10-K405/A 1 c65123a2e10-k405a.txt AMENDMENT NO. 2 TO FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K/A Amendment No. 2 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2000 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, 2000: Common Stock, $.15 Par Value - $17,410,759 The number of shares outstanding of the issuer's classes of common stock as of September 20, 2000: Common Stock, $.15 Par Value - 2,476,105 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the annual shareholders meeting to be held December 15, 2000 are incorporated by reference into Part III. 2 ENERGY WEST INCORPORATED Items 6,7 and 8 to Registrant's Form 10-K for the fiscal year ended June 30, 2000 are hereby amended as follows: This amendment reflects the restatement of the financial statements for the fiscal year ended June 30, 2000 due to an error that affects the expense for postretirement benefits other than pensions, related balance sheet accounts and certain disclosures previously reported. See Note 2 to the consolidated financial statements in Item 8 for a description of the error. Page 2 3 Item 6. - Selected Financial Data Selected Financial Data on a Consolidated Basis (2000-1996) (dollar amounts in thousands, except per share data)
2000 1999 1998 1997 1996 ------------- --------------- ------------- ------------- ------------- (Restated) Operating results: Operating revenue $72,196 $53,815 $43,064 $38,215 $31,318 Operating expenses Gas and electric purchases 58,788 39,687 28,757 24,675 18,724 General and administrative 7,649 8,018 7,697 7,498 6,924 Maintenance 400 469 497 497 409 Depreciation and amortization 1,856 1,695 1,732 1,689 1,667 Taxes other than income 639 708 628 660 629 --------- --------- --------- --------- --------- Total operating expenses 69,332 50,577 39,311 35,019 28,353 --------- --------- --------- --------- --------- Operating income 2,864 3,238 3,753 3,196 2,965 Other income - net 581 819 142 325 215 --------- --------- --------- --------- --------- Income before interest charges 3,445 4,057 3,895 3,521 3,180 Total interest charges 1,674 1,493 1,583 1,525 1,243 --------- --------- --------- --------- --------- Income before taxes 1,771 2,564 2,312 1,996 1,937 Income taxes 649 977 792 703 670 --------- --------- --------- --------- --------- Net income $1,121 $ 1,587 $ 1,520 $ 1,293 $ 1,267 ========= ========= ========= ========= ========= Earnings per common share .46 .66 .64 .55 .55 Dividends per common share .49 .47 .45 .43 .41 Weighted average common shares Outstanding 2,456,555 2,418,910 2,390,814 2,356,624 2,298,734 At year end: Current assets $16,388 $11,429 $12,326 $12,398 $9,092 Total assets 51,194 43,710 42,808 42,543 37,268 Current liabilities 14,831 7,230 7,272 15,317 11,088 Total long-term obligations 16,395 16,840 17,278 9,684 10,046 Total stockholders' equity 13,786 13,532 12,811 11,997 11,400 --------- --------- --------- --------- --------- Total capitalization $30,181 $30,372 $30,089 $21,681 $21,446 ========= ========= ========= ========= =========
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS RESULTS OF CONSOLIDATED OPERATIONS Fiscal 2000 Compared to Fiscal 1999 Net Income The Company's net income for fiscal 2000 was $1,121,000 compared to $1,587,000 in fiscal 1999, a decrease of $466,000. Net income from utility operations decreased by $129,000 as a result of a reduction in gross margin due to warmer weather. Energy West Propane, Inc. ("EWP") had higher net income of $24,000, due to higher margins in the wholesale propane operations, partially offset by a decrease in retail propane margins, due to warmer weather. Energy West Resources, Inc. ("EWR"), the Company's gas and electric marketing affiliate, had an earnings decrease of $379,000 due to higher gas and electricity costs. Energy West Development, Inc. ("EWD"), the Company's real estate development affiliate, had higher net income of $18,000, due to the sale of one of its real estate properties in June 2000 for an after-tax capital gain of approximately $50,000. This gain was partially offset by lower operating revenues of $45,000, from a cash settlement Page 3 4 received in fiscal 1999, upon final dissolution of Gas Finco, a financing subsidiary of the American Gas Association. Revenue Operating revenues increased approximately 34%. Although weather was warmer than last year in the Company's utility operations, which decreased revenues by approximately 5%, the Company's propane wholesale revenue increased by 43%, propane retail revenues increased by 39%, gas marketing revenues increased by 33% and electric marketing revenues by 101%, due to customer growth and significantly higher gas, propane and electricity market prices. Gross Margin Gross margins (operating revenues less cost of gas and electric trading) decreased approximately $720,000. Utility gross margins decreased approximately $366,000, due to warmer weather in all three states served by the utility operations. Energy marketing gross margins decreased approximately $316,000, primarily due to unusually high electricity costs incurred in May and June of 2000. Operating Income Operating income decreased by approximately $374,000. Utility operations increased by $13,000 and propane operations increased by $120,000. These were offset by a decrease of $458,000 in Energy Marketing operations and a $49,000 decrease in the operating income in EWD. The increased operating income from Utility operations resulted from lower operating expenses of approximately $379,000, due to voluntary cut-backs in non-essential operating and maintenance expenses in fiscal 2000, partially offset by lower gross margins of $366,000, due to warmer weather than last fiscal year. Propane operations operating income increased primarily from higher gross margins of $64,000 from increased retail and wholesale sales and reduced operating expenses of $56,000, due to lower incentives paid and increased payroll costs capitalized to the newly constructed Superior, Montana propane terminal. Energy Marketing operations had an operating loss, primarily due to reduced margins of approximately $316,000, because of unusually high electric purchase costs and approximately $142,000 higher operating expenses incurred as start-up costs in the new electricity marketing operation. EWD operating income decreased approximately $49,000, due to a cash settlement received in fiscal 1999, upon final dissolution of Gas Finco, a financing subsidiary of the American Gas Association. Other Expenses Operating expenses (excluding cost of gas and electric sales) decreased approximately $347,000 or 3% in 2000, due to reduction of non-essential discretionary expenses and reduced incentives. The result of the changes, as detailed above, was a decrease in operating income from approximately $3,238,000 in 1999 to $2,864,000 in 2000. Interest expense increased by $181,000 or 12% from $1,493,000 in fiscal 1999 to $1,674,000 in fiscal 2000, due to higher short-term borrowing, as a result of higher gas and propane inventories and higher unrecovered tracker gas costs in Montana. Other income decreased approximately $238,000 from $819,000 in fiscal 1999 to $581,000 in fiscal 2000. The primary reasons for this decrease were carrying costs on regulatory assets and gains recognized on derivative trading higher in fiscal 1999 than gains recognized in fiscal 2000. Fiscal 1999 Compared to Fiscal 1998 Net Income The Company's net income for fiscal 1999 was $1,587,000 compared to $1,520,000 in fiscal 1998, an increase of $67,000. Net income from utility operations increased by $130,000 due to higher gross margins, higher other income and lower interest costs. Energy West Propane, Inc. ("EWP") had lower net income of $90,000 due to a capital gain recognized, in fiscal 1998, from the Page 4 5 sale of four retail propane districts in Wyoming and from warmer weather in all of its propane operating areas. Also, Energy West Resources, Inc. ("EWR"), the Company's gas and electric marketing affiliate, had an earnings decrease of $100,000 due to significantly higher natural gas prices in Canada and Montana. This subsidiary achieved its first electric marketing sales in fiscal 1999 offsetting some of the decrease in gas marketing margins. In addition, this subsidiary had a $390,000 gain from trading derivatives. Energy West Development, Inc. ("EWD"), the Company's real estate development affiliate, had higher net income of $170,000 because, in fiscal 1998, it recorded a loss from its investment in American Gas Finance Company, LLC, a financing operation of the American Gas Association, which discontinued operations. The Company also lowered its interest costs by approximately $100,000 primarily from generating more cash from operating activities. Revenue Operating revenues increased approximately 24%. Although weather was slightly warmer than last year in the Company's utility operations, revenues were approximately the same as the prior year due to customer growth, in all utility operations, and rate increases in certain Energy West Montana ("EWM") operating entities. Revenues decreased approximately 5% in propane operations due to the sale of the four retail propane districts in Wyoming in February of fiscal 1998 and warmer weather than last year. Revenues from gas and electric marketing activities increased approximately 90% of which, 51% is from significantly higher volumes of natural gas sold and 39% is from the electric sales. Gross Margin Gross margins (operating revenues less cost of gas purchased and cost of gas trading) decreased approximately $275,000 in 1999. Regulatory gross margins increased approximately $445,000 even though degree-days were slightly warmer than the previous year in all the Company's utility operations. The increase in gross margin resulted from customer growth in all utility operations and allowed rate increases in the West Yellowstone and Cascade districts of EWM. Gross margins from propane operations decreased approximately $410,000 from the sale of the propane properties in fiscal 1998 and warmer weather experienced in all of its operating divisions in fiscal 1999. EWR had lower gross margins of $390,000 of which, gas marketing decreased by $520,000 due to significantly higher natural gas prices in Canada and Montana. This was partially offset by electric gross margins totaling $115,000. Operating Income Operating income decreased by approximately $510,000. Regulated operations had an increase of $75,000, however propane operations had a decrease of $200,000 and energy marketing had a decrease of $420,000. The increased operating income from regulated operations resulted from higher gross margin of $445,000 offset by higher operating expenses of $300,000 primarily due to inflationary trends and additional staff added for safety operations of the Company. Taxes other than income increased approximately $70,000, of which, approximately $50,000 was due to an unfavorable settlement of a sales and use tax audit related to the Company's Arizona operations. The decreased operating income from propane operations was due to a $410,000 decrease in gross margins offset by lower operating expenses of $200,000 both of which are related to the sale of the properties in Wyoming. The decrease in operating income from the Company's energy marketing activities was primarily due to the decrease in gross margin. Other Expenses Operating expenses (excluding cost of gas sales) increased approximately $240,000 or 2% in 1999. The result of the changes, as detailed above, was a decrease in operating income from $3,753,000 in 1998 to $3,240,000 in 1999. However, interest expense decreased by $91,000 or 6% from $1,492,000 in fiscal 1999 compared to $1,583,000 in fiscal 1998. The decrease in interest expense was primarily due to improvement in cash generated from operating activities. Other income increased $698,000 from $209,000 in fiscal 1998 to $907,000 in fiscal 1999. The primary reasons for this increase were gains on derivative trading of Page 5 6 $390,000, an increase in carrying costs on regulatory assets of $100,000 and a loss recognized in fiscal 1998 from the write-off of the investment in American Gas Finance Company, LLC of approximately $248,000. OPERATING RESULTS OF THE COMPANY'S UTILITY OPERATIONS
Years Ended June 30 ------------------------------------------- 2000 1999 1998 -------- -------- -------- (In thousands) (Restated) Operating revenues $ 27,579 $ 28,105 $ 27,825 Gas purchased 16,725 16,885 17,047 -------- -------- -------- Gross Margin 10,854 11,220 10,778 Operating expenses 8,265 8,644 8,273 -------- -------- -------- Operating Income 2,589 2,576 2,505 Interest charges (see note below) 1,378 1,239 1,343 Other utility (income) - net (176) (225) (177) Income taxes 488 534 439 -------- -------- -------- Net utility income $ 899 $ 1,028 $ 900 ======== ======== ========
