1
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, 2001
Commission File No. 0-29604
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
-------------
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 2, 2001 - 4,929,406 shares.
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ENERGYSOUTH, INC.
INDEX
Page No.
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PART I. Financial Information:
Consolidated Balance Sheets - March 31,
2001 and 2000 and September 30, 2000 3 - 4
Consolidated Statements of Income - Three, Six and
Twelve Months Ended March 31, 2001 and 2000 5
Consolidated Statements of Retained Earnings - Three,
Six and Twelve Months Ended March 31, 2001
and 2000 6
Consolidated Statements of Cash Flows - Six
Months Ended March 31, 2001 and 2000 6
Notes to Consolidated Financial Statements 7 - 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 16
Quantitative and Qualitative Disclosures About
Market Risk 17
PART II. Other Information 18
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PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
March 31, September 30,
Assets 2001 2000 2000
---------- ---------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and Cash Equivalents $ 16,648 $ 8,886 $ 8,691
Temporary Investments 18,692 -- --
Receivables:
Gas 12,206 7,532 6,168
Unbilled Revenue 2,987 1,442 989
Merchandise 2,969 2,973 2,992
Other 1,332 814 767
Allowance for Doubtful Accounts (1,551) (787) (749)
Materials, Supplies, and Merchandise (at average cost) 2,733 1,594 2,117
Gas Stored Underground (at average cost) 1,085 1,111 1,870
Deferred Income Taxes 2,869 1,886 1,037
Prepayments 1,516 1,333 1,376
---------- ---------- -------------
Total Current Assets 61,486 26,784 25,258
---------- ---------- -------------
PROPERTY, PLANT, AND EQUIPMENT:
Property, Plant, and Equipment 192,320 179,246 185,846
Less Accumulated Depreciation and Amortization 57,699 52,513 54,811
---------- ---------- -------------
Property, Plant, and Equipment in Service - Net 134,621 126,733 131,035
Construction Work in Progress 14,153 2,882 3,316
---------- ---------- -------------
Total Property, Plant, and Equipment 148,774 129,615 134,351
---------- ---------- -------------
OTHER ASSETS:
Regulatory Assets 360 561 460
Deferred Charges 739 551 792
Prepayments 1,189 1,016 962
Merchandise Receivables Due After One Year 5,524 5,521 5,557
---------- ---------- -------------
Total Other Assets 7,812 7,649 7,771
---------- ---------- -------------
Total $ 218,072 $ 164,048 $ 167,380
========== ========== =============
See Notes to Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
March 31, September 30,
Liabilities and Capitalization 2001 2000 2000
---------- ---------- -------------
(Unaudited)
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 1,846 $ 2,746 $ 2,795
Notes Payable 10,812 710 6,330
Accounts Payable 8,668 3,690 5,679
Dividends Declared 1,231 1,152 1,228
Customer Deposits 1,512 1,479 1,449
Taxes Accrued 6,257 4,259 3,546
Deferred Purchased Gas Adjustment 3,079 2,295 2
Interest Accrued 1,489 1,685 1,551
Other 1,885 1,629 1,128
---------- ---------- -------------
Total Current Liabilities 36,779 19,645 23,708
---------- ---------- -------------
OTHER LIABILITIES:
Accrued Pension Cost 502 964 769
Accrued Postretirement Benefit Cost 895 1,076 932
Deferred Income Taxes 12,792 12,129 12,378
Deferred Investment Tax Credits 353 379 366
Other 1,563 1,381 1,485
---------- ---------- -------------
Total Other Liabilities 16,105 15,929 15,930
---------- ---------- -------------
Total Liabilities 52,884 35,574 39,638
---------- ---------- -------------
CAPITALIZATION:
Stockholders' Equity
Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares;
Outstanding:
March 2001 - 4,926,000 Shares;
March 2000 - 4,902,000 Shares:
September 2000 - 4,912,000 Shares) 49 49 49
Capital in Excess of Par Value 19,186 18,743 18,919
Retained Earnings 52,070 50,104 49,576
---------- ---------- -------------
Total Stockholders' Equity 71,305 68,896 68,544
Minority Interest 3,132 3,742 3,976
Long-Term Debt (Less Current Maturities) 90,751 55,836 55,222
---------- ---------- -------------
Total Capitalization 165,188 128,474 127,742
---------- ---------- -------------
