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 June 30, 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
-------------------------------------------------
(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 August 1, 2001 -- 4,936,697 shares.
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ENERGYSOUTH, INC.
INDEX
<Table>
<Caption>
Page No.
--------
PART I. Financial Information:
Consolidated Balance Sheets - June 30,
2001 and 2000 and September 30, 2000 3 - 4
Consolidated Statements of Income - Three, Nine and
Twelve Months Ended June 30, 2001 and 2000 5
Consolidated Statements of Retained Earnings - Three,
Nine and Twelve Months Ended June 30, 2001 and 2000 6
Consolidated Statements of Cash Flows - Nine
Months Ended June 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7 - 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 17
Quantitative and Qualitative Disclosures About
Market Risk 18
PART II. Other Information 19
</Table>
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PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<Table>
<Caption>
June 30, September 30,
2001 2000 2000
-------------------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 18,203 $ 8,199 $ 8,691
Temporary Investments 4,259 -- --
Receivables:
Gas 8,505 5,671 6,168
Unbilled Revenue 1,035 981 989
Merchandise 2,873 2,976 2,992
Other 1,055 775 767
Allowance for Doubtful Accounts (1,473) (778) (749)
Materials, Supplies, and Merchandise (average cost) 2,677 1,852 2,117
Gas Stored Underground for Current Use (average cost) 2,456 1,474 1,870
Deferred Income Taxes 2,770 1,557 1,037
Prepayments 888 1,856 1,376
---------- ---------- ----------
Total Current Assets 43,248 24,563 25,258
---------- ---------- ----------
PROPERTY, PLANT, AND EQUIPMENT:
Property, Plant, and Equipment 200,152 181,919 185,846
Less Accumulated Depreciation and Amortization 59,343 53,802 54,811
---------- ---------- ----------
Property, Plant, and Equipment - Net 140,809 128,117 131,035
Construction Work in Progress 21,722 1,786 3,316
---------- ---------- ----------
Total Property, Plant, and Equipment 162,531 129,903 134,351
---------- ---------- ----------
OTHER ASSETS:
Regulatory Assets 310 511 460
Deferred Charges 844 650 792
Prepayments 1,141 752 962
Merchandise Receivables Due After One Year 5,346 5,302 5,557
---------- ---------- ----------
Total Other Assets 7,641 7,215 7,771
---------- ---------- ----------
Total $ 213,420 $ 161,681 $ 167,380
========== ========== ==========
</Table>
See Accompanying Notes to Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<Table>
<Caption>
June 30, September 30,
2001 2000 2000
-------------------------- -------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 1,859 $ 2,795 $ 2,795
Notes Payable 12,185 -- 6,330
Accounts Payable 4,689 4,147 5,679
Dividends Declared 1,283 1,227 1,228
Customer Deposits 1,403 1,443 1,449
Taxes Accrued 4,585 4,119 3,546
Deferred Purchased Gas Adjustment 3,748 1,549 2
Interest Accrued 1,624 1,342 1,551
Other 1,324 1,049 1,128
---------- ---------- ----------
Total Current Liabilities 32,700 17,671 23,708
---------- ---------- ----------
OTHER LIABILITIES:
Accrued Pension Cost 399 851 769
Accrued Postretirement Benefit Cost 877 1,059 932
Deferred Income Taxes 12,992 12,381 12,378
Deferred Investment Tax Credits 347 373 366
Other 1,649 1,451 1,485
---------- ---------- ----------
Total Other Liabilities 16,264 16,115 15,930
---------- ---------- ----------
Total Liabilities 48,964 33,786 39,638
---------- ---------- ----------
CAPITALIZATION:
Stockholders' Equity
Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares;
Outstanding:
June 2001 - 4,936,000
June 2000 - 4,907,000
September 2000 - 4,912,000) 49 49 49
Capital in Excess of Par Value 19,359 18,901 18,919
Retained Earnings 51,276 49,906 49,576
---------- ---------- ----------
Total Stockholders' Equity 70,684 68,856 68,544
Minority Interest 3,180 3,817 3,976
