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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2000
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Commission File No. 0-29604
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ENERGYSOUTH, INC.
(Successor to Mobile Gas Service Corporation)
---------------------------------------------
(Exact name of registrant as specified in its charter)
Alabama 58-2358943
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2828 Dauphin Street, Mobile, Alabama 36606
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 334-450-4774
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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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock ($.01 par value) outstanding at May 9, 2000 - 4,939,501 shares.
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ENERGYSOUTH, INC.
INDEX
Page No.
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PART I. Financial Information:
Consolidated Balance Sheets - March 31,
2000 and 1999 and September 30, 1999 3 - 4
Consolidated Statements of Income - Three, Six and
Twelve Months Ended March 31, 2000 and 1999 5
Consolidated Statements of Retained Earnings - Three,
Six and Twelve Months Ended March 31, 2000
and 1999 6
Consolidated Statements of Cash Flows - Six
Months Ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7 - 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 15
Quantitative and Qualitative Disclosures About
Market Risk 16
PART II. Other Information 17
Exhibit Index 18
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PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
March 31, September 30,
2000 1999 1999
------------------------------- -------------
(Unaudited)
Assets
CURRENT ASSETS:
Cash and Cash Equivalents $ 8,886 $ 8,700 $ 22,875
Receivables:
Gas 7,532 6,947 4,099
Unbilled Revenue 1,442 1,767 886
Merchandise 2,973 3,007 2,921
Other 893 690 687
Less Allowance for Doubtful Accounts (871) (814) (735)
Materials, Supplies, and Mdse (at average cost) 1,600 1,488 1,357
Gas Stored Underground for Current Use (at average cost) 1,111 628 1,180
Deferred Income Taxes 1,886 2,573 1,129
Prepayments 1,587 674 1,841
--------- --------- ---------
Total Current Assets 27,039 25,660 36,240
--------- --------- ---------
PROPERTY, PLANT, AND EQUIPMENT:
Property, Plant, and Equipment 179,246 172,067 175,768
Less: Accumulated Depreciation and Amortization 52,513 47,599 49,855
--------- --------- ---------
Property, Plant, and Equipment in Service - Net 126,733 124,468 125,913
Construction Work in Progress 2,882 1,585 3,763
--------- --------- ---------
Total Property, Plant, and Equipment - Net 129,615 126,053 129,676
--------- --------- ---------
OTHER ASSETS:
Regulatory Asset 561 805 738
Merchandise Receivables Due After One Year 5,521 5,584 5,670
Deferred Charges 1,312 1,324 1,311
--------- --------- ---------
Total Other Assets 7,394 7,713 7,719
--------- --------- ---------
Total $ 164,048 $ 159,426 $ 173,635
========= ========= =========
See Notes to Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
March 31, September 30,
2000 1999 1999
------------------------ -------------
(Unaudited)
Liabilities and Capitalization
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 2,746 $ 918 $ 962
Notes Payable 710 -- 17,177
Accounts Payable 3,690 3,237 4,368
Dividends Declared 1,152 1,074 1,150
Customer Deposits 1,479 1,456 1,428
Taxes Accrued 4,259 4,240 3,182
Interest Accrued 1,685 1,721 1,612
Deferred Purchased Gas Adjustment 2,295 3,337 754
Other Liabilities 1,654 1,812 1,723
--------- --------- ---------
Total Current Liabilities 19,670 17,795 32,356
--------- --------- ---------
OTHER LIABILITIES:
Other Liabilities 1,356 1,062 1,128
Accrued Pension Cost 964 1,319 1,189
Accrued Postretirement Benefit Cost 1,076 1,283 1,112
Deferred Income Taxes 12,129 11,305 11,705
Deferred Investment Tax Credits 379 408 392
--------- --------- ---------
Total Other 15,904 15,377 15,526
--------- --------- ---------
Total Liabilities 35,574 33,172 47,882
--------- --------- ---------
CAPITALIZATION:
Stockholders' Equity
Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares;
Outstanding: March, 2000 -
4,902,000 Shares; March, 1999 -
4,881,000 Shares; September , 1999 -
4,894,000 Shares) 49 49 49
