<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 December 31, 1998
-----------------
Commission File No. 0-29604
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ENERGYSOUTH, INC.
(Successor to Mobile Gas Service Corporation)
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Alabama 58-2358943
------------------------------ ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2828 Dauphin Street, Mobile, Alabama 36606
-----------------------------------------------------
(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 February 10, 1999 - 4,881,032
shares.
<PAGE> 2
ENERGYSOUTH, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. Financial Information:
Consolidated Balance Sheets - December 31,
1998 and 1997 and September 30, 1998 3 - 4
Consolidated Statements of Income - Three and
Twelve Months Ended December 31, 1998 and 1997 5
Consolidated Statements of Retained Earnings -
Three and Twelve Months Ended December 31, 1998
and 1997 6
Consolidated Statements of Cash Flows - Three
Months Ended December 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 13
Quantitative and Qualitative Disclosures About
Market Risk 14
PART II. Other Information 15 - 16
Exhibit Index 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
December 31, September 30,
Assets 1998 1997 1998
------------------------ -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 5,553 $ 2,090 $ 18,515
Receivables:
Gas 7,140 7,852 4,468
Unbilled Revenue (Note 6) 3,638
Merchandise 3,023 3,029 3,021
Other 730 607 759
Less Allowance for Doubtful Accounts (678) (606) (626)
Materials, Supplies, and Merchandise (at average cost) 1,256 1,139 1,327
Gas Stored Underground (at average cost) 1,634 1,524 1,435
Deferred Purchased Gas Adjustment 951
Deferred Gas Costs (Note 6) 1,492 176
Deferred Income Taxes 1,864 360 1,430
Prepayments 1,235 1,328 1,375
--------- --------- ---------
Total Current Assets 25,395 19,766 31,880
--------- --------- ---------
PROPERTY, PLANT, AND EQUIPMENT:
Property, Plant, and Equipment 170,996 166,152 170,894
Less Accumulated Depreciation and Amortization 46,267 41,633 44,872
--------- --------- ---------
Property, Plant, and Equipment in Service - Net 124,729 124,519 126,022
Construction Work in Progress 1,375 1,237 1,106
--------- --------- ---------
Total Property, Plant, and Equipment 126,104 125,756 127,128
--------- --------- ---------
OTHER ASSETS:
Regulatory Assets 857 1,081 909
Merchandise Receivables Due After One Year 5,614 5,156 5,371
Deferred Charges 1,060 1,302 1,253
--------- --------- ---------
Total Other Assets 7,531 7,539 7,533
--------- --------- ---------
Total $ 159,030 $ 153,061 $ 166,541
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
December 31, September 30,
Liabilities and Capitalization 1998 1997 1998
------------------------ -------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 971 $ 2,471 $ 4,600
Notes Payable 4,660 2,500 12,665
Accounts Payable 3,549 4,300 2,511
Dividends Declared 1,072 972 1,072
Customer Deposits 1,393 1,460 1,461
Taxes Accrued 4,667 2,619 3,551
Deferred Purchased Gas Adjustment 1,725 592
Interest Accrued 1,491 1,577 1,794
Other Liabilities 1,953 2,246 1,898
-------- -------- --------
Total Current Liabilities 21,481 18,145 30,144
-------- -------- --------
OTHER LIABILITIES:
Accrued Pension Cost 1,385 1,666 1,452
Accrued Postretirement Benefit Cost 1,307 1,061 1,332
Deferred Income Taxes 11,012 10,317 10,945
Deferred Investment Tax Credits 413 438 418
-------- -------- --------
Total Other 14,117 13,482 14,147
-------- -------- --------
Total Liabilities 35,598 31,627 44,291
-------- -------- --------
CAPITALIZATION:
Stockholders' Equity (Note 1)
Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares;
Outstanding: December 1998 -
4,877,000 Shares; December 1997 -
4,859,000 Shares; September 1997 -
4,872,000 Shares) 49 49 49
Capital in Excess of Par Value 18,232 17,834 18,135
Retained Earnings 43,156 38,399 41,711
-------- -------- --------
Total Stockholders' Equity 61,437 56,282 59,895
Minority Interest 3,413 3,099 3,376
Long-Term Debt (Less Current Maturities) 58,582 62,053 58,979
-------- -------- --------
Total Capitalization 123,432 121,434 122,250
-------- -------- --------
Total $159,030 $153,061 $166,541
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended December 31, Ended December 31,
----------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Revenues
Gas Revenues $ 18,611 $ 18,990 $ 70,366 $ 71,670
Merchandise Sales and Jobbing 1,000 1,084 3,181 3,117
-------- -------- -------- --------
Total Operating Revenues 19,611 20,074 73,547 74,787
-------- -------- -------- --------
Operating Expenses
Cost of Gas 4,886 7,035 20,747 23,683
Cost of Merchandise and Jobbing 776 806 2,486 2,300
Operations 4,516 4,390 17,147 17,921
Maintenance 363 399 1,497 1,505
Depreciation 1,677 1,590 6,365 6,024
Taxes, Other Than Income Taxes 1,505 1,485 5,612 5,603
-------- -------- -------- --------
Total Operating Expenses 13,723 15,705 53,854 57,036
-------- -------- -------- --------
Operating Income 5,888 4,369 19,693 17,751
-------- -------- -------- --------
Other Income and (Expense)
Interest Expense (1,408) (1,413) (5,563) (5,744)
Allowance for Borrowed Funds Used During Construction 12 11 61 151
Interest Income 265 330 1,178 1,087
Minority Interest (164) (136) (553) (509)
-------- -------- -------- --------
Total Other Income (Expense) (1,295) (1,208) (4,877) (5,015)
-------- -------- -------- --------
Income Before Income Taxes 4,593 3,161 14,816 12,736
-------- -------- -------- --------
Income Taxes 1,695 1,172 5,489 4,660
-------- -------- -------- --------
Income Before Cumulative Effect of Changes in Accounting Principles 2,898 1,989 9,327 8,076
-------- -------- -------- --------
Cumulative Effect on Prior Years of Change in Accounting Method For
Unbilled Revenue (Net of Income Tax of $133)(Note 6) 235 -- 235 --
Cumulative Effect on Prior Years of Change in Accounting Method For
Start-Up Costs (Net of Income Tax of $(350))(Note 7) (616) -- (616) --
-------- -------- -------- --------
Total Cumulative Effect of Accounting Changes (Net of Tax) (381) -- (381) --
-------- -------- -------- --------
Net Income (Note 4) $ 2,517 $ 1,989 $ 8,946 $ 8,076
======== ======== ======== ========
Basic Earnings Per Share
Income Before Cumulative Effect of Changes in Accounting Principles $ 0.60 $ 0.41 $ 1.92 $ 1.66
Cumulative Effect of Accounting Changes (0.08) -- (0.08) --
-------- -------- -------- --------
Net Income $ 0.52 $ 0.41 $ 1.84 $ 1.66
======== ======== ======== ========
Diluted Earnings Per Share
Income Before Cumulative Effect of Changes in Accounting Principles $ 0.59 $ 0.40 $ 1.90 $ 1.65
Cumulative Effect of Accounting Changes (0.08) -- (0.08) --
-------- -------- -------- --------
Net Income $ 0.51 $ 0.40 $ 1.82 $ 1.65
======== ======== ======== ========
Pro Forma Amounts Assuming Retroactive Application
of Accounting Changes
Net Income $ 2,898 $ 2,846 $ 8,504 $ 8,057
======== ======== ======== ========
Basic Earnings Per Share $ 0.60 $ 0.59 $ 1.75 $ 1.66
======== ======== ======== ========
Diluted Earnings Per Share $ 0.59 $ 0.58 $ 1.73 $ 1.64
======== ======== ======== ========
Cash Dividends Declared Per Share of Common Stock $ 0.22 $ 0.20 $ 0.86 $ 0.79
======== ======== ======== ========
Average Common Shares Outstanding (Note 8)
Basic 4,877 4,858 4,870 4,851
Diluted 4,927 4,927 4,926 4,900
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE> 6
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended December 31, Ended December 31,
-------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at Beginning of Period $41,711 $37,382 $38,399 $34,139
Net Income 2,517 1,989 8,946 8,076
------- ------- ------- -------
Total 44,228 39,371 47,345 42,215
Less: Dividends 1,072 972 4,189 3,816
------- ------- ------- -------
Balance at End of Period $43,156 $38,399 $43,156 $38,399
======= ======= ======= =======