Long-Term Debt (Less Current Maturities) 90,592 55,222 55,222
---------- ---------- ----------
Total Capitalization 164,456 127,895 127,742
---------- ---------- ----------
Total $ 213,420 $ 161,681 $ 167,380
========== ========== ==========
</Table>
See Accompanying Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Data)
<Table>
<Caption>
Three Months Nine Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
---------------------------------------------------------------------
2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- --------- --------
Operating Revenues
Gas Revenues $ 15,445 $ 13,408 $ 89,630 $ 56,601 $ 102,751 $ 67,263
Merchandise Sales 652 637 2,248 2,217 2,920 2,844
Other 284 389 1,015 1,077 1,455 1,376
-------- -------- -------- -------- --------- --------
Total Operating Revenues 16,381 14,434 92,893 59,895 107,126 71,483
-------- -------- -------- -------- --------- --------
Operating Expenses
Cost of Gas 5,598 3,379 47,904 16,769 51,139 18,529
Cost of Merchandise 504 503 1,769 1,709 2,287 2,225
Operations and Maintenance 5,224 4,758 16,780 15,341 21,728 19,687
Depreciation 1,819 1,720 5,457 5,155 7,036 6,643
Taxes, Other Than Income Taxes 1,302 1,197 6,195 4,510 7,308 5,518
-------- -------- -------- -------- --------- --------
Total Operating Expenses 14,447 11,557 78,105 43,484 89,498 52,602
-------- -------- -------- -------- --------- --------
Operating Income 1,934 2,877 14,788 16,411 17,628 18,881
-------- -------- -------- -------- --------- --------
Other Income and (Expense)
Interest Expense (2,142) (1,216) (5,651) (3,801) (6,914) (5,075)
Allowance for Borrowed Funds Used During Construction 669 41 1,069 170 1,078 190
Interest Income 345 122 1,076 323 1,213 443
Minority Interest (129) (186) (505) (546) (727) (615)
-------- -------- -------- -------- --------- --------
Total Other Income (Expense) (1,257) (1,239) (4,011) (3,854) (5,350) (5,057)
-------- -------- -------- -------- --------- --------
Income Before Income Taxes 677 1,638 10,777 12,557 12,278 13,824
Income Taxes 188 609 3,912 4,663 4,515 5,060
-------- -------- -------- -------- --------- --------
Income Before Extraordinary Loss 489 1,029 6,865 7,894 7,763 8,764
Extraordinary Loss on Early Extinguishment of Debt
(Net of Income Tax Benefit of $808) (Note 6) -- -- (1,423) -- (1,423) --
-------- -------- -------- -------- --------- --------
Net Income $ 489 $ 1,029 $ 5,442 $ 7,894 $ 6,340 8,764
======== ======== ======== ======== ========= ========
Basic Earnings Per Share
Income Before Unusual Items $ 0.10 $ 0.21 $ 1.40 $ 1.61 $ 1.58 $ 1.79
Extraordinary Loss on Early Extinguishment of Debt $ (0.29) $ (0.29)
-------- -------- -------- -------- --------- --------
Net Income $ 0.10 $ 0.21 $ 1.11 $ 1.61 $ 1.29 $ 1.79
======== ======== ======== ======== ========= ========
Diluted Earnings Per Share
Income Before Unusual Items $ 0.10 $ 0.21 $ 1.38 $ 1.60 $ 1.56 $ 1.77
Extraordinary Loss on Early Extinguishment of Debt $ (0.29) $ (0.29)
-------- -------- -------- -------- --------- --------
Net Income $ 0.10 $ 0.21 $ 1.09 $ 1.60 $ 1.27 $ 1.77
======== ======== ======== ======== ========= ========
Average Common Shares Outstanding (Note 5)
Basic 4,929 4,907 4,923 4,902 4,920 4,900
======== ======== ======== ======== ========= ========
Diluted 4,992 4,944 4,981 4,944 4,974 4,943
======== ======== ======== ======== ========= ========
</Table>
See Accompanying Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
(Unaudited)
<Table>
<Caption>
Three Months Nine Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
---------------------------------------------------------------------
2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- --------- --------
Balance at Beginning of Period $ 52,070 $ 50,104 $ 49,576 $ 45,542 $ 49,906 $ 45,822
Net Income 489 1,029 5,442 7,894 6,340 8,764
-------- -------- -------- -------- --------- --------
