulative effect on prior years of change in accounting for income taxes 42 Net income (loss) $ 427 $197 $28 MONTANA SUN Operating revenues $99 $100 $99 Operating expenses 47 61 41 Other (income) expense-net (16) (24) (23) Interest expense [see note below] (14) (4) 3 Federal and state income taxes 31 26 31 Cumulative effect on prior years of change in accounting for income taxes 46 Net income (loss) $51 $87 $47 [interest charges for utility and non-utility operations do not equal total interest charges for the Company, due to eliminating entries between entities.] Non-Utility Operations Rocky Mountain Fuels For the fiscal year ended June 30, 1995, RMF generated net income of $122,000 compared to $183,000 for fiscal 1994. Approximately $68,000 of RMF's net income for fiscal 1995 was attributable to the Wyo L-P division, which serves northwestern Wyoming and Cooke City, Montana, and approximately $63,000 was attributable to the Petrogas division, which serves the Payson, Arizona area. RMF income decreased because of higher overheads, due to reallocation from the utility operation and normal inflationary trends along with higher depreciation. Missouri River Propane in Montana and Big Horn Answering Service in Cody, Wyoming account for the balance, which had a net loss for fiscal 1995. For the fiscal year ended June 30, 1994, RMF generated net income of $183,000 compared to $140,000 for fiscal 1993. Approximately $83,000 of RMF's net income for fiscal 1994 was attributable to the Wyo L-P division and approximately $106,000 was attributable to the Petrogas division. Petrogas division income increased substantially, due to growth in the Payson, Arizona area, as well as substantially increased margins, due to favorable propane purchases. In addition, RMF had higher net income of $4,200 due to the adoption of SFAS No. 109 which is accounting treatment related to income taxes. The balance of net income or loss is attributable to Missouri River Propane, a bulk propane distributor in Cascade, Montana and Big Horn Answering Service in Cody, Wyoming. Vesta - Transenergy For fiscal 1995, Vesta's net income was $427,000 compared to $198,000 for fiscal 1994, primarily due to increased gas marketing margins in Transenergy, Vesta's gas marketing subsidiary. In fiscal 1995, Vesta's gross marketing margin in gas trading activities increased approximately 148% to approximately $738,000 from $298,000 in fiscal 1994. This increase in margins was partially offset by the effect of a $42,000 increase to net income in Fiscal 1994 as a result from adoption of SFAS No.109. For fiscal 1994, Vesta's net income was $198,000 compared to $28,000 for fiscal 1993. Revenues and earnings of Vesta increased primarily as a result of increased activity from Transenergy, Vesta's gas marketing division as well as the effect of an accounting change of $42,000 increase to net income. This increase resulted from adoption of SFAS No. 109, which changed the method of accounting for income taxes from the deferred method to the liability method. Montana Sun For fiscal 1995, Montana Sun's net income was $51,000 as compared to $87,000 for fiscal 1994 which had the effect of an accounting change, from adoption of SFAS No. 109. For fiscal 1994, Montana Sun's net income was $87,000 as compared to $47,000 for fiscal 1993, primarily as a result of the effect of an accounting change, from adoption of SFAS No. 109. 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 had borrowed long-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, financing of customer accounts receivable 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 two years, the Company has used short-term borrowing to finance the acquisition of propane operations. Short-term borrowing utilized for construction or property acquisitions generally are replaced by permanent financing when it becomes economical and practical to do so. At June 30, 1995, the Company had a $8,000,000 bank line of credit, of which $2,620,000 had been borrowed under the credit agreement. The short-term borrowings bear interest at the rate of 8 3/4% per annum as of June 30, 1995. The company generated net cash from operating activities for fiscal 1995 of approximately $3,605,000 as compared to $2,851,000 for fiscal 1994. This change from fiscal 1994 is attributed to a $162,000 increase in net income, $249,000 increase in depreciation and amortization, $92,000 cumulative effect of an accounting change and other miscellaneous working capital changes, offset by approximately $302,000 decrease in deferred income taxes. Cash used in investing activities was approximately $4,262,000 for fiscal 1995, as compared to $1,817,000 for fiscal 1994. Capital expenditures for fiscal 1995 was approximately $4,700,000, primarily due to system expansion in all areas and construction of the West Yellowstone system. Partially offsetting these capital expenditures were proceeds received from a restricted deposit from the Series 1992A bonds deposited in a construction fund, drawn for specific capital projects in the Great Falls division of approximately $205,000, proceeds from the sale of property, plant and equipment of $80,000, proceeds from collection of long-term notes receivable of $79,000 and proceeds from contributions in aid of construction of $81,000. The Company generated net cash from operating activities for fiscal 1994 of $2,851,000 as compared to $1,464,000 for fiscal 1993. This increase in cash generated from operations resulted from lower working capital requirement of approximately $1,200,000, and increased depreciation and amortization expenses of $197,000 and a $67,000 increase in net income. Cash used in investing activities was $1,817,000 for fiscal 1994, as compared to $4,445,000 for fiscal 1993. The decrease in capital expenditures for fiscal 1994 was primarily due to the proceeds received from a restricted deposit from the Series 1992A bonds deposited in a construction fund, drawn for specific capital projects in the Great Falls division and to non-use of cash, used last year in fiscal 1993, for the acquisition of the Payson, Arizona properties. 