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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 1998
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Commission File No. 0-29604
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ENERGYSOUTH, INC.
(Successor to Mobile Gas Service Corporation)
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Alabama 58-2358943
------------------------------ ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2828 Dauphin Street, Mobile, Alabama 36606
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 334-450-4774
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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 February 10, 1999 - 4,881,032
shares.
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ENERGYSOUTH, INC.
INDEX
Page No.
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PART I. Financial Information:
Consolidated Balance Sheets - December 31,
1998 and 1997 and September 30, 1998 3 - 4
Consolidated Statements of Income - Three and
Twelve Months Ended December 31, 1998 and 1997 5
Consolidated Statements of Retained Earnings -
Three and Twelve Months Ended December 31, 1998
and 1997 6
Consolidated Statements of Cash Flows - Three
Months Ended December 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 13
Quantitative and Qualitative Disclosures About
Market Risk 14
PART II. Other Information 15 - 16
Exhibit Index 17
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PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, September 30,
Assets 1998 1997 1998
------------------------ -------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 5,553 $ 2,090 $ 18,515
Receivables:
Gas 7,140 7,852 4,468
Unbilled Revenue (Note 6) 3,638
Merchandise 3,023 3,029 3,021
Other 730 607 759
Less Allowance for Doubtful Accounts (678) (606) (626)
Materials, Supplies, and Merchandise (at average cost) 1,256 1,139 1,327
Gas Stored Underground (at average cost) 1,634 1,524 1,435
Deferred Purchased Gas Adjustment 951
Deferred Gas Costs (Note 6) 1,492 176
Deferred Income Taxes 1,864 360 1,430
Prepayments 1,235 1,328 1,375
--------- --------- ---------
Total Current Assets 25,395 19,766 31,880
--------- --------- ---------
PROPERTY, PLANT, AND EQUIPMENT:
Property, Plant, and Equipment 170,996 166,152 170,894
Less Accumulated Depreciation and Amortization 46,267 41,633 44,872
--------- --------- ---------
Property, Plant, and Equipment in Service - Net 124,729 124,519 126,022
Construction Work in Progress 1,375 1,237 1,106
--------- --------- ---------
Total Property, Plant, and Equipment 126,104 125,756 127,128
--------- --------- ---------
OTHER ASSETS:
Regulatory Assets 857 1,081 909
Merchandise Receivables Due After One Year 5,614 5,156 5,371
Deferred Charges 1,060 1,302 1,253
--------- --------- ---------
Total Other Assets 7,531 7,539 7,533
--------- --------- ---------
Total $ 159,030 $ 153,061 $ 166,541
========= ========= =========
See Notes to Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
December 31, September 30,
Liabilities and Capitalization 1998 1997 1998
------------------------ -------------
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 971 $ 2,471 $ 4,600
Notes Payable 4,660 2,500 12,665
Accounts Payable 3,549 4,300 2,511
Dividends Declared 1,072 972 1,072
Customer Deposits 1,393 1,460 1,461
Taxes Accrued 4,667 2,619 3,551
Deferred Purchased Gas Adjustment 1,725 592
Interest Accrued 1,491 1,577 1,794
Other Liabilities 1,953 2,246 1,898
-------- -------- --------
Total Current Liabilities 21,481 18,145 30,144
-------- -------- --------
OTHER LIABILITIES:
Accrued Pension Cost 1,385 1,666 1,452
Accrued Postretirement Benefit Cost 1,307 1,061 1,332
Deferred Income Taxes 11,012 10,317 10,945
Deferred Investment Tax Credits 413 438 418
-------- -------- --------
Total Other 14,117 13,482 14,147
-------- -------- --------
Total Liabilities 35,598 31,627 44,291
-------- -------- --------
CAPITALIZATION:
Stockholders' Equity (Note 1)
Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares;
Outstanding: December 1998 -
4,877,000 Shares; December 1997 -
4,859,000 Shares; September 1997 -
4,872,000 Shares) 49 49 49