Total 52,559 51,133 55,018 53,436 56,246 54,586
Less: Dividends 1,283 1,227 3,742 3,530 4,970 4,680
-------- -------- -------- -------- --------- --------
Balance at End of Period $ 51,276 $ 49,906 $ 51,276 $ 49,906 $ 51,276 $ 49,906
======== ======== ======== ======== ========= ========
</Table>
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In Thousands)
(Unaudited)
<Table>
<Caption>
Nine Months
Ended June 30,
2001 2000
---------- ----------
Net Cash Provided by Operating Activities $ 11,505 $ 12,464
---------- ----------
Cash Flows Used In Investing Activities:
Capital Expenditures (33,643) (5,497)
Increase in Temporary Investments (4,259) --
---------- ----------
Net Cash Used in Investing Activities (37,902) (5,497)
Cash Flows From Financing Activities:
Repayment of Long-Term Debt (20,566) (962)
Proceeds from Issuance of Long-Term Debt 55,000 --
Changes in Short-Term Borrowings 5,855 (17,177)
Payment of Dividends (3,742) (3,530)
Dividend Reinvestment 440 337
Partnership Distributions (1,078) (311)
---------- ----------
Net Cash Provided (Used) by Financing Activities 35,909 (21,643)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 9,512 (14,676)
---------- ----------
Cash and Cash Equivalents at Beginning of Period 8,691 22,875
---------- ----------
Cash and Cash Equivalents at End of Period $ 18,203 $ 8,199
========== ==========
</Table>
See Accompanying 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 three and nine month periods ended June 30, 2001 and 2000 are
not indicative of the results to be expected for the full year.
Note 4. 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
through 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.
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.
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<Table>
<Caption>
For the three months ended NATURAL GAS NATURAL GAS
June 30, 2001 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
------------ ----------- ------ ------------ ------------
Operating Revenues $ 14,481 $ 2,004 $ 937 $ (1,041) $ 16,381
Operating Expenses 13,813 771 904 (1,041) 14,447
Operating Income 668 1,233 33 1,934
</Table>
<Table>
<Caption>
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 1,556 1,136 185 2,877
</Table>
<Table>
<Caption>
For the nine months ended NATURAL GAS NATURAL GAS
June 30, 2001 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
------------ ----------- ------ ------------ ------------
Operating Revenues $ 86,886 $ 5,966 $ 3,264 $ (3,223) $ 92,893
Operating Expenses 75,950 2,358 3,020 (3,223) 78,105
Operating Income 10,936 3,608 244 14,788
Extraordinary Loss (1,423) (1,423)
</Table>
<Table>
<Caption>
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 12,630 3,056 725 16,411
</Table>
<Table>
<Caption>
For the twelve months ended NATURAL GAS NATURAL GAS
June 30, 2001 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
------------ ----------- ------ ------------ ------------
Operating Revenues $ 98,878 $ 8,125 $ 4,375 $ (4,252) $ 107,126
Operating Expenses 86,880 2,946 3,924 (4,252) 89,498
Operating Income 11,998 5,179 451 17,628
Extraordinary Loss (1,423) (1,423)
</Table>
<Table>
<Caption>
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 13,930 4,083 868 18,881
</Table>
Note 5. 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
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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
63,000 and 37,000 for the three months ended June 30, 2001 and 2000,
respectively; 58,000 and 42,000 for the nine months ended June 30, 2001 and
2000, respectively; and 54,000 and 43,000 for the twelve months ended June 30,
2001 and 2000, respectively. These differences in equivalent shares are from
outstanding stock options.
Note 6. In December 2000, 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.
Note 7. 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 accompanying financial statements.
