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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 June 30, 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 August 11, 2000 - 4,911,527 shares.
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ENERGYSOUTH, INC.
INDEX
Page No.
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PART I. Financial Information:
Consolidated Balance Sheets - June 30,
2000 and 1999 and September 30, 1999 3 - 4
Consolidated Statements of Income - Three, Nine and
Twelve Months Ended June 30, 2000 and 1999 5
Consolidated Statements of Retained Earnings - Three,
Nine and Twelve Months Ended June 30, 2000
and 1999 6
Consolidated Statements of Cash Flows - Nine
Months Ended June, 2000 and 1999 6
Notes to Consolidated Financial Statements 7 - 9
Management's Discussion and Analysis of
Financial Condition and Results of Operation 10 - 15
Quantitative and Qualitative Disclosures About
Market Risk 16
PART II. Other Information 17
Exhibit Index
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PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, September 30,
ASSETS 2000 1999 1999
--------- --------- -------------
(Unaudited)
CURRENT ASSETS
Cash and Cash Equivalents $ 8,199 $ 9,817 $ 22,875
Receivables:
Gas 5,671 5,142 4,099
Unbilled Revenue (Note 6) 981 884 886
Merchandise 2,983 3,013 2,921
Other 852 682 687
Allowance for Doubtful Accounts (862) (876) (735)
Materials, Supplies, and Merchandise (average cost) 1,852 1,228 1,357
Gas Stored Underground for Current Use (average cost) 1,474 448 1,180
Deferred Income Taxes 1,557 2,229 1,129
Prepayments 1,856 1,426 1,841
--------- --------- ---------
Total Current Assets 24,563 23,993 36,240
--------- --------- ---------
PROPERTY, PLANT, AND EQUIPMENT
Property, Plant, and Equipment 181,919 173,416 175,768
Less: Accumulated Depreciation and Amortization 53,802 48,941 49,855
--------- --------- ---------
Property, Plant, and Equipment - Net 128,117 124,475 125,913
Construction Work in Progress 1,786 2,469 3,763
--------- --------- ---------
Total Property, Plant, and Equipment 129,903 126,944 129,676
--------- --------- ---------
OTHER ASSETS
Regulatory Assets 511 778 738
Merchandise Receivables Due After One Year 5,302 5,596 5,670
Deferred Charges 1,402 1,366 1,311
--------- --------- ---------
Total Other Assets 7,215 7,740 7,719
--------- --------- ---------
Total $ 161,681 $ 158,677 $ 173,635
========= ========= =========
See Accompanying Notes to Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
June 30, September 30,
LIABILITIES AND CAPITALIZATION 2000 1999 1999
-------- -------- ------------
(Unaudited)
CURRENT LIABILITIES
Current Maturities of Long-Term Debt $ 2,795 $ 962 $ 962
Notes Payable 1,100 17,177
Accounts Payable 4,147 2,938 4,368
Dividends Declared 1,227 1,148 1,150
Customer Deposits 1,443 1,424 1,428
Taxes Accrued 4,119 3,799 3,182
Interest Accrued 1,342 1,366 1,612
Deferred Purchased Gas Adjustment 1,549 2,642 754
Other Liabilities 1,068 1,792 1,723
-------- -------- --------
Total Current Liabilities 17,690 17,171 32,356
-------- -------- --------
OTHER LIABILITIES
Other Liabilities 1,432 1,098 1,128
Accrued Pension Cost 851 1,252 1,189
Accrued Postretirement Benefit Cost 1,059 1,259 1,112
Deferred Income Taxes 12,381 11,618 11,705
Deferred Investment Tax Credits 373 403 392
-------- -------- --------
Total Other 16,096 15,630 15,526
-------- -------- --------
Total Liabilities 33,786 32,801 47,882
-------- -------- --------
CAPITALIZATION
Stockholders' Equity
Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares;
Outstanding: June, 2000 -
4,907,000 Shares; June 1999 -
4,886,000 Shares; September 1999
4,894,000 Shares) 49 49 49
Capital in Excess of Par Value 18,901 18,424 18,563
Retained Earnings 49,906 45,822 45,542
-------- -------- --------
Total Stockholders' Equity 68,856 64,295 64,154
