-----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, A/jkPk9xz0pvvKGNXTOmGNEcU+z1FpfPpoGULldgSBKmoUxk1a2fykZkFwmR48B2 Yu6JVQkx3g0OaW939Qv+mA== 0000912057-97-023659.txt : 19970709 0000912057-97-023659.hdr.sgml : 19970709 ACCESSION NUMBER: 0000912057-97-023659 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19970708 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: 97637536 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 FORM 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-KA/1 [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. 1 PART I Item 1. - Business ENERGY WEST INCORPORATED ("the Company") is a regulated public utility, with certain non-utility operations conducted through its subsidiaries. The Company's regulated utility operations primarily involve the distribution and sale of natural gas to the public in the Great Falls, Montana and Cody, Wyoming areas. Since January 1993, the Company's regulated utility operations have also included the distribution of propane to the public through an underground propane vapor system in the Payson, Arizona area, and since 1995, the distribution of natural gas through an underground system in West Yellowstone, Montana, that is supplied by liquified natural gas ("LNG"). The Company conducts certain non-regulated non-utility operations through its three wholly-owned subsidiaries, Rocky Mountain Fuels, Inc. ("RMF"), Energy West Resources, Inc. ("EWR"), [formerly Vesta, Inc.] and Montana Sun, Inc. ("Montana Sun"). RMF is engaged in the distribution of bulk propane in Northwestern Wyoming, the Payson, Arizona area and the Cascade, Montana area. EWR is involved in gas storage, a small amount of oil and gas development and the marketing of gas in Montana and Wyoming. Montana Sun owns two real estate properties in Great Falls, Montana. UTILITY OPERATIONS The Company's primary business is the distribution and sale of natural gas and propane to residential, commercial and industrial customers. The natural gas distribution operations consist of two divisions, the Great Falls division and the Cody division. The Cody division is also involved in the transportation of natural gas. In addition, since January 1993 the Company has been involved in the regulated distribution of propane in Arizona through the Broken Bow division. Generally, residential customers use natural gas and propane for space heating and water heating, commercial customers use natural gas and propane for space heating and cooking, and industrial customers use natural gas as a fuel in industrial processing and space heating. The Company's revenues from utility operations are generated under tariffs regulated by the respective state utility commissions. GREAT FALLS DIVISION The Great Falls division provides natural gas service to Great Falls, Montana and much of suburban Great Falls within approximately 11 miles of the city limits. The service area has a population base of approximately 65,000. The Company has a franchise to distribute natural gas within the city of Great Falls. The franchise was renewed for 50 years by the city of Great Falls in 1971. As of June 30, 1996, the Great Falls division provided service to over 25,000 customers, including approximately 22,000 residential customers, approximately 3,000 commercial customers, an oil refinery through a transportation agreement and Malmstrom Air Force Base ("Malmstrom"). 2 The following table shows the Great Falls division's revenues by customer class for the year ended June 30, 1996 and the past two fiscal years: Gas Revenues (in thousands) Years Ended June 30, -------------------- 1996 1995 1994 ---- ---- ---- Residential................. $8,648 $8,996 $9,016 Commercial.................. 6,146 6,350 6,360 Malmstrom................... 0 1,393 1,437 Transportation.............. 468 73 88 ----- ----- ----- Total............... $15,262 $16,812 $16,901 ------- ------- ------- ------- ------- ------- The following table shows the volumes of natural gas, expressed in millions of cubic feet ("MMcf") at 13.28 P.S.I.A., sold by the Great Falls division for the year ended June 30, 1996 and the past two fiscal years: Gas Volumes (MMcf) Years Ended June 30, -------------------- 1996 1995 1994 ---- ---- ---- Residential................ 2,540 2,297 2,315 Commercial................. 1,822 1,646 1,655 Malmstrom................... 0 464 478 ----- ----- ----- Total Gas Sales....... 4,362 4,407 4,448 ----- ----- ----- ----- ----- ----- Transportation 1,294 714 521 ----- ----- ----- ----- ----- ----- Malmstrom, the Great Falls division's largest customer, accounted for approximately 3% of the revenues of the division. Including revenues received by EWR, Malmstrom accounted for approximately 5% of the consolidated revenues of the Company in fiscal 1996. On July 1, 1995, Malmstrom became a transport customer of the Great Falls division, purchasing its gas load from EWR, a wholly-owned subsidiary of ENERGY WEST INCORPORATED. The Great Falls division will experience no loss of margin as a result of this new contract. Malmstrom purchases gas for space heating and water heating for buildings and residential housing, to supplement its coal-fired central heating system. Malmstrom, which is located near Great Falls, is an air force base with intercontinental nuclear missiles and KC-135 refueling tankers. The base employed approximately 4,400 military personnel and 550 civilian personnel as of June 30, 1996. As of this date, a current realignment plan by the federal government, calls for the base to receive additional Minuteman III missiles from North Dakota, and the refueling unit to move to Florida. The plan is now final and when both changes take place, the base is expected to lose approximately 700 jobs. 3 Beginning in three years, Malmstrom has been selected as the site where 13 of 15 test flight of NASA's X-33 space shuttle will land during 1999. No assurance can be given as to the future level of activity at Malmstrom. The Great Falls division's other transport customer is an oil refinery located in the city. The Company provides gas to the customer for processing use in its refining business. In fiscal 1996, the refinery accounted for less than 1% of the consolidated revenues of the Company. Historically, this customer's gas load has remained relatively constant during the year because the gas is used in the customer's business and is therefore not weather-sensitive. On June 1, 1993, the refinery became a transport customer of the Great Falls division, purchasing its gas load from EWR, a wholly-owned subsidiary of ENERGY WEST INCORPORATED. The Great Falls division has not experienced a loss of margin as a result of this new contract. In July, 1996 it was announced that a $20 million pasta plant will be built in Great Falls. Construction is expected to begin in the fall of 1996 and is estimated to use approximately 60,000 Mcf/year of natural gas annually. The Great Falls division's gas distribution operations are subject to regulation by the Montana Public Service Commission ("MPSC"). The MPSC regulates rates, adequacy of service, accounting, issuance of securities and other matters. In November, 1994, the Company filed for a rate increase to recover the cost of increased operating expenses, increases in financing expenses due to additional investments in utility plant, and other costs of doing business. Included with the filing was a new surcharge to recover costs associated with the environmental assessment and remediation of its service center, which was formerly a manufactured gas plant site. The Montana Consumer Counsel ("MCC") intervened in the rate case and in January, 1995, the Company and the MCC filed a Joint Motion for Suspension of the Procedural Order, in order to allow both parties to negotiate toward a stipulated settlement. On May 30, 1995, the MPSC approved the revenue requirement stipulation executed between the Company and the MCC as filed in March, 1995, which reduced base rates by $250,000 and allowed a new surcharge associated with the manufactured gas plant site with an initial balance of approximately $183,000, with the surcharge calculated on a two-year recovery of the average annual basis. The effective date of the rate decrease and surcharge was the beginning of fiscal 1996 or July 1, 1995. The rate decrease reduces earnings per share by approximately 1.8 cents on normalized volumes. 4 In June, 1996, the Great Falls division filed a rate adjustment application with the MPSC of approximately $386,000, to recover increased gas supply costs, as part of an annual filing made by the Great Falls division to balance gas supply costs against gas revenues. This filing does not increase the Great Falls division's margins. On July 8, 1996, the Great Falls division filed a general rate increase with the MPSC, which reflects increased operating, maintenance and depreciation costs as well as a change in the cost of capital. The Great Falls division has applied for and expects interim relief no later than November, 1996. The Rate Hearing will be held in late fiscal 1997 and no assurance can be given as to the amount of rate relief that will be granted to the Company. Historically, the Great Falls division has purchased all of its gas from Montana Power Company ("MPC"), a publicly owned electric and gas utility serving much of Montana. In 1991 the MPSC ordered MPC to become an open access transporter of natural gas over a phase-in period ending on August 31, 1993. Since the 1991 order, the Company has been able to purchase gas from sources other than MPC and transport supplies on MPC's system. The Company has increased its gas purchases from suppliers other than MPC, as open access transportation has been phased in. The Great Falls division, as of June 30, 1996, purchases approximately forty percent of its gas from a Canadian producer under a long-term contract expiring in 2007, and approximately twenty percent of its gas from two Montana producers under long-term contracts expiring between 1998 and 2005 and fifteen percent of its gas from short-term contracts with Montana producers. The division also makes spot market purchases from time to time to fill its storage capacity in the spring and summer. The price of gas under the contract with the Canadian producer is negotiated annually between the parties. The prices of gas under the contracts with the two independent producers can be negotiated bi-annually by either party. Gas purchased from the division's suppliers is transported through pipelines owned by MPC and is delivered to the division's distribution system at two city gates. The Company pays transportation tariffs to MPC at rates approved by the MPSC. Open access for the division's customers was negotiated between the division, MPC and the MPSC during 1991, which called for a three year phase-in of open access gas supplies, with gas costs tracking filings every six months. The three year phase-in period began in November, 1991, with two-thirds of supply purchased from MPC under the "Firm Utility Gas Cost" ("FUGC") rate and one-third directly from other gas suppliers. The regulatory mechanism used to track the phase-in resulted in additional costs in 1994 that offset an increase in gross margins associated with the change in contract terms with the refinery customer, which changed from a gas supply contract to a transportation contract. On September 1, 1993, the Great Falls division became a full open access customer of MPC. 5 The division secured the balance of its long-term gas supplies, to replace gas which was previously being supplied by MPC, on terms satisfactory to the Company. The Great Falls division contracts for gas storage from MPC in MPC-owned gas storage areas and pays storage tariffs at rates approved by the MPSC. The division uses this storage capacity to provide for seasonal peaking needs and to take advantage of lower priced gas generally available during the summer months. During 1996, the Company was a party to gas financial swap agreements for its regulated operations, including the Great Falls and Cody divisions. Under these agreements, the Company is required to pay the counterparty (an entity making a market in gas futures) a cash settlement equal to the excess of the stated index price over an agreed upon fixed price for gas purchases. The Company receives cash from the counterparty when the stated index price falls below the fixed price. These swap agreements are made to minimize exposure to gas price fluctuations. Any cash settlements or receipts are included in gas purchased. CODY DIVISION The Cody division provides natural gas service in Northwestern Wyoming to the city of Cody and the towns of Meeteetse and Ralston and the surrounding areas. The service area has a population base of approximately 12,000. The Cody division has a franchise granted by the Wyoming Public Service Commission (the "WPSC") for gas purchasing, transportation and distribution covering the west side of the Big Horn Basin, which stretches approximately 70 miles north and south and 40 miles east and west from Cody. The franchise is effective until 2002. As of June 30, 1996, the Cody division provided service to approximately 5,200 customers, including 4,500 residential customers, 700 commercial customers and one industrial customer. The division also provides transportation service to two customers. The following table shows the Cody division's revenues by customer class for the year ended June 30, 1996 and the past two fiscal years: Gas Revenues (in thousands) Years Ended June 30, -------------------- 1996 1995 1994 ---- ---- ---- Residential................. $2,353 $2,176 $2,219 Commercial.................. $1,922 $1,887 $2,034 Industrial.................. $1,360 $1,375 $1,331 Transportation.............. $ 305 $ 172 $ 228 ------ ------ ------ Total................. $5,940 $5,610 $5,812 ------ ------ ------ ------ ------ ------ 6 The following table shows the volumes of natural gas, expressed in millions of cubic feet ("MMcf") at 13.28 P.S.I.A., sold by the Cody division for the year ended June 30, 1996 and the past two fiscal years: Gas Volumes (MMcf) Years Ended June 30, -------------------- 1996 1995 1994 ---- ---- ---- Residential................. 536 486 474 Commercial.................. 565 539 559 Industrial.................. 552 517 473 --- --- --- Total Gas Sales....... 1,653 1,542 1,506 ----- ----- ----- ----- ----- ----- Transportation 642 1,484 2,533 ---- ----- ----- ---- ----- ----- The industrial sale in the Cody division is to Celotex, a manufacturer of gypsum wallboard, under a long-term contract expiring in 2000. Sales to the customer are made pursuant to a special industrial customer tariff which fluctuates with the cost of gas. In fiscal 1996 this customer accounted for approximately 23% of the revenues of the division and approximately 4% of the consolidated revenues of the Company. The division's sales to Celotex, whose business is cyclical and dependent on the level of national housing starts, increased by 7% over previous year's volumes. Celotex and its parent company Jim Walters Corporation, have been operating under Chapter 11 bankruptcy since October, 1990. The bankruptcy stems from potential asbestos claims. Approximately $132,000 was due the Cody division prior to the bankruptcy filing. During 1995 the division increased its allowance for uncollectible accounts to $52,000. Celotex has filed a plan for reorganization. On July 12, 1996, a joint Plan of Reorganization was filed by Celotex. The Bankruptcy Court has also scheduled a confirmation hearing on the Plans to begin October 7, 1996. If the Plan is confirmed, the distribution will equal between 94% and 95% of the principal amount of the claim and distribution could be made prior to the end of 1996. No assurance can be given that Celotex will continue to be a significant customer of the Cody division. The Cody division's primary transportation customer is Interenergy Corporation, a regional aggregator, producer and marketer of gas and the division's primary supplier of natural gas. The parameters of the transportation tariff (currently between $.08 and $.30 per Mcf) are established by the WPSC. Agreements between the Company and the customer are negotiated periodically within the parameters. 7 The division's revenues are generated under regulated tariffs that are designed to recover a base cost of gas, administrative and operating expenses and provide sufficient return to cover interest and profit. The division also services customers under separate contract rates that were individually approved by the WPSC. The division's tariffs include a purchased gas adjustment clause which allows an adjustment of rates charged to customers in order to recover changes in gas costs from base gas costs. A Wyoming statute permits the WPSC to allow gas utilities to retain 10% of its cost of gas savings over a base period level. In fiscal 1996 this gas cost incentive improved gross margin for the division by approximately $139,000. The amount of gas cost incentive if any, fluctuates with the market price of natural gas. The Cody division's last general rate order was effective in 1989. The Company does not contemplate filing an application for a general rate increase for the division in the foreseeable future. The division's allowed return on common equity on normalized earnings, calculated in accordance with the WPSC order, has been 13.01% since the last general rate order. The Cody division has a five-year agreement with Interenergy Corporation, a regional aggregator, producer and marketer of gas, to supply natural gas to the division. The contract has been renewed and renegotiated annually since 1989. The contract requires Interenergy to deliver gas to various points on the division's transmission system. Most of the gas purchased by the division is transported on the division's own transportation system and the balance is transported on Interenergy's transportation system. The division also has several small supply contracts with small producers in the Cody transportation network. (The division's service area is located in a gas producing region.) In addition, the division has a backup contract to purchase natural gas from Coastal Gas Marketing, but has never purchased gas under this contract. The Cody division does not own storage facilities, however has contracted with a gas supply company in fiscal 1996 for storage capacity of approximately 500,000 Mcf of natural gas to allow more flexibility in the timing of its gas purchases. Historically, the division has been able to purchase gas from its suppliers to meet peak demands. During 1996, the Company was a party to gas financial swap agreements for its regulated operations, including the Great Falls and Cody divisions (see detail explanation under the Great Falls division). BROKEN BOW DIVISION The Broken Bow division is involved in the regulated distribution of propane in the Payson, Arizona area. The division was formed following the Company's acquisition of Broken Bow Gas's underground propane vapor distribution system in January 1993. The acquisition was effective as of November 1, 1992. The service area of the Broken Bow division includes approximately 575 square miles and has a population base of approximately 30,000. As of June 30, 1996, the Broken Bow division provided service to approximately 4,000 customers, including approximately 3,500 residential customers and approximately 500 commercial customers. 8 The Broken Bow division's operations are subject to regulation by the Arizona Corporation Commission, which regulates rates, adequacy of service, issuance of securities and other matters. The Broken Bow division's properties include approximately 90 miles of underground distribution pipeline, propane storage facilities and an office building leased from Petrogas, an affiliated bulk propane distributor in the Payson area. The division purchases its propane supplies from Petrogas under terms reviewed periodically by the Arizona Corporation Commission. In September, 1996, the Broken Bow division will file a general rate increase with the Arizona Corporation Commission, which reflects increased operating, maintenance and depreciation costs as well as a change in the cost of capital. The Arizona Corporation Commission does not provide interim rate relief and the earliest the rate case would be heard is one year from the filing, in Fiscal 1998 or in September, 1997. NON-UTILITY OPERATIONS The Company conducts its non-utility operations through its three wholly-owned subsidiaries: RMF, EWR (formerly Vesta) and Montana Sun. RMF is engaged in the bulk sale of propane through its three divisions: Wyo L-P, which serves Northwestern Wyoming and Cooke City, Montana, Petrogas, which serves the Payson, Arizona area and Missouri River Propane, which sells bulk propane in the Cascade area, immediately southwest of Great Falls, Montana. RMF acquired assets and operations comprising its Wyo L-P divisions through acquisitions of existing propane distribution businesses in August 1991 and May 1992. RMF acquired the assets and operations of its Petrogas division through an acquisition of an existing propane distribution business in January 1993. The aggregate purchase price for RMF's acquisitions were approximately $2.79 million. RMF had approximately 3,500 customers as of June 30, 1996, of which the Wyo L-P division had approximately 2,500 customers and the Petrogas division and Missouri River Propane had approximately 1,000 customers. RMF purchases propane from various suppliers under short-term contracts and on the spot market, and sells propane to residential and commercial customers, primarily for use in space heating and cooking. Petrogas also supplies propane to the Broken Bow division, while Missouri River Propane supplies propane to Cascade Gas, an underground propane-vapor system serving the city of Cascade, Montana. For the twelve months ended June 30, 1996, RMF's revenues (excluding approximately $1,112,000 sales by Petrogas to the Broken Bow division and approximately $101,000 sales by Missouri River Propane to Cascade Gas Company, an operating district of the Great Falls division) were approximately $3,139,000, of which approximately $2,404,000 was attributable to the Wyo L-P division, $650,000 was attributable to the Petrogas division and the balance attributable to the Missouri River Propane division. 9 On June 28, 1996, Petrogas sold real property, consisting of land and office and warehouse building, for $525,000 in cash resulting in a gain of $236,000. The gain will be amortized ratably into income over the initial ten-year lease term. Concurrent with the sale, the Company leased the property back for a period of ten years at an annual rental of $51,975. Petrogas sub-leases the property to the Broken Bow division. On 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. 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 received 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. RMF faces competition from other propane distributors and suppliers of the same fuels that compete with natural gas. Competition is based primarily on price and there is a high degree of competition with other propane distributors in the service areas. EWR is involved in a small amount of oil and gas development and the marketing of gas in Montana and Wyoming. EWR currently has varying working interests in four oil and nine gas producing properties. Volumes of oil and gas produced are not significant and did not result in significant net income in fiscal 1996. The Company believes that the ordering of MPC to provide open access on its gas transportation system in Montana presents an opportunity for EWR to do business as a broker of natural gas using the MPC and other systems. EWR presently has eight customers for those services, plus the State of Montana, which includes several units of the State of Montana. EWR also purchased an underground storage facility near Havre, Montana and leased additional storage capacity from Montana Power Company, to allow more flexibility in the timing of its gas purchases. Montana Sun owns a commercial real estate property and a parcel of undeveloped land in Great Falls, Montana. Montana Sun leases the commercial property to a federal governmental agency. The Company is presently seeking to sell the commercial property, but is otherwise inactive at this time. Additional information with respect to the nonutility operation of the company is set forth in notes 1, 6, 9 and 10 to the company's consolidated financial statements. 10 CAPITAL EXPENDITURES The Company generally conducts a continuing construction program and has completed expansion of its gas pipeline in areas around metropolitan Great Falls as well as an underground propane-vapor system in the town of Cascade, Montana, southwest of Great Falls. In the Cody division, expansion of the gas system in that area was completed and in the Broken Bow division, construction is still being completed, as a result of growth. The Company has completed construction of a natural gas system in West Yellowstone, Montana started in May of 1994. West Yellowstone Gas Company transports liquefied natural gas from southwestern Wyoming for revaporization into the system; operations started in May of 1995. The Great Falls division has also added an underground propane vapor system to service customers in the Hardy area, 30 miles southwest of Great Falls, Montana. In fiscal years 1996, 1995 and 1994, total capital expenditures were $4,590,608, $4,705,868 and $2,626,221 respectively. OTHER BUSINESS INFORMATION The principal competition faced by the Company in its distribution of natural gas is from other suppliers of competitive fuels, including electricity, oil, propane and coal. The principal competition faced by the Company in its distribution and sales of propane is from other propane distributors and suppliers of the same energy sources that compete with natural gas and electricity. Competition is based primarily on price and there is a high degree of competition with other propane distributors in the service areas. The principal considerations affecting a customer's selection of utility gas service over competing energy sources include service, price, equipment costs, reliability and ease of delivery. In addition, the type of equipment already installed in businesses and residences significantly affects the customer's choice of energy. However, where previously installed equipment is not an issue, households in recent years have consistently preferred the installation of gas heat. The Great Falls division's statistics indicate that approximately 95% of the houses and businesses in the service area use natural gas for space heating fuel, approximately 91% use gas for water heating and approximately 99% of the new homes built on or near the Great Falls division's service mains in recent years have selected natural gas as their energy source. The Cody division believes that approximately 95% of the houses and businesses in the service area use natural gas for space heating fuel, approximately 90% use gas for water heating, and approximately 99% of the new homes built on or near the division's service mains in recent years have selected gas as their energy source. The Broken Bow division believes that approximately 59% of the houses and businesses adjacent to the division's distribution pipeline use the division's propane for space heating or water heating. 11 The Company had approximately 141 employees as of June 30, 1996, of which 125 were full-time. Twenty-six of the employees were with the Cody division, 22 employees were with RMF and 15 were with the Broken Bow division. The other 78 employees were with the Great Falls division, including Cascade Gas and West Yellowstone Gas and at corporate headquarters. Approximately 13 full-time and 3 seasonal hourly employees in the Great Falls division are represented by two collective bargaining units, the United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry of the USA and the Construction and General Laborer's Union. The Company's two labor contracts were renegotiated through April 30, 1997. The Company considers its relationship with its employees to be satisfactory. The Company has instituted an extensive customer-related energy conservation program which encourages the efficient use of energy through proper conservation measures. The Company provides inspection services to homeowners and businesses and recommends appropriate conservation projects. The Company also is concentrating on increasing load in existing residential structures by the addition of gas appliances and conversion of homes with all electric appliances. The Company has started a natural gas and propane appliance showroom to market gas appliances in the Great Falls and Cody divisions with future plans to market appliances in the propane offices of the Company. In addition, the Company encourages converting commercial food service equipment to natural gas through a developed commercial equipment efficiency program, both in Great Falls and Cody. The Company's field marketing personnel are paid through an incentive plan geared to how much load they add to the system. 12 The Company has management and employee incentive programs tied to bottom-line performance of the corporation. Officers and management, down to first-line supervisors, participate in a pay-for-performance program. If the Company meets a minimum earnings per share for the consolidated corporation for 25% and a minimum rank on the comparison of utilities published by Edward D. Jones & Co. for an additional 25% funding and individual divisions meet their allocated consolidated earnings per share for the other 50%, or in the case of senior officers and corporate staff the corporation meets a minimum rank on the comparison of utilities published by Edward D. Jones & Co. for the other 50%; then the incentive pool is triggered; then whether the incentive is actually earned depends on whether the individuals in the program achieve individual specific performance objectives set at the beginning of the year. Incentives vary from .8% on up of base wages. All officers and eligible employees participate in the Company's Employee Stock Ownership Plan, in which payout is based on pre-tax earnings of the Company and approved by the Board each year. The Company has implemented a deferred compensation plan for directors, which provides a deferral of directors' fees and incentive awards until such time as the director ceases to be a director of the Company by retirement or otherwise. The plan provides an incentive compensation based on the total fees earned by each Director for that year multiplied by the highest percentage incentive award for that year to any employee under the Company's management incentive compensation plan, which In fiscal 1996 was 38.91%. Fees (either cash or stock) and incentive compensation (stock only) can be received either currently, as they are earned, or on a deferred basis. Elections to defer receipts are subject to timing requirements. The deferred compensation plan for directors is subject to approval of the shareholders at the Annual Shareholders Meeting of Energy West, Incorporated November 21, 1996. 13 PART I ENVIRONMENTAL MATTERS The Company owns property on which it operated a manufactured gas plant from 1909 to 1928. The site is currently used as a service center for the Company where certain equipment and materials owned by the Company are stored. The coal gasification process utilized in the plant resulted in the production of certain by-products which have been classified by the federal government and the State of Montana as hazardous to the environment. Several years ago the Company initiated an assessment of the site to determine if remediation of the site was required. That assessment resulted in a submission of a report to the Montana Department of Environmental Quality (MDEQ) in 1994. The Company has worked with the MDEQ since that time obtain the data that would lead to a remediation acceptable to MDEQ. The Company's environmental consultant advises the Company that it expects to have a report, which will include remediation recommendations, filed with the MDEQ by approximately mid-summer of 1997. MDEQ would then provide an opportunity for public comment on the remediation plan. Once the comment period has ended and due consideration of any comments occurs, the plan can be finalized. Assuming acceptance of the plan, remediation could be underway by the fall of 1998. At June 30, 1996 the Company's costs incurred in evaluating this site have totalled approximately $320,000. On May 30, 1995 the Company received an order from the Montana Public Service Commission allowing for a surcharge on customer bills in conntection with the costs associated with evalution of the site. As of June 30, 1996 the surcharge had generated approximately $214,000. The Commission's order calls for ongoing review by the Commission of the costs incurred for this matter by periodic approvals of the costs incurred for this matter. 14 Item 3. - LEGAL PROCEEDINGS From time to time the Company is involved in litigation relating to claims arising from its operations in the normal course of business. Neither the Company nor any of its subsidiaries is a party to any legal proceedings, other than as described below, the adverse outcome of which individually or in the aggregate, in the Company's view, would have a material adverse effect on the Company's results of operations, financial position or liquidity. On December 20, 1996, an action was filed against the Company by Randy Hynes and Melissa Hynes in Federal District Court in Wyoming. The action arises from a natural gas explosion involving a four-plex apartment building which was damaged after natural gas from a gas line leaked into the building on February 3, 1996 (which was not serviced by natural gas). The plaintiffs, who were tenants in the building, sustained burns and other injuries as well as property damage. The plaintiffs allege that the Company was negligent in that in failed to maintain the natural gas line consistent with its duty to do so and failed to properly odorize the gas which caused the explosion. The action also asserts claims of product liability, willful and wanton conduct and breach of warranty. The plaintiffs are seeking damages for personal injury, pain and suffering, emotional distress, loss of earnings, medical expenses, physical disability and property damage as well as punitive damages. A dollar amount has not been set forth in the pleadings. The Company denies responsibility for the damages and is vigorously contesting the matter. The Company believes the gas leak resulted from damage caused to the pipeline by an unknown third party. Discovery is proceeding at this time. A trial has been scheduled for the fall of 1997. A similar lawsuit involving the same explosion was filed by five other plaintiffs Wyoming District court, Park County, Wyoming on April 3, 1997. The allegations are substantially the same as the allegations in the Federal District Court case, the Company has filed an answer denying liability and is contesting the matter vigorously. Only limited discovery has occurred to date. The plaintiffs, Heidl Woodward, at al., were also tenants in the apartment building. On October 24, 1996, an action was filed against the Company by Colten and Julie White and their three children in Superior Court in Gila County, Arizona. The action arises from an explosion that occurred on May 3, 1995 in the plaintiffs' new home which was serviced by the Company's propane business. The explosion occurred in the course of the plaintiffs' attempt to light their appliances for the first time. The plaintiffs sustained injuries and property damage in the explosion and the fire that occurred after the explosion. The claims are for personal injury, mental suffering and anguish, medical expenses, lost income, property damages and punitive damages. Plaintiffs' claims are based on a strict liability claim that the propane was defective, breach of warranty in that the propane was not fit for the purpose fro which it was intended and negligence for failure to assure that the propane was properly odorized. The dollar value of the claims has not been set forth in the pleadings of the plaintiffs. The Company carries commercial general liability insurance for bodily injury and property damages of $1,000,000 per occurrence and $5,000,000 in the aggregate, and has an additional $30,000,000 umbrella policy for excess claims. The Company's general liability carrier has assumed the defense of both Wyoming actions and the Arizona action. The Company believes it has insurance coverage for these matters. However, no assurance can be given that insurance will cover these matters in the event that the company is held liable. In the event of an adverse result for the Company, and if the Company's insurance does not cover the matters or is not sufficient to cover the matters, such result could have a material adverse effect on the Company's results of operations, financial position and liquidity (depending on the amount of the judgment or judgments). Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 15 EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY The following table sets forth the names and ages of, and the positions and offices within the Company presently held by, all directors and executive officers of the Company: Name Age Position ---- --- -------- Larry D. Geske 57 President and Director since 1978; appointed Chief Executive Officer in 1979 Edward J. Bernica 46 Vice-President and Chief Financial Officer since October, 1994 William J. Quast 57 Vice-President, Treasurer, Controller and Assistant Secretary since 1988, has been Vice-President, Secretary and Treasurer since 1987, Assistant Vice-President, Secretary Controller and Assistant Treasurer since 1983, Secretary since 1982 and an Assistant Treasurer of the Company since 1979 Tim A. Good 51 Vice-President and Manager of the CGD since 1988; General Manager of Cody Gas Company, a Division of the Coastal Corporation, for five years prior to the acquisition of CGD by the Company Sheila M. Rice 49 Vice-President and Division Manager of the Great Falls division since April, 1993; Vice-President Marketing and Consumer Services since 1988 and has been Vice-President, Marketing and Consumer Relations since 1987; was Assistant Vice-President for Marketing and Customer Relations 1983-1987 16 Name Age Position ---- --- -------- John C. Allen 45 Vice-President of Human Resources and Corporate Counsel and Secretary since 1992; Corporate Counsel and Secretary since 1988; Counsel and Assistant Secretary from November 1986 to 1988 and Corporate Attorney to the Company from March 1986 to November 1986 Lynn F. Hardin 48 Assistant Vice-President of Gas Supply for the Great Falls division since June 1, 1993; Assistant Vice-President of Division Administration since 1989; was manager of Accounting and Administration or Cody Gas Company, a Division of The Coastal Corporation, for five years prior to acquisition of CGD by the Company Earl L. Terwilliger, Jr. 48 Assistant Vice-President for Market Development for the Great Falls division since 1990; has been Assistant Vice-President of Customer Accounting and Credit since 1988 Ian B. Davidson 64 Director since 1969 Timothy J. Moylan (deceased) 40 Director since 1991 Thomas N. McGowen, Jr. 70 Director since 1978 G. Montgomery Mitchell 68 Director since 1984 John Reichel 70 Director since 1984 David A. Flitner 63 Director since 1988 17 Larry D. Geske has been employed by the Company since 1975 and became President and Director of the Company in 1978. In 1979, Mr. Geske was appointed to the position of Chief Executive Officer. In addition, Mr. Geske is a past Director of First Interstate Bank of Great Falls (parent Company is First Interstate Bank Corporation) and is a Director of the Great Falls Capital Corporation and the Great Falls Dodgers Baseball Club. He is also a Director of the American Gas Association's Board. Mr. Geske, prior to service with the Company, was a Field Engineer "A" with NIGAS in Aurora, Illinois and a Senior Consultant with Stone and Webster Management Consultants, Inc. in New York. Mr. Edward J. Bernica has been employed by the Company since October 1994 and became Vice-President and Chief Financial Officer in November, 1994. Mr. Bernica, prior to service with the Company, was Director of Finance at U. S. West in Englewood, Colorado and prior to that, was employed by ENRON Corporation in Omaha, Nebraska as Director-Financial Analysis and Planning William J. Quast has been Vice-President, Treasurer, Controller and Assistant Secretary since 1988. He has served as Vice-President, Secretary and Treasurer since 1987 and as Assistant Vice-President, Secretary, Controller and Assistant Treasurer since 1983. He has served as Secretary of the Company since 1982 and as Assistant Treasurer of the Company since 1979. Mr. Quast was re-elected in 1993 and served as Trustee for the Great Falls Public School system for most of fiscal 1996. Mr. Quast, prior to service with the Company, was an accounting manager for Wyton Oil and Gas Company, a multi-state propane distributor headquartered in Denver, Colorado and was Treasurer for D. A. Davidson & Co. in Great Falls, Montana. Tim A. Good has been Vice-President and Division Manager of the CGD since 1988. He served as General Manager of Cody Gas Company, a Division of The Coastal Corporation for five years prior to the acquisition of the Cody Gas Company by EWST in 1988. Sheila M. Rice has been Vice-President and Division Manager of the Great Falls division since April, 1993. Prior to that, she was Vice-President of Marketing and Consumer Services since 1988. She served as Vice-President, Marketing and Consumer Relations from 1987 to 1988, Assistant Vice-President for Marketing/Customer Relations from 1983 to 1987 and as Consumer Service Representative/Conservation Specialist for the Company from 1979 to 1983. John C. Allen has been Vice-President of Human Resources and Corporate Counsel since 1992 and previously served as Corporate Counsel and Secretary of the Company since 1988. He served as Corporate Counsel and Assistant Secretary from November 1986 until 1988 and as Corporate Attorney of the Company (March, 1986-November 1986). From 1979 to 1986, Mr. Allen was employed as a staff attorney with the Montana Consumer Counsel. 18 Lynn F. Hardin has been Assistant Vice-President of Gas Supply since June 1, 1993. Prior to that, he was Assistant Vice-President of Division Administration since 1989. He was Manager of Accounting and Administration of Cody Gas Company, a Division of The Coastal Corporation for five years prior to the acquisition of the Cody Gas Company by the Company in 1988. Earl L. Terwilliger, Jr. has been Assistant Vice-President for Market Development since 1990. He served as Assistant Vice-President of Customer Accounting and Credit from 1988 to 1990 and Manager of Customer Accounting and Credit for the previous four years. Prior to that time, Mr. Terwilliger was office manager. Ian B. Davidson has been a Director of the Company since 1969. Mr. Davidson has been Chairman and Chief Executive Officer of D. A. Davidson & Co. since October, 1970. Mr. Davidson also is a Director of Plum Creek Management Company, a member of the 1996 Nominating Committee for District 3 of the National Association of Securities Dealers and a member of the C. M. Russell Museum Advisory Board. Timothy J. Moylan (deceased) was a Director of the Company since 1991. On August 1, 1996, Mr. Moylan became deceased, due to a drowning accident, while vacationing in Mexico. Mr. Moylan was President of the BelRad Group, South Pacific, Inc., and Natural Resources Group, Inc. Mr. Dean South, a former Vice-President of Western Operation of Heritage Propane Corporation, was appointed to fill the unexpired term of Mr. Moylan on August 29, 1996. Thomas N. McGowen, Jr. has been a Director of the Company since 1978. Mr. McGowen is past President and Chairman of the Board of Pabst Brewing Company. Mr. McGowen is a Director of Federal Signal Corporation and Ribi Immunochem Corporation. G. Montgomery Mitchell has been a Director of the Company since 1984. Mr. Mitchell was a Senior Vice-President and Director of Stone and Webster Management Consultants, Inc. until his retirement in 1993. Mr. Mitchell was responsible for Stone and Webster's services provided to natural gas utility and pipeline companies and managed their Houston, Texas office. He is presently retained by Stone and Webster for advisory and senior consulting services. Mr. Mitchell also is a Director of Mobile Gas Service Corporation (Alabama). John Reichel has been a Director of the Company since 1984. Prior to his retirement he was Managing Director of the Montana Region of First Bank System, Inc. From 1983 to 1985, Mr. Reichel was Managing Director of the Western Montana Region of First Bank System, Inc. and from 1975 to 1983 served as President of First Bank Great Falls. Mr. Reichel retired from First Bank System, Inc. in 1987. Mr. Reichel has elected not to run for re-election as a Director in November, 1996. David A. Flitner has been a Director of the Company since 1988. Mr. Flitner is owner of the Flitner Ranch and Dave Flitner Packing and Outfitting (Wyoming Companies) and Hideout Adventures, Inc., a recreational enterprise. 19 PART II Item 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common Stock Prices and Dividend Comparison - Fiscal 1995 and Shares of the Company's Class A Common Stock are traded in the over-the-counter market on the NASDAQ (National Association of Securities Dealers Automated Quotation) system-symbol: EWST. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent the actual transactions. Prices are shown as a result of a 2-for-1 stock split, effective June 24, 1994. Price Range - Fiscal 1996 High Low - ------------------------- ---- --- First Quarter 8 1/4 7 3/4 Second Quarter 9 1/2 7 3/4 Third Quarter 9 3/4 8 3/4 Fourth Quarter 9 3/8 8 Year 9 3/8 7 3/4 Price Range - Fiscal 1995 High Low - ------------------------- ---- --- First Quarter 9 1/4 8 1/2 Second Quarter 9 1/4 8 Third Quarter 8 1/2 7 1/2 Fourth Quarter 8 1/4 7 1/2 Year 9 1/4 7 1/2 20 Item 7. 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 $1,267,000 compared to $1,513,000 in fiscal 1995, a decrease of $246,000 or 16%. The following summary describes the components of the change between years. Revenue Operating revenues increased approximately 3%. Regulated revenues decreased 3% compared to the prior year due to a rate decrease in the Great Falls division, effective July 1, 1995. This decrease in rates was partially offset by colder weather this year than one year ago in the Great Falls and Cody utility divisions, increased transport revenues in the Cody division and the recognition of West Yellowstone revenues in this start-up operation. 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, a new operation in Montana, are reflected in this fiscal year. Nonregulated gross margins decreased approximately $84,000, primarily due to smaller margins in Energy West Resources' gas marketing operations. Regulated Revenues Regulated revenues decreased from $24,363,000 in fiscal 1995 to $23,672,000 in fiscal 1996 or 3%, primarily due to a decrease in the revenues of the Great Falls division of approximately $1,550,000, due to a $260,000 rate decrease ordered by the Montana Public Service Commission, a reduction in gas costs reducing rates by approximately $290,000 and the shift of Malmstrom Air Force Base revenues to a transportation customer, which further reduced revenues by approximately $1,000,000. This was offset by the inclusion of West Yellowstone revenues of approximately $300,000 and increased Cody division revenues of approximately $330,000, due to increased volumes sold due to customer growth, colder weather, higher transportation revenues and increases in Propane sales in the Broken Bow and Cascade divisions, due to customer growth. Gas purchased decreased from $15,077,500 in fiscal 1995 to $13,646,200 in fiscal 1996 or 10%, primarily due to a reduction in natural gas costs. 21 Regulated Operating Income Regulated operating income increased approximately $65,000 in fiscal 1996 or 3%, primarily due to increased gross margins of approximately $740,000, due to customer growth, colder weather, higher transportation sales and the inclusion of West Yellowstone margins. This was offset by increases in distribution, general, administrative and general expenses of approximately $490,000, due to operations growth and inflation, increases in depreciation and amortization expenses of approximately $153,000, due to additional utility plant and increases in taxes other than income of approximately $29,000, due to higher property taxes in all three states served by Energy West. Nonregulated Operating Income Nonregulated operating income decreased approximately $190,000 in fiscal 1996 or 20%, due to smaller margins in Energy West Resources' gas marketing operations of approximately $151,000 and higher operating and maintenance expenses of approximately $156,000 due to inflation and growth of nonregulated operations, offset partially by lower depreciation and amortization costs. Other Expenses Operating expenses (excluding cost of gas sales) increased approximately $790,000 or 9% in 1996. The primary reason for this increase was due to normal inflationary trends and lower capitalized payroll since the completion of the West Yellowstone system, as well as the addition of West Yellowstone's utility operating expenses this fiscal year. As a result of the above changes, operating income decreased 4% from $3,092,000 in 1995 to $2,965,000 in 1996. Total interest expense for the Company was $1,243,000 for fiscal 1996, up from $939,000 in fiscal 1995, due to higher short-term borrowing used in expansion of the Company's utility systems. Other additions to or deductions from operating income in determining net income remained comparable between the two years. 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. 22 Regulated Revenues Regulated revenues decreased minimally from approximately $24,421,000 in fiscal 1994 to $24,363,000 in fiscal 1995, primarily due to a decrease in the revenues of the Great Falls division of approximately $56,000, due primarily to 1% warmer weather in fiscal 1995, reducing sales of natural gas. Gas purchases decreased from approximately $15,667,000 in fiscal 1994 to $15,077,000 in fiscal 1995 or 4%, primarily due to a timing difference in purchased gas costs booked in the Great Falls division. Regulated Operating Income Regulated operating income increased approximately $100,000 in fiscal 1995 or 5%, primarily due to increased gross margins of approximately $532,000, due to customer growth and higher margins in the Great Falls division due to a timing difference in purchased gas costs booked. This was offset by increases in distribution, general and administrative and general expenses of approximately $296,000, due to operations growth and inflation, increases in depreciation and amortization expenses of approximately $72,000, due to additional utility plant and increases in taxes other than income of approximately $64,000, due to higher property taxes in all three states served by Energy West. Nonregulated Operating Income Nonregulated operating income increased approximately $387,000 in fiscal 1995 from fiscal 1994 or 70%, due primarily to increased margins in Energy West Resources' gas marketing operations of approximately $440,000, partially offset by higher operating and maintenance expenses of approximately $48,000 due to inflation and growth of nonregulated operations and higher depreciation and amortization costs. 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. 23 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.] 24 Fiscal 1996 Compared to Fiscal 1995 Revenues and Gross Margins Utility operating revenues in fiscal 1996 were approximately $23,672,000 compared to $24,363,000 in fiscal 1995. Gross margin, which is defined as operating revenues less gas purchased, was approximately $10,026,000 for fiscal 1996 compared to approximately $9,286,000 in fiscal 1995. Overall revenues decreased from fiscal 1995 due primarily to a $250,000 rate decrease in the Great Falls division in Montana, effective July 1, 1995. In addition, Malmstrom AFB became a transport customer of the Great Falls division in fiscal 1996, further reducing operating revenues. Energy West Resources sold natural gas to Malmstrom AFB in fiscal 1996. This decrease in rates and the Malmstrom change to transport was tempered by colder weather this year than one year ago in all utility divisions and recognition of West Yellowstone revenues this year in this start-up operation. While utility revenues decreased from fiscal 1995, margins increased approximately 8% for fiscal 1996, primarily due to higher margins from natural gas sales in the Great Falls and Cody divisions and propane sales in the Broken Bow division because of customer growth and colder weather than one year ago in the Great Falls and Cody divisions and the addition of West Yellowstone's margins in Fiscal 1996, in this new start-up operation. The winter heating season in the Great Falls division in fiscal 1996 was approximately 10% colder than fiscal 1995 and 8% colder than "normal" (i.e., the average temperature during the preceding 30 years). The winter heating season in the Cody division was approximately 5% colder than fiscal 1995, and very 25 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. 26 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) Interest expense [SEE NOTE BELOW] 112 87 113 Federal and state income taxes 85 71 85 Cumulative effect on prior years of change in accounting for income taxes 4 ------- ------- ------- Net income $ 131 $ 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 $ 286 $ 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 $ 46 $ 51 $ 87 ------ ---- ---- ------ ---- ---- Total Non-Utility Net Income $ 463 $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.] 27 Non-Utility Operations Rocky Mountain Fuels For the fiscal year ended June 30, 1996, Rocky Mountain Fuels (RMF) generated net income of approximately $131,000 compared to $122,000 for fiscal 1995. Earnings improved by approximately $76,000, due to decreasing depreciation expense in all of RMF's operating divisions as a result of changing the estimated useful lives for certain propane properties from twelve and fifteen years to twenty years, to better reflect its useful lives. Missouri River Propane and Big Horn Answering Service had a loss for the fiscal year. 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. 28 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 $606,000 as compared to $3,605,000 for fiscal 1995. This change from fiscal 1995 is attributed to a $246,000 decrease in net income, a reduction in accounts payable of approximately $1,000,000, an increase in recoverable costs of gas purchases and prepaid gas of approximately $1,627,000 and other miscellaneous working capital changes of approximately $1,170,000 offset by approximately $491,000 increase in deferred income taxes, an increase in gas inventory of approximately $470,000 and an increase in accounts receivable of approximately $80,000. Cash used in investing activities was approximately $3,989,000 for fiscal 1996, as compared to $4,274,000 for fiscal 1995. Capital expenditures for fiscal 1996 was approximately $4,591,000, primarily due to system expansion in Payson, Arizona and all other areas and continued expansion of the West Yellowstone system. Partially offsetting these capital expenditures were proceeds received from a sale lease back in Payson, Arizona of approximately $525,000, proceeds from the sale of property, plant and equipment of $27,000 and proceeds from contributions in aid of construction of approximately $63,000. 29 The Company generated net cash from operating activities for fiscal 1995 of approximately $3,605,000 as compared to $2,837,000 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 $4,274,000 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. 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. 30 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. 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. 31 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. 32 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 for the Company where certain equipment and materials owned by the Company are stored. The coal gasification process utilized in the plant resulted in the production of certain by-products which have been classified by the federal government and the State of Montana as hazardous to the environment. Several years ago the Company initiated an assessment of the site to determine if remediation of the site was required. That assessment resulted in a submission of a report to the Montana Department of Environmental Quality (MDEQ) in 1994. The Company has worked with the MDEQ since that time obtain the data that would lead to a remediation acceptable to MDEQ. The Company's environmental consultant advises the Company that it expects to have a report, which will include remediation recommendations, filed with the MDEQ by approximately mid-summer of 1997. MDEQ would then provide an opportunity for public comment on the remediation plan. Once the comment period has ended and due consideration of any comments occurs, the plan can be finalized. Assuming acceptance of the plan, remediation could be underway by the fall of 1998. At June 30, 1996 the Company's costs incurred in evaluating this site have totalled approximately $320,000. On May 30, 1995 the Company received an order from the Montana Public Service Commission allowing for a surcharge on customer bills in conntection with the costs associated with evalution of the site. As of June 30, 1996 the surcharge had generated approximately $214,000. The Commission's order calls for ongoing review by the Commission of the costs incurred for this matter by periodic approvals of the costs incurred for this matter. 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. 33 Item 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Auditors The Board of Directors Energy West Incorporated We have audited the accompanying consolidated balance sheets of Energy West Incorporated and Subsidiaries as of June 30, 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. As described in Note 1 to the consolidated financial statements, the Company has restated its fiscal 1996 consolidated financial statements to reflect the deferral of the gain on sale-leaseback of assets totalling $140,000 net of tax. \s\ ERNST & YOUNG LLP Denver, Colorado August 15, 1996 34 Energy West Incorporated and Subsidiaries Consolidated Balance Sheets JUNE 30 1996 1995 ------------------------- [RESTATED] ASSETS Current assets: Cash and cash equivalents $ 721,093 $ 356,200 Temporary cash investments (at cost which approximates market) - 59,556 Marketable equity securities 172,208 151,250 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 ------------------------- ------------------------- 35 Energy West Incorporated and Subsidiaries Consolidated Balance Sheets JUNE 30 1996 1995 --------------------------- [RESTATED] 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 2,700,184 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 Deferred gain on sale-leaseback of assets 236,291 - Other 17,799 6,736 --------------------------- Total other 4,961,539 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 8,416,119 8,076,907 --------------------------- Total stockholders' equity 11,399,857 10,532,758 --------------------------- Total Capitalization 21,445,571 20,967,715 --------------------------- Total capitalization and liabilities $37,494,673 $32,374,781 --------------------------- --------------------------- SEE ACCOMPANYING NOTES. 36 Energy West Incorporated and Subsidiaries Consolidated Statements of Income YEAR ENDED JUNE 30 1996 1995 1994 ---------------------------------------- [RESTATED] 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 Other income, net 214,902 174,878 199,014 ---------------------------------------- Income before interest charges and income taxes 3,179,738 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 1,937,000 2,328,591 1,872,595 Provision for income taxes 670,025 815,688 613,964 ---------------------------------------- Income before cumulative effect of change in accounting principle 1,266,975 1,512,903 1,258,631 Cumulative effect on prior years of change in accounting for income taxes - - 92,365 ---------------------------------------- Net income $1,266,975 $ 1,512,903 $ 1,350,996 ---------------------------------------- ---------------------------------------- Income per share of common equivalent stock: Income before cumulative effect of change in accounting principle $.55 $.68 $.57 Cumulative effect of change in accounting for income taxes - - .04 ---------------------------------------- Net income per common share $.55 $.68 $.61 ---------------------------------------- ---------------------------------------- SEE ACCOMPANYING NOTES. 37 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 - - 1,266,975 1,266,975 Cash dividends on common stock-- $.405 per share - - (927,763) (927,763) ---------------------------------------------- Balance at June 30, 1996 $348,198 $2,635,540 $8,416,119 $11,399,857 ---------------------------------------------- ----------------------------------------------
SEE ACCOMPANYING NOTES. 38 Energy West Incorporated and Subsidiaries Consolidated Statements of Cash Flows
YEAR ENDED JUNE 30 1996 1995 1994 ------------------------------------ [RESTATED] OPERATING ACTIVITIES Net income $1,266,975 $ 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 of assets (11,406) (4,174) (25,276) Investment tax credit (21,062) (21,062) (21,062) Deferred income taxes 399,205 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 Increase in marketable equity securities (20,958) (12,171) (7,911) 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 (3,989,398) (4,273,826) (1,825,143)
39 Energy West Incorporated and Subsidiaries Consolidated Statements of Cash Flows (continued)
YEAR ENDED JUNE 30 1996 1995 1994 ------------------------------------------- [RESTATED] 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 364,893 42,450 (121,538) Cash and cash equivalents at beginning of year 356,200 313,750 435,288 ----------------------------------------- Cash and cash equivalents at end of year $ 721,093 $ 356,200 $ 313,750 ----------------------------------------- ----------------------------------------- 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.
40 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. 41 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 42 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. MARKETABLE EQUITY SECURITIES Marketable equity securities are classified as available for sale securities. 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. 43 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. 44 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 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. 45 Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) EFFECTS OF REGULATION (CONTINUED) 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. 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. PRIOR PERIOD ADJUSTMENT The Company has restated its previously issued fiscal 1996 financial statements to reflect the deferral of the gain on sale-leaseback of assets totalling $236,000 (see Note 9). The gain will be amortized ratably into income over the initial ten-year lease term. The effect on previously reported retained earnings as of June 30, 1996 and results of operations for the year ended June 30, 1996, are as follows: Net income: As previously reported $1,407,366 As restated $1,266,975 Net income per common share: As previously reported $.61 As restated $.55 Retained earnings: As previously reported $8,556,510 As restated $8,416,119 46 Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) 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. 47 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%. 48 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 49 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. 50 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. 51 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 Deferred gain on sale of assets 95,900 - Other 47,093 42,318 ------------------------- Total deferred tax assets 665,212 532,842 52 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 $2,953,569 $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) - - Deferred Gain on sale of assets (95,900) Other (25,362) 17,813 (62,016) ------------------------------------- Total deferred income taxes 461,646 62,686 171,896 Investment tax credit, net (21,062) (21,062) (21,062) ------------------------------------- Total income taxes $707,180 $867,118 $653,863 ------------------------------------- ------------------------------------- Income taxes--operations $670,025 $815,688 $613,964 Income taxes--other income 37,155 51,430 39,899 ------------------------------------- Total income taxes $707,180 $867,118 $653,863 ------------------------------------- ------------------------------------- 53 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% $666,930 $799,582 $607,394 State income tax, net of federal tax benefit 44,710 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 $707,180 $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: 54 Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. REGULATED AND NONREGULATED OPERATIONS (CONTINUED)
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 $3,168,260 $(1,071,999) $11,399,857 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 3,207,968 270,816 (778,600) 2,700,184 OTHER LIABILITIES 2,473,659 283,456 (495,760) 2,261,355 --------------------------------------------------------- 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 --------------------------------------------------------- ---------------------------------------------------------
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 -------------------------------------------------------- --------------------------------------------------------
55 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 56 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-Leaseback 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 deferred gain of $236,000, which will be amortized ratably into income over the initial lease term. The land, buildings and related accounts are no longer recognized in the accompanying financial statements. 57 Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. Gain on Sale-Leaseback 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. 58 Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Commitments and Contingencies (continued) ENVIRONMENTAL MATTERS The Company owns property on which it operated a manufactured gas plant from 1909 to 1928. The site is currently used as a service center for the Company where certain equipment and materials owned by the Company are stored. The coal gasification process utilized in the plant resulted in the production of certain by-products which have been classified by the federal government and the State of Montana as hazardous to the environment. Several years ago the Company initiated an assessment of the site to determine if remediation of the site was required. That assessment resulted in a submission of a report to the Montana Department of Environmental Quality (MDEQ) in 1994. The Company has worked with the MDEQ since that time obtain the data that would lead to a remediation acceptable to MDEQ. The Company's environmental consultant advises the Company that it expects to have a report, which will include remediation recommendations, filed with the MDEQ by approximately mid-summer of 1997. MDEQ would then provide an opportunity for public comment on the remediation plan. Once the comment period has ended and due consideration of any comments occurs, the plan can be finalized. Assuming acceptance of the plan, remediation could be underway by the fall of 1998. At June 30, 1996 the Company's costs incurred in evaluating this site have totalled approximately $320,000. On May 30, 1995 the Company received an order from the Montana Public Service Commission allowing for a surcharge on customer bills in conntection with the costs associated with evalution of the site. As of June 30, 1996 the surcharge had generated approximately $214,000. The Commission's order calls for ongoing review by the Commission of the costs incurred for this matter by periodic approvals of the costs incurred for this matter. 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. 59 Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. Financial Instruments and Risk Management For fiscal years ending June 30, 1995 and 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. 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 idfferences between the cost of gas allowed by the regulators and the actual prices paid including any financial swap agreements.
