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 December 31, 2001
-----------------
Commission File No. 0-29604
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ENERGYSOUTH, INC.
-----------------
(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 251-450-4774
-------------
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 February 11, 2002 -- 4,963,740
shares.
ENERGYSOUTH, INC.
INDEX
<Table>
<Caption>
Page No.
--------
PART I. Financial Information (Unaudited):
Consolidated Balance Sheets - December 31,
2001 and 2000 and September 30, 2001 3 - 4
Consolidated Statements of Income - Three and
Twelve Months Ended December 31, 2001 and 2000 5
Consolidated Statements of Retained Earnings -
Three and Twelve Months Ended December 31, 2001
and 2000 6
Consolidated Statements of Cash Flows - Three
Months Ended December 31, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Quantitative and Qualitative Disclosures About
Market Risk 17
PART II. Other Information 18 - 19
</Table>
2
PART 1. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
ENERGYSOUTH, INC. December 31, September 30,
-------------------- -------------
In Thousands 2001 2000 2001
---- ---- ----
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 16,206 $ 18,614 $ 18,052
Temporary Investments -- 18,298 3,000
Receivables
Gas 8,651 16,375 7,793
Unbilled Revenue 4,485 7,474 781
Merchandise 2,897 3,047 2,865
Other 946 834 984
Allowance for Doubtful Accounts (1,237) (940) (849)
Materials, Supplies, and Merchandise (At Average Cost) 2,568 2,245 2,743
Gas Stored Underground For Current Use (At Average Cost) 3,614 455 3,690
Deferred Income Taxes 3,203 2,658 3,466
Prepayments 1,692 1,473 957
--------- --------- ---------
Total Current Assets 43,025 70,533 43,482
--------- --------- ---------
PROPERTY, PLANT, AND EQUIPMENT 219,268 186,796 206,286
Less: Accumulated Depreciation and Amortization 62,653 56,229 60,853
--------- --------- ---------
Property, Plant, and Equipment - Net 156,615 130,567 145,433
Construction Work in Progress 16,798 8,412 25,159
--------- --------- ---------
Total Property, Plant, and Equipment 173,413 138,979 170,592
--------- --------- ---------
OTHER ASSETS
Regulatory Assets 904 410 978
Deferred Charges 640 738 859
Prepayments 1,110 1,177 1,125
Merchandise Receivables Due After One Year 5,149 5,670 5,321
--------- --------- ---------
Total Other Assets 7,803 7,995 8,283
--------- --------- ---------
TOTAL $ 224,241 $ 217,507 $ 222,357
--------- --------- ---------
</Table>
See Accompanying Notes to Consolidated Financial Statements
3
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
ENERGYSOUTH, INC. December 31, September 30,
------------------------ -------------
In Thousands, Except Per Share Data 2001 2000 2001
---- ---- ----
(Unaudited)
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Current Maturities of Long-Term Debt $ 1,859 $ 1,846 $ 1,859
Notes Payable 16,560 10,573 13,235
Accounts Payable 5,684 11,294 8,739
Dividends Declared 1,287 1,229 1,284
Customer Deposits 1,489 1,466 1,422
Taxes Accrued 5,936 5,909 5,981
Interest Accrued 688 1,529 1,371
Deferred Purchased Gas Adjustment 4,011 3,705 4,708
Unearned Revenue (Note 8) 2,908 -- --
Other 2,002 1,201 3,117
--------- --------- ---------
Total Current Liabilities 42,424 38,752 41,716
--------- --------- ---------
OTHER LIABILITIES
Accrued Pension Cost 89 666 235
Accrued Postretirement Benefit Cost 688 913 729
Deferred Income Taxes 13,836 12,575 13,660
Deferred Investment Tax Credits 335 360 340
Other 1,772 1,578 1,691
--------- --------- ---------
Total Other Liabilities 16,720 16,092 16,655
--------- --------- ---------
Total Liabilities 59,144 54,844 58,371
--------- --------- ---------
CAPITALIZATION
Stockholders' Equity
Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares; Outstanding
December 2001 - 4,951,000 Shares;
December 2000 - 4,917,000 Shares;
September 2001 - 4,937,000 Shares) 50 49 49
Capital in Excess of Par Value 19,618 19,082 19,387
Retained Earnings 53,154 49,665 50,688
--------- --------- ---------
Total Stockholders' Equity 72,822 68,796 70,124
Minority Interest 3,383 3,116 3,270
Long-Term Debt 88,892 90,751 90,592
--------- --------- ---------
Total Capitalization 165,097 162,663 163,986
--------- --------- ---------
TOTAL $ 224,241 $ 217,507 $ 222,357
--------- --------- ---------
</Table>
