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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 March 31, 1999
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Commission File No. 0-29604
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ENERGYSOUTH, INC.
(Successor to Mobile Gas Service Corporation)
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(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 May 3, 1999 - 4,885,513 shares.
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ENERGYSOUTH, INC.
INDEX
Page No.
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PART I. Financial Information:
Consolidated Balance Sheets - March 31,
1999 and 1998 and September 30, 1998 3 - 4
Consolidated Statements of Income - Three, Six and
Twelve Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Retained Earnings - Three,
Six and Twelve Months Ended March 31, 1999
and 1998 6
Consolidated Statements of Cash Flows - Six
Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 14
Quantitative and Qualitative Disclosures About
Market Risk 15
PART II. Other Information 16
Exhibit Index 17
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PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
March 31, September 30,
Assets 1999 1998 1998
-------------------------- ---------
(Unaudited)
CURRENT ASSETS:
Cash and Cash Equivalents $ 8,700 $ 7,305 $ 18,515
Receivables:
Gas 6,947 7,779 4,468
Unbilled Revenue (Note 6) 1,767
Merchandise 3,007 2,945 3,021
Other 690 733 759
Less Allowance for Doubtful Accounts (814) (648) (626)
Materials, Supplies, and Mdse (at average cost) 1,488 1,358 1,327
Gas Stored Underground for Current Use (at average cost) 628 793 1,435
Deferred Gas Costs (Note 6) 0 591 176
Deferred Income Taxes 2,573 1,663 1,430
Prepayments 992 1,083 1,375
--------- --------- ---------
Total Current Assets 25,978 23,602 31,880
--------- --------- ---------
PROPERTY, PLANT, AND EQUIPMENT:
Property, Plant, and Equipment 172,067 166,745 170,894
Less: Accumulated Depreciation and Amortization 47,599 42,876 44,872
--------- --------- ---------
Property, Plant, and Equipment in Service - Net 124,468 123,869 126,022
Construction Work in Progress 1,585 1,656 1,106
--------- --------- ---------
Total Property, Plant, and Equipment - Net 126,053 125,525 127,128
--------- --------- ---------
OTHER ASSETS:
Regulatory Asset 805 1,023 909
Merchandise Receivables Due After One Year 5,584 5,015 5,371
Deferred Charges 1,006 1,356 1,253
--------- --------- ---------
Total Other Assets 7,395 7,394 7,533
--------- --------- ---------
Total $ 159,426 $ 156,521 $ 166,541
========= ========= =========
See Notes to Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
March 31, September 30,
Liabilities and Capitalization 1999 1998 1998
-------- -------- --------
(Unaudited)
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 918 $ 2,372 $ 4,600
Notes Payable 12,665
Accounts Payable 3,237 3,558 2,511
Dividends Declared 1,074 973 1,072
Customer Deposits 1,456 1,517 1,461
Taxes Accrued 4,240 3,395 3,551
Deferred Purchased Gas Adjustment 3,337 1,333 592
Interest Accrued 1,721 1,926 1,794
Other Liabilities 2,874 2,176 1,898
-------- -------- --------
Total Current Liabilities 18,857 17,250 30,144
-------- -------- --------
OTHER LIABILITIES:
Accrued Pension Cost 1,319 1,535 1,452
Accrued Postretirement Benefit Cost 1,283 1,049 1,332
Deferred Income Taxes 11,305 10,854 10,945
Deferred Investment Tax Credits 408 432 418
-------- -------- --------
Total Other 14,315 13,870 14,147
-------- -------- --------
Total Liabilities 33,172 31,120 44,291
-------- -------- --------
CAPITALIZATION:
Stockholders' Equity
Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares;
Outstanding: March, 1999 -
4,881,000 Shares; March 1998 -
4,864,000 Shares; September, 1998 -
4,872,000 Shares) 49 49 49
Capital in Excess of Par Value 18,326 17,961 18,135
Retained Earnings 45,841 42,217 41,711
-------- -------- --------
Total Stockholders' Equity 64,216 60,227 59,895
Minority Interest 3,456 3,175 3,376
Long-Term Debt (Less Current Maturities) 58,582 61,999 58,979
-------- -------- --------
Total Capitalization 126,254 125,401 122,250
-------- -------- --------
Total $159,426 $156,521 $166,541
======== ======== ========
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
Three Months Six Months Twelve Months
Ended March 31, Ended March 31, Ended March 31,
------------------ ------------------ ------------------
