| ENERGY WEST INC under “Item 1A Risk Factors,” as well as other factors that we currently are unable to identify or quantify, but that may exist in the future |
| In addition, the foregoing factors may affect generally our business, results of operations and financial position |
| Forward-looking statements speak only as of the date the statement was made |
| We do not undertake and specifically decline any obligation to update any forward-looking statements |
| Overview Energy West, Incorporated is a regulated public utility, with certain non-utility operations conducted through its subsidiaries |
| We were originally incorporated in Montana in 1909 |
| We currently have four reporting segments: • Natural Gas Operations Distributes approximately 6dtta4 billion cubic feet of natural gas to approximately 34cmam000 customers through regulated utilities operating in and around Great Falls and West Yellowstone, Montana, and Cody, Wyoming |
| The approximate population of the service territories is 94cmam000 |
| • Propane Operations Distributes approximately 5dtta4 million gallons of propane to approximately 8cmam000 customers through utilities operating underground vapor systems in and around Payson, Pine, and Strawberry, Arizona and retail distribution of bulk propane to approximately 2cmam300 customers in the same Arizona communities |
| The approximate population of the service territories is 50cmam000 |
| We are in the process of selling the Arizona assets of these operations |
| • Energy West Resources, Inc |
| (EWR) Markets approximately 2dtta5 billion cubic feet of natural gas to commercial and industrial customers in Montana and Wyoming and manages midstream supply and production assets for transportation customers and utilities |
| EWR also has an ownership interest in 163 natural gas producing wells and gas gathering assets |
| • Pipeline Operations Owns the Shoshone interstate and the Glacier gathering natural gas pipelines located in Montana and Wyoming |
| Certain natural gas producing wells owned by our Pipeline Operations subsidiary are being managed and reported under the operations of EWR See Note 10 to our Consolidated Financial Statements for financial information for each of our segments |
| Natural Gas Operations Our natural gas operations consist of two divisions located in Montana and Wyoming |
| Our revenues from natural gas operations are generated under tariffs regulated by the state utility commissions of Montana and Wyoming |
| Natural Gas — Montana Division The Montana division provides natural gas service to customers in and around Great Falls and West Yellowstone, Montana and manages an underground propane vapor system in Cascade, Montana |
| The division’s service area has a population of approximately 80cmam000 in the Great Falls area, 1cmam300 in the West Yellowstone area, and approximately 900 in the Cascade area |
| The Montana division has right of way privileges for its distribution systems either through franchise agreements or general franchise agreements within its respective service territories |
| The Great Falls distribution component of the Montana division also provides natural gas transportation service to certain customers who purchase natural gas from other suppliers |
| 1 _________________________________________________________________ [33]Table of Contents The operations of the Montana division are subject to regulation by the Montana Public Service Commission, or “MPSC” The MPSC regulates rates, adequacy of service, issuance of securities, compliance with US Department of Transportation safety regulations and other matters |
| The Montana division received orders during fiscal 2005 from the MPSC respecting base rates in both Great Falls and West Yellowstone, Montana |
| These orders were effective on an interim basis on November 1, 2004 and made final effective September 1, 2005 |
| The rate order effectively granted full recovery of the increased property tax liability resulting from the settlement reached with the Montana Department of Revenue in fiscal 2004 |
| It also provided recovery of other operating expenses as requested by our company |
| The West Yellowstone rate order granted relief related to its share of the Montana Department of Revenue settlement as well as other operating expenses |
| The following table shows the Montana division’s revenues by customer class for the fiscal year ended June 30, 2006 and the two preceding fiscal years: Gas Revenue (in thousands) Years Ended June 30, 2006 2005 2004 Residential $ 22cmam155 $ 18cmam116 $ 16cmam427 Commercial 14cmam233 11cmam437 9cmam918 Transportation 1cmam961 1cmam939 1cmam856 Total $ 38cmam349 $ 31cmam492 $ 28cmam201 Note: Revenue increases in fiscal 2006 compared to fiscal 2005 and fiscal 2004 are primarily due to higher gas costs, as well as rate increases related to recovering property taxes |
| The following table shows the volumes of natural gas, expressed in millions of cubic feet, or “MMcf,” sold or transported by the Montana division for the fiscal year ended June 30, 2006 and the two preceding fiscal years: Gas Volumes (in MMcf) Years Ended June 30, 2006 2005 2004 Residential 1cmam978 2cmam136 2cmam206 Commercial 1cmam210 1cmam267 1cmam317 Transportation 1cmam524 1cmam493 1cmam443 Total Gas Sales 4cmam712 4cmam896 4cmam966 Note: Volumes decreased in fiscal 2006 compared to fiscal 2005 and fiscal 2004 primarily due to warmer weather |