Fair Index Price Value of Volume Range for Contract Index Remaining (MMBTU Effective Termination Contract Fiscal Value Price Contract Fiscal Year per Day) Date Date Price Year at June 30 at June 30 At June 30 - -------------------------------------------------------------------------------------------------------------------- 1995 - ----------- Swap #1 4,000 5/1/95 4/30/96 $1.57 $.98 to $1.14 $2,059,840 $0.98 $1,285,760 1996 - ----------- Swap #1 5,000 11/1/95 10/31/96 $1.35 $.89 to $1.22 $830,250 $0.89 $547,350
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. 60 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 $169,500 $141,590 ($121,799) $189,291 Year Ended June 30, 1995 $189,291 $81,327 ($79,450) $191,168 Year Ended June 30, 1996 $191,168 $64,509 ($47,571) $208,106 61 Consolidated Quarterly Financial Data on page 17 of the 1996 Annual Report to Shareholders is incorporated herein by reference. Item 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable 62 PART III Item 10. - DIRECTORS AND EXECUTIVE OFFICER OF THE REGISTRANT Information concerning the directors and executive officers is included in Part I, on pages 16 through 19. The information contained under the heading "Election of Directors" in the Proxy Statement is incorporated herein by reference in response to this item. Item 11. - EXECUTIVE COMPENSATION The information contained under heading "Executive Compensation" in the Proxy Statement is incorporated herein by reference in response to this item. Item 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by reference in response to this item. Item 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained under the heading "Certain Transactions" in the Proxy Statement is incorporated herein by reference in response to this item. 63 PART IV Item 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K (a) 3. Exhibits (See Exhibit Index on Page E-1) (b) Reports on Form 8-K None 64 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENERGY WEST INCORPORATED /s/ Larry D. Geske /s/ William J. Quast - ------------------- --------------------- Larry D. Geske, President and William J. Quast Chief Executive Officer Vice-President, Treasurer, and Chairman of the Board Controller and Assistant Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Larry D. Geske 7/8/97 - ------------------- ------- Larry D. Geske President and Chief Executive Date Officer and Acting Chairman of the Board /s/ Ian B. Davidson 7/8/97 - ------------------- ------- Ian B. Davidson Director Date /s/ Thomas N. Mcgowen, Jr. 7/8/97 - -------------------------- ------- Thomas N. McGowen, Jr. Director Date /s/ G. Montgomery Mitchell 7/8/97 - -------------------------- ------- G. Montgomery Mitchell Director Date /s/ John Reichel 7/8/97 - ---------------- ------- John Reichel Director Date /s/ David A. Flitner 7/8/97 - -------------------- ------- David A. Flitner Director Date 65 EXHIBIT INDEX Exhibits - -------- 3.1 Restated Articles of Incorporation of the Company, as amended to date (filed herewith). 3.2 Bylaws of the Company, as amended to date (filed herewith). 4.1 Form of Indenture (including form of Note) relating to the Company's Series 1993 Notes (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-2, File No. 33-62680). 4.2 Loan Agreement, dated as of September 1, 1992, relating to the Company's Series 1992A and Series 1992B Industrial Development Revenue Bonds (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-2, File No. 33-62680). 10.1 Credit Agreement dated as of January 18, 1995, by and between the Company and Norwest Bank Great Falls, National Association (filed herewith). 10.2 Amendment dated April 17, 1996 to Credit Agreement dated as of January 18, 1995, by and between the Company and Norwest Bank Montana, National Association (filed herewith). 10.3 Amendment dated November 7, 1996 to Credit Agreement dated as of January 18, 1995, the Company and Norwest Bank Montana, National Association (filed herewith). 10.4 Promissory Note dated November 7, 1996, issued to Norwest Bank Montana, National Association (filed herewith). 10.5 Credit Agreement dated as of February 12, 1997, by and between the Company and First Bank Montana, National Association (filed herewith). 10.6 Delivered Gas Purchase Contract dated February 23, 1997, as amended by that Letter Amendment Amending Gas Purchase Contract dated March 9, 1982; that Amendment to Delivered Gas Purchase Contract applicable as of March 20, 1986; that Letter Agreement dated December 18, 1986; that Letter Agreement dated April 12, 1988; that Letter Agreement dated April 28, 1992; that Letter Agreement dated March 14, 1996; that Letter Agreement dated April 15, 1996; a second Letter Agreement dated April 15, 1996; that Letter dated February 18, 1997; and that Letter dated April 1, 1997, transmitting a Notice of Assignment effective February 26, 1993 (filed herewith). 10.7 Delivered Gas Purchase Contract dated December 1, 1985, as amended by that Letter Agreement dated July 1, 1986; that Letter Agreement dated November 19, 1987; that Letter Agreement dated December 1, 1988; that Letter Agreement dated July 30, 1992; that Assignment Conveyance and Bill of Sale effective as of January 1, 1993; that Letter Agreement dated March 8,, 1993; that Letter Agreement dated October 21, 1993; that Letter Agreement dated October 18, 1994; that Letter Agreement dated January 30, 1995; that Letter Agreement dated August 30, 1995; that Letter Agreement dated October 3, 1995; that Letter Agreement dated October 31, 1995; that Letter Agreement dated December 21, 1995; that Letter Agreement dated April 25, 1996; that Letter Agreement dated January 29, 1997; and that Letter dated April 11, 1997 (filed herewith). E-1 10.8 Natural Gas Sale and Purchase Agreement dated July 20, 1992 between Shell Canada Limited and the Company, as amended by that Letter Agreement dated August 23, 1993; that Amending Agreement effective as of November 1, 1994; and that Schedule A Incorporated Into and Forming a Part of That Natural Gas Sale and Purchase Agreement, effective as of November 1, 1996 (filed herewith). 10.9 Employee Stock Ownership Plan Trust Agreement (incorporated by reference to Exhibit 10.2 to Registrant's Registration Statement on Form S-1, File No. 33-1672). 10.10 1992 Stock Option Plan (filed herewith). 10.11 Form of Incentive Stock Option under the 1992 Stock Option Plan (filed herewith). 10.12 Management Incentive Plan (filed herewith). 13.1 Portions of the Company's 1996 Annual Report to Shareholders (previously filed). 21.1 Subsidiaries of the Company (filed herewith). 23.1 Consent of Independent Auditors (filed herewith). 27.1 Financial Data Schedule (filed herewith). E-1 EX-3.1 2 EXHIBIT 3.1 [LETTERHEAD] RESTATED CERTIFICATE OF INCORPORATION I, FRANK MURRAY, Secretary of State of the State of Montana, do hereby certify that duplicate originals of Restate Articles of Incorporation of GREAT FALLS GAS COMPANY and Statement on Adoption thereon duly executed pursuant to the provisions of Section 35-1-213 of the Montana Code Annotated have been received in my office and found to conform to law. NOW, THEREFORE, I, FRANK MURRAY, as such Secretary of Sate, by virtue of the authority vested in me by law, HEREBY ISSUE this Restated Certificate of Incorporation of Incorporation of GREAT FALLS GAS COMPANY and attach hereto a duplicate original of the Restated Articles of Incorporation and the Statement on Adoption thereon. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Great Seal of the State of Montana, at Helena, the Capital this 24th day of November, A.D. 1980. /s/ Frank Murray FRANK MURRAY Secretary of State /s/ Leonard C. Larson By Leonard C. Larson Chief Deputy 281111 RESTATED ARTICLES OF INCORPORATION STATE OF MONTANA FILED OF NOV 24 1980 FRANK MURRAY GREAT FALLS GAS COMPANY SECRETARY OF STATE /s/ Frank Murray Pursuant to the provisions of Section 58 of the Montana Business Corporation Act (Section 35-1-213, MCA (1978)), the undersigned corporation, pursuant to a resolution duly adopted by its Board of Directors, hereby adopts the following Restated Articles of Incorporation: FIRST: The name of the corporation is Great Falls Gas Company. SECOND: The duration of the corporation is to be perpetual. THIRD: The purposes for which the corporation was and is organized are as follows: (a) To acquire by purchase that certain gas franchise known as "Ordinance No. 310", passed by the city council of the City of Great Falls, Montana, on the 20th day of January, 1908, and approved by the Mayor of said City on the 21st day of January, 1908, being a grant to Charles U. Gordon, his associates, successors and assigns, of the right to construct, maintain and operate a plant for the manufacture, sale and distribution of illuminating and fuel gas and their by-products, and to use the streets, alleys and public places of said City therefor, and thereafter to own, said gas franchise and to use and enjoy the same according to the nature thereof. (As originally pro- -1- vided in the Articles of Incorporation filed February 11, 1909.) (b) To acquire, own and hold lands, buildings, tanks, machinery, pipes and pipe lines, and any and all suitable appliances for manufacturing, producing, and distributing illuminating and fuel gas, and by-products, and any and all other illuminant products for lighting, heating, and any and all other beneficial uses and purposes to which they may be applied. (As originally provided in the Articles of Incorporation filed February 11, 1909.) (c) To acquire, hold and operate machinery and other property for the purpose of generating and transmitting electricity, electric energy and electric light, heat and power; and to supply such gas and illuminant products, heat and light to the said City of Great Falls, and to the inhabitants thereof, or to any other useful purpose. (As originally provided in the Articles of Incorporation filed February 11, 1309.) (d) To acquire and hold mineral lands and rights to prospect for, bore, sink wells, produce, pipe and transport natural gas, oil and petroleum; and to refine, store and deal in petroleum and other oils and their products and by-products; to operate and maintain oil and natural gas wells, with suitable tanks and pipe lines for the same; and to acquire, own, dispose of, develop and operate mines of coal and coal lands. (As originally provided in the Articles of Incorporation filed -2- February 11, 1909.) (e) To incur indebtedness in such amount as may be deemed necessary or proper; to evidence such indebtedness by the bonds or other written obligations of this corporation; and to secure the payment of such indebtedness by mortgage, deed of trust, or other form of incumbrance of and upon all or any part of the property, rights, privileges and franchises of this corporation, whether acquired at the time of making such incumbrance or thereafter to be acquired. (As originally provided in the Articles of Incorporation filed February 11, 1909.) (f) To carry on any other business, or to do any other thing in connection with the objects and purposes above mentioned that may be necessary or proper to successfully accomplish or promote said subjects and purposes. And to do any and all other acts and things, and to exercise any and all other powers, which a copartnership or natural person could do and exercise, and which now or hereafter may be authorized by law. (As originally provided in the Articles of Incorporation filed February 11, 1909.) (g) To engage in any lawful act or activity for which corporations may be organized under the Montana Business Corporation Act. (h) To do each and every thing necessary, proper or convenient for the accomplishment of any such purposes. -3- FOURTH: The aggregate number of shares which the corporation now has authority to issue is One Hundred Twenty Thousand (120,000) shares of the par value of One Dollar and Fifty Cents ($1.50) each, of which Eighty-Seven Thousand Five Hundred Forty-Four (87,544) shares are issued and outstanding, including Nine Hundred Thirty-Eight (938) shares of treasury stock. The stated capital of the corporation is One Hundred Thirty-One Thousand Three Hundred Sixteen Dollars ($131,316.00). FIFTH: The Bylaws of this corporation may be altered, amended, or additional provisions adopted by a majority vote of all of the capital stock represented in any regular or special meeting of the stockholders, or by a majority of the directors in any regular or special meeting of the Board of Directors. SIXTH: The current address of the initial registered office of the corporation is: 725 Central Avenue P. O. Box 2229 Great Falls, Montana 59403. And the name of its current registered agent at such Address Larry D. Geske SEVENTH: The number of directors now constituting the Board of Directors of the corporation is seven (7). -4- The foregoing Restated Articles of Incorporation correctly set forth without change the corresponding provisions of the Articles of Incorporation as herein and as heretofore amended, and supersede the original Articles of Incorporation and all amendments thereto. DATED this 1st day of May, 1980. GREAT FALLS GAS COMPANY BY: /s/ Larry D. Geske ------------------------------ LARRY D. GESKE, President ATTEST: /s/ Robert W. Creek - --------------------------- ROBERT W. CREEK, Secretary VERIFICATION ------------ STATE OF MONTANA ) : ss. County of Cascade ) On this 25th day of August, 1980, before me, the undersigned, a Notary Public for the State of Montana, personally appeared LARRY D. GESKE and ROBERT W. CREEK, known to me to be the president and secretary, respectively, of GREAT FALLS GAS COMPANY, and they, upon their oath, acknowledged to me that such corporation executed the foregoing Restated Articles of Incorporation of Great Falls Gas Company and that the statements therein contained are true. /s/ William Quast --------------------------------------- Notary Public for the State of Montana Residing at Great Falls, Montana My Commission expires: June 16, 1981 (NOTARIAL SEAL) -5- ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION The name of the Corporation is the Great Falls Gas Company. The following is the Article of Amendment to the Articles of Incorporation for Great Falls Gas Company: [STAMP] RESOLVED, that the Shareholders amend the Articles of Incorporation, in order to increase the number of authorized shares of Common Stock, to effect a 10-for-1 split of the Company's Common Stock and to authorize preferred shares of Preferred Stock, and to establish the par value of said authorized shares, such amendment to be effective June 15, 1984, and that to that end Article Fourth be changed to read as follows: "FOURTH. The total authorized number of shares of this Corporation is 5,000,000, of which 3,500,000 shall be shares of Common Stock of the par value of $.15 each and of which 1,500,000 shall be shares of preferred stock of the par value of $.15 each. The shares of Preferred Stock may be issued from time to time by the Board of Directors in one or more series with such designations, relative rights, preferences, limitations, dividend rates, redemption prices, liquidation prices, conversion rights, sinking or purchase fund rights, and other provisions as the Board of Directors may establish, fix and determine. The holders of shares of Common Stock shall have one vote for each share of Common Stock held on each matter submitted to the holders of shares of Common Stock." The date of adoption was May 10, 1984, which was the date of a Special meeting of the Stockholders. There are 86,606 shares of common stock Outstanding and entitled to vote. The corporation only had one class of stock at the time of the vote. The holders of 81,066 shares of stock attended, in person or by proxy, the Special Meeting of Stockholders. The following votes here received: 80,838 votes "for" 161 votes "against" 67 votes "abstained" The 10-for-1 split of the Company's common stock requires the issuance of 9 additional shares to each holder of shares, as of the effective date of June 1984. The transfer agent will send the additional shares along with a note of explanation signed by the President of the Corporation. /s/Larry D. Geske /s/ William Quast - ----------------------- ------------------------ President Secretary SECRETARY OF STATE STATE OF MONTANA CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION I, JIM WALTERMIRE, Secretary of State of the State of Montana, do hereby certify that the Articles of Amendment to the Articles of Incorporation of GREAT FALLS GAS COMPANY, a Montana profit corporation, duly executed pursuant to the provisions of Section 35-1-210, Montana Code Annotated, have been received in my office and conform to law. NOW, THEREFORE, I, JIM WALTERMIRE, as such Secretary of State, by virtue of the authority vested in me by law, hereby issue this Certificate of Amendment to the Certificate of Incorporation of GREAT FALLS GAS COMPANY, a Montana profit corporation, and attach hereto a copy of the Articles of Amendment to the Articles of Incorporation. . IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Great Seal of the State of Montana, at Helena, the Capital, this December 10, A.D. 1987. /s/ Jim Waltermire JIM WALTERMIRE Secretary of State GREAT FALLS GAS COMPANY ARTICLES OF INCORPORATION ARTICLES OF AMENDMENT Pursuant to the provisions of the Montana Business Corporation Act ( MCA Section 35-1-207 et seq.), Great Falls Gas Company submits its Articles of Amendment as follows: 1. The name of the corporation is Great Falls Gas Company. 2. The amendment adopted by its shareholders reads as follows: EIGHTH. A director of the corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its shareholders, (ii) for acts or omissions that constitute willful misconduct, recklessness, or a knowing violation of law, (iii) under Section 409 of the Montana Business Corporation Act, or (iv) for a transaction from which the director derives an improper personal benefit. If the Montana Business Corporation Act is hereafter amended to authorize further elimination or limitation of the liability of a director then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Montana Business Corporation Act, as so amended., Any repeal or modification of the foregoing provisions of this Article Eight shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. 3. On August 25th the Board of Directors for Great Falls Gas Company adopted a resolution proposing to amend the Articles of Incorporation in the above manner. On November 5th shareholders approved that amendment at the annual shareholders meeting. 4. The number of shares outstanding at the time of the annual meeting was 1,001,146. The number of shares entitled to vote was 991,766. At the time of the annual meeting the Company had only one authorized class of stock. 5. The number of shares voted in favor of the amendment was 511,728. The number of shares voted in opposition to the amendment was 14,800. 6. The amended article does not provide for exchange, reclassification or cancellation of issued shares. -1- Dated this 7th day of December, 1987. By: /s/ Larry D. Geske --------------------------- Larry D. Geske, President Attest: /s/ John C. Allen - ----------------------------------- John C. Allen, Assistant Secretary VERIFICATION STATE OF MONTANA ) : ss. County of Cascade ) On the 7th day of December, 1987, before me, the undersigned, a Notary Public for the State of Montana, personally appeared LARRY D. GESKE, and JOHN C. ALLEN, known to me to be the president and assistant secretary, respectively, of GREAT FALLS GAS COMPANY, and they, upon their oath, acknowledged to me that such corporation executed the foregoing Restated Articles of Incorporation of Great Falls Gas Company and that the statements therein contained are true. /s/ Cheryl Johnson --------------------------------------- Notary Public for the State of Montana Residing at Great Falls, Montana My commission expires: February 21, 1988 (NOTARIAL SEAL) -2- GREAT FALLS GAS COMPANY ARTICLES OF INCORPORATION ARTICLES OF AMENDMENT Pursuant to the provisions of the Montana Business Corporation Act (MCA 35-1-230 et seq.) Great Falls Gas Company submits its Articles of Amendment as follows: 1. The name of the corporation is Great Falls Gas Company. 2. At the Shareholders meeting held November 18, 1993, a majority of its Shareholders adopted the following proposals: 1. To change the corporate name from Great Falls Gas Company to ENERGY WEST, Incorporated, 2. To amend the Articles of Incorporation to allow for the election of a range in the number of Directors from five to nine. Therefore, the Articles of Incorporation shall be changed to replace the name Great Falls Gas Company throughout the Articles of Incorporation, wherever it appears with the name ENERGY WEST, Incorporated. Furthermore, consistent with proposition Number 2 above, Article 3.2 shall be changed to read as follows: Section 3.2 Number, Qualification and Term of Office. The number of directors which shall constitute the whole Board shall be determined by resolution of the Board of Directors except that the number of directors shall not be less than five or more than nine. Each director shall own at least ten shares of capital stock of the Company. The term of office shall be one year unless the Board of Directors by resolution implement staggered terms consistent with the requirements of prevailing law. The terms of directors, if staggered, shall be two years. 3. On November 18, 1993 the Board of Directors for Great Falls Gas Company adopted a resolution proposing to amend the Articles of Incorporation in the above manner. On November 18, 1993 shareholders approved that amendment at the annual shareholders meeting. 4. The number of shares outstanding at the time of the annual meeting was 1,085,724. The number of shares entitled to vote was 1,085,724. At the time of the annual meeting the Company had only one authorized class of stock. 5. The number of shares voted in favor of Proposal No. 1, the Name Change amendment, was 951,716. The number of shares voted in opposition to the amendment was 16,091. The number of shares voted in favor of the Proposal No. 2, Number of Directors, was 941,505. The number of shares voted in opposition to the amendment was 25,597. 6. The amended article does not provide for exchange, reclassification or cancellation of issued shares. Dated this 21st day of December, 1993. By: /s/ Larry D. Geske ---------------------------------- Larry D. Geske, President and CEO VERIFICATION STATE OF MONTANA ) : ss. County of Cascade ) On the 20th day of December, 1993, before me, the undersigned, a Notary Public for the State of Montana, personally appeared LARRY D. GESKE, known to me to be the President and CEO of ENERGY WEST, Incorporated, and upon his oath, acknowledged to me that such corporation executed the foregoing Articles of Amendment of ENERGY WEST, Incorporated and that the statements therein contained are true. /s/ Cheryl Johnson - ----------------------------------------- Notary Public for the State of Montana Residing at Great Falls, Montana My commission expires: February 21, 1994 EX-3.2 3 EXHT 3.2 : BY LAWS BY LAWS OF ENERGY WEST, INC. ARTICLE I OFFICES Section 1.1. PRINCIPAL OFFICE. The principal office of Great Falls Gas Company, a Montana corporation, (hereinafter called the "Company"), shall be in the City of Great Falls, County of Cascade, State of Montana. Section 1.2. OTHER OFFICES. The Company may also have an office in the City of Chicago, County of Cook, State of Illinois, and also an office or offices at such other places either within or without the State of Montana as the board of Directors (hereinafter called the "Board") may from time to time determine, or the business of the Company may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 2.1. PLACE OF MEETINGS. All meetings of stockholders shall be held at the principal office of the Company in Montana. Section 2.2. ANNUAL MEETINGS. Commencing with the year 1951 an annual meeting of the stockholders of the Company shall be held on the first Thursday of April in each year if not a legal holiday, and if a legal holiday, then on the next succeeding business day not a legal holiday. At each annual meeting, directors shall be elected by stockholders in accordance with the provisions of the Articles of Incorporation of the Company (hereinafter called the "Articles of Incorporation") and these By-Laws. Each such annual meeting shall be a general meeting, open for the transaction of any business within the powers of the Company, without special notice of such business, except in any case where special notice may be required by the laws of the State of Montana. Section 2.3. SPECIAL MEETINGS OF STOCKHOLDERS. Special meetings of stockholders for any purpose of purposes may be called at any time by the Board or the President and shall be called by the Board or the President or the Secretary upon the request in writing of a stockholder or stockholders holding of record at least one-fifty of the number of outstanding shares of stock entitled to vote at such meeting, provided that any such request shall state the purpose or purposes of the proposed meeting. 1 Section 2.4. NOTICE OF MEETINGS. Except as otherwise provided by law, or by the Articles of Incorporation or by the By-Laws, written notice of each annual and special meeting of stockholders shall be given by at the direction of the President or the Secretary, or, in case of a special meeting, by the officer or the person calling the meeting as provided in these By-Laws, either personally or by mail, not more than 40 days and not less than 10 days before the meeting, to each stockholder of record entitled to vote there at. Every such notice shall state the place, day and hour of the meeting, and, in the case of a special meeting, shall state briefly the purpose or purposes thereof. Section 2.5. QUORUM AND ADJOURNMENTS. For the purpose of any action to be taken by stockholders at any meeting, the presence in person or by proxy of the holders of a majority vote there at shall be necessary to constitute a quorum for the transaction of business except as otherwise expressly provided by law. If for any reason there is not present a quorum at any meeting as hereinbefore provided, the stockholders present or represented at the meeting may adjourn, and such adjournment and the reasons therefor shall be recorded in the journal of the proceedings of the meetings of stockholders. If from any cause an election does not take place on the day appointed in these By-laws, it may be held on any day thereafter as shall be designated by a majority vote of the stockholders present or represented at such meeting, or to which such election may be adjourned or ordered by the Board. At any such adjourned meeting, at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The absence from any meeting of the number required by law or by the Articles of Incorporation or these By-laws for action upon any given matter shall not prevent action at such meeting upon any other matter or matters which may properly come before the meeting if the number required in respect of such other matters shall be present. Any regularly called meeting of stockholders may adjourn from day to day, from time to time. Section 2.6. ORGANIZATION. Except as otherwise provided by law, at any meeting of stockholders, the President, or, in the absence of the President, the Vice President, or, in the absence of both the President and the Vice President, a chairman, chosen by the vote of a majority in interest of the stockholders present thereat in person or by proxy and entitled to vote shall act as a chairman; and the Secretary, or in his absence, an Assistant Secretary, or in the absence of the Secretary and all Assistant Secretaries, a person whom the Chairman of the meeting shall appoint shall act as Secretary of the meeting. Section 2.7. VOTING BY STOCKHOLDERS. Except as otherwise expressly provided by law or the Articles of Incorporation, each stockholder present in person or by proxy at any meeting shall have one vote with respect to each share of stock registered in his name on the books of the Company: 2 (a) on the date fixed pursuant to Section 8.5 hereof as the record date for the determination of stockholders entitled to notice of and to vote at such meeting, or (b) in the event that no such record date shall have been fixed, then on the date determined in accordance with Section 8.5 hereof; provided, however, that, in all elections for Directors, every stockholder shall have the right to vote in person or by proxy the number of shares standing in his name, upon which he is entitled to vote, for as many persons as there are directors to be elected, or to cumulate said shares, and give one candidate as many votes as the number of directors multiplied by the number of his shares of stock shall equal, or to distribute them on the same principle among as many candidates as he shall think fit. The candidates receiving the highest number of votes shall be deemed elected. Any stockholder entitled to vote at any meeting may vote either in person or by his proxy appointed by an instrument in writing, subscribed by such stockholder, or his attorney or agent thereunto authorized in writing and delivered to the Secretary of the meeting. Except as otherwise expressly provided by law or by the Articles of Incorporation, all matters to be decided by stockholders at any meeting, shall be decided, if a quorum be present, by a plurality of the votes passed at the meeting of the stockholders present in person, or by proxy and entitled to vote thereon. The vote for election of directors shall be by ballot. Unless directed by the Chairman of the meeting or demanded by a majority in interest of the stockholders present in person or by proxy at any meeting and entitled to vote thereon, the vote on any other matter, other than the election of directors need not be by ballot. Upon vote by ballot, each proxy if there be such proxy, and shall state the number of shares voted by him. In the event that a vote by ballot is so taken, the chairman of the meeting may, and, if requested by any stockholder present in person or by proxy entitled to vote thereon, shall appoint two persons to serve as inspectors of election for the purpose of such vote. Such inspectors of election shall examine the ballots cast upon the taking of such vote and shall report to the chairman the result thereof. 3 ARTICLE III BOARD OF DIRECTORS Section 3.1. GENERAL POWERS. The corporate powers, business and property of the Company shall be exercised, conducted and controlled by the Board as from time to time constituted. Section 3.2. NUMBER, QUALIFICATION AND TERM OF OFFICE. The number of directors which shall constitute the whole Board shall be six directors, each of whom shall be the holder of at least one share of capital stock of the Company. The term of office of each director shall be for one year and until his successor is elected and qualified. Section 3.3. ELECTION OF DIRECTORS. Directors shall be elected solely from the list of persons nominated for directors at the meeting. Each stockholder entitled to vote, present in person or by proxy, shall have the right to nominate persons to be voted upon. Section 3.4. PLACE OF MEETINGS. The Board may hold its meetings at the principal place of business of the Company in the State of Montana or at the office of the Company in the City of Chicago, Illinois, or at such other place or places either within or without the State of Montana as the Board may from time to time determine or shall be specified or fixed in the respective notices or waivers of notice thereof. In case the meetings of the Board shall be held outside the State of Montana, either the original minutes of each meeting containing a record of all proceedings has thereat and signed by the chairman and the secretary of such meeting or full and complete copies or duplicates of such minutes certified by such chairman and secretary, under the seal of the Company, shall be sent to and kept at the principal office of the Company in Montana and shall be a part of the records in Montana. Section 3.5. FIRST MEETINGS. A meeting of the Board for the purposes of organization, election of officers and transaction of other business shall be held, if practicable, at the close of each annual meeting of stockholders for election of Directors and at the place of the holding of such election. No notice of any such meeting held at such time and place need be given. Such meeting may be held at any other time and place which shall be specified in a notice given as thereinafter provided of special meetings of the Board or in a waiver of notice signed by all the Directors. 4 Section 3.6. REGULAR MEETINGS. Regular meetings of the Board may be held, with or without notice, at such time and place as may from time to time be specified in a resolution adopted by the Board and at the time in effect. Section 3.7. SPECIAL MEETINGS: NOTICE. Special meetings of the Board shall be held whenever called by the President, or by the Secretary at the request of the President, or by not less thank two of the Directors, or not less than one-third of the number of Directors then constituting the Board, whichever is the greater. Notice of such meetings shall be given to each Director at least 48 hours before the time fixed for such meeting, and such notice may be given in person or by mail, telegraph, or cable. Every such notice shall state the time and place of the meeting, but need not state the purposed thereof except as otherwise by law or in these By-Laws expressly provided. Section 3.8. QUORUM: MANNER OF ACTING. At each meeting of the Board the presence of a majority of the full number of Directors shall be necessary to constitute a quorum and sufficient to form a Board for the transaction of business. Any act and every decision of a majority of the Directors present at a meeting at which a quorum shall be present and forming such Board shall be the act of the Board, except as may be otherwise specifically provided by law or these By-Laws. Any meeting of the Board may be adjourned by a majority vote of the Directors present at such meeting. In the absence of a quorum at such meeting, a majority of the Directors present thereat may adjourn such meeting from time to time until a quorum shall be present thereat. Notice of any adjourned meeting need not be given. The Directors shall act only as a Board, and the individual Directors shall have no power as such. Section 3.9. ORGANIZATION. At all meetings of the Board, the President, or, in the absence of the President, a Director chosen by the Board, shall act as Chairman. The Secretary, or, in his absence, the Assistant Secretary of the Company, or, in the absence of the Secretary and all Assistant Secretaries, a person appointed by the chairman of the meeting shall act as Secretary of the meeting. Section 3.10. COMPENSATION. Directors shall be entitled to receive such fees and expenses, if any, for attendance at meetings of the Board of Directors, and/or fixed salaries for services as Directors, as may be fixed from time to time by resolution of the Board. Directors may also receive compensation for services rendered to the Company as officers, members of the Executive Committee or other committee, or in any other capacity. Section 3.11. VACANCIES. If the office of any director or directors becomes vacant by reason of death, resignation, retirement, disqualification, or otherwise, such vacancy or vacancies shall except as otherwise provided by law of these By- 5 Laws, be filled by an appointee of the remaining Directors, such appointee to hold office for the unexpired term in respect of which the vacancy occurred and until the next annual election of Directors. ARTICLE IV EXECUTIVE COMMITTEE AND OTHER COMMITTEES Section 4.1. DESIGNATION: TERM: VACANCIES. The Board, by resolution passed by a majority of the whole Board, may designate two or more Directors, as it may from time to time determine, to constitute together with the President as an ex-officio member, an Executive Committee, and may designate one or more other Directors to serve as alternates for the members thereof in such order and manner as may be fixed of the Executive Committee, and the Secretary, or in his absence an Assistant Secretary, shall be the Secretary of the Executive Committee. Any vacancy which may occur in the Executive Committee shall be filled by the Board at any regular or special meeting thereof. Section 4.2. POWERS. To the extent provided in the resolution of the Board establishing the Executive Committee, and to the extent permitted by law, the Executive Committee shall have all of the powers vested in the Board by law or by these By-Laws in the management of the property, business and affairs of the Company, and such specific powers as may from time to time be conferred upon the Executive Committee by resolution of the Board, and may exercise such powers in such manner as the Executive Committee shall deem for the best interests of the Company in all cases in which specific directions shall not have been given by the Board; provided, however, that the Executive Committee shall have no power to make any change in the By-Laws. All action taken by the Executive Committee shall be subject to revision or alteration by the Board; provided, however, that such revision or alternation shall not affect any action taken by any officer or employee of the Company, or by any third party, or any rights of third parties that have vested, in reliance upon any action or direction of the Executive Committee. Section 4.3. PROCEDURE: MEETINGS,: VOTING: RECORDS. The Executive Committee may prescribe, for the conduct of its business, such rules and regulations, not inconsistent with these By-Laws, or with such resolution of r the guidance and control of the Executive Committee as may from time to time be passed by the Board, as it shall deem necessary or desirable, including, without limitation, rules fixing the time and place of meetings and the notice to be given thereof, if any. A majority of the member of the Executive Committee shall constitute a quorum. The affirmative vote of a majority of the whole Executive Committee, as from time to time constituted, shall be necessary for the adoption of any resolution or the taking of any other action. The Executive Committee shall 6 keep a record of all action taken by it. Section 4.4. OTHER COMMITTEES. The Board may from time to time by resolution create such other committee or committees (in addition to the Executive Committee) of Directors, officers, employees or other person designated by it with such authority, function, and duties and compensation as the Board shall by resolution prescribe. Each such committee passed by a majority of the whole Board, and shall consist upon them by the resolution creating such committee. A majority of all the members of any such committee may determine the action and fix the time and place of its meetings, unless the Board shall otherwise provide. The Board shall have power to change the members of any such committee at any time, to fill vacancies, and to discharge any such committee, either with or without cause, at any time. ARTICLE V OFFICERS Section 5.1. DESIGNATION. The principal officers of the Company shall be a President, one or more Vice Presidents (one of whom maybe designated as the Senior or Executive Vice President), a Secretary, and a Treasurer; and there may be, in addition, such appointive officer, agents and employees as shall be appointed in accordance with the provisions of Section 4.4 of these By-Laws. Two or more offices may be held by the same person, except the offices of President and Secretary. Section 5.2. ELECTION: QUALIFICATIONS. The principal officers of the Company shall be elected annually by the Board at its first meeting following the annual meeting of shareholders. The person receiving the greatest number of votes cast for any principal office at a meeting of the Board for the election of officers, a quorum being present, shall be deemed elected to such office. The President shall be elected from among the Directors. Section 5.3. TERM OF OFFICE: REMOVAL. Unless sooner removed, each principal officer of the Company shall hold office until his successor shall have been elected and qualified, but any principal officer may be removed from office at any time at the pleasure of the Board. Section 5.5. APPOINTIVE OFFICERS AND AGENTS. The Board may appoint such officers, other than principal officers, including one or more Assistant Secretaries, and Assistant Treasurers, and such agents and employees, as the Board may deem necessary or advisable, each of whom shall hold office or his position, as the case may be, for such period, have in these By-Laws or as the Board may from time to 7 time determine. The Board may delegate to any principal officer or to any committee the power to appoint, remove, fill vacancies, define the tenure of office or position, and prescribe the duties and responsibilities of any such appointive officers, agents or employees. Section 5.6. SALARIES. The compensation of all officers, agents and employees of the Company shall be fixed from time to time by the Board, but, in the absence of a determination by the board, the President or any other principal officer of the Company designation by him shall have the power to fix and determine the compensation to be paid appointive officers (other than principal officers), agents and employees of the Company. Section 5.7. BONDS. The Treasurer and any Assistant Treasurer and such other officers and agents of the company as the Board shall prescribe may each be required by the Board to give bond to the Company in such form and amount and with such surety and upon such conditions as the Board may determine. The Company may pay any reasonable premium cost of such bonds. Section 5.8. EMPLOYMENT CONTRACTS. Every contract of employment for services to be rendered to the Company shall be at the pleasure of the Company unless paid contract of employment is in writing, signed by officers of the company, and approved or authorized by the Board. Section 5.9. PRESIDENT. The President shall be the executive officer of the Company; shall preside at meetings for the election of Directors and at other meetings of stockholders and at meetings of the Board and of the Executive Committee; subject to the control and direction of the Board, shall have general supervision, control and management of the affairs and business of the Company, and general charge and supervision of all the officers, agents and employees of the company, and shall see that all orders and resolutions of the Board are carried into effect; shall sign with the Secretary any or all certificates of shares of stock of the Company; shall sign and execute in the name of the company all deeds, mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing and execution thereof shall be expressly delegated by the Board or these By-Laws to some other officer or agent of the company; and in general shall exercise all powers and perform all duties incident to the office of President and such other powers and duties as may from time to time be assigned to him by the Board or be prescribed by these By-Laws. 8 Section 5.10. VICE PRESIDENT. At the request of the President, or during his absence or disability, a Vice President shall exercise the powers and perform the duties of the President. Each Vice President shall exercise such other powers and perform such other duties as may from time to time be assigned to him by the Board or by the President or prescribed by these By-Laws. In case there shall be more than one Vice President, the foregoing shall apply to all the Vice Presidents in the order of there seniority. Section 5.11. SECRETARY. The Secretary shall attend all meetings of the Board and all meetings of stockholders and shall be and act as the secretary of such meetings; shall keep a journal of such meetings in the manner provided in these ByLaws; shall give, or cause to be given, all notices provided for in these By-Laws or required by the Articles of Incorporation or by law; shall be custodian of the records and of the seal of the Company and see that the seal is affixed to all documents the execution of which on behalf of the Company under its seal is duly authorized in accordance with these By-Laws; shall have charge of the Stock and Transfer Book of the Company, and shall keep or cause to be kept said book in the manner provided in these By-Laws; shall have charge of all books, records and papers of the Company relating to its organization as a corporation, and shall see that all reports, statements, and other documents required by are properly kept or filed by the Treasurer or some other officer; shall sign with the President any or all certificates of shares of stock of the company; and in general shall exercise all powers and perform all duties incident to the office of Secretary and such other powers and duties as may from time to time be assigned to him by the Board or the President or be prescribed by these By-Laws. Section 5.12. ASSISTANT SECRETARIES. The Assistant Secretaries shall assist at all time in the performance of the duties of the Secretary, subject to his control and direction, and, in the absence of the Secretary, the Assistant Secretary designated therefor by the President, or in the absence of such designation, and Assistant Secretary, shall exercise the powers and perform the duties of the Secretary. The Assistant Secretaries shall exercise such other powers and perform such other duties as may from time to time be assigned to them by the Board or the President to be prescribed by these By-Laws. Section 5.13. TREASURER. Subject to order of the Board or the President, or as provided for in these By-Laws, the Treasurer shall have the custody of the corporate fund and securities; shall keep, or cause to be kept, full and accurate books and records of account of the Company; shall deposit all moneys and other valuable effects in the name and to the credit of the Company, in such depositaries as may be designated by the Board; shall disburse the funds of the Company as may be ordered by the Board, taking proper vouchers for such disbursements; shall render to the President and Directors at the regular meeting of the Board, or whenever they 9 may require it, an account of all his transactions as Treasurer and of the Financial condition of the Company; and in general shall exercise all powers and perform all duties incident of the office of Treasurer and such other powers and duties as may from time to time be assigned to him by the Board, or the President or be prescribed by these By-Laws. Section 5.14. ASSISTANT TREASURERS. The Assistant Treasurers shall assist at all times in the performance of the duties of the Treasurer, subject to his control and direction, and in the absence of the Treasurer, the Assistant Treasurer designated therefor by the President, or, in the absence of such designation, any Assistant Treasurer, shall exercise the powers and perform the duties of the Treasurer. The Assistant Treasurers shall exercise such other powers and perform such other duties as may from time to time be assigned to them by the Board or the President or be prescribed by these By-Laws. ARTICLE VI INDEMNIFICATION Section 6.1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Each director or officer, and their personal representatives, of the Company, shall be indemnified by the Company against claims, liabilities, expenses, and costs actually and necessarily incurred by him or his estate in connection with or arising out of, any action, suit or proceeding in which he is made a party by reason of his being, or having been an officer or director of the Company, or of any other company fifty per centum (50%) or more of the voting stock of which is owned by the Company and which he serves as a Director or officer at the request of the Company; provided that the Company shall not indemnify such Director or officer with respect to any matters as to which he shall be finally adjudged in such action, suit or proceeding to have been liable for actual negligence or misconduct in the performance of his duties as such Director or officer. The indemnification herein provided for shall also apply in respect of any amount paid in compromise of any such claim asserted against such Director or officer (including expenses and cost actually and necessarily incurred in connection therewith), provided the Board shall have first approved such proposed compromise settlement and determined that the Director or officer involved was not guilty of actual negligence or misconduct; but in taking such action, any Director involved shall not be qualified to vote thereon, and if for this reason a quorum of the Board cannot be obtained to vote on such matter, it shall be determined by a majority of the disinterested members of the Board, whether or not a quorum, or such matter may be determined by a committee of three (3) disinterested stockholders appointed by the stockholders at a duly called special or regular meeting. As to whether or not a Director or officer was guilty of actual negligence or misconduct in relation to any such matters, the Board and each 10 Director and officer may conclusively rely upon an opinion of independent legal counsel selected by the Board or by the disinterested members of the Board or by said stockholders committee, as the case may be. ARTICLE VII CHECKS, CONTRACTS, LOANS, BANK ACCOUNT, ETC. Section 7.1. CHECK, DRAFTS, ETC. All checks, drafts, bill of exchange or other orders for the payment of money, obligations, notes, or other evidences of indebtedness, bills of lading, warehouse receipts and insurance certificates of the company shall be signed or endorsed by such officer or officers, agent or agents, employee or employees of the Company as shall from time to time be designated by the Board. Section 7.2. CONTRACTS. Unless authorized so to do by these By-Laws or the Board, no officer, agent or employee shall have any power or authority to bind the Company by any contract or engagement or to pledge its credit or to render it liable pecuniarily for any purpose or to any amount. The board may authorize one or more officers, agents or employees of the Company to enter into any contract or execute and deliver any contract or other instrument in the name and on behalf of the Company, and such authority may be general or be confined to specific instances. Section 7.3. LOANS. No loans shall be contracted on behalf of the Company, and no negotiable paper shall be issued in its name, unless authorized by the Board. When so authorized, the officer or officers thereunto authorized may effect loans and advances at any time of the Company from any bank, trust Company or other institution or from any person, firm, association or corporation, and or such loans and advances may make, execute and deliver promissory notes or other evidences of indebtedness of the Company and, when authorized as aforesaid, as security for the payment of any and all loans, advances, indebtedness and liabilities of the company, may mortgage, pledge, hypothecate or transfer any real or personal property at the time or thereafter held or to be held by the Company and to that end execute instruments of mortgage or pledge or otherwise transfer such property. Such authority may be general or be confined to specific instances. No loan of money shall be made by the Company to any stockholder thereof. Section 7.4. DEPOSITS: BANK ACCOUNTS. All funds of the Company shall be deposited from time to time to the credit of the company in such general or special bank account or as the Board may from time to time designate, or as may be designated by any officer or officers of the Company to whom the power to do so may be delegated by the Board. The Board may make such special rules and regulations with respect thereto, not inconsistent with the provisions of these By- 11 Laws, as it may deem expedient. Section 7.5. PROXIES. The Board, by resolution from time to time, and either generally or in specific instances, or the President, unless the Board shall have acted, may appoint an attorney or attorneys or agent or agents of the Company, in its name and behalf, to cast the votes, which the Company may be entitled to cast as a shareholder or otherwise in any other corporation any of whose stock or other securities may be held by the Company, at meetings of the holders of the stock or other securities of such other corporation, or to consent tin writing to any action by such other corporation. Unless otherwise ordered by the Board, the present, or any other person designated by him for the purpose, shall have the full power and authority in behalf of the company to attend and to act and to vote at any meetings of holders of stock or other securities of any corporation in which the Company may hold stock or securities, and, at any such meeting, shall possess and may exercise any and all the rights and powers incident to the ownership of such stock or securities. ARTICLE VIII SHARES AND THEIR TRANSFER Section 8.1. CERTIFICATES FOR SHARES. Certificates for shares of stock of the Company shall be in such form as shall be approved by the Board. Each such certificate shall bear the corporate seal or a facsimile thereof and shall be signed by the President and the Secretary of the Company. In case any officer or officers who shall have signed any such certificate or certificates shall cease to be such officer or officers before such certificate or certificates shall have been issued by the Company, such certificate or certificates may none the less be adopted by the Company and be issued and delivered as though the person or person who signed such certificates or certificates had not ceased to be such officer or officers. Section 8.2. TRANSFER OF SHARES. Transfer of shares of stock of the Company, whether part paid or full paid, shall be made only on the books of the Company, on payment of all taxes thereon and such shares (except as hereinafter provided in the case of loss, destruction or mutilation of certificates) properly endorsed by the holder thereof, or accompanied by proper evidence of succession, assignment or authority to transfer, and delivered to Secretary of the Company or a transfer agent, if any, of the company. In addition to such other evidence of succession, assignment or authority to transfer as may be required by the Company, President, or Directors of Company may require when shares are owned by person residing out of the of Montana and before entering any transfer of the shares on the books of the Company or issuing a certificate therefor to the transferee, from attorney or agent of the non-resident owner, or from person claiming under the transfer, an 12 affidavit or other evidences, that the non-resident owner was alive at the date of the transfer, and if such affidavit or other satisfactory evidence is not furnished, may require from the attorney, agent or claimant, a bond of indemnity, with two sureties, satisfactory to the office of the Company or, if not so satisfactory, then one approved by the judge of the District Court of county in which the principal office of the Company is situated, conditioned to protect the Company against any liability to the legal representatives of the owners of the shares, in case of his or her death before the transfer; and if such affidavit or other evidence or bond be not furnished when required as herein provided, neither the Company nor any officer thereof, shall be liable for refusing to enter the transfer on the book of the Company. A person in whose name shares of stock stand on books of Company shall be deemed the owner thereof as regards the Company, and, upon any transfer of shares, the person or persons into whose name or names such shares shall be transferred on books of the Company shall be substituted for the person or person out of whose name or names such shares shall have been transferred with respect to all rights, privileges and obligations of holders of stock of the Company and as against the Company or any other person or persons. Except to extent permitted and provided for by law, no transfer of shares of stock of the Company shall be valid against the Company, its stockholders or its creditors, for any purpose until they shall have been entered on the records of the company as hereinbefore in this section provided, or until a new certificate is issued to the person to whom it has been transferred. The Company shall be entitled to treat the holder of record of any share or shares as the holder in fact thereof and, accordingly, shall not be sound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided by law and these By-Laws. Section 8.3. LOST, DESTROYED AND MUTILATED CERTIFICATES. The holder of any stock of the company shall immediately notify the company of any loss, destruction or mutilation of the certificate for any such stock, and the Board may, in its discretion, cause to be issued to him a new certificate or certificates of stock upon the surrender of the mutilate certificate or, in case or loss or destruction, upon satisfactory proof of such loss or destruction; and the board may, in its discretion, require the owner of the lost or destroyed certificate or his legal representative to give such surety or sureties as it may direct, to indemnify the Company against any claim that may be made against it with respect to the certificate or certificates alleged to have been lost or destroyed. Section 8.4. TRANSFER AGENT AND REGISTRAR: REGULATIONS. The company shall, if and whenever the Board shall so determine, maintain one or more transfer officers or agencies, each in charge of a transfer agent designated by the Board, where the share of the stock of the Company shall be directly transferable, and/or one or more 13 registry offices, each in charge or a registrar designated by the Board where such shares of stock shall be registered, and no certificate for share of stock of the Company, in respect of which a transfer agent and/or a registrar shall have been designated, shall be valid unless countersigned by such transfer agent and/or registered by such registrar. The Board may also make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the stock of the Company. Section 8.5. CLOSING OF TRANSFER BOOKS: RECORD DATE. The Board may close the stock transfer books of the Company for a period not exceeding forty (40) days preceding the date of any meeting of stockholders or election to vote, or the date for the payment of any dividend, allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect or the date of any other corporate action or proceeding; provided, however, that in lieu of closing the stock transfer books as aforesaid, the Board may fix in advance a date not exceeding forty (40) days preceding the date of any meeting of stockholders, election or vote, or the date of the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or the date for any other corporate action or proceeding, as a record date for the determination of the stockholders entitled to notice of and to vote at any such dividend, or any such allotment of rights, or to exercise the rights in respect of any such change or conversion or exchange of capital stock, or entitled to participate in or benefit by such other corporate action or proceeding, and, in such case, such stockholders, and only such stockholders, as shall be stockholders of record on the date so fixed shall be entitled to notice of and to vote at such meeting, election or vote, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights of change or conversion or exchange of stock, or to participate in or benefit by such other corporate action or proceeding, notwithstanding any transfer of any stock on the books of the Company, after any such record date fixed as aforesaid. Each share of stock entitled under the Article of Incorporation and the laws and constitution of Montana to be voted may, at every meeting of the stockholders, be voted by the holder of record thereof, on the books of the Company shall have closed, or a date shall have been fixed as the record date for the determination of its stockholders entitled to vote, as hereinbefore provided, no share of stock shall be voted on at any election of directors which shall have been transferred on the books of the company within the (10) days next preceding such election of directors. ARTICLE IX DIVIDENDS Section 9.1. PAYMENTS OF DIVIDENDS. Subject to the provisions of law and the 14 provisions of the Articles of Incorporation, the Board may, at any regular or special meeting, declare a dividend out of any funds legally available for such purpose on the outstanding share of the Company, which dividends may be paid in cash, in property, or in shares of the Company. ARTICLE X BOOKS AND RECORDS Section 10.1. BOOK OF BY-LAWS. A copy of these By-Laws, certified by a majority of the Directors and the Secretary of the Company, shall be typewritten in a book kept in the principal office of the Company to be known as the "Book of By-Laws". Said book shall be open to the inspection of the public during the office hours of the Company each day except holidays. Whenever any amendment to these By-Laws or new by-laws is adopted, it shall be typewritten in the book of By-Laws, with the original By-Laws, and immediately after them. If any By-Laws be repealed, the fact of repeal, with the date of the meeting at which the repeal was enacted, or written consent was filed, shall be stated in said book. Section 10.2. JOURNAL OF MEETINGS OF BOARD OF DIRECTORS AND STOCKHOLDERS. The Company shall also keep a journal of all meeting of its directors and stockholders, with the time and place of holding the same, whether regular or special, and if special, its object, how authorized, and the notice thereof given. Such record must embrace every act done or ordered to be done; who were present, and, in the record of directors' meetings, who absent. If requested by any Director or stockholder, the time must be noted when he entered the meeting or obtained leave of absence therefrom. On a similar request, the "ayes" and "nays" must be taken on any action or proposed action, and a record thereof made. On a similar request, the protest of any Director or stockholder to any 15 action or proposed action, must be entered in full, and such records must be opened to the inspection of any Director, stockholder or creditor of the Company. In lieu of embracing in the records of stockholders' meetings who were present, a list showing the names of those present at any such meeting, certified by the chairman and secretary thereof, may be filed and kept in the office of the Secretary of the Company. Section 10.3. STOCK AND TRANSFER BOOK. The Company shall also keep a book, to be know as the "stock and transfer book" in which must be kept a record of all stock; the names of the stockholders alphabetically arranged; installments paid or unpaid; assessments levied, and paid and unpaid, a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom. The Stock and Transfer creditor, provided that the Board, may, from time to time, prescribe the conditions and regulations pursuant to which such inspections will be permitted. Section 10.4. OTHER BOOKS AND RECORDS. The company shall keep a record of all business transactions and shall keep such other books and records as the Board or the officers may from time to time determine. Section 10.5. PLACE OF KEEPING. The books and records of the Company, or duplicates duly certified thereof, shall be kept at the principal office of the Company. ARTICLE XI MISCELLANEOUS PROVISIONS Section 11.1. SEAL. The corporate seal shall have inscribed thereon the name of the Company, the year of its organization, the State of its incorporation, and the words "Corporate Seal". Such seal may be used by causing it or a facsimile or equivalent thereof to be impressed or affixed or reproduced. Section 11.2. FISCAL YEAR. The fiscal year of the Company shall begin on January 1 and end of December 31 in each year. 16 Section 11.3. NOTICES. Any notice required by these By-Laws, or otherwise, to be given by mail shall be deemed to have been given by mail to any person entitled thereto at the time it shall have been deposited in a Post Office or mail box or mail chute maintained of the purpose by the United States Government, provided that it shall at the time of such deposit be enclosed in a postage prepaid envelope or wrapped addressed to such person at his address as it appears on the books and records of the Company, or, if no address appears on such books and records, then at such address as shall be otherwise known to the Secretary, or, if no such address appears on such books and records or is otherwise know to the Secretary, then in care of the agent of the Company at its principal office in the State of Montana. Whenever, by any provisions of the Articles of Incorporation or these By-Laws, or otherwise, any notice is required to be given any specified number of days before any meeting or other event, the day on which such notice was given shall be counted, but the day of such meeting or other event shall not be counted in determining whether or not notice has been given in proper time in a particular case. Section 11.4. WAIVER OF NOTICE. Except as may be expressly provided by law or by the Articles of Incorporation, whenever any notice whatever is required to be given under the provisions of the laws of the State of Montana or under the provisions of the Articles of Incorporation or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Except as maybe otherwise specifically provided by law, any waiver by mail, telegraph, cable or wireless, bearing the name of the person entitled to notice, shall be deemed a waiver in writing, duly signed. The presence of any person at any meeting, either in person or by proxy, shall be deemed the equivalent of a waiver in writing, duly signed. Attendance of a Director at any meeting of the Board shall constituted a waiver of notice of such meeting except where a Director attends for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. Section 11.5. INFORMAL ACTION BY STOCKHOLDER. When all the stockholders entitled under the Articles of Incorporation and the law and constitution of Montana to vote at any meeting are present at any meeting, however called or notified, and sign a written consent thereto on a record of such meeting, the act and proceedings of such meeting are as valid as if has at a meeting legally called and noticed. 17 Section 11.6. RESIGNATIONS. Except as otherwise provided by law, any officer or Director may resign at any time upon giving written notice to the President or the Secretary. Such resignation shall take effect at the time specified in the notice and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 11.7. AMENDMENT OF BY-LAWS. These By-Laws may be repealed and amended and new By-Law maybe adopted by the affirmative vote of a majority of the Board at any Special meeting of the Board if notice of the proposed repeal, amendment or new by-law to be adopted be contained in the notice of such special meeting, provided that the power to be revoked by the vote of the holders of two-thirds (2/3) of the capital stock of the Company at any regular meeting of law shall take effect until typewritten, and no repeal of any by-law shall take effect until the fact of such repeal shall be stated in the Book of By-Laws in accordance with Section 10.1. 18 AMENDMENTS OF THE BY-LAWS Section 2.2. Section 2.2. ANNUAL MEETINGS. Commencing with the year 1974 an annual meeting of the stockholders of the Company shall be held on the first Thursday of May in each year if not a legal holiday, and if a legal holiday, then on the next succeeding business day not a legal holiday. At each annual meeting, directors shall be elected by stockholders in accordance with the provisions of the Articles of Incorporation of the Company (hereinafter called the "Articles of Incorporation") and these By-Laws. Each annual meeting shall be a general meeting, open for the transaction of any business within the powers of the Company, without special notice of such business, except in any case where special notice may be required by the laws of the State of Montana. Section 3.2. Section 3.2. NUMBER QUALIFICATIONS AND TERMS OF OFFICE. The number of directors which shall constitute the whole Board shall be seven directors, each of whom shall be the holder of at least one share of capital stock of the Company. The term of office of each Director shall be for one year and until his successor is elected and qualified. 