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- --------
Operating Revenues
Gas Revenues $ 22,394 $ 27,782 $ 41,005 $ 46,772 $ 65,005 $ 70,744
Merchandise Sales and Jobbing 693 729 1,693 1,814 3,143 3,223
-------- -------- -------- -------- -------- --------
Total Operating Revenues 23,087 28,511 42,698 48,586 68,148 73,967
-------- -------- -------- -------- -------- --------
Operating Expenses
Cost of Gas 7,156 11,008 12,042 18,043 16,889 23,357
Cost of Merchandise and Jobbing 557 543 1,333 1,349 2,500 2,388
Operations 4,559 4,192 9,076 8,583 17,549 17,359
Maintenance 352 453 715 852 1,396 1,705
Depreciation 1,656 1,591 3,333 3,181 6,430 6,116
Taxes, Other Than Income Taxes 1,711 1,923 3,216 3,408 5,400 5,561
-------- -------- -------- -------- -------- --------
Total Operating Expenses 15,991 19,710 29,715 35,416 50,164 56,486
-------- -------- -------- -------- -------- --------
Operating Income 7,096 8,801 12,983 13,170 17,984 17,481
-------- -------- -------- -------- -------- --------
Other Income and (Expense)
Interest Expense (1,289) (1,405) (2,697) (2,818) (5,412) (5,719)
Allowance for Borrowed Funds Used During Construction 9 13 21 23 57 112
Interest Income 316 297 581 628 1,166 1,151
Minority Interest (129) (132) (292) (269) (550) (484)
-------- -------- -------- -------- -------- --------
Total Other Income (Expense) (1,093) (1,227) (2,387) (2,436) (4,739) (4,940)
-------- -------- -------- -------- -------- --------
Income Before Income Taxes 6,003 7,574 10,596 10,734 13,245 12,541
-------- -------- -------- -------- -------- --------
Income Taxes 2,244 2,783 3,939 3,955 4,950 4,536
-------- -------- -------- -------- -------- --------
Income Before Cumulative Effect of Changes in Accounting Principles 3,759 4,791 6,657 6,779 8,295 8,005
-------- -------- -------- -------- -------- --------
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 $ 3,759 $ 4,791 $ 6,276 $ 6,779 $ 7,914 $ 8,005
======== ======== ======== ======== ======== ========
Basic Earnings Per Share
Income Before Cumulative Effect of Changes in Accounting Principles $ 0.77 $ 0.99 $ 1.37 $ 1.39 $ 1.70 $ 1.65
Cumulative Effect of Accounting Changes -- -- (0.08) -- (0.08) --
-------- -------- -------- -------- -------- --------
Net Income $ 0.77 $ 0.99 $ 1.29 $ 1.39 $ 1.62 $ 1.65
======== ======== ======== ======== ======== ========
Diluted Earnings Per Share
Income Before Cumulative Effect of Changes in Accounting Principles $ 0.76 $ 0.97 $ 1.35 $ 1.38 $ 1.69 $ 1.63
Cumulative Effect of Accounting Changes -- (0.08) -- (0.08) --
-------- -------- -------- -------- -------- --------
Net Income $ 0.76 $ 0.97 $ 1.27 $ 1.38 $ 1.61 $ 1.63
======== ======== ======== ======== ======== ========
Pro Forma Amounts Assuming Retroactive Application
of Accounting Changes
Net Income $ 3,759 $ 4,163 $ 6,657 $ 7,009 $ 8,103 $ 7,898
======== ======== ======== ======== ======== ========
Basic Earnings Per Share $ 0.77 $ 0.86 $ 1.37 $ 1.44 $ 1.66 $ 1.63
======== ======== ======== ======== ======== ========
Diluted Earnings Per Share $ 0.76 $ 0.84 $ 1.35 $ 1.42 $ 1.64 $ 1.61
======== ======== ======== ======== ======== ========
Cash Dividends Declared Per Share of Common Stock $ 0.22 $ 0.20 $ 0.44 $ 0.40 $ 0.88 $ 0.80
======== ======== ======== ======== ======== ========
Average Common Shares Outstanding (Note 8)
Basic 4,881 4,862 4,879 4,860 4,874 4,856
Diluted 4,933 4,929 4,930 4,928 4,927 4,912
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
Three Months Six Months Twelve Months
Ended March 31, Ended March 31, Ended March 31,
------------------- ------------------- -------------------
1999 1998 1999 1998 1999 1998
------- ------- ------- ------- ------- -------
Balance at Beginning of Period $43,156 $38,398 $41,711 $37,382 $42,217 $38,097
Net Income 3,759 4,791 6,276 6,779 7,914 8,005
------- ------- ------- ------- ------- -------
Total 46,915 43,189 47,987 44,161 50,131 46,102
Less: Dividends 1,074 972 2,146 1,944 4,290 3,885
------- ------- ------- ------- ------- -------
Balance at End of Period $45,841 $42,217 $45,841 $42,217 $45,841 $42,217
======= ======= ======= ======= ======= =======
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In Thousands)
Six Months
Ended March 31,
1999 1998
-------- --------
Cash Flows Provided by Operating Activities $ 12,255 $ 8,510
-------- --------
Cash Flows Used In Investing Activities -
Capital Expenditures (3,369) (2,897)
-------- --------