Minority Interest 3,817 3,564 3,582
Long-Term Debt (Less Current Maturities) 55,222 58,017 58,017
-------- -------- --------
Total Capitalization 127,895 125,876 125,753
-------- -------- --------
Total $161,681 $158,677 $173,635
======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Nine Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
-------------------- -------------------- --------------------
2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- -------- --------
Operating Revenues
Gas Revenues (Note 7) $ 13,408 $ 12,239 $ 56,601 $ 53,207 $ 67,263 $ 64,135
Merchandise Sales 637 700 2,217 2,201 2,844 2,784
Other 389 327 1,077 1,045 1,376 1,333
-------- -------- -------- -------- -------- --------
Total Operating Revenues 14,434 13,266 59,895 56,453 71,483 68,252
-------- -------- -------- -------- -------- --------
Operating Expenses
Cost of Gas 3,379 2,388 16,769 14,431 18,529 16,259
Cost of Merchandise 503 574 1,709 1,714 2,225 2,147
Operations 4,313 4,133 13,910 13,418 17,736 17,928
Maintenance 445 344 1,431 1,059 1,951 1,402
Depreciation 1,720 1,646 5,155 4,979 6,643 6,485
Taxes, Other Than Income Taxes 1,197 1,138 4,510 4,354 5,518 5,391
-------- -------- -------- -------- -------- --------
Total Operating Expenses 11,557 10,223 43,484 39,955 52,602 49,612
-------- -------- -------- -------- -------- --------
Operating Income 2,877 3,043 16,411 16,498 18,881 18,640
-------- -------- -------- -------- -------- --------
Other Income and (Expense)
Interest Expense (1,216) (1,243) (3,801) (3,940) (5,075) (5,296)
Allowance for Borrowed Funds Used
During Construction 41 8 170 29 190 48
Interest Income 122 105 323 215 443 300
Minority Interest (186) (150) (546) (442) (615) (584)
-------- -------- -------- -------- -------- --------
Total Other Income (Expense) (1,239) (1,280) (3,854) (4,138) (5,057) (5,532)
-------- -------- -------- -------- -------- --------
Income Before Income Taxes 1,638 1,763 12,557 12,360 13,824 13,108
Income Taxes 609 666 4,663 4,605 5,060 4,868
-------- -------- -------- -------- -------- --------
Income Before Cumulative Effect of Changes
in Accounting Principles 1,029 1,097 7,894 7,755 8,764 8,240
-------- -------- -------- -------- -------- --------
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) -- 32 -- (584) -- (584)
-------- -------- -------- -------- -------- --------
Total Cumulative Effect of
Accounting Changes -- 32 -- (349) -- (349)
-------- -------- -------- -------- -------- --------
Net Income $ 1,029 $ 1,129 $ 7,894 $ 7,406 8,764 $ 7,891
======== ======== ======== ======== ======== ========
Basic Earnings Per Share
Income Before Cumulative Effect $ 0.21 $ 0.22 $ 1.61 $ 1.59 $ 1.79 $ 1.69
Cumulative Effect of Accounting Changes -- 0.01 -- (0.07) -- (0.07)
-------- -------- -------- -------- -------- --------
Net Income $ 0.21 $ 0.23 $ 1.61 $ 1.52 $ 1.79 $ 1.62
======== ======== ======== ======== ======== ========
Diluted Earnings Per Share
Income Before Cumulative Effect $ 0.21 $ 0.22 $ 1.60 $ 1.57 $ 1.77 $ 1.67
Cumulative Effect of Accounting Changes -- 0.01 -- (0.07) -- (0.07)
-------- -------- -------- -------- -------- --------
Net Income $ 0.21 $ 0.23 $ 1.60 $ 1.50 $ 1.77 $ 1.60
======== ======== ======== ======== ======== ========
Pro Forma Amounts Assuming Retroactive Application
of Accounting Changes
Net Income $ 1,029 $ 1,097 $ 7,894 $ 7,755 $ 8,764 $ 8,189
======== ======== ======== ======== ======== ========
Basic Earnings Per Share $ 0.21 $ 0.22 $ 1.61 $ 1.60 $ 1.79 $ 1.68
======== ======== ======== ======== ======== ========
Diluted Earnings Per Share $ 0.21 $ 0.22 $ 1.60 $ 1.57 $ 1.77 $ 1.66
======== ======== ======== ======== ======== ========
Cash Dividends Declared Per Share of Common Stock $ 0.2500 $ 0.2350 $ 0.7200 $ 0.6750 $ 0.9550 $ 0.8950
======== ======== ======== ======== ======== ========
Average Common Shares Outstanding (Note 9)