| The MPSC allows customers to choose a natural gas supplier other than the Montana division |
| The Montana division, however, provides gas transportation services to customers who purchase from other suppliers |
| The Montana division uses the NorthWestern Energy, or “NWE,” pipeline transmission system to transport supplies of natural gas for its core load and to provide transportation and balancing services to customers who have chosen to obtain natural gas from other suppliers |
| In 2000, we entered into a ten-year transportation agreement with NWE that fixes the cost of pipeline and storage capacity for the Montana division |
| The Montana division generates its revenues under regulated tariffs designed to recover a base cost of gas and administrative and operating expenses and to provide a sufficient rate of return to cover interest and profit |
| The 2 _________________________________________________________________ [34]Table of Contents Montana division’s tariffs include a purchased gas adjustment clause, which allows the Montana division to adjust rates periodically to recover changes in gas costs |
| Natural Gas — Wyoming Division The Wyoming division provides natural gas service to customers in and around Cody, Meeteetse, and Ralston, Wyoming |
| This service area has a population of approximately 12cmam000 |
| EWR supplies natural gas to the Wyoming division pursuant to an agreement through 2007 |
| The Wyoming division has a certificate of public convenience and necessity granted by the Wyoming Public Service Commission, or “WPSC,” for transportation and distribution covering the west side of the Big Horn Basin, which extends approximately 70 miles north and south and 40 miles east and west from Cody |
| As of June 30, 2006, the Wyoming division provided service to approximately 6cmam100 customers, including one large industrial customer |
| The Wyoming division also offers transportation through its pipeline system |
| This service is designed to permit producers and other purchasers of gas to transport their gas to markets outside of the Wyoming division’s distribution and transmission system |
| The following table shows the Wyoming division’s revenues by customer class for the fiscal year ended June 30, 2006 and the two preceding fiscal years: Gas Revenue (in thousands) Years Ended June 30, 2006 2005 2004 Residential $ 5cmam883 $ 4cmam805 $ 4cmam149 Commercial 5cmam771 4cmam434 3cmam606 Industrial 5cmam741 4cmam059 3cmam107 Total $ 17cmam395 $ 13cmam298 $ 10cmam862 Note: Higher revenues were realized in fiscal 2006 and 2005 compared to fiscal 2004 due to higher gas costs which are passed on to the customers in accordance with approvals from the rate regulators |
| 3 _________________________________________________________________ [35]Table of Contents The following table shows volumes of natural gas, expressed in MMcf, sold by the Wyoming division for the fiscal year ended June 30, 2006 and the two preceding fiscal years: Gas Volumes (in MMcf) Years Ended June 30, 2006 2005 2004 Residential 478 519 515 Commercial 684 582 540 Industrial 567 643 568 Total Gas Sales 1cmam729 1cmam744 1cmam623 The Wyoming division generates its revenues under tariffs regulated by the WPSC The tariffs are structured to enable our company to recover a base cost of gas and administrative and operating expenses to provide a sufficient rate of return to cover interest and profit |
| The Wyoming division’s tariffs include a purchased gas adjustment clause, which allows the Wyoming division to adjust rates periodically to recover changes in gas costs |
| The Wyoming division has an industrial customer whose gas sales rates are subject to an industrial tariff, which provides for lower incremental prices as higher volumes are used |
| This customer accounted for approximately 33prca of the revenues of the Wyoming division and approximately 10prca of the consolidated revenues of the natural gas segment of our business |
| This customer’s business is cyclical and depends upon the level of housing starts in their market areas |
| The Wyoming division transports gas for third parties pursuant to a tariff filed with and approved by the WPSC The terms of the transportation tariff (currently between $ |
| 31 per thousand cubic feet, or “Mcf”) are approved by the WPSC Propane Operations We engage in the regulated sale of propane under the business name Energy West Arizona, or “EWA” |
| EWA distributes propane in the Payson, Pine, and Strawberry, Arizona area located about 75 miles northeast of Phoenix in the Arizona Rim Country |
| EWA’s service area includes approximately 575 square miles and has a population of approximately 50cmam000 |
| EWA’s operations are subject to regulation by the Arizona Corporation Commission, or “ACC”, which regulates rates, adequacy of service, and other matters |
| EWA’s properties include approximately 170 miles of underground distribution pipeline and an office building leased from a third party |
| The principal competition in this area comes from bulk propane retailers that sell to customers who use propane from storage tanks located at their homes or businesses rather than using propane from EWA’s underground distribution system |
| EWA purchases propane from our unregulated subsidiary, Energy West Propane, Inc |
| or “EWP”, under terms reviewed periodically by the ACC EWP engages in the bulk sale of propane through its two divisions: Energy West Propane-Arizona, which serves the Payson, Pine, and Strawberry Arizona area, and Rocky Mountain Fuels Wholesale, or “RMF” |