Cash Flows From Financing Activities:
Repayment of Long-Term Debt (4,080) (2,138)
Changes in Short-Term Borrowings (12,665) (10,700)
Payment of Dividends, Net of Dividend Reinvestment (1,956) (1,730)
-------- --------
Net Cash Used In Financing Activities (18,701) (14,568)
-------- --------
Net Decrease in Cash and Cash Equivalents (9,815) (8,955)
-------- --------
Cash and Cash Equivalents at Beginning of Period 18,515 16,260
-------- --------
Cash and Cash Equivalents at End of Period $ 8,700 $ 7,305
======== ========
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; EnergySouth Services, Inc., formerly 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 six month periods ended March 31, 1999 and 1998 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 six months and twelve months ended March 31, 1999 was to increase
net income by $490,000 ($0.10 per share, diluted) of which $255,000 ($.05 per
share, diluted) is included in operating income, and $235,000 ($0.05 per share,
diluted),
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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.
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 52,000 and 67,000 for the three months ended March
31, 1999 and 1998, respectively; 51,000 and 68,000 for the six months ended
March 31, 1999 and 1998, respectively; and 53,000 and 56,000 for the twelve
months ended March 31, 1999 and 1998, 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 OPERATION
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, are 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 minimize regulatory involvement in the setting of its rates for
storage services. The FERC issued an order on April 28, 1999 granting authority
to Bay Gas to provide transportation-only services to interstate and intrastate
shippers and approved rates for such service.
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 March 31, 1999 and 1998 was
$3,759,000 or $.76 per share and $4,791,000 or $.97 per share, respectively. Net
income for the six months ended March 31, 1999 and 1998 was $6,276,000 or $1.27
per share and $6,779,000 or $1.38 per share, respectively. Net income for the
twelve months ended March 31, 1999 and 1998 was $7,914,000 or $1.61 per share
and $8,005,000 or $1.63 per share, respectively. All references to earnings per
share amounts are computed on a diluted basis. The fiscal 1999 period earnings
include the effect of a change in accounting for unbilled revenues while the
fiscal 1999 six and twelve month periods also include the effect of a change in
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accounting for start-up costs. In accordance with prescribed accounting rules,
the amounts presented for the same prior year periods have not been adjusted.
Both accounting changes are discussed in further detail within "New Accounting
Standards" below. The effect of these accounting changes for the three months
ended March 31, 1999 was to decrease net income by $588,000 ($0.12 per share)
while the effect on the fiscal 1999 six and twelve month periods was to decrease
net income by $126,000 ($0.03 per share). Assuming retroactive application of
the accounting changes, earnings per share amounts for three, six and twelve
months ended March 31, 1999 would have been $0.76, $1.35 and $1.64,
respectively, as compared to $0.84, $1.42 and $1.61, respectively, for the
three, six and twelve months ended March 31, 1998.
The decrease in earnings for the three and six months ended March 31,
1999, assuming retroactive application of the accounting changes, is due
primarily to decreased margin on gas sales revenues resulting from unusually
warm weather, decreased gas storage revenues, increased operations expenses and
increased depreciation expense. The increase in earnings for the twelve months
ended March 31, 1999 is due primarily to increased margin on gas transportation
revenues, decreased maintenance expenses and decreased interest expense.
OPERATING REVENUES
Gas revenues decreased $5.4 million (19%), $5.8 million (12%) and $5.7
million (8%), respectively, for the three, six and twelve months ended March 31,
1999 as compared to the same prior year periods. Included within gas revenues
for each fiscal 1999 period is the effect of accruing for unbilled gas revenues
at month-end while no such accrual is included within prior year periods since
this new accounting method was adopted in the first quarter of fiscal 1999.