See Accompanying Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<Table>
<Caption>
Three Months Twelve Months
ENERGYSOUTH, INC. Ended December 31, Ended December 31,
----------------------- -----------------------
In Thousands, Except Per Share Data 2001 2000 2001 2000
-------- -------- -------- --------
OPERATING REVENUES
Gas Revenues $ 22,799 $ 32,811 $ 93,412 $ 82,883
Merchandise Sales 982 981 2,967 3,007
Other 372 348 1,391 1,455
-------- -------- -------- --------
Total Operating Revenues 24,153 34,140 97,770 87,345
-------- -------- -------- --------
OPERATING EXPENSES
Cost of Gas 6,253 17,933 40,337 31,815
Cost of Merchandise 733 774 2,258 2,372
Operations and Maintenance 5,816 5,611 21,189 20,622
Depreciation 2,098 1,815 7,595 6,825
Taxes, Other Than Income Taxes 1,747 2,227 7,068 6,299
-------- -------- -------- --------
Total Operating Expenses 16,647 28,360 78,447 67,933
-------- -------- -------- --------
OPERATING INCOME 7,506 5,780 19,323 19,412
-------- -------- -------- --------
OTHER INCOME AND (EXPENSE)
Interest Expense (2,068) (1,464) (8,351) (5,212)
Allowance for Borrowed Funds Used During Construction 554 49 2,227 190
Interest Income 193 199 1,238 535
Minority Interest (186) (235) (603) (822)
-------- -------- -------- --------
TOTAL OTHER INCOME (EXPENSE) (1,507) (1,451) (5,489) (5,309)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 5,999 4,329 13,834 14,103
Income Taxes 2,246 1,588 5,261 5,265
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY LOSS 3,753 2,741 8,573 8,838
-------- -------- -------- --------
Extraordinary Loss on Early Extinguishment of Debt
(Net of Income Tax Benefit of $808) (Note 6) -- (1,423) -- (1,423)
-------- -------- -------- --------
NET INCOME $ 3,753 $ 1,318 $ 8,573 $ 7,415
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Income Before Extraordinary Loss $ 0.76 $ 0.56 $ 1.74 $ 1.80
Extraordinary Loss on Early Extinguishment of Debt -- (0.29) -- (0.29)
-------- -------- -------- --------
Net Income $ 0.76 $ 0.27 $ 1.74 $ 1.51
-------- -------- -------- --------
DILUTED EARNINGS PER SHARE:
Income Before Extraordinary Loss $ 0.75 $ 0.55 $ 1.72 $ 1.78
Extraordinary Loss on Early Extinguishment of Debt -- (0.29) -- (0.29)
-------- -------- -------- --------
Net Income $ 0.75 $ 0.26 $ 1.72 $ 1.49
-------- -------- -------- --------
AVERAGE COMMON SHARES OUTSTANDING
Basic 4,947 4,916 4,934 4,909
Diluted 5,017 4,974 4,997 4,952
-------- -------- -------- --------
</Table>
See Accompanying Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
<Table>
<Caption>
THREE MONTHS TWELVE MONTHS
ENERGYSOUTH, INC. ENDED DECEMBER 31, ENDED DECEMBER 31,
---------------------- ---------------------
In Thousands 2001 2000 2001 2000
-------- -------- -------- --------
BALANCE AT BEGINNING OF PERIOD $ 50,688 $ 49,576 $ 49,665 $ 47,086
Net Income 3,753 1,318 8,573 7,415
-------- -------- -------- --------
Total 54,441 50,894 58,238 54,501
LESS: DIVIDENDS 1,287 1,229 5,084 4,836
-------- -------- -------- --------
BALANCE AT END OF PERIOD $ 53,154 $ 49,665 $ 53,154 $ 49,665
======== ======== ======== ========
</Table>
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
THREE MONTHS
ENERGYSOUTH, INC. ENDED DECEMBER 31,
-----------------------
In Thousands 2001 2000
-------- --------
NET CASH USED BY OPERATING ACTIVITIES $ (357) $ (2,126)
-------- --------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES
Capital Expenditures (4,986) (6,469)
Changes in Temporary Investments 3,000 (18,298)
-------- --------
Net Cash Used by Investing Activities (1,986) (24,767)
-------- --------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES
Repayment of Long-Term Debt (1,700) (20,420)
Proceeds from Issuance of Long-Term Debt -- 55,000
Changes in Short-Term Borrowings 3,325 4,243
Payment of Dividends (1,287) (1,229)
Dividend Reinvestment 87 84
Exercise of Stock Options 145 10
Partnership Distributions (73) (872)
-------- --------
Net Cash Provided by Financing Activities 497 36,816
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,846) 9,923
-------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,052 8,691
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,206 $ 18,614
======== ========
</Table>
See Accompanying Notes to Consolidated Financial Statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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); 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 2002 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, 2001.
