-----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, JgUbG339GOlghaI0o57O185Q7ifO9aVqEMiWLsgl/9piVRiJ0eigq+EWE02Ob6BW tPnVd/84g75XYUmylqrzaQ== 0000043350-97-000004.txt : 19970325 0000043350-97-000004.hdr.sgml : 19970325 ACCESSION NUMBER: 0000043350-97-000004 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19970324 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENERGY WEST INC CENTRAL INDEX KEY: 0000043350 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 810141785 STATE OF INCORPORATION: MT FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-14183 FILM NUMBER: 97561776 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/A 1 THE PURPOSE OF THIS AMENDED 10-K IS TO INCLUDE SUPPLEMENTAL INFORMATION REQUESTED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, FEBRUARY 28, 1997. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-KA [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1996 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, 1996 Common Stock, $.15 Par Value - $11,997,032 The number of shares outstanding of the issuer's classes of common stock as of September 20, 1996 Common Stock, $.15 Par Value - 2,336,245 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual shareholders' report for the year ended June 30, 1996 are incorporated by reference into Parts I and II. Portions of the proxy statement for the annual shareholders meeting held November 21, 1996 are incorporated by reference into Part III. PART I Item 2. - Properties ---------- The Company owns all of its properties in Great Falls, including an office building, a service and operating center, regulating stations and its distribution system. In Wyoming, the Company owns its distribution system, including 167 miles of transmission pipeline. Office and service buildings for the Cody division are leased under long-term leases. RMF owns buildings, propane tanks and related metering and regulating equipment for the Wyoming and Arizona propane distribution operations. The Company owns mains and service lines for the Broken Bow division's propane vapor distribution operation in Payson, Arizona. In June, 1996, Petrogas a division of RMF sold its buildings and improvements in Payson, Arizona to an outside party and signed a lease agreement with the same party for a period of ten (10) years, with a provision of extension of the lease for two successive five (5) year periods. RMF has the right of first refusal to purchase the property back at the end of the initial term or either extension term. 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 $320,000 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, results of operations and net cash flows. 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. The total recoveries collected through June 30, 1996 is $214,000. 14 ***************************************************************************** ITEM 7 Energy West Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS RESULTS OF CONSOLIDATED OPERATIONS Fiscal 1996 Compared to Fiscal 1995 Net Income The Company's net income for fiscal 1996 was $1,407,000 compared to $1,513,000 in fiscal 1995 a decrease of $106,000 or 7% from 1995. Net income in Fiscal 1996 included a gain on the sale of assets of approximately $236,000. The following summary describes the components of the change between years. Revenue Operating revenues increased approximately 3%. Regulated revenues decreased 3% compared to the prior year due to a rate decrease in the Great Falls division in Montana, effective July 1, 1995. This decrease in rates was partially offset by colder weather this year than one year ago in the Great Falls and Cody utility divisions, increased transport revenues in the Cody division operations and the West Yellowstone revenues in this start-up operation. Nonregulated revenues increased approximately 6%, from increased bulk propane sales in the areas served by Wyo L-P gas in Wyoming, Missouri River Propane in Montana and Petrogas in Arizona. Both Missouri River Propane and Petrogas, sell propane to related regulated utilities Cascade Gas Company and Broken Bow Gas Company respectively. Operating revenues in Energy West Resources decreased by 20% however gas trading revenues increased by 34% due to customer growth and an increase in volumes. Gross Margin Gross margins (operating revenues less cost of gas purchased and cost of gas trading) increased approximately $664,000 in 1996. Regulatory gross margins increased approximately $740,000 because of higher margins from natural gas sales in the Great Falls and Cody divisions. Margins were tempered by the effects of a rate reduction in the Great Falls division of approximately $260,000 annually, ordered by the Montana Public Service Commission which went into effect on July 1, 1995. In addition, margins of West Yellowstone are reflected in 1996 this fiscal year. Nonregulated gross margins decreased approximately $84,000, primarily due to smaller margins in Energy West Resources' gas marketing operations. 1 *********************************************************************** Revenues Regulated revenues decreased from $24,363,000 in fiscal 1995 to $23,672,000 in fiscal 1996 or 3%, primarily due to a decrease in the revenues of the Great Falls division of approximately $1,550,000, due to a $260,000 rate decrease ordered by the Montana Public Service Commission and a reduction in gas costs reducing rates by approximately $290,000 and the shift of Malmstrom Air Force Base revenues to a transportation customer, further reducing revenues by approximately $1,000,000. This was offset by the inclusion of West Yellowstone revenues of approximately $300,000 and increased Cody division revenues of approximately $330,000, due to increased volumes sold due to customer growth and weather and higher transportation revenues and increases in the Broken Bow and Cascade divisions, due to customer growth. Gas purchases decreased from $15,077,500 in fiscal 1995 to $13,646,200 in fiscal 1996 or 10%, primarily due to a reduction in natural gas costs. Operating Income Regulated operating income increased approximately $65,000 in fiscal 1996 or 3%, primarily due to increased gross margins of approximately $740,000, due to customer growth, colder weather and higher transportation sales and the inclusion of West Yellowstone margins. This was offset by increases in distribution, general, administrative and general expenses of approximately $490,000, due to operations growth and inflation, increases in depreciation and amortization expenses of approximately $153,000, due to additional utility plant and increases in taxes other than income of approximately $29,000, due to higher property taxes in all three states served by Energy West. Nonregulated operating income decreased approximately $190,000 in fiscal 1996 or 20%, due to smaller margins in Energy West Resources' gas marketing operations of approximately $84,000, higher operating and maintenance expenses of approximately $156,000 due to inflation and growth of nonregulated operations, offset partially by lower depreciation and amortization costs. 2 *********************************************************************** Other Expenses Operating expenses (excluding cost of gas sales) increased approximately $2,042,000 or 18% in 1996. The primary reason for this increase was due to normal inflationary trends, lower capitalized payroll since the completion of the West Yellowstone system as well as the addition of West Yellowstone's utility operating expenses this fiscal year. As a result of the above changes, operating income decreased 4% from $3,092,000 in 1995 to $2,965,000 in 1996. Total interest expense for the Company was $1,243,000 for fiscal 1996, up from $939,000 in fiscal 1995, due to higher short-term borrowing used in expansion of the Company's utility systems. Other additions to or deductions from operating income in determining net income remained comparable between the two years. 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 $92,000 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, representing 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 purchased 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. 