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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
For the fiscal year ended September 30, 1995 Commission File
Number 0-234
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Mobile Gas Service Corporation
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(Exact name of registrant as specified in its charter)
Alabama 63-0142930
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(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2828 Dauphin Street, Mobile, Alabama 36606
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (334) 476-2720
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
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None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock ($2.50 par value)
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(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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The aggregate market value of Common Stock, Par Value $2.50 per share,
held by non-affiliates (based upon the average of the high and low prices as
reported by NASDAQ on November 30, 1995) was approximately $71,899,691.
As of November 30, 1995, there were 3,213,394 shares of Common Stock,
Par Value $2.50 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders on January 26, 1996 are incorporated by reference into Part III.
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PART I
Item 1. Business.
GENERAL
Mobile Gas Service Corporation (together with its subsidiaries, the
"Company" or "Registrant", and exclusive of its subsidiaries, "Mobile Gas") was
incorporated under the laws of the State of Alabama in 1933. The Company is
engaged in the purchase, distribution, sale and transportation of natural gas
to approximately 100,000 residential, commercial and industrial customers in
southwest Alabama, including the City of Mobile and adjacent areas. The
Company has increased its customer base from approximately 84,900 peak-month
customers in fiscal 1989 through the acquisition of the gas distribution system
of the City of Bayou La Batre in fiscal 1990, which added approximately 2,400
customers, and the acquisition of certain assets of the Utilities Board of the
Town of Citronelle in fiscal 1993, which added almost 8,000 customers.
Additional growth has been accomplished through marketing of Company services
to new construction and existing households and businesses. The Company's
service territory covers approximately 300 square miles. Mobile Gas is also
involved in merchandise sales, specifically sales of natural gas appliances.
MGS Energy Services, Inc. ("MGS Energy"), a wholly-owned subsidiary,
was incorporated in March 1983. Through MGS Energy, the Company provides
contract and consulting work for utilities and industrial customers. MGS
Energy owns a 51% interest in Southern Gas Transmission Company ("SGT"), an
Alabama general partnership which was formed in November 1991. SGT was
established to provide transportation services to the facilities of Alabama
River Pulp Company, Inc. During fiscal year 1992, SGT constructed and began
operating a 50-mile pipeline from the facilities of Koch Gateway Pipeline
Company ("Koch"), formerly United Gas Pipe Line Company, near Flomaton, Alabama
to the facilities of Alabama River Pulp Company, Inc. in Claiborne, Alabama.
MGS Storage Services, Inc. ("MGS Storage"), a wholly-owned subsidiary,
was incorporated on December 4, 1991. MGS Storage and MGS Energy formed Bay
Gas Storage Company, Ltd. ("Bay Gas"), an Alabama limited partnership, on
January 13, 1992, with MGS Storage as general partner and MGS Energy as the
initial limited partner. MGS Storage and MGS Energy initially held partnership
interests of 87 1/2% and 12 1/2%, respectively, in Bay Gas. As of September
12, 1994, MGS Energy's 12 1/2% limited partnership interest was transferred to
Olin Corporation ("Olin"). Bay Gas provides for the storage and delivery of
natural gas for Mobile Gas. Bay Gas also markets its storage services to other
customers.
MGS Marketing Services, Inc. ("MGS Marketing"), a wholly-owned
subsidiary, was incorporated on March 5, 1993 to assist existing and potential
customers in the purchase of natural gas.
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CUSTOMERS
Of the approximately 100,000 customers of the Company, approximately
95% are residential customers. In the fiscal year ended September 30, 1995,
approximately 66% of the Company's gas revenues came from residential
customers, 15% from commercial sales, 8% from industrial sales and 11% from
transportation services. Residential sales in 1995 accounted for approximately
14% of the total volume of gas delivered to the Company's customers, with
commercial, industrial and transportation deliveries accounting for
approximately 4%, 4% and 74%, respectively. The ten largest customers of the
Company accounted for approximately 13% of the Company's gross margin in fiscal
1995, with the largest accounting for approximately 3%. For further
information with respect to revenues from and deliveries to the various
categories of the Company's customers, see Item 6, "Selected Financial Data".
In May 1995, the Company entered into a long-term contract with
Tuscaloosa Steel Corporation to transport natural gas to a proposed new iron
ore reduction facility to be located adjacent to downtown Mobile. When fully
operational in 1997, that facility is expected to use approximately 35,000
MMBTU of gas per day, making Tuscaloosa Steel the largest volume user of
natural gas on the Company's system. To fulfill its obligations under such
contract, the Company will construct approximately five miles of new high
pressure pipeline and upgrade certain other segments of its existing
facilities, representing a capital commitment of nearly $10,000,000. The
Company expects construction to be completed in mid-1997.
GAS SUPPLY
The Company is directly connected to Mobil's natural gas processing
plant in South Mobile county and to Shell's Yellowhammer Plant. Mobile Gas has
contracted for a portion of its firm supply directly with these producers. For
the fiscal year ended September 30, 1995, the Company obtained approximately
70% of its gas supply from sources located in the Mobile Bay area, with the
balance being obtained from interstate sources.
To encourage more competition among natural gas suppliers, FERC issued
Order 636 in 1992. Order 636 required interstate pipelines to unbundle or
separate gas sales, transportation and storage services. With the
implementation of Order 636, most pipelines discontinued their traditional
merchant function resulting in each local distribution company becoming
responsible for obtaining all of its gas supply in the open market. While
unbundling of these services allows a local distribution company, such as
Mobile Gas, more flexibility in selecting and managing the type of services
required to provide its customers with the lowest possible priced gas while
maintaining a reliable gas supply, it also places additional responsibility on
a distribution company to obtain its natural gas supply in the open market on a
timely basis to fulfill commitments during peak demand periods. The Company
believes that the Bay Gas storage facility, which had already been planned by
the Company prior to Order 636, will enhance its ability to respond to the
changes in the industry brought about by Order 636.
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The Company has a current peak day firm requirement of 129,870 MMBTUs.
Firm supply needs of 80,000 MMBTU/day are expected to be met through the
withdrawal of gas from the storage facility owned by Bay Gas. The Company also
has firm supply contracts with Mobil for 10,000 MMBTU/day through October 31,
2000 and Shell for 13,000 MMBTU/day through December 31, 1996, through the
direct connections with their processing plants. Additionally, the Company has
contracted for firm transportation and storage service ("No-Notice Service")
for 26,870 MMBTU/day from Koch under agreements extending to April 1, 1999. In
conjunction with the No-Notice Service, the Company has contracted with Koch
Gas Services, an affiliate of Koch, to provide firm gas supply to April 1,
1997.
GAS STORAGE
Construction of the storage facility was completed in 1994. The
cavern is designed to hold up to 3.7 BCF of natural gas. Approximately 1.3 BCF
of the gas to be injected into the storage cavern, called "base gas," will
remain in the cavern to provide sufficient pressure to maintain cavern
integrity, and the remainder, approximately 2.4 BCF, represents working storage
capacity. Compressors are required to inject gas into the storage facility
and, because the moisture content of stored gas must be lowered to reach the
requisite standard for use, dehydrators are required to treat gas upon
withdrawal.
During 1995, a pipeline interconnect with Florida Gas Transmission, an
interstate pipeline company, was completed. Bay Gas has also entered into an
agreement with Koch for a pipeline interconnection which will further expand
access to interstate markets. The Koch interconnect is expected to be
completed in December 1995.
Mobile Gas entered into a Gas Storage Agreement with Bay Gas under
which Bay Gas agreed to provide storage of approximately one-third of the
working storage capacity for an initial period of 20 years. The cavern
currently has sufficient injection and withdrawal capacity to meet the
requirements of the Mobile Gas storage contract. Most of the storage
facility's current injection capacity of 35,000 MMBTU/day and withdrawal
capacity of 107,000 MMBTU/day will be utilized under the Mobile Gas storage
contract, under which injection capacity of 15,000 MMBTU/day and withdrawal
capacity of 80,000 MMBTU/day are committed to Mobile Gas. The unused injection
and withdrawal capacity are not anticipated to be sufficient to allow Bay Gas
to provide services to any substantial additional customers; however, Bay Gas
has entered into several contracts to provide interruptible storage service.
In the event that additional customers contract for a substantial
portion of the remaining capacity of the storage facility, the Company would
expend additional funds to add injection and withdrawal capacity to serve such
customers. There can be no assurance that Bay Gas will enter into any such
contracts.
Under its agreements with Olin, Bay Gas has the right to develop up to
2 additional caverns on the property leased from Olin. Olin has the right,
from the time of
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commencement of operations at the storage facility until Bay Gas makes certain
required payments to Olin prior to commencement of the construction of a second
cavern, to increase its ownership interest in Bay Gas by an additional 12 1/2%,
by purchasing from MGS Storage such additional percentage at a price based on
the book equity of MGS Storage in Bay Gas. The Company is unable to determine
at this time whether additional caverns will be developed at the storage
facility, but anticipates that an additional cavern would be considered if and
when contracts are obtained for the entire capacity of the first cavern.
COMPETITION
Gas Distribution Competition. The Company is not in significant
direct competition with respect to the retail distribution of natural gas to
residential and small commercial customers within its service area.
Electricity competes with natural gas for such uses as cooking, water heating
and space heating.
The Company's large commercial and industrial customers either buy
natural gas from the Company or have contracted with the Company for
transportation of customer-owned gas. With certain limited exceptions the
Company's rates are structured so that the gross margin is the same whether gas
is sold or transported. Some industrial customers have the capability to use
either fuel oil, coal, wood chips or natural gas, and choose their fuel
depending upon a number of factors, including the availability and price of
such fuels. In recent years, the Company has had adequate supplies so that
interruptible industrial customers that are capable of using alternative fuels
have not had supplies curtailed, and the price of natural gas has remained at
levels such that, in most cases, these industrial customers have chosen to use
natural gas rather than other fuels. The Company's rate tariffs include a
competitive fuel clause which allows the Company to adjust its rates to certain
large commercial and industrial customers in order to compete with alternative
energy sources. However, there can be no assurance that the current
competitive advantage of natural gas over alternative fuels will continue. See
"Rates and Regulation."
Due to the close proximity of various pipelines and gas processing
plants to the Company's service area, there exists the possibility that current
or prospective customers could install their own facilities and connect
directly to a supply source and thereby "bypass" the Company's service. The
Company believes that because it has worked closely with major industrial
customers to meet those customers' needs, and because of its ability to provide
competitive pricing under its rate tariffs, none of the Company's customers
have bypassed its facilities to date. Although there can be no assurance as to
future developments, the Company intends to continue its efforts to reduce the
likelihood of bypass by offering competitive rates and services to such
customers.
