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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the fiscal year ended September 30, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the transition period from to
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Commission File
Number 0-29604
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EnergySouth, Inc.
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(Exact name of registrant as specified in its charter)
Alabama 58-2358943
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(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 offices) (Zip Code)
Registrant's telephone number, including area code (334) 450-4774
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock ($.01 par value)
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(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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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
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The aggregate market value of Common Stock, Par Value $.01 per share,
held by non-affiliates (based upon the average of the high and low prices as
reported by NASDAQ on December 19, 2000) was approximately $104,173,344.
As of December 19, 2000, there were 4,916,736 shares of Common Stock,
Par Value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders on January 26, 2001 are incorporated by reference into Part III.
<PAGE> 2
PART I
Item 1. Business.
GENERAL
EnergySouth, Inc. (together with its subsidiaries, the "Company" or
"Registrant", and exclusive of its subsidiaries, "EnergySouth") was initially
incorporated under the laws of the State of Alabama on September 5, 1997 for the
primary purpose of becoming the holding company for Mobile Gas Service
Corporation ("Mobile Gas"), a natural gas utility, and its subsidiaries.
Effective February 2, 1998, Mobile Gas and its subsidiaries were reorganized
(the "Reorganization") into a holding company structure whereby Mobile Gas
became a wholly-owned subsidiary of EnergySouth.
Mobile Gas was incorporated under the laws of the State of Alabama in
1933. Mobile Gas is engaged in the purchase, distribution, sale and
transportation of natural gas to over 100,000 residential, commercial and
industrial customers in Southwest Alabama, including the City of Mobile and
adjacent areas. Mobile Gas' service territory covers approximately 300 square
miles. Mobile Gas is also involved in merchandise sales, specifically sales of
natural gas appliances.
EnergySouth Services, Inc. ("Services") was incorporated in March 1983.
Through Services, the Company provides contract and consulting work for
utilities and industrial customers. Services owns a 51% interest in Southern Gas
Transmission Company ("SGT"), an Alabama general partnership which was formed in
November 1991. SGT was established to provide transportation services to the
facilities of Alabama River Pulp Company, Inc. During fiscal year 1992, SGT
constructed and began operating a 50-mile pipeline from the facilities of Koch
Gateway Pipeline Company ("Koch"), formerly United Gas Pipe Line Company, near
Flomaton, Alabama to the facilities of Alabama River Pulp Company, Inc. in
Claiborne, Alabama.
MGS Marketing Services, Inc. ("Marketing") was incorporated on March 5,
1993 to assist existing and potential customers in the purchase of natural gas.
In connection with the Reorganization, Services and Marketing became
wholly-owned subsidiaries of EnergySouth during fiscal year 1998.
MGS Storage Services, Inc. ("Storage") was incorporated on December 4,
1991 as a wholly-owned subsidiary of Mobile Gas. Effective December 19, 2000,
Storage became a wholly-owned subsidiary of EnergySouth. As of September 30,
2000 Storage held a general partnership interest of 87 1/2% in Bay Gas Storage
Company, Ltd. ("Bay Gas"), an Alabama limited partnership, and a 12 1/2% limited
partnership interest was held by Olin Corporation ("Olin"). As of the date
hereof, the Bay Gas general partner and limited partner ownership interests of
Storage and Olin are 90.9% and 9.1%, respectively. Bay Gas owns and operates an
underground gas storage cavern and related pipeline facilities which are used to
provide storage and delivery of natural gas for Mobile Gas and other customers.
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BUSINESS SEGMENTS
The Company's operations are classified into the following business
segments:
o Natural Gas Distribution - The Natural Gas Distribution segment is actively
engaged in the distribution and transportation of natural gas to
residential, commercial and industrial customers in Southwest Alabama
through Mobile Gas and SGT.
o Natural Gas Storage - The Natural Gas Storage segment provides for the
underground storage of natural gas and transportation services through the
operations of Bay Gas and Storage. The storage operations are located in
Southwest Alabama.
o Other - Includes marketing, merchandising, and other energy-related
services which are provided through Marketing, Mobile Gas, and Services,
respectively, and are aggregated with the corporate operations of
EnergySouth, the holding company.
For financial information by business segment, including revenues by
segment, for the fiscal years ended September 30, 2000, 1999, and 1998, please
see Note 9 to the Consolidated Financial Statements on pages F-19 and F-20.
CUSTOMERS
Of the approximately 100,000 customers of the Company, approximately
95% are residential customers. In the fiscal year ended September 30, 2000,
approximately 60% of the Company's gas revenues were derived from residential
sales, 14% from small commercial and industrial sales, 9% from large commercial
and industrial sales, 13% from transportation services, and 4% from storage and
miscellaneous services. Residential sales in 2000 accounted for approximately 6%
of the total volume of gas delivered to the Company's customers, with small
commercial and industrial, large commercial and industrial, and transportation
deliveries accounting for approximately 2%, 2% and 90%, respectively. The ten
largest customers of the Company accounted for approximately 14% of the
Company's gross margin in fiscal 2000, with the largest accounting for
approximately 2%. (Gross margin refers to Gas Revenue less Cost of Gas, as shown
on the Consolidated Statements of Income at page F-3.) For further information
with respect to revenues from and deliveries to the various categories of the
Company's customers, see Item 6, "Selected Financial Data".