Basic 4,907 4,885 4,902 4,881 4,900 4,879
======== ======== ======== ======== ======== ========
Diluted 4,944 4,931 4,944 4,931 4,943 4,928
======== ======== ======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
(Unaudited)
Three Months Nine Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
----------------- ----------------- -----------------
2000 1999 2000 1999 2000 1999
------- ------- ------- ------- ------- -------
Balance at Beginning of Period $50,104 $45,841 $45,542 $41,711 $45,822 $42,298
Net Income 1,029 1,129 7,894 7,406 8,764 7,891
------- ------- ------- ------- ------- -------
Total 51,133 46,970 53,436 49,117 54,586 50,189
Less: Dividends 1,227 1,148 3,530 3,295 4,680 4,367
------- ------- ------- ------- ------- -------
Balance at End of Period $49,906 $45,822 $49,906 $45,822 $49,906 $45,822
======= ======= ======= ======= ======= =======
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months
Ended June 30,
2000 1999
-------- --------
Cash Flows Provided by Operating Activities $ 12,153 $ 16,452
-------- --------
Cash Flows Used In Investing Activities -
Capital Expenditures (5,497) (5,979)
-------- --------
Cash Flows Used In Financing Activities:
Repayment of Long-Term Debt (962) (4,600)
Changes in Short-Term Borrowings (17,177) (11,565)
Payment of Dividends, Net of Dividend Reinvestment (3,193) (3,006)
-------- --------
Net Cash Used In Financing Activities (21,332) (19,171)
-------- --------
Net Decrease in Cash and Cash Equivalents (14,676) (8,698)
-------- --------
Cash and Cash Equivalents at Beginning of Period 22,875 18,515
-------- --------
Cash and Cash Equivalents at End of Period $ 8,199 $ 9,817
======== ========
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 nine month periods ended June 30, 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 nine months ended June 30, 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
June 30, 2000 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 12,709 $ 1,731 $ 1,026 $ (1,032) $ 14,434
Operating Expenses 11,153 595 841 (1,032) 11,557
Operating Income (Loss) 1,556 1,136 185 2,877
For the three months ended NATURAL GAS NATURAL GAS
June 30, 1999 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 11,681 $ 1,584 $ 1,028 $ (1,027) $ 13,266
Operating Expenses 9,892 549 809 (1,027) 10,223
Operating Income (Loss) 1,789 1,035 219 3,043
For the nine months ended NATURAL GAS NATURAL GAS
June 30, 2000 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 54,801 $ 4,894 $ 3,294 $ (3,094) $ 59,895
Operating Expenses 42,171 1,838 2,569 (3,094) 43,484
Operating Income (Loss) 12,630 3,056 725 16,411
For the nine months ended NATURAL GAS NATURAL GAS
June 30, 1999 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 52,109 $ 4,232 $ 3,246 $ (3,134) $ 56,453
Operating Expenses 38,876 1,640 2,573 (3,134) 39,955
Operating Income (Loss) 13,233 2,592 673 16,498
For the twelve months ended NATURAL GAS NATURAL GAS
June 30, 2000 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 64,900 $ 6,483 $ 4,220 $ (4,120) $ 71,483
Operating Expenses 50,970 2,400 3,352 (4,120) 52,602
Operating Income (Loss) 13,930 4,083 868 18,881
For the twelve months ended NATURAL GAS NATURAL GAS
June 30, 1999 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 62,576 $ 5,619 $ 4,223 $ (4,166) $ 68,252
Operating Expenses 48,225 2,202 3,351 (4,166) 49,612
Operating Income (Loss) 14,351 3,417 872 18,640
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 nine months and twelve months ended June 30, 1999
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was to increase net income by $268,000 ($0.055 per share, diluted) of which
$235,000 ($0.05 per share, diluted), the cumulative effect of the change as of
October 1, 1998, 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. The
cumulative effect recorded as of October 1, 1998 was adjusted for these costs.