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-month periods ended December 31, 2001 and 2000 are not
indicative of the results to be expected for the full year.
Note 4. The Company is principally engaged in the distribution and storage of
natural gas. Through Mobile Gas and SGT, the Company is engaged primarily in the
distribution and transportation of natural gas to residential, commercial and
industrial customers in Southwest Alabama. The Alabama Public Service Commission
(APSC) regulates the Company's gas distribution operations. For the major
portion of the Company's business, the APSC approves rates which are intended to
permit the recovery of the cost of service including a return on investment. Gas
deliveries to certain industrial customers are subject to regulation by the APSC
through contract approval.
Through Storage and Bay Gas, the Company provides for the underground storage of
natural gas and transportation services. The APSC regulates intrastate storage
operations through contract approval. Interstate gas storage contracts are not
subject to APSC approval; the Federal Energy Regulatory Commission (FERC), which
has jurisdiction over such contracts, allows them to have market-based rates.
The FERC has granted authority to Bay Gas to provide transportation-only
services to interstate and intrastate shippers and approved rates for such
services.
The Company also provides natural gas marketing, merchandising, and other
energy-related services through Marketing, Mobile Gas, and Services.
7
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.
<Table>
<Caption>
For the three months ended Natural Gas Natural Gas
December 31, 2001 (in thousands): Distribution Storage Other Eliminations Consolidated
------------ ----------- -------- ------------ ------------
Operating revenues $ 21,282 $ 2,562 $ 1,353 $ (1,044) $ 24,153
Operating expenses 15,417 1,003 1,271 (1,044) 16,647
Operating income 5,865 1,559 82 -- 7,506
</Table>
<Table>
<Caption>
For the three months ended Natural Gas Natural Gas
December 31, 2000 (in thousands): Distribution Storage Other Eliminations Consolidated
------------ ----------- -------- ------------ ------------
Operating revenues $ 31,912 $ 2,024 $ 1,329 $ (1,125) $ 34,140
Operating expenses 27,648 637 1,200 (1,125) 28,360
Operating income 4,264 1,387 129 -- 5,780
Extraordinary (Loss) -- (1,423) -- -- (1,423)
</Table>
<Table>
<Caption>
For the twelve months ended Natural Gas Natural Gas
December 31, 2001 (in thousands): Distribution Storage Other Eliminations Consolidated
------------ ----------- -------- ------------ ------------
Operating revenues $ 88,998 $ 8,614 $ 4,357 $ (4,199) $ 97,770
Operating expenses 75,177 3,457 4,012 (4,199) 78,447
Operating income 13,821 5,157 345 -- 19,323
</Table>
<Table>
<Caption>
For the twelve months ended Natural Gas Natural Gas
December 31, 2000 (in thousands): Distribution Storage Other Eliminations Consolidated
------------ ----------- -------- ------------ ------------
Operating revenues $ 79,604 $ 7,496 $ 4,462 $ (4,217) $ 87,345
Operating expenses 65,953 2,489 3,708 (4,217) 67,933
Operating income 13,651 5,007 754 -- 19,412
Extraordinary (Loss) -- (1,423) -- -- (1,423)
</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 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 70,000 and 58,000 for the three months ended December 31, 2001 and
2000, respectively, and 63,000 and 43,000 for the twelve months ended December
31, 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
8
notes. Approximately $18,670,000 of the proceeds was 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. In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial 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. SFAS 142 is not expected to have a
material impact on the Company's financial statements and will be adopted by the
Company on October 1, 2002.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. In August 2001, FASB issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment of Disposal of Long-Lived Assets" (SFAS 144) which addresses
accounting and reporting standards for long-lived assets. The Company is
required to adopt these statements in fiscal 2003 and is currently evaluating
the impact of these pronouncements.