3 *********************************************************************** Other Expenses Operating expenses (excluding cost of gas sales) increased approximately $538,000 in 1995. The primary reason 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, 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. OPERATING RESULTS OF THE COMPANY'S UTILITY OPERATIONS Years Ended June 30 1996 1995 1994 ---- ---- ---- (in thousands) Operating revenues: Great Falls division $15,737 $16,812 $16,900 Cody division 5,940 5,609 5,813 Broken Bow division 1,995 1,942 1,708 ------- ------- ------- Total operating revenues 23,672 24,363 24,421 Gas purchased 13,646 15,077 15,667 ------- ------- ------- Gross Margin 10,026 9,286 8,754 Operating expenses 7,810 7,136 6,673 Interest charges [see note below] 1,145 908 895 Other utility (income) expense-net (118) (126) (106) Federal and state income taxes 385 454 410 ------- ------- ------- Net utility income $804 $ 914 $882 ======= ======= ======= [interest charges for utility and non-utility operations do not equal total interest charges for the Company, due to eliminating entries between entities.] Fiscal 1996 Compared to Fiscal 1995 4 *********************************************************************** Revenues and Gross Margins Utility operating revenues in fiscal 1996 were approximately $23,672,000 compared to $24,363,000 in fiscal 1995. Gross margin, which is defined as operating revenues less gas purchased, was approximately $10,026,000 for fiscal 1996 compared to approximately $9,286,000 in fiscal 1995. Overall revenues decreased from fiscal 1995 due primarily to a $250,000 rate decrease in the Great Falls division in Montana, effective July 1, 1995. In addition, Malmstrom AFB became a transport customer of the Great Falls division in Fiscal 1996, further reducing operating revenues. Energy West Resources sold natural gas to Malmstrom AFB in Fiscal 1996. This decrease in rates and the Malmstrom change to transport was tempered by colder weather this year than one year ago in all utility divisions and recognition of West Yellowstone revenues this year in this start-up operation. While utility revenues decreased from fiscal 1995, margins increased approximately 8% for fiscal 1996, primarily due to higher margins from natural gas sales in the Great Falls and Cody divisions and propane sales in the Broken Bow division because of customer growth and colder weather than one year ago in the Great Falls and Cody divisions and the addition of West Yellowstone's margins in fiscal 1996, in this start-up operation. The winter heating season in the Great Falls division in fiscal 1996 was approximately 10% colder than fiscal 1995 and 8% colder than "normal" (i.e., the average temperature during the preceding 30 years). The winter heating season in the Cody division was approximately 5% colder than fiscal 1995, and very close to normal. The Broken Bow division experienced an 18% warmer period than 1995 and 15% warmer period than normal. Operating Expenses Utility operating expenses, exclusive of the cost of gas purchased and federal and state income taxes, were approximately $7,810,000 for fiscal 1996, as compared to approximately $7,136,000 for fiscal 1995. The 9% increase in the period is due to normal inflationary trends, less payroll capitalized since the completion of the West Yellowstone system as well as the addition of West Yellowstone's utility operating expenses of approximately $257,000 this fiscal year in this start-up operation. Interest Charges Interest charges allocable to the Company's utility divisions were approximately $1,146,000 in fiscal 1996, as compared to approximately $908,000 in fiscal 1995. Long term debt interest decreased, however short-term interest increased primarily due to facility expansion, which has been temporarily financed with short-term debt. Income Taxes State and federal income taxes of the company's utility divisions was approximately $385,000 in fiscal 1996, as compared to approximately $454,000 in fiscal 1995. The 15% decrease was primarily attributable to a $184,000 decrease in pre-tax income of the utility divisions. 5 *********************************************************************** 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. 6 *********************************************************************** OPERATING RESULTS OF EACH OF THE COMPANY'S NON-UTILITY SUBSIDIARIES Years Ended June 30 1996 1995 1994 ---- ---- ---- (in thousands) ROCKY MOUNTAIN FUELS (RMF) Operating revenues $4,352 $3,902 $3,759 Cost of propane 2,540 2,171 2,050 Operating expenses 1,548 1,484 1,399 Other (income) expense-net (64) (33) (67) Gain on sale lease back (236) 0 0 Interest expense [see note below] 112 87 113 Federal and state income taxes 181 71 85 Cumulative effect on prior years of change in accounting for income taxes 4 ------ ------ ------ Net income $ 271 $ 122 $ 183 ====== ====== ====== ENERGY WEST RESOURCES (Formerly Vesta-Transenergy) Operating revenues $ 61 $ 76 $ 77 Gas trading revenue 4,348 3,239 1,965 Operating expenses 201 172 170 Cost of gas trading 3,773 2,500 1,667 Other (income) expense-net (20) (43) (44) Federal and state income taxes 169 259 94 Cumulative effect on prior years of change in accounting for income taxes 42 ------ ------ ------ Net income $ 285 $ 427 $ 197 ====== ====== ====== MONTANA SUN Operating revenues $ 97 $ 99 $100 Operating expenses 48 47 61 Other (income) expense-net (24) (16) (24) Interest expense [see note below] 0 (14) (4) Federal and state income taxes 27 31 26 Cumulative effect on prior years of change in accounting for income taxes 46 ------ ------ ------ Net income $ 47 $ 51 $ 87 ====== ====== ====== Total Non-Utility Net Income $ 603 $ 600 $ 467 ====== ====== ====== [interest charges for utility and non-utility operations do not equal total interest charges for the Company, due to eliminating entries between entities.] 7 *********************************************************************** Non-Utility Operations Rocky Mountain Fuels For the fiscal year ended June 30, 1996, Rocky Mountain Fuels (RMF) generated net income of approximately $271,000 compared to $122,000 for fiscal 1995. Approximately $140,000 of RMF's increase in net income for fiscal 1996 was attributable to the Petrogas division in Arizona, because of a gain on a sale of assets of Petrogas and approximately $76,000 was due to decreasing depreciation expense in all of RMF's operating divisions as a result of changing the estimated useful lives for certain propane properties from twelve and fifteen years to twenty years, to better reflect its useful lives. Missouri River Propane and Big Horn Answering Service had a loss for the fiscal year. 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 and approximately $63,000 was attributable to the Petrogas division. 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 and Big Horn Answering Service account for the balance, which had a net loss for fiscal 1995. Energy West Resources (Formerly Vesta - Transenergy) For fiscal 1996, Energy West Resources' (EWR) net income was approximately $285,000 compared to $427,000 for fiscal 1995, primarily due to lower margins experienced by its gas marketing operations. Although margins were lower than 1995, EWR's average margin is outstanding and sales volumes have increased 34%. EWR expenses were also higher than 1995 because of power marketing investigations, salary and expenses for an EWR specific employee, increased direct charges and overheads allocated to EWR from EWST management in connection with efforts to enhance EWR operations. For fiscal 1995, EWR net income was $427,000 compared to $198,000 for fiscal 1994, primarily due to increased gas marketing margins. In fiscal 1995, Energy West Resources' 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. Montana Sun For fiscal 1996, Montana Sun's net income was approximately $47,000 as compared to $51,000 for fiscal 1995. 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. 