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 $4.7 million in fiscal 1995 and approximately $2.6 million for fiscal 1994 and $3.7 million in fiscal 1993, including RMF's expenditures for the acquisition of propane operations. During fiscal 1995, approximately $1.6 million has been expended for the construction of the natural gas system in West Yellowstone, Montana and approximately $400,000 had been expended for gas system expansion projects for new subdivisions in the Broken Bow division's service area. Capital expenditures are expected to be approximately $5.5 million in fiscal 1996, including approximately $1.6 million for continued expansion into West Yellowstone, Montana, $1.3 million for the Broken Bow division, with the balance for maintenance and other special system expansion projects in the Great Falls and Cody divisions. The Company continues to evaluate opportunities to expand its existing businesses from time to time. Information on the sources and uses of cash for the Company is included in the Consolidated Statements of Cash Flows on page 22 of the Company's 1995 Annual Report. SEC Ratio of Earnings to Fixed Charges For the twelve months ended June 30, 1995, 1994 and 1993, the Company's ratio of earnings to fixed charges was 2.93, 2.64 and 2.77 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. Accounting for Income Taxes In February 1992 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards "SFAS") No. 109, "Accounting for Income Taxes." SFAS No.109 retains the current requirement to record deferred income taxes for temporary differences that are reported in different years for financial reporting and tax purposes; however, the methodology for calculating and recording deferred income taxes has changed. Under the liability method adopted by SFAS No. 109, deferred tax liabilities or assets are computed using the tax rate that will be in effect when the temporary differences reverse. However, the changes in tax rates applied to accumulated deferred income taxes may not be immediately recognized in operating results by regulated companies because of rate-making treatment and provisions in the Tax Reform Act of 1986. 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. As permitted under the new rules, prior year's financial statements have not been restated. For regulated operations, the cumulative effect of this change in accounting method on July 1, 1993 resulted in the recording of a regulatory asset of approximately $601,000 and a regulatory liability of approximately $205,000. For nonregulated operations, the cumulative effect of this change in accounting method on July 1, 1993 was to increase net income by approximately $92,000. Postretirement Benefits Other Than Pensions In December 1990 the FASB issued SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires that the projected future cost of providing postretirement benefits, such as health care which the Company provides, be recognized as an expense as employees render service rather than when paid. The cumulative effect of this accounting change may be recognized as a charge against income in the year adopted or, alternatively, on a deferred basis as part of the future annual benefit cost. The Company complied with SFAS No. 106 on July 1, 1993. Effective for fiscal year 1994, the Company modified its plan for these benefits and has elected to pay eligible retirees $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 adoption of SFAS No. 106 did not have a significant effect upon results of operations. See Note 4 to the Consolidated Financial Statement for additional information. Environmental Issues The Company owned and operated a manufactured gas plant from 1909 to 1928. The Company's service center and shop in Great Falls is presently located on the site. The five-acre site is one of approximately 1,500 manufactured gas plant sites listed on a national survey prepared for the Environmental Protection Agency in 1985. The Company has retained an environmental consulting firm to investigate the site for possible environmental contamination. The Company initiated the investigation on its own accord. The consultant recently concluded a site investigation which indicated that some contamination exists on the site. The contamination consists of certain compounds from purifier wastes and coal tar. The Company has notified appropriate federal and state environmental authorities of the existence of such contamination. The results of this investigation has been submitted to the Montana Department of Health and Environmental Sciences. The Company's consultant has indicated that further environmental investigation or remediation may be necessary, but the Department has not yet requested or ordered such investigation or remediation. It is not possible at this time to determine the actual costs of the further investigation or remediation. Based upon a number of technical and regulatory assumptions that may change in the future, the Company's consultant has estimated that the cost of further investigation and remediation likely will be at least $300,000 and possibly could be higher by a material amount. The Company, in November, 1994, filed an application with the Montana Public Service Commission, requesting a surcharge on customer bills to recover in rates, the projected costs associated with the investigation and any subsequent remediation that may occur. On May 30, 1995, the Montana Public Service Commission approved the surcharge associated with the investigation, assessment and remediation of the manufactured gas plant site, based on a two- year recovery of the initial balance of $182,736. The unamortized balance will earn the Great Falls division's last Montana Public Service Commission approved return on rate base to allow the Great Falls division to recover its time value of money. The Great Falls division is expected to complete remediation of the manufactured gas plant site at the lowest possible cost. Any cost increases beyond the initial amount must be requested by the Company. The Company intends to include such costs beyond the initial amount, in its rate applications to the Montana Public Service Commission when such applications are made. However, the Company cannot give assurance that such costs will be recovered in that regulatory process. Management expects that recovery of a significant portion of, if not all, costs of remediation will be granted. Subsequent Event In August, 1995, the Company announced that it had signed a letter of intent and a definitive agreement to purchase the assets of Jackson Vangas in Jackson, Wyoming, for approximately $1,000,000, from Quantum Chemical (Suburban Propane Division) of Whippany, New Jersey. Jackson Vangas operates a propane vapor system which serves approximately 500 customers in and around Jackson, Wyoming, a city of approximately 5,000 people. The agreement is contingent upon the approval of the Wyoming Public Service Commission to grant ENERGY WEST a natural gas franchise to serve the Jackson Hole area. There are competing applications for the Jackson franchise and hearings are scheduled for Cheyenne, Wyoming starting August 23, 1995. It is anticipated that the Wyoming Public Service Commission will render their decision, as to which applicant will be granted the franchise, within thirty days of the close of the hearing. If a certificate to serve is granted, ENERGY WEST will eventually serve Jackson with natural gas through an LNG station, which would