<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, 1999
-----------------
Commission File No. 0-29604
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ENERGYSOUTH, INC.
(Successor to Mobile Gas Service Corporation)
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Alabama 58-2358943
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2828 Dauphin Street, Mobile, Alabama 36606
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 334-450-4774
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock ($.01 par value) outstanding at February 10, 2000 - 4,902,138
shares.
<PAGE> 2
ENERGYSOUTH, INC.
INDEX
<TABLE>
<CAPTION>
Page
No.
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<S> <C> <C>
PART I. Financial Information (Unaudited):
Consolidated Balance Sheets - December 31,
1999 and 1998 and September 30, 1999 3-4
Consolidated Statements of Income - Three and
Twelve Months Ended December 31, 1999 and 1998 5
Consolidated Statements of Retained Earnings -
Three and Twelve Months Ended December 31, 1999
and 1998 6
Consolidated Statements of Cash Flows - Three
Months Ended December 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
Quantitative and Qualitative Disclosures About
Market Risk 15
PART II. Other Information 16
Exhibit Index 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
December 31, September 30,
Assets 1999 1998 1999
------------------------------ -------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 4,951 $ 5,553 $ 22,875
Receivables:
Gas 7,786 7,140 4,099
Unbilled Revenue(Note 7) 4,064 3,638 886
Merchandise 3,048 3,023 2,921
Other 737 730 687
Allowance for Doubtful Accounts (812) (678) (735)
Materials, Supplies, and Merchandise (at average cost) 1,539 1,256 1,357
Gas Stored Underground (at average cost) 966 1,634 1,180
Deferred Income Taxes 1,719 1,864 1,129
Prepayments 1,769 915 1,841
------------- ------------- -------------
Total Current Assets 25,767 25,075 36,240
------------- ------------- -------------
PROPERTY, PLANT, AND EQUIPMENT:
Property, Plant, and Equipment 178,321 170,996 175,768
Less Accumulated Depreciation and Amortization 51,054 46,267 49,855
------------- ------------- -------------
Property, Plant, and Equipment in Service - Net 127,267 124,729 125,913
Construction Work in Progress 2,493 1,375 3,763
------------- ------------- -------------
Total Property, Plant, and Equipment 129,760 126,104 129,676
------------- ------------- -------------
OTHER ASSETS:
Regulatory Assets 611 857 738
Merchandise Receivables Due After One Year 5,662 5,614 5,670
Deferred Charges 1,281 1,380 1,311
------------- ------------- -------------
Total Other Assets 7,554 7,851 7,719
------------- ------------- -------------
Total $ 163,081 $ 159,030 $ 173,635
============= ============= =============
</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 1999 1998 1999
----------------------------- -------------
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 2,746 $ 971 $ 962
Notes Payable 4,130 4,660 17,177
Accounts Payable 3,525 3,580 4,398
Dividends Declared 1,152 1,072 1,150
Customer Deposits 1,420 1,393 1,428
Taxes Accrued 4,287 4,667 3,182
Deferred Purchased Gas Adjustment 1,485 1,491 1,612
Interest Accrued 1,395 1,725 754
Other Liabilities 2,332 1,572 2,390
------------- ------------- -------------
Total Current Liabilities 22,472 21,131 33,053
------------- ------------- -------------
OTHER LIABILITIES:
Other Liabilities 478 350 431
Accrued Pension Cost 1,076 1,385 1,189
Accrued Postretirement Benefit Cost 1,093 1,307 1,112
Deferred Income Taxes 12,181 11,012 11,705
Deferred Investment Tax Credits 386 413 392
------------- ------------- -------------
Total Other 15,214 14,467 14,829
------------- ------------- -------------
Total Liabilities 37,686 35,598 47,882
------------- ------------- -------------
CAPITALIZATION:
Stockholders' Equity
Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares;
Outstanding: December 1999 -
4,898,000 Shares; December 1998 -
4,877,000 Shares; September 1999 -