8 *********************************************************************** Liquidity and Capital Resources The Company's operating capital needs, as well as dividend payments and capital expenditures, are generally funded through cash flow from operating activities, short-term borrowing and liquidation of temporary cash investments. Historically, to the extent cash flow has not been sufficient to fund capital expenditures, the Company has borrowed short-term or issued equity securities to fund capital expansion projects or reduce short-term borrowing. The Company's short-term borrowing requirements vary according to the seasonal nature of its sales and expense activity. The Company has greater need for short-term borrowing during periods when internally generated funds are not sufficient to cover all capital and operating requirements, including costs of gas purchases and capital expenditures. In general, the company's short-term borrowing needs for purchases of gas inventory and capital expenditures are greatest during the summer months and the Company's short-term borrowing needs for financing of customer accounts receivable are greatest during the winter months. In addition during the past two years, the Company has used short-term borrowing to finance the acquisition of propane operations and LNG for West Yellowstone Gas. Short-term borrowing utilized for construction or property acquisitions generally has been on an interim basis and converted to long-term debt and equity when it becomes economical and feasible to do so. At June 30, 1996, the Company had a $11,000,000 bank line of credit, of which $7,175,000 had been borrowed under the credit agreement. The short-term borrowings bear interest at the rate of 8% per annum as of June 30, 1996. The company generated net cash from operating activities for fiscal 1996 of approximately $547,000 as compared to $3,605,000 for fiscal 1995. This change from fiscal 1995 is attributed to a $106,000 decrease in net income, a $236,000 gain on sale-leaseback, a reduction in accounts payable of approximately $1,000,000, an increase in recoverable costs of gas purchases and prepaid gas of approximately $1,627,000 and other miscellaneous working capital changes of approximately $1,170,000 offset by approximately $491,000 increase in deferred income taxes, an increase in gas inventory of approximately $470,000 and an increase in accounts receivable of approximately $80,000. Cash used in investing activities was approximately $3,968,000 for fiscal 1996, as compared to $4,262,000 for fiscal 1995. Capital expenditures for fiscal 1996 was approximately $4,591,000, primarily due to system expansion in Payson, Arizona and all other areas and continued expansion of the West Yellowstone system. Partially offsetting these capital expenditures were proceeds received from a sale lease back in Payson, Arizona of approximately $525,000, proceeds from the sale of property, plant and equipment of $27,000 and proceeds from contributions in aid of construction of approximately $63,000. 9 *********************************************************************** 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. Capital expenditures of the Company are primarily for expansion and improvement of its gas utility properties. To a lesser extent, funds are also expended to meet the equipment needs of the Company's operating subsidiaries and to meet the Company's administrative needs. The Company's capital expenditures were approximately $4.6 million in fiscal 1996 and approximately $4.7 million for fiscal 1995 and $2.6 million in fiscal 1994, including RMF's expenditures for the acquisition of propane operations. During fiscal 1996, approximately $1.3 million has been expended for the construction of the natural gas system in West Yellowstone, Montana and approximately $1 million had been expended for gas system expansion projects for new subdivisions in the Broken Bow division's service area and approximately $350,000 for additions to the office and the east storage site of Petrogas in Payson, Arizona. Capital expenditures are expected to be approximately $3.6 million in fiscal 1997, including approximately $1.4 million for continued expansion 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. The major factors which will affect the Company's future results include general and regional economic conditions, weather, customer retention and growth, the ability to meet competitive pressures and to contain costs, changes in the competitive environment in the Company's non-regulated segment, the adequacy and timeliness of rate relief, cost recovery and necessary regulatory approvals, and continued access to capital markets. 10 *********************************************************************** The regulatory structure which has historically embraced the gas industry has been in the process of transition. Legislative and regulatory initiatives, at both the federal and state levels, are designed to promote competition and will continue to impose additional pressure on the Company's ability to retain customers and to maintain current rate levels. The changes in the gas industry have allowed commercial and industrial customers to negotiate their own gas purchases directly with producers or brokers. To date, the changes in the gas industry have not had a negative impact on earnings or cash flow of the Company's regulated segment. The accounts and rates of the Company's regulated segment are subject, in certain respects, to the requirements of the Montana, Wyoming and Arizona public utilities commissions. As a result, the Company's regulated segment maintains its accounts in accordance with the requirements of those regulators. The application of generally accepted accounting principles by the Company's regulated segments differ in certain respects from application by the non-regulated segment and other non-regulated businesses. The regulated segment prepares its financial statements in accordance with Statement of Accounting Standards No. 71 --"Accounting for the Effects of Certain Types of Regulation" (SFAS 71). In general, SFAS 71 recognizes that accounting for rate-regulated enterprises should reflect the relationship of costs and revenues. As a result, a regulated utility may defer recognition of cost (a regulatory asset) or recognize an obligation (a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in revenues. Accordingly, the Company has deferred certain costs, which will be amortized over various periods of time. The costs deferred are further described in the Company's financial statements and the notes thereto. To the extent that collection of such costs or payment of liabilities is no longer probable as a result of changes in regulation and/or the Company's competitive position, the associated regulatory asset or liability will be reversed with a charge or credit to income. If the Company's regulated segment were to discontinue the application of SFAS 71, the accounting impact would be an extraordinary, non-cash charge to operations that could be material to the financial position and results of operation of the Company. However, the Company is unaware of any circumstances or events in the foreseeable future that would cause it to discontinue the application of SFAS 71. 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 1996 Annual Report. SEC Ratio of Earnings to Fixed Charges For the twelve months ended June 30, 1996, 1995 and 1994, the Company's ratio of earnings to fixed charges was 2.42, 2.93 and 2.64 times, respectively. Fixed charges include interest related to long- term debt, short-term borrowing, certain lease obligations and other current liabilities. 