<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1999
Commission File No. 0-29604
ENERGYSOUTH, INC.
(Successor to Mobile Gas Service Corporation)
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Alabama 58-2358943
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
2828 Dauphin Street, Mobile, Alabama 36606
-----------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 334-450-4774
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock ($.01 par value) outstanding at August 10, 1999 - 4,890,486 shares.
<PAGE> 2
ENERGYSOUTH, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. Financial Information:
Consolidated Balance Sheets - June 30,
1999 and 1998 and September 30, 1998 3-4
Consolidated Statements of Income - Three, Nine and
Twelve Months Ended June 30, 1999 and 1998 5
Consolidated Statements of Retained Earnings - Three,
Nine and Twelve Months Ended June 30, 1999
and 1998 6
Consolidated Statements of Cash Flows - Nine
Months Ended June, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Quantitative and Qualitative Disclosures About
Market Risk 15
PART II. Other Information 16
Exhibit Index 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
June 30, September 30,
ASSETS 1999 1998 1998
------------------------ -------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 9,817 $ 7,857 $ 18,515
Receivables:
Gas 5,142 4,416 4,468
Unbilled Revenue (Note 6) 884
Merchandise 3,013 2,926 3,021
Other 682 712 759
Allowance for Doubtful Accounts (876) (733) (626)
Materials, Supplies, and Merchandise (average cost) 1,228 1,279 1,327
Gas Stored Underground for Current Use (average cost) 448 1,117 1,435
Deferred Gas Costs 313 176
Deferred Income Taxes 2,229 1,637 1,430
Prepayments 1,742 1,408 1,375
--------- --------- ---------
Total Current Assets 24,309 20,932 31,880
--------- --------- ---------
PROPERTY, PLANT, AND EQUIPMENT
Property, Plant, and Equipment 173,416 168,134 170,894
Less: Accumulated Depreciation and Amortization 48,941 43,924 44,872
--------- --------- ---------
Property, Plant, and Equipment - Net 124,475 124,210 126,022
Construction Work in Progress 2,469 2,086 1,106
--------- --------- ---------
Total Property, Plant, and Equipment 126,944 126,296 127,128
--------- --------- ---------
OTHER ASSETS
Regulatory Assets 778 966 909
Merchandise Receivables Due After One Year 5,596 5,203 5,371
Deferred Charges 1,050 1,316 1,253
--------- --------- ---------
Total Other Assets 7,424 7,485 7,533
--------- --------- ---------
Total $ 158,677 $ 154,713 $ 166,541
========= ========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
June 30, September 30,
LIABILITIES AND CAPITALIZATION 1999 1998 1998
------------------------ -------------
(Unaudited)
<S> <C> <C> <C>
Current Liabilities
Current Maturities of Long-Term Debt $ 962 $ 2,258 $ 4,600
Notes Payable 1,100 12,665
Accounts Payable 2,938 2,313 2,511
Dividends Declared 1,148 1,071 1,072
Customer Deposits 1,424 1,488 1,461
Taxes Accrued 3,799 3,251 3,551
Interest Accrued 1,366 1,446 592
Deferred Purchased Gas Adjustment 2,642 1,172 1,794
Other Liabilities 2,890 2,244 1,898
-------- -------- --------
Total Current Liabilities 18,269 15,243 30,144
-------- -------- --------
Other Liabilities
Accrued Pension Cost 1,252 1,519 1,452
Accrued Postretirement Benefit Cost 1,259 996 1,332
Deferred Income Taxes 11,618 11,395 10,945
Deferred Investment Tax Credits 403 425 418
-------- -------- --------
Total Other 14,532 14,335 14,147
-------- -------- --------
Total Liabilities 32,801 29,578 44,291
-------- -------- --------
Capitalization
Stockholders' Equity (Note 1)
Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares;
Outstanding: June, 1999 -
4,886,000 Shares; June 1998 -
4,868,000 Shares; September 1998 -
4,872,000 Shares) 49 49 49
Capital in Excess of Par Value 18,424 18,035 18,135
Retained Earnings 45,822 42,298 41,711
-------- -------- --------
Total Stockholders' Equity 64,295 60,382 59,895
Minority Interest 3,564 3,274 3,376
Long-Term Debt (Less Current Maturities) 58,017 61,479 58,979
-------- -------- --------
Total Capitalization 125,876 125,135 122,250
-------- -------- --------
Total $158,677 $154,713 $166,541
======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
-------------------- -------------------- --------------------
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Gas Revenues $ 12,260 $ 13,066 $ 53,266 $ 59,838 $ 64,199 $ 70,641
Merchandise Sales and Jobbing 764 803 2,457 2,617 3,105 3,336
-------- -------- -------- -------- -------- --------
Total Operating Revenues 13,024 13,869 55,723 62,455 67,304 73,977
-------- -------- -------- -------- -------- --------
Operating Expenses
Cost of Gas 2,388 3,019 14,431 21,062 16,259 23,176
Cost of Merchandise and Jobbing 642 691 1,976 2,040 2,451 2,523
Operations 4,059 4,065 13,133 12,648 17,544 17,318
Maintenance 344 338 1,059 1,190 1,402 1,695
Depreciation 1,646 1,591 4,979 4,772 6,485 6,207
Taxes, Other Than Income Taxes 1,138 1,147 4,354 4,555 5,391 5,549
-------- -------- -------- -------- -------- --------
Total Operating Expenses 10,217 10,851 39,932 46,267 49,532 56,468
-------- -------- -------- -------- -------- --------
Operating Income 2,807 3,018 15,791 16,188 17,772 17,509
-------- -------- -------- -------- -------- --------
Other Income and (Expense)
Interest Expense (1,243) (1,358) (3,940) (4,176) (5,296) (5,649)
Allowance for Borrowed Funds Used During Construction 8 18 29 41 48 61
Interest Income 341 339 922 967 1,168 1,212
Minority Interest (150) (116) (442) (385) (584) (496)
-------- -------- -------- -------- -------- --------
Total Other Income (Expense) (1,044) (1,117) (3,431) (3,553) (4,664) (4,872)
-------- -------- -------- -------- -------- --------
Income Before Income Taxes 1,763 1,901 12,360 12,635 13,108 12,637
Income Taxes 666 748 4,605 4,703 4,868 4,574
-------- -------- -------- -------- -------- --------
Income Before Cumulative Effect of Changes in Accounting
Principles 1,097 1,153 7,755 7,932 8,240 8,063
-------- -------- -------- -------- -------- --------
Cumulative Effect on Prior Years of Change in Accounting
Method For Unbilled Revenue (Net of Income Tax Expense
of $133)(Note 6) -- -- 235 -- 235 --
Cumulative Effect on Prior Years of Change in Accounting
Method For Start-Up Costs (Net of Income Tax Benefit of
$331)(Note 7) 32 -- (584) -- (584) --
-------- -------- -------- -------- -------- --------
Total Cumulative Effect of Accounting Changes
(Net of Tax) 32 -- (349) -- (349) --
-------- -------- -------- -------- -------- --------
Net Income $ 1,129 $ 1,153 $ 7,406 $ 7,932 $ 7,891 $ 8,063
======== ======== ======== ======== ======== ========
Basic Earnings Per Share
Income Before Cumulative Effect of Changes in
Accounting Principle $ 0.22 $ 0.24 $ 1.59 $ 1.63 $ 1.69 $ 1.66
Cumulative Effect of Accounting Changes 0.01 -- (0.07) -- (0.07) --
-------- -------- -------- -------- -------- --------
Net Income $ 0.23 $ 0.24 $ 1.52 $ 1.63 $ 1.62 $ 1.66
======== ======== ======== ======== ======== ========
Diluted Earnings Per Share
Income Before Cumulative Effect of Changes in
Accounting Principle $ 0.22 $ 0.23 $ 1.57 $ 1.61 $ 1.67 $ 1.64
Cumulative Effect of Accounting Changes 0.01 -- (0.07) -- (0.07) --