Capital in Excess of Par Value 18,232 17,834 18,135
Retained Earnings 43,156 38,399 41,711
-------- -------- --------
Total Stockholders' Equity 61,437 56,282 59,895
Minority Interest 3,413 3,099 3,376
Long-Term Debt (Less Current Maturities) 58,582 62,053 58,979
-------- -------- --------
Total Capitalization 123,432 121,434 122,250
-------- -------- --------
Total $159,030 $153,061 $166,541
======== ======== ========
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
Three Months Twelve Months
Ended December 31, Ended December 31,
----------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Operating Revenues
Gas Revenues $ 18,611 $ 18,990 $ 70,366 $ 71,670
Merchandise Sales and Jobbing 1,000 1,084 3,181 3,117
-------- -------- -------- --------
Total Operating Revenues 19,611 20,074 73,547 74,787
-------- -------- -------- --------
Operating Expenses
Cost of Gas 4,886 7,035 20,747 23,683
Cost of Merchandise and Jobbing 776 806 2,486 2,300
Operations 4,516 4,390 17,147 17,921
Maintenance 363 399 1,497 1,505
Depreciation 1,677 1,590 6,365 6,024
Taxes, Other Than Income Taxes 1,505 1,485 5,612 5,603
-------- -------- -------- --------
Total Operating Expenses 13,723 15,705 53,854 57,036
-------- -------- -------- --------
Operating Income 5,888 4,369 19,693 17,751
-------- -------- -------- --------
Other Income and (Expense)
Interest Expense (1,408) (1,413) (5,563) (5,744)
Allowance for Borrowed Funds Used During Construction 12 11 61 151
Interest Income 265 330 1,178 1,087
Minority Interest (164) (136) (553) (509)
-------- -------- -------- --------
Total Other Income (Expense) (1,295) (1,208) (4,877) (5,015)
-------- -------- -------- --------
Income Before Income Taxes 4,593 3,161 14,816 12,736
-------- -------- -------- --------
Income Taxes 1,695 1,172 5,489 4,660
-------- -------- -------- --------
Income Before Cumulative Effect of Changes in Accounting Principles 2,898 1,989 9,327 8,076
-------- -------- -------- --------
Cumulative Effect on Prior Years of Change in Accounting Method For
Unbilled Revenue (Net of Income Tax of $133)(Note 6) 235 -- 235 --
Cumulative Effect on Prior Years of Change in Accounting Method For
Start-Up Costs (Net of Income Tax of $(350))(Note 7) (616) -- (616) --
-------- -------- -------- --------
Total Cumulative Effect of Accounting Changes (Net of Tax) (381) -- (381) --
-------- -------- -------- --------
Net Income (Note 4) $ 2,517 $ 1,989 $ 8,946 $ 8,076
======== ======== ======== ========
Basic Earnings Per Share
Income Before Cumulative Effect of Changes in Accounting Principles $ 0.60 $ 0.41 $ 1.92 $ 1.66
Cumulative Effect of Accounting Changes (0.08) -- (0.08) --
-------- -------- -------- --------
Net Income $ 0.52 $ 0.41 $ 1.84 $ 1.66
======== ======== ======== ========
Diluted Earnings Per Share
Income Before Cumulative Effect of Changes in Accounting Principles $ 0.59 $ 0.40 $ 1.90 $ 1.65
Cumulative Effect of Accounting Changes (0.08) -- (0.08) --
-------- -------- -------- --------
Net Income $ 0.51 $ 0.40 $ 1.82 $ 1.65
======== ======== ======== ========
Pro Forma Amounts Assuming Retroactive Application
of Accounting Changes
Net Income $ 2,898 $ 2,846 $ 8,504 $ 8,057
======== ======== ======== ========
Basic Earnings Per Share $ 0.60 $ 0.59 $ 1.75 $ 1.66
======== ======== ======== ========
Diluted Earnings Per Share $ 0.59 $ 0.58 $ 1.73 $ 1.64
======== ======== ======== ========
Cash Dividends Declared Per Share of Common Stock $ 0.22 $ 0.20 $ 0.86 $ 0.79
======== ======== ======== ========
Average Common Shares Outstanding (Note 8)
Basic 4,877 4,858 4,870 4,851
Diluted 4,927 4,927 4,926 4,900
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
Three Months Twelve Months
Ended December 31, Ended December 31,
-------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
Balance at Beginning of Period $41,711 $37,382 $38,399 $34,139
Net Income 2,517 1,989 8,946 8,076
------- ------- ------- -------
Total 44,228 39,371 47,345 42,215
Less: Dividends 1,072 972 4,189 3,816
------- ------- ------- -------
Balance at End of Period $43,156 $38,399 $43,156 $38,399
======= ======= ======= =======
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In Thousands)
Three Months