Capital in Excess of Par Value 18,743 18,326 18,563
Retained Earnings 50,104 45,841 45,542
--------- --------- ---------
Total Stockholders' Equity 68,896 64,216 64,154
Minority Interest 3,742 3,456 3,582
Long-Term Debt (Less Current Maturities) 55,836 58,582 58,017
--------- --------- ---------
Total Capitalization 128,474 126,254 125,753
--------- --------- ---------
Total $ 164,048 $ 159,426 $ 173,635
========= ========= =========
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Six Months Twelve Months
Ended March 31, Ended March 31, Ended March 31,
--------------------- --------------------- ---------------------
2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- -------- --------
Operating Revenues
Gas Revenues (Note 7) $ 23,544 $ 22,371 $ 43,194 $ 40,968 $ 66,095 $ 64,952
Merchandise Sales 693 627 1,580 1,500 2,907 2,820
Other 321 329 688 718 1,315 1,322
-------- -------- -------- -------- -------- --------
Total Operating Revenues 24,558 23,327 45,462 43,186 70,317 69,094
-------- -------- -------- -------- -------- --------
Operating Expenses
Cost of Gas 7,270 7,156 13,390 12,042 17,539 16,889
Cost of Merchandise 531 477 1,206 1,141 2,296 2,205
Operations 4,882 4,650 9,598 9,284 17,557 17,907
Maintenance 492 352 986 715 1,850 1,396
Depreciation 1,710 1,656 3,435 3,333 6,570 6,430
Taxes, Other Than Income Taxes 1,762 1,711 3,313 3,216 5,459 5,400
-------- -------- -------- -------- -------- --------
Total Operating Expenses 16,647 16,002 31,928 29,731 51,271 50,227
-------- -------- -------- -------- -------- --------
Operating Income 7,911 7,325 13,534 13,455 19,046 18,867
-------- -------- -------- -------- -------- --------
Other Income and (Expense)
Interest Expense (1,291) (1,289) (2,586) (2,698) (5,102) (5,412)
Allowance for Borrowed Funds Used During
Construction 91 9 130 21 158 57
Interest Income 99 87 202 110 427 283
Minority Interest (179) (129) (361) (292) (579) (550)
-------- -------- -------- -------- -------- --------
Total Other Income (Expense) (1,280) (1,322) (2,615) (2,859) (5,096) (5,622)
-------- -------- -------- -------- -------- --------
Income Before Income Taxes 6,631 6,003 10,919 10,596 13,950 13,245
Income Taxes 2,461 2,244 4,054 3,939 5,118 4,950
-------- -------- -------- -------- -------- --------
Income Before Cumulative Effect of Changes
in Accounting Principles 4,170 3,759 6,865 6,657 8,832 8,295
-------- -------- -------- -------- -------- --------
Cumulative Effect on Prior Years of Change
in Accounting Method For Unbilled Revenue
(Net of Income Tax of $133)(Note 7) -- -- -- 235 -- 235
Cumulative Effect on Prior Years of Change
in Accounting Method For Start-up Costs
(Net of Income Tax of $(350))(Note 8) -- -- -- (616) 32 (616)
-------- -------- -------- -------- -------- --------
Total Cumulative Effect of Accounting Changes -- -- -- (381) 32 (381)
-------- -------- -------- -------- -------- --------
Net Income $ 4,170 $ 3,759 $ 6,865 $ 6,276 $ 8,864 $ 7,914
======== ======== ======== ======== ======== ========
Basic Earnings Per Share
Income Before Cumulative Effect $ 0.85 $ 0.77 $ 1.40 $ 1.37 $ 1.80 $ 1.70
Cumulative Effect of Accounting Changes -- -- -- (0.08) 0.01 (0.08)
-------- -------- -------- -------- -------- --------
Net Income $ 0.85 $ 0.77 $ 1.40 $ 1.29 $ 1.81 $ 1.62
======== ======== ======== ======== ======== ========
Diluted Earnings Per Share
Income Before Cumulative Effect $ 0.84 $ 0.76 $ 1.39 $ 1.35 $ 1.78 $ 1.69
Cumulative Effect of Accounting Changes -- -- -- (0.08) 0.01 (0.08)
-------- -------- -------- -------- -------- --------
Net Income $ 0.84 $ 0.76 $ 1.39 $ 1.27 $ 1.79 $ 1.61
======== ======== ======== ======== ======== ========
Pro Forma Amounts Assuming Retroactive
Application of Accounting Changes
Net Income $ 4,170 $ 3,759 $ 6,865 $ 6,657 $ 8,832 $ 8,103
======== ======== ======== ======== ======== ========
Basic Earnings Per Share $ 0.85 $ 0.77 $ 1.40 $ 1.37 $ 1.80 $ 1.66
======== ======== ======== ======== ======== ========
Diluted Earnings Per Share $ 0.84 $ 0.76 $ 1.39 $ 1.35 $ 1.79 $ 1.64
======== ======== ======== ======== ======== ========
Cash Dividends Declared Per Share of Common Stock $ 0.2350 $ 0.2200 $ 0.4700 $ 0.4400 $ 0.9400 $ 0.8800
======== ======== ======== ======== ======== ========
Average Common Shares Outstanding (Note 9)
Basic 4,902 4,881 4,900 4,879 4,895 4,874