EnergySouth is located at the crossroads of the expanding offshore
natural gas production areas of the central gulf coast and the developing
gas-fired electric generation markets in the lower southeast region of the
United States. Mobile Gas has contracted to provide transportation services to
two electric generating facilities currently under construction which are
expected to be fully operational in fiscal 2001. Bay Gas provides transportation
services to three gas-fired electric generating facilities, one of which is
currently being expanded. During 1999 Bay Gas entered into storage contracts
with electric utilities which fully subscribed the remaining space in its first
storage cavern. During 2000 Bay Gas entered into a long term contract with
Southern Company Services, Inc., as agent for a number of electric utility
subsidiaries of Southern Company, to provide salt-dome storage capacity of up to
3.2 million MMBtu of natural gas for those subsidiaries. Bay Gas is currently
developing a second underground storage cavern as discussed in "Gas Storage". In
addition to the developing local electric generation market for transportation
and storage services, industry projections indicate
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Florida utilities will add in excess of 10,000 megawatts of gas fueled power
generation in the next decade. Management believes that Bay Gas, with the
construction of additional caverns, is well positioned to serve the storage
needs of that market.
GAS SUPPLY
The Company is directly connected to four natural gas processing
plants in south Mobile County. Mobile Gas has contracted for a portion of its
firm supply directly with these producers. For the fiscal year ended September
30, 2000, the Company obtained approximately 76% of its gas supply from sources
located in the Mobile Bay area, with the balance being obtained from interstate
sources.
Mobile Gas has a current peak day firm requirement of 127,000 MMBtus.
Firm supply needs of 80,000 MMBtu/day are expected to be met through the
withdrawal of gas from the storage facility owned by Bay Gas. The Company also
has firm supply contracts with gas suppliers for peak day needs of 10,000
MMBtu/day until October 31, 2002, and 13,000 MMBtu/day until June 30, 2002,
through the direct connections with Mobil and Shell's processing plants.
Additionally, the Company has contracted for firm transportation and storage
service ("No-Notice Service") for 24,000 MMBtu/day from Koch under an agreement
effective through March 31, 2002.
GAS STORAGE
Construction of the current Bay Gas storage cavern and facilities was
completed in 1994. At September 30, 2000, the cavern had the capacity to hold up
to 3.2 million MMBtu of natural gas. Approximately 1.2 million MMBtu of the gas
injected into the storage cavern, called "base gas," remains in the cavern to
provide sufficient pressure to maintain cavern integrity, and the remainder,
approximately 2.0 million MMBtu, represents working storage capacity. Bay Gas
has pipeline interconnects with Florida Gas Transmission Company and Koch which
provide access to interstate markets.
In 1994 Mobile Gas entered into a gas storage agreement with Bay Gas
under which Bay Gas agreed to provide storage of approximately one-third of the
working storage capacity for an initial period of 20 years. Under the Mobile Gas
storage contract, injection and withdrawal capacity of 15,000 MMBtu/day and
80,000 MMBtu/day, respectively, is committed to Mobile Gas. At September 30,
2000, the storage facility's injection capacity ranged from 35,000 to 50,000
MMBtu/day, depending upon cavern pressure, and the withdrawal capacity was
260,000 MMBtu/day.
In order to provide storage services under the terms of the contract
with Southern Company Services, Inc., Bay Gas has begun development of a second
underground storage cavern. The second cavern is planned to be constructed in
two phases at a total cost of approximately $35 million. Phase I, which is
scheduled for completion by December 1, 2002, would more than double Bay Gas'
existing natural gas storage capacity and will provide sufficient working
capacity so that Bay Gas can begin providing storage services under its contract
with Southern Company Services, Inc. Phase II, which would expand the cavern
without interruption of storage operations to its planned ultimate working
storage capacity of 3.5 million MMBtu, is intended to be completed by fiscal
year 2004. In order to accommodate new transportation customers, Bay Gas is also
constructing two new pipelines to expand and/or
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extend its existing pipeline at a cost of approximately $20 million. One project
will add approximately 11 miles of 20-inch pipeline that will parallel the
northern half of the Bay Gas existing 20-inch main line. The second project will
add 18 miles of 24-inch pipeline to connect the current south end of Bay Gas'
existing line with Koch's interstate pipeline. See "Liquidity and Capital
Resources" in Item 7 below for a discussion of the financing of these projects.
COMPETITION
Gas Distribution Competition. The Company is not in significant direct
competition with respect to the retail distribution of natural gas to
residential, small commercial and small industrial customers within its service
area. Electricity competes with natural gas for such uses as cooking, water
heating and space heating.
The Company's large commercial and industrial customers with
requirements of 200 MMBtu per day or more have the right to contract with the
Company to transport customer-owned gas while other commercial and industrial
customers buy natural gas from the Company. Some industrial customers have the
capability to use either fuel oil, coal, wood chips or natural gas, and choose
their fuel depending upon a number of factors, including the availability and
price of such fuels. In recent years, the Company has had adequate supplies so
that interruptible industrial customers that are capable of using alternative
fuels have not had supplies curtailed. Even with the recent increase in natural
gas prices, as of September 30, 2000, the price of natural gas had remained at
levels such that, other than as described in "Operating Revenues" under Item 7
below, these industrial customers continued to use natural gas rather than other
fuels. The Company's rate tariffs include a competitive fuel clause which allows
the Company to adjust its rates to certain large commercial and industrial
customers in order to compete with alternative energy sources. However,
particularly in light of recent price increases, there can be no assurance that
the current competitive advantage of natural gas over alternative fuels will
continue. See "Rates and Regulation" below and "Operating Revenues" under Item 7
below.