Total $ 218,072 $ 164,048 $ 167,380
========== ========== =============
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,
----------------------- ----------------------- -----------------------
2001 2000 2001 2000 2001 2000
---------- ---------- ---------- ---------- ---------- ----------
Operating Revenues
Gas Revenues $ 41,374 $ 23,544 $ 74,185 $ 43,194 $ 100,713 $ 66,095
Merchandise Sales 615 693 1,596 1,580 2,929 2,907
Other 382 321 731 688 1,516 1,315
---------- ---------- ---------- ---------- ---------- ----------
Total Operating Revenues 42,371 24,558 76,512 45,462 105,158 70,317
---------- ---------- ---------- ---------- ---------- ----------
Operating Expenses
Cost of Gas 24,374 7,270 42,307 13,390 48,919 17,539
Cost of Merchandise 491 531 1,265 1,206 2,331 2,296
Operations and Maintenance 5,945 5,374 11,556 10,584 21,195 19,407
Depreciation 1,822 1,710 3,637 3,435 6,937 6,570
Taxes, Other Than Income Taxes 2,666 1,762 4,893 3,313 7,203 5,459
---------- ---------- ---------- ---------- ---------- ----------
Total Operating Expenses 35,298 16,647 63,658 31,928 86,585 51,271
---------- ---------- ---------- ---------- ---------- ----------
Operating Income 7,073 7,911 12,854 13,534 18,573 19,046
---------- ---------- ---------- ---------- ---------- ----------
Other Income and (Expense)
Interest Expense (2,045) (1,291) (3,509) (2,586) (5,967) (5,102)
Allowance for Borrowed Funds Used During
Construction 351 91 400 130 450 158
Interest Income 533 99 732 202 968 427
Minority Interest (142) (179) (377) (361) (784) (579)
---------- ---------- ---------- ---------- ---------- ----------
Total Other Income (Expense) (1,303) (1,280) (2,754) (2,615) (5,333) (5,096)
---------- ---------- ---------- ---------- ---------- ----------
Income Before Income Taxes 5,770 6,631 10,100 10,919 13,240 13,950
Income Taxes 2,134 2,461 3,723 4,054 4,936 5,118
---------- ---------- ---------- ---------- ---------- ----------
Income Before Extraordinary Loss and Cumulative
Effect of a Change in Accounting Principle 3,636 4,170 6,377 6,865 8,304 8,832
---------- ---------- ---------- ---------- ---------- ----------
Extraordinary Loss on Early Extinguishment of Debt
(Net of Income Tax Benefit of $808) (Note 7) -- -- (1,423) -- (1,423) --
Cumulative Effect to October 1, 1998 of Expensing
Start-Up Costs (Net of Income Taxes of $19) -- -- -- -- -- 32
---------- ---------- ---------- ---------- ---------- ----------
Total Extraordinary Loss and Cumulative Effect
(Net of Tax) -- -- (1,423) -- (1,423) 32
---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 3,636 $ 4,170 $ 4,954 $ 6,865 $ 6,881 $ 8,864
========== ========== ========== ========== ========== ==========
Basic Earnings Per Share:
Income Before Unusual Items $ 0.74 $ 0.85 $ 1.30 $ 1.40 $ 1.69 $ 1.80
Extraordinary Loss on Early Extinguishment of Debt -- -- (0.29) -- (0.29) --
Cumulative Effect of Accounting Changes -- -- -- -- -- 0.01
---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 0.74 $ 0.85 $ 1.01 $ 1.40 $ 1.40 $ 1.81
========== ========== ========== ========== ========== ==========
Diluted Earnings Per Share:
Income Before Unusual Items $ 0.73 $ 0.84 $ 1.28 $ 1.39 $ 1.67 $ 1.78
Extraordinary Loss on Early Extinguishment of Debt -- -- (0.29) -- (0.29) --
Cumulative Effect of Accounting Changes -- -- -- -- -- 0.01
---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 0.73 $ 0.84 $ 0.99 $ 1.39 $ 1.38 $ 1.79
========== ========== ========== ========== ========== ==========
Average Common Shares Outstanding:
Basic 4,923 4,902 4,920 4,900 4,914 4,895
========== ========== ========== ========== ========== ==========
Diluted 4,980 4,940 4,976 4,943 4,962 4,940
========== ========== ========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
(In Thousands)
Three Months Six Months Twelve Months
Ended March 31, Ended March 31, Ended March 31
------------------- ------------------- -------------------
2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- --------
Balance at Beginning of Period $ 49,665 $ 47,086 $ 49,576 $ 45,542 $ 50,104 $ 45,841
Net Income 3,636 4,170 4,954 6,865 6,881 8,864
-------- -------- -------- -------- -------- --------
Total 53,301 51,256 54,530 52,407 56,985 54,705