======== ======== ======== ======== ======== ========
Diluted 4,940 4,933 4,943 4,930 4,940 4,927
======== ======== ======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
Three Months Six Months Twelve Months
Ended March 31, Ended March 31, Ended March 31,
-------------------- -------------------- --------------------
2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- -------- --------
Balance at Beginning of Period $ 47,086 $ 43,156 $ 45,542 $ 41,711 $ 45,841 $ 42,217
Net Income 4,170 3,759 6,865 6,276 8,864 7,914
-------- -------- -------- -------- -------- --------
Total 51,256 46,915 52,407 47,987 54,705 50,131
Less: Dividends 1,152 1,074 2,303 2,146 4,601 4,290
-------- -------- -------- -------- -------- --------
Balance at End of Period $ 50,104 $ 45,841 $ 50,104 $ 45,841 $ 50,104 $ 45,841
======== ======== ======== ======== ======== ========
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In Thousands)
Six Months
Ended March 31,
2000 1999
-------- --------
Cash Flows Provided by Operating Activities $ 8,451 $ 12,255
-------- --------
Cash Flows Used In Investing Activities -
Capital Expenditures (3,452) (3,369)
-------- --------
Cash Flows From Financing Activities:
Repayment of Long-Term Debt (398) (4,080)
Changes in Short-Term Borrowings (16,467) (12,665)
Payment of Dividends, Net of Dividend Reinvestment (2,123) (1,956)
-------- --------
Net Cash Used In Financing Activities (18,988) (18,701)
-------- --------
Net Decrease in Cash and Cash Equivalents (13,989) (9,815)
-------- --------
Cash and Cash Equivalents at Beginning of Period 22,875 18,515
-------- --------
Cash and Cash Equivalents at End of Period $ 8,886 $ 8,700
======== ========
See Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The consolidated financial statements of EnergySouth, Inc. and its
subsidiaries (collectively the Company) include the accounts of Mobile Gas
Service Corporation (Mobile Gas); EnergySouth Services, Inc. (Services); MGS
Storage Services (Storage); MGS Marketing Services, Inc. (Marketing); an 87.5%
owned partnership, Bay Gas Storage Company, Ltd. (Bay Gas); and a 51% owned
partnership, Southern Gas Transmission Company (SGT). All significant
intercompany balances and transactions have been eliminated. Certain amounts in
the prior year financial statements have been reclassified to conform with the
fiscal year 2000 financial statement presentation.
Note 2. The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. All adjustments, consisting of
normal and recurring accruals, which are, in the opinion of management,
necessary to present fairly the results for the interim periods have been made
and are of a recurring nature. The statements should be read in conjunction with
the summary of accounting policies and notes to financial statements included in
the Annual Report on Form 10-K of the Company for the fiscal year ended
September 30, 1999.
Note 3. Due to the high percentage of customers using gas for heating, the
Company's operations are seasonal in nature. Therefore, the results of
operations for the six month periods ended March 31, 2000 and 1999 are not
indicative of the results to be expected for the full year.
Note 4. Effective October 1, 1999, the Company adopted Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). Accordingly, the Company now capitalizes certain
direct payroll and payroll-related costs for employees directly associated with
activities defined within the "application development stage" which in the past
have been expensed. The materiality of this change is dependent upon the
magnitude of the costs of specific software development or acquisition projects
incurred in any period. For the six months ended March 31, 2000, the amount of
costs capitalized under SOP 98-1 was not material to the financial statements.
Note 5. Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June
1998 and establishes accounting and reporting standards for derivative
instruments and hedging activities. In June 1999, Statement of Financial
Accounting Standards No. 137 (SFAS 137) was issued which defers the effective
date of SFAS 133 for the Company until October 1, 2000, the beginning of the
first quarter of fiscal year 2001. The Company does not anticipate that SFAS 133
will have a significant impact on the financial statements.