19 AMENDMENTS OF THE BY-LAWS (At September 1, 1982) Section 2.2. Section 2.2. ANNUAL MEETING. Commencing with the current fiscal year, an Annual Meeting of the Stockholders of the Company shall be held on the first Thursday of November in each year if not a legal holiday, and if a legal holiday, then on the next succeeding business day not a legal holiday. The first of the November Annual Meetings is to be held on Thursday, November 4, 1982. At each Annual Meeting, Directors shall be elected by Stockholders in accordance with the provisions of the Articles of Incorporation of the Company (hereinafter called the "Articles of Incorporation") and these By-Laws. Each Annual Meeting shall be a general meeting, open for the transaction of any business within the powers of the Company, without special notice of such business except in any case where special notice may be required by the laws of the State of Montana. Section 11.2. Section 11.2. FISCAL YEAR. The Fiscal Year of the Company shall begin on July 1 and end on June 30 in each year. 20 AMENDMENTS OF THE BY-LAWS Section 3.2 Section 3.2. NUMBER, QUALIFICATION AND TERM OF OFFICE. The number of directors which shall constitute the whole Board shall be determined by resolution of the Board of Directors except that the number of directors shall not be less than five or more than nine. Each director shall own at least ten shares of capital stock of the Company. The term of office shall be one year unless the Board of Directors by resolution implement staggered terms consistent with the requirements of prevailing law. The terms of directors, if staggered, shall be two years. 21 AMENDMENTS OF THE BY-LAWS Section 5.9. PRESIDENT. The President shall be the executive officer of the Company; shall preside at stockholder meetings and at meetings of the board subject to the control of the board; shall preside at meetings for the election of Directors and at other meetings of stockholders and at meetings of the board of the Executive Committee; subject to the control and direction of the Board, shall have general supervision, control and management of the affairs and business of the Company, and, general charge and supervision of Vice Presidents and Division Managers, and shall see that all orders and resolutions of the Board are carried into effect; shall sign or delegate to one or more Vice Presidents, the power to sign and execute in the name of the company all deeds mortgages, bonds, contracts or other instruments as may be required in the ordinary course of business; and in general shall exercise all powers and perform the duties incident to the office of President and such other powers and duties as may from time to time be assigned to him by the Board or be prescribed by these By-Laws. 22 EX-10.1 4 EXH 10.1 : CREDIT AGREEMENT CREDIT AGREEMENT THIS CREDIT AGREEMENT is dated as of the 18th day of January, 1995, and is by and between ENERGY WEST, INCORPORATED, formerly known as Great Falls Gas Company, of P.O. Box 2229, No. 1 River Park Tower, Great Falls, MT 59403-2229 (the "Borrower"), and NORWEST BANK GREAT FALLS, NATIONAL ASSOCIATION, a national banking association with offices located at 21 Third Street North, P.O. Box 5011, Great Falls, Montana 59403-8200 (the "Bank"). RECITALS: WHEREAS, Borrower desires to obtain a committed revolving credit line in the principal amount of EIGHT MILLION AND NO/100 DOLLARS ($8,000,000.00) for its own working capital purposes and to fund the working capital needs of certain of its Subsidiaries; and, WHEREAS, Borrower desires the Bank to continue to consider making zero interest rate commercial loans to certain of Borrower's customers (the "Customer Loans") in an aggregate amount not to exceed TWO MILLION ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($2,100,000.00); WHEREAS, the Borrower desires the Bank to make certain Borrower-guaranteed zero interest loans or CLIP Loans to customers whose requests have been previously rejected by the Bank (the "Guaranteed Loans"), in an aggregate amount outstanding not to exceed ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00) at any time outstanding. WHEREAS, the Borrower desires to obtain a stand-by letter of credit facility from the Bank in the amount of ONE MILLION AND NO/100 DOLLARS (1,000,000.00); WHEREAS, the Bank is willing to make the Credit and the Stand-By Letter of Credit available to the Borrower, to continue consideration of Customer Loans and to make available the Guaranteed Loans subject to the provisions of this Credit Agreement; NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein, the parties agree as follows: 1. Definitions In addition to those terms defined in the above recitals, as used herein: 1.1. "Agreement" shall mean this Credit Agreement and all amendments and supplements hereto which may from time to time become effective hereafter in accordance with the terms hereof. 1.2. "Banking Day" shall mean a day on which banks are generally open for business in Great Falls, Montana. 1.3. "Base Rate" shall mean the "base" or "prime" rate of interest as announced by Norwest Bank Minnesota, National Association, as in effect from time to time. 1.4. "Borrowed Money" shall mean funds obtained by incurring contractual indebtedness and shall not include trade accounts payable or money borrowed from the Bank. 1.5. "Closing Date" shall mean the date on which funds are advanced under the Credit. 1.6. "Credit" shall mean the revolving credit line established hereby for Borrower, which shall not in any event exceed the aggregate principal amount of EIGHT MILLION AND NO/100 DOLLARS ($8,000,000.00) outstanding at any one time. 1.7. "Default" shall mean an Event of Default as referred to in Section 7 hereof, or an event which with notice or lapse of time or both would become an Event of Default. 1.8. "Generally Accepted Accounting Principles" shall mean generally accepted accounting principles applied on a basis consistent with those reflected in the financial statements referred to in Section 4.5 hereof. 1.9. "Event of Default" shall mean any and all events of default described in Section 7 hereof. 1.10. "Maturity Date" shall mean January 15, 1996. 1.11. "Note" shall mean the promissory note of the Borrower substantially in the form of attached Exhibit A, evidencing borrowings under Section 2.1 hereof. 1.12. "Permitted Liens" shall mean: 1.12.1. Liens in favor of the Bank; 1.12.2. Existing liens disclosed to the Bank in writing prior to the date of this Agreement; and, 1.12.3. Liens for taxes not delinquent or which Borrower is contesting in good faith. 1.13. "Stand-By Letter of Credit Line" shall mean the letter or letters of credit issued under the letter of credit application and agreement executed by Borrower in accordance with section 2.6 of this Agreement, which shall be in form and substance as Exhibit C attached hereto and incorporated herein, and which must not exceed ONE MILLION AND NO/100 DOLLARS ($1,000,000.00) outstanding at any one time. 1.14. "Subsidiary" shall mean any corporation of which more than fifty percent (50%) of the outstanding voting securities shall, at the time of determination, be owned directly, or indirectly through one or more intermediaries, by either Borrower. 1.15. "Tangible Net Worth" shall mean the sum of the par or stated value of all outstanding capital stock, surplus and undivided profits of the Borrower, less any amounts attributable to treasury stock, good will, patents, copyrights, mailing lists, catalogues, trademarks, bond discount and underwriting expenses, organization expenses and other like intangibles (not including prepaid expenses classified as current assets or intangible assets offset by equal related liabilities), excluding also Subchapter S earnings unless such earnings are converted to Note and subordinated to bank debt or the Bank is given written confirmation, in form acceptable to the Bank, that such earnings are being retained as equity capital, all as determined in accordance with generally accepted accounting principles. 2. The Loan 2.1. The Bank agrees to lend to Borrower from time to time from the effective date hereof until the Maturity Date sums not to exceed EIGHT MILLION AND NO/100 DOLLARS ($8,000,000.00) in aggregate principal amount at any one time outstanding. Each Page 2 of 9 borrowing under this Section 2.1. will be requested in writing or in person by an authorized officer of Borrower, or telephonic ally by any person reasonably believed by the Bank to be an authorized officer of Borrower. Each borrowing under this Section 2.1. will be evidenced by a notation on the Bank's records, which shall be conclusive evidence of such borrowing, and by the Note. Within the limits of the Credit and subject to the terms and conditions hereof, Borrower may borrow, prepay pursuant to Section 2.5 hereof and reborrow pursuant to this Section 2.1. 2.2. Interest on the unpaid principal of the Note shall be calculated at an annual rate of ONE QUARTER OF ONE percent (1/4%) less than the Base Rate in effect from time to time on the basis of the actual number of days elapsed in a year of 360 days. Each change in the Base Rate shall take effect on the first day of the month immediately succeeding such change. 2.3. Interest on the Note shall be payable on demand but, until such demand is made, monthly, commencing February 1, 1995, and continuing on the first day of each succeeding month until the Note is paid. 2.4. The principal of the Note will be due and payable on the Maturity Date. 2.5. The Borrower may at any time prepay the Note in whole or from time to time in part without premium or penalty. 2.6. The Bank shall issue stand-by letters of credit to Enron Risk Management Services Corporation for the account of Borrower, in an aggregate amount not to exceed ONE MILLION AND NO/100 DOLLARS. The Stand-By Letter of Credit shall expire on December 27, 1995. Borrower shall execute an application, agreement and promissory note for standby letters of credit (Exhibit B), on standard Norwest forms as required by the Bank. 2.7. Fees on the Stand-By Letter of Credit Line shall be calculated at a rate of 1.5% of the amount issued under the Stand-By Letter of Credit on the basis of the actual number of days elapsed in a year of 360 days. Borrower shall also pay all additional fees assessed by Bank in connection with the Stand-By Letter of Credit Line, issuance of letters of credit or any amendments or modifications of the Stand-By Letter of Credit Line or letters or credit issued under the Stand-By Letter of Credit Line. 2.8. Interest on the Stand-By Letter of Credit Line shall be payable on demand but, until such demand is made, monthly, commencing February 1, 1995, and continuing on the first day of each succeeding month until the Note is paid. 2.9. In addition, the Bank shall continue to consider making Customer Loans for the purpose of funding purchases of energy conservation devices, provided, however, that no such Customer Loan shall be in an amount in excess of ONE THOUSAND FIVE HUNDRED AND NO/100 DOLLARS ($1,500.00) per household or per unit of an apartment building, shall not exceed a term of five (5) years and shall require a minimum payment of $25.00 per month, and the aggregate outstanding of all Customer Loans shall not at any time exceed TWO MILLION ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($2,100,000.00). Applications for Customer Loans shall be subjected to the Bank's customary credit review policies. 2.10. The interest rate to obligors on the Customer Loans and the Guaranteed Loans shall be 0%. Borrower, however, shall reimburse the Bank for all expenses incurred in the Page 3 of 9 making of such loans and, in addition, shall pay to the Bank interest at an annual rate equal to TWO AND ONE-HALF percent (2 1/2%) in excess of the Base Rate. 2.11. In addition, Borrower shall, on the last day of each month, pay to Bank for each Customer Loan and/or Guaranteed Loan made by the Bank: an origination fee of $5.00, a monthly servicing fee of $0.40, and a delinquency fee, where incurred, of $1.00 for each payment past due for 30 days or less and $5.00 for each payment past due more than 30 days. 3. Conditions Precedent 3.1. The Borrower shall deliver the following to the Bank on or before the Closing Date: 3.1.1. The Note, duly executed by Borrower; 3.1.2. A copy, certified as of the most recent date practicable by the Secretary of State of Montana of Borrower's certificate of incorporation, together with a certificate of Borrower's corporate secretary to the effect that such certificate of incorporation has not been amended since the date of the aforesaid certification; 3.1.3. Certificates, as of the most recent dates practicable, of the Secretary of State of Montana and the secretary of state of each state in which Borrower is qualified as a foreign corporation, as to the good standing of Borrower; 3.1.4. A certified copy of Borrower's filed Articles of Incorporation and By-laws; 3.1.5. A certified copy of resolutions of Borrower's board of directors authorizing the execution, delivery and performance of this Agreement, the Note, the leter of credit application and agreement, and each other document to be delivered pursuant hereto; and, 3.1.6. A certificate of Borrower's corporate secretary as to the incumbency and signatures of the officers of Borrower signing this Agreement, the Note, the leter of credit application and agreement and each other document to be delivered pursuant hereto. 3.2. The Bank shall not be obligated to lend hereunder on the occasion for any borrowing unless: 3.2.1. The representations and warranties contained in Section 5 hereof are true and accurate on and as of such date; and, 3.2.2. No Event of Default, and no event which might become an Event of Default after the lapse of time or the giving of notice and the lapse of time, has occurred and is continuing or will exist upon the disbursement of such loan. 4. Representations and Warranties To induce the Bank to enter into this Agreement, the Borrower represents and warrants to the Bank as follows: 4.1. Borrower is a corporation duly organized, existing and in good standing under the laws of the State of Montana. Page 4 of 9 4.2. The execution, delivery and performance of this Agreement and the Note by the Borrower are within their corporate powers, have been duly authorized, and are not in contravention of law, or the terms of either Borrower's Articles of Incorporation or By-Laws or of any undertaking to which either Borrower is a party or by which it is bound. 4.3. The property of the Borrower is not subject to any lien except Permitted Liens. 4.4. No litigation or governmental proceeding is pending or, to the knowledge of the officers of Borrower, threatened against Borrower which could have a material adverse effect on Borrower's financial condition or business. 4.5. The consolidated financial statements of Borrower and its Subsidiaries for the fiscal year ending June 30, 1994, prepared by certified public accountants, and for the period ending November 30, 1994, prepared by the Borrower, copies of which financial statements have been furnished to the Bank, are complete and accurate in all respects and present fairly the financial condition of the Borrower and its Subsidiaries as of such dates, and the results of their operations for the periods covered thereby in accordance with Generally Accepted Accounting Principles, and there have been no material adverse changes in the consolidated financial condition or business of the Borrower from November 30, 1994, to the date hereof. 5. Affirmative Covenants Borrower covenants and agrees that so long as any indebtedness remains outstanding hereunder, unless the Bank shall otherwise consent in writing, it will: 5.1. Pay, when due, all taxes assessed against it or its property except to the extent and so long as contested in good faith. 5.2. Maintain its corporate existence and comply with all laws and regulations applicable thereto. 5.3. Furnish to the Bank: 5.3.1. Within 150 days after the end of each fiscal year of the Borrower (i) a detailed, consolidated and consolidating report of audit of the Borrower and their Subsidiaries for such fiscal year including the balance sheet of the Borrower and their Subsidiaries as of the end of such fiscal year and the statements of profit and loss and surplus of the Borrower and their Subsidiaries for the fiscal year then ended, prepared by independent certified public accountants satisfactory to the Bank, and (ii) a certificate of such accountants stating whether, in making their audit, they have become aware of any Event of Default set forth in Section 7 hereof, or of any event which might become an Event of Default after the lapse of time or the giving of notice and the lapse of time, which has occurred and is then continuing and, if any such event has occurred and is continuing, specifying the nature and period of existence thereof. 5.3.2. Within 45 days after the end of each month, (i) the balance sheet of the Borrower as of the end of such month, and (ii) the statement of profit and loss and surplus of the Borrower from the beginning of such fiscal year to the end of such month in a form acceptable to Bank. All of the foregoing shall be Page 5 of 9 unaudited, but certified as correct (subject to year end adjustments) by an appropriate officer of the Borrower. 5.3.3. Promptly upon knowledge thereof, notice to the Bank in writing of the occurrence of any event which has or might, after the lapse of time or the giving of notice and the lapse of time, become an Event of Default under Section 7 hereof. 5.3.4. Promptly, such other information as the Bank may reasonably request. 5.4. Cause its properties of an insurable nature to be adequately insured by reputable and solvent insurance companies against loss or damages customarily insured against by persons operating similar properties, and similarly situated, and carry such other insurance (including business interruption insurance) as usually carried by persons engaged in the same or similar businesses and similarly situated. 5.5. Keep true, complete and accurate books, records and accounts in accordance with Generally Accepted Accounting Principles consistently applied. 6. Negative Covenants Without the Bank's written consent, which the Bank will not unreasonably withhold, so long as any indebtedness remains outstanding under the Credit, Borrower will: 6.1. Permit any lien including, without limitation, any pledge, assignment, mortgage, title retaining contract or other type of security interest to exist on its property, real or personal, except Permitted Liens. 6.2. Enter into any transaction of merger or consolidation, or transfer, sell, assign, lease or otherwise dispose of (other than sales in the ordinary course of business) all or a substantial part of its properties or assets, or any of its promissory notes or accounts receivable, or any stock (other than directors qualifying shares) or any assets or properties necessary or desirable for the proper conduct of its business, or change the nature of its business, or wind up, liquidate or dissolve, or agree to do any of the foregoing. 6.3. Create, incur, assume or suffer to exist, contingently or otherwise, other than in the ordinary course of business for conducting its present business operation, indebtedness for Borrowed Money, except: (i) indebtedness arising from issuance of bonds; (ii) indebtedness arising under this Agreement; (iii) indebtedness disclosed to the Bank in writing as existing at the time of execution of this Agreement; and (iv) indebtedness incurred in connection with the Energy West purchase of Wyo-LP, Broken Bow Gas Company and Petrogas. 6.4. Become or remain a guarantor or surety, or pledge its credit or become liable in any manner (except by endorsement for deposit in the ordinary course of business, and except for the Guaranteed Loans, as defined herein) on undertakings of another. 6.5. Purchase or otherwise acquire all or substantially all of the assets of any person, firm, corporation or association unless after the consummation of such transaction, and after giving effect thereto and to any concurrent transactions, no Event of Default specified in Section 7 hereof, and no event which with notice or lapse of time or both would become such an Event of Default would exist. Page 6 of 9 6.6. Permit the ratio of its Debt to Tangible Net Worth at fiscal year end to be more than 3.0 to 1.0. 7. Events of Default 7.1. Upon the occurrence of any of the following Events of Default: 7.1.1. Default in any payment of interest or of principal on the Note when due, and continuance thereof for 15 calendar days; 7.1.2. Default in the observance or performance of any other agreement of Borrower or any Subsidiary thereof set forth herein and continuance thereof for 30 days; 7.1.3. Default by Borrower or any Subsidiary thereof in the payment of any other indebtedness for Borrowed Money or in the observance or performance of any term, covenant or agreement of Borrower or any Subsidiary thereof in any agreement relating to any indebtedness of Borrower or Subsidiary, the effect of which default is to permit the holder of such indebtedness to declare the same due prior to the date fixed for its payment under the terms thereof; 7.1.4. Any representation or warranty made by Borrower herein, or in any statement or certificate furnished by Borrower hereunder, is untrue in any material respect; or, 7.1.5. The occurrence of any litigation or governmental proceeding which is pending or threatened against Borrower or any Subsidiary thereof, which, in the reasonable opinion of Borrower's legal counsel, could have a material adverse effect on Borrower's or such Subsidiary's financial condition or business, and which is not remedied within a reasonable period of time (a reasonable period of time not to exceed 10 days) after notice thereof to the Borrower; then, or at any time thereafter, unless such Event of Default is remedied, the Bank or the holder of the Note may, by notice in writing to the Borrower, terminate the Credit or declare the Note to be due and payable, or both, whereupon the Credit shall terminate forthwith or the Note shall immediately become due and payable, or both, as the case may be. 7.2. Upon the occurrence of any of the following Events of Default: Borrower or any Subsidiary thereof becomes insolvent or bankrupt, or makes an appointment for the benefit of creditors or consents to the appointment of a custodian, trustee or receiver for itself or for the greater part of its properties; or a custodian, trustee or receiver is appointed for Borrower or any Subsidiary thereof, or for the greater part of its properties without its consent and is not discharged within 30 days; or bankruptcy, reorganization or liquidation proceedings are instituted by or against Borrower or Subsidiary and, if instituted against it, are consented to by it or remain undismissed for 30 days; then the Credits shall automatically terminate and the Note shall automatically become immediately due and payable, without notice. 8. Miscellaneous 8.1. The provisions of this Agreement shall be in addition to those of any guaranty, pledge or security agreement, note or other evidence of liability held by the Bank, all of which Page 7 of 9 shall be construed as complementary to each other. Nothing herein contained shall prevent the Bank from enforcing any or all other Notes, guaranties, pledges or security agreements in accordance with their respective terms. 8.2. From time to time, the Borrower will execute and deliver to the Bank such additional documents and will provide such additional information as the Bank may reasonably require to carry out the terms of this Agreement and be informed of the Borrower's status and affairs. 8.3. The Borrower will pay all expenses, including the reasonable fees and expenses of legal counsel for the Bank, incurred in connection with the preparation, administration, amendment, modification or enforcement of this Agreement, and the collection or attempted collection of the Note. 8.4. Any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed delivered if delivered in person or if sent by certified mail, postage prepaid, return receipt requested, or telegraph, as follows, unless such address is changed by written notice hereunder: 8.4.1. If to the Borrower: Energy West, Incorporated P.O. Box 2229 No. 1 River Park Towers Great Falls, MT 59403-2229 Attention: Larry D. Geske, President and CEO William J. Quast, Vice President Treasurer and Comptroller Edward J. Bernica, Vice President and CFO 8.4.2. If to the Bank: Norwest Bank Great Falls, National Association 21 3rd Street North Great Falls, MT 59403 Attention: John Koslosky, Vice President 8.5. The substantive Laws of the State of Montana shall govern the construction of this Agreement and the rights and remedies of the parties hereto. 8.6. This Agreement shall inure to the benefit of, and shall be binding upon, the respective successors and permitted assigns of the parties hereto. The Borrower has no right to assign any of their rights or obligations hereunder without the prior written consent of the Bank. This Agreement, and the documents executed and delivered pursuant hereto, constitute the entire agreement between the parties, and may be amended only by a writing signed on behalf of each party. 8.7. If any provision of this Agreement shall be held invalid under any applicable Laws, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end, the provisions hereof are severable. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. Page 8 of 9 ENERGY WEST, INCORPORATED NORWEST BANK GREAT FALLS, NATIONAL ASSOCIATION By: /s/ Larry D. Geske By: /s/ John Koslosky ---------------------------------- -------------------------------- Larry D. Geske, President and CEO John Koslosky, Vice President By: /s/ William J. Quast ---------------------------------- William J. Quast, Vice President, Treasurer and Controller Page 9 of 9 EX-10.2 5 EXH 10.2 : AMENDMENT TO CREDIT AGREEMENT AMENDMENT TO CREDIT AGREEMENT THIS AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is entered into this 17 day of April, 1996, by and between ENERGY WEST, INCORPORATED, formerly known as Great Falls Gas Company, of P.O. Box 2229, No. 1 River Park Tower, Great Falls, MT 59403-2229 (the "Borrower") and NORWEST BANK MONTANA, NATIONAL ASSOCIATION, formerly known as Norwest Bank Great Falls, National Association, a national banking association with offices located at 21 Third Street North, P.O. Box 5011, Great Falls, MT 59403-8200 (the "Bank"). A. Borrower and Bank entered into a Credit Agreement dated January 18, 1995 (the "Agreement"), pursuant to which the Bank made available to Borrower a revolving credit line in the amount of $8,000,000.00 for working capital purposes ("Credit 1"), loans to customers of Borrower in an amount not to exceed $2,100,000.00 in the aggregate outstanding at any time ("Credit 2"), loans to customers of Borrower whose applications had been previously rejected in an amount not to exceed $100,000.00 in the aggregate outstanding at any time ("Credit 3"), and a standby letter of credit facility in the amount of $1,000,000.00 (the "LC Facility"). B. Borrower has requested Bank to make amendments to the Agreement, including an increase of the maximum available under Credit 1 to $11,000,000.00, and Bank, subject to the terms and conditions herein and in the Agreement, is willing to make such amendments. NOW, THEREFORE, in consideration of the premises and of other valuable consideration the receipt and sufficiency of which are hereby acknowledged, the Bank and the Borrower agree as follows: 1. In the first paragraph of the RECITALS and in Sections 1.6. and 2.1. of the Agreement "EIGHT MILLION AND NO/100 DOLLARS ($8,000,000.00)" is hereby changed to "ELEVEN MILLION AND NO/100 DOLLARS ($11,000,000.00)". 2. Sections 1.13., 2.6., 2.7., and 2.8., relating to issuance of standby letters of credit are hereby deleted in their entirety. 3. Section 2.2. of the Agreement is deleted in its entirety and replaced with the following: 2.2. Interest on the unpaid principal of the Note shall be calculated at an annual rate of ONE QUARTER OF ONE percent (1/4%) less than the Base Rate in effect from time to time on the basis of the actual number of days elapsed in a year of 360 days. Each change in the Base Rate shall take effect on the first day of the month immediately succeeding such change. The foregoing notwithstanding, Borrower shall have the option, in $1,000,000.00 minimum increments, to fix interest rates for 30, 60, or 90 day periods at 250 basis points over the LIBOR for such period. "LIBOR" means the average (rounded upward, if necessary, to the nearest one-eighth of one percent) of offered rates for dollar deposits in immediately available funds in the London market based on quotations at five major banks for a period, and in an amount, comparable to the interest period and principal amount of the portion of the loan for which the LIBOR option has been chosen, as such rates are published from time to time in the Money Rates section of the Wall Street Journal. 4. In Section 2.3. of the Agreement, the date February 1, 1995, is hereby changed to April 1, 1996. 5. There is hereby added at the end of Section 6.3. of the Agreement, the following: The foregoing notwithstanding, Borrower shall be permitted to incur additional indebtedness to entities other than the Bank provided that, (i) the Borrower notifies the Bank of its intention to do so prior to the incurring of such additional indebtedness, (ii) the Borrower agrees hereby to an immediate and permanent decrease in the Credit to a maximum of $5,000,000.00 (the "New Credit Limit"), and (iii) the Borrower remits to the Bank prior to the incurring of such additional indebtedness an amount sufficient to eliminate the Credit balance, if any, in excess of the New Credit Limit. 6. In Section 4.5 of the Agreement, the date June 30, 1994, is hereby changed to June 30, 1995, and the date November 30, 1994, both times that it appears in the section, is hereby changed to February 29, 1996. 7. Except as expressly amended hereby, the Agreement shall remain in full force and effect. 8. This Amendment shall be governed by and interpreted in accordance with the laws of the State of Montana. Executed as of the date and year first above written. NORWEST BANK MONTANA, NATIONAL ASSOCIATION, Formerly known as Norwest Bank Great Falls, National Association By: /s/ John A. Koslosky --------------------------------------------- John A. Koslosky, Vice President ENERGY WEST, INCORPORATED By: /s/ Edward J. Bernica -------------------------------------------- Edward J. Bernica, Vice President and CFO By: /s/ William J. Quast -------------------------------------------- William J. Quast, Vice President, Treasurer and Controller EX-10.3 6 EXH 10.3 : AMENDMENT TO CREDIT AGREEMENT AMENDMENT TO CREDIT AGREEMENT THIS AMENDMENT TO CREDIT AGREEMENT (the "Agreement") is entered into this 7 day of November, 1996, by and between ENERGY WEST, INCORPORATED, formerly known as Great Falls Gas Company, of PO Box 2229, No. 1 River Park Tower, Great Falls, MT 59403-2229 (the "Borrower") and NORWEST BANK MONTANA, NATIONAL ASSOCIATION, formerly known as Norwest Bank Great Falls, National Association, a national banking association with offices located at 21 Third Street North, PO Box 5011, Great Falls, MT 59403-8200 (the "Bank"). A. Borrower and Bank entered into a Credit Agreement dated January 18, 1995, (the "Agreement"), pursuant to which the Bank made available to Borrower a revolving credit line in the amount of $8,000,000.00 for working capital purposes (Credit 1"), loans to customers of Borrower in an amount not to exceed $2,100,000.00 in the aggregate outstanding at any time ("Credit 2"), loans to customers of Borrower whose applications had been previously rejected in an amount not to exceed $100,000.00 in the aggregate outstanding at any time ("Credit 3"), and a standby letter of credit facility in the amount of $1,000,000.00 (the "LC Facility"). B. Borrower has requested Bank to make amendments to the Agreement, including an increase of the maximum available under Credit 1 to $13,000,000.00, and Bank, subject to the terms and conditions herein and in the Agreement, is willing to make such amendments. NOW, THEREFORE, in consideration of the premises and of other valuable consideration the receipt and sufficiency of which are hereby acknowledged, the Bank and Borrower agree as follows: 1. In the first paragraph of the RECITALS and in Sections 1.6. and 2.1. of the Agreement "ELEVEN MILLION AND NO/100 DOLLARS ($11,000,000.00)" is hereby changed to THIRTEEN MILLION AND NO/100 DOLLARS ($13,000,000.00). 2. Sections 1.13., 2.6., 2.7., and 2.8., relating to issuance of standby letters of credit and hereby deleted in their entirety. 3. Section 2.2. of the Agreement is deleted in its entirety and replaced with the following: 2.2. Interest on the unpaid principal of the Note shall be calculated at an annual rate of ONE QUARTER OF ONE percent (1/4%) less than the Base Rate in effect from time to time on the basis of the actual number of days elapsed in a year of 360 days. Each change in the Base Rate shall take effect on the first day of the month immediately succeeding such change. The foregoing notwithstanding, Borrower shall have the option, in $1,000,000.00 minimum increments, to fix interest rates for 30, 60, or 90 day periods at 250 basis points over the LIBOR for such period. "LIBOR" means the average (rounded upward, if necessary, the nearest one-eighth of one percent) of offered rates for dollar deposits in immediately available funds in the London market based on quotations at five major banks for a period, and in an amount, comparable to the interest period and principal amount of the portion of the loan for which the LIBOR option has been chosen, as such rates are published from time to time in the Money Rates section of the Wall Street Journal. 4. In Section 2.3. of the Agreement, the date April 1, 1995, is hereby changed to December 1, 1996. 5. There is hereby added at the end of Section 6.3. of the Agreement, the following: The foregoing notwithstanding, Borrower shall be permitted to incur additional indebtedness to entities other than the Bank provided that, (i) the Borrower notifies the Bank of its intention to do so prior to the incurring of such additional indebtedness, (ii) the Borrower agrees hereby to an immediate and permanent decrease in the Credit to maximum of $5,000,000.00 (the "New Credit Limit"), and (iii) the Borrower remits to the Bank prior to the incurring of such additional indebtedness an amount sufficient to eliminate the Credit balance, if any, in excess of the New Credit Limit. 6. In Section 4.5 of the Agreement, the date June 30, 1995, is hereby changed to June 30, 1996, and the date November 30, 1995, both times that it appears in the section, is hereby changed to September 30, 1996. 7. Except as expressly amended hereby, the Agreement shall remain in full force and effect. 8. This Amendment shall be governed by and interpreted in accordance with the laws of the State of Montana. Executed as of the date and year first above written. NORWEST BANK MONTANA, NATIONAL ASSOCIATION, Formerly known as Norwest Bank Great Falls, National Association By: /s/ John A. Koslosky ----------------------------------------------- John A. Koslosky, Vice President ENERGY WEST, INCORPORATED By: /s/ Edward J. Bernica ----------------------------------------------- Edward J. Bernica, Vice President and CFO By: /s/ William J. Quast ------------------------------------------------ William J. Quast, Vice President Treasurer and Controller EX-10.4 7 EXH 10.4 : PROMISSORY NOTE PROMISSORY NOTE ENERGY WEST, INCORPORATED NOVEMBER 7, 1996 On March 15, 1997, for value received, the undersigned promises to pay to the order of Norwest Bank Montana, National Association (the "Bank") at 21 Third Street North, Great Falls, MT 59403-8200, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America, the principal sum of THIRTEEN MILLION AND NO/100 DOLLARS ($13,000,000.00), or so much thereof as is disbursed and remains outstanding hereunder on the due date hereof, as shown by the Bank's liability record, together with interest (calculated on the basis of actual days elapsed in a 360-day year) on the unpaid balance hereof from the date hereof until this Note is fully paid, payable at the times and calculated at the rate or rates as follow: The Borrower shall pay interest monthly on the unpaid principal amount of the Credit, at a rate per annum equal to ONE-FOURTH OF ONE percent (1/4%) less than the Base Rate, commencing December 1, 1996, and continuing on the same day of each succeeding month until March 15, 1997, when the entire remaining balance of principal and interest shall be immediately due and payable. The foregoing notwithstanding, Borrower shall have the option, in $1,000,000.00 minimum increments, to fix interest rates for 30, 60 or 90 day periods at 250 basis points over the LIBOR for such period. "Base Rate" means the rate of interest established by the Norwest Bank Minnesota, National Association, from time to time as its "base" or "prime" rate of interest and shall be subject to change as often as monthly, with each such change to take effect as of the first day of the immediately succeeding month. "LIBOR" means the average (rounded upward, if necessary, to the nearest one-eighth of one percent) of offered rates for dollar deposits in immediately available funds in the London market based on quotations at five major banks for a period, and in an amount, comparable to the interest period and principal amount of the portion of the loan for which the LIBOR option has been chosen, as such rates are published from time to time in the Money Rates section of the Wall Street Journal. This note shall be subject to additional terms and conditions included in that certain Credit Agreement, dated January 18, 1995, and all amendments thereto (collectively, the "Agreement"), between the Bank or its successor in interest, and the undersigned. The terms and conditions of the Agreement are incorporated herein by reference. In the event that any provision in the Agreement is found to be in conflict with any provision of this Note, the provision in the Agreement shall control. ENERGY WEST, INCORPORATED By: /s/ Edward J. Bernica ------------------------------------------- Edward J. Bernica, Vice President & CFO By: /s/ William J. Quast ------------------------------------------- William J. Quast, Vice President, Treasurer and Controller EX-10.5 8 EXH 10.5 : CREDIT AGREEMENT 2/12/97 CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of February 12, 1997, is by and between ENERGY WEST INCORPORATED, a Montana corporation (the "Borrower"), and FIRST BANK MONTANA, NATIONAL ASSOCIATION (the "Lender"). ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.1 DEFINED TERMS. As used in this Agreement the following terms shall have the following respective meanings: "ADJUSTED EURODOLLAR RATE": With respect to each Interest Period applicable to a Eurodollar Rate Advance, the rate (rounded upward, if necessary, to the next one hundredth of one percent) determined by dividing (i) the Eurodollar Rate for such Interest Period by (ii) 1.00 minus the Eurodollar Reserve Percentage. "ADVANCE": Any portion of the principal balance of the Note as to which the Borrower elected one of the available interest rate options and, if applicable, an Interest Period. An Advance may be a Eurodollar Rate Advance or a Reference Rate Advance. "APPLICABLE MARGIN": With respect to any Eurodollar Rate Advance, 2% per annum, PROVIDED, so long as the covenanted ratio described in Section 6.5 is greater than 3.0 to 1.0, the Applicable Margin for any Eurodollar Rate Advance shall be 1.75% per annum. "BOARD": The Board of Governors of the Federal Reserve System or any successor thereto. "BUSINESS DAY": Any day (other than a Saturday, Sunday or legal holiday in the State of where the Lender is located). "CLOSING DATE": The date hereof; provided that all the conditions precedent to the obligation of the Lender to make the initial Advance, as set forth in Article III, have been or, on the Closing Date, will be, satisfied. "COMMITMENT": The obligation of the Lender to make Advances to the Borrower in an aggregate principal amount outstanding at any time not to exceed the "COMMITMENT AMOUNT", defined in Section 2.1, upon the terms and subject to the conditions and limitations of this Agreement. "DEFAULT": Any event which, with the giving of notice (whether such notice is required under Section 7.1, or under some other provision of this Agreement, or otherwise) or lapse of time, or both, would constitute an Event of Default. "EBITDA": For any period of determination, the consolidated net income of the Borrower and its subsidiaries before deductions for income taxes, interest expense, depreciation and amortization, all as determined in accordance with GAAP. "EURODOLLAR BUSINESS DAY": A Business Day which is also a day for trading by and between banks in United States dollar deposits in the interbank Eurodollar market and a day on which banks are open for business in New York City. "EURODOLLAR RATE": With respect to each Interest Period applicable to a Eurodollar Rate Advance the per annum Eurodollar interest rate (LIBOR) for United States dollars displayed on the Reuters Screen LIBO page or, if such rate is not so published, a rate determined for such amount and maturity based on published composite quotations of interbank Eurodollar rates selected by the Lender, in each case two Eurodollar Business Days prior to the first day of such Interest Period and for a maturity comparable to the Interest Period; PROVIDED, if Lender is unable to determine the rate in the foregoing manner, the Lender may substitute the interest rate per annum (rounded upward, if necessary, to the next one-sixteenth of one percent) at which United States dollar deposits are offered to the Lender in the interbank Eurodollar market two Eurodollar Business Days prior to the first day of such Interest Period for delivery in Immediately Available Funds on the first day of such Interest Period and in an amount approximately equal to the Advance by the Lender to which such Interest Period is to apply as determined by the Lender. "Reuters Screen LIBO page" means the display designated as page "LIBO" on the Reuters Monitor Money Rate Screen (or such other page as may replace the LIBO page on such service) for the purpose of displaying Reuters interbank offered rates of major banks for United States dollar deposits. The "ONE MONTH EURODOLLAR RATE" shall be defined as provided in Section 2.4. "EURODOLLAR RATE ADVANCE": An Advance with respect to which the interest rate is determined by reference to the Adjusted Eurodollar Rate. "EURODOLLAR RESERVE PERCENTAGE": As of any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board for determining the maximum reserve requirement (including any basic, supplemental or emergency reserves) for a member lender of the Federal Reserve System, with deposits comparable in amount to those held by the Lender, in respect of "Eurocurrency Liabilities" as such term is defined in Regulation D of the Board. "EVENT OF DEFAULT": Any event described in Section 7.1. "GAAP": Generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of any date of determination. "GUARANTORS": Rocky Mountain Fuels, Inc., Montana Sun, Inc., and Energy West Resources, Inc. "GUARANTY": The Guaranty of even date herewith executed by the Guarantors. "IMMEDIATELY AVAILABLE FUNDS": Funds with good value on the day and in the city in which payment is received. "INTEREST PERIOD": The period commencing on the date of a Eurodollar Rate Advance and ending one, two, three, four, five or six months thereafter, as the Borrower may elect in the manner provided in Sections 2.2 or 2.4 hereof; PROVIDED THAT: (1) Any Interest Period that would otherwise end on a day which is not a Eurodollar Business Day shall be extended to the next succeeding Eurodollar Business Day unless such Eurodollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Eurodollar Business Day; (2) Any Interest Period that begins on the last Eurodollar Business Day of a calendar month (or a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Eurodollar Business Day of a calendar month; and (3) Any Interest Period that would otherwise end after the Maturity Date shall end on the Maturity Date. "LOAN DOCUMENTS": This Agreement, the Note and the Guaranty. "LIEN": With respect to any Person, any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including the interest of each lessor under any capitalized lease), in, of or on any assets or properties of such Person, now owned or hereafter acquired, whether arising by agreement or operation of law. "MAXIMUM INTEREST BEARING DEBT RATIO": For any period of determination with respect to the Borrower and its subsidiaries, the ratio on a consolidated basis of (a) the sum of the aggregate principal amount of all outstanding capitalized lease obligations of Borrower and its subsidiaries and that portion of Total Liabilities bearing interest determined as of the last day of that period TO (b) EBITDA in each case determined for said period in accordance with GAAP. "MATURITY DATE": As defined in Section 2.1. "NOTE": As defined in Section 2.3. "PERSON": Any natural person, corporation, partnership, limited partnership, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity. "REFERENCE RATE": The rate of interest from time to time publicly announced by First Bank National Association as its "reference rate." "REFERENCE RATE ADVANCE": An Advance with respect to which the interest rate is determined by reference to the Reference Rate. "REGULATORY CHANGE": Any change after the date of this Agreement in federal, state or foreign laws or regulations or the adoption or making after such date of any interpretations, directives or requests applying to a class of banks including the Lender under any federal, state or foreign laws or - 2 - regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "TOTAL LIABILITIES": At the time of any determination, the amount of all items of Indebtedness of the Borrower and its subsidiaries on a consolidated basis that would constitute "liabilities" for balance sheet purposes in accordance with GAAP. Section 1.2 ACCOUNTING TERMS AND CALCULATIONS. Except as may be expressly provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP. Section 1.3 OTHER DEFINITIONAL TERMS, TERMS OF CONSTRUCTION. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole, and not to any particular provision of this Agreement. References to Sections, Exhibits, Schedules and the like references are to Sections, Exhibits, Schedules and the like of this Agreement unless otherwise expressly provided. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". Unless the context in which used herein otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or". All incorporations by reference of covenants, terms, definitions or other provisions from other agreements are incorporated into this Agreement as if such provisions were fully set forth herein, and include all necessary definitions and related provisions from such other agreements. All covenants, terms, definitions and other provisions from other agreements incorporated into this Agreement by reference shall survive any termination of such other agreements until the obligations of the Borrower under this Agreement and the Note are irrevocably paid in full and the Commitment is terminated. ARTICLE II TERMS OF LENDING Section 2.1 THE REVOLVING COMMITMENT. On the terms and subject to the conditions hereof, the Lender agrees to make Advances to the Borrower on a revolving basis at any time and from time to time from the Closing Date to January 2, 1998 (the "Maturity Date"), during which period the Borrower may borrow, repay and reborrow in accordance with the provisions hereof, PROVIDED, that the unpaid principal amount of outstanding Advances shall not at any time exceed $11,000,000 (the "Commitment Amount"). Section 2.2 PROCEDURE FOR ADVANCES. Any request for an Advance must be given so as to be received by the Lender not later than 12:00 a.m. (Mountain Time) two Eurodollar Business Days prior to the date of the requested Advance if the Advance is requested as a Eurodollar Rate Advance and not later than 2:00 p.m. on the date of the requested Advance if the Advance is requested as a Reference Rate Advance. Each request for an Advance shall specify (i) the date of the Advance, (ii) the amount of the Advance to be made on such date, (iii) whether such Advance is to be funded as a Reference Rate Advance or a Eurodollar Rate Advance, and (iv) in the case of a Eurodollar Rate Advance fixed as provided in Section 2.4, the duration of the initial Interest Period applicable thereto; PROVIDED, that if Borrower fails to specify an interest rate for any Advance, whether newly requested or outstanding, Lender shall fund such Advance as a Reference Rate Advance. Section 2.3 THE NOTE. The Advances shall be evidenced by a single promissory note of the Borrower (the "Note"), substantially in the form of Exhibit 2.3 hereto, in the amount of the Commitment Amount originally in effect. The Lender shall enter in its ledgers and records the amount of each Advance made and the payments made thereon, and the Lender is authorized by the Borrower (but not required) to enter on a schedule attached to the Note a record of such Advances and payments. Section 2.4 INTEREST. Except as otherwise provided in this Section 2.4, the Note shall bear interest on the principal amount thereof remaining outstanding from time to time, payable monthly in arrears on the first Business Day of each month and on the Maturity Date, from the date of the Note until payment thereof in full at a variable rate per annum of (A) the sum of (i) the Adjusted Eurodollar Rate (based on the Eurodollar Rate for United States dollar deposits with a maturity of 30 days in effect from time to time [the "One Month Eurodollar Rate"]) plus (ii) the Applicable Margin, or (B) the sum of (i) the Reference Rate minus (ii) 0.5% per annum, as Borrower may elect in the manner - 3 - provided in Section 2.2. The interest rate hereunder or under the Note shall change as and when the One Month Eurodollar Rate or Reference Rate change, as the case may be. Notwithstanding the foregoing, the Borrower may at any time elect to fix the interest rate on any new Advance or any portion of the principal then outstanding under the Note for which the interest rate has not been fixed for a specified Interest Period. If the Borrower makes the election described in the preceding sentence, the interest rate on the Advance or that portion of the outstanding principal of the Note designated by Borrower shall be the Adjusted Eurodollar Rate corresponding to the Interest Period elected and the principal amount designated shall thereafter be deemed a Eurodollar Rate Advance for the purposes of this Agreement for the duration of the Interest Period elected. The Borrower may exercise its option to fix the interest rate payable on any portion of principal outstanding under the Note by giving the Lender notice of the Borrower's election, specifying the Interest Period elected and the amount of outstanding principal to be so converted, at least two Eurodollar Business Days prior to commencement of the Interest Period elected. Any principal or interest that is not paid when due under the Note, whether by acceleration or otherwise, shall bear interest until paid in full at a per annum rate equal to the sum of the rate applicable to the Note pursuant to this Section 2.4 plus two percent per annum, payable on demand. Interest on the Note shall be computed on the basis of actual days elapsed and a year of 360 days. Section 2.5 INTEREST RATE NOT ASCERTAINABLE. If, on or prior to the date for determining the Adjusted Eurodollar Rate in respect of the Interest Period for any Eurodollar Rate Advance, the Lender reasonably and in its sound business judgment determines (which determination shall be conclusive and binding, absent error) that (a) deposits in dollars (in the applicable amount) are not available to the Lender in the interbank Eurodollar market for such Interest period, or (b) the Adjusted Eurodollar Rate will not adequately and fairly reflect the cost to the Lender of funding or maintaining Eurodollar Rate Advances for such Interest Period, the Lender shall forthwith give notice to the Borrower of such determination, whereupon the obligation of the Lender to make or continue, or to convert any Advances to, Eurodollar Rate Advances, as the case may be, shall be suspended until the Lender notifies the Borrower that the circumstances giving rise to such suspension no longer exist. While any such suspension continues, all further Advances by the Lender shall be made as Reference Rate Advances. No such suspension shall affect the interest rate then in effect during the applicable Interest Period for any Eurodollar Rate Advance outstanding at the time such suspension is imposed. Section 2.6. ILLEGALITY. If any Regulatory Change shall make it unlawful or impossible for the Lender to make, maintain or fund any Eurodollar Rate Advances, the Lender shall notify the Borrower, whereupon the obligation of the Lender to make or continue, or to convert any Advances to, Eurodollar Rate Advances shall be suspended until the Lender notifies the Borrower that the circumstances giving rise to such suspension no longer exist. If the Lender determines that a Regulatory Change does not allow it to lawfully continue to maintain any Eurodollar Rate Advances to the End of the applicable Interest Periods, all of the affected Advances shall be automatically converted to Reference Rate Advances as of the date of the Lender's notice and upon conversion the Borrower shall indemnify the Lender in accordance with Section 2.7. Section 2.7. FUNDING LOSSES; EURODOLLAR RATE ADVANCES. The Borrower shall compensate the Lender, upon its written request, for actual losses, expenses and liabilities (including any interest paid by the Lender to lenders of funds borrowed by it to make or carry Eurodollar Rate Advances to the extent not recovered by the Lender in connection with the reemployment of such funds) which the Lender may sustain: (i) if a funding of a Eurodollar Rate Advance does not occur as a result of Borrower's default on the date specified therefor in the Borrower's request or notice as to such Advance under Section 2.2 or 2.4, or (ii) if any repayment of a Eurodollar Rate Advance, or a conversion pursuant to Section 2.6, occurs on any day prior to the last day of the Interest Period applicable thereto. The Lender's request for compensation shall set forth the basis for the amount requested and shall be final, conclusive and binding, absent error. Section 2.8. DISCRETION OF LENDER AS TO MANNER OF FUNDING. The Lender shall be entitled to fund and maintain its funding of Eurodollar Rate Advances in any manner it may elect, it being understood, however, that for the purposes of this Agreement all determinations hereunder (including, but not limited to, determinations under Section 2.7, but excluding determinations that the Lender may - 4 - elect to make from the Reuters screen) shall be made as if the Lender had actually funded and maintained each Eurodollar Rate Advance during the Interest Period for such Advance through the purchase of deposits having a maturity corresponding to the last day of the Interest Period and bearing an interest rate equal to the Eurodollar Rate for such Interest Period. Section 2.9. REPAYMENT. Principal of the Note shall be payable in full on the Maturity Date. Section 2.10 OPTIONAL PREPAYMENTS. The Borrower may prepay Reference Rate Advances, in whole or in part, at any time, without premium or penalty. Any such prepayment must be accompanied by accrued and unpaid interest on the amount prepaid. Each partial prepayment shall be in a minimum amount of $100,000 or, if more, an integral multiple thereof. Except upon an acceleration following an Event of Default or upon termination of the Commitment in whole, the Borrower may pay Eurodollar Rate Advances only on the last day of the Interest Period applicable thereto. Amounts paid (unless following an acceleration or upon termination of the Commitment in whole) or prepaid on Advances under this Section 2.10 may be reborrowed upon the terms and subject to the conditions and limitations of this Agreement. Section 2.11 USE OF PROCEEDS. The proceeds of any Advance hereunder shall be used for the Borrower's general business purposes in a manner not in conflict with any of the Borrower's covenants in this Agreement. ARTICLE III CONDITIONS PRECEDENT Section 3.1 CONDITIONS OF INITIAL ADVANCE. The obligation of the Lender to make the initial Advance hereunder shall be subject to the prior or simultaneous fulfillment of each of the following conditions: 3.1(a) DOCUMENTS. The Lender shall have received the following: (i) This Agreement and the Note executed by a duly authorized officer (or officers) of the Borrower. (ii) A copy of the corporate resolutions of the Borrower and the Guarantors authorizing the execution, delivery and performance of the respective Loan Documents and containing an incumbency certificate showing the names and titles, and bearing the signatures of, the officers of the Borrower authorized to execute Loan Documents, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Borrower or the Guarantors as the case may be. (iii) Copies of the articles of incorporation and bylaws of the Borrower and Guarantors with all amendments thereto certified as of the Closing Date by the Secretary or an Assistant Secretary of the Borrower or Guarantors as the case may be. (iv) A certificate of good standing for the Borrower and Guarantors each in the jurisdiction of their incorporation together with evidence of each entities' authority to do business in any other jurisdiction the absence of which would materially affect the ability of the Borrower or respective Guarantor to carry on its business (specifically including, without limitation, Montana), in each case certified by the appropriate governmental officials as of a date not more than 10 days prior to the Closing Date. (v) The opinion of counsel to the Borrower and Guarantors covering such matters as the Lender may request. (vi) The Guaranty. 3.1(b) OTHER MATTERS. The Lender shall have received such other information, instruments and agreements in connection with the transactions contemplated by this Agreement as it may reasonably request satisfactory in scope, form and substance to the Lender and its counsel. Section 3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The Lender shall not have any obligation to make any Advance (including Advances after the initial Advance) hereunder unless all - 5 - representations and warranties of the Borrower made in this Agreement remain true and correct and no Default or Event of Default exists. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lender: Section 4.1 ORGANIZATION, STANDING, ETC. The Borrower is a corporation duly incorporated and validly existing and in good standing under the laws of Montana and has all requisite corporate power and authority to carry on its business as now conducted, to enter into this Agreement and to issue the Note and to perform its obligations hereunder and thereunder. This Agreement and the Note have been duly authorized by all necessary corporate action and when executed and delivered will be the legal and binding obligations of the Borrower, subject to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or similar law affecting creditors' rights generally and to general principles of equity. The execution and delivery of this Agreement and the Note will not violate the Borrower's Articles of Incorporation or bylaws or any law, regulation, order or ruling applicable to the Borrower. No governmental authorization, consent or exemption is required in connection with the Borrower's execution and delivery of this Agreement and the Note. Section 4.2 FINANCIAL STATEMENTS AND NO MATERIAL ADVERSE CHANGE. The audited financial statements attached to the Borrower's annual Form 10-K dated as of June 30, 1996 and the unaudited financial statements contained in its quarterly Form 10-Q dated as of September 30, 1996, as heretofore furnished to the Lender, have been prepared in accordance with GAAP, except for normal year-end adjustments and the absence of footnotes in the case of the unaudited financial statements. The Borrower has no material obligation or liability not disclosed in such financial statements, and there has been no material adverse change in the condition of the Borrower since the dates of such financial statements. Section 4.3 LITIGATION. There are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower which, if determined adversely to the Borrower, would have, a material adverse effect on the condition of the Borrower. The Borrower is not in violation of any law or regulation (including securities, environmental and public utilities laws and regulations and laws and regulations relating to employee benefit plans) where such violation could reasonably be expected to impose a material liability on the Borrower. Section 4.4 TAXES. The Borrower has filed all federal, state and local tax returns required to be filed and has paid or made provision for the payment of all taxes due and payable pursuant to such returns and pursuant to any assessments made against it or any of its property (other than taxes, fees or charges the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Borrower and except where failure to file or pay would not have a material adverse effect on the Borrower). Section 4.5 SUBSIDIARIES. The Borrower has only three (3) subsidiaries, the Guarantors. ARTICLE V AFFIRMATIVE COVENANTS Until the Commitment shall have expired or been terminated and the Note and all of the Borrower's other obligations to the Lender under this Agreement shall have been paid in full, unless the Lender shall otherwise consent in writing: Section 5.1 FINANCIAL STATEMENTS AND REPORTS. The Borrower will furnish to the Lender: 5.1(a) As soon as available after the end of each fiscal year of the Borrower, the Borrower's Form 10-K, with the audited financial statements attached thereto, certified without qualification by independent certified public accountants of recognized national standing selected by - 6 - the Borrower and acceptable to the Lender. The Lender acknowledges that Ernst & Young LLP is an acceptable public accounting firm. 5.1(b) As soon as available after the end of each fiscal quarter, Form 10Q for the Borrower. 5.1(c) As soon as practicable and in any event within 60 days after the end of each fiscal quarter, a statement in the form of that attached hereto as Exhibit 5.1 signed by the chief financial officer of the Borrower (i) stating that as of the end of such quarter there did not exist any Default or Event of Default or, if such Default or Event of Default existed, specifying the nature and period of existence thereof and what action the Borrower proposes to take with respect thereto and (ii) certifying compliance with Sections 6.4 and 6.5 hereof. 5.1(d) As soon as practicable and in any event within 90 days before the end of each fiscal year, a projection of the Borrower's income and expenses and capital expenditures for the next fiscal year. 5.1(e) From time to time, such other information regarding the business, operation and financial condition of the Borrower as the Lender may reasonably request. Section 5.2 CORPORATE EXISTENCE. The Borrower will maintain for itself and the Guarantors corporate existence in good standing under the laws of their respective jurisdictions of incorporation and qualification to transact business in each jurisdiction where failure so to qualify would have a material adverse effect on the Borrower or the Guarantor. Section 5.3 INSURANCE. The Borrower will maintain with financially sound and reputable insurance companies such insurance as may be required by law and such other insurance in such amounts and against such hazards as is customary in the case of reputable corporations engaged in the same or similar business and similarly situated. Section 5.4 PAYMENT OF TAXES AND CLAIMS. The Borrower will file all tax returns and reports which are required by law to be filed by it and will pay before they become delinquent, all taxes, assessments and governmental charges and levies imposed upon it or its property and all claims or demands of any kind (including those of suppliers, mechanics, carriers, warehousemen, landlords and other like Persons) which, if unpaid, might result in the creation of a Lien upon its property unless the Borrower contests in good faith by appropriate proceedings such taxes, assessments, charges, levies, claims or demands and adequate reserves have been made in the financial statements as required under GAAP. Section 5.5 RECORDS AND INSPECTION. The Borrower will keep adequate and proper records and books of account in which full and correct entries will be made of its dealings, business and affairs. The Borrower will permit the Lender or its designee to visit and inspect any of the properties, books and financial records of the Borrower, to examine and to make copies of the books of accounts and other financial records of the Borrower as the Lender may reasonably request in connection with this Agreement and the loans made hereunder, and to discuss the affairs, finances and accounts of the Borrower with its officers at such reasonable times and intervals as the Lender may designate. The Lender shall keep all such information confidential and will not disclose such information to any third party except as may be required by law. Section 5.6 COMPLIANCE. The Borrower will comply in all material respects with all laws, rules and regulations to which it is subject. Section 5.7 NOTICE OF LITIGATION. The Borrower will give prompt written notice to the Lender of the commencement of any action, suit or proceeding affecting the Borrower if in the Borrower's reasonable judgment, the action will have a material adverse effect on the Borrower. Section 5.8 PLANS. The Borrower and the Guarantors will maintain any employee benefit plans in compliance with all material requirements of applicable laws and regulations. - 7 - ARTICLE VI NEGATIVE COVENANTS Until the Commitment shall have expired or been terminated and the Note and all of the Borrower's other obligations to the Lender under this Agreement shall have been paid in full, unless the Lender shall otherwise consent in writing: Section 6.1 MERGER. The Borrower will not merge or consolidate or enter into any analogous reorganization or transaction with any Person or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution). Section 6.2 SALE OF ASSETS. The Borrower will not sell, transfer, lease or otherwise convey more than 10% of its assets in any calendar year during the term of this Agreement except for sales and leases in the ordinary course of business and sales and leases to any of the Guarantors. Section 6.3 LIENS. The Borrower will not create, incur, assume or suffer to exist any Lien, or enter into any arrangement for the acquisition of any property through conditional sale, lease-purchase or other title retention agreements except (a) Liens for taxes, fees, assessments, governmental charges or governmental entitlements not delinquent (b) Liens incurred or deposits or pledges made or given in connection with, or to secure payment of, indemnity, performance or other similar bonds and (c) purchase money Liens for the acquisition of any property by Borrower and equipment or capital leases for the acquisition of personal property by the Borrower. Section 6.4 CASH FLOW COVERAGE RATIO. The Borrower will not permit the ratio of its EBITDA minus income taxes minus dividends plus proceeds from issuance of new shares of common stock net of any retirement of common stock TO the principal payments on consolidated long term debt plus total interest expense, as of the last day of any fiscal quarter, for the four consecutive fiscal quarters ending on that date, to be less than 1.5 to 1. Section 6.5 MAXIMUM INTEREST BEARING DEBT RATIO. The Borrower will not permit the Maximum Interest Bearing Debt Ratio, as of the last day of the fiscal quarters ending on March 31 and June 30 to be less than 4.5 to 1 and ending September 30 and December 31 to be less than 5.0 to 1. ARTICLE VII EVENTS OF DEFAULT AND REMEDIES Section 7.