Note 8. Bay Gas entered into an agreement which grants an option to transport
additional volumes in excess of the volumes currently under long-term contract.
Bay Gas received during the 1st quarter of 2002 $3,274,000 in consideration of
the option agreement, of which $2,908,000 is classified as unearned revenue on
EnergySouth's consolidated balance sheet and will be amortized over the
remaining life of the option agreement.
9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
THE COMPANY
EnergySouth, Inc. (EnergySouth) is a holding company for a family of energy
businesses. EnergySouth and its consolidated subsidiaries are collectively
referred to herein as the "Company." The Company, through Mobile Gas Service
Corporation (Mobile Gas) and Southern Gas Transmission Company (SGT), is engaged
in the distribution of natural gas to residential, commercial and industrial
customers in southwest Alabama. Through Bay Gas Storage Company, Ltd. (Bay Gas),
the Company provides underground natural gas storage services and transportation
services. Other EnergySouth subsidiaries are engaged in gas marketing,
merchandising 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
margins. Other costs, including a return on investment, are recovered through
rates approved in traditional rate proceedings. The APSC certificated Bay Gas as
an Alabama gas storage public utility in 1992. Bay Gas provides substantial,
long-term services for Mobile Gas and other customers that include storage and
transportation of natural gas from interstate and intrastate sources. The APSC
does not regulate rates for Bay Gas interstate gas storage and storage-related
services. The Federal Energy Regulatory Commission (FERC), which has
jurisdiction over interstate services, allows Bay Gas to charge market-based
rates for such services. Market-based rates minimize regulatory involvement in
the setting of rates for storage services and allow Bay Gas to respond to market
conditions. Bay Gas also provides interstate transportation-only services. The
FERC issued orders on April 28, 1999 and October 11, 2001 approving rates for
such services.
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 factors, 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.
10
RESULTS OF OPERATIONS
NET INCOME BEFORE EXTRAORDINARY LOSS
All earnings per share amounts referred to herein are computed on a diluted
basis and all financial statement changes discussed herein for the three and
twelve months ended December 31, 2001 are based upon comparative income before
extraordinary loss of prior periods. Income for the three and twelve months
ended December 31, 2001 was $3,753,000 or $0.75 per share and $8,573,000 or
$1.72 per share, respectively, as compared to income before the extraordinary
loss due to the early extinguishment of debt of $2,741,000 or $0.55 per share
for the three months ended December 31, 2000 and $8,838,000 or $1.78 per share
for the twelve month period ended December 31, 2000. Earnings increased
$1,012,000 or $0.20 for the three-month period ending December 31, 2001 due to
increased earnings from Mobile Gas' distribution business and Bay Gas' storage
and transportation business. For the twelve month period, earnings decreased
$265,000 or $0.06 per share due to declines in earnings from Mobile Gas'
distribution business and EnergySouth's other business segments which were
partially offset by increased earnings from Bay Gas.
RATE PROCEEDINGS
In May 2001, Mobile Gas filed a petition with the 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 the gas distribution system. The APSC approved new base rates,
effective October 2, 2001, which are designed to increase annual gas revenues by
approximately $7.8 million and allow Mobile Gas the opportunity to earn a rate
of return on equity of 13.6%.