-------- -------- -------- -------- -------- --------
Net Income $ 0.23 $ 0.23 $ 1.50 $ 1.61 $ 1.60 $ 1.64
======== ======== ======== ======== ======== ========
Pro Forma Amounts Assuming Retroactive Application
of Accounting Changes
Net Income $ 1,097 $ 1,013 $ 7,755 $ 8,018 $ 8,189 $ 8,088
======== ======== ======== ======== ======== ========
Basic Earnings Per Share $ 0.22 $ 0.21 $ 1.60 $ 1.65 $ 1.68 $ 1.66
======== ======== ======== ======== ======== ========
Diluted Earnings Per Share $ 0.22 $ 0.21 $ 1.57 $ 1.63 $ 1.66 $ 1.64
======== ======== ======== ======== ======== ========
Cash Dividends Declared Per Share of Common Stock $ 0.2350 $ 0.2200 $ 0.6750 $ 0.6200 $ 0.8950 $ 0.8200
======== ======== ======== ======== ======== ========
Average Common Shares Outstanding (Note 8)
Basic 4,885 4,868 4,881 4,863 4,879 4,861
Diluted 4,931 4,925 4,931 4,928 4,928 4,922
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
------------------- ------- ------- ------- -------
1999 1998 1999 1998 1999 1998
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at Beginning of Period $45,841 $42,216 $41,711 $37,382 $42,298 $38,222
Net Income 1,129 1,153 7,406 7,932 7,891 8,063
------- ------- ------- ------- ------- -------
Total 46,970 43,369 49,117 45,314 50,189 46,285
Less: Dividends 1,148 1,071 3,295 3,016 4,367 3,987
------- ------- ------- ------- ------- -------
Balance at End of Period $45,822 $42,298 $45,822 $42,298 $45,822 $42,298
======= ======= ======= ======= ======= =======
</TABLE>
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended June 30,
1999 1998
-------- --------
<S> <C> <C>
Cash Flows Provided by Operating Activities $ 16,452 $ 13,071
-------- --------
Cash Flows Used In Investing Activities -
Capital Expenditures (5,979) (5,275)
-------- --------
Cash Flows Used In Financing Activities:
Repayment of Long-Term Debt (4,600) (2,772)
Changes in Short-Term Borrowings (11,565) (10,700)
Payment of Dividends, Net of Dividend Reinvestment (3,006) (2,727)
-------- --------
Net Cash Used In Financing Activities (19,171) (16,199)
-------- --------
Net Decrease in Cash and Cash Equivalents (8,698) (8,403)
-------- --------
Cash and Cash Equivalents at Beginning of Period 18,515 16,260
-------- --------
Cash and Cash Equivalents at End of Period $ 9,817 $ 7,857
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The consolidated financial statements of EnergySouth, Inc. and its
subsidiaries (collectively the "Company") include the accounts of Mobile Gas
Service Corporation; EnergySouth Services, Inc., formerly MGS Energy Services,
Inc.; MGS Storage Services; MGS Marketing Services, Inc.; an 87.5% owned
partnership, Bay Gas Storage Company, Ltd. ("Bay Gas"); and a 51% owned
partnership, Southern Gas Transmission Company ("SGT"). All significant
intercompany balances and transactions have been eliminated.
Note 2. The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. All adjustments, consisting of
normal and recurring accruals, which are, in the opinion of management,
necessary to present fairly the results for the interim periods have been made.
The statements should be read in conjunction with the summary of accounting
policies and notes to financial statements included in the Annual Report on Form
10-K of the Company for the fiscal year ended September 30, 1998.
Note 3. Due to the high percentage of customers using gas for heating, the
Company's operations are seasonal in nature. Therefore, the results of
operations for the nine month periods ended June 30, 1999 and 1998 are not
indicative of the results to be expected for the full year.