Gas Storage Competition. A number of types of competitors may provide
services like or in competition with those of Bay Gas. These include, among
others, natural gas storage facilities, natural gas aggregators (who rebundle
services ordered unbundled by FERC Order 636), and natural gas pipelines. Bay
Gas believes that its strategic
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geographic location and its ability to charge market-based rates for interstate
storage services will enable it to effectively compete with such competitors.
See "Rates and Regulation."
RATES AND REGULATION
The Company's natural gas distribution operations are under the
jurisdiction of the Alabama Public Service Commission ("APSC"). The APSC
approves rates which are intended to permit the recovery of the cost of service
including a return on investment. Rates are determined by reference to rate
tariffs approved by the APSC in traditional rate proceedings or, for certain
large customers, on a case-by-case basis. In addition, pursuant to APSC order,
rates for a limited number of large industrial customers are determined on a
privately negotiated basis. The APSC also approves the issuance of debt and
equity securities and has supervision and regulatory authority over service,
equipment, accounting, and other matters.
During the year ended September 30, 1995, the Company petitioned the
APSC for an increase in rates. On November 27, 1995, the APSC approved an
increase in rates designed to generate an additional $6,890,000 in annual
revenues, excluding the effects of changes in the base price of gas. The
increased rates went into effect on December 1, 1995. The rates for service
rendered by the Company are on file with the APSC.
The Company's tariffs include a purchased gas adjustment clause which
allows the Company to pass on to certain of its customers increases or
decreases in gas costs from those reflected in its tariff charges. Adjustments
under such clauses require periodic filings with the APSC but do not require a
general rate proceeding. Under the purchased gas adjustment clause, the
Company has a competitive fuel clause which gives it the right to adjust its
rates to certain large customers in order to compete with alternative energy
sources. Any margin lost as a result of competitive fuel clause adjustments is
recoverable from its other customers.
Gas deliveries to certain industrial customers are subject to
regulation by the APSC through contract approval. The operations of SGT, which
consist only of intrastate transportation of gas, are also regulated by the
APSC.
Bay Gas is a regulated utility governed under the jurisdiction of the
APSC, which issued a Certificate of Public Convenience and Necessity to Bay Gas
on May 4, 1992. As a regulated utility, Bay Gas' intrastate storage contracts
are subject to APSC approval. Operation of the storage cavern and well-head
equipment are subject to regulation by the Oil and Gas Board of the State of
Alabama. On March 25, 1994, FERC issued an order approving Bay Gas'
application for permission to charge market-based rates for interstate storage
services. The FERC order enables Bay Gas to provide storage services to
entities outside of the State of Alabama. Market-based rates allow Bay Gas to
respond to market conditions and minimizes regulatory involvement in the
setting of its rates for storage services.
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The Company has been granted nonexclusive franchises to construct,
maintain and operate a natural gas distribution system in the areas in which it
operates. Except for the franchise granted by Mobile County, Alabama, which
has no stated expiration date, the franchises have expiration dates, the
earliest of which is in 2007. The Company has no reason to believe that the
franchises will not be renewed upon expiration.
SEASONAL NATURE OF BUSINESS
The nature of the Company's business is highly seasonal and
temperature-sensitive. As a result, the Company's operating results in any
given period reflect, in addition to other matters, the impact of weather, with
colder temperatures resulting in increased sales by the Company. The
substantial impact of this sensitivity to seasonal conditions is reflected in
the Company's results of operations and the Company anticipates that it will
continue to be so reflected in future periods.
Due to the seasonality of the Company's business, the generation of
working capital is greatly impaired during the summer months because of reduced
gas sales. Cash needs during this period are generally met through short-term
financing arrangements or the reduction of temporary investments as is common
in the industry.
ENVIRONMENTAL ISSUES
The Company is subject to various federal, state and local laws and
regulations relating to the environment, which have not had a material effect
on the Company's financial position or results of operations.
Like many gas distribution companies, prior to the widespread
availability of natural gas, the Company manufactured gas for sale to its
customers. In contrast to some other companies which operated multiple
manufactured gas plants, the Company and its predecessor operated only one such
plant, which discontinued operations in 1933. The process for manufacturing
gas produced by-products and residuals, such as coal tar, and certain remnants
of these residuals are sometimes found at former gas manufacturing sites.
The Company conducted a preliminary assessment in 1994 of its former
gas plant site and has tested certain waters in the vicinity of the site. The
Company developed and has implemented a plan for the site based on the advice
of its environmental consultants, which involves securing and monitoring the
site, and continued testing. Based on the results of tests to date, the
Company does not believe that the site currently poses any threat to human
health or the environment. While no conclusion can be reached at this time as
to whether any further remedial action might ultimately be required, based on
currently available information, it is believed that any costs with respect to
the site are likely to be immaterial, and the Company has therefore established
no reserve for such costs in its financial statements. The Company intends
that, should further investigation or changes in environmental laws or
regulations require material expenditures for investigation,
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remediation, or clean-up with regard to the site, it would apply to the APSC
for appropriate rate recovery of such costs. However, there can be no
assurance that the APSC would approve the recovery of such costs or the amount
and timing of any such recovery.
EMPLOYEES
Mobile Gas employed 270 full-time employees as of September 30, 1995.
Of these, approximately 38% are represented by the Oil, Chemical and Atomic
Workers International Union, Local No. 3-541. As of September 30, 1995 Bay Gas
employed five full-time employees. The Company believes that it enjoys
generally good labor relations.
Item 2. Properties.
The Company's properties consist of distribution, general,
transmission, and storage plant. The distribution plant is located in Mobile
County, Alabama and is used in the distribution of natural gas to the Company's
customers. The distribution plant consists primarily of mains, services,
meters and regulating equipment, all of which are adequate to serve the present
customers. The distribution plant is located on property which the Company is
entitled to use as a result of franchises granted by municipal corporations, or
on easements or rights-of-way.
The general plant consists of land, structures (with aggregate floor
space of approximately 118,000 square feet), office equipment, transportation
equipment and miscellaneous equipment, all located in Mobile County, Alabama.
The transmission plant consists of a pipeline of approximately 50
miles and related surface equipment which is used in the transmission of
natural gas by SGT and is located primarily in Monroe County, Alabama. The
transmission plant is located on easements or rights-of-way.
The storage plant, consisting of an underground cavern for the storage
of natural gas and related pipeline and surface facilities, is located
primarily in Washington County, Alabama. The storage plant is constructed on a
leasehold estate with an initial term of 50 years, which will expire in 2040,
and which may be renewed at the Company's option for an additional term of 20
years.
Substantially all of the property of the Company is pledged as
collateral for the long-term debt.
Item 3. Legal Proceedings.
FERC Order 636 permits pipelines to recover from their customers the
transition costs of restructuring their services. On October 16, 1995, Koch
filed tariff sheets which have been approved by the FERC to be effective
November 1, 1995, which reflect recovery
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of transition costs over a two- year period through a reservation surcharge.
Based on the reservation surcharge in Koch's tariff sheets and the Company's
contract reservation volumes over the next two years, the Company's share of
transition costs is estimated to be $43,000.
Take-or-pay costs represent (i) Koch's costs of buying out gas
contracts with its producer-suppliers (those contracts contain clauses
requiring Koch either to take the gas or to pay for it even if not taken) and
(ii) the costs of buying down Koch's commitments under those contracts. As a
result of a take-or-pay settlement between Koch and its customers entered into
during the year ended September 30, 1993, the Company recorded a liability of
$860,000 during 1993. An additional liability of $679,000 was recorded during
the year ended September 30, 1994 as a result of settlements filed in 1994
which resolved all take-or-pay cost recovery issues. The above settlements
have been approved by the FERC, and the Company has recovered all take-or-pay
costs from its customers as allowed by the APSC. During the year ended
September 30, 1995, the Company paid all remaining unpaid take-or-pay costs as
required by such settlements.
Although the Company is not involved currently in material litigation,
the Company may from time to time be involved in litigation in the ordinary
course of its business.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following list
is included as an unnumbered Item in Part I of this Report in lieu of being
included in the proxy statement to be filed with the Securities and Exchange
Commission.
Information relating to executive officers who are also directors and
nominees for election as directors is included under the caption "Election of
Directors" contained in the Company's definitive proxy statement with respect
to its 1996 Annual Meeting of Stockholders and is incorporated herein by
reference.
The following is a list of names and ages of all of the executive
officers who are not also directors or nominees for election as directors of
the Registrant indicating all positions and offices with the Registrant held by
each such person and each such person's principal occupations or employment
during the past five years. All such persons have been elected for terms
expiring in January 1996. Officers serve at the pleasure of the Board of
Directors of the Company.
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Business Experience
Name, Age, and Position During Past 5 Years
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W. G. Coffeen, III, 48 Appointed in 1986
Vice President - Marketing;
Director/Vice President
MGS Marketing Services, Inc.
Gerald S. Keen, 59 Appointed in December 1989
Vice President - Operations;
Director/President - MGS Energy
Services, Inc.;
Director/President - MGS Storage
Services, Inc.
Charles P. Huffman, 42 Appointed in January 1995; Previously: Chief Financial
Vice President, Chief Officer (1993-1994); Treasurer (1991-1993); Assistant
Financial Officer, Treasurer, Treasurer (1980-1991)
and Assistant Secretary;
Treasurer - MGS Energy Services, Inc.;
Director/Treasurer - MGS Storage
Services, Inc.;
Director/Treasurer - MGS Marketing
Services, Inc.
G. Edgar Downing, Jr., 39 Appointed in January 1995; Previously: Secretary and
Vice President, Secretary and General General Counsel (1993-1994); Assistant Secretary (1991-
Counsel; Director/Secretary - MGS Energy 1993), General Attorney (1990-1993)*
Services, Inc.; Director/
Secretary - MGS Storage
Services, Inc.;
Secretary - MGS Marketing Services, Inc.
A. H. Tenhundfeld, Jr., 48
Vice President - Administration and Appointed in March 1995; Previously: Vice President -
Planning Finance and Treasurer, Dravo Corporation (December 1989-
February 1995)
* Mr. Downing is the son-in-law of Gaylord C. Lyon, a Director of the Company.
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PART II
Item 5. Market for the Registrant's Common Stock Equity and Related
Stockholder Matters.
