SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2002
Commission File No. 0-29604
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 May 3, 2002 - 4,983,128 shares.
ENERGYSOUTH, INC.
INDEX
<Table>
<Caption>
Page No.
--------
PART I. Financial Information (Unaudited):
Consolidated Balance Sheets - March 31,
2002 and 2001 and September 30, 2001 3 - 4
Consolidated Statements of Income - Three, Six, and
Twelve Months Ended March 31, 2002 and 2001 5
Consolidated Statements of Retained Earnings - Three,
Six, and Twelve Months Ended March 31, 2002
and 2001 6
Consolidated Statements of Cash Flows - Six
Months Ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7 - 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 18
Quantitative and Qualitative Disclosures About
Market Risk 18
PART II. Other Information 19
</Table>
2
PART 1. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
March 31,
ENERGYSOUTH, INC. ------------------------ September 30,
In Thousands 2002 2001 2001
---------- ---------- --------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 13,901 $ 17,579 $ 18,052
Temporary Investments -- 18,692 3,000
Receivables
Gas 10,634 12,206 7,793
Unbilled Revenue 1,547 2,987 781
Merchandise 2,727 2,969 2,865
Other 687 1,332 984
Allowance for Doubtful Accounts (1,481) (1,551) (849)
Materials, Supplies, and Merchandise (At Average Cost) 2,591 2,733 2,743
Gas Stored Underground For Current Use (At Average Cost) 43 1,085 3,690
Deferred Income Taxes 3,189 2,869 3,466
Prepayments 1,324 1,516 957
---------- ---------- --------------
Total Current Assets 35,162 62,417 43,482
---------- ---------- --------------
PROPERTY, PLANT, AND EQUIPMENT 223,634 192,320 206,286
Less: Accumulated Depreciation and Amortization 64,305 57,699 60,853
---------- ---------- --------------
Property, Plant, and Equipment - Net 159,329 134,621 145,433
Construction Work in Progress 18,673 14,153 25,159
---------- ---------- --------------
Total Property, Plant, and Equipment 178,002 148,774 170,592
---------- ---------- --------------
OTHER ASSETS
Regulatory Assets 813 360 978
Deferred Charges 553 739 859
Prepayments 1,153 1,189 1,125
Merchandise Receivables Due After One Year 4,848 5,524 5,321
---------- ---------- --------------
Total Other Assets 7,367 7,812 8,283
---------- ---------- --------------
TOTAL $ 220,531 $ 219,003 $ 222,357
========== ========== ==============
</Table>
See Accompanying Notes to Consolidated Financial Statements
3
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
March 31,
ENERGYSOUTH, INC. ------------------- September 30,
In Thousands, Except Share Data 2002 2001 2001
-------- -------- -------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Current Maturities of Long-Term Debt $ 1,859 $ 1,846 $ 1,859
Notes Payable 9,935 10,812 13,235
Accounts Payable 5,300 9,599 8,739
Dividends Declared 1,291 1,231 1,284
Customer Deposits 1,565 1,512 1,422
Taxes Accrued 5,722 6,257 5,981
Interest Accrued 1,426 1,489 1,371
Deferred Purchased Gas Adjustment 3,938 3,079 4,708
Unearned Revenue (Note 8) 2,413 -- --
Other 1,248 1,885 3,117
-------- -------- -------------
Total Current Liabilities 34,697 37,710 41,716
-------- -------- -------------
OTHER LIABILITIES
Accrued Pension Cost -- 502 235
Accrued Postretirement Benefit Cost 651 895 729
Deferred Income Taxes 14,082 12,792 13,660
Deferred Investment Tax Credits 330 353 340
Other 1,954 1,563 1,691
-------- -------- -------------
Total Other Liabilities 17,017 16,105 16,655
-------- -------- -------------
Total Liabilities 51,714 53,815 58,371
-------- -------- -------------
CAPITALIZATION
Stockholders' Equity
Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares; Outstanding
March 2002 - 4,966,000 Shares;
March 2001 - 4,926,000 Shares;
September 2001 - 4,937,000 Shares) 50 49 49
Capital in Excess of Par Value 19,878 19,186 19,387
Retained Earnings 56,562 52,070 50,688
-------- -------- --------------
Total Stockholders' Equity 76,490 71,305 70,124
Minority Interest 3,435 3,132 3,270
Long-Term Debt 88,892 90,751 90,592
-------- -------- --------------
Total Capitalization 168,817 165,188 163,986
-------- -------- --------------
TOTAL $220,531 $219,003 $ 222,357
======== ======== ==============
</Table>
See Accompanying Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<Table>
<Caption>
Three Months Six Months Twelve Months
Ended March 31, Ended March 31, Ended March 31,