Note 4. Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" was effective for the Company on October 1, 1998. The
Company does not currently have any comprehensive income other than items
included in net income. Therefore, comprehensive income is the same as net
income for all periods reported.
Note 5. Statement of Financial Accounting Standards No, 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS 131) is effective for
the Company for the fiscal year ending September 30, 1999. SFAS 131 establishes
standards for reporting operating segments by public business enterprises in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Interim
disclosures are not required in the year of adoption; accordingly, the Company
expects to report the required financial and descriptive information about its
operating segments beginning with its annual financial statements for the fiscal
year ending September 30, 1999.
Note 6. Effective October 1, 1998 the Company changed its method of accounting
for unbilled revenues to be consistent with prevailing industry practice. Prior
to October 1, 1998, the Company recorded revenues as meters were read on a
monthly cycle basis and the commodity cost of purchased gas applicable to gas
delivered but not yet billed at month-end was deferred. The accrual method
adopted records revenues based upon estimated consumption through the end of the
month for all customers regardless of the meter reading date. The effect of the
change for the nine months and twelve months ended June 30, 1999 was to increase
net income by $268,000 ($0.055 per share, diluted) of which $235,000 ($0.05 per
share, diluted), the cumulative effect of the change as of October 1, 1998, is
7
<PAGE> 8
reported as a separate component of net income. This change in accounting method
has the effect of recognizing income earlier within the fiscal year but has a
minimal impact on the fiscal year as a whole.
Note 7. Effective October 1, 1998, the Company adopted Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5) and recorded a
cumulative effect of change in accounting method of $616,000 ($.13 per share,
diluted) as a result of expensing organization and start-up costs previously
capitalized. On November 5, 1998, Bay Gas filed a petition with the Federal
Energy Regulatory Commission ("FERC") seeking authority to provide
transportation-only services for both interstate and intrastate shippers. An
order granting such authority was issued by the FERC on April 28, 1999. As a
result of that order, and in compliance with regulatory accounting treatment, a
regulatory asset was established relating to the amount of organization and
start-up costs associated with providing such transportation-only services. The
cumulative effect recorded as of October 1, 1998 was adjusted for these costs.
After recording the regulatory asset, the adjusted cumulative effect expense,
net of tax, was $584,000 ($0.12 per share, diluted). The effect on operating
income as a result of not expensing the amortization of such costs is not
material to the financial statements.
Note 8. Basic earnings per share are computed based on the weighted average
number of common shares outstanding during each period. Diluted earnings per
share are computed based on the weighted average number of common shares and
dilutive 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 46,000 and 57,000 for the three months ended June
30, 1999 and 1998, respectively; 50,000 and 65,000 for the nine months ended
June 30, 1999 and 1998, respectively; and 49,000 and 61,000 for the twelve
months ended June 30, 1999 and 1998, respectively. These differences in
equivalent shares are from outstanding stock options.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
THE COMPANY
The following discussion and analysis encompasses EnergySouth, Inc. and its
direct and indirect subsidiaries (collectively referred to as the "Company").
EnergySouth became the holding company for Mobile Gas Service Corporation
(Mobile Gas) on February 2, 1998, and at that time Mobile Gas became a
wholly-owned subsidiary. The Company, primarily through Mobile Gas, is engaged
principally in the distribution of natural gas to residential, commercial and
industrial customers in Southwest Alabama. Other subsidiaries are engaged in
providing gas pipeline transportation, gas storage, gas marketing and other
energy-related services. The Alabama Public Service Commission (APSC) regulates
the Company's gas distribution and storage operations. Mobile Gas' rate tariffs
for gas distribution allow a pass-through to customers of the cost of gas
supplies, certain taxes, and incremental costs associated with the replacement
of cast iron mains. These costs, therefore, have little impact on the Company's
earnings. Other costs, including a return on investment, are recovered through
rates approved in traditional rate proceedings. Interstate gas storage contracts
do not require APSC approval since the Federal Energy Regulatory Commission
(FERC), which has jurisdiction over such contracts, allows them to have
market-based rates. Market-based rates minimize regulatory involvement in the
setting of rates for storage services and allow Bay Gas to respond to market
conditions. The FERC issued an order on April 28, 1999 granting authority to Bay
Gas to provide transportation-only services to interstate and intrastate
shippers and approved rates for such service.