Assuming retroactive application of this accounting change, gas revenues
decreased $2.7 million (11%), $6.7 million (14%) and $6.6 million (9%),
respectively, for the three, six and twelve months ended March 31, 1999
resulting primarily from decreased gas sales volumes of 21%, 26% and 21%,
respectively. Causing these decreases in gas sales volumes, primarily to
temperature-sensitive customers, was weather which was 22%, 37% and 36%,
respectively, warmer than the prior year three, six and twelve month periods and
22%, 27% and 26%, respectively, warmer than normal for the three, six and twelve
month periods. The temperature adjustment rider in rates mitigated the effects
of weather to a large extent; however, margins from customers who are sensitive
to weather were slightly down from the prior year for the three and six month
periods. 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.
Gas revenues from large commercial and industrial customers decreased
$762,000, $1,331,000 and $2,032,000, respectively, for the three, six and twelve
months ended March 31, 1999 due in part to factors mentioned previously in
addition to decreased plant utilization and several customers switching to
transportation agreements. Transportation revenues during the three, six and
twelve months ended March 31, 1999 increased $43,000, $363,000 and $1,231,000,
respectively, due primarily to several new customers added to the distribution
system and certain sales customers who switched to transportation agreements.
Revenues from natural gas storage operations decreased $76,000, $148,000 and
$46,000, respectively, for the three, six and twelve months ended March 31, 1999
due primarily to decreased firm storage contracted to customers.
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EXPENSES
Cost of gas decreased $3.9 million (35%), $6.0 million (33%) and $6.5
million (28%), respectively, for the three, six and twelve months ended March
31, 1999 as compared to the same prior year periods. Included within each fiscal
1999 period is an accrual for cost of gas associated with unbilled gas revenues
whereas the prior year periods do not reflect such an accrual. Assuming
retroactive application of the accounting change for unbilled gas revenues, cost
of gas decreased $2.3 million (25%), $6.5 million (35%) and $7.2 million (30%),
respectively, for the three, six and twelve months ended March 31, 1999. The
decrease for all periods is attributed to decreased gas sales volumes and
decreased purchased gas costs on a per unit basis as mentioned previously.
Operations expense increased $367,000, $493,000 and $190,000,
respectively, for the three, six and twelve months ended March 31, 1999 compared
to the same prior year periods due primarily to increases in the following
areas: payroll and related benefits, reserve for uncollectible accounts, and
selling expenses.
Maintenance expense decreased $101,000, $137,000 and $309,000,
respectively, for the three, six and twelve months ended March 31, 1999 compared
to the same prior year periods due primarily to decreased maintenance on mains
and services.
Depreciation expense increased 4% for the second quarter of fiscal 1999
and increased 5% for the six and twelve months ended March 31, 1999 as compared
to the same prior year periods due to growth 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 8%, 4% and 5%, respectively, for the three,
six and twelve months ended March 31, 1999 as compared to the same prior year
periods due to decreased long-term debt which was due in part to the early
redemption of $2,500,000 of First Mortgage Bonds, 10.25% Series, during the
first quarter of fiscal 1999.
Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs decreased $55,000 for the twelve months ended March 31, 1999 due
to completion in August 1997 of new facilities to service a large industrial
customer.
Interest income increased $19,000, decreased $47,000 and increased
$15,000, respectively, for the three, six and twelve months ended March 31, 1999
as compared to the same prior year periods. Interest income of $42,000 related
to an income tax refund was recorded during the fiscal 1998 first quarter,
whereas the fiscal 1999 periods do not include any such miscellaneous interest
income. The fluctuation in interest income for each period is due primarily to
financing of merchandise sales and installations and income from short-term
investments.
Income tax expense changed primarily in relation to changes in income
before income taxes.
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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. 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. As of
December 31, 1998, unbilled revenue had increased net income by $1,078,000
($0.22 per share, diluted) of which $843,000 ($0.17 per share, diluted) was
included in operating income and $235,000 ($0.05 per share, diluted), the
cumulative effect of the accounting change, was reported as a separate component
of net income. During the three months ended March 31, 1999, a portion of this
effect reversed so that the six and twelve month periods ended March 31, 1999
reflect an increase in net income of $490,000 ($0.10 per share, diluted) of
which $255,000 ($0.05 per share, diluted) is included in operating income and
$235,000 ($0.05 per share, diluted) is reflected as the cumulative effect of the
accounting change.
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.
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Operating activities provided cash of $12,255,000 and $8,510,000,
respectively, for the six months ended March 31,1999 and 1998. The increase in
cash flow from operating activities is attributed primarily to the change in
operating assets and liabilities, which reflects the timing of cash receipts and
payments on receivables and payables.