ENERGYSOUTH, INC. -------------------- -------------------- --------------------
In Thousands, Except Per Share Data 2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- --------
OPERATING REVENUES
Gas Revenues $ 30,130 $ 41,374 $ 52,930 $ 74,185 $ 82,169 $100,713
Merchandise Sales 801 615 1,783 1,596 3,153 2,929
Other 345 382 716 731 1,356 1,516
-------- -------- -------- -------- -------- --------
Total Operating Revenues 31,276 42,371 55,429 76,512 86,678 105,158
-------- -------- -------- -------- -------- --------
OPERATING EXPENSES
Cost of Gas 10,681 24,374 16,934 42,307 26,644 48,919
Cost of Merchandise 619 491 1,352 1,265 2,387 2,331
Operations and Maintenance 6,391 5,945 12,208 11,556 21,634 21,195
Depreciation 2,092 1,822 4,190 3,637 7,865 6,937
Taxes, Other Than Income Taxes 2,203 2,666 3,950 4,893 6,605 7,203
-------- -------- -------- -------- -------- --------
Total Operating Expenses 21,986 35,298 38,634 63,658 65,135 86,585
-------- -------- -------- -------- -------- --------
OPERATING INCOME 9,290 7,073 16,795 12,854 21,543 18,573
-------- -------- -------- -------- -------- --------
OTHER INCOME AND (EXPENSE)
Interest Expense (2,034) (2,045) (4,101) (3,509) (8,299) (5,967)
Allowance for Borrowed Funds Used During Construction 426 351 979 400 2,301 450
Interest Income 72 533 265 732 733 968
Minority Interest (205) (142) (390) (377) (665) (784)
-------- -------- -------- -------- -------- --------
Total Other Income (Expense) (1,741) (1,303) (3,247) (2,754) (5,930) (5,333)
-------- -------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES 7,549 5,770 13,548 10,100 15,613 13,240
Income Taxes 2,850 2,134 5,096 3,723 5,977 4,936
-------- -------- -------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY LOSS 4,699 3,636 8,452 6,377 9,636 8,304
-------- -------- -------- -------- -------- --------
Extraordinary Loss on Early Extinguishment of Debt
(Net of Income Tax Benefit of $808) (Note 6) -- -- -- (1,423) -- (1,423)
NET INCOME $ 4,699 $ 3,636 $ 8,452 $ 4,954 $ 9,636 $ 6,881
======== ======== ======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Income Before Extraordinary Loss $ 0.95 $ 0.74 $ 1.71 $ 1.30 $ 1.95 $ 1.69
Extraordinary Loss on Early Extinguishment of Debt -- -- -- (0.29) -- (0.29)
-------- -------- -------- -------- -------- --------
Net Income $ 0.95 $ 0.74 $ 1.71 $ 1.01 $ 1.95 $ 1.40
-------- -------- -------- -------- -------- --------
DILUTED EARNINGS PER SHARE:
Income Before Extraordinary Loss $ 0.93 $ 0.73 $ 1.68 $ 1.28 $ 1.92 $ 1.67
Extraordinary Loss on Early Extinguishment of Debt -- -- -- (0.29) -- (0.29)
-------- -------- -------- -------- -------- --------
Net Income $ 0.93 $ 0.73 $ 1.68 $ 0.99 $ 1.92 $ 1.38
-------- -------- -------- -------- -------- --------
AVERAGE COMMON SHARES OUTSTANDING
Basic 4,965 4,923 4,956 4,920 4,944 4,914
Diluted 5,047 4,980 5,041 4,976 5,014 4,962
</Table>
See Accompanying Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
<Table>
<Caption>
THREE MONTHS SIX MONTHS TWELVE MONTHS
ENDED MARCH 31, ENDED MARCH 31, ENDED MARCH 31,
ENERGYSOUTH, INC. ------------------- ------------------- -------------------
In Thousands 2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- --------
BALANCE AT BEGINNING OF PERIOD $ 53,154 $ 49,665 $ 50,688 $ 49,576 $ 52,070 $ 50,104
Net Income 4,699 3,636 8,452 4,954 9,636 6,881
-------- -------- -------- -------- -------- --------
Total 57,853 53,301 59,140 54,530 61,706 56,985
LESS: DIVIDENDS 1,291 1,231 2,578 2,460 5,144 4,915
-------- -------- -------- -------- -------- --------
BALANCE AT END OF PERIOD $ 56,562 $ 52,070 $ 56,562 $ 52,070 $ 56,562 $ 52,070
======== ======== ======== ======== ======== ========
</Table>
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
SIX MONTHS
ENDED MARCH 31,
ENERGYSOUTH, INC. --------------------
In Thousands 2002 2001
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 11,909 $ 9,752
-------- --------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES
Capital Expenditures (11,749) (18,044)
Changes in Temporary Investments 3,000 (18,692)
-------- --------
Net Cash Used by Investing Activities (8,749) (36,736)
-------- --------
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 (3,300) 4,482
Payment of Dividends (2,578) (2,460)
Dividend Reinvestment 168 268
Exercise of Stock Options 323
Partnership Distributions (224) (998)