The Company's distribution business is highly seasonal and
temperature-sensitive since residential and small commercial customers use more
gas during colder weather for heating. As a result, the Company's operating
results in any given period historically have reflected, in addition to other
matters, the impact of weather, through either increased or decreased sales
volumes. The Company utilizes a temperature rate adjustment rider to mitigate
the impact that unusually cold or warm weather has on customer billings and
operating margins by reducing high gas bills in colder than normal weather and
increasing gas revenues in warmer than normal weather. Normal weather for the
Company's service territory is defined as the 30-year average temperature as
determined by the National Weather Service. In the gas utility industry, heating
degree-days are the benchmark for measuring coldness and represent the number of
degrees that the daily average temperature falls below 65 degrees Fahrenheit.
RESULTS OF OPERATIONS
NET INCOME
Net income for the three months ended June 30, 1999 and 1998 was
$1,129,000 or $0.23 per share and $1,153,000 or $0.23 per share, respectively.
Net income for the nine months ended June 30, 1999 and 1998 was $7,406,000 or
$1.50 per share and $7,932,000 or $1.61 per share, respectively. Net income for
the twelve months ended June 30, 1999 and 1998 was $7,891,000 or $1.60 per share
and $8,063,000 or $1.64 per share, respectively. All references to earnings per
share amounts are computed on a diluted basis. The fiscal 1999 period earnings
include the effect of changes in accounting for unbilled
9
<PAGE> 10
revenues and start-up costs. In accordance with prescribed accounting rules, the
amounts presented for the same prior year periods have not been adjusted. Both
accounting changes are discussed in further detail within "Notes to Consolidated
Financial Statements". The effect of these accounting changes on operating
income components, income taxes and cumulative effect items for the three months
ended June 30, 1999 was to decrease net income by $190,000 ($0.04 per share)
while the effect on the fiscal 1999 nine and twelve month periods was to
decrease net income by $316,000 ($0.06 per share). Assuming retroactive
application of the accounting changes, earnings per share amounts for three,
nine and twelve months ended June 30, 1999 would have been $0.22, $1.57 and
$1.66, respectively, as compared to $0.21, $1.63 and $1.64, respectively, for
the three, nine and twelve months ended June 30, 1998.
Assuming retroactive application of the accounting changes, the
increase in earnings for the three months ended June 30, 1999 compared to the
prior year period is due primarily to increased revenue from gas storage
operations and decreased interest expense; the decrease in earnings for the nine
months ended June 30, 1999 compared to the prior year period is due primarily to
moderate increases in operations expense and depreciation expense; and the
increase in earnings for the twelve months ended June 30, 1999 compared to the
prior year period is due primarily to increased gas storage and transportation
revenues and decreased interest expense.
OPERATING REVENUES
Gas revenues decreased $806,000 (6%), $6.6 million (11%) and $6.4
million (9%), respectively, for the three, nine and twelve months ended June 30,
1999 as compared to the same prior year periods. Included within gas revenues
for each fiscal 1999 period is the effect of accruing for unbilled gas revenues
at month-end while no such accrual is included within prior year periods since
this new accounting method was adopted in the first quarter of fiscal 1999.
Assuming retroactive application of this accounting change, gas revenues
decreased $162,000 (1%) for the three months ended June 30, 1999 while the
changes for the nine and twelve month periods approximated the amounts noted
above. The decrease in gas revenues for the three, nine and twelve months ended
June 30, 1999 is due primarily to decreased gas sales volumes of 10%, 23% and
22%, respectively, resulting from weather in Mobile Gas' service area during the
winter heating season which was 37% warmer than prior year and 27% warmer than
normal. The temperature adjustment rider in rates mitigated the effect on
earnings of weather to a large extent, however, margins from customers who are
sensitive to weather were down slightly from the prior year for the three and
nine month periods. During the nine and twelve months ended June 30, 1999,
revenues were lower also because of reduced rates to customers due to the pass
through of lower purchased gas costs on a per unit basis.