| RMF’s wholesale operations supply propane for our underground propane-vapor systems serving the cities of Cascade, Montana and Payson, Arizona and the surrounding areas |
| EWP faces competition from other propane distributors and suppliers of other types of fuels that compete with propane |
| Competition is based primarily on price and there is a high degree of competition with other propane distributors in each of our service areas |
| On July 17, 2006, we entered into an Asset Purchase Agreement among our company, EWP, and SemStream, LP Pursuant to the Asset Purchase Agreement, our company and EWP agreed to sell, and SemStream agreed to buy, (i) all of the assets and business operations associated with our regulated propane gas distribution system operated in the cities and outlying areas of Payson, Pine, and Strawberry, Arizona (the “Regulated 4 _________________________________________________________________ [36]Table of Contents Business”), and (ii) all of the assets and business operations of EWP that are associated with certain “non-regulated” propane assets (the “Non-Regulated Business,” and together with the Regulated Business, the “Business”) |
| SemStream is purchasing only the assets and business operations of our company and EWP that solely pertain to the Business within the state of Arizona, and that solely pertain to the Energy West Propane – Arizona division of our company and/or EWP (collectively, the “Arizona Assets”) |
| Pursuant to the Asset Purchase Agreement, SemStream will pay a cash purchase price of dlra15 million for the Arizona Assets, subject to final working capital adjustments |
| The sale is conditioned on approval by the ACC and the receipt of certain other approvals by third parties |
| We cannot predict with certainty whether or when the closing conditions will be satisfied or whether or when this transaction will be consummated |
| The following tables show Propane Operations revenues and volumes by customer class for the fiscal year ended June 30, 2006 and the two preceding fiscal years: Propane Revenue (in thousands) Years Ended June 30, 2006 2005 2004 Residential $ 6cmam986 $ 6cmam509 $ 5cmam456 Commercial 2cmam597 2cmam310 2cmam280 Total $ 9cmam583 $ 8cmam819 $ 7cmam736 Propane Volume (in thousands of gallons) Years Ended June 30, 2006 2005 2004 Residential 3cmam783 4cmam115 3cmam735 Commercial 1cmam577 1cmam513 2cmam095 Total 5cmam360 5cmam628 5cmam830 Energy West Resources We conduct certain marketing activities involving the sale of natural gas in Montana and Wyoming through our wholly-owned subsidiary EWR In order to provide a stable source of natural gas for a portion of its requirements, EWR and our Pipeline Operations subsidiary purchased ownership in two natural gas production properties and three gathering systems, located in north central Montana, in May 2002 and March 2003 |
| The gas production from the properties provided approximately 14prca of EWR’s volume requirements for fiscal 2006 |
| Because gas production facilities generate higher operating margins than our regulated natural gas and propane operations, we are seeking to acquire additional gas production properties if and when such opportunities arise |
| We cannot provide assurance, however, that we will be able to identify production properties that we can acquire on terms that we consider favorable |
| 5 _________________________________________________________________ [37]Table of Contents Prior to fiscal 2004, EWR participated in the electric market as a broker of electricity |
| However, in fiscal 2003, EWR exited the electricity marketing business by not renewing its electric contracts as they expired |
| As a result, EWR has only two remaining contracts, one with a commercial customer and the other with a supplier to obtain the electricity for the commercial customer |
| The terms of these contracts extend through June 2007 |
| Accordingly, during fiscal 2006, 2005, and 2004, we had only one remaining electric contract with a margin of dlra48cmam000, dlra34cmam000, and dlra72cmam000, respectively, in each of those three years |
| The electricity operations are reported within continuing operations because we use the same employees with the same overhead as our natural gas marketing operation |
| Pipeline Operations Our Pipeline Operations reflect operation of the “Glacier” natural gas gathering pipeline placed in service in fiscal 2001 and the “Shoshone” transmission pipeline placed in service in fiscal 2004 |
| The revenues and expenses associated with the pipelines are included in the “Pipeline Operations” segment |
| We believe that our Pipeline Operations represent a significant opportunity to increase our company’s profitability over time |
| We currently are seeking ways in which we can expand our Pipeline Operations by (a) expanding the capacity and throughput of our existing pipeline assets, and (b) acquiring additional pipeline assets |
| We believe that expanded or newly acquired pipeline operations can provide higher operating margins and faster returns on investment than we can derive from other aspects of our business |
| We cannot provide assurance, however, that (i) we will be able to expand our existing Pipeline Operations or acquire new pipeline assets, or (ii) that the actual results of such expanded or acquired assets will be as profitable as we anticipate |