</TABLE>
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three Months
Ended December 31,
-----------------------
1998 1997
---------- ---------
<S> <C> <C>
Cash Flows Provided (Used) by Operating Activities $ 1,742 $ (1,596)
-------- --------
Cash Flows Used In Investing Activities -
Capital Expenditures (1,698) (1,506)
-------- --------
Cash Flows From Financing Activities:
Repayment of Long-Term Debt (4,026) (1,985)
Changes in Short-Term Borrowings (8,005) (8,200)
Payment of Dividends, Net of Dividend Reinvestment (975) (883)
-------- --------
Net Cash Used by Financing Activities (13,006) (11,068)
-------- --------
Net Decrease in Cash and Cash Equivalents (12,962) (14,170)
-------- --------
Cash & Cash Equivalents at Beginning of Period 18,515 16,260
-------- --------
Cash & Cash Equivalents at End of Period $ 5,553 $ 2,090
======== ========
</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; MGS Energy Services, Inc.; MGS Storage Services; MGS
Marketing Services, Inc.; an 87.5% owned partnership, Bay Gas Storage Company,
Ltd. ("Bay Gas"); and a 51% owned partnership, Southern Gas Transmission Company
("SGT"). All significant intercompany balances and transactions have been
eliminated.
Note 2. The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. All adjustments, consisting of
normal and recurring accruals, which are, in the opinion of management,
necessary to present fairly the results for the interim periods have been made
and are of a recurring nature. The statements should be read in conjunction with
the summary of accounting policies and notes to financial statements included in
the Annual Report on Form 10-K of the Company for the fiscal year ended
September 30, 1998.
Note 3. Due to the high percentage of customers using gas for heating, the
Company's operations are seasonal in nature. Therefore, the results of
operations for the three month periods ended December 31, 1998 and 1997 are not
indicative of the results to be expected for the full year.
Note 4. Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" was effective for the Company on October 1, 1998. The
Company does not currently have any comprehensive income other than items
included in net income. Therefore, comprehensive income is the same as net
income for all periods reported.
Note 5. Statement of Financial Accounting Standards No, 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS 131) is effective for
the Company for the fiscal year ending September 30, 1999. SFAS 131 establishes
standards for reporting operating segments by public business enterprises in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Interim
disclosures are not required in the year of adoption; accordingly, the Company
expects to report the required financial and descriptive information about its
operating segments beginning with its annual financial statements for the fiscal
year ending September 30, 1999.
Note 6. Effective October 1, 1998 the Company changed its method of accounting
for unbilled revenues to be consistent with prevailing industry practice. Prior
to October 1, 1998, the Company recorded revenues as meters were read on a
monthly cycle basis and the commodity cost of purchased gas applicable to gas
delivered but not yet billed at month-end was deferred. The accrual method
adopted records revenues based upon estimated consumption through the end of the
month for all customers regardless of the meter reading date. The effect of the
change for the three months and twelve months ended December 31, 1998 was to
increase net income by $1,078,000 ($0.22 per share, diluted) of which $843,000
($.17 per share, diluted) is included in operating income, and $235,000 ($0.05
per share, diluted), the cumulative effect of the change, is reported as a
separate component of net
7
<PAGE> 8
income. This change in accounting method has the effect of recognizing income
earlier within the fiscal year but will have a minimal impact on the fiscal year
as a whole.
Note 7. Effective October 1, 1998, the Company adopted Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5) and recorded a
cumulative effect of change in accounting method of $616,000 ($.13 per share,
diluted) as a result of expensing organization and start-up costs previously
capitalized. The effect on operating income as a result of not expensing the
amortization of such costs is not material to the financial statements.
Note 8. Basic earnings per share are computed based on the weighted average
number of common shares outstanding during each period. Diluted earnings per
share are computed based on the weighted average number of common shares and
diluted potential common shares, using the treasury stock method, outstanding
during each period. Average common shares used to compute basic earnings per
share differed from average common shares used to compute diluted earnings per
share by equivalent shares of 50,000 and 69,000 for the three months ended
December 31, 1998 and 1997, respectively, and 56,000 and 49,000 for the twelve
months ended December 31, 1998 and 1997, respectively. These differences in
equivalent shares are from outstanding stock options.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
The following discussion and analysis encompasses EnergySouth, Inc. and its
direct and indirect subsidiaries (collectively referred to as the "Company").
EnergySouth became the holding company for Mobile Gas Service Corporation
(Mobile Gas) on February 2, 1998, and at that time Mobile Gas became a
wholly-owned subsidiary. The Company, primarily through Mobile Gas, is engaged
principally in the distribution of natural gas to residential, commercial and
industrial customers in Southwest Alabama. Other subsidiaries are engaged in
providing gas pipeline transportation, gas storage, gas marketing and other
energy-related services. The Alabama Public Service Commission (APSC) regulates
the Company's gas distribution and storage operations. Mobile Gas' rate tariffs
for gas distribution allow a pass-through to customers of the cost of gas
supplies, certain taxes, and incremental costs associated with the replacement
of cast iron mains. These costs, therefore, have little impact on the Company's
earnings. Other costs, including a return on investment, have historically been
recovered through rates approved in traditional rate proceedings. Interstate gas
storage contracts do not require APSC approval since the Federal Energy
Regulatory Commission (FERC), which has jurisdiction over such contracts, allows
them to have market-based rates. Market-based rates allow Bay Gas to respond to
market conditions and minimizes regulatory involvement in the setting of its
rates for storage services. Bay Gas filed a petition with the FERC on November
5, 1998 seeking authority to provide transportation-only services for both
interstate and intrastate shippers. Such application is currently pending.
The Company's distribution business is highly seasonal and temperature-sensitive
since residential and small commercial customers use more gas during colder
weather for heating. As a result, the Company's operating results in any given
period historically have reflected, in addition to other matters, the impact of
weather, through either increased or decreased sales volumes. The Company
utilizes a temperature rate adjustment rider to offset the impact that unusually
cold or warm weather has on customer billings and operating margins by reducing
high gas bills in colder than normal weather and increasing gas revenues in
warmer than normal weather. Normal weather for the Company's service territory
is defined as the 30-year average temperature as determined by the National
Weather Service. In the gas utility industry, degree-days are the benchmark for
measuring coldness and represent the number of degrees that the daily average
temperature falls below 65 degrees Fahrenheit.