Gas sales revenues from large commercial and industrial customers
decreased $157,000, $1,488,000 and $1,762,000, respectively, for the three, nine
and twelve months ended June 30, 1999 due to warm weather, reduced rates, and
several customers changing from sales to transportation agreements.
Transportation revenues during the three months ended June 30, 1999 decreased
$37,000 and increased $326,000 and $810,000, respectively, for the nine and
twelve month periods. The addition of several new customers and certain sales
customers who changed to transportation agreements resulted in the nine and
twelve month period increases. Revenues from natural gas storage and
transmission operations at Bay Gas increased $383,000, $238,000 and $343,000,
respectively, for the
10
<PAGE> 11
three, nine and twelve months ended June 30, 1999 due primarily to several new
customer contracts.
The decrease in merchandise sales and jobbing revenues and costs for
each current year period is due primarily to a decrease in appliance unit sales.
EXPENSES
Cost of gas decreased $631,000 (21%), $6.6 million (31%) and $6.9
million (30%), respectively, for the three, nine and twelve months ended June
30, 1999 as compared to the same prior year periods. Included within each fiscal
1999 period is an accrual for cost of gas associated with unbilled gas revenues
whereas the prior year periods do not reflect such an accrual. Assuming
retroactive application of the accounting change for unbilled gas revenues, cost
of gas decreased $252,000 (10%) for the three months ended June 30, 1999, while
the decrease for the nine and twelve month periods approximated the amounts
previously noted. The decrease for all periods is attributed to decreased gas
sales volumes and decreased purchased gas costs on a per unit basis as described
previously.
Operations and maintenance expenses remained substantially unchanged
for the three months ended June 30, 1999 as compared to the same prior year
period. Operations expenses increased $485,000 and $226,000, respectively, for
the nine and twelve months ended June 30, 1999 as compared to the same prior
year periods due primarily to increases in the following areas: payroll and
related benefits, reserve for uncollectible accounts, and selling expenses.
Maintenance expenses decreased $131,000 and $293,000, respectively, for the nine
and twelve months ended June 30, 1999 compared to the same prior year periods
due primarily to decreased maintenance on mains and services.
Depreciation expense increased 3% for the third quarter of fiscal 1999
and increased 4% for the nine and twelve months ended June 30, 1999 as compared
to the same prior year periods due to growth in depreciable plant-in-service.
Taxes, other than income taxes, primarily consist of state and local
taxes that are based on gross revenues and fluctuate accordingly.
Interest expense decreased 8% for the third quarter of fiscal 1999 and
decreased 6% for the nine and twelve months ended June 30, 1999 as compared to
the same prior year periods. These decreases resulted primarily from decreased
long-term debt caused in part by the early redemption of $2,500,000 of First
Mortgage Bonds, 10.25% Series, during the first quarter of fiscal 1999.
Interest income decreased $45,000 and $44,000, respectively, for the
nine and twelve months ended June 30, 1999 as compared to the same prior year
periods. Interest income of $42,000 related to an income tax refund was recorded
during the fiscal 1998 first quarter, whereas the fiscal 1999 periods do not
include any such miscellaneous interest income. The fluctuation in interest
income for each period is due primarily to financing of merchandise sales and
installations and income from short-term investments.
Income tax expense changed primarily in relation to changes in income
before income taxes.
11
<PAGE> 12
FINANCIAL CONDITION AND LIQUIDITY
The Company generally relies on cash generated from operations and on a
temporary basis, short-term borrowings, to meet working capital requirements and
to finance normal capital expenditures. The Company issues debt and equity for
longer term financing as needed.