be constructed near Jackson. Item 8. - Financial Statements and Supplementary Data The financial statements and schedule listed in Item 14(a)(1) and (3) are included in this report beginning on page F-1. Item 9. - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable PART III Item 10. - Directors and Executive Officer of the Registrant Information concerning the directors and executive officers is included in Part I, on pages 15 through 18. The information contained under the heading "Election of Directors" in the Proxy Statement is incorporated herein by reference in response to this item. Item 11. - Executive Compensation The information contained under heading "Executive Compensation" in the Proxy Statement is incorporated herein by reference in response to this item. Item 12. - Security ownership of certain beneficial owners and management The information contained under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by reference in response to this item. Item 13. - Certain relationships and related transactions The information contained under the heading "Certain Transactions" in the Proxy Statement is incorporated herein by reference in response to this item. PART IV Item 14. - Exhibits, Financial Statement Schedules and Reports on Form 8K Page No. (a) 1. Index to Consolidated Financial Statements Report of Independent Auditors F-1 Consolidated Balance Sheets - June 30, 1995 and 1994 F-2 - F-3 Consolidated Statements of Income - Years ended June 30, 1995, 1994 and 1993 F-4 Consolidated Statements of Stockholders' Equity - Years ended June 30, 1995, 1994 and 1993 F-5 Consolidated Statement of Cash Flows - Years ended June 30, 1995, 1994 and 1993 F-6 - F-7 Notes to Consolidated Financial Statements F-8 - F-23 All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a) 3 Exhibits (See Exhibit Index on Page E-1) (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENERGY WEST INCORPORATED /S/ Larry D. Geske /s/ William J. Quast Larry D. Geske, President and William J. Quast Chief Executive Officer Vice-President, Treasurer, and Chairman of the Board Controller and Assistant Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Larry D. Geske 9/27/95 Larry D. Geske President and Chief Executive Date Officer and Acting Chairman of the Board /s/ Ian B. Davidson 9/27/95 Ian B. Davidson Director Date /s/ Timothy J. Moylan 9/27/95 Timothy J. Moylan Director Date /s/ Thomas N. McGowen, Jr. 9/27/95 Thomas N. McGowen, Jr. Director Date /s/ G. Montgomery Mitchell 9/27/95 G. Montgomery Mitchell Director Date /s/ John Reichel 9/27/95 John Reichel Director Date /s/ David A. Flitner 9/27/95 David A. Flitner Director Date EXHIBIT INDEX EXHIBITS 3.1 Restated Articles of Incorporation of the Company, as amended (1) 3.2 Bylaws of the Company, as amended (1) 4.2 Indenture of Trust, dated as of November 1, 1979, relating to Series 1979 Industrial Development Revenue Bonds (1) 4.3 Loan Agreement, dated as of November 1, 1979, relating to Series 1979 Industrial Development Revenue Bonds (1) 4.4 Indenture of Trust, dated as of October 1, 1982, relating to Series 1982 Industrial Development Revenue Bonds (1) 4.5 Loan Agreement, dated as of October 1, 1982, relating to Series 1982 Industrial Development Revenue Bonds (1) 4.6 First Supplemental Indenture, dated as of December 1, 1985, relating to Series 1982-A Industrial Development Revenue bonds (1) 4.7 First Amendment to Loan Agreement, dated as of December 1, 1985, relating to Series 1982-A Industrial Development Revenue Bonds (1) 10.1 1984 Stock Option Plan (1) 10.2 Employee Stock Ownership Plan Trust Agreement (1) 10.3 PAYSOP Trust Agreement (1) 10.4 Gas Service Contract, dated July 11, 1985, between the Company and Montana Refining Company (1) 10.5 Demand Promissory Note, dated January 23, 1984, between the Company and Norwest Bank Great Falls, National Association (1) 13 Financial Statements and Schedules 22 Subsidiaries of the Registrant (included on page E-3) 24 Consent of Independent Auditors (included on page E-4) (1) Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No. 33-1672) which became effective on January 8, 1986 E-1 ************************************************************************ EX-22 2 EXHIBIT (22) SUBSIDIARIES OF THE REGISTRANT The voting stock of the following subsidiaries is 100% owned by the Registrant: State or Sovereign Name of Subsidiary of Incorporation Vesta, Inc. Montana Montana Sun, Inc. Montana Rocky Mountain Fuels, Inc. Montana E-3 *********************************************************************** EX-24 3 EXHIBIT 24 - CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Energy West Incorporated or our report dated August 25, 1995, included in the 1995 Annual Report to Shareholders of Energy West Incorporated. We also consent to the addition of the financial statement schedules, listed in the accompanying index to financial statements, to the financial statements covered by our report dated August 25, 1995, incorporated herein by reference. ERNST & YOUNG LLP Denver, Colorado August 25, 1995 E-4 *********************************************************************** EX-13 4 EXHIBIT 13 - FINANCIAL STATEMENTS AND SCHEDULES 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, 1995 and 1994, and the related consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended June 30, 1995. These financial statements 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, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1995, in conformity with generally accepted accounting principles. As described in Notes 4 and 5 to the consolidated financial statements, in 1994 the Company changed its method of accounting for postretirement benefits other than pensions and for income taxes, respectively. Denver, Colorado August 25, 1995 F-1 *********************************************************************** Energy West Incorporated and Subsidiaries Consolidated Balance Sheets June 30 1995 1994 Assets Current assets: Cash $ 507,450 $ 452,829 Temporary cash investments (at cost which approximates market) 59,556 59,384 Restricted deposit - 204,550 Accounts receivable, less allowances for uncollectible accounts of $191,168 ($189,300 at June 30, 1994) 3,042,603 2,627,531 Natural gas and propane inventory 1,686,704 699,623 Materials and supplies 458,596 388,547 Prepayments and other 59,761 199,380 Refundable income tax payments 241,798 237,023 Recoverable costs of gas purchases 125,410 400,966 Deferred income taxes-current 81,398 - Total current assets 6,263,276 5,269,833 Investments 12,476 12,476 Notes receivable due after one year 15,984 94,721 Property, plant and equipment 39,697,080 35,158,559 Less accumulated depreciation and amortization 16,146,743 14,595,743 Net property, plant and equipment 23,550,337 20,562,816 Deferred charges: Net unamortized