1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1997
Commission File No. 0-234
MOBILE GAS SERVICE CORPORATION
(Exact name of registrant as specified in its charter)
Alabama 63-0142930
- --------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2828 Dauphin Street, Mobile, Alabama 36606
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 334-476-2720
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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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock ($.01 par value) outstanding at April 30, 1997 - 3,231,622 shares.
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MOBILE GAS SERVICE CORPORATION
INDEX
Page No.
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PART I. Financial Information:
Consolidated Balance Sheets - March 31,
1997 and 1996 and September 30, 1996 3 - 4
Consolidated Statements of Income - Three, Six and
Twelve Months Ended March 31, 1997 and 1996 5
Consolidated Statements of Retained Earnings - Three,
Six and Twelve Months Ended March 31, 1997
and 1996 6
Consolidated Statements of Cash Flows - Six
Months Ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 10
PART II. Other Information 11
Exhibit Index 12
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3
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
March 31, September 30,
Assets 1997 1996 1996
---------------------- ---------
(Unaudited)
Property, Plant, and Equipment $ 155,507 $ 148,961 $ 153,000
Less: Accumulated Depreciation and Amortization 38,566 34,073 36,099
--------- --------- ---------
Property, Plant, and Equipment in Service - Net 116,941 114,888 116,901
Construction Work in Progress 5,476 1,144 2,579
--------- --------- ---------
Total Property, Plant, and Equipment 122,417 116,032 119,480
--------- --------- ---------
Current Assets:
Cash and Cash Equivalents 7,857 1,791 12,030
Receivables:
Gas 6,351 7,131 3,151
Merchandise 1,675 1,503 1,530
Other 741 384 566
Allowance for Doubtful Accounts (764) (438) (349)
Materials, Supplies, and Merchandise 1,136 1,216 1,163
Gas Stored Underground for Current Use 1,329 525 1,951
Deferred Gas Costs 298 942 186
Deferred Income Taxes 2,059 2,708 2,063
Prepayments 914 931 1,331
--------- --------- ---------
Total Current Assets 21,596 16,693 23,622
--------- --------- ---------
Regulatory Asset 1,253 1,578 1,367
--------- --------- ---------
Merchandise Receivables Due After One Year 5,944 5,326 5,670
--------- --------- ---------
Deferred Charges 1,455 1,629 1,463
--------- --------- ---------
Total $ 152,665 $ 141,258 $ 151,602
========= ========= =========
See Accompanying Notes to Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
March 31, September 30,
Capitalization and Liabilities 1997 1996 1996
------------------ ----------
(Unaudited)
Capitalization:
Stockholders' Equity
Common Stock, $.01 Par Value
(Authorized 8,000,000 Shares;
Outstanding: March, 1997 -
3,229,000 Shares; March, 1996 -
3,215,000 Shares; September, 1996 -
3,222,000 Shares) $ 32 $ 32 $ 32
Capital in Excess of Par Value 17,540 17,212 17,364
Retained Earnings 38,097 33,295 33,004
-------- -------- --------
Total Stockholders' Equity 55,669 50,539 50,400
Minority Interest 2,827 2,327 2,451
Long-Term Debt (Less Current Maturities) 65,122 55,989 54,509
-------- -------- --------
Total Capitalization 123,618 108,855 107,360
-------- -------- --------
Current Liabilities:
Current Maturities of Long-Term Debt 2,117 2,013 2,818
Notes Payable 15,000
Accounts Payable 3,200 4,327 3,687
Dividends Declared 904 868 902
Customer Deposits 1,579 1,568 1,549
Taxes Accrued 2,871 3,364 2,607
Interest Accrued 1,963 1,763 1,641
Deferred Purchased Gas Adjustment 73 3,547 638
Other Liabilities 1,952 2,308 2,380
-------- -------- --------
Total Current Liabilities 14,659 19,758 31,222
-------- -------- --------
Accrued Pension Cost 1,849 1,705 1,778
Accrued Postretirement Benefit Cost 1,367 1,563 1,312
Deferred Income Taxes 10,715 8,892 9,460
Deferred Investment Tax Credits 457 485 470
-------- -------- --------
Total $152,665 $141,258 $151,602
======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Six Months Twelve Months
Ended March 31, Ended March 31, Ended March 31,
--------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
-------- -------- -------- -------- -------- --------
Operating Revenues
Gas Revenues $ 28,711 $ 27,527 $ 45,653 $ 43,459 $ 70,527 $ 64,373
Merchandise Sales and Jobbing 625 695 1,644 1,578 3,108 2,879
-------- -------- -------- -------- -------- --------
Total Operating Revenues 29,336 28,222 47,297 45,037 73,635 67,252
-------- -------- -------- -------- -------- --------
Operating Expenses