Operating activities provided cash of $16,452,000 and $13,071,000,
respectively, for the nine months ended June 30,1999 and 1998. The increase in
cash flow from operating activities is attributed primarily to the change in
operating assets and liabilities, which reflects the timing of cash receipts and
payments on receivables and payables.
Financing activities used cash of $19,171,000 and $16,199,000
respectively, for the nine months ended June 30, 1999 and 1998. The increase in
cash used by financing activities primarily reflects the early redemption of
$2,500,000 of First Mortgage Bonds, 10.25% Series during the fiscal 1999 first
quarter in addition to increased payments on short-term borrowings.
Cash used in investing activities increased $704,000 during the nine
months ended June 30, 1999 primarily as a result of the Company's regular
construction program. The Company's capital needs for construction of
distribution and storage facilities, purchase of equipment and other general
improvements for the remainder of fiscal 1999 are estimated to be $4,100,000.
Bay Gas is planning to construct an additional salt-dome cavern for storing
natural gas with expanded injection and withdrawal facilities which will double
the size of its storage operations. An "open season" to assess customer storage
needs is being held from July 15 through August 31 to determine the ultimate
size and configuration of the cavern and related facilities. The expansion of
storage facilities is expected to be complete by September 2001 and is expected
to be funded through the debt and/or equity markets. Funds for the Company's
short-term cash needs are expected to come from cash provided by operations and
borrowings under the Company's revolving credit agreement. Management believes
it has adequate financial flexibility to meet its expected cash needs in the
foreseeable future.
YEAR 2000
The Company is completing its work 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. Programs that
recognize a date using "00" as the year 1900 rather than 2000 could result in
errors or system failures that could ultimately cause the Company to interrupt
service or become unable to process transactions and could thereby require the
Company to cease operations pending resolution of the problem. Such an
eventuality would materially adversely affect the Company's business, financial
condition and results of operations. Accordingly, management continues to
devote significant attention to identifying Year 2000 issues and testing its
systems for Year 2000 compliance.
The identification, assessment, remediation and testing of the
Company's computer systems have been substantially completed. As a result, the
Company has made changes to its computer application programs and tested them
accordingly. The state of Year 2000 readiness of hardware and software already
evaluated will be monitored to maintain this readiness and to determine that
there have been no subsequent changes, exclusions or disclaimers by
12
<PAGE> 13
manufacturers resulting in a loss of Year 2000 readiness. Mission critical
processes have been identified and contingency plans have been developed in an
effort to ensure the uninterrupted continuation of customer service. An
inventory and assessment of the Company's embedded systems has been completed.
The two systems for which failure of embedded systems would be critical are
responsible for monitoring and controlling 1) the distribution of gas through
the Company's pipeline system and 2) the underground storage facility. Both
systems have been replaced with systems that are certified by the vendors to be
Year 2000 compliant. The system responsible for monitoring and controlling the
distribution of gas through the Company's pipeline system is undergoing final
implementation and is expected to be completed by September 30, 1999.
In addition to the remediation and testing efforts of the Company's
internal systems, the Company has contacted 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 operations
will not be materially affected.
During March 1999, the Company's Year 2000 project was subjected to a
third party Readiness Review for completeness. The Company has responded to the
recommendations made by the third party review which includes a limited amount
of on-going testing of third party software, continued assessment and inquiry of
significant vendors and finalizing contingency plans for mission critical
processes. Each department within the Company has completed a written
contingency plan which is now being compiled into a comprehensive plan for the
Company. A steering committee of the Company's executive management has reviewed
and will continue to review the Year 2000 project progress on a regular basis.
As of June 30, 1999, the Company has incurred approximately $166,000 of
remediation costs related to Year 2000 which has been expensed and expects to
incur an additional $21,000 to complete the remediation costs. The Company has
been utilizing working capital to fund its Year 2000 compliance program and
anticipates that it will continue to do so. The Company's internal costs with
respect to the Year 2000 project have not been separately identified, but
management believes that they are immaterial.