The Registrant's Common Stock, $2.50 par value, is traded on the
NASDAQ National Market under the symbol "MBLE". As of December 15, 1995 there
were 1,630 holders of record of the Company's common stock. Information
regarding Common Stock dividends and the bid price range for Common Stock
during the periods indicated is as follows:
Per Share
Dividends Declared Bid Price Range
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Quarter Ended 1995 1994 1995 1994
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High Low High Low
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December 31 $.26 $.25 $22 1/4 $19 1/4 $26 $24 3/4
March 31 .26 .25 20 19 1/4 28 1/2 25 1/4
June 30 .27 .26 21 19 1/4 28 3/4 25 3/4
September 30 .27 .26 21 1/2 20 1/4 26 1/4 21 1/4
Over-the-counter quotations reflect inter-dealer prices without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
While the Board of Directors intends to continue the practice of
paying dividends quarterly, amounts and dates of such dividends as may be
declared will be dependent upon the Registrant's future earnings, financial
requirements, and other factors.
The Registrant'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. At September 30, 1995, under the
most limiting of such provisions, retained earnings in the amount of
$10,143,177 was unrestricted.
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Item 6. Selected Financial Data.
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Years Ended September 30, 1995 1994 1993 1992 1991
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SELECTED FINANCIAL DATA (in thousands, except per share data)
Gas Revenues $ 56,204 $ 60,470 $ 54,292 $ 51,166 $ 48,337
Merchandise Sales and Jobbing 2,907 2,824 2,525 2,366 2,174
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Total Operating Revenues $ 59,111 $ 63,294 $ 56,817 $ 53,532 $ 50,511
Net Income $ 4,028 $ 4,893 $ 4,920 $ 5,368 $ 4,051
Preferred Stock Dividends 5 29 29 29
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Earnings Applicable to Common Stock $ 4,028 $ 4,888 $ 4,891 $ 5,339 $ 4,022
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Earnings Per Share of Common Stock $ 1.26 $ 1.78 $ 1.79 $ 1.96 $ 1.48
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Cash Dividends Per Share of Common Stock $ 1.06 $ 1.02 $ .96 $ .90 $ .86
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Average Common Shares Outstanding 3,208 2,752 2,733 2,726 2,718
Total Assets $ 136,567 $ 134,529 $ 116,839 $ 80,531 $ 67,281
Long-Term Debt Obligations $ 57,328 $ 59,047 $ 60,416 $ 26,833 $ 14,765
STATISTICAL
Gas Revenues (in thousands):
Sales:
Residential $ 36,106 $ 40,535 $ 35,204 $ 33,023 $ 30,126
Commercial 8,664 9,076 7,723 7,052 6,930
Industrial-Firm 723 767 727 644 1,575
Industrial-Interruptible 3,577 3,554 4,123 4,760 4,879
Transportation 6,172 5,881 5,927 5,104 4,299
Storage Other Than Intercompany 245 13
Other 717 644 588 583 528
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Total $ 56,204 $ 60,470 $ 54,292 $ 51,166 $ 48,337
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Delivery to Customers (in thousand therms):
Gas Sales:
Residential 47,992 56,100 50,046 49,986 44,291
Commercial 15,982 16,794 14,888 14,688 14,034
Industrial-Firm 1,948 2,148 2,097 2,084 5,689
Industrial-Interruptible 13,275 12,566 17,099 23,077 23,883
Transportation 274,859 253,702 237,499 221,608 190,074
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Total 354,056 341,310 321,629 311,443 277,971
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Customers Billed (Peak Month):
Residential 94,822 94,424 91,936 84,640 83,485
Commercial 5,292 5,250 4,866 4,839 4,864
Industrial-Firm 13 13 11 12 12
Industrial-Interruptible 38 38 40 37 37
Transportation 29 31 30 30 29
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Total 100,194 99,756 96,883 89,558 88,427
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Average Use and Revenue Per
Residential Customer:
Gas Used (Therms) 512 602 574 597 536
Revenue $ 385 $ 435 $ 404 $ 394 $ 365
Revenue Per Therm $ .75 $ .72 $ .70 $ .66 $ .68
Degree Days (Annual Normal in 1995 and 1994 -1702;
1991 to 1993 - 1,695) (1) 1,331 1,837 1,611 1,689 1,302
NUMBER OF EMPLOYEES (END OF PERIOD) 270 260 243 238 243
Note: (1) The number of degrees that the daily mean temperature falls below 65
degrees F.
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
THE COMPANY
The Company's natural gas distribution operations are under the
jurisdiction of the Alabama Public Service Commission (APSC). The Company's
rate tariffs allow the cost of gas supplies and certain taxes to be passed
through to customers. These costs, therefore, ultimately have little impact on
the Company's earnings. Other costs, including a return on investment, must be
recovered through rates approved in traditional rate proceedings. (See Note 13
to the Consolidated Financial Statements.)
The nature of the Company's distribution business is highly seasonal
and temperature sensitive. As a result, in addition to other matters, the
Company's operating results in any given period reflect the impact of weather
through either increased or decreased sales volumes.
Bay Gas, which commenced operations in September 1994, is a regulated
utility governed under the jurisdiction of the APSC and as such, Bay Gas'
intrastate storage contracts are subject to APSC approval. In addition, by
Federal Energy Regulatory Commission order, Bay Gas is permitted to charge
market-based rates for interstate storage services.
RESULTS OF OPERATIONS
NET INCOME
The Company's net income for 1995 amounted to $4.0 million or $1.26
per share compared to $4.9 million or $1.78 per share for 1994. The 1995
decrease in net income reflects the impact of one of the warmest winters on
record in 1995 compared to a 1994 winter that was 7.9% colder than normal.
Earnings per share in 1995 were also impacted by the September 1994 issuance of
460,000 shares of Common Stock. The major portion of the proceeds from the
stock issuance were invested into Bay Gas which, in its first year of
operation, made only a limited contribution to net income. Currently, Bay Gas
has a contract with Mobile Gas to provide firm storage services and contracts
with third parties to provide interruptible storage services. Because certain
construction would be required to provide storage services to significant
additional customers, revenues from contracts with such customers, if any,
would not have a significant positive effect on the company's earnings per
share prior to fiscal 1997. There can be no assurance that Bay Gas will enter
into any such contracts. By APSC order, any losses from Bay Gas will not be
recoverable through increased rates to Mobile Gas customers.
Net income of $4.9 million or $1.79 per share was reported for 1993.
An increase from 1993 to 1994 in operating income of $902,000 was offset by an
increase in interest expense of $885,000.
13
14
OPERATING REVENUES
Gross revenues from the sale and transportation of natural gas totaled
$56.2 million in 1995, $60.5 million in 1994, and $54.3 million in 1993. The
decrease in 1995 gross revenues reflects the impact of warmer weather which was
27.5% warmer than 1994 and 21.8% warmer than normal. Gas volumes sold and
delivered to temperature sensitive customers, who are primarily residential and
small commercial customers, tend to fluctuate as a function of weather.
Temperature sensitive volumes decreased 13.0% in 1995, which resulted in a $4.8
million or 10.1% decrease in revenues from these customers as compared to 1994.
Offsetting the decrease in gas revenues from temperature sensitive customers
was a 7.9% increase in gas volumes sold and delivered in 1995 to industrial and
large commercial customers. Revenues from these customers increased $253,000 or
2.1% in 1995 as compared to 1994 as a result of increased plant utilization by
such customers. Another offset to the decrease in revenue from temperature
sensitive customers was the effect of the first full year of operation of Bay
Gas. Non-intercompany revenues from Bay Gas operations increased $232,000 in
1995 as compared to 1994.
The increase in gross revenues for 1994 compared to 1993 reflects the
effect of the first full year of operations of customers acquired from the
Utilities Board of the Town of Citronelle ("Citronelle") in May 1993. These
customers accounted for $2.7 million of the increase in revenues. Also
contributing to the increase in revenues was the effect of weather which in
1994 was 14.0% colder than 1993 and 7.9% colder than normal. As a result of the
colder weather and the acquisition of Citronelle, gas volumes sold and
delivered to temperature sensitive customers in 1994 increased 12.2% as
compared to 1993.
Merchandise sales and jobbing revenues were $2.9 million in 1995, $2.8
million in 1994, and $2.5 million in 1993. The increases for both years
resulted primarily from increased sales volumes.
EXPENSES
Cost of gas decreased $6.9 million or 27.5% in 1995 compared to 1994.
The 1995 decrease is primarily attributed to the Company's use of the Bay Gas
storage facility, as opposed to interstate pipeline companies' facilities, for
storage of gas which is used as a firm gas supply to ensure that a certain
amount of gas supply is available during peak demand periods. Amounts paid to
Bay Gas of $4.1 million for gas storage services, a component of gas costs,
have been eliminated in consolidation. Another factor in the 1995 decrease is
the 9.6% decrease in gas volumes sold to customers during 1995. Cost of gas
increased $2.9 million or 12.8% in 1994 compared to 1993 as a result of factors
discussed above which influenced gas revenues.
Cost of merchandise and jobbing decreased $49,000 or 2.2% in 1995
despite an increase in merchandise and jobbing revenue as a result of higher
profit margins realized
14
15
on 1995 sales. Cost of merchandise and jobbing increased $248,000 or 12.7%
primarily as a result of increased sales volumes reported in 1994.
Operations expense increased $913,000 or 6.1% in 1995 as compared to
1994. Of this increase, $647,000 is attributed to the first full year of Bay
Gas operations, with the remaining increase due to general inflation.
Operations expense increased $1.2 million or 8.5% in 1994 compared to 1993 as a
result of servicing additional customers acquired from Citronelle and the
colder weather experienced in 1994. Also contributing to the 1994 increase were
special promotional expenses.
Maintenance expense increased $241,000, or 19.3% in 1994 compared to
1993. The 1994 increase resulted from the additional customers acquired from
Citronelle and certain structural repairs made to buildings.
Depreciation expense increased $1.0 million or 26.0% in 1995 compared
to 1994 and $545,000 or 15.7% in 1994 compared to 1993. Increases for both
years were due to continued growth in depreciable plant in service.
Depreciation attributable to Bay Gas accounted for $776,000 of the increase in
1995, while assets acquired from Citronelle accounted for $393,000 of the
increase in 1994.
Taxes, other than income taxes, consist primarily of state and local
taxes which are based on gross revenues and fluctuate accordingly. These taxes
are passed through to customers and thus do not impact the Company's net
income. Another component of taxes, other than income taxes, is taxes paid on
property. Bay Gas property taxes and other taxes increased $362,000 as a result
of the first full year of operations. As a result, taxes other than income
taxes increased in 1995 compared to 1994 despite lower revenues in 1995.
Gross interest expense increased $66,000 or 1.2% in 1995 and $1.5
million or 37.3% in 1994. An increase in short-term borrowings accounted for
the 1995 increase while the Company's issuance of $12 million of 7.48% Series
First Mortgage Bonds in July 1993 and $22.5 million of 8.19% Guaranteed Senior
Secured Notes ("Bay Gas Notes") during 1993 accounted for the increase in 1994.