Due to the close proximity of various pipelines and gas processing
plants to the Company's service area, there exists the possibility that current
or prospective customers could install their own facilities and connect directly
to a supply source and thereby "bypass" the Company's service. The Company
believes that because it has worked closely with major industrial customers to
meet those customers' needs, and because of its ability to provide competitive
pricing under its rate tariffs, none of the Company's customers have bypassed
its facilities to date. Although there can be no assurance as to future
developments, the Company intends to continue its efforts to reduce the
likelihood of bypass by offering competitive rates and services to such
customers.
Gas Storage Competition. A number of types of competitors may provide
services like or in competition with those of Bay Gas. These include, among
others, natural gas storage facilities, natural gas aggregators, and natural gas
pipelines. Bay Gas believes that its strategic geographic location and its
ability to charge market-based rates for interstate storage services will enable
it to effectively compete with such competitors.
See "Rates and Regulation."
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RATES AND REGULATION
The natural gas distribution operations of Mobile Gas are under the
jurisdiction of the Alabama Public Service Commission ("APSC"). The APSC
approves rates which are intended to permit the recovery of the cost of service
including a return on investment. Rates are determined by reference to rate
tariffs approved by the APSC in traditional rate proceedings or, for certain
large customers, on a case-by-case basis. In addition, pursuant to APSC order,
rates for a limited number of large industrial customers are determined on a
privately negotiated basis. Beginning December 1, 1995, Mobile Gas also is
allowed to recover costs associated with its replacement of cast iron mains.
This component of rates is adjusted annually through a filing with the APSC. The
rates for service rendered by Mobile Gas are on file with the APSC. The APSC
also approves the issuance of debt and equity securities and has supervision and
regulatory authority over service, equipment, accounting, and other matters.
Mobile Gas is also authorized by the APSC to apply a temperature rate
adjustment to customers' gas bills for the months of November through April. The
temperature rate adjustment helps to level out the effects of temperature
extremes on Company earnings by reducing high gas bills to customers in colder
than normal weather and increasing gas revenues received by the Company in
warmer than normal weather. The temperature rate adjustment has been reflected
in customers' gas bills during the months of November through April since
November 1, 1996.
The Mobile Gas tariffs include a purchased gas adjustment clause which
allows it to pass on to certain of its customers increases or decreases in gas
costs from those reflected in its tariff charges. Adjustments under such clauses
require periodic filings with the APSC but do not require a general rate
proceeding. Under the purchased gas adjustment clause, Mobile Gas has a
competitive fuel clause which gives it the right to adjust its rates to certain
large customers in order to compete with alternative energy sources. Any margin
lost as a result of competitive fuel clause adjustments is recoverable from its
other customers.
Gas deliveries to certain industrial customers are subject to
regulation by the APSC through contract approval. The operations of SGT, which
consist only of intrastate transportation of gas, are also regulated by the
APSC.
Bay Gas is a regulated utility governed under the jurisdiction of the
APSC. As a regulated utility, Bay Gas' intrastate storage contracts are subject
to APSC approval. Operation of the storage cavern and well-head equipment are
subject to regulation by the Oil and Gas Board of the State of Alabama. Bay Gas
is allowed by Federal Energy Regulatory Commission ("FERC") order to charge
market-based rates for interstate storage services. Market-based rates allow Bay
Gas to respond to market conditions and minimizes regulatory involvement in the
setting of its rates for storage services. 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 services.
Mobile Gas has been granted nonexclusive franchises to construct,
maintain and operate a natural gas distribution system in the areas in which it
operates. Except for the franchise granted by Mobile County, Alabama, which has
no stated expiration date, the
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franchises have various expiration dates, the earliest of which is in 2007. The
Company has no reason to believe that the franchises will not be renewed upon
expiration.
SEASONAL NATURE OF BUSINESS
The nature of the Company's business is highly seasonal and
temperature-sensitive. As a result, the Company's operating results in any given
period have historically reflected, in addition to other matters, the impact of
weather, with colder temperatures resulting in increased sales by the Company.
The substantial impact of this sensitivity to seasonal conditions has been
reflected in the Company's results of operations. As discussed above under
"Rates and Regulation" and below under "Management's Discussion and Analysis of
Results of Operations and Financial Condition" the application of a temperature
rate adjustment in customers' bills beginning in November 1996 has helped to
level out the effects of temperature extremes on results of operations.
Due to the seasonality of the Company's business, the generation of
working capital is impaired during the summer months because of reduced gas
sales. Cash needs during this period are met generally through short-term
financing arrangements or the reduction of temporary investments as is common in
the industry.
ENVIRONMENTAL ISSUES
The Company is subject to various federal, state and local laws and
regulations relating to the environment, which have not had a material effect on
the Company's financial position or results of operations.
Like many gas distribution companies, prior to the widespread
availability of natural gas, Mobile Gas manufactured gas for sale to its
customers. In contrast to some other companies which operated multiple
manufactured gas plants, Mobile Gas and its predecessor operated only one such
plant, which discontinued operations in 1933. The process for manufacturing gas
produced by-products and residuals, such as coal tar, and certain remnants of
these residuals are sometimes found at former gas manufacturing sites.