-------- --------
Net Cash Provided (Used) by Financing Activities (7,311) 35,872
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,151) 8,888
-------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,052 8,691
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,901 $ 17,579
======== ========
</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. 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 and six-month periods ended March 31, 2002 and 2001 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 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. 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
March 31, 2002 (in thousands): Distribution Storage Other Eliminations Consolidated
- -------------------------------- ------------ ----------- ------- ------------ ------------
Operating revenues $ 28,281 $ 2,957 $ 1,145 $ (1,107) $ 31,276
Operating expenses 20,873 1,129 1,091 (1,107) 21,986
Operating income 7,408 1,828 54 -- 9,290
</Table>
<Table>
<Caption>
For the three months ended Natural Gas Natural Gas
March 31, 2001 (in thousands): Distribution Storage Other Eliminations Consolidated
- -------------------------------- ------------ ----------- ----- ------------ ------------
Operating revenues $ 40,493 $ 1,938 $ 997 $ (1,057) $ 42,371
Operating expenses 34,489 949 917 (1,057) 35,298
Operating income 6,004 989 80 -- 7,073
</Table>
<Table>
<Caption>
For the six months ended Natural Gas Natural Gas
March 31, 2002 (in thousands): Distribution Storage Other Eliminations Consolidated
- -------------------------------- ------------ ----------- ------- ------------ ------------
Operating revenues $ 49,563 $ 5,519 $ 2,499 $ (2,152) $ 55,429
Operating expenses 36,290 2,132 2,364 (2,152) 38,634
Operating income 13,273 3,387 135 -- 16,795
</Table>
<Table>
<Caption>
For the six months ended Natural Gas Natural Gas
March 31, 2001 (in thousands): Distribution Storage Other Eliminations Consolidated
- -------------------------------- ------------ ----------- ------- ------------ ------------
Operating revenues $ 72,405 $ 3,962 $ 2,327 $ (2,182) $ 76,512
Operating expenses 62,137 1,586 2,117 (2,182) 63,658
Operating income 10,268 2,376 210 -- 12,854
Extraordinary (Loss) -- (1,423) -- -- (1,423)
</Table>
<Table>
<Caption>
For the twelve months ended Natural Gas Natural Gas
March 31, 2002 (in thousands): Distribution Storage Other Eliminations Consolidated
- -------------------------------- ------------ ----------- ------- ------------ ------------
Operating revenues $ 76,786 $ 9,632 $ 4,509 $ (4,249) $ 86,678
Operating expenses 61,561 3,636 4,187 (4,249) 65,135
Operating income 15,225 5,996 322 -- 21,543
</Table>
<Table>
<Caption>
For the twelve months ended Natural Gas Natural Gas
March 31, 2001 (in thousands): Distribution Storage Other Eliminations Consolidated
- -------------------------------- ------------ ----------- ------- ------------ ------------
Operating revenues $ 97,105 $ 7,852 $ 4,444 $ (4,243) $ 105,158
Operating expenses 84,218 2,770 3,840 (4,243) 86,585
Operating income 12,887 5,082 604 -- 18,573
Extraordinary (Loss) -- (1,423) -- -- (1,423)
</Table>
8
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
outstanding 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 82,000 and 57,000 for the three months ended March 31, 2002 and 2001,
respectively, 85,000 and 56,000 for the six months ended March 31, 2002 and
2001, respectively, and 70,000 and 48,000 for the twelve months ended March 31,
2002 and 2001, 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 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 did not 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 first quarter of fiscal 2002 $3,274,000 in
consideration of the option agreement, of which the unamortized balance,
$2,413,000, is classified as unearned revenue on EnergySouth's consolidated
balance sheet and is being 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, 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
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, six,
and twelve months ended March 31, 2002 are based upon comparative income before
extraordinary loss of prior periods as shown in the table below:
<Table>
<Caption>
THREE MONTHS SIX MONTHS TWELVE MONTHS
ENDED MAR. 31, ENDED MAR. 31, ENDED MAR. 31,
------------------- ------------------- -------------------