Financing activities used cash of $18,701,000 and $14,568,000
respectively, for the six months ended March 31, 1999 and 1998. 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 in addition to increased payments on short-term borrowings.
Cash used in investing activities increased $472,000 during the six
months ended March 31, 1999 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 $9,375,000.
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.
YEAR 2000
The Company is working to resolve the potential impact of the Year 2000
on the ability of computerized information systems to accurately process
information that may be date sensitive. Programs that recognize a date using
"00" as the year 1900 rather than 2000 could result in errors or system failures
that could ultimately cause the Company to interrupt service or 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.
The identification, assessment, remediation and testing of the
Company's computer systems have been substantially completed. As a result, the
Company has made changes to its computer application programs and tested them
accordingly. Additional testing will be completed during 1999 to ensure that no
subsequent changes have affected the Year 2000 modifications. The state of Year
2000 readiness of hardware and software already evaluated will be monitored
during the coming year to maintain this readiness and to determine that there
have been no subsequent exclusions or disclaimers by manufacturers resulting in
a loss of Year 2000 readiness. Mission critical processes have been identified
and contingency plans are being developed at this time and are scheduled for
completion by the end of June 1999 in an effort to ensure the uninterrupted
continuation of customer service. An inventory and assessment of the Company's
embedded systems has been completed. The two systems for which failure of
embedded systems would be critical are responsible for monitoring and
controlling 1) the distribution of gas through the Company's pipeline system and
2) the underground storage facility. These systems are scheduled for replacement
by June 30, 1999.
In addition to the remediation and testing efforts of the Company's
internal systems, the Company is contacting each of its significant vendors to
obtain a commitment that they
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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 operations will not be materially affected.
During March 1999, the Company's Year 2000 project was subjected to a
third party Readiness Review for completeness. The Company has responded to the
recommendations made by the third party review which includes a limited amount
of on-going testing of third party software, continued assessment and inquiry of
significant vendors and finalizing contingency plans for mission critical
processes. A steering committee of the Company's executive management has
reviewed and will continue to review the Year 2000 project progress on a regular
basis.
As of March 31, 1999, the Company has incurred approximately $164,000
of remediation costs related to Year 2000 which has been expensed and expects to
incur an additional $23,000 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's internal costs with
respect to the Year 2000 project have not been separately identified, but
Management believes that they are immaterial.
The Company's goal is that Year 2000 issues will be addressed on
schedule and in a manner that will prevent such issues from having a material
effect on the Company's business, financial condition and result of operations.
While the Company has and will be pursuing Year 2000 compliance, there can be no
assurance that the Company and its vendors will be successful in identifying and
addressing all material Year 2000 issues.
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 March 31, 1999 the
Company had approximately $59.5 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 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
10(a) Transportation agreement between Mobile Gas Service
Corporation and Alabama Power Company dated
February 18, 1999 (1)
10(b) Agreement for Firm and Interruptible Storage Service
between Bay Gas Storage Company, Ltd. And Southern
Company Services, Inc. dated April 1, 1999 (1)
10(c) Agreement for Firm Intrastate Transportation services
between Bay Gas Storage Company, Ltd. And Alabama
Power Company dated April 8, 1999 (1)
27 Financial Data Schedule (EDGAR version only)
(1) Confidential portions of this exhibit have been omitted and previously
filed separately with the Securities and Exchange Commission pursuant
to a request for confidential treatment made in accordance with Rule
24b-2 promulgated under the Securities Exchange Act of 1934, as
amended.
(b) Reports on Form 8-K
During the quarter for which this report is filed, the Company
filed no reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOBILE GAS SERVICE CORPORATION
(Registrant)
Date: May 17, 1999 /s/ John S. Davis
------------------------- --------------------------------------
John S. Davis
President and
Chief Executive Officer
Date: May 17, 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(a) Transportation agreement between Mobile Gas Service Corporation and
Alabama Power Company dated February 18, 1999 (1)
10(b) Agreement for Firm and Interruptible Storage Service between Bay Gas
Storage Company, Ltd. And Southern Company Services, Inc. dated April
1, 1999 (1)
10(c) Agreement for Firm Intrastate Transportation services between Bay Gas
Storage Company, Ltd. And Alabama Power Company dated April 8, 1999
(1)
27 Financial Data Schedule (EDGAR version only)
(1) Confidential portions of this exhibit have been omitted and previously
filed separately with the Securities and Exchange Commission pursuant
to a request for confidential treatment made in accordance with Rule
24b-2 promulgated under the Securities Exchange Act of 1934, as
amended.
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