debt issue costs 1,042,155 1,109,600 Regulatory assets for income taxes 519,484 600,867 Unrecognized postretirement obligation 352,380 372,000 Other 618,689 763,663 Total deferred charges 2,532,708 2,846,130 Total assets $32,374,781 $28,785,976 F-2 *********************************************************************** June 30 1995 1994 Capitalization and liabilities Current liabilities: Long-term debt due within one year $ 365,833 $ 343,064 Notes payable 2,620,000 1,275,000 Accounts payable-gas purchases 1,535,736 1,263,839 Accounts payable-other 735,810 228,708 Payable to employee benefit plans 443,430 188,490 Accrued vacation 267,350 267,868 Other current liabilities 817,834 580,732 Deferred income taxes-current - 44,952 Total current liabilities 6,785,993 4,192,653 Other: Deferred income taxes 2,674,928 2,611,008 Deferred investment tax credits 523,903 544,965 Contributions in aid of construction 771,702 690,525 Accumulated postretirement obligation 467,274 439,800 Regulatory liability for income taxes 176,530 191,286 Other 6,736 4,713 Total other 4,621,073 4,482,297 Commitments and contingencies (Note 10) Long-term debt (less amounts due within one year) 10,434,957 10,718,064 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 - 2,254,138 shares (2,191,478 shares at June 30, 1994) 338,121 328,722 Capital in excess of par value 2,117,730 1,643,793 Retained earnings 8,076,907 7,420,447 Total stockholders' equity 10,532,758 9,392,962 Total capitalization 20,967,715 20,111,026 Total capitalization and liabilities $32,374,781 $28,785,976 See accompanying notes. F-3 *********************************************************************** Energy West Incorporated and Subsidiaries Consolidated Statements of Income
Year ended June 30 1995 1994 1993 Operating revenue: Regulated utilities $23,300,606 $23,443,438 $24,565,127 Nonregulated operations 4,008,954 3,939,148 3,036,772 Gas trading 3,238,839 1,964,866 332,798 Total revenue 30,548,399 29,347,452 27,934,697 Operating expenses: Gas purchased 16,116,688 16,742,903 17,232,138 Cost of gas trading 2,500,363 1,667,182 305,980 Distribution, general and administrative 6,379,651 5,979,621 5,453,770 Maintenance 306,077 330,762 376,420 Depreciation and amortization 1,558,755 1,464,078 1,285,632 Taxes other than income 594,569 527,142 540,187 Total operating expenses 27,456,103 26,711,688 25,194,127 Operating income 3,092,296 2,635,764 2,740,570 Other income, net 174,878 199,014 138,736 Income before interest charges and income taxes 3,267,174 2,834,778 2,879,306 Interest charges: Long-term debt 735,813 741,866 779,701 Other 202,770 220,317 178,822 Total interest charges 938,583 962,183 958,523 Income before income taxes 2,328,591 1,872,595 1,920,783 Provision for income taxes 815,688 613,964 637,115 Income before cumulative effect of change in accounting principle 1,512,903 1,258,631 1,283,668 Cumulative effect on prior years of change in accounting for income taxes - 92,365 - Net income $ 1,512,903 $ 1,350,996 $ 1,283,668 Income per share of common equivalent stock: Income before cumulative effect of change in accounting principle $0.68 $0.57 $0.59 Cumulative effect of change in accounting for income taxes - 0.04 - Net income per common share $0.68 $0.61 $0.59
See accompanying notes. F-4 *********************************************************************** 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, 1992 $161,178 $1,519,323 $6,265,210 $ 7,945,711 Exercise of stock options into 5,200 shares of common stock at $3.64 per share 390 18,548 - 18,938 Sale of 25,174 shares of common stock at $6.88 to $7.94 per share under the Company's dividend reinvestment plan 1,888 182,369 - 184,257 Net income for the year ended June 30, 1993 - - 1,283,668 1,283,668 Cash dividends on common stock- $.32 per share - - (699,085) (699,085) Balance at June 30, 1993 163,456 1,720,240 6,849,793 8,733,489 Exercise of stock options into 3,800 shares of common stock at $7.13 to $8.19 per share 285 14,977 - 15,262 Sale of 8,293 shares of common stock at $8.87 per share under the Company's dividend reinvestment plan 1,244 72,313 - 73,557 Net income for the year ended June 30, 1994 - - 1,350,996 1,350,996 Common stock dividend, 2-for-1 stock split 163,737 (163,737) - - Cash dividends on common stock- $.36 per share - - (780,342) (780,342) 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 Cash 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
See accompanying notes. F-5 *********************************************************************** Energy West Incorporated and Subsidiaries Consolidated Statements of Cash Flows
Year ended June 30 1995 1994 1993 Operating activities Net income $ 1,512,903 $ 1,350,996 $ 1,283,668 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,777,559 1,529,310 1,332,432 Gain on sale of property, plant and equipment (4,174) (25,276) (2,061) Investment tax credit (21,062) (21,062) (21,062) Deferred income taxes 4,197 306,026 423,076 Cumulative effect of change in accounting method - 92,365 - Changes in operating assets and liabilities: Accounts receivable (415,072) 92,638 (1,060,221) Gas inventory (987,081) 506,099 (123,359) Accounts payable 778,999 (616,316) 18,977 Other assets and liabilities 958,624 (437,164) (387,346) Net cash provided by operating activities 3,604,893 2,777,616 1,464,104 Investing activities Construction expenditures (4,705,868) (2,626,221) (2,468,463) Acquisition of propane distribution assets and operations - - (1,202,062) Restricted deposit 204,550 619,367 (823,917) Proceeds from sale of property, plant and equipment 79,749 64,820 12,218 Long-term notes receivable - - (25,000) Collection of long-term notes receivable 78,737 36,526 17,615 Proceeds from contributions in aid of construction 81,177 88,276 44,292 Net cash used in investing activities (4,261,655) (1,817,232) (4,445,317)
F-6 *********************************************************************** Energy West Incorporated and Subsidiaries Consolidated Statements of Cash Flows (continued)
Year ended June 30 1995 1994 1993 Financing activities Proceeds from long-term debt $ 117,808 $ 20,000 $11,300,000 Debt issuance and reacquisition costs - (65,000) (976,692) Payment of long-term debt (335,000) (333,872) (6,890,000) Proceeds from notes payable 19,926,854 17,428,000 22,529,000 Repayment of notes payable (18,625,000) (17,491,000) (22,899,943) Sale of common stock 80,479 15,262 18,938 Dividends paid (453,586) (706,785) (514,828) Net cash provided by (used in) financing activities 711,555 (1,133,395) 2,566,475 Net increase (decrease) in cash and cash equivalents 54,793 (173,011) (414,738) Cash and cash equivalents at beginning of year 512,213 685,224 1,099,962 Cash and cash equivalents at end of year $ 567,006 $ 512,213 $ 685,224 Supplemental disclosures of cash flow information: Cash paid for: Interest $ 942,221 $ 932,159 $ 928,465 Income taxes 870,327 369,000 576,000 Noncash financing activities: Dividend reinvestment plan $ 299,037 $ 73,557 $ 184,257 ESOP shares issued 103,820 - -