[interest charges for utility and non-utility operations do not equal total interest charges for the Company, due to eliminating entries between entities.] Fiscal 2000 Compared to Fiscal 1999 Revenues and Gross Margins Utility operating revenues in fiscal 2000 decreased to $27,579,000 from approximately $28,105,000 in fiscal 1999 or 2%. Regulated gross margin, which is defined as operating revenues less gas purchased, was approximately $10,854,000 for fiscal 2000 compared to approximately $11,220,000 in fiscal 1999. Overall revenues decreased by $526,000 primarily due to lower revenues of approximately $40,000 in EWM's Great Falls and Cascade districts, lower revenues of approximately $400,000 in EWW, lower revenues of approximately $164,000 in EWA, all due to warmer weather than last fiscal year. These decreases were partially offset by higher revenues in the West Yellowstone district of EWM of approximately $78,000 due to customer growth. Utility gross margins decreased by approximately $366,000 or 3%, due to significantly warmer weather from last year in all three states served by the utility operations. The winter heating season was 4% warmer than one year ago in EWM's Great Falls and Cascade districts, 3% warmer in EWM's West Yellowstone district, 9% warmer in EWW and 16% warmer in EWA, than the same period one year ago. Operating Expenses Utility operating expenses, exclusive of the cost of gas purchased and federal and state income taxes, were approximately $8,265,000 for fiscal 2000, as compared to approximately $8,644,000 for fiscal 1999. The 4% decrease in the period is due to reduction of non-essential discretionary expenses, higher capitalized payroll and reduced incentives in the Company's utility operations. Interest Charges Interest charges allocable to the Company's utility divisions were approximately $1,378,000 in fiscal 2000, as compared to approximately $1,239,000 Page 6 7 in fiscal 1999, primarily due to higher short-term borrowing, as a result of higher gas inventories and higher unrecovered tracker gas costs in Montana. Income Taxes State and federal income taxes of the Company's utility divisions were approximately $488,000 in fiscal 2000, as compared to approximately $534,000 in fiscal 1999 primarily due to a decrease in pre-tax earnings of approximately $175,000. Fiscal 1999 Compared to Fiscal 1998 Revenues and Gross Margins Regulated revenues increased from $27,825,000 in fiscal 1998 to $28,105,000 in fiscal 1999 or 1%. Gas purchases decreased from approximately $17,047,000 in fiscal 1998 to $16,885,000 in fiscal 1999 or 1%. Regulated gross margin, which is defined as operating revenues less gas purchased, was approximately $11,220,000 for fiscal 1999 compared to approximately $10,778,000 in fiscal 1998. Overall revenues increased approximately $280,000 from fiscal 1998 primarily due to rate increases related to gas purchase adjustments and general rate increases for EWM operating entities. The increased revenue for EWM was partially offset by lower revenue for EWW and EWA due to warmer weather than one year ago. Utility margins increased $442,000 or 4%, because of higher margins from natural gas sales in EWM and slightly higher margins from propane vapor sales in EWA due to a change in regulations related to propane purchase adjustments. These increases were offset by lower margins from warmer weather in EWW. Annual degree-days were 2% warmer in EWM, 8% warmer in EWW and 9% warmer in EWA, than the same period one-year ago. Operating Expenses Utility operating expenses, exclusive of the cost of gas purchased and federal and state income taxes, were approximately $8,644,000 for fiscal 1999, as compared to approximately $8,273,000 for fiscal 1998. The $370,000 or 4% increase in the period is due to normal inflationary trends, additional staff added for safety operations of the Company and higher vacation accruals. In addition, taxes other than income, which are included in operating expenses increased by about $50,000 from an unfavorable settlement of a sales and use tax audit related to the Arizona operations. Interest Charges Interest charges allocable to the Company's utility divisions were approximately $1,239,000 in fiscal 1999, as compared to approximately $1,343,000 in fiscal 1998. The decrease in interest costs of $104,000 is primarily related to higher cash generated from operating activities. Income Taxes State and federal income taxes for the Company's utility operations was approximately $534,000 in fiscal 1999, as compared to approximately $439,000 in fiscal 1998 primarily due to an increase in pre-tax earnings of approximately $250,000. Page 7 8 OPERATING RESULTS OF THE COMPANY'S PROPANE OPERATIONS
Years Ended June 30 ------------------------------------------- 2000 1999 1998 ------ ------ ------ (In thousands) ENERGY WEST PROPANE (EWP) (Restated) Operating revenues $4,824 $3,569 $ 3,757 Cost of propane 2,884 1,693 1,525 ------ ------ ------- Gross Margin 1,940 1,876 2,232 Operating expenses 1,406 1,462 1,664 ------ ------ ------- Operating income 534 414 568 Other (income) expense - net (70) (178) (204) Interest expense (see note below) 147 168 198 Income taxes 161 152 208 ------ ------ ------- Net income $296 $ 272 $ 366 ====== ====== =======
Fiscal 2000 Compared to Fiscal 1999 Revenues and Gross Margins Propane revenues increased approximately $1,255,000 or 35% from $3,569,000 in fiscal 1999 to $4,824,000 in fiscal 2000. These increases occurred primarily because higher wholesale revenues of 43% and retail revenues of 39% due to customer growth and significantly higher propane prices. Gross margin increased by approximately $64,000 primarily because of higher margins per gallon of propane sold in our wholesale and retail operations, due to customer growth, partially offset by volume variance related to weather. Other Income Other income decreased by approximately $108,000 from fiscal 1999 to fiscal 2000, primarily due to a one-time capital gain of approximately $95,000 from the sale of property in Wyoming in fiscal 1999. Expenses for Operations, Interest and Income Taxes Operating expenses for propane operations decreased from approximately $1,462,000 in fiscal 1999 to approximately $1,406,000 in fiscal 2000, a decrease of $56,000. The decrease in operating expenses was primarily related to lower incentives paid and increased capitalized payroll, to build the Superior, Montana Wholesale Propane terminal. Interest charges allocable to the Company's propane divisions were approximately $147,000 in fiscal 2000 compared to approximately $168,000 in fiscal 1999. The lower interest costs was primarily due to lower average capital employed in fiscal year 2000. State and federal income taxes increased to approximately $161,000 for fiscal 2000 from $152,000 due to higher pre-tax income in the propane operations this year. Fiscal 1999 Compared to Fiscal 1998 Revenues and Gross Margins Propane revenues decreased from $3,757,000 in fiscal 1998 to $3,569,000 in fiscal 1999. Propane purchases increased from $1,525,000 in fiscal 1998 to $1,693,000 in fiscal 1999. Correspondingly, gross margin decreased by $356,000 from $2,232,000 in fiscal 1998 to $1,876,000 in fiscal 1999. The decrease in revenue resulted primarily from the sale of retail propane properties, in February of fiscal 1998. However, greater propane wholesale sales of $306,000 mitigated the reduction in retail sales, from that sale. The gas cost increase and margin decrease were also directly attributable to the change in the mix of retail to wholesale propane sales. The margin per gallon for wholesale gallons sold are substantially less than margin per gallon for retail gallons sold. Also, contributing to the decrease in gross margin was warmer weather than last year throughout the Company's propane operations. Page 8 9 Other Income In fiscal 1999 and in fiscal 1998 EWP had capital gains from the sale of operating entities or land and buildings. The decrease in other income in fiscal 1999 compared to fiscal 1998 is directly related to these sales. Specifically, there was a one-time capital gain of approximately $95,000 from the sale of property in Wyoming in fiscal 1999. In fiscal 1998 approximately $125,000 of EWP's other income was attributable to a one-time capital gain on the sale of four district retail propane offices in Wyoming. Expenses for Operations, Interest and Income Taxes Operating expenses for propane operations decreased from approximately $1,664,000 in fiscal 1998 to approximately $1,462,000 in fiscal 1999 for a decrease of $202,000. The decrease in operating expenses was primarily related to the sale of the retail properties in fiscal 1998. Interest charges allocable to the Company's propane divisions were approximately $168,000 in fiscal 1999 compared to approximately $198,000 in fiscal 1998. This decrease of $30,000 is primarily related to lower investments in property, plant and equipment related to the property sales in fiscal 1998 and fiscal 1999. State and federal income taxes decreased approximately $56,000 from fiscal 1998 to fiscal 1999, primarily due to lower pre-tax earnings in fiscal 1999. OPERATING RESULTS OF THE COMPANY'S ENERGY MARKETING OPERATIONS
Years Ended June 30 ------------------------------------------- 2000 1999 1998 ------ ------ ------ (In thousands) ENERGY WEST RESOURCES (EWR) (Restated) Gas & electric trading revenue $39,414 $21,643 $11,383 Cost of gas & electric trading 38,937 20,850 10,185 ------- ------- ------- Gross Margin 477 793 1,198 Operating expenses 779 637 570 ------- ------- ------- Operating income (loss) (302) 156 628 Other (income) - net (243) (413) (10) Interest expense (see note below) 122 56 6 Income taxes (benefit) (68) 247 234 ------- ------- ------- Net income (loss) $ (113) $ 266 $ 398 ======= ======= =======
[interest charges for each of the Company's operations do not equal total interest charges for the Company, due to eliminating entries between entities.] Fiscal 2000 Compared to Fiscal 1999 Revenues and Gross Margins Gas and Electric trading revenues increased approximately $17,800,000 or 82% in fiscal 2000 to approximately $39,414,000 from $21,643,000 in fiscal 1999. Cost of gas and electric trading increased approximately $18,100,000 or 87% from $20,850,000 in fiscal 1999 to $38,937,000 in fiscal 2000. Consequently, gross margin decreased by approximately $300,000 from fiscal 1999 to fiscal 2000. The increase in revenues was due to greater gas volumes and electricity sold due to an increase in customers in fiscal 2000 compared to fiscal 1999, while cost of gas and electric trading increased primarily from greater gas volumes and electricity sold due to an increase in customers at significantly higher gas and electricity market prices. Energy marketing gross margins decreased due to contracts at market on the supply side and fixed contracts on the sale side. Page 9 10 Expenses for Operations, Interest and Income Taxes Operating expenses related to energy marketing activities increased from approximately $637,000 in fiscal 1999 to approximately $779,000 in fiscal 2000. This increase in operating expenses was related to staff expansion and training costs required to serve the growth in marketing activity. The Company had no retail energy marketing activities in fiscal 1999, because open-access for residential and small commercial customers, in Montana, was not allowed until the fall of 1999. Other income decreased approximately $168,000 in fiscal 2000 from approximately $411,000 in fiscal 1999 to $243,000 in fiscal 2000, and is directly related to the difference in gains associated with derivative trading between fiscal 2000 and fiscal 1999. Interest charges increased approximately $66,000, due to increased working capital requirements in fiscal 2000. State and federal income taxes decreased in fiscal 2000 to approximately a $68,000 benefit from $247,000 in tax expense in fiscal 1999, due to an increased pre-tax loss of approximately $694,000. Fiscal 1999 Compared to Fiscal 1998 Revenues and Gross Margins Gas marketing revenues increased from approximately $11,383,000 in fiscal 1998 to $17,168,000 in fiscal 1999. Cost of gas increased from $10,185,000 in fiscal 1998 to $16,490,000 in fiscal 1999. However, gross margin decreased by $520,000 from $1,198,000 in fiscal 1998 to $678,000 in fiscal 1999. The increase in revenue resulted primarily from greater gas volumes sold due to higher market capture in fiscal 1999 compared to fiscal 1998. The higher cost of gas occurred because of greater gas volumes sold and from significantly higher prices, for gas purchases, in Canada and Montana. The higher cost of gas was the most significant factor affecting the decrease in gross margin. The Company had its first electric marketing sales in fiscal 1999. The revenues and cost of electricity associated with these electric sales were approximately $4,475,000 and $4,360,000, respectively. The resulting margin from these sales was $115,000. Other Income Other income increased by approximately $351,000 in fiscal 1999 when compared to fiscal 1998. This increase was directly related to mark-to-market gains associated with gas trading derivative activities. Expenses for Operations, Interest and Income Taxes Operating expenses related to energy marketing activities increased from approximately $570,000 in fiscal 1998 to approximately $638,000 in fiscal 1999, an increase of $67,000. The increase in operating expenses is primarily due to inflationary trends, staff expansion and training costs required to serve the growth in marketing activity. Interest charges allocable to EWR increased by approximately $50,000 from fiscal 1998 to fiscal 1999. This increase is related to higher working capital required to finance gas inventory and an increase in accounts receivable due to increased sales of gas and electricity. State and federal income taxes increased approximately $10,000 from fiscal 1998 to fiscal 1999. Page 10 11 OPERATING RESULTS OF THE COMPANY'S OTHER OPERATIONS
Years Ended June 30 ------------------------------------- 2000 1999 1998 ------ ------ ------ (In thousands) (Restated) ENERGY WEST DEVELOPMENT (EWD) Operating revenues $379 $ 499 $ 98 Cost of Goods Sold 243 259 0 ---- ----- ----- Gross Margin 136 240 98 Operating expenses 93 148 47 ---- ----- ----- Operating income 43 92 51 Other (income) expense - net (91) (3) 284 Interest expense (see note below) 27 30 0 Income taxes (benefit) 68 44 (89) ---- ----- ----- Net income (loss) $39 $ 21 ($ 144) ==== ===== ========