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an Event of Default: 7.1(a) The Borrower shall fail to make when due, whether by acceleration or otherwise, any payment of principal of or interest on the Note or any other obligations of the Borrower to the Lender pursuant to this Agreement and such failure continues for a period of five consecutive days. 7.1(b) Any representation or warranty made by or on behalf of the Borrower in this Agreement or by or on behalf of the Borrower in any certificate, statement, report or document herewith or hereafter furnished to the Lender pursuant to this Agreement shall prove to have been false or misleading in any material respect on the date as of which the facts set forth are stated or certified. 7.1(c) The Borrower shall fail to comply with Sections 5.2, 5.3, 6.1, 6.2 or 6.3. 7.1(d) The Borrower shall fail to comply with any other agreement, covenant, condition, provision or term contained in this Agreement (other than those hereinabove set forth in this Section 7.1 or Sections 6.4 or 6.5) and such failure to comply shall continue for 30 calendar days after whichever of the following dates is the earliest: (i) the date the Borrower gives notice of such failure to the Lender, (ii) the date the Borrower should have given notice of such failure to the Lender pursuant to Section 5.1(c), or (iii) the date the Lender gives notice of such failure to the Borrower. 7.1(e) The Borrower shall fail to comply with Sections 6.4 or 6.5 of this Agreement and such failure to comply shall continue for 90 calendar days after whichever of the - 8 - following dates is earliest: (i) the date the Borrower gives notice of such failure to the Lender, (ii) the date the Borrower should have given notice of such failure to the Lender pursuant to Section 5.1(c), or (iii) the date the Lender gives notice of such failure to the Borrower. 7.1(f) The Borrower shall become insolvent or shall generally not pay its debts as they mature or shall apply for, shall consent to, or shall acquiesce in the appointment of a custodian, trustee or receiver of the Borrower or for a substantial part of the property thereof or, in the absence of such application, consent or acquiescence, a custodian, trustee or receiver shall be appointed for the Borrower or for a substantial part of the property thereof and shall not be discharged within 60 days, or the Borrower shall make an assignment for the benefit of creditors. 7.1(g) Any bankruptcy, reorganization, debt arrangement or other proceedings under any bankruptcy or insolvency law shall be instituted by or against the Borrower and, if instituted against the Borrower, shall have been consented to or acquiesced in by the Borrower or shall remain undismissed for 60 days, or an order for relief shall have been entered against the Borrower. 7.1(h) Any dissolution or liquidation proceeding shall be instituted by or against the Borrower and, if instituted against the Borrower, shall be consented to or acquiesced in by the Borrower or shall remain for 60 days undismissed. 7.1(i) A judgment or judgments for the payment of money in excess of the sum of $250,000 in the aggregate shall be rendered against the Borrower and either (i) the judgment creditor executes on such judgment or (ii) such judgment remains unpaid or undischarged for more than 60 days from the date of entry thereof or such longer period during which execution of such judgment shall be stayed during an appeal from such judgment. 7.1(j) The maturity of any indebtedness of the Borrower exceeding $250,000 in the aggregate (other than indebtedness under this Agreement) shall be accelerated, or the Borrower shall fail to pay any such indebtedness when due (after the lapse of any applicable grace period) or any event shall occur or condition shall exist and shall continue for more than the period of grace, if any, applicable thereto and shall have the effect of causing, or permitting the holder of any such indebtedness to cause, such indebtedness to become due prior to its stated maturity. Section 7.2 REMEDIES. If (a) any Event of Default described in Sections 7.1 (f), (g) or (h) shall occur with respect to the Borrower, the Commitment shall automatically terminate and the Note and all other obligations of the Borrower to the Lender under this Agreement shall automatically become immediately due and payable, or (b) any other Event of Default shall occur and be continuing, then the Lender may (i) declare the Commitment terminated, whereupon the Commitment shall terminate, and (ii) declare the Note and all other obligations of the Borrower to the Lender under this Agreement to be forthwith due and payable, whereupon the same shall immediately become due and payable, in each case without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, anything in this Agreement or in the Note to the contrary notwithstanding. Upon the occurrence of any of the events described in clauses (a) or (b) of the preceding sentence the Lender may exercise all rights and remedies under this Agreement, the Note and any related agreements and under any applicable law. ARTICLE VIII MISCELLANEOUS Section 8.1 MODIFICATIONS. Notwithstanding any provisions to the contrary herein, any term of this Agreement may be amended with the written consent of the Borrower. Section 8.2 COSTS AND EXPENSES. The Borrower agrees to reimburse the Lender upon demand for all reasonable out-of-pocket expenses paid or incurred by the Lender in connection with the amendment, modification, interpretation, collection and enforcement of this Agreement and the Note. The obligations of the Borrower under this Section shall survive any termination of this Agreement. Section 8.3 WAIVERS, ETC. No failure on the part of the Lender or the holder of the Note to exercise and no delay in exercising any power or right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude any other or further exercise - 9 - thereof or the exercise of any other power or right. The rights and remedies of the Lender hereunder are cumulative and not exclusive of any right or remedy the Lender otherwise has. Section 8.4 NOTICES. Except when telephonic notice is expressly authorized by this Agreement, any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, telegram, telex, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telegram, telex or facsimile transmission, from the first Business Day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed; PROVIDED, HOWEVER, that any notice to the Lender under Article II hereof shall be deemed to have been given only when received by the Lender. Section 8.5 SUCCESSORS AND ASSIGNS; DISPOSITION OF LOANS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign its rights or delegate its obligations hereunder without the prior written consent of the Lender. The Lender may at any time sell, assign, transfer, grant participations in, or otherwise dispose of any portion of the Commitment and/or Advances to banks or other financial institutions. The Lender may disclose any information regarding the Borrower in the Lender's possession to any prospective buyer or participant unless such information has been previously designated by the Borrower as confidential information, in which case the Lender may not disclose such information without the written permission of Borrower. SECTION 8.6 GOVERNING LAW AND CONSTRUCTION. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MONTANA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS. Section 8.7 CAPTIONS. The captions or headings herein and any table of contents hereto are for convenience only and in no way define, limit or describe the scope or intent of any provision of this Agreement. Section 8.8 ENTIRE AGREEMENT. This Agreement and the other Loan Documents embody the entire agreement and understanding between the Borrower and the Lender with respect to the subject matter hereof and thereof. This Agreement supersedes all prior agreements and understandings relating to the subject matter hereof. Section 8.9 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and either of the parties hereto may execute this Agreement by signing any such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. ENERGY WEST INCORPORATED By /s/ Larry D. Geske ------------------------ Print Name LARRY D. GESKE ---------------- Title President --------------------- Borrower's Address: No. 1 First Avenue South P. O. Box 2229 Great Falls, Montana 59403 Fax 406-___-____ - 10 - FIRST BANK MONTANA, NATIONAL ASSOCIATION By ------------------------ Robert A. Butcher Senior Vice President Lender's Address: 300 Central Avenue P.O. Box 5000 Great Falls, Montana 59403-3127 Fax 406-455-1009 - 11 - EXHIBIT 2.3 TO CREDIT AGREEMENT REVOLVING NOTE $11,000,000.00 February 12, 1997 Great Falls, Montana FOR VALUE RECEIVED, ENERGY WEST INCORPORATED, a Montana corporation, hereby promises to pay to the order of FIRST BANK MONTANA, NATIONAL ASSOCIATION (the "Lender") at its main office in Great Falls, Montana, in lawful money of the United States of America in immediately available funds on the Maturity Date (as such term and each other capitalized term used herein are defined in the Credit Agreement hereinafter referred to) the principal amount of ELEVEN MILLION AND NO/100 DOLLARS ($11,000,000.00) or, if less, the aggregate unpaid principal amount of all Advances made by the Lender under the Credit Agreement, and to pay interest (computed on the basis of actual days elapsed and a year of 360 days) in like funds on the unpaid principal amount hereof from time to time outstanding at the rates and times set forth in the Credit Agreement. This note is the Note referred to in the Credit Agreement dated as of February 12, 1997 (as the same may be hereafter from time to time amended, restated or modified, the "Credit Agreement") between the undersigned and the Lender. This note is subject to certain permissive and mandatory prepayments and its maturity is subject to acceleration, in each case upon the terms provided in said Credit Agreement. In the event of default hereunder, the undersigned agrees to pay all reasonable costs and expenses of collection, including reasonable attorneys' fees. The undersigned waives demand, presentment, notice of nonpayment, protest, notice of protest and notice of dishonor. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MONTANA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS. ENERGY WEST INCORPORATED By ---------------------- Title ------------------- EXHIBIT 5.1 to CREDIT AGREEMENT [FORM OF COMPLIANCE CERTIFICATE] To: First Bank Montana, National Association THE UNDERSIGNED HEREBY CERTIFIES THAT: (1) I am the duly elected chief financial officer (or deputy thereof) of Energy West Incorporated (the "Borrower"), a Montana corporation; (2) I have reviewed the terms of the Credit Agreement dated as of February 12, 1997 (the "Credit Agreement"), between the Borrower and First Bank Montana, National Association (the "Bank") and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Borrower during the accounting period covered by Attachment No. 1 hereto; (3) The examinations described in paragraph (2) did not disclose, and I have no knowledge, whether arising out of such examinations or otherwise, of the existence of any condition or event which constitutes a Default or an Event of Default (as such terms are defined in the Credit Agreement) during or at the end of the accounting period covered by Attachment No. 1 hereto or as of the date of this Certificate, except as described below (or in a separate attachment to this Certificate), the exceptions listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking, or proposes to take with respect to each such condition or event: The foregoing certifications, together with the computations set forth in Attachment No. 1 hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this __ day of __________, 19__, pursuant to Section 5.1(c) of the Credit Agreement. ENERGY WEST INCORPORATED By ------------------------- Print Name ----------------- Title ---------------------- ATTACHMENT TO COMPLIANCE CERTIFICATE AS OF __________, 199_ AND PERTAINS TO THE PERIOD FROM __________, 19__ TO __________, 19__ 1. CASH FLOW COVERAGE RATIO (ON A CONSOLIDATED BASIS) (SECTION 6.4). (a) EBITDA (adjusted as provided in Section 6.4): $_____ (b) Principal payments on long term debt: $_____ (c) Total interest expense: $_____ (d) Ratio of (a) to (b) + (c): _____ to 1.0 (e) Required ratio: equal to or greater than 1.5 to 1.0 2. MAXIMUM INTEREST BEARING DEBT RATIO (ON A CONSOLIDATED BASIS) (SECTION 6.5). (a) Aggregate principal amount of outstanding capitalized lease obligations of Borrower and its subsidiaries $_____ (b) Interest-bearing Total Liabilities: $_____ (c) EBITDA: $_____ (d) Ratio of (a) plus (b) to (c): _____ to 1.0 (e) Required ratio: less than or equal to 4.5 to 1.0 (as of March 31 and June 30) or 5.0 to 1.0 (as of September 30 and December 31) EX-10.6 9 EXH 10.6 : DELIVERED GAS PURCHASE CONTRACT 2/23/77 DELIVERED GAS PURCHASE CONTRACT FEBRUARY 23, 1977 CASCADE GAS CO. SELLER THE MONTANA POWER COMPANY BUYER DELIVERED GAS PURCHASE CONTRACT Index Page Article Title Number ------- ----- ------ I Definitions 1 II Commitment of Gas Reserves 2 III Seller's Obligations 2 IV Quantity of Gas 6 V Determinations of Gas Reserves 10 VI Delivery Pressure and Delivery Points 13 VII Quality of Gas 14 VIII Measurement and Tests 15 IX Price and Payment 21 X Seller's Representations 27 XI Title to Gas 28 XII Force Majeure 29 XIII Term 31 XIV Miscellaneous 31 DELIVERED GAS PURCHASE CONTRACT (Montana) THIS CONTRACT, EFFECTIVE and agreed to by the parties hereto this 23rd of February, 1977, is by and between CASCADE GAS CO., P. O. Box 577, Shelby, Montana, 59474 (hereinafter called "Seller") and THE MONTANA POWER COMPANY (hereinafter called "Buyer"). WITNESSETH: WHEREAS, Seller is the contract purchaser of gas produced from those lands situated in the State of Montana, and described on Schedule "A" attached hereto, on which gas production has been developed; and WHEREAS, Buyer is willing to buy gas which may be purchased by Seller from said lands in commercial quantities; and WHEREAS, the parties hereto are desirous of entering into a contract providing for the sale by Seller and purchase by Buyer of volumes of gas delivered by Seller; NOW, THEREFORE, in consideration of the premises and the covenants herein contained, Seller agrees to sell and deliver to Buyer and Buyer agrees to purchase and receive from Seller, pursuant to the terms and conditions hereinafter set forth, all of the gas purchased, produced or otherwise obtained by Seller from acreage described on Schedule "A" attached hereto. -1- ARTICLE I DEFINITIONS For the purpose of the Contract, the following words and terms are defined as follows: 1. "CONTRACT YEAR" means a calendar year except that the first "Contract Year" is deemed to commence on the date of initial delivery of gas hereunder and extending to, but not including the following January 1. 2. The "ANNIVERSARY DATE" of this Contract is deemed to be January l in each Contract year. 3. "DAY" means a period of twenty-four (24) consecutive hours beginning and ending at 8:00 a.m., Mountain Time. The reference date for any day shall be the calendar date upon which said 24-hour period shall commence. 4. "MONTH" means the period of time beginning at 8:00 a.m., Mountain Time on the first day of a calendar month and ending at 8:00 a.m., Mountain Time on the first day of the next calendar month. 5. "GAS" means either natural gas obtained from the wells or the residue remaining after the natural gas has been treated by Seller for the removal of any of its constituent parts other than methane and the removal of methane to such extent as is necessary in removing other constituents, as the context may require, but not including casinghead gas. 6. "CASINGHEAD GAS" means gas which has its rate of production controlled by the amount of oil simultaneously produced therewith. -2- 7. "RECOVERABLE GAS RESERVES" means the quantity of gas which is determined or redetermined at a future date to be economically recoverable and deliverable during the initial term of this Contract from all Gas Production Units connected to Seller's gathering system and available for delivery as of the date of initial delivery hereunder after processing, if any, to satisfy the quality specifications hereof, less the quantities of gas reserved by the Seller hereunder. Such reserves shall be computed by accepted reservoir engineering and geological procedures, and shall consist of only those reserves controlled by Seller and underlying or attributable to the lands listed on Schedule "A", but shall not include casinghead gas. 8. "RESERVOIR" means stratigraphic trap, or pool, from which gas is produced, and one (1) or more "reservoirs" may be produced by means of a single well. 9. "CUBIC FOOT OF GAS" is the unit of volume for purposes of measurement hereunder, except for gross heating value, and means one cubic foot of gas at a temperature of 60 DEG. F. and at a pressure of 14.73 pounds per square inch absolute. For purposes of measurement, the atmospheric pressure shall be assumed to remain constant at 13 pounds per square inch absolute. 10. "MCF" means one thousand (1,000) cubic feet. 11. "BTU" means British Thermal Unit. "GROSS HEATING VALUE" means the total calorific value expressed in BTU's obtained by the complete combustion at constant pressure of the amount of gas which would occupy a volume of one cubic foot at -3- a temperature of 60 DEG. F. if saturated with water vapor and under a pressure equivalent to that of 30 inches of mercury at 32 DEG. F. and under standard gravitational force (980.665 c.m. per sec. sec.) with air of the same temperature and pressure as the gas, when the products of combustion are cooled to the initial temperature of gas and air and when the water formed by combustion is condensed to the liquid state. 12. "DCQ" means Daily Contract Quantity, and is defined in Article IV, Section 1, of this agreement. 13. "ANNUAL CONTRACT VOLUME" means the DCQ multiplied by the number of calendar days in the Contract Year. ARTICLE II COMMITMENT OF GAS RESERVES Seller hereby commits to the performance of the Contract all of the gas purchased, produced or otherwise obtained by Seller from the lands specified and described on Schedule "A". ARTICLE III SELLER'S OBLIGATION SECTION 1: GAS TO BE PURCHASED AND SOLD. Subject to the provisions of this Agreement, during the term hereof the Seller shall gather, compress, dehydrate, sell and deliver to Buyer, and the Buyer shall purchase and receive from the Seller at the delivery point the natural gas purchased, produced or otherwise obtained by Seller from wells on the lands described in Schedule "A". -4- SECTION 2: (a) SELLER'S OBLIGATION TO DELIVER. Seller shall available for delivery all volumes requested by not to exceed 125% of the DCQ, provided however, Seller shall not be required to demand that the owners produce any wells in excess of the legal of such wells as may be fixed from time to time regulatory bodies or in excess of any rate which, judgment of the well owners, may damage the well. (b) LIMITATION ON SELLER'S OBLIGATIONS. (i) RATE OF DELIVERY. Seller shall not be obligated to demand delivery of gas from any well at a rate which in the opinion of the well owner, acting as a reasonably prudent operator, would be injurious to such well or to the reservoir or reservoirs from which such well is produced. (ii) RESERVATION OF GAS BY THE SELLER. The Seller reserves the following rights: (1) the right to retain or allow others to retain title and possession to such quantities of gas produced from the lands described in Schedule "A" as may be required to fulfill the obligations of the Seller under the terms of the Agreement or other document by which Seller derives its right to sell the gas to be sold hereunder; (2) the right to use such quantities of gas as may be needed or required for delivery of gas for -5- sale under this Contract from the lands described in Schedule "A"; (3) the right to process or allow others to process gas produced from any one or more of the wells located on the lands described in Schedule "A" for the removal of any component other than methane prior to delivery of such gas to the Buyer, which components so removed shall belong to the Seller or other processor; provided however, that the gas which is delivered to Buyer after such processing shall meet the quality requirements of Article VII hereof. ARTICLE IV QUANTITY OF GAS SECTION 1 VOLUME OBLIGATION. Commencing on the date that Seller notifies Buyer in writing that Seller is prepared, pursuant to the terms of this Delivered Gas Purchase Contract, to deliver gas to Buyer at the discharge side of Seller's plant and facilities located in the NW1/4 NW1/4 NE1/4 of Section 34, Township 34 North, Range 2 West, Toole County, Montana, (Delivery Point), the volume of gas which Buyer shall be obligated to take and pay for, or pay for if available and not taken, and which Seller shall be obligated to have available for delivery, shall be the Daily Contract Quantity (DCQ). -6- Until such time as Seller has available for delivery to Buyer in excess of ten million (10,000,000) cubic feet of gas per day, the DCQ shall be eighty percent (80%) of the daily volume available for delivery by Seller, whether or not taken by Buyer. However, at such time as the DCQ so computed equals or exceeds eight million (8,000,000) cubic feet per day, the DCQ shall be one million (1,000,000) cubic feet per day for each five billion five hundred million (5,500,000,000) cubic feet of Recoverable Gas Reserves as defined herein. The parties have agreed that, at the date of inception of Buyer's obligation to take or pay for gas under the terms of this Contract, and until initial delivery of gas to Buyer, the DCQ shall equal one million two hundred thousand (1,200,000) cubic feet of gas per day. SECTION 2: CASINGHEAD GAS. Subject to the Quality Provisions of Article VII, Seller may deliver to Buyer, in addition to the volumes of gas determined under Section 1 of the Article IV, Casinghead Gas purchased by Seller from the lands described in Schedule "A". Buyer shall be obligated to accept delivery of such Casinghead Gas only to the extent that the daily volume delivery thereof does not exceed the DCQ (that is the total daily volume delivered does not exceed two times the DCQ). Buyer, at its option, may accept Casinghead volumes in excess of the DCQ. SECTION 3: DRAINAGE. If a reservoir producing gas delivered to Buyer under this Contract is produced by anyone other than a well owner -7- selling to Seller at a rate which makes imminent, in Seller's judgment, the drainage of gas from land under Seller's purchase contracts, then Seller shall immediately notify Buyer in writing of the existence of such situation and may request that Buyer, to the extent reasonabley possible, increase its takes from Seller by a volume sufficient to protect Seller and Seller's well owners from drainage of the reservoir. SECTION 4: MAKE-UP OF DEFICIENCIES IN PURCHASE. (a) Beginning with initial delivery hereunder, all volumes of gas taken by Buyer during a contract year in excess of the Annual Contract Volume up to a total quantity having a total value (calculated at the price being paid hereunder at the time such gas is so made up) equal to the payments theretofore made by Buyer to Seller for gas not taken shall be credited to the make-up of take or pay deficiencies limited to the five (5) contract years immediately following the later of: (1) the contract year in which the deficiency occurred, or (2) the contract year in which all take or pay deficiencies which occurred prior to initial delivery have been recouped. Nothing contained in this Section 4 shall reduce Buyer's obligation to take and pay for, or nevertheless pay for if available and not taken, the Annual Contract Volume during each contract year. (b) In the event that this Contract terminates for any -8- reason other than the breach of the terms hereof by Buyer prior to the Buyer's recovery of any volumes paid for but not taken hereunder, and Seller begins deliveries of gas to another purchaser, Seller shall pay to Buyer one-third (1/3) of the then current sales value of such gas each month until the Buyer has recovered in full the sums paid by Buyer for gas not taken. SECTION 5: LIMITATIONS UPON BUYER'S OBLIGATION TO PURCHASE GAS. (a) DELIVERY CAPACITY OF SELLER. Buyer's obligation to purchase the Annual Contract Volume during each contract year is conditioned upon Seller having the capability at all times of delivering a daily volume of gas equal to at least 125% of the DCQ. (b) FAILURE TO DELIVER CONTRACT VOLUME. If the Seller fails for any calendar month to deliver to Buyer the daily quantity of gas requested by Buyer up to 125% of the DCQ, Buyer may notify Seller in writing of such failure. Seller shall have such time as may be necessary, but in no event more than twelve (12) months from the date of receipt by Seller of Buyer's notice, in which period the DCQ shall be reduced temporarily to a volume equal to 80% of the average daily volume of gas Seller delivered to Buyer during the calendar month on which Buyer's notice was based. In the event Seller's attempts to restore its ability to deliver 125% of the DCQ -9- in effect prior to such notice are unsuccessful, as evidenced by Seller's failure to deliver such quantity on each day of a calendar month test conducted by Seller and Buyer for the period commencing on the day following the end of said twelve (12) month period, or at such earlier time as Seller may request, Buyer shall have the right to reduce the DCQ to a volume equal to 80% of the average daily volume of gas delivered to Buyer during the calendar month of said delivery test. ARTICLE V DETERMINATION OF GAS RESERVES At such time as the DCQ is equal to eight million (8,000,000) cubic feet per day, and thereafter, from time to time as new wells are completed or discoveries of gas are made for which Seller is the contract purchaser, Seller will provide Buyer with the basic geological, engineering, production and other data within Seller's possession which would be needed in making a determination of gas reserves and deliverability of each well. SECTION 1: RECOVERABLE GAS RESERVE DETERMINATION: One (1) month prior to the expected initial delivery of gas from any such new well hereunder, Buyer shall furnish Seller an estimate of Recoverable Gas Reserves. The estimate shall not include nor be based in any manner upon volumes of casinghead gas. -10- Within fifteen (15) days after Buyer's furnishing its estimate of the Recoverable Gas Reserves, Seller shall advise Buyer whether Buyer's estimate is acceptable. If Buyer's estimate of such Recoverable Gas Reserves is not acceptable to Seller, and Seller and Buyer are unable to negotiate an agreeable settlement, then the matter shall be determined by arbitration as provided in this Article V. The Recoverable Gas Reserves when determined will form the basis for determining the DCQ and take or pay obligations. Such DCQ shall be effective until superseded by a subsequent redetermination of Recoverable Gas Reserves or until changed under the provisions of Article IV, Section 5. The fact that Buyer and Seller cannot agree on the Recoverable Gas Reserves for any well and find it necessary to submit such matter to arbitration shall not prevent the connection of such well and the commencement of production therefrom. The Recoverable Gas Reserves as finally determined by arbitration shall be used to determine the DCQ retroactive to the date of initial delivery from such well. SECTION 2: SUBSEQUENT REDETERMINATIONS OF RECOVERABLE GAS RESERVES. Either party may request a redetermination of Recoverable Gas Reserves during the month of July of every second contract year hereof. Upon request Buyer shall, between July 1 and September 1 of each such year, estimate the quantity of Seller's Recoverable Gas Reserves and promptly provide Seller with a statement thereof. -11- Within fifteen (15) days after Buyer's furnishing its estimate of such reserves, Seller shall advise Buyer whether Buyer's estimate of such reserves is acceptable. If Seller and Buyer reach agreement on Recoverable Gas Reserves, then such reserve agreement shall form the basis for determining the DCQ effective the following January 1, unless limited by the provisions of Article IV, Section 5. If Buyer's estimate of such reserves is not acceptable to Seller, and Seller and Buyer are unable to negotiate an agreeable settlement, then the matter shall be determined by arbitration as provided in this Article V. SECTION 3: ARBITRATION OF RESERVES. If Seller and Buyer are unable to agree upon the Recoverable Gas Reserves in any of the foregoing instances and such disagreement cannot be resolved by negotiation within sixty (60) days after Buyer has submitted its determination of Recoverable Gas Reserves, then the determination of such reserves will, at the request of either party, be submitted to arbitration as hereinafter set forth. Upon written demand of either party, the parties shall meet and attempt to appoint a single arbitrator. If the parties fail to name an arbitrator within ten (10) days from such demand, then the arbitrator shall be appointed by the American Arbitration Society. The arbitrator selected to act hereunder shall be qualified by education, training and experience to determine gas reserves. The arbitrator so chosen shall proceed immediately to hear -12- and determine Recoverable Gas Reserves. The decision of the arbitrator shall be made within thirty (30) days after his appointment, subject to any reasonable delay due to unforeseen circumstances. Notwithstanding the foregoing, in the event the arbitrator fails to make a decision within sixty (60) days after his appointment, then either party may elect to have a new arbitrator chosen in like manner as if none had previously been selected. If such election is made, the decision of the previous arbitrator shall be null and void. The decision of the arbitrator shall be in writing and signed by the arbitrator and shall be final and binding upon the parties hereto as to Recoverable Gas Reserves hereunder, until such time as a redetermination may be made as herein provided. The compensation and expenses of the arbitrator shall be paid in equal proportions by Buyer and Seller. An initial determination of a redetermination of Recoverable Gas Reserves rendered by an arbitrator shall form the basis of determining the DCQ effective January 1 of the year following the year in which such arbitration was requested, subject to the provisions of Article IV, Section 5. ARTICLE VI DELIVERY PRESSURE AND DELIVERY POINTS SECTION 1: DELIVERY PRESSURE. Delivery by Seller of gas shall be made at a pressure that is sufficient to effect delivery of gas into -13- Buyer's pipeline but not in excess of one thousand (1,000) pounds per square inch. Maintenance by Seller of sufficient pressure to enter Buyer's pipeline shall be a condition of Buyer's obligation to purchase and receive from Seller the quantities of gas specified in Article III hereof. SECTION 2: DELIVERY POINT. Delivery of natural gas hereunder shall be at the discharge side of Seller's plant and facilities located in the NW 1/4 NW 1/4 NE 1/4 of Section 34, Township 34 North, Range 2 West, Toole County, Montana. SECTION 3: TITLE: Title to all gas shall pass at the point of delivery. ARTICLE VII QUALITY OF GAS SECTION 1: Seller agrees that the gas delivered hereunder shall be merchantable natural gas, at all times complying with the following quality requirements: (a) The gas shall be in its natural state as produced, including all hydrocarbon constituents therein contained, except gas from which Seller has removed liquid hydrocarbons under the provisions of Article III, Section 2(b)(ii)(3) hereof. Seller shall also have the right to remove nonhydrocarbon constituents and hydrocarbons as required to -14- remove other constituents. Seller may enrich the gas to the extent required to meet the gross heating requirement set forth in Paragraph (b) below, and may subject the gas, or permit the gas to be subjected, to compression, cooling, cleaning and other processes. (b) The weighted average gross heating value of gas delivered to Buyer hereunder shall not be less than nine hundred (900) British Thermal Units per cubic foot, and shall not be more than one thousand two hundred (1,200) British Thermal Units per cubic foot. Buyer may reject delivery of gas having a weighted average gross heating value of less than nine hundred (900) British Thermal Units or more than one thousand two hundred (1,200) British Thermal Units. (c) The gas shall be commercially free from sand, dust, gums, liquid water, crude oil, impurities and other objectionable substances and shall have been dehydrated by Seller for removal of water present therein in a vapor state, and in no event contain more than four (4) pounds of water vapor per one million (1,000,000) cubic feet of gas, and shall be free from hydrocarbons liquifiable at temperatures in excess of fifteen degrees (15 DEG) Fahrenheit at pressures up to 800 psig. (d) The gas shall not contain more than one-quarter (1/4) grain of hydrogen sulphide per one hundred (100) cubic feet of gas. -15- (e) The gas shall not contain in excess of three percent (3%) by volume of carbon dioxide. (f) The temperature of the gas at the delivery point or delivery points shall not be in excess of one hundred twenty degrees (120 DEG) Fahrenheit. ARTICLE VIII MEASUREMENT AND TESTS SECTION l: UNIT OF VOLUME. The unit of volume for all gas hereunder shall be one (l) cubic foot of gas, and the term "Cubic foot of Gas" wherever used in the Contract shall mean a cubic foot of gas at a temperature of sixty degrees (60 DEG) Fahrenheit and at a pressure of 14.73 pounds per square inch absolute. SECTION 2: SALES UNIT. The sales unit of the gas delivered hereunder shall be one thousand (1,000) cubic feet. SECTION 3. OWNERSHIP OF MEASURING EQUIPMENT. All measuring devices and materials required at the point or points of delivery shall be installed, maintained, and operated or furnished by Buyer at Buyer's expense. Seller may install and operate check measuring equipment provided it does not interfere with the use of Buyer's equipment in determining the volumes of gas delivered by Seller to Buyer at the points of delivery. SECTION 4: METERING AND COMPUTATION OF VOLUME. The gas shall be -16- metered by orifice meters or other measurement facilities constructed, installed, and maintained by Buyer at or near the point or points of delivery. Such measurement facilities of Buyer shall be constructed and installed in accordance with the applicable provisions of the American Gas Association's "Gas Measurement Committee Report No. 3, dated April, 1955". The volumes of gas delivered to Buyer shall be computed from the meter records and converted into the units of measurement specified herein in accordance with the methods prescribed in Gas Measurement Committee Report No. 3 of the American Gas Association, including the appendix thereto, as published April, 1955, or any subsequent revision thereof acceptable to Buyer and Seller. Corrections shall be made for deviation from the Ideal Gas Laws at the pressure and temperature at which the gas is metered. To determine the factors for such correction a quantitative analysis of the gas shall be made at reasonable intervals with such apparatus as shall be agreed upon by Buyer and Seller, and such factors shall be obtained from data contained in "Supercompressibility Factors for Natural Gas", Volumes 1 through 6, inclusive, or in "Tables for Determination of Supercompressibility Factors for Natural Gas Containing Nitrogen and/or Carbon Dioxide", Volume 7, as published by the American Gas Association in 1955, or any subsequent revision thereof acceptable to Buyer and Seller. For the purpose of measurement and meter calibration, the atmospheric pressure shall be assumed to be 13 pounds per square inch, irrespective of variations in natural atmospheric pressure from time to time. Seller agrees -17- to provide sufficient pulsation dampening equipment so that measurement at the point of delivery will not be affected by pulsation. SECTION 5: SPECIFIC GRAVITY. The specific gravity of the gas flowing through the well meter, or meters, shall be determined by Buyer, or, at Seller's election, by joint tests, at intervals of appoximately twelve (12) months as may be practicable under the circumstances. All such determinations of specific gravity shall be made by a standard gravity balance or by a gravitometer employing the "Momentum Method" of specific gravity determinations as described in Chapter VII, "Determination of Specific Gravity", of the American Gas Association Gas Measurement Manual, 1963 edition. The specific gravity of the gas flowing through each meter determined by either of the above-mentioned methods shall be used in computing the volume of gas delivered through such meter. The specific gravity determined by any test shall apply from the date the test was taken until the date of the next test. SECTION 6. TEMPERATURE. The temperature of the gas delivered at the points of delivery hereunder shall be determined by means of an indicating thermometer. The arithmetic average of readings taken at the beginning and end of each chart period shall be used in computing the volumes delivered hereunder. SECTION 7: EQUIPMENT TESTING. The accuracy of Buyer's measuring equipment shall be verified by test, using means and methods -18- generally acceptable in the gas industry, at least annually or upon the written request of Seller. Notice of the time and nature of each test shall be given by Buyer to Seller sufficiently in advance to permit convenient arrangement for Seller's representative to be present. Measuring equipment found to be registering inaccurately shall be adjusted to read as accurately as possible. If, after notice, Seller fails to have a representative present, the results of the test shall nevertheless be considered accurate until the next test. All tests of such measuring equipment shall be made at Buyer's expense, except that Seller shall bear the expense of tests made at its request if the inaccuracy is found to produce an error of two percent (2%) or less in the measurement of gas. SECTION 8: MEASURING EQUIPMENT OUT OF REPAIR. If, for any reason any measuring equipment is inoperative or inaccurate so that the volume of gas delivered is not correctly indicated by the reading thereof, and if such reading is in error by more than two percent (2%) in the measurement of gas, then the volume of gas delivered, during the period such measuring equipment is inoperative or inaccurate, shall be determined by the parties hereto on the basis of the best date available using the first of the following methods which is feasible: (a) By using the registration of any check measuring equipment installed and accurately registering; (b) By correcting the error if the percentage of error is ascertainable by calibration, test, or mathematical -19- calculations; or (c) By comparing deliveries made during preceding periods under similar delivery conditions when the meter was registering accurately. An adjustment based on such determination shall be made for such period of inaccuracy as may be definitely known, or if not known, then for one-half the period since the date of the last meter test. In no event, however, shall any adjustment extend back beyond six months from the date the error was first made known by one party hereunder to the other. SECTION 9: INSPECTION OF EQUIPMENT. Buyer and Seller shall have the right to inspect equipment installed or furnished by the other party, and the charts and other measurement or test data of the other party, at all times during business hours; but the reading, calibration, and adjustment of such equipment and changing of charts shall be done only by the party installing and furnishing the same. Unless the parties otherwise agree, each party shall perserve all original test data, charts, and other similar records in such party's possession for a period of at least five (5) years. SECTION 10: GROSS HEATING VALUE. The gross heating value per cubic foot of gas shall be determined from time to time by the Buyer at the Buyer's expense, using an accurately calibrated Culter-Hammer calorimeter from samples of the gas taken at the delivery point or points. The Seller shall have the right to witness any and all tests of gross heating value made by the Buyer. The Seller -20- shall have the right at any time to make or to require the Buyer to make a special test of the gross heating value of gas delivered hereunder, but the Seller shall bear the expense of any special tests made at its request. Tests of gross heating value of gas delivered hereunder shall be made by the Buyer after giving Seller ten (10) days written notice thereof. SECTION 11: HYDROGEN SULPHIDE. Tests to determine hydrogen sulphide content shall be made whenever necessary, but not oftener than two (2) times during any calendar year, to determine whether the gas meets the requirements of Article VII, Section 1 (d) hereof. Such test shall be made at the expense of the Buyer. Seller shall have the right to witness and verify all tests. SECTION 12: DATA TO BE PROVIDED TO SELLER. Buyer shall provide Seller with all information, data, test results, reservoir information, etc, immediately upon receipt of same by Buyer, to the end that at all times Seller shall have all information relative to its wells that is available to Buyer. -21- ARTICLE IX PRICE AND PAYMENT SECTION 1: (a) Buyer shall pay the Seller on or before the 25th day of each month for gas volumes delivered and actually taken in the preceding month. If during any calendar month Seller has available for delivery 125% of the DCQ and Buyer does not take a total volume of gas equal to the DCQ multiplied by the number of days in said calendar month, then, on or before the 25th day of the succeeding month Buyer shall pay Seller, as take-or-pay payment, the value of such volume of gas not taken. If Buyer shall have taken a total volume of gas in excess of the DCQ multiplied by the number of days in any calendar month, and if said excess has not been credited to make up of deficiencies pursuant to Article IV, Section 4(a) hereof, then Buyer shall be entitled to credit such excess against any deficiency in take occurring in any subsequent month in the same calendar year. (b) The price to be paid by the Buyer to the Seller for gas delivered to the Buyer at the delivery point or for take or pay payments shall be in U. S. funds and shall be at all times equivalent to the Canadian Border price for gas produced in Alberta and delivered to Buyer at the Canadian-Montana border at Aden, Alberta. Proper adjustments shall be made monthly for Pressure Base, -22- BTU Content, (none required at present since this Contract and the Canadian Border price are both stated at 14.73 psia and 1000 BTU), and currency adjustment between Canandian and U. S. currency. The currency adjustment shall be based on the arithmetic average of the daily exchange rate of Canadian currency and United States currency as published at Twelve O'clock (12:00) noon by the Royal Bank of Canada at the City of Ottawa. In the event deliveries of gas produced in Alberta at the Aden border export point cease but Buyer continues to import gas produced in Alberta at the Carway border export point, then the Canadian Border price at Carway will determine the price hereunder. (c) If the gas delivered hereunder has a gross heating value of less than one thousand (1,000) BTU per cubic foot, then the price payable for such gas shall be reduced. If the gas has a gross heating value of more than one thousand (1,000) BTU per cubic foot, then the price payable for such gas shall be increased. Such reduced or increased price shall be determined by multiplying the price otherwise payable by a fraction, the numerator of which is the actual gross heating value of the gas delivered, express in BTU per cubic foot, and the denominator of which is one thousand (1,000); provided, however, such fraction shall not exceed 12/10 even though the gross heating value of the gas is found to be in excess of one thousand two hundred (1,200) BTU per cubic foot. -23- SECTION 2: (a) If Buyer ceases to import gas produced in the Province of Alberta, then the price per MCF to be paid pursuant to Section 1 of this Article IX shall, upon demand by either party, be renegotiated, effective the day Canadian gas produced in Alberta ceases to flow into Buyer's Montana system, pursuant to the provisions of this Section. Either party shall also have the right to demand renegotiation, pursuant to this Section, on the second (2nd) anniversary date following the date on which gas produced in Alberta ceases to flow into Buyer's Montana system and on each second anniversary date thereafter. (b) Upon demand made at least six (6) months but not more than ten (10) months prior to the second (2nd) "anniversary date", and/or at least six (6) months but not more than ten (10) months prior to the "anniversary date" of each second (2nd) year thereafter, as appropriate, the parties shall renegotiate the price to be paid pursuant to this Contract. Failure to make the demand within the times allowed shall be deemed a waiver of the right to renegotiate. (c) Such renegotiation shall arrive at the fair market price of the gas hereunder based upon similar sales of gas, irrespective of whether such sales are delivered or wellhead sales, for ultimate delivery to pipeline transmission companies or upon sales of gas derived from field sales of gas to pipeline transmission companies, produced -24- from fields and reservoirs located in the State of Montana. In determining the fair market price, all pertinent factors, such as point of delivery, cost of gathering, quality, quantity and delivery pressure, shall be considered and given due weight. If the parties are successful in negotiating a price, as provided above, said price shall become effective on the "anniversary date" for which such price renegotiation is requested. If the parties are unable to agree upon such fair market price by sixty (60) days prior to the appropriate "anniversary date", then either party shall have the right to refer the matter to arbitration to determine the price of gas to be delivered hereunder. Upon written demand of either party, the parties shall meet and attempt to appoint a single arbitrator. If the parties are unable to agree on a single arbitrator, then upon written demand of either party and within ten (10) days of such demand, each party shall name an arbitrator; and the two arbitrators so named shall within ten (10) days therafter choose a third. If either party shall fail to name an arbitrator within ten (10) days from the date of such demand, then the second arbitrator shall be appointed by the American Arbitration Society. If the two arbitrators shall fail within ten (10) days from their appointment to agree upon and appoint the third arbitrator, then upon written application by either party such third arbitrator shall be appointed by the American Arbitration Society. The arbitrator or arbitrators selected to act hereunder shall be qualified by education and training to determine the appropriate price for gas delivered hereunder. -25- The single arbitrator or the arbitrators so chosen shall proceed immediately to determine the price for gas delivered hereunder. The cecision of the single arbitrator shall be made within thirty (30) days after his appointment, subject to any reasonable delay due to unforeseen circumstances. The decision of the arbitrators, or a majority of them, shall be made within forty-five (45) days after the appointment of the third arbitrator, subject to any reasonable delay due to unforeseen circumstances. Notwithstanding the foregoing, in the event the single arbitrator fails to make a decision within sixty (60) days after his appointment or if the arbitrators, or a majority of them, fail to make a decision within sixty (60) days after the appointment of the third arbitrator, then either party may elect to have a new single arbitrator or arbitrators chosen in like manner as if none had previously been selected. The decision of the single arbitrator or the decision of the arbitrators, or a majority of them shall be drawn up in writing and signed by the single arbitrator or by the arbitrators, or a majority of them and shall be final and binding upon the parties as to the price of gas delivered hereunder, effective on the "anniversary date" for which such price renegotiation was requested. The compensation and expenses of the single arbitrator shall be paid in equal proportions by Buyer and Seller. If each party has named an arbitrator, and the third has been appointed as provided herein, the compensation and expenses of such arbitrator shall be paid by the party appointing him or -26- in whose behalf such arbitrator was appointed, and the compensation and expenses of the third arbitrator shall be paid in equal proportions by Buyer and Seller. SECTION 3: On or before the fifteenth (15th) day of each calendar month after deliveries of gas are commenced hereunder, the Buyer shall render to Seller a statement showing the amount of gas delivered during the preceding calendar month, together with sufficient information to explain and support any adjustment by the Buyer with respect to the value of gas delivered in determining the amounts stated to be due. Payment shall be made by Buyer to Seller on or before the twenty-fifth (25th) day of said month. SECTION 4: Seller shall have, upon request within one (l) year after receipt of the statement referred to in Section 3 of this Article IX, the right to examine the meter charts and computations upon which such statements are based. If the Seller deems such charts for computations to be inaccurate, Seller may protest the statement within one (l) year of the examination thereof, and may request a check to be made of the meter installed pursuant to Article VIII hereof. Any statement not protested within one (l) year of the examination of meter charts and computations thereof shall be deemed to be correct. The Buyer shall make current meter charts available to the Seller for examination. ARTICLE X SELLER'S REPRESENTATIONS -27- SECTION 1: AGREEMENT. Seller represents and warrants that it is the purchaser of and has the right to sell gas to be produced from the land described in Schedule "A" and agrees to maintain its purchase contracts in full force and effect, at its own expense. SECTION 2: WELLS. Seller's gathering system and the wells connected thereto shall be equipped and operated as required to meet the Quality provisions of Article VII hereof and shall be maintained in good operating condition, in accordance with approved practices, without cost to Buyer. In the event liquids exist, requiring separation from the gas, then Seller agrees to install, operate, and maintain, without cost to Buyer, such liquid removal equipment operated at normal temperatures, as may be necessary to separate such liquids from the gas. SECTION 3: NOTICE TO BUYER. Seller will advise Buyer, at the earliest possible date, its best estimate of the initial delivery date of gas from any new wells connected to Seller's gathering system. ARTICLE XI TITLE TO GAS Seller warrants that it has title to all gas delivered to Buyer under this Contract and that Seller has authority to sell the same, and Seller agrees to indemnify and save Buyer harmless from any and all suits, claims, and liens of whatsoever nature -28- relating to such gas or the title thereto. If the title to any property or interest in any property from which gas is purchased by Seller and sold to Buyer hereunder shall at any time be involved in litigation, Buyer shall have the right to withhold (invested in certificates of deposit, short-term government securities or similar obligations or deposited in an interest bearing account, such interest to be paid along with the principal sum) the proceeds payable for the gas produced from the particular property or interest in property in litigation during the period of such litigation or until Seller shall furnish a bond, in form and with sureties acceptable to Buyer, conditioned to save Buyer harmless. If it should be finally determined that there is a defect in Seller's right to or ownerhsip of the gas to be sold hereunder, Seller shall, with reasonable promptness, attempt to remedy such defect. Until the defect to such title shall have been remedied, Buyer shall have the right either to refuse to accept deliveries of gas hereunder and withhold (invested in certificates of deposit, short-term government securities or similar obligations or deposited in an interest bearing account, such interest to be paid along with the principal sum) the proceeds otherwise payable to Seller hereunder. Title to the gas delivered hereunder shall pass to the Buyer at the Delivery Point. ARTICLE XII FORCE MAJEURE If either party to this Contract shall fail to perform any -29- obligation hereby imposed upon it and such failure shall be caused, or materially contributed to by acts of God, strikes, lockouts, or other industrial disturbances in the operation of Seller or Buyer or their customers, acts of enemies of the State, sabotage, wars, blockades, insurrections, riots, epidemics, landslides, lightning, earthquakes, floods, storms, fires, washouts, arrests and restraints of rulers and people, civil disturbances, explosions, breakage of or accident to machinery or lines of pipe, hydrate obstructions to lines of pipe, temporary failure of gas supply, freezing of wells or delivery facilities, well blowouts, craterings, inability to obtain pipe, materials or equipment, the order of any court or governmental authority, or by any act or omission which is occasioned by any event or occurrence of the character described in this Article XII as constituting force majeure, or by the necessity for making repairs to or reconditioning wells, a gas processing plant, machinery, equipment, or pipe lines, not resulting from the fault or negligence of such party, or by any other cause, whether of the kind herein enumerated or otherwise, all such causes being beyond control of the party invoking this Article and being such that by the exercise of due diligence such party could not have prevented, such failure shall not give rise to any cause of action based on breach of the obligations to such party hereunder, but such party shall use reasonable diligence to put itself again in a position to carry out its obligations hereunder. Nothing contained herein shall be construed to require either party to settle a strike or lockout by acceding against its judgment to the demands of opposing parties. -30- No such cause affecting the performance of the Contract by either party shall continue to avoid a cause of action after the expiration of a reasonable period of time within which by the use of due diligence such party could have remedied the situation preventing its performance, nor shall any such cause relieve either party from its obligation to make payment of amounts then due hereunder for gas already delivered nor shall any such cause avoid a cause of action unless such party shall give notice of such cause in writing to the other party with reasonable promptness; and like notice shall be given upon termination of such cause. For purposes of determining the occurrence of performance of obligations under this agreement, it is mutually agreed that, during a period of force majeure, the party affected shall be deemed to have performed all of its obligations as if it had delivered or purchased the gas required to be delivered or purchased during said period. ARTICLE XIII TERM SECTION 1: This Contract shall become effective on the Effective Date hereof and shall continue in effect for a period of fifteen (15) Contract Years (initial term) from the date of initial delivery of gas hereunder and thereafter from year to year until cancelled by one (1) year's written notice from one party to the other. -31- ARTICLE XIV MISCELLANEOUS SECTION 1: NOTICES. Notices to Buyer shall be addressed to: The Montana Power Company 40 East Broadway Butte, Montana 59701 Notices to Seller shall be addressed to: Cascade Gas Co. P. O. Box 577 Shelby, Montana 59474 Either party may change its address under this Section at any time upon written notice. SECTION 2: REGULATORY JURISDICTION. This Contract is subject to all valid legislation and to all valid present and future orders, rules, and regulations of duly constituted authorities having jurisdiction. Should Buyer propose to transport, sell or use gas purchased hereunder in such a manner that would, in Seller's opinion, subject Seller to jurisdiction of the Federal Power Commission with respect to Seller's performance of this Agreement, Seller may terminate this Agreement prior to consummation of such proposals of Buyer upon written notice of such termination to Buyer. Such notice must be given to Buyer not more than thirty (30) days after Buyer provides Seller with written notice of any such proposal; provided Buyer shall not inaugurate any such proposals prior to the effective date of any termination Seller may elect pursuant to this paragraph. After any -32- such termination, Seller shall not sell or contract to sell such gas under circumstances which would render Seller subject to jurisdiction of the Federal Power Commission respecting such sale or contract without first offering the gas to Buyer on the same terms, which offer shall be in writing and shall be open for thirty (30) days after given. Thereafter, unless such offer is accepted within said time, Seller may sell or contract to sell such gas to any person. SECTION 3. This Contract shall bind and inure to the benefit of the parties hereto, their successors and assigns. SECTION 4: EASEMENTS. Seller hereby grants and assigns to Buyer all requisite easements and rights-of-way over, across and under any of the land covered hereby that Seller has the right so to do under the terms of the Agreement covering such lands, and the right to perform thereon any acts necessary or convenient in carrying out the terms of this Contract and Buyer's obligations hereunder. SECTION 5. TITLES. The numbering and titling of particular provisions of the Contract is for the purpose of facilitating administration and shall not be construed as having any substantive effect on the terms of this Contract. SECTION 6. INTERPRETATION. The terms of this Contract shall be construed according to the laws of the State of Montana. -33- SECTION 7. The effective date of this Contract is the day and date first above written. SECTION 8. SEVERABILITY. The various articles, sections, provisions and clauses of this Contract are severable. The invalidity of any portion hereof shall not affect the validity of any other portion of nor the entire Contract. SECTION 9. TIME. Time is of the essence in this Agreement. SECTION 10. PAYMENT. All take-or-pay payments or payments for gas taken shall be made to: Cascade Gas Co. P. O. Box 577 Shelby, Montana 59474 SECTION 11: EXECUTED at Butte, Montana, the day and year first above written. THE MONTANA POWER COMPANY By /s/ [ILLEGIBLE] ----------------------- ATTEST: /s/ F.A. McElwain - ----------------------------------- ASSISTANT SECRETARY BUYER -34- EXECUTED at Shelby, Montana, as of the day and year first above written. CASCADE GAS CO. ATTEST: By /s/ Jerry L. Branch -------------------------- /s/ [ILLEGIBLE] - --------------------------- ASSISTANT SECRETARY SELLER -35- SCHEDULE A A part of the Delivered Gas Purchase Contract dated February 23, 1977, between The Montana Power Company as Buyer and Cascade Gas Co. as Seller. DESCRIPTION OF LANDS Toole County, Montana Township 34 North, Range 2 West Section 14, 15, 16, 20, 21, 22, 23, 26, 27, 28, 29, 32, 34 and 35 Township 33 North, Range 2 West Sections 3 and 4 [LETTERHEAD] LETTER AGREEMENT AMENDING GAS PURCHASE CONTRACT March 9, 1982 Cascade Gas Company P. O. Box 577 Shelby, MT 59474 Gentlemen: Please refer to that certain Delivered Gas Purchase Contract dated February 23, 1977 (hereinafter called the "Contract") by and between The Montana Power Company (hereinafter called "Buyer") and Cascade Gas Company (hereinafter called "Seller"). Because Cascade Gas Company has obtained the rights to produce gas from lands not originally covered by the Contract, and as a consequence The Montana Power Company will receive an additional gas supply, The Montana Power Company hereby proposes to amend the Contract as follows, subject to the terms and conditions hereinafter set forth: 1. SCHEDULE A Add T33N-R2W - All Sections Add T33N-R3W - Sections 23, 24, 25, 26, 35, 36 2. Whenever Seller's deliverability reaches 1000 MCFD or more under the Contract then whenever it appears in the Contract, Seller's obligation to deliver 125% of the DCQ shall be changed to 150% and Buyer's right to reduce the DCQ to 80% of average daily volume of gas shall be changed to 66-2/3%. 3. Whenever Seller's deliverability is less than 1000 MCFD under the Contract then Seller's obligation to deliver 125% of the DCQ and Buyer's right to reduce the DCQ to 80% of average daily volume of gas shall be reinstated. In this case Buyer will use its best efforts to take delivery of all the gas Seller is capable of delivering. Page Two LETTER AGREEMENT AMENDING GAS PURCHASE CONTRACT 4. Under no circumstances will the Buyer be required to conduct a deliverability test during the month of June, July and August under the Contract. 5. These contract amendments will be effective October 1, 1981. These amendments make no changes to the Contract other than those specified herein. If these contract amendments are satisfactory, please signify your acceptance by signing in the space provided and return the "Montana Copy" to me. THE MONTANA POWER COMPANY BY: /s/ R.P. Madison ----------------------- TITLE: MGR, GAS SUPPLY -------------------- AGREED TO AND ACCEPTED CASCADE GAS COMPANY BY: /s/ Jerry L. Branch ----------------------------- TITLE: Manager -------------------------- DATE: April 23, 1982 --------------------------- AMENDMENT TO DELIVERED GAS PURCHASE CONTRACT Dated February 23, 1977 Cascade Gas Co. - Seller The Montana Power Company - Buyer THE UNDERSIGNED, CASCADE GAS CO. (hereinafter SELLER) and THE MONTANA POWER COMPANY (hereinafter BUYER), in consideration of the mutual benefits to accrue to each Party, do hereby agree that that certain Delivered Gas Purchase Contract between the Parties hereto, dated February 23, 1977, is hereby amended as follows: I. The amendments herein set forth shall be applicable as of 8:00 o'clock A.M. on March 20, 1986. II. Section 1, Delivery Pressure, of Article VI, Delivery Pressure and Delivery Points, appearing on pages 13 and 14 of said Contract of February 23, 1977 shall be deleted in its entirety and the following inserted in place thereof: "Section 1: DELIVERY PRESSURE. Delivery by Seller of gas shall be made at a pressure that is sufficient to effect delivery of gas into Buyer's pipeline but not in excess of one thousand (1,000) pounds per square inch. However, Buyer agrees that it will not operate its pipeline at a pressure greater than eight hundred (800) pounds per square inch unless Buyer gives Seller one (1) year's advance written notice of the need to increase the pipeline pressure to more than eight hundred (800) pounds per square inch (but not more than one thousand (1,000) pounds per square inch) and, pursuant to such written notice Buyer does, in fact, at the stated time increase its pipeline pressure to the pressure set forth in the written notice. Maintenance by Seller of sufficient pressure to enter Buyer's pipeline shall be a condition of Buyer's obligation to purchase and receive from Seller the quantities of gas specified in Article III hereof." 1 III. Sections 1 and 2 of Article IX, Price and Payment, beginning on page 22 and continuing to page 27 of said Contract of February 23, 1977, shall be deleted in their entirety and the following inserted in place thereof: "SECTION 1: (a) Buyer shall pay the Seller on or before the 25th day of each month for gas volumes delivered and actually taken in the preceding month. If during any calendar month Seller has available for delivery 125% of the DCQ and Buyer does not take a total volume of gas equal to the DCQ multiplied by the number of days in said calendar month, then, on or before the 25th day of the succeeding month Buyer shall pay Seller, as take-or-pay payment, the value of such volume of gas not taken. If Buyer shall have taken a total volume of gas in excess of the DCQ multiplied by the number of days in any calendar month, and if said excess has not been credited to make up of deficiencies pursuant to Article IV, Section 4(a) hereof, then Buyer shall be entitled to credit such excess against any deficiency in take occurring in any subsequent month in the same calendar year. (b) The price to be paid by the Buyer to the Seller for gas delivered to Buyer at the delivery point or for take-or-pay payments, for the period of time expiring on December 31, 1987, shall be Two Dollars and 25/lOOths ($2.25) in U.S. funds per MCF. (c) If the gas delivered hereunder has a gross heating value of less than one thousand (1,000) BTU per cubic foot, then the price payable for such gas shall be reduced. If the gas has a gross heating value of more than one thousand (1,000) BTU per cubic foot, then the price payable for such gas shall be increased. Such reduced or increased price shall be determined by multiplying the price otherwise payable by a fraction, the numerator of which is the actual gross heating value of the gas delivered, expressed in BTU per cubic foot, and the denominator of which is one thousand (1,000); provided, however, 2 such fraction shall not exceed 12/10 even though the gross heating value of the gas is found to be in excess of one thousand two hundred (1,200) BTU per cubic foot. SECTION 2: (a) Either party shall have the right to demand renegotiation of the price to be paid for gas hereunder as hereinafter provided. (b) Upon demand made at least six (6) months but not more than ten (10) months prior to the anniversary date of January 1, 1988, and/or at least six (6) months but not more than ten (10) months prior to each second anniversary date thereafter (i.e., January 1, 1990, et seq.), the parties shall renegotiate the price to be paid pursuant to this Contract. Failure to make the demand within the times allowed shall be deemed a WAIVER OF THE right to renegotiate. (c) Such renegotiation shall arrive at the fair market price of the gas hereunder based on similar sales of gas, irrespective of whether such sales are delivered or wellhead sales, for ultimate delivery to pipeline transmission companies or upon sales of gas derived from field sales of gas to pipeline transmission companies, produced from fields snd reservoirs located in the State of Montana. In determining the fair market price, all pertinent facts, such as point of delivery, cost of gathering, quality, quantity and delivery pressure, shall be considered and given due weight. If the parties are successful in negotiating a price, as provided above, said price shall become effective on the "anniversary date" for which such price renegotiation is requested. If the parties are unable to agree upon such fair market price by sixty (60) days prior to the appropriate "anniversary date", then either party shall have the right to refer the matter to arbitration to determine the price of gas to be delivered hereunder. If written demand for arbitration is not delivered or mailed, certified mail with postage prepaid, on or before November 15 prior to such "anniversary date", the right shall be deemed waived, and the price in effect on the "anniversary date" shall remain in effect. 