Interest on the Bay Gas Notes was capitalized during construction of the
storage facility and is reflected in the allowance for borrowed funds used
during construction, which has the effect of reducing net interest expense. As
a result of the commencement of Bay Gas operations in September 1994, interest
on the Bay Gas Notes was no longer capitalized during 1995, which increased net
interest expense by $2.0 million.
Higher interest income in 1993 results from earnings on the temporary
investment of the funds received upon issuance of the two First Mortgage Bonds
by the Company in advance of the funds being expended.
Income taxes fluctuated with the changes in pre-tax income. The
Company's effective tax rates in 1995, 1994, and 1993 were 36.0%, 36.4% and
35.9% respectively. Income tax expense is detailed in Note 7 to the
Consolidated Financial Statements.
15
16
EFFECTS OF INFLATION
Inflation impacts the prices the Company must pay for labor and other
goods and services required for operation, maintenance and capital
improvements. Changes in purchased gas costs are passed through to customers in
accordance with the approved provision of the Company's rate tariffs. Increases
in other costs must be recovered through timely filings for rate relief.
GAS SUPPLY
A primary goal of the Company is to provide gas at the lowest possible
cost while maintaining a reliable long-term supply. To accomplish this goal the
Company has diversified its gas supply by constructing and purchasing pipelines
to access the vast gas reserves in our area, both offshore and onshore. The
Company has also contracted with certain of these sources for firm supply. In
addition, the Company has completed construction of a storage cavern which
provides for a major portion of the Company's peak day needs. The storage
cavern commenced operations in September 1994 when the Company began to inject
gas for storage. The diversification of sources gives the Company more
flexibility to obtain gas at the most favorable prices. See Note 3 to the
Consolidated Financial Statements for a discussion of certain gas supply
issues.
ENVIRONMENTAL
The Company is subject to various federal, state, and local laws and
regulations relating to the environment, which thus far have not had a material
effect on the Company's financial position or results of operations. See Note
10 to the Consolidated Financial Statements for a discussion of certain
environmental issues.
CAPITAL RESOURCES AND LIQUIDITY
The Company's cash needs reflect the capital-intensive nature of its
business. The following table briefly describes capital expenditures in the
periods indicated:
Fiscal Years Ended September 30, (In thousands)
1995 1994 1993
------ ------ ------
System improvement and expansion $ 8,121 $ 8,187 $ 5,716
Gas system acquisition 11,603
Gas storage facility 2,917 19,810 7,923
------- ------- -------
Total $11,038 $27,997 $25,242
The Company generally relies on internally generated funds and
short-term borrowings to meet working capital requirements and temporarily
finance normal capital expenditures. Cash flows from operating activities were
lower in 1995 as compared to 1994
16
17
due primarily to decreased net income and the change in operating assets and
liabilities. These two factors which decreased cash flow were partially offset
by an increase in depreciation in 1995. The fluctuation in operating assets and
liabilities is generally the result of the timing of cash receipts and
payments. Funds provided by operations totaled $8.9 million in 1995,
representing 57% of the Company's cash needs during such period, the remainder
of which was obtained through reduction of temporary investments and cash
equivalents and by drawings upon the Company's revolving credit agreement.
Funds provided by operations totaled $13.0 million in 1994, representing 40% of
the Company's cash needs. Additional funding in 1994 was provided through
reduction of temporary investments and by the issuance of 460,000 shares of
Common Stock during September 1994. Funds provided by operations accounted for
24% of the Company's cash needs in 1993 with the remainder of the Company's
cash needs provided by the issuance of long-term debt.
In 1993, additional financing was required for the $11.6 million
purchase of a portion of the gas distribution system of Citronelle. Mobile Gas
issued a $4.1 million 9%, 20-year unsecured note to Citronelle for the purchase
and also issued $12.0 million in 7.48% Series First Mortgage Bonds due 2023,
which funded the cash portion of the purchase price related to the Citronelle
acquisition, as well as the early retirement of an aggregate principal amount
of $4.4 million of the 8% Series First Mortgage Bonds due 1997 and the 9.35%
Series First Mortgage Bonds due 1996.
The Bay Gas Storage facility is able to hold up to 3.7 billion cubic
feet ("BCF") of natural gas, of which approximately 2.4 BCF represents working
storage capacity and 1.3 BCF represents base gas to remain in the cavern to
provide sufficient pressure to maintain cavern integrity. Capital costs as of
September 30, 1995, which include an interconnect with Florida Gas
Transmission, an interstate pipeline company, were approximately $33.3 million
plus an additional $1.7 million for base gas. Funds for the development and
construction of the Bay Gas storage facility have come from private issuance of
the $22.5 million of Bay Gas Notes, pursuant to an Indenture of Mortgage which
secures the Bay Gas Notes. Additional funds have come from cash equivalents on
hand and Mobile Gas' issuance of 460,000 shares of Common Stock in September
1994, which generated net proceeds of $9.3 million.
Bay Gas has entered into an agreement with Koch Gateway Pipeline
Company for a pipeline interconnection which will further expand access to
interstate markets. Expected to be completed in December 1995 at a cost to Bay
Gas of $1,000,000, this interconnect will be funded through an equity
contribution from the Bay Gas partners to Bay Gas. Funds for such equity
contribution by Mobile Gas will be obtained from short-term bank borrowings.
Currently, Bay Gas has a contract with Mobile Gas to provide storage
of approximately one-third of the working storage capacity of the storage
facility or approximately .8 BCF. Additionally, Bay Gas has entered into
several contracts to provide interruptible storage service. Should Bay Gas
enter into significant contracts to provide firm
17
18
storage services, additional equipment, which will consist primarily of
compressors and dehydrators, will need to be added to give the storage facility
sufficient injection and withdrawal capacity. The Company estimates that up to
$6.7 million in capital expenditures, plus $850,000 for additional base gas
(based on current costs) would be required to efficiently utilize all the
remaining storage capacity of the storage facility. The Company ultimately
intends to finance the cost of these additional facilities by issuing up to
$7.5 million in debt under the Bay Gas Indenture and through an equity
contribution from the Bay Gas partners to Bay Gas. Funds for such equity
contribution by Mobile Gas would be obtained from short-term bank borrowings
and funds provided by operations. The Company anticipates that additional base
gas costs would also be financed from short-term bank borrowings.
During 1995, Mobile Gas entered into a long-term contract with an
industrial customer to transport gas to the customer's facility. In order to
service the customer by mid 1997, an estimated $10 million in new facilities
will be constructed by the Company. At September 30, 1995, $150,000 had been
expended on constructing these facilities.
In addition to the cash requirements of Bay Gas, the Company
anticipates fiscal 1996 capital expenditures related to the Company's regular
construction program to be $6.4 million. Funds for the Company's cash needs
other than Bay Gas are expected to come primarily from internal cash generation
and draws upon the Company's unused committed lines of credit totaling $18.2
million at September 30, 1995. Management believes it has adequate financial
flexibility to meet its anticipated cash needs in the foreseeable future.
Item 8. Financial Statements and Supplementary Data.
The financial statements and financial statement schedules and the
Independent Auditors' Report thereon filed as part of this report are listed in
the "Mobile Gas Service Corporation and Subsidiaries Index to Financial
Statements and Schedules" at Page F-1, which follows Part IV hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information under the captions "Election of Directors" and
"Information Regarding the Board of Directors" contained in the Company's
definitive proxy statement with respect to its 1996 Annual Meeting of
Stockholders is incorporated herein by reference.
18
19
For information with respect to executive officers of the Registrant,
see "Executive Officers of the Registrant" at the end of Part I of this Report.
Information under the caption "Reports Under Section 16 of the
Securities and Exchange Act" contained in the Company's definitive proxy
statement with respect to its 1996 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 11. Executive Compensation.
Information under the caption "Executive Compensation" contained in
the Company's definitive proxy statement with respect to its 1996 Annual
Meeting of Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information under the caption "Security Ownership of Certain
Beneficial Owners and Management" contained in the Company's definitive proxy
statement with respect to its 1996 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Not Applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a), (d) Financial Statements and Financial Statement Schedules
See "Mobile Gas Service Corporation and Subsidiaries
Index to Financial Statements and Schedules" at page
F-1, which follows Part IV hereof.
(3) Exhibits - See Exhibit Index on pages E-1 through
E-4.
(b) No reports on Form 8-K were filed during the last
quarter of the fiscal year ended September 30, 1995.
(c) Exhibits filed with this report are attached hereto.
19
20
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MOBILE GAS SERVICE CORPORATION
------------------------------
Registrant
By: /s/ Charles P. Huffman
-------------------------------------
Charles P. Huffman, Vice President,
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ William J. Hearin Director, Chairman December 1, 1995
- ---------------------
William J. Hearin
/s/ Walter L. Hovell Director, Vice-Chairman December 1, 1995
- --------------------
Walter L. Hovell
Director, President and
Chief Executive Officer
/s/ John S. Davis (Principal Executive Officer) December 1, 1995
- -----------------
John S. Davis
Vice President, Chief Financial
Officer and Treasurer (Principal
/s/ Charles P. Huffman Financial and Accounting Officer) December 1, 1995
- ----------------------
Charles P. Huffman
/s/ Joseph G. Hollis Director December 1, 1995
- --------------------
Joseph G. Hollis
20
21
Signatures (Continued)
/s/ John C. Hope Director December 1, 1995
- ----------------
John C. Hope
/s/ Gaylord C. Lyon Director December 1, 1995
- -------------------
Gaylord C. Lyon
/s/ S. Felton Mitchell, Jr. Director December 1, 1995
- --------------------------
S. Felton Mitchell, Jr.
/s/ G. Montgomery Mitchell Director December 1, 1995
- --------------------------
G. Montgomery Mitchell
/s/ F. B. Muhlfeld Director December 1, 1995
- ------------------
F. B. Muhlfeld
/s/ E. B. Peebles, Jr. Director December 1, 1995
- ---------------------
E. B. Peebles, Jr.
/s/ Thomas B. Van Antwerp Director December 1, 1995
- -------------------------
Thomas B. Van Antwerp
21
22
MOBILE GAS SERVICE CORPORATION
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report F-2
Consolidated Balance Sheets, September 30, 1995 and 1994 F-3
Consolidated Statements of Income for the years ended
September 30, 1995, 1994 and 1993 F-5
Consolidated Statements of Cash Flow for the years ended
September 30, 1995, 1994 and 1993 F-6
Consolidated Statements of Common Stockholders' Equity
for the years ended September 30, 1995, 1994 and 1993 F-7
Notes to Consolidated Financial Statements F-8
Financial Statement Schedules
- -----------------------------
II Valuation and Qualifying Accounts and Reserves, Years
Ended September 30, 1995, 1994 and 1993 S-1
Schedules other than that referred to above are omitted and are not applicable or not required.