Less: Dividends 1,231 1,152 2,460 2,303 4,915 4,601
-------- -------- -------- -------- -------- --------
Balance at End of Period $ 52,070 $ 50,104 $ 52,070 $ 50,104 $ 52,070 $ 50,104
======== ======== ======== ======== ======== ========
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months
Ended March 31,
--------------------
2001 2000
-------- --------
Net Cash Provided by Operating Activities $ 8,821 $ 8,525
-------- --------
Cash Flows Used In Investing Activities:
Capital Expenditures (18,044) (3,452)
Increase in Temporary Investments (18,692) --
-------- --------
Net Cash Used In Investing Activities (36,736) (3,452)
-------- --------
Cash Flows From Financing Activities:
Repayment of Long-Term Debt (20,420) (398)
Proceeds from Issuance of Long-Term Debt 55,000 --
Changes in Short-Term Borrowings 4,482 (16,467)
Payment of Dividends (2,460) (2,303)
Dividend Reinvestment 268 180
Partnership Distributions (998) (74)
-------- --------
Net Cash Provided (Used) by Financing Activities 35,872 (19,062)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 7,957 (13,989)
-------- --------
Cash and Cash Equivalents at Beginning of Period 8,691 22,875
-------- --------
Cash and Cash Equivalents at End of Period $ 16,648 $ 8,886
======== ========
See Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The consolidated financial statements of EnergySouth, Inc. (EnergySouth)
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); a 90.9%
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 2001 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 accounting principles generally
accepted in the United States of America 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, 2000.
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, 2001 and 2000 are not
indicative of the results to be expected for the full year.
Note 4. As of October 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), as amended by Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments and hedging activities. The adoption of these standards
did not have a significant impact on the financial statements.
Note 5. 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 are aggregated
with EnergySouth, the holding company, and included in the Other category. All
segments are located in Southwest Alabama.
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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, 2001 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- ------------------------------- ------------ ----------- --------- ------------ ------------
Operating Revenues $ 40,493 $ 1,938 $ 997 $ (1,057) $ 42,371
Operating Expenses 34,489 949 917 (1,057) 35,298
Operating Income 6,004 989 80 7,073
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 6,769 914 228 7,911
For the six months ended NATURAL GAS NATURAL GAS
March 31, 2001 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- ------------------------------- ------------ ----------- --------- ------------ ------------
Operating Revenues $ 72,405 $ 3,962 $ 2,327 $ (2,182) $ 76,512
Operating Expenses 62,137 1,586 2,117 (2,182) 63,658
Operating Income 10,268 2,376 210 12,854
Extraordinary Loss (1,423) (1,423)
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 11,073 1,921 540 13,534
For the twelve months ended NATURAL GAS NATURAL GAS
March 31, 2001 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- ------------------------------- ------------ ----------- --------- ------------ ------------
Operating Revenues $ 97,105 $ 7,852 $ 4,444 $ (4,243) $ 105,158
Operating Expenses 84,218 2,770 3,840 (4,243) 86,585
Operating Income 12,887 5,082 604 18,573
Extraordinary Loss (1,423) (1,423)
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 14,162 3,983 901 19,046
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Note 6. 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 57,000 and 38,000 for the three months ended March
31, 2001 and 2000, respectively; 56,000 and 43,000 for the six months ended
March 31, 2001 and 2000, respectively; and 48,000 and 45,000 for the twelve
months ended March 31, 2001 and 2000, respectively. These differences in
equivalent shares are from outstanding stock options.