RESULTS OF OPERATIONS
NET INCOME
Net income for the three months ended December 31, 1998 and 1997 was
$2,517,000 or $.51 per share and $1,989,000 or $.40 per share, respectively. Net
income for the twelve months ended December 31, 1998 and 1997 was $8,946,000 or
$1.82 per share and $8,076,000 or $1.65 per share, respectively. The 1998
earnings include the effects of changes in accounting for unbilled revenues and
start-up costs as discussed in further detail within "New Accounting Standards"
below while, in accordance with prescribed accounting rules, the amounts
presented for the same periods in the prior year have not been adjusted. The
effect of these accounting changes for the three and twelve months ended
December
9
<PAGE> 10
31, 1998 was to increase net income by $462,000 ($.09 per share). Unbilled
revenues and related costs recorded at December 31, 1998 and reflected within
operating income increased net income by $843,000 while the cumulative effect of
both accounting changes decreased net income by $381,000. Assuming retroactive
application of the accounting changes, earnings per share amounts for the fiscal
1999 and 1998 first quarter would have been $.59 and $.58, respectively, while
earnings per share amounts for the twelve months ended December 31, 1998 and
1997 would have been $1.73 and $1.64, respectively. All references to earnings
per share amounts are computed on a diluted basis.
The increase in first quarter earnings, assuming retroactive
application of the accounting changes, is due to an increase in margins from
temperature-sensitive and transportation customers and was offset partially by
an increase in operating expenses. The increase in earnings on a retroactive
basis for the twelve months ended December 31, 1998 is due primarily to
decreased operations expenses and increased margins from transportation
customers.
OPERATING REVENUES
Gas revenues decreased 2% for the three and twelve months ended December 31,
1998 compared to the same prior year periods. Included within gas revenues at
December 31, 1998 is an accrual for unbilled gas revenues of $3,638,000 while no
such accrual is included within the prior year periods since this new accounting
method was adopted in the fiscal 1999 first quarter. Assuming retroactive
application of the accounting change for unbilled revenues, gas revenues
decreased 17% and 7%, respectively, for the fiscal 1999 three and twelve month
periods as a result of decreased gas sales volumes of 32% and 12%, respectively,
primarily to temperature-sensitive customers. Causing this decrease was weather
during the three and twelve months ended December 31, 1998 which was 53% and
18%, respectively, warmer than prior year and 35% and 13%, respectively, warmer
than normal. Warmer or colder than normal weather has little impact on the
Company's earnings as a result of the temperature adjustment rider, however,
weather does impact the level of gas revenues since gas costs on actual volumes
are passed through to customers. In addition to the effect on gas revenues of
lower gas sales volumes, the Company passed through to customers lower purchased
gas costs on a per unit basis during the fiscal 1999 periods through the
purchased gas adjustment component of customer rates. Weather normalized gas
revenues from temperature sensitive customers were impacted positively during
the three months ended December 31, 1998 by an increase in the customer
consumption per degree day compared to the fiscal 1998 first quarter thus
providing increased margin. Transportation revenues during the three and twelve
months ended December 31, 1998 increased $320,000 and $1,469,000, respectively,
due to increased plant utilization by existing customers, several new customers
added to the distribution system, and certain sales customers who switched to
transportation agreements.
EXPENSES
Cost of gas decreased 31% and 12%, respectively, for the three and twelve months
ended December 31, 1998 compared to the same periods of the prior fiscal year.
Included within cost of gas at December 31, 1998 is an accrual for cost of gas
associated with unbilled gas revenues of $1,752,000. Assuming retroactive
application of the accounting change for unbilled gas revenues, cost of gas
decreased 46% and 23%, respectively, for the fiscal 1999 three and twelve month
periods. The cost of gas decrease for both periods is attributed to decreased
gas sales volumes and decreased purchased gas costs on a per unit basis.
10
<PAGE> 11
Operations and maintenance expense increased 2% for the three months ended
December 31, 1998 compared to the same period of fiscal 1998 primarily due to
the timing of certain operation expenses. Operations and maintenance expenses
decreased 4% for the twelve months ended December 31, 1998 due primarily to
decreased retirement expense and cost control efforts throughout the Company.
Depreciation expense increased 5% and 6%, respectively, for the three and twelve
months ended December 31, 1998 due to an increase in depreciable
plant-in-service.
Taxes, other than income taxes, primarily consist of state and local taxes that
are based on gross revenues and fluctuate accordingly.
Interest expense decreased less than 1% and 3%, respectively, for the three and
twelve months ended December 31, 1998. During the fiscal 1999 first quarter, the
Company paid a fee of $73,200 to redeem early $2,500,000 of First Mortgage
Bonds, 10.25% Series. Excluding this early redemption fee, interest expense
decreased 6% and 4%, respectively, for the three and twelve-month periods ended
December 31, 1998 which reflects the reduction in long-term debt principal
balances.
Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs decreased $90,000 for the twelve months ended December 31, 1998
due to completion in August 1997 of new facilities to service a large industrial
customer.
Interest income decreased $65,000 and increased $91,000, respectively, for the
three and twelve months ended December 31, 1998 compared to the corresponding
periods of fiscal 1998. The fiscal 1998 first quarter includes interest income
of $42,000 recorded on an income tax refund, whereas the fiscal 1999 periods do
not include any such miscellaneous interest income. The increase in interest
income for the twelve-month period comparison is due primarily to increased
financing of merchandise sales and installations and increased income from
short-term investments.
Income tax expense changed primarily in relation to changes in income before
income taxes.
NEW ACCOUNTING STANDARDS
Effective October 1, 1998 the Company changed its method of accounting for
unbilled revenues to be consistent with prevailing industry practice. Prior to
October 1, 1998, the Company recorded revenues as meters were read on a monthly
cycle basis and the commodity cost of purchased gas applicable to gas delivered
but not yet billed at month-end was deferred. The accrual method adopted records
revenues based upon estimated consumption through the end of the month for all
customers regardless of the meter reading date. The effect of the change for the
three months and twelve months ended December 31, 1998 was to increase net
income by $1,078,000 ($0.22 per share, diluted) of which $843,000 ($0.17 per
share, diluted) is included in operating income, and $235,000 ($0.05 per share,
diluted), the cumulative effect of the change, is reported as a separate
component of net income. This change in accounting method has the effect of
recognizing income earlier within the fiscal year but will have a minimal impact
on the fiscal year as a whole.
11
<PAGE> 12
Effective October 1, 1998, the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" (SOP 98-5) and recorded a
cumulative effect of change in accounting method of $616,000 ($0.13 per share,
diluted) as a result of expensing organization and start-up costs previously
capitalized. The effect on operating income as a result of not expensing the
amortization of such costs is not material to the financial statements.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130) was effective for the Company on October 1, 1998. The Company
does not currently have any comprehensive income other than items included in
net income. Therefore, comprehensive income is the same as net income for all
periods reported.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131) is effective for the
Company for the fiscal year ending September 30, 1999. SFAS 131 establishes
standards for reporting operating segments by public business enterprises in
annual financial statements and requires that those enterprises report selected
information about operating segments on interim financial reports issued to
shareholders. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Interim
disclosures are not required in the year of adoption, accordingly, the Company
expects to report the required financial and descriptive information about its
operating segments beginning with its annual financial statements for the fiscal
year ending September 30, 1999.