Note 6. The Company is principally engaged in two reportable business segments:
Natural Gas Distribution and Natural Gas Storage. The Natural Gas Distribution
segment is actively engaged in the distribution and transportation of natural
gas to residential, commercial and industrial customers through Mobile Gas and
SGT. The Natural Gas Storage segment provides for the underground storage of
natural gas and transportation services through the operations of Bay Gas and
Storage. Through Marketing, Mobile Gas, and Services, the Company also provides
marketing, merchandising, and other energy-related services which
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are aggregated with EnergySouth, the holding company, and included in the Other
category. All segments are located in Southwest Alabama.
Segment earnings information presented in the table below includes intersegment
revenues which are eliminated in consolidation. Such intersegment revenues are
primarily amounts paid by the Natural Gas Distribution segment to the Natural
Gas Storage segment.
For the three months ended NATURAL GAS NATURAL GAS
March 31, 2000 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 22,993 $ 1,582 $ 1,014 $ (1,031) $ 24,558
Operating Expenses 16,224 668 786 (1,031) 16,647
Operating Income (Loss) 6,769 914 228 7,911
For the three months ended NATURAL GAS NATURAL GAS
March 31, 1999 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 22,088 $ 1,336 $ 956 $ (1,053) $ 23,327
Operating Expenses 15,702 561 792 (1,053) 16,002
Operating Income (Loss) 6,386 775 164 7,325
For the six months ended NATURAL GAS NATURAL GAS
March 31, 2000 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 42,093 $ 3,163 $ 2,268 $ (2,062) $ 45,462
Operating Expenses 31,020 1,242 1,728 (2,062) 31,928
Operating Income (Loss) 11,073 1,921 540 13,534
For the six months ended NATURAL GAS NATURAL GAS
March 31, 1999 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 40,427 $ 2,648 $ 2,218 $ (2,107) $ 43,186
Operating Expenses 28,983 1,091 1,764 (2,107) 29,731
Operating Income (Loss) 11,444 1,557 454 13,455
For the twelve months ended NATURAL GAS NATURAL GAS
March 31, 2000 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 63,874 $ 6,337 $ 4,221 $ (4,115) $ 70,317
Operating Expenses 49,712 2,354 3,320 (4,115) 51,271
Operating Income (Loss) 14,162 3,983 901 19,046
For the twelve months ended NATURAL GAS NATURAL GAS
March 31, 1999 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 63,776 $ 5,236 $ 4,248 $ (4,166) $ 69,094
Operating Expenses 48,754 2,209 3,430 (4,166) 50,227
Operating Income (Loss) 15,022 3,027 818 18,867
Note 7. Effective October 1, 1998 the Company changed its method of accounting
for unbilled revenues to be consistent with prevailing industry practice. Prior
to October 1, 1998, the Company recorded revenues as meters were read on a
monthly cycle basis and the commodity cost of purchased gas applicable to gas
delivered but not yet billed at month-end was deferred. The accrual method
adopted records revenues based upon estimated consumption through the end of the
month for all customers regardless of the meter reading date. The effect of the
change for the six months and twelve months ended March 31, 1999
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was to increase net income by $490,000 ($0.10 per share, diluted) of which
$255,000 ($.05 per share, diluted) is included in operating income, and $235,000
($0.05 per share, diluted), the cumulative effect of the change, is reported as
a separate component of net income. In subsequent fiscal years this change in
accounting method has the effect of recognizing income earlier within the fiscal
year but will have a minimal impact on the fiscal year as a whole.
Note 8. Effective October 1, 1998, the Company adopted Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5) and recorded a
cumulative effect of change in accounting method of $616,000 ($.13 per share,
diluted) as a result of expensing organization and start-up costs previously
capitalized. On November 5, 1998, Bay Gas filed a petition with the Federal
Energy Regulatory Commission ("FERC") seeking authority to provide
transportation-only services for both interstate and intrastate shippers. An
order granting such authority was issued by the FERC on April 28, 1999. As a
result of that order, and in compliance with regulatory accounting treatment, a
regulatory asset was established relating to the amount of organization and
start-up costs associated with providing such transportation-only services. This
resulted in an adjustment to reduce the cumulative effect of the adoption of SOP
98-5 by $32,000, net of tax (approximately $0.01 per share). The ongoing effect
on operating income as a result of not expensing the amortization of such costs
is not material to the financial statements.