4,894,000 Shares) 49 49 49
Capital in Excess of Par Value 18,661 18,232 18,563
Retained Earnings 47,086 43,156 45,542
------------- ------------- -------------
Total Stockholders' Equity 65,796 61,437 64,154
Minority Interest 3,763 3,413 3,582
Long-Term Debt (Less Current Maturities) 55,836 58,582 58,017
------------- ------------- -------------
Total Capitalization 125,395 123,432 125,753
------------- ------------- -------------
Total $ 163,081 $ 159,030 $ 173,635
============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended December 31, Ended December 31,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating Revenues
Gas Revenues (Note 7) $ 19,650 $ 18,597 $ 64,944 $ 70,335
Merchandise Sales 887 873 2,841 2,832
Other 367 389 1,322 1,342
--------- --------- --------- ---------
Total Operating Revenues 20,904 19,859 69,107 74,509
--------- --------- --------- ---------
Operating Expenses
Cost of Gas 6,120 4,886 17,427 20,747
Cost of Merchandise 675 664 2,241 2,204
Operations 4,715 4,634 17,325 17,488
Maintenance 494 363 1,711 1,497
Depreciation 1,725 1,677 6,515 6,365
Taxes, Other Than Income Taxes 1,552 1,505 5,408 5,612
--------- --------- --------- ---------
Total Operating Expenses 15,281 13,729 50,627 53,913
--------- --------- --------- ---------
Operating Income 5,623 6,130 18,480 20,596
--------- --------- --------- ---------
Other Income and (Expense)
Interest Expense (1,322) (1,408) (5,127) (5,563)
Allowance for Borrowed Funds Used During Construction 39 12 76 61
Interest Income 130 23 422 275
Minority Interest (181) (164) (529) (553)
--------- --------- --------- ---------
Total Other Income (Expense) (1,334) (1,537) (5,158) (5,780)
--------- --------- --------- ---------
Income Before Income Taxes 4,289 4,593 13,322 14,816
Income Taxes 1,593 1,695 4,900 5,489
--------- --------- --------- ---------
Income Before Cumulative Effect of Changes in Accounting Principles 2,696 2,898 8,422 9,327
--------- --------- --------- ---------
Cumulative Effect on Prior Years of Change in Accounting Method For
Unbilled Revenue (Net of Income Tax of $133)(Note 7) 235 -- 235
Cumulative Effect on Prior Years of Change in Accounting Method For
Start-up Costs (Net of Income Tax of $(350))(Note 8) (616) 32 (616)
--------- --------- --------- ---------
Total Cumulative Effect of Accounting Changes -- (381) 32 (381)
--------- --------- --------- ---------
Net Income $ 2,696 $ 2,517 $ 8,454 $ 8,946
========= ========= ========= =========
Basic Earnings Per Share
Income Before Cumulative Effect $ 0.55 $ 0.60 $ 1.72 $ 1.92
Cumulative Effect of Accounting Changes -- (0.08) 0.01 (0.08)
--------- --------- --------- ---------
Net Income $ 0.55 $ 0.52 $ 1.73 $ 1.84
========= ========= ========= =========
Diluted Earnings Per Share
Income Before Cumulative Effect $ 0.54 $ 0.59 $ 1.70 $ 1.90
Cumulative Effect of Accounting Changes -- (0.08) 0.01 (0.08)
--------- --------- --------- ---------
Net Income $ 0.54 $ 0.51 $ 1.71 $ 1.82
========= ========= ========= =========
Pro Forma Amounts Assuming Retroactive Application
of Accounting Changes
Net Income $ 2,696 $ 2,898 $ 8,422 $ 8,504
========= ========= ========= =========
Basic Earnings Per Share $ 0.55 $ 0.60 $ 1.72 $ 1.75
========= ========= ========= =========
Diluted Earnings Per Share $ 0.54 $ 0.59 $ 1.71 $ 1.73
========= ========= ========= =========
Cash Dividends Declared Per Share of Common Stock $ 0.2350 $ 0.2200 $ 0.9250 $ 0.8600
========= ========= ========= =========
Average Common Shares Outstanding (Note 9)
Basic 4,898 4,877 4,890 4,870
========= ========= ========= =========
Diluted 4,947 4,927 4,938 4,926
========= ========= ========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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<PAGE> 6
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended December 31, Ended December 31,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at Beginning of Period $ 45,542 $ 41,711 $ 43,156 $ 38,399
Net Income 2,696 2,517 8,454 8,946