After recording the regulatory asset, the adjusted cumulative effect expense,
net of tax, was $584,000 ($0.12 per share, diluted). The 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
dilutive 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 37,000 and 46,000 for the three months ended June
30, 2000 and 1999, respectively; 42,000 and 50,000 for the nine months ended
June 30, 2000 and 1999, respectively; and 43,000 and 49,000 for the twelve
months ended June 30, 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 OPERATION
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, nine and twelve months ended June 30, 2000 are based on comparison to the
same periods in fiscal 1999. Net income for the three months ended June 30, 2000
was $1,029,000 or $0.21 per share compared to net income before the cumulative
effect of accounting changes for the quarter ended June 30, 1999 of $1,097,000
or $0.22 per share. Net income for the nine months ended June 30, 2000 was
$7,894,000 or $1.60 per share compared to net income before the cumulative
effect of accounting changes of $7,755,000 or $1.57 per share for the nine
months ended June 30, 1999. Net income for the twelve months ended June 30, 2000
was
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$8,764,000 or $1.77 per share compared to net income before the cumulative
effect of accounting changes of $8,240,000 or $1.67 per share for the twelve
months ended June 30, 1999. 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 effects 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 three, nine and twelve months ended
June 30, 1999 would have been $0.22, $1.57 and $1.66 per share, respectively.
Increased revenues from natural gas storage and transportation operations at Bay
Gas produced the largest positive impact on earnings for all fiscal year 2000
periods. During the three months ended June 30, 2000 margins from Mobile Gas'
natural gas distribution segment were relatively flat compared to the three
months ended June 30, 1999 while increased operations and maintenance expenses
offset the third quarter growth in earnings from Bay Gas. Increased utility
margins during the nine months ended June 30, 2000 and decreased interest
expense for the nine and twelve-month periods also contributed to the growth in
earnings for these periods. Increased operations and maintenance expenses for
the nine and twelve months ended June 30, 2000 partially offset the positive
impacts to earnings for these periods.
OPERATING REVENUES
Gas revenues increased $1,169,000 (10%), $3,394,000 (6%) and $3,128,000
(5%), respectively, for the three, nine and twelve months ended June 30, 2000.
Assuming retroactive application of the accounting change for unbilled gas
revenues, in which case unbilled gas revenues and related costs at June 30, 1998
would have been accrued and thus not reflected in amounts presented for the
twelve months ended June 30, 1999, gas revenues would have increased $3,300,000
(5%) for the current twelve-month period. References made herein to pro forma
amounts indicate that such amounts were computed assuming retroactive
application of the accounting changes.
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
$353,000 (4%), $2,027,000 (5%), and $2,182,000 (5%), respectively, for the
three, nine and twelve months ended June 30, 2000. The fluctuation for the
twelve-month period was computed comparing pro forma amounts. Increased gas
revenues from temperature-sensitive customers resulted primarily from increased
pass-through of gas costs, as well as increased gas volumes sold of 2%, 9% and
8%, respectively, for the three, nine and twelve months ended June 30, 2000.
Temperatures, as measured by heating degree-days, during both the nine and
twelve months ended June 30, 2000 were 16% colder than the prior year periods,
resulting in increased gas usage. The third quarter typically has a low number
of heating degree-days, as was the case this year; however, the heating
degree-days recorded in the Company's service area during the 2000 third quarter
were more than double the 1999 third quarter heating degree-days.
Gas sales revenues from large commercial and industrial customers
increased $573,000 (50%), $500,000 (12%) and $444,000 (8%), respectively, for
the three, nine and twelve months ended June 30, 2000 due primarily to increased
gas sales volume to industrial interruptible customers and the increased
pass-through of gas costs. Gas volumes sold to industrial interruptible
customers can fluctuate significantly between periods since some of
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these customers have the ability to use fuels other than natural gas and their
fuel selection depends on the economic and operational considerations of
competing fuels. One such customer used significantly more gas during the three
months ended June 30, 2000 to supplement its normal fuel usage because of its
unique operational needs. Gas sales volumes attributed to several new industrial
customers also impacted the growth in industrial sales revenues for all 2000
periods.
Gas transportation revenues, excluding those of Bay Gas, increased
$71,000 (4%) and $134,000 (2%), respectively, for the three and nine months
ended June 30, 2000 and decreased $186,000 (2%) for the current twelve-month
period. Excluding the impacts of a customer's plant closing in October 1998 and
a rate reduction to an industrial customer in February 1999, the twelve-month
comparison increased $71,000 (1%). Increased gas transportation revenues have
resulted from increased gas volumes transported to existing customers in
addition to a new gas-powered cogeneration facility that became fully
operational in April 2000. Similar to certain industrial interruptible gas sales
customers, some industrial transportation customers have the ability to use
fuels other than natural gas. Natural gas wholesale prices have increased
recently to levels far exceeding their 10-year average due in part to increased
demand from electric generating plants. The wholesale natural gas price
increases have been passed on by Mobile Gas to its gas sales customers and are
being incurred by transportation customers in their commodity purchases. Since
the wholesale price increases are not expected to decrease in the near term,
Management expects a decrease in gas consumption by two industrial customers who
can use coal as an alternative fuel choice. Management does not presently expect
the impact of such decreased volumes on the consolidated financial statements to
be material.