[interest charges for each of the Company's operations do not equal total interest charges for the Company, due to eliminating entries between entities.] The other operations of the Company are primarily related to EWD, the Company's real estate development subsidiary. In fiscal 2000, EWD's net income was approximately $39,000 as compared to $21,000 in fiscal 1999, primarily due to the sale of one of its real estate properties in June 2000 for an after-tax capital gain of approximately $50,000, partially offset by lower operating revenues of $45,000, from a cash settlement received in fiscal 1999, upon final dissolution of Gas Finco, a financing subsidiary of the American Gas Association. In fiscal 1999, EWD's net income was approximately $21,000 as compared to a net loss of ($144,000). The primary difference in net income is due a to pre-tax cash settlement of $45,000 upon final dissolution of Gas Finco, a financing subsidiary of the American Gas Association as compared to a pre-tax write-off of $250,000 from the Company's investment in Gas Finco in fiscal year 1998. The primary activity for Energy West Development, Inc. during fiscal 2000 was a lease of commercial property in Great Falls, Montana. However appliance sales operations, which the Company has been involved in for the last seven years and had previously been reported as other income from regulated operations, is now included with Energy West Development, Inc. The net income associated with the appliance sales operations in fiscal 2000 is comparable to the net income from that operation for the same period in fiscal 1999. 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. As the short-term debt balance significantly exceeds working capital requirements, the Company has issued long-term debt or equity securities to pay down short-term debt. The Company's short-term borrowing requirements vary according to the seasonal nature of its sales and expense activity. The Company has greater need for short-term borrowing during periods when internally generated funds are not sufficient to cover all capital and operating requirements, including costs of gas purchases and capital expenditures. In general, the Company's short-term borrowing needs for purchases of gas inventory and capital expenditures are greatest during the summer months and the Company's short-term borrowing needs for financing of customer accounts receivable are greatest during the winter months. Short-term borrowing utilized for construction or property acquisitions generally has been on an interim basis and converted to long-term debt and equity when it becomes economical and feasible to do so. At June 30, 2000, the Company had $22,000,000 in bank lines of credit, of Page 11 12 which $4,855,000 had been borrowed under the credit agreement at June 30, 2000. The short-term borrowings for fiscal 2000 had a daily weighted average interest rate of 8.01%. The Company had outstanding letters of credit totaling $4,027,000 related to electric and gas purchase contracts. These letters of credit, when netted against the total bank lines of credit, result in a reduction in borrowing capacity to $17,973,000. CASH FLOW ANALYSIS Fiscal 2000 Compared to Fiscal 1999 The Company provided net cash from operating activities for fiscal 2000 of approximately $616,000 as compared to approximately $6,275,000 for fiscal 1999. This decrease in cash provided by operating activities of approximately $5,660,000 was primarily due to greater working capital requirements of approximately $5,610,000 and non-cash transactions of $50,000. The higher working capital requirements were primarily due to an increase in gas inventory of approximately $3,730,000, increased prepaid gas of approximately $198,000, decreased income tax liability of $1,190,000, increase in accounts receivable of $166,000, and an increase in recoverable cost of gas purchases of approximately $950,000, offset by payables increasing by $543,000. Net income and non-cash transactions affecting net income decreased cash provided by operations by approximately $50,000. The most significant items affecting this decrease were lower net income of $466,000 and greater gains from the sale of assets of $24,000, partially offset by higher depreciation costs of $220,000 and greater deferred income taxes of $256,000. Cash used in investing activities was approximately $4,130,000 in fiscal 2000 compared to approximately $3,240,000 in fiscal 1999, an increase of $890,000. This increase was primarily due to higher construction expenditures for capital projects of approximately $1,030,000 and a net decrease in proceeds from customer advances for construction and contributions in aid of construction of approximately $130,000. These increases were offset by an increase in the proceeds from the sale of assets of approximately $240,000 and lower loans to customers, recorded as notes receivable of approximately $20,000. Cash provided by financing activities was approximately $3,400,000 in fiscal 2000 compared to cash used in financing activities of approximately $2,860,000, an increase of $6,260,000. The primary reasons for the increase are lower principal payments on notes payable of approximately $6,290,000. These increases are partially offset by higher repayments of long-term debt and higher dividends paid. Fiscal 1999 Compared to Fiscal 1998 The Company provided net cash in operating activities for fiscal 1999 of approximately $6,275,000 as compared to net cash provided from operating activities of approximately $4,960,000 for fiscal 1998. This increase in cash provided by operating activities of $1,315,000 was primarily due to lower working capital requirements of approximately $1,220,000. The decrease in working capital requirements resulted primarily from lower natural gas inventory somewhat offset by an increase in recoverable cost of gas purchases. The required quantity for natural gas inventory is lower because of open access, approved by the Montana Public Service Commission, for the Great Falls district of EWM. Regulatory treatment of natural gas inventory pricing has the affect of increasing recoverable cost of gas purchases, as inventory levels decline. The lower inventory also impacts the increase in recoverable cost of gas purchases. Other significant impacts on lower working capital were an increase in accounts payable of approximately $750,000 offset by higher accounts receivable of approximately $430,000 primarily due to greater natural gas revenues and the Company's first electric sales by EWR. Page 12 13 Net income and non-cash transactions affecting net income improved cash generated from operations by approximately $100,000. The most significant items affecting this increase were higher net income of $70,000, less gains from the sale of assets of $90,000 and greater deferred income taxes of $225,000. These increases were offset by the write-off of an investment in American Gas Finance Co. of $250,000 in fiscal 1998. Cash used in investing activities was approximately $3,240,000 in fiscal 1999 compared to approximately $1,590,000 in fiscal 1998, an increase of $1,650,000. This increase was primarily due to higher construction expenditures for capital projects of approximately $720,000, a decrease in the proceeds from the sale of assets of approximately $950,000 and a net decrease in proceeds from customer advances for construction and contributions in aid of construction of approximately $180,000. These increases were offset by lower loans to customers, recorded as notes receivable, of approximately $190,000. Cash used in financing activities was approximately $2,860,000 in fiscal 1999 compared to approximately $3,460,000 in fiscal 1998, a decrease of $600,000. The primary reasons for the decrease are lower principal payments on notes payable of $8,490,000 mostly offset by proceeds, from a long-term debt issuance in fiscal 1998 of approximately $7,540,000 resulting in a net decrease of $940,000. These decreases are offset by higher dividends paid of approximately $140,000 and lower sales of common stock through the Company's Dividend Reinvestment Plan and the Company's Incentive Stock Option Plan of approximately $160,000. Capital Expenditures Capital expenditures of the Company are primarily for expansion and improvement of its regulated 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 $4.8 million in fiscal 2000, $3.7 million for fiscal 1999 and $3.0 million in fiscal 1998. During fiscal 2000, approximately $3.7 million was expended for system expansion, construction and maintenance of the natural gas and propane vapor systems for the regulated utility operations. In addition, approximately $.9 million was expended for bulk tanks, customer tanks and equipment for the propane operating entities. Capital expenditures are expected to be approximately $3.5 million in fiscal 2001, including approximately $2.4 million for continued system expansion, construction and maintenance of the natural gas and propane vapor systems for the regulated utility operations. In addition, approximately $.7 million is expected to be expended for bulk tanks, customer tanks and equipment for the propane operating entities with the balance of $.4 million to be expended for energy marketing. The Company continues to evaluate opportunities to expand its existing businesses from time to time. Restatement of Financial Statements The Company is restating its financial statements because an error was recently discovered that affects the expense for postretirement benefits other than pensions, related balance sheet accounts and certain disclosures previously reported in its financial statement for the years ended June 30, 2000 and 1999. The net effect of the correction of this non-cash error was to decrease net income by $175,422 in 2000. The Company's actuary consistently uses a method that defers and amortizes actuarial gains and losses over approximately 16 years in the determination of postretirement benefit expense. In 2000, the Company inadvertently included all of these gains in the calculation of the postretirement benefit expense, resulting in an understatement of postretirement benefit expense. Business Factors 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, the adequacy and timeliness of rate relief, cost recovery and necessary regulatory approvals, and continued access to capital markets. In addition, changes in the Page 13 14 competitive environment particularly related to the Company's propane and energy marketing segments could have a significant impact on the performance of the Company. The regulatory structure is in the process of transition. Legislative and regulatory initiatives, at both the federal and state levels, are designed to promote competition. The changes in the gas industry have allowed all 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 is 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 differs 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 ratemaking process, there will be a corresponding increase or decrease in revenues. Accordingly, the Company has deferred certain costs, which will be amortized over various periods of time. The costs deferred are further described in the Company's financial statements and the notes thereto. To the extent that collection of such costs or payment of liabilities is no longer probable as a result of changes in regulation and/or the Company's competitive position, the associated regulatory asset or liability will be reversed with a charge or credit to income. If the Company's regulated segment were to discontinue the application of SFAS 71, the accounting impact would be an extraordinary, non-cash charge to operations, that could be material to the financial position and results of operation of the Company. However, the Company is unaware of any circumstances or events in the foreseeable future that would cause it to discontinue the application of SFAS 71. SEC Ratio of Earnings to Fixed Charges For the twelve months ended June 30, 2000,1999 and 1998, the Company's ratio of earnings to fixed charges was 1.92, 2.45 and 2.25 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 regulated utility operations, are significantly affected by long-term inflation. Neither depreciation charges against earnings nor the ratemaking process reflect the replacement cost of utility plant. However, based on past practices of regulators, these businesses will be allowed to recover and earn on the actual cost of their investment in the replacement or upgrade of plant. Although prices for natural gas may fluctuate, earnings are not impacted because gas cost tracking procedures semi-annually balance gas costs collected from customers with the costs of supplying natural gas. The Company believes that the effects of inflation, at currently anticipated levels, will not significantly affect results of operations. Accounting for Income Taxes Effective July 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by SFAS No. 109, Accounting for Income Taxes. The cumulative effect of adopting Page 14 15 Statement No. 109 created a regulatory asset and a regulatory liability for regulated operations, representing the anticipated effects on regulated rates charged to customers which will result from the adoption of Statement No. 109. For the Year ended June 30, 2000, changes in certain assets and liabilities resulted in a decrease in regulatory assets of $156,486 and a decrease in regulatory liabilities of $13,160 for regulated entities, resulting in ending balances of $485,073 and $109,481, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. See Note 5 to the Consolidated Financial Statements for additional information. Postretirement Benefits Other than Pensions The Company adopted, effective July 1, 1993, SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This standard requires that the projected future cost of providing postretirement benefits be recognized as an expense as employees render service rather than when paid. Effective for fiscal year 1994, the Company modified its