Mobile Gas also requested approval of a Rate Stabilization and Equalization
(RSE) tariff, a ratemaking methodology already used by the Commission to
regulate certain other utilities, which would allow for periodic rate
adjustments in the future. The Commission will conduct a hearing by the end of
May 2002 addressing Mobile Gas' RSE request.
OPERATING REVENUES
Gas revenues decreased $10,012,000 (31%) for the three months ended December 31,
2001 and increased $10,529,000 (13%) for the twelve-month period ended December
31, 2001.
NATURAL GAS DISTRIBUTION
Revenue from the sale and transportation of gas to customers by the distribution
business decreased $10,641,000 (33%) for the first quarter of 2002 compared to
the first quarter of fiscal 2001. The decrease experienced in the first quarter
of fiscal 2002 is due primarily to a decrease in sales to temperature-sensitive
customers of $9,215,000 (34%) with a corresponding decline in
temperature-sensitive volumes of 8,375,000 (35%) therms. The decline in both
revenues and volumes can be attributed, in part, to the lower prices of natural
gas experienced during this year's heating season as compared to last year. Also
contributing to the decline in revenues and volumes was weather that was 20%
warmer than normal and 46% warmer than the prior year period. The distribution
business experienced a decrease in the number of temperature sensitive customers
served during the first quarter of 2002 as compared with the same prior year
period due to customers who were disconnected during fiscal 2001 for nonpayment
that did not restore their service as of December 31, 2001, in part, as a result
of the warmer weather conditions.
11
During the winter of fiscal 2001, natural gas prices increased to levels which
far exceeded their 10-year average. The price of natural gas has declined
significantly during the first quarter of 2002 as compared with the prior year
period. Fluctuations in the actual cost of gas are passed on to customers
through the purchased gas adjustment provision of the rate tariffs and do not
directly result in any increase or decrease in margins or profits. For the
twelve months ended December 31, 2001, revenue from the sale and transportation
of gas to customers by the distribution business increased $9,347,000 (12%) due
primarily to an increase in revenues of $9,101,000 (15%) from
temperature-sensitive customers. Volumes declined by 4% as a result of the
dramatic rise in natural gas prices experienced during last year's heating
season.
Revenue from gas sales to large commercial and industrial customers decreased
$1,153,000 (44%) and increased $1,274,000 (17%), respectively, for the three and
twelve month period ended December 31, 2001 due to the fluctuations in the price
of natural gas. Additionally, for the three and twelve month periods ended
December 31, 2001, one industrial customer did not use a significant amount of
gas that it had used in the prior year periods due to unique operational needs
that did not occur in the current year periods.
Gas transportation revenues, excluding Bay Gas, decreased $335,000 (14%) and
$1,034,000 (12%) for the three-month and twelve-month periods ended December 31,
2001, respectively, 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
decreased 14% and 7%, respectively, for the three and twelve month periods. In
addition to the International Paper closure, transportation volumes were
impacted by the Corus Group plc (Corus, formerly known as British Steel) plant
closure. Because of minimum payment provisions of the contract with Corus, the
Corus closure did not 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,
was 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 and the start-up of another co-generation facility
in June 2001 to which Mobile Gas has a long-term transportation contract.
Although revenue from the sale and transportation of gas to customers by the
distribution business decreased during the first quarter of 2002, margins
increased $2,208,000 (17%) as compared to the prior year primarily as a result
of the general rate increase which became effective October 2, 2001. Margins
declined $2,154,000 (5%) for the twelve months ended December 31, 2001 as
compared to the prior year due primarily to a decline in margins from the sale
and transportation of gas to large industrial customers as a result of a
downturn in general economic conditions, plant closings as discussed above and
an unusual amount of gas used by one industrial customer during the prior
twelve-month period. Additionally, margins from gas sales to
temperature-sensitive customers declined during the most recent twelve months as
customers sought to conserve energy during a time of dramatically higher natural
gas prices and colder than normal weather last winter.