3 Upon written demand of either perty, the parties shall meet end attempt to appoint a single arbitrator. If the parties are unable to agree on a single arbitrator, then upon written demand of either party and within ten (10) days of such demand, each party shall name an arbitrator; and the two arbitrators so named shall within ten (10) days thereafter choose a third. If either party shall fail to name an arbitrator within ten (10) days from the date of such demand, then the second arbitrator shall be appointed by the American Arbitration Society. If the two arbitrators shall fail within ten (10) days from their appointment to agree upon and appoint the third arbitrator, then upon written application by either party such third arbitvator shall be appointed by the American Arbitration Society. The arbitrator or arbitrators selected to act hereunder shall be qualified by education and training to determine the appropriate price for gas delivered hereunder. The single arbitrator or the arbitrators so chosen shall proceed immediately to determine the price for gas delivered hereunder. The decision of the single arbitrator shall be made within thirty (30) days after his appointment, subject to any reasonable delay due to unforeseen circumstances. The decision of the arbitrators, or a majority of them, shall be made within forty-five (45) days after the appointment of the third arbitrator, subject to any reasonable delay due to unforeseen circumstances. Notwithstanding the foregoing, in the event the single arbitrator fails to make a decision within sixty (60) days after his appointment or if the arbitrators, or a majority of them, fail to make a decision within sixty (60) days after the appointment of the third arbitrator, then either party may elect to have a new single arbitrator or arbitrators chosen in like manner as if none had previously been selected. The decision of the single arbitrator or the decision of the arbitrators, or a majority of them, shall be drawn up in writing and signed by the single arbitrator or by the arbitrators, or a majority of them and shall be final and binding upon the parties as to the price of gas delivered hereunder, effective on the "anniversary date" for which such price renegotiation was requested. 4 The compensation and expenses of the single arbitrator shall be paid in equal proportions by Buyer and Seller. If each party has named an arbitrator, and the third has been appointed as provided herein, the compensation and expenses of such arbitrator shall be paid by the party appointing him or in whose behalf such arbitrator was appointed, and the compensation and expenses of the third arbitrator shall be paid in equal proportions by Buyer and Seller." IV. Section 1 of Article XIII, Term, appearing on page 31 of said Contract of February 23, 1977, shall be deleted in its entirety and the following inserted in place thereof: "SECTION 1: This Contract shall become effective on the Effective Date hereof and shall continue in effect for a period of twenty-five (25) Contract Years (initial term) from the date of initial delivery of gas hereunder and thereafter from year to year until canceled by one (1) year's written notice from one party to the other. The twenty-five (25) Contract Years (initial term) shall expire on December 31, 2001." V. Schedule A attached to said Contract of February 23, 1977 shall be deleted in its entirety and the following inserted in place thereof: "SCHEDULE A A part of the Delivered Gas Purchase Contract dated February 23, 1977 between The Montana Power Company as Buyer and Cascade Gas Co. as Seller DESCRIPTION OF LANDS Toole County, Montana TOWNSHIP 34 NORTH, RANGE 1 WEST Sections: All (being 1 through 36 inclusive) TOWNSHIP 34 NORTH, RANGE 2 WEST Sections: All (being 1 through 36 inclusive) 5 TOWNSHIP 34 NORTH, RANGE 3 WEST Sections E1/2 (being Sections 1, 2, 3, 10, 11, 12, 13 14, 15, 22, 23, 24, 25, 26, 27, 34, 35, 36 TOWNSHIP 33 NORTH, RANGE 1 WEST Sections: All (being 1 through 36 INCLUSIVE) TOWNSHIP 33 NORTH, RANGE 2 WEST Sections: All (being 1 through 36 inclusive) TOWNSHIP 33 NORTH. RANGE 3 WEST SECTIONS E1/2 (being Sections 1, 2, 3, 10, 11, 12, 13, 14, 15, 22, 23, 24, 25, 26, 27, 34, 35, 36 TOWNSHIP 32 NORTH, RANGE 1 WEST Sections: N1/2 (being Sections 1 through 18 inclusive) TOWNSHIP 32 NORTH. RANGE 2 WEST Sections: N1/2 (being sections 1 through 18 inclusive) TOWNSHIP 32 NORTH, RANGE 3 WEST Sections: NE1/4 (being Sections 1, 2, 3, 10, 11, 12, 13, 14 & 15 inclusive)" VI. With respect to Articles III, IV and IX of the Delivered Gas Purchase Contract dated February 23, 1977, whenever reference is made to Seller's obligation to deliver 125% OF DCQ, SAID reference shall be changed to 150% of the DCQ. Likewise, whenever reference is made to Buyer's right to reduce the DCQ to 80% of average daily volume of gas, said reference shall be changed to 66 2/3%. The changes hereinabove specified shall be effective to and including December 31, 1987. Commencing January 1, 1988 and thereafter during the term of said Delivered Gas Purchase Contract, whenever reference is made to Seller's obligation to deliver 125% of the DCQ, said reference shall be changed to 133 1/3% of the DCQ and, likewise, whenever reference is made to Buyer's right to reduce the DCQ to 80% of AVERAGE DAILY volume of gas, said reference shall be changed to 75%. VII. Except as herein specifically modified, the terms and conditions of that certain Delivered Gas Purchase Contract, dated February 23, 1977, between the Parties hereto are hereby ratified and confirmed in all respects as being and remaining in full force and effect. 6 IN WITNESS WHEREOF, the Parties hereto have caused execution of this Amendment to Delivered Gas Purchase Contract to be made as of the date hereinafter specified beside the execution of each party, but effective as provided in Paragraph I hereof. CASCADE GAS CO. DATED: May 2, 1986 By /s/ Billy Froman - -------------------------- --------------------------------- Billy Froman, President SELLER THE MONTANA POWER COMPANY DATED: 5-12-86 By /s/ David A. Johnson - -------------------------- --------------------------------- David A. Johnson Vice President, Gas Operations BUYER 7 State of Montana ) : ss County of Toole ) On this 2nd day of May, 1986, before me, the undersigned, a Notary Public in and for the State of Montana, personally appeared BILLY FROMAN known to me to be the President of CASCADE GAS CO., and acknowledged to me that he executed the foregoing document for and on behalf of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my Notarial Seal the day and year first hereinabove written. /s/ Loretta J. Schoenduller -------------------------------------- Notary Public for the State of Montana Residing at Shelby, MT My Commission expires 1/22/89 State of Montana ) : ss County of Silver Bow ) On this 12th day Of May, 1986, before me, the undersigned, a Notary Public in and for the State of Montana, personally appeared DAVID A. JOHNSON, known to me to be the Vice President, Gas Operations, of THE MONTANA POWER COMPANY, a corporation, and acknowledged to me that he executed the foregoing document for and on behalf of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my Notarial Seal the day and year first hereinabove written. /s/ Terrence O. Wisner - -------------------------------------- Notary Public for the State of Montana Residing at Butte, Montana My Commission expires 11-13-87 8 RELEASE AND SETTLEMENT AGREEMENT THIS AGREEMENT, Made, entered into and effective as of the date hereinafter provided is by and between CASCADE GAS CO. hereinafter FIRST PARTY, and THE MONTANA POWER COMPANY, hereinafter SECOND PARTY, WITNESSETH: WHEREAS, a controversy exists between the Parties as to amounts of money allegedly owed by Second Party to First Party, said controversy having arisen by differences in interpretation of the effect of the provisions of Section 110 of the Natural Gas Policy Act of 1978 when applied to the terms of that certain Delivered Gas Purchase Contract dated February 23, 1977 (wherein First Party appears as Seller and Second Party appears as Buyer), and WHEREAS, without admission by either Party of the validity of the position advanced by the other, the Parties hereto have agreed to compromise and resolve all of said disputed issues in the manner hereinafter set forth, NOW, THEREFORE, in consideration of the payments and performances hereinafter provided to be made, and the mutual agreements and releases as hereinafter set forth, the Parties do hereby agree as follows: I. Second Party agrees to pay to First Party the sum of Five Hundred Sixty-five Thousand Nine Hundred Seventy-five and no/lOOths Dollars ($565,975.00) payable as follows: (A) The sum of One Hundred Twenty-three Thousand Seven Hundred Twenty-five and no/lOOths Dollars ($123,725.00) payable simultaneously with execution hereof, receipt of which is hereby acknowledged; (B) The sum of Four Hundred Forty-two Thousand Two Hundred Fifty and no/lOOths Dollars ($442,250.00) payable in nineteen (19) monthly installments, without interest, beginning with an installment due June 15, 1986, with subsequent installments due on the 15th day of each month thereafter, through and including November 15, 1987, and the final installment due December 27, 1987. Each of the first eighteen (18) monthly installments shall be calculated as follows: (i) Fifty cents ($.50) per mof times the first 1,450 mcfd of gas delivered to Second Party by First 1 Party during the preceding calendar month; provided, however, that in the event total deliveries during any calendar month shall be less than an average of 1,450 mcfd for said month, then the payment shall be calculated upon the DCQ then in effect or 1,450 mcfd, whichever is the lesser. In the further event that any monthly payment so calculated should be less than an amount calculated at the rate of fifty cents (5.50) per mcf times 1,450 mcfd, then the underpayment shall be carried forward into the next succeeding month or months, as necessary, so that said underpayment will be made up against gas delivered in each subsequent month or months wherein deliveries exceed the average of 1,450 mcfd. (ii) Any remaining unpaid balance of said sum of Four Hundred Forty-two Two Hundred Fifty Dollars and no/lOOths Dollars ($442,250.00) will be paid in the final monthly installment due December 27, 1987. (iii) Recoupment of underpayments pursuant to subparagraphs (i) and (ii) above shall be permitted only so long as First Party complies with the best efforts provisions of Paragraph II hereinafter set forth. In the event First Party does not comply with the provisions of Paragraph II hereof, Second Party shall not be obligated to pay the underpayment amounts referred to in subparagraphs (i) and (ii) above. II. First Party agrees that, during the period of time from effective date hereof to and including December 31, 1987, it will manage and operate the Cascade Gas Go. compressor ano related facilities in a good and workmanlike manner, in accordance with accepted oil and gas field practices, to the end that it shall exercise absolute good faith to attempt to deliver to Second as Second Party, from time to time, the rights granted Second Party under the terms of the Delivered Gas Purchase Contract dated February 23, 1977. It is the intent of this Paragraph II that First Party will exercise all good faith in delivery of volumes of properly requested gas and will not unilaterally attempt, by any means, to reduce the volumes of delivered gas below those properly requested by Second Party pursuant to said Delivered Gas Purchase Contract. Both Parties recognize that mechanical breakdowns, shutdowns for normal maintenance and repair, factors 2 that constitute items of force majeure under said contract or other similar causes can or might interrupt delivery of requested gas volumes by First Party. Such type of interruptions shall not be deemed to be in contravention of First Party's good faith obligations herein set forth. III. Second Party shall, simultaneously with execution hereof, assign and convey unto First Party, without warranty of title and without warranty of fitness for use, all right, title and interest in and to that portion of a certain gas pipeline, together with attendent rights-of-way or easements, more particularly described as follows, to-wit: The portion of a certain gas pipeline which originates in Section 30, Township 34 North, Range 2 West; thence proceeding southeasterly through Sections 29, 32 and 33, Township 34 North, Range 2 West; thence proceeding on into Sections 3, 4 and 10 of Township 33 North, Range 2 West, Toole County, Montana. First Party shall be solely responsible for payment of personal property taxes for the year 1986 and all years subsequent thereto attributable to the above referenced portion of said gas pipeline, or if appropriate, will reimburse Second Party for such taxes for the year 1986. First Party further agrees to hold harmless and indemnify Second Party of and from any and all liability of whatsoever nature arising from or attributable to First Party's usage of said gas pipeline from and after the effective date hereof. IV. Except for the payments and performances herein above set forth to be made and performed by each respective Party hereto, the Parties do hereby agree that all of the claims heretofore existing by either Party against the other arising by virtue of the application of the provisions of Section 110 of the Natural Gas Policy Act of 1978 to the Delivered Gas Purchase Contract dated February 23, 1977 are hereby fully and finally compromised and settled in all respects. Each Party does hereby relieve, release and discharge the other Party of and from any and all claims heretofore existing or alleged to exist, contingent or accrued, of any nature whatsoever relative to or arising under or out of the application of the provisions of Section 110 of the Natural Gas Policy Act of 1978 to the Delivered Gas Purchase contract dated February 23, 1977, and each Party agrees to indemnify and hold the other Party harmless of and from any and all liability arising from any such claims. 3 V. This Release and Settlement Agreement shall be effective as of the date of execution hereof by the last of the Parties signatory hereto. IN WITNESS WHEREOF, the Parties hereto have caused execution of this Release and Settlement Agreement to be made as of the date hereinafter specified beside the execution of each Party. CASCADE GAS CO. DATED: May 2, 1986 By /s/ Billy Froman - -------------------------- --------------------------------- Billy Froman, President FIRST PARTY THE MONTANA POWER COMPANY DATED: 5-12-86 By /s/ David A. Johnson - -------------------------- --------------------------------- David A. Johnson Vice President, Gas Operations SECOND PARTY 4 State of Montana ) : ss County of Toole ) On this 2nd day of May, 1986, before me, the undersigned, a Notary Public in and for the State of Montana, personally appeared BILLY FROMAN, known to me to be the President of CASCADE GAS CO. and acknowledged to me that he executed the foregoing document for and on behalf of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my Notarial Seal the day and year first hereinabove written. /s/ Loretta J. Schoenduller -------------------------------------- Notary Public for the State of Montana Residing at Shelby, MT My Commission expires 1/22/89 State of Montana ) : ss County of Silver Bow ) On this 12th day Of May, 1986, before me, the undersigned, a Notary Public in and for the State of Montana, personally appeared DAVID A. JOHNSON, known to me to be the Vice President, Gas Operations, of THE MONTANA POWER COMPANY, a corporation, and acknowledged to me that he executed the foregoing document for and on behalf of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my Notarial Seal the day and year first hereinabove written. /s/ Terrence O. Wisner -------------------------------------- Notary Public for the State of Montana Residing at Butte, Montana My Commission expires 11-13-87 5 [LETTERHEAD] December 18, 1986 Cascade Gas Company P. O. Box 488 Cut Bank, MT 59427 Gentlemen: Please refer to that certain Gas Purchase Contract dated February 23, 1977, as amended (hereinafter referred to as the "Contract") by and between The Montana Power Company (hereinafter referred to as "Buyer") and Cascade Gas Company (hereinafter referred to as "Seller"). Buyer and Seller have agreed to amend the Price and Quantity sections of the Contract as the result of an agreement between the parties whereby Seller buys gas from Buyer and redelivers said gas to Buyer at the Contract delivery point. AGREEMENT In consideration of the representations and promises stated in this Letter Agreement, Seller and Buyer agree to amend the Contract effective October 1, 1986 as follows: 1. ARTICLE IV QUANTITY OF GAS Add the following Section 6: Section 6: LIMITATION UPON GAS GATHERED BY SELLER FOR BUYER. Seller has agreed by separate Gathered Gas Purchase Contract dated October 1, 1986 (hereinafter referred to as "Gathered Contract") to gather and compress gas for the Buyer from the Buyer's existing gathering system in the Kevin area. This gas is to be delivered to Buyer in a common stream with Seller's gas under the Contract. The gas delivered to the Buyer by the Seller that was originally delivered to the Seller by the Buyer under the Gathered Contract will not be viewed as production by Seller at anytime, including production test periods and the subsequent calculation of the Contract DCQ. Cascade Gas Company Gas Purchase Contract Dated February 23, 1977 2. ARTICLE IX. PRICE AND PAYMENT Delete Section 1, paragraph (b) of the Contract amendment that was effective on March 20, 1986 and replace it with the following: b. PRICE (i) AMOUNT TO BE PAID FOR BUYER'S GAS DELIVERED BY SELLER. From the effective date hereof, and thereafter as specified in the Gathered Contract, the price to be paid by the Buyer to the Seller for gas originally sold to the Seller under said Gathered Contract and subsequently redelivered to the Buyer at the Contract delivery point shall be (in U.S. funds) the amount specified in Article V of the Gathered Contract. This gas will always represent the first increment that is purchased and payment will be based on Buyer's meters in accordance with the Gathered Contract. (ii) AMOUNT TO BE PAID FOR SELLER'S PRODUCTION. From the effective date hereof, and thereafter until January 1, 1988, the price to be paid by the Buyer to the Seller for gas from Seller's production delivered to the Buyer at the delivery point or for take-or-pay payment shall be (in U.S. funds) two dollars and twenty five cents ($2.25) per Mcf. These contract amendments will become effective on October 1, 1986. Please signify your acceptance by signing in the space provided below and return the fully executed "Montana Copy" to John Smith. THE MONTANA POWER COMPANY BY /s/ David A. Johnson ----------------------------------- Vice President, Gas Supply AGREED TO AND ACCEPTED CASCADE GAS COMPANY BY /s/ [ILLEGIBLE] ---------------------------------------- DATE September 18, 1987 -------------------------------------- [LETTERHEAD] April 12, 1988 Adobe Gas Gathering & Processing Co. 300 West Texas, Suite 1100 Midland, Texas 79701-9990 Gentlemen: Please refer to that certain Gas Purchase Contract dated February 23, 1977, as amended (hereinafter referred to as the "Contract") between The Montana Power Company (hereinafter referred to as "Buyer") and Adobe Gas Gathering & Processing Company (hereinafter referred to as "Seller"). Buyer and Seller have agreed to amend the Seller's Obligations, Quantity of Gas, Price and Payment and Schedule A Sections of the Contract as the result of a price renegotiation that is effective January 1, 1988. AGREEMENT: In consideration of the representations and promises stated in this Letter Agreement, Buyer and Seller agree to amend the Contract effective January 1, 1988 as follows: 1. ARTICLES III, IV AND IX With respect to Articles III, IV and IX of the Contract, whenever reference is made to Seller's obligation to deliver 133-1/3% of DCQ, said reference shall be changed to 125% of the DCQ. Likewise, whenever reference is made to Buyer's right to reduce the DCQ to 75% of average daily volume of gas, said reference shall be changed to 80%. The changes hereinabove specified shall be effective from January 1, 1988 to and including December 31, 1989. Commencing January 1, 1990 and thereafter during the term of said Contract, whenever reference is made to Seller's obligation to deliver 125% of the DCQ, said reference shall be changed to 133-1/3% of the DCQ and, likewise, whenever reference is made to Buyer's right to reduce the DCQ to 80% of average daily volume of gas, said reference shall be changed to 75%. 2. ARTICLE IV Add the following paragraph to Section 5: (c) MONTHLY NOMINATIONS. Buyer shall nominate monthly for a volume of gas to be delivered by Seller at the delivery point. When calculating whether Buyer has complied with the obligation to purchase the Annual Contract Volume under this Contract, Buyer will take credit for the greater of the volume of gas nominated by Buyer or the volume of gas delivered by Seller. The determination as to whether the Seller has delivered the volume of gas requested by Buyer is done on a monthly basis. 3. ARTICLE IX Delete paragraphs (a) and (b) of Section 1 and replace them with the following: SECTION 1: (a) Buyer shall pay the Seller monthly for gas volumes delivered and actually taken in the preceding month. Buyer shall pay Seller for all deficiency volumes on or before the 25th day of February in the year following the year in which a deficiency volume occurred. The payment shall equal the deficiency volumes times the average unit price applicable in the preceding year. A deficiency volume is calculated by subtracting the greater of purchased volumes or nominated volumes from the Annual Contract Volume. If the nominated volume or purchased volume exceeds the Annual Contract Volume, a deficiency has not occurred. (b) The price to be paid by the Buyer to the Seller for gas delivered to the Buyer at the delivery points or for take-or-pay payment shall be two dollars and ten cents ($2.10) per MCF with no escalation. No adjustment to this price will be made to provide for reimbursement of production-related taxes or any other NGPA Section 110 add-ons. 4. SCHEDULE A. Add the following lands to Schedule A: Township 35 North, Range 2 West: All Sections Township 35 North, Range 1 West: All Sections Township 35 North, Range 1 East: All Sections Township 34 North, Range 1 East: All Sections Delete the following lands from Schedule A: Township 32 North, Range 2 West, Sections: N 1/2 (being sections 1 through 18 inclusive). Township 32 North, Range 3 West, Sections: NE 1/4 (being sections 1, 2, 3, 10, 11, 12, 13, 14, and 15 inclusive). THE MONTANA POWER COMPANY BY: /s/ David A. Johnson --------------------------------- Vice President, Gas Operations AGREED TO AND ACCEPTED: Adobe Gas Gathering & Processing Company BY /s/ [ILLEGIBLE] ------------------------- TITLE President ---------------------- DATE: 4-23-88 ---------------------- Northland Royalty Operating Company [GRAPHIC] 3030 4th Avenue North Billings, Montana 59101 (406) 259-5400 Fax(406) 259-7345 April 28, 1992 Mr. Douglas R. Mann Great Falls Gas Company P.O. Box 2229 Great Falls, MT 59403-2229 Dear Mr. Mann, Please refer to that certain Gas Purchase Contract dated February 23, 1977, as amended, (hereinafter referred to as the "Contract") between the Montana Power Company as Buyer and Cascade Gas Gathering Company as Seller, to which Great Falls Gas Company (hereinafter referred to as "Buyer") has become the successor in the Buyer's interest and to which Northland Royalty Operating Company (hereinafter referred to as "Seller") has become the successor in the Seller's interest. Buyer and Seller have agreed to amend Article II-Commitment of Gas Reserves and Article IX-Price and Payment as the result of a price renegotiation that is effective on January 1st, 1992. AGREEMENT In consideration of the representations and promises stated in this Letter Agreement, Buyer and Seller agree to amend the Contract effective January 1, 1992 as follows: 1. ARTICLE II. COMMITMENT OF GAS RESERVES Delete Article II and replace it with the following: ARTICLE II. COMMITMENT OF GAS RESERVES With respect to all of the gas purchased, produced or otherwise obtained by Seller from the lands specified and described on Schedule A, Buyer shall have the right to all such gas except as follows: In each month of the contract period, Seller shall have the right to sell gas it produces, in excess of that required by Buyer, to third parties on an interruptible basis. Nothing herein shall limit Buyer from its right to purchase the total production of Seller at any time. Furthermore, in months when Seller makes such third party sales, Buyer's volumes for the month shall be considered the first volumes through the meter, on a daily basis. 2. ARTICLE IX. PRICE AND PAYMENT Delete Section 1 and replace it with the following: SECTION 1: The price to be paid by Buyer to Seller for gas delivered to Buyer at the delivery points shall be one dollar and ninety cents ($1.90) per mcf with no escalation. No adjustment to this price will be made to provide for reimbursement of production-related taxes or any other costs. Signed this 29th day of April, 1992. Agreed to and accepted by: Northland Royalty Operating Company Great Falls Gas Company By: /s/ W.F. Sheehan, III By: /s/ Larry D. Geske ---------------------------- --------------------------- Title: Secretary Title: President ------------------------- ------------------------ Northland Royalty Operating Company [GRAPHIC] 3030 4th Avenue North Billings, Montana 59101 (406) 259-5400 Fax(406) 259-7345 March 14, 1996 Lynn F. Hardin Assistant Vice President Great Falls Gas Company Energy West, Incorporated P.O. Box 2229 Great Falls, MT 59403-2229 RE: Cascade Gas Contract Price Negotiations Dear Mr. Hardin, Please find enclosed an executed original of your gas price offer to Northland Royalty Operating Company on the Cascade gas System Contract. Since we have been unable to arrive at a mutually acceptable and beneficial "Pre-Buy" purchase and development program, Northland has no other alternative at this time with Great Falls Gas Company than to execute the enclosed offer and return it to you. Northland will be willing to meet with Great Falls Gas Company at a mutually convenient time to have what we believe could be a jointly profitable and beneficial contract for the sale of summertime gas and for delivering a larger quantity of gas in the winter peak months. Yours Truly, Northland Royalty Operating Company /s/ W. F Sheehan, III W. F. Sheehan, III [LETTERHEAD] December 7, 1995 Mr. William Sheehan III Northland Royalty Operating Company 3030 4th Ave. N. Billings, MT 59101 Re: Requested Price Renegotiation Dear Mr. Sheehan: Great Falls Gas Company, agrees that arbitration in determining a price for your Cascade gas would be costly and should be unnecessary. I have little doubt that such arbitration would result in a two year price of $1.60. This is the price that we have contracted for with other suppliers on MPC's system. Please consider the following proposal. 1. For Jan, Feb, Mar, Nov & Dec of 1996 and 1997, $1.80/MMBtu. 2. For Apr through Oct of 1996 and 1997, the monthly Aeco Storage Hub Index (US/MMBtu) plus transport to Carway (currently $.09 US/MMBtu) plus a premium of $.05/MMBtu, but not less than $1.40/MMBtu. 3. Prior to each of these months (Apr-Oct), if seller has a higher offer from another buyer, Great Falls Gas will have the option to match the offer or to release the deliverability for that month. Any released deliverability will apply to the ACQ. Seller would have the option to shut-in for any of these months. At 1029 Btu/cf, $1.80/MMBtu is the same as $1.85/Mcf @ 14.9#. The above should guarantee seller a floor average price of over $1.60/MMBtu with the ability to improve that average price by taking advantage of stronger market conditions as they develop. If the above meets with your approval, please indicate so by your signature below, return an original to us and keep one for your records. Very truly yours, /s/ Lynn F. Hardin Lynn F. Hardin Assistant Vice President Agreed to this 14th day of March, 1996 Northland Royalty Operating Company By: /s/ W. F. Sheehan III ------------------------------- [LETTERHEAD] April 15, 1996 Mr. W.F. Sheehan III Northland Royalty Company 3030 4th Avenue North Billings, Montana 59101 Dear Mr. Sheehan, This letter is intended to resolve the arbitration of the contract between Northland Royalty Company and Great Falls Gas Company held by Great Falls Gas Company by assignment from Montana Power Company. If the contents of this letter adequately reflect your understanding of our settlement please sign both copies of this letter and return one for our records. This settlement is intended to supersede and replace any of the conditions and terms of the contract which was entered into between Northland Royalty Company (NRC) and Montana Power Company (MPC) and which has subsequently been assigned to Great Falls Gas Company, a division of ENERGY WEST Incorporated (GFG). That contract will be referred to throughout this agreement as the "Contract". The terms of that contract will continue in full force and effect except when a provision of this agreement is inconsistent with the terms of the Contract. In that event the terms of this agreement are intended to prevail as the binding agreement of the parties. 1. GFG will prepay for gas in the amount of $500,000 upon final execution by both parties of the settlement agreement. The $500,000 has been placed in escrow at Norwest Investment Management & Trust Company (Norwest). NRC may receive disbursement of the funds so placed according to the following instruction which GFG agrees to include in it's escrow agreement with Norwest: Upon execution of this agreement, NRC will receive a disbursement of $250,000. After copies of paid invoices are presented that exceed $250,000 in aggregate, the remaining escrow balance will be available for the funding of expenditures directly related to increasing the deliverability of natural gas from the fields identifiecl in the Contract between NRC and GFG. Norwest is hereby instructed to disburse to NRC amounts corresponding to expenditures which have been submitted to and approved by GFG which approval shall not be unreasonably denied. 2. The DCQ under Article IV Section I will be reduced to 50% of the daily contract quantity available for delivery by NRC, but will increase to 62.5% should the outstanding prepayment balance be extinguished by NRC. Quantities of gas available for delivery but not taken by GFG are hereby released to NRC for resale to third parties. 3. The price paid for gas delivered would be the monthly AECO Storage Hub Index (US/MMBtu) plus transport to Carway (currently $.09 US/MMBtu) plus a premium of $.05 per MMBtu, but not less than $1.40/MMBtu for the months of April through September and $1.80 per MMBtu for the months of October through March. This pricing provision will be in effect from January 1, 1996 until January 1, 1998 or until such time as any outstanding prepayment has been extinguished whichever occurs latest in time. 4. GFG would pay NRC for 60% of the delivered gas at prices established in paragraph 3, above, 40% of the gas taken each year will be credited against the prepayment. Payments will be apportioned each month between the gas credited against prepayment and the gas paid in cash until such time as the prepayment amount is extinguished when the entire amount shall be paid in cash. NRC may elect from time to time to make cash payments to GFG to be applied against the prepayment balance. 5. GFG would have the option to prepay for additional gas each six months of the contact beginning six months from the date of the first prepayment. GFG will notify NRC within 30 days of the six month anniversary of its desire to prepay. If GFG prepays, its prepayment will be limited to an amount equal to $1.60 multiplied by 50% of the gas taken by GFG during the previous six months. GFG may elect to make such prepayments (which would be paid pursuant to the pricing provisions of #4 above) until such time as the Contract expires. At the expiration of the Contract, GFG would be entitled to an amount of gas equivalent to the amount of prepayment balance divided by $1.60. If in any six month period GFG does not elect to prepay, either party will have the option to continue according to the provisions of this agreement or to notify the other party of its intention to renegotiate the contract terms pursuant to provisions of Article IX of the Contract. However, such notice must be received by the other party by July 1 of ANY calendar year. When notice is so given the parties agree that the effective date of the price renegotiated pursuant to such notice shall be January 1 of the year following the giving of such notice. This agreement is subject to satisfactory review by GFG of appropriate financial statements of NRC. Agreed to this 17th day of April, 1996. Great Falls Gas Company Northland Royalty Company By: /s/ [ILLEGIBLE] By: /s/ W.F. Sheehan III ----------------------- ------------------------- [LETTERHEAD] April 15, 1996 Mr. William F. Sheehan III Northland Royalty Company 3030 4th Avenue North Billings, Mt. 59101 Dear Mr. Sheehan, This letter when signed by you is intended to constitute an agreement between Northland Royalty Company (NRC) and Energy West Resources, Incorporated. 1. NRC agrees to sell 100% of its released output from its contract with Great Falls Gas Company (GFG) to Energy West Resources (EWR). EWR agrees to purchase 100% of such gas at a price 10% under the monthly Aeco Storage Hub Index (US/MMBtu) plus transport to Carway (currently $.09 US/MMBtu) index at Empress as published in the Canadian Gas Price Reporter. 2. Northland will produce its fields at full capability, (which is interpreted to mean 90% of the ACQ, as that term is defined in the contract between Great Falls Gas Company and NRC for the term of this agreement. This is intended to mean that NRC will shut in its wells only for required maintenance and not for economic considerations. Further, NRC will conduct its scheduled maintenance in the months of June, July or August to allow for the utilization of the gas when it will be in greatest demand by EWR customers. 3. The term of this agreement is effective on the date of NRC's settlement agreement with GFG and will continue for the term of that settlement agreement. Agreed to this 17th day of April, 1996 Energy West Resources, Incorporated Northland Royalty Company By: /s/ [ILLEGIBLE] By: /s/ W.F. Sheehan III ----------------------- ------------------------- Northland Royalty Operating Company [GRAPHIC] 3030 4th Avenue North Billings, Montana 59101 (406) 259-5400 Fax(406) 259-7345 Energy West Incorporated No.1 First Avenue South P.O. Box 2229 Great Falls, MT 59403-2229 Attention: Mr. Lynn Hardin, Assistant Vice President Fax: 406-791-7560 February 18, 1997 Dear Mr. Hardin, Pursuant to Gas Contract Between Great Falls Gas and the Northland Royalty Operating Company (MPC #93) we hereby request that future payment for gas sold under this contract be made to the Northland Royalty Company rather than Northland Royalty Operating Company. A recent change in our accounting procedure requires us to make this change. Thank you for your assistance and if you have any questions concerning this request please contact me in our Billings offfice. Sincerely, /s/ Peter C. Sheehan Peter C. Sheehan Northland Royalty Operating Company [LETTERHEAD] April 1, 1997 VIA FEDERAL EXPRESS: 8830183283 Energy West Resources No. 1 First Avenue South P.O. Box 2229 Great Falls, MT 59403-2229 ATTN: Jim Morin RE: Northland Royalty Company and Northland Royalty Operating Company; KeyBank of Wyoming Dear Mr. Morin This firm represents KeyBank of Wyoming (the "Bank") with respect to loans which it has made to Northland Royalty Company and Northland Royalty Operating Company ("Northland"). Pursuant to the enclosed Mortgage, Assignment of Proceeds, Security Agreement and Financing Statement ("Mortgage") between the Bank and Northland, the Bank is the assignee of the production and proceeds from the properties encumbered by the Mortgage which are therefore the property of the Bank. In addition, pursuant to the enclosed Notice of Assignment ("Notice"), Northland has directed any purchaser of oil or gas pertaining to the lands or contracts described in the Notice to pay all proceeds attributable to the interests of Northland to the Bank. Please note that the lands and contracts set forth in the Notice correlate with the lands and contracts set forth in each respective Exhibit A to the Mortgage. The purpose of this letter is to place you on notice of the Bank's claim of first priority to payment of proceeds attributable to the interests of Northland arising from the purchase and sale of oil or gas attributable to the lands or contracts described in the Mortgage and/or the Notice and located in the following counties within the State of Montana: 5. Glacier; and 6. Toole. Energy West Resources Page two April 1, 1997 Please make payment directly to the following address: KeyBank of Wyoming 1800 Carey Avenue P.O. Box 924 Cheyenne, WY 82001 ATTN: Cathy Ford, Assistant Vice-President Special Assets Department If for whatever reason funds are placed in suspense and not paid directly to the Bank as set forth above, please contact the undersigned directly. Very truly yours, POULSON, ODELL & PETERSON, LLC /s/ William F. Leonard William F. Leonard WFL/kak Enclosures xc: KeyBank of Wyoming ATTN: Cathy Ford NOTICE OF ASSIGNMENT NOTICE IS HEREBY GIVEN, that effective February 26, 1993, Northland Royalty Company and Northland Royalty Operating Company have assigned to Key Bank of Wyoming all right, title and interest in: A. All proceeds of production from oil and gas wells located on the following described lands: 1. Glacier County, Montana Township 36 North, Range 6 West, MPM Sections: 11, 13, 14, 22, 23, 24, 25, 26, 27, and 34. 2. Toole County, Montana Township 34 North, Range 2 West, MPM Sections: 4, 9, 10, 14, 15, 16, 17, 19, 20, 21, 22, 23, 26, 27, 28, 32, 33, 34, and 35. Township 33 North, Range 2 West, MPM Sections: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 14, 15, 16, 17, 19, 20, 21, 22, 23, 26, 27, 28, and 30. B. That certain Gathered Gas Purchase Contract, dated December 18, 1979, MPC Contract No. 327, wherein originally Fourem Company is "Seller" and The Montana Power Company is "Buyer" and Northland Royalty Operating Company is now "Seller", together with all prior amendments, as well as all future renewals, modifications, amendments, substitutions or replacements thereof pertaining to the lands described above and those referenced in said contract. C. That certain Delivered Gas Purchase Contract, dated February 23, 1977, wherein originally Cascade Gas Co. is "Seller" and The Montana Power Company is "Buyer" and Northland Royalty Operating Company is now "Seller" and Great Falls Gas Company is now "Buyer", together will all prior amendments, as well as all future renewals, modifications, amendments, substitutions or replacements thereof pertaining to the lands described above and those referenced in said contract. IT IS HEREBY DIRECTED that all rights, benefits and privileges pertaining to the above described items are hereby transferred to Key Bank of Wyoming and any purchaser of oil or gas pertaining to the lands or contracts described above is to pay all proceeds attributable to the interests of Northland Royalty Company or Northland Royalty Operating Company to: Key Bank of Wyoming Attention: Cary E. Brus 1130 Sheridan Avenue Cody, Wyoming 82414 until further notice from Key Bank of Wyoming. DATED this 26th day of February, 1993. NORTHLAND ROYALTY COMPANY By /s/ W. F. Sheehan, Jr. --------------------------- Name: William F. Sheehan, Jr. ------------------------- Title: President -------------------------- NORTHLAND ROYALTY OPERATING COMPANY By /s/ W. F. Sheehan, Jr. --------------------------- Name: William F. Sheehan, Jr. ------------------------- Title: President -------------------------- CORPORATE ACKNOWLEDGMENT STATE OF MONTANA ) ) SS. COUNTY OF YELLOWSTONE ) On this 26th day of February, 1993, before me Joseph R. Glennon, a notary public personally appeared William F. Sheehan, Jr. known to me to be the President of Northland Royalty Company and Northland Royalty Operating Company and acknowledged to me that he executed the within instrument on behalf of such corporations. Given under my hand and notarial seal this 26th day of February, 1993. /s/ Joseph R. Glennon -------------------------------------- NOTARY PUBLIC My Commission Expires: 10-27-95 - -------------------------------- - ------------------------------------------------------------------------------- ACKNOWLEDGMENT The undersigned hereby acknowledges receipt of a copy of the above and foregoing Notice of Assignment and consents to the terms thereof. DATED this ______________ day of __________________, 199__. Company Name -------------------------- By ------------------------------------ Name ---------------------------------- Title --------------------------------- EX-10.7 10 EXH 10.7 : DELIVERED GAS PURCHASE CONTRACT 12/1/85 DELIVERED GAS PURCHASE CONTRACT The contract, dated December 1, 1985 effective upon the date designated herein, is by and between: GATEWAY ENERGY CORPORATION P. O. Box 524 Englewood, Colorado 80151 (hereinafter called "Seller" whether one or more) and THE MONTANA POWER COMPANY (hereinafter called "Buyer"). W I T N E S S E T H: WHEREAS, Seller owns or otherwise controls the rights to produce natural gas from certain lands located in the State of Montana, on which Seller has developed gas production; and WHEREAS, Buyer is willing to buy gas which may be produced by Seller in commercial quantities; and WHEREAS, Seller has available commercial quantities of gas which Seller is willing to sell to Buyer; and WHEREAS, the parties hereto are desirous of entering into a contract providing for the sale by Seller and purchase by Buyer of volumes of gas developed by Seller; NOW, THEREFORE, in consideration of the promises and the covenants herein contained, Seller agrees to sell and deliver to Buyer and Buyer agrees to purchase and receive from Seller, pursuant to the terms and conditions hereinafter set forth, all of the gas produced by Seller from Seller's lands. ARTICLE I. GENERAL PROVISIONS SECTION 1 - TERM. This contract shall become effective on the effective date hereof and shall continue in effect for -1- a period of twenty (20) contract years and thereafter from year to year until canceled by one (1) year's written notice from one party to the other. SECTION 2 - EFFECTIVE DATE. The effective date of this contract is December 1, 1985. SECTION 3 - TYPE OF CONTRACT. This contract is a Delivered Gas Purchase Contract. SECTION 4 - NOTICES. Notices to Buyer shall be addressed to: The Montana Power Company 40 East Broadway Butte, Montana 59701 Notices to Seller shall be addressed to: Gateway Energy Corporation P. O Box 524 Englewood, Colorado 80151 Either party may change its address under this section at any time upon written notice to the other party. ARTICLE II. QUANTITY OF GAS SECTION 1 - VOLUME OBLIGATION. Commencing with the initial delivery of gas hereunder, the volume of gas which Buyer shall be obligated to take and pay for, or pay for if available and not taken, shall be the daily contract quantity (DCQ). The DCQ shall equal one million (1,000,000) cubic feet for each 7.3 Bcf (7,300,000,000 cubic feet) of recoverable gas reserves, with a minimum DCQ of two million (2,000,000) cubic feet per day, subject to Seller having available for delivery 150 percent of the DCQ. -2- SECTION 2 - INITIAL DCQ. The DCQ shall equal 66-2/3 percent of the daily volume available for delivery by Seller up to a maximum of two million (2,000,000) cubic feet, except as hereinafter provided. The initial DCQ shall be established as soon as practical, but not more than three months after initial delivery allowing Seller sufficient time to solve any start-up problems. Seller shall notify Buyer when Seller is ready, and a monthly production period will be used as a production test provided, however, that under no circumstances will Buyer be required to conduct a production test during the months of June, July or August. The initial DCQ shall be equal to 66-2/3 percent of the average daily delivery during the production test. For the period from initial delivery to the first day of the initial production test, Buyer's take-or-pay obligation shall be equal to the volume actually delivered and accepted. Should Seller increase his deliverability and desire to increase the DCQ, Seller may request a new production test for that purpose, provided that such new production test shall be not less than six (6) months from the last production test and provided further that under no circumstances will Buyer be required to conduct a production test during the months of June, July or August. Establishment of DCQ based on 66-2/3 percent of deliverability during a production test shall be applicable only for DCQ's up to two million (2,000,000) cubic feet. -3- SECTION 3 - ALTERNATIVE DCQ BASED UPON DETERMINATION OF RESERVES. At such time as 66-2/3 percent of deliverability exceeds two million (2,000,000) cubic feet, the DCQ shall be one million (1,000,000) cubic feet for each 7.3 Bcf (7,300,000,000 cubic feet) of recoverable gas reserves or two million (2,000,000) cubic feet, whichever is greater. SECTION 4 - LIMITATIONS UPON BUYER'S OBLIGATION TO PURCHASE GAS. (a) DELIVERY CAPACITY OF SELLER. After commencement of initial delivery, Buyer's obligations to purchase the annual contract volume during each contract year is conditioned upon Seller having the capability at all times of delivering a daily volume of gas equal to at least 150 percent of the DCQ. (b) FAILURE TO DELIVER CONTRACT VOLUME. If the Seller fails for any calendar month to deliver to Buyer the daily quantity of gas requested by Buyer up to 150 percent of the DCQ, Buyer may notify Seller in writing of such failure. Seller shall have such time as may be necessary, but in no event more than twelve (12) months from the date of receipt by Seller of Buyer's notice, in which to restore its ability to deliver such quantity, during which period the DCQ shall be reduced to 66-2/3 percent of the average daily volume of gas Seller delivered to Buyer during the calendar month on which Buyer's notice was based. After Seller attempts to restore its ability to deliver 150 percent of the DCQ in effect prior to such notice and reduction and after Seller -4- gives written notice to Buyer that it is ready for a test, or following the end of said twelve (12) month period, Buyer shall conduct a production test using a monthly production period in which Seller must demonstrate delivery of 150 percent of the DCQ in effect prior to such notice and reduction on each day, provided, however, that under no circumstances will Buyer be required to conduct a production test during the months of June, July or August. In the event Seller's efforts to restore its ability to deliver 150 percent of the DCQ in effect prior to such notice are unsuccessful, as evidenced by said production test, Buyer shall have the right to reduce the DCQ to a volume equal to 66-2/3 percent of the average daily volume of gas delivered to Buyer during the calendar month of said delivery test. If 66-2/3 percent of deliverability results in a DCQ less than l00 MCFD, the DCQ shall be assigned a value of zero. If a zero DCQ is assigned, Seller shall nonetheless continue to produce and deliver gas to Buyer and Buyer shall take and pay for gas delivered on a best efforts basis. ARTICLE III. RESERVES AND DELIVERABILITY SECTION 1 - COMMITMENT OF GAS RESERVES. Seller hereby commits to the performance of this contract all of the gas produced by Seller from the lands specified and described on Schedule "A." SECTION 2 - DETERMINATION OF GAS RESERVES. After the execution of this contract, and thereafter from time to time as new wells are completed or discoveries of gas are made on -5- Seller's lands, Seller will provide Buyer with the basic geological, engineering, production and other data within Seller's possession which would be needed in making a determination of gas reserves and deliverability of each well. One (1) month after Buyer has received said data, Buyer shall furnish Seller an estimate of recoverable gas reserves. Within fifteen (15) days after Buyer's furnishing its estimate of the recoverable gas reserves, Seller shall advise Buyer whether Buyer's estimate is acceptable. If Buyer's estimate of such recoverable gas reserves is not acceptable to Seller, and Seller and Buyer are unable to negotiate an agreeable settlement, then the matter shall be determined by arbitration as provided in Article XII. The recoverable gas reserves when determined will form the basis for determining the DCQ and take-or-pay obligations subject, however, to the provisions of Article II. SECTION 3 - SUBSEQUENT REDETERMINATIONS OF RECOVERABLE GAS RESERVES. Either party may request, in writing, a redetermination of recoverable gas reserves between March 1 and June 30, inclusive, of every second contract year hereof. After such request, Buyer shall, between July 1 and September 1, estimate the quantity of Seller's recoverable gas reserves and promptly provide Seller with a statement thereof. Within fifteen (15) days after Buyer's furnishing its estimate of such reserves, Seller shall advise Buyer whether Buyer's estimate of such reserves is acceptable. If Seller and Buyer reach agreement on Seller's recoverable gas -6- reserves, or the matter is determined by arbitration, then such reserve agreement or determination shall form the basis for determining the DCQ effective the following January 1, subject, however, to the provisions of Article II. SECTION 4 - RECOVERABLE GAS RESERVES. In making the determination of recoverable gas reserves, all pertinent factors shall be considered and given due weight, including but not limited to the production-pressure decline curve, if sufficient data is available, and a volumetric determination of reserves which is based upon the thickness of the gas bearing sands, the acres in which the production occurs, the porosity and water saturation of said sands, the pressures occurring in the formation and at which the gas is produced, and the recovery factor. SECTION 5 - ARBITRATION OF RESERVES. If Seller and Buyer are unable to agree upon the Recoverable Gas Reserves and such disagreement cannot be resolved by negotiation within sixty (60) days after Buyer has submitted its determination of recoverable gas reserves, then the determination of such reserves will, at the request of either party, be submitted to arbitration as provided in Article XII. ARTICLE IV. DELIVERY SECTION 1 - DELIVERY PRESSURE. Delivery by Seller of gas shall be made at a pressure that is sufficient to effect delivery of gas into Buyer's pipeline at existing working pressure maintained therein from time to time not to exceed -7- one thousand (1,000) pounds per square inch gauge. Maintenance by Seller of sufficient pressure to enter Buyer's pipeline shall be a condition of Buyer's obligation to purchase and receive from Seller the quantities of gas specified in Article II hereof. SECTION 2 - DELIVERY POINT. Delivery of natural gas hereunder shall be at a mutually agreeable single point on Buyer's transmission line in the NE NE of Section 20, T33N, RlW, Toole County, Montana. Additional delivery points may be used upon the written agreement of the parties hereto. SECTION 3 - NOTICE TO BUYER. Seller will advise Buyer at the earliest date possible after Seller has determined it will connect a well of its best estimate of the initial delivery date. SECTION 4 - TITLE. Title to all gas shall pass at the point of delivery. ARTICLE V. PRICE SECTION 1 - AMOUNT. The price to be paid by the Buyer to the Seller for the gas delivered to the Buyer at the delivery points or for take-or-pay payments shall be the lesser of: a) Two dollars and seventy-five cents ($2.75) per Mcf. This price will be redetermined at two year intervals with the first price renegotiation effective January 1, 1988. Price renegotiation shall be conducted as per Article V, -8- Section 5 hereof. No adjustment will be made to this price for reimbursement of production related taxes or any other NGPA Section 110 add ons; or b) The applicable maximum lawful price established by the Natural Gas Policy Act (NGPA) and the regulations promulgated thereunder (weighted according to the respective volumes of gas subject to different maximum lawful prices) up to a ceiling price of the maximum lawful price under Section 102 of the NGPA. Proper adjustments shall be made monthly for pressure base and BTU content. In the event Seller does not furnish Buyer with the statement required by Article XI, Section 1(b), the price to be paid by Buyer shall be the applicable maximum lawful price established by Section 109 of the NGPA without an allowance for state severance taxes borne by the Seller. SECTION 2 - BTU ADJUSTMENT. If the gas delivered hereunder has a gross heating value of less than one thousand (1,000) BTU per cubic foot, then the price payable for such gas shall be reduced. If the gas has a gross heating value of more than one thousand (1,000) BTU per cubic foot, then the price payable for such gas shall be increased. Such reduced or increased price shall be determined by multiplying the price otherwise payable by a fraction, the numerator of which is the actual gross heating value of the gas delivered, expressed in BTU per cubic foot, and the denominator of which is one thousand (1,000); provided, however such fraction -9- shall not exceed 12/10 even though the gross heating value of the gas is found to be in excess of one thousand two hundred (1,200) BTU per cubic foot. SECTION 3 - TAKE-OR-PAY OBLIGATION. If during any calendar year Seller has available for delivery 150 percent of the DCQ and Buyer does not take a total volume of gas equal to the ACQ in said calendar year, then, on or before the 25th day of the following January Buyer shall mail payment to Seller, as a take-or-pay payment, the value of such volume of gas not taken below the ACQ; calculated with a unit price representing the average unit price applicable in the preceding year. There shall be no BTU adjustment when calculating payment for gas available but not taken. SECTION 4 - MAKE-UP OF DEFICIENCIES IN PURCHASE. (a) Beginning with initial delivery hereunder, all volumes of gas taken by Buyer during a contract month in excess of the monthly contract quantity, up to a total quantity having a total value (calculated at the price being paid hereunder at the time such gas is so made up) equal to the payments theretofore made by Buyer to Seller for gas not taken, shall be credited to the make-up of take-or-pay deficiencies incurred in any of the contract years following the contract year in which the deficiency occurred. Nothing contained in this Section 4 shall reduce Buyer's obligation to take and pay for, or nevertheless pay for, if available and not taken, the annual contract volume during each contract year. -10- (b) Gas taken in excess of the annual contract volume in any year shall first be credited against amounts of gas paid for but not taken in any prior year, and the balance, if any, shall be carried forward as a credit against annual contract volume deficiencies occurring in any subsequent year; provided, however, that no credit shall exist for a period longer than five (5) years. (c) In the event that this contract terminates for any reason other than the breach of the terms hereof by Buyer prior to the Buyer's recovery of any volumes paid for but not taken hereunder, or if a zero DCQ is assigned, Seller shall pay to Buyer 100 percent of the outstanding sums paid by Buyer for gas not taken. SECTION 5 - RENEGOTIATION OF PRICE. Either party shall have the right to demand renegotiation, pursuant to this Article between March 1 and June 30, inclusive, prior to the anniversary date of each second contract year. Failure to make the demand in writing within the times allowed shall be deemed a waiver of the right to renegotiate. The first price renegotiation hereunder will be effective January 1, 1988. SECTION 6 - FAIR MARKET PRICE. The price redetermined shall be the fair market price of the gas which is subject to this agreement. The fair market price of the gas is the price paid or value obtained for natural gas produced in Montana under similar delivery conditions, or adjusted for similar delivery conditions, on sales to, or for ultimate delivery to pipeline transmission companies, or wellhead -11- sales. In determining the fair market price, all, pertinent factors, such as point of delivery, cost of gathering, quality, quantity and delivery pressure, shall be considered and given due weight. If the parties are successful in negotiating a price, as provided above, or if the price is determined by arbitration, said price shall become effective on the "anniversary date" for which such price negotiation is requested. SECTION 7 - ARBITRATION DEMAND. If the parties are unable to agree upon the fair market price by sixty (60) days prior to the appropriate "anniversary date" then either party shall have the right to demand that the matter of redetermination of price be submitted to arbitration as provided in Article XII, provided that if no such demand is made and delivered within ten (10) days of the date the right to invoke arbitration arises, the right shall be deemed waived, and the price in effect on the "anniversary date" shall remain in effect. ARTICLE VI. DEFINITIONS For the purpose of this contract, the following words and terms are defined as follows: 1. The first "CONTRACT YEAR" means that period of time commencing on the effective date hereof and extending to, but not including the following January l, which date shall constitute the anniversary date of this contract. Thereafter, each subsequent "contract year" shall mean that period of -12- time commencing with an anniversary date of this contract and extending to, but not including the following anniversary date. 2. The "ANNIVERSARY DATE" of this contract is deemed to be January l in each contract year. 3. "DAY" means a period of twenty-four (24) consecutive hours beginning and ending at 8:00 a.m., Mountain Standard Time. The reference date for any day shall be the calendar date upon which said 24-hour period shall commence. 4. "MONTH" means the period of time beginning at 8:00 a.m., Mountain Standard Time, on the first day of a calendar month and ending at 8:00 a.m., Mountain Standard Time, on the first day of the next calendar month. 5. "SELLER'S LANDS" means the real property and all natural gas production from the real property described in Schedule "A" attached to this contract, including all geologic zones and horizons underlying the property unless otherwise limited on Schedule "A." 6. "LEASE" means any right of Seller to drill for, produce, and dispose of gas in, under and from Seller's lands, and includes any document evidencing such right now or hereafter acquired. 7. "GAS" means either natural gas obtained from the wells or the residue remaining after the natural gas has been treated by Seller for the removal of any of its constituent parts other than methane and the removal of methane to such -13- extent as is necessary in removing other constituents, as the context may require, but not including casinghead gas. 8. "RECOVERABLE GAS RESERVES" means the total quantity of gas which is determined or redetermined at a future date to be economically recoverable from each gas production unit and available for delivery as of the date of initial delivery hereunder after processing, if any, to satisfy the quality specifications hereof, less the quantities of gas reserved by the Seller hereunder. Such reserves shall be computed by accepted reservoir engineering and geological procedures, and shall consist of only those reserves owned or controlled by Seller and underlying or attributable to Seller's lands listed on Schedule "A." Recoverable gas reserves means original, NOT remaining, recoverable reserves. 9. "RESERVOIR" means stratigraphic trap, or pool, from which gas is produced, and one (1) or more "reservoirs" may be produced by means of a single well. 10. "GAS PRODUCTION UNIT" means one governmental section (640 acres more or less), unless otherwise agreed between the parties or established by the Montana Oil and Gas Conservation Commission. As to the units on which there are wells completed in more than one producing formation, each such formation shall be considered as a separate gas production unit. 11. "CUBIC FOOT OF GAS" is the unit of volume for purposes of measurement hereunder, except for gross heating value, and means one cubic foot of gas at a temperature of -14- 60 DEGREES F and at a pressure of 14.73 per square inch absolute. For purposes of measurement, the atmospheric pressure shall be assumed to remain constant at 13.0 pounds per square inch absolute. 12. "MCF" means one thousand (1,000) cubic feet. 13. "BTU" means British thermal unit. 14. "GROSS HEATING VALUE" means the total calorific value expressed in Btu's obtained by the complete combustion at constant pressure of the amount of gas which would occupy a volume of one cubic foot at a temperature of 60 DEGREES F if saturated with water vapor and under a pressure equivalent to that of 30 inches of mercury at 32 DEGREES F and under standard gravitational force (980.665 cm. per sec., per sec.) with air of the same temperature and pressure as the gas, when the products of combustion are cooled to the initial temperature of gas and air and when the water formed by combustion is condensed to the liquid state. 15. "DCQ" means the Daily Contract Quantity and is defined in Article II of this agreement. 16. "MONTHLY CONTRACT QUANTITY" or "MCQ" means the DCQ times the number of days in any particular contract month. 