Note 9. Basic earnings per share are computed based on the weighted average
number of common shares outstanding during each period. Diluted earnings per
share are computed based on the weighted average number of common shares and
diluted potential common shares, using the treasury stock method, outstanding
during each period. Average common shares used to compute basic earnings per
share differed from average common shares used to compute diluted earnings per
share by equivalent shares of 38,000 and 52,000 for the three months ended March
31, 2000 and 1999, respectively; 43,000 and 51,000 for the six months ended
March 31, 2000 and 1999, respectively; and 45,000 and 53,000 for the twelve
months ended March 31, 2000 and 1999, respectively. These differences in
equivalent shares are from outstanding stock options.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
EnergySouth, Inc. (the "Company") is a holding company for a family of energy
businesses. The Company, primarily through Mobile Gas Service Corporation
(Mobile Gas), is engaged principally in the distribution of natural gas to
residential, commercial and industrial customers in southwest Alabama. Other
subsidiaries are engaged in providing gas pipeline transportation, gas storage,
gas marketing and other energy-related services. The Alabama Public Service
Commission (APSC) regulates the Company's gas distribution and storage
operations. Mobile Gas' rate tariffs for gas distribution allow a pass-through
to customers of the cost of gas supplies, certain taxes, and incremental costs
associated with the replacement of cast iron mains. These costs, therefore, have
little impact on the Company's earnings. Other costs, including a return on
investment, are recovered through rates approved in traditional rate
proceedings. Interstate gas storage contracts of Bay Gas Storage Company, Ltd.
(Bay Gas) do not require APSC approval since the Federal Energy Regulatory
Commission (FERC), which has jurisdiction over such contracts, allows them to
have market-based rates. Market-based rates minimize regulatory involvement in
the setting of rates for storage services and allow Bay Gas to respond to market
conditions. The FERC issued an order on April 28, 1999 granting authority to Bay
Gas to provide transportation-only services to interstate and intrastate
shippers and approved rates for such service.
The Company's distribution business is highly seasonal and temperature-sensitive
since residential and commercial customers use more gas during colder weather
for space heating. As a result, gas revenues, cost of gas and related taxes in
any given period reflect, in addition to other matters, the impact of weather,
through either increased or decreased sales volumes. The Company utilizes a
temperature rate adjustment rider to mitigate the impact that unusually cold or
warm weather has on operating margins by reducing the base rate portion of
customers' bills in colder than normal weather and increasing the base rate
portion of customers' bills in warmer than normal weather.
Normal weather for the Company's service territory is defined as the 30-year
average temperature as determined by the National Weather Service. In the gas
utility industry, heating degree-days are the benchmark for measuring coldness
and represent the number of degrees that the daily average temperature falls
below 65 degrees Fahrenheit.
RESULTS OF OPERATIONS
NET INCOME
All earnings per share amounts referred to herein are computed on a diluted
basis and all financial statement changes discussed herein for the three, six
and twelve months ended March 31, 2000 are based on comparison to the same
period in fiscal 1999. Net income for the three months ended March 31, 2000 was
$4,170,000 or $0.84 per share compared to net income of $3,759,000 or $0.76 per
share for the second quarter of fiscal 1999. Net income for the six months ended
March 31, 2000 was $6,865,000 or $1.39 per share compared to net income before
the cumulative effect of accounting changes of $6,657,000 or $1.35 per share for
the 1999 six-month period. Net income before the cumulative effect of accounting
changes for the twelve months ended March 31, 2000 and 1999 was $8,832,000 or
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$1.78 per share and $8,295,000 or $1.69 per share, respectively. Beginning
October 1, 1998 the Company changed its accounting methods for unbilled gas
revenues to be consistent with prevailing industry practice and for start-up
costs to comply with new accounting standards. The cumulative effect of the
respective accounting changes on prior years are reported as separate components
of net income. These accounting changes are discussed in detail within Note 7
and Note 8 to the quarterly financial statements. Assuming retroactive
application of such accounting changes, earnings per share amounts for the
twelve months ended March 31, 2000 and 1999 would have been $1.79 per share and
$1.64 per share, respectively. The increase in earnings for the three, six and
twelve months ended March 31, 2000 was due primarily to increased revenues from
natural gas storage and transportation operations of Bay Gas, increased margins
on gas sales to temperature-sensitive utility customers in the natural gas
distribution business segment and increased interest income on temporary
investments. Also contributing to increased earnings for the six and
twelve-month periods was a decrease in interest expense reflecting the early
redemption of high rate bonds in October 1998. Increased operations and
maintenance expenses during the fiscal 2000 periods partially offset the
aforementioned positive impacts to earnings.
OPERATING REVENUES
Gas revenues increased $1,173,000 (5%), $2,226,000 (5%) and $1,143,000 (2%),
respectively, for the three, six and twelve months ended March 31, 2000.