FINANCIAL CONDITION AND LIQUIDITY
The Company generally relies on cash generated from operations and on a
temporary basis, short-term borrowings, to meet working capital requirements and
to finance normal capital expenditures. The Company issues debt and equity for
longer term financing as needed.
Operating activities provided cash of $1,742,000 for the three months ended
December 31, 1998 compared to using cash of $1,596,000 for the prior year first
quarter. The increase in cash flow from operating activities is attributed to
increased net income and non-cash components of net income, primarily the
expensing of organization and start-up costs, and the change in operating assets
and liabilities, which reflects the change in receipts and payments on
receivables and payables.
Financing activities used cash of $13,006,000 and $11,068,000, respectively, for
the three months ended December 31, 1998 and 1997. The increase in cash used by
financing activities primarily reflects the early redemption of $2,500,000 of
First Mortgage Bonds, 10.25% Series during the fiscal 1999 first quarter.
Cash used in investing activities increased $192,000 during the three months
ended December 31, 1998 primarily as a result of the Company's regular
construction program. The Company's capital needs for construction of
distribution and storage facilities, purchase of equipment and other general
improvements for the remainder of fiscal 1999 is estimated to be $10,387,000
Funds for the Company's cash needs are expected to come from cash provided by
operations and borrowings under the Company's revolving credit agreement.
Management believes it has adequate financial flexibility to meet its expected
cash needs in the foreseeable future.
12
<PAGE> 13
YEAR 2000
The Company is working to resolve the potential impact of the Year 2000 on the
ability of its computerized information systems to accurately process
information that may be date sensitive. Any of the programs it uses that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures that could ultimately cause the Company to
become unable to process transactions and could thereby require the Company to
cease operations pending resolution of the problem. Such an eventuality would
materially adversely affect the Company's business, financial condition and
results of operations. Accordingly, management is devoting significant attention
to identifying Year 2000 issues and testing its systems for Year 2000
compliance. To date, the Company has incurred Year 2000 remediation costs of
approximately $145,000 and has budgeted approximately $42,000 to complete the
remediation costs. The Company has been utilizing working capital to fund its
Year 2000 compliance program and anticipates that it will continue to do so.
The Company has made changes to its computer application programs and has
completed testing of such programs for Year 2000 compliance. The Company is
contacting each of its significant vendors to obtain a commitment that they are
or will be Year 2000 compliant. If such assurances are not forthcoming, or if
management believes for any reason that any of its significant vendors will not
be Year 2000 compliant when required, management plans to either contract with
other vendors that would be able to provide similar services at similar costs or
have plans in place so that operations will not be materially affected.
Management of the Company is in the process of formalizing its Year 2000
contingency plan for its computer application programs and for its vendors. Such
plan is expected to be completed in the second quarter of fiscal 1999.
Management believes that the Company will be able to continue its operations
without material interruption of its business and without a material adverse
effect on the Company's results of operations.
FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are subject to risks
and uncertainties that may cause actual future results to differ materially.
Such risks and uncertainties with respect to the Company include, but are not
limited to, its ability to successfully achieve internal performance goals,
competition, the effects of state and federal regulation, including rate relief
to recover increased capital and operating costs, general economic conditions,
and specific conditions in the Company's service area. Additional factors that
may impact forward-looking statements include the Company's dependence on
external suppliers, partners, operators, service providers, and governmental
agencies and their ability to upgrade their business systems and measurement and
control systems in order to mitigate the potential adverse effects of the Year
2000 issue.
13
<PAGE> 14
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company does not have any derivative financial instruments such as futures,
forwards, swaps and options. Also, the Company has no market risk-sensitive
instruments held for trading purposes. At December 31, 1998 the Company had
approximately $59.6 million of long-term debt at fixed interest rates. Interest
rates range from 7.27% to 9.00% and the maturity dates of such debt extend to
2014. See the information provided under the captions "The Company", "Gas
Supply", and "Liquidity and Capital Resources" in the Company's Form 10-K for
the fiscal year ended September 30, 1998 for a discussion of the Company's risks
related to regulation, weather, gas supply, and the capital-intensive nature of
the Company's business.
14
<PAGE> 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of EnergySouth, Inc. was held on
January 29, 1999.
(b) The following nominees were re-elected as Directors of the Company, to
Serve until the 2002 Annual Meeting of Stockholders, by the votes
indicated:
<TABLE>
<CAPTION>
Nominee For Against
--------------------- --------- ---------
<S> <C> <C>
William J. Hearin 4,427,150 31,944
Joseph G. Hollis, Jr. 4,429,554 29,540
Gaylord C. Lyon 4,428,206 30,888
E. B. Peebles, Jr. 4,428,925 30,169
</TABLE>
The other Directors of the Company whose terms of office continued
after the 1999 Annual Meeting are as indicated below:
<TABLE>
<CAPTION>
To Serve Until the Annual
Director Meeting of Stockholders in the year
----------------------- -----------------------------------
<S> <C>
John C. Hope, III 2000
S. Felton Mitchell, Jr. 2000
Thomas B. VanAntwerp 2000
John S. Davis 2001
Walter L. Hovell 2001
G. Montgomery Mitchell 2001
F. B. Muhlfeld 2001
</TABLE>
(c) The stockholders of the Company approved an amendment to increase the
number of shares reserved for issuance under the Amended and Restated
Stock Option Plan of EnergySouth, Inc. (the "Plan") from 225,000 to
350,000 by the following vote:
<TABLE>
<CAPTION>
For Against Abstain
--------- ------- -------
<S> <C> <C>
4,179,508 207,337 72,248
</TABLE>
A copy of the Amended and Restated Stock Option Plan of EnergySouth,
Inc. is attached hereto as Exhibit 10(r)-1.
15
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
10(r)-1 Amended and Restated Stock Option Plan of
EnergySouth, Inc.
11 Computation of Earnings Per Share
18 Change in Accounting Principle
27 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
During the quarter for which this report is filed, the
Registrant filed no reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
ENERGYSOUTH, INC.
(Successor to Mobile Gas Service Corporation)
-------------------------------------------
(Registrant)
<S> <C> <C>
Date: February 12, 1999 /s/ John S. Davis
------------------------- --------------------------------------------
John S. Davis
President and
Chief Executive Officer
Date: February 12, 1999 /s/ Charles P. Huffman
------------------------- --------------------------------------------
Charles P. Huffman
Vice President, Chief Financial
Officer, and Treasurer
</TABLE>
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10(r)-1 Amended and Restated Stock Option Plan of EnergySouth, Inc.
11 Computation of Earnings Per Share
18 Change in Accounting Principle
27 Financial Data Schedule (EDGAR version only)*
</TABLE>
17
<PAGE> 1
Exhibit 10(r)-1
AMENDED AND RESTATED STOCK OPTION PLAN
OF
ENERGYSOUTH, INC.
(AS SUCCESSOR TO MOBILE GAS SERVICE CORPORATION)
[including amendment approved by stockholders on January 29, 1999]
1. ASSUMPTION OF PLAN BY ENERGYSOUTH, INC.; PURPOSE AND SCOPE
(a) This Amended and Restated Stock Option Plan of EnergySouth, Inc.