12
The following table summarizes gas distribution margins for the three and twelve
month periods ended December 31, 2001 and 2000 and the related volumes delivered
to customers.
<Table>
<Caption>
THREE MONTHS TWELVE MONTHS
ENDED DEC. 31, ENDED DEC. 31,
---------------------- ----------------------
IN THOUSANDS: 2001 2000 2001 2000
-------- -------- -------- --------
Natural Gas Sales and Transportation Revenues $ 22,799 $ 32,811 $ 93,412 $ 82,883
Cost of Natural Gas (6,253) (17,933) (40,337) (31,815)
Revenue Taxes (1,015) (1,555) (8,165) (4,004)
-------- -------- -------- --------
NATURAL GAS SALES AND TRANSPORTATION MARGINS
(EXCLUDING BAY GAS) $ 15,531 $ 13,323 $ 44,910 $ 47,064
======== ======== ======== ========
Natural Gas Sales Volumes (Therms)
Temperature-Sensitive Customers 15,869 24,244 57,355 59,734
Commercial and Industrial - Large 2,602 3,612 11,563 13,562
-------- -------- -------- --------
Total Natural Gas Sales Volumes 18,471 27,856 68,918 73,296
Natural Gas Transportation Volumes (Therms) 83,449 97,584 368,079 394,615
-------- -------- -------- --------
TOTAL DELIVERIES (EXCLUDING BAY GAS) (THERMS) 101,920 125,440 436,997 467,911
======== ======== ======== ========
</Table>
NATURAL GAS STORAGE
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.
Bay Gas is currently constructing a second storage cavern which is anticipated
to begin operations in fiscal 2003. A substantial portion of the capacity of
this cavern has been contracted for, through a fifteen year agreement, by
Southern Company Services, Inc., an affiliate of Southern Company, as agent for
certain Southern Company subsidiaries.
In order to provide additional pipeline capacity to serve existing customers'
transportation needs and provide the infrastructure for anticipated growth in
the area, Bay Gas has completed construction of two major pipeline projects.
Construction was completed in fiscal 2001 of an 11-mile, 20-inch pipeline that
parallels the northern portion of the existing Bay Gas pipeline. Construction
was completed in November 2001 on a new 18-mile, 24-inch pipeline that connects
Bay Gas' existing line with Gulf South Pipeline Company's (Gulf South)
high-pressure pipeline and provides a second connection with Mobile Gas'
distribution system.
Bay Gas' storage and transportation revenues (excluding revenues received from
Mobile Gas) increased $618,000 (69%) and $1,135,805 (35%) for the three and
twelve month
13
periods ended December 31, 2001, respectively, compared to the corresponding
prior year periods. Contributing to the increase was transportation of natural
gas to Phase I of Alabama Power's Plant Barry co-generation facility which
became operational in June 2000 and the completion of Phase II of Alabama
Power's gas-powered generating facility at Plant Barry in June 2001.
Additionally, in November 2001, Bay Gas began transporting gas under another
long-term contract upon completion of the new 24-inch, 18 mile pipeline that
connects Bay Gas to Gulf South's high pressure pipeline. Bay Gas also entered
into an agreement which grants an option to transport additional volumes in
excess of the volumes currently under long-term contract. Bay Gas received
$3,274,000 in consideration of the option agreement which will be amortized over
the nineteen-month option period.
MERCHANDISING
Merchandising sales revenues were relatively flat for the three months ended
December 31, 2001 as compared to the same period last year but decreased $40,000
(1%) for the same twelve-month period due to a decline in appliance sales which
was partially offset by increased revenues from the sale of natural gas
generators.
OTHER REVENUES
Other operating revenues consist primarily of interest income from the financing
of merchandise sales that occur at the Company and through trade programs. Also
included in other revenues are revenues from engineering consulting, operations
training, pipeline corrosion protection services and gas marketing services.
Other revenues increased $24,000 (7%) for the three months ended December 31,
2001 due to an increase in revenues associated with pipeline corrosion services
and an increase in interest income associated with financing activities. For the
twelve months ended December 31, 2001, other revenues decreased $64,000 (4%) due
to a decline in revenues associated with pipeline corrosion services and a
slight decrease in interest income associated with financing activities.