F-1
23
INDEPENDENT AUDITORS' REPORT
Mobile Gas Service Corporation:
We have audited the accompanying consolidated balance sheets of Mobile
Gas Service Corporation and subsidiaries as of September 30, 1995 and 1994 and
the related consolidated statements of income, common stockholders' equity, and
cash flows for each of the three fiscal years in the period ended September 30,
1995. Our audits also included the financial statement schedules listed in the
Index referred to in Item 14. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by Management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Mobile Gas Service
Corporation and its subsidiaries at September 30, 1995 and 1994, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended September 30, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 7 to the Consolidated Financial Statements, the
Company changed its method of accounting for income taxes effective October 1,
1993.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Mobile, Alabama
October 31, 1995
F-2
24
CONSOLIDATED
BALANCE SHEETS
ASSETS
==========================================================================================================================
September 30, (in thousands) 1995 1994
==========================================================================================================================
Property, Plant, and Equipment - At Cost $146,589 $136,242
Less Accumulated Depreciation and Amortization 31,853 28,657
- --------------------------------------------------------------------------------------------------------------------------
Net Property, Plant, and Equipment 114,736 107,585
Construction Work in Progress 188 1,154
- --------------------------------------------------------------------------------------------------------------------------
Total Property, Plant, and Equipment 114,924 108,739
- --------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and Cash Equivalents 1,023 4,045
Temporary Investments (At Cost Which Approximates Market) 1,900
Special Deposits 1,717
Receivables:
Gas 2,809 2,484
Merchandise 1,444 1,611
Other 208 255
Allowance for Doubtful Accounts (266) (215)
Materials, Supplies, and Merchandise (At Average Cost) 1,206 978
Gas Stored Underground For Current Use (At Average Cost) 1,352 896
Deferred Gas Costs 156 195
Accumulated Deferred Income Taxes 3,540 2,408
Prepayments 1,456 1,513
- --------------------------------------------------------------------------------------------------------------------------
Total Current Assets 12,928 17,787
- --------------------------------------------------------------------------------------------------------------------------
Regulatory Assets 1,780 1,736
Merchandise Receivables Due After One Year 5,305 4,365
Deferred Charges 1,630 1,902
- --------------------------------------------------------------------------------------------------------------------------
Total $136,567 $134,529
==========================================================================================================================
See Accompanying Notes to Consolidated Financial Statements
F-3
25
CONSOLIDATED
BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
==========================================================================================================================
September 30, (in thousands, except share data) 1995 1994
==========================================================================================================================
Capitalization:
Stockholders' Equity:
Common Stock, $2.50 Par Value
(Authorized 4,000,000 Shares; Outstanding
1995 - 3,211,000; 1994 - 3,202,000 Shares) $ 8,028 $ 8,005
Capital in Excess of Par Value 9,123 8,962
Retained Earnings 27,912 27,284
- --------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 45,063 44,251
Minority Interest 2,011 1,835
Long-Term Debt (Less Current Maturities) 57,328 59,047
- --------------------------------------------------------------------------------------------------------------------------
Total Capitalization 104,402 105,133
- --------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Long-Term Debt Due Within One Year 1,719 1,369
Notes Payable to Banks 1,800
Accounts Payable 2,249 3,236
Take-or-Pay Costs 1,150
Dividends Declared 867 833
Customer Deposits 1,558 1,549
Taxes Accrued 2,273 2,207
Interest Accrued 1,673 1,698
Deferred Purchased Gas Adjustment 5,960 3,085
Other Liabilities 2,237 1,777
- --------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 20,336 16,904
- --------------------------------------------------------------------------------------------------------------------------
Accrued Pension Cost 1,639 1,507
Accrued Postretirement Benefit Cost 1,480 1,652
Accumulated Deferred Income Taxes 8,213 6,753
Accumulated Deferred Investment Tax Credits 497 521
Other Liabilities 2,059
Commitments and Contingencies (Note 10)
- --------------------------------------------------------------------------------------------------------------------------
Total $136,567 $134,529
==========================================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
F-4
26
CONSOLIDATED
STATEMENTS OF INCOME
==============================================================================================================================
Years Ended September 30, (in thousands, except per share data) 1995 1994 1993
==============================================================================================================================
Operating Revenues
Gas Revenues $56,204 $60,470 $54,292
Merchandise Sales and Jobbing 2,907 2,824 2,525
- ------------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 59,111 63,294 56,817
- ------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Cost of Gas 18,311 25,251 22,378
Cost of Merchandise and Jobbing 2,148 2,197 1,949
Operations 15,826 14,913 13,742
Maintenance 1,419 1,490 1,249
Depreciation 5,055 4,013 3,468
Taxes, Other Than Income Taxes 4,758 4,600 4,103
- ------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 47,517 52,464 46,889
- ------------------------------------------------------------------------------------------------------------------------------
Operating Income 11,594 10,830 9,928
- ------------------------------------------------------------------------------------------------------------------------------
Other Income and (Expense)
Interest Expense (5,485) (5,419) (3,947)
Allowance for Borrowed Funds Used During Construction 57 2,003 1,038
Interest Income 438 559 885
Minority Interest (312) (284) (232)
- ------------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (5,302) (3,141) (2,256)
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 6,292 7,689 7,672
Income Taxes 2,264 2,796 2,752
- ------------------------------------------------------------------------------------------------------------------------------
Net Income 4,028 4,893 4,920
Preferred Stock Dividend Requirements 5 29
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $4,028 $4,888 $4,891
- ------------------------------------------------------------------------------------------------------------------------------
Average Shares Outstanding 3,208 2,752 2,733
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share of Common Stock $1.26 $1.78 $1.79
- ------------------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements.
F-5
27
page
CONSOLIDATED
STATEMENTS OF
CASH FLOWS
==============================================================================================================================
Years Ended September 30, (in thousands) 1995 1994 1993
==============================================================================================================================
Cash Flows from Operating Activities:
Net Income $4,028 $4,893 $4,920
Depreciation and Amortization 5,261 4,207 3,645
Provision for Losses on Accounts Receivable 293 259 128
Provision for Deferred Income Taxes 494 (286) 1,474
Provision for Deferred Gas Cost 39 74 (89)
Minority Interest 176 215 94
- ------------------------------------------------------------------------------------------------------------------------------
10,291 9,362 10,172
Changes in Operating Assets and Liabilities (1,390) 3,646 (1,988)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 8,901 13,008 8,184
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital Expenditures (11,038) (27,997) (13,639)
Acquisition of Business, Net of Cash Acquired (11,603)
Net Change in Temporary Investments 1,900 11,000 (12,900)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (9,138) (16,997) (38,142)
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Repayment of Long-Term Debt (1,369) (1,548) (5,830)
Proceeds from Issuance of Long-Term Debt 38,581
Proceeds from Issuance of Common Stock 9,318
Changes in Short-Term Borrowings 1,800
Payment of Dividends, Net of Dividend Reinvestment (3,216) (2,749) (2,511)
Redemption of Preferred Stock (642)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Financing Activities (2,785) 4,379 30,240
- ------------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (3,022) 390 282
Cash and Cash Equivalents at Beginning of Year 4,045 3,655 3,373
- ------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $1,023 $4,045 $3,655
- ------------------------------------------------------------------------------------------------------------------------------
Cash Paid During the Year for:
Interest $5,294 $5,309 $3,172
- ------------------------------------------------------------------------------------------------------------------------------
Income Taxes $1,938 $3,055 $2,218
- ------------------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements.
F-6
28
CONSOLIDATED
STATEMENTS OF
COMMON STOCKHOLDERS'
EQUITY
Common Stock
------------------------ Capital in
Number of Par Excess of Retained
(In thousands, except per share data) Shares Value Par Value Earnings
====================================================================================================================================
Balance at September 30, 1992 2,729 $6,823 $513 $23,085
Net Income 4,920
Dividend Reinvestment Plan 7 16 127
Cash Dividends:
Common Stock - $.96 per share (2,624)
Preferred Stock - $4.90 per share (29)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1993 2,736 6,839 640 25,352
Net Income 4,893
Dividend Reinvestment Plan 6 16 153
Cash Dividends:
Common Stock - $1.02 per share (2,914)
Preferred Stock - $.83 per share (5)
Premium on Redemption of Preferred Stock (42)
Issuance of Common Stock 460 1,150 8,168
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1994 3,202 8,005 8,961 27,284
Net Income 4,028
Dividend Reinvestment Plan 9 23 162
Cash Dividends:
Common Stock - $1.06 per share (3,400)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 3,211 $8,028 $9,123 $27,912
- ------------------------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements.
F-7
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Mobile
Gas Service Corporation, its wholly-owned subsidiaries, MGS Energy Services,
Inc., MGS Storage Services, Inc., MGS Marketing Services, Inc., its 87.5%
owned partnership, Bay Gas Storage Company, Ltd. (Bay Gas), and its 51% owned
partnership, Southern Gas Transmission Company (collectively the"Company"). All
significant intercompany balances and transactions have been eliminated.
PROPERTY, PLANT, AND EQUIPMENT
The cost of additions includes direct labor and materials, allocable
administrative and general expenses, pension and payroll taxes, and an
allowance for funds used during construction. The cost of depreciable property
retired, plus cost of dismantling, less salvage, is charged to accumulated
depreciation. Estimated interest cost associated with property under
construction, based upon weighted average interest rate for short-term
borrowings or the interest rate on borrowings for specific projects, is
capitalized as an allowance for borrowed funds used during construction.
Maintenance, repairs, and minor renewals and betterment of property
are charged to operations.
Provisions for depreciation are computed principally on straight-line
rates for financial statement purposes and on accelerated rates for income tax
purposes. Depreciation for financial statement purposes is provided at an
annual rate averaging approximately 4% of depreciable property, excluding the
gas storage facility which is depreciated at an annual rate averaging 2.7%.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Temporary
investments, consisting of certificates of deposit, committed to be used for
construction are excluded from cash equivalents.
REVENUES AND GAS COSTS
Rates charged to gas customers are subject to the jurisdiction of the
Alabama Public Service Commission (APSC). Increases or decreases in the cost
of gas and certain other costs are passed through to customers in accordance
with provisions in the Company's rate schedules. Any over or under recoveries
of these costs are charged or credited to cost of gas and included in current
assets or liabilities.