11 *********************************************************************** 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 The Company adopted, effective July 1, 1993, SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This standard requires that the projected future cost of providing postretirement benefits be recognized as an expense as employees render service rather than when paid. Effective for fiscal year 1994, the Company modified its plan for these benefits and has elected to pay eligible retirees (post 65 years of age) $125 per month in lieu of contracting for health and life insurance benefits. The amount of this payment is fixed and will not increase with medical trends or inflation. The Company made a change to the plan, effective July 1, 1996 allowing pre-65 retirees and their spouses to remain on the same medical plan as active employees by contributing 125% of the current COBRA rate to retain this coverage. The increased liability from this change is $269,200. The Company expects regulators in Montana and Wyoming to allow recovery of the additional costs associated with the plan change. The adoption of SFAS No. 106 did not have a significant effect upon results of operations. See Note 4 to the Consolidated Financial Statement for additional information. 12 *********************************************************************** Environmental Issues The Company owns property on which it operated a manufactured gas plant from 1909 to 1928. The site is currently used as a service center 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 Environment 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 $320,000 and have been capitalized as other deferred charges. Until further work is done regarding remediation alternative, 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 results of operations and net cash flows. The Company received formal approval from MPSC to recover the costs associated with the cleanup of this site. The Company has begun recovery of costs incurred at June 30, 1995 over two years through a surcharge in billing rates effective July 1, 1995. The total of recoveries collected through June 30, 1996 is $214,000. Management intends to request that future costs be recovered over a similar time period. However, the Company cannot give assurance that such costs will be recovered in that regulatory process. 13 *********************************************************************** 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. In December, 1995, the Wyoming Public Service Commission granted a natural gas franchise to a competing utility, which now serves electricity in the Jackson Hole area. Since the definitive 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, that agreement has now become nullified. The costs of the Jackson project were written off through March 31, 1996 of approximately $113,000, which reduced earnings by approximately $.03 per share. In June, 1996, the Great Falls division filed a rate adjustment application with the Montana Public Service Commission of approximately $386,000, to recover increased gas supply costs, as part of an annual filing made by the Great Falls division to balance gas supply costs against gas revenues. This filing does not increase the Great Falls division's margins. In July, 1996, the Great Falls division file a general rate increase with the Montana Public Service Commission for approximately $963,000, which reflects increased operating, maintenance and depreciation costs as well as a change in the cost of capital. The Great Falls division has applied for interim rate relief of approximately $530,000 and the division expects interim relief no later than November, 1996. If the Montana Public Service Commission approves the Great Falls division's rate filing, the impact of rate relief would increase earnings per share on an annual basis of approximately $.26 per share and would increase Fiscal 1997 earnings by approximately $.07 per share. The Rate Hearing will be held in late Fiscal 1997. 14 *********************************************************************** EX-24 2 Exhibit 24 Consent of Independent Auditors We consent to the use of our report dated August 15, 1996, incorporated by reference in the Annual Report (Form 10-K) of Energy West Incorporated for the year ended June 30, 1996, with respect to the consolidated financial statements, as amended, and the related financial statement schedule, as amended, included in this Form 10- K/A. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Denver, Colorado March 21, 1997 EX-13 3 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, 1996 and 1995, and the related consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended June 30, 1996. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. As described in Notes 4 and 5 to the consolidated financial statements, the Company changed its method of accounting for postretirement benefits other than pensions and for income taxes, respectively, in 1994. \s\ ERNST & YOUNG LLP Denver, Colorado August 15, 1996 F-1 ****************************************************************************** Energy West Incorporated and Subsidiaries Consolidated Balance Sheets June 30 1996 1995 ------------------------------- Assets Current assets: Cash and cash equivalents $ 893,301 $ 507,450 Temporary cash investments (at cost which approximates market) - 59,556 Accounts receivable, less allowances for uncollectible accounts of $208,106 ($191,168 at June 30, 1995) 3,486,328 3,042,603 Natural gas and propane inventory 2,200,778 1,686,704 Materials and supplies 543,316 458,596 Prepayments and other 602,427 59,761 Refundable income tax payments 412,662 241,798 Recoverable costs of gas purchases 953,392 125,410 Deferred income taxes current - 81,398 ------------------------------- Total current assets 9,092,204 6,263,276 Investments 12,476 12,476 Notes receivable due after one year 9,190 15,984 Property, plant and equipment 43,919,358 39,697,080 Less accumulated depreciation and amortization 17,829,528 16,146,743 ------------------------------- Net property, plant and equipment 26,089,830 23,550,337 Deferred charges: Net unamortized debt issue costs 974,876 1,042,155 Regulatory assets for income taxes 443,918 519,484 Unrecognized postretirement obligation 332,800 352,380 Other 539,379 618,689 ------------------------------- Total deferred charges 2,290,973 2,532,708 ------------------------------- Total assets $37,494,673 $32,374,781 =============================== F-2 ****************************************************************************** Energy West Incorporated and Subsidiaries Consolidated Balance Sheets June 30 1996 1995 ------------------------------- Capitalization and liabilities Current liabilities: Long-term debt due within one year $ 348,044 $ 365,833 Notes payable 7,175,000 2,620,000 Accounts payable gas purchases 1,226,508 1,535,736 Accounts payable other 826,885 735,810 Payable to employee benefit plans 508,890 443,430 Accrued vacation 327,897 267,350 Other current liabilities 420,954 817,834 Deferred income taxes current 253,385 - ------------------------------- Total current liabilities 11,087,563 6,785,993 Other: Deferred Income Taxes 2,796,084 2,674,928 Deferred investment tax credits 502,841 523,903 Contributions in aid of construction 834,917 771,702 Accumulated postretirement obligation 507,386 467,274 Regulatory liability for income taxes 162,121 176,530 Other 17,799 6,736 ------------------------------- Total other 4,821,148 4,621,073 Long-term debt (less amounts due within one year) 10,045,714 10,434,957 Commitments and contingencies (Note 10) 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 - 2,321,314 shares (2,254,138 shares at June 30, 1995) 348,198 338,121 Capital in excess of par value 2,635,540 2,117,730 Retained earnings 8,556,510 8,076,907 ------------------------------- Total stockholders' equity 11,540,248 10,532,758 ------------------------------- Total Capitalization 21,585,962 20,967,715 ------------------------------- Total capitalization and liabilities $37,494,673 $32,374,781 =============================== See accompanying notes. F-3 ****************************************************************************** Energy West Incorporated and Subsidiaries Consolidated Statements of Income Year ended June 30 1996 1995 1994 --------------------------------------- Operating revenue: Regulated utilities $23,672,186 $24,363,446 $24,421,153 Nonregulated operations 3,297,583 2,946,114 2,961,433 Gas trading 4,348,239 3,238,839 1,964,866 --------------------------------------- Total operating revenue 31,318,008 30,548,399 29,347,452 Operating expenses: Gas purchased 14,972,454 