Mobile Gas conducted a preliminary assessment in 1994 of its former gas
plant site and has tested certain waters in the vicinity of the site. The
Company developed and has implemented a plan for the site based on the advice of
its environmental consultants, which involves securing and monitoring the site,
and continued testing. Based on the results of tests to date, the Company does
not believe that the site currently poses any threat to human health or the
environment. While no conclusion can be reached at this time as to whether any
further remedial action might ultimately be required, based on currently
available information, it is believed that any costs with respect to the site
are likely to be immaterial, and the Company has therefore established no
reserve for such costs in its financial statements. The Company intends that,
should further investigation or changes in environmental laws or regulations
require material expenditures for investigation, remediation, or clean-up with
regard to the site, it would apply to the APSC for appropriate rate recovery of
such costs. However, there can be no assurance that the APSC would approve the
recovery of such costs or the amount and timing of any such recovery.
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EMPLOYEES
Mobile Gas employed 285 full-time employees as of September 30, 2000.
Of these, approximately 39% are represented by the Oil, Chemical and Atomic
Workers International Union, Local No. 3-541. As of September 30, 2000 Bay Gas
employed six full-time employees. The Company believes that it enjoys generally
good labor relations.
Item 2. Properties.
The Company's physical properties consist of distribution, general,
transmission, and storage plant. The distribution plant is located in Mobile
County, Alabama and is used in the distribution of natural gas to the Company's
customers. The distribution plant consists primarily of mains, services, meters
and regulating equipment, all of which are adequate to serve the present
customers. The distribution plant is located on property which the Company is
entitled to use as a result of franchises granted by municipal corporations, or
on easements or rights-of-way.
The general plant consists of land, structures (with aggregate floor
space of approximately 118,000 square feet), office equipment, transportation
equipment and miscellaneous equipment, all located in Mobile County, Alabama.
The transmission plant consists of a pipeline of approximately 50 miles
and related surface equipment which is used in the transmission of natural gas
by SGT and is located primarily in Monroe County, Alabama. The transmission
plant is located on easements or rights-of-way.
The storage plant, consisting of an underground cavern for the storage
of natural gas and related pipeline and surface facilities, is located primarily
in Washington County, Alabama. The storage plant is constructed on a leasehold
estate with an initial term of 50 years, which will expire in 2040, and which
may be renewed at the Company's option for an additional term of 20 years.
As of December 20, 2000, substantially all of the utility property of
Mobile Gas was pledged as collateral for its long-term debt.
Item 3. Legal Proceedings.
The Company is involved in litigation arising in the normal course of
business. Management believes that the ultimate resolution of such litigation
will not have a material adverse effect on the consolidated financial statements
of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal year 2000.
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Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following list
is included as an unnumbered Item in Part I of this Report in lieu of being
included in the proxy statement to be filed with the Securities and Exchange
Commission.
Information relating to executive officers who are also directors is
included under the caption "Election of Directors" contained in the Company's
definitive proxy statement with respect to its 2001 Annual Meeting of
Stockholders and is incorporated herein by reference.
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The following is a list of names and ages of all of the executive
officers who are not also directors or nominees for election as directors of the
Registrant indicating all positions and offices with the Registrant held by each
such person and each such person's principal occupations or employment during
the past five years. All such persons have been elected for terms expiring in
January 2001. Officers are appointed by the Board of Directors of the Company.
<TABLE>
<CAPTION>
Business Experience
Name, Age, and Position During Past 5 Years
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<S> <C>
W. G. Coffeen, III, 54 Appointed in 1998
Vice President - Corporate Development
and Planning - EnergySouth, Inc.;
Vice President - Corporate Development and Appointed in 1998; Previously:
Planning - Mobile Gas; Director/Vice President - Vice President - Marketing, Mobile Gas Service
MGS Marketing Services, Inc.; Vice President - Corporation (1986 - 1998)
MGS Storage Services, Inc.
Charles P. Huffman, 47 Appointed in 1998
Vice President, Chief Financial Officer, and
Treasurer - EnergySouth, Inc.
Vice President, Chief Financial Officer,
Treasurer, and Assistant Secretary - Mobile Gas Appointed in January 1995; Previously:
Service Corporation; Vice President/Treasurer - Chief Financial Officer (1993-1994)
EnergySouth Services, Inc.; Director/Vice
President/Treasurer - MGS Storage Services,
Inc.; Director/Vice President/Treasurer - MGS
Marketing Services, Inc.
G. Edgar Downing, Jr., 44* Appointed in 1998
Vice President, Secretary and General Counsel -
EnergySouth, Inc.;
Secretary, General Counsel and Vice President Appointed in 1998; Previously: Vice President,
of Administration - Mobile Gas Service Secretary and General Counsel - Mobile Gas
Corporation; Director/Vice President/Secretary - Service Corporation (1994-1998)
EnergySouth Services, Inc.; Director/Vice
President/Secretary - MGS Storage Services,
Inc.; Vice President/ Secretary - MGS
Marketing Services, Inc.
</TABLE>
* Mr. Downing is the son-in-law of Gaylord C. Lyon, a Director of the Company.
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PART II
Item 5. Market for the Registrant's Common Stock Equity and Related
Stockholder Matters.