F-8
30
Revenues from residential and commercial customers are recorded as
meters are read on a cycle basis throughout each month. The commodity cost of
purchased gas applicable to gas delivered to customers but not yet billed
under the cycle billing method is deferred.
INCOME TAXES
Beginning October 1, 1993, the Company adopted the Statement of
Financial Accounting Standards No. 109,"Accounting for Income Taxes" ("SFAS
109"). SFAS 109 required the Company to change to the asset and liability
method of accounting for income taxes which required the establishment of
deferred tax liabilities and assets, as measured by enacted tax rates, for all
temporary differences caused when the tax basis of an asset or liability
differs from that reported in the financial statements. Due to the regulated
nature of the Company's utility business, the primary effect of adoption of
this statement was recorded as a regulatory asset. The effect on income as a
result of the adoption of this statement was not significant.
For fiscal year ended September 30, 1993, deferred income taxes are
generally recorded for timing differences between book and taxable income. The
tax effect of differences in book and tax depreciation related to pre-1981
property additions, however, was flowed through to income.
Investment tax credits realized after 1980 are deferred and amortized
over the average life of the related property in accordance with regulatory
treatment.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been
reclassified to conform with the 1995 financial statement presentation.
2. DETAIL OF SELECTED BALANCE SHEET ACCOUNTS
THE FUNCTIONAL CLASSIFICATIONS FOR THE COST OF PROPERTY, PLANT, AND EQUIPMENT
ARE AS FOLLOWS AT SEPTEMBER 30, (IN THOUSANDS):
1995 1994
---- ----
Distribution Plant $85,646 $79,420
General Plant 12,396 11,032
Storage Plant 34,954 32,055
Transmission Plant 3,464 3,464
Acquisition Adjustment 10,129 10,271
-------- -------
Total Property, Plant, and Equipment $146,589 $136,242
======== ========
F-9
31
THE COMPONENTS OF REGULATORY ASSETS ARE AS FOLLOWS AT SEPTEMBER 30, (IN
THOUSANDS):
1995 1994
---- ----
Income Taxes (Note 7) $1,569 $1,736
Postemployment Benefits (Note 9) 211
-------- --------
Total Regulatory Assets $1,780 $1,736
======== ========
3. REGULATORY MATTERS
DESCRIPTION OF BUSINESS
The Company is engaged principally in the distribution of natural gas
to residential, commercial, and industrial customers in South Alabama subject
to regulation by the APSC. 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. In
September 1994, Bay Gas completed the development and construction of a natural
gas storage facility located in a salt dome near the north end of the Company's
service area. As a separate utility regulated by the APSC, Bay Gas' intrastate
storage contracts require APSC approval. In addition, by Federal Energy
Regulatory Commission order, Bay Gas is permitted to charge market-based rates
for interstate storage services. The Company is also engaged in various
unregulated activities including the sale and financing of gas appliances,
jobbing work, and contract and consulting work for utilities and industrial
customers. Substantially all property, plant, and equipment is considered
utility plant. Included in property, plant, and equipment are acquisition
adjustments, net of amortization, of $9,203,000 and $9,592,000 at September 30,
1995 and 1994, respectively. Such acquisition adjustments are being amortized
to cost of service over the lives of the assets acquired.
FERC ORDER 636
In April 1992, the Federal Energy Regulatory Commission (FERC) issued
Order 636 which requires pipeline companies to unbundle services such as
transportation and storage from traditional merchant service and offer these
services on a nondiscriminatory basis to all shippers of natural gas. The
Company and Koch Gateway Pipeline Company (Koch), formerly United Gas Pipe
Line Company, have entered into contracts, approved by the FERC and effective
April 1, 1994, complying with Order 636 methodology. Approximately twenty
percent of the Company's firm gas supply is delivered under such contracts.
Pricing under the contracts in accordance with Order 636 has not had a material
impact on the Company's cost of gas. The remaining firm gas supply for the
Company is obtained from intrastate sources and the Company's own storage
facility.
F-10
32
Order 636 permits pipelines to recover from their customers the
transition costs of restructuring their services. On October 16, 1995, Koch
filed tariff sheets, which have been approved by the FERC to be effective
November 1, 1995, which reflect recovery of transition costs over a two-year
period through a reservation surcharge. Based on the reservation surcharge in
Koch's tariff sheets and the Company's contract reservation volumes over the
next two years, the Company's share of transition costs is estimated to be
$43,000.
TAKE-OR-PAY COSTS
As a result of a take-or-pay cost settlement between Koch and its
customers entered into during the year ended September 30, 1993, the Company
recorded a liability of $860,000 during 1993. An additional liability of
$679,000 was recorded during the year ended September 30, 1994 as a result of
settlements filed in 1994 which resolved all take-or-pay cost recovery issues.
The above settlements have been approved by the FERC, and the Company has
recovered all take-or-pay costs from its customers as allowed by the APSC.
During the year ended September 30, 1995, the Company paid all remaining unpaid
take-or-pay costs as required by such settlements.
4. CAPITAL STOCK
In January 1993, the stockholders approved the Mobile Gas Service
Corporation 1992 Stock Option Plan ("the Plan") which provides for the granting
of incentive stock options, non-qualified stock options, and stock appreciation
rights to key employees. Under the Plan, 150,000 shares of the Company's
authorized but unissued common stock have been reserved for issuance. No stock
options or stock appreciation rights had been granted as of September 30, 1994.
During the year ended September 30, 1995, 105,000 options were granted at an
option price of $21.125, representing the market price on the date of the
grant. Stock options become 25% exercisable on the first anniversary of the
date of grant, and an additional 25% become exercisable each succeeding year.
No stock options were exercised during 1995 and no stock options are
exercisable at September 30, 1995. As of September 30, 1995, there remained
45,000 shares for which options may be granted under the Plan.
At September 30, 1995, 24,000 shares of the Company's authorized but
unissued common stock were reserved for issuance under the Company's Dividend
Reinvestment Plan.
5. RESTRICTIONS ON RETAINED EARNINGS
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. At September 30, 1995, under the
most limiting provisions, retained earnings in the amount of $10,143,177 were
unrestricted.
F-11
33
6. LONG-TERM DEBT
LONG-TERM DEBT CONSISTS OF THE FOLLOWING AT SEPTEMBER 30, (IN THOUSANDS):
1995 1994
---- ----
Mobile Gas Service Corporation
First Mortgage Bonds
10.25% Series, Due October 1, 2003 $7,000 $7,500
8.75% Series, Due July 1, 2022 12,000 12,000
7.48% Series, Due July 1, 2023 12,000 12,000
9% Note, Due May 13, 2023 3,914 4,001
Southern Gas Transmission Company
Revenue Note, Series A, Due February 1, 1999
(Interest varies from 6.875% to 8.05%) 1,920 2,415
Bay Gas Storage Company, Ltd.
8.19% Guaranteed Senior Secured Notes
due December 1, 2014 22,213 22,500
--------- ---------
Total 59,047 60,416
Less amounts due within one year 1,719 1,369
--------- ---------
Total long-term debt $57,328 $59,047
========= =========
Maturities and sinking fund requirements on long-term debt in each of
the five fiscal years subsequent to September 30, 1995 are as follows: 1996 -
$1,719,000; 1997 -$2,068,000; 1998 - $2,180,000; 1999 - $2,100,000; and 2000 -
$1,962,000.
Substantially all of the property of the Company is pledged as
collateral for the long-term debt.
At September 30, 1995, the Company had a $20 million revolving credit
agreement which expires in July 1997, with a group of banks. Drawings upon the
agreement may be made as needed providing that the Company is in compliance
with certain covenants in the revolving credit agreement and other loan
agreements. The Company currently is in compliance with all such convenants.
The Company pays a fee for its committed lines of credit rather than maintain
compensating balances. The commitment fee is 0.125% of the average daily
unborrowed amount during the annual period of calculation. Unused committed
lines of credit at September 30, 1995 were $18.2 million. Short-term borrowings
outstanding were $1.8 million with a weighted average interest rate of 6.875%
at September 30, 1995. There were no short-term borrowings at September 30,
1994.
F-12
34
7. INCOME TAXES
THE COMPONENTS OF INCOME TAX EXPENSE ARE AS FOLLOWS FOR THE YEARS ENDED
SEPTEMBER 30, (IN THOUSANDS):
1995 1994 1993
---- ---- ----
Income Tax Components
Current:
Federal $1,622 $2,819 $1,185
State 172 287 117
------- ------- -------
1,794 3,106 1,302
------- ------- -------
Deferred:
Federal 448 (260) 1,337
State 46 (26) 137
------- ------- -------
494 (286) 1,474
------- ------- -------
Deferred investment tax
credit amortization (24) (24) (24)
------- ------- -------
Total $2,264 $2,796 $2,752
======= ======= =======
THE TAX EFFECT OF TIMING DIFFERENCES IS AS FOLLOWS FOR THE YEAR ENDED SEPTEMBER
30, (IN THOUSANDS):
1993
----
Excess of tax over book depreciation
on post-1980 property additions $720
Over collection of gas and certain other costs 977
Other (223)
------
Total deferred income taxes $1,474
======
A RECONCILIATION OF INCOME TAX EXPENSE AND THE AMOUNT COMPUTED BY MULTIPLYING
INCOME BEFORE INCOME TAXES BY THE STATUTORY FEDERAL INCOME TAX RATE FOR THE
PERIODS INDICATED IS AS FOLLOWS FOR THE YEARS ENDED SEPTEMBER 30, (IN
THOUSANDS):
1995 1994 1993
---- ---- ----
Statutory Federal income taxes $2,139 $2,614 $2,608
Excess of book over tax depreciation on
pre-1981 property additions 109 106 104
State income taxes 144 172 168
Gas supply settlement (74) (68) (153)
Other, net (54) (28) 25
------- ------- --------
Income tax expense $2,264 $2,796 $2,752
------- ------- --------
Effective tax rate 36.0% 36.4% 35.9%
F-13
35
Changes in the deferred income taxes relating to utility operations
arising from the adoption of SFAS 109 represent income taxes recoverable
through future rates over the life of the related assets and liabilities. A
regulatory asset of $1,569,000 and $1,736,000 at September 30, 1995 and 1994,
respectively, has been recorded as a result of the increase in the net deferred
tax liability related to utility operations. In accordance with the current
rate making practices followed by the APSC, the tax effect of these differences
is expected to be collected in customer rates when such taxes become payable.
No valuation allowance is deemed necessary, as the Company anticipates
generating adequate future taxable income to realize the benefits of all
deferred tax assets on the balance sheet.