16,116,688 16,742,903 Cost of gas trading 3,751,053 2,500,363 1,667,182 Distribution, general and administrative 6,924,391 6,379,651 5,979,621 Maintenance 408,590 306,077 330,762 Depreciation and amortization 1,667,256 1,558,755 1,464,078 Taxes other than income 629,428 594,569 527,142 --------------------------------------- Total operating expenses 28,353,172 27,456,103 26,711,688 --------------------------------------- Operating income 2,964,836 3,092,296 2,635,764 Gain on sale of assets 236,291 - - Other income, net 214,902 174,878 199,014 --------------------------------------- Income before interest charges and income taxes 3,416,029 3,267,174 2,834,778 Interest charges: Long-term debt 709,872 735,813 741,866 Short-term and other 532,866 202,770 220,317 --------------------------------------- Total interest charges 1,242,738 938,583 962,183 --------------------------------------- Income before income taxes 2,173,291 2,328,591 1,872,595 Provision for income taxes 765,925 815,688 613,964 --------------------------------------- Income before cumulative effect of change in accounting principle 1,407,366 1,512,903 1,258,631 Cumulative effect on prior years of change in accounting for income taxes - - 92,365 --------------------------------------- Net income $ 1,407,366 $ 1,512,903 $ 1,350,996 ======================================= Income per share of common equivalent stock: Income before cumulative effect of change in accounting principle $.61 $.68 $.57 Cumulative effect of change in accounting for income taxes - - .04 --------------------------------------- Net income per common share $.61 $.68 $.61 ======================================= 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, 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 Exercise of stock options into 13,680 shares of common stock at $4.875 to $7.125 per share 2,052 72,918 - 74,970 Sale of 37,611 shares of common stock at $8.00 to $9.50 per share under the Company's dividend reinvestment plan 5,642 320,158 - 325,800 Issuance of 15,889 shares of common stock to ESOP at estimated fair value of $8.00 per share 2,383 124,734 - 127,117 Net income for the year ended June 30, 1996 - - 1,407,366 1,407,366 Cash dividends on common stock $.405 per share - - (927,763) (927,763) ---------------------------------------------- Balance at June 30, 1996 $348,198 $2,635,540 $8,556,510 $11,540,248 ============================================== See accompanying notes. F-5 ****************************************************************************** Energy West Incorporated and Subsidiaries Consolidated Statements of Cash Flows Year ended June 30 1996 1995 1994 ------------------------------------------ Operating activities Net income $ 1,407,366 $ 1,512,903 $ 1,350,996 Adjustments to reconcile net income to cash flow from operations: Depreciation and amortization 1,833,511 1,777,559 1,529,310 (Gain) on sale lease of assets (247,697) (4,174) (25,276) Investment tax credit (21,062) (21,062) (21,062) Deferred income taxes 495,105 4,197 306,026 Cumulative effect of change in accounting method - - 92,365 Changes in operating assets and liabilities: Accounts receivable (443,725) (415,072) 92,638 Natural gas and propane inventory (514,074) (987,081) 506,099 Accounts payable (218,153) 778,999 (616,316) Recoverable costs of gas purchases (827,982) 275,556 (134,502) Prepaid gas (523,212) - - Other assets and liabilities (333,878) 682,896 (243,278) ------------------------------------------ Net cash provided by operating activities 606,199 3,604,721 2,837,000 Investing activities Construction expenditures (4,590,609) (4,705,868) (2,626,221) Restricted deposit - 204,550 619,367 Proceeds from sale of assets 552,160 79,749 64,820 Collection of long-term notes receivable 6,794 78,737 36,526 Proceeds from contributions in aid of construction 63,215 81,177 88,276 ------------------------------------------ Net cash used in investing activities (3,968,440) (4,261,655) (1,817,232) F-6 ****************************************************************************** Energy West Incorporated and Subsidiaries Consolidated Statements of Cash Flows (continued) Year ended June 30 1996 1995 1994 ------------------------------------------ Financing activities Proceeds from long-term debt $ - $ 117,808 $ 20,000 Debt issuance and reacquisition costs - - (65,000) Payment of long-term debt (407,032) (335,000) (333,872) Proceeds from notes payable 20,965,000 19,926,854 17,428,000 Repayment of notes payable (16,410,000) (18,625,000) (17,491,000) Sale of common stock 74,970 80,479 15,262 Dividends paid (474,846) (453,586) (706,785) ------------------------------------------ Net cash provided by (used in) financing activities 3,748,092 711,555 (1,133,395) ------------------------------------------ Net increase (decrease) in cash and cash equivalents 385,851 54,621 (113,627) Cash and cash equivalents at beginning of year 507,450 452,829 566,456 ------------------------------------------ Cash and cash equivalents at end of year $ 893,301 $ 507,450 $ 452,829 ========================================== Supplemental disclosures of cash flow information: Cash paid for: Interest $ 1,242,035 $ 942,221 $ 932,159 Income taxes 498,461 870,327 369,000 Noncash financing activities: Dividend reinvestment plan 325,800 299,037 73,557 ESOP shares issued 127,117 103,820 - See accompanying notes. F-7 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements June 30, 1996 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, Energy West Resources, Inc. ("EWR") (formerly Vesta, Inc.), 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. EWR's activities include a gas marketing operation and oil and gas exploration and development. Its principal assets are capitalized oil and gas development costs, storage field costs and equipment, and inventory. EWR 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) ============================================ Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Natural Gas and Propane Inventory - --------------------------------- Natural gas inventory and propane inventory are stated at the lower of weighted average cost or net realizable value. Recoverable Costs of Gas Purchases - ---------------------------------- Differences between the costs of gas approved by regulators in the Company's rate structure and actual gas 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 3.93%, 4.15% and 4.32% during the years ended June 30, 1996, 1995 and 1994, respectively. During the fourth quarter of 1996, the estimated useful lives for certain propane properties were increased from twelve and fifteen years to twenty years to better reflect their estimated useful lives. This change in estimate reduced depreciation expense by approximately $83,000 in 1996. 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 F-9 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Principal Accounting Policies (continued) ============================================ 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 the buying and selling of natural gas. The Company recognizes revenue and costs on gas trading transactions when gas is delivered to the purchaser. 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. Consolidated Statements of Cash Flows - ------------------------------------- For purposes of these statements, 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, 1996. 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, 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. F-10 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Principal Accounting Policies (continued) ============================================ 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 approximately 99% of the carrying value. 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 such shares at June 30 was 2,298,734 in 1996, 2,235,413 in 1995, and 2,205,050 in 1994. 