Cost of Gas 11,334 9,264 16,582 14,003 22,130 19,194
Cost of Merchandise and Jobbing 455 503 1,201 1,171 2,374 2,102
Operations 4,785 5,045 9,177 9,256 18,022 16,810
Maintenance 254 400 689 796 1,837 1,508
Depreciation 1,451 1,354 2,901 2,708 5,600 5,220
Taxes, Other Than Income Taxes 1,964 1,956 3,115 3,288 5,401 5,222
-------- -------- -------- -------- -------- --------
Total Operating Expenses 20,243 18,522 33,665 31,222 55,364 50,056
-------- -------- -------- -------- -------- --------
Operating Income 9,093 9,700 13,632 13,815 18,271 17,196
-------- -------- -------- -------- -------- --------
Other Income and (Expense)
Interest Expense (1,450) (1,331) (2,850) (2,684) (5,468) (5,404)
Allowance for Borrowed Funds Used
During Construction 51 5 88 8 115 17
Interest Income 231 192 462 385 965 478
Minority Interest (157) (118) (300) (213) (518) (357)
-------- -------- -------- -------- -------- --------
Total Other Income (Expense) (1,325) (1,252) (2,600) (2,504) (4,906) (5,266)
-------- -------- -------- -------- -------- --------
Income Before Income Taxes 7,768 8,448 11,032 11,311 13,365 11,930
-------- -------- -------- -------- -------- --------
Income Taxes 2,907 3,133 4,132 4,192 4,953 4,315
-------- -------- -------- -------- -------- --------
Net Income $ 4,861 $ 5,315 $ 6,900 $ 7,119 $ 8,412 $ 7,615
======== ======== ======== ======== ======== ========
Earnings Per Share of Common Stock $ 1.49 $ 1.65 $ 2.12 $ 2.21 $ 2.60 $ 2.37
======== ======== ======== ======== ======== ========
Cash Div. Per Share of Common Stock $ 0.28 $ 0.27 $ 0.56 $ 0.54 $ 1.12 $ 1.08
======== ======== ======== ======== ======== ========
Average Common Shares Outstanding 3,254 3,215 3,248 3,214 3,239 3,212
======== ======== ======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
(In Thousands)
Three Months Six Months Twelve Months
Ended March 31, Ended March 31, Ended March 31,
----------------- ----------------- -----------------
1997 1996 1997 1996 1997 1996
------- ------- ------- ------- ------- -------
Balance at Beginning of Period $34,140 $28,848 $33,004 $27,912 $33,295 $29,150
Net Income 4,861 5,315 6,900 7,119 8,412 7,615
------- ------- ------- ------- ------- -------
Total 39,001 34,163 39,904 35,031 41,707 36,765
Less: Dividends 904 868 1,807 1,736 3,610 3,470
------- ------- ------- ------- ------- -------
Balance at End of Period $38,097 $33,295 $38,097 $33,295 $38,097 $33,295
======= ======= ======= ======= ======= =======
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months
Ended March 31,
1997 1996
-------- --------
Cash Flows Provided by Operating Activities $ 8,431 $ 9,138
-------- --------
Cash Flows From Investing Activities -
Capital Expenditures (5,884) (3,882)
-------- --------
Cash Flows From Financing Activities:
Repayment of Long-Term Debt (2,089) (1,046)
Proceeds From Issuance of Long-Term Debt 12,000
Changes in Short-Term Borrowings (15,000) (1,800)
Payment of Dividends, Net of Dividend Reinvestment (1,631) (1,642)
-------- --------
Net Cash Used In Financing Activities (6,720) (4,488)
-------- --------
Net (Decrease) Increase in Cash and Cash Equivalents (4,173) 768
-------- --------
Cash & Cash Equivalents at Beginning of Period 12,030 1,023
-------- --------
Cash & Cash Equivalents at End of Period $ 7,857 $ 1,791
======== ========
See Accompanying Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. 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"). Minority interest represents the respective other owner's
proportionate share of the equity of Bay Gas and Southern Gas Transmission
Company. All significant intercompany balances and transactions have been
eliminated.
Note 2. The accompanying unaudited condensed financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. All adjustments,
consisting of normal and recurring accruals, which are, in the opinion of
management, necessary to present fairly the results for the interim periods
have been made and are of a recurring nature. The statements should be read in
conjunction with the summary of accounting policies and notes to financial
statements included in the Company's annual report on Form 10-K for the fiscal
year ended September 30, 1996.
Note 3. Due to the high percentage of customers using gas for heating,
the Company's operations are seasonal in nature. Therefore, the results of
operations for the three and six month periods ended March 31, 1997 and 1996
are not indicative of the results to be expected for the full year.
Note 4. The Company issued $12,000,000 of 7.27% First Mortgage bonds
on November 26, 1996. The bonds mature beginning November 1, 2000 and ending
November 1, 2006.