(as successor to Mobile Gas Service Corporation) (this "Plan") amends and
restates the Mobile Gas Service Corporation 1992 Stock Option Plan (the
"Original Plan"), which was adopted by the Board of Directors of Mobile Gas
Service Corporation ("Mobile Gas") on December 4, 1992, and became effective as
of such date upon approval of the Original Plan by the shareholders of Mobile
Gas on January 29, 1993. The amendment and restatement of the Original Plan and
the assumption of liabilities hereunder are undertaken by EnergySouth, Inc. (the
"Company"), as successor to Mobile Gas, in connection with the reorganization of
Mobile Gas into a holding company structure (the "Reorganization") as a part of
which Mobile Gas became a wholly-owned subsidiary of EnergySouth as of February
2, 1998. The Reorganization is being effected pursuant to an Agreement and Plan
of Merger dated as of December 10, 1997 (the "Merger Agreement"), which was
approved by the stockholders of Mobile Gas on January 30, 1998, and pursuant to
which Mobile Gas and EnergySouth agreed that from and after the effective date
of the Merger provided for therein, this Plan would utilize EnergySouth common
stock instead of Mobile Gas common stock. Accordingly, as of the effective date
hereof, EnergySouth assumes the obligations of Mobile Gas under the Original
Plan, including without limitation obligations with respect to Options granted
pursuant to the Original Plan, and undertakes to carry out all responsibilities
of the Company specified herein. Mobile Gas consents and agrees to the
assumption by EnergySouth of the Company's responsibilities under this Plan.
(b) The purposes of this Plan are to encourage stock ownership by key
employees of the Company and the Company's subsidiaries upon whose judgment,
initiative, and effort the Company is largely dependent for its success, to
provide an incentive for such employees and other individuals to expand and
improve the profits and prosperity of the Company, and to assist the Company and
its subsidiaries in attracting and retaining key personnel through the grant of
options to purchase shares of the Company's common stock.
2. DEFINITIONS
Each term set forth in this Section 2 shall have the meaning set forth
opposite such term for purposes of this Plan unless the context otherwise
requires, and for the purposes of such definitions, the singular shall include
the plural and the plural shall include the singular:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the Compensation and Planning Committee
appointed by the Board or any successor committee designated by the Board,
which shall be comprised of not less than two (2) members of the Board,
each of whom shall be a "disinterested person" as defined in Rule
16b-3(b)(3)(i) promulgated under the 1934 Act.
(d) "Company" shall mean EnergySouth, Inc., an Alabama corporation.
(e) "Fair Market Value" for a share of Stock shall mean the price that the
Committee acting in good faith determines, through any reasonable
valuation method (including but not limited to reference to prices
existing in any established market in which the Stock is traded), to be
the price at which a share of Stock might change hands between a willing
buyer and a willing seller, neither being under any compulsion to buy or
to sell and both having reasonable knowledge of the relevant facts. It
shall be deemed a reasonable valuation method if the Fair Market Value is
set at the mean between the highest and lowest quoted selling price of a
share of Stock on the NASDAQ Stock Market on the date such value is
determined or the nearest prior business day on which trading occurred on
the NASDAQ Stock Market.
(f) "Grant Date" means the date on which a Participant is granted an
Option or SAR, as determined by the Committee.
(g) "ISO" shall mean a right in the form of an option to purchase Stock
granted under this Plan that is intended to qualify as an incentive stock
option under Section 422 of the Code.
<PAGE> 2
(h) "Non-ISO" shall mean a right in the form of an option to purchase
stock granted under this Plan that is not intended to qualify as an
incentive stock option under Section 422 of the Code.
(i) "Option" shall mean either an ISO or a Non-ISO.
(j) "Option Price" shall mean the purchase price for Stock under an
Option, as determined in Section 6 below.
(k) "Participant" shall mean an employee of the Company or any of its
Subsidiaries to whom an Option or SAR is granted under the Plan.
(l) "Plan" shall mean this Amended and Restated Stock Option Plan of
EnergySouth, Inc.
(m) "SAR" or "Stock Appreciation Right" shall mean a right to receive cash
or Stock granted pursuant to Section 8 of the Plan.
(n) "Stock" shall mean the $.01 par value common stock of the Company.
(o) "Subsidiary" shall mean any corporation of which the Company owns
fifty percent (50%) or more of the total combined voting power of all
classes of stock of such corporation, and any corporation which is itself
a Subsidiary of any other Subsidiary.
(p) "Ten Percent Shareholder" shall mean a person who owns more than ten
percent (10%) of the total combined voting power of all classes of stock
of the Company or a Subsidiary.
(q) "1934 Act" means the Securities Exchange Act of 1934, as amended.
3. STOCK SUBJECT TO OPTIONS
(a) Subject to the provisions of Section 14 of the Plan, the maximum
number of shares of Stock that may be optioned or sold under the Plan is three
hundred fifty thousand (350,000) shares.
(b) For purposes of calculating the maximum number of shares of Stock that
may be issued under the Plan, (i) all the shares issued (including the shares,
if any, withheld for tax withholding requirements) shall be counted when cash is
used as full payment for shares issued upon exercise of an Option, (ii) only the
net shares issued (including the shares, if any, withheld for tax withholding
requirements) shall be counted when shares of Stock are used as full or partial
payment for shares issued upon exercise of an Option, and (iii) all shares
issued in lieu of cash upon exercise of Stock Appreciation Rights shall be
counted.
4. ADMINISTRATION
The Plan shall be administered by the Committee. A majority of the members
of the Committee shall constitute a quorum for the transaction of business. The
Committee shall have full authority in its discretion, subject to and not
inconsistent with the express provisions of the Plan and with Section 16 of the
1934 Act, to grant Options and SARs; to determine the Option Price and term of
each Option, whether an Option will be an ISO or a Non-ISO, the Participants to
whom, and the time or times at which, Options shall be granted and the number of
shares of Stock to be covered by each Option; to determine which Options shall
be accompanied by SARs and/or dividend equivalents; to interpret the Plan; to
prescribe, amend, and rescind rules and regulations relating to the Plan; to
determine the terms and provisions of the option agreements (which need not be
identical) entered into in connection with the grant of Options and SARs; and to
make all other determinations deemed necessary or advisable for the
administration of the Plan. Members of the Committee may participate in a
meeting of the Committee by means of conference telephone, and such
participation shall constitute presence in person at the meeting. The Committee
may delegate to one or more of its members, or to one or more agents, such
administrative duties as it may deem advisable, and the Committee or any person
to whom it has delegated duties as aforesaid may employ one or more persons to
render advice with respect to any responsibility the Committee or such person
may have under the Plan. The Committee may employ attorneys, consultants,
accountants, or other persons, and the Committee shall be entitled to rely upon
the advice, opinions, or valuations of such persons. All actions taken and all
interpretations and determinations made by the Committee in good faith shall be
final and binding upon all Participants, the Company, and all other interested
persons. No member of the Committee shall be personally
2
<PAGE> 3
liable for any action, determination, or interpretation made in good faith with
respect to the Plan; and all members of the Committee shall be fully protected
by the Company in respect of any such action, determination, or interpretation.
5. ELIGIBILITY; FACTORS TO BE CONSIDERED IN GRANTING OPTIONS
Options may be granted to officers or other key employees of the Company
or its Subsidiaries upon whose judgment, initiative or effort the Company relies
for the successful conduct of its business, as determined by the Committee in
its discretion. In determining the employees or other individuals to whom
Options shall be granted and the number of shares of Stock to be covered by each
Option, the Committee shall take into account the nature of such persons'
duties, their present and potential contributions to the success of the Company,
and such other factors as it shall deem relevant in connection with
accomplishing the purposes of the Plan. A director of the Company who is not
also a regular full-time employee will not be eligible to receive an Option.