Comparing pro forma amounts assuming retroactive application of the accounting
change for unbilled gas revenues, in which case unbilled gas revenues and
related costs at March 31, 1998 would have been accrued and thus not reflected
in amounts presented for the twelve months ended March 31, 1999, gas revenues
would have increased $1,959,000 (3%) for the current twelve-month period.
Gas sales revenues from residential and small commercial customers, referred to
as temperature-sensitive customers since their heating usage is affected to a
large degree by temperatures during the heating season, increased $825,000 (5%),
$1,674,000 (5%), and $1,445,000 (3%), comparing pro forma amounts, respectively,
for the three, six and twelve months ended March 31, 2000, resulting primarily
from increased gas volumes sold of 2%, 11% and 6%, respectively. Despite weather
during the fiscal 2000 second quarter that was 9% warmer in terms of heating
degree days than the second quarter of fiscal 1999, temperature-sensitive
customers consumed more gas on a degree-day basis during the fiscal 2000 second
quarter resulting in increased gas volumes sold to these customers. Weather
during the six and twelve months ended March 31, 2000 was 14% and 11%,
respectively, colder than the prior year periods resulting in increased gas
usage.
Gas sales revenues from large commercial and industrial customers increased
$11,000 (1%) for the three months ended March 31, 2000 due to increased gas
sales volume to large commercial firm customers partially offset by decreased
gas sales to industrial interruptible customers. Gas sales revenues from large
commercial and industrial customers decreased $73,000 (2%) and $286,000 (5%),
respectively, for the current six and twelve month periods. Excluding several
gas sales to municipalities and certain other customers during the 1999
twelve-month period, which by their nature occur infrequently and have not
occurred since, gas sales attributed to large commercial and industrial
customers decreased $114,000 (2%) for the twelve-month comparison. Decreased gas
sales revenues during the six and twelve-month periods were caused primarily by
decreased gas sales to industrial interruptible customers with alternative fuel
burning capability. Also impacting the twelve-month period
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comparison was the effect of an industrial customer which switched to
transportation-only service in May 1998 and an industrial customer which closed
part of its operations in November 1998. The above impacts on gas sales to large
commercial and industrial customers were partially offset by the addition of
several new industrial customers in fiscal year 2000.
Gas transportation revenues, excluding those of Bay Gas, increased $49,000 (2%)
and $63,000 (1%), respectively, for the three and six months ended March 31,
2000 primarily due to increased volumes transported to customers. Gas
transportation revenues, excluding Bay Gas, decreased $294,000 (3%) for the
twelve months ended March 31, 2000 due primarily to a customer's plant closing
in October 1998 and a rate reduction to an industrial customer in February 1999.
Excluding the above impacts on the twelve-month comparison, gas transportation
revenues increased due to increased volumes transported to customers.
Bay Gas storage and transportation revenues, other than from Mobile Gas,
increased $268,000 (95%), $563,000 (105%) and $1,151,000 (108%), respectively,
for the three, six and twelve months ended March 31, 2000 primarily as a result
of a long-term storage contract with Southern Company that began in April 1999
and a long-term transportation contract with Florida Gas Transmission that began
in December 1998. Southern Company is using Bay Gas' facilities to store gas
primarily for backup service to several of its new gas powered electric
generating facilities in the Southeast while Bay Gas is delivering gas received
from Florida Gas Transmission to a gas powered electric cogeneration facility
located off the Bay Gas pipeline. The emergence of using natural gas-fired
electric generation facilities in the Southeast and specifically in the Mobile
area has provided new opportunities for EnergySouth companies to provide gas
storage and transportation. Management expects this trend to continue with
recent developments in natural gas-fired electric generation such as Alabama
Power's installation of two gas powered electric generating units at its Plant
Barry facility located north of Mobile. Bay Gas has contracted to transport up
to 100,000 MMBtu of gas per day to this facility when operations begin in
mid-2000. Additionally, Alabama Power has plans to install two additional units
in 2001 to which Bay Gas has also contracted to transport gas. Alabama Power is
also constructing a new gas powered cogeneration facility in an industrial park
located within the southern portion of Mobile Gas' distribution system. Mobile
Gas expects to transport approximately 40,000 MMBtu of gas per day to this
facility when it becomes operational in mid-2000. Also, Mobile Gas recently
entered into a contract to transport up to 54,000 MMBtu of gas per day to
another electric cogeneration facility being constructed in the Mobile area.
This facility is expected to be operational in early 2001.