Ended December 31,
-----------------------
1998 1997
---------- ---------
Cash Flows Provided (Used) by Operating Activities $ 1,742 $ (1,596)
-------- --------
Cash Flows Used In Investing Activities -
Capital Expenditures (1,698) (1,506)
-------- --------
Cash Flows From Financing Activities:
Repayment of Long-Term Debt (4,026) (1,985)
Changes in Short-Term Borrowings (8,005) (8,200)
Payment of Dividends, Net of Dividend Reinvestment (975) (883)
-------- --------
Net Cash Used by Financing Activities (13,006) (11,068)
-------- --------
Net Decrease in Cash and Cash Equivalents (12,962) (14,170)
-------- --------
Cash & Cash Equivalents at Beginning of Period 18,515 16,260
-------- --------
Cash & Cash Equivalents at End of Period $ 5,553 $ 2,090
======== ========
See Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The consolidated financial statements of EnergySouth, Inc. and its
subsidiaries (collectively the "Company") include the accounts of Mobile Gas
Service Corporation; MGS Energy Services, Inc.; MGS Storage Services; MGS
Marketing Services, Inc.; an 87.5% owned partnership, Bay Gas Storage Company,
Ltd. ("Bay Gas"); and a 51% owned partnership, Southern Gas Transmission Company
("SGT"). All significant intercompany balances and transactions have been
eliminated.
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 Annual Report on Form 10-K of the Company for the fiscal year ended
September 30, 1998.
Note 3. Due to the high percentage of customers using gas for heating, the
Company's operations are seasonal in nature. Therefore, the results of
operations for the three month periods ended December 31, 1998 and 1997 are not
indicative of the results to be expected for the full year.
Note 4. Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" was effective for the Company on October 1, 1998. The
Company does not currently have any comprehensive income other than items
included in net income. Therefore, comprehensive income is the same as net
income for all periods reported.
Note 5. Statement of Financial Accounting Standards No, 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS 131) is effective for
the Company for the fiscal year ending September 30, 1999. SFAS 131 establishes
standards for reporting operating segments by public business enterprises in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Interim
disclosures are not required in the year of adoption; accordingly, the Company
expects to report the required financial and descriptive information about its
operating segments beginning with its annual financial statements for the fiscal
year ending September 30, 1999.
Note 6. Effective October 1, 1998 the Company changed its method of accounting
for unbilled revenues to be consistent with prevailing industry practice. Prior
to October 1, 1998, the Company recorded revenues as meters were read on a
monthly cycle basis and the commodity cost of purchased gas applicable to gas
delivered but not yet billed at month-end was deferred. The accrual method
adopted records revenues based upon estimated consumption through the end of the
month for all customers regardless of the meter reading date. The effect of the
change for the three months and twelve months ended December 31, 1998 was to
increase net income by $1,078,000 ($0.22 per share, diluted) of which $843,000
($.17 per share, diluted) is included in operating income, and $235,000 ($0.05
per share, diluted), the cumulative effect of the change, is reported as a
separate component of net
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income. This change in accounting method has the effect of recognizing income
earlier within the fiscal year but will have a minimal impact on the fiscal year
as a whole.
Note 7. Effective October 1, 1998, the Company adopted Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5) and recorded a
cumulative effect of change in accounting method of $616,000 ($.13 per share,
diluted) as a result of expensing organization and start-up costs previously
capitalized. The effect on operating income as a result of not expensing the
amortization of such costs is not material to the financial statements.