| Competition The traditional competition we face in our distribution and sales of natural gas and propane is from suppliers of fuels other than natural gas or propane, including electricity, oil, and coal |
| Traditionally, the principal considerations affecting a customer’s selection of utility gas service over competing energy sources include service, price, equipment costs, reliability, and ease of delivery |
| In addition, the type of equipment already installed in a business and residence significantly affects the customer’s choice of energy |
| However, with respect to the majority of our service territory, previously installed equipment is not an issue |
| Households in recent years have generally preferred the installation of natural gas and/or propane for space and water heating as an energy source |
| We face more intense competition in West Yellowstone and Cascade, Montana and the Payson/Strawberry area of Arizona due to the cost of competing fuels than we face in the Great Falls area of Montana and our service territory in Wyoming |
| Our Propane Operations estimate that approximately 67prca of the homes and businesses adjacent to the division’s distribution pipeline use the division’s propane for space heating or water heating |
| The principal competition we face in the distribution and sale of propane is from electricity suppliers and other propane distributors |
| Competition is based primarily on price and customer service |
| There is a high degree of competition from other propane distributors in all of the service areas EWR’s principal competition is from other natural gas marketing firms doing business in Montana |
| 6 _________________________________________________________________ [38]Table of Contents Governmental Regulation Our utility operations are subject to regulation by the MPSC, the WPSC, the ACC, and the Federal Energy Regulatory Commission, or “FERC” |
| Such regulation plays a significant role in determining our profitability |
| The commissions approve rates intended to permit a reasonable rate of return on investment |
| Our tariffs allow gas cost to be recovered in full (barring a finding of imprudence) in regular (as often as monthly) rate adjustments |
| This mechanism has substantially reduced any delay between the incurrence and recovery of gas costs |
| In addition, final orders have been received in the Montana Division for the West Yellowstone and Great Falls service territories as a result of general rate filings made by us in fiscal 2004 |
| The rate increases approved approximately dlra200cmam000 annually in increased revenues for West Yellowstone and approximately dlra800cmam000 in increased revenues for Great Falls |
| Both rate orders were effective for service rendered on and after November 1, 2004 |
| Seasonality Our business and that of our subsidiaries in all segments is temperature-sensitive |
| Colder temperatures generally result in increased sales, while warmer temperatures generally result in reduced sales |
| We anticipate that this sensitivity to seasonal and other weather conditions will continue to be reflected in our sales volumes in future periods |
| Environmental Matters We own property on which we operated a manufactured gas plant from 1909 to 1928 |
| We currently use this site as an office facility for field personnel and storage location for certain equipment and materials |
| The coal gasification process utilized in the plant resulted in the production of certain by-products that have been classified by the Federal government and the State of Montana as hazardous to the environment |
| We have completed our remediation of soil contaminants at the plant site |
| In April 2002 we received a closure letter from the Montana Department of Environmental Quality, or “MDEQ,” approving the completion of such remediation program |
| We and our consultants continue to work with the MDEQ relating to the remediation plan for water contaminants |
| The MDEQ has established regulations that allow water contaminants at a site to exceed standards if it is technically impracticable to achieve those standards |
| Although the MDEQ has not established guidance respecting the attainment of a technical waiver, the US Environmental Protection Agency, or “EPA,” has developed such guidance |
| The EPA guidance lists factors that render remediation technically impracticable |
| We have filed with the MDEQ a request for a waiver from complying with certain standards |
| At June 30, 2006, we had incurred cumulative costs of approximately dlra2cmam093cmam000 in connection with our evaluation and remediation of the site |
| On May 30, 1995, we received an order from the MPSC allowing for recovery of the costs associated with the evaluation and remediation of the site through a surcharge on customer bills |
| As of June 30, 2006, we had recovered approximately dlra1cmam758cmam000 through such surcharges |
| As of June 30, 2006, the cost remaining to be recovered through the on going rate is dlra335cmam000 |
| We are required to file with the MPSC every two years for approval to continue the recovery of these costs through a surcharge |
| One of these employees is employed by EWR, 20 by our Propane Operations, 69 by our Natural Gas Operations and 10 at the corporate office |
| Item 1A Risk Factors |
| An investment in our common stock involves a substantial degree of risk |