Gross margins on gas revenues, defined as gas revenues less related cost of gas,
have increased $1,059,000 (7%), $878,000 (3%) and $493,000 (1%), respectively,
for the three, six and twelve months ended March 31, 2000. Comparing pro forma
amounts, gross margins on gas revenues would have increased $848,000 (2%) for
the twelve-month period. Margins from temperature-sensitive customers increased
$668,000 (6%), $271,000 (1%), and $113,000 (0.4%), on a pro forma basis,
respectively, for the three, six and twelve months ended March 31, 2000
primarily as a result of an increase in gas consumption per heating degree-day
during the fiscal 2000 second quarter. The Company uses its temperature
adjustment rider to adjust margins on gas sales to residential and small
commercial/industrial customers during the months of November through April when
temperatures vary from normal. Temperatures were 30%, 18% and 18%, respectively,
warmer than normal during the three, six and twelve months ended March 31, 2000.
Gross margins from large
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commercial and industrial sales increased slightly during the three months ended
March 31, 2000 primarily due to increased commercial firm sales revenues and
decreased $43,000 (4%) and $85,000 (4%), respectively, for the six and
twelve-month period comparison primarily due to decreased industrial
interruptible gas sales revenues as discussed previously. Because gas
transportation revenues and Bay Gas revenues do not have an associated cost of
gas, the margin change on these revenues approximates the change in revenues
discussed previously.
Other operating revenues is comprised primarily of interest income from the
financing of merchandise sales and installations that occur at the Company and
through trade programs and also includes revenues from appliance service work,
engineering consulting, operations training and gas marketing services. Other
operating revenues decreased slightly for all periods due primarily to decreases
in appliance service revenues.
OPERATING EXPENSES
Cost of gas increased $114,000 (2%), $1,348,000 (11%) and $650,000 (4%),
respectively, for the three, six and twelve months ended March 31, 2000.
Comparing pro forma amounts assuming retroactive application of the accounting
change for unbilled revenues and related costs, cost of gas would have increased
$1,110,000 (7%) for the twelve-month period. Cost of gas increased for the
current periods due primarily to increased total gas sales volumes of 2%, 8% and
4%, comparing pro forma amounts, respectively, for the three, six and twelve
months ended March 31, 2000. The volume increases resulted primarily from the
increase in gas consumption per heating degree-day during the 2000 second
quarter and weather that was colder than the prior year during the current six
and twelve month periods. The Company passes the actual cost of gas on to
customers under the purchased gas adjustment provision of rate tariffs. The
difference between actual gas costs and the amount collected from its customers
is included as a current asset or liability in the Consolidated Balance Sheets
and excluded from the Consolidated Statements of Income. Because cost of gas is
completely recovered from the Company's customers, fluctuations in the cost of
gas have no effect on gas margins.
Operations and maintenance expenses combined increased $372,000 (7%), $585,000
(6%) and $104,000 (0.5%), respectively, for the three, six and twelve months
ended March 31, 2000. Operations expense for all periods was impacted primarily
by an increase in the liability for providing future health insurance benefits
for disabled employees, several of whom recently received disability status.
Excluding the required reserves to expense for this liability, operations and
maintenance expense combined increased 4% for the three and six months ended
March 31, 2000 and decreased for the current twelve-month period. Additionally,
distribution system operations and maintenance expenses, primarily associated
with mains and services, and sales related expenses increased for all periods
while increased legal and consulting expenses also impacted the current six and
twelve-month periods. Decreased bad debt expense partially offset the above
impacts on the six and twelve months ended March 31, 2000.
Depreciation expense increased for all periods ended March 31, 2000 resulting
from increased investment in property, plant and equipment.
Taxes, other than income taxes (other taxes), primarily consist of property
taxes and business license taxes that are based on gross revenues and fluctuate
accordingly. Other
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taxes increased $51,000 (3%), $97,000 (3%) and $59,000 (1%), respectively, for
the three, six and twelve months ended March 31, 2000 due primarily to
fluctuations in business license taxes associated with gas revenues.
OTHER INCOME AND EXPENSES
Interest expense increased slightly for the 2000 second quarter and decreased
$112,000 (4%) and $310,000 (6%), respectively, for the six and twelve months
ended March 31, 2000. The early redemption of high rate bonds in October 1998
was the primary reason for the decreased interest expense for the six and
twelve-month periods.
Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs increased $82,000, $109,000 and $101,000, respectively, for the
three, six and twelve months ended March 31, 2000, primarily to an increase in
on-going capital projects during fiscal 2000.