The Registrant's Common Stock, $.01 par value, is traded on the
NASDAQ-AMEX National Market under the symbol "ENSI". As of December 19, 2000
there were 1,455 holders of record of the Company's Common Stock. Information
regarding Common Stock dividends and the bid price range for Common Stock during
the periods indicated is as follows:
<TABLE>
<CAPTION>
Per Share
Dividends Declared Closing Price Range
--------------------- ---------------------------------------------
Fiscal Year
Quarter Ended 2000 1999 2000 1999
--------- --------- --------------------- ---------------------
High Low High Low
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
December 31 $ .235 $ .220 $ 25.000 $ 19.500 $ 23.625 $ 18.000
March 31 .235 .220 20.500 17.000 23.000 20.000
June 30 .250 .235 20.250 17.375 20.250 18.250
September 30 .250 .235 20.000 18.000 21.625 19.500
</TABLE>
Over-the-counter quotations reflect inter-dealer prices without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions.
While the Board of Directors intends to continue the practice of paying
dividends quarterly, amounts and dates of such dividends as may be declared will
be dependent upon the Registrant's future earnings, financial requirements, and
other factors.
The Registrant's long-term debt instruments contain certain debt to
equity ratio requirements and restrictions on the payment of cash dividends and
the purchase of shares of its capital stock. None of these requirements is
expected to have a significant impact on the Registrant's ability to pay
dividends in the future.
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Item 6. Selected Financial Data.
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Years Ended September 30, 2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
Gas Revenues $ 69,714 $ 63,889 $ 70,740 $ 69,622 $ 68,334
Merchandise Sales 2,913 2,827 2,920 2,678 2,674
Other 1,470 1,344 1,329 1,281 1,224
---------- ---------- ---------- ---------- ----------
Total Operating Revenues $ 74,097 $ 68,060 $ 74,989 $ 73,581 $ 72,232
---------- ---------- ---------- ---------- ----------
Income Before Cumulative Effect of Changes in
Accounting Principles $ 8,792 $ 8,624 $ 8,417 $ 8,126 $ 8,631
Cumulative Effect of Changes in Accounting Principles -- (349) -- -- --
---------- ---------- ---------- ---------- ----------
Net Income $ 8,792 $ 8,275 $ 8,417 $ 8,126 $ 8,631
---------- ---------- ---------- ---------- ----------
Cash Dividends Per Share of Common Stock(1) $ 0.97 $ 0.91 $ 0.84 $ 0.78 $ 0.74
Basic Earnings Per Share of Common Stock(1):
Income Before Cumulative Effect of Changes in
Accounting Principles(1) $ 1.79 $ 1.77 $ 1.73 $ 1.68 $ 1.79
Net Income(1) $ 1.79 $ 1.70 $ 1.73 $ 1.68 $ 1.79
Diluted Earnings Per Share of Common Stock(1):
Income Before Cumulative Effect of Changes in
Accounting Principles(1) $ 1.78 $ 1.75 $ 1.71 $ 1.66 $ 1.78
Net Income(1) $ 1.78 $ 1.68 $ 1.71 $ 1.66 $ 1.78
Weighted Average Common Shares Outstanding(1):
Basic(1) 4,904 4,884 4,865 4,844 4,826
Diluted(1) 4,944 4,933 4,926 4,881 4,838
Total Assets $ 167,380 $ 173,635 $ 166,541 $ 161,867 $ 150,779
Long-Term Debt Obligations $ 55,222 $ 58,017 $ 58,979 $ 63,580 $ 54,509
STATISTICAL
Gas Revenue (in thousands):
Sales:
Residential $ 41,750 $ 39,575 $ 44,725 $ 44,330 $ 43,929
Commercial and Industrial - Small 9,433 8,613 9,208 8,948 8,348
Commercial and Industrial - Large 6,316 5,242 6,784 7,638 7,914
Transportation 9,336 8,215 8,210 6,886 6,571
Storage (other than intercompany) 2,153 1,689 1,204 1,176 926
Other 726 555 609 644 646
---------- ---------- ---------- ---------- ----------
Total $ 69,714 $ 63,889 $ 70,740 $ 69,622 $ 68,334
---------- ---------- ---------- ---------- ----------
Delivery to Customers (in thousand therms):
Gas Sales:
Residential 43,014 39,866 51,493 48,099 59,403
Commercial and Industrial - Small 12,590 11,781 13,231 12,338 14,148
Commercial and Industrial - Large 12,860 11,683 15,169 16,975 23,252
Transportation 611,541 357,183 335,905 284,248 279,798
---------- ---------- ---------- ---------- ----------
Total 680,005 420,513 415,798 361,660 376,601
---------- ---------- ---------- ---------- ----------
Customers Billed (peak month):
Residential 95,131 95,022 95,443 95,446 95,338
Commercial and Industrial - Small 5,256 5,282 5,305 5,267 5,257
Commercial and Industrial - Large 95 92 97 101 105
Transportation 37 37 30 30 30
---------- ---------- ---------- ---------- ----------
Total 100,519 100,433 100,875 100,844 100,730
---------- ---------- ---------- ---------- ----------
Degree Days(2) 1,379 1,196 1,889 1,487 2,030
NUMBER OF EMPLOYEES (END OF PERIOD) 291 280 281 276 276
</TABLE>
Note: (1) All references to number of shares and per share amounts have been
restated to reflect the three-for-two conversion of Mobile Gas common
stock into EnergySouth, Inc. common stock effective February 2, 1998.