THE SIGNIFICANT TAX COMPONENTS OF THE COMPANY'S NET DEFERRED TAX LIABILITY AS
OF SEPTEMBER 30, ARE (IN THOUSANDS)
1995 1994
---- ----
Deferred Tax Liabilities:
Differences between book and tax basis of property $7,860 $6,253
Prepaid Insurance 318 355
Regulatory Asset 568 629
Other 156 190
------- --------
8,902 7,427
------- --------
Deferred Tax Assets:
Pension 593 546
Purchased Gas Adjustment 2,158 1,117
Gross Receipts Taxes 371 409
Unbilled Revenue 169 271
Postretirement 244 232
Other 694 507
------- --------
4,229 3,082
------- --------
Net Deferred Tax Liability $4,673 $4,345
======= ========
8. RETIREMENT PLANS AND OTHER BENEFITS
The Company has a noncontributory, defined benefit retirement plan
covering substantially all of its employees. Benefits are based on the greater
of amounts resulting from two different formulas: years of service and average
compensation during the last five years of employment or years of service and
compensation during the term of employment. The"projected unit credit"
actuarial method was used to determine the service cost and actuarial
liability. The Company annually contributes to the plan an amount deductible
for Federal income tax purposes.
F-14
36
NET PERIODIC PENSION COST INCLUDED THE FOLLOWING COMPONENTS FOR THE YEARS ENDED
SEPTEMBER 30, (IN THOUSANDS):
1995 1994 1993
---- ---- ----
Service cost $431 $433 $429
Interest cost 1,168 1,086 999
Actual return on plan assets (3,549) (490) (3,320)
Net amortization and deferral 2,082 (856) 2,047
----- ----- -----
Net pension cost $132 $173 $155
===== ===== =====
ASSUMPTIONS USED IN THE ACTUARIAL COMPUTATIONS FOR THE YEARS ENDED SEPTEMBER 30
WERE:
1995 1994 1993
---- ----- ----
Weighted average discount rate 7.5% 7.5% 7.5%
Rate of increase in future compensation 6.1% 6.1% 6.1%
Expected long-term rate of return on plan assets 7.5% 7.5% 7.5%
THE FOLLOWING TABLE SETS FORTH THE PLAN'S FUNDED STATUS AND AMOUNT RECORDED IN
THE FINANCIAL STATEMENTS AT SEPTEMBER 30, (IN THOUSANDS):
1995 1994
---- ----
Actuarial present value of benefit obligations:
Vested benefits $(12,177) $(11,675)
Nonvested benefits (705) (810)
-------- --------
Accumulated benefit obligation (12,882) (12,485)
Effect of projected future compensation (3,488) (3,171)
-------- --------
Projected benefit obligation (16,370) (15,656)
Plan assets at market value, primarily listed stocks and bonds 22,717 20,011
-------- --------
Excess of plan assets over projected benefit obligations 6,347 4,355
Unrecognized net gain (6,904) (4,636)
Prior service cost not yet recognized 510 550
Remaining unrecognized net asset being
recognized over 16.7 years (1,592) (1,776)
-------- --------
Accrued pension cost $ (1,639) $ (1,507)
======== ========
The Company's eligible employees may participate in the Employee
Savings Plan or the Bargaining Unit Employee Savings Plan by investing a
percentage of their compensation in the Plans with the Company matching a part
of the employee investment. The Company's contributions for the years ended
September 30, 1995, 1994, and 1993 were $177,000, $162,000, and $145,000,
respectively.
F-15
37
9. OTHER POSTEMPLOYMENT BENEFITS
The Company provides certain health care and life insurance benefits
for retired employees. Substantially all employees may become eligible for such
benefits if they retire under the provisions of the Company's retirement plan.
The Company is accruing costs over the expected service period of the
employees. The"projected unit credit" actuarial method was used to determine
the service cost and actuarial liability.
NET PERIODIC POSTRETIREMENT BENEFIT COST INCLUDED THE FOLLOWING COMPONENTS FOR
THE YEARS ENDED SEPTEMBER 30, (IN THOUSANDS):
1995 1994 1993
---- ---- ----
Service cost $78 $96 $94
Interest cost 216 231 235
Actual return on plan assets (150) (18) (41)
Net amortization and deferral 48 (48) 23
---- ---- ----
Net periodic postretirement benefit cost $192 $261 $311
---- ---- ----
ASSUMPTIONS USED IN THE ACTUARIAL COMPUTATIONS:
1995 1994 1993
---- ---- ----
Weighted average discount rate 7.5% 7.5% 7.5%
Rate of increase in future compensation 6.1% 6.1% 6.1%
Expected long-term rate of return on assets 7.0% 7.0% 7.0%
The September 30, 1995 accumulated benefit obligation was determined
using an assumed health care cost trend rate of 10.7% in 1995, gradually
declining to 5.0% in the year 2006 and thereafter. The September 30, 1994
accumulated benefit obligation was determined using an assumed health care cost
trend rate of 13.7% in 1994 which gradually declines to 6.5% in the year 2010
and thereafter. If the health care cost trend rate assumptions were increased
by 1%, the accumulated postretirement benefit obligation as of September 30,
1995 would be increased by 10.7%. The effect of this change on the sum of the
service cost and interest cost components would be an increase of 11.6%.
F-16
38
THE FOLLOWING TABLE SETS FORTH THE PLAN'S FUNDED STATUS AND AMOUNT RECORDED IN
THE FINANCIAL STATEMENTS AT SEPTEMBER 30, (IN THOUSANDS):
1995 1994
---- ----
Accumulated postretirement benefit obligation:
Portion attributable to retirees $(1,623) $(1,549)
Fully eligible active plan participants (434) (660)
Other active plan participants (1,047) (1,130)
------- -------
Accumulated postretirement benefit obligation (3,104) (3,339)
Plan assets - cash equivalents, stocks and bonds 1,421 1,052
------- -------
Accumulated postretirement benefit obligation
in excess of plan assets (1,683) (2,287)
Unrecognized net loss 375 229
Prior service cost not yet recognized (566)
------- -------
Accrued postretirement benefit cost (1,874) (2,058)
Less: Current accrued postretirement benefit cost 394 406
------- -------
Long-term accrued postretirement benefit cost $(1,480) $(1,652)
======= =======
The unrecognized net loss has resulted principally from a difference
between estimated and actual health care costs.
In September 1991, the Company formed two voluntary employees'
beneficiary association (VEBA) trusts to fund postretirement health and life
insurance benefits. The Company's contributions to this plan in 1995, 1994 and
1993 were $218,000, $200,000 and $450,000, respectively.
Beginning October 1, 1994, the Company adopted the Statement of
Financial Accounting Standards No. 112,"Employers' Accounting for
Postemployment Benefits" ("SFAS 112"). SFAS 112 required the Company to record
the cost of providing postemployment benefits to former or inactive employees,
their beneficiaries, and covered dependents after employment but before
retirement. For the year ended September 30, 1995, the Company recorded a
liability for postemployment benefits of $211,000 with a corresponding charge
to regulatory assets. The regulatory asset is expected to be amortized to
expense and will be recovered from customers through rates paid over a period
to be determined by the APSC.
10. COMMITMENTS AND CONTINGENCIES
The Company has contracts, which expire at various dates through the
year 2000, for firm supplies of natural gas. A portion of firm supply
requirements are expected to be met through the withdrawal of gas from the
storage facility owned by Bay Gas. Mobile Gas Service Corporation 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 purchased
gas adjustment provisions of the Company's rate schedules permit the recovery
of gas costs from the Company's customers.
F-17
39
The Company is subject to various federal, state and local laws and
regulations relating to the environment which have not had a material effect
on the Company's financial position or results of operations.
Like many gas distribution companies, prior to the widespread
availability of natural gas, the Company manufactured gas for sale to its
customers. In contrast to some other companies which operated multiple
manufactured gas plants, the Company and its predecessor operated only one such
plant, which discontinued operations in 1933. The process for manufacturing gas
produced by-products and residuals, such as coal tar, and certain remnants of
these residuals are sometimes found at former gas manufacturing sites.
The Company conducted a preliminary assessment in 1994 of its former
gas plant site and has tested certain waters in the vicinity of the site. The
Company developed and has implemented a plan for the site based on advice of
its environmental consultants, which involves securing and monitoring the site,
and continued testing. Based on the results of tests to date, the Company does
not believe that the site currently poses any threat to human health or the
environment. While no conclusion can be reached at this time as to whether any
further remedial action might ultimately be required, based on currently
available information, it is believed that any costs with respect to the site
are likely to be immaterial, and the Company has therefore established no
reserve for such costs in its financial statements. The Company intends that,
should further investigation or changes in environmental laws or regulations
require material expenditures for investigation, remediation, or clean-up with
regard to the site, it would apply to the APSC for appropriate rate recovery of
such costs. However, there can be no assurance that the APSC would approve the
recovery of such costs or the amount and timing of any such recovery.
11. ACQUISITION OF GAS SYSTEM
On May 13, 1993, the Company purchased a portion of the assets of the
gas distribution system of the Utilities Board of the Town of Citronelle. The
cost of the acquisition was $11.6 million. The purchase price consisted of cash
and a $4.1 million 9% note payable over 20 years. The assets acquired,
consisting primarily of utility plant, were recorded at their fair values using
the purchase method of accounting. The acquired system serves approximately
8,000 customers in Mobile County, Alabama.
The following unaudited pro forma information for the year ended
September 30, 1993 presents the consolidated results of operations of the
Company and Citronelle as if the acquisition had occurred on October 1, 1992.
The pro forma information is not necessarily indicative of the results of
operations which would have actually been obtained during such period (in
thousands, except per share data).
Gas Revenues $57,471
Earnings Applicable to Common Stock $ 4,850
Earnings per Share of Common Stock $1.77
F-18
40
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERLY FINANCIAL DATA FOR 1995 AND 1994 IS SUMMARIZED AS FOLLOWS (IN
THOUSANDS, EXCEPT PER SHARE DATA):
Three Months Ended
------------------------
Dec. 31 Mar. 31 Jun. 30 Sep. 30
------- ------- ------- -------
1995
Total operating revenues $13,784 $23,156 $12,039 $10,132
Total operating income $2,404 $5,817 $2,033 $1,340
Net income $740 $2,792 $439 $57
Earnings per share of Common Stock $.23 $.87 $.14 $.02
1994
Total operating revenues $17,220 $24,738 $11,494 $9,842
Total operating income $3,088 $5,941 $1,241 $560
Net income (loss) $1,558 $3,240 $341 $(246)
Earnings (loss) per share of Common Stock $.57 $1.18 $.12 $(.09)
The pattern of quarterly earnings reflects a seasonal nature because weather
conditions strongly influence operating results.
