<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the fiscal year ended September 30, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission File Number 0-29604
EnergySouth, Inc.
(Exact name of registrant as specified in its charter)
Alabama 58-2358943
- ----------------------------------- -------------------
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2828 Dauphin Street, Mobile, Alabama 36606
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (334) 450-4774
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
- -------------------------- -----------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock ($.01 par value)
-------------------------------
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
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
--- ---
The aggregate market value of Common Stock, Par Value $.01 per share,
held by non-affiliates (based upon the average of the high and low prices as
reported by NASDAQ on December 15, 1998) was approximately $101,805,705.
As of December 15, 1998, there were 4,876,920 shares of Common Stock,
Par Value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders on January 29, 1999 are incorporated by reference into Part III.
<PAGE> 2
PART I
Item 1. Business.
GENERAL
EnergySouth, Inc. (together with its subsidiaries, the "Company" or
"Registrant", and exclusive of its subsidiaries, "EnergySouth") was initially
incorporated under the laws of the State of Alabama on September 5, 1997 for the
primary purpose of becoming the holding company for Mobile Gas Service
Corporation ("Mobile Gas"), a natural gas utility, and its subsidiaries.
Effective February 2, 1998, Mobile Gas and its subsidiaries were reorganized
(the "Reorganization") into the holding company structure whereby Mobile Gas
became a wholly-owned subsidiary of EnergySouth. As the context may require,
certain references herein to the Company are references to Mobile Gas and its
subsidiaries prior to the Reorganization.
Mobile Gas was incorporated under the laws of the State of Alabama in
1933. Mobile Gas is engaged in the purchase, distribution, sale and
transportation of natural gas to over 100,000 residential, commercial and
industrial customers in southwest Alabama, including the City of Mobile and
adjacent areas. Mobile Gas' service territory covers approximately 300 square
miles. Mobile Gas is also involved in merchandise sales, specifically sales of
natural gas appliances.
MGS Energy Services, Inc. ("MGS Energy") was incorporated in March
1983. Through MGS Energy, the Company provides contract and consulting work for
utilities and industrial customers. MGS Energy owns a 51% interest in Southern
Gas Transmission Company ("SGT"), an Alabama general partnership which was
formed in November 1991. SGT was established to provide transportation services
to the facilities of Alabama River Pulp Company, Inc. During fiscal year 1992,
SGT constructed and began operating a 50-mile pipeline from the facilities of
Koch Gateway Pipeline Company ("Koch"), formerly United Gas Pipe Line Company,
near Flomaton, Alabama to the facilities of Alabama River Pulp Company, Inc. in
Claiborne, Alabama.
MGS Marketing Services, Inc. ("MGS Marketing") was incorporated on
March 5, 1993 to assist existing and potential customers in the purchase of
natural gas.
In connection with the Reorganization, MGS Energy and MGS Marketing
became wholly-owned subsidiaries of EnergySouth during fiscal year 1998.
MGS Storage Services, Inc. ("MGS Storage"), a wholly-owned subsidiary
of Mobile Gas, was incorporated on December 4, 1991. MGS Storage holds a general
partnership interest of 87 1/2% in Bay Gas Storage Company, Ltd. ("Bay Gas"), an
Alabama limited partnership, and a 12 1/2% limited partnership interest is held
by Olin Corporation. Bay Gas constructed an underground gas storage cavern and
related pipeline facilities which are used to provide storage and delivery of
natural gas for Mobile Gas and other customers.
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CUSTOMERS
Of the approximately 100,000 customers of the Company, approximately
95% are residential customers. In the fiscal year ended September 30, 1998,
approximately 63% of the Company's gas revenues was derived from residential
sales, 12% from small commercial and industrial sales, 10% from large commercial
and industrial sales, 12% from transportation services, and 2% from storage and
miscellaneous services. Residential sales in 1998 accounted for approximately
12% of the total volume of gas delivered to the Company's customers, with small
commercial and industrial, large commercial and industrial, and transportation
deliveries accounting for approximately 3%, 4% and 81%, respectively. The ten
largest customers of the Company accounted for approximately 14% of the
Company's gross margin in fiscal 1998, with the largest accounting for
approximately 2%. For further information with respect to revenues from and
deliveries to the various categories of the Company's customers, see Item 6,
"Selected Financial Data".
In May 1995, the Company entered into a long-term contract with
Tuscaloosa Steel Corporation to transport natural gas to a new iron ore
reduction facility on a site located adjacent to downtown Mobile. To fulfill its
obligations under such contract, the Company constructed approximately five
miles of new high pressure pipeline and upgraded certain other segments of its
existing facilities. In October 1997 the Company made the first deliveries of
gas to Tuscaloosa Steel's facility.
The move to gas-fired generating plants by the electric industry is
expanding that market for the natural gas industry. The natural gas-fired power
generation growth in our area is unprecedented. During fiscal 1998, Bay Gas
entered into agreements for transporting gas to such gas fired co-generation
facilities. The Company is currently working with developers of several new
power plants planned for different sites in or near its service area. The
Company is able to serve these sites because of their proximity to the Mobile
Gas distribution system, the Bay Gas pipeline, or the SGT pipeline.
GAS SUPPLY
The Company is directly connected to two natural gas processing plants
in south Mobile County. Mobile Gas has contracted for a portion of its firm
supply directly with these producers. For the fiscal year ended September 30,
1998, the Company obtained approximately 86% of its gas supply from sources
located in the Mobile Bay area, with the balance being obtained from interstate
sources.
Mobile Gas has a current peak day firm requirement of 129,870 MMBtus.
Firm supply needs of 80,000 MMBtu/day are expected to be met through the
withdrawal of gas from the storage facility owned by Bay Gas. The Company also
has firm supply contracts with gas suppliers for 10,000 MMBtu/day until October
31, 2000, and 13,000 MMBtu/day until June 30, 2000, through the direct
connections with Mobil and Shell's processing plants. Additionally, the Company
has contracted for firm transportation and storage service ("No-Notice Service")
for 26,870 MMBtu/day from Koch under agreements extending to April 1, 1999. In
conjunction with the No-Notice Service, the Company has contracted with a gas
supplier to provide firm gas supply through March 31, 1999. The Company has
entered into a contract with Koch for No-Notice Service of 24,000 MMBtu/day
effective
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April 1, 1999 through March 31, 2002.
GAS STORAGE
Construction of the Bay Gas storage facility was completed in 1994. At
September 30, 1998, the cavern had the capacity to hold up to 3.2 BCF of natural
gas. Approximately 1.1 BCF of the gas injected into the storage cavern, called
"base gas," remains in the cavern to provide sufficient pressure to maintain
cavern integrity, and the remainder, approximately 2.1 BCF, represents working
storage capacity. Bay Gas has pipeline interconnects with Florida Gas
Transmission and Koch which provide access to interstate markets.
In 1994 Mobile Gas entered into a gas storage agreement with Bay Gas
under which Bay Gas agreed to provide storage of approximately one-third of the
working storage capacity for an initial period of 20 years. Under the Mobile Gas
storage contract, injection and withdrawal capacity of 15,000 MMBtu/day and
80,000 MMBtu/day, respectively, is committed to Mobile Gas. At September 30,
1998, the storage facility's injection capacity ranges from 35,000 to 50,000
MMBtu/day depending upon cavern pressure and the withdrawal capacity was 260,000
MMBtu/day. An additional compressor may be added to increase the injection
capacity if significant contracts are entered into which provide for firm
injection services. There can be no assurance that Bay Gas will enter into
additional contracts.
Under its agreements with Olin, Bay Gas has the right to develop up to
2 additional caverns on the property leased from Olin. Until Bay Gas makes
certain required payments to Olin prior to commencement of the construction of a
second cavern, Olin has the right to increase its ownership interest in Bay Gas
by an additional 12 1/2%, by purchasing from MGS Storage such additional
percentage at a price based on the book equity of MGS Storage in Bay Gas. The
Company is unable to determine at this time whether additional caverns will be
developed at the storage facility, but anticipates that an additional cavern
would be considered with sufficient market demand.
COMPETITION
Gas Distribution Competition. The Company is not in significant direct
competition with respect to the retail distribution of natural gas to
residential, small commercial and small industrial customers within its service
area. Electricity competes with natural gas for such uses as cooking, water
heating and space heating.
The Company's large commercial and industrial customers with
requirements of 200 MMBtu per day or more contract with the Company to transport
customer-owned gas while other commercial and industrial customers buy natural
gas from the Company. Some industrial customers have the capability to use
either fuel oil, coal, wood chips or natural gas, and choose their fuel
depending upon a number of factors, including the availability and price of such
fuels. In recent years, the Company has had adequate supplies so that
interruptible industrial customers that are capable of using alternative fuels
have not had supplies curtailed, and the price of natural gas has remained at
levels such that, in most cases, these industrial customers
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have chosen to use natural gas rather than other fuels. The Company's rate
tariffs include a competitive fuel clause which allows the Company to adjust its
rates to certain large commercial and industrial customers in order to compete
with alternative energy sources. However, there can be no assurance that the
current competitive advantage of natural gas over alternative fuels will
continue. See "Rates and Regulation."
Due to the close proximity of various pipelines and gas processing
plants to the Company's service area, there exists the possibility that current
or prospective customers could install their own facilities and connect directly
to a supply source and thereby "bypass" the Company's service. The Company
believes that because it has worked closely with major industrial customers to
meet those customers' needs, and because of its ability to provide competitive
pricing under its rate tariffs, none of the Company's customers have bypassed
its facilities to date. Although there can be no assurance as to future
developments, the Company intends to continue its efforts to reduce the
likelihood of bypass by offering competitive rates and services to such
customers.
Gas Storage Competition. A number of types of competitors may provide
services like or in competition with those of Bay Gas. These include, among
others, natural gas storage facilities, natural gas aggregators, and natural gas
pipelines. Bay Gas believes that its strategic geographic location and its
ability to charge market-based rates for interstate storage services will enable
it to effectively compete with such competitors. See "Rates and Regulation."
RATES AND REGULATION
The natural gas distribution operations of Mobile Gas are under the
jurisdiction of the Alabama Public Service Commission ("APSC"). The APSC
approves rates which are intended to permit the recovery of the cost of service
including a return on investment. Rates are determined by reference to rate
tariffs approved by the APSC in traditional rate proceedings or, for certain
large customers, on a case-by-case basis. In addition, pursuant to APSC order,
rates for a limited number of large industrial customers are determined on a
privately negotiated basis. Beginning December 1, 1995, Mobile Gas also is
allowed to recover costs associated with its replacement of cast iron mains.
This component of rates is adjusted annually through a filing with the APSC. The
rates for service rendered by Mobile Gas are on file with the APSC. The APSC
also approves the issuance of debt and equity securities and has supervision and
regulatory authority over service, equipment, accounting, and other matters.
On June 10, 1996, the APSC authorized Mobile Gas to apply a temperature
rate adjustment to customers' gas bills for the months of November through
April. The temperature rate adjustment helps 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. The temperature rate adjustment has been
reflected in customers' gas bills during the months of November through April
since November 1, 1996.
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The Mobile Gas tariffs include a purchased gas adjustment clause which
allows it to pass on to certain of its customers increases or decreases in gas
costs from those reflected in its tariff charges. Adjustments under such clauses
require periodic filings with the APSC but do not require a general rate
proceeding. Under the purchased gas adjustment clause, Mobile Gas has a
competitive fuel clause which gives it the right to adjust its rates to certain
large customers in order to compete with alternative energy sources. Any margin
lost as a result of competitive fuel clause adjustments is recoverable from its
other customers.
Gas deliveries to certain industrial customers are subject to
regulation by the APSC through contract approval. The operations of SGT, which
consist only of intrastate transportation of gas, are also regulated by the
APSC.
Bay Gas is a regulated utility governed under the jurisdiction of the
APSC. As a regulated utility, Bay Gas' intrastate storage contracts are subject
to APSC approval. Operation of the storage cavern and well-head equipment are
subject to regulation by the Oil and Gas Board of the State of Alabama. Bay Gas
is allowed by FERC order to charge market-based rates for interstate storage
services. 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.
Mobile Gas has been granted nonexclusive franchises to construct,
maintain and operate a natural gas distribution system in the areas in which it
operates. Except for the franchise granted by Mobile County, Alabama, which has
no stated expiration date, the franchises have expiration dates, the earliest of
which is in 2007. The Company has no reason to believe that the franchises will
not be renewed upon expiration.
SEASONAL NATURE OF BUSINESS
The nature of the Company's business is highly seasonal and
temperature-sensitive. As a result, the Company's operating results in any given
period have historically reflected, in addition to other matters, the impact of
weather, with colder temperatures resulting in increased sales by the Company.
The substantial impact of this sensitivity to seasonal conditions has been
reflected in the Company's results of operations. As discussed above under
"Rates and Regulation - Results of Operations" and below under "Management's
Discussion and Analysis of Results of Operations and Financial Condition" the
application of a temperature rate adjustment in customers' bills beginning in
November 1996 has helped to level out the effects of temperature extremes on
results of operations.
Due to the seasonality of the Company's business, the generation of
working capital is impaired during the summer months because of reduced gas
sales. Cash needs during this period are met generally through short-term
financing arrangements or the reduction of temporary investments as is common in
the industry.
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ENVIRONMENTAL ISSUES
The Company is subject to various federal, state and local laws and
regulations relating to the environment, which have not had a material effect on
the Company's financial position or results of operations.