Options shall be granted to Participants in the sole discretion of the
Committee, and the Committee shall be under no obligation whatsoever to grant
Options or to grant all Options subject to the same terms and conditions. A
Participant who has been granted an Option under the Plan may be granted new
Options, which may be in addition to prior Options granted to said Participant
under the Plan or may be in exchange for the surrender and cancellation of prior
Options, with the new Option having an Option Price lower (or higher) than the
Option Price provided in the prior Option and containing such other terms as the
Committee may deem appropriate.
If the Committee grants an ISO and a Non-ISO to the same Participant, the
right of the Participant to exercise one such Option shall not be conditioned on
his or her failure to exercise the other such Option.
6. OPTION PRICE
The Option Price for each share of Stock under each Option shall be
determined by the Committee in its absolute discretion, provided, however, that
for an ISO the Option Price shall be not less than the Fair Market Value of the
shares of Stock on the date that the ISO is granted, and for a non-ISO the
Option Price shall not be less than 75% of the Fair Market Value of the shares
of Stock on the date that the non-ISO is granted. If an ISO is granted to a Ten
Percent Shareholder, the Option Price shall be not less than one hundred ten
percent (110%) of the Fair Market Value of the shares of Stock on the date that
the ISO is granted.
7. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to the Plan shall be authorized by the Committee
and shall be evidenced by agreements ("Option Agreements") in such form as the
Committee shall from time to time approve. Such Option Agreements shall specify
whether the Options covered thereby are intended to qualify as ISOs or Non-ISOs
(and in the case of any Option Agreement which does not contain such
specification, the Options covered thereby shall be deemed to be Non-ISOs) and
shall comply with and be subject to the following terms and conditions:
(a) Exercise Limitations; No Right to Employment. In no event shall an
Option be exercisable by a Participant who is subject to the provisions of
Section 16(b) of the 1934 Act and rules promulgated thereunder in a manner, or
during a period of time, that would constitute a violation of any such
applicable provisions. Unless otherwise approved by the Committee and set forth
in an Option Agreement, an Option granted under the Plan may be exercised, and
shares of Stock may be acquired, as follows:
25% of the shares of Stock covered by the Option may be acquired on or
after the first anniversary of the Grant Date; an additional 25% on or
after the second anniversary; an additional 25% on or after the third
anniversary; and the remaining 25% on or after the fourth anniversary of
the Grant Date.
No Option may be exercised after the expiration of ten (10) years from the Grant
Date (although the term of an Option may be for a shorter period as provided in
the Option Agreement). No Option may be exercised for a fractional share of
Stock. No Option Agreement shall impose upon the Company any obligation to
employ the Participant for any period of time.
(b) Manner of Exercise. A Participant shall exercise an Option by giving
written notice of such exercise to the Company and paying the Option Price in
full to the Company for the shares to be purchased. The date upon which such
payment is received by the Company shall be the exercise date for the Option.
3
<PAGE> 4
(c) Time and Method of Payment. The Option Price shall be paid in United
States dollars, or by check, bank draft, or money order payable to the order of
the Company, or by payroll deduction if requested by the Participant and
approved by the Committee, or, in the discretion of the Committee, through
delivery of Stock or a combination of cash and Stock. Any Stock so delivered
shall be valued at the Fair Market Value of such Stock on the date of delivery
to the Company. Promptly after the exercise of an Option and the payment of the
full Option Price, the Participant shall be entitled to the issuance of a stock
certificate evidencing his ownership of the appropriate number of shares of
Stock. A Participant shall have none of the rights of a shareholder until shares
are issued to him, and no adjustment with respect to such Participant will be
made for dividends or other rights which accrue prior to the date such stock
certificate is issued.
(d) Number of Shares. Each Option shall state the total number of shares
of Stock to which it pertains. The number of shares to which a Participant is
entitled under an Option shall be reduced by, and the Option with respect to
such shares shall be deemed surrendered to the extent of, the number of Stock
Appreciation Rights (described in Section 8 below) related to the Option that
have been previously exercised by the Participant, and the number of shares
covered by the Option as to which the Participant has partially exercised his
rights. For ISOs, the aggregate Fair Market Value (determined as of the Grant
Date) of the shares of Stock with respect to which the ISO is exercisable for
the first time by a participant during any calendar year (under all plans of the
Company and its Subsidiaries) shall not exceed $100,000.
8. STOCK APPRECIATION RIGHTS
The Committee may grant Stock Appreciation Rights to Participants at the
same time that such Participants are awarded Options under the Plan. Such Stock
Appreciation Rights shall be included in and be part of the Option Agreement
evidencing the Option to which the Stock Appreciation Rights relate.
(a) Employment Requirement. The Committee may, in its discretion, include
in any Stock Appreciation Rights granted under the Plan a condition that the
participant shall agree to remain in the employ of, and to render services to,
the Company or any of its Subsidiaries for a period of time (specified in the
Option Agreement) following the date the Stock Appreciation Rights are granted.
No such Option Agreement shall impose upon the Company any obligation to employ
the participant for any period of time.
(b) Grant and Exercise. Each Stock Appreciation Right shall relate to one
share of Stock covered by a specific Option under the Plan and shall be awarded
to a participant, if at all, concurrently with the grant of such Option. The
number of Stock Appreciation Rights granted to a Participant, if any, shall be
equal to the number of shares of Stock that the Participant is entitled to
receive pursuant to the related Option. The number of Stock Appreciation Rights
held by a participant shall be reduced by:
(1) the number of Stock Appreciation Rights exercised for Stock or
cash by the Participant, and
(2) the number of shares of Stock purchased by such Participant
pursuant to the related Option.
Each Stock Appreciation Right shall be subject to the same terms and conditions
as the related Option and shall be exercisable only to the extent the Option is
exercisable, provided that no Stock Appreciation Right shall be exercisable for
cash by a Participant who is subject to the provisions of Section 16(b) of the
1934 Act prior to the expiration of the later of: (i) six months after the date
on which this Plan is approved by the shareholders of the Company, or (ii)
twelve months after the Grant Date (and then, in either case, only to the extent
that the related Option is exercisable).
(c) Manner of Exercise. A Participant shall exercise Stock Appreciation
Rights by giving written notice of such exercise to the Company. The date upon
which the Company receives such notice shall be the exercise date for the Stock
Appreciation Rights.
(d) Appreciation Available. Each Stock Appreciation Right shall entitle a
Participant to surrender unexercised the related Option to purchase one share of
Stock and to receive in exchange, subject to the provisions of the Plan and such
rules and regulations as from time to time may be established by the Committee,
a payment equal to the excess of the Fair Market Value of a share of Stock on
the exercise date over the Option Price per share of Stock of the related
Option. The aggregate appreciation available to a Participant from any exercise
of Stock Appreciation Rights shall be equal to the number of Stock Appreciation
Rights being exercised, multiplied by the amount of appreciation per Stock
Appreciation Right determined under the preceding sentence.