-------- -------- -------- --------
Total 48,238 44,228 51,610 47,345
Less: Dividends 1,152 1,072 4,524 4,189
-------- -------- -------- --------
Balance at End of Period $ 47,086 $ 43,156 $ 47,086 $ 43,156
======== ======== ======== ========
</TABLE>
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months
Ended December 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash Flows Provided (Used) by Operating Activities $ (1,581) $ 1,742
--------- ---------
Cash Flows Used In Investing Activities -
Capital Expenditures (1,845) (1,698)
--------- ---------
Cash Flows From Financing Activities:
Repayment of Long-Term Debt (398) (4,026)
Changes in Short-Term Borrowings (13,047) (8,005)
Payment of Dividends, Net of Dividend Reinvestment (1,053) (975)
--------- ---------
Net Cash Used by Financing Activities (14,498) (13,006)
--------- ---------
Net Decrease in Cash and Cash Equivalents (17,924) (12,962)
--------- ---------
Cash and Cash Equivalents at Beginning of Period 22,875 18,515
--------- ---------
Cash and Cash Equivalents at End of Period $ 4,951 $ 5,553
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. The consolidated financial statements of EnergySouth, Inc. and its
subsidiaries (collectively the Company) include the accounts of Mobile Gas
Service Corporation (Mobile Gas); EnergySouth Services, Inc. (Services); MGS
Storage Services (Storage); MGS Marketing Services, Inc. (Marketing); 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. Certain amounts in
the prior year financial statements have been reclassified to conform with the
fiscal year 2000 financial statement presentation.
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, 1999.
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, 1999 and 1998 are not
indicative of the results to be expected for the full year.
Note 4. Effective October 1, 1999, the Company adopted Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). Accordingly, the Company now capitalizes certain
direct payroll and payroll-related costs for employees directly associated with
activities defined within the "application development stage" which in the past
have been expensed. The materiality of this change is dependent upon the
magnitude of the costs of specific software development or acquisition projects
incurred in any period. For the three months ended December 31, 1999, the amount
of costs capitalized under SOP 98-1 was not material to the financial
statements.
Note 5. Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June
1998 and establishes accounting and reporting standards for derivative
instruments and hedging activities. In June 1999, Statement of Financial
Accounting Standards No. 137 (SFAS 137) was issued which defers the effective
date of SFAS 133 for the Company until October 1, 2000, the beginning of the
first quarter of fiscal year 2001. The Company does not anticipate that SFAS 133
will have a significant impact on the financial statements.
Note 6. The Company is principally engaged in two reportable business segments:
Natural Gas Distribution and Natural Gas Storage. The Natural Gas Distribution
segment is actively engaged in the distribution and transportation of natural
gas to residential, commercial and industrial customers through Mobile Gas and
SGT. The Natural Gas Storage segment provides for the underground storage of
natural gas and transportation services through the operations of Bay Gas and
Storage. Through Marketing, Mobile Gas, and Services, the Company also provides
marketing, merchandising, and other energy-related services which are
7
<PAGE> 8
aggregated with EnergySouth, the holding company, and included in the Other
category. All segments are located in Southwest Alabama.
Segment earnings information presented in the table below includes intersegment
revenues which are eliminated in consolidation. Such intersegment revenues are
primarily amounts paid by the Natural Gas Distribution segment to the Natural
Gas Storage segment.