Interest income increased $12,000, $92,000 and $144,000, respectively, for the
three, six and twelve months ended March 31, 2000 due primarily to increased
interest income on temporary investments particularly attributed to Bay Gas as a
result of its improved financial position. Also in January 1999, the Company
implemented improved cash management procedures to maximize the use of available
funds.
Minority interest reflects the minority partners' share of pre-tax earnings of
the Bay Gas and Southern Gas Transmission Company partnerships, of which
EnergySouth, Inc. subsidiaries hold controlling interests.
Income tax expense increased $217,000 (10%), $115,000 (3%) and $168,000 (3%),
respectively, for the three, six and twelve months ended March 31, 2000,
primarily in relation to changes in income before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally relies on cash generated from operations and on a
temporary basis, short-term borrowings, to meet working capital requirements and
to finance normal capital expenditures. The Company issues debt and equity for
longer term financing as needed. Operating activities provided cash of
$8,451,000 for the six months ended March 31, 2000 compared to providing cash of
$12,255,000 for the 1999 six-month period. The primary factors causing the
decreased cash flow from operations include: a decrease in net income after
considering non-cash components, a reduction in the overcollection of gas costs
between the two periods, a reduction in payments received for pipeline
relocations, and ordinary timing differences of receipts and payments on
receivables and payables.
Financing activities used cash of $18,988,000 and $18,701,000, respectively, for
the six months ended March 31, 2000 and 1999. The increase in cash used by
financing activities was due to increased payments on short-term borrowings and
increased dividends paid, which were partially offset by reduced payments on
long-term debt. In September 1999, the Company purchased short-term federal
obligations for tax planning purposes. These investments matured in early
October 1999 and the proceeds were used to repay the related debt thus primarily
causing the increase in payments on short-term borrowings. The
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increase in dividends paid during the six months ended March 31, 2000 was due
primarily to a 7% increase in the dividend per share rate. The large repayment
of long-term debt during the six months ended March 31, 1999 primarily reflects
the early redemption in October 1998 of $2,500,000 of 10.25% First Mortgage
Bonds.
Investing activities used cash of $3,452,000 and $3,369,000, respectively, for
the six months ended March 31, 2000 and 1999 primarily as a result of the
Company's regular construction program. The Company's capital needs relating to
its regular construction program, equipment purchases, and other general
improvements for the remainder of fiscal 2000 is estimated to be $10,000,000.
Bay Gas is planning to construct an additional salt-dome cavern for storing 3.5
billion cubic feet (Bcf) of natural gas with expanded injection and withdrawal
facilities. Bay Gas expects to spend $30 to $35 million on this project which
will take more than two years to complete. Funding will come from internal cash
generation and the debt and/or equity markets. Funds for the Company's
short-term cash needs are expected to come from cash provided by operations and
borrowings under the Company's revolving credit agreement of which $19,290,000
is available for borrowing at March 31, 2000. Management believes it has
adequate financial flexibility to meet its expected cash needs in the
foreseeable future.
FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not historical in nature
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are subject to risks
and uncertainties that may cause actual future results to differ materially.
Such risks and uncertainties with respect to the Company include, but are not
limited to, its ability to successfully achieve internal performance goals,
competition, the effects of state and federal regulation, including rate relief
to recover increased capital and operating costs, general economic conditions,
and specific conditions in the Company's service area. Additional factors that
may impact forward-looking statements include the Company's dependence on
external suppliers, partners, operators, service providers, and governmental
agencies.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company does not have any derivative financial instruments such as
futures, forwards, swaps and options. Also, the Company has no market
risk-sensitive instruments held for trading purposes. At March 31, 2000 the
Company had approximately $58.6 million of long-term debt at fixed interest
rates. Interest rates range from 7.27% to 9.00% and the maturity dates of such
debt extend to 2023. See the information provided under the captions "The
Company", "Gas Supply", and "Liquidity and Capital Resources" in the Company's
Form 10-K for the fiscal year ended September 30, 1999 for a discussion of the
Company's risks related to regulation, weather, gas supply, and the
capital-intensive nature of the Company's business.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
27 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
During the quarter for which this report is filed, the Company
filed no reports on Form 8-K.
SIGNATURES
Pursuant to the requirements 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.
MOBILE GAS SERVICE CORPORATION
------------------------------
(Registrant)
Date: May 15, 2000 /s/ John S. Davis
------------------------- ------------------------------------
John S. Davis
President and
Chief Executive Officer
Date: May 15, 2000 /s/ Charles P. Huffman
------------------------- ------------------------------------
Charles P. Huffman
Vice President, Chief Financial
Officer, and Treasurer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule (EDGAR version only)