4
<PAGE> 5
(e) Payment of Appreciation. The total appreciation available to a
Participant from an exercise of Stock Appreciation Rights may be paid to the
participant either in Stock or in cash, or a combination thereof, as elected by
the Participant, provided that the Committee shall have sole discretion to
consent to or disapprove the election of any Participant who is subject to the
provisions of Section 16(b) of the 1934 Act to receive all or part of a payment
in cash (which consent or disapproval may be given at any time after the
election to which it relates). If paid all in cash, the amount thereof shall be
the amount of aggregate appreciation determined under Section 8(d) above. If
paid all in Stock, the number of shares of Stock that shall be issued pursuant
to the exercise of Stock Appreciation Rights shall be determined by dividing the
amount of aggregate appreciation determined under Section 8(d) above by the Fair
Market Value of a share of Stock on the exercise date of the Stock Appreciation
Rights; provided, however, that no fractional shares shall be issued upon the
exercise of Stock Appreciation Rights and cash will be paid in lieu of any such
fractional share.
(f) Limitations Upon Exercise of Stock Appreciation Rights. A Participant
may exercise a Stock Appreciation Right only at such times and to such extent as
the Option to which the Stock Appreciation Right relates may be exercised, and
if the Participant is subject to the provisions of Section 16(b) of the 1934
Act, exercise of his Stock Appreciation Rights for cash may be limited to
certain time periods as provided in his Option Agreement. Adjustments to the
number of shares of Stock in the Plan and the price per share pursuant to
Section 14 below shall also be made to any Stock Appreciation Rights held by
each Participant. Any termination, amendment, or revision of the Plan pursuant
to Section 15 below shall be deemed a termination, amendment, or revision of
Stock Appreciation Rights to the same extent.
9. TERMINATION OF EMPLOYMENT
In the event that the employment of a Participant with the Company or any
of its Subsidiaries shall be terminated (except as set forth in Section 10
below), any Option or SARs that the Participant is entitled to exercise at the
date of termination of employment may, subject to the provisions of the Plan, be
exercised at any time within the thirty (30) day period following the date of
such termination, but in no case later than the date on which the Option
terminates. Any Option or SARs granted under the Plan shall not be affected by
any change of duties or position of the Participant so long as the Participant
continues to be a regular full-time employee of, or otherwise maintains his
relationship with, the Company or any of its Subsidiaries. Any Option or SARs,
or any rules and regulations relating to the Plan, may contain such provisions
as the Committee shall approve with respect to the determination of the date
employment terminates and the effect of leaves of absence. Nothing in the Plan
or in any Option or SARs granted pursuant to the Plan shall confer upon any
Participant any right to continue in the employ of the Company or any of its
Subsidiaries, or interfere in any way with the right of the Company or any of
its Subsidiaries to terminate such employment at any time.
10. RIGHTS IN EVENT OF DEATH OR DISABILITY
In the event of termination of employment because of the death or
disability of a Participant, the participant or his legatees, heirs, or legal
representative, as the case may be, shall have the right for one (1) year after
the Participant's death or disability, as the case may be, to exercise any of
the Participant's Options or SARs to the extent that such Participant was
entitled to exercise such Options or SARs on the date of his death or
disability, as the case may be. In no event, however, shall the Options or SARs
be exercisable later than the date on which the Options terminate. For purposes
of this Plan, "disability" shall mean the inability of a Participant to perform
his regular duties with the Company or its Subsidiaries by reason of a medically
determinable physical or mental impairment which can be expected to result in
death within twelve (12) months, or which can be expected to last for a
continuous period of not less than twelve (12) months.
11. NO OBLIGATIONS TO EXERCISE OPTION OR STOCK APPRECIATION RIGHTS
The granting of an Option or SAR shall impose no obligation upon the
Participant to exercise such Option or SAR.
12. TRANSFERABILITY OF OPTION OR SAR
Options and SARs shall not be transferable other than by will or by the
laws of descent and distribution, and during a Participant's lifetime shall be
exercisable only by such Participant.
5
<PAGE> 6
13. EFFECT OF CHANGE IN STOCK SUBJECT TO PLAN; MERGERS; CHANGE IN CONTROL
(a) The aggregate number of shares of Stock available for Options under
the Plan, the shares subject to any Option, the Option Price per share, and the
number of related Stock Appreciation Rights shall all be proportionately
adjusted as the Committee deems appropriate to prevent dilution or enlargement
of Participants' rights under the Plan in connection with any increase or
decrease in the number of issued shares of Stock subsequent to the effective
date of the Plan resulting from (1) a subdivision or consolidation of shares or
any other capital adjustment, (2) the payment of a stock dividend, or (3) any
other increase or decrease in such shares effected without receipt of
consideration by the Company.
(b) If the Company shall be the surviving corporation in any merger or
consolidation, any Option or SAR shall pertain, apply, and relate to the
securities to which a holder of the number of shares of Stock subject to the
Option would have been entitled after the merger or consolidation. Upon
dissolution or liquidation of the Company, or upon a merger or consolidation in
which the Company is not the surviving corporation, all Options and SARs
outstanding under the Plan shall terminate; provided, however, that each
Participant (and each other person entitled under Section 10 to exercise an
Option) shall have the right, immediately prior to such dissolution or
liquidation, or such merger or consolidation, to exercise such Participant's
Options or SARs in whole or in part to the full extent of such Options or SARs,
regardless of whether such Options or SARs would be otherwise exercisable by
such Participant at that time under the terms of the Plan.
(c) If there is a "Change in Control of the Company", all outstanding
Options granted under the Plan shall immediately become fully exercisable. A
"Change in Control of the Company" shall be deemed to have occurred if any
"person" (as that term is used in Sections 13(d) and 14(d)(2) of the 1934 Act)
becomes a beneficial owner directly or indirectly of securities of the Company
representing 20% or more of the combined voting power of the Company's then
outstanding securities other than as a result of a merger or consolidation
involving the Company.
14. AMENDMENT AND TERMINATION
The Board, by resolution, may amend or revise the Plan to the extent the
Board deems necessary or appropriate. Any amendment, however, that would (1)
increase the aggregate number of shares of Stock that may be issued under the
Plan, (2) materially increase the benefits accruing to Participants, or (3)
modify the requirements as to eligibility for participation in the Plan, shall
be subject to shareholder approval (unless Section 16(b) of the 1934 Act and/or
Rule 16b-3 promulgated thereunder do not require shareholder approval in order
for the Plan to comply with Rule 16b-3). The Board may terminate the Plan at any
time. No amendment, revision or termination of the Plan may, without the written
consent of the holder of an Option, alter or impair any Option or SAR previously
granted under the Plan, except as otherwise authorized in this Plan. Unless
sooner terminated, the Plan shall remain in effect for a period of ten (10)
years following the date that the Plan is adopted by the Board or approved by
the shareholders of the Company, whichever is earlier, at which time no further
Options or SARs shall be granted hereunder. Termination of the Plan shall not
affect any Option or SAR previously granted.