2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- --------
Income Before
Extraordinary Loss (in thousands) $ 4,699 $ 3,636 $ 8,452 $ 6,377 $ 9,636 $ 8,304
Diluted Earnings Per Share Before
Extraordinary Loss $ 0.93 $ 0.73 $ 1.68 $ 1.28 $ 1.92 $ 1.67
</Table>
Earnings before extraordinary loss increased $1,063,000 or $0.20 per share,
$2,075,000 or $0.40 per share, and $1,332,000 or $0.25 per share respectively,
for the three, six, and twelve month periods ending March 31, 2002 due to
increased earnings from Mobile Gas' distribution business and Bay Gas' storage
and transportation business. Earnings from Mobile Gas' distribution business
were positively impacted as a result of the general rate increase discussed
below. Bay Gas' earnings increased due, in part, to transportation revenues
received from Phase I of Alabama Power's co-generation facility that commenced
operations in June 2000 and Phase II which went on-line in June 2001.
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 costs 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 APSC to regulate
certain other utilities, which would allow for periodic rate adjustments in the
future. The APSC will conduct a hearing by the end of May 2002 addressing Mobile
Gas' RSE request.
11
OPERATING REVENUES
Gas revenues decreased $11,244,000 (27%), $21,255,000 (29%), and $18,544,000
(18%), respectively, for the three, six, and twelve months ended March 31, 2002.
NATURAL GAS DISTRIBUTION
Revenue from the sale and transportation of gas to customers by the distribution
business decreased $12,224,000 (30%), $22,866,000 (32%), and $20,377,000 (21%)
for the three, six, and twelve-month periods ended March 31, 2002 as compared to
the same prior year periods. The decrease experienced in all three periods is
due primarily to a decrease in revenue from temperature-sensitive customers of
$10,918,000 (31%), $20,132,00 (33%), and $17,669,000 (23%), respectively, for
the three, six, and twelve month periods with a corresponding decline in volumes
delivered to these customers of 2,283,000 (8%), 10,658,000 (20%), and 10,773,000
(16%) therms. The decline in revenues can be attributed, in part, to the lower
prices of natural gas experienced during this year's heating season as compared
to last year. 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 and second quarters of fiscal 2002 as
compared with the prior year periods. 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. Also contributing to the decline in revenues and volumes was weather
that was 3% warmer than normal and 20% warmer than the prior year period.
Additionally, the number of temperature-sensitive customers declined 1% during
the first and second quarters of 2002 as compared to the same prior year
periods. The decline from last year can be attributed to customers who were
disconnected during fiscal 2001 for nonpayment and did not restore their service
as of March 31, 2002.
Revenue from gas sales to large commercial and industrial customers decreased
$1,622,000 (47%), $2,775,000 (46%), and $2,278,000 (24%), respectively, for the
three, six, and twelve month periods ended March 31, 2002. Volumes delivered to
these customers declined 665,000 (18%), 1,675,000 (23%), and 2,925,000 (21%)
therms due to a general decline in usage attributed to economic conditions.
Additionally, for all current year periods referenced, 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, increased $165,000 (9%) for the
three month period ended March 31, 2002 and declined $170,000 (4%) and $615,000
(7%), respectively, for the six and twelve month periods ended March 31, 2002 as
compared to the same periods in fiscal 2001. 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 is the primary reason for the decrease in
revenues in the six and twelve month periods. Volumes transported to customers
remained consistent for the three months ended March 31, 2002 as compared to the
same period in 2001, but decreased 32% and 9%, respectively, for the six and
twelve month periods. In addition to the International Paper closure,
12
transportation volumes for the six and twelve month periods ended March 31, 2002
were impacted by the Corus Group plc (Corus, formerly known as British Steel)
plant closure in late October 2000. Because of minimum payment provisions of the
contract with Corus, the Corus plant 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.