Note 7. In December, Bay Gas completed the sale of $55,000,000 of senior secured
notes. Approximately $18,670,000 of the proceeds were used to pay the balance of
existing debt incurred to construct Bay Gas' first natural gas storage cavern.
In connection with the early payment of the existing debt, Bay Gas incurred an
extraordinary loss on early extinguishment of debt which totaled $2,454,000,
consisting of a $2,026,000 make-whole premium and a write-off of $428,000 of
unamortized issuance costs relating to the financing of the first cavern. After
deducting the minority interest of $223,000 and a tax benefit of $808,000, the
extraordinary loss recorded by the Company was $1,423,000.
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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 direct 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 has granted 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.
RESULTS OF OPERATIONS
NET INCOME
All earnings per share amounts referred to herein are computed on a diluted
basis. Net income for the three months ended March 31, 2001 was $3,636,000 or
$0.73 per share compared to net income of $4,170,000 or $0.84 per share for the
second quarter of fiscal 2000. Net income before the extraordinary loss due to
the early extinguishment of debt (see Note 7 above) for the six months ended
March 31, 2001 was $6,377,000 or $1.28 per share compared to net income of
$6,865,000 or $1.39 per share for the six-month period of fiscal year 2000. Net
income before the extraordinary loss and cumulative effect of accounting changes
for the twelve months ended March 31, 2001 and 2000 was $8,304,000 or $1.67
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per share and $8,832,000 or $1.78 per share, respectively. The decrease in net
income before the extraordinary loss and cumulative effect of accounting changes
for the three, six and twelve months ended March 31, 2001 was due almost
exclusively to factors associated with the unprecedented increases in natural
gas prices in the current winter heating season. Fluctuations in the commodity
price of natural gas were passed on to customers, which, together with colder
than normal weather, resulted in large increases in customers' monthly gas
bills. In response to the corresponding increase in accounts receivable, the
Company has established additional reserves for anticipated uncollectible
account balances for gas delivered during the current year winter heating
season. The increased reserves are reflected as operating expenses in the
current year periods.
OPERATING REVENUES
Gas revenues increased $17,830,000 (76%), $30,991,000 (72%) and $34,618,000
(52%), respectively, for the three, six and twelve months ended March 31, 2001
primarily due to the dramatic increase in natural gas prices and an increase in
gas volumes delivered to customers. During the last twelve months, natural gas
wholesale prices have increased to levels far exceeding their 10-year average.
As anticipated, the price of natural gas has declined compared to the prices
experienced during the peak of the heating season; however, the price has not
returned to levels of a year ago, and the Company does not anticipate pricing at
such levels in the near term. Fluctuations in the actual cost of gas
are passed on to the customers through the purchased gas adjustment provision of
rate tariffs and do not generally result in any direct increase or decrease in
margins or profits when gas prices are within a broad range of historical
averages.
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 $15,852,000
(83%), $27,247,000 (79%), and $28,567,000 (57%), respectively, for the three,
six and twelve months ended March 31, 2001. The increases in revenues are due
primarily to the higher purchased gas costs passed through to the customers as
discussed above and an increase in usage by these customers due to weather that
was colder than the prior year. Volumes sold to temperature sensitive customers
increased 28%, 28%, and 19%, respectively, for the three, six, and twelve-month
periods ended March 31, 2001. Temperatures during this year's heating season,
October 2000 through March 2001, were 22% colder than normal and 47% colder than
the prior year. Although the Company does not anticipate any material short-term
change in the number of temperature sensitive customers, it is possible that
persistent extraordinarily high gas prices at the levels experienced this past
winter would cause some temperature sensitive customers to change to other
heating methods.