plan for these benefits and has elected to pay eligible retirees (post 65 years of age) $125 per month in lieu of contracting for health and life insurance benefits. The amount of this payment is fixed and will not increase with medical trends or inflation. The Company's transition obligation at June 30, 2000 and 1999 was $254,960 and $274,560, respectively, of which $215,000 in 2000 and $234,100 in 1999 is related to the regulated utility operations. The transition obligation was accrued as a deferred charge and will be amortized over 20 years. Substantially, all of the transition obligation is for the future cost of benefits to active employees. The Company's plan allows 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 prior service obligation association with the plan change at June 30, 2000 and 1999 was $198,220 and $216,120 respectively, of which $162,020 in 2000 and $178,520 in 1999 is related to regulated utility operations. The prior service obligation was accrued as a deferred charge and will be amortized over fifteen years. The incremental annual increases in consolidated expenses due to adoption of SFAS No. 106 were $47,500, $115,120 and $121,600 in fiscal years 2000, 1999 and 1998, respectively. Included in these amounts were $35,800 in 2000, $95,600 in 1999 and $95,600 in 1998 relating to regulatory operations. The MPSC allowed recovery of these costs beginning on November 4, 1997 for the utility operation 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 adoption of SFAS No. 106 did not have a significant effect upon results of operations. See Note 4 to the Consolidated Financial Statements for additional information. ENVIRONMENTAL ISSUES Refer to footnote 10 of the Company's Notes to Consolidated Financial Statements located at item 8. Year 2000 The Y2K issue relates to the ability of systems, including hardware, software and embedded technology, to properly interpret date information relating to the Year 2000 and beyond that. Any of the Company's computer systems and embedded microprocessors that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the Year 2000 (Y2K). This could result in a system failure or miscalculations causing disruptions in operations. Some possible affects include the inability to process transactions, send billing statements to customers, or similar normal business activities. Page 15 16 Total costs incurred for fiscal 2000, to address the Y2K issue, were approximately $50,000. The total costs to address the Y2K issue, most of which were internal labor costs incurred in prior fiscal years, were approximately $125,000 and therefore did not have a material impact on the Company's current financial position, liquidity or results of operations. The Company did not experience any Y2K rollover incidents and has not experienced any other Y2K related incidents since the rollover. Although it is impossible to predict if there will be any Y2K incidents in the future, the Company's experience, to date, and its extensive preparations prior to the rollover, results in the Company not expecting any significant Y2K incidents to occur in the future. Market Risk The Company's energy-related businesses are exposed to risks relating to changes in certain commodity prices and counterparty performance. In order to manage the various risks relating to these exposures, the Company utilizes natural gas derivatives and has established risk management oversight for these risks. The Company has implemented or is in the process of implementing procedures to manage such risk and has established a comprehensive risk management committee, overseen by the Audit Committee of the Company's Board of Directors, to monitor compliance with the Company's risk management policies and procedures. The Company protects itself against price fluctuations on natural gas and electricity by limiting the aggregate level of net open positions, which are exposed to market price changes and through the use of natural gas derivative instruments for hedging purposes. The net open position is actively managed with strict policies designed to limit the exposure to market risk and which require at least weekly reporting to management of potential financial exposure. The risk management committee has limited the types of financial instruments the company may trade to those related to natural gas commodities. The quantitative information related to derivative transactions is contained in footnote number eleven to the condensed consolidated financial statements. Credit risk relates to the risk of loss that the Company would incur as a result of non-performance by counterparties of their contractual obligations under the various instruments with the Company. Credit risk may be concentrated to the extent that one or more groups of counterparties have similar economic, industry or other characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in market or other conditions. In addition, credit risk includes not only the risk that a counterparty may default due to circumstances relating directly to it, but also the risk that a counterparty may default due to circumstances which relate to other market participants which have a direct or indirect relationship with such counterparty. The Company seeks to mitigate credit risk by evaluating the financial strength of potential counterparties. However, despite mitigation efforts, defaults by counterparties occur from time to time. To date, no such default has occurred. Page 16 17 Supplementary Data (Unaudited) Consolidated Quarterly Financial Data (In thousands, except per share data)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER --------- --------- --------- ---------- (Restated) FISCAL YEAR 2000 Revenues $12,008 $19,709 $23,861 $16,618 Operating income (loss) ($881) $1,201 $2,688 ($ 144) Net income (loss) ($666) $500 $1,441 ($ 154) Net income (loss) per share ($.27) $.20 $.59 ($ .06) FISCAL YEAR 1999 Revenues $9,061 $17,115 $17,749 $9,536 Operating income (loss) $(893) $1,315 $2,265 $553 Net income (loss) $(685) $751 $1,290 $231 Net income (loss) per share $(0.28) $0.31 $0.53 $0.10
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 The foregoing Management's Discussion and Analysis and other portions of this annual report contain various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Sections 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events, including the statement that the total cost of changes required to achieve a year 2000 date conversion are not expected to have a material effect on the Company's financial statements. In addition, statements containing expressions such as "believes," "anticipates," "plans" or "expects" used in the Company's periodic reports on Forms 10-K and 10-Q filed with the SEC are intended to identify forward-looking statements. The company cautions that these and similar statements included in this report and in previously filed periodic reports including reports filed on Forms 10-K and 10-Q are further qualified by important factors that could cause actual results to differ materially from those in the forward looking statement. Page 17 18 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, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2000. Our audits also included the financial statement schedule listed in the index at item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. As discussed in Note 2 to the consolidated financial statements, the Company has restated its previously issued 2000 and 1999 financial statements. /s/ Ernst & Young LLP Salt Lake City, Utah August 18, 2000, except for Note 2 As to which the date is August 31, 2001 Page 18 19 Energy West Incorporated and Subsidiaries Consolidated Balance Sheets
JUNE 30 ------------------------------- 2000 1999 ---------- ----------- (Restated) ASSETS Current assets: Cash and cash equivalents $112,174 $225,970 Accounts receivable, less allowances for uncollectible accounts of $87,999 ($84,538 at June 30, 1999) 7,729,841 6,033,820 Natural gas and propane inventory 1,913,701 1,423,910 Materials and supplies 586,130 627,046 Prepayments and other 360,828 154,643 Refundable income tax payments 971,626 122,202 Recoverable costs of gas purchases 4,713,395 2,840,975 ---------- ---------- Total current assets 16,387,695 11,428,566 Notes receivable due after one year 162,385 188,446 Property, plant and equipment 54,801,395 50,913,383 Less accumulated depreciation and amortization 22,997,262 21,541,657 ---------- ---------- Net property, plant and equipment 31,804,133 29,371,726 Deferred charges: Net unamortized debt issue costs 1,021,274 1,112,081 Regulatory assets for income taxes 485,073 641,559 Other regulated assets 1,044,259 765,529 Other assets 289,403 202,385 ---------- ---------- Total deferred charges 2,840,009 2,721,554 ---------- ---------- Total assets $51,194,222 $43,710,292 =========== ===========
Page 19 20
JUNE 30 ------------------------------- 2000 1999 ----------- ---------- (Restated) CAPITALIZATION AND LIABILITIES Current liabilities: Long-term debt due within one year $445,000 $430,723 Notes payable 4,855,000 - Accounts payable--gas and electric purchases 5,769,485 3,522,655 Accounts payable--other 589,807 679,288 Payable to employee benefit plans 585,984 641,721 Accrued vacation 409,117 393,256 Other current liabilities 524,993 611,672 Deferred income taxes--current 1,651,208 950,446 ----------- ----------- Total current liabilities 14,830,594 7,229,761 Other: Deferred income taxes 3,699,199 3,565,085 Deferred investment tax credits 418,593 439,655 Contributions in aid of construction 993,910 938,572 Customer Advances for Construction 658,748 658,867 Accumulated postretirement obligation 65,803 156,535 Regulatory liability for income taxes 109,481 122,641 Deferred gain on sale-leaseback of assets 141,779 165,407 Other 94,910 61,754 ----------- ----------- Total other 6,182,423 6,108,516 Long-term debt (less amounts due within one year) 16,395,000 16,840,000 Commitments and contingencies Stockholders' equity: Preferred stock--$.15 par value: Authorized--1,500,000 shares; Outstanding--none Common stock--$.15 par value: Authorized--3,500,000 shares; Outstanding--2,475,435 shares (2,433,740 shares at June 30, 1999) 371,321 365,065 Capital in excess of par value 3,906,401 3,560,541 Retained earnings 9,508,483 9,606,409 ----------- ----------- Total stockholders' equity 13,786,205 13,532,015 ----------- ----------- Total capitalization 30,181,205 30,372,015 ----------- ----------- Total capitalization and liabilities $51,194,222 $43,710,292 =========== ===========
See accompanying notes. Page 20 21 Energy West Incorporated and Subsidiaries Consolidated Statements of Income
YEAR ENDED JUNE 30 ---------------------------------------------------- 2000 1999 1998 ------------ ----------- ------------ (Restated) Operating revenue: Utilities $27,578,721 $28,105,077 $27,824,360 Propane operations 4,824,258 3,568,594 3,757,742 Gas & Electric trading 39,413,771 21,643,071 11,383,019 Other 379,042 498,609 98,500 ----------- ----------- ----------- Total operating revenue 72,195,792 53,815,351 43,063,621 Operating expenses: Gas purchased 19,608,510 18,577,797 18,571,808 Gas & Electric trading 38,936,672 20,850,052 10,184,855 Other Cost of Goods Sold 243,128 258,987 - Distribution, general and administrative 7,648,834 8,018,224 7,696,928 Maintenance 399,579 469,021 496,545 Depreciation and amortization 1,856,453 1,694,895 1,732,394 Taxes other than income 638,788 708,354 628,183 ----------- ----------- ----------- Total operating expenses 69,331,964 50,577,330 39,310,713 ----------- ----------- ----------- Operating income 2,863,828 3,238,021 3,752,908 Other income, net 580,697 818,609 142,574 ----------- ----------- ----------- Income before interest charges and income taxes 3,444,525 4,056,630 3,895,482 Interest charges: Long-term debt 1,242,380 1,258,810 1,216,190 Short-term and other 431,523 233,747 367,073 ----------- ----------- ----------- Total interest charges 1,673,903 1,492,557 1,583,263 ----------- ----------- ----------- Income before income taxes 1,770,622 2,564,073 2,312,219 Provision for income taxes 649,352 976,760 792,129 ----------- ----------- ----------- Net income $1,121,270 $1,587,313 $1,520,090 =========== =========== =========== Basic and diluted earnings per Common share $.46 $.66 $.64
See accompanying notes. Page 21 22 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, 1997 $353,623 $2,932,962 $8,710,349 $11,996,934 Exercise of stock options into 22,908 shares of common stock at $6.375 to $7.125 per share 3,436 157,948 - 161,384 Sale of 8,095 shares of common stock at $8.84 To $9.004 per share under the Company's Dividend reinvestment plan 1,214 71,071 - 72,285 Issuance of 11,639 shares of common stock to ESOP at estimated fair value of $8.645 per share 1,746 98,869 - 100,615 Issuance of 3,078 shares of common stock at $8.395 per share under the Company's deferred board stock compensation plan 462 25,378 - 25,840 Net income for the year ended June 30, 1998 - - 1,520,090 1,520,090 Dividends on common stock--$.445 per share - - (1,065,859) (1,065,859) -------- ---------- ---------- ----------- Balance at June 30, 1998 360,481 3,286,228 9,164,580 12,811,289 Exercise of stock options into 100 shares of common stock at $9.00 per share 15 885 - 900 Sale of 15,011 shares of common stock at $8.625 to $9.688 per share under the Company's dividend reinvestment plan 2,253 132,533 - 134,786 Issuance of 13,738 shares of common stock to ESOP at estimated fair value of $9.310 per share 2,061 125,840 - 127,901 Issuance of 1,701 shares of common stock at $9.00 per share under the Company's deferred board stock compensation plan 255 15,055 - 15,310 Net income for the year ended June 30, 1999 - - 1,587,313 1,587,313 Dividends on common stock--$.465 per share - - (1,145,484) (1,145,484) -------- ---------- ---------- ----------- Balance at June 30, 1999 365,065 3,560,541 9,606,409 13,532,015 Sale of 24,499 shares of common stock at $7.930 to $8.502 per share under the Company's dividend reinvestment plan 3,677 194,779 - 198,456 Issuance of 16,153 shares of common stock to ESOP at estimated fair value of $8.922 per share 2,423 141,695 - 144,118 Issuance of 1,043 shares of common stock at $9.149 per share under the Company's Deferred Board stock compensation plan 156 9,386 - 9,542 Net income for the year ended June 30, 2000 - - 1,121,270 1,121,270 Dividends on common stock--$.485 per share - - (1,219,196) (1,219,196) -------- ---------- ---------- ----------- Balance at June 30, 2000 (Restated) $371,321 $3,906,401 $9,508,483 $13,786,205 ======== ========== ========== ===========