Note: (2) The number of degrees that the daily mean temperature falls below 65
degrees F. The Company's rates were designed assuming annual normal
degree days of 1,640 beginning December 1, 1995 and an annual normal
of 1,695 for prior periods.
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Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
THE COMPANY
EnergySouth, Inc. (EnergySouth) is a holding company for a family of
energy businesses. EnergySouth and its consolidated subsidiaries are
collectively referred to herein as "the Company." 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 EnergySouth 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 factors, 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 before the cumulative effect of changes in accounting
principles for the fiscal years ended September 30, 2000, 1999 and 1998 was
$8,792,000 ($1.78 per share), $8,624,000 ($1.75 per share) and $8,417,000 ($1.71
per share), respectively. Beginning October 1, 1998 the Company changed its
accounting methods for unbilled gas revenues to
12
<PAGE> 14
be consistent with prevailing industry practice and for start-up costs to comply
with new accounting standards. The cumulative effects of the respective
accounting changes on prior years are reported as separate components of net
income in 1999. These accounting changes are discussed in detail within Note 1
to the Consolidated Financial Statements. Assuming retroactive application of
such accounting changes, earnings per share amounts for fiscal 1999 and 1998
would have been $1.75 and $1.72, respectively. Increased revenues from natural
gas storage and transportation operations at Bay Gas produced the largest
positive impact on earnings in fiscal 2000. Increased utility margins (gas
revenues less cost of gas) and decreased interest expense also contributed to
the growth of 2000 earnings. Increased operations and maintenance expenses
partially offset the positive impacts to 2000 earnings.
The increase in pro forma earnings in 1999 compared to 1998 was due
primarily to increased revenues from Bay Gas, decreased operations expense and
decreased interest expense.
OPERATING REVENUES
Gas revenues increased $5,825,000 (9%) in 2000 compared to 1999. Gas
sales revenues from residential and small commercial customers, referred to as
temperature-sensitive customers since their gas usage is affected to a large
degree by temperatures during the heating season, increased $2,994,000 (6%) in
2000 due primarily to higher purchased gas costs passed through to customers and
increased volumes sold of 8% resulting primarily from temperatures as measured
by heating degree-days in Mobile Gas' service area that were 15% colder than
1999. Gas sales from large commercial and industrial customers increased
$1,076,000 (21%) in 2000 compared to 1999 due primarily to increased
pass-through of gas costs and increased volumes sold to industrial interruptible
customers. One such customer used significantly more gas during the last six
months of fiscal 2000 as a backup to its normal fuel supply. Several new
industrial customers also impacted the growth in industrial sales revenues in
2000.
Gas transportation revenues, excluding those of Bay Gas, increased
$351,000 (4%) in 2000 compared to 1999 resulting from increased gas volumes
transported to existing customers in addition to a new gas-powered co-generation
facility that began using natural gas for steam production and testing of
turbine generators during fiscal 2000. The facility is expected to be fully
operational in December 2000. Several industrial transportation customers have
the ability to use fuels other than natural gas and their fuel selection depends
on the economic and operational considerations of competing fuels. Natural gas
wholesale prices have increased recently to levels far exceeding their 10-year
average due to increased demand for natural gas due to a strong economy,
increased industrial usage, and increased use of natural gas to produce
electricity. Because of the wholesale price increases, which have been passed on
by Mobile Gas to its gas sales customers and are being incurred by
transportation customers in their commodity purchases, the Company expects a
limited decrease in gas consumption by one industrial customer with an
alternative fuel choice. Other factors expected to reduce gas transportation
volumes are the recent announcements by International Paper Company of its plan
to shut down its Mobile operations by the end of calendar year 2000 and the
announcement by Corus Group plc (Corus, formerly known as British Steel) that it
will shut down its Mobile plant for an indefinite period beginning late October
2000. Based on minimum payment provisions of the contract with Corus, the
Company does not expect a material
13
<PAGE> 15
financial statement impact resulting from the shut down of the Corus Mobile
plant. Offsetting the declines in transportation requirements of some customers
are additional demands from other customers. For example, Mobile Gas entered
into a contract in November 1999 to transport gas to a co-generation facility
being constructed in the Mobile area that is expected to be operational in early
2001. The Company does not expect the decreased gas consumption by some
industrial customers to have a material impact on the Consolidated Financial
Statements. Also, Management expects the impact of decreased transportation
volumes to be mitigated by the impact of increases in gas consumption by new
gas-fired electric generating facilities as discussed herein.
Bay Gas storage and transportation revenues increased $1,237,000 (73%)
in 2000 compared to 1999 primarily as a result of a full year of revenues from
providing gas storage services for Southern Company's new gas-fired electric
generation facilities along the Gulf Coast. Bay Gas began transporting gas to
one such facility, Alabama Power's Plant Barry, beginning June 2000 under a
long-term transportation contract. Alabama Power is currently constructing two
additional gas-powered generating units at Plant Barry, expected to be in
service in the summer of 2001, to which Bay Gas has contracted to transport gas.