Like many gas distribution companies, prior to the widespread
availability of natural gas, Mobile Gas manufactured gas for sale to its
customers. In contrast to some other companies which operated multiple
manufactured gas plants, Mobile Gas and its predecessor operated only one such
plant, which discontinued operations in 1933. The process for manufacturing gas
produced by-products and residuals, such as coal tar, and certain remnants of
these residuals are sometimes found at former gas manufacturing sites.
Mobile Gas conducted a preliminary assessment in 1994 of its former gas
plant site and has tested certain waters in the vicinity of the site. The
Company developed and has implemented a plan for the site based on the advice of
its environmental consultants, which involves securing and monitoring the site,
and continued testing. Based on the results of tests to date, the Company does
not believe that the site currently poses any threat to human health or the
environment. While no conclusion can be reached at this time as to whether any
further remedial action might ultimately be required, based on currently
available information, it is believed that any costs with respect to the site
are likely to be immaterial, and the Company has therefore established no
reserve for such costs in its financial statements. The Company intends that,
should further investigation or changes in environmental laws or regulations
require material expenditures for investigation, remediation, or clean-up with
regard to the site, it would apply to the APSC for appropriate rate recovery of
such costs. However, there can be no assurance that the APSC would approve the
recovery of such costs or the amount and timing of any such recovery.
EMPLOYEES
Mobile Gas employed 275 full-time employees as of September 30, 1998.
Of these, approximately 37% are represented by the Oil, Chemical and Atomic
Workers International Union, Local No. 3-541. As of September 30, 1998 Bay Gas
employed six full-time employees. The Company believes that it enjoys generally
good labor relations.
Item 2. Properties.
The Company's properties consist of distribution, general,
transmission, and storage plant. The distribution plant is located in Mobile
County, Alabama and is used in the distribution of natural gas to the Company's
customers. The distribution plant consists primarily of mains, services, meters
and regulating equipment, all of which are adequate to serve the present
customers. The distribution plant is located on property which the Company is
entitled to use as a result of franchises granted by municipal corporations, or
on easements or rights-of-way.
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The general plant consists of land, structures (with aggregate floor
space of approximately 118,000 square feet), office equipment, transportation
equipment and miscellaneous equipment, all located in Mobile County, Alabama.
The transmission plant consists of a pipeline of approximately 50 miles
and related surface equipment which is used in the transmission of natural gas
by SGT and is located primarily in Monroe County, Alabama. The transmission
plant is located on easements or rights-of-way.
The storage plant, consisting of an underground cavern for the storage
of natural gas and related pipeline and surface facilities, is located primarily
in Washington County, Alabama. The storage plant is constructed on a leasehold
estate with an initial term of 50 years, which will expire in 2040, and which
may be renewed at the Company's option for an additional term of 20 years.
Substantially all of the property of the Company is pledged as
collateral for the long-term debt.
Item 3. Legal Proceedings.
The Company is involved in litigation arising in the normal course of
business. Management believes that the ultimate resolution of such litigation
will not have a material adverse effect on the consolidated financial statements
of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal year 1998.
Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following list
is included as an unnumbered Item in Part I of this Report in lieu of being
included in the proxy statement to be filed with the Securities and Exchange
Commission.
Information relating to executive officers who are also directors is
included under the caption "Election of Directors" contained in the Company's
definitive proxy statement with respect to its 1999 Annual Meeting of
Stockholders and is incorporated herein by reference.
The following is a list of names and ages of all of the executive officers who
are not also directors or nominees for election as directors of the Registrant
indicating all positions and offices with the Registrant held by each such
person and each such person's principal occupations or employment during the
past five years. All such persons have been elected for terms expiring in
January 1999. Officers are appointed by the Board of Directors of the Company.
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<TABLE>
<CAPTION>
Business Experience
Name, Age, and Position During Past 5 Years
- ----------------------- -------------------
<S> <C>
W. G. Coffeen, III, 52 Appointed in 1998
Vice President - Corporate Development and
Planning - EnergySouth, Inc.;
Vice President - Corporate Development and Appointed in 1998; Previously:
Planning - Mobile Gas; Director/Vice President - Vice President - Marketing, Mobile
MGS Marketing Services, Inc.; Vice President - Gas Service Corporation (1986 - 1998)
MGS Storage Services, Inc.
Charles P. Huffman, 45 Appointed in 1998
Vice President, Chief Financial Officer, and
Treasurer - EnergySouth, Inc.
Vice President, Chief Financial Officer, Appointed in January 1995;
Treasurer, and Assistant Secretary - Mobile Gas Previously: Chief Financial Officer
Service Corporation; Vice President/Treasurer - (1993-1994); Treasurer (1991-1993)
MGS Energy Services, Inc.; Director/Vice
President/Treasurer - MGS Storage Services,
Inc.; Director/Vice President/ Treasurer - MGS
Marketing Services, Inc.
G. Edgar Downing, Jr., 42* Appointed in 1998
Vice President, Secretary and General Counsel -
EnergySouth, Inc.;
Secretary, General Counsel and Vice President Appointed in 1998; Previously: Vice
of Administration - Mobile Gas Service President, Secretary and General
Corporation; Director/Vice President/Secretary - Counsel - Mobile Gas Service
MGS Energy Services, Inc.; Director/Vice Corporation (1994-1998); Secretary
President/Secretary - MGS Storage Services, and General Counsel (1993-1994);
Inc.; Vice President/ Secretary - MGS Marketing Assistant Secretary (1991-1993),
Services, Inc. General Attorney (1990-1993)
</TABLE>
* Mr. Downing is the son-in-law of Gaylord C. Lyon, a Director of the Company.
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PART II
Item 5. Market for the Registrant's Common Stock Equity and Related
Stockholder Matters.
As part of the Reorganization, effective February 2, 1998, shareholders
of Mobile Gas automatically became shareholders of EnergySouth with each two
shares of Mobile Gas common stock outstanding on that date being converted into
three shares of EnergySouth common stock. All per share amounts presented below
have been restated to reflect the three-for-two conversion.
The Registrant's Common Stock, $.01 par value, is traded on the
NASDAQ-AMEX National Market under the symbol "ENSI". As of December 15, 1998
there were 1,508 holders of record of the Company's Common Stock. Information
regarding Common Stock dividends and the bid price range for Common Stock during
the periods indicated is as follows:
<TABLE>
<CAPTION>
Per Share
Dividends Declared Closing Price Range
------------------ ----------------------------------------------
Fiscal Year
Quarter Ended 1998 1997 1998 1997
- ------------- ---- ---- --------------------- ------------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
December 31 $.20 $.19 $27-1/4 $23-11/16 $ 19- 5/16 $ 15-11/16
March 31 .20 .19 27-1/2 21- 1/2 19- 1/2 17-11/16
June 30 .22 .20 24 20- 1/8 18-13/16 17- 5/16
September 30 .22 .20 23-1/4 18-15/16 24-13/16 18- 3/16
</TABLE>
Over-the-counter quotations reflect inter-dealer prices without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions.
While the Board of Directors intends to continue the practice of paying
dividends quarterly, amounts and dates of such dividends as may be declared will
be dependent upon the Registrant's future earnings, financial requirements, and
other factors.
The Registrant's long-term debt instruments contain certain debt to
equity ratio requirements and restrictions on the payment of cash dividends and
the purchase of shares of its capital stock. At September 30, 1998, under the
most limiting of such provisions, retained earnings in the amount of $21,389,000
were unrestricted.
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Item 6. Selected Financial Data.
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Years Ended September 30, 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
Gas Revenues $ 70,758 $ 69,622 $ 68,334 $ 56,204 $ 60,470
Merchandise Sales and Jobbing 3,264 3,048 3,044 2,907 2,824
-------- -------- -------- -------- --------
Total Operating Revenues $ 74,022 $ 72,670 $ 71,378 $ 59,111 $ 63,294
-------- -------- -------- -------- --------
Net Income $ 8,417 $ 8,126 $ 8,631 $ 4,028 $ 4,893
Preferred Stock Dividends 5
-------- -------- -------- -------- --------
Earnings Applicable to Common Stock $ 8,417 $ 8,126 $ 8,631 $ 4,028 $ 4,888
-------- -------- -------- -------- --------
Cash Dividends Per Share of Common Stock (1) $ 0.84 $ 0.78 $ 0.74 $ 0.70 $ 0.68
Earnings Per Share of Common Stock (1)
Basic (1) $ 1.73 $ 1.68 $ 1.79 $ 0.84 $ 1.18
Diluted (1) $ 1.71 $ 1.66 $ 1.78 $ 0.84 $ 1.18
Weighted Average Common Shares Outstanding (1)
Basic (1) 4,865 4,844 4,826 4,812 4,128
Diluted (1) 4,926 4,881 4,838 4,812 4,128
Total Assets $166,541 $161,867 $150,779 $136,567 $134,529
Long-Term Debt Obligations $ 58,979 $ 63,580 $ 54,509 $ 57,328 $ 59,047
STATISTICAL
Gas Revenue (in thousands):
Sales:
Residential $ 44,725 $ 44,330 $ 43,929 $ 36,106 $ 40,535
Commercial and Industrial - Small 9,208 8,948 8,348 6,813 7,209
Commercial and Industrial - Large 6,784 7,638 7,914 6,151 6,188
Transportation 8,210 6,886 6,571 6,172 5,881
Storage (other than intercompany) 1,204 1,176 926 245 13
Other 627 644 646 717 644
-------- -------- -------- -------- --------
Total $ 70,758 $ 69,622 $ 68,334 $ 56,204 $ 60,470
-------- -------- -------- -------- --------
Delivery to Customers (in thousand therms):
Gas Sales:
Residential 51,493 48,099 59,403 47,992 56,100
Commercial and Industrial - Small 13,231 12,338 14,148 11,669 12,463
Commercial and Industrial - Large 15,169 16,975 23,252 19,536 19,045
Transportation 335,905 284,248 279,798 274,859 253,702
-------- -------- -------- -------- --------
Total 415,798 361,660 376,601 354,056 341,310
-------- -------- -------- -------- --------
Customers Billed (peak month):
Residential 95,443 95,446 95,338 94,822 94,424
Commercial and Industrial - Small 5,305 5,267 5,257 5,235 5,195
Commercial and Industrial - Large 97 101 105 108 106
Transportation 30 30 30 29 31
-------- -------- -------- -------- --------
Total 100,875 100,844 100,730 100,194 99,756
-------- -------- -------- -------- --------
Degree Days (2) 1,889 1,487 2,030 1,331 1,837
NUMBER OF EMPLOYEES (END OF PERIOD) 281 276 276 275 260
</TABLE>
Note: (1) All references to number of shares and per share amounts have been
restated to reflect the three-for-two conversion of Mobile Gas common
stock into EnergySouth, Inc. common stock effective February 2, 1998.
Note: (2) The number of degrees that the daily mean temperature falls below 65
degrees F. The Company's rates were designed assuming annual normal
degree days of 1,640 beginning December 1, 1995 and an annual normal
of 1,695 for prior periods.
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Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
THE COMPANY
The following discussion and analysis refers to EnergySouth, Inc. and
its direct and indirect subsidiaries (collectively referred to as the
"Company"). The Company 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 of the Company. 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, and the Federal Energy
Regulatory Commission, which has jurisdiction over such contracts, allows them
to have market-based rates.
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. On November 1, 1996, Mobile Gas implemented a temperature rate
adjustment rider designed 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 U. S. 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
The Company's net income for the fiscal year ended September 30, 1998
was $8,417,000 or $1.71 per share compared to $8,126,000 or $1.66 per share and
$8,631,000 or $1.78 per share for fiscal 1997 and 1996, respectively. All
earnings per share amounts referred to above are computed on a diluted basis.
Earnings for 1998 increased compared to 1997 due in part to increased margin on
gas transportation revenues and decreased operations expenses. Since Mobile Gas'
temperature rate adjustment rider was not in operation during fiscal 1996,
earnings for 1996 reflect the effects of weather which was 24% colder than
normal. The impact of colder weather increased 1996 earnings by $.30 per
11
<PAGE> 13
share compared to earnings that would have occurred with normal weather.
Earnings for 1997 reflect improvement compared to 1996 earnings that would have
been realized with normal weather primarily due to decreased operation and
maintenance expenses, improved financial results from natural gas storage
operations, and a refund of a business license tax, which resulted in a per
share impact of $.03.
OPERATING REVENUES
Gas revenues increased $1,136,000 (2%) in 1998 compared to 1997. Gas
sales to temperature-sensitive customers increased $655,000 (1%) due to a 7%
increase in volumes resulting from weather which was 27% colder than the prior
year and 15% colder than normal. Given the colder weather, gas revenues in 1998
from temperature-sensitive customers did not increase as much as expected since
gas revenues were impacted negatively by a decrease in the customer consumption
per degree day as compared to the historical usage. This decline in customer
usage appears to be attributed to the consistent moderate temperatures
experienced throughout the fiscal 1998 winter season even though the winter was
colder than normal in terms of degree days. Additional margins from increased
sales volumes attributed to colder weather were more than offset by the
operation of Mobile Gas' temperature rate adjustment rider. Large commercial and
industrial gas sales decreased $854,000 (11%) primarily due to certain customers
switching from sales to transportation agreements, and therefore, gas revenues
were less because there is no commodity gas cost in transportation rates. Gas
transportation revenues increased $1,324,000 (19%) as a result of two large
industrial customers added to the distribution system during fiscal 1998 as well
as customers who switched from sales agreements.