See accompanying notes. Page 22 23 Energy West Incorporated and Subsidiaries Consolidated Statements of Cash Flows
YEAR ENDED JUNE 30 ------------------------------------------------- 2000 1999 1998 ----------- ---------- ---------- (Restated) OPERATING ACTIVITIES Net income $1,121,270 $1,587,313 $1,520,090 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,132,118 1,912,112 1,946,480 Write-off of investment in Gas Finco - - 250,000 Gain on sale of assets (145,289) (121,416) (211,465) Investment tax credit (21,062) (21,061) (21,063) Deferred gain on sale of assets (23,628) (23,628) (23,628) Deferred income taxes 834,876 578,881 353,438 Changes in operating assets and liabilities: Accounts receivable (1,696,021) (1,529,585) (1,101,707) Natural gas and propane inventory (489,791) 3,246,023 1,122,584 Accounts payable 2,157,349 1,615,928 864,460 Recoverable costs of gas purchases (1,872,420) (914,226) (253,464) Prepaid gas (206,185) (7,552) 371,413 Other assets and liabilities (1,174,935) (48,620) 142,232 ----------- ----------- ----------- Net cash provided by (used in) operating Activities 616,282 6,274,169 4,959,370 INVESTING ACTIVITIES Construction expenditures (4,756,883) (3,731,125) (3,014,020) Increase in notes receivable - (13,200) (200,000) Proceeds from sale of assets 541,988 298,378 1,247,601 Collection of long-term notes 26,061 16,946 10,345 Customer advances for construction (119) 144,804 347,374 Increase from contributions in aid of construction 55,338 43,805 22,025 ----------- ----------- ----------- Net cash used in investing activities (4,133,615) (3,240,392) (1,586,675)
Page 23 24 Energy West Incorporated and Subsidiaries Consolidated Statements of Cash Flows (continued)
YEAR ENDED JUNE 30 ------------------ 2000 1999 1998 ------------ ------------ ------------ FINANCING ACTIVITIES Proceeds from long-term debt - - 8,000,000 Debt issuance and reacquisition costs - - (458,642) Payment of long-term debt (430,723) (413,033) (361,959) Proceeds from notes payable 44,325,000 29,231,484 22,346,120 Repayment of notes payable (39,470,000) (30,674,466) (32,283,139) Sale of common stock - 900 161,384 Dividends paid (1,020,740) (1,010,698) (867,118) ----------- ----------- ----------- Net cash provided by (used in) financing activities 3,403,537 (2,865,813) (3,463,354) Net increase (decrease) in cash and cash equivalents (113,796) 167,964 (90,659) Cash and cash equivalents at beginning of year 225,970 58,006 148,665 ----------- ----------- ----------- Cash and cash equivalents at end of year $112,174 $225,970 $58,006 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid for: Interest $1,639,867 $1,444,943 $1,536,402 Income taxes 460,000 (38,319) 862,000 Noncash financing activities: Dividend reinvestment and 207,998 150,096 98,125 compensation plan ESOP shares issued 144,118 127,901 100,615
See accompanying notes. Page 24 25 Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements June 30, 2000 1. PRINCIPAL ACCOUNTING POLICIES GENERAL 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 involve the distribution and sale of natural gas to the public in the Great Falls, Montana and Cody, Wyoming areas and sale of propane to the public through underground propane vapor systems in the Payson, Arizona and Cascade, Montana areas. In addition, since 1995, the Company has distributed natural gas through an underground system in West Yellowstone, Montana that is supplied by liquefied natural gas ("LNG"). The Company conducts certain non-utility operations through its three wholly owned subsidiaries, Energy West Propane, Inc. ("EWP"), formally Rocky Mountain Fuels, Inc., Energy West Resources, Inc. ("EWR"), and Energy West Development, Inc. ("EWD"), formerly Montana Sun. EWP is engaged in the distribution of retail and wholesale bulk propane in Wyoming, South Dakota, Nebraska, Colorado, Arizona and Montana and Wyoming. EWR is involved in the marketing of gas and electricity and gas storage in Montana. EWD owns one real estate property in Great Falls, Montana. CONSOLIDATED SUBSIDIARIES The consolidated financial statements include three wholly-owned, nonregulated subsidiaries - Energy West Resources, Inc., Energy West Propane (dba Rocky Mountain Fuels Inc), Energy West Development (formerly Montana Sun). All significant intercompany accounts and transactions have been eliminated in consolidation. Energy West Resources, Inc. ("EWR") is a gas and electricity marketing operation. Its principal assets are capitalized storage field costs and inventory. EWR primarily markets gas and electricity to industrial and commercial customers (businesses using over 5,000 Mcf of natural gas annually), but recently began marketing to small commercial and residential customers. EWR began its electric marketing activities in January 1999. Energy West Propane ("EWP") is a bulk retail and wholesale liquid propane sales operation. Its principal assets include bulk storage and customer tanks, delivery trucks, and related equipment. Energy West Development ("EWD") operating activities consist of commercial real estate development. Its significant assets consist of real estate held for future sale. 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. Page 25 26 Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) NATURAL GAS AND PROPANE INVENTORY Natural gas inventory and propane inventory are stated at the lower of weighted average cost or net realizable value except for Energy West Montana - Great Falls, which is stated at the rate approved by the MPSC, which includes transportation costs. 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 3.47%, 3.38% and 3.66% during the years ended June 30, 2000, 1999 and 1998, respectively. GAS REVENUE AND COST RECOGNITION The Company's business activities include the buying and selling of natural gas. The Company recognizes revenue and costs on gas transactions when gas is delivered to the purchaser. Any gas not purchased by the consumer at the end of each month is carried in inventory at cost. GAS COMMODITY HEDGING The Company's energy-related businesses are exposed to risks relating to changes in certain commodity prices and counter-party performance. In order to manage the various risks relating to these exposures, the Company utilizes natural gas derivatives and has established risk management oversight for these risks. The Company has procedures to manage such risk and has established a comprehensive risk management committee, overseen by the Audit Committee of the Company's Board of Directors, to monitor compliance with the Company's risk management policies and procedures. The Company protects itself against price fluctuations on natural gas by limiting the aggregate level of net open positions exposed to market price changes and through the use of natural gas derivative instruments for hedging purposes. The net open position is actively managed with strict policies designed to limit the exposure to market risk and which require at least weekly reporting to management of potential financial exposure. The risk management committee has limited the types of financial instruments the Company may trade to those related to natural gas commodities. Financial instruments generally are not held for speculative trading purposes. Gains and losses related to derivative commodity instruments which qualify as hedges are recognized in the consolidated statements of income when the underlying hedged physical transaction closes (the deferral method) and are included in the same category as the hedged item (natural gas purchased). GAS AND ELECTRIC COMMODITY TRADING The Company may engage in natural gas and electricity commodity derivatives designated for trading purposes and therefore experiences net open positions in terms of price and volume and specified delivery point. The open positions expose the Company to the risk that fluctuating market prices may adversely impact its financial position or results of operations. However, the net open position is actively managed with strict policies designed to limit the exposure to market risk and which require weekly reporting to management of potential financial exposure. Management has limited the types of derivative instruments the company may trade to those related to natural gas and electric commodities. Page 26 27 Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) The Company's trading activities are subject to mark-to-market accounting. Under this method, changes in the market value of outstanding natural gas and electric derivative instruments utilized for trading are recognized in income on a current basis. They are included on the Consolidated Statements of Income in operating revenues or expenses (cost of sales) as appropriate, and on the Consolidated Balance Sheets as accounts receivable or payable. Because of underlying price fluctuations, the mark-to-market totals may fluctuate throughout the month. 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 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 sheets. 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 and cash equivalents, 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. 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 98% of the carrying value. Outstanding letters of credit totaled $4,027,000 at June 30, 2000 and $3,450,000 at June 30, 1999. The letters of credit guarantee the Company's performance to third parties for gas purchases and gas transportation services. EARNINGS PER SHARE Earnings per common share ("EPS") are computed based on the weighted average number of common shares issued and outstanding and common stock equivalents, if dilutive. Basic EPS is calculated by dividing net income by the weighted-average shares outstanding during the period. Page 27 28 Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) Diluted EPS is calculated by dividing net income by the sum of the weighted- average shares outstanding during the period and the additional dilutive shares resulting from the outstanding stock options. For fiscal year ended June 30, 2000, 1999, and 1998 the calculations for basic EPS and diluted EPS resulted in the same earnings per share. The weighted average number of shares under the diluted method at each date were 2,456,555 in 2000, 2,418,910 in 1999, and 2,390,814 in 1998. STOCK-BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees (the intrinsic value method), for its stock options rather than the alternative fair value method provided for by SFAS No. 123, Accounting for Stock-Based Compensation. Accounting for stock options using APB No. 25 results in no compensation expense to the Company because the exercise price for the stock options equals the market price of the underlying stock on the date of the grant. 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 flows 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 differs in certain respects from application by the nonregulated segment and other nonregulated businesses. The regulated segment prepares its financial statements in accordance with Statement of Financial 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, noncash charge to operations that could be material to the financial position and results of operations 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 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 approximate the economic lives for generally accepted accounting principles. Page 28 29 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 1998 and 1999 consolidated financial statements to conform to the fiscal 2000 presentation. NEW ACCOUNTING STANDARD The Company adopted the accounting provisions of Statement of Financial Accounting Standards (SFAS) 133 - "Accounting for Derivative Instruments and Hedging Activities" beginning in July 2000. The new accounting rules require that the fair value of derivative and hedging instruments be measured and recorded as either assets or liabilities on the balance sheet with a regular, periodic mark-to-market adjustment. The effect of this new accounting standard is not significant. 2. RESTATED FINANCIAL STATEMENTS The Company is restating its financial statements because an error was recently discovered that affects the expense for postretirement benefits other than pensions, related balance sheet accounts and certain disclosures previously reported in its financial statements for the years ended June 30, 2000 and 1999. The net effect of the correction of this non-cash error was to decrease net income by $175,422 in 2000. The Company's actuary consistently uses a method that defers and amortizes actuarial gains and losses over approximately 16 years in the determination of postretirement benefit expense. In 2000, the Company inadvertently included all of these gains in the calculation of the postretirement benefit expense, resulting in an understatement of postretirement benefit expense. The following table reflects the effect of the restatement on reported earnings for the year ended June 30, 2000.