| Before making an investment decision, you should give careful consideration to the following risk factors in addition to the other information contained in this report |
| The following risk factors, however, may not reflect all of the risks associated with our business or an investment in our common stock |
| 7 _________________________________________________________________ [39]Table of Contents Our results of operations could fluctuate due to a variety of factors outside of our control, including the following: • Fluctuating energy commodity prices; • The possibility that regulators may not permit us to pass through all of our increased costs to our customers; • Fluctuations in wholesale margins due to uncertainty in the wholesale propane markets; • Changes in general economic conditions in the United States and changes in the industries in which we conduct business; • Our business and that of our subsidiaries in all segments is temperature-sensitive |
| In any given period, sales volumes reflect the impact of weather, in addition to other factors; • Changes in federal or state laws and regulations to which we are subject, including tax, environmental, and employment laws and regulations; • The impact of the FERC and state public service commission statutes, regulations, and actions, including allowed rates of return, and the resolution of other regulatory matters; • Our ability to obtain governmental and regulatory approval of various expansion or other projects; • The costs and effects of legal and administrative claims and proceedings against us or our subsidiaries; • Conditions of the capital markets we utilize to access capital; • The ability to raise capital in a cost-effective way; • The ability to meet financial covenants imposed by lenders; • The effect of changes in accounting policies, if any; • The ability to manage our growth; • The ability to control costs; • The ability of each business unit to successfully implement key systems, such as service delivery systems; • Our ability to develop expanded markets and product offerings and our ability to maintain existing markets; • The ability of customers of the energy marketing and trading business to obtain financing for various projects; • The ability of customers of the energy marketing and trading business to obtain governmental and regulatory approval of various projects; • Future utilization of pipeline capacity, which can depend on energy prices, competition from alternative fuels, the general level of natural gas and propane demand, decisions by customers not to renew expiring natural gas or propane contracts, and weather conditions; • Global and domestic economic repercussions from terrorist activities and the government’s response thereto; and • Disruptions to natural gas or propane supplies or prices caused by man-made or natural disasters, such as tropical storms or hurricanes |
| We are subject to comprehensive regulation by several federal, state, and local regulatory agencies, which significantly influence our operating environment and may affect our ability to recover costs from utility customers |
| We are required to have numerous permits, approvals, and certificates from the agencies that regulate our business |
| FERC, state and federal environmental agencies, the MPSC, the WPSC, and the ACC regulate many aspects of our utility operations, including siting and construction of facilities, customer service, and the rates that we can charge customers |
| We believe that we have obtained the necessary permits, approvals, and certificates for our existing operations |
| However, we are unable to predict the impact on our business and operating 8 _________________________________________________________________ [40]Table of Contents results from the future regulatory activities of any of these agencies |
| Changes in regulations or the imposition of additional regulations could have an adverse impact on our results of operations |
| Legislative and regulatory initiatives, at both the federal and state levels, are designed to promote competition |
| Changes in the gas industry have allowed certain customers to negotiate gas purchases directly with producers or brokers |
| Although open access in the gas industry has not had a negative impact on the earnings or cash flow of our regulated segment to date, we may lose market share or our profit margins may decline in the future if we are unable to remain competitive in this market |
| Our regulated natural gas and propane vapor operations follow Statement of Financial Accounting Standards (SFAS) Nodtta 71, “Accounting for the Effects of Certain Types of Regulation,” and our financial statements reflect the effects of the different rate-making principles followed by the various jurisdictions regulating our business |
| The application of SFAS Nodtta 71 can result in the regulated segment of our business recording costs that have been or are expected to be allowed in the ratemaking process in a period different from the period in which the costs would be charged to expense by an unregulated enterprise |
| Additionally, regulators can impose liabilities upon our regulated business segment for amounts previously collected from customers and for amounts that are expected to be refunded to customers |
| Although we currently do not anticipate the occurrence of any circumstances or events that would cause our natural gas and propane vapor operations to discontinue the application of SFAS Nodtta 71, the accounting impact of such an event would be an extraordinary, non-cash charge to operations that could be material to the financial position and results of operations of our company |