See accompanying notes. F-7 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements June 30, 1995 1. Principal Accounting Policies General Energy West Incorporated (the Company) operates principally in a single business segment as a distributor of natural gas and propane to residential and commercial customers. Natural gas and propane vapor distribution operations (regulated utilities) are regulated by the Montana Public Service Commission (MPSC), the Wyoming Public Service Commission (WPSC) and the Arizona Corporation Commission. Accordingly, most of the Company's accounting policies are subject to the requirements set forth in the Federal Energy Regulatory Commission s Uniform System of Accounts. In some cases, because of the rate making process, these accounting policies differ from those used by nonregulated operations. Bulk propane distribution is a nonregulated operation. Consolidated Subsidiaries The Company s wholly-owned nonregulated subsidiaries, Vesta, Incorporated (Vesta), Montana Sun, Inc. (Montana Sun) and Rocky Mountain Fuels, Inc. (RMF), are included in the consolidated financial statements. The results of operations of these subsidiaries constitute all of the Company's nonregulated operations. All significant intercompany accounts and transactions have been eliminated in consolidation. Vesta's activities include a gas marketing division doing business as Transenergy and oil and gas exploration and development. Its principal assets are capitalized oil and gas development costs, storage field costs and equipment, and inventory. The Transenergy division currently markets gas to large industrial customers (businesses using over 60,000 Mcf of natural gas annually). Montana Sun s operating activities consist of commercial real estate development. Its significant assets consist of real estate held for future sale. RMF began operations in fiscal 1992 following the Company s acquisition of the assets and operations of six Wyoming propane distribution entities. In fiscal 1993 these operations were expanded through the acquisition of an Arizona propane distribution entity. Principal assets of RMF include bulk storage and customer tanks, delivery trucks and related equipment. F-8 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Principal Accounting Policies (continued) Natural Gas and Propane Inventory Natural gas inventory is stated at the lower of weighted average cost or net realizable value. Propane inventory is stated at the lower of first-in, first- out or net realizable value. Recoverable Costs of Gas Purchases Differences between the costs of gas considered in the Company's rate structure and actual costs are accounted for as a current asset or liability, as applicable. These differences are recovered or refunded, as applicable, in future periods by adjustment of the Company's rates. Property, Plant and Equipment Additions to property, plant and equipment are recorded at original cost when placed in service. Depreciation and amortization are recorded on a straight-line basis over estimated useful lives or the units-of-production method, as applicable, at various rates averaging approximately 4.15%, 4.32% and 4.17% during the years ended June 30, 1995, 1994 and 1993, respectively. Oil and Gas Activities Oil and gas operations are accounted for under the successful efforts method. Exploratory drilling costs are capitalized pending determination of proved reserves; all other exploration costs are expensed. All development and lease acquisition costs are capitalized. Provision for depreciation and amortization, including estimated future dismantlement and restoration costs, is determined on a field-by-field basis using the units-of-production method. When properties are sold, the asset cost and related accumulated depreciation and amortization are eliminated, with any gain or loss reflected in income. Gas Trading The Company s business activities include buying and selling of natural gas. The Company recognizes revenue and costs on gas trading transactions at the point in time when gas is delivered to the purchaser. F-9 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Principal Accounting Policies (continued) Debt Issuance and Reacquisition Costs Debt premium, discount and issuance expenses are amortized over the life of each issue. Debt reacquisition costs for refinanced debt are amortized over the remaining life of the new debt. Statement of Cash Flows For purposes of this statement, all highly liquid investments with original maturities of three months or less are considered to be cash equivalents. Financial Instruments All of the Company s financial instruments requiring fair value disclosure were recognized in the consolidated balance sheet as of June 30, 1995. Except for long-term debt, their carrying values approximate the estimated fair values. Descriptions of the methods and assumptions used to reach this conclusion are as follows: Cash, temporary cash investments, restricted deposit, accounts receivable, accounts payable, and payable to employee benefit plans: These financial instruments have short maturities, or are invested in financial instruments with short maturities. Notes receivable: These notes generally relate to energy conservation incentive programs, some of which bear favorable interest rates compared to market for similar risks. However, due to the relatively small balances of these notes, any differences between carrying value and fair value are immaterial. Notes payable: Represent lines of credit, with maturities of a year or less, bearing interest at current market rates. The fair value of the Company s long-term debt, based on quoted market prices for the same or similar issues, is less than carrying value by approximately three percent. Earnings Per Share Earnings per common share were computed based on the weighted average number of common shares outstanding and common stock equivalents, if dilutive. The weighted average number of shares has been restated for 1993 as the Company's Board of F-10 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Principal Accounting Policies (continued) Directors approved a 2-for-1 stock split effective June 24, 1994 for stockholders of record on May 31, 1994. The weighted average number of such shares at June 30 was 2,235,413 in 1995, 2,205,050 in 1994, and 2,171,448 in 1993. New Accounting Standards In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, effective for financial statements for fiscal years beginning after December 15, 1995. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. SFAS No. 121 also establishes the procedures for review of recoverablity, and measurement of impairment if necessary, of long-lived assets and certain identifiable intangibles to be held and used by an entity. The financial effects of adopting the new standard are not expected to be material to the Company's financial position or operations. Reclassifications Certain reclassifications have been made to the fiscal 1994 and 1993 consolidated financial statements to conform to the fiscal 1995 presentation. 2. Notes Payable At June 30, 1995, the Company maintained a line of credit totaling $8,000,000 with interest calculated at prime less 1/4 percent. A total of $2,620,000, $1,275,000 and $1,338,000 had been borrowed under line of credit agreements at June 30, 1995, 1994, and 1993, respectively. Borrowings on lines of credit, based upon daily loan balances, averaged $2,397,175, $2,369,671 and $2,960,151 during the years ended June 30, 1995, 1994 and 1993, respectively. The maximum borrowings outstanding on this line at any month end were $4,983,000, $4,267,000 and $4,000,000 during these same periods. The daily weighted average interest rate was 8.2%, 6.4% and 6.3% for the years ended June 30, 1995, 1994 and 1993, respectively. This line of credit expires January 1, 1996. Management expects this line of credit to be renewed for another year. F-11 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Long-Term Debt Obligations Long-term debt consists of the following: June 30 1995 1994 Series 1993 notes payable $ 7,800,000 $ 7,800,000 Industrial development revenue obligations: Series 1992A 1,200,000 1,455,000 Series 1992B 1,690,000 1,745,000 Other 110,790 61,128 Total long-term obligations 10,800,790 11,061,128 Less portion due within one year 365,833 343,064 Long-term obligations due after one year $10,434,957 $10,718,064 Series 1993 Notes Payable On June 24, 1993, the Company issued $7,800,000 of Series 1993 unsecured notes bearing interest rates ranging from 6.20% to 7.60% (6.20% at June 30, 1995), payable semiannually on June 1 and December 1 of each year, commencing December 1, 1993. Maturity dates began in 1999 and extend to 2013. At the Company's option, beginning June 1, 2003, notes maturing subsequent to 2003 may be redeemed prior to maturity, in whole or part, at redemption prices declining from 104% to 100% of face value, plus accrued interest. Industrial Development Revenue Obligations On September 15, 1992, Cascade County, Montana (the County) issued two Industrial Development Revenue Obligations, the Series 1992A Bonds for $1,700,000 and Series 1992B Bonds for $1,800,000. The Series 1992A and Series 1992B Bonds are unsecured; however, loan agreements are maintained with the Company in the same amounts. Both the Series 1992A and Series 1992B Bonds require annual principal payments on October 1 and semiannual interest payments on April 1 and October 1 of each year beginning in 1993. The Series 1992A Bonds have a final maturity in 1999 and bear interest at rates ranging from 3.25% to 5.30%. The Series 1992B Bonds have a final maturity in 2012 and bear interest at rates ranging from 3.354% to 6.50%. The restricted deposit in the consolidated balance sheet is proceeds from the Series 1992A bonds deposited in a construction fund with the trustee, Trust Corp., an entity whose Chairman and Chief Executive Officer is a significant shareholder and a member of the Company's Board of Directors. The deposit can only be drawn for specific capital projects under the terms of the related indenture. All Capital projects were completed in fiscal year 1995. F-12 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Long-Term Debt Obligations (continued) of the Company's Board of Directors. The deposit can only be drawn for specific capital projects under the terms of the related indenture. All capital projects were completed in fiscal year 1995. Aggregate Annual Maturities
Fiscal Series IDR Obligations Total Year Ending 1993 Series Series Long-Term June 30 Bonds 1992A 1992B Other Obligations 1996 $ $ 265,000 $ 55,000 $ 45,833 $ 365,833 1997 - 280,000 60,000 15,340 355,340 1998 - 295,000 60,000 17,202 372,202 1999 165,000 175,000 65,000 19,299 424,299 2000 175,000 185,000 70,000 13,116 443,116 Thereafter 7,460,000 - 1,380,000 - 8,840,000 7,800,000 1,200,000 1,690,000 110,790 10,800,790 Less current portion - 265,000 55,000 45,833 365,833 $7,800,000 $ 935,000 $1,635,000 $ 64,957 $10,434,957
The Company's long-term debt obligation agreements contain various covenants including: limiting total dividends and distributions made in the immediately preceding 60-month period to aggregate consolidated net income for such period, restricting senior indebtedness, limiting asset sales, and maintaining certain financial debt and interest ratios. 4. Retirement Plans The Company has a defined contribution pension plan (the Plan) which covers substantially all of the Company's employees. Under the Plan, the Company contributes 10% of each participant's eligible compensation. Total contributions to the Plan for the years ended June 30, 1995, 1994 and 1993 were $336,589, $279,668 and $264,160, respectively. In addition to providing benefits under the Plan, the Company provides certain health and life insurance benefits for eligible retired employees. Through June 30, 1993, the cost of these benefits was recognized as an expense when paid. The cost of these benefits for 1993 was $6,429. F-13 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Retirement Plans (continued) 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 $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, 1995 and 1994 was $352,380 and $372,000, respectively, of which $327,400 in 1995 and $363,000 in 1994 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 incremental annual increases in consolidated expenses due to adoption of SFAS No. 106 were $71,200 and $68,000 in fiscal years 1995 and 1994, respectively. Included in these amounts were $62,600 in 1995 and $58,300 in 1994 relating to regulatory operations. The MPSC will allow recovery of these costs beginning on July 1, 1995 for the utility operations in Montana. Management believes it is probable that its regulators in Wyoming and Arizona will allow recovery of these costs based upon recent industry rate decisions addressing this issue. The Company plans to fund the related annual cost by establishing and contributing to a trust from which future benefits would be paid. The following table presents the amounts recognized at June 30, 1995 and 1994 in the consolidated financial statements. 