17. "ANNUAL CONTRACT QUANTITY" or "ACQ" means the DCQ times the number of days applicable to that DCQ within that particular contract year. 18. "INITIAL DELIVERY" means the date on which Buyer first receives gas produced from a well on Seller's land. -15- 19. "DELIVERABILITY" means the average volume of gas available for delivery. ARTICLE VII. SELLER'S REPRESENTATIONS SECTION 1 - LEASES. Seller represents and warrants that it is the owner of valid oil and gas leases or other documents of title which grant to Seller the right to produce and dispose of Seller's share of the natural gas from the land described in Schedule "A" and agrees to maintain all of such right to produce and sell gas in full force and effect, at its own expense; provided, that Seller shall not be required to retain by payment of delay rentals any acreage which, in Seller's judgment, will not be productive of gas in commercial quantities. SECTION 2 - WARRANTY OF TITLE. Seller warrants that, to extent of Seller's interest as indicated on Schedule "A," it has the right to produce and sell to Buyer, and that Seller has merchantable title to, and that Seller has authority to sell, Seller's share of gas which is produced from the wells on Seller's lands. Seller agrees to indemnify and save Buyer harmless from any and all suits, claims and liens of any nature relating to such gas or the title thereto. If there is a defect in Seller's title, Seller shall, with reasonable promptness, attempt to remedy said defect. If Seller's title shall at any time be questioned, or involved in litigation, Buyer shall have the right to (1) refuse to accept deliveries of gas hereunder, or (2) withhold (without interest) the proceeds payable for the -16- gas produced from the particular property in litigation or dispute during the period of such litigation or until said title is freed from such question, or until Seller shall furnish a bond, in form and with sureties acceptable to Buyer, conditioned to save Buyer harmless. Seller agrees, upon the reasonable request of Buyer, to furnish for examination all abstracts of title which Seller has or may have covering acreage committed hereunder, authentic copies of Seller's leases, delay rental receipts covering such acreage, and any other title information pertaining to such acreage which Seller may have. ARTICLE VIII. BUYER'S & SELLER'S OBLIGATION SECTION 1 - GAS TO BE PURCHASED AND SOLD. Subject to the provisions of this agreement, during the term hereof the Seller shall gather, compress, sweeten, if necessary, dehydrate, sell and deliver to the Buyer, and the Buyer shall purchase and receive from the Seller at the delivery point the natural gas produced from the Seller's lands described in Schedule "A." (a) SELLER'S OBLIGATION TO DELIVER. Subject to the provisions of this Article, the Seller shall deliver gas to Buyer's transmission system as provided in Article IV hereof, in such volume and at such times as requested by Buyer, provided that Seller shall not be required to produce gas from wells in excess of the lesser of (1) the legal capacity of each well as may be fixed from time to time by law or regulatory bodies, or (2) the delivery capacity of each well. -17- (b) LIMITATION ON SELLER'S OBLIGATIONS. Seller shall not be obligated to deliver gas hereunder from any well at a rate which in the opinion of the Seller, acting as a reasonably prudent operator, would be injurious to such well or to the reservoir or reservoirs from which such well is produced. (c) RESERVATION OF GAS BY THE SELLER: The Seller reserves the following rights: (1) the right, at Seller's option, to retain or allow others to retain such quantities of gas produced from the lands described in Schedule "A" as the Seller may need or require to fulfill the obligations of the Seller under the terms of its lease or other document under which it derives title to its gas rights; (2) the right at Seller's option to such quantities of gas produced from Seller's lands as Seller may need or require for development, production and delivery of gas for sale under this contract. (3) the right at Seller's option to process gas produced from Seller's lands for the removal of any component, other than methane, prior to delivery of such gas to the Buyer, which components so removed shall belong to the Seller; provided, however, that the gas which is delivered to Buyer after such processing shall meet the quality requirements of Article IX hereof. -18- SECTION 2 - SELLER'S OBLIGATION TO MAINTAIN WELLS. Seller shall use diligence in maintaining said wells and the appliances and machinery appurtenant thereto in good and efficient working order at all times and in such manner that each of said wells will at all times be able to produce the amounts of gas required to be delivered by Seller under this contract. The obligations of Seller hereunder are subject to the ability of Seller's wells to produce without waste and in accordance with prudent oil and gas field practice. Seller reserves the right, subject to this agreement, to control the Seller's lands and leaseholds and the operations thereon producing gas to be sold to Buyer; such reserved rights include, but are not limited to, the right to unitize or pool its leases with its own or others, the right to determine when, where, or whether to drill new wells, to repair and rework old wells, and to abandon any well or surrender any lease when no longer deemed by Seller to be capable of producing gas in paying quantities under normal methods of operation. SECTION 3 - WELLS. The gas wells connected under this contract shall be equipped and maintained in good operating condition, in accordance with approved practices, without cost to Buyer. In the event liquids exist, requiring separation from the gas, then Seller agrees to install, operate, and maintain, without cost to Buyer, such liquid removal equipment operated at normal temperature, as may be necessary to separate such liquids from the gas. -19- SECTION 4 - SELLER'S OBLIGATION TO MAINTAIN THE GATHERING SYSTEM. Seller shall diligently maintain the facilities used to produce and deliver the gas from Seller's lands as described on Schedule "A" up to the point of delivery. Seller shall be, at no expense to Buyer, responsible for the installation and operation of all equipment, piping and Seller's gathering system up to the point of delivery. SECTION 5 - DRAINAGE. If a reservoir producing gas delivered to Buyer under this contract is produced by anyone other than Seller at a rate which makes imminent, in Seller's judgment, the drainage of gas from Seller's lands, then Seller shall immediately notify Buyer in writing of the existence of such situation and may request that Buyer, to the extent reasonably possible, increase its takes from Seller by a volume sufficient to protect Seller from drainage of the reservoir. If Buyer is unable to increase takes sufficiently to protect Seller from drainage, Buyer agrees to permit Seller to seek another purchaser for those volumes needed to avoid drainage. ARTICLE IX. QUALITY OF GAS SECTION 1 - GENERAL STANDARDS. Seller agrees that the gas delivered hereunder shall be merchantable natural gas, at all times complying with the following quality requirements: (a) The gas shall be in its natural state as produced, including all hydrocarbon constituents therein contained, -20- except gas from which Seller has removed liquid or liquifiable hydrocarbons. Seller shall also have the right to remove nonhydrocarbon constituents and hydrocarbons as required to remove other constituents. Seller may enrich the gas to the extent required to meet the gross heating requirements set forth in paragraph (b) below, and may subject the gas, or permit the gas to be subjected to compression, cooling, cleaning and other processes. (b) The weighted average gross heating value of gas delivered to Buyer hereunder shall not be less than nine hundred (900) Btu's per cubic foot, and shall not be more than twelve hundred (1,200) Btu's per cubic foot as defined in Article VI, Section 14. Buyer may reject delivery of gas having a weighted average gross heating value of less than nine hundred (900) Btu's or more than twelve hundred (1,200) Btu's. (c) The gas shall be merchantable and usable by the ultimate consumers thereof without further treatment. The terms merchantable and usable shall mean conforming to the seven specifications stated below. In particular, the gas delivered hereunder at the delivery point shall be commercially free of dust, gum, gum-forming constituents, gasoline, and other solid or liquid matter that may become separated from the gas during transportation thereof and shall conform to the following specifications: -21- 1. Dust, rust or other solids None 2. Carbon dioxide Not more than 2% by volume 3. Oxygen Not more than 1% by volume 4. Hydrogen sulfide Not more than 1/4 grain per 100 cubic feet 5. Total sulfur Not more than 20 grains per 100 cubic feet 6. Liquid water None 7. Temperature Not more than 120 DEGREES F SECTION 2 - DELIVERED CONTRACT QUALITY STANDARDS. In addition to the quality standards set forth above in Section 1 of this Article, the gas delivered by Seller under this Delivered Gas Purchase Contract shall have been dehydrated by Seller for removal of water present therein in a vapor state, and shall in no event contain more than four (4) pounds of water vapor per one million (1,000,000) cubic feet of gas, and shall be free from hydrocarbons liquifiable at temperatures in excess of fifteen degrees Fahrenheit (15 DEGREES F) at pressures up to eight hundred (800) psig. SECTION 3 - BUYER'S OPTION TO TREAT. Buyer, at its option, may refuse to accept delivery of any gas not meeting the quality specifications set out in this Article. Thereafter, Seller shall have the right to conform the gas to the above specifications. If Seller does not elect to conform the gas to said specifications, then Buyer may, at its option, accept gas tendered by Seller hereunder which does not meet the specifications above, treat same to conform to said specifications and charge Seller for the actual cost of such treating, including (but not limited to) amortization, fuel and shrinkage. -22- ARTICLE X. MEASUREMENT AND TESTS SECTION 1 - UNIT OF VOLUME. The unit of volume for all gas hereunder shall be one (1) cubic foot of gas as defined in Article VI, Section 11. SECTION 2 - SALES UNIT. The sales unit of the gas delivered hereunder shall be one thousand (1,000) cubic feet. SECTION 3 - OWNERSHIP OF MEASURING EQUIPMENT. All measuring devices, and materials required at the point or points of delivery shall be installed, maintained, and operated, or furnished by Buyer at Buyer's expense. Seller may install and operate check measuring equipment provided it does not interfere with the use of Buyer's equipment in determining the volumes of gas delivered by Seller to Buyer at the points of delivery. SECTION 4 - METERING AND COMPUTATION OF VOLUME. The gas shall be metered by orifice meters or other measurement facilities constructed, installed and maintained by Buyer at or near the point or points of delivery. Such measurement facilities of Buyer shall be constructed and installed in accordance with the applicable provisions of the American Gas Association's "Gas Measurement Committee Report No. 3," as revised March, 1978 and reprinted June, 1979. The volumes of gas delivered to Buyer shall be computed from the meter records and converted into the units of measurement specified herein in accordance with the methods prescribed in Gas Measurement Committee Report No. 3 of the American Gas Association, including the appendix thereto, as revised -23- March, 1978 and reprinted June 1979, or any subsequent revision thereof acceptable to Buyer and Seller. Corrections shall be made for deviation from the Ideal Gas Laws at the pressure and temperature at which the gas is metered. To determine the factors for such correction, a quantitative analysis of the gas shall be made at reasonable intervals with such apparatus as shall be agreed upon by Buyer and Seller, and such factors shall be obtained from data contained in Report NX-19, as published by the American Gas Association in December, 1962, or any subsequent revision thereof acceptable to Buyer and Seller. For the purpose of measurement and meter calibration, the atmospheric pressure shall be assumed to be 13.0 pounds per square inch, irrespective of variations in natural atmospheric pressure from time to time. SECTION 5 - SPECIFIC GRAVITY. The specific gravity of the gas flowing through the delivery meter, or meters, shall be determined by Buyer, or, at Seller's election, by joint tests, at monthly intervals. All such determinations of specific gravity shall be made by a standard gravity balance or by a gravitometer employing the "Momentum Method" of specific gravity determinations as described in Chapter VII, "Determination of Specific Gravity," of the American Gas Association Gas Measurement Manual, 1963 edition. The specific gravity of the gas flowing through each meter determined by either of the above-mentioned methods shall be -24- used in computing the volume of gas delivered through such meter. The specific gravity determined by any test shall apply from the date the test was taken until the date of the next test. SECTION 6 - TEMPERATURE. The temperature of the gas delivered at the points of delivery hereunder shall be determined by means of a recording thermometer. The arithmetic average of readings taken while gas is flowing during each chart period shall be used in computing the volumes delivered hereunder. SECTION 7 - EQUIPMENT TESTING. The accuracy of Buyer's measuring equipment shall be verified by test, using means and methods generally acceptable in the gas industry, at least annually or otherwise as agreed to by Buyer and Seller. Seller shall have the right to witness and verify all tests of Buyer's measuring equipment. Measuring equipment found to be registering inaccurately shall be adjusted to read as accurately as possible. If Seller fails to witness any test, the results of the test shall nevertheless be considered accurate until the next test. All tests of such measuring equipment shall be made at Buyer's expense, except that Seller shall bear the expense of tests made at its request if the inaccuracy is found to produce an error of two percent (2%) or less in the measurement of gas. SECTION 8 - MEASURING EQUIPMENT OUT OF REPAIR. If, for any reason, any measuring equipment is inoperative or inaccurate so that the volume of gas delivered is not correctly -25- indicated by the reading thereof, and if such reading is in error by more than two percent (2%) in the measurement of gas, then the volume of gas delivered, during the period such measuring equipment is inoperative or inaccurate, shall be determined by the parties hereto on the basis of the best data available using the first of the following methods which is feasible: (a) By using the registration of any check measuring equipment installed and accurately registering; (b) By correcting the error if the percentage of error is ascertainable by calibration, test or mathematical calculations; or (c) By comparing deliveries made during preceding periods under similar delivery conditions when the meter was registering accurately. An adjustment based on such determination shall be made for such period of inaccuracy as may be definitely known, or if not known, then for one-half the period since the date of the last meter test. In no event, however, shall any adjustment extend back beyond six months from the date the error was first made known by one party hereunder to the other. SECTION 9 - INSPECTION OF EQUIPMENT. Buyer and Seller shall have the right to inspect equipment installed or furnished by the other party, and the charts and other measurement or test data of the other party, at all times during business hours; but the reading, calibration, and -26- adjustment of such equipment and changing of charts shall be done only by the party installing and furnishing the same. Unless the parties otherwise agree, each party shall preserve all original test data, charts, and other similar records in such party's possession for a period of at least five (5) years. SECTION 10 - GROSS HEATING VALUE. The gross heating value per cubic foot of gas shall be determined at least monthly by the Buyer at the Buyer's expense, using an accurately calibrated Cutler-Hammer recording calorimeter, from samples of the gas taken at the delivery point or points. The Seller shall have the right to witness any and all tests of gross heating value made by the Buyer. The Seller shall have the right at any time to make or to require the Buyer to make a special test of the gross heating value of gas delivered hereunder, but the Seller shall bear the expense of any special tests made at its request. SECTION 11 - HYDROGEN SULPHIDE. Tests to determine hydrogen sulphide content shall be made whenever necessary to determine whether the gas meets the requirements of Article IX hereof. Such tests shall be made at the expense of the Buyer. Seller shall have the right to witness and verify all tests. SECTION 12 - DATA TO BE PROVIDED TO SELLER. Buyer shall provide Seller with all information, data, test results, reservoir information, etc., immediately upon receipt of same -27- by Buyer, to the end that at all times Seller shall have all information relative to its wells that is available to Buyer. ARTICLE XI. STATEMENT AND PAYMENT SECTION 1 - STATEMENTS. (a) BUYER'S STATEMENT. On or before the fifteenth (15th) day of each calendar month after deliveries of gas are commenced hereunder, the Buyer shall render to Seller a statement showing the amount of gas delivered during the preceding calendar month, together with sufficient information to explain and support any adjustment by the Buyer with respect to the BTU value of gas delivered in determining the amounts stated to be due. (b) SELLER'S STATEMENT. On or before the fifteenth (15th) day of each calendar month after deliveries of gas are commenced hereunder, the Seller shall render to Buyer a statement showing the total volume of gas delivered to Buyer during the preceding calendar month, together with sufficient information to explain and support the application of particular NGPA maximum lawful prices to particular volumes of gas, and to explain and support the amount of allowable state severance taxes borne by the Seller. If Seller fails to render such statement, Buyer shall nonetheless make payment under this Article at the alternative price established by Article V, Section 1(b). -28- SECTION 2 - PROTEST OF STATEMENT. (a) Seller shall have, upon request made within one year after receipt of the Buyer's statement referred to in the previous section the right to examine the meter charts and computations upon which such statements are based. If the Seller deems such charts or computations to be inaccurate, Seller may protest the statement within ninety (90) days of the receipt of the meter charts and computations, and may request a check to be made of the meter installed, pursuant to Article X hereof. Any statement not protested within ninety (90) days of the receipt thereof shall, together with the underlying charts and computations upon which statements are based, be deemed to be correct. The Buyer shall make current charts available to the Seller for examination. (b) Buyer shall have upon request the right to examine the meter charts, records and computations upon which Seller's statement as to the application of particular NGPA maximum lawful prices to particular volumes of gas and as to the allowable state severance taxes borne by the Seller. If the Buyer deems such charts, records and computations to be incorrect or inaccurate, Buyer may protest and elect to receive a refund for any amount improperly or incorrectly paid to Seller, under the procedures established by the NGPA and regulations thereunder, or under the process of state law, whichever is applicable. -29- SECTION 3 - PAYMENT DUE DATE. For gas actually taken, Buyer shall mail payment to Seller monthly, on or before the 25th day of the month in which the statement was issued. If Buyer's statement is protested, Buyer shall nonetheless render payment on the basis of the statement. If the protest is resolved in favor of the Seller, payment shall be mailed within twenty-five (25) days of resolution. SECTION 4 - PAYMENT. All payments for gas shall be made to the Seller designated in Section 4 of Article I for its own account. ARTICLE XII. ARBITRATION SECTION 1 - SCOPE OF ARBITRATION. Under the terms of this contract, only the factual determinations involving the size and amount of "recoverable gas reserves," and the "fair market price" can be submitted to arbitration. No legal issues may be arbitrated. This arbitration provision does not preclude consideration of law questions in connection with decisions on "recoverable gas reserves" or "fair market price," provided that nothing in this contract shall be construed as making final or binding the decision of the arbitrator or arbitrators on a question of law, and further provided that the arbitrator or arbitrators explain fully, in writing in the decision, the consideration given to a question of law. SECTION 2 - QUALIFICATIONS OF ARBITRATORS. In an arbitration involving the determination of "recoverable gas reserves," the arbitrator or arbitrators selected hereunder -30- shall be qualified by education, training and experience to determine gas reserves. In an arbitration involving the determination of "fair market price," the arbitrator or arbitrators selected hereunder shall be qualified by education, training and experience to determine the "fair market price" (as defined hereunder) of the gas purchased hereunder. The qualifications of any arbitrator or arbitrators selected hereunder shall be subject to judicial review in accordance with the laws of Montana. SECTION 3 - SELECTION OF ARBITRATOR(S). Upon the timely written demand of either party, the parties shall meet and attempt to appoint a single arbitrator. If the parties are unable to agree on a single arbitrator, then upon written demand of either party and within ten (10) days of such demand, each party shall name an arbitrator and the two arbitrators so named shall within ten (10) days of their appointment choose a third arbitrator. If either party shall fail to timely name an arbitrator, the American Arbitration Association shall be requested to appoint the second arbitrator. If the two arbitrators shall fail within ten (10) days from their appointment to appoint the third arbitrator, then the American Arbitration Association shall be requested to appoint the third arbitrator. The American Arbitration Association shall be bound, in any event, to select an arbitrator in accordance with the provisions of Section 2 of this Article. -31- SECTION 4. - ARBITRATION PROCESS. The arbitrator or arbitrators shall proceed immediately to hear and determine either the "recoverable gas reserves" or the "fair market price," as is appropriate. In making the determination of "recoverable gas reserves," the arbitrator or arbitrators shall consider and give due weight to the factors denominated in Section 4 of Article III. In making the determination of "fair market price," the arbitrator or arbitrators shall consider and give due weight to the factors denominated in Section 6 of Article V. SECTION 5 - ARBITRATOR(S) DECISION. The arbitrator or arbitrators shall render a decision as soon as is reasonably possible following the submission of the issue by the parties. The arbitrator or arbitrators shall decide only the factual issue before them; that is, either the "recoverable gas reserves" or the "fair market price," and no legal issues may be determined. The decision of the arbitrator or a majority of the arbitrators shall be in writing, explain the reasons therefore, and signed by the arbitrator or a majority of them. Only the decision of the arbitrator, or a majority of the arbitrators, as to the factual issue before he or them shall be final and binding upon the parties. SECTION 6 - ARBITRATION EXPENSES. The compensation and expenses of the single arbitrator shall be paid in equal proportions by Buyer and Seller. The compensation and expenses of the arbitrators, be there more than one, shall be -32- paid by the party in whose behalf such arbitrator was appointed, and the compensation and expenses of the third arbitrator shall be paid in equal proportions by Buyer and Seller. ARTICLE XIII. FORCE MAJEURE If either party to this contract shall fail to perform any obligation hereby imposed upon it and such failure shall be caused, or materially contributed to by acts of God, strikes, lockouts, or other industrial disturbances in the operation of Seller or Buyer or Buyer's customers, acts of enemies of the State, sabotage, war, blockades, insurrections, riots, epidemics, landslides, lightning, earthquakes, floods, storms, fires, washouts, arrests and restraints of rulers and people, civil disturbances, explosions, breakage or accident to machinery or lines of pipe, hydrate obstructions of line of pipe, temporary failure of gas supply, freezing of wells or delivery facilities, well blowouts, craterings, inability to obtain pipe, materials or equipment, lack of market, the order of any court or governmental authority, or by any act or omission which is occasioned by any event or occurrence of the character described in this Article as constituting force majeure, or by the necessity for making repairs to or reconditioning wells, a gas processing plant, machinery, equipment, or pipelines, not resulting from the fault or negligence of such party, or by any other cause, whether of the kind herein -33- enumerated or otherwise, all such causes being beyond the control of the party invoking this Article and being such that by the exercise of due diligence such party could not have prevented, such failure shall not give rise to any cause of action based on breach of the obligation to such party hereunder, but such party shall use reasonable diligence to put itself again in a position to carry out its obligations hereunder. Nothing contained herein shall be construed to require either party to settle a strike or lockout by acceding against its judgment to the demands of opposing parties. No such cause affecting the performance of this contract by either party shall continue to avoid a cause of action after the expiration of a reasonable period of time within which by the use of due diligence such party could have remedied the situation preventing its performance, nor shall any such cause relieve either party from its obligation to make payment for amounts then due hereunder for gas already delivered, nor shall any such cause avoid a cause of action unless such party shall give notice of such cause in writing to the other party with reasonable promptness; and like notice shall be given upon termination of such cause. For purposes of determining the occurrence of performance of obligations under this agreement, it is mutually agreed that, during a period of force majeure the party affected shall be deemed to have performed all of its -34- obligations as if it had delivered or purchased the gas required to be delivered or purchased during said period. ARTICLE XIV. MISCELLANEOUS SECTION 1 - REGULATORY JURISDICTION. This contract is subject to all valid legislation and to all valid present and future orders, rules and regulations of duly constituted authorities having jurisdiction. SECTION 2 - ASSIGNMENT. This contract shall bind and inure to the benefit of the parties hereto, their successors and assigns, and shall constitute a covenant running with the land and leasehold estates covered hereby. Buyer shall not be considered as notified of any transfer by Seller of any interest in the leases, wells, or property referred to on Schedule "A" hereof until Buyer shall have been furnished with the original or certified copy of such conveyance or transfer evidencing such transfer or an abstract of title to said property showing such transfer of interest, and the effective date of such transfer shall be considered to be the first day of the month following the day Buyer receives such evidence of transfer. SECTION 3 - EASEMENTS. Seller hereby grants and assigns to Buyer all requisite easements and rights-of-way over, across and under any of the land covered hereby that Seller has the right so to do under the terms of its Oil and Gas Lease covering such lands, and the right to perform thereon any acts necessary or convenient in carrying out the terms of this Contract and Buyer's obligations hereunder. -35- SECTION 4 - TITLES. The numbering and titling of particular provisions of this contract is for the purpose of facilitating administration and shall not be construed as having any substantive effect on the terms of this contract SECTION 5 - INTERPRETATION. The terms of this contract shall be construed according to the laws of the State of Montana. SECTION 6 - SEVERABILITY. The various articles, sections, provisions and clauses of this contract are severable. The invalidity of any portion hereof shall not affect the validity of any other portion of, nor the entire contract. SECTION 7 - COUNTERPART EXECUTION. This Agreement may be signed in counterpart, no one of which need be signed by all parties hereto. IN WITNESS WHEREOF, this instrument is executed as of the day and dates as noted below: "BUYER" ATTEST: THE MONTANA POWER COMPANY /s/ ILLEGIBLE BY: /s/ David A. Johnson - ----------------------------- ------------------------------------ Vice President DATE: December 12, 1985 ---------------------------------- "SELLER" GATEWAY ENERGY CORPORATION --------------------------------------- ATTEST: /s/ Ronald L. Groom BY: /s/ Alan R. Ramer - ----------------------------- ------------------------------------ DATE: December 10, 1985 ---------------------------------- -36- SCHEDULE "A" (Part of the Gas Purchase Contract dated December 1, 1985, between The Montana Power Company, as Buyer, and Gateway Energy Corporation as Seller.) DESCRIPTION OF SELLER'S LANDS Seller dedicates to the performance of this contract 100 percent of Seller's interest in the natural gas produced, purchased or otherwise obtained from the following described lands: SELLER'S DESCRIPTION INTEREST - ----------- -------- T32N - R1W - ---------- Sections 4 through 9 - All 100% Sections 16 through 19 - All 100% T32N - R2W - ---------- Sections 1 through 12 - All 100% Sections 15 through 22 - All 100% Sections 25 through 36 - All 100% T33N - R1W - ---------- Sections 2 through 11 - All 100% Sections 14 through 22 - All 100% Sections 28 through 33 - All 100% T33N - R2W - ---------- Sections 12 through 14 - All 100% Sections 22 through 29 - All 100% Sections 31 through 36 - All 100% 230212 -37- [LETTERHEAD] July 1, 1986 Mr. Alan R. Ramer Gateway Energy Corporation P.O. Box 524 Englewood, CO 80151 Re: Gas Purchase Contract Dated December 1, 1985; MPC No. 156 (Contract) Dear Mr. Ramer: The Montana Power Company (hereinafter referred to as "Buyer") and Gateway Energy Corporation (hereinafter referred to as "Seller") entered into the above mentioned contract which provides for the sale and purchase of natural gas from lands located in the State of Montana. Buyer has requested that Seller amend the Contract to move the delivery point. Buyer has also requested that Seller construct the transmission line necessary to facilitate this move of the delivery point. Seller has requested that Buyer assign its rights in certain easements or rights of way that cross the interstate highway in Toole County, Montana. The following proposed amendments are intended to accommodate these requests. RECITALS 1. Seller intends to sell certain quantities of natural gas produced from lands located in the State of Montana to Buyer under the terms and conditions of the Gas Purchase Contract dated December 1, 1985 (Contract). 2. Buyer intends to purchase certain quantities of this natural gas from Seller under the terms and conditions of the Contract. 3. Buyer and Seller intend to modify the existing delivery provisions in the Contract to allow Buyer's meter installation to be located in a location that is accessible all year. Seller agrees to install the transmission pipeline necessary to facilitate this change in the delivery point. Seller further agrees that this section of transmission pipeline will be constructed in accordance with Buyer's transmission MPC No. 156 (Contract) July 1, 1986 Page 2 system specifications. Buyer and Seller agree that once this section of transmission pipeline is completed it will become the property of the Buyer. 4. Buyer has agreed to assign to Seller its rights in certain easements or rights of way that cross the interstate highway in Section 3 of Township 32 North, Range 2 West in Toole County, Montana. 5. The Contract must be amended to accomplish this intent. AGREEMENT In consideration of the promises and covenants stated in this Letter Agreement, Seller and Buyer agree to amend the Contract and to perform as follows: 1. ARTICLE IV. DELIVERY a. Delete Section 2 and replace it with the following: SECTION 2 - DELIVERY POINT. Delivery of natural gas hereunder shall be at a mutually agreeable single point on Buyer's transmission line in the SE SE SE of Section 19, Township 33 North, Range 1 West, Toole County, Montana. This delivery point is adjacent to the Bronken Road. Additional delivery points may be used upon the written agreement of the parties hereto. b. Add the following Section 5: SECTION 5 - CONSTRUCTION OF ADDITIONAL TRANSMISSION LINE. Seller agrees to construct an additional section of transmission line between the original delivery point in the NE NE of Section 20, T33N, R1W to the delivery point stated in Article IV, Section 2 hereof. Seller agrees that this line will be constructed to Buyer's specifications and that Buyer has the right to inspect said line. When completed, this section of transmission line will become the property of the Buyer. Buyer agrees that Buyer will be responsible for the operation and maintenance of this section of transmission line after said line becomes the property of the Buyer. MPC No. 156 (Contract) July 1, 1986 Page 3 2. ARTICLE XIV. MISCELLANEOUS Add the following Section 8: SECTION 8 - ASSIGNMENT OF INTERSTATE HIGHWAY CROSSING. Buyer hereby agrees to assign to Seller all of Buyer's rights in certain easements or rights of way, hereinafter referred to as "Buyer's Easement," and described as follows: From St. Paul Oil Co. to Hope Engineering (Montana Power successor in interest) crossing the N 1/2 NW 1/4 of Section 3, Township 32 North, Range 2W, recorded Book 13, Page 141 records of Toole County, Montana. The assignment of easement is attached hereto. These Contract amendments will become effective on July 1, 1986. Please signify your acceptance in the space provided below and return the "Montana Copy" to John Smith's attention. THE MONTANA P0WER COMPANY By /s/ David A. Johnson -------------------------------- Vice President, Gas Operations AGREED TO AND ACCEPTED: Gateway Energy Corporation By: /s/ Alan R. Ramer ------------------------ Title: President ------------------------ Date: 8/7/86 ------------------------ [LETTERHEAD] November 19, 1987 CERTIFIED MAIL Mr. Alan R. Ramer Gateway Energy Corporation P.O. Box 524 Englewood, CO 80151 W.C. #156 Dear Mr. Ramer: Please refer to that certain Gas Purchase Contract dated December 1, 1985 as amended, (hereinafter referred to as the "Contract") between The Montana Power Company (hereinafter referred to as "Buyer") and Gateway Energy Corporation (hereinafter referred to as "Seller"). Buyer and Seller have agreed to amend the Price Section and the Schedule A of the Contract as the result of a price renegotiation that is effective on January 1, 1988. AGREEMENT In consideration of the representations and promises stated in this Letter Agreement, Buyer and Seller agree to amend the Contract effective January 1, 1988 as follows: 1. ARTICLE V. PRICE Delete Section 1 and replace it with the following: SECTION 1: The price to be paid by Buyer to Seller for gas delivered to Buyer at the delivery points or for take-or-pay payments shall be two dollars and ten cents ($2.10) per Mcf with no escalation. No adjustments to this price will be made to provide for reimbursement of production-related taxes or any other costs. Gateway Energy Corporation GPC Dated December 1, 1985 2. SCHEDULE A. Add the following lands to the Contract Schedule A. TOWNSHIP 33 NORTH, RANGE 3 WEST Sections 25 through 27 Sections 34 through 36 Toole County, Montana TOWNSHIP 32 NORTH, RANGE 3 WEST Sections 1 through 3 Sections lO through 15 Sections 22 through 27 Toole County, Montana These Contract amendments will become effective January 1, 1988. Please signify your acceptance by signing in the space provided below and return the "Montana Copy" to John Smith. THE MONTANA POWER COMPANY /s/ David A. Johnson --------------------------------- Vice President Gas Operations AGREED TO AND ACCEPTED: GATEWAY ENERGY CORPORATION BY: /s/ Alan R. Ramer ----------------------- TITLE: President ----------------------- DATE: December 3, 1987 ----------------------- [LETTERHEAD] December 1, 1988 CERTIFIED MAIL Mr. Alan R. Ramer Gateway Energy Corporation P. O. Box 524 Englewood, CO 80151 Re: W. C. #156 Dear Mr. Ramer: Please refer to that certain Gas Purchase Contract dated December 1 1985 as amended, (hereinafter referred to as the "Contract") between The Montana Power Company (hereinafter referred to as "Buyer") and Gateway Energy Corporation (hereinafter referred to as "Seller"). Buyer and Seller have agreed to amend the Schedule A of the Contract effective on December 1, 1988. AGREEMENT In consideration of the representations and promises stated in this Letter Agreement, Buyer and Seller agree to amend the Contract effective December 1, 1988 as follows: SCHEDULE A. Add the following lands to the Contract Schedule A. TOWNSHIP 33 NORTH, RANGE 2 WEST S.E. Qtr. of Section 1 This Contract amendment will become effective December 1, 1988. Please signify your acceptance by signing in the space provided below and return the "Montana Copy" to John Smith. THE MONTANA POWER COMPANY /s/ David A. Johnson --------------------------------- Vice President, Natural Gas Utility AGREED TO AND ACCEPTED: GATEWAY ENERGY CORPORATION BY: /s/ Alan R. Ramer ----------------------- TITLE: President ----------------------- DATE: December 14, 1988 ----------------------- [LETTERHEAD] July 30, 1992 Mr. Alan Ramer Gateway Energy Corporation 5568 Willow Springs Drive Morrison, CO 80465 Dear Mr. Ramer: Please refer to that certain Gas Purchase Contract dated December 1, 1985 as amended, (hereinafter referred to as the "Contract") between The Montana Power Company Buyer and Gateway Energy Corporation (hereinafter referred to as "Seller"), to which Great Falls Gas Company (hereinafter referred to as "Buyer") has become the successor in the Buyer's interest. Buyer and Seller have agreed to amend the Price Section of the Contract effective on June 1,1992. AGREEMENT In consideration of the representations and promises stated in this Letter Agreement, Buyer and Seller agree to amend the Contract effective June 1,1992 as follows: 1. ARTICLE V. PRICE Delete Section 1 and replace it with the following: SECTION 1: The price to be paid by Buyer to Seller for gas delivered to Buyer at the delivery points or for take-or-pay payments shall be one dollar and ninety cents ($1.90) per Mcf with no escalation. No adjustments to this price will be made to provide for reimbursement of production~related taxes or any other costs. Price renegotiation shall be conducted as per Article V, Section 5 hereof. 2. SCHEDULE A. Add the following lands to the Contract Schedule A. TOWNSHIP 32 NORTH, RANGE 2 WEST Section 14: W/2 23: W/2, SE/4, S/2 NE/4 24: S/2, S/2 N/2 The addition of these lands to Schedule A can be used to maintain the current (as of 1 /1/92) Annual Contract Quantity (ACQ) or the Daily Contract Quantity (DCQ). The addition of these lands to Schedule A will not increase (prior to 1/1/94) the Annual Contract Quantity (ACQ) or the Daily Contract Quantity (DCQ) from those levels present on 1/1/92. This Contract amendment will become effective June 1, 1992. The effective date (June 1, 1992) of this amendment in no way alters or affects other dates or schedules contained in the Contract. Please signify your acceptance by signing in the space provided below and return both copies to Doug Mann. GREAT FALLS GAS COMPANY BY /s/ Larry D. Geske ------------------- President and CEO DATE: 8/6/92 ----------------- AGREED TO AND ACCEPTED: GATEWAY ENERGY CORPORATION BY: /s/ Alan R. Ramer ------------------- TITLE: President ----------------- DATE: July 31, 1992 ----------------- ASSIGNMENT, CONVEYANCE AND BILL OF SALE GATEWAY GATHERING FACILITY THIS ASSIGNMENT, CONVEYANCE AND BILL OF SALE (this "Assignment"), dated effective as of January 1, 1993 (the "Effective Time"), is from GATEWAY ENERGY CORPORATION, a Colorado corporation ("Assignor"), and SHELBY GATHERING PARTNERS, a Colorado General Partnership composed of Interenergy Corporation and Nielson & Associates, Inc. ("Assignee"). FOR TEN DOLLARS ($10.00), and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, Assignor hereby transfers, grants, bargains, sells, conveys and assigns to Assignee all of Assignor's rights in the following interests (collectively, the "Interests"): 1. The personal property, fixtures and improvements (the "Gas Gathering Facilities") described in Exhibit "A" including, without limitation, all processing, refining and treatment plants, compression and metering equipment, pipelines and gathering systems, electrical equipment, buildings, machinery, piping, tanks, fencing, valves, tools, and all other equipment, appurtenances, appliances and property of every kind and character, moveable or immovable, located on the Land (as defined hereinafter), appurtenant thereto, or used or obtained in connection therewith. 2. The gas agreements (the "Gas Agreements") described in Exhibit "B". 3. The pipeline easements, surface lease agreements, licenses and permits (the "Pipeline Rights") described in Exhibit "C". 4. The operating licenses, permits and applications and agreements for utilities and related services (the "Other Agreements") described in Exhibit "D". 5. All rights, claims, titles, interests, estates and privileges granted or conferred by the Surface Lease Agreements, Pipeline Easements, Operating Licenses, Utility agreements, Gas Agreements or Gas Processing Facilities, or the Land (as hereinafter defined), or appurtenant thereto, used or obtained in connection therewith, or in any way relating thereto. For purposes of this Assignment, the "Land" shall mean the lands covered by the Surface Lease Agreements and Pipeline Easements described on Exhibit "C" to this Assignment, including the recording information therefor. For a full and complete description of the land, the legal description of the Land contained in the Surface Lease Agreements and Pipeline Easements is hereby incorporated by reference herein as if fully set forth in this Assignment. TO HAVE AND TO HOLD the Interests unto Assignee, its successors and assigns forever. -2- Assignee hereby accepts this assignment, and agrees to assume the obligations of Assignor with respect to the Interests. Assignor also hereby grants and transfers to Assignee, its successors and assigns, to the extent so transferable, the benefit of and the right to enforce the covenants and warranties, if any, which Assignor is entitled to enforce with respect to the Interests against Assignor's predecessors in title to the Interests. Assignor hereby warrants and agrees to defend title to the Interests against all defects, burdens, liens and claims arising by, through and under Assignor, but not otherwise. This Assignment shall not constitute an assignment of any Gas Contract, Utility Agreement, Operating License or other agreement which, by its terms or as a matter of law, is not assignable without the consent of a third party, unless and until such third party shall have consented to such assignment. This Assignment may be executed in any number of counterparts, and each counterpart hereof shall be deemed to be an original instrument, but all such counterparts shall constitute but one Assignment. Assignor and Assignee have each retained a counterpart of this Assignment with complete Exhibits attached. -3- This Assignment shall be binding upon and inure to the benefit of Assignor and Assignee, and their respective successors and assigns. EXECUTED this 24th day of February, 1993, to be effective for all purposes as of the Effective Date. GATEWAY ENERGY CORPORATION WITNESS: Assignor: /s/ Ronald L. Groom By: /s/ Alan R. Ramer - --------------------- --------------------------- Name: Alan R. Ramer ------------------------- Title: President ------------------------ SHELBY GATHERING PARTNERS By: Interenergy Corporation, its Managing General Partner ATTEST: Assignee: /s/ James P. Rode By: /s/ Patrick R. McDonald - --------------------- ------------------------- Secretary Name: Patrick R. McDonald ------------------------- Title: President ------------------------ -4- STATE OF COLORADO ) CITY AND COUNTY OF DENVER ) Before me, the undersiqned, a Notary Public, in and for said County and State on the 24th day of February, 1993, personally appeared Alan R. Ramer to me known to be the identical person who subscribed the name of GATEWAY ENERGY CORPORATION to the foregoing as its President, and acknowledged to me that he executed the same as his free and voluntary act and deed and as the free and voluntary act and deed of such corporation, for the uses and purposes therein set forth. Given under my hand and seal the day and year last above written. /s/ Marie J. Reinhardt ------------------------------ Notary Public My commission expires: 2/19/95 ------- (SEAL) STATE OF COLORADO ) CITY AND COUNTY OF DENVER ) Before me, the undersiqned, a Notary Public, in and for said County and State on the 24th day of February, 1993, personally appeared Patrick R. McDonald to me known to be the identical person who subscribed the name of INTERENERGY CORPORATION, as the Managing General Partner of Shelby Gathering Partners, to the foregoing as its President, and acknowledged to me that he executed the same as his free and voluntary act and deed and as the free and voluntary act and deed of such corporation, as managing general partner, for the uses and purposes therein set forth. Given under my hand and seal the day and year last above written. /s/ Marie J. Reinshardt -------------------------------- Notaty Public My commission expires: 2/19/95 --------- (SEAL) gateway\assignmt.bos revised 2/19/93 -5- EXHIBIT "A" TO ASSIGNMENT, CONVEYANCE AND BILL OF SALE THE GATEWAY PIPELINE FACILITY LOCATED IN TWP 33N, RGES 1W AND 2W, AND TWP 32N, RGES 1W AND 2W, TOOLE COUNTY, MONTANA Compressor facility - building 32' x 24' - 2 Barton recording meters - scrubber 16" x 7' - Superior W-63 compressor with White 6G825 gas 650 HP engine, with 18 1/2 x 9 3/4 x 5 3/4 Cylinders Refrigeration plant Dehydration plant - building 10' x 16' Meterhouses - 30 houses with concrete floors, Barton meters, catalytic heaters, methanol drips with tanks Materials - miscellaneous tubing, fittings, valves and regulators - polyethylene pipe: 2000' of 3", 3000' of 2" Pipeline Right-of-Way Easements, 30 miles, see Exhibit "C" Pipeline - 47,400' 2" polyethylene - 54,100' 3" polyethylene - 32,800' 4" polyethylene - 11,900' 6" polyethylene - 14,800' 3-1/2" steel - 8,000' 3-1/2" prime steel (assigned to Montana Power) Tanks - 3 pipeline drips - pressurized condensate, 210 barrel - water disposal, 25 barrel concrete tank EQUIPMENT EXCLUDED FROM INVENTORY Worthington Cub OF-5HU-3 Compressor package, including 14 1/2, 6 and 5 inch cylinders, Air exchanger, Westinghouse electric motor, and separate circuit breaker panel. EXHIBIT "B" TO ASSIGNMENT, CONVEYANCE AND BILL OF SALE DATED THE 24TH DAY OF FEBRUARY, 1993, BY AND BETWEEN GATEWAY ENERGY CORPORATION, SELLER AND SHELBY GATHERING PARTNERS, BUYER 1. Wellhead Gas Purchase Agreements a. Agreement dated the 1st day of December, 1985, by and between Inland Energy, Seller, and Gateway Energy Corporation, Buyer (i) Amendment dated November 15, 1988 b. Agreement dated the 1st day of December, 1985, by and between Crescent Oil & Gas Corporation, Seller, and Gateway Energy Corporation, Buyer (i) Amendment dated June 6, 1987 (ii) Amendment dated November 15, 1988 (iii) Amendment dated February 10, 1989 c. Agreement dated the 1st day of December, 1985, by and between Frederick Operating Co., Inc., Seller, and Gateway Energy Corporation, Buyer d. Agreement dated the lst day of September, 1987, by and between Branch Oil & Gas, Seller, and Gateway Energy Corporation, Buyer (i) Amendment dated October 2, 1987 (ii) Amendment dated March 1, 1990 e. Agreement dated the 1st day of November, 1987, by and between Cavalier Petroleum, Inc., Seller, and Gateway Energy Corporation, Buyer (i) Amendment dated November 6, 1987 (ii) Amendment dated November 18, 1987 (iii) Amendment dated September 1, 1988 f. Agreement dated the 1st day of January, 1988, by and between CDM Oil & Gas, Seller, and Gateway Energy Corporation, Buyer g. Agreement dated the 1st day of November, 1988, by and between Keesun Partners, a Wyoming partnership, Seller, and Gateway Energy Corporation, Buyer h. Agreement dated the 1st day of September, 1989, by and between Trelexploration Limited, Seller, and Gateway Energy Corporation, Buyer (i) Amendment dated February 19, 1990 (ii) Amendment dated August 18, 1992 i. Agreement dated the 1st day of October, 1989, by and between Keesun Partners, a Wyoming partnership, Seller, and Gateway Energy Corporation, Buyer (i) Amendment dated July 30, 1991 (ii) Amendment dated July 21, 1992 2. Gas Sales Agreement a. Agreement dated the 1st day of December, 1985, by and between Gateway Energy Corporation, Seller, and Montana Power Company, Buyer (i) Amendment dated July 1, 1986, between Montana Power Company, Buyer, and Gateway Energy Corporation, Seller (ii) Amendment dated November 19, 1987, made effective January 1, 1988, between Montana Power Company, Buyer, and Gateway Energy Corporation, Seller (iii) Amendment dated December 1, 1988, between Montana Power Company, Buyer, and Gateway Energy Corporation, Seller (iv) Assignment dated the 1st day of November, 1991, between Montana Power Company, Assignor, and Great Falls Gas Company, Assignee (v) Amendment dated June 1, 1992, between Great Falls Gas Company, Buyer, and Gateway Energy Corporation, Seller EXHIBIT "C" TO ASSIGNMENT, CONVEYANCE AND BILL OF SALE DATED THE 24TH DAY OF FEBRUARY, 1993, BY AND BETWEEN GATEWAY ENERGY CORPORATION, SELLER AND SHELBY GATHERING PARTNERS, BUYER RIGHT-OF-WAY EASEMENTS Toole Co. MT Recording Grantor Date Description Book & Page - ------- ---- ----------- ----------- Leo H. & Wilma Flesch 2/27/91 133N-R2W:Sec. 27 86M/134 SESW, SWSE Howard & James Welker 9/ 7/90 T32N-R2W:Sec. 2 86M/133 Lot 1 Julius & Tom Hasquet 9/ 7/90 T32N-R2W:Sec. 1 86M/132 Lots 1-4 Robert Wolfe, Trustee 9/10/90 T32N-RlW:Sec. 6 86M/131 Lot 4 Robert P. & Juanita 9/23/90 T33N-R2W:Sec. 32 86M/130 Hasquet E/2SE, 33 W/2SW T32N-R2W:Sec. 4 Lot 4 John G. Nesbo 6/18/90 T33N-R2W:Sec. 26 84M/664 SESE Edward O. & Harriet 11/18/88 T32N-RlW:Sec. 5 83M/960 Gagner SW Howard & James Welker 11/10/88 T32N-RlW:Sec. 6 83M/961 S/2NE, SENW T32N-R2W:Sec. 2 SENE Robert Wolfe, Trustee 11/10/88 T32N-RlW:Sec. 6 83M/962 Lot 5 Julius T. Hasquet 11/10/88 T32N-R2W:Sec. 1 84M/11 S/2N/2 John G. Nesbo 12/14/89 T33N-R2W:Sec. 25 86M/137 SW, 26 SESE Howard & James Welker 12/14/89 T33N-R2W:Sec. 35 86M/129 E/2E/2 Edward O. & Harriet 10/20/89 T32N-RlW:Sec. 5 86M/128 Gagner NESW Howard & James Welker 10/20/89 T32N-RlW:Sec. 5 86M/127 S/2NE, NWSE Adolph Ansay & David 11/17/89 T32N-RlW:Sec. 4 86M/125,126 Gronik Lot 4, 5 Lot 1 T33N-RlW:Sec. 32 E/2SE Evelyn Wolfe Kinyon 11/21/89 T33N-RlW:Sec. 32 86M/124 SWNE, W/2SE Donald F. & Frances A. 11/28/88 T33N-R2W:Sec. 12 NE 83M/955 Fischer Leo H. & Wilma Flesch 11/18/88 T33N-R2W:Sec. 12 83M/954 NWSE Cook & Sons Farm 11/19/88 T33N-R2W:Sec. 1 83M/953 SESE Robert Wolfe, Trustee 2/14/89 T32N-RlW:Sec. 6 84M/12 Lots 4, 5 Leo H. & Wilma Flesch 9/30/88 T33N-R2W:Sec. 34 83M/950 SENE Howard & James Welker 10/ 4/88 T33N-R2W:Sec. 34 83M/951,952 E/2SE Leo H. & Wilma Flesch 11/25/88 T33N-R2W:Sec. 13 83M/958 SWNE Ethel M. Benjamin, 11/25/88 T33N-R2W:Sec. 13 83M/957 a widow; and Gary A. - S/2NW Wolfe and Harry Lee Wolfe Flesch Farms, Inc. 11/25/88 T33N-R2W:Sec. 14 83M/956 SENE Ethel Benjamin, 5/20/92 T33N-RlW:Sec. 18 86M/135 a widow; and Gary A. NW/4 Wolfe and Harry Lee Wolfe Allen J. Flesch 7/12/92 T33N-RlW:Sec. 7 86M/136 S/2SW/4 Ethel M. Benjamin, 11/16/87 T33N-R2W:Sec. 24 NE 83M/230 a Widow; and Gary A. Wolfe and Harry Lee Wolfe Leo & Wilma Flesch 10/29/87 T33N-R2W:Sec. 12 SE, 83M/228 13 NE, 23 NWNE Robert P. & Juanita 10/29/87 T32N-R2W:Sec. 4 83M/229 Hasquet Lots 2-4, 5 Lot 1 Chas. G. Houdek, et al 9/15/87 T33N-R2W:Sec. 24 83M/226 NESE John F. & Arlene Lager 10/29/87 T33N-R2W:Sec. 23 83M/227 NENE, 24 N/2NW Chas. G. Houdek, et al 12/ 4/86 T33N-R2W:Sec. 24 82M/815 SE, 25 NE John G. Nesbo 12/ 9/86 T33N-R2W:Sec. 25 SE 82M/816 Douglas Mintenko & 9/21/86 T32N-R2W:Sec. 4 82M/743 Arlene Avery Lot 1, NESE Ethel Benjamin, 8/28/86 T33N-RlW:Sec. 30 82M/745 a widow; and Gary A. NE, W/2 Wolfe and Harry Lee Wolfe John F. & Arlene Lager 8/15/86 T32N-R2W:Sec. 3 82M/746 E/2SE Robert P. & Juanita 9/02/86 T33N-R2W:Sec. 33 82M/748 Hasquet E/2SW, W/2SE T32N-R2W:Sec. 4 W/2E/2, SENW, 9 N/2N/2 Margo Hasquet Trust 9/02/86 T32N-R2W: Sec. 2 82M/744 S/2, 3 Lot 4, 10 E/2NE, 11 E/2NE Howard & James Welker 8/15/86 T33N-R2W:Sec. 34 82M/747 S/2, 35 S/2 T32N-R2W:Sec. 2 E/2NE Howard & James Welker 5/31/85 T33N-R2W:Sec. 34 82M/709 NWSW Leo H. & Wilma Flesch 5/30/85 T33N-R2W:Sec. 27 82M/710 S/2, 34 NWSW, E/2NW State of Montana 9/10/87 T33N-R2W:Sec. 13 83M/231 NWSE, S/2SE State of Montana 10/ 7/86 T33N-R2W:Sec. 36 82M/749 NENE, S/2NE, NESW, S/2SW, NWSE Montana Power Company 7/31/86 T32N-R2W:Sec. 3 NR N/2NW SURFACE LEASE - FOR PLANT Howard & James Welker 9/19/88 T33N-R2W:Sec. 35 82M/643 1 acre in SESE OFF CONVEYANCE OF RIGHT-OF-WAY EASEMENT Gateway Energy Corp. 12/10/88 SE/4, SE/4, S19-T33N-R2W 82M/870 NE/4 and W/2 S20-T33N-R2W EXHIBIT "D" TO ASSIGNMENT, CONVEYANCE AND BILL OF SALE DATED THE 24TH DAY OF FEBRUARY, 1993, BY AND BETWEEN GATEWAY ENERGY CORPORATION, SELLER AND SHELBY GATHERING PARTNERS, BUYER 1. Agreement dated the ______ day of _________ , 19___, between Seller and Keesun pertaining to special gathering fees for recovery of cost of gathering installation, to be executed. [LETTERHEAD] [LOGO] March 8, 1993 Great Falls Gas Company P. O. Box 2229 Great Falls, MT 59403-2229 Attention: Mr. Lynn Hardin RE: Gateway Gathering System Dear Mr. Hardin: On February 24, 1993, Shelby Gathering Partners, a Colorado Partnership composed of Interenergy Corporation, Managing Partner, and Nielson & Associates, Inc., acquired the interest of Gateway Energy Corporation (being a 100% interest) in and to the Gateway Gathering System. The purchase was effective January 1, 1993 and the system will now be operated under the name of Shelby Gathering Partners. This letter shall constitute notice of assignment of any contract between Gateway Energy Corporation and your company to Shelby Gathering Partners, effective January 1, 1993. Any questions concerning system operation should be addressed to: Mr. Bret F. Ketcham, Facilities Superintendent, 210 South Seventh Street, Worland, WY 82401, telephone 307/347-2491, facsimile 307/347-2493. Any questions concerning contract administration matters should be addressed to James P. Rode, Executive Vice President and General Counsel, Interenergy Corporation, P. O. Box 1612, Owensboro, KY 42302-1612. Should you have any questions or comments concerning the above, please do not hesitate to contact us. Sincerely, INTERENERGY CORPORATION By: /s/ James P. Rode ------------------------------ James P. Rode, Executive Vice President and General Counsel JPR:kde [LETTERHEAD] [LOGO] October 21, 1993 Mr. Lynn Hardin ENERGY WEST, INC. One River Park Tower P. O. Box 2229 Great Falls, MT 59403-2229 RE: Delivered Gas Purchase Contract dated December 1, 1985 by and between Gateway Energy Corporation, "Seller" and Montana Power Company, "Buyer", as Amended by Letter Amendment dated July 30, 1992, Subsequently Assigned by the Montana Power Company to Great Falls Gas Company Effective November 1, 1991, and Subsequently Assigned by Gateway Energy Corporation to Shelby Gathering Partners, Effective January 1, 1993 Dear Mr. Hardin: This letter, when signed by the appropriate representative of Energy West, Inc. ("EWI"), formerly known as Great Falls Gas Company, shall constitute a letter amendment to the above captioned agreement currently between Great Falls Gas Company and Interenergy Corporation ("Interenergy") under the following terms and conditions: 1. It is acknowledged by and between the parties hereto as of this amendment that Seller is Shelby Gathering Partners, a Colorado general partnership composed of Interenergy Corporation, Managing Partner, and Nielson & Associates, Inc., and that Buyer is Energy West, Inc.; 2. Insert new Article II, "Quantity of Gas", Section 5, "Base Load": "Notwithstanding anything to the contrary contained herein in this Article II, and subject to the price renegotiation provisions set forth in Article V, Section 5, effective January 1, 1994, it is agreed by and between the parties hereto that the minimum DCQ shall be equal to 1,500 MMBtu per day averaged per month. Seller may deliver to Buyer the DCQ volumes aforesaid from any on-system mainline Mr. Lynn Hardin October 21, 1993 Page 2 Montana Power delivery point, provided that Seller gives Buyer reasonable notice in the event Seller desires to change the delivery points herein. Nothing herein contained shall limit Buyer's ability to make-up deficient take or pay purchase obligations as set forth in Article V of the above captioned Delivered Gas Purchase Contract." 3. Delete in its entirety Section 1 of Article V, "Price", and insert in its place the following: "Section 1. AMOUNT. The price to be paid by the Buyer to the Seller for gas delivered to Buyer at the delivery points or for take or pay payments shall be: a. $2.00 per MMBtu dry. This price will be redetermined at one year intervals, with the first price renegotiation effective October 1, 1994. Price renegotiation shall be conducted as per Article V, Section 5 hereof. No adjustment will be made to this price for reimbursement of production related taxes or any other NGPA Section 110 add-ons." 4. Delete in its entirety Section 5 of Article V, "Price", and insert in its place the following: "Section 5. RENEGOTIATION OF PRICE. Either party shall have the right to demand renegotiation, pursuant to this Article V, between August 1 and September 30, inclusive, prior to the anniversary date of each contract year. Failure to make the demand in writing within the time allowed shall be deemed a waiver of the right to renegotiate. The first price renegotiation hereunder will be effective October 1, 1994." 5. To the extent of any conflicts between the terms and conditions of this letter amendment and the terms and conditions of the above captioned Delivered Gas Purchase Contract and previous amendments thereto, the terms and conditions of this letter amendment shall prevail. Mr. Lynn Hardin October 21, 1993 Page 3 If you are in agreement with the foregoing, please signify your acceptance by returning one fully executed original of this letter amendment to us, retaining the other for your files. Sincerely, INTERENERGY CORPORATION By: /s/ James P. Rode ------------------------------ James P. Rode, Executive Vice President and General Counsel ACCEPTED AND AGREED TO, this 28 day of OCTOBER, 1993 ENERGY WEST, INC. By: Larry S. Geske --------------- Its President; CEO -------------- GAS SALES CONTRACT ------------------ DATE: October 1, 1993 CONTRACT NUMBER: 2-93-10-066 SELLER: Interenergy Resources Corporation BUYER: Energy West, Inc. TRANSPORTER: Montana Power Company EFFECTIVE DATE: October 1, 1993 CONTRACT TERM: October 1, 1993 - September 30, 1998 and year to year thereafter, subject to annual price renegotiation DELIVERY POINT: Into Mainline facilities of Montana Power Company at the following points: MPC / Carway Interenergy / Shelby system Interenergy / Aloe system WBI / Warren CIG / Grizzley NNG / Blaine County #3 UNITS OF MEASUREMENT: One million (1,000,000) Btu, (MMBtu) dry. 1 MMBtu = 1 Decatherm (Dkt) PURCHASE AND SALE OBLIGATION: Firm MAXIMUM DAILY QUANTITY (MDQ): Up to 3,000 MMBtu per day. Minimum Annual Quantity of 2,000 MMBtu per day from November 1 through February 28 of each year. PRICE PER MMBtu: The price per MMBtu (dry) shall be the first issue published during the month of delivery of Canadian Gas Price Reporter "Canadian Natural Gas Supply Prices - Alberta Border Spot Interruptible Avg." price, converted to U.S. dollars, plus $.15. The U.S./Canadian exchange rate to be used to convert to U.S. dollars shall be the exchange rate first published by THE WALL STREET JOURNAL during the month of delivery. Either party hereto shall have the right to demand price renegotiation between August 1 and September 30, inclusive, prior to the Anniversary Date of each contract year. The first Anniversary Date hereunder shall be October 1, 1994. In the event that the parties hereto are unable to agree upon a renegotiated price during the period so specified, then upon 30 days notice following the Anniversary Date of each year, either party may terminate this agreement. NOMINATIONS: Buyer and Buyer's agent shall contact Seller, as needed, by telephone or facsimile, as to Buyer's estimated daily natural gas requirements. BILLING AND PAYMENT: Buyer shall pay Seller on or before two (2) days prior to the end of the month following the month of deliveries via wire transfer to Seller's account. SELLER - NOTICES: Interenergy Resources Corporation 1700 Broadway - Suite 1150 Denver, CO 80290 TELEPHONE: 303/860-8949 FAX: 303/860-9128 PAYMENTS: WIRE TRANSFER INSTRUCTIONS Norwest Bank Denver ABA # 102-00-0076 For credit to: Interenergy Resources Corporation Acct. #101-8169612 BUYER - NOTICES AND INVOICES: Great Falls Gas Company P.O. Box 2229 Great Falls, MT 59403-2229 Attention: Mr. Lynn Hardin TELEPHONE: 406/791-7504 FAX: 406/791-7560 OTHER PROVISIONS: To any given month hereunder, if Seller fails to deliver to Buyer the MDQ as herein provided, or Buyer fails to take the Minimum Annual Quantity as herein provided, then the party so failing to perform shall pay to the performing party $.25 per MMBtu multiplied by the MMBtu's not delivered by Seller or not taken by Buyer in that given month (as the case may be) a liquidated damages for such non-performance. In the event of conflict between the provisions of this cover page and the provisions of the General Terms and Conditions attached hereto, the provisions of this cover page shall prevail. THIS CONTRACT CONSISTS OF TWO SUMMARY PAGES AND THE ATTACHED GENERAL TERMS AND CONDITIONS. ACCEPTED Buyer: Seller: Energy West, Inc. Interenergy Resources Corporation /s/ James P. Rode - ------------------------------ ---------------------------------------- By: /s/ Larry D. Geske By: James P. Rode ------------------------- Its: President & CEO Its: Executive Vice President ------------------------- Date: 10/28/93 Date: 10/20/93 ------------------------- ----------------------------------- Federal Tax I.D. No. 38-2495425 GAS SALES CONTRACT GENERAL TERMS AND CONDITIONS 1. TRANSPORTATION: Seller shall arrange and pay for transportation to the Delivery Point(s) and Buyer shall arrange and pay for transportation subsequent to the Delivery Point(s). Buyer's obligation to purchase and take delivery of Seller's gas, and Seller's obligation to sell and deliver gas to buyer, is on a firm basis. 2. QUANTITIES: If Buyer desires to purchase and receive gas in excess of the Maximum Daily Quantities ("MDQ") listed in the Contract Summary section, then Buyer shall notify Seller of the amount of additional gas required and Seller will, on a best efforts basis, secure the gas and transportation capacity to meet Buyer's requirements. Buyer and Seller must mutually agree to the pricing of such incremental gas and this Contract shall be amended to reflect any price changes and to increase the MDQ. 3. QUALITY: All deliveries made under this Contract are subject to Transporter(s) pipeline specifications and therefore, cannot be regulated, changed or altered in any way, shape or form. Any gas delivered by Seller of a quality which is acceptable for transmission by transporter(s) shall be conclusively deemed to be gas that is acceptable to Buyer. 4. METERS AND COMPUTATION OF VOLUMES SOLD: The unit of measurement of gas delivered to Buyer at the Delivery Point shall be specified in the Contract summary section. The parties agree that the volumes of gas sold to Buyer shall be the volume of gas which Transporter(s) reports to Seller or buyer for Transporter(s) meters installed, maintained and operated by Transporter(s) at the Delivery Point and the parties shall accept the reports of such volumes for all purposes. Seller and Buyer agree that either party may request special meter tests, install check meters and exercise such other rights as allowed under Transporter(s) tariff or transportation service agreement with Seller. 5. BILLING AND PAYMENTS: Transporter(s) shall furnish Seller with monthly statements detailing the volume of gas delivered to Buyer at the Delivery Point(s). Seller shall prepare a statement showing the amount of payment due from buyer directly to Seller, for said gas, based upon the price and one-half (1.5%) per month shall accrue on payments not received by the due date. If any payment has not been received by Seller within thirty (30) days after the date of the statement, the Seller at its option, in addition to all of the other remedies it may have, may at any time cease delivery of gas to Buyer without breach of this Contract until such payment, together with accrued interest, has been paid in full. Seller shall be entitled to reasonable attorney's fees incurred by it in collecting all late payments. 6. FINANCIAL RESPONSIBILITY: (a) It is agreed that if Seller, acting in good faith, shall have any reason to doubt Buyer's financial responsibility, Seller may decline to make delivery under this Agreement except for cash payable on delivery or Letter of Credit acceptable in form and content to Seller. Seller shall so advise Buyer in writing, whereupon buyer shall have the right to satisfy Seller as to Buyer's financial responsibility by providing Letter of Credit or other satisfactory assurance to Seller. If Seller is satisfied, delivery may be resumed hereunder pursuant to the terms provided. Seller may exercise its right under this paragraph at any time and from time to time during the continuation of this Agreement. (b) Buyer hereby grants Seller a security interest in and to (1) the accounts receivable generated by Buyer's resale of the gas; and (2) any proceeds received by Buyer in payment for Buyer's resale of the gas. (c) Buyer hereby assigns to Seller all accounts receivable which are generated from Buyer's resale of the gas to the extent required to pay Seller the purchase price of the gas sold. 7. WARRANTIES: Seller warrants the title to the gas delivered pursuant to the terms of this Contract and warrants that it has the right and lawful authority to sell the same. Seller further warrants that it will indemnify Buyer and save it harmless from suits, actions, debts, accounts, damages, costs, losses and expenses arising from or out of adverse claims of any and all persons to said gas or to royalties, production taxes, license fees or charges thereon. 8. TITLE: Title to gas and risk of loss hereunder shall pass from Seller to Buyer at the Delivery Point(s) and Buyer shall be responsible for the gas after delivery at said point(s). Buyer shall have no responsibility to pay for any gas hereunder until it is actually received at the Delivery Point(s) unless otherwise agreed. 9. LIABILITIES: Seller and Buyer each assume full responsibility for the operation and maintenance of their respective equipment and facilities and each party shall indemnify and hold harmless the other party, its officers, employees and agents from and against any and all claims, suits, causes of action, damages, liability, costs and expenses, including attorney's fees, incurred as a result of or related to the operation and maintenance of such equipment and facilities by the responsible party. 10. DEFAULT: If either party fails to perform under the Contract except a otherwise provided for in the contract, the other party may at its option terminate this Contract. To terminate, the other party shall send written notification stating specific reasons for termination. The party in default shall have thirty-five (35) days to respond and notify the other party of the remedies which will be made to remedy or remove the causes for default. If the party in default does not remedy or indemnify the party giving the notice within thirty (30) days, this contract shall become null and void after the thirty (30) days. Any cancellation will also require Seller to deliver to Buyer any gas for which it paid but did not receive. A waiver by either party of a default in the performance of nay provision of this Contract shall not operate or be construed as a waiver of any future default, whether of a like or different kind. 11. FORCE MAJEURE: Neither party is liable to the other for any failure to perform any provision or obligation to this Contract (except Buyer's obligation to pay for gas previously delivered) if such failure is caused or results directly or indirectly from any act of God; Federal, State or Local legislation or regulation; fires, floods, storms or other natural occurrences; strikes, was or accidents; the unwillingness of any pipeline to accept gas for delivery or any other cause beyond the control of the party failing to perform including, but not limited to, partial, or total failure of gas supply. 12. APPLICABLE LAW AND REGULATIONS: This Contract shall be construed under the laws of the State of Montana. In the event any provision of this Contract is declared to be unlawful by a court of competent jurisdiction, the remainder of this Contract shall remain in full force and effect. This Contract is also subject to al governmental laws, orders, directives, rules and regulations. 13. ASSIGNMENT: The rights or obligations of the parties under this Contract may not be assigned without the written permission of the other party, which permission shall not be unreasonably withheld. This Contract shall bind and inure to the benefit of the parties hereto, and their respective successors and assigns. 14. NOTICE: Any notice required herein shall be deemed to have been properly served upon receipt if telecopied, delivered personally or sent by regular or certified mail to the addresses stated o the face hereof. 15. TAXES: Buyer is responsible for paying any taxes, fees, tariffs and/or charges imposed upon the sale of gas under this Contract, regardless of which party hereto may be required to collect and pay such by law or tariff. If Buyer is exempt from the obligation to pay certain taxes, then Buyer shall provide Seller with documentation establishing that exemption. 16. INSPECTION OF BOOKS AND RECORDS: Each party hereto shall have, at his expense, the right during normal business hours to examine the books and records of the other party to the extent necessary to verify the accuracy of any statement, charge, computation, or demand made upon or pursuant to any of the provisions of this Contract. Any statement shall be final as to both parties unless questioned within ninety (90) days from the date of discovery of any error and in any event within two(2) years from the date of the delivery of such statement. As to information furnished by Transporters, any statement shall be final as of the date set forth in Transporter tariffs. Statements shall be subject to adjustment based upon adjustments made by Transporters. All books or accounts and records of either party relating to this Contract, deliveries of gas hereunder and the amount hereunder, or microfilm or microfiche copies thereof, shall be preserved for a period of at least three (3) years. 17. ENTIRE AGREEMENT: This Contract supersedes, amends and modifies any prior agreements, representations, warranties or contracts between the parties for the purchase and sale of gas and contains all of the agreements of the parties. Any and all prior representations, agreements, warranties or contract shall conclusively be deemed to have been merged herein. This Contract shall not be modified or amended except by a written instrument specifically referencing this Contract which has been executed by the parties hereto. 18. CONFIDENTIALITY: The terms of this agreement, including but not limited to, the price paid for gas, term, volumes and all other material terms of this Contract shall be kept confidential by the parties hereto, except to the extent that the information which must be disclosed to a third party for the purpose of effectuating transportation of the gas or which must be disclosed to regulatory bodies. INTERENERGY CORPORATION [LOGO] P.O. Box 1612 Owensboro, KY 42302-1612 Tel. (502) 926-4185 Fax (502) 683-7786 October 18, 1994 ENERGY WEST, INC. P. O. Box 2229 Great Falls, MT 59403-2229 Attention: Mr. Lynn Hardin RE: Gas Sales Contract #2-93-10-066 dated October 1, 1993 by and between Interenergy Resources Corp. "Seller" and Energy West, Inc. "Buyer" Dear Mr. Hardin: This letter, when signed by the appropriate representative of Energy West, Inc. ("Buyer"), shall constitute a letter amendment to the above referenced Gas Sales Contract between Interenergy Resources Corp. ("Seller") and Buyer, under the following terms and conditions: 1. Delete existing paragraph entitled "MDQ" and insert in its place the following: "Up to 3,000 MMBtu per day. From October 1, 1994 through September 30, 1995 there is no minimum daily quantity. If Montana Power Company designates a "System Stress Day", Buyer has the right to call on 100% of Seller's daily gas delivery available from the Aloe system during the period of November 1, 1994 through February 28, 1995 only." 2. Delete existing paragraph entitled "Price per MMBtu" and insert in its place the following: "Deliveries from the Aloe system shall be priced in U.S. Dollars per MMBtu on a daily basis at the AECO C & N.I.T. Spot Price, Average, as reported in the Canadian Gas Price Reporter, Natural Gas Market Report plus twelve (12) cents. For any other deliveries, the price will be negotiated at the time of sale." ENERGY WEST, INC. October 18, 1994 Page 2 3. Delete existing paragraph entitled "Other Provisions" and insert in its place the following: "If Buyer needs incremental supply on a monthly or daily basis, Buyer agrees to contact Seller to request a quote on providing such incremental supply." 