As Originally Reported As Restated -------------- ------------ Operating Income $3,139,720 $2,863,828 Income before income taxes 2,046,514 1,770,622 Net income 1,296,691 1,121,270 Earnings per common share 0.53 0.46
3. NOTES PAYABLE At June 30, 2000, the Company maintained two lines of credit totaling $22,000,000. One line is for $11,000,000 with interest calculated the London Interbank Offering Rate ("LIBOR") plus 2% or prime less 1/2 percent, expiring January 5, 2001. The other is also for $11,000,000 with interest calculated at LIBOR plus 2% or prime less .04 percent, expiring May 1, 2001. A total of $4,855,000 and $1,442,982 had been borrowed under the line of credit agreements at June 30, 2000 and 1998 respectively. No amount was outstanding at June 30, 1999. Borrowings on lines of credit, based upon daily loan balances, averaged $5,045,943, $2,519,255 and $4,193,679 during the years ended June 30, 2000, 1999 and 1998, respectively. The maximum borrowings outstanding on these lines at any month end were $10,855,000, $5,587,000 and $11,835,000 during these same periods. The daily weighted average interest rate was 8.01%, 7.16% and 7.85% for the years ended June 30, 2000, 1999 and 1998, respectively. Management expects both lines of credit to be renewed for another year. Page 29 30 Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. LONG-TERM DEBT OBLIGATIONS Long-term debt consists of the following:
JUNE 30 ------------------------------- 2000 1999 ---- ---- Series 1997 notes payable $8,000,000 $8,000,000 Series 1993 notes payable 7,460,000 7,635,000 Industrial development revenue obligations: Series 1992A - 185,000 Series 1992B 1,380,000 1,450,000 Other - 723 ----------- ----------- Total long-term obligations 16,840,000 17,270,723 Less portion due within one year 445,000 430,723 ----------- ----------- Long-term obligations due after one year $16,395,000 $16,840,000 =========== ===========
SERIES 1997 NOTES PAYABLE On August 1, 1997, the Company issued $8,000,000 of Series 1997 unsecured notes bearing interest at the rate of 7.5%, payable semiannually on June 1 and December 1 of each year, commencing on December 1, 1997. All principal amount of Notes then outstanding, plus accrued interest, will be due and payable on June 1, 2012. At the Company's option, beginning June 1, 2002, notes maturing subsequent to 2002 may be redeemed prior to maturity, in whole or part, at 100% of face value, plus accrued interest. 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%, payable semiannually on June 1 and December 1 of each year, commencing on December 1, 1993. Maturity dates began in 1999 and extend to 2013. At the Company's option, beginning June 1, 2003, notes maturing subsequent to 2003 may be redeemed prior to maturity, in whole or part, at redemption prices declining from 104% to 100% of face value, plus accrued interest. INDUSTRIAL DEVELOPMENT REVENUE OBLIGATIONS On September 15, 1992, Cascade County, Montana (the "County") issued two Industrial Development Revenue Obligations, the Series 1992A Bonds for $1,700,000 and Series 1992B Bonds for $1,800,000. The Series 1992A and Series 1992B Bonds are unsecured; however, loan agreements are maintained with the Company in the same amounts. Both the Series 1992A and Series 1992B Bonds require annual principal payments on October 1 and semiannual interest payments on April 1 and October 1 of each year beginning in 1993. The Series 1992A Bonds matured on October 1999. The Series 1992B bonds have a final maturity in 2012 and bear interest at rates ranging from 3.35% to 6.50%. Page 30 31 Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. LONG-TERM DEBT OBLIGATIONS (CONTINUED) AGGREGATE ANNUAL MATURITIES
IDR FISCAL SERIES OBLIGATIONS TOTAL ------ ------ ------------------ ----------- YEAR ENDING 1997 SERIES 1993 LONG-TERM JUNE 30 NOTES 1992B NOTES OBLIGATIONS ----------- ----- ------- ----- ----------- 2001 $ - $ 75,000 $ 370,000 $ 445,000 2002 - 75,000 390,000 465,000 2003 - 80,000 420,000 500,000 2004 - 85,000 445,000 530,000 2005 - 90,000 480,000 570,000 Thereafter 8,000,000 975,000 5,355,000 14,330,000 ---------- ---------- ---------- ----------- $8,000,000 $1,380,000 $7,460,000 $16,840,000 Less current portion - 75,000 370,000 445,000 ---------- ---------- ---------- ----------- $8,000,000 $1,305,000 $7,090,000 $16,395,000 ========== ========== ========== ===========
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. 5. 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, 2000, 1999, and 1998 were $491,068, $497,015 and $405,441 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, 2000 and 1999 was $254,960 and $274,560 respectively, of which $215,000 in 2000 and $234,100 in 1999 is related to the regulated utility operations. The transition obligation was accrued as a deferred charge and will be amortized over 20 years. Substantially, all of the transition obligation is for the future cost of benefits to active employees. The Company's plan allows 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 prior service obligation associated with this plan change at June 30, 2000 and 1999 was $198,220 and $216,120 respectively, of which $162,020 in 2000 and $178,520 in 1999 is related to regulated utility operations. The prior service obligation was accrued as a deferred charge and will be amortized over fifteen years. Page 31 32 ENERGY WEST INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. RETIREMENT PLANS (CONTINUED) The incremental annual increases in consolidated expenses due to adoption of SFAS No. 106 were $47,500, $115,120 and $121,600 in fiscal years 2000, 1999 and 1998, respectively. Included in these amounts were $35,800 in 2000, $95,600 in 1999 and $95,600 in 1998 relating to regulatory operations. The MPSC allowed recovery of these costs beginning on November 4, 1997 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 plan assets are held in a VEBA trust fund into which all the company's contributions are made. The trust primarily invests in money market funds. The following table presents the amounts recognized at June 30, 2000 and 1999 in the consolidated financial statements.