<TABLE>
<CAPTION>
As of and for the three months ended NATURAL GAS NATURAL GAS
December 31, 1999 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 19,100 $ 1,581 $ 1,253 $ (1,030) $ 20,904
Operating Expenses 14,795 574 942 (1,030) 15,281
Operating Income (Loss) 4,305 1,007 311 5,623
As of and for the three months ended NATURAL GAS NATURAL GAS
December 31, 1998 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 18,339 $ 1,312 $ 1,262 $ (1,054) $ 19,859
Operating Expenses 13,281 530 972 (1,054) 13,729
Operating Income (Loss) 5,058 782 290 6,130
As of and for the twelve months ended NATURAL GAS NATURAL GAS
December 31, 1999 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 62,968 $ 6,111 $ 4,163 $ (4,135) $ 69,107
Operating Expenses 49,189 2,247 3,326 (4,135) 50,627
Operating Income (Loss) 13,779 3,864 837 18,480
As of and for the twelve months ended NATURAL GAS NATURAL GAS
December 31, 1998 (in thousands) DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 69,110 $ 5,274 $ 4,279 $ (4,154) $ 74,509
Operating Expenses 52,565 2,164 3,338 (4,154) 53,913
Operating Income (Loss) 16,545 3,110 941 20,596
</TABLE>
Note 7. 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 income. In subsequent fiscal years 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.
8
<PAGE> 9
Note 8. 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. This
resulted in an adjustment to reduce the cumulative effect of the adoption of
SOP 98-5 by $32,000, net of tax (approximately $0.01 per share). The ongoing
effect on operating income as a result of not expensing the amortization of such
costs is not material to the financial statements.
Note 9. 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 49,000 and 50,000 for the three months ended
December 31, 1999 and 1998, respectively, and 48,000 and 56,000 for the twelve
months ended December 31, 1999 and 1998, respectively. These differences in
equivalent shares are from outstanding stock options.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
THE COMPANY
EnergySouth, Inc. (the "Company") is a holding company for a family of energy
businesses. The Company, primarily through Mobile Gas Service Corporation
(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 of Bay Gas Storage Company, Ltd.
(Bay Gas) 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 commercial customers use more gas during colder weather
for space heating. As a result, gas revenues, cost of gas and related taxes in
any given period reflect, 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 operating margins by reducing the base rate portion of
customers' bills in colder than normal weather and increasing the base rate
portion of customers' bills 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
All earnings per share amounts referred to herein are computed on a
diluted basis. Net income for the three months ended December 31, 1999 was
$2,696,000 or $0.54 per share as compared to net income before the cumulative
effect of accounting changes for the three months ended December 31, 1998 of
$2,898,000 or $0.59 per share. The decrease in first quarter earnings is due
primarily to a decrease in margins on gas sales and an increase in operations
and maintenance expenses. The decline in earnings from the Company's traditional
distribution business was partially offset by increased earnings from Bay Gas'
storage and transportation operations. Beginning October 1, 1998 the Company
changed its accounting methods for unbilled gas revenues to be consistent with
prevailing industry practice and for start-up costs to comply with new
accounting standards (See Note 7 and Note 8 above). The cumulative effect of the
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<PAGE> 11
respective accounting changes on prior years are reported as separate
components of net income. Financial results for the twelve months ended December
31, 1999 reflect the change in accounting for the full twelve months, while
results for the twelve months ended December 31, 1998 include the effect for
only three months. Thus the two periods are not directly comparable since the
same accounting methodology was not used consistently across the periods. Net
income before the cumulative effect of accounting changes for the twelve months
ended December 31, 1999 and 1998 was $8,422,000 or $1.70 per share and
$9,327,000 or $1.90 per share, respectively. The change in accounting has the
impact of increasing income before the cumulative effect of accounting changes
approximately $830,000 or $0.17 per share for the year ended December 31, 1998.
On a comparative basis, assuming retroactive application of the accounting
change, net income for the twelve months ended December 31, 1998 would have been
$1.73 per share compared to $1.71 per share for the twelve months ended December
31, 1999. The current year decrease of $0.02 per share on this comparative basis
is due primarily to decreased margins on gas sales mitigated by improved Bay Gas
earnings and decreased interest expense.