4. In the event of a conflict between the terms and conditions of this letter amendment and the terms and conditions of the above referenced Gas Sales Contract, the terms and conditions of this letter amendment shall prevail. To the extent that the above captioned Gas Sales Contract has not been amended by this letter amendment, same shall be ratified in all particulars. If the foregoing is acceptable, please return one fully executed original of this letter amendment, retaining the other for your records. Interenergy appreciates the opportunity of being of service to Energy West, Inc. Should you have any questions or comments, please do not hesitate to contact me. Very truly yours, INTERENERGY RESOURCES CORP. By: /s/ James P. Rode ----------------------------------- James P. Rode Executive Vice President ACCEPTED AND AGREED TO, this _____ day of _______________, 1994. ENERGY WEST, INC. By: /s/ Larry D. Geske ----------------------------------- Its: President & CEO ------------------------------ INTERENERGY CORPORATION [LOGO] P.O. Box 1612 Owensboro, KY 42302-1612 Tel. (502) 926-4185 Fax (502) 683-7786 January 30, 1995 Mr. Lynn Hardin ENERGY WEST, INC. One River Park Tower P. O. Box 2229 Great Falls, MT 59403-2229 RE: Delivered Gas Purchase Contract dated December 1, 1985 by and between Gateway Energy Corporation, "Seller" and Montana Power Company, "Buyer", Subsequently Assigned to Shelby Gathering Partners, "Seller" and Great Falls Gas Company, Successor in Title to Energy West, Inc. "Buyer" Dear Mr. Hardin: This letter, when signed by the appropriate representative of Energy West, Inc. ("EWI"), formerly known as Great Falls Gas Company, shall constitute a letter amendment to the above captioned Contract currently EWI and Shelby Gathering Partners under the following terms and conditions: 1. It is acknowledged by and between the parties hereto as of this amendment that Seller is Shelby Gathering Partners, a Colorado general partnership composed of Interenergy Corporation, Managing Partner, and Nielson & Associates, Inc., and that Buyer is Energy West, Inc. 2. To the extent that the above captioned Delivered Gas Purchase Contract dated December 1, 1985 is not amended by this Letter Amendment, same is ratified in full in all particulars. Any conflict between the terms of the aforedescribed Delivered Gas Purchase Contract and subsequent amendments (with the exception of this Amendment), the terms and conditions of the aforedescribed Delivered Gas Purchase Contract shall prevail. In the event of any conflict between the terms of the Delivered Gas Purchase Contract and this Letter Amendment, the terms and conditions of this Letter Amendment shall prevail. 3. EFFECTIVE DATE. This amendment shall be effective from October 1, 1994. Mr. Lynn Hardin January 30, 1995 Page 2 4. QUANTITY OF GAS. Effective October 1, 1994, the Daily Contract Quantity ("DCQ") shall equal 839 MMBtu, resulting in an Annual Contract Quantity ("ACQ") of 306,293 MMBtu. Upon thirty (30) days notice to Buyer, Seller shall have the right to request a new production test for purposes of establishing a new DCQ, which may result in a revised ACQ per the above captioned Delivered Gas Purchase Contract. 5. RELEASE FOR VOLUMES NOT TAKEN. Within five (5) days prior to the beginning of the month, Buyer shall provide written notice to Seller if Buyer anticipates not taking gas during the upcoming month. Buyer agrees to allow Seller to sell gas to third parties during periods where Buyer is not taking gas. Buyer accordingly releases Seller on a temporary basis to accomplish these sales. 6. PRICE PER MMBtu. $1.85 per MMBtu. 7. DELIVERY POINT. At the interconnection between Seller's facilities and the Montana Power Company's transmission line in Toole County, Montana, or other mutually agreeable delivery points. 8. RENEGOTIATION OF PRICE. Either party shall have the right to demand renegotiation pursuant to Article V of the above captioned Delivered Gas Purchase Contract between August 1 and September 30, inclusive, prior to the anniversary date of each contract year. Failure to make the demand in writing within the time allowed shall be deemed a waiver of the right to renegotiate. The first price renegotiation hereunder will be effective October 1, 1995. 9. Pursuant to a Letter Amendment dated October 21, 1993 and effective January 1, 1994, to the above captioned Delivered Gas Purchase Contract, the DCQ was amended to 1,500 MMBtu per day. Through September 30, 1994, Buyer accumulated a purchase deficiency of take or pay purchases of approximately 60,000 MMBtu. As further consideration of the price to be paid by Buyer to Seller for the term herein set forth, Seller does Mr. Lynn Hardin January 30, 1995 Page 3 hereby forever waive the purchase deficiency accumulated under said Letter Amendment dated October 21, 1993. Sincerely, INTERENERGY CORPORATION By: /s/ James P. Rode ----------------------------------- James P. Rode, Executive Vice President and General Counsel ACCEPTED AND AGREED TO, this ____ day of _________________, 1995 ENERGY WEST, INC. By: /s/ Larry D. Geske ------------------------------ Its ------------------------------ INTERENERGY CORPORATION [LOGO] P.O. Box 1612 Owensboro, KY 42302-1612 Tel. (502) 926-4185 Fax (502) 683-7786 August 30, 1995 ENERGY WEST, INC. P. O. Box 2229 Great Falls, MT 59403-2229 Attention: Mr. Lynn Hardin RE: Letter Amendment to that certain Natural Gas Supply Contract by and between Cody Gas Company, as Buyer, and Interenergy Resources Corporation, as Seller, dated May 1, 1995 Gentlemen: Please accept this letter (Letter Amendment) as amending the above-named agreement. Specifically, the parties agree to amend said agreement as follows: 1. For the period April 1, 1996 through October 31, 1996, Seller agrees to sell and deliver and Buyer agrees to purchase and receive five hundred thousand (500,000) MMBtu, ratably over said seven (7) month period. 2. In consideration therefor, Buyer agrees to prepay Seller an amount equal to $695,000.00, which, on an MMBtu basis, shall be comprised of $1.00 gas commodity charge, and $.39 charge for transportation, storage and fuel. Said payment shall be made in three equal installments which shall be due on or before August 31, 1995, September 30, 1995 and October 31, 1995. 3. In the event Buyer does not receive from Seller, for reasons other than force majeure that are within the control of Buyer, at least 71,400 MMBtu during any month during the above mentioned seven month period, the parties shall meet in an effort to negotiate a revised repayment schedule. Notwithstanding the foregoing, Seller is obligated hereunder to supply 71,400 MMBTU per month each month of the seven month period. All other provisions set out in the May 1, 1995 Agreement not in conflict with this Letter Agreement shall remain in full force and effect. ENERGY WEST, INC. August 30, 1995 Page 2 If the above reflects accurately your understanding of the transaction contemplated, please so indicate by executing in the space provided below and return one copy of this Letter Agreement to the undersigned. Very truly yours, INTERENERGY RESOURCES CORPORATION By: /s/ James P. Rode ----------------------------------- James P. Rode Executive Vice President AGREED AND ACCEPTED, this ____ day of August, 1995. ENERGY WEST, INC. By: /s/ Larry D. Geske ------------------------------ Title: President ---------------------------- INTERENERGY CORPORATION [LOGO] P.O. Box 1612 Owensboro, KY 42302-1612 Tel. (502) 926-4185 Fax (502) 683-7786 October 3, 1995 Mr. Lynn Hardin ENERGY WEST, INC. One River Park Tower P. O. Box 2229 Great Falls, MT 59403-2229 RE: Delivered Gas Purchase Contract dated December 1, 1985 by and between Gateway Energy Corporation, "Seller" and Montana Power Company, "Buyer", Subsequently Assigned to Shelby Gathering Partners, "Seller" and Great Falls Gas Company, Successor in Title to Energy West, Inc. "Buyer" Dear Lynn: This will confirm our understanding that the above captioned agreement shall remain in full force and effect on a month to month basis until either Energy West or Shelby Gathering Partners notifies the other of its desire to negotiate a long-term price or to arbitrate per the terms of the Agreement. The price for the month of October for gas delivered from Shelby Gathering Partners' Shelby System in Toole County, Montana, shall be $1.30 per MMBtu. If you are in agreement, please return one fully executed version of this letter agreement to me, retaining the other for your files. Sincerely, INTERENERGY CORPORATION By: /s/ James P. Rode ----------------------------------- James P. Rode, Executive Vice President and General Counsel ACCEPTED AND AGREED TO, this ____ day of__________________, 1995. ENERGY WEST, INC. By: /s/ Larry D. Geske ------------------------------ It: President & CEO ------------------------- INTERENERGY CORPORATION [LOGO] P.O. Box 1612 Owensboro, KY 42302-1612 Tel. (502) 926-4185 Fax (502) 683-7786 October 31, 1995 Mr. Lynn Hardin ENERGY WEST, INC. One River Park Tower P. O. Box 2229 Great Falls, MT 59403-2229 RE: Delivered Gas Purchase Contract dated December 1, 1985 by and between Gateway Energy Corporation, "Seller" and Montana Power Company, "Buyer", Subsequently Assigned to Shelby Gathering Partners, "Seller" and Great Falls Gas Company, Successor in Title to Energy West, Inc. "Buyer" Dear Lynn: This will confirm our understanding that the above captioned agreement shall remain in full force and effect on a month to month basis until either Energy West or Shelby Gathering Partners notifies the other of its desire to negotiate a long-term price or to arbitrate per the terms of the Agreement. The price for the month of November for gas delivered from Shelby Gathering Partners' Shelby System in Toole County, Montana, shall be $1.60 per MMBtu. If you are in agreement, please return one fully executed version of this letter agreement to me, retaining the other for your files. Sincerely, INTERENERGY CORPORATION By: /s/ James P. Rode ----------------------------------- James P. Rode, Executive Vice President and General Counsel ACCEPTED AND AGREED TO, this ____ day of _________________, 1995. ENERGY WEST, INC. By: /s/ Larry D. Geske ------------------------------ Its: President & CEO ------------------------- INTERENERGY CORPORATION [LOGO] P.O. Box 1612 Owensboro, KY 42302-1612 Tel. (502) 926-4185 Fax (502) 683-7786 December 21, 1995 Mr. Lynn Hardin ENERGY WEST, INC. One River Park Tower P. O. Box 2229 Great Falls, MT 59403-2229 RE: Delivered Gas Purchase Contract dated December 1, 1985 by and between Gateway Energy Corporation, "Seller" and Montana Power Company, "Buyer", Subsequently Assigned to Shelby Gathering Partners, "Seller" and Great Falls Gas Company, Successor in Title to Energy West, Inc. "Buyer" Dear Lynn: This will confirm our understanding that the above captioned agreement shall remain in full force and effect on a month to month basis until either Energy West or Shelby Gathering Partners notifies the other of its desire to negotiate a long-term price or to arbitrate per the terms of the Agreement. The price for the period of January 1, 1996 through March 31, 1996 for gas delivered from Shelby Gathering Partners' Shelby System in Toole County, Montana, shall be $1.80 per MMBtu. If you are in agreement, please return one fully executed version of this letter agreement to me, retaining the other for your files. Sincerely, INTERENERGY CORPORATION By: /s/ James P. Rode ----------------------------------- James P. Rode, Executive Vice President and General Counsel ACCEPTED AND AGREED TO, this ____ day of _________________, 1995. ENERGY WEST, INC. By: /s/ Larry D. Geske ------------------------------ Its: President & CEO ------------------------- INTERENERGY CORPORATION Post Office Box 1612 Owensboro, Kentucky 42302-1612 [LOGO] 502 926-4185 502 683-7786 Fax April 25, 1996 Mr. Lynn Hardin ENERGY WEST, INC. One River Park Tower P. O. Box 2229 Great Falls, MT 59403-2229 RE: Delivered Gas Purchase Contract dated December 1, 1985 by and between Gateway Energy Corporation, "Seller" and Montana Power Company, "Buyer", Subsequently Assigned to Shelby Gathering Partners, "Seller" and Great Falls Gas Company, Successor in Title to Energy West, Inc. "Buyer" Dear Lynn: This will confirm our understanding that the price to be paid pursuant to the above captioned agreement for the period of May 1, 1996 through September 30, 1996 for gas delivered from Shelby Gathering Partners' Shelby System in Toole County, Montana, shall be $1.60 per MMBtu. Energy West agrees to take the balance of the ACQ during this period. If you are in agreement, please return one fully executed version of this letter agreement to me, retaining the other for your files. Sincerely, INTERENERGY CORPORATION By: /s/ James P. Rode, (KDE) ----------------------------------- James P. Rode, Executive Vice President and General Counsel ACCEPTED AND AGREED TO, this 2 day of May, 1996. ENERGY WEST, INC. By: /s/ Larry D. Geske ----------------------------------- Its President & CEO ------------------------------ INTERENERGY CORPORATION Post Office Box 1612 Owensboro, Kentucky 42302-1612 [LOGO] 502 926-4185 502 683-7786 Fax January 29, 1997 Mr. Lynn Hardin ENERGY WEST, INC. One River Park Tower P. O. Box 2229 Great Falls, MT 59403-2229 RE: Delivered Gas Purchase Contract dated December 1, 1985 by and between Gateway Energy Corporation, "Seller" and Montana Power Company, "Buyer", Subsequently Assigned to Shelby Gathering Partners, "Seller" and Great Falls Gas Company, Successor in Title to Energy West, Inc. "Buyer" Dear Lynn: This will confirm our understanding that the price to be paid pursuant to the above captioned agreement for the period beginning January 1, 1997 through December 31, 1997 for gas delivered from Shelby Gathering Partners' Shelby System in Toole County, Montana, shall be $1.75 per MMBtu. Buyer shall purchase 100% of Seller's deliverability from January 1, 1997 through May 31, 1997 and from October 1, 1997 through December 31, 1997 in satisfaction of the ACQ for the year. To the extent of any inconsistencies between the above captioned Contract and this letter agreement, the terms and conditions of this letter agreement shall prevail. If you are in agreement, please return one fully executed version of this letter agreement to me, retaining the other for your files. Sincerely, INTERENERGY CORPORATION By: /s/ James P. Rode ----------------------------------- James P. Rode, Executive Vice President and General Counsel ACCEPTED AND AGREED TO, this ____ day of ________________, 1997. ENERGY WEST, INC. By: /s/ Larry D. Geske ----------------------------------- Its President & CEO ------------------------------ INTERENERGY CORPORATION 1700 Broadway, Suite 1150 Denver, Colorado 80290-1101 [LOGO] 303 860-8949 303 860-9128 Fax April 11, 1997 ENERGY WEST, INC. a/k/a Great Falls Gas Company One River Park Tower P. O. Box 2229 Great Falls, MT 59403-2229 Attention: Mr. Lynn Hardin RE: Shelby Gathering Partners Dear Lynn: Effective March 1, 1997, Shelby Gathering Partners sold the Shelby Natural Gas Gathering System and associated assets to T&O, LLC. The following is a list of names and addresses of various contact people in the T&O organization with which you will be dealing in the future: T&O, LLC 4455 E. Camelback, Suite E-160 Phoenix, AZ 85018 602/912-9006 602/9124840 (FAX) Attn: Charles Taylor, President Pursuant to that certain Delivered Gas Purchase Contract dated December 1,1985 by and between Gateway Energy Corporation, "Seller", and the Montana Power Company, "Buyer", subsequently assigned to Great Falls Gas Company as Buyer and Shelby Gathering Partners as Seller, specifically Article XIV, Section 2 - "Assignment", enclosed herewith please find an original or certified copy of the conveyance document transferring the assets of Shelby Gathering Partners to T&O, LLC. Should you have any questions regarding this acquisition and future operations, please contact T&O, LLC. Very truly yours, SHELBY GATHERING PARTNERS, by Interenergy Corporation, Managing Partner By: /s/ Joseph L. Schmid ----------------------------------- Its Vice President ----------------------------------- EXHIBIT "A" TO THAT CERTAIN ASSET PURCHASE AGREEMENT BY AND BETWEEN SHELBY GATHERING PARTNERS, A COLORADO GENERAL PARTNERSHIP, INTERENERGY CORPORATION, MANAGING PARTNER, "SELLER", AND T&O, LLC, "BUYER" I. GAS SALES AGREEMENT 1. Agreement dated December 1, 1985 by and between Gateway Energy Corporation, "Seller" and Montana Power Company, "Buyer", subsequently assigned to Shelby Gathering Partners, "Seller" and Great Falls Gas Company, Successor in Title to Energy West, Inc. "Buyer", and as most recently amended by Amendment dated January 29, 1997. II. WELLHEAD GAS PURCHASE AGREEMENTS 1. Agreement dated December 1, 1985 by and between Inland Energy, "Seller", and Gateway Energy Corporation, "Buyer" 2. Agreement dated December 1, 1985 by and between Crescent Oil & Gas Corporation, "Seller", and Gateway Energy Corporation, "Buyer" 3. Agreement dated December 1, 1985 by and between Frederick Operating Co., Inc., "Seller", and Gateway Energy Corporation, "Buyer" 4. Agreement dated September 1, 1987 by and between Branch Oil & Gas, "Seller", and Gateway Energy Corporation, "Buyer" 5. Agreement dated November 1, 1987 by and between Cavalier Petroleum, Inc., "Seller", and Gateway Energy Corporation, "Buyer" 6. Agreement dated January 1, 1988 by and between CDM Oil & Gas, "Seller", and Gateway Energy Corporation, "Buyer" 7. Agreement dated November 1, 1988 by and between Keesun Partners, a Wyoming partnership, "Seller", and Gateway Energy Corporation, "Buyer" 8. Agreement dated September 1, 1989 by and between Trelexploration Limited, "Seller", and Gateway Energy Corporation, "Buyer" 9. Agreement dated October 1, 1989 by and between Keesun Partners, a Wyoming partnership, "Seller", and Gateway Energy Corporation, "Buyer" - 13 - III. FACILITY DATA - SHELBY GATHERING SYSTEM PLANT EQUIPMENT: Dew Point Control Unit Glycol Dehydration Unit COMPRESSORS:
Unit# Location Compressor Engine BHP Cylinders - ----- -------- ---------- ------ --- --------- 1 Sales Superior W-64 Superior 6G-825 650 (1)5.75x6(1)9.75x6 2 Gathering Gardner RLC Ford 300 50 (1)18.50x6 --- Total: 700
PIPELINE EQUIPMENT: Type Size Miles - ---- ---- ----- Gathering Steel 3" 3 Poly 6" 2 Poly 4" 8 Poly 3" 13 Poly 2" 8 -- Total 34 THROUGHPUT CAPACITY: 2,000 Mcf per day (Sales Compression Limitation) CATHODIC: Yes SALES GAS DELIVERY PIPELINE: Montana Power Company DELIVERY INTERCONNECT LOCATION: SEC19-T33N-R1W - 14 - METER STATIONS: Master: 2 Gathering: 38 Fuel 1 -- Total: 41 DEHYDRATORS: 1 PIG LAUNCHERS/RECEIVERS: 0 VEHICLES: 0 NUMBER OF WELLS: 38 - 15 - EXHIBIT B GENERAL CONVEYANCE KNOW ALL MEN BY THESE PRESENTS: THAT, the undersigned, SHELBY GATHERING PARTNERS, a Colorado general partnership, Interenergy Corporation, Managing Partner, with an address at 1700 Broadway - Suite 1150, Denver, CO 80290, (herein "Assignor") for and in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt of which is hereby acknowledged, does hereby sell, assign, transfer and convey unto T&O, LLC, (herein "Assignee"), with an address of 4455 E. Camelback, Suite E-160, Phoenix, AZ 85018, all of Assignor's right, title and interest in and to the following properties, assets, contracts and other rights, both real and personal, all of which together are herein called the "Assets": a. All of the right, title and interest in and to that certain Shelby Gas Gathering System and Gas Processing Facility, located in Toole County, Montana (the "System"), together with all improvements, equipment, equipment leases, easements, permits, licenses, servitude, rights-of-way, surface leases and other surface rights used in connection with the System, all as more particularly described on Exhibit "A"; b. All files, books, records, papers, and instruments, including all of the Seller's counterparts of all conveyed contracts, all documents of title relating to the Assets, blueprints, specifications, plats, maps, surveys, accounting and financial records and sales and property tax records directly related to the System; c. To the extent transferable, all licenses, certificates, approvals, registrations, variances, exemptions, rights-of-way, privileges, immunities, grants, permits, franchises, consents, authorizations or other rights of every kind and character held by Seller and directly related to the ownership or operation of the Assets; and, d. All other or additional privileges, rights, interests, properties, contracts, agreements and assets of the Seller of every kind and description and located upon the Assets that are used or intended for use in connection with the continued conduct of the Assets as presently being conducted. - 16 - This Assignment is made expressly subject to and in accordance with the terms and conditions of that certain Asset Purchase Agreement between Assignor and Assignee, dated March 25, 1997 (the "Agreement") and all covenants, indemnities and obligations of the parties under the Agreement shall survive the execution and delivery of this Assignment strictly in accordance, and only in accordance with the terms of the Agreement, it being expressly understood that any and all representations or warranties of the parties contained in the Agreement are terminated, extinguished and of no further force or effect upon the delivery of this Assignment except to the extent expressly stated as surviving the delivery of this Assignment. By acceptance hereof, Assignee agrees to take and receive the Assets in accordance with the Agreement, including, without limitation all assumptions of liabilities contained therein. ASSIGNOR IS MAKING NO REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, BEYOND THOSE EXPRESSLY GIVEN HEREIN, AND IT IS UNDERSTOOD THAT WITH RESPECT TO EQUIPMENT AND PERSONAL PROPERTY COMPRISING PORTIONS OF THE ASSETS, ASSIGNEE SHALL TAKE THOSE "AS IS" AND "WHERE IS," WITH ALL FAULTS. WITHOUT LIMITING THE GENERALITY OF THE IMMEDIATELY FOREGOING, ASSIGNOR HEREBY (I) EXPRESSLY DISCLAIMS AND NEGATES ANY REPRESENTATION OR WARRANTY, EXPRESSED OR IMPLIED, AT COMMON LAW, BY STATUTE OR OTHERWISE, RELATING TO (A) THE CONDITION OF THE SYSTEM (INCLUDING WITHOUT LIMITATION ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS) (B) THE ENVIRONMENTAL CONDITION OF ANY OF THE ASSETS, (C) TITLE TO ANY OF THE ASSETS, OR (D) ANY INFRINGEMENT BY ASSIGNOR OR ANY OF ITS AFFILIATES OF ANY PATENT OR PROPRIETARY RIGHT OF ANY THIRD PARTY; AND (II) NEGATES ANY RIGHTS UNDER STATUTES TO CLAIM DIMINUTION OF CONSIDERATION AND ANY CLAIMS FOR DAMAGES BECAUSE OF HIDDEN OR LATENT DEFECTS, WHETHER KNOWN OR UNKNOWN, IT BEING THE INTENTION OF ASSIGNOR AND ASSIGNEE THAT THOSE PROPERTIES ARE TO BE ACCEPTED BY ASSIGNEE IN THEIR PRESENT CONDITION AND STATE OF REPAIR. All of the provisions of this Assignment shall be available to and binding upon the respective successors and assigns of Assignor and Assignee herein. Assignor hereby warrants title to the Assets against all lawful claims of persons claiming by, through, or under Assignor, but not otherwise. EXECUTED this 25th day of March, 1997, but effective for all purposes as of 7:00 a.m., MST on March 1, 1997. - 17 - ASSIGNOR: SHELBY GATHERING PARTNERS, a Colorado general partnership, Interenergy Corporation, Managing Partner By: /s/ Joseph L. Schmid ----------------------------------- Joseph L. Schmid Vice President ASSIGNEE: T&O, LLC By: /s/ Charles Taylor ----------------------------------- Name: Charles Taylor --------------------------------- Title: President --------------------------------- This is a true and correct copy of the original. /s/ Janice C. Hoft 4/11/97 - ---------------------------------------- Notary Public My Commission Expires 12-24-97 - 18 - THE STATE OF COLORADO ) -------- ) COUNTY OF DENVER ) ------ The foregoing instrument was acknowledged before me this 25th day of March, 1997, by Joseph Schmid, the Vice President of SHELBY GATHERING PARTNERS, a Colorado general partnership, Interenergy Corporation, Managing Partner. Witness my Hand and Official Seal. My Commission expires: My Commission Expires 12-24-97 ----------------------------------- /s/ Janice C. Hoft ---------------------------------------- Notary Public THE STATE OF ARIZONA ) ------- ) COUNTY OF MARICOPA ) -------- The foregoing instrument was acknowledged before me this 25th day of March, 1997, by Charles Taylor, the President of T&O, LLC. Witness my Hand and Official Seal. My Commission expires: 8/19/2000 --------------- [NOTARY SEAL] /s/ Meredith A. Lightcap ---------------------------------------- Notary Public - 19 - EX-10.8 11 EXH 10.8 : NATURAL GAS SALE & PURCHASE AGREEMENT NATURAL GAS SALE AND PURCHASE AGREEMENT BETWEEN: SHELL CANADA LIMITED, A Canadian Corporation with head office in Calgary, Alberta, Canada. (hereinafter referred to as "Seller") and GREAT FALLS GAS COMPANY, A Montana Corporation with head offices in Great Falls, Montana USA (hereinafter referred to as "Buyer") INDEX ARTICLE PAGE I Interpretation. . . . . . . . . . . . . . . . . . . . . . . . 1 II Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . 4 III Delivery and Ownership. . . . . . . . . . . . . . . . . . . . 5 IV Gas Specifications and Measurement. . . . . . . . . . . . . . 5 V Contract Volumes. . . . . . . . . . . . . . . . . . . . . . . 6 VI Term and Price. . . . . . . . . . . . . . . . . . . . . . . . 8 VII Payment . . . . . . . . . . . . . . . . . . . . . . . . . . .12 VIII Force Majeure . . . . . . . . . . . . . . . . . . . . . . . .15 IX Covenants, Warranties and Indemnities by Seller . . . . . . .18 X Arbitration . . . . . . . . . . . . . . . . . . . . . . . . .19 XI Default and Remedies. . . . . . . . . . . . . . . . . . . . .21 XI General Provisions. . . . . . . . . . . . . . . . . . . . . .22 NATURAL GAS SALE AND PURCHASE AGREEMENT This Agreement dated the 20th day of July, 1992 is made between: SHELL CANADA LIMITED, A Canadian Corporation with head office in Calgary, Alberta, Canada. (hereinafter referred to as "Seller") and GREAT FALLS GAS COMPANY, A Montana Corporation with head offices in Great Falls, Montana USA (hereinafter referred to as "Buyer") WHEREAS, Seller has available for sale certain supplies of natural gas, and Seller desires to sell and deliver to Buyer such natural gas supplies in the quantities and under the terms and conditions hereinafter provided; and WHEREAS, Buyer and it's subsidiaries desire to receive and purchase such natural gas in the quantities and under the terms and conditions hereinafter provided; NOW THEREFORE, in consideration of the premises and mutual covenants and agreements herein set forth, Seller and Buyer contract and agree as follows: ARTICLE I - INTERPRETATION 1.01 DEFINITIONS As used in this Agreement: (a) "ANNUAL CONTRACT QUANTITY" OR "ACQ" means the volume obtained when multiplying the number of Days in the Contract Year by the Maximum Daily Quantity in effect for that Contract Year; (b) "BUSINESS DAY" means all calendar days excluding: (i) Saturdays and Sundays; (ii) All statutory holidays under the laws of Alberta, Montana, Canada or the United States of America; and, - 2 - (iii) All calendar days on which the head office of Seller or Buyer is not open for business, provided however that all such calendar days during each calendar year shall be identified by notice from Seller to Buyer and vice versa on or before February 15 of the calendar year in question; (c) "BRITISH THERMAL UNIT" OR "BTU" means the amount of heat required to raise the temperature of one (1) pound of water from fifty-nine degrees Fahrenheit (59 DEG F) to sixty degrees Fahrenheit (60 DEG F) at a constant pressure of fourteen and seventy-three hundredths pounds per square inch absolute (14.73) psia). Total BTU's shall be determined by multiplying the total volume of Gas delivered times the Gas Heating Value expressed in BTU's per cubic foot of Gas adjusted on a dry basis; (d) "MAXIMUM DAILY QUANTITY" or "MDQ" means the specified volume of Gas which Buyer contracts to purchase each Day under this Agreement as set out in section 5.02 herein, or as otherwise provided in this Agreement; (e) "DAY" means a period of 24 consecutive hours, beginning and ending at 0800 hours MST; (f) "DELIVERY POINT" has the meaning as set forth in section 3.01; (g) "INTERRUPTIBLE DAILY QUANTITY" or "IDQ" means the specified volume of Gas which Buyer may purchase on an interruptible basis, as set forth in section 5.06; (h) "Mcf" means the quantity of Gas occupying a volume of one thousand (1,000) cubic feet at a temperature of sixty degrees Fahrenheit (60 DEG F) and at a pressure of fourteen and seventy-three hundredths pounds per square inch absolute (14.73 psia); (i) "MONTH" means a period beginning at 0800 hours MST on the first Day of a calendar month and ending 0800 hours MST on the first Day of the next succeeding calendar month; (j) "GAS" means natural gas and or residue gas comprised primarily of methane; (k) "NOVA" means Nova Corporation of Alberta or any successor thereof; (1) "PARTY" means a party to this Agreement; (m) "YEAR" or "CONTRACT YEAR" means a period of 12 consecutive months commencing on November 1, 1992 and on each subsequent anniversary thereof; - 3 - (n) "HEATING VALUE" means the quantity of heat, measured in Btu, produced by combustion in air of one (1) cubic foot of anhydrous Gas at a temperature of sixty degrees Fahrenheit (60 DEG F) and a constant pressure of fourteen and seventy-three hundredths pounds per square inch absolute (14.73 psia), the air being at the same temperature and pressure as the Gas, after the products of combustion are cooled to the initial temperature of the Gas and air, and after condensation of the water formed by combustion; (o) "CANADIAN REGULATORY AUTHORITIES" means the federal, provincial or local governmental agencies or other authorities in Canada, which have jurisdiction over the sale, export or transportation of Gas or other matters in question, including, without limitation, the National Energy Board of Canada ("NEB"), the Energy Resources Conservation Board of Alberta ("ERCB"), the Alberta Petroleum Marketing Commission ("APMC"), and the federal and provincial Governors-in-Council; and, (p) "U.S. REGULATORY AUTHORITIES" means the federal, state or local government agencies or other authorities in the United States of America which have jurisdiction over the sale, import, transportation of Gas or other matters in question, including, without limitation, the Office of Fossil Fuels of the United States Department of Energy ("OFE"), the Federal Energy Regulatory Commission ("FERC") and the Montana Department of Public Service Regulation ("PSR"). 1.02 CUSTOM In this Agreement, words, phrases or expressions which are not defined herein, and which, in the usage or custom of the business of the exploration, production, transportation, distribution or sale of Gas, have an accepted meaning, shall have that meaning. 1.03 SCHEDULES Any and all schedules appended hereto shall constitute part of, and be incorporated into this Agreement. 1.04 CURRENCY All conversions from Canadian currency to currency of the United States or vice-versa, shall be done by the parties using the average Bank of Canada posted noon spot exchange rates for the conversion of Canadian funds into United States funds or vice-versa, as quoted for the calendar month in which the transaction occurred. - 4 - ARTICLE II - CONDITIONS 2.01 CONDITIONS PRECEDENT This Agreement is subject to the satisfaction of the following conditions precedent on terms and conditions satisfactory to the Party, acting reasonably, entering into or obtaining same: (a) Seller entering into firm, non-interruptible transportation agreements with NOVA and Seller and NOVA obtaining all necessary certificates, permits, licenses and authorizations from Canadian Regulatory Authorities for the transactions contemplated by this Agreement, including without limitation, the sale and removal of the Maximum Daily Quantity from Alberta, the export of the Maximum Daily Quantity from Canada and the firm, non-interruptible transportation of the Maximum Daily Quantity in Canada from Seller's facilities through the facilities of NOVA; (b) Buyer entering into firm, non-interruptible transportation agreements with Montana Power Company and Buyer and Montana Power Company obtaining all necessary certificates, permits licenses and authorizations from U.S. Regulatory Authorities for the transactions contemplated by this Agreement for the full term of this Agreement, including without limitation, the purchase and importation of the Maximum Daily Quantity from Canada and for the firm, non-interruptible transportation of the Maximum Daily Quantity in the United States through the facilities of Montana Power Company. 2.02 FULFILLING CONDITIONS (a) If by October 15, 1992, any condition precedent referred to in section 2.01 has not been satisfied, or with respect to subsection 2.01(a) waived by written notice provided by Seller or with respect to subsection 2.01(b) waived by written notice provided by Buyer then either Party may thereafter, at any time, provide written notice to the other Party of its election to terminate this Agreement and unless such conditions precedent are so satisfied or waived within ninety (90) Days after the receipt of such notice, this Agreement shall thereupon terminate. (b) Both Buyer and Seller shall act with due diligence and exercise all reasonable efforts to fulfill all such conditions precedent. (c) Buyer and Seller shall notify each other forthwith in writing upon the conditions precedent in section 2.01 having been met. (d) Seller and Buyer shall cooperate with each other so as to assist each other in fulfilling the conditions precedent set forth in section 2.01 in order that the delivery of Gas hereunder may commence on a timely basis. - 5 - ARTICLE III - DELIVERY AND OWNERSHIP 3.01 DELIVERY POINT The Delivery Point for all Gas delivered hereunder shall be that point on the Canada/United States of America border at the interconnection of the pipeline systems of NOVA and Montana Power Company near Carway, Alberta. 3.02 TITLE AND POSSESSION Property in and title to the Gas and all risk of loss respecting all Gas delivered hereunder shall pass from Seller to Buyer and shall vest in Buyer at the Delivery Point. As between Seller and Buyer, until delivery of the Gas at the Delivery Point, Seller shall be deemed to be in control and possession of the Gas and shall be responsible for all costs, losses, damages, injuries to persons or property or liabilities arising from or out of Seller's title, possession, custody or control of Gas hereunder prior to title to the Gas passing to Buyer at the Delivery Point. As between Seller and Buyer, after delivery of the Gas at the Delivery Point, Buyer shall be deemed to be in control and possession of the Gas and shall be responsible for all costs, losses, damages, injuries to persons or property or liabilities arising from or out of Buyer's title, possession, custody or control of Gas hereunder after title to the Gas passes to Buyer at the Delivery Point. 3.03 ROYALTIES AND TAXES Seller shall pay or cause to be paid and shall be solely responsible for all royalties, overriding royalties and payments out of production, together with all applicable federal, provincial, municipal and local taxes, levies or surcharges imposed by authorities that are applicable on Gas delivered hereunder before title to such Gas passes to Buyer at the Delivery Point. Buyer shall be solely responsible for the above enumerated payments, taxes, levies or surcharges that are applicable on Gas delivered hereunder when and after title to such Gas passes to Buyer at the Delivery Point. ARTICLE IV - GAS SPECIFICATIONS & MEASUREMENT 4.01 GAS SPECIFICATIONS Buyer and Seller each agree that Gas delivered hereunder will be in a commingled stream and shall be at the pressure and meet or exceed the minimum quality specifications required by NOVA and Montana Power Company. - 6 - 4.02 MEASUREMENT It is understood and agreed that neither Buyer nor Seller owns or operates measuring and testing equipment at the Delivery Point. Therefore, all Gas delivered to Buyer hereunder shall be measured at the Delivery Point as to volume and Heating value by Montana Power Company, in accordance with its filed and approved tariffs and standard Industry practice. All such measurements made (including all correction thereof) shall be final and binding upon Seller and Buyer as to the Gas delivered under this Agreement. Seller or Buyer may at their sole cost, risk and expense witness such measuring and the testing of measuring equipment if they so desire. ARTICLE V - CONTRACT VOLUMES 5.01 SUPPLY COMMITMENT Subject to Article VIII, Force Majeure, Seller has, or shall have and shall maintain at all times throughout the term of this Agreement, sufficient Gas reserves and deliverability with respect to the delivery of Gas to the Delivery Point, so as to enable Seller to meet its obligations hereunder. 5.02 MAXIMUM DAILY QUANTITY The Maximum Daily Quantity shall be equal to 5,000 MMBtu/day (140 10(3)m(3)/d). On each Day during the term of this Agreement, Buyer may nominate its Gas requirement and Seller shall be obligated to deliver the amount so nominated by Buyer up to the MDQ. 5.03 CATEGORIES OF GAS The quantities of Gas to be purchased by Buyer hereunder shall consist of Tier I Gas and Tier II Gas which shall bear different prices as set forth in Article VI below. 5.04 TIER I GAS Commencing with each Contract Year, Buyer will purchase the initial sixty-five percent (65%) of the ACQ ("Tier I Gas") at the then applicable price for Tier I Gas, as set forth in section 6.02 herein. If and when the Tier I Gas is taken by Buyer, the remainder of gas taken by Buyer in that Contract Year will be Tier II Gas. 5.05 TIER II GAS Commencing with the completion of the Tier I Gas Volume (defined as the product of the MDQ and the number of Days in the Contract Year multiplied by 0.65), all Gas taken thereafter by Buyer in that Contract Year will be Tier II Gas. - 7 - 5.06 INTERRUPTIBLE DAILY QUANTITY ("IDQ") On any Day Buyer may request, over and above the MDQ, up to an additional 5,000 MMBtu/day (140 10(3)m(3)/d) and subject to agreement upon price, Seller shall endeavor, on an interruptible basis, to supply the difference between the IDQ and the MDQ. The price for the volume of gas that is the difference between the IDQ and the MDQ shall be established on a monthly basis by negotiation between Buyer and Seller. 5.07 GAS TAKE LEVELS If, during any Contract Year, Buyer does not purchase at least eighty percent (80%) of the then applicable ACQ, a "Shortfall Year" will exist. The difference between eighty percent (80%) of the then applicable ACQ and the amount actually taken by the Buyer will be the "Shortfall Amount". Within ninety (90) Days of the commencement of the Contract Year following the end of the Shortfall Year (the "Make-up Year"), Seller may elect to provide notice to Buyer stating the Shortfall Amount and the proportionate reduction in the ACQ and MDQ that will be in effect at the commencement of the Contract Year following the Make-up Year. Subject to the limitation created by the MDQ and ACQ applicable during the Make-up Year, buyer may elect to avoid all or part of this reduction by first purchasing eighty percent (80%) of the applicable ACQ in the Make-up Year and then purchasing all or a portion of the Shortfall Amount prior to the end of the Make-up Year. The Commodity Charge for the Shortfall Amount will be the applicable rate (depending upon whether the Shortfall Amount being purchased represents Tier I Gas or Tier II Gas) in effect during the Make-up Year. The ACQ and MDQ in the Contract Year following the Make-up Year will be proportionately reduced by the remaining Shortfall Amount, unpurchased, if any, at the end of the Make-up Year. 5.08 NOMINATIONS Buyer or Buyer's nominee shall nominate to Seller or Seller's nominee, by written telecommunication each and every Day by 1200 hours MST, Buyer's daily requirements for Gas for the following Day. Failure to so nominate to Seller shall cause continuation of the last received nomination. 5.09 FAILURE TO TAKE NOMINATION In the event that Buyer nominates quantities and Seller delivers such quantities into the NOVA pipeline system and Buyer is unable or unwilling for whatever reason to take delivery of such quantities at the Delivery Point, then Buyer shall pay the price calculated on a per MMBtu on a 100% Load Factor basis for such volumes so nominated and delivered to NOVA, including the actual associated transportation and inventory penalty incurred by Seller for such quantities of Gas, provided that Seller makes reasonable efforts to mitigate such transportation penalties. - 8 - 5.10 FAILURE TO DELIVER If Seller is unable to meet Buyer's nomination, Seller shall promptly notify Buyer of Seller's inability to deliver Gas, whether or not such inability covers all or part of Buyer's nomination. Seller shall use its reasonable efforts to obtain and supply from other sources the volumes of Gas that Seller is obligated but unable to deliver to Buyer at the Delivery Point ("Replacement Gas"). Seller shall endeavor to arrange for delivery of Replacement Gas, to the Delivery Point on the same Day at a price which shall not exceed the delivered cost to Buyer of Gas that Seller was obligated to deliver in accordance with Buyer's nomination ("Buyer's Cost of Gas"). Notwithstanding the foregoing, if Seller is unable to deliver Replacement Gas hereunder, Buyer may purchase Replacement Gas and Seller shall reimburse Buyer for any unabsorbed demand charges incurred on the Montana Power Company system and the price of Replacement Gas, in excess of the price hereunder, that Buyer is required to pay to any other producer or local distribution company as a result of Seller's failure to deliver Gas nominated by Buyer, adjusted for transportation, if applicable. Buyer shall make reasonable efforts to mitigate the cost of Replacement Gas. Seller's sole liability and Buyer's sole remedy with respect to Seller's failure to supply Gas shall be limited to such cost of Replacement Gas. In no event shall Seller, it's directors, trustees, agents, officers or employees be liable to Buyer, it's directors, trustees, agents, officers or employees for any incidental, special, indirect or consequential damages of any nature including without limitation any claims of customers of Buyer, connected with or resulting from Seller's failure to supply Gas under this Agreement. ARTICLE VI - TERM AND PRICE 6.01 TERM (a) Subject to the satisfaction or waiver of the conditions precedent set forth in section 2.01, deliveries of Gas under this Agreement shall commence on November 1, 1992 ("Commencement Date") and shall except as otherwise specifically provided for herein continue for a term of fifteen (15) Contract Years after November 1, 1992. (b) The Term of the Agreement shall consist of three (3) segments of five (5) Contract Year periods as follows: Segment 1 November 1, 1992 - October 31, 1997; Segment 2 November 1, 1997 - October 31, 2002; Segment 3 November 1, 2002 - October 31, 2007. (c) Unless either Party gives notice to the other Party at least twenty-seven (27) Months prior to the end of Segment 1 specifying its intention to terminate this Agreement at the end of Segment 1 the term shall continue into Segment 2. - 9 - (d) Anytime on or after August 1, 1995, either Party may give notice to the other Party of at least twenty-seven (27) Months to terminate this Agreement prior to the end of the Term. 6.02 PRICE The Price to be paid by Buyer to Seller for Gas purchased and sold and the service provided hereunder for the period of time commencing with the Commencement Date will consist of the sum of the four (4) components identified hereunder. The Price will be in U.S. dollars. (a) Each Month, Buyer shall pay Seller a "Demand Charge" equal to Seller's actual cost for that Month of reserving the firm transportation required to transport the MDQ on NOVA to the Delivery Point. (b) Each Month, Buyer shall pay Seller a "Reservation Charge" equal to the product of the MDQ times the number of days in the Month times the Reservation Charge. The Reservation Charge for the first two years of this Agreement shall be $0.06 U.S./MMBtu. (c) Each Month, Buyer shall pay Seller for each MMBtu of Tier I Gas delivered and received at the Delivery Point, a "Commodity Charge" equal to a per MMBtu price fixed for at least one year by agreement of the Parties in advance. The Commodity Charge for Tier I Gas for the first two Years of this Agreement shall be $1.31 U.S./MMBtu on a dry basis. (d) Commencing with the completion of Tier I Gas purchases in each Contract Year, the Commodity Charge for Tier II Gas will be negotiated and agreed to by the Parties prior to the end of each previous Month. The Parties will take into consideration the prepaid Demand Charge when arriving at the Commodity Charge for the following month. Failing agreement by the Parties, the Commodity Charge for the applicable Month will equal the price published by NATURAL GAS WEEK in their Canadian Price Report Section, under the Empress Border - Contract Subsection. In the event that such price is no longer published or such publication is no longer published then, failing agreement by the parties, the Commodity Charge or a method of determining it shall be determined by arbitration pursuant to Article X hereof. The prepaid Demand Charge will be subtracted from the published price to arrive at the Commodity Charge. Each Month Buyer shall pay Seller for each MMBtu of Tier II Gas delivered and received at the Delivery Point, the above applicable Commodity Charge. If Buyer elects not to take gas during a Tier II Gas Month, Seller will be allowed to sell that gas on an interruptible basis to third party purchasers. The Demand Charge and the Reservation Charge shall be paid each Month regardless of the quantity of Gas purchased and sold hereunder, except to the extent that Seller fails to deliver Gas nominated. - 10 - 6.03 FUTURE PRICE DETERMINATION (a) The Parties agree that they will meet from time to time to negotiate the Tier I Commodity Charge and Reservation Charge components of the Price payable hereunder for subsequent Contract Years. In any such negotiations or resulting arbitration with respect to Price during the Term of this Agreement only the Tier I Commodity Charge and Reservation Charge components of the Price shall be redetermined and the Demand Charge component of the Price shall not be subject to redetermination. (b) Subject to 6.03 (a) The Parties agree, to establish a new Price for the next Contract Year at least one hundred and twenty (120) Days prior to the termination date of the current Contract Year and the Parties will commence procedures for such redetermination no later than one hundred and eighty (180) Days prior to the termination date of the current Contract Year by either Party giving fifteen (15) Days written notice to the other, to meet and negotiate. Such Price, and the various components making up that Price, will be effective for a period of time, as then agreed to, and will become effective on the commencement of the next Contract Year. If neither Party has given written notice to the other to renegotiate at least one hundred and eighty (180) Days prior to the termination date of the current Contract Year, then the Price for the current Contract Year shall continue in effect for the next Contract Year. 6.04 FAILURE TO REACH AGREEMENT ON PRICE In the event that the Parties are unable to reach agreement on the Price, or the Price components at least one hundred and twenty (120) Days prior to the termination date of the current Contract Year, as provided pursuant to section 6.03 herein, either Party may, upon not less than fifteen (15) days written notice to the other Party, have the Price determined pursuant to the Arbitration provisions contained in Article X herein and exclusively in accordance with the principles set forth in section 6.05 herein. Should no notice for Arbitration be given at least ninety (90) days prior to the termination date of the current Contract Year, the Price for the next Contract Year shall continue to be the Price in effect for the current Contract Year. 6.05 PRICING PRINCIPLES For each Contract Year subsequent to the Contract Year for which the Price of Gas to be sold and purchased hereunder has been established and specified, the Parties agree to determine Price by negotiation or by arbitration. If the Price for Gas delivered in any Contract Year is to be determined by arbitration, the arbitrators shall determine a Price that, under the prevailing market circumstances for long term firm Gas Supply and in the opinion of the arbitrators, is fair and reasonable to both Buyer and Seller. In making such determination, the arbitrators shall limit - 11 - their consideration to the evidence which is presented by the Parties, and to the extent that evidence is presented, shall base their determination upon and shall give due consideration to each of the following criteria: (i) The weighted average cost of gas paid by Buyer during the next Contract Year for firm gas supplies with a term of two (2) years or more; (ii) The prices being paid during the next Contract Year for other firm gas supplies by local distribution companies with a term of two (2) years or more in the state of Montana; and, (iii) The prices being paid during the next Contract Year for other firm gas supplies by local distribution companies with a term of two (2) years or more in the province of Alberta; provided that the arbitrators shall consider the above matters in light of the following: (a) To the extent that evidence with respect to Prices for the next Contract Year is not available or is insufficient, prices for the current Contract Year will be considered; (b) The times at which the prices were agreed to between the respective buyers and sellers; (c) Differences in transportation costs relevant to establishing a point of comparison at the Delivery Point; (d) The similarities and dissimilarities between the service provided hereunder and the sales and transportation arrangements under which other gas is being sold for consumption in Buyer's market area and in Alberta, including in particular but not limited to the similarities and dissimilarities between the quality of service and the security of supply provided hereunder and provided under such other arrangements; and, (e) Any other considerations in respect of which relevant evidence is adduced by the Parties and which is relevant to the determination of such matters. In the event that a negotiated or arbitrated Price is determined for a Contract Year after commencement thereof, Seller shall retroactively adjust its invoices to Buyer to the first Day of that Contract Year, to take into account the revised Price. Until a new Price is concluded and retroactively implemented, the previous Price shall remain in effect. If the Price settlement date exceeds sixty (60) Days past the Contract Year commencement, the retroactive invoice shall be adjusted for interest at the prime rate pursuant to section 7.04. - 12 - 6.06 REGULATORY INTERVENTION If Canadian Regulatory Authorities or U.S. Regulatory Authorities take action by rule, order or other official means which materially and fundamentally alters the operation of this Article VI such that Gas cannot be sold and purchased hereunder at a market based price for long term firm Gas supply, then either Buyer or Seller may notify the other Party by the means identified in Article XII hereof of its intention to terminate this Agreement This Agreement shall then terminate in all respects one hundred and eighty (180) days after the provision of such notice unless within such one hundred and eighty (180) day period the regulatory action has been modified or revoked such that the operation of Article VI has been restored. The Parties shall use due diligence and exercise all reasonable efforts to oppose any regulatory action which might trigger the operation of this section 6.06. ARTICLE VII - PAYMENT 7.01 MONTHLY BILLING Once service or deliveries of Gas have commenced hereunder, Seller shall send by facsimile to Buyer on or before the fifteenth (15th) Day of each Month (the "Billing Month") with the original to follow by mail: (a) A statement for the preceding Month showing the daily and total amount of Gas delivered hereunder or, if such information is not available by that Day, an estimate of such daily and total amounts; and, (b) A bill in U.S. dollars with respect to the preceding Month together with information sufficient to explain and support the amount billed. 7.02 PAYMENT DATE Buyer shall pay Seller in U.S. dollars by direct electronic transfer to the account of Seller designated herein, within ten (10) Days of receipt of Seller's bill, the amount due to Seller with regard to Gas sold or reasonably estimated to have been sold hereunder and service provided in the preceding Month in accordance with the provisions of this Agreement as follows: The Chase Manhattan Bank, N.Y. Fedwire #0210-0002-1 Account: 001-1-146305 Bank of Montreal, Montreal For Transfer to: Calgary Main Office For Credit Account: 00109-4604-211 - 13 - In addition, Buyer shall send a copy of payment record by facsimile to Seller. In the event that the tenth (10th) Day after receipt of Seller's bill is not a Business Day, then Buyer shall pay Seller as aforesaid on or before the Business Day immediately before such tenth (10th) Day. If Seller's bill for any Month is based on an estimate of the Gas sold in the previous Month, then the Parties shall make all necessary adjustments in the Month following the billing Month to reflect the actual volumes of Gas Sold. 7.03 EXAMINATION OF RECORDS Subject to the confidentiality provisions of this Agreement, Seller and Buyer shall have the right, at any reasonable time and from time to time during the term of this Agreement, to examine the books, records and accounts of the other to the extent reasonably necessary to verify the accuracy of any statement, billing, computation or procedure made under or pursuant to the provisions of this Agreement. 7.04 REMEDIES FOR NON-PAYMENT (a) Should Buyer fail to pay all of the amount of the bill as herein provided when such amount is due, then commencing on the date such payment is due, late payment charges shall accrue daily on the unpaid part of such bill and be paid at a rate of interest per annum which is equal to the prime rate charged from time to time by The Chase Manhattan Bank of New York for loans to commercial borrowers, plus 1% compounded monthly until paid. All such late payment charges shall be payable on demand by Buyer to Seller. If either principal or late payment interest charges are due, any payments thereafter received shall first be applied to late payment charges due, then to the previously outstanding principal due and lastly, to the most current principal due. (b) In the event of any such failure to pay, Seller may, in addition to any other remedies that it may have under the terms of this Agreement, upon 10 Days written notice via facsimile and courier to Buyer, suspend further delivery of Gas hereunder until such amount is paid. During the period of any such suspension, Buyer shall continue to be liable to Seller for the amounts set forth in section 6.02 with respect to the Reservation Charge and Demand Charge attributable to such suspended deliveries and such suspended deliveries shall not be considered to be a failure by Seller to deliver gas under section 5.10 (c) Notwithstanding the foregoing, if Buyer shall in good faith dispute the amount of any such bill or any part thereof, if Buyer shall pay to Seller such amounts as it concedes to be correct and if Buyer at any time within ten (10) Days after a demand made upon it by Seller for a letter of credit with respect to the amount in dispute shall furnish security by way of a letter of credit in a form reasonably satisfactory to Seller assuring payment to Seller of the amount ultimately found to be due to Seller upon such bill by agreement or - 14 - by a decision of a court of competent jurisdiction, as the case may be, then Seller shall not be entitled to suspend further delivery of Gas hereunder as a result of any such nonpayment unless and until a default occurs in relation to the conditions of any such letter of credit or any renewal thereof. If it is determined that Buyer owes Seller the disputed amount, Buyer shall pay Seller the disputed amount within five (5) Days of the determination thereof. (d) Notwithstanding the provisions of subsection 7.04 (b), if Buyer does not in good faith dispute the payment of the amount of any such bill or any part thereof not paid, Seller, in addition to any other remedies that it may have under the terms of this Agreement, at law or in equity, may on written notice of at least thirty (30) Days, elect to terminate this Agreement. Such notice may only be given after the suspension of Gas deliveries referred to in subsection 7.04 (b) has commenced. 7.05 ADJUSTMENTS Subject to the provisions of section 7.02, if it shall be found that at any time Buyer has been overcharged by Seller in relation to this Agreement and Buyer shall have actually paid the bills containing such overcharge, then within thirty (30) Days after the final determination thereof, Seller shall refund the amount of any such overcharge and if such overcharge was the result of Seller's error, then interest shall be paid by Seller on the amount in question on the same basis as interest is charged under the provisions of section 7.04 from the date the overcharge was paid to the date Buyer is reimbursed for the overcharge. If any such overcharge is not a result of an error on the part of Seller, then no interest shall be charged to Seller. Similarly, if it shall be found that at any time Buyer has been undercharged under the provisions of this Agreement, then within thirty (30) Days after the final determination thereof, Buyer shall pay the amount undercharged. No interest shall be payable by Buyer on the amount of any undercharge unless Buyer shall fail to pay the amount thereof within such thirty (30) Day period, in which event interest shall be calculated and payable thereon on the same basis as is described in section 7.04 from the first Day after such thirty (30) Day period to the date of payment of the undercharge by Buyer. 7.06 EXTENSION OF TIME FOR PAYMENT WHEN BILL DELAYED If presentation of the bill to Buyer is delayed after the fifteenth (15th) Day of the billing Month, then the time of payment shall be extended accordingly unless Buyer is responsible for such delay. 7.07 DISPUTES Notwithstanding anything herein contained to the contrary, neither Party hereto shall be entitled to dispute the volume of Gas delivered, or the amount paid or payable with respect thereto, unless such dispute is raised by notice to the other Party within two years after the end of the Month in question. - 15 - 7.08 CREDIT APPROVAL Upon Seller's request at any time prior to commencement of Gas deliveries or during the Term of this Agreement, Buyer shall provide Seller with evidence satisfactory to Seller of Buyer's ability to perform its financial obligations under this Agreement. If Seller is not so satisfied, Seller may, acting reasonably, having provided Buyer written notice of suspension in accordance with section 7.04(b), suspend deliveries of Gas hereunder. During the period of any such suspension, Buyer shall continue to be liable to Seller for the amounts set forth in section 6.02 with respect to the Reservation Charge and Demand Charge attributable to such suspended deliveries and such suspended deliveries shall not be considered to be a failure by Seller to deliver Gas under section 5.10. Deliveries shall recommence upon Buyer providing to Seller an irrevocable stand-by letter of credit from a banking institution which is satisfactory to Seller. The letter of credit shall be a dollar amount reasonably specified by Seller which will cover the full Price for two (2) Months worth of Gas purchases at the MDQ or such other assurance as is acceptable to Seller. The letter of credit shall provide that it will be automatically renewed every twelve (12) Months unless notice of the issuer's intent to cancel the letter of credit as of any anniversary date of the issuance thereof is received by Seller no later than sixty (60) Days prior to such proposed expiration date. ARTICLE VIII - FORCE MAJEURE 8.01 SUSPENSION Subject to section 8.03 hereof, to the extent that either Party to this Agreement fails to observe or perform any of the covenants or obligations herein imposed upon it and such failure shall have been solely caused by Force Majeure, then such failure shall be deemed not to be a breach of such covenants or obligations and such covenants and obligations to the extent affected by such Force Majeure shall be suspended during the continuance of the event of Force Majeure. 8.02 FORCE MAJEURE (a) For the purposes of this Agreement, the term "Force Majeure" shall mean any acts of God, lightning, earthquakes, storms, strikes, lockouts or other industrial disturbances, acts of the Queen's or country's enemies, sabotage, wars, blockades, insurrections, riots, epidemics, landslides, floods, fires, washouts, arrests and restraints of governments and people, civil disturbances, explosions, breakages of or accidents to machinery or lines of pipe, interruptions in transportation service on any of the pipeline facilities required for delivery of Gas not reasonably within the control of Seller or Buyer, the orders of any court or government authority, agency or tribunal, or any other extraordinary cause, whether of the kind herein enumerated or otherwise, not within the reasonable control of the Party claiming suspension and which, by the exercise of due diligence, such Party could not have prevented or is unable to overcome. - 16 - (b) For the purposes of this Agreement, the term "Force Majeure" shall also mean any action not caused by and beyond the reasonable control of either Party hereto which results in the interruption of deliveries or which prevents totally or partially the exportation of Gas from Canada by Seller or the importation of Gas into the U.S. by Buyer, or its transportation by NOVA or Montana Power Company, provided however, that where the exportation, importation or transportation is only partially prevented by the action, the parties' obligations hereunder shall be suspended only to the extent prevented by such action. 8.03 NO RELIEF (a) Neither Party shall be entitled to the benefit of the provisions of section 8.01 under any of the following circumstances: (i) to the extent that the failure was caused by the negligence or contributory negligence of the Party claiming suspension; (ii) to the extent that the failure was caused by the Party claiming suspension having not made reasonable efforts to remedy the condition and remove the cause or circumstances of Force Majeure in an adequate manner, or having failed to resume with all reasonable dispatch the performance of such covenants or obligations; (iii) if the event of Force Majeure was caused by lack of finances or was related to the payment of any amount or amounts due hereunder; (iv) to the extent that the failure was caused by the insufficiency of Seller's Gas supply as opposed to an event of the nature described in section 8.02; (v) to the extent that the failure was caused by the failure of Buyer or Buyer's market to require Gas; (vi) unless as soon as reasonably possible after the happening of the occurrence relied upon, or as soon as possible after determining that the occurrence was in the nature of Force Majeure and would affect the claiming Party's ability to observe or perform any of its covenants or obligations under this Agreement, the Party claiming suspension shall have given to the other Party hereto notice to the effect that by reason of Force Majeure (the nature whereof shall be therein specified) the claiming Party is unable to perform the particular covenants or obligations. (b) (i) Buyer's obligation to pay the Demand Charge and Reservation Charge as set forth in section 6.02, shall be suspended in the event and to the extent that a claim of Force Majeure by Seller hereunder reduces the quantity of Gas delivered - 17 - hereunder by Seller, however, in the event of a claim of Force Majeure by Buyer hereunder, Buyer's Demand Charge and Reservation Charge payment obligation shall not be suspended but shall remain its responsibility and obligation provided that it shall be reduced to the extent of any reduction in the actual demand charges paid by Seller. (ii) In the event of a claim of Force Majeure hereunder by Seller, Seller shall not be liable for Replacement Gas costs or unabsorbed demand charges as described in section 5.10, provided however, that Seller will use reasonable efforts to locate replacement natural gas supplies for the quantity of Gas not delivered hereunder as a result of Seller's Force Majeure, which replacement natural gas, upon and subject to the negotiation and agreement between Seller and Buyer as to the terms and conditions of the sale thereof from Seller to Buyer, shall be sold and delivered by Seller and purchased by Buyer. (iii) In the event of and during a claim of Force Majeure hereunder by Seller, Buyer shall have the right to locate an alternative supply of gas and direct Seller to use on Buyer's behalf Seller's firm NOVA transportation covered by this Agreement to move such gas, to the extent of any reduction in the quantity of Gas and/or replacement natural gas pursuant to subsection 8.03(b)(ii), delivered by Seller under this Agreement, which reduction results from Seller's Force Majeure. Notwithstanding subsection 8.03(b)(i) hereof, to the extent that Seller uses any such NOVA transportation on Buyer's behalf, Buyer shall pay the Demand Charge relating thereto. 8.04 END OF SUSPENSION The party claiming suspension by reason of Force Majeure shall give notice to the other Party, as soon as possible after the event of Force Majeure shall have been remedied, to the effect that the same has been remedied and that such Party has resumed, or is then in a position to resume, the performance of the suspended covenants or obligations under this Agreement. 8.05 STRIKES OR LOCKOUTS Notwithstanding anything to the contrary in this Article VIII expressed or implied, the settlement of strikes, lockouts and other industrial disturbances shall be entirely within the discretion of the Party involved therein and such Party may make settlement thereof at such time and on such terms and conditions as it may deem to be advisable and no delay in making such settlement shall deprive such Party of the benefit of section 8.01. - 18 - 8.06 LIMITATION ON SUSPENSION OF OBLIGATIONS If at any time during the Term hereof, either Buyer or Seller (the "Party Claiming Force Majeure") has claimed Force Majeure and (i) such Force Majeure remains in effect for at least one hundred and eighty (180) consecutive Days or (ii) such Force Majeure remains in effect for at least thirty (30) consecutive Days during which time such Party fails to deliver or take at least 10% of the Maximum Daily Quantity as a daily average over such thirty (30) day period, then so long as the Force Majeure event is still continuing, the other party hereto may by notice to the Party Claiming Force Majeure, terminate this Agreement effective as of the date of such notice. The Party Claiming Force Majeure shall not manipulate its performance under this Agreement in order to avoid the application of this section 8.06. ARTICLE IX - COVENANTS, WARRANTIES AND INDEMNITIES BY SELLER 9.01 WARRANTIES With respect to the Gas sold hereunder, Seller hereby covenants, warrants and represents to Buyer that: (i) Seller shall at the Delivery Point have good right or title to all Gas delivered hereunder, free and clear of all liens and adverse claims whatsoever, except those being contested in good faith by Seller, and, (ii) Seller shall at the Delivery Point have the right to sell the Gas delivered or tendered for delivery hereunder. 