Years Ended June 30 ------------------------------- 2000 1999 ---- ---- (Restated) Service Costs $ 33,800 $ 37,900 Interest Costs 47,900 50,980 Expected return on plan assets (28,000) (10,060) Amortization of transition obligation 19,600 19,040 Amortization of unrecognized prior service costs 17,900 17,256 Actuarial gain (43,700) - -------- -------- Postretirement benefit expense 47,500 115,116 Weighted-Average assumptions as of June 30, Discount rate 7.75% 7.0% Long term return on plan assets 9.0% 9.0% Health care inflation rate 7.0% 9.0% Grading to 5.5% Grading to 5.5% Change in benefit obligation Projected benefit obligation Projected benefit obligation at July 1 $949,845 $933,813 Service costs 33,800 37,900 Interest costs 47,900 50,980 Actuarial gain (331,045) (10,023) Benefits paid (13,600) (62,825) -------- -------- Projected benefit obligation at June 30 686,900 949,845 Change in plan assets Fair value of plan assets at July 1 325,768 285,113 Actual return on plan assets 20,227 12,280 Contributions to the plan 121,600 91,200 Benefits paid (13,600) (62,825) -------- -------- Fair value of plan assets at June 30 453,995 325,768 -------- -------- Projected benefit obligation in excess of plan assets 232,905 624,077 Transition obligation (255,000) (274,600) Unrecognized prior service cost (198,200) (216,100) Unrecognized gain 286,098 23,158 -------- -------- Accrued postretirement benefit liability recorded in other liabilities $ 65,803 $156,535 ======== ========
Page 32 33 ENERGY WEST INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. 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. The cumulative effect of adopting Statement No. 109 created a regulatory asset and a regulatory liability for regulated operations, representing the anticipated effects on regulated rates charged to customers which will result from the adoption of Statement No. 109. For the year ended June 30, 2000, changes in certain assets and liabilities resulted in a decrease in regulatory assets of $156,486 and a decrease in regulatory liabilities of $13,160 for regulated entities, resulting in ending balances of $485,073 and $109,481 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, 2000 and 1999 are as follows:
2000 1999 ----------- ----------- Deferred tax assets: Allowance for doubtful accounts $ 29,389 $ 28,274 Unamortized investment tax credit 109,702 122,862 Contributions in aid of construction 184,262 164,955 Other nondeductible accruals 240,032 221,949 Deferred gain on sale of assets 56,627 66,064 Other 21,588 60,224 ---------- ---------- Total deferred tax assets 641,600 664,328 Deferred tax liabilities: Customer refunds payable 1,816,757 1,128,838 Property, plant and equipment 3,829,193 3,715,188 Unamortized debt issue costs 144,866 159,058 Unamortized deferred rate case costs 101,085 84,550 Covenant not to compete 72,071 76,313 Other 28,035 15,912 ---------- ---------- Total deferred tax liabilities 5,992,007 5,179,859 ---------- ---------- Net deferred tax liabilities $5,350,407 $4,515,531 ========== ==========
Page 33 34 ENERGY WEST INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAX EXPENSE (CONTINUED) Income tax expense consists of the following:
Year Ended June 30 ----------------------------------------------- 2000 1999 1998 ---- ---- ---- (Restated) Current income taxes: Federal $ (295,999) $ 159,487 $ 704,914 State (38,092) 105,807 27,487 ----------- ----------- ----------- (334,091) 265,294 732,401 Total current income taxes Deferred income taxes (benefits): Tax depreciation in excess of book 267,543 235,141 285,124 Book amortization in excess of tax (18,434) (18,434) (18,434) Recoverable cost of gas purchases 687,795 363,763 111,393 Regulatory surcharges 86,314 246,445 (93,149) Deferred gain (loss) on sale of assets 1,201 9,284 (215,552) Contributions in aid of construction (19,307) (15,862) 55,237 Deferred rate case costs 16,535 (29,563) 4,553 Bad debt reserves (1,179) 5,370 23,726 Other 43,249 27,035 (5,377) ----------- ----------- ----------- Total deferred income taxes 1,063,717 823,179 147,521 Investment tax credit, net (21,062) (21,062) (21,062) ----------- ----------- ----------- Total income taxes $ 708,564 $ 1,067,411 $ 858,860 =========== =========== =========== Income taxes - operations $ 649,352 $ 976,760 $ 792,129 Income taxes - other income 59,212 90,651 66,731 ----------- ----------- ----------- Total income taxes $ 708,564 $ 1,067,411 $ 858,860 =========== =========== ===========
Page 34 35 ENERGY WEST INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. 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:
2000 1999 1998 ---- ---- ---- (Restated) Tax expense at statutory rate - 34% $ 622,143 $ 902,606 $ 812,798 State income tax, net of federal tax benefit 52,422 149,331 55,138 Amortization of deferred investment tax credits (21,062) (21,062) (21,062) Other 55,061 36,536 11,986 ----------- ----------- ----------- Total income taxes $ 708,564 $ 1,067,411 $ 858,860 =========== =========== ===========
7. SEGMENTS OF OPERATIONS Summarized financial information for the Company's regulated utilities, propane operations, EWR and other (before intercompany eliminations between segments primarily consisting of gas sales from nonregulated to regulated entities, intercompany accounts receivable, accounts payable, equity, and subsidiary investment) is as follows:
YEARS ENDED JUNE 30 2000 REGULATED PROPANE UTILITIES OPERATIONS EWR OTHER ELIMINATIONS CONSOLIDATED --------------------------------------------------------------------------------- (Restated) (Restated) (Restated) (Restated) (Restated) OPERATING REVENUE REGULATED UTILITIES $27,578,721 $ - $ - $ - $ - $27,578,721 PROPANE OPERATIONS - 6,570,982 - - (1,746,724) 4,824,258 EWR - - 41,623,968 - (2,210,197) 39,413,771 OTHER - - - 379,042 - 379,042 ---------- --------- ---------- ------- ---------- ---------- TOTAL OPERATING REVENUE 27,578,721 6,570,982 41,623,968 379,042 (3,956,921) 72,195,792 ---------- --------- ---------- ------- ---------- ---------- GAS PURCHASED 16,725,249 4,629,985 - - (1,746,724) 19,608,510 COST OF GOODS SOLD - - - 243,128 - 243,128 EWR COST OF TRADING - - 41,146,869 - (2,210,197) 38,936,672 DISTRIBUTION, GENERAL & ADMIN 5,805,929 1,046,706 726,545 69,654 - 7,648,834 MAINTENANCE 348,685 50,894 - - - 399,579 DEPRECIATION 1,589,574 239,634 19,756 7,489 - 1,856,453 TAXES OTHER THAN INCOME 520,418 69,640 33,113 15,617 - 638,788 ---------- --------- ---------- ------- ---------- ---------- OPERATING EXPENSES 24,989,855 6,036,859 41,926,283 335,888 (3,956,921) 69,331,964 ---------- --------- ---------- ------- ---------- ---------- OPERATING INCOME $ 2,588,866 $ 534,123 $( 302,315) $ 43,154 - $ 2,863,828 =========== ========== ============ ======== ========== ===========
1999 REGULATED PROPANE UTILITIES OPERATIONS EWR OTHER ELIMINATIONS CONSOLIDATED ----------------------------------------------------------------------------------- OPERATING REVENUE REGULATED UTILITIES $28,105,983 $ - $ - $ - $( 906) $28,105,077 PROPANE OPERATIONS - 7,832,247 - - (4,263,653) 3,568,594 EWR - - 25,012,590 - (3,369,519) 21,643,071 OTHER - - - 498,609 - 498,609 ----------------------------------------------------------------------------------- TOTAL OPERATING REVENUE 28,105,983 7,832,247 25,012,590 498,609 (7,634,078) 53,815,351 ---------- --------- ---------- ------- ---------- ---------- GAS PURCHASED 16,885,480 5,956,876 - - (4,264,559) 18,577,797 COST OF GOODS SOLD - - - 258,987 - 258,987 EWR COST OF TRADING - - 24,219,571 (3,369,519) 20,850,052 DISTRIBUTION, GENERAL & ADMIN 6,197,407 1,102,717 596,505 121,595 - 8,018,224 MAINTENANCE 396,057 72,964 - - - 469,021 DEPRECIATION 1,450,434 210,058 19,756 14,647 - 1,694,895 TAXES OTHER THAN INCOME 599,615 76,039 21,900 10,800 - 708,354 ---------- --------- ---------- ------- ---------- ---------- OPERATING EXPENSES 25,528,993 7,418,654 24,857,732 406,029 (7,634,078) 50,577,330 ---------- --------- ---------- ------- ---------- ---------- OPERATING INCOME $ 2,576,990 $ 413,593 $ 154,858 $ 92,580 - $ 3,238,021 =========== ========== =========== =========== ========== ===========
Page 35 36
1998 REGULATED PROPANE UTILITIES OPERATIONS EWR OTHER ELIMINATIONS CONSOLIDATED ------------------------------------------------------------------------------------ OPERATING REVENUE REGULATED UTILITIES $27,824,360 $ - $ - $ - $ - $27,824,360 PROPANE OPERATIONS - 8,642,464 - - (4,884,722) 3,757,742 EWR - - 14,488,326 - (3,105,307) 11,383,019 OTHER - - - 98,500 - 98,500 ---------- --------- ---------- ------ ---------- ---------- TOTAL OPERATING REVENUE 27,824,360 8,642,464 14,488,326 98,500 (7,990,029) 43,063,621 ---------- --------- ---------- ------ ---------- ---------- GAS PURCHASED 17,046,612 6,404,939 - - (4,879,743) 18,571,808 COST OF GOODS SOLD - - - - - - EWR COST OF TRADING - - 13,289,205 - (3,104,350) 10,184,855 DISTRIBUTION, GENERAL & ADMIN 5,910,077 1,226,697 538,438 21,716 - 7,696,928 MAINTENANCE 397,512 99,033 - - - 496,545 DEPRECIATION 1,435,936 270,191 17,893 14,310 (5,936) 1,732,394 TAXES OTHER THAN INCOME 529,671 73,806 13,906 10,800 - 628,183 ---------- --------- ---------- ------ ---------- ---------- OPERATING EXPENSES 25,319,808 8,074,666 13,859,442 46,826 (7,990,029) 39,310,713 ---------- --------- ---------- ------ ---------- ---------- OPERATING INCOME $ 2,504,552 $ 567,798 $ 628,884 $ 51,674 - $ 3,752,908 =========== =========== =========== =========== ========== ===========
YEARS ENDED JUNE 30 2000 REGULATED PROPANE UTILITIES OPERATIONS EWR OTHER ELIMINATIONS CONSOL. --------------------------------------------------------------------------------- (Restated) (Restated) (Restated) (Restated) (Restated) (Restated) Capital expenditures $ 3,703,472 $ 984,903 $ 68,508 $ - $ - $ 4,756,883 =========== ========== =========== ========= =========== =========== PROPERTY, PLANT AND EQUIPMENT, NET 28,238,369 3,341,938 154,606 - - 31,734,913 REAL ESTATE HELD FOR INVESTMENT - - - 69,220 - 69,220 ----------- ---------- ----------- --------- ----------- ----------- TOTAL P&E 28,238,369 3,341,938 154,606 69,220 - 31,804,133 CURRENT ASSETS 8,543,351 2,018,623 7,985,254 897,362 (3,056,895) 16,387,695 OTHER ASSETS 3,703,355 9,903 334,152 26,984 (1,072,000) 3,002,394 ----------- ---------- ----------- --------- ----------- ----------- TOTAL ASSETS $40,485,075 $5,370,464 $ 8,474,012 $ 993,566 ($4,128,895) $51,194,222 =========== ========== =========== ========= =========== =========== EQUITY $ 9,799,844 $1,759,621 $ 2,331,847 $ 966,893 ($1,072,000) $13,786,205 LONG-TERM DEBT 14,663,317 1,350,876 95,419 285,388 - 16,395,000 CURRENT LIABILITIES 10,145,491 1,021,601 6,219,752 500,645 (3,056,895) 14,830,594 DEFERRED INCOME TAXES 3,266,236 412,022 20,941 - - 3,699,199 OTHER LIABILITIES 2,610,187 826,344 (193,947) (759,360) - 2,483,224 ----------- ---------- ----------- --------- ----------- ----------- TOTAL CAPITALIZATION AND LIABILITIES $40,485,075 $5,370,464 $ 8,474,012 $ 993,566 ($4,128,895) $51,194,222 =========== ========== =========== ========= =========== ===========
1999 REGULATED PROPANE UTILITIES OPERATIONS EWR OTHER ELIMINATIONS CONSOL. --------------------------------------------------------------------------------- Capital expenditures $ 3,012,735 $ 688,932 $ 2,482 $ 26,976 $ - $ 3,731,125 =========== ========== =========== ========= =========== =========== PROPERTY, PLANT AND EQUIPMENT, NET 26,200,361 2,599,628 105,854 - - 28,905,843 REAL ESTATE HELD FOR INVESTMENT - - - 465,883 - 465,883 ----------- ---------- ----------- --------- ----------- ----------- TOTAL P&E 26,200,361 2,599,628 105,854 465,883 - 29,371,726 CURRENT ASSETS 6,581,740 1,467,551 4,648,930 18,498 (1,288,153) 11,428,566 OTHER ASSETS 3,749,899 13,204 218,897 - (1,072,000) 2,910,000 ----------- ---------- ----------- --------- ----------- ----------- TOTAL ASSETS $36,532,000 $4,080,383 $ 4,973,681 $ 484,381 ($2,360,153) $43,710,292 =========== ========== =========== ========= =========== =========== EQUITY $ 9,767,171 $1,463,217 $ 2,445,044 $ 927,679 ($1,071,096) $13,532,015 LONG-TERM DEBT 15,108,317 1,350,876 95,419 285,388 - 16,840,000 CURRENT LIABILITIES 4,348,582 755,054 3,434,203 (19,021) (1,289,057) 7,229,761 DEFERRED INCOME TAXES 3,253,552 323,284 21,611 (33,362) - 3,565,085 OTHER LIABILITIES 4,054,378 187,952 (1,022,596) (676,303) - 2,543,431 ----------- ---------- ----------- --------- ----------- ----------- TOTAL CAPITALIZATION AND LIABILITIES $36,532,000 $4,080,383 $ 4,973,681 $ 484,381 ($2,360,153) $43,710,292 =========== ========== =========== ========= =========== ===========