Note 5. At the Annual Meeting of Stockholders held on January 31,
1997, stockholders approved a proposed amendment to the Restated Articles of
Incorporation of the Company to increase the authorized number of shares of
common stock of the Company to eight million and to reduce the par value of
such common stock from $2.50 per share to $.01 per share. The effect of this
change on the Company's financial statements at January 31, 1997 was a
reduction in the Common Stock Par Value of $8,037,421 and an increase in the
Capital in Excess of Par Value of the same amount. The change in par value has
been retroactively reflected in the financial statements for all dates
presented.
Note 6. Statement of Financial Accounting Standards No. 128, "Earnings
per Share" (SFAS 128), was issued in February 1997 and is effective for the
Company for the quarter ending December 31, 1997. SFAS 128 establishes
standards for computing and presenting earnings per share. The Company does
not expect the implementation of SFAS 128 to have a significant impact on the
Company's reported earnings per share.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Mobile Gas Service Corporation (Mobile Gas), an investor owned natural gas
utility incorporated under the laws of the State of Alabama, is engaged
principally in the distribution of natural gas to customers in southwest
Alabama. Mobile Gas serves over 100,000 residential, commercial, and
industrial customers. Gas deliveries to these customers are regulated by the
Alabama Public Service Commission (APSC).
Bay Gas Storage Company, Ltd. (Bay Gas) is a limited partnership in which MGS
Storage Services, Inc., a wholly owned subsidiary of Mobile Gas, is general
partner and 87.5% owner. Bay Gas operates an underground gas storage cavern
which is used to provide storage and delivery of natural gas for Mobile Gas and
other customers. Bay Gas is a separate utility with rates regulated by the
APSC for intrastate contracts. By Federal Energy Regulatory Commission order,
Bay Gas is permitted to charge market-based rates for interstate storage
contracts.
Unregulated operations include the sale and financing of appliances, jobbing
work, and contract and consulting work for utilities and industrial customers.
Financial Condition
The Company relies on funds provided by operations and short-term borrowings to
meet working capital requirements and to finance capital expenditures on a
temporary basis. During the six months ended March 31, 1997 and 1996,
operating activities provided cash of $8,431,000 and $9,138,000, respectively.
The decrease in cash provided by operating activities is attributed to the
decrease in net income of $219,000, a net decrease in operating assets and
liabilities, which generally results from the timing of receipts and payments,
and an increase in the non-cash components of net income, which offset
partially the above impacts.
The Company's capital needs are due primarily to its on-going construction
program. In addition to its normal construction program, an estimated $7
million in new facilities are under construction to service a large new
industrial customer by mid-1997. At March 31, 1997 $4.0 million had been
expended on these facilities. Capital expenditures related to the Company's
normal construction program for the remainder of fiscal 1997 are estimated to
be $ 4.0 million.
Net cash used by financing activities for the six months ended March 31, 1997
and 1996 was $6,720,000 and $4,488,000, respectively. Several components of
financing activities contributed to this decrease. The increase in the
repayment of long-term debt is attributed primarily to the Company exercising
its option to retire an additional $750,000 of the 10.25% First Mortgage Bonds.
Changes in short-term borrowings represent the net of borrowings and payments
on the Company's revolving credit agreement. Of the $15,000,000 net pay-down
since September 30, 1996, $11,000,000 is related to the maturity of short-term
investments which were purchased with funds drawn on the revolving credit
agreement. The proceeds from the maturity of these investments were applied to
the balance owed on the revolving credit agreement. In order to fund on-going
capital projects, the Company issued $12,000,000 7.27% First Mortgage Bonds in
November 1996.
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Funds for the Company's working capital and capital needs are expected to come
from cash provided by operations, the November 1996 bond issue, and draws upon
the Company's revolving credit agreement of which $20 million is available at
March 31, 1997. Management believes it has adequate financial flexibility to
meet its expected cash needs in the foreseeable future.
Results of Operations
Net income for the three, six and twelve month periods ended March 31, 1997 was
$4,861,000 or $1.49 per share, $6,900,000 or $2.12 per share, and $8,412,000 or
$2.60 per share, respectively, compared to $5,315,000 or $1.65 per share,
$7,119,000 or $2.21 per share, and $7,615,000 or $2.37 per share, respectively,
for the corresponding periods of the prior year.