OPERATING REVENUES
Gas revenues increased $1,053,000 (6%) for the three months ended December 31,
1999 compared to the prior three-month period due to several factors. Gas sales
revenues from residential and small commercial customers, commonly referred to
as temperature-sensitive customers, increased $849,000 (6%) for the three-month
period due to increased gas volumes sold of 23% resulting from weather that was
52% colder than prior year and near normal in terms of heating degree-days. Gas
sales revenue from large commercial and industrial customers decreased $84,000
(6%) in first quarter 2000 due to a 10% decrease in gas volumes sold caused
primarily by two industrial interruptible customers, who have the capability to
burn alternative fuels, using less gas in their process. Transportation
revenues, excluding Bay Gas transportation, increased $14,000 (1%) for the
current three-month period due to increased gas volumes transported to existing
customers. Bay Gas revenues, other than from Mobile Gas, from storage and
transportation operations increased $295,000 (115%) during the three months
ended December 31, 1999 due primarily to providing storage services for a major
electric utility's new gas powered electric generating facilities in the
Southeast and increased transportation services to a gas powered electric
cogeneration facility which began operations in December 1998.
The construction of natural gas-fired electric generation facilities in the
Southeast and specifically in the Mobile area has provided new opportunities for
EnergySouth companies to provide gas storage and transportation. Management
expects this trend to continue with recent developments in natural gas-fired
electric generation, such as Alabama Power's installation of two gas powered
electric generating units at its Plant Barry facility located north of Mobile.
Bay Gas has contracted to transport up to 100,000 MMBtu of gas per day to this
facility when operations begin in mid-2000. Additionally, Alabama Power has
plans to install two additional units in 2001 to which Bay Gas will also
transport gas. Alabama Power is also constructing a new gas powered cogeneration
facility in an industrial park located within the southern portion of Mobile
Gas' distribution system. Mobile Gas expects to transport approximately 40,000
MMBtu of gas per day to this facility when it becomes operational in mid-2000.
Also, Mobile Gas recently entered into a contract to transport up to 54,000
MMBtu of gas per day to another electric cogeneration facility being constructed
in the Mobile area. This facility is expected to be operational in early 2001.
11
<PAGE> 12
Gas revenues decreased $5,391,000 (8%) for the twelve months ended December 31,
1999 compared to the prior year period. Assuming retroactive application of the
accounting change for unbilled revenues, in which case unbilled gas revenues and
related costs at December 31, 1997 would have been accrued and thus not
reflected in amounts for the twelve months ended December 31, 1998, gas revenues
for the twelve months ended December 31, 1999 would have decreased $1,936,000
(3%) compared to the prior year period. Of this amount, gas sales revenues from
temperature-sensitive customers decreased $1,378,000 (3%) for the twelve-month
period due to decreased gas volumes of 3% which was caused by weather being 2%
warmer than prior year and 14% warmer than normal. Gas sales revenues from large
commercial and industrial customers decreased $886,000 (15%) for the twelve
months ended December 31, 1999 due to a 16% decrease in gas volumes sold. This
volume decrease was caused primarily by reduced volumes associated with
commercial firm customers, whose volumes were impacted by the warmer weather,
and two industrial customers who switched to transportation-only service in
early 1998. Transportation revenues, excluding Bay Gas transportation, decreased
$301,000 (4%) for the twelve months ended December 31, 1999 due primarily to a
customer's plant closing in October 1998 and a rate reduction to an industrial
customer. Bay Gas revenues, other than from Mobile Gas, increased $858,000 (77%)
for the twelve months ended December 31, 1999 due primarily to the same factors
affecting the three-month comparison.
Gross margins on gas revenues, defined as gas revenues less related cost of gas,
have decreased $181,000 (1%) and $2,071,000 (4%), respectively, for the three
and twelve months ended December 31, 1999. Assuming retroactive application of
the accounting change for unbilled revenues, gross margins on gas revenues
decreased $582,000 (1%) for the twelve-month period. The Company utilizes a
temperature adjustment rider on gas sales to residential and small
commercial/industrial customers during the months of November through April to
mitigate the impact that warmer or colder than normal weather has on earnings.