OPERATING EXPENSES
Operations and maintenance expenses increased $205,000 (4%) and $567,000 (3%)
for the three and twelve month periods ended December 31, 2001, respectively.
Contributing to the higher operations and maintenance expenses were additional
costs associated with the expansion of Bay Gas' operations and increased
expenses related to the expansion of other businesses including the opening of a
second specialty store, the relocation of one specialty store, and the start-up
of sales of natural gas generators. Inflation also contributed to the increase
in other expenses.
Increases in depreciation expense for the three and twelve month periods were
due to increased investment in property, plant and equipment primarily from
Mobile Gas' and Bay Gas' capital expansion projects.
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
14
taxes decreased $480,000 (22%) for the three months ended December 31, 2001 and
increased $769,000 (12%) for the same twelve month period due primarily to
fluctuations in business license taxes associated with gas revenues.
OTHER INCOME AND EXPENSES
Interest expense increased $604,000 (41%) and $3,139,000 (60%), respectively,
for the three and twelve month periods ended December 31, 2001 due primarily to
the issuance of $55 million of Bay Gas Senior Secured Notes (see "Liquidity and
Capital Resources" below). The twelve-month period ended December 31, 2000 was
impacted as a result of increased short-term borrowings under the Company's line
of credit due to the negative cash flow impact associated with higher accounts
receivable balances and higher natural gas prices experienced during last year's
heating season and expansion projects.
Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs increased $505,000 (1,031%) and $2,037,000 (1,072%),
respectively, for the three and twelve month periods ended December 31, 2001 due
to an increase in on-going capital projects and the construction of Bay Gas'
second storage cavern and pipeline projects.
Interest income decreased $6,000 (3%) for the three-month period ended December
31, 2001 and increased $703,000 for the twelve-month period. The twelve-month
period increase is due primarily to increased interest income on temporary
investments of Bay Gas as a result of the investment of the unused portion of
debt issuance proceeds.
Minority interest reflects the minority partners' share of pre-tax earnings of
the Bay Gas and SGT partnerships, of which EnergySouth's subsidiaries hold
controlling interests. Minority interest decreased $49,000 (21%) and $219,000
(27%), respectively, for the three and twelve month period ended December 31,
2001 compared to the same periods in 2000 due partially to a decrease in pre-tax
earnings from Southern Gas Transmission and due to the reduction in Olin
Corporation's limited partnership interest in Bay Gas from 12.5% for fiscal year
2000 to 9.1% in fiscal 2001.
Income tax expense fluctuates with the changes in income before income taxes.
Income tax expense increased $658,000 (41%) for the three-month period ended
December 31, 2001 and decreased $4,000 for the twelve-month period.
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 used cash of $357,000 and
$2,126,000, respectively, for the three months ended December 31, 2001 and 2000.
Operating activities used $1,769,000 less than the prior year due primarily to
the payment of a $2,026,000 make whole premium associated with the early
extinguishment of debt in December 2000.
15
Cash used in investing activities reflects the capital-intensive nature of the
Company's business. Investing activities used cash of $1,986,000 and
$24,767,000, respectively, for the three months ended December 31, 2001 and
2000. In addition to the Company's regular construction program, cash used in
investing activities decreased for the three-month period in 2001 due to the
completion of Bay Gas' pipeline projects. Bay Gas' temporary investments of $3.0
million matured in December 2001 and are now included in the $13.8 million in
investments classified as cash equivalents from the unused proceeds of the
December 2000 Bay Gas debt issuance.
Cash provided by financing activities was $497,000 and $36,816,000 for the three
months ended December 31, 2001 and 2000. The three-month change was due
primarily to a decrease in short-term borrowings. The three-month change for the
quarter ended December 31, 2000 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 was used to repay a note to Mobile Gas for the financing of base
gas in the existing Bay Gas storage cavern and $18,670,000 was used to pay the
balance of the existing debt incurred to construct that storage cavern. In
connection with the early payoff of the existing debt, Bay Gas incurred an
extraordinary loss on the early extinguishment of debt of $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.