13. SUBSEQUENT EVENT (UNAUDITED)
During the year ended September 30, 1995, the Company petitioned the
APSC for an increase in rates. Subsequent to year-end, the APSC approved an
increase in rates designed to generate an additional $6,890,000 in annual
revenues, excluding the effects of changes in the base price of gas. The
increased rates went into effect on December 1, 1995.
F-19
41
SCHEDULE II
MOBILE GAS SERVICE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- ------------------------------- -------- --------
ADDITIONS
-------------------------------
CHARGED TO
BALANCE AT COSTS CHARGED TO BALANCE AT
BEGINNING AND OTHER ACCOUNTS DEDUCTIONS END
DESCRIPTION OF YEAR EXPENSES AMOUNT AMOUNT OF YEAR
----------- ------- -------- ------ ------ -------
Reserves deducted from assets to
which they apply -
Allowance for doubtful accounts:
September 30, 1995 $215 $293 (1) $242 $266
September 30, 1994 $205 $260 (1) $250 $215
September 30, 1993 $159 $128 (1) $ 82 $205
NOTES:
(1) Accounts written off - net of recoveries.
S-1
42
MOBILE GAS SERVICE CORPORATION
EXHIBIT INDEX
Exhibit No. Description
- ----------- --------------------------------------------------------
3(a) Restated Articles of Incorporation (incorporated by reference to Exhibit 3(i)-B to Form 8-K Current
Report dated January 28, 1994)
3(b) By-laws, adopted January 27, 1995 (incorporated by reference to Exhibit 3(b) to Form 8-K Current Report
dated January 27, 1995)
4(a)-1 Indenture of Mortgage and Deed of Trust of the Company dated as of December 1, 1941 (incorporated by
reference to Exhibit B-a to Registration Statement No. 2-4887)
Sup. Ind.
Dated as of File Reference Exhibit
----------- -------------- -------
4(a)-2 10/1/44 Reg. No. 2-5493 7-6
4(a)-3
4(a)-3 7/1/52 Form 10-K for fiscal year ended
September 30, 1985
4(a)-4 6/1/54 " 4(a)-4
4(a)-5 4/1/57 " 4(a)-5
4(a)-6 7/1/61 " 4(a)-6
4(a)-7 6/1/63 " 4(a)-7
4(a)-8 10/1/64 " 4(a)-8
4(a)-9 7/1/72 " 4(a)-9
4(a)-10 8/1/75 " 4(a)-10
4(a)-11 7/1/79 " 4(a)-11
4(a)-12 7/1/82 " 4(a)-12
4(a)-13 7/1/86 Form 10-K for fiscal year ended 4(a)-13
September 30, 1986
4(a)-14 10/1/88 Form 10-K for fiscal year ended 4(a)-14
September 30, 1989
4(a)-15 7/1/92 Form 10-K for fiscal year 4(a)-15
ended September 30, 1992,
4(a)-16 7/1/93 Form 10-K for fiscal year 4(a)-16
ended September 30, 1993,
4(a)-17 12/3/93 Form 10-K for fiscal year 4(a)-17
ended September 30, 1993,
4(b) Southern Gas Transmission Company Indenture (incorporated by reference to Exhibit 4(b) to Form 10-K for
fiscal year ended September 30, 1992)
E-1
43
4(c)-1 Bay Gas Indenture dated as of October 1, 1992 (incorporated by reference to Exhibit 4(c) to Form 10-K
for fiscal year ended September 30, 1992)
4(c)-2* First Supplemental Indenture dated as of October 1, 1994 supplemental to Bay Gas Indenture
4(d) Promissory Note to the Utilities Board of the Town of Citronelle dated May 13, 1993 (incorporated by
reference to Form 10-K for fiscal year ended September 30, 1993)
10(d)-1 Firm Service Agreement with Koch Gas Services Company dated December 1, 1994 (incorporated by reference
to Exhibit 10(d)-1 to Form 10-K for fiscal year ended September 30, 1994)
10(d)-2 Settlement Agreement with Koch Gateway Pipeline Company dated September 21, 1993 (incorporated by
reference to Exhibit 10(d)-2 to Form 10-K for fiscal year ended September 30, 1993)
10(d)-3 No Notice Service Agreements between Koch Gateway Pipeline Company and Mobile Gas Service Corporation
dated November 1, 1993 (incorporated by reference to Form S-1, Registration Statement No. 33-82498)
10(d)-4 Gas Supply Agreement between Mobile Gas Service Corporation and Koch Gas Services Company made as of
the 1st day of April, 1994 (incorporated by reference to Form S-1, Registration Statement No. 33-82498)
10(e)-1 Gas Sale and Purchase Contract between Shell Gas Trading Company as Seller and Mobile Gas Service
Corporation as Buyer dated January 1, 1992 (incorporated by reference to Exhibit 10(e) to Form 10-K for
year ended September 30, 1992)
10(e)-2 Amendment dated December 1, 1993 to Gas Sale and Purchase Contract with Shell (incorporated by
reference to Exhibit 10(e)-2 to Form 10-K for fiscal year ended September 30, 1993)
10(f) * Agreement for Sale and Purchase of Gas - Mobile Plant dated August 10, 1995 between Mobil Natural Gas
Inc. and Mobile Gas Service Corporation
10(i) Mobile Gas Service Corporation/Bay Gas Storage Company, Ltd. Gas Storage Agreement dated February 26,
1992 (incorporated by reference to Exhibit 10(i) to Form 10-K for fiscal year ended September 30, 1992)
10(j) Directors/Officers Indemnification Agreement (incorporated by reference to Exhibit 10(j) to Form 10-K
for fiscal year ended September 30, 1992)
10(k)-1 ** Amended and Restated Supplemental Deferred Compensation Agreement with Walter L. Hovell, dated December
11, 1992 (incorporated by reference to Exhibit 10(k) to Form 10-K for fiscal year ended September 30,
1992)
E-2
44
10(k)-2 ** Amendment to Amended and Restated Supplemental Deferred Compensation Agreement dated January 27, 1995
between the Company and Walter L. Hovell (incorporated by reference to Exhibit 10(k)-2 to Form 8-K
Current Report dated January 27, 1995)
10(l)-1 Bay Gas Agreement by and among Mobile Gas Service Corporation, MGS Storage Services, Inc., MGS Energy
Services, Inc. and Olin Corporation, dated December 5, 1991 (incorporated by reference to Exhibit 10(l)
to Form 10-K for fiscal year ended September 30, 1992)
10(l)-2 Assignment of Limited Partnership Interest in Bay Gas Storage Company, Ltd. dated as of September 12,
1994 (incorporated by reference to Exhibit 10(l)-2 to Form 10-K for fiscal year ended September 30,
1994)
10(m)-1 Limited Partnership Agreement between MGS Storage Services, Inc., as General Partner, and MGS Energy
Services, Inc., as Limited Partner (forming Bay Gas Storage Company, Ltd.), dated December 5, 1991
(incorporated by reference to Exhibit 10(m) to Form 10-K for fiscal year ended September 30, 1992)
10(m)-2 First Amendment to Limited Partnership Agreement dated as of April 6, 1992 and Second Amendment to
Limited Partnership Agreement dated as of September 12, 1994 (incorporated by reference to Exhibit
10(m)-2 to Form 10-K for fiscal year ended September 30, 1994)
10(n) Cavity Development and Storage Agreement between Olin Corporation and Bay Gas Storage Company, Ltd.,
dated January 14, 1992 (incorporated by reference to Exhibit 10(n) to Form 10-K for fiscal year ended
September 30, 1992)
10(o) * Transportation Agreement between Mobile Gas Service Corporation and Tuscaloosa Steel Corporation dated
as of May 15, 1995
10(p) Note Guaranty Agreement between Mobile Gas Service Corporation and AmSouth Bank N.A., Trustee, dated as
of January 1, 1992, relating to Indenture of Southern Gas Transmission Company (incorporated by
reference to Exhibit 10(p) to Form 10-K for fiscal year ended September 30, 1992)
10(q) Guaranty Agreement by Mobile Gas Service Corporation, dated as of October 1, 1992, relating to
Indenture of Bay Gas Storage Company, Ltd. (incorporated by reference to Exhibit 10(q) to Form 10-K for
fiscal year ended September 30, 1992)
10(r) ** Mobile Gas Service Corporation 1992 Stock Option Plan (incorporated by reference to Exhibit A to
definitive proxy statement dated December 21, 1992)
10(s) ** Mobile Gas Service Corporation Incentive Compensation Plan (incorporated by reference to Exhibit B to
definitive proxy statement dated December 21, 1992)
10(t) Agreement for Purchase and Sale of Assets by and between The Utilities Board of the Town of Citronelle
and Mobile Gas Service Corporation dated January 28,
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45
1993 (incorporated by reference to Exhibit 10(t) to Form 10-K for fiscal year ended September 30, 1993)
10(u) * Revolving Credit Agreement dated July 17, 1995 by and among Mobile Gas Service Corporation as Borrower,
AmSouth Bank of Alabama as Agent, and AmSouth Bank of Alabama, First Alabama Bank, Whitney Bank of
Alabama, Bank of Mobile, SouthTrust Bank of Alabama, N.A., and Commonwealth National Bank as Lenders
10(v) Compressor Facility and Pipeline Construction Agreement between Bay Gas Storage Company, Ltd. and BE&K
Construction Company dated January 13, 1994 (incorporated by reference to Exhibit 10(v) to Form S-1
Registration Statement No. 33-82498)
10(w) Contract for Construction of the Bay Gas Pipeline System between Bay Gas Storage Company, Ltd. and WHC,
Inc. dated January 10, 1994 (incorporated by reference to Exhibit 10(w) to Form S-1 Registration
Statement No. 33-82498)
10(x) ** Letter dated October 7, 1994 from Mobile Gas Service Corporation to John S. Davis confirming terms of
employment (incorporated by reference to Exhibit A to Form 8-K Current Report filed November 2, 1994)
10(y) ** Consulting Agreement dated January 27, 1995 between the Company and Walter L. Hovell (incorporated by
reference to Exhibit 10(y) to Form 8-K Current Report dated January 27, 1995)
10(z) ** Mobile Gas Service Corporation Non-Employee Directors Deferred Fee Plan (incorporated by reference to
Exhibit 10(z) to Form 8-K Current Report dated January 27, 1995)
21 * Subsidiaries of Registrant and Partnerships in which Registrant Owns an Interest
23 * Consent of Deloitte & Touche
27 * Financial Data Schedule
*Filed herewith
** Management contract or compensatory plan or arrangement
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