Despite the use of the temperature adjustment rider, margins from these
customers decreased $397,000 (4%) for the three months and $746,000 (2%) for the
twelve months ended December 31, 1999. The margin decrease from these customers
is attributed primarily to a decrease in residential customers' gas consumption
per heating degree-day, which factors into the recovery of margins through the
temperature adjustment rider. Consistent with other natural gas distribution
companies in the United States, Mobile Gas has over time experienced slight
declines in residential customer usage per degree day as customers replace old
appliances with new, more energy efficient models and as new, more energy
efficient homes are built. Although this has been the overall trend, usages per
degree day can and do vary between periods due to several factors including
humidity, wind speed, cloud cover, and duration of cold spells. Contrary to the
general trend, usages per degree day during the fiscal 1999 first quarter
actually trended up from prior periods while in the fiscal 2000 first quarter
usages were below expectations. Gross margins from large commercial and
industrial customers decreased $55,000 and $402,000, respectively, for the three
and twelve months ended December 31, 1999 due to the decrease in related
revenues as discussed previously. Because transportation and Bay Gas revenues do
not have an associated cost of gas, the margin change on these revenues
approximates the change in revenues discussed previously.
Other operating revenues are comprised primarily of interest income from the
financing of merchandise sales and installations that occur at the Company and
through trade programs and also includes revenues from non-utility jobbing work,
engineering consulting, operations training and gas marketing services. Other
operating revenues decreased $22,000 (6%) and $20,000 (1%), respectively, for
the three and twelve months ended December 31, 1999 due
12
<PAGE> 13
primarily to decreased non-utility jobbing work. Additional impacts during the
twelve-month period included decreased merchandise financing income that was
partially offset by increased gas marketing service revenues.
OPERATING EXPENSES
Cost of gas increased $1,234,000 (25%) for the three months ended December 31,
1999 due primarily to a 23% increase in gas volume sold to temperature-sensitive
customers. Cost of gas decreased $3,320,000 (16%) for the twelve months ended
December 31, 1999. Assuming retroactive application of the accounting change for
unbilled revenues and related costs, cost of gas for the twelve-month period
ended December 31, 1999 would have decreased $1,353,000 (7%) due primarily to a
6% decrease in total gas sales volume and a 1% decrease in unit gas costs
charged to customers. The Company passes the actual cost of gas on to customers
under the purchased gas adjustment provision of rate tariffs. The difference
between actual gas costs and the amount collected from its customers is included
as a current asset or liability in the Consolidated Balance Sheets and excluded
from the Consolidated Statements of Income. Because cost of gas is recovered
from the Company's customers, fluctuations in the cost of gas have no effect on
gas margins.
Operations and maintenance expenses increased $212,000 (4%) for the three months
ended December 31, 1999 due primarily to increased distribution operations and
maintenance expenses partly attributed to intensified leak surveying on mains
and services, increased sales expenses attributed to advertising and promotional
payments, and increased legal and consulting expenses attributed to completed
arbitration proceedings on a customer's contract rate. Operations and
maintenance expenses increased $51,000 (0.3%) for the twelve months ended
December 31, 1999 due to factors impacting the fiscal 2000 first quarter which
were partially offset by decreased uncollectible accounts expense.
Depreciation expense increased $48,000 (3%) and $150,000 (2%), respectively, for
the three and twelve months ended December 31, 1999 due primarily to increased
depreciable plant in service.
Taxes, other than income taxes (other taxes), primarily consist of property
taxes and business license taxes that are based on gross revenues and fluctuate
accordingly. Other taxes increased $47,000 (3%) in the fiscal 2000 first quarter
and decreased $204,000 (4%) for the twelve-month period due primarily to
fluctuations in business license taxes associated with gas revenues.
OTHER INCOME AND EXPENSES
Interest expense decreased $86,000 (6%) and $436,000 (8%), respectively, for the
three and twelve months ended December 31, 1999 due in part to the early
redemption of $2,500,000 of 10.25% First Mortgage Bonds in October 1998. In
conjunction with the early redemption of this debt, the Company incurred an
early redemption fee of approximately $73,000 and also expensed the remaining
amount of unamortized debt premium of approximately $7,900.
Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs increased $27,000 and $15,000, respectively, for the three and
twelve months ended December 31, 1999 due primarily to an increase of capital
projects in the first quarter of fiscal 2000.
13
<PAGE> 14
Interest income increased $107,000 and $147,000, respectively, for the three and
twelve months ended December 31, 1999 due primarily to increased interest income
on temporary investments, particularly with respect to Bay Gas as a result of
its improved financial position. Also during the past year, the Company
implemented improved cash management procedures to maximize the use of available
funds.
Income tax expense decreased 102,000 (6%) and $589,000 (11%), respectively, for
the three and twelve months ended December 31, 1999, primarily in relation to
changes in income before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally relies on cash generated from operations and on a
temporary basis, short-term borrowings, to meet working capital requirements and
to finance normal capital expenditures. The Company issues debt and equity for
longer term financing as needed. Operating activities used cash of $1,581,000
for the three months ended December 31, 1999 compared to providing cash of
$1,742,000 for the prior year first quarter. The decrease in cash flow from
operating activities was due to a decrease in net income adjusted for non-cash
components such as depreciation, write-off of organization and start-up costs,
deferred taxes, and other components. Other impacts decreasing cash on a
comparative basis include timing differences between receipts and payments on
receivables and payables, reduced collection of gas costs from customers, and
increased inventory balances attributed to Year 2000 contingency planning.
Financing activities used cash of $14,498,000 and $13,006,000, respectively, for
the three months ended December 31, 1999 and 1998. The increase in cash used by
financing activities during the three months ended December 31, 1999 was
primarily due to increased payments on short-term borrowings. In September 1999,
the Company purchased short-term federal obligations for tax planning purposes.
These investments matured in October 1999 and the proceeds were used to repay
the related debt. The increased payments on short-term borrowings were partially
offset by a decrease in payments on long-term debt during the quarter ended
December 31, 1999 due to the early redemption in October 1998 of $2,500,000 of
10.25% First Mortgage Bonds.
Investing activities used cash of $1,845,000 and $1,698,000, respectively, for
the three months ended December 31, 1999 and 1998 primarily as a result of the
Company's regular construction program. The Company's capital needs relating to
its regular construction program, equipment purchases, and other general
improvements for the remainder of fiscal 2000 is estimated to be $9,750,000. Bay
Gas is planning to construct an additional salt-dome cavern for storing 3.5
billion cubic feet (Bcf) of natural gas with expanded injection and withdrawal
facilities. Bay Gas expects to spend $30 to $35 million on this project which
will take more than two years to complete. Funding will come from internal cash
generation and 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 of which $15,900,000
is available for borrowing at December 31, 1999. Management believes it has
adequate financial flexibility to meet its expected cash needs in the
foreseeable future.
14
<PAGE> 15
YEAR 2000
Prior to January 1, 2000, the Company devoted significant attention to
identifying, evaluating and testing the ability of its computerized information
systems to accurately process information that may be date sensitive. As of
February 11, 2000, the Company had not experienced any Year 2000 problems and is
not aware of any significant problems encountered by its customers, service
providers and vendors. Based on the preparation and analysis undertaken by the
Company before, during, and after December 31, 1999, the Company does not
anticipate that Year 2000 issues will have a material adverse effect on the
Company's business, financial condition or results of operations. Through
December 31, 1999, the Company had incurred approximately $204,000 for
remediation costs related to Year 2000 issues and does not expect to incur
significant costs in the future. The Company will continue to monitor Year 2000
related issues.
FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are subject to risks
and uncertainties that may cause actual future results to differ materially.
Such risks and uncertainties with respect to the Company include, but are not
limited to, its ability to successfully achieve internal performance goals,
competition, the effects of state and federal regulation, including rate relief
to recover increased capital and operating costs, general economic conditions,
and specific conditions in the Company's service area. Additional factors that
may impact forward-looking statements include the Company's dependence on
external suppliers, partners, operators, service providers, and governmental
agencies.