Gas sales revenues from large commercial and industrial customers increased
$1,930,000 (126%), $3,247,000 (114%) and $4,396,000 (85%), respectively, for the
three, six and twelve months ended March 31, 2001. The increase in revenues for
these periods is due in part to
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the pass through of gas costs and an increase in gas sales volumes of 8%, 15%,
and 21%, respectively, for the current three, six and twelve month periods. A
significant increase in volumes can be attributed to one customer that used
significantly more natural gas than normal due to unique operational needs.
These circumstances are not expected to recur.
Some industrial customers have the capability to use fuel oil, coal, wood chips,
or natural gas, and choose their fuel depending upon a number of factors,
including the price of such fuels. The Company's rate tariffs include a
competitive fuel clause, which allows the Company to adjust its rates to certain
large industrial customers in order to compete with alternative energy sources.
Even with the recent increase in natural gas prices, as of March 31, 2001, these
industrial customers continued to use natural gas rather than other fuels.
Gas transportation revenues, excluding those of Bay Gas, decreased $254,000
(-12%) for the three months ended March 31, 2001 due primarily to the closure of
the International Paper plant in late December 2000 and a decrease in usage due
to higher gas prices. Volumes transported to customers, excluding Bay Gas,
during the three months ended March 31, 2001 declined by 5% due to the plant
closure. For the six months ended March 31, 2001, transportation revenues
declined by $199,000 (5%) and volumes by 10%; however, for the twelve months
ended March 31, 2001, revenues increased by $90,000 (1%) while volumes decreased
3%. In addition to the International Paper closure, transportation volumes were
impacted for the three, six, and twelve month periods by the Corus Group plc
(Corus, formerly known as British Steel) plant closure. Based on minimum payment
provisions of the contract with Corus, the Corus closure is not expected to have
a significant impact on transportation revenues. Partially offsetting the
decline in transportation requirements as a result of these plant closures is
increased demand from other customers such as Alabama Power's new gas-powered
co-generation facility which became fully operational in the first quarter of
fiscal year 2001. Construction was also recently completed on another new
co-generation facility to which Mobile Gas has contracted to transport gas. The
facility is currently receiving gas for test purposes and is expected to be
fully operational in the summer of 2001.
Bay Gas storage and transportation revenues (excluding revenues received from
Mobile Gas) increased $356,000 (23%), $799,000 (25%) and $1,515,000 (24%),
respectively, for the three, six and twelve months ended March 31, 2001.
Contributing to the increase for all periods was a new industrial customer
utilizing both storage and transportation services, transportation of natural
gas to phase one of Alabama Power's Plant Barry co-generation facility, and a
new storage customer which began receiving service late in the first quarter of
2001. 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 also contracted to transport gas.
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 services.
Management expects this trend to continue since all new electric generation
facilities reported to be planned for the Southeast are to be
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natural gas-fired. In August 2000, Bay Gas entered into a long-term natural gas
storage contract with Southern Company Services, Inc., an affiliate of Southern
Company, as agent for certain Southern Company subsidiaries. The new storage
capacity, in excess of Southern Company's current contract capacity, will be
provided primarily from Bay Gas' second underground storage cavern that is
currently under construction. The anticipated completion date for the second
cavern is December 2002. In addition, Bay Gas is constructing two new pipelines
to expand and/or extend its existing pipeline. A new 11-mile pipeline expansion,
which will parallel the northern part of the existing 22-mile Bay Gas pipeline,
is being constructed to accommodate new transportation customers. Also, in
October 2000, Bay Gas entered into a long-term transportation agreement with
Gulf South Pipeline Co. (formerly Koch Gateway Pipeline Company, Inc.) to
provide firm transportation service through a new 18-mile extension of the
existing Bay Gas system. Construction on both pipelines is scheduled for
completion during fiscal year 2001.
Gross margins on gas revenues, defined here as gas revenues less related cost of
gas, have increased $726,000 (4%), $2,074,000 (7%) and $3,238,000 (7%),
respectively, for the three, six and twelve months ended March 31, 2001.