1995 1994 Accumulated postretirement benefit obligation: Retirees $154,400 $184,600 Fully eligible active plan participants 53,700 15,600 Other active plan participants 259,174 239,600 $467,274 $439,800 Net periodic postretirement benefit cost: Service cost $ 19,400 $ 18,000 Interest cost 32,200 30,400 Amortization of transition obligation 19,600 19,600 Net periodic postretirement benefit cost $ 71,200 $ 68,000 F-14 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Retirement Plans (continued) The weighted-average discount rate used in determining the accumulated postretirement benefit obligation at June 30, 1995 was 7.5 percent. The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 12.5 percent for the 1995-96 fiscal year and is assumed to decrease gradually to 6.5 percent after 7 years and remain at that level thereafter. At June 30, 1994, the weighted- average discount rate used in determining the accumulated postretirement benefit obligation was 8.0 percent. The weighted-average health care cost trend rate was 14.0 percent for the 1994-95 fiscal year and was assumed to decrease gradually to 7.0 percent after 8 years and remain at that level thereafter. Due to the minimal number of retirees receiving benefits that are not fixed and the relatively short duration of these benefits, the health care cost trend rate assumption does not have a significant effect on the amounts reported. 5. Income Tax Expense Effective July 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by FASB Statement No. 109, Accounting for Income Taxes. As permitted under the new rules, prior years financial statements have not been restated. The cumulative effect of adopting Statement 109 as of July 1, 1993, was to increase net income by $92,365 for nonregulated operations and create a regulatory asset of $600,867 and regulatory liability of $204,620 for regulated operations. The regulatory assets and liabilities represent the anticipated effects on regulated rates charged to customers which will result from the adoption of Statement 109. For the year ended June 30, 1995, state income tax rate changes in Montana and Arizona and amortization of certain liabilities resulted in a decrease in regulatory assets of $81,383 and regulatory liabilities of $14,756 for regulated entities, resulting in ending balances of $519,484 and $176,530, respectively. F-15 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. Income Tax Expense (continued) 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. Significant components of the Company s deferred tax assets and liabilities as of June 30, 1995 and 1994 are as follows: 1995 1994 Deferred tax assets: Allowance for doubtful accounts $ 55,987 $ 44,070 Unamortized investment tax credit 175,983 191,286 Contributions in aid of construction 102,458 70,809 Other nondeductible accruals 156,096 124,260 Other 42,318 36,642 Total deferred tax assets 532,842 467,067 Deferred tax liabilities: Customer refunds payable 84,525 189,501 Property, plant and equipment 2,615,597 2,489,331 Unamortized debt issue costs 215,827 231,874 Unamortized environmental study costs 101,330 81,442 Covenant not to compete 93,283 97,525 Other 15,810 33,354 Total deferred tax liabilities 3,126,372 3,123,027 Net deferred tax liabilities $2,593,530 $2,655,960 F-16 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. Income Tax Expense (continued) Income tax expense consists of the following:
Year ended June 30 1995 1994 1993 Liability Method Deferred Method Current income taxes: Federal $705,420 $490,698 $185,323 State 120,074 12,331 37,958 Total current income taxes 825,494 503,029 223,281 Deferred income taxes (benefits): Tax depreciation in excess of book 179,794 139,564 264,098 Book amortization in excess of tax (56,981) (73,435) (42,859) Recoverable cost of gas purchases (98,479) 86,341 75,161 Environmental study cleanup costs 20,539 81,442 - Bond issuance costs - - 246,161 Other 17,813 (62,016) (56,368) Total deferred income taxes 62,686 171,896 486,193 Investment tax credit, net (21,062) (21,062) (21,062) Total income taxes $867,118 $653,863 $688,412 Income taxes-operations $815,688 $613,964 $637,115 Income taxes-other income 51,430 39,899 51,297 Total income taxes $867,118 $653,863 $688,412
Income tax expense from operations differs from the amount computed by applying the federal statutory rate to pre-tax income for the following reasons:
1995 1994 1993 Tax expense at statutory rate - 34% $799,582 $607,394 $567,652 State income tax, net of federal tax benefit 77,377 38,693 56,922 Amortization of deferred investment tax credits (21,062) (21,062) (21,062) Other 11,221 28,838 33,603 Total income taxes $867,118 $653,863 $637,115
F-17 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Regulated and Nonregulated Operations Summarized financial information for the Company s regulated utility and nonregulated nonutility operations (before intercompany eliminations between regulated and nonregulated primarily consisting of gas sales from nonregulated to regulated entities, intercompany accounts receivable, accounts payable, equity, and subsidiary investment) is as follows:
June 30 1995 June 30 1994 Regulated Nonregulated Regulated Nonregulated Capital expenditures $ 3,933,828 $ 772,040 $ 2,211,940 $ 414,281 Property, plant and equipment, net: Regulated utilities $19,907,237 - $17,283,956 - Nonregulated propane - 2,811,913 - 2,541,025 Oil and gas operations - 334,704 - 227,042 Real estate held for investment - 496,483 - 510,793 Current assets 4,458,594 2,420,839 4,967,194 1,117,233 Other assets 3,884,006 496,360 4,157,392 581,411 Total assets $28,249,837 $6,560,299 $26,408,542 $4,977,504 Equity $ 8,903,740 $2,701,018 $ 8,362,673 $2,102,290 Long-term debt 8,533,074 1,901,883 9,220,711 1,497,353 Current liabilities 6,304,063 1,493,087 4,473,446 928,799 Deferred income taxes 2,727,782 299,343 2,678,634 250,851 Other liabilities 1,781,178 164,968 1,673,078 198,211 Total capitalization and liabilities $28,249,837 $6,560,299 $26,408,542 $4,977,504
1995 1994 1993 Regulated Nonregulated Regulated Nonregulated Regulated Nonregulated Revenue: Operating revenue $24,363,446 $4,077,768 $24,421,153 $3,935,760 $24,565,127 $3,743,120 Gas trading revenue - 3,238,839 - 1,964,866 - 332,798 Operating expenses: Gas purchased 15,077,466 2,170,877 15,666,853 2,050,377 15,926,510 2,011,976 Cost of gas trading - 2,500,363 - 1,667,182 - 305,980 Distribution, general and administrative 5,130,220 1,249,431 4,792,531 1,187,090 4,494,489 959,281 Maintenance 304,677 1,400 315,409 15,353 373,677 2,743 Depreciation and amortization 1,205,758 352,997 1,134,150 329,928 993,046 292,586 Taxes other than income 494,338 100,230 430,446 96,696 460,013 80,174 Operating income $ 2,150,987 $ 941,309 $ 2,081,764 $ 554,000 $ 2,317,392 $ 423,178