A significant portion of the Company's short-term operational cash needs,
especially during the winter heating season, is the cost of gas supply. A
portion of the firm supply requirements is expected to be met through the
withdrawal of gas from the storage facility owned by Bay Gas. Mobile Gas has
entered into a Gas Storage Agreement under which Bay Gas is to provide storage
services for an initial period of 20 years which began in September 1994 with
the commencement of commercial operations of the storage facility. The Company
also has third-party contracts, which expire at various dates through the year
2011, for the purchase, storage and delivery of gas supplies. The Company has a
gas supply strategy in which it enters into forward purchases to lock-in prices
for a majority of its expected gas sales during the upcoming winter heating
season. As of December 31, 2001, minimum payments under gas supply contracts for
the remaining nine months of fiscal year 2002 are $10,355,000. As of February 1,
2002, minimum payments under gas supply contracts for fiscal years subsequent to
September 30, 2002 are as follows: 2003 - $6,371,000, 2004 - $5,364,000, 2005 -
$5,360,000, 2006 - $5,364,000, 2007-2011 - $26,559,000.
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 line of
credit agreement. At December 31, 2001, the Company had a $20 million revolving
credit agreement with a group of banks. Borrowings under the agreement may be
made as needed provided that the Company is in compliance with certain covenants
in the revolving credit agreement and other long-term loan agreements. The
Company's long-term debt instruments contain certain debt to equity ratio
requirements and restrictions on the payment of cash dividends and the purchase
of shares of its capital stock. The Company is currently in compliance with all
such covenants and none of these requirements and restrictions are expected to
have a significant impact on the Company's ability to meet its short-term cash
needs. At December 31, 2001, the Company had $3,440,000 available for borrowing
on its revolving credit agreement. The decrease from September 30, 2001 of
$3,325,000 in available funds on the revolving credit agreement is due primarily
to the seasonality of the distribution business in which an increase in cost of
gas and related taxes results in an increase in short-term borrowings.
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
16
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.
ITEM 3 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 December 31, 2001 the Company had approximately
$88.9 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, 2001 for a discussion of the Company's risks related to
regulation, weather, gas supply, and the capital-intensive nature of the
Company's business.
17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of EnergySouth, Inc. was
held on January 25, 2002.
(b) The following nominee was elected as Director of the Company,
to serve until the 2004 Annual Meeting of Stockholders, by the
votes indicated:
<Table>
<Caption>
Nominee For Against
------------------------ --------------- ------------
Robert H. Rouse 4,407,225 17,160
</Table>
(c) The following nominees were elected as Directors of the
Company, to serve until the 2005 Annual Meeting of
Stockholders, by the votes indicated:
<Table>
<Caption>
Nominee For Against
------------------------ --------------- ------------
Walter A. Bell 4,405,670 18,715
Gaylord C. Lyon 4,405,245 19,140
E.B. Peebles, Jr. 4,404,326 20,059
Harris V. Morrissette 4,406,879 17,506
</Table>
The other Directors of the Company whose terms of office
continued after the 2001 Annual Meeting are as indicated
below:
<Table>
<Caption>
To Serve Until the Annual
Director Meeting of Stockholders in the year
---------------------------- -----------------------------------
Judy A. Marston 2003
John C. Hope, III 2003
S. Felton Mitchell, Jr. 2003
Thomas B. Van Antwerp 2003
John S. Davis 2004
Walter L. Hovell 2004
G. Montgomery Mitchell 2004
</Table>
18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
----------- -----------
none
(b) Reports on Form 8-K
Exhibit No. Description
----------- -----------
99 (a) Report and Order of Alabama Public
Service Commission dated
October 3, 2001
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.
ENERGYSOUTH, INC.
(Registrant)
Date: February 11, 2002 /s/ John S. Davis
------------------------ -----------------------------------
John S. Davis
President and
Chief Executive Officer
Date: February 11, 2002 /s/ Charles P. Huffman
------------------------ -----------------------------------
Charles P. Huffman
Senior Vice President and
Chief Financial Officer
19