The Company's goal is that Year 2000 issues will be addressed on
schedule and in a manner that will prevent such issues from having a material
effect on the Company's business, financial condition and result of operations.
While the Company has and will be pursuing Year 2000 compliance, there can be no
assurance that the Company and its vendors will be successful in identifying and
addressing all material Year 2000 issues.
FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not historical in nature
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are subject to risks
and uncertainties that may cause actual future results to differ materially.
Such risks and uncertainties with respect to the Company include, but are not
limited to, its ability to successfully achieve internal performance goals,
competition, the effects of state and federal regulation, including rate relief
to recover increased capital and operating costs, general economic conditions,
and
13
<PAGE> 14
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.
14
<PAGE> 15
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company does not have any derivative financial instruments such as
futures, forwards, swaps and options. Also, the Company has no market
risk-sensitive instruments held for trading purposes. At June 30, 1999 the
Company had approximately $58.9 million of long-term debt at fixed interest
rates. Interest rates range from 7.27% to 9.00% and the maturity dates of such
debt extend to 2014. See the information provided under the captions "The
Company", "Gas Supply", and "Liquidity and Capital Resources" in the Company's
Form 10-K for the fiscal year ended September 30, 1998 for a discussion of the
Company's risks related to regulation, weather, gas supply, and the
capital-intensive nature of the Company's business.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
----------- -----------
27 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
During the quarter for which this report is filed, the Company filed no
reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOBILE GAS SERVICE CORPORATION
--------------------------------------
(Registrant)
Date: August 13, 1999 /s/ John S. Davis
----------------------------- --------------------------------------
John S. Davis
President and
Chief Executive Officer
Date: August 13, 1999 /s/ Charles P. Huffman
------------------------------ --------------------------------------
Charles P. Huffman
Vice President, Chief Financial
Officer, and Treasurer
16
<PAGE> 17
EXHIBIT INDEX
EXHIBIT
NUMBER Description
- ------- -----------
27 Financial Data Schedule (EDGAR version only)*
* Filed with the SEC and omitted from this conformed copy.
17
<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 NINE MONTHS ENDED
JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S
FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 124,475
<OTHER-PROPERTY-AND-INVEST> 2,469
<TOTAL-CURRENT-ASSETS> 24,309
<TOTAL-DEFERRED-CHARGES> 1,050
<OTHER-ASSETS> 6,374
<TOTAL-ASSETS> 158,677
<COMMON> 49
<CAPITAL-SURPLUS-PAID-IN> 18,424
<RETAINED-EARNINGS> 45,822
<TOTAL-COMMON-STOCKHOLDERS-EQ> 64,295
0
0
<LONG-TERM-DEBT-NET> 58,017
<SHORT-TERM-NOTES> 1,100
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 962
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 34,303
<TOT-CAPITALIZATION-AND-LIAB> 158,677
<GROSS-OPERATING-REVENUE> 55,723
<INCOME-TAX-EXPENSE> 4,605
<OTHER-OPERATING-EXPENSES> 39,932
<TOTAL-OPERATING-EXPENSES> 44,537
<OPERATING-INCOME-LOSS> 11,186
<OTHER-INCOME-NET> 131<F3>
<INCOME-BEFORE-INTEREST-EXPEN> 11,317
<TOTAL-INTEREST-EXPENSE> 3,911
<NET-INCOME> 7,406
0
<EARNINGS-AVAILABLE-FOR-COMM> 7,406
<COMMON-STOCK-DIVIDENDS> 1,148
<TOTAL-INTEREST-ON-BONDS> 4,453<F1>
<CASH-FLOW-OPERATIONS> 16,452
<EPS-BASIC> 0.23<F2>
<EPS-DILUTED> 0.23<F2>
<FN>
<F1>Total interest on books 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.
<F3>Includes expense due to the net cumulative effect of accounting changes
of $349.
</FN>
</TABLE>