Note 8. Basic earnings per share are computed based on the weighted average
number of common shares outstanding during each period. Diluted earnings per
share are computed based on the weighted average number of common shares and
diluted potential common shares, using the treasury stock method, outstanding
during each period. Average common shares used to compute basic earnings per
share differed from average common shares used to compute diluted earnings per
share by equivalent shares of 50,000 and 69,000 for the three months ended
December 31, 1998 and 1997, respectively, and 56,000 and 49,000 for the twelve
months ended December 31, 1998 and 1997, respectively. These differences in
equivalent shares are from outstanding stock options.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
The following discussion and analysis encompasses EnergySouth, Inc. and its
direct and indirect subsidiaries (collectively referred to as the "Company").
EnergySouth became the holding company for Mobile Gas Service Corporation
(Mobile Gas) on February 2, 1998, and at that time Mobile Gas became a
wholly-owned subsidiary. The Company, primarily through Mobile Gas, is engaged
principally in the distribution of natural gas to residential, commercial and
industrial customers in Southwest Alabama. Other subsidiaries are engaged in
providing gas pipeline transportation, gas storage, gas marketing and other
energy-related services. The Alabama Public Service Commission (APSC) regulates
the Company's gas distribution and storage operations. Mobile Gas' rate tariffs
for gas distribution allow a pass-through to customers of the cost of gas
supplies, certain taxes, and incremental costs associated with the replacement
of cast iron mains. These costs, therefore, have little impact on the Company's
earnings. Other costs, including a return on investment, have historically been
recovered through rates approved in traditional rate proceedings. Interstate gas
storage contracts do not require APSC approval since the Federal Energy
Regulatory Commission (FERC), which has jurisdiction over such contracts, allows
them to have market-based rates. Market-based rates allow Bay Gas to respond to
market conditions and minimizes regulatory involvement in the setting of its
rates for storage services. Bay Gas filed a petition with the FERC on November
5, 1998 seeking authority to provide transportation-only services for both
interstate and intrastate shippers. Such application is currently pending.
The Company's distribution business is highly seasonal and temperature-sensitive
since residential and small commercial customers use more gas during colder
weather for heating. As a result, the Company's operating results in any given
period historically have reflected, in addition to other matters, the impact of
weather, through either increased or decreased sales volumes. The Company
utilizes a temperature rate adjustment rider to offset the impact that unusually
cold or warm weather has on customer billings and operating margins by reducing
high gas bills in colder than normal weather and increasing gas revenues in
warmer than normal weather. Normal weather for the Company's service territory
is defined as the 30-year average temperature as determined by the National
Weather Service. In the gas utility industry, degree-days are the benchmark for
measuring coldness and represent the number of degrees that the daily average
temperature falls below 65 degrees Fahrenheit.
RESULTS OF OPERATIONS
NET INCOME
Net income for the three months ended December 31, 1998 and 1997 was
$2,517,000 or $.51 per share and $1,989,000 or $.40 per share, respectively. Net
income for the twelve months ended December 31, 1998 and 1997 was $8,946,000 or
$1.82 per share and $8,076,000 or $1.65 per share, respectively. The 1998
earnings include the effects of changes in accounting for unbilled revenues and
start-up costs as discussed in further detail within "New Accounting Standards"
below while, in accordance with prescribed accounting rules, the amounts
presented for the same periods in the prior year have not been adjusted. The
effect of these accounting changes for the three and twelve months ended
December
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31, 1998 was to increase net income by $462,000 ($.09 per share). Unbilled
revenues and related costs recorded at December 31, 1998 and reflected within
operating income increased net income by $843,000 while the cumulative effect of
both accounting changes decreased net income by $381,000. Assuming retroactive
application of the accounting changes, earnings per share amounts for the fiscal
1999 and 1998 first quarter would have been $.59 and $.58, respectively, while
earnings per share amounts for the twelve months ended December 31, 1998 and
1997 would have been $1.73 and $1.64, respectively. All references to earnings
per share amounts are computed on a diluted basis.
The increase in first quarter earnings, assuming retroactive
application of the accounting changes, is due to an increase in margins from
temperature-sensitive and transportation customers and was offset partially by
an increase in operating expenses. The increase in earnings on a retroactive
basis for the twelve months ended December 31, 1998 is due primarily to
decreased operations expenses and increased margins from transportation
customers.