Bay Gas storage and transportation revenues, which exclude those from
Mobile Gas, increased $142,000 (25%) for the three months ended June 30, 2000
primarily as a result of increased transportation revenues from providing
service to Alabama Power's new gas-powered electric generating units at its
Plant Barry facility located north of Mobile. These units became operational in
June 2000. Alabama Power is currently constructing two additional gas powered
generating units at Plant Barry, expected to be in service in the summer of
2001, to which Bay Gas has contracted to transport gas. Bay Gas revenues
increased $702,000 (64%) and $909,000 (63%), respectively, for the nine and
twelve months ended June 30, 2000 primarily as a result of the new
transportation service to Alabama Power's Plant Barry, 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
along the Gulf Coast 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 construction of 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 since all new electric generation facilities
currently planned for the Southeast are expected to be natural gas-fired. In
addition to the contracts described above, Mobile Gas recently entered into a
contract to transport up to 54,000 MMBtu of gas per day to an electric
cogeneration facility being constructed in the Mobile area that is expected to
be operational in early 2001. In August 2000, Bay Gas announced that it had
entered into a 15-year natural gas storage contract with Southern Company
Services, Inc., an affiliate of Southern Company, to provide a total of 3.2
million MMBtu's of storage capacity for five subsidiaries of Southern Company.
The new storage capacity, 2.4 million MMBtu of capacity in excess of Southern
Company's current .8 million MMBtu contract capacity, will be provided primarily
from a second Bay Gas underground storage cavern that is currently in
the
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engineering and permitting stage of construction. A more detailed discussion of
this construction project is included under Liquidity and Capital Resources
below.
Gross margins on gas revenues, defined as gas revenues less related
cost of gas, have increased $178,000 (2%), $1,056,000 (3%) and $858,000 (2%),
respectively, for the three, nine and twelve months ended June 30, 2000.
Comparing pro forma amounts, gross margins on gas revenues would have increased
$948,000 (2%) for the twelve-month period. Increased gas margins for all periods
were due primarily to increases in Bay Gas revenues and gas sales to industrial
interruptible customers. Margins from large industrial transport customers
increased for the three and nine months ended June 30, 2000 and decreased for
the twelve-month period due to factors mentioned previously. Margins from
temperature-sensitive customers were down slightly for the third quarter
primarily due to a decrease in baseload volume, or non-temperature related
volume. Margins from temperature-sensitive customers for the nine months ended
June 30, 2000 were up slightly due primarily to an increase in these customers'
usage per heating degree-day while twelve-month period margins from these
customers were flat. 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 16% warmer than normal for the nine months ended June 30,
2000, resulting in a recovery of margins from customers subject to the
temperature adjustment rider.
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. Also included within other operating revenues are
revenues from appliance service work, engineering consulting, operations
training, pipeline corrosion protection services and gas marketing services.
Other operating revenues increased for all periods primarily due to revenues
generated by a recently created division within the Company that performs
pipeline corrosion protection services.
OPERATING EXPENSES
Cost of gas increased $991,000 (41%), $2,338,000 (16%) and $2,270,000
(14%), respectively, for the three, nine and twelve months ended June 30, 2000.
Assuming retroactive application of the accounting change for unbilled revenues
and related costs, cost of gas would have increased $2,352,000 (15%) for the
twelve-month period. Cost of gas increased for the current periods as a result
of increased total gas sales volumes of 10%, 9% and 8%, respectively, for the
three, nine and twelve months ended June 30, 2000 and to increased pass-through
of gas costs resulting from higher purchased gas prices. 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 generally have no effect on gas
margins.
Operations and maintenance expenses combined increased $281,000 (6%),
$864,000 (6%) and $357,000 (2%), respectively, for the three, nine and twelve
months ended June 30, 2000. Factors which impacted all current periods were:
increased utility distribution system operations and maintenance
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expenses, increased Bay Gas operations and maintenance expenses, and increased
sales related expenses. Operations expenses for the nine and twelve-month
periods were impacted also by an increase in the liability for providing future
health insurance benefits for disabled employees, several of whom recently
received disability status, and increased legal and consulting expenses.