Gas revenues increased $1,288,000 (2%) in 1997 compared to 1996
primarily due to increased revenue from temperature-sensitive, transportation,
and natural gas storage customers. Weather in 1997 was 27% warmer than prior
year and 9% warmer than normal resulting in an 18% decrease in gas volumes sold
to temperature-sensitive customers. Despite the volume decrease, gas revenues
from these customers increased $1,000,000 due to the impact of higher commodity
gas costs, which were passed through to customers under the purchased gas
adjustment provisions of the Company's rate schedules, and billings to customers
under the temperature rate adjustment rider. Revenues from the transportation of
natural gas increased $315,000 due to increased volumes by existing customers
and certain sales customers switching to transportation agreements. Primarily as
a result of these switches, large commercial and industrial sales decreased
$276,000. Revenues from natural gas storage operations increased $250,000 due to
new contracts for storage services.
EXPENSES
Cost of gas increased $1,001,000 (5%) in 1998 compared to 1997 due to
increased gas sales volumes of 3% and increased average cost of gas per therm
sold of 2%. Cost of gas increased $2,343,000 (12%) in 1997 compared to 1996
primarily due to an increase in the cost of gas passed through to customers
under the purchased gas adjustment provisions of Mobile Gas' rate schedules.
During 1996, Mobile Gas intentionally under-collected gas
12
<PAGE> 14
costs through the purchased gas component of rates to refund previously
over-collected gas costs.
Operations and maintenance expenses decreased $846,000 (4%) in 1998
compared to 1997 primarily due to decreases in retirement expense, bad debt
expense and Company efforts to improve efficiencies and control expenses.
Operations and maintenance expenses decreased $490,000 (2%) in 1997 compared to
1996. The most significant factors contributing to this decrease were lower
utility maintenance costs resulting from the completion in 1996 of certain
non-routine maintenance projects, increased capitalized expenses resulting from
a higher level of construction activity, and lower gas storage expenses.
Increases in depreciation expense for 1998 and 1997 were due to
continued 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. During fiscal
1997, 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 expense for
taxes, other than income taxes, by $246,000.
Interest expense decreased $178,000 (3%) in 1998 compared to 1997 as a
result of a reduction in long-term debt principal balances. Interest expense
increased $483,000 (9%) in 1997 compared to 1996 due to the issuance of $12
million in 7.27% First Mortgage Bonds in November 1996.
Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs decreased in 1998 compared to 1997 due to decreased construction
activity and increased $142,000 in 1997 compared to 1996 primarily as a result
of increased construction activity during 1997 to complete a pipeline and
related facilities to service a large industrial customer.
Interest income increased $242,000 (24%) in 1998 compared to 1997 due
to increased financing of merchandise sales and installations and increased
interest income from short-term financial instruments.
Income tax expense fluctuates with the changes in income before income
taxes. The Company's effective tax rate in 1998 was 37.1% compared to 36.7% in
1997 and 1996. The components of income tax expense are reflected in Note 4 to
the Consolidated Financial Statements.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) was issued in June 1997 and is effective for
the Company for the fiscal year beginning October 1, 1998. SFAS 130 establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general-purpose financial
13
<PAGE> 15
statements. The Company does not currently have any comprehensive income other
than items included in net income and, therefore, does not expect any material
changes to its current reporting in response to SFAS 130.
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
interim and annual financial statements. 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;
therefore, 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.
Statement of Financial Accounting Standards No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits" (SFAS 132) was
issued in February 1998. SFAS 132 standardizes the disclosure of information
required about pensions and other postretirement benefits. In fiscal 1998, the
Company adopted the disclosure requirements of SFAS 132.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June
1998 and establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS 133 will be effective for the Company's
fiscal year ending September 30, 2000. The Company does not currently have any
derivative instruments nor is it involved in hedging activities.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1) which provides guidance for
the accounting of such costs. SOP 98-1 is effective for the Company for the
fiscal year ending September 30, 2000. The impact of SOP 98-1 on the Company's
annual financial statements is currently being evaluated.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5) which requires costs of start-up activities and organization costs to be
expensed as incurred. The Company expects to adopt SOP 98-5 in fiscal 1999 and
recognize a negative cumulative effect adjustment of approximately $617,000 or
$.13 per share (diluted) as a result of expensing organization and start-up
costs previously capitalized. SOP 98-5 is not expected to have a material effect
on the Company's subsequent annual financial statements.
In fiscal 1999, the Company expects to begin recording an estimate of
unbilled revenue for service rendered subsequent to the meter reading date
through the end of the reporting period. Presently, the commodity cost of
purchased gas applicable to gas delivered but not yet billed under the cycle
billing method is deferred. The Company expects to recognize a positive
cumulative effect adjustment of $234,000 or $.05 per share (diluted) in its
fiscal year 1999 financial statements as a result of this accounting change.
This
14
<PAGE> 16
accounting change is not expected to have a material effect on the Company's
subsequent annual financial statements.
EFFECTS OF INFLATION
Inflation impacts the prices the Company must pay for labor and other
goods and services required for operation, maintenance and capital improvements.
Changes in purchased gas costs are passed through to customers in accordance
with the purchased gas adjustment provision of the Company's rate schedules.
Increases in other utility costs must be recovered through timely filings for
rate relief.
GAS SUPPLY
A primary goal of the Company is to provide gas at the lowest possible
cost while maintaining a reliable long-term supply. To accomplish this goal the
Company has diversified its gas supply by constructing and purchasing pipelines
to provide access to the vast gas reserves in our area, both offshore and
onshore. The Company has also contracted with certain of these sources for firm
supply. Future minimum payments under third-party contracts for firm gas supply,
which expire at various dates through the year 2002, are as follows: 1999 -
$1,671,000; 2000 - $1,698,000; 2001 - $1,216,000; and 2002 - $597,000. A portion
of firm supply requirements is met through the withdrawal of gas from the
storage facility owned by Bay Gas Storage Company, Ltd. (Bay Gas), the Company's
87.5% owned partnership. Mobile Gas has a gas storage agreement with Bay Gas to
receive storage services for an initial period of 20 years, which began in
September 1994 with the commencement of commercial operations of the storage
facility. Mobile Gas' purchased gas adjustment provision in rate schedules filed
with the APSC allows the recovery of demand and commodity costs of purchased gas
from customers. Should Mobile Gas' customer base decline due to deregulation or
other reasons, resulting in costs related to firm gas supply in excess of
requirements, management believes it would be able to take one or more of the
following actions: as part of the regulatory decision allowing other suppliers
to serve current customers, secure the right to allocate firm gas supply costs
to the new company supplying gas, reduce some excess gas supply costs through a
negotiated settlement with suppliers, pass through excess gas supply costs to
existing customers through the purchased gas component of customers rates.
ENVIRONMENTAL
The Company is subject to various federal, state and local laws and
regulations relating to the environment, which have not had a material effect on
the Company's financial position or results of operations. See Note 8 to the
Consolidated Financial Statements for a discussion of certain environmental
issues.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally relies on cash generated from operations and on a
temporary basis, short-term borrowings, to meet working capital requirements and
to finance normal capital expenditures. The Company issues debt and equity for
longer term financing as
15
<PAGE> 17
needed. Cash provided by operating activities was $14.6 million, $14.9 million
and $13.0 million in 1998, 1997 and 1996, respectively. The decrease in cash
flow from operating activities for 1998 compared to 1997 is primarily due to a
decrease in deferred tax expense, a non-cash component of net income, which was
partially offset by an increase in net income and cash provided by the change in
operating assets and liabilities. The increased cash flow from operating
activities for 1997 compared to 1996 is primarily due to the change in operating
assets and liabilities which reflects the timing of cash receipts and payments
on receivables and payables.
Financing activities used net cash of $4.7 million in 1998 compared to
providing cash of $1.5 million and $8.2 million in 1997 and 1996, respectively.
Additional funding in 1997 for working capital and capital requirements was
obtained from issuance in November 1996 of $12 million in 7.27% First Mortgage
Bonds. A majority of the additional funding was used to finance the construction
of gas distribution facilities in order to serve a large industrial customer
with whom the Company has a long-term contract to transport gas. Changes in
short-term borrowings represent interim financing. Of the $13.2 million increase
in short-term borrowings for 1996, $11 million is related to the purchase of
short-term federal obligations for shares tax planning purposes. These
investments matured in early October 1996 and the proceeds were used to repay
the debt. At September 30, 1998, the Company had short-term investments totaling
$14.3 million for shares tax planning purposes, of which $12.7 million was
borrowed under the Company's revolving credit agreement.
Cash used in investing activities reflects the capital-intensive nature
of the Company's business. During fiscal years 1998, 1997 and 1996, the Company
used cash for construction of distribution and storage facilities, purchase of
equipment and other general improvements, of $7.6 million, $12.2 million, and
$10.1 million, respectively. Capital expenditures related to the gas storage
facility were $288,000, $831,000 and $2,284,000 in 1998, 1997 and 1996,
respectively, while the remaining portion of capital expenditures for each year
primarily reflects gas distribution system improvement and expansion.
The Company expects fiscal 1999 capital expenditures relating to Mobile
Gas' regular construction program, equipment purchases, and other general
improvements to be $7.6 million. In addition to these capital costs, in fiscal
1999 Bay Gas will construct a pipeline interconnect with an interstate pipeline
at an estimated cost of $1.0 million in order to provide gas supply for its
transport customers. 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. Excluding the borrowings under the credit agreement related to
the purchase of short-term investments for shares tax planning purposes, the
Company has $20.0 million available for borrowing on its 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 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
16
<PAGE> 18
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 $143,000 and has budgeted approximately
$44,000 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.
Item 7A. 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. The Company does have
approximately $63.6 of long-term debt at fixed interest rates. Interest rates
range from 7.27% to 10.25% 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 Item 7 above for a discussion of the
Company's risks related to regulation, weather, gas supply, and the
capital-intensive nature of the Company's business.
Item 8. Financial Statements and Supplementary Data.
The financial statements and financial statement schedules and the
Independent Auditors' Report thereon filed as part of this report are listed in
the "EnergySouth, Inc. and Subsidiaries Index to Financial Statements and
Schedules" at Page F-1, which follows Part IV hereof.
17
<PAGE> 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There have been no disagreements on accounting and financial disclosure
with the Company's outside auditors which are required to be disclosed.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information under the captions "Election of Directors" and "Information
Regarding the Board of Directors" contained in the Company's definitive proxy
statement with respect to its 1999 Annual Meeting of Stockholders is
incorporated herein by reference.
For information with respect to executive officers of the Registrant,
see "Executive Officers of the Registrant" at the end of Part I of this Report.
Information under the caption "Reports Under Section 16 of the
Securities and Exchange Act" contained in the Company's definitive proxy
statement with respect to its 1999 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 11. Executive Compensation.
Information under the caption "Executive Compensation" contained in the
Company's definitive proxy statement with respect to its 1999 Annual Meeting of
Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information under the caption "Security Ownership of Certain Beneficial
Owners and Management" contained in the Company's definitive proxy statement
with respect to its 1999 Annual Meeting of Stockholders is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions.
There were no transactions required to be disclosed pursuant to this
item.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a), (d) Financial Statements and Financial Statement Schedules
See "EnergySouth, Inc. and Subsidiaries Index to Financial
Statements and Schedules" at page F-1, which follows
Part IV hereof.
18
<PAGE> 20
(3) Exhibits - See Exhibit Index on pages E-1 through E-5.
(b) No reports on Form 8-K were filed during the last quarter of
the fiscal year ended September 30, 1998.
(c) Exhibits filed with this report are attached hereto.
19
<PAGE> 21
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ENERGYSOUTH, INC.
Registrant
December 29, 1998 By: /s/ Charles P. Huffman
-------------------------------------
Charles P. Huffman, Vice President,
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William J. Hearin Director, Chairman December 29, 1998
- ------------------------------------------
William J. Hearin
/s/ Walter L. Hovell Director, Vice-Chairman December 29, 1998
- ------------------------------------------
Walter L. Hovell
Director, President and
Chief Executive Officer
/s/ John S. Davis (Principal Executive Officer) December 29, 1998
- ------------------------------------------
John S. Davis
Vice President, Chief Financial
Officer and Treasurer (Principal
/s/ Charles P. Huffman Financial and Accounting Officer) December 29, 1998
- ------------------------------------------
Charles P. Huffman
/s/ Joseph G. Hollis, Jr. Director December 29, 1998
- ------------------------------------------
Joseph G. Hollis, Jr.
</TABLE>
20
<PAGE> 22
Signatures (Continued)
<TABLE>
<S> <C> <C>
/s/ John C. Hope Director December 29, 1998
- ------------------------------------------
John C. Hope
/s/ Gaylord C. Lyon Director December 29, 1998
- ------------------------------------------
Gaylord C. Lyon
/s/ S. Felton Mitchell, Jr. Director December 29, 1998
- ------------------------------------------
S. Felton Mitchell, Jr.
/s/ G. Montgomery Mitchell Director December 29, 1998
- ------------------------------------------
G. Montgomery Mitchell
/s/ F. B. Muhlfeld Director December 29, 1998
- ------------------------------------------
F. B. Muhlfeld
/s/ E. B. Peebles, Jr. Director December 29, 1998
- ------------------------------------------
E. B. Peebles, Jr.
/s/ Thomas B. Van Antwerp Director December 29, 1998
- ------------------------------------------
Thomas B. Van Antwerp
</TABLE>
21
<PAGE> 23
ENERGYSOUTH, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
Independent Auditors' Report F-2
Consolidated Statements of Income for the years ended
September 30, 1998, 1997 and 1996 F-3
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996 F-4
Consolidated Balance Sheets, September 30, 1998 and 1997 F-5
Consolidated Statements of Common Stockholders' Equity
for the years ended September 30, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
Financial Statement Schedules
II Valuation and Qualifying Accounts and Reserves, Years
Ended September 30, 1998, 1997 and 1996 S-1
</TABLE>
Schedules other than that referred to above are omitted and are not applicable
or not required.