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, 1999 the Company had
approximately $58.6 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
2023. 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, 1999 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 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of EnergySouth, Inc. was held on
January 28, 2000.
(b) The following nominees were re-elected as Directors of the Company, to
serve until the 2003 Annual Meeting of Stockholders, by the votes
indicated:
<TABLE>
<CAPTION>
Nominee For Against
---------------------- --------- -------
<S> <C> <C>
John C. Hope, III 4,361,292 21,662
S. Felton Mitchell, Jr 4,358,970 23,984
Thomas B. VanAntwerp 4,362,064 20,890
</TABLE>
The following nominee was elected to a new director position, created by
the increase in the number of directors from eleven to twelve, to Serve
until the 2003 Annual Meeting of Stockholders, by the votes indicated:
<TABLE>
<CAPTION>
Nominee For Against
---------------------- --------- -------
<S> <C> <C>
Judy A. Marston 4,347,609 35,344
</TABLE>
The following nominee was elected to fill the vacancy created by the
resignation of Joseph G. Hollis, Jr. from the Board effective January 28,
2000 and to Serve until the 2002 Annual Meeting of Stockholders, by the
votes indicated:
<TABLE>
<CAPTION>
Nominee For Against
---------------------- --------- -------
<S> <C> <C>
Harris V. Morrissette 4,362,023 20,931
</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 S. Davis 2001
Walter L. Hovell 2001
G. Montgomery Mitchell 2001
F. B. Muhlfeld 2001
William J. Hearin 2002
Gaylord C. Lyon 2002
E. B. Peebles, Jr 2002
</TABLE>
16
<PAGE> 17
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 Registrant filed no
reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENERGYSOUTH, INC.
(Successor to Mobile Gas Service Corporation)
---------------------------------------------
(Registrant)
Date: February 14, 2000 /s/ John S. Davis
------------------------- -------------------------------------
John S. Davis
President and
Chief Executive Officer
Date: February 14, 2000 /s/ Charles P. Huffman
------------------------- ---------------------------------------
Charles P. Huffman
Vice President, Chief Financial
Officer, and Treasurer
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule (EDGAR version only)
</TABLE>
18
<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, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S FORM
10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 127,267
<OTHER-PROPERTY-AND-INVEST> 2,493
<TOTAL-CURRENT-ASSETS> 25,767
<TOTAL-DEFERRED-CHARGES> 1,281
<OTHER-ASSETS> 6,273
<TOTAL-ASSETS> 163,081
<COMMON> 49
<CAPITAL-SURPLUS-PAID-IN> 18,661
<RETAINED-EARNINGS> 47,086
<TOTAL-COMMON-STOCKHOLDERS-EQ> 65,796
0
0
<LONG-TERM-DEBT-NET> 55,836
<SHORT-TERM-NOTES> 4,130
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 2,746
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 34,573
<TOT-CAPITALIZATION-AND-LIAB> 163,081
<GROSS-OPERATING-REVENUE> 20,904
<INCOME-TAX-EXPENSE> 1,593
<OTHER-OPERATING-EXPENSES> 15,281
<TOTAL-OPERATING-EXPENSES> 16,874
<OPERATING-INCOME-LOSS> 4,030
<OTHER-INCOME-NET> (51)
<INCOME-BEFORE-INTEREST-EXPEN> 3,979
<TOTAL-INTEREST-EXPENSE> 1,283
<NET-INCOME> 2,696
0
<EARNINGS-AVAILABLE-FOR-COMM> 2,696
<COMMON-STOCK-DIVIDENDS> 1,152
<TOTAL-INTEREST-ON-BONDS> 4,378<F1>
<CASH-FLOW-OPERATIONS> (1,581)
<EPS-BASIC> .55
<EPS-DILUTED> .54
<FN>
<F1>Total interest on bonds represents annual interest expense to be incurred
during fiscal year 2000 on long-term debt outstanding under first mortgage
bonds and long-term secured notes.
</FN>
</TABLE>