Increased gas margins were due primarily to Bay Gas and increases in gas sales
to industrial interruptible customers. Even though volumes sold to temperature
sensitive customers increased during the current year periods, the temperature
adjustment rider mitigates the impact of the colder than normal weather on the
Company's margins. The Company uses its temperature adjustment rider to adjust
margins on gas sales to residential and small commercial customers during the
months of November through April when temperatures vary from normal.
Temperatures during the current year were 22% colder than normal, thus reducing
the base rate portion of the bills of customers who are subject to the
temperature adjustment rider.
Merchandise sales revenues decreased $78,000 (11%) for the three months ended
March 31, 2001 due to a decline in appliance sales; however, for the six and
twelve months ended March 31, 2001, revenues increased $16,000 (1%) and $22,000
(1%). Although appliance sales were also down for the six and twelve months,
revenues associated with the sale of generators and the opening of a second
specialty store helped to offset the decrease.
Other operating revenues are comprised primarily of interest income from the
financing of merchandise sales 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 $61,000 (19%), $43,000 (6%), and $201,000 (15%),
respectively, for the three, six, and twelve months ended December 31, 2001 due
to revenues associated with appliance service work, gas marketing services, and
a new division offering pipeline corrosion protection services.
OPERATING EXPENSES
Cost of gas increased $17,104,000 (235%), $28,917,000 (216%) and $31,380,000
(179%), respectively, for the three, six and twelve months ended March 31, 2001
due primarily to the higher purchased gas prices and an increase in gas sales
volumes. The Company passes
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the actual cost of gas on to customers under the purchased gas adjustment
provision of rate tariffs as discussed above. Due to the fact cost of gas is
completely recovered from the Company's customers, fluctuations in the cost of
gas have no direct effect on gas margins.
Operations and maintenance expenses combined increased $571,000 (11%), $972,000
(9%) and $1,788,000 (9%), respectively, for the three, six and twelve months
ended March 31, 2001. Operations expense for all periods was impacted primarily
by an increase in bad debt reserves. Bad debt reserves were increased by
$529,000 (527%), $655,000 (363%) and $765,000 (239%) for the three, six, and
twelve-month periods ended March 31, 2001. The additional reserves for bad debts
were established in an effort to provide adequate reserves for increased
customer accounts receivable and arrears resulting from the higher gas costs and
a colder than normal winter. Other factors impacting operations and maintenance
expenses for the six and twelve months ended March 31, 2001 were payroll costs,
including overtime, overhead costs associated with the opening of a second
specialty store, and a general increase in expenses due to inflation.
Depreciation expense increased for all periods ended March 31, 2001 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 taxes increased $904,000 (51%), $1,580,000 (48%) and
$1,744,000 (32%), respectively, for the three, six and twelve months ended March
31, 2001 due primarily to fluctuations in business license taxes associated with
gas revenues.
OTHER INCOME AND EXPENSES
Interest expense increased $754,000 (58%), $923,000 (36%), and $865,000 (17%),
respectively, for the three, six and twelve months ended March 31, 2001 due
primarily to the issuance of Bay Gas Senior Secured Notes (see "Liquidity and
Capital Resources" below for more detailed information) and increased short-term
borrowings under the Company's line of credit due to the negative cash flow
impact associated with higher accounts receivable balances.
Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs increased $260,000 (288%), $270,000 (208%) and $292,000 (185%),
respectively, for the three, six and twelve months ended March 31, 2001,
primarily due to an increase in on-going capital projects, which include Bay
Gas' second storage cavern and the two Bay Gas pipeline projects.
Interest income increased $434,000 (438%), $530,000 (262%) and $541,000 (127%),
respectively, for the three, six and twelve months ended March 31, 2001 due
primarily to increased interest income on temporary investments of Bay Gas as a
result of the investment of the unused portion of the debt issuance proceeds.