F-1
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
EnergySouth, Inc.:
We have audited the accompanying consolidated balance sheets of
EnergySouth, Inc. and subsidiaries as of September 30, 1998 and 1997 and the
related consolidated statements of income, common stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1998. Our
audits also included the financial statement schedule listed in the Index
referred to in Item 14. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of EnergySouth, Inc. and its
subsidiaries at September 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1998, in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------------------
Deloitte & Touche LLP
Atlanta, Georgia
November 6, 1998
F-2
<PAGE> 25
CONSOLIDATED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Years Ended September 30, (in thousands, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES
Gas Revenues $ 70,758 $ 69,622 $ 68,334
Merchandise Sales and Jobbing 3,264 3,048 3,044
- -------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 74,022 72,670 71,378
- -------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of Gas 22,896 21,895 19,552
Cost of Merchandise and Jobbing 2,516 2,240 2,343
Operations 17,057 17,894 17,981
Maintenance 1,533 1,542 1,945
Depreciation 6,278 5,933 5,599
Taxes, Other Than Income Taxes 5,592 5,269 5,574
- -------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 55,872 54,773 52,994
- -------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 18,150 17,897 18,384
- -------------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSE)
Interest Expense (5,533) (5,711) (5,228)
Allowance for Borrowed Funds Used During Construction 60 177 35
Interest Income 1,233 991 884
Minority Interest (526) (516) (431)
- -------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (4,766) (5,059) (4,740)
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 13,384 12,838 13,644
Income Taxes (Note 4) 4,967 4,712 5,013
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 8,417 $ 8,126 $ 8,631
- -------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE OF COMMON STOCK (NOTE 1)
Basic $ 1.73 $ 1.68 $ 1.79
- -------------------------------------------------------------------------------------------------------------------------
Diluted $ 1.71 $ 1.66 $ 1.78
- -------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING (NOTE 1)
Basic 4,865 4,844 4,826
- -------------------------------------------------------------------------------------------------------------------------
Diluted 4,926 4,881 4,838
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-3
<PAGE> 26
CONSOLIDATED
STATEMENTS OF
CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Years Ended September 30, (in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 8,417 $ 8,126 $ 8,631
Depreciation and Amortization 6,596 6,181 5,791
Provision for Losses on Accounts Receivable 534 821 441
Provision for Deferred Income Taxes 745 1,691 2,939
Provision for Deferred Gas Cost 55 (45) (30)
Minority Interest 391 534 440
Changes in Operating Assets and Liabilities (2,177) (2,379) (5,252)
- -------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 14,561 14,929 12,960
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (7,642) (12,232) (10,140)
- -------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (7,642) (12,232) (10,140)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Long-Term Debt (2,930) (2,818) (1,719)
Proceeds from Issuance of Long-Term Debt 12,000
Changes in Short-Term Borrowings 1,965 (4,300) 13,200
Payment of Dividends, Net of Dividend Reinvestment (3,699) (3,349) (3,294)
- -------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities (4,664) 1,533 8,187
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,255 4,230 11,007
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 16,260 12,030 1,023
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,515 $ 16,260 $ 12,030
- -------------------------------------------------------------------------------------------------------------------------
CASH PAID DURING THE YEAR FOR:
Interest $ 5,558 $ 5,325 $ 5,187
- -------------------------------------------------------------------------------------------------------------------------
Income Taxes $ 3,886 $ 3,289 $ 2,697
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-4
<PAGE> 27
CONSOLIDATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
September 30, (in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 18,515 $ 16,260
Receivables
Gas 4,468 3,013
Merchandise 3,021 2,715
Other 759 609
Allowance for Doubtful Accounts (626) (536)
Materials, Supplies, and Merchandise (At Average Cost) 1,327 1,241
Gas Stored Underground For Current Use (At Average Cost) 1,435 2,152
Deferred Purchased Gas Adjustment 809
Deferred Gas Costs 176 231
Deferred Income Taxes 1,430 818
Prepayments 1,375 1,419
- -------------------------------------------------------------------------------------------------------------------------
Total Current Assets 31,880 28,731
- -------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT (NOTE 2) 170,894 165,208
Less: Accumulated Depreciation and Amortization 44,872 40,289
- -------------------------------------------------------------------------------------------------------------------------
Property, Plant, and Equipment - Net 126,022 124,919
Construction Work in Progress 1,106 946
- -------------------------------------------------------------------------------------------------------------------------
Total Property, Plant, and Equipment 127,128 125,865
- -------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Regulatory Assets (Note 2) 909 1,138
Merchandise Receivables Due After One Year 5,371 4,827
Deferred Charges 1,253 1,306
- -------------------------------------------------------------------------------------------------------------------------
Total Other Assets 7,533 7,271
- -------------------------------------------------------------------------------------------------------------------------
TOTAL $ 166,541 $ 161,867
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-5
<PAGE> 28
LIABILITIES AND CAPITALIZATION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
September 30, (in thousands, except share data) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Current Maturities of Long-Term Debt (Note 3) $ 4,600 $ 2,930
Notes Payable 12,665 10,700
Accounts Payable 2,511 4,080
Dividends Declared 1,072 971
Customer Deposits 1,461 1,556
Taxes Accrued 3,551 2,827
Interest Accrued 1,794 1,897
Deferred Purchased Gas Adjustment 592
Other Liabilities 1,898 1,788
- -------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 30,144 26,749
- -------------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES
Accrued Pension Cost (Note 7) 1,452 1,718
Accrued Postretirement Benefit Cost (Note 7) 1,332 1,467
Deferred Income Taxes 10,945 9,747
Deferred Investment Tax Credits 418 444
- -------------------------------------------------------------------------------------------------------------------------
Total Other Liabilities 14,147 13,376
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities 44,291 40,125
- -------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 8) -- --
- -------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION
Stockholders' Equity (Note 5)
Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares; Outstanding
1998 - 4,872,000; 1997 - 4,854,000 Shares) 49 49
Capital in Excess of Par Value 18,135 17,746
Retained Earnings (Note 6) 41,711 37,382
- -------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 59,895 55,177
Minority Interest 3,376 2,985
Long-Term Debt (Less Current Maturities) (Note 3) 58,979 63,580
- -------------------------------------------------------------------------------------------------------------------------
Total Capitalization 122,250 121,742
- -------------------------------------------------------------------------------------------------------------------------
Total $ 166,541 $ 161,867
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-6
<PAGE> 29
CONSOLIDATED
STATEMENTS OF
COMMON STOCKHOLDERS'
EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------ Capital in
Number of Par Excess of Retained
(In thousands, except per share data) Shares Value Par Value Earnings
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1995 4,816 $ 49 $ 17,102 $ 27,912
Net Income 8,631
Dividend Reinvestment Plan 16 245
Cash Dividends
Common Stock - $.74 per share (3,539)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996 4,832 49 17,347 33,004
Net Income 8,126
Dividend Reinvestment Plan 22 399
Cash Dividends
Common Stock - $.78 per share (3,748)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 4,854 49 17,746 37,382
Net Income 8,417
Dividend Reinvestment Plan 16 369
Cash Paid in Lieu of Fractional Shares
for Stock Conversion (6)
Exercise of Stock Options 2 26
Cash Dividends
Common Stock - $.84 per share (4,088)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998 4,872 $ 49 $ 18,135 $ 41,711
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-7
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Effective February 2, 1998, Mobile Gas Service Corporation (Mobile Gas) and its
subsidiaries were reorganized into a holding company structure (the
Reorganization). As part of the Reorganization, Mobile Gas became a subsidiary
of EnergySouth, Inc. (EnergySouth) and shareholders of Mobile Gas automatically
became shareholders of EnergySouth, with each two shares of Mobile Gas common
stock outstanding on that date being converted into three shares of EnergySouth
common stock, $.01 par value per share. All references to number of shares, per
share amounts, stock option data and market prices presented throughout the
financial statements have been restated to reflect the three-for-two conversion
of Mobile Gas common stock into EnergySouth common stock.
The consolidated financial statements of EnergySouth and its subsidiaries
(collectively the "Company") include the accounts of Mobile Gas; MGS Energy
Services, Inc.; MGS Storage Services, Inc.; 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). Minority interest
represents the respective other owner's proportionate shares of the income and
equity of Bay Gas and SGT. All significant intercompany balances and
transactions have been eliminated.
DESCRIPTION OF BUSINESS
The Company, primarily through its wholly-owned subsidiary Mobile Gas, is
engaged principally in the distribution of natural gas to residential,
commercial and industrial customers in Southwest Alabama. Other wholly-owned
subsidiaries participate and own investments in gas pipeline, transportation,
storage, marketing, and other energy-related services. The Alabama Public
Service Commission (APSC) regulates the Company's gas distribution and
intrastate storage operations. For the major portion of the Company's business,
the APSC approves rates which are intended to permit the recovery of the cost of
service including a return on investment. Gas deliveries to certain industrial
customers are subject to regulation by the APSC through contract approval.
Interstate gas storage contracts do not require APSC approval since the Federal
Energy Regulatory Commission allows these contracts to have market-based rates.
REVENUES AND GAS COSTS
Revenues from residential and commercial customers are recorded as meters are
read on a cycle basis throughout each month. The commodity cost of purchased gas
applicable to gas delivered to customers but not yet billed under the cycle
billing method is deferred and classified as Deferred Gas Costs within the
Company's Balance Sheet. Increases or decreases in the cost of gas and certain
other costs are passed through to customers in accordance with provisions in the
Company's rate schedules.
F-8
<PAGE> 31
Any over or under recoveries of these costs are charged or credited to cost of
gas and included in current assets or liabilities as the Deferred Purchased Gas
Adjustment within the Company's Balance Sheet. A general rate increase designed
to increase the Company's operating margins was approved by the APSC and became
effective on December 1, 1995. The APSC authorized Mobile Gas, effective
November 1, 1996, to implement a temperature rate adjustment rider. Such rider
is designed to offset the impact of unusually cold or warm weather on the
Company's operating margin. The rider decreased net income approximately
$685,000 in 1998 and increased net income approximately $816,000 in 1997.
PROPERTY, PLANT, AND EQUIPMENT
Substantially all property, plant, and equipment is considered utility plant.
Included in property, plant, and equipment are acquisition adjustments, net of
amortization, of $8,039,000 and $8,424,000 at September 30, 1998 and 1997,
respectively. Such acquisition adjustments are being amortized to cost of
service over the lives of the assets acquired.
The cost of additions includes direct labor and materials, allocable
administrative and general expenses, pension and payroll taxes, and an allowance
for funds used during construction. The cost of depreciable property retired,
plus cost of dismantling, less salvage, is charged to accumulated depreciation.
Estimated interest cost associated with property under construction, based upon
weighted average interest rates for short-term borrowings or the interest rate
on borrowings for specific projects, is capitalized as an allowance for borrowed
funds used during construction. Maintenance, repairs, and minor renewals and
betterment of property are charged to operations.
Provisions for depreciation are computed principally on straight-line rates for
financial statement purposes and on accelerated rates for income tax purposes.
Depreciation for financial statement purposes is provided at an annual rate
averaging approximately 4.0% of depreciable property, excluding the gas storage
facility which is depreciated at an annual rate averaging 2.7%.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INCOME TAXES
The Company records deferred tax liabilities and assets, as measured by enacted
tax rates, for all temporary differences caused when the tax basis of an asset
or liability differs from that reported in the financial statements. Investment
tax credits realized after 1980 are deferred and amortized over the average life
of the related property in accordance with regulatory treatment.
F-9
<PAGE> 32
EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Accounting Standards No.
128, "Earnings per Share" (SFAS 128) for the year ended September 30, 1998, and
has restated earnings per share amounts for all prior annual and quarterly
periods presented as required by the new Standard.
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 61,000, 37,000, and 12,000 for the years ended September 30, 1998,
1997, and 1996, respectively. These differences in equivalent shares are from
outstanding stock options.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
LONG-LIVED ASSETS
The Company reviews its long-lived assets whenever indications of impairment are
present. If any assets are determined to be impaired, such assets would be
written down to their estimated fair market values. The Company does not believe
it has any assets which are currently impaired.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130) was issued in June 1997 and is effective for the Company for
the fiscal year beginning October 1, 1998. SFAS 130 establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements. The Company does not currently have any
comprehensive income other than items included in net income and, therefore,
does not expect any material changes to its current reporting in response to
SFAS 130.
F-10
<PAGE> 33
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
interim and annual financial statements. 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;
therefore, 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.
Statement of Financial Accounting Standards No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits" (SFAS 132) was issued in
February 1998. SFAS 132 standardizes the disclosure of information required
about pensions and other postretirement benefits. In fiscal 1998, the Company
adopted the disclosure requirements of SFAS 132.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS 133 will be effective for the Company's fiscal year
ending September 30, 2000. The Company does not currently have any derivative
instruments nor is it involved in hedging activities.