OPERATING REVENUES
Gas revenues decreased 2% for the three and twelve months ended December 31,
1998 compared to the same prior year periods. Included within gas revenues at
December 31, 1998 is an accrual for unbilled gas revenues of $3,638,000 while no
such accrual is included within the prior year periods since this new accounting
method was adopted in the fiscal 1999 first quarter. Assuming retroactive
application of the accounting change for unbilled revenues, gas revenues
decreased 17% and 7%, respectively, for the fiscal 1999 three and twelve month
periods as a result of decreased gas sales volumes of 32% and 12%, respectively,
primarily to temperature-sensitive customers. Causing this decrease was weather
during the three and twelve months ended December 31, 1998 which was 53% and
18%, respectively, warmer than prior year and 35% and 13%, respectively, warmer
than normal. Warmer or colder than normal weather has little impact on the
Company's earnings as a result of the temperature adjustment rider, however,
weather does impact the level of gas revenues since gas costs on actual volumes
are passed through to customers. In addition to the effect on gas revenues of
lower gas sales volumes, the Company passed through to customers lower purchased
gas costs on a per unit basis during the fiscal 1999 periods through the
purchased gas adjustment component of customer rates. Weather normalized gas
revenues from temperature sensitive customers were impacted positively during
the three months ended December 31, 1998 by an increase in the customer
consumption per degree day compared to the fiscal 1998 first quarter thus
providing increased margin. Transportation revenues during the three and twelve
months ended December 31, 1998 increased $320,000 and $1,469,000, respectively,
due to increased plant utilization by existing customers, several new customers
added to the distribution system, and certain sales customers who switched to
transportation agreements.
EXPENSES
Cost of gas decreased 31% and 12%, respectively, for the three and twelve months
ended December 31, 1998 compared to the same periods of the prior fiscal year.
Included within cost of gas at December 31, 1998 is an accrual for cost of gas
associated with unbilled gas revenues of $1,752,000. Assuming retroactive
application of the accounting change for unbilled gas revenues, cost of gas
decreased 46% and 23%, respectively, for the fiscal 1999 three and twelve month
periods. The cost of gas decrease for both periods is attributed to decreased
gas sales volumes and decreased purchased gas costs on a per unit basis.
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Operations and maintenance expense increased 2% for the three months ended
December 31, 1998 compared to the same period of fiscal 1998 primarily due to
the timing of certain operation expenses. Operations and maintenance expenses
decreased 4% for the twelve months ended December 31, 1998 due primarily to
decreased retirement expense and cost control efforts throughout the Company.
Depreciation expense increased 5% and 6%, respectively, for the three and twelve
months ended December 31, 1998 due to an increase in depreciable
plant-in-service.
Taxes, other than income taxes, primarily consist of state and local taxes that
are based on gross revenues and fluctuate accordingly.
Interest expense decreased less than 1% and 3%, respectively, for the three and
twelve months ended December 31, 1998. During the fiscal 1999 first quarter, the
Company paid a fee of $73,200 to redeem early $2,500,000 of First Mortgage
Bonds, 10.25% Series. Excluding this early redemption fee, interest expense
decreased 6% and 4%, respectively, for the three and twelve-month periods ended
December 31, 1998 which reflects the reduction in long-term debt principal
balances.
Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs decreased $90,000 for the twelve months ended December 31, 1998
due to completion in August 1997 of new facilities to service a large industrial
customer.
Interest income decreased $65,000 and increased $91,000, respectively, for the
three and twelve months ended December 31, 1998 compared to the corresponding
periods of fiscal 1998. The fiscal 1998 first quarter includes interest income
of $42,000 recorded on an income tax refund, whereas the fiscal 1999 periods do
not include any such miscellaneous interest income. The increase in interest
income for the twelve-month period comparison is due primarily to increased
financing of merchandise sales and installations and increased income from
short-term investments.
Income tax expense changed primarily in relation to changes in income before
income taxes.