Weather in the Company's service area during the three, six and twelve months
ended March 31, 1997 was 29%, 25% and 17%, respectively, warmer than the prior
year periods and 14%, 10% and 4%, respectively, warmer than normal. Even
though sales volumes to residential and small commercial customers were down
due to warmer weather, a temperature rate adjustment implemented on November 1,
1996 helped mitigate the effect of warmer than normal weather on Company
earnings, particularly during the second quarter of fiscal 1997. The
temperature rate adjustment is applied to the aforementioned customers' gas
bills during the months of November through April and is designed to level out
the effects of temperature extremes on Company earnings by reducing high gas
bills to customers in colder than normal weather and increasing gas revenues
received by the Company in warmer than normal weather. For the three, six and
twelve month periods ended March 31, 1996, the impact of colder weather
increased earnings per share $.27, $.34 and $.31, respectively, compared to
earnings that would have occurred with normal weather. The fiscal 1997 three
and six month earnings, on a weather normalized basis, showed improvement over
fiscal 1996 as a result of stable operating and maintenance expenses, improved
gas storage results, and consistent industrial load growth. Additionally,
both the six and twelve month earnings for 1997 were positively impacted as
compared to the same prior year periods by a general rate increase which became
effective on December 1, 1995.
Gas revenues increased 4%, 5% and 10%, respectively, for the three, six and
twelve months ended March 31, 1997 compared to the corresponding periods in the
prior year. The increase in gas revenues is due primarily to the increase in
the purchased gas adjustment component included within customer rates which was
in response to increased gas costs incurred by the Company. Other contributing
factors for the three current year periods were increased gas storage revenues
and the recently implemented temperature rate adjustment. Gas revenues for the
1997 six and twelve month periods were impacted also by the general rate
increase. The effects of warmer weather during the 1997 three, six and twelve
month periods resulted in a decrease of gas sold and delivered to
temperature-sensitive customers of 23%, 19% and 11%, respectively, which
partially offset the aforementioned impacts on gas revenues.
Cost of gas increased 22%, 18% and 15% for the three, six and twelve months
ended March 31, 1997 due primarily to increased gas costs per unit of purchased
gas. The Company's rate tariffs allow a pass-through to customers of the
incurred cost of gas. Unit gas costs were much higher during current year
periods compared to the prior year periods resulting in increased billings to
customers under the Company's purchased gas adjustment provision.
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Operations and maintenance expenses decreased 7% for the second quarter of
fiscal 1997. Factors contributing to this decrease were: increased capitalized
costs due to a higher level of construction activity, lower workers
compensation premium expense, lower promotional sales expenses, and lower
overtime pay than in last year's unusually cold winter. The above factors were
offset partially by an increase in bad debt expense of $136,000 attributed
primarily to higher customer bills resulting from the pass-through of incurred
gas costs. Operations and maintenance expenses increased 8% for the twelve
months ended March 31, 1997. Certain non-routine maintenance projects totaling
$450,000 were initiated and completed during the last six months of fiscal
1996. Additionally, increased advertising, contributions and additional
personnel hired in late fiscal 1995 contributed to the twelve month increase.
Taxes, other than income taxes decreased $173,000 for the six months ended
March 31, 1997 as compared to the same period last year. During fiscal 1997
first quarter, the State of Alabama approved the Company's claim for refund
of a business license tax. As a result of this approval, the Company reduced
its accrued taxes, other than income taxes, by $246,000.
Interest income increased $487,000 for the twelve months ended March 31, 1997
as compared to the same period last year. An improved cash position during the
current twelve month period provided the Company more opportunities to invest
in short-term financial instruments.
Income tax expense changed primarily in relation to changes in pre-tax income
for the periods ended March 31, 1997.
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128) was issued in February 1997 and is effective for the Company for the
quarter ending December 31, 1997. SFAS 128 establishes standards for computing
and presenting earnings per share. The Company does not expect the
implementation of SFAS 128 to have a significant impact on the Company's
reported earnings per share.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
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3(i)-D Articles of Amendment dated January 31, 1997
to Restated Articles of Incorporation of
Mobile Gas Service Corporation (incorporated
by reference to Exhibit 3(i)-D to Form 8-K
Current Report filed February 12, 1997)
11 Computation of Earnings Per Share
27 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
-------------------
During the quarter for which this report is filed, the Company
filed one report on Form 8-K.
Date of Report Items Reported Under Item 5 Financial Statement
-------------- --------------------------- -------------------
January 31, 1997 Adoption of an amendment None
(filed February 12, 1997) to the Restated Articles of
Incorporation of the Company
and election of Directors of
the Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOBILE GAS SERVICE CORPORATION
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(Registrant)
Date: May 12, 1997 /s/ John S. Davis
----------------------- -------------------------------
John S. Davis
President and
Chief Executive Officer
Date: May 12, 1997 /s/ Charles P. Huffman
----------------------- -------------------------------
Charles P. Huffman
Vice President, Chief Financial
Officer, and Treasurer
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EXHIBIT INDEX
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EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
3(i)-D Articles of Amendment dated January 31, 1997
to Restated Articles of Incorporation of
Mobile Gas Service Corporation (incorporated
by reference to Exhibit 3(i)-D to Form 8-K
Current Report filed February 12, 1997)
11 Computation of Earnings Per Share 13
27 Financial Data Schedule (EDGAR version only)
12