Note 8. In July 2001, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 141, "Business Combinations" (SFAS 141) and No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 eliminates the
pooling-of-interest method of accounting for all business combinations initiated
after June 30, 2001 and is not expected to have a material impact on the
Company's financial statements. SFAS 142 requires that goodwill and other
certain intangible assets no longer be amortized, but instead tested for
impairment on an annual basis. The Company will be required to adopt SFAS 142 on
October 1, 2002, but may early adopt on October 1, 2001. The Company is
currently evaluating the impact, if any, that this standard will have on its
financial statements.
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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 June 30, 2001 was $489,000 or $0.10
per share compared to net income of $1,029,000 or $0.21 per share for the third
quarter of fiscal 2000. Net income before extraordinary loss due to the early
extinguishment of debt (see Note 6 above) for the nine months ended June 30,
2001 was $6,865,000 or $1.38 per share compared to net income of $7,894,000 or
$1.60 per share for the nine-month period of fiscal year 2000. Net income before
extraordinary loss for the twelve months ended June 30, 2001 and 2000 was
$7,763,000 or $1.56 per share and $8,764,000 or $1.77 per share,
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respectively. The decrease in net income before extraordinary loss for the
three, nine and twelve months ended June 30, 2001 was due primarily to factors
associated with the unprecedented increases in natural gas prices in the current
year winter heating season. Fluctuations in the commodity price of natural gas
were passed on to customers, which, together with colder than normal weather,
one of the coldest winter seasons on record, resulted in large increases in
customers' monthly gas bills. In response to the corresponding increase in
accounts receivable, in the second quarter of 2001 the Company established
substantial additional reserves for anticipated uncollectible account balances
for gas delivered during the current year winter heating season and adjusted
these reserves by an additional $49,000 in the third quarter of 2001. The
increased reserves are reflected as operating expenses in the current year
periods.
OPERATING REVENUES
Gas revenues increased $2,037,000 (15%), $33,029,000 (58%) and $35,488,000
(53%), respectively, for the three, nine and twelve months ended June 30, 2001
primarily due to the dramatic increase in natural gas prices and an increase in
gas volumes delivered to customers. This past winter natural gas wholesale
prices increased to levels far exceeding their 10-year average. In recent
months 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
historic levels 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 directly result in any increase or decrease in margins or profits.
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 $1,721,000
(20%), $28,968,000 (67%), and $29,934,000 (60%), respectively, for the three,
nine and twelve months ended June 30, 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 during the first and
second quarters of 2001 due to weather that was colder than the prior year.
Volumes sold to temperature-sensitive customers declined 13% for the three
months ended June 30, 2001 due to a decrease in usage per degree day as
customers sought to conserve energy and as a result of weather which was warmer
than normal and warmer than the prior year during this three month period;
however, volumes increased 21% and 16% for the nine and twelve-month periods
ended June 30, 2001. Temperatures during this year's heating season, October
2000 through April 2001, were 20% colder than normal and 44% colder than the
prior year. Although the Company does not anticipate any material change in the
number of customers in this next winter, it is possible that persistent
extraordinarily high gas prices at the levels experienced this past winter would
cause some customers to change to other heating methods or reduce their usage of
natural gas. Recent reductions in natural gas prices, as compared to the
unprecedented levels experienced this past winter, however, are encouraging.
Mobile Gas has taken steps to reduce the risk of price fluctuations through the
implementation of a gas supply purchasing strategy designed to help stabilize
gas costs for next winter.
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Gas sales revenues from large commercial and industrial customers increased
$279,000 (16%), $3,526,000 (77%) and $4,102,000 (72%), respectively, for the
three, nine and twelve months ended June 30, 2001 due primarily to higher gas
prices. Volumes decreased 27% for the three months ended June 30, 2001 due
primarily to one customer's unique operational needs which resulted in unusually
high volumes delivered to that customer during the same period last year. For
the nine months ended June 30, 2001, volumes increased less than 1% and, for the
twelve months ended June 30, 2001, volumes increased 4%.
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 high natural gas prices this past winter, as of June 30, 2001,
these industrial customers, with the exception of one, continued to use natural
gas rather than other fuels although, in some cases, these volumes were reduced
due to the higher prices and general economic conditions.