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1) which provides guidance for the accounting
of such costs. SOP 98-1 is effective for the Company for the fiscal year ending
September 30, 2000. The impact of SOP 98-1 on the Company's annual financial
statements is currently being evaluated.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5) which
requires costs of start-up activities and organization costs to be expensed as
incurred. The Company expects to adopt SOP 98-5 in fiscal 1999 and recognize a
negative cumulative effect adjustment of approximately $617,000 or $.13 per
share (diluted) as a result of expensing organization and start-up costs
previously capitalized. SOP 98-5 is not expected to have a material effect on
the Company's subsequent annual financial statements.
In fiscal 1999, the Company expects to begin recording an estimate of unbilled
revenue for service rendered subsequent to the meter reading date through the
end of the reporting period. Presently, the commodity cost of purchased gas
applicable to gas delivered but not yet billed under the cycle billing method is
deferred. The Company expects to recognize a positive cumulative effect
adjustment of $235,000 or $.05 per share (diluted) in its fiscal year 1999
financial statements as a result of this accounting change. This accounting
change is not expected to have a material effect on the Company's subsequent
annual financial statements.
F-11
<PAGE> 34
RECLASSIFICATIONS
Certain amounts in the prior years financial statements have been reclassified
to conform with the 1998 financial statement presentation.
2. PROPERTY AND REGULATORY ASSETS
The functional classifications for the cost of property, plant, and equipment
are as follows at September 30, (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Distribution plant $ 103,347 $ 99,329
General plant 16,219 14,526
Storage plant 38,022 38,015
Transmission plant 3,479 3,464
Acquisition adjustment 9,827 9,874
--------- --------
Total property, plant, and equipment $ 170,894 $165,208
--------- --------
</TABLE>
The components of regulatory assets are as follows at September 30, (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Income tax (Note 4) $ 897 $ 1,056
Postemployment benefits (Note 7) 12 82
--------- --------
Total regulatory assets $ 909 $ 1,138
--------- --------
</TABLE>
F-12
<PAGE> 35
3. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following at September 30, (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Mobile Gas Service Corporation
First Mortgage Bonds
10.25% Series, due October 1, 2001 $ 3,500 $ 5,000
8.75% Series, due July 1, 2022 12,000 12,000
7.48% Series, due July 1, 2023 12,000 12,000
7.27% Series, due November 1, 2006 12,000 12,000
9% Note, due May 13, 2013 3,603 3,716
Bay Gas Storage Company, Ltd.
8.19% Guaranteed Senior Secured Notes
due December 1, 2014 20,263 20,967
Southern Gas Transmission Company
Revenue Note, Series A, due February 1, 1999
(Interest rate of 8.05% for 1998; interest varies from
7.95% to 8.05% for 1997) 213 827
-------- --------
Total 63,579 66,510
Less amounts due within one year 4,600 2,930
-------- --------
Long-term debt $ 58,979 $ 63,580
======== ========
</TABLE>
The 10.25% Series, due October 1, 2001, was called for early redemption on
October 1, 1998 as allowed by the Indenture of Mortgage. As a result of the
early payment of these bonds, the $3,500,000 principal amount due as of
September 30, 1998 has been included in current maturities of long-term debt.
Other maturities and sinking fund requirements on long-term debt in each of the
five fiscal years subsequent to September 30, 1998 are as follows: 1999 -
$1,100,000; 2000 - $2,712,000; 2001 - $2,745,000; 2002 - $2,834,000 and 2003 -
$2,931,000. Substantially all of the property of the Company is pledged as
collateral for the long-term debt.
At September 30, 1998, the Company had a $20 million revolving credit agreement
with a group of banks, which expires in July 1999. Borrowings under the
agreement may be made as needed providing that the Company is in compliance with
certain covenants in the revolving credit agreement and other loan agreements.
The Company currently is in compliance with all such covenants. The Company pays
a fee for its committed lines of credit rather than maintain compensating
balances. The commitment fee is 0.125% of the average daily unborrowed amount
during the annual period of calculation. Unused committed lines of credit at
September 30, 1998 and 1997 were $7.3 million and $9.3 million, respectively.
The weighted average interest rates on short-term debt outstanding at September
30, 1998 and 1997 were 6.6% and 6.7%, respectively.
F-13
<PAGE> 36
4. INCOME TAXES
The components of income tax expense are as follows for the years ended
September 30, (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current
Federal $ 3,869 $ 2,750 $ 1,897
State 392 286 202
------- ------- -------
4,261 3,036 2,099
------- ------- -------
Deferred
Federal 662 1,544 2,667
State 70 158 273
------- ------- -------
732 1,702 2,940
------- ------- -------
Deferred investment tax credit
amortization (26) (26) (26)
------- ------- -------
Total income tax expense $ 4,967 $ 4,712 $ 5,013
======= ======= =======
</TABLE>
A reconciliation of income tax expense and the amount computed by multiplying
income before income taxes by the statutory federal income tax rate for the
periods indicated is as follows for the years ended September 30, (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Income tax expense at federal
statutory rate $ 4,550 $ 4,365 $ 4,639
Excess of book over tax depreciation on
pre-1981 property additions 120 113 108
State income taxes 305 289 307
Other - net (8) (55) (41)
------- ------- -------
Total income tax expense $ 4,967 $ 4,712 $ 5,013
======= ======= =======
Effective tax rate 37.1% 36.7% 36.7%
======= ======= =======
</TABLE>
The tax effect of differences in book and tax depreciation related to pre-1981
property additions was recognized in income for accounting and ratemaking
purposes prior to 1981. With the adoption in fiscal 1994 of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," the
Company recorded deferred taxes related to this temporary difference and a
corresponding regulatory asset expected to be collected in customer rates when
such taxes become payable in accordance with the current ratemaking practices
followed by the APSC. Such future collections included in regulatory assets are
$897,000 and $1,056,000 at September 30, 1998 and 1997, respectively.
F-14
<PAGE> 37
No valuation allowance is deemed necessary, as the Company anticipates
generating adequate future taxable income to realize the benefits of all
deferred tax assets on the balance sheet.
The significant components of the Company's net deferred tax liability as of
September 30, are (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax
basis of property $11,797 $10,605
Prepaid insurance 199 197
Regulatory assets 325 383
Purchased gas adjustment 293
Other 87 150
------- -------
Total deferred tax liabilities 12,408 11,628
------- -------
Deferred tax assets:
Pension 526 622
Gross receipts taxes 592 585
Unbilled revenue 280 238
Postretirement benefits 223 247
Purchased gas adjustment 214
Other 1,058 1,007
------- -------
Total deferred tax assets 2,893 2,699
------- -------
Net deferred tax liability $ 9,515 $ 8,929
======= =======
</TABLE>
5. CAPITAL STOCK
The number of authorized shares of EnergySouth common stock is 10,000,000
shares. As part of the Reorganization discussed in Note 1, shareholders of
Mobile Gas received three shares of EnergySouth common stock for each two shares
of Mobile Gas common stock held on the date of Reorganization. Cash was paid to
certain shareholders in lieu of fractional shares. An amount equal to the par
value of the incremental shares issued was transferred from capital in excess of
par value. All references to number of shares and per share amounts have been
restated to reflect the three-for-two conversion.
On January 31, 1997, the stockholders approved a proposed amendment to the
Restated Articles of Incorporation of Mobile Gas to increase the authorized
number of shares of common stock of Mobile Gas to 8,000,000 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.
F-15
<PAGE> 38
The Mobile Gas Service Corporation 1992 Stock Option Plan (the "Plan") provides
for the granting of incentive stock options, non-qualified stock options, and
stock appreciation rights to key employees. Under the Plan, an aggregate of
225,000 shares of the Company's authorized but unissued Common Stock have been
reserved for issuance. Stock options become 25% exercisable on the first
anniversary of the grant date and an additional 25% become exercisable each
succeeding year. No option may be exercised after the expiration of ten years
from the grant date. During the year ended September 30, 1995, 157,500 options
were granted at an option price of $14.083, representing the market price on the
date of grant. Transactions under the Plan are summarized below:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Outstanding at beginning of year ($14.083) 157,500 157,500 157,500
Exercised (at $14.083) (1,850) -- --
-------- -------- --------
Outstanding at end of year 155,650 157,500 157,500
-------- -------- --------
Exercisable at end of year 116,737 78,750 39,375
-------- -------- --------
Remaining reserved for issuance at end of year 67,500 67,500 67,500
-------- -------- --------
</TABLE>
At September 30, 1998, 282,000 shares of the Company's authorized but unissued
Common Stock were reserved for issuance under the Company's Dividend
Reinvestment and Stock Purchase Plan.
6. RESTRICTIONS ON RETAINED EARNINGS
The Company's long-term debt instruments contain certain debt to equity ratio
requirements and restrictions on the payment of cash dividends and the purchase
of shares of its capital stock. At September 30, 1998, under the most
restrictive provisions, retained earnings in the amount of $21,389,000 was
unrestricted.
7. RETIREMENT PLANS AND OTHER BENEFITS
The Company has a noncontributory, defined benefit retirement plan covering
substantially all of its employees. Benefits are based on the greater of amounts
resulting from two different formulas: years of service and average compensation
during the last five years of employment, or years of service and compensation
during the term of employment. The Company annually contributes to the plan the
amount deductible for federal income tax purposes.
The Company also provides certain health care and life insurance benefits for
retired employees. Substantially all employees may become eligible for such
benefits if they retire under the provisions of the company's retirement plan.
The company is accruing the costs over the expected service period of the
employees.
F-16
<PAGE> 39
The "projected unit credit" actuarial method was used to determine service cost
and actuarial liability.
The following table sets forth the funded status of the plans and the amounts
recorded in the financial statements at September 30, (in thousands):
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
BENEFITS BENEFITS
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of the period $ 18,009 $ 17,587 $ 3,426 $ 3,653
Service cost 599 574 82 83
Interest cost 1,299 1,248 249 240
Benefits paid (986) (942) (202) (192)
(Gain)/loss (192) (458) (12) (358)
-------- -------- -------- --------
Benefit obligation at the end of the period $ 18,729 $ 18,009 $ 3,543 $ 3,426
-------- -------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of assets at the beginning of the period $ 29,293 $ 24,579 $ 2,366 $ 1,790
Benefits paid (986) (942) -- --
Contributions -- -- 70 215
Actual return on plan assets 1,956 5,656 251 361
-------- -------- -------- --------
Fair value of plan assets at the end of the period $ 30,263 $ 29,293 $ 2,687 $ 2,366
-------- -------- -------- --------
FUNDED STATUS
Plan assets in excess of benefit obligation $ 11,534 $ 11,284 $ (856) $ (1,060)
Unrecognized net (gain)/loss (12,334) (12,207) (23) 83
Prior service cost not yet recognized 391 431 (453) (490)
Remaining unrecognized transition asset (1,043) (1,226) -- --
-------- -------- -------- --------
Accrued benefit cost $ (1,452) $ (1,718) $ (1,332) $ (1,467)
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
BENEFITS BENEFITS
---------------------------------- ----------------------------------
Weighted average assumptions as of
September 30, 1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Average discount rate 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%
Expected rate of return on plan assets 7.5% 7.5% 7.5% 7.0% 7.0% 7.0%
Rate of compensation increase 6.1% 6.1% 6.1%
</TABLE>
The accumulated postretirement benefit obligation at September 30, 1998 and 1997
was determined using an assumed health care cost trend rate of 8.7% in 1998 and
9.6% in 1997, gradually declining to 5.0% in the fiscal year 2005 and
thereafter.
F-17
<PAGE> 40
The assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects (in
thousands):
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Effect on total of service and
interest cost components $ 26 $ 35 $ (22) $ (29)
Effect on postretirement benefit obligations 199 268 (170) (226)
</TABLE>
Net periodic benefit cost included the following components for the years ended
September 30, (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 599 $ 574 $ 527 $ 82 $ 83 $ 96
Interest cost 1,299 1,248 1,258 249 240 256
Amortization of transition asset (183) (183) (183) -- -- --
Amortization of prior service cost 40 40 40 (38) (38) (38)
Amortization of unrecognized (gain)/loss (291) (184) (84) -- -- 29
Expected return on plan assets (1,731) (1,554) (1,420) (156) (118) (95)
--------- --------- --------- --------- --------- ---------
Net periodic benefit cost $ (267) $ (59) $ 138 $ 137 $ 167 $ 248
--------- --------- --------- --------- --------- ---------
</TABLE>
The Company has formed two voluntary employees' beneficiary association (VEBA)
trusts to fund postretirement health and life insurance benefits. The Company's
contributions to these trusts in 1998, 1997, and 1996 were $70,000, $215,000,
and $200,000, respectively.
The Company's eligible employees may participate in the Employee Savings Plan or
the Bargaining Unit Employees Savings Plan, both of which are 401(k) plans. The
Company's contributions for the years ended September 30, 1998, 1997, and 1996
were $248,000, $255,000, and $199,999, respectively.
During fiscal 1995 in connection with the adoption of Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits," the Company recorded a liability for postemployment benefits of
$211,000 with a corresponding charge to a regulatory asset. The regulatory asset
is being amortized to expense and collected from customers over a three year
period beginning December 1, 1995 as approved by the APSC.