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 recoverability, 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. F-11 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Principal Accounting Policies (continued) ============================================ SFAS No. 123, Accounting for Stock-Based Compensation, was issued in October 1995. This standard addresses the timing and measurement of stock-based compensation expense. The Company has elected to retain the approach of Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees (the intrinsic value method), for recognizing stock-based expense in the consolidated financial statements. The Company will adopt SFAS No. 123 in 1997 with respect to the disclosure requirements set forth therein for companies retaining the intrinsic value approach of APB No. 25. Effects of Regulation - --------------------- All regulatory assets have been formally approved by the applicable regulator, although other than environmental cleanup costs, no return on assets is allowed by the regulators. The Company uses the lives for depreciation as defined by the regulators which approximates the economic lives for GAAP. Reclassifications - ----------------- Certain reclassifications have been made to the fiscal 1995 and 1994 consolidated financial statements to conform to the fiscal 1996 presentation. 2. Notes Payable ================ At June 30, 1996, the Company maintained a line of credit totaling $11,000,000 with interest calculated at prime less 1/4 percent. A total of $7,175,000, $2,620,000 and $1,275,000 had been borrowed under line of credit agreements at June 30, 1996, 1995, and 1994, respectively. Borrowings on lines of credit, based upon daily loan balances, averaged $6,166,380, $2,397,175 and $2,369,671 during the years ended June 30, 1996, 1995 and 1994, respectively. The maximum borrowings outstanding on this line at any month end were $9,415,000, $4,983,000 and $4,267,000 during these same periods. The daily weighted average interest rate was 8.5%, 8.2% and 6.4% for the years ended June 30, 1996, 1995 and 1994, respectively. This line of credit expires January 15, 1997. Management expects this line of credit to be renewed for another year. F-12 ****************************************************************************** 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 1996 1995 -------------------------- Series 1993 notes payable $ 7,800,000 $ 7,800,000 Industrial development revenue obligations: Series 1992A 935,000 1,200,000 Series 1992B 1,635,000 1,690,000 Other 23,758 110,790 -------------------------- Total long-term obligations 10,393,758 10,800,790 Less portion due within one year 348,044 365,833 -------------------------- Long-term obligations due after one year $10,045,714 $10,434,957 Series 1993 Notes Payable - ------------------------- On June 24, 1993, the Company issued $7,800,000 of Series 1993 unsecured notes bearing interest at rates ranging from 6.20% to 7.60% (6.20% at June 30, 1996), payable semiannually on June 1 and December 1 of each year, commencing on December 1, 1993. Maturity dates begin 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 3.35% to 6.50%. F-13 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Long-Term Debt Obligations (continued) ========================================= Aggregate Annual Maturities - --------------------------- --IDR Obligations-- Fiscal Series ------------------- Total Year Ending 1993 Series Series Long-Term June 30 Notes 1992A 1992B Other Obligations - --------------------------------------------------------------------------- 1997 $ - $280,000 $ 60,000 $ 8,044 $ 348,044 1998 - 295,000 60,000 6,959 361,959 1999 165,000 175,000 65,000 8,032 413,032 2000 175,000 185,000 70,000 723 430,723 2001 370,000 - 75,000 - 445,000 Thereafter 7,090,000 - 1,305,000 - 8,395,000 ------------------------------------------------------------- 7,800,000 935,000 1,635,000 23,758 10,393,758 Less current portion - 280,000 60,000 8,044 348,044 ------------------------------------------------------------- $ 7,800,000 $ 655,000 $ 1,575,000 $15,714 $ 10,045,714 ============================================================= 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, 1996, 1995 and 1994 were $383,018, $336,589 and $279,668, respectively. The Company adopted, effective July 1, 1993, SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. This standard requires that the projected future cost of providing postretirement benefits be recognized as an expense as employees render service rather than when paid. Effective for fiscal year 1994, the Company modified its plan for these benefits and has elected to pay eligible retirees (post-65 years of age) $125 per month in lieu of contracting for health and life insurance benefits. The amount of this payment is fixed and will not increase with medical trends or inflation. The Company's transition obligation at June 30, 1996 and 1995 was F-14 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Retirement Plans (continued) =============================== $332,800 and $352,380, respectively, of which $288,600 in 1996 and $327,400 in 1995 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 $70,900 and $71,200 in fiscal years 1996 and 1995, respectively. Included in these amounts were $58,100 in 1996 and $62,600 in 1995 relating to regulatory operations. The MPSC allowed 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 will allow recovery of these costs based upon recent industry rate decisions addressing this issue. The Company has established a VEBA trust fund and is contributing to that trust the annual expense of the plan. The balance in that trust after benefit payments in fiscal year 1996 is $61,750. The Company made a change to the plan, effective July 1, 1996, allowing pre- 65 retirees and their spouses to remain on the same medical plan as active employees by contributing 125% of the current COBRA rate to retain this coverage. The increased liability from this change is $269,200 and has been reflected in the 1996 financial statements. The Company expects regulators in Montana and Wyoming to allow recovery of the additional costs associated with the plan change. F-15 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Retirement Plans (continued) =============================== The following table presents the amounts recognized at June 30, 1996 and 1995 in the consolidated financial statements. 1996 1995 ------------------- Accumulated postretirement benefit obligation: Retirees $128,500 $154,400 Fully eligible active plan participants 80,500 53,700 Other active plan participants 522,900 259,174 ------------------- $731,900 $467,274 Net periodic postretirement benefit cost: Service cost $ 19,300 $ 19,400 Interest cost 32,000 32,200 Actual return on plan assets (1,500) - Amortization of transition obligation 19,600 19,600 ------------------- Net periodic postretirement benefit cost $ 69,400 $ 71,200 The weighted-average discount rate used in determining the accumulated postretirement benefit obligation at June 30, 1996 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 11.0 percent for the 1996-97 fiscal year and is assumed to decrease gradually to 5.5 percent after 6 years and remain at that level thereafter. At June 30, 1995, the weighted- average discount rate used in determining the accumulated postretirement benefit obligation was 7.5 percent. The weighted-average health care cost trend rate was 12.5 percent for the 1995-96 fiscal year and was assumed to decrease gradually to 6.5 percent after 7 years and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of June 30, 1996 by $45,700. The aggregate of interest and service cost for the year ended June 30, 1996 is not affected by this increase due to the minimal number of retirees receiving benefits that are not fixed and the large number of retirees receiving benefits that were not affected by the trend rate during the 1995-96 fiscal year. F-16 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 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 No. 