Distribution margins increased $2,103,000 (15%), $3,695,000 (14%), and
$2,959,000 (7%) for the three, six, and twelve month periods, respectively, as
compared to the same prior year periods primarily as a result of the general
rate increase which became effective October 2, 2001.
The following table summarizes gas distribution margins for the three, six, and
twelve-month periods ended March 31, 2002 and 2001 and the related volumes
delivered to customers.
<Table>
<Caption>
THREE MONTHS SIX MONTHS TWELVE MONTHS
ENDED MAR. 31, ENDED MAR. 31, ENDED MAR. 31,
------------------------ ------------------------ ------------------------
In Thousands: 2002 2001 2002 2001 2002 2001
- ------------- ---------- ---------- ---------- ---------- ---------- ----------
Natural Gas Sales and Transportation Revenues $ 28,281 $ 40,493 $ 49,563 $ 72,405 $ 76,786 $ 97,105
Cost of Natural Gas (10,681) (24,374) (16,934) (42,307) (26,644) (48,919)
Revenue Taxes (1,410) (2,032) (2,424) (3,588) (3,724) (4,727)
---------- ---------- ---------- ---------- ---------- ----------
NATURAL GAS SALES AND TRANSPORTATION MARGINS
(EXCLUDING BAY GAS) $ 16,190 $ 14,087 $ 30,205 $ 26,510 $ 46,418 $ 43,459
========== ========== ========== ========== ========== ==========
Natural Gas Sales Volumes (Therms)
Temperature-Sensitive Customers 25,727 28,010 41,596 52,254 55,071 65,844
Commercial and Industrial - Large 3,011 3,676 5,613 7,288 10,898 13,823
---------- ---------- ---------- ---------- ---------- ----------
Total Natural Gas Sales Volumes 28,738 31,686 47,209 59,542 65,969 79,667
Natural Gas Transportation Volumes (Therms) 100,455 97,450 184,303 195,033 371,083 389,141
---------- ---------- ---------- ---------- ---------- ----------
TOTAL DELIVERIES (EXCLUDING BAY GAS) (THERMS) 129,193 129,136 231,512 254,575 437,052 468,808
========== ========== ========== ========== ========== ==========
</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. 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. Management currently
believes that the date for commencement of operations of the second storage
cavern, originally anticipated to be in December 2002, will be no later than
April 1, 2003. The Company does not expect the delayed commencement of
operations to have a material effect on its financial condition or results of
operations.
13
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 pipelines.
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 $981,000 (111%), $1,611,000 (91%), and $1,833,000 (51%),
respectively, for the three, six, and twelve month periods ended March 31, 2002
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 in November 2001 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 that is
being amortized over a nineteen-month option period.
MERCHANDISING
Merchandising sales revenues increased $186,000 (30%), $187,000 (12%), and
$224,000 (8%) for the three, six, and twelve months ended March 31, 2002 as
compared to the same periods last year due, in part, to an increase in revenues
from the sale of natural gas generators and sales from the specialty stores. In
addition, for the three and six month periods ended March 31, 2002, sales of
natural gas and electric appliances also increased as compared to the same
periods last year.
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. Other
revenues also include revenues from engineering consulting, operations training,
pipeline corrosion protection services and gas marketing services. Other
revenues decreased $37,000 (10%), $15,000 (2%), and $160,000 (11%) for the
three, six, and twelve months ended March 31, 2002 due to a general decline in
the various categories outlined above which were partially offset during the
three and six month periods by an increase in revenues associated with pipeline
corrosion protection services.
14
OPERATING EXPENSES
Operations and maintenance expenses increased $446,000 (8%), $652,000 (6%), and
$439,000 (2%), respectively, for the three, six, and twelve month periods ended
March 31, 2002, as a result of the expansion of Bay Gas' operations and 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, six, and twelve month periods
were due to increased investment in property, plant and equipment 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 taxes decreased $463,000 (17%), $943,000 (19%), and $598,000
(8%) for the three, six, and twelve months ended March 31, 2002 due primarily to
decreases in business license taxes associated with decreases in gas revenues.
OTHER INCOME AND EXPENSES
Interest expense decreased $11,000 (1%) for the three-month period ended March
31, 2002 due to a decline in the average short term borrowing rate. Interest
expense increased $592,000 (17%) and $2,332,000 (39%), respectively, for the six
and twelve month periods ended March 31, 2002 due primarily to the issuance of
$55 million of Bay Gas Senior Secured Notes (see "Liquidity and Capital
Resources" below) in December 2000.
Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs increased $75,000 (21%), $579,000 (145%), and $1,851,000 (411%),
respectively, for the three, six, and twelve month periods ended March 31, 2002
due primarily to the construction of Bay Gas' second storage cavern and pipeline
projects.
Interest income decreased $461,000 (86%), $467,000 (64%), and $235,000 (24%) for
the three, six, and twelve month periods ended March 31, 2002 due primarily to a
decline in the amount of the unused portion of debt issuance proceeds of Bay Gas
available for investment.
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 increased $63,000 (44%) and $13,000
(3%), respectively, for the three and six month periods ended March 31, 2002
compared to the same periods in 2001. The three-month increase was due to
increased pre-tax earnings from both Bay Gas and SGT; however, for the six-month
period, Bay Gas' improved earnings were partially offset by a decline in SGT
earnings for the six-month period. For the twelve month period, minority
interest decreased $119,000 (15%) due partially to a decrease in pre-tax
earnings from SGT
15
and due to the reduction in Olin Corporation's limited partnership interest in
Bay Gas from 12.5% to 9.1% in December 2000.
Income tax expense fluctuates with the changes in income before income taxes.
Income tax expense increased $716,000 (34%), $1,373,000 (37%), and $1,041,000
(21%) for the three, six, and twelve month periods ended March 31, 2002.
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
$11,909,000 and $9,752,000, respectively, for the six months ended March 31,
2002 and 2001. The increase in cash flow from operating activities provided
$2,157,000 more than the prior year due primarily to an increase in net income,
a decline in accounts receivable, and the option payment Bay Gas received during
the first quarter of 2002 classified as unearned revenue, all of which were
partially offset by increased payments on accounts payable.
Cash used by investing activities reflects the capital-intensive nature of the
Company's business. Investing activities used cash of $8,749,000 and
$36,736,000, respectively, for the six months ended March 31, 2002 and 2001. In
addition to the Company's regular construction program for the distribution
business, Bay Gas completed two pipeline projects in 2001 and Mobile Gas
completed expansion projects in 2001 which included providing transportation
services to a new co-generation facility and a 10-mile pipeline that expanded
its system into Baldwin County. Bay Gas' temporary investments of $3.0 million
from the unused proceeds of the December 2000 debt issuance matured in December
2001. In the six months ended March 31, 2001, Bay Gas invested $18.7 million of
the December 2000 debt offering discussed below.
Cash used by financing activities was $7,311,000 for the six-month period ended
March 31, 2002 and for the six months ended March 31, 2001, financing activities
provided cash of $35,872,000. 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
16
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 long-term purchase contracts to lock-in prices
for a majority of its expected gas sales during the upcoming winter heating
season.
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 March 31, 2002, 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. In January of 2002, the Company obtained a term loan in the amount of
$5,000,000 which is due August 1, 2002. At March 31, 2002, the Company had
$15,065,000 available for borrowing on its revolving credit agreement. The
increase from September 30, 2001 of $8,300,000 in available funds on the
revolving credit agreement is due partially to the $3,274,000 option agreement
payment received by Bay Gas discussed above and the $5,000,000 proceeds from the
term loan due August 1, 2002.
The table below summarizes the Company's contractual obligations and commercial
commitments as of March 31, 2002:
<Table>
<Caption>
FISCAL YEARS
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR 2006 AND
CONTRACTUAL OBLIGATIONS 2002 2003 2004 2005 THEREAFTER
------------ ------------ ------------ ------------ ------------
SHORT-TERM BORROWINGS $ 5,000,000 $ -- $ -- $ -- $ --
LINE OF CREDIT -- 4,935,000 -- -- --
LONG-TERM DEBT 159,000 3,433,000 5,496,000 5,702,000 75,961,000
GAS SUPPLY CONTRACTS 2,462,000 6,371,000 5,364,000 5,364,000 26,559,000
</Table>
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
17
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 March 31, 2002 the Company had
approximately $90.8 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.
18
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.
ENERGYSOUTH, INC.
-----------------
(Registrant)
Date: May 06, 2002 /s/ John S. Davis
------------ -----------------------------------------
John S. Davis
President and
Chief Executive Officer
Date: May 06, 2002 /s/ Charles P. Huffman
------------ -----------------------------------------
Charles P. Huffman
Senior Vice President and
Chief Financial Officer
19