| Events in the energy markets that are beyond our control may have negative impacts on our business |
| For example, the energy crisis in California during the summer of 2001, the recent volatility of natural gas prices in North America, the bankruptcy filing by Enron Corporation, and investigations by governmental authorities into energy trading activities, greatly increased the amount of public and regulatory scrutiny of companies generally in the regulated and unregulated utility businesses |
| The capital markets and credit ratings agencies also have increased their level of scrutiny |
| We believe that we are complying with all applicable laws, but it is difficult to predict or control what effect these or related issues may have on our business or our access to the capital markets |
| Our business and that of our subsidiaries in all segments is temperature-sensitive |
| Colder temperatures generally result in increased sales, while our results of operations can be adversely affected by milder weather |
| We anticipate that this sensitivity to seasonal and other weather conditions will continue to be reflected in our sales volumes in future periods |
| The use of derivative contracts in the normal course of our business and changing interest rates and market conditions could result in financial losses that negatively impact our results of operations |
| We are exposed to the impact of market fluctuations in the price and transportation costs of natural gas and propane |
| In order to mitigate the risk of natural gas market price volatility related to firm commitments to purchase or sell natural gas, from time to time we have entered into hedging arrangements |
| We may use such arrangements to protect profit margins on future obligations to deliver gas at a fixed price, or to protect against adverse effects of potential market price declines on future obligations to purchase gas at fixed prices |
| We are exposed to losses in the event of nonperformance or nonpayment by counterparties |
| We use a risk management process to assess and monitor the financial exposure of all counterparties |
| Despite the fact that the majority of trading counterparties are rated as investment grade by the credit rating agencies, there is still a possibility that one or more of these companies could default, resulting in a material adverse impact on our earnings for a given period |
| We are subject to numerous environmental laws and regulations that may increase our cost of operations, impact our business plans, or expose us to environmental liabilities |
| Environmental regulations that may affect our present and future operations include regulation of air emissions, water quality, wastewater discharges, solid waste, and hazardous waste |
| These laws and regulations can result in increased capital expenditures or operating, costs |
| These laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections, and other approvals |
| Both public officials and private individuals may 9 _________________________________________________________________ [41]Table of Contents seek to enforce applicable environmental laws and regulations |
| We cannot predict the outcome (financial or operational) of any related litigation that may arise |
| We may be a responsible party for environmental clean-up at sites identified by a regulatory body in the future |
| If that occurs, we cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean-up costs |
| There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties |
| We cannot be sure that existing environmental regulations will not be revised or that new regulations seeking to protect the environment will not be adopted or become applicable to us |
| Revised or additional regulations that result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from our customers, could have a material adverse effect on our results of operations |
| We will face a variety of risks associated with acquiring and integrating new business operations |
| The growth and success of our company’s business will depend to a great extent on our ability to acquire new assets or business operations and to integrate the operations of businesses that we may acquire in the future |
| We cannot provide assurance that we will be able to • identify suitable acquisition candidates or opportunities, • acquire assets or business operations on commercially acceptable terms, • effectively integrate the operations of any acquired assets or businesses with our existing operations, • manage effectively the combined operations of the acquired businesses, • achieve our operating and growth strategies with respect to the acquired assets or businesses, or • reduce our overall selling, general, and administrative expenses associated with the acquired assets or businesses |
| The integration of the management, personnel, operations, products, services, technologies, and facilities of any businesses that we acquire in the future could involve unforeseen difficulties |
| These difficulties could disrupt our ongoing businesses, distract our management and employees, and increase our expenses, which could have a material adverse affect on our company’s business, financial condition, and operating results |