F-18 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Regulated and Nonregulated Operations (continued) The significant changes between fiscal years for nonregulated operations are due to acquisitions of propane entities described in Note 8. 7. Stock Options and Ownership Plans Stock Options There are two Incentive Stock Option Plans which provide for granting options to purchase up to 200,000 shares of the Company s common stock to key employees. The option price may not be less than 100% of the common stock fair market value on the date of grant (110% of the fair market value if the employee owns more than 10% of the Company s outstanding common stock). These options may not have a term exceeding five years. A summary of the activity under this plan is as follows: Number of Price Per Shares Share Fiscal 1995 Outstanding at July 1, 1994 106,948 $4.938-8.75 Granted 5,000 $9.125 Exercised (14,410) $4.938-8.75 Expired (6,950) $4.938-7.125 Outstanding at June 30, 1995 90,588 At June 30, 1995 Exercisable 90,588 Available for grant 29,652 F-19 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Stock Options and Ownership Plans (continued) Number of Price Per Shares Share Fiscal 1994 Outstanding at July 1, 1993 105,048 $3.188-7.125 Granted 7,000 $7.375-8.75 Exercised (3,800) $3.188-7.125 Expired (1,300) $3.188 Outstanding at June 30, 1994 106,948 $4.938-8.75 At June 30, 1994 Exercisable 106,948 Available for grant 27,702 Fiscal 1993 Outstanding at July 1, 1992 35,700 $3.188-6.50 Granted 74,548 $6.375-7.125 Exercised (5,200) $3.188-7.125 Outstanding at June 30, 1993 105,048 $3.188-7.125 At June 30, 1993 Exercisable 105,048 Available for grant 33,402 Employee Stock Ownership Plan In 1984, the Company established an Employee Stock Ownership Plan (ESOP) which covers most of the Company s employees. The Company has contributed and recognized as expense $129,367, $103,820 and $106,844 for the years ended June 30, 1995, 1994 and 1993, respectively. Contributions to the Plan are determined by the Board of Directors. During the years ended June 30, 1995, 1994 and 1993, the ESOP acquired 11,535 shares at $9.00 per share, 11,772 shares at $9.08 per share and 9,112 shares at $7.41 per share, respectively. F-20 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. Purchase of Assets In January 1993, the Company purchased the assets of two Arizona propane distribution entities for an aggregate purchase price of $1,200,000. Broken Bow Gas Company (Broken Bow) is an underground propane distribution entity regulated by the Arizona Corporation Commission. This acquisition was accounted for by the purchase method and the financial statements include the results of operations of the acquired assets from their respective dates of acquisition. The total purchase price was assigned to assets acquired (primarily property, plant and equipment) based on the estimated fair values of such assets at their date of acquisition. If the above acquisitions had occurred on July 1, 1992, the consolidated results of operations for the year ended June 30, 1993 would have been as follows: Year ended June 30 1993 (Unaudited) Pro forma basis: Operating revenue $27,913,000 Net income 1,240,000 Earnings per share 0.57 9. Operating Lease The Company leases a building in Cody, Wyoming. The lease expires on June 30, 2005. Future minimum rental payments will be approximately $72,000 per year from fiscal 1996 through fiscal 2005 and total future minimum lease payments of $720,000. Rental expenses related to this lease were $70,133, $73,933 and $73,737 in fiscal years 1995, 1994 and 1993, respectively. F-21 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Commitments and Contingencies Commitments The Company has entered into long-term, take or pay natural gas supply contracts which expire beginning in 1996 and ending in 2005. The contracts generally require the Company to purchase specified minimum volumes of natural gas at a fixed price which is subject to renegotiation every two years. Current prices per Mcf for these contracts range from $1.28 to $1.90. Based on current prices, the minimum take or pay obligation at June 30, 1995 for each of the next five years and in total is as follows: Fiscal Year 1996 $ 2,630,414 1997 1,659,614 1998 1,460,894 1999 1,460,894 2000 1,460,894 Thereafter 5,188,606 Total $13,861,316 Natural gas purchases under these contracts for the years ended June 30, 1995, 1994, and 1993 approximated $6,203,000, $6,901,000, and $7,400,000, respectively. The Company signed a definitive purchase agreement for the acquisition of a propane vapor system, contingent on the Company obtaining regulatory approval for an exclusive natural gas franchise for the area where this system is located. The purchase price is approximately $920,000. Environmental Contingency The Company owns property on which it operated a manufactured gas plant from 1909 to 1928. The site is currently used as a service center and to store certain equipment and materials and supplies. 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. After management became aware of the potential of contamination on this site, it initiated an assessment of the property through the assistance of a qualified consulting firm. That assessment revealed the presence of certain hazardous material in quantities exceeding tolerances established for such material by regulatory authorities. After making required notifications of that condition to federal and state regulatory authorities, a report summarizing the assessment F-22 *********************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Commitments and Contingencies (continued) was filed with the State of Montana Department of Health and Environmental Science (MDHES). Subsequent to that submittal a meeting was held with a representative of the MDHES wherein a process was agreed upon to arrive at appropriate remediation of the site. The costs incurred by the Company to date approximate $263,500 and have been capitalized as other deferred charges. Until further work is done regarding remediation alternatives, no further estimate of the costs of remediation can be made. However, management believes that regardless of the alternative selected, the costs incurred will not materially affect the Company s financial position. The Company received formal approval from MPSC to recover the costs associated with the cleanup of this site. The Company will begin recovery of costs incurred at June 30, 1995 over two years through a surcharge in billing rates effective July 1, 1995. Management intends to request that future costs be recovered over a similar time period. F-23 *********************************************************************** EX-27 5
UT YEAR JUN-30-1995 JUN-30-1995 PER-BOOK 23,550,337 0 6,263,276 2,532,708 28,460 32,374,781 338,121 2,117,730 8,076,907 10,532,758 0 0 10,434,957 2,620,000 0 0 365,833 0 0 0 8,421,233 32,374,781 30,548,399 815,688 27,456,103 27,456,103 3,092,296 174,878 3,267,174 938,583 1,512,903 0 8,076,907 856,443 735,813 3,604,893 .68 .68
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