Gas transportation revenues, excluding those of Bay Gas, decreased $229,000
(11%), $428,000 (7%) and $211,000 (3%), respectively, for the three, nine and
twelve months ended June 30, 2001 due primarily to the closure of the
International Paper plant in late December 2000 and a decrease in volumes
transported to other plants in the pulp and paper industry. Volumes transported
to customers, excluding Bay Gas, during the three, nine and twelve months ended
June 30, 2001 declined 10%, 10% and 9%, respectively, primarily due to the plant
closure. In addition to the International Paper closure, transportation volumes
were impacted for the three, nine 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 volumes as a result of these plant closures and
reduced demand associated with the pulp and paper industry is increased demand
from other customers such as Alabama Power's new gas-powered co-generation
facility that 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 has been
receiving small amounts of natural gas over the last two quarters for test
purposes only and became fully operational in June 2001.
In May 2001, Mobile Gas filed a petition with the Alabama Public Service
Commission (APSC) to increase its base rates to customers for the first time
since 1995. A general rate increase covers such things as increased operating
expenses, taxes, depreciation, and financing costs of its gas distribution
system. Even though Mobile Gas' operation and maintenance expenses are low
compared to other small gas distribution companies, they have been significantly
affected by inflation over the last six years. This, along with the continuing
investment required in the Company's distribution system, has prompted the
Company to file for the increase, which if approved, would increase revenues
approximately $9 million annually. There can be no assurance that the APSC will
approve the increase since it has the authority to adjust the requested amount.
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Bay Gas storage and transportation revenues (excluding revenues received from
Mobile Gas) increased $264,000 (38%), $944,000 (52%) and $1,510,000 (64%),
respectively, for the three, nine and twelve months ended June 30, 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 which
became operational in June 2000, and a new storage customer which began
receiving service late in the first quarter of 2001. An additional factor
contributing to the increase in transportation revenues for the three months
ended June 30, 2001 was the completion of phase two of Alabama Power's
gas-powered generating facility at Plant Barry in June 2001.
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 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 well has been drilled for the second cavern, leaching facilities have been
installed, and the initial process of conventional leaching, which actually
forms the cavern, has begun. The anticipated completion date for the second
cavern is December 2002. In order to provide additional pipeline capacity to
serve existing customers' additional transportation needs and provide the
infrastructure for anticipated growth in the area, Bay Gas has had two major
pipeline projects under construction. Construction was recently completed on an
11-mile 20-inch pipeline that parallels the northern portion of the existing
22-mile Bay Gas pipeline. Construction is well underway on a new 18-mile 24-inch
pipeline that will connect Bay Gas' existing line with Gulf South Pipeline
Company's high pressure pipeline. This project is anticipated to be complete in
fiscal 2001.
Gross margins on gas revenues, defined here as gas revenues less related cost of
gas, have decreased $182,000 (2%) for the three months ended June 30, 2001, and
increased $1,894,000 (5%) and $2,878,000 (6%), respectively, for the nine and
twelve months ended June 30, 2001. As stated above, volumes delivered to
temperature sensitive customers during the quarter ended June 30, 2001, as
compared to the same period last year, decreased due to warmer weather. Volumes
delivered to these same customers increased for the nine and twelve-month
periods ended June 30, 2001 primarily due to weather which was 20% colder than
normal during the current year winter heating season. Even though volumes sold
to temperature sensitive customers fluctuated and temperatures ranged from
colder than normal to warmer than normal for the periods presented, the
temperature adjustment rider mitigates the impact of 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. A significant portion
of the increase in gross margin for the nine and twelve month periods noted
above is due to the increase in business license taxes billed to customers and
included in revenues. An explanation of the increase in business license taxes
is included under "Operating Expenses" below. When the increase in these taxes
are considered, the net margin for these periods increased slightly. While net
margins (after deducting related business license taxes billed) from the
Company's distribution business declined for all periods presented, such decline
was offset by an increase in margins from Bay Gas for all periods.
Merchandise sales revenues increased $15,000 (2%), $31,000 (1%), and $76,000
(3%),
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respectively, for the three, nine, and twelve months ended June 30, 2001 due to
revenues associated with the sale of generators and the revenues associated with
specialty stores.