| Our performance depends substantially on the performance of our executive officers and other key personnel |
| The success of our business in the future will depend on our ability to attract, train, retain, and motivate high quality personnel, especially highly qualified managerial personnel |
| The loss of services of key executive officers or personnel could have a material adverse effect on our business, results of operations or financial condition |
| Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, it is expected that beginning with our Annual Report on Form 10-K for fiscal year ending June 30, 2008, we will be required to furnish a report by our management on our internal control over financial reporting |
| The internal control report must contain (i) a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting, (ii) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (iii) management’s assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not internal control over financial reporting is effective, and (iv) a statement that our independent auditors have issued an attestation report on management’s assessment of internal control over financial reporting |
| In order to achieve compliance with Section 404 of the Sarbanes-Oxley Act within the prescribed period, we have initiated a process to document and evaluate our internal control over financial reporting, which will be both costly and challenging |
| In this regard, management has dedicated internal resources and will engage outside consultants if necessary |
| The project team will adopt a detailed work plan to (i) assess and document the adequacy of internal control over financial reporting, (ii) take steps to improve control processes where appropriate, (iii) 10 _________________________________________________________________ [42]Table of Contents validate through testing that controls are functioning as documented, and (iv) implement a continuous reporting and improvement process for internal control over financial reporting |
| There is a risk that neither we nor our independent auditors will be able to conclude the attestation expected at June 30, 2009 that our internal controls over financial reporting are effective as required by Section 404 of the Sarbanes-Oxley Act |
| During the course of our testing we may identify deficiencies that we may not be able to remediate in time to meet the deadlines imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404 |
| In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act |
| Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud |
| If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could be adversely affected |
| Our Shareholder Rights Plan, as well as, certain provisions in our charter, may prevent or delay a change of control of our company |
| We have adopted a Shareholder Rights Plan that serves as a strong deterrent to any unsolicited or hostile takeover attempts and, effectively, requires an interested acquirer to negotiate with our Board of Directors |
| Additionally, our Articles of Incorporation authorize our Board of Directors to issue preferred stock in one or more series and to fix the rights, preferences, privileges, and restrictions granted to or imposed upon any unissued shares of preferred stock and to fix the number of shares constituting any series and the designations of such series, without further vote or action by the shareholders |
| Our Shareholders Rights Plan and our charter could prohibit or delay mergers or other takeover or change of control of our company and may discourage attempts by other companies to acquire us, even if such a transaction would be beneficial to our stockholders |
| Our actual results of operations could differ from estimates used to prepare our financial statements |
| In preparing our financial statements in accordance with generally accepted accounting principles, our management often must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period |
| We consider the following accounting policies to be our most critical because of the uncertainties, judgments, and complexities of the underlying accounting standards and operations involved: • Regulatory Accounting — Regulatory accounting allows for the actions of regulators to be reflected in the financial statements |
| Their actions may cause us to capitalize costs that would otherwise be included as an expense in the current period by unregulated companies |
| If future recovery of costs ceases to be probable, the assets will be written off as a charge in current period earnings |
| • Derivative Accounting — Derivative accounting requires evaluation of rules that are complex and subject to varying interpretations |
| Our evaluation of these rules, as they apply to our contracts, will determine whether we use accrual accounting or fair value (mark-to-market) accounting |
| Mark-to-market accounting requires us to record changes in fair value in earnings or, if certain hedge accounting criteria are met, in common stock equity (as a component of other comprehensive income (loss)) |
| • Mark-to-Market Accounting — The market value of our derivative contracts is not always readily determinable |
| In some cases, we use models and other valuation techniques to determine fair value |
| The use of these models and valuation techniques sometimes requires subjective and complex judgment |
| Actual results could differ from the results estimated through application of these methods |