Page 36 37 Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. STOCK OPTIONS AND OWNERSHIP PLANS STOCK OPTIONS The Company has an Incentive Stock Option Plan which provides for options to purchase up to 100,000 shares of the Company's common stock by certain 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. Since the Company has elected to use APB No. 25, pro forma information regarding net income and earnings per share is required by SFAS No. 123 as if the Company had accounted for its stock options under the fair value method of that statement. In the fiscal year ended June 30, 2000, no options were granted. For the fiscal year ended June 30, 1999, 42,820 options were granted. For purposes of pro forma disclosures, the Company's pro forma net income was $1,537,110 or $.64 earnings per share. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: Risk-free interest rate--length of exercise period 6.3% Dividend yields 5.2% Volatility factors of the expected market price of the Company's common stock .164 Weighted-average expected life of the employee stock options 5 Year The weighted-average fair value of options granted $1.13
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. In management's opinion, because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's stock options. Page 37 38 ENERGY WEST INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. STOCK OPTIONS AND OWNERSHIP PLANS (CONTINUED) A summary of the activity under the plans is as follows:
Weighted Average Number of Exercise Shares Price ------------------ ------------------- Fiscal 1998 Outstanding at July 1, 1997 89,428 $7.533 Granted - - Exercised (22,908) $7.045 Expired (37,920) $7.172 -------- Outstanding at June 30, 1998 28,600 $8.402 -------- At June 30, 1998 Exercisable 28,600 Available for grant 42,820 Fiscal 1999 Outstanding at July 1, 1999 28,600 $8.402 Granted 42,820 $9.096 Exercised (100) $9.000 Expired (3,600) $7.375 -------- Outstanding at June 30, 1999 67,720 $8.894 -------- At June 30, 1999 Exercisable 67,720 Available for grant 3,600 Fiscal 2000 Outstanding at July 1, 1999 67,720 $8.894 Granted - - Exercised - - Expired (5,000) $9.125 -------- Outstanding at June 30, 2000 62,720 $8.972 -------- At June 30, 2000 Exercisable 62,720 Available for grant 8,600
EMPLOYEE STOCK OWNERSHIP PLAN The Company has 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 buys shares of the Company's common stock from either the Company or the open market at the 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 $103,886, $144,118 and $127,901 for the years ended June 30, 2000, 1999 and 1998, respectively. During the years ended June 30, 2000, 1999 and 1998, the ESOP acquired 16,153 shares at $8.92 per share, 13,738 shares at $9.31 per share, 11,639 shares at $8.65 per share, respectively. Page 38 39 ENERGY WEST INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. LEASES The Company leases a building in Cody, Wyoming. The lease expires on June 30, 2005. Future minimum rental payments will be approximately $79,200 per year from fiscal 2000 through fiscal 2005, for total future minimum lease payments of $396,000. Rental expenses related to this lease were $80,739, $80,631 and $74,438 in fiscal years 2000, 1999 and 1998, respectively. The Company leases certain property consisting of land, offices and office buildings for a period of ten years at an annual rent 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 refusal to buy the land and buildings under the same terms and conditions. The future minimum lease payments under the terms of the related lease agreement required the payment of $51,975 per year from fiscal 2000 through fiscal 2006, for future minimum lease payments of $311,850. 10. COMMITMENTS AND CONTINGENCIES COMMITMENTS The Company has entered into long-term, take or pay natural gas supply contracts which expire at varying times through 2002. 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 average approximately $2.10. Based on current prices, the minimum take or pay obligation at June 30, 2000 for each of the next two years and in total is as follows: FISCAL YEAR 2001 $1,379,700 2002 461,160 Total $1,840,860 Natural gas purchases under these contracts for the years ended June 30, 2000, 1999 and 1998 approximated $1,182,000, $2,042,000 and $1,630,000, respectively. Page 39 40 Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) ENVIRONMENTAL CONTINGENCY The Company owns property on which it operated a manufactured gas plant from 1909 to 1928. The site is currently used as a service center where certain equipment and materials are stored. The coal gasification process utilized in the plant resulted in the production of certain by-products which have been classified by the federal government and the State of Montana as hazardous to the environment. Several years ago the Company initiated an assessment of the site to determine if remediation of the site was required. That assessment resulted in a submission to the Montana Department of Environmental Quality ("MDEQ"), formerly known as the Montana Department of Health and Environmental Science ("MDHES"), in 1994. The Company has worked with the MDEQ since that time to obtain the data that would lead to a remediation action acceptable to the MDEQ. In the summer of 1999, the Company received final approval from the MDEQ for its plan for remediation of soil contaminants. To date, all contaminated soil has been removed, and an asphalt cap has been placed over the site. The Company and its consultants continue their work with the MDEQ relating to the remediation plan for water contaminants. At June 30, 2000, the costs incurred in evaluating and beginning remediation have totaled approximately $1,800,000. On May 30, 1995, the Company received an order from the Montana Public Service Commission allowing for recovery of the costs associated with evaluation and remediation of the site through a surcharge on customer bills. As of June 30, 2000, that recovery mechanism had generated approximately $903,000. The Company expects to recover the full amount expended through the surcharge. The Commission's decision calls for ongoing review by the Commission of any costs incurred. The Company will submit an application for review by the Commission when the remediation plan is approved by the MDEQ for water contaminants. 11. REGULATORY MATTERS In October 1999, the Company applied for recovery of approximately $2,960,000 in gas costs with the Montana Public Service Commission (MPSC). This gas cost application is similar to applications made annually as the mechanism the MPSC utilizes to permit recovery of gas costs. The Montana Consumer Counsel (MCC) intervened in this application, and a hearing on this matter was held on May 31, 2000. A work session was held on September 26, and the MPSC ruled in favor of the Company. 12. FINANCIAL INSTRUMENTS & RISK MANAGEMENT Gas Trading Derivatives In July 1998 the Company signed a basis swap agreement between the NYMEX and AECO price indexes. The contract period for the 5,000 MMBTU per day begins November 1, 1999 and ends October 31, 2000. The swap compares the index price of natural gas quoted on the NYMEX gas exchange with the AECO gas exchange on a daily basis. The original basis differential was at $.62 per MMBTU. The Company settled this basis differential at $.38 resulting in a gain of $390,000 which is included in other income in 1999. The company has designated this basis swap as a trading commodity derivative. In May 1999 the Company signed a basis swap agreement between the NYMEX and AECO price indexes. The contract period for 4,000 MMBTU per day began June 1, 1999 and ended October 31, 1999. The swap compared the index price of natural gas quoted on the NYMEX gas exchange with the AECO gas exchange on a daily basis. The original basis differential was at $.38 per MMBTU. The Company designated this swap as a trading commodity derivative. The Company settled the June 1999 portion of the swap at a gain of $13,000 and settled the remaining portion, a basis differential, at $.36 for an additional gain of $7,500. The Company entered into two swap agreements with a market maker which requires the market maker to pay a fixed price to the Company and for the Company to pay the AECO index price for the contracted volumes. The Company Page 40 41 Energy West Incorporated and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FINANCIAL INSTRUMENTS & RISK MANAGEMENT (CONTINUED) entered into two reciprocal agreements with a counter party whereby the counter party pays the AECO index price to the Company and the Company pays the AECO fixed price to the counter party. The first agreement was from June 1, 1999 to October 31, 1999 for 2,500 MMBTU per day at a fixed price of $1.925. The second agreement is from November 1, 1999 to October 31, 2001, for 1,200 MMBTU per day at a fixed price of $2.06. The reciprocal agreements have offsetting terms, resulting in no gain or loss. The AECO index price at June 30, 2000 was $3.26. In the event the counter party fails to perform under its obligation, and the AECO index price exceeds the fixed prices of these swaps, the Company would be liable to the market maker. The Company's contingent liability based on the June 30, 2000 AECO index price is $700,000. In March 2000 the Company signed a basis swap agreement between the NYMEX and AECO price indexes. The contract period for the 5,000 MMBTU per day began April 1, 2000 and ends October 31, 2000. The swap compares the index price of natural gas quoted on the NYMEX gas exchange with the AECO gas exchange index. The original basis differential was at $.26 per MMBTU. The Company settled the April basis differential at $.32 resulting in a $9,000 gain and the May basis differential at $.38 resulting in a gain of $19,000. The June to October basis differentials were settled in May at $.28 and resulted in a gain of $15,000. The Company designated this basis swap as a trading commodity derivative. In May 2000 the Company signed a basis swap agreement between the NYMEX and AECO price indexes. The contract period for the 5,000 MMBTU per day began June 1, 2000 and ends October 31, 2000. The swap compares the index price of natural gas quoted on the NYMEX gas exchange with the AECO gas exchange index. The original basis differential was $.37 per MMBTU. The Company settled the June basis differential at $.98 resulting in a loss of $91,000. The July to October basis differentials were settled at $.34 and resulted in a gain of $19,000. The Company designated this basis swap as a trading commodity derivative. In June 2000 the Company entered into a fixed for floating swap agreement with a market maker which required the Company to pay a fixed price of $3.765 per MMBTU in return for gas quoted on the AECO gas exchange. The contract period for the 10,000 MMBTU per day begins November 1, 2000 and ends March 31, 2001. The Company settled the swap for a fixed sales price to the market maker of $3.865 per MMBTU which resulted in a gain of $151,000. The Company has designated this swap as a trading commodity derivative. The Company entered into a basis swap agreement between the NYMEX and AECO price indexes. The contract period for the 5,000 MMBTU per day begins November 1, 2000 and ends October 31, 2003. The swap compares the index price of natural gas quoted on the NYMEX gas exchange with the AECO gas exchange index. The original basis differential is at $.27 per MMBTU. At June 30, 2000 the basis differential was $.272 resulting in a mark-to-market gain of $8,000 which the Company recorded in other income. The Company designated this swap as a trading commodity derivative. The Company entered into a fixed for floating swap agreement which requires the Company to pay a fixed price of $4.09 per MMBTU in return for gas quoted on the AECO gas exchange. The contract period for the 10,000 MMBTU per day begins November 1, 2000 and ends March 31, 2001. At June 30, 2000 the winter block AECO index was $4.11 which resulted in a mark-to-market gain of $30,000 which the Company recorded in other income. The Company designated this swap as a trading commodity derivative. Item 9. - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable Page 41 42 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/ Edward J. Bernica ------------------------------------------------------ Edward J. Bernica, President & Chief Executive Officer (Principal Executive Financial and Accounting Officer) 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 09/27/00 ----------------------------- Larry D. Geske Director Date /s/ Andrew Davidson 09/27/00 ----------------------------- Andrew Davidson Director Date /s/ Thomas N. McGowen, Jr. 09/27/00 ----------------------------- Thomas N. McGowen, Jr. Director Date /s/ G. Montgomery Mitchell 09/27/00 ----------------------------- G. Montgomery Mitchell Director Date /s/ George D. Ruff 09/27/00 ----------------------------- George D. Ruff Director Date /s/ David A. Flitner 09/27/00 ----------------------------- David A. Flitner Director Date /s/ Dean South 09/27/00 ----------------------------- Dean South Director Date /s/ Richard J. Schulte 09/27/00 ----------------------------- Richard J. Schulte Director Date Page 42 43 EXHIBIT INDEX EXHIBITS 23.1 Consent of Independent Auditors (filed herewith). Page 43