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
engineering consulting, operations training, pipeline corrosion protection
services and gas marketing services. Other operating revenues decreased $105,000
(27%) and $62,000 (6%), respectively, for the three and nine months ended June
30, 2001 due to a decline in interest income associated with the financing of
merchandise sales. An increase of $79,000 (6%) for the twelve-month period ended
June 30, 2001 is primarily the result of revenues generated from pipeline
corrosion protection services.
OPERATING EXPENSES
Cost of gas increased $2,219,000 (66%), $31,135,000 (186%) and $32,610,000
(176%), respectively, for the three, nine and twelve months ended June 30, 2001
due primarily to the higher purchased gas prices and an increase in gas sales
volumes. The Company passes the actual cost of gas on to customers under the
purchased gas adjustment provision of rate tariffs as discussed above. Due to
the fact that cost of gas is completely billed through to the Company's
customers, fluctuations in the cost of gas have no direct effect on gas margins.
Operations and maintenance expenses increased $466,000 (10%), $1,439,000 (9%)
and $2,041,000 (10%), respectively, for the three, nine and twelve months ended
June 30, 2001. Bad debt reserves were increased by $49,000, $664,000 and
$750,000 for the three, nine, and twelve-month periods ended June 30, 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 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. Of the
increase noted above, approximately $161,000 (73%), $461,000 (63%) and $524,000
(53%) represent increases in Bay Gas' operations and maintenance expenses for
the respective three, nine and twelve months ended June 30, 2001 as a result of
expansion activities.
Depreciation expense increased for all periods ended June 30, 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 $105,000 (9%), $1,685,000 (37%) and
$1,790,000 (32%), respectively, for the three, nine and twelve months ended June
30, 2001 due primarily to fluctuations in business license taxes associated with
gas revenues.
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OTHER INCOME AND EXPENSES
Interest expense increased $926,000 (76%), $1,850,000 (49%), and $1,839,000
(36%), respectively, for the three, nine and twelve months ended June 30, 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 of $12,185,000 under the Company's line of credit due to
the negative cash flow impact associated with higher accounts receivable
balances, higher natural gas prices, and infrastructure expansion projects.
Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs increased $628,000 (1,532%), $899,000 (529%) and $888,000 (467%),
respectively, for the three, nine and twelve months ended June 30, 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 $223,000 (183%), $753,000 (233%) and $770,000 (174%),
respectively, for the three, nine and twelve months ended June 30, 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.
Minority interest reflects the minority partners' share of pre-tax earnings of
the Bay Gas and SGT 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 $421,000 (69%),
$751,000 (16%) and $545,000 (11%), respectively, for the three, nine and twelve
months ended June 30, 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
$11,505,000 and $12,464,000, respectively, for the nine months ended June 30,
2001 and 2000. The decline in cash flow from operating activities of $959,000
resulted from the timing of the collection of gas costs, timing differences of
receipts from customers on their gas receivable balance, and increased inventory
balances attributed to stored natural gas.
Cash used in investing activities reflects the capital-intensive nature of the
Company's business. Investing activities used cash of $37,902,000 and
$5,497,000, respectively, for the nine months ended June 30, 2001 and 2000.
Total capital expenditures increased $28,146,000 for the current year nine
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 nine month period increased due to capital expansion projects
related to the construction by Bay Gas of its second underground storage cavern
and two pipeline
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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 June 30, 2001, of $4,259,000 of
proceeds from the December 2000 Bay Gas debt issuance.
Financing activities provided cash of $35,909,000 for the nine months ended June
30, 2001 compared to using cash of $21,643,000 for the nine months ended June
30, 2000. The increase in cash provided by financing activities during the
current year nine 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.
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 $7,815,000 was available for borrowing as of June 30, 2001.
With these sources, in addition to cash and temporary investments of $22,462,000
as of June 30, 2001, 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. 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
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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 June 30, 2001 the Company had
approximately $92.5 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
(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 10, 2001 /s/ John S. Davis
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John S. Davis
President and
Chief Executive Officer
Date: August 10, 2001 /s/ Charles P. Huffman
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Charles P. Huffman
Sr. Vice President and
Chief Financial Officer
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