F-18
<PAGE> 41
8. COMMITMENTS AND CONTINGENCIES
The Company has third-party contracts, which expire at various dates through the
year 2002, for the purchase, storage and delivery of gas supplies. Minimum
payments under these contracts in the fiscal years subsequent to September 30,
1998 are as follows: 1999 - $1,671,000; 2000 - $1,698,000; 2001 - $1,216,000;
and 2002 - $597,000. A portion of firm supply requirements is expected to be met
through the withdrawal of gas from the storage facility owned by Bay Gas. Mobile
Gas has entered into a Gas Storage Agreement under which Bay Gas is to provide
storage services for an initial period of 20 years which began in September 1994
with the commencement of commercial operations of the storage facility. The
purchased gas adjustment provisions of the Company's rate schedules permit the
recovery of gas costs from customers.
The Company is subject to various federal, state and local laws and regulations
relating to the environment, which have not had a material effect on the
Company's financial position or results of operations.
Like many gas distribution companies, prior to the widespread availability of
natural gas, the Company manufactured gas for sale to its customers. In contrast
to some other companies which operated multiple manufactured gas plants, the
Company and its predecessor operated only one such plant, which discontinued
operations in 1933. The process for manufacturing gas produced by-products and
residuals, such as coal tar, and certain remnants of these residuals are
sometimes found at former gas manufacturing sites.
The Company conducted a preliminary assessment in 1994 of its former gas plant
site and has tested certain waters in the vicinity of the site. The Company
developed and has implemented a plan for the site based on the advice of
environmental consultants, which involves securing and monitoring the site, and
continued testing. Based on the results of tests to date, the Company does not
believe that the site currently poses any threat to human health or the
environment. While no conclusion can be reached at this time as to whether any
further remedial action might ultimately be required, based on currently
available information, it is believed that any costs with respect to the site
are likely to be immaterial, and the Company has, therefore, established no
reserve for such costs in its financial statements. The Company intends that,
should further investigation or changes in environmental laws or regulations
require material expenditures for investigation, remediation, or clean-up with
regard to the site, it would apply to the APSC for appropriate rate recovery of
such costs. However, there can be no assurance that the APSC would approve the
recovery of such costs or the amount and timing of any such recovery.
The Company is involved in litigation arising in the normal course of business.
Management believes that the ultimate resolution of such litigation will not
have a material adverse effect on the consolidated financial statements of the
Company.
F-19
<PAGE> 42
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of financial instruments have been reported to meet the disclosure
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Values of Financial Instruments," and are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.
The carrying amounts for cash and cash equivalents, gas and other receivables,
notes payable, accounts payable and other current liabilities approximate fair
value. The fair value of merchandise receivables is estimated based on market
interest rates for similar receivables at the end of each respective year. The
carrying amount of merchandise receivables, as shown below, is net of the
reserve for uncollectible merchandise receivables of $484,000 and $404,000 for
the years ended September 30, 1998 and 1997, respectively. The fair value of
long-term debt is estimated based on interest rates available to the Company at
the end of each respective year for the issuance of debt with similar terms and
remaining maturities.
The carrying amount and the estimated fair value of such financial instruments
are as follows at September 30, (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Merchandise receivables $ 7,908 $ 7,941 $ 7,138 $ 7,239
Long-term debt 63,579 72,860 66,510 73,669
</TABLE>
F-20
<PAGE> 43
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 1998 and 1997 is summarized as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Dec. 31 Mar. 31 Jun. 30 Sep. 30
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1998
Total operating revenues $ 20,074 $ 28,511 $ 13,869 $ 11,568
Total operating income $ 4,369 $ 8,801 $ 3,018 $ 1,962
Net income $ 1,989 $ 4,791 $ 1,153 $ 484
Basic earnings per share (1) $ 0.41 $ 0.99 $ 0.24 $ 0.10
Diluted earnings per share (1) $ 0.40 $ 0.97 $ 0.23 $ 0.10
1997
Total operating revenues $ 17,961 $ 29,336 $ 13,854 $ 11,519
Total operating income $ 4,518 $ 9,093 $ 2,989 $ 1,297
Net income $ 2,038 $ 4,861 $ 1,096 $ 131
Basic earnings per share $ 0.42 $ 1.00 $ 0.23 $ 0.03
Diluted earnings per share (1) $ 0.42 $ 1.00 $ 0.22 $ 0.03
</TABLE>
The pattern of quarterly earnings reflects a seasonal nature because weather
conditions strongly influence operating results.
(1) The sum of the quarterly amounts does not equal the year's amount due to
rounding of the quarterly amounts or a changing number of average shares.
F-21
<PAGE> 44
11. FINANCIAL INFORMATION BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
Years Ended September 30, (in thousands) 1998 1997 1996
- --------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Operating Revenues, Unaffiliated Customers
Natural gas distribution $ 72,818 $ 71,493 $ 70,452
Natural gas storage 1,204 1,177 926
---------- ---------- ----------
Total $ 74,022 $ 72,670 $ 71,378
---------- ---------- ----------
Intersegment Revenues
Natural gas distribution $ 179 $ 3 $ 25
Natural gas storage 4,135 4,146 4,141
---------- ---------- ----------
Total, eliminated in consolidation $ 4,314 $ 4,149 $ 4,166
---------- ---------- ----------
Operating Expenses, Excluding Income Taxes
Natural gas distribution $ 57,970 $ 57,067 $ 54,842
Natural gas storage 2,216 1,855 2,318
Eliminated in consolidation (4,314) (4,149) (4,166)
---------- ---------- ----------
Total $ 55,872 $ 54,773 $ 52,994
---------- ---------- ----------
Operating Income Before Income Taxes
Natural gas distribution $ 15,027 $ 14,429 $ 15,635
Natural gas storage 3,123 3,468 2,749
---------- ---------- ----------
Total $ 18,150 $ 17,897 $ 18,384
---------- ---------- ----------
Depreciation and Amortization
Natural gas distribution $ 5,596 $ 5,102 $ 4,682
Natural gas storage 1,000 967 937
---------- ---------- ----------
Total $ 6,596 $ 6,069 $ 5,619
---------- ---------- ----------
Capital Expenditures
Natural gas distribution $ 7,354 $ 11,401 $ 7,856
Natural gas storage 288 831 2,284
---------- ---------- ----------
Total $ 7,642 $ 12,232 $ 10,140
---------- ---------- ----------
Identifiable Assets, at September 30,
Natural gas distribution $ 126,658 $ 122,656 $ 113,479
Natural gas storage 39,883 39,211 37,300
---------- ---------- ----------
Total $ 166,541 $ 161,867 $ 150,779
---------- ---------- ----------
</TABLE>
F-22
<PAGE> 45
SCHEDULE II
MOBILE GAS SERVICE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
(in thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
-----------------------
CHARGED CHARGED
BALANCE AT TO COSTS TO OTHER BALANCE
BEGINNING AND ACCOUNTS DEDUCTIONS AT END
DESCRIPTION OF YEAR EXPENSES AMOUNT AMOUNT OF YEAR
----------- ------- -------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Reserves deducted from assets
to which they apply - Allowance
for doubtful accounts:
September 30, 1998 $536 $535 $445 (1) $626
September 30, 1997 $349 $821 $634 (1) $536
September 30, 1996 $266 $441 $358 (1) $349
</TABLE>
NOTES:
(1) Amounts written off - net of recoveries.
S-1
<PAGE> 46
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description (Exhibits prior to February 2, 1998 filed by Mobile Gas)
- ----------- -----------
<S> <C>
2 Articles of Merger of MBLE Merger Co., Inc. into Mobile Gas
Service Corporation (incorporated by reference to Exhibit 2 to
Form 10-Q Quarterly Report dated February 13, 1998)
3(i) Articles of Restatement of the Articles of Incorporation of
EnergySouth, Inc. (incorporated by reference to Exhibit 3(i) to
Form 10-Q Quarterly Report dated February 13, 1998)
3(ii) By-laws of EnergySouth, Inc., adopted January 31, 1998
(incorporated by reference to Exhibit 3.2 to Registration
Statement 333-42057)
4(a)-1 Indenture of Mortgage and Deed of Trust of Mobile Gas Service
Corporation dated as of December 1, 1941 (incorporated by
reference to Exhibit B-a to Mobile Gas Registration Statement No.
2-4887)
Sup. Ind.
Dated as of File Reference Exhibit
----------- -------------- -------
4(a)-2 10/1/44 Reg. No. 2-5493 7-6
4(a)-3 7/1/52 Form 10-K for fiscal year ended 4(a)-3
September 30, 1985
4(a)-4 6/1/54 " 4(a)-4
4(a)-5 4/1/57 " 4(a)-5
4(a)-6 7/1/61 " 4(a)-6
4(a)-7 6/1/63 " 4(a)-7
4(a)-8 10/1/64 " 4(a)-8
4(a)-9 7/1/72 " 4(a)-9
4(a)-10 8/1/75 " 4(a)-10
4(a)-11 7/1/79 " 4(a)-11
4(a)-12 7/1/82 " 4(a)-12
4(a)-13 7/1/86 Form 10-K for fiscal year ended 4(a)-13
September 30, 1986
4(a)-14 10/1/88 Form 10-K for fiscal year ended 4(a)-14
September 30, 1989
4(a)-15 7/1/92 Form 10-K for fiscal year 4(a)-15
ended September 30, 1992
4(a)-16 7/1/93 Form 10-K for fiscal year 4(a)-16
ended September 30, 1993
</TABLE>
E-1
<PAGE> 47
<TABLE>
<CAPTION>
Sup. Ind.
Dated as of File Reference Exhibit
----------- -------------- -------
<S> <C> <C> <C>
4(a)-17 12/3/93 Form 10-K for fiscal year 4(a)-17
ended September 30, 1993
4(a)-18 11/1/96 Form 10-K for fiscal year 4(a)-18
ended September 30, 1997
4(b) Southern Gas Transmission Company Indenture (incorporated by
reference to Exhibit 4(b) to Form 10-K for fiscal year ended
September 30, 1992)
4(c)-1 Bay Gas Indenture dated as of October 1, 1992 (incorporated by
reference to Exhibit 4(c) to Form 10-K for fiscal year ended
September 30, 1992)
4(c)-2 First Supplemental Indenture dated as of October 1, 1994
supplemental to Bay Gas Indenture (incorporated by reference to
Exhibit 4(c)-2 to Form 10-K for fiscal year ended September 30,
1995)
4(d) Promissory Note to the Utilities Board of the Town of Citronelle
dated May 13, 1993 (incorporated by reference to Exhibit 4(d) to
Form 10-K for fiscal year ended September 30, 1993)
10(d)-2 Settlement Agreement with Koch Gateway Pipeline Company dated
September 21, 1993 (incorporated by reference to Exhibit 10(d)-2
to Form 10-K for fiscal year ended September 30, 1993)
10(d)-3 No Notice Service Agreements between Koch Gateway Pipeline
Company and Mobile Gas Service Corporation dated November 1, 1993
(incorporated by reference to Form S-1, Registration Statement
No. 33-82498)
10(d)-4 Gas Supply Agreement between Mobile Gas Service Corporation and
Koch Gas Services Company made as of the 1st day of April, 1994
(incorporated by reference to Form S-1, Registration Statement
No. 33-82498)
10(d)-5 NNS Settlement Agreement between Koch Gateway Pipeline Company
and Mobile Gas Service Corporation dated March 26, 1998 (1)
10(e)-3 Gas Sale and Purchase Contract between Coral Energy Resources,
L.P. as Seller and Mobile Gas Service Corporation as Buyer dated
as of January 1, 1997 (incorporated by reference to Exhibit
10(e)-3 to Form 10-K for fiscal year ended September 30, 1997)
(3)
</TABLE>
E-2
<PAGE> 48
<TABLE>
<S> <C>
10(e)-4 Gas Supply Agreement between Midcon Gas Services Corp. and Mobile
Gas Service Corporation dated as of April 1, 1997 (incorporated
by reference to Exhibit 10(e)-4 to Form 10-K for fiscal year
ended September 30, 1997) (3)
10(e)-5 Letter dated July 13, 1998 with consent dated July 20, 1998 to
assignment of Gas Supply Agreement to K N Marketing, L.P. (1)
10(f)-1 Agreement for Sale and Purchase of Gas - Mobile Plant dated
August 10, 1995 between Mobil Natural Gas Inc. and Mobile Gas
Service (incorporated by reference to Exhibit 10(f) to Form 10-K
for fiscal year ended September 30, 1995) (3)
10(f)-2 Letter dated June 26, 1996 with consent dated July 31, 1996 to
assignment of Agreement for Sale and Purchase of Gas - Mobile
Plant to PanEnergy Trading and Market Services, L.L.C.