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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, excluding the income tax benefit of $808,000 related to the
extraordinary loss on early extinguishment of debt, decreased $327,000 (13%),
$331,000 (8%) and $182,000 (4%), respectively, for the three, six and twelve
months ended March 31, 2001, 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
$8,821,000 and $8,525,000, respectively, for the six months ended March 31, 2001
and 2000. The increase in cash flow from operating activities of $296,000
resulted primarily from the timing of the collection of gas costs and business
license taxes which are based on revenues and an increase in accounts payable
due to the higher cost of gas and increased volume. These increases were
primarily offset by an increase in accounts receivable due to the higher gas
costs and the payment of a make-whole premium upon the early payment of debt by
Bay Gas in December 2000.
Cash used in investing activities reflects the capital-intensive nature of the
Company's business. Investing activities used cash of $36,736,000 and
$3,452,000, respectively, for the six months ended December 31, 2001 and 2000.
Total capital expenditures increased $14,592,000 for the current year six months
compared to the same period of fiscal year 2000. In addition to the Company's
regular construction program, cash used in investing activities for the current
year six month period increased due to capital expansion projects related to the
construction by Bay Gas of its second storage cavern and two pipeline projects.
Also, Mobile Gas completed construction of a 10-mile pipeline in December 2000
that expands its system into nearby Baldwin County and has also completed an
expansion project to provide transportation services to a new co-generation
facility. Also contributing to the increase in investing activities was the
short-term investment, as of March 31, 2001, of $18,692,000 of proceeds from the
December 2000 Bay Gas debt issuance.
Financing activities provided cash of $35,872,000 for the six months ended March
31, 2001 compared to using cash of $19,062,000 for the six months ended March
31, 2000. The increase in cash provided by financing activities during the
current year six month period was primarily due to the financing activities of
Bay Gas. In December 2000, Bay Gas completed the sale of $55,000,000 of senior
secured notes. These notes, which are guaranteed by EnergySouth, are due in 2017
and accrue interest at an annual rate of 8.45%. The proceeds from the sale of
the notes are being used in part by Bay Gas to construct the second natural gas
storage cavern, pipelines, and related equipment. Additionally, $2,650,000 of
the proceeds were used to repay a note to Mobile Gas for the financing of base
gas in the existing storage cavern and $18,670,000 was used to pay the balance
of existing debt incurred to construct that storage cavern.
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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. Such forward-looking statements are made as of
the date of this report and involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of EnergySouth or its affiliates, or industry results, to differ
materially from any future results, performance or achievement expressed or
implied by such forward-looking statements. Such risks, uncertainties and other
important factors include, among others, risks associated with fluctuations in
natural gas prices, including changes in the historical seasonal variances in
natural gas prices and changes in historical patterns of collections of accounts
receivable; the prices of alternative fuels; the relative pricing of natural
gas versus other energy sources; the availability of other natural gas storage
capacity; failures or delays in completing the planned cavity development
project; disruption or interruption of pipelines serving the Bay Gas storage
facilities due to accidents or other events; risks generally associated with the
transportation and storage of highly volatile natural gas; the possibility that
contracts with storage customers could be terminated under certain
circumstances, or not renewed or extended upon expiration; the prices or terms
of any extended or new contracts; possible loss or material change in the
financial condition of one or more major customers; liability for remedial
actions under environmental regulations; liability resulting from litigation;
national and global economic and political conditions; and changes in tax and
other laws applicable to the business. Additional factors that may impact
forward-looking statements include, but are not limited to, the Company's
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, specific
conditions in the Company's service area, and the Company's dependence on
external suppliers, contractors, 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, or any other derivatives as defined by Statement of
Financial Accounting Standards No 133, "Accounting for Derivative Instruments
and Hedging Activities." Also, the Company has no market risk-sensitive
instruments held for trading purposes. At March 31, 2001 the Company had
approximately $92.6 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, 2000 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
Reports on Form 8-K
(b) 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
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(Registrant)
Date: May 15, 2001 /s/ John S. Davis
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John S. Davis
President and
Chief Executive Officer
Date: May 15, 2001 /s/ Charles P. Huffman
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Charles P. Huffman
Sr. Vice President and Chief Financial
Officer
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