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. The Company
expects this trend to continue since all new electric generation facilities
reported to be planned for the Southeast are to be natural gas-fired. In August
2000, Bay Gas entered into a long-term natural gas storage contract with
Southern Company Services, Inc., an affiliate of Southern Company, as agent for
certain Southern Company subsidiaries. The new storage capacity in excess of
Southern Company's current contract capacity will be provided primarily from Bay
Gas' second underground storage cavern that is in the initial stages of
construction. In addition, Bay Gas plans to construct two new pipelines to
expand and/or extend its existing pipeline. A new 11-mile pipeline expansion,
which will parallel the northern part of the existing 22-mile Bay Gas pipeline,
will be constructed to ensure deliverability to the current level of
transportation business. Also, in October 2000, Bay Gas entered into a long-term
transportation agreement with Koch Gateway Pipeline Company, Inc. to provide
firm transportation service through a new 18-mile extension of the existing Bay
Gas system. A more detailed discussion of these construction projects is
included under "Liquidity and Capital Resources" below.
Gas revenues decreased $6,851,000 (10%) in 1999 compared to 1998.
Included within gas revenues for 1999 was the effect of accruing for unbilled
gas revenues at month-end while no such accrual was included within 1998 since
this new accounting method was adopted in the first quarter of fiscal 1999. The
effect on gas revenues of the accounting change assuming retroactive application
would not have been materially different from amounts presented within the
Consolidated Financial Statements. Gas sales revenues to residential and
commercial customers decreased $5,743,000 (11%) in 1999 compared to 1998 due
primarily to decreased gas sales volumes of 18% resulting from weather in Mobile
Gas' service area that was 37% warmer than in the prior year and due to lower
purchased gas costs passed through to customers. Large commercial and industrial
gas sales revenues decreased $1,544,000 (23%) in 1999 compared to 1998 due
primarily to warmer weather, reduced rates related to the pass-through of gas
costs, and several customers changing from sales to transportation agreements.
Gas transportation revenues, excluding Bay Gas, remained flat in 1999 compared
to 1998. Revenues from natural gas storage and transportation operations at Bay
14
<PAGE> 16
Gas increased $480,000 in 1999 compared to 1998 due primarily to transporting
gas to a new co-generation facility at Olin Corporation's plant in McIntosh and
to storing gas for Southern Company, both services having begun in fiscal 1999.
Gross margins on gas revenues, defined as gas revenues less related
cost of gas, increased $2,013,000 (4%) in 2000 compared to 1999. Increased gas
margins were due primarily to increases in Bay Gas revenues, gas sales to
industrial interruptible customers and large industrial transportation revenues
as discussed previously. Margins from temperature-sensitive customers were up
slightly in 2000 due primarily to an increase in these customers' usage per
heating degree-day. The Company uses its temperature adjustment rider to adjust
margins on gas sales to residential and small commercial customers during the
months of November through April when temperatures vary from normal.
Temperatures during fiscal 2000 and 1999 were 16% and 27%, respectively, warmer
than normal resulting in a recovery of margins from customers subject to the
temperature adjustment rider.
Despite the temperature adjustment rider, margins from residential and
commercial customers in 1999 were slightly lower than 1998 thus contributing to
total gross margins in 1999 compared to 1998 being lower by $138,000 or less
than 1%. Decreased gas sales to large commercial and industrial customers was
the primary factor in reduced margins in 1999. Partially offsetting the above
impacts on 1999 margins was an increase in Bay Gas revenues.
Merchandise sales revenues increased $86,000 (3%) in 2000 compared to
1999 due primarily to increased sales of natural gas generators, while
merchandise sales revenues decreased $93,000 (3%) in 1999 compared to 1998 due
to lower sales volume.
Other operating revenues is comprised primarily of interest income from
the financing of merchandise sales and installations that occur at the Company
and through trade programs. Also included within other operating revenues are
revenues from appliance service work, engineering consulting, operations
training, pipeline corrosion protection services and gas marketing services.
Other operating revenues increased $126,000 (9%) in 2000 compared to 1999 due
primarily to revenues generated by a recently created division within
EnergySouth Services, Inc. that performs pipeline corrosion protection services.
Interest income from merchandise financing programs also increased in 2000.
Other operating revenues increased slightly in 1999 due primarily to increased
gas marketing revenues.
OPERATING EXPENSES
Cost of gas increased $3,812,000 (24%) in 2000 compared to 1999 due to
an 8% increase in gas sales volumes and to increased pass-through of gas costs
resulting from higher purchased gas prices. The Company passes the actual cost
of gas on to customers under the purchased gas adjustment provision of rate
tariffs. Because cost of gas is recovered from the Company's customers,
fluctuations in the cost of gas generally have no effect on gas margins. Cost of
gas decreased $6,713,000 (29%) in 1999 compared to 1998 due to decreased sales
volumes of 19% and decreased pass-through of gas costs resulting from lower
purchased gas prices.
Cost of merchandise in 2000 and 1999 changed in proportion to the
change in merchandise sales revenues.
15
<PAGE> 17
Operations and maintenance expenses increased $1,389,000 (7%) in 2000
compared to 1999 primarily due to increases in: Bay Gas operations and
maintenance expenses, sales related expenses, expense related to providing
future health benefits to employees on long-term disability, employee health and
life insurance costs, planned utility maintenance, and operating costs impacted
by inflation. Operations and maintenance expenses decreased $75,000 (0.4%) in
1999 compared to 1998 primarily due to decreased advertising and sales promotion
expenses and a lower provision for uncollectible gas receivables.