NEW ACCOUNTING STANDARDS
Effective October 1, 1998 the Company changed its method of accounting for
unbilled revenues to be consistent with prevailing industry practice. Prior to
October 1, 1998, the Company recorded revenues as meters were read on a monthly
cycle basis and the commodity cost of purchased gas applicable to gas delivered
but not yet billed at month-end was deferred. The accrual method adopted records
revenues based upon estimated consumption through the end of the month for all
customers regardless of the meter reading date. The effect of the change for the
three months and twelve months ended December 31, 1998 was to increase net
income by $1,078,000 ($0.22 per share, diluted) of which $843,000 ($0.17 per
share, diluted) is included in operating income, and $235,000 ($0.05 per share,
diluted), the cumulative effect of the change, is reported as a separate
component of net income. This change in accounting method has the effect of
recognizing income earlier within the fiscal year but will have a minimal impact
on the fiscal year as a whole.
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Effective October 1, 1998, the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" (SOP 98-5) and recorded a
cumulative effect of change in accounting method of $616,000 ($0.13 per share,
diluted) as a result of expensing organization and start-up costs previously
capitalized. The effect on operating income as a result of not expensing the
amortization of such costs is not material to the financial statements.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130) was effective for the Company on October 1, 1998. The Company
does not currently have any comprehensive income other than items included in
net income. Therefore, comprehensive income is the same as net income for all
periods reported.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131) is effective for the
Company for the fiscal year ending September 30, 1999. SFAS 131 establishes
standards for reporting operating segments by public business enterprises in
annual financial statements and requires that those enterprises report selected
information about operating segments on interim financial reports issued to
shareholders. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Interim
disclosures are not required in the year of adoption, accordingly, the Company
expects to report the required financial and descriptive information about its
operating segments beginning with its annual financial statements for the fiscal
year ending September 30, 1999.
FINANCIAL CONDITION AND LIQUIDITY
The Company generally relies on cash generated from operations and on a
temporary basis, short-term borrowings, to meet working capital requirements and
to finance normal capital expenditures. The Company issues debt and equity for
longer term financing as needed.
Operating activities provided cash of $1,742,000 for the three months ended
December 31, 1998 compared to using cash of $1,596,000 for the prior year first
quarter. The increase in cash flow from operating activities is attributed to
increased net income and non-cash components of net income, primarily the
expensing of organization and start-up costs, and the change in operating assets
and liabilities, which reflects the change in receipts and payments on
receivables and payables.
Financing activities used cash of $13,006,000 and $11,068,000, respectively, for
the three months ended December 31, 1998 and 1997. The increase in cash used by
financing activities primarily reflects the early redemption of $2,500,000 of
First Mortgage Bonds, 10.25% Series during the fiscal 1999 first quarter.
Cash used in investing activities increased $192,000 during the three months
ended December 31, 1998 primarily as a result of the Company's regular
construction program. The Company's capital needs for construction of
distribution and storage facilities, purchase of equipment and other general
improvements for the remainder of fiscal 1999 is estimated to be $10,387,000
Funds for the Company's cash needs are expected to come from cash provided by
operations and borrowings under the Company's revolving credit agreement.
Management believes it has adequate financial flexibility to meet its expected
cash needs in the foreseeable future.
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YEAR 2000
The Company is working to resolve the potential impact of the Year 2000 on the
ability of its computerized information systems to accurately process
information that may be date sensitive. Any of the programs it uses that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures that could ultimately cause the Company to
become unable to process transactions and could thereby require the Company to
cease operations pending resolution of the problem. Such an eventuality would
materially adversely affect the Company's business, financial condition and
results of operations. Accordingly, management is devoting significant attention
to identifying Year 2000 issues and testing its systems for Year 2000
compliance. To date, the Company has incurred Year 2000 remediation costs of
approximately $145,000 and has budgeted approximately $42,000 to complete the
remediation costs. The Company has been utilizing working capital to fund its
Year 2000 compliance program and anticipates that it will continue to do so.