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 No. 109. For the year ended June 30, 1996, amortization of certain liabilities resulted in a decrease in regulatory assets of $75,566 and in regulatory liabilities of $14,409 for regulated entities, resulting in ending balances of $443,918 and $162,121, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of June 30, 1996 and 1995 are as follows: 1996 1995 --------------------------- Deferred tax assets: Allowance for doubtful accounts $ 54,065 $ 55,987 Unamortized investment tax credit 162,343 175,983 Contributions in aid of construction 115,876 102,458 Other nondeductible accruals 189,935 156,096 Other 47,093 42,318 --------------------------- Total deferred tax assets 569,312 532,842 F-17 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. Income Tax Expense (continued) ================================= 1996 1995 --------------------------- Deferred tax liabilities: Customer refunds payable $ 399,255 $ 84,525 Property, plant and equipment 2,908,836 2,615,597 Unamortized debt issue costs 201,635 215,827 Unamortized environmental study costs - 101,330 Covenant not to compete 89,041 93,283 Other 20,014 15,810 --------------------------- Total deferred tax liabilities 3,618,781 3,126,372 --------------------------- Net deferred tax liabilities $3,049,469 $2,593,530 Income tax expense consists of the following: Year ended June 30 1996 1995 1994 ------------------------------ Current income taxes: Federal $244,777 $705,420 $490,698 State 21,819 120,074 12,331 ------------------------------ Total current income taxes 266,596 825,494 503,029 Deferred income taxes (benefits): Tax depreciation in excess of book 341,217 179,794 139,564 Book amortization in excess of tax (35,958) (56,981) (73,435) Recoverable cost of gas purchases 322,479 (98,479) 86,341 Environmental study cleanup costs - 20,539 81,442 Regulatory surcharges (44,830) - - Other (25,362) 17,813 (62,016) ------------------------------ Total deferred income taxes 557,546 62,686 171,896 Investment tax credit, net (21,062) (21,062) (21,062) ------------------------------ Total income taxes $803,080 $867,118 $653,863 ============================== Income taxes - operations $765,925 $815,688 $613,964 Income taxes - other income 37,155 51,430 39,899 ------------------------------ Total income taxes $803,080 $867,118 $653,863 ============================== F-18 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. Income Tax Expense (continued) ================================= Income tax expense from operations differs from the amount computed by applying the federal statutory rate to pre-tax income for the following reasons: 1996 1995 1994 ------------------------------ Tax expense at statutory rate - 34% $747,269 $799,582 $607,394 State income tax, net of federal tax benefit 60,271 77,377 38,693 Amortization of deferred investment tax credits (21,062) (21,062) (21,062) Other 16,602 11,221 28,838 ------------------------------ Total income taxes $803,080 $867,118 $653,863 ============================== 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: F-19 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Regulated and Nonregulated Operations (continued) ==================================================== XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Note: These two tables were originally in side-by-side format. The format was changed to meet the EDGAR file width limitations. ****************** JUNE 30, 1996 ***************** REG. NONREG. ADJ. CONSOL. -------------------------------------------------- CAPITAL EXPENDITURES $3,910,000 $680,609 $4,590,609 -------------------------------------------------- PROPERTY,PLANT AND EQUIPMENT, NET REGULATED UTILITIES $22,362,130 $22,362,130 NONREGULATED PROPANE 2,971,174 2,971,174 OIL AND GAS OPERATIONS 274,352 274,352 REAL ESTATE HELD FOR INVESTMENT 482,173 1 482,174 -------------------------------------------------- TOTAL P P & E 22,362,130 3,727,699 1 26,089,830 CURRENT ASSETS 7,663,566 2,385,186 (956,548) 9,092,204 OTHER ASSETS 3,669,404 590,542 (1,947,307) 2,312,639 -------------------------------------------------- TOTAL ASSETS $33,695,100 $6,703,427 ($2,903,854) $37,494,673 ================================================== EQUITY $9,303,596 $3,308,651 $(1,071,999) $11,540,248 LONG-TERM DEBT 8,257,090 1,788,624 10,045,714 CURRENT LIABILITIES 10,452,787 1,192,271 (557,495) 11,087,563 DEFERRED INCOME TAXES 3,207,968 366,716 (778,600) 2,796,084 OTHER LIABILITIES 2,473,659 47,165 (495,760) 2,025,064 -------------------------------------------------- TOTAL CAPITALIZATION AND LIABILITIES $33,695,100 $6,703,427 ($2,903,854) $37,494,673 ================================================== ****************** JUNE 30,1995 ****************** REG. NONREG. ADJ. CONSOL. -------------------------------------------------- CAPITAL EXPENDITURES $3,933,828 $772,040 $4,705,868 -------------------------------------------------- PROPERTY,PLANT AND EQUIPMENT, NET REGULATED UTILITIES $19,907,237 $19,907,237 NONREGULATED PROPANE 2,811,913 2,811,913 OIL AND GAS OPERATIONS 334,704 334,704 REAL ESTATE HELD FOR INVESTMENT 496,483 496,483 -------------------------------------------------- TOTAL P P & E 19,907,237 3,643,100 23,550,337 CURRENT ASSETS 4,458,594 2,420,839 (616,157) 6,263,276 OTHER ASSETS 3,884,006 496,360 (1,819,198) 2,561,168 -------------------------------------------------- TOTAL ASSETS $28,249,837 $6,560,299 ($2,435,355) $32,374,781 ================================================== EQUITY $8,903,740 $2,701,018 $(1,072,000) $10,532,758 LONG-TERM DEBT 8,533,074 1,901,883 10,434,957 CURRENT LIABILITIES 6,304,063 1,493,087 (1,011,157) 6,785,993 DEFERRED INCOME TAXES 2,727,782 299,343 (352,197) 2,674,928 OTHER LIABILITIES 1,781,178 164,968 (1) 1,946,145 -------------------------------------------------- TOTAL CAPITALIZATION AND LIABILITIES $28,249,837 $6,560,299 ($2,435,355) $32,374,781 ================================================== XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Note: These three tables were originally in side-by-side format. The format was changed to meet the EDGAR file width limitations. ********************** 1996 ********************** REG. NONREG. ADJ. CONSOL. -------------------------------------------------- OPERATING REVENUE $23,672,186 $4,510,942 ($1,213,359) $26,969,769 GAS TRADING REVENUE 4,348,239 4,348,239 -------------------------------------------------- TOTAL OPERATING REVENUE 23,672,186 8,859,181 (1,213,359) 31,318,008 GAS PURCHASED 13,646,178 2,539,635 (1,213,359) 14,972,454 COST OF GAS TRADING 3,751,053 3,751,053 DISTRIBUTION, GENERAL & ADMIN 5,578,188 1,346,203 6,924,391 MAINTENANCE 348,123 60,467 408,590 DEPRECIATION AND AMORTIZATION 1,359,339 307,917 1,667,256 TAXES OTHER THAN INCOME 523,768 105,660 629,428 -------------------------------------------------- OPERATING INCOME $2,216,590 $748,246 $0 $2,964,836 ================================================== ********************** 1995 ********************** REG. NONREG. ADJ. CONSOL. -------------------------------------------------- OPERATING REVENUE $24,363,446 $4,077,768 ($1,131,655) $27,309,559 GAS TRADING REVENUE 3,238,839 3,238,839 -------------------------------------------------- TOTAL OPERATING REVENUE 24,363,446 7,316,607 (1,131,655) 30,548,398 GAS PURCHASED 15,077,466 2,170,877 (1,131,655) 16,116,688 COST OF GAS TRADING 2,500,363 2,500,363 DISTRIBUTION, GENERAL & ADMIN 5,130,220 1,249,431 6,379,651 MAINTENANCE 304,677 1,400 306,077 DEPRECIATION AND AMORTIZATION 1,205,758 352,997 1,558,755 TAXES OTHER THAN INCOME 494,338 100,230 594,568 -------------------------------------------------- OPERATING INCOME $2,150,987 $941,309 $0 $3,092,296 ================================================== ********************** 1994 ******************** REG. NONREG. ADJ. CONSOL. ------------------------------------------------ OPERATING REVENUE $24,421,153 $3,935,760 ($974,327) $27,382,586 GAS TRADING REVENUE 1,964,866 1,964,866 ------------------------------------------------ TOTAL OPERATING REVENUE 24,421,153 5,900,626 (974,327) 29,347,452 GAS PURCHASED 15,666,853 2,050,377 (974,327) 16,742,903 COST OF GAS TRADING 1,667,182 1,667,182 DISTRIBUTION, GENERAL & ADMIN 4,792,531 1,187,090 5,979,621 MAINTENANCE 315,409 15,353 330,762 DEPRECIATION AND AMORTIZATION 1,134,150 329,928 1,464,078 TAXES OTHER THAN INCOME 430,446 96,696 527,142 ------------------------------------------------ OPERATING INCOME $2,081,764 $554,000 $0 $2,635,764 ================================================ XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX F-20 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 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 the plans is as follows: Number of Price Per Shares Share ------------------------------- Fiscal 1996 Outstanding at July 1, 1995 90,588 $4.875-9.125 Granted - Exercised (13,680) $4.875-7.125 Expired (1,200) $6.50 ----------- Outstanding at June 30, 1996 75,708 $6.375-9.125 =========== At June 30, 1996 Exercisable 75,708 Available for grant 6,052 Fiscal 1995 Outstanding at July 1, 1994 106,948 $4.875-8.75 Granted 5,000 $9.125 Exercised (14,410) $4.938-8.75 Expired (6,950) $4.875-7.125 ----------- Outstanding at June 30, 1995 90,588 =========== At June 30, 1995 Exercisable 90,588 Available for grant 29,652 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 $4.875-8.75 =========== At June 30, 1994 Exercisable 106,948 Available for grant 27,702 F-21 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Stock Options and Ownership Plans (continued) ================================================ Employee Stock Ownership Plan - ----------------------------- In 1984, the Company established an Employee Stock Ownership Plan ("ESOP") which covers most of the Company's employees. The unleveraged ESOP receives cash contributions from the Company each year as determined by the Board of Directors and will buy shares of the Company's common stock from either the Company or the open market at the then current price per share. The ESOP has no allocated shares, committed-to-be-released shares or suspense shares at the balance sheet dates. In addition, there are no unearned shares and there is no repurchase obligation. The Company has contributed and recognized as expense $121,400, $129,367 and $103,820 for the years ended June 30, 1996, 1995 and 1994, respectively. During the years ended June 30, 1996, 1995 and 1994, the ESOP acquired 15,889 shares at $8.00 per share, 11,535 shares at $9.00 per share and 11,772 shares at $9.08 per share, respectively. 8. 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 for total future minimum lease payments of $648,000. Rental expenses related to this lease were $73,808, $70,133 and $73,933 in fiscal years 1996, 1995 and 1994, respectively. 9. Gain on Sale of Assets - ------------------------- On June 28, 1996, one of the Company's nonregulated subsidiaries sold real property, consisting of land and office and warehouse buildings, for $525,000 in cash. Concurrent with the sale, the Company leased the property back for a period of ten years at an annual rental of $51,975. The initial ten-year term of the lease is extended for two successive five-year periods unless the Company provides at least six months notice prior to the end of either the initial term or the first successive five-year term. The Company does not have an option to repurchase the real property. However, should the lessor have a bona fide third-party offer, the Company has the right of first refusal to buy the land and buildings under the same terms and conditions. As a result, the transaction has been recorded as a sale, resulting in a gain of $236,000. The land, buildings and related accounts are no longer recognized in the accompanying financial statements. F-22 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. Gain on Sale of Assets (continued) ===================================== The future minimum lease payments under the terms of the related lease agreement require the payment of $51,975 per year from fiscal 1997 through fiscal 2006 for total future minimum lease payments of $519,750. 10. Commitments and Contingencies ================================= Commitments - ----------- The Company has entered into long-term, take or pay natural gas supply contracts which expire beginning in 1997 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 $1.17 to $1.85. Based on current prices, the minimum take or pay obligation at June 30, 1996 for each of the next five years and in total is as follows: Fiscal Year ----------- 1997 $1,931,088 1998 1,320,018 1999 1,099,218 2000 832,018 2001 832,018 Thereafter 1,809,672 ---------- Total $7,824,032 ========== Natural gas purchases under these contracts for the years ended June 30, 1996, 1995 and 1994 approximated $5,520,000, $6,203,000, and $6,091,000, respectively. On July 1, 1996, the Company entered into a take or pay propane contract which expires June 30, 1997. The contract generally requires the Company to purchase all propane quantities produced by a propane producer in Wyoming (approximately 182,500 gallons per month) tied to the Billings, Montana spot price. F-23 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Commitments and Contingencies (continued) ============================================= 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 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 $320,000 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, results of operations and net cash flows. The Company received formal approval from the MPSC to recover the costs associated with the cleanup of this site. The Company began 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. The total of recoveries collected through June 30, 1996 is $214,000. 11. Regulatory Matters ====================== On July 8, 1996, the Company filed a general rate case with the MPSC requesting a revenue increase for its Great Falls Gas operations. The revenue request is the result of increased cost of service primarily due to inflation and higher capital investment for utility operations. The Company intends to file for a rate increase for Broken Bow (a regulated utility subsidiary in Payson, Arizona) in the fall of 1996. F-24 ****************************************************************************** Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. Financial Instruments and Risk Management ============================================= During 1996, the Company was a party to gas financial swap agreements for its regulated operations. Under these agreements, the Company is required to pay the counterparty (an entity making a market in gas futures) a cash settlement equal to the excess of the stated index price over an agreed upon fixed price for gas purchases. The Company receives cash from the counterparty when the stated index price falls below the fixed price. These swap agreements are made to minimize exposure to gas price fluctuations. During the fiscal year ending June 30, 1996 the company had financial swap agreements in place with average fixed prices of $1.33 per MMBTU. The index price paid for the volumes associated with those agreements was $1.04. This price differential had no impact on earnings, because the effect of the difference is included in gas costs and adjusted to recoverable cost of gas purchases for any differences between the cost of gas allowed by the regulators and the actual prices paid. Beginning on September 1, 1996, the Company is a party to two gas swap agreements, for its nonregulated operations, to hedge 4,400 MMBTU of its daily gas purchases. This contract represents approximately 92% of the supply required for the Company's customers who have selected fixed price service. The hedges were made to minimize the Company's exposure to price fluctuations and to secure a known margin for the purchase and resale of gas in marketing activities. F-25 ****************************************************************************** SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS ENERGY WEST INC. June 30, 1996 Balance at Charged Write-offs Balance Beginning to Costs Net of at end of Description of Period & Expenses Recoveries Period Allowance for ---------- ---------- ---------- ---------- Uncollectible Accounts - ------------------------ Year Ended June 30, 1994 $160,500 $141,590 ($121,799) $180,291 Year Ended June 30, 1995 $180,291 $81,327 ($70,450) $191,168 Year Ended June 30, 1996 $191,168 $64,509 ($47,571) $208,106 F-25 ****************************************************************************** -----END PRIVACY-ENHANCED MESSAGE-----