15. AGREEMENTS AND REPRESENTATIONS OF EMPLOYEES
(a) Acquiring Stock for Investment Purposes. As a condition to the
exercise of any Option, or of any SAR for which shares of Stock are to be
issued, the Company may require the Participant exercising such Option to
represent and warrant that any shares of Stock acquired at exercise are being
acquired only for investment and without any present intention to sell or
distribute such shares, if, in the opinion of counsel for the Company, such a
representation is required or desirable under the Securities Act of 1933, as
amended (the "1933 Act"), or any other applicable law, regulation, or rule of
any governmental agency. The Company also may require, if its counsel deems it
required or desirable under the 1933 Act or any other applicable law or
regulation, as a condition to the exercise of any Option or SAR, that the
Participant exercising such Option represent and warrant that he will not sell
or offer to sell any shares of Stock acquired at exercise unless a registration
statement shall be in effect with respect to such shares under the 1933 Act and
any applicable state securities laws, or unless he shall have furnished to the
Company an opinion, in form and substance satisfactory to the Company, that such
registration is not required. Certificates representing the shares of Stock
acquired at exercise may, at the discretion of the Company, bear a legend to the
effect that such shares have not been registered under the 1933 Act or any
applicable state securities laws, and that such shares may not be sold or
offered for sale in the absence of an effective registration statement as to
such shares under the 1933 Act and any applicable state securities laws, or an
opinion, in form and substance satisfactory to the Company, that such
registration is not required.
6
<PAGE> 7
(b) Withholding. With respect to the exercise of any Option or SAR granted
under this Plan, each Participant shall fully and completely consent to whatever
action the Committee directs to satisfy the federal and state tax withholding
requirements, if any, which the Committee in its discretion deems applicable to
such exercise or surrender. Upon the partial or full exercise of an Option, or
any SAR for which shares of Stock are to be issued, in the discretion of the
Committee and if the Participant so elects by providing notice to the Company,
the stock certificate representing such shares shall be for the appropriate
number of shares less the number, rounded up for any fraction to the next whole
number, that have a Fair Market Value (as of the date of exercise) equal to such
amount as is determined by the Company to be sufficient to satisfy applicable
federal, state or local withholding tax requirements. The Company shall promptly
remit, or cause to be remitted, to the appropriate taxing authorities the amount
so withheld. Although the stock certificate delivered to the Participant will be
for a net number of shares, such Participant shall be considered, for tax
purposes, to have received the number of shares equal to the full number of
shares for which the Option has been exercised.
16. RESERVATION OF SHARES OF STOCK
The Company, during the term of this Plan, will at all times reserve and
keep available, and will seek or obtain from any regulatory body having
jurisdiction any requisite authority necessary to issue and to sell, the number
of shares of Stock that shall be sufficient to satisfy the requirements of this
Plan. The inability of the Company to obtain from any regulatory body having
jurisdiction the authority deemed necessary by counsel for the Company for the
lawful issuance and sale of its Stock hereunder shall relieve the Company of any
liability in respect of the failure to issue or sell Stock as to which the
requisite authority has not been obtained.
17. EFFECTIVE DATE; OUTSTANDING OPTIONS
The Effective Date of this Amended and Restated Stock Option Plan shall be
as of February 2, 1998. Options granted under the Original Plan prior to such
date shall be governed hereby, with appropriate adjustments to reflect the
number of shares of Stock subject to each such Option and the Option Price for
same consistent with the conversion of Mobile Gas common stock into EnergySouth
common stock in accordance with the Merger Agreement, and shall otherwise remain
in full force and effect.
MOBILE GAS SERVICE CORPORATION
By: /s/ John S. Davis
-------------------------------
John S. Davis
Its: President
-------------------------------
ENERGYSOUTH, INC.
By: /s/ John S. Davis
-------------------------------
John S. Davis
Its: President
-------------------------------
7
<PAGE> 1
EXHIBIT 11
ENERGYSOUTH, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
1998 1997 (1) 1998 1997 (1)
---- ------- ---- --------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Earnings applicable to common stock $2,517 $1,989 $8,946 $8,076
Weighted average common shares outstanding 4,877 4,858 4,870 4,851
Basic earnings per share $ 0.52 $ 0.41 $ 1.84 $ 1.66
DILUTED EARNINGS PER SHARE:
Earnings applicable to common stock $2,517 $1,989 $8,946 $8,076
Weighted average common shares outstanding 4,877 4,858 4,870 4,851
Incremental shares resulting from assumed
exercise of stock options 50 69 56 49
Weighted average common shares outstanding,
assuming dilution 4,927 4,927 4,926 4,900
Diluted earnings per share $ 0.51 $ 0.40 $ 1.82 $ 1.65
</TABLE>
(1) Restated to reflect three-for-two conversion of Mobile Gas common stock into
EnergySouth common stock effective February 2, 1998.
<PAGE> 1
Exhibit 18
January 29, 1999
EnergySouth, Inc.
2828 Dauphin Street
Mobile, Alabama
Dear Sirs:
At your request, we have read the description included in your Quarterly Report
on Form 10-Q to the Securities and Exchange Commission for the quarter ended
December 31, 1998 of the facts relating to the change in accounting method to
record an estimate of unbilled revenue for service rendered subsequent to the
meter reading date through the end of the reporting period. We believe, on the
basis of the facts so set forth and other information furnished to us by
officials of the Company, that the accounting change described in your Form 10-Q
is to an alternative accounting principle that is preferable under the
circumstances.
We have not audited any consolidated financial statements of EnergySouth, Inc.
and its consolidated subsidiaries as of any date or for any period subsequent to
September 30, 1998. Therefore, we are unable to express, and we do not express,
an opinion on the facts set forth in the above-mentioned Form 10-Q, on the
related information furnished to us by officials of the Company, or on the
financial position, results of operations, or cash flows of EnergySouth, Inc.
and its consolidated subsidiaries as of any date or for any period subsequent to
September 30, 1998.
Yours truly,
/s/ Deloitte & Touche
DELOITTE & TOUCHE
<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 THREE MONTHS ENDED DECEMBER
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S FORM
10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 124,729
<OTHER-PROPERTY-AND-INVEST> 1,375
<TOTAL-CURRENT-ASSETS> 25,395
<TOTAL-DEFERRED-CHARGES> 1,060
<OTHER-ASSETS> 6,471
<TOTAL-ASSETS> 159,030
<COMMON> 49
<CAPITAL-SURPLUS-PAID-IN> 18,232
<RETAINED-EARNINGS> 43,156
<TOTAL-COMMON-STOCKHOLDERS-EQ> 61,437
0
0
<LONG-TERM-DEBT-NET> 58,582
<SHORT-TERM-NOTES> 4,660
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 971
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 33,380
<TOT-CAPITALIZATION-AND-LIAB> 159,030
<GROSS-OPERATING-REVENUE> 19,611
<INCOME-TAX-EXPENSE> 1,695
<OTHER-OPERATING-EXPENSES> 13,723
<TOTAL-OPERATING-EXPENSES> 15,418
<OPERATING-INCOME-LOSS> 4,193
<OTHER-INCOME-NET> (280)<F3>
<INCOME-BEFORE-INTEREST-EXPEN> 4,294
<TOTAL-INTEREST-EXPENSE> 1,396
<NET-INCOME> 2,517
0
<EARNINGS-AVAILABLE-FOR-COMM> 2,517
<COMMON-STOCK-DIVIDENDS> 1,072
<TOTAL-INTEREST-ON-BONDS> 4,761<F1>
<CASH-FLOW-OPERATIONS> 1,742
<EPS-PRIMARY> .52<F2>
<EPS-DILUTED> .51<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 INTEREST INCOME, MINORITY INTEREST, AND TOTAL CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING PRINCIPLES (NET OF TAX).
</FN>
</TABLE>