Depreciation expense increased for all periods ended June 30, 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. The increase in other taxes for all periods was due
primarily to fluctuations in business license taxes associated with gas
revenues.
OTHER INCOME AND EXPENSES
Interest expense decreased $27,000 (2%), $139,000 (4%) and $221,000
(4%), respectively, for the three, nine and twelve months ended June 30, 2000.
The early redemption of high rate bonds in October 1998 was the primary reason
for the decreased interest expense for the nine 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 $33,000, $141,000 and $142,000, respectively, for the
three, nine and twelve months ended June 30, 2000, due primarily to an increase
in ongoing capital projects during fiscal 2000.
Interest income increased $17,000, $108,000 and $143,000, respectively,
for the three, nine and twelve months ended June 30, 2000 due primarily to
increased interest income on temporary investments primarily attributed to Bay
Gas' improved financial position.
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 for all periods fluctuated 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
$12,153,000 for the nine months ended June 30, 2000 compared to providing cash
of $16,452,000 for the 1999 nine-month period. The primary factors causing the
decreased cash flow from operations include: a reduction in the purchased gas
adjustment liability, the use of cash received in advance for a major pipeline
relocation, increased gas storage inventory, and ordinary timing differences of
receipts and payments on receivables and payables.
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Financing activities used cash of $21,332,000 and $19,171,000,
respectively, for the nine months ended June 30, 2000 and 1999. In September
1999, the Company used funds provided by short-term borrowings to purchase
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 large repayment of long-term debt during the nine months ended June 30, 1999
resulted primarily from the early redemption in October 1998 of $2,500,000 of
10.25% First Mortgage Bonds.
Investing activities used cash of $5,497,000 and $5,979,000,
respectively, for the nine months ended June 30, 2000 and 1999 primarily as a
result of the Company's regular construction program. The Company's capital need
relating to its regular construction program, equipment purchases, and other
general improvements for the remainder of fiscal 2000 is estimated to be
$3,200,000.
Bay Gas announced in August 2000 that it had entered into a 15-year
natural gas storage contract with Southern Company Services, Inc., an affiliate
of Southern Company. Under the contract, Bay Gas will provide storage capacity
of up to 3.2 million MMBtu's of natural gas for Alabama Power Company, Georgia
Power Company, Gulf Power Company, Mississippi Power Company and Savannah
Electric & Power Company, all subsidiaries of Southern Company. This new
contract will quadruple the amount of natural gas storage that Bay Gas currently
provides for Southern Company subsidiaries. Bay Gas is currently developing a
second underground storage cavern at its facility in McIntosh, Alabama. Bay Gas
plans to construct the cavern in two phases. The first phase, scheduled for
completion by December 1, 2002, will provide sufficient capacity for the
Southern Company Services contract by more than doubling the existing storage
capacity of Bay Gas. The second phase would expand the cavern to a total of 3.5
million MMBtu's of working capacity. The estimated cost of the second cavern
project is $35 million; completion of this project is subject to state and
federal regulatory approvals. Another upcoming significant capital investment by
Bay Gas is the construction of an eleven mile 20 inch pipeline that will
parallel a portion of the existing Bay Gas 20 inch pipeline in order to provide
for increased gas transportation service under contract. This new pipeline and
related facilities are estimated to cost $6.1 million and are expected to be in
service by the summer of 2001. Bay Gas intends to fund both the second cavern
and the new pipeline with internally generated cash and new debt. Bay Gas has
retained an investment banker to explore financing alternatives for both these
projects.
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 $20,000,000 is available for borrowing at June 30, 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 and approval of capital
construction projects, general economic conditions, the ability of Company
subsidiaries to obtain capital financing, and
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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.
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 June 30, 2000 the
Company had approximately $58.0 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: August 14, 2000 /s/ John S. Davis
--------------- ------------------------------
John S. Davis
President and
Chief Executive Officer
Date: August 14, 2000 /s/ Charles P. Huffman
--------------- ------------------------------
Charles P. Huffman
Vice President, Chief Financial
Officer, and Treasurer
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule (EDGAR version only)*
* Filed with the SEC and omitted from this conformed copy.