(incorporated by reference to Exhibit 10(f)-2 to Form 10-K for
fiscal year ended September 30, 1996)
10(g) Deferred Compensation Agreement with John S. Davis dated January
26, 1996 (incorporated by reference to Exhibit 10(g) to Form 8-K
Current Report dated February 7, 1996)
10(i) Mobile Gas Service Corporation/Bay Gas Storage Company, Ltd. Gas
Storage Agreement dated February 26, 1992 (incorporated by
reference to Exhibit 10(i) to Form 10-K for fiscal year ended
September 30, 1992)
10(j) Directors/Officers Indemnification Agreement (incorporated by
reference to Exhibit 10(j) to Form 10-K for fiscal year ended
September 30, 1992)
10(k)-1 Amended and Restated Supplemental Deferred Compensation Agreement
with Walter L. Hovell, dated December 11, 1992 (incorporated by
reference to Exhibit 10(k) to Form 10-K for fiscal year ended
September 30, 1992) (2)
10(k)-2 Amendment to Amended and Restated Supplemental Deferred
Compensation Agreement dated January 27, 1995 between the Company
and Walter L. Hovell (incorporated by reference to Exhibit
10(k)-2 to Form 8-K Current Report dated January 27, 1995) (2)
10(l)-1 Bay Gas Agreement by and among Mobile Gas Service Corporation,
MGS Storage Services, Inc., MGS Energy Services, Inc. and Olin
Corporation, dated December 5, 1991 (incorporated by reference to
Exhibit 10(l) to Form 10-K for fiscal year ended September 30,
1992)
10(m)-1 Limited Partnership Agreement between MGS Storage Services, Inc.,
as General Partner, and MGS Energy Services, Inc., as Limited
Partner (forming Bay Gas Storage Company, Ltd.), dated December
5, 1991 (incorporated by reference to Exhibit 10(m) to Form 10-K
for fiscal year ended September 30, 1992)
</TABLE>
E-3
<PAGE> 49
<TABLE>
<S> <C>
10(m)-2 First Amendment to Limited Partnership Agreement dated as of
April 6, 1992 and Second Amendment to Limited Partnership
Agreement dated as of September 12, 1994 (incorporated by
reference to Exhibit 10(m)-2 to Form 10-K for fiscal year ended
September 30, 1994)
10(n) Cavity Development and Storage Agreement between Olin Corporation
and Bay Gas Storage Company, Ltd., dated January 14, 1992
(incorporated by reference to Exhibit 10(n) to Form 10-K for
fiscal year ended September 30, 1992)
10(o)-1 Transportation Agreement between Mobile Gas Service Corporation
and Tuscaloosa Steel Corporation dated as of May 15, 1995
(incorporated by reference to Exhibit 10(o) to Form 10-K for
fiscal year ended September 30, 1995) (3)
10(o)-2 Amendment dated August 23, 1996 to Transportation Agreement
between Mobile Gas Service Corporation and Tuscaloosa Steel
Corporation(3)
10(p) Note Guaranty Agreement between Mobile Gas Service Corporation
and AmSouth Bank of Alabama, Trustee, dated as of January 1,
1992, relating to Indenture of Southern Gas Transmission Company
(incorporated by reference to Exhibit 10(p) to Form 10-K for
fiscal year ended September 30, 1992)
10(q) Guaranty Agreement by Mobile Gas Service Corporation, dated as of
October 1, 1992, relating to Indenture of Bay Gas Storage
Company, Ltd. (incorporated by reference to Exhibit 10(q) to Form
10-K for fiscal year ended September 30, 1992)
10(r) Amended Restated Stock Option Plan of EnergySouth, Inc.
(incorporated by reference to Appendix A to definitive proxy
statement dated December 17, 1998) (2)
10(s) Mobile Gas Service Corporation Incentive Compensation Plan
(incorporated by reference to Exhibit B to definitive proxy
statement dated December 21, 1992) (2)(4)
10(t) Agreement for Purchase and Sale of Assets by and between The
Utilities Board of the Town of Citronelle and Mobile Gas Service
Corporation dated January 28, 1993 (incorporated by reference to
Exhibit 10(t) to Form 10-K for fiscal year ended September 30,
1993)
10(u)-1 Revolving Credit Agreement dated July 17, 1995 by and among
Mobile Gas Service Corporation as Borrower, AmSouth Bank of
Alabama as Agent, and
</TABLE>
E-4
<PAGE> 50
<TABLE>
<S> <C>
AmSouth Bank of Alabama, First Alabama Bank, Whitney Bank of
Alabama, Bank of Mobile, SouthTrust Bank of Alabama, N.A., and
Commonwealth National Bank as Lenders (incorporated by reference
to Exhibit 10(u) to Form 10-K for fiscal year ended September 30,
1995)
10(u)-3 Amendment dated July 15, 1997 to Revolving Credit Agreement by
and among Mobile Gas Service Corporation as Borrower, AmSouth
Bank of Alabama as Agent, and AmSouth Bank of Alabama, First
Alabama Bank, Whitney Bank of Alabama, Bank of Mobile, SouthTrust
Bank of Alabama, N.A., and Commonwealth National Bank as Lenders
(incorporated by reference to Exhibit 10(u)-3 to Form 10-K for
fiscal year ended September 30, 1997)
10(x) Letter dated October 7, 1994 from Mobile Gas Service Corporation
to John S. Davis confirming terms of employment (incorporated by
reference to Exhibit A to Form 8-K current report filed November
2, 1994) (2)
10(y) Consulting Agreement dated January 27, 1995 between the Company
and Walter L. Hovell (incorporated by reference to Exhibit 10(y)
to Form 8-K Current Report dated January 27, 1995) (2)
10(z) Mobile Gas Service Corporation Non-Employee Directors Deferred
Fee Plan (incorporated by reference to Exhibit 10(z) to Form 8-K
Current Report dated January 27, 1995) (2)(4)
10(aa) Mobile Gas Service Corporation Transportation Agreement between
the Company and Methanol One of Alabama, L.L.C. dated September
26, 1997 (incorporated by reference to Exhibit 10(aa) to Form
10-K for fiscal year ended September 30, 1997) (3)
11 Statement Re Computation of Per Share Earnings(1)
21 Subsidiaries of Registrant and Partnerships in which Registrant
Owns an Interest(1)
23 Consent of Deloitte & Touche LLP(1)
27 Financial Data Schedule(1)
</TABLE>
(1) Filed herewith.
(2) Management contract or compensatory plan or arrangement.
(3) 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.
(4) Amended to use Company Common Stock instead of Mobile Gas common stock
effective February 2, 1998.
E-5
<PAGE> 1
EXHIBIT 10(d)-5
3/26/98
NNS SETTLEMENT AGREEMENT
BY AND BETWEEN
KOCH GATEWAY PIPELINE COMPANY AND
MOBILE GAS SERVICE CORPORATION
This Agreement is made this 26th day of March, 1998, by and between Koch Gateway
Pipeline Company ("Koch") and Mobile Gas Service Corporation ("MGS").
WHEREAS, Koch and MGS have agreements relating to No Notice Service ("NNS") that
will expire by their own terms on March 31, 1999, including Koch contact no.
14530 ("NNS Contract") and Koch Contract nos. 14478 and 14528 ("NNS SCO
Contracts"); and
WHEREAS, pending before the Federal Energy Regulatory Commission is Docket No.
97-373 in which rates and other terms for NNS are disputed and the outcome of
which is uncertain; and
WHEREAS, Koch and MGS desire to resolve amicably all disputes between them as to
NNS and to provide for NNS after March 31, 1999; and
NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of
which is hereby acknowledged, and in consideration of the promises and mutual
covenants and agreements contained herein, Koch and MGS agree as follows:
1) The terms and conditions of the settlement reached between Koch and its two
part NNS Customers ("NNS Customers") in Docket No. RP94-120 shall continue
through March 31, 1999.
2) Subject to the other provisions of this agreement, MGS shall extend its
existing two part NNS Contract for a term beginning April 1, 1999 through March
31, 2002, which shall be the term of this Agreement.
3) For the term of this Agreement and subject to any rate modifications in
Paragraphs 9 and 10, below, the demand charge for MGS's two part NNS Contract
shall be the lesser of $6.38 per MMBtu or the maximum applicable tariff rate(s)
in effect during the term of this Agreement. In addition to the demand charges
set forth herein, MGS shall pay the maximum commodity rate, all applicable
surcharges and the maximum fuel retention levels as set forth in Koch's FERC Gas
Tariff. Provided however, the 100% load factor rate, between primary receipts
and delivery points shall not exceed $0.23 per MMBtu (demand and commodity) plus
fuel and all applicable
1
<PAGE> 2
surcharges. Provided further, the 100% load factor rates may increase pursuant
to Paragraph 15 (B) if MGS utilizes supplemental receipt points.
4) On March 31, 1999, MGS's existing NNS SCO Contracts with Koch shall expire.
These NNS-SCO Contracts currently have a MDQ of 6,870. MGS will not renew these
contracts, nor add the delivery points under these SCO contracts to its two part
NNS Contract which serves Whistler Junction, as well as other delivery points.
5) Effective on April 1, 1999 MGS shall increase its MDQ under its two part NNS
Contract to 24,000 MMBtu per day. During the term hereof, MGS will serve only
those delivery points which it is currently serving under its two part NNS
Contract as of the date of this Agreement.
6) Notwithstanding Paragraph 5, above, on or after April 1, 1999, MGS can add a
new delivery point with an MDQ of 2,000 MMBtu/d or less to their two part NNS
Contract to serve a future interconnect to be located at Baldwin County, Alabama
("Baldwin delivery point") without increasing their NNS MDQ above 24,000
MMBtu/d. Provided however, MGS can add additional MDQ to the Baldwin delivery
point in excess of 2,000 MMBtu/d to the extent they increase their overall NNS
contract MDQ by at least the same amount. The rate for such additional MDQ will
be the rate stated in Paragraph 3.
7) Subject to paragraph 6 above, to the extent MGS desires to serve delivery
points not currently being served under its two part NNS Contract, then MGS
shall submit a valid request for service and enter into a new two part NNS
agreement to serve those points. During the term hereof, the demand rate for
delivery points which will be used to serve loads which were not previously
served using transportation on Koch shall be $6.38; the rate for delivery points
which were previously served through NNS SCO on Koch shall be $6.38, and MGS
shall convert 100% of that NNS SCO MDQ to two-part NNS MDQ; the rate and all
other applicable terms and conditions for all other delivery points will be
subject to negotiation and shall not be covered by the Settlement as amended
herein.
8) If MGS suffers from a bypass which originates from Koch's pipeline shall have
the right to reduce its MDQ as follows. In the event a third party builds
facilities to KGPC or has Koch build such facilities and bypasses MGS to serve
an existing load currently served by that MGS under its NNS contracts, then Koch
shall allow MGS to reduce its NNS MDQ by an amount equal to the peak day volume
of the bypassed load during the last 12 months for interruptible loads, or the
NNS MDQ allocated by MGS to serve the load, if firm. Such NNS reduction may
become effective immediately upon commencement of bypass flows and can be
exercised up to 12 months following the commencement of bypass flows. In
addition and contemporaneously with its offer to
2
<PAGE> 3
other party(s), Koch will offer MGS the same service, terms, conditions and rate
to its city gate which Koch offered to any other party(s) to serve that
particular bypassed load. If MGS experiences a load reduction as a result of a
bypass initiated by Koch or Koch's marketing affiliate that results in an actual
reduction in the load being served by a NNS contract, then MGS shall be entitled
to reduce its annual MDQ by a percentage not to exceed the percentage reduction
in MGS's total annual throughput that resulted from the bypass. Such NNS
reduction may become effective immediately upon commencement of bypass flows and
can be exercised up to 12 months following the commencement of bypass flows.
9) In the event MGS is required by its regulatory authority to unbundle its
merchant function and provide open access transportation to delivery points on
its system(s):
A. MGS shall make a good faith effort to require that those parties
which, through the unbundling process take over all or part of MGS's
merchant service business, will take assignment of their respective
portions of MGS's MDQ. All assignments shall be subject to all of the
terms of this Agreement.
B. In the event a third party assumes the responsibility to serve all or
part of MGS's load which was previously supplied under MGS's NNS
contract on Koch ("assigned load"), then MGS may (a) assign that
portion of its NNS contract to that third party, or (b) to the extent
the loss of that load results in the demand charge for that portion of
MGS's Koch NNS contract becoming a stranded cost, then MGS shall have
the right to cancel a portion of its NNS MDQ equal to the peak day
requirement of that assigned load. MGS shall use best efforts to
provide Koch 6 months prior written notice for any such contract
reductions. Such reductions shall be effective on the date gas is
first delivered by an alternative supplier. If this reduction was the
result of a proceeding before a body which regulates MGS, then MGS
shall provide Koch with timely written notice so that it has the
opportunity to participate in that proceeding. MGS shall use its best
efforts, in any such proceeding, to insure that its contract with Koch
will not take the full impact of any such reduction but will endeavor
to insure that the contract reductions are spread evenly among all its
transportation contracts. Finally, to the extent a reduction in MDQ
occurs pursuant to the terms of this paragraph and the revenue earned
by Koch from any replacement transportation contract is less than what
Koch received under its NNS agreement for this portion of MGS's MDQ,
then the NNS rate for the remaining MDQ will be increased by an
amount, up to the rate set forth in Paragraph 12, necessary to insure
that Koch's revenues remain unchanged. If the revenues earned by Koch
from any replacement transportation contract are more than what Koch
received
3
<PAGE> 4
under its NNS agreement for this portion of MGS's MDQ, then the NNS
rate for the remaining MDQ will be decreased by an amount necessary to
insure that Koch's revenues remain unchanged.
10) In the event MGS is prohibited by its regulatory authority from recovering
in its rates the cost for a portion of their MDQ on Koch based on the conclusion
of its regulator that MGS's MDQ is in excess of its peak day needs, then MGS
shall have the right to reduce its NNS MDQ to a level that it can recover in
their rates. This reduction shall be effective prospectively beginning on the
date a final order disallowing recovery of the NNS demand charges is issued.