9.02 INDEMNITY Seller shall indemnify Buyer and hereby agrees to save Buyer harmless from and in respect of all suits, actions, debts, accounts, damages, costs, losses and expenses of every nature and kind whatsoever arising from or in connection with any adverse claims of any or all persons to the Gas or to royalties, taxes, license fees or charges thereon, which are applicable before the title to the Gas passes to Buyer at the Delivery Point. In the event that any such adverse claim is prosecuted against Buyer in respect of any of the Gas as aforesaid, Buyer may retain the Price thereof up to the amount of such claim, until such claim has been finally determined, as security for the performance of Seller's obligations hereunder with respect to such claim or until Seller shall have furnished a surety bond or other form of security satisfactory to Buyer in connection with the subject claim. Buyer shall invest any amount withheld from Seller at any short term rate of interest available to the Buyer, acting reasonably, until the amount withheld is released to the Seller, at which time all interest earned thereon shall be paid to Seller. - 19 - 9.03 PAYMENTS BY SELLER Seller shall at all times pay all fees, rentals and royalties due and payments due to all mineral and all royalty owners and all amounts due under all documents, as may appear of record or otherwise to be binding upon Seller, and shall pay all other persons having any interests in the Gas sold and delivered hereunder, which interests arise prior to the Delivery Point. ARTICLE X - ARBITRATION 10.01 PRICING DISPUTES All disputes arising out of or in connection with the determination of the Price for Gas sold hereunder shall be referred to and finally resolved in a manner which shall be final and binding on the Parties hereto, by an arbitration pursuant to the principles outlined herein and subject to the criteria set forth in section 6.05 and pursuant to the International Commercial Arbitration Act, of the Province of Alberta, except to the extent that the provisions of such Act are contrary to the principles outlined herein. 10.02 APPOINTMENT OF ARBITRATORS The Party hereto initiating the arbitration (the "Initiating Party") shall in its written notice of request to arbitrate, which notice shall be sent to the other Party hereto (the "Receiving Party"), name one arbitrator. Within twenty-one (21) Days after receipt of such notice, the Receiving Party shall serve notice on the Initiating Party, which notice shall contain the name of a second arbitrator. 10.03 ARBITRATION BOARD If the Receiving Party fails to name a second arbitrator, then the Initiating Party's arbitrator shall function as a single arbitrator. In the event that both Parties appoint their own arbitrator, the two arbitrators so appointed shall name a third arbitrator, or, if they fail to do so within ten (10) Days of the second arbitrator's appointment, the Parties hereto shall promptly meet and attempt to agree upon and appoint such third arbitrator. If the parties hereto are unable to agree within ten (10) Days on the choice of the third arbitrator, then, on the request of either Party hereto, the third arbitrator shall be appointed by the consulting firm of Stone & Webster Engineering Corporation. If for any reason the third arbitrator is not appointed by the Consulting Firm or otherwise agreed upon by the Parties or the two arbitrators within thirty (30) Days of the second arbitrator's appointment then on the request of either Party hereto the third arbitrator shall be appointed by any Justice of the Court of Queen's Bench of Alberta. - 20 - 10.04 QUALIFICATIONS OF ARBITRATORS The single arbitrator (the "Arbitrator") or the three arbitrators (the "Board") appointed hereunder shall be qualified by education or experience to decide the particular pricing matters in dispute, and shall not be employees or agents of either Party hereto or any of their affiliates. 10.05 PROCEDURE The Arbitrator or the Board shall proceed immediately to hear and determine the pricing question or questions in dispute. The decision of the Arbitrator shall be made within forty-five (45) Days after his or her appointment, subject to any reasonable delay due to unforeseen circumstances. The decision of the Board, or the majority thereof, shall be made within forty-five (45) Days after the appointment of the third arbitrator, subject to any reasonable delay due to unforeseen circumstances. Notwithstanding the foregoing, in the event the Arbitrator fails to make a decision within sixty (60) Days after his or her appointment or if the Board, or the majority thereof, fails to make a decision within sixty (60) Days after the appointment of the third arbitrator then either Party may elect to have a new Arbitrator or Board chosen in like manner as if none had previously been selected. 10.06 BINDING DECISION The decision of the Arbitrator or the decision of the Board, or the majority thereof, shall be drawn up in writing and signed by the Arbitrator or by the Board members, or the majority thereof, and shall adopt the last position put forward in writing by Seller or Buyer in the negotiations preceding the request for arbitration and shall be final and binding upon the Parties hereto as to any pricing question or questions so submitted to arbitration, and the Parties shall be bound by such decision and perform the terms and conditions thereof. 10.07 COMPENSATION OF ARBITRATORS Each Party shall pay the compensation and expenses of the Arbitrator appointed by that Party and the compensation and expenses of the third Arbitrator (unless otherwise determined by the Arbitrator or the Board) shall be paid in equal proportions by Buyer and Seller. 10.08 PLACE OF ARBITRATION The place of arbitration shall be determined by the Arbitrator or the Board. 10.09 PRICING CRITERIA Notwithstanding anything to the contrary contained in this Agreement, in any pricing arbitration the Arbitrator or the Board, as the case may be, shall use the criteria contained in section 6.05 in making a determination of the Price along with such other criteria, if any, as may then be agreed upon by Seller and Buyer and submitted to the Arbitrator or the Board. - 21 - 10.10 OPERATIONS CONTINUED Whenever there is an arbitration proceeding, operations under this Agreement shall continue in the same fashion as they were conducted before the arbitration proceeding was commenced, without prejudice to either Party, pending a decision in the arbitration proceeding. ARTICLE XI - DEFAULT AND REMEDIES 11.01 EVENT OF DEFAULT An Event of Default under this Agreement shall be deemed to exist upon the occurrence of any one or more of the following events: (a) Failure by either Party to make payment of any amounts due to the other Party under this Agreement, and that failure continues for a period of thirty (30) days after written notice of non-payment; or (b) Failure by either Party to perform fully any other material provision of this Agreement, and (i) such failure continues for a period of thirty (30) days after written notice of such non-performance from the other Party is received, or (ii) if within such thirty (30) day period the non-performing Party commences and proceeds with due diligence to cure the failure and the failure is not cured within ninety (90) days after written notice of nonperformance from the other Party is received or such longer period of time agreed to by the Parties in writing as being necessary for the Party to cure the failure with all due diligence; or (c) If by order of a court of competent jurisdiction, a receiver or liquidator or trustee of either Party or of all or any of the property of either Party shall be appointed, and such receiver or liquidator or trustee shall not have been discharged within a period of sixty (60) days after its appointment; or if by decree of such a court, either Party shall be adjudicated bankrupt or insolvent or any substantial part of the property of such Party shall have been sequestered, or such decree shall have continued undischarged and unstayed for a period of sixty (60) days after the entry thereof; or if a petition to declare bankruptcy or to reorganize Buyer or Seller pursuant to any of the provisions of any Canadian or United States federal, provincial or state bankruptcy law shall be filed against such Party and shall not be dismissed within sixty (60) days after such filing; or (d) If either Party shall file a voluntary petition in bankruptcy under any provision of any Canadian or United States federal, provincial or state bankruptcy law or shall consent to the filing of any bankruptcy or reorganization petition against it under any similar law; or if either Party shall make an assignment for the benefit of its creditors; or if either Party - 22 - shall admit in writing its inability to pay its debts generally as they become due; or if either Party shall consent to the appointment of a receiver or receivers, or trustee or trustees, or liquidator or liquidators of it or of all or of any part of its property. 11.02 TERMINATION Upon the occurrence and during the continuance of an Event of Default, the Party not in default shall have the right to terminate this Agreement upon ten (10) days' written notice to the defaulting Party. ARTICLE XII - GENERAL PROVISIONS 12.01 NOTICES Any notice, request, consent, direction, demand, waiver of condition, invoice or other instrument required or permitted to be given under the provisions of this Agreement shall be in writing. Written communications as aforesaid may be given by delivering same in person or by prepaid courier or sending same by facsimile, in each case addressed as follows: TO BUYER: GREAT FALLS GAS COMPANY (i) General P.O. Box 2229 Great Falls, Montana 59403 or, #1 First Avenue South Great Falls, Montana 59401 Attention: Director, Gas Supply and Industrial Marketing Facsimile: (406) 791-7560 Telephone: (406) 791-7504 (ii) Nominations GREAT FALLS GAS COMPANY P.O. Box 2229 Great Falls, Montana 59403 Attention: Director, Gas Supply and Industrial Marketing Facsimile: (406) 791-7560 Telephone: (406) 791-7504 (iii) Billings GREAT FALLS GAS COMPANY P.O. Box 2229 Great Falls, Montana 59403 Attention: Director, Accounting Facsimile: (406) 791-7560 Telephone: (406) 791-5206 - 23 - TO SELLER: SHELL CANADA LIMITED (i) General Natural Gas Business Centre 400 - 4th Avenue S.W. Calgary, Alberta T2P 0J4 Attention: Manager, Direct Marketing Facsimile: (403) 269-7818 Telephone: (403) 691-3189 (ii) Billings 400 - 4th Avenue S.W. Calgary, Alberta T2P 0J4 Attention: Supervisor, Natural Gas Accounting Facsimile: (403) 269-7818 Telephone: (403) 691-4069 (iii) Nominations 400 - 4th Avenue S.W. Calgary, Alberta T2P 0J4 Attention: Operations Analyst Facsimile: (403) 269-7818 Telephone: (403) 691 -3044 or (403) 691-3878 Any written communication as aforesaid, if delivered in person or SENT BY facsimile, shall be deemed to have been given or made on the Business Day on which it was received as aforesaid, and, if delivered by prepaid courier, shall be deemed to have been given or made on the second Business Day following the Day on which it is so received. Any Party may give written notice of change of address in the same manner, in which event any written communication as aforesaid shall thereafter be given to it as above provided at such changed address. 12.02 FURTHER ASSURANCES Each Party shall from time to time and at all times hereafter upon reasonable written request so to do, make, do, execute and deliver, or cause to be made, done, executed and delivered all such further acts, deeds, assurances and things as may be reasonably required for more effectually implementing and carrying out the true intent and meaning of this Agreement. 12.03 MORTGAGES Notwithstanding anything to the contrary contained in this Agreement, either Party shall have the right to mortgage, pledge, hypothecate or otherwise encumber its interest in and to this Agreement as security for its indebtedness to any other person. - 24 - 12.04 WAIVERS Either Party hereto in its sole discretion may waive, without thereby prejudicing such Party's right to rely on any other conditions inserted herein for such Party's sole benefit, a breach or default of any covenant or condition inserted herein for the benefit or protection of such Party. No such waiver, however, shall operate as a waiver of any future breach or default, whether of a like or different character. 12.05 INTERPRETATIONS In the event that Buyer or Seller are in disagreement as to the interpretation to be placed on any term, condition, covenant or agreement contained in this Agreement or the performance or satisfaction thereof by any such Party, or any such Party asserts that the other Party has committed a breach of this Agreement, Buyer or Seller, as the case may be, may give written notice of such disagreement or asserted breach to the other such Party. If Buyer and Seller are unable to settle the controversy or claim within (thirty) 30 Days of the delivery of such notice, the Parties may then agree to submit with all reasonable dispatch, such disagreement or asserted breach to a competent court of law for determination. 12.06 APPLICABLE LAWS This Agreement for all purposes shall be construed in accordance with and governed by the laws of the Province of Alberta. The Courts of the Province of Alberta shall have exclusive jurisdiction in relation to any legal proceedings arising in connection with this Agreement. The Parties hereby expressly and exclusively submit to the jurisdiction of the courts of the said Province. The Parties agree to share equally all travel and hotel expenses incurred in connection with disputes raised under this Agreement. 12.07 INVALIDITY OF PROVISIONS The intention of the Parties to this Agreement is to comply fully with all applicable laws, and this Agreement shall be construed consistently with such laws to the extent possible. If and to the extent that any court of competent jurisdiction determines it is impossible to construe any provision of this Agreement consistently with any applicable law and consequently holds that provision to be invalid, such holding shall in no way affect the validity of the other provisions of this Agreement, which shall remain in full force and effect. - 25 - 12.08 FULL UNDERSTANDING The terms of this Agreement represent the full understanding between the Parties and replaces all other contracts, agreements or representations whether written or oral. No amendments to this Agreement shall be made or be binding on either Party unless made in writing and signed by each Party. 12.09 GENDER AND NUMBER REFERENCES Whenever the singular, masculine or neuter is used in this Agreement the same shall be construed as being the plural or feminine or body corporate or vice versa where the context or reference so require. 12.10 CONFIDENTIALITY All data, documents and information of a confidential nature concerning the business or assets of either Party to this Agreement which is made available or disclosed to either other Party hereto pursuant to the terms of this Agreement (the "Confidential Information"), shall be kept and maintained on a confidential basis by the Party hereto which is the recipient thereof. Each Party hereto shall implement such measures and shall take such precautions as may be reasonably necessary to endeavor to ensure the confidentiality of all Confidential Information. Notwithstanding the foregoing, either Party hereto may, without consultation with or notice to the other Party hereto, from time to time disclose Confidential Information to any court, government, governmental agency, regulatory body or quasijudicial agency ("Regulatory Agency") at any time and from time to time and may thereby cause the Confidential Information to become public if and to the extent that may be required by any Regulatory Agency or the rules, regulations, procedures, requirements or practices of any Regulatory Agency. 12.11 REQUESTS FOR CONSENT Whenever a request is made hereunder by one Party hereto to the other for a consent, approval or authorization, such request shall be deemed to have been refused or declined if it is not granted in writing within thirty (30) Days after the request is made. 12.12 SUCCESSORS AND ASSIGNMENT This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Parties, but no assignment shall release either Party from such Party's obligations hereunder without the written consent of the other Party to such release, which consent shall not be unreasonably withheld. - 26 - IN WITNESS WHEREOF the parties hereto have duly executed and delivered this Agreement as of the Day and year first above written. SHELL CANADA LIMITED GREAT FALLS GAS COMPANY Per: /s/ illegible Per: /s/ Larry D. Geske ------------------------ ------------------------ 92-07-29 8/6/92 Per: Per: ------------------------ ------------------------ [LOGO] [LETTERHEAD] August 23, 1993 VIA COURIER Mr. Lynn Hardin Director, Gas Supply and Industrial Marketing TransEnergy #1 First Avenue South Great Falls, Montana 59401 Dear Mr. Hardin RE: LETTER AGREEMENT FOR THE SHORT TERM AMENDMENT TO SECTION 6.02 OF ARTICLE VI OF THE NATURAL GAS SALE AND PURCHASE AGREEMENT BETWEEN SHELL CANADA LIMITED ("SHELL") AND GREAT FALLS GAS COMPANY ("GFG") DATED JULY 20, 1992 - -------------------------------------------------------------------------------- The parties do hereby agree to temporarily amend the referenced Agreement pursuant to the following terms and conditions: 1. TERM The term of this Letter Agreement shall commence on November 1, 1993 and continue until October 31, 1995. 2. DEMAND CHARGE (6.02 (a)) The Demand Charge component of the Price, as defined in section 6.02 of the referenced Agreement shall not change. The Demand Charge shall be paid each Month regardless of the quantity of Gas purchased and sold hereunder, except to the extent that Shell fails to deliver Gas nominated. 3. RESERVATION CHARGE (6.02(b)) The Reservation Charge component of the Price, as defined in section 6.02 of the referenced Agreement shall be deleted for the term of this Letter Agreement. Page 2 [LOGO] August 23, 1993 4. PRICING ELECTION On or before September 15, 1993, GFG will have the option of choosing a fixed or variable pricing mechanism for each of the four periods pursuant to the following paragraph 5 of this Letter Agreement. 5. COMMODITY CHARGE (6.02(c)) The Commodity Charge component of the Price, as defined in section 6.02 of the referenced Agreement shall be deleted for the term of this Letter Agreement and replaced with the following: (a) For the time period commencing November 1, 1993, for the first 755,000 MMBtus of Gas delivered: (i) A fixed price of $2.10 US dollars per MMBtu, less the Demand Charge on a US dollar per MMBtu basis; or (ii) A rolling three Month "average" of the Canadian Gas Price Reporter mid month index of "Alberta Short-Term Spot Prices at the Alberta Border (Empress)" converted to US dollars per MMBtu plus $0.25 US dollar per MMBtu, less the Demand Charge on a US dollar per MMBtu basis. (b) After the fulfillment of 5(a) hereof, for the balance of the 1993 Contract Year: (i) A fixed price of $ 1.75 US dollar per MMBtu, less the Demand Charge on a US dollar per MMBtu basis; or (ii) A rolling three Month "average" of the Canadian Gas Price Reporter mid month index of "Alberta Short-Term Spot Prices at the Alberta Border (Empress)" converted to US dollars per MMBtu, less the Demand Charge on a US dollar per MMBtu basis. (c) For the time period commencing November 1, 1994, for the first 755,000 MMBtus of Gas delivered: (i) A fixed price of $2.20 US dollars per MMBtu less the Demand Charge on a US dollar per MMBtu basis; or (ii) A rolling three Month "average" of the Canadian Gas Price Reporter mid month index of "Alberta Short-Term Spot Prices at the Alberta Border (Empress)" converted to US dollars per MMBtu plus $0.25 US dollar per MMBtu, less the Demand Charge on a US dollar per MMBtu basis. Page 3 [LOGO] August 23, 1993 (d) After the fulfillment of 5(c) hereof, for the balance of the 1994 Contract Year: (i) A fixed price of S1.85 US dollars per MMBtu, less the Demand Charge on a US dollar per MMBtu basis; or (ii) A rolling three Month "average" of the Canadian Gas Price Reporter mid month index of "Alberta Short-Term Spot Prices at the Alberta Border (Empress)" converted to US dollars per MMBtu, less the Demand Charge on a US dollar per MMBtu basis. 6. PRICING DATA Pursuant to paragraph 5 of the Letter Agreement, in the event that such pricing data is no longer published or such publication is no longer published then, failing agreement by the parties, the Commodity Charge or a method of determining it shall be determined by arbitration pursuant to Article X of the referenced Agreement. 7. OTHER TERMS AND CONDITIONS All other terms and conditions of the referenced Agreement shall remain in full force and effect. 8. REGULATORY APPROVALS This Letter Agreement is subject to all applicable American and Canadian federal, provincial and state regulatory approvals. If you are in agreement with the foregoing, please indicate your acceptance in the space provided below and return one copy of this Letter Agreement to our office. Yours truly, /s/ S. MacCulloch - ------------------------ S. D. (Sandy) MacCulloch Coordinator, Market Development GREAT FALLS GAS COMPANY Accepted and Agreed to this day of , 1993 ---- ------------ Per: /s/ Larry D. Geske ------------------------------------------------ Title: President ----------------------------------------------- AMENDING AGREEMENT BETWEEN: SHELL CANADA LIMITED ("SELLER") AND GREAT FALLS GAS COMPANY ("BUYER") - 2 - THIS AMENDING AGREEMENT is made effective as of November 1, 1994. WHEREAS, Seller and Buyer are parties to a Natural Gas Sale and Purchase Agreement dated July 20, 1992 (the "Contract"), as temporarily amended by a Letter Agreement dated August 23, 1993, (the "Letter Agreement") regarding the long term firm supply of Canadian natural Gas from Seller to Buyer, and WHEREAS, Seller and Buyer wish to further amend the Contract and Letter Agreement so as to provide for a different pricing mechanism under the Contract effective November 1, 1994. NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, Seller and Buyer agree as follows: 1. All words and phases as used in this Amending Agreement shall have the same meaning as attributed to them in the Contract. 2. The Letter Agreement is hereby amended so as to reduce the term thereof to a one (1) year period by deleting from Article 1 thereof the words "October 31, 1995" and replacing them with the words "November 1, 1994", and by deleting paragraphs 5(c) and 5(d) thereof. 3. The Contract is amended by adding thereto the following definition; "Pricing Period" means that period of time as set forth in Schedule "A" hereto for which a Price has been agreed to or otherwise established, and which shall not be less than one (1) Contract Year. 4. The Contract is amended by deleting in their entirety Sections 5.03, 5.04 and 5.05, without changing the numbering of any other Sections of the Contract. 5. The Contract is hereby amended by deleting from the second last line of paragraph 1 in Section 5.07 the words "(depending upon whether the Shortfall Amount being purchased represents Tier I Gas or Tier II Gas)". 6. Article VI of the Contract is amended by deleting therefrom Sections 6.02, 6.03, 6.04 and 6.05 in their entirety and replacing them with the following: "6.02 PRICE The price to be paid by Buyer to Seller for Gas purchased and sold and the service provided hereunder for the period of time commencing with the Commencement Date will consist of the sum of the three (3) components identified hereunder. The Price will be in U.S. dollars. (a) Each Month, Buyer shall pay Seller a "Demand Charge" equal to Seller's actual cost for that Month of reserving the firm transportation required to transport the MDQ on NOVA to the Delivery Point. - 3 - (b) Each Month, Buyer shall pay Seller a "Reservation Charge" equal to the product of the MDQ times the number of days in the Month times the Reservation Charge. The Reservation Charge shall be as set forth from time to time in Schedule "A" hereto. (c) Each Month, Buyer shall pay Seller for each MMBtu of Gas delivered and received at the Delivery Point, a "Commodity Charge" equal to a per MMBtu price on a dry basis as set forth from time to time in Schedule "A" hereto. In the event the parties utilize index data in determining the Commodity Charge component and such index data is no longer ascertainable, for whatever reason, then, failing agreement between Seller and Buyer on a new Commodity Charge within forty-five (45) days of such event, the new Commodity Charge shall be determined by arbitration pursuant to Article X hereof. Until a new Commodity Charge has been determined the parties agree to use the last ascertainable Commodity Charge. The new Commodity Charge shall be retroactive to the date the index data became unascertainable and any necessary adjustments shall be dealt with in accordance with Section 7.05 hereof. If Buyer elects not to take Gas during any Month, Seller will be allowed to sell that gas on an interruptible basis to third party purchasers. The Demand Charge and the Reservation Charge shall be paid each Month regardless of the quantity of Gas purchased and sold hereunder, except to the extent that Seller fails to deliver Gas nominated. 6.03 FUTURE PRICE DETERMINATION (a) The Parties agree that they will meet from time to time to negotiate the Commodity Charge and Reservation Charge components of the Price payable hereunder for subsequent Pricing Periods. In any such negotiations or resulting arbitration with respect to Price during the Term of this Agreement only the Commodity Charge and Reservation Charge components of the Price shall be redetermined and the Demand Charge component of the Price shall not be subject to redetermination. (b) Subject to 6.03 (a), the Parties agree to establish a new Price for the next Pricing Period at least one hundred and twenty (120) Days prior to the termination date of the current Pricing Period and the Parties will commence procedures for such redetermination no later than one hundred and eighty (180) Days prior to the termination date of the current Pricing Period by either Party giving fifteen (15) Days written notice to the other, to meet and negotiate. Such Price, and the various components making up that Price, will be effective for a period of time, as then agreed to, and will become effective on the commencement of the next Pricing Period. If neither Party has given written notice to the other to renegotiate at least one hundred and eighty (180) Days prior to the termination date of the current Pricing Period, then the LAST Price in effect for the current Pricing Period shall continue in effect for the next one year period which shall then become the next Pricing Period. - 4 - 6.04 FAILURE TO REACH AGREEMENT ON PRICE In the event that the Parties are unable to reach agreement on the Price, or the Price components at least one hundred and twenty (120) Days prior to the termination date of the current pricing period, as provided pursuant to section 6.03 herein, either Party may, upon not less than fifteen (15) days written notice to the other Party, have the Price determined pursuant to the Arbitration provisions contained in Article X herein and exclusively in accordance with the principles set forth in section 6.05 herein. Should no notice for Arbitration be given at least ninety (90) days prior to the termination date of the current Pricing Period, the Price for the next one year period, which shall then become the next Pricing Period, shall continue to be the last Price in effect for the current Pricing Period. 6.05 PRICING PRINCIPLES For each Pricing Period subsequent to the Pricing Period for which the price of gas to be sold and purchased hereunder has been established and specified, the Parties agree to determine Price by negotiation or, if unsuccessful, by arbitration. If the Price for Gas delivered in any Pricing Period is to be determined by arbitration, the arbitrators shall determine a Price that, under the prevailing market circumstances for long term firm Gas Supply and in the opinion of the arbitrators, is fair and reasonable to both Buyer and Seller. In making such determination, the arbitrators shall limit their consideration to the evidence which is presented by the Parties, and to the extent that evidence is presented, shall base their determination upon and shall give due consideration to each of the following criteria: (i) The weighted average cost of gas paid by Buyer during the next one year period for firm gas supplies with a term of two (2) years or more; (ii) The prices being paid during the next one year period for other firm gas supplies by local distribution companies with a term of two (2) years or more in the state of Montana; and, (iii) The prices being paid during the next one year period for other firm gas supplies by local distribution companies with a term of two (2) years or more in the province of Alberta; provided that the arbitrators shall consider the above matters in light of the following: (a) To the extent that evidence with respect to Prices for the next one year period is not available or is insufficient, prices for the current Pricing Period will be considered; (b) The times at which the prices were agreed to between the respective buyers and sellers; (c) Differences in transportation costs relevant to establishing a point of comparison at the Delivery Point; (d) The similarities and dissimilarities between the service provided hereunder and the sales and transportation arrangements under which other gas is being sold for consumption in Buyer's market area and in Alberta, including in particular but not limited to the similarities and - 5 - dissimilarities between the quality of service and the security of supply provided hereunder and provided under such other arrangements; and, (e) Any other considerations in respect of which relevant evidence is adduced by the Parties and which is relevant to the determination of such matters. In the event that a negotiated or arbitrated Price is determined for a Pricing Period after commencement thereof, Seller shall retroactively adjust its invoices to Buyer to the first Day of that Pricing Period, to take into account the revised Price. Until a new Price is concluded and retroactively implemented, the previous Price shall remain in effect. If the Price settlement date exceeds sixty (60) Days past the Pricing Period commencement, the retroactive invoice shall be adjusted for interest at the prime rate pursuant to section 7.04." 7. The Contract is hereby amended by incorporating Schedule "A" attached hereto as Schedule "A" to the Contract. 8. As amended by this Amending Agreement, the Contract is hereby ratified and confirmed and shall continue in full force and effect. IN WITNESS WHEREOF this Amending Agreement has been executed by the parties hereto effective as of the day and year first above written. SHELL CANADA LIMITED GREAT FALLS GAS COMPANY Per: /s/ Eric Le Dain Per: /s/ Larry D. Geske -------------------------- -------------------------- Name: ERIC LE DAIN Name: LARRY D. GESKE ------------------------- ------------------------- Title: MANAGER MARKETING - Title: PRESIDENT & CEO ------------------------ ------------------------ NE/MIDWEST U.S. SCHEDULE A SCHEDULE A INCORPORATED INTO AND FORMING A PART OF THAT NATURAL GAS SALE AND PURCHASE AGREEMENT BETWEEN SHELL CANADA LIMITED ("SELLER") AND GREAT FALLS GAS COMPANY ("BUYER") DATED THE 20TH DAY OF JULY, 1992 AS AMENDED FROM TIME TO TIME (THE "AGREEMENT") All words and phrases used in this Schedule "A" shall have the same meaning as provided for in the Agreement. PRICING PERIOD: November 1, 1994 to November 1, 1996 RESERVATION CHARGE: During this Pricing Period the Reservation Charge as defined in Section 6.02 of the Agreement shall be set at $0.00 US./MMBtu. COMMODITY CHARGE: During this Pricing Period, the Commodity Charge component of the Price, as defined in Section 6.02 of the Agreement shall be as follows: 1. For the period November 1, 1994 to November 1, 1995: For 50% of the volume of Gas delivered each Month up to 50% of the MDQ, the Commodity Charge shall be $1.58 US/MMBtu on a dry basis at the Delivery Point, less the Demand Charge calculated on a US dollar per MMBtu basis at a 100% load factor. For 50% of the volume of Gas delivered each Month up to 50% of the MDQ, the Commodity Charge shall be the Average Alberta Border (Empress) Spot (one month) Firm (100% LF) price for such Month as reported in the Canadian Gas Price Reporter published by Canadian Enerdata Ltd. plus $0.25 US/MMBtu for the period November 1, 1994 to April 1, 1995; and plus $0.05 US/MMBtu for the period April 1, 1995 to November 1, 1995, less the Demand Charge calculated on a US dollar per MMBtu basis at a 100% load factor. 2. For the period November 1, 1995 to November 1, 1996; For 100% of the volume of Gas delivered each Month, up to the MDQ, the Commodity Charge shall be the Average Alberta Border (Empress) Spot (one month) Firm (100% LF) price for such Month as reported in the Canadian Gas Price Reporter published by Canadian Enerdata Ltd. plus $0.05 US/MMBtu, less the Demand Charge calculated on a US dollar per MMBtu basis at a 100% load factor. Accepted and agreed to as of the 1st day of November, 1994. SHELL CANADA LIMITED GREAT FALLS GAS COMPANY Per: /s/ Eric Le Dain Per: /s/ Larry D. Geske ------------------------ --------------------------- Name: ERIC LE DAIN Name: LARRY D. GESKE ----------------------- --------------------------- Title: MANAGER MARKETING - Title: PRESIDENT & CEO ---------------------- -------------------------- NE/MIDWEST U.S. SCHEDULE "A" SCHEDULE A INCORPORATED INTO AND FORMING A PART OF THAT NATURAL GAS SALE AND PURCHASE AGREEMENT BETWEEN SHELL CANADA LIMITED ("SELLER") AND GREAT FALLS GAS COMPANY ("BUYER") DATED THE 20TH DAY OF JULY, 1992 AS AMENDED FROM TIME TO TIME (THE "AGREEMENT") All words and phrases used in this Schedule "A" shall have the same meaning as provided for in the Agreement. PRICING PERIOD: November 1, 1996 to November 1, 1997 RESERVATION CHARGE: During this Pricing Period, the Reservation Charge as defined in Section 6.02 of the Agreement shall be set at $0.00 US./MMBtu. COMMODITY CHARGE: During this Pricing Period, the Commodity Charge component of the Price, as defined in Section 6.02 of the Agreement shall be as follows: $1.19 US/MMBtu on a dry basis at the Delivery Point. FURTHER AMENDMENTS: During the above Pricing Period, in place of the provisions dealing with incurring a Shortfall Amount as set forth in Section 5.07 of the Agreement, if on any Day Buyer does not purchase one hundred percent (100%) of the then applicable MDQ, a Deficit will exist. The difference between the MDQ and the amount actually taken by Buyer on any Day will be the Deficit for that Day. On a Monthly basis, in accordance with Article VII of the Agreement, Buyer shall pay Seller, at the Commodity Charge rate then in effect, for the Deficit incurred on each Day during the preceding Month, regardless of whether or not Buyer has been able to take, as hereinafter provided, the Deficit Gas after it has been incurred. Buyer shall have the opportunity to nominate and take Deficit Gas on any Day after it has been incurred, provided however, that: (i) Buyer shall first purchase 100% of the MDQ; (ii) Seller's obligation to deliver Deficit Gas shall only be on an interruptible basis; (iii) Buyer shall pay Seller for any additional transportation charges Seller incurs in delivering the Deficit Gas to the Delivery Point; and (iv) the maximum amount of Deficit Gas (or any Gas) that Seller shall be obligated to deliver on any Day above the MDQ shall be the IDQ limit set out in Section 5.06 of the Agreement. If a Shortfall Amount was incurred in the Contract Year preceding the first above referenced Pricing Period, the provisions of Section 5.07 regarding Buyer's purchase of the Shortfall Amount in the Make-up Year shall apply in that Pricing Period, however, subject to the same conditions as outlined above in (i) through (iv) with respect to Deficit Gas, and further provided that any Gas taken above the MDQ shall first be applied to Deficit Gas, then to the Shortfall Amount and finally to any agreed upon interruptible gas pursuant to Section 5.06 of the Agreement. The Commodity Charge for the Shortfall Amount shall be as specified in Section 5.07 of the Agreement. Accepted and agreed to as of the day of , 1996. --- ----------- SHELL CANADA LIMITED GREAT FALLS GAS COMPANY Per: /s/ James Chunn Per: /s/ Larry D. Geske -------------------------- ------------------------- Name: James Chunn Name: LARRY D. GESKE ------------------------- ------------------------ Title: MGR. - BC & WESTERN U.S. Title: President & CEO ------------------------ ------------------------ EX-10.10 12 EXH 10.10 :GREAT FALLS GAS 1992 STOCK OP PLAN GREAT FALLS GAS COMPANY 1992 STOCK OPTION PLAN 1. PURPOSE OF PLAN. This Plan shall be known as the "GREAT FALLS GAS COMPANY 1992 STOCK OPTION PLAN" and is hereinafter referred to as the "Plan". The purpose of the Plan is to aid in maintaining and developing personnel capable of assuring the future success of Great Falls Gas Company, a Montana corporation (the "Company"), to offer such personnel additional incentives to put forth maximum efforts for the success of the business, and to afford them an opportunity to acquire a proprietary interest in the Company through stock options. Options granted under this Plan may be either incentive stock options ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986 (the "Code"), or options which do not qualify as Incentive Stock Options. 2. STOCK SUBJECT TO PLAN. Subject to the provisions of Section 12 hereof, the stock to be subject to options under the Plan shall be the Company's authorized Common Shares, $.15 par value per share. Such shares may be either authorized but unissued shares, or issued shares which have been reacquired by the Company. Subject to adjustment as provided in Section 12 hereof, the maximum number of shares on which options may be exercised issued under this Plan shall be 50,000 shares. If an option under the Plan expires, or for any reason is terminated or unexercised with respect to any shares, such shares shall again be available for options thereafter granted during the term of the Plan. 3. ADMINISTRATION OF PLAN. (a) The Plan shall be administered by a committee (the "Committee") of two or more directors of the Company, none of whom shall be officers or employees of the Company and all of whom shall be "disinterested persons" with respect to the Plan within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor rule or regulation thereto. (b) The Committee shall have plenary authority in its discretion, but subject to the express provisions of the Plan: (i) to determine the purchase price of the Common Stock covered by each option, (ii) to determine the employees to whom and the time or times at which such options shall be granted and the number of shares to be subject to such options, (iii) to determine the terms of exercise of each option, (iv) to accelerate the time at which all or any part of an option may be exercised, (v) to amend or modify the terms of any option with the consent of the optionee, (vi) to interpret the Plan, (vii) to prescribe, amend and rescind rules and regulations relating to the Plan, (viii) to determine the terms and provisions of each option agreement under the Plan (which agreements need not be identical), including the designation of those options intended to be Incentive Stock Options, and (ix) to make all other determinations necessary or advisable for the administration of the Plan, subject to the exclusive authority of the Board of Directors under Section 13 herein to amend or terminate the Plan. The -2- Committee's determinations on the foregoing matters, unless otherwise disapproved by the Board of Directors of the Company, shall be final and conclusive. (c) The Committee shall select one of its members as its Chairman and shall hold its meetings at such times and places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by not less than a majority of its members. Any decision or determination reduced to writing and signed by all of the members of the Committee shall be fully effective as if it had been made by a majority vote at a meeting duly called and held. The grant of an option shall be effective only if a written agreement shall have been duly executed and delivered by and on behalf of the Company following such grant. The Committee may appoint a Secretary and may make such rules and regulations for the conduct of its business as it shall deem advisable. 4. ELIGIBILITY. Incentive Stock Options may only be granted under this Plan to any full or part-time employee (which term as used herein includes, but is not limited to, officers and directors who are also employees) of the Company and of its present and future subsidiary corporations within the meaning of Section 424(f) of the Code (herein called "subsidiaries"). Full or part-time employees, directors who are not also employees, consultants or independent contractors to the Company or one of its subsidiaries shall be eligible to receive options which do not qualify as Incentive Stock Options. In determining the persons to whom options shall be granted and the number of shares subject to such options, the Committee may take into account -3- the nature of services rendered by the respective employees or consultants, their present and potential contributions to the success of the Company and such other factors as the Committee in its discretion shall deem relevant. A person who has been granted an option under this Plan may be granted additional options under the Plan if the Committee shall so determine; provided, however, that for Incentive Stock Options granted after December 31, 1986, to the extent the aggregate fair market value (determined at the time the Incentive Stock Option is granted) of the Common Shares with respect to which all Incentive Stock Options are exercisable for the first time by an employee during any calendar year (under all plans described in subsection (d) of Section 422 of the Code of his employer corporation and its parent and subsidiary corporations) exceeds $100,000, such options shall be treated as options which do not qualify as Incentive Stock Options. Nothing in the Plan or in any agreement thereunder shall confer on any employee any right to continue in the employ of the Company or any of its subsidiaries or affect, in any way, the right of the Company or any of its subsidiaries to terminate his or her employment at any time. 5. PRICE. The option price for all Incentive Stock Options granted under the Plan shall be determined by the Committee but shall not be less than 100% of the fair market value of the Common Shares at the date of grant of such option. The option price for options granted under the Plan which do not qualify as Incentive Stock Options shall also be determined by the Committee but shall not be less than 100% -4- of the fair market value of the Common Shares at the date of grant of such option. For purposes of the preceding two sentences and for all other valuation purposes under the Plan, the fair market value of the Common Shares shall be (i) the closing price of the Common Stock as reported for composite transactions if the Common Stock is then traded on a national securities exchange, (ii) the last sale price if the Common Stock is then quoted on the NASDAQ National Market System, or (iii) the average of the closing representative bid and asked prices of the Common Stock as reported on NASDAQ on the date as of which the fair market value is being determined. If on the date of grant of any option hereunder the Common Shares are not traded on an established securities market, the Committee shall make a good faith attempt to satisfy the requirements of this Section 5 and in connection therewith shall take such action as it deems necessary or advisable. 6. TERM. Each option and all rights and obligations thereunder shall expire on the date determined by the Committee and specified in the option agreement. The Committee shall be under no duty to provide terms of like duration for options granted under the Plan, but the term of an Incentive Stock Option may not extend more than ten (10) years from the date of grant of such option and the term of options granted under the Plan which do not qualify as Incentive Stock Options may not extend more than ten (10) years from the date of granting of such option. -5- 7. EXERCISE OF OPTION. (a) The Committee shall have full and complete authority to determine whether an option will be exercisable in full at any time or from time to time during the term thereof, or to provide for the exercise thereof in such installments, upon the occurrence of such events (such as termination of employment for any reason) and at such times during the term of the option as the Committee may determine and specify in the option agreement. (b) The exercise of any option granted hereunder shall only be effective at such time that the sale of Common Shares pursuant to such exercise will not violate any state or federal securities or other laws. Only to the extent required in order to comply with Rule 16b-3 under the Exchange Act, in the case of an option or other award granted to a person considered by the Company as one of its officers or directors for purposes of Section 16 of the Exchange Act, the terms of the option or other award will require that such shares are not disposed of by such officer or director for a period of at least six months from the date of grant. (c) An optionee or grantee electing to exercise an option shall give written notice to the Company of such election and of the number of shares subject to such exercise. The full purchase price of such shares shall be tendered with such notice of exercise. Payment shall be made to the Company in cash (including bank check, certified check, personal check, or money order), or, at the discretion of the Committee and as specified by the Committee, (i) by delivering certificates for the Company's Common Shares already owned by the optionee or grantee having a fair -6- market value as of the date of grant equal to the full purchase price of the shares, or (ii) by delivering the optionee's or grantee's promissory note, which shall provide for interest at a rate not less than the minimum rate required to avoid the imputation of income, original issue discount or a below-market-rate loan pursuant to Sections 483, 1274 or 7872 of the Code or any successor provisions thereto, or (iii) a combination of cash, the optionee's or grantee promissory note and such shares. The fair market value of such tendered shares shall be determined as provided in Section 5 herein. The optionee's or grantee's promissory note shall be a full recourse liability of the optionee and may, at the discretion of the Committee, be secured by a pledge of the shares being purchased. Until such person has been issued the shares subject to such exercise, he or she shall possess no rights as a shareholder with respect to such shares. 8. INCOME TAX WITHHOLDING AND TAX BONUSES. (a) In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of an optionee or grantee under the Plan, are withheld or collected from such optionee or grantee. In order to assist an optionee or grantee in paying all federal and state taxes to be withheld or collected upon exercise of an option which does not qualify as an Incentive Stock Option hereunder, the Committee, in its absolute discretion and subject to such additional terms and conditions as it may adopt, shall permit the optionee or -7- grantee to satisfy such tax obligation by (i) electing to have the Company withhold a portion of the shares otherwise to be delivered upon exercise of such option with a fair market value, determined in accordance with Section 5 herein, equal to such taxes or (ii) delivering to the Company Common Shares other than the shares issuable upon exercise of such option with a fair market value, determined in accordance with Section 5, equal to such taxes. (b) The Committee shall have the authority, at the time of grant of an option under the Plan or at any time thereafter, to approve tax bonuses to designated optionees or grantees to be paid upon their exercise of options granted hereunder. The amount of any such payments shall be determined by the Committee. The Committee shall have full authority in its absolute discretion to determine the amount of any such tax bonus and the terms and conditions affecting the vesting and payment thereafter. 9. ADDITIONAL RESTRICTIONS. The Committee shall have full and complete authority to determine whether all or any part of the Common Shares of the Company acquired upon exercise of any of the options granted under the Plan shall be subject to restrictions on the transferability thereof or any other restrictions affecting in any manner the optionee's or grantee's rights with respect thereto, but any such restriction shall be contained in the agreement relating to such options. 10. TEN PERCENT SHAREHOLDER RULE. -8- Notwithstanding any other provision in the Plan, if at the time an option is otherwise to be granted pursuant to the Plan the optionee owns directly or indirectly (within the meaning of Section 424(d) of the Code) Common Shares of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its parent or subsidiary corporations, if any (within the meaning of Section 422(b)(6) of the Code), then any Incentive Stock Option to be granted to such optionee pursuant to the Plan shall satisfy the requirements of Section 422(c)(5) of the Code, and the option price shall be not less than 110% of the fair market value of the Common Shares of the Company determined as described herein, and such option by its terms shall not be exercisable after the expiration of five (5) years from the date such option is granted. 11. NON-TRANSFERABILITY. No option granted under the Plan shall be transferable by an optionee or grantee, otherwise than by will or the laws of descent or distribution. Except as otherwise provided in an option agreement, during the lifetime of an optionee or grantee, the option shall be exercisable only by such optionee or grantee. 12. DILUTION OR OTHER ADJUSTMENTS. If there shall be any change in the Common Shares through merger, consolidation, reorganization, recapitalization, dividend in the form of stock (of whatever amount), stock split or other change in the corporate structure, appropriate adjustments in the Plan and outstanding options shall be made by the Committee. In the event of any such changes, adjustments shall include, where -9- appropriate, changes in the aggregate number of shares subject to the Plan and the number of shares and the price per share subject to outstanding options, in order to prevent dilution or enlargement of option rights. 13. AMENDMENT OR DISCONTINUANCE OF PLAN. The Board of Directors may amend or discontinue the Plan at any time. Subject to the provisions of Section 12 no amendment of the Plan, however, shall without shareholder approval: (i) increase the maximum number of shares under the Plan as provided in Section 2 herein, (ii) decrease the minimum price provided in Section 5 herein, (iii) extend the maximum term under Section 6, or (iv) modify the eligibility requirements for participation in the Plan. The Board of Directors shall not alter or impair any option theretofore granted under the Plan without the consent of the holder of the option. 14. TIME OF GRANTING. Nothing contained in the Plan or in any resolution adopted or to be adopted by the Board of Directors or by the shareholders of the Company, and no action taken by the Committee or the Board of Directors (other than the execution and delivery of an option agreement), shall constitute the granting of an option hereunder. 15. EFFECTIVE DATE AND TERMINATION OF PLAN. (a) The Plan was approved by the Board of Directors on September 1, 1992, and shall be approved by the shareholders of the Company within twelve (12) months thereof. -10- (b) Unless the Plan shall have been discontinued as provided in Section 13 hereof, the Plan shall terminate September 1, 2002. No option may be granted after such termination, but termination of the Plan shall not, without the consent of the optionee or grantee, alter or impair any rights or obligations under any option theretofore granted. -11- EX-10.11 13 EXH 10.11:GREAT FALLS GAS INCENTIVE STOCK OP PLAN GREAT FALLS GAS COMPANY INCENTIVE STOCK OPTION PLAN THIS AGREEMENT, made in Great Falls, Montana on this 6th day of November, 1992, between Great Falls Gas Company (hereinafter referred to as "Company") and hereinafter referred to as "Optionee"), an employee of the Company or a subsidiary thereof. WHEREAS, the Company desires to maintain and develop personnel capable of assuring the future success of the Company, to offer such personnel additional incentives to put forth maximum efforts for the success of the business, and to afford them an opportunity to acquire a proprietary interest in the Company through stock options: NOW, THEREFORE, in consideration of the mutual agreements stated hereinafter, the Company and Optionee agree that: 1. STOCK OPTION. The Company hereby grants to the Optionee and the Optionee accepts an incentive option to purchase 2200 shares of the Company's stock at any time prior to November 6, 1997 at a purchase price of $14.25 per share, all subject to the terms, provisions and conditions of this Agreement and of the Company's 1984 Stock Option Plan (hereinafter referred to as the "Plan"), which is incorporated herein by reference. Should there be any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall control. This option may be exercised in the following manner. In the first twelve months from the date of this agreement no more than twenty percent (440) of the options granted herein may be exercised; in the next succeeding twelve months no more than forty percent (880) of said options shall be exercisable, in the next succeeding twelve months no more than sixty percent (1320) of said options shall be exercisable; in the next succeeding twelve months no more than eighty percent (1760) of the options shall be exercisable. Other than the foregoing restriction this Agreement shall be exercised in the manner provided in the Plan as to all or any part of the shares of stock subject to the option from time to time during the option period, and exercise of the option as to part of such shares shall not exhaust or terminate the option. The option shall be exercised as to not less than One Hundred (100) shares at any one time, however. Payment of the option price shall be made concurrently with the exercise of the option as provided in the Plan. 2. LIMITATION ON AMOUNT. In any calendar year, the aggregate fair market value (such value being determined as of the time the option is granted) of stock for which Optionee may be granted Incentive Stock Options shall not exceed One Hundred Thousand Dollars (100,000) plus any unused limit carryover to such year. (Any unused limit carryover amount shall be determined as prescribed by Section 422A(c)(4) of the Internal Revenue Code of 1954, or similar provisions in succeeding enactments, and the regulations and rulings promulgated thereunder). In determining the maximum permissible value of Incentive Stock Options which may be granted to Optionee in any calendar year, all Incentive Stock Options granted under Incentive Stock Option Plans of the Company and its divisions or subsidiary corporations shall be considered in the aggregate. This annual $100,000 limitation shall not apply to any stock option which is not an Incentive Stock Option as defined by Section 433A of the Internal Revenue Code of 1954 (or similar provisions in succeeding enactments). 3. EXERCISE OF OPTION. All Incentive Stock Options must be exercised sequentially; i.e., no Incentive Stock Option may be exercised by any one individual while there is outstanding any Incentive Stock Option to that same individual which was granted prior to the grant date of the Incentive Stock Option sought to be exercised. Any outstanding Incentive Stock Option shall be treated as outstanding until such option is exercised in full or expires by reason of lapse of time. 4. PERCENT SHAREHOLDER RULE. Notwithstanding any other provision in the Plan, if at the time an option is otherwise to be granted pursuant to the Plan the Optionee owns directly or indirectly (within the meaning of Section 425(d) of the Code), common stock of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its parent or subsidiary corporations, if any (within the meaning of Section 422A(c)(8) of the Code, and the option price shall be not less than 110% of the fair market value of the common stock of the Company determined as described herein, and such option by its terms shall not be exercisable after the expiration of five (5) years from the date such option is granted. 5. NON-TRANSFERABILITY AND TERMINATION OF EMPLOYMENT. No option granted under the Plan shall be transferable by an Optionee, otherwise than by will or the laws of descent of distribution as provided in Section 9(c) of the Plan. During the lifetime of an Optionee, the option shall be exercisable only by such Optionee. In the event that Optionee ceases to be employed by the Company or its subsidiaries, if any, for any reason other than his gross and willful misconduct or his death or disability, such Optionee shall have the right to exercise the option at any time within three (3) months after such termination of employment to the extent of the full number of shares he was entitled to purchase under the option on the date of termination, subject to the condition that no option shall be exercisable after the expiration of the term of the option. 6. DILUTION OR OTHER ADJUSTMENTS. If there shall be any change in the common stock through merger, consolidation, reorganization, recapitalization, stock dividend (of whatever amount), stock split or other change in the corporate structure, appropriate adjustments in the Plan and outstanding options shall be made by the Committee. In the event of any such changes adjustments shall include, where appropriate, changes in the aggregate number of shares subject to the Plan and the number of shares and the price per share subject to outstanding options. 7. RIGHTS OF OPTIONEE NOT THAT OF SHAREHOLDER. The Optionee shall have no rights as a shareholder in respect of shares as to which this option shall not have been exercised and payment made as provided in the Plan, and the Optionee shall not be considered or treated as a record owner of shares with respect to which this option is exercised until the date that the stock certificate or certificates are actually issued and such issuance reflected on the stock records of the Company. 8. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the heirs, legatees, legal representatives, successors and assigns of the parties hereto. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its Compensation Committee thereunto duly authorized, and the Optionee has signed the same, in duplicate originals, on the date and year first above written. GREAT FALLS GAS COMPANY /s/ Ian B. Davidson /s/ Thomas N. McGowen, Jr. - ------------------------------ -------------------------- Ian B. Davidson Thomas N. McGowen, Jr. /s/ Timothy J. Moylan -------------------------- Timothy Moylan /s/ John P. Allen -------------------------- Optionee EX-10.12 14 EXH 10.12:ENERGY WEST MANAGEMENT INCENTIVE PLAN ENERGY WEST MANAGEMENT INCENTIVE PLAN The following plan is designed to reward plan participants for building shareholder value. This is generally accomplished through efficient operations and innovative revenue production. It is measured by exceeding earnings per share targets and favorable comparison with other utilities' returns on equity. A. Eligible Participants: President Vice Presidents Division Managers, Managers, Directors and Supervisors B. General Policy Criteria: 1. The incentive will be paid to a participant on the basis of the regular compensation earned during the year (exclusive of any incentive pay received during the fiscal year). 2. The participant must be employed by the Company at the end of the fiscal year to be eligible for incentive pay. 3. All earnings figures referenced throughout this plan description are "net earnings" after all taxes, contributions to ESOP and other benefit plans and after all payments associated with this or any other incentive plans. 4. Specific Performance Objectives are established and monitored by the supervisor of each participant. Accomplishment of SPO's is recommended by the senior officer to the CEO who approves all SPO accomplishments. 5. Any Specific Performance Objective changes from those approved at the beginning of the fiscal year must be submitted in writing to the senior officer who must agree and forward to the President for approval. 6. This plan does not create contractual rights for the participant. The sole purpose for this plan description is to describe how the incentive will be paid in years that the decision is made to pay an incentive. The plan can be terminated, modified or suspended by the Board of Directors or Senior Management, at any time without notice to participants. 7. Interpolation will be utilized when results fall between the data points on the attached schedules. 8. All calculations utilized in the plan will be rounded to the closest 100th (two decimal places). C. Funding Mechanism: Step 1. Each fiscal year a corporate earnings per share (EPS) threshold will be established using the three year modified EPS target calculated pursuant to the methodology found on Exhibit "A". Division EPS targets are then derived from this consolidated EPS target. The 1996 targets are found on Exhibit "A-1". Step 2. 50% of the incentive pool will be determined by the consolidated results. The consolidated results are measured by two equally weighted elements. The first element is calculated by ascertaining the percentage by which consolidated EPS exceeds the Fiscal Year EPS target. The percentage increase in EPS over the target increase is then compared to the schedule appearing on Exhibit "B" which will provide 25% of the total incentive pool (one half of this part of the funding mechanism). The second element is determined by the Company's rank against the Edward D. Jones Gas Distribution Companies determined on the basis of return on equity, (as displayed on Exhibit "C"). The return on equity for the Company will be determined by the most recent report available from Edward D. Jones from its Gas Distribution Company group. The rank of ENERGY WEST compared to this 34 company group is then compared to the matrix on Exhibit "C" to calculate the balance of this part of the incentive. Once these two elements have been calculated, one half of the funding pool has been determined. Step 3. The remaining 50% of the incentive pool will be calculated by determining the amount by which the division's actual EPS for the fiscal year exceeds the target found on Exhibit "A-1". That percentage will then be utilized with Exhibit "B" to determine the percent of salary attributable to this portion of the pool. (The incentive for ENERGY WEST Services employees will be calculated 100% under Step 2 unless a % of their incentive is allocated to another entity at the beginning of the fiscal year.) Step 4. Certain employees will have an additional step if they have responsibility for more than one division. In that instance the portion of the incentive attributable to the division in step 3 will be allocated among the divisions or entities for which that individual has responsibility. This allocation occurs at the beginning of the fiscal year. This allocation will be proposed by the affected participant and approved by the participant's supervisor and the CEO. Step 5. Once the incentive pool is established by the above steps, 80% of the payout will be determined by the percentage of SPO achievement. The remainder of the incentive is determined by applying the remaining 20% to the pool. (These percentages will be established each fiscal year.) The following illustrations are intended to illustrate the operation of the incentive plan. Illustration 1. Assumptions. Manager Earns $40,000 in base salary. Corporate EPS for 1996 is $.66. Corporate Return on Equity ranks No. 6 on the E. D. Jones survey of distribution companies. Division EPS for this managers division is 8% above the target. The Manager earned 85% of his SPOs. Step 1. Exhibit "A" provides the consolidated company EPS target of $.63. The assumed consolidated earnings of $.66 results in growth of 5% over the target. Step 2. The consolidated portion of the incentive is then calculated using Exhibits "B" and "C". Exhibit "B" provides the percentage related to 5% growth in EPS for a manager of 6.4%. $40,000 x 6.4% = $2,560 x 50% = $1,280 Exhibit "C" provides the percentage attributable to the Edward D. Jones ranking of No. 6 which is 21.8% for a manager. $40,000 x 21.8% = $8,720 x 50% = $4,360 The consolidated portion of the plan is determined by adding the two elements ($1,280 + $4,360 = $5,640) which is then multiplied by the 50% weighing attributable to the consolidated portion of the plan resulting in $2,820 available for the pool. Step 3. The division is assumed to have earned 8% over the target resulting in a 12.8% factor from Exhibit "B" $40,000 x .128 = $5,120 x 50% (weighing for the division portion of the plan) = $2,560 Step 5. The total pool is determined by adding the consolidated pool of $2,820 to the Division portion of $2,560 resulting in a pool of $5,380. SPO achievement is assumed to be 85 % and is applicable to 80% of the pool. Therefore $5,380 x 80% = $4,304 This is the amount subject to SPO achievement. $4,304 x 85% = $3.658.40. 20% of the pool was not subject to SPO achievement and is derived as follows: $5,380 x 20% = $1.076 which is added to the $3,658.4 to arrive at a total incentive for the year of $4,734.40. Illustration No. 2. Assumptions: Manager earns $40,000 in base salary. Corporate EPS for 1996 is $.68 Corporate Return on Equity is No. 4 on the E.D. Jones survey of distribution companies. Manager has been assigned 70% responsibility for division A and 30% for division B. Division A exceeded its EPS target by 7% Division B did not meet its target. SPO achievement is assumed to be 90% Step 1. Exhibit "A" provides the consolidated company EPS target of $.63. The assumed consolidated earnings of $.68 is 8% over the target. Step 2. The consolidated portion of the incentive is then calculated using Exhibits "B" and "C". Exhibit "B" provides the percentage related to 8% growth in EPS for a manager of 12.8%. $40,000 x .128 = $5,120 x 50% = $2,560 Exhibit "C" provides the percentage attributable to the Edward D. Jones ranking of No. 4 which is 27.5% for a manager. $40,000 x .275 = $11,000 x 50% = $5,500 The total pool for this part of the incentive is then determined by adding the $5,500 and the $2,560 (8,060) and multiplying by 50% weighing for the consolidated portion of the plan or $4,030. Step 3. Division A is assumed to have exceeded its EPS target by 7% resulting in a 9% factor from Exhibit "B". 40,000 x .09 = $3,600 Step 4. Since this division represents 70% of the managers responsibility the $3,600 is multiplied by the 70% resulting in $2,520. Division B did not achieve its EPS target. The total funding from the division part of the plan is, therefore, $2,520. Since the division weighing is 50% it is multiplied by 50% to arrive at $1,260. Step 5. The total pool is determined by adding the consolidated pool of $4,030 to the division portion of $1,260 resulting in a pool of $5,290. SPO achievement is assumed to be 90%. It is applicable to 80% of the pool - $5,290 x 80% = $4,232. This is the amount subject to SPO achievement. 90% SPO achievement results in .9 x $4,232 = $3,808.80. 20% of the pool is not subject to SPO achievement and is calculated as follows: $4,030 x 20% = $806. This amount is combined with the $3.808.80 to arrive at a total incentive of $4,016.80. EX-21.1 15 EXH 21.1:SUBSIDIARIES OF COMPANY EXHIBIT (21.1) SUBSIDIARIES OF THE REGISTRANT The voting stock of the following subsidiaries is 100% owned by the Registrant: State or Sovereign of Name of Subsidiary Incorporation ------------------ ------------------ Energy West Resources, Inc. (formerly Vesta, Inc.) Montana Montana Sun, Inc. Montana Rocky Mountain Fuels, Inc. Montana E-3 EX-23.1 16 EXH 23.1:CONSENT OF IND AUDITORS Exhibit 23.1--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 and the Registration Statement on Form S-3 and related Prospectus pertaining to the Dividend Reinvestment Plan, with respect to the consolidated financial statements, as amended, and the related financial statement schedule, as amended, included in this Form 10-K/A1. /s/ ERNST & YOUNG LLP -------------------------- ERNST & YOUNG LLP Denver, Colorado July 3, 1997 E-4 EX-27.1 17 EXHIBIT 27.1: FDS
UT 12-MOS JUN-30-1996 JUL-01-1995 JUN-30-1996 PER-BOOK 26,089,830 21,666 9,092,204 2,290,973 0 37,494,673 348,198 2,635,540 8,416,119 11,399,857 0 0 10,045,714 7,175,000 0 0 348,044 0 0 0 8,526,058 37,494,673 31,318,008 670,025 28,353,172 29,023,197 2,294,811 214,902 2,509,713 1,242,738 1,266,975 0 8,416,119 927,763 709,872 606,199 0.55 0
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