The Company has made changes to its computer application programs and has
completed testing of such programs for Year 2000 compliance. The Company is
contacting each of its significant vendors to obtain a commitment that they are
or will be Year 2000 compliant. If such assurances are not forthcoming, or if
management believes for any reason that any of its significant vendors will not
be Year 2000 compliant when required, management plans to either contract with
other vendors that would be able to provide similar services at similar costs or
have plans in place so that operations will not be materially affected.
Management of the Company is in the process of formalizing its Year 2000
contingency plan for its computer application programs and for its vendors. Such
plan is expected to be completed in the second quarter of fiscal 1999.
Management believes that the Company will be able to continue its operations
without material interruption of its business and without a material adverse
effect on the Company's results of operations.
FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are subject to risks
and uncertainties that may cause actual future results to differ materially.
Such risks and uncertainties with respect to the Company include, but are not
limited to, its ability to successfully achieve internal performance goals,
competition, the effects of state and federal regulation, including rate relief
to recover increased capital and operating costs, general economic conditions,
and specific conditions in the Company's service area. Additional factors that
may impact forward-looking statements include the Company's dependence on
external suppliers, partners, operators, service providers, and governmental
agencies and their ability to upgrade their business systems and measurement and
control systems in order to mitigate the potential adverse effects of the Year
2000 issue.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company does not have any derivative financial instruments such as futures,
forwards, swaps and options. Also, the Company has no market risk-sensitive
instruments held for trading purposes. At December 31, 1998 the Company had
approximately $59.6 million of long-term debt at fixed interest rates. Interest
rates range from 7.27% to 9.00% and the maturity dates of such debt extend to
2014. See the information provided under the captions "The Company", "Gas
Supply", and "Liquidity and Capital Resources" in the Company's Form 10-K for
the fiscal year ended September 30, 1998 for a discussion of the Company's risks
related to regulation, weather, gas supply, and the capital-intensive nature of
the Company's business.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of EnergySouth, Inc. was held on
January 29, 1999.
(b) The following nominees were re-elected as Directors of the Company, to
Serve until the 2002 Annual Meeting of Stockholders, by the votes
indicated:
Nominee For Against
--------------------- --------- ---------
William J. Hearin 4,427,150 31,944
Joseph G. Hollis, Jr. 4,429,554 29,540
Gaylord C. Lyon 4,428,206 30,888
E. B. Peebles, Jr. 4,428,925 30,169
The other Directors of the Company whose terms of office continued
after the 1999 Annual Meeting are as indicated below:
To Serve Until the Annual
Director Meeting of Stockholders in the year
----------------------- -----------------------------------
John C. Hope, III 2000
S. Felton Mitchell, Jr. 2000
Thomas B. VanAntwerp 2000
John S. Davis 2001
Walter L. Hovell 2001
G. Montgomery Mitchell 2001
F. B. Muhlfeld 2001
(c) The stockholders of the Company approved an amendment to increase the
number of shares reserved for issuance under the Amended and Restated
Stock Option Plan of EnergySouth, Inc. (the "Plan") from 225,000 to
350,000 by the following vote:
For Against Abstain
--------- ------- -------
4,179,508 207,337 72,248
A copy of the Amended and Restated Stock Option Plan of EnergySouth,
Inc. is attached hereto as Exhibit 10(r)-1.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
10(r)-1 Amended and Restated Stock Option Plan of
EnergySouth, Inc.
11 Computation of Earnings Per Share
18 Change in Accounting Principle
27 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
During the quarter for which this report is filed, the
Registrant filed no reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENERGYSOUTH, INC.
(Successor to Mobile Gas Service Corporation)
-------------------------------------------
(Registrant)
Date: February 12, 1999 /s/ John S. Davis
------------------------- --------------------------------------------
John S. Davis
President and
Chief Executive Officer
Date: February 12, 1999 /s/ Charles P. Huffman
------------------------- --------------------------------------------
Charles P. Huffman
Vice President, Chief Financial
Officer, and Treasurer
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EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10(r)-1 Amended and Restated Stock Option Plan of EnergySouth, Inc.
11 Computation of Earnings Per Share
18 Change in Accounting Principle
27 Financial Data Schedule (EDGAR version only)*
17