Before this provision can become effective MGS must notify timely Koch in
writing that this issue is pending before a regulatory authority so that Koch
can participate in that proceeding. In addition MGS must use its best efforts to
prevent its contract with Koch from taking more than a proportionate reduction
in MDQ during these proceedings. Finally, to the extent a reduction in MDQ
occurs pursuant to the terms of this paragraph and the revenue earned by Koch
from any replacement transportation contract is less than what Koch received
under its NNS agreement for this portion of MGS's MDQ, then the NNS rate for the
remaining MDQ will be increased by an amount, up to the rate set forth in
Paragraph 10, necessary to insure that Koch's revenues remain unchanged. If the
revenues earned by Koch from any replacement transportation contract are more
than what Koch received under its NNS agreement for this portion of MGS's MDQ,
then the NNS rate for the remaining MDQ will be decreased by an amount necessary
to insure that Koch's revenues remain unchanged.
11) MGS agrees not to oppose any overall settlement in Docket No. RP97-373 which
is acceptable to both Koch and the Commission Trial Staff that includes a
postage stamp rate design for NNS. In addition, MGS agrees to file comments in
support of a stipulation and agreement filed with the Commission that reflects
the provisions of this agreement. Upon execution of a joint stipulation and
agreement by Koch, Trial Staff, and all of the parties which support the
settlement, and upon certification of that joint stipulation and agreement to
the Commission and suspension of the procedural schedule in this docket, MGS
shall conditionally withdraw their opposition to the positions which Koch has
taken in this docket (including any testimony which opposes any aspect of Koch's
case) subject to Commission approval of said stipulation and agreement in a
final order. At the same time, and under the same circumstances described above,
Koch shall conditionally withdraw its testimony supporting zoned NNS rates and
advocate the utilization of a postage stamp rate design for NNS rates during the
Contract Extension. Upon approval of the stipulation and agreement without
modifications by the Commission in a final order, the referenced testimony of
Koch shall be deemed withdrawn. In the event the Commission rejects the
stipulation and agreement, or modifies it in a manner that is unacceptable to
either Koch or MGS, then the referenced testimony shall not be deemed withdrawn
and both Koch and MGS shall be free to pursue such testimony in any future
proceedings in this docket.
4
<PAGE> 5
12) With respect to rate changes pursuant to Paragraph 9 and 10, the NNS demand
charge rate shall be capped (exclusive of applicable surcharges, fuel and
supplemental transportation charges) at a rate of $7.05 and a maximum 100% load
factor NNS rate of $.24 per MMBTU until Koch files a section 4 rate case in
which new NNS rates are established.
13) MGS shall not file a Section 5 proceeding at the FERC which will have the
effect of reducing Koch's rates during the term of this Agreement. MGS is not
prohibited from filing a Section 5 Proceeding with respect to any other matters.
MGS shall, however, have the right to litigate any and all issues raised in any
proceedings before the FERC filed by Koch and any other party during the term of
this Agreement. Neither Koch nor MGS shall during the term of this Agreement
take any action that would frustrate or prejudice the provisions of this
Agreement. Nothing herein prohibits Koch from filing a Section 4 during the term
hereof, for which MGS shall have full opposition rights.
14) Receipt points and the use of supplemental points.
A. The primary receipt point restrictions contained in the currently
effective Settlement shall stay in place during the term of this
Agreement.
B. Supplemental Points: Koch shall charge the rate set forth in Paragraph
3 (i.e., no additional charges) for any supplemental receipt points
that are located (i) in the same zone as the original primary receipt
point(s) which were replaced by those supplemental points, or (ii) in
the zone of the primary NNS delivery point(s). The higher of the rate
set forth in Paragraph 3 or the maximum applicable FTS tariff rates,
on a 100% load factor basis, shall be charged for the path between all
other supplemental receipts.
C. MGS shall not oppose any filing made by Koch which would incorporate
this aspect of this Agreement into its tariff.
15) During the term of this Agreement Koch will not (a) seek to modify any
provisions of the NNS Service Agreements and Rate Schedule without prior
approval of MGS, such approval shall not be unreasonably withheld, or (b) seek
to make deliveries to MGS's city gates subject to market based rate services, to
the extent those deliveries are being transported under MGS own transportation
contract and not the contract of another shipper including MGS's affiliated
companies.
16) At the end of the term of this Agreement, MGS shall have the right to extend
their NNS Contract for an additional term of three years at an MDQ equal to or
greater than the MDQ originally subscribed by MGS on 4/1/99, at a rate(s) that
will provide annual revenue to Koch equal to the MSRR. If MGS elects to extend
its NNS Contract then
5
<PAGE> 6
Koch and it will agree to all of the terms of this Agreement, subject to that
higher rate. This right to extend at the rate set forth in this paragraph shall
continue until Koch files its next Section 4 rate case and the terms of any such
extension shall terminate once Koch implements new rates. This provision of this
Agreement can not be assigned.
As used in the previous paragraph "MSRR" is the sum of the twelve monthly
amounts that would result if the lesser of $6.85 or the maximum applicable
tariff NNS rate(s) ultimately approved in RP97-373 as well as the commodity
rates ultimately approved in RP97-373 were applied to the MDQ to be extended,
above. MSRR amounts shall include only demand and commodity charges for NNS, and
shall exclude fuel and other applicable charges.
17) If and to the extent Koch offers a discounted transportation rate to any
party for gas deliveries to a city gate of MGS or an existing customer of MGS to
serve a certain market, Koch shall offer a comparable discount (same services,
terms and conditions) to the affected MGS for the same market.
18) If any material aspect of the Joint Stipulation and Agreement filed in
Docket No. RP97-373, is modified by the Commission, then the parties shall have
the option to terminate this Agreement within 30 days of a final FERC order.
19) All rates and services described in this Agreement are subject to the terms
and conditions of Koch's FERC Gas Tariff. Koch shall have no obligation to make
refunds to MGS unless the maximum rate ultimately established by the FERC for
any service described herein is less than the rate paid by MGS under this
Agreement. Koch shall have the unilateral right to file with the appropriate
regulatory authority and make changes effective in the filed rates, charges, and
services in Tariff, including both the level and design of such rates, charges
and services and the general terms and conditions therein.
20) The terms and conditions of this Agreement except those that become a matter
of public record, are confidential and shall not be disclosed to any person or
entity or used by any of the Parties for any purpose except to the extent
required by the valid order of a judicial or regulatory authority. The foregoing
notwithstanding, either Party, with consent of the other, may disclose the terms
and conditions of this Agreement to their respective employees, agents or
affiliates only to the extent necessary for the performance of such employee's,
agent's, or affiliate's duties regarding the execution of this Agreement;
provided, however, that the Party making such disclosure shall take all
reasonable steps to ensure that such employee, agent or affiliate shall maintain
the confidentiality of this Agreement. If either Party is otherwise required to
disclose any of the terms and conditions of this Agreement, such Party shall
first notify the other and shall seek to obtain confidential treatment of this
Agreement consistent with its terms.
6
<PAGE> 7
21) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE
STATE OF TEXAS, EXCLUDING ANY PROVISION WHICH WOULD DIRECT THE APPLICATION OF
THE LAWS OF ANOTHER JURISDICTION.
22) This Agreement shall constitute the entire agreement of the parties and may
only be modified by a written agreement if signed by both parties.
23) If any provision is found to be contrary to existing laws or regulations,
then that provision shall be severed from the Agreement and all other aspects of
this Agreement shall be given then full force and effect.
Accepted by,
/s/ RENATO PEREIRA
- --------------------------------------------
Koch Gateway Pipeline Co
Renato Pereira, President
- --------------------------------------------
Name, Title
/s/ GERALD S. KEEN
- --------------------------------------------
Mobile Gas Service Corporation
Gerald S. Keen, Vice President of Operations
- --------------------------------------------
Name, Title
7
<PAGE> 1
EXHIBIT 10(e)-5
[KN ENERGY LETTERHEAD]
July 13, 1998
MOBILE GAS SERVICE CORP.
ATTN: HARRIS OSWALT
2828 DAUPHIN STREET
MOBILE AL 36606
Re: Assignment of MidCon Gas Services Contract dated 04/01/1997
to K N Marketing, L.P.
Ladies/Gentlemen:
As a result of the acquisition of MidCon Corp. and its subsidiaries by
KN Energy, Inc. on January 30, 1998, this notice is to inform you that the above
listed contract(s) between MidCon Gas Services Corp. (Seller) and your company
(Buyer) is now being assigned from Midcon Gas Services Corp. to K N Marketing,
L.P. effective July 1, 1998.
The parties responsible in the Notices and Payment sections also change
as a result of the acquisition. Therefore, please direct further Notice and
Payment information to the following parties under the contracts:
Please direct all correspondence and/or notices applicable therein to the
following address:
K N MARKETING, L.P.
One Allen Center
500 Dallas Street, Suite 500
Houston, Texas 77002
Attention: Contract Administration
Please direct all ACH and wire payment transactions to:
K N MARKETING, L.P.
The Chase Manhattan Bank
New York, NY
Account No. 323-076947
ABA No. 021000021
Payments by check should be mailed to:
K N MARKETING, L.P.
Post Office Box 730563
Dallas, Texas 75373-0563
Please indicate your consent by signing in the space below. Please direct any
questions to Contract Administration at (713) 963-3394. Thank you for your
cooperation in this matter.
Sincerely,
KN MARKETING, L.P.
/s/ DOUGLAS N. SCHANTZ
Douglas N. Schantz
Executive Vice President
AGREED TO AND ACCEPTED
this 20th day of July, 1998
By: /s/ HARRIS OSWALT
------------------------
Name: Harris Oswalt
------------------------
<PAGE> 1
EXHIBIT 11
ENERGYSOUTH, INC.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:(1)
Earnings applicable to common stock $8,417 $8,126 $8,631
Weighted average common shares outstanding 4,865 4,844 4,826
Basic earnings per share $ 1.73 $ 1.68 $ 1.79
DILUTED EARNINGS PER SHARE:(1)
Earnings applicable to common stock $8,417 $8,126 $8,631
Weighted average common shares outstanding 4,865 4,844 4,826
Incremental shares resulting from assumed
exercise of stock options 61 37 12
Weighted average common shares outstanding,
assuming dilution 4,926 4,881 4,838
Diluted earnings per share $ 1.71 $ 1.66 $ 1.78
</TABLE>
(1) Restated to reflect the three-for-two conversion of Mobile Gas common stock
into EnergySouth common stock effective February 2, 1998.
<PAGE> 1
EXHIBIT 21
ENERGYSOUTH, INC.
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Percent of Voting State of
Subsidiary Securities Owned Incorporation
---------- ---------------- -------------
<S> <C> <C>
Mobile Gas Service Corporation 100% Alabama
MGS Storage Services, Inc. 100% Alabama
MGS Energy Services, Inc. 100% Alabama
MGS Marketing Services, Inc. 100% Alabama
</TABLE>
PARTNERSHIPS IN WHICH REGISTRANT OWNS AN INTEREST
<TABLE>
<CAPTION>
Partnership Equity Ownership
----------- ----------------
<S> <C>
Bay Gas Storage Company, Ltd. 87.5%
Southern Gas Transmission Co. 51%
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
2-74613 on Form S-16 and No. 33-66474 on Form S-8 of Mobile Gas Service
Corporation, and No. 333-02271 on Form S-3 of EnergySouth, Inc. (the "Company"),
successor to Mobile Gas Service Corporation, of our report dated November 6,
1998, appearing in this Annual Report on Form 10-K of the Company for the year
ended September 30, 1998.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Atlanta, Georgia
December 28, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT FOR THE COMPANY FOR THE FISCAL YEAR ENDED SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S FORM
10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 126,022
<OTHER-PROPERTY-AND-INVEST> 1,106
<TOTAL-CURRENT-ASSETS> 31,880
<TOTAL-DEFERRED-CHARGES> 1,253
<OTHER-ASSETS> 6,280
<TOTAL-ASSETS> 166,541
<COMMON> 49
<CAPITAL-SURPLUS-PAID-IN> 18,135
<RETAINED-EARNINGS> 41,711
<TOTAL-COMMON-STOCKHOLDERS-EQ> 59,895
0
0
<LONG-TERM-DEBT-NET> 58,979
<SHORT-TERM-NOTES> 12,665
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 4,600
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 30,402
<TOT-CAPITALIZATION-AND-LIAB> 166,541
<GROSS-OPERATING-REVENUE> 74,022
<INCOME-TAX-EXPENSE> 4,967
<OTHER-OPERATING-EXPENSES> 55,872
<TOTAL-OPERATING-EXPENSES> 55,872
<OPERATING-INCOME-LOSS> 18,150
<OTHER-INCOME-NET> (4,766)
<INCOME-BEFORE-INTEREST-EXPEN> 18,857
<TOTAL-INTEREST-EXPENSE> 5,473
<NET-INCOME> 8,417
0
<EARNINGS-AVAILABLE-FOR-COMM> 8,417
<COMMON-STOCK-DIVIDENDS> 4,088
<TOTAL-INTEREST-ON-BONDS> 4,917<F1>
<CASH-FLOW-OPERATIONS> 14,561
<EPS-PRIMARY> 1.73<F2>
<EPS-DILUTED> 1.71<F2>
<FN>
<F1>Total interest on bonds represents interest expense related to long-term debt
outstanding under first mortgage bonds and long-term secured notes.
<F2>Represents basic and diluted earnings per share computed in accordance with
FASB 128. Amounts have been restated to reflect three-for-two conversion of
Mobile Gas common stock into EnergySouth common stock effective February 2,
1998. See Note 1 and 5 of Notes to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998.
</FN>
</TABLE>