Increases in depreciation expense in 2000 and 1999 were due 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. The change in other taxes for 2000 and 1999 is due
primarily to fluctuations in business license taxes associated with gas
revenues.
OTHER INCOME AND EXPENSES
Interest expense decreased $171,000 (3%) in 2000 compared to 1999 due
primarily to a reduction in long-term debt. Also, the Company redeemed early
$2,500,000 of 10.25% First Mortgage Bonds in October 1998, and in doing so,
related debt issuance costs, which were previously being amortized over the debt
repayment period, were written off. Interest expense decreased $319,000 (6%) in
1999 compared to 1998 primarily as a result of decreased long-term debt caused
partly by the early redemption of First Mortgage Bonds.
Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs increased $131,000 in 2000 compared to 1999 due primarily to an
increase in ongoing capital projects during fiscal 2000. In 1999, capitalized
interest costs decreased slightly compared to 1998 due to lower short-term
interest rates applied in the computations of capitalized interest.
Interest income increased $124,000 (39%) in 2000 compared to 1999 due
primarily to increased interest income on temporary investments, most of which
is attributable to Bay Gas as a result of its improved financial position.
Interest income decreased $4,000 in 1999 compared to 1998. Interest income of
$73,000 on income tax refunds was recorded in 1998 while there was no such
miscellaneous interest income in 1999. Increased interest income on temporary
investments in 1999 compared to 1998 resulting from improved Bay Gas results and
the implementation of improved cash management procedures partially offset the
decrease resulting from the impact of the tax refunds received in 1998.
Minority interest reflects the minority partners' share of pre-tax
earnings of the Bay Gas and Southern Gas Transmission Company partnerships, in
which EnergySouth, Inc. subsidiaries hold controlling interests. Minority
interest increased $257,000 in 2000 compared to 1999 due to increased pre-tax
earnings in 2000 for both partnerships.
Income tax expense fluctuates with the changes in income before taxes.
The Company's effective tax rate in 2000, 1999 and 1998 was 37.5%, 36.7% and
37.1%,
16
<PAGE> 18
respectively. The components of income tax expense are reflected in Note 4 to
the Consolidated Financial Statements.
EFFECTS OF INFLATION
Inflation impacts the prices the Company must pay for labor and other
goods and services required for operation, maintenance and capital improvements.
Changes in purchased gas costs are passed through to customers in accordance
with the purchased gas adjustment provision of the Company's rate schedules.
Increases in other utility costs must be recovered through timely filings for
rate relief.
GAS SUPPLY
A primary goal of the Company is to provide gas at the lowest possible
cost while maintaining a reliable long-term supply. To accomplish this goal the
Company has diversified its gas supply by constructing and purchasing pipelines
to access the vast gas reserves in its area, both offshore and onshore. The
Company has also contracted with certain of these sources for firm supply.
Future minimum payments under third-party contracts for firm gas supply, which
expire at various dates through the year 2003, are as follows: 2001 -
$1,287,000; 2002 - $917,000; and 2003 - $3,000. A portion of firm supply
requirements is met through the withdrawal of gas from the storage facility
owned by Bay Gas. Mobile Gas has a gas storage agreement with Bay Gas to receive
storage services for an initial period of 20 years, which began in September
1994 with the commencement of commercial operations of the storage facility. The
Company's purchased gas adjustment provision in rate schedules filed with the
APSC allows the recovery of demand and commodity costs of purchased gas from
customers. Should the Company's customer base decline due to deregulation or
other reasons, resulting in costs related to firm gas supply in excess of
requirements, the Company believes it would be able to take one or more of the
following actions: as part of the regulatory decision allowing other suppliers
to serve current customers, secure the right to allocate firm gas supply costs
to the new company supplying gas; reduce some excess gas supply costs through a
negotiated settlement with suppliers; and/or pass-through excess gas supply
costs to existing customers through the purchased gas component of customers'
rates.
ENVIRONMENTAL
The Company is subject to various federal, state and local laws and
regulations relating to the environment, which have not had a material effect on
the Company's financial position or results of operations. See Note 8 to the
Consolidated Financial Statements for a discussion of certain environmental
issues.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally relies on cash generated from operations and on a
temporary basis, short-term borrowings, to meet working capital requirements and
to finance normal capital expenditures. The Company issues debt and equity for
longer term financing as needed. Cash provided by operating activities was $13.6
million, $18.5 million and $14.6 million in 2000, 1999 and 1998, respectively.
The decrease in cash flow from operating activities in 2000 was due to changes
in operating assets and liabilities which generally
17
<PAGE> 19
reflects the timing differences between years of cash receipts on trade
receivables. The increase in cash provided by operating activities in 1999
compared to 1998 was due to an increase in net income, adjusted for non-cash
components and the changes in operating assets and liabilities.
Financing activities used cash of $16.2 million, $4.1 million and $4.7
million in 2000, 1999 and 1998, respectively. In October 1998, the Company
redeemed early $2,500,000 of 10.25% First Mortgage Bonds. As of September 30,
2000, 1999 and 1998, the Company had borrowings on its revolving credit
agreement of $6.3 million, $17.2 million and $12.7 million, respectively. Of
these amounts, $15.9 million and $12.7 million for 1999 and 1998, respectively,
was related to the purchase of short-term federal obligations for shares tax
planning purposes. These investments matured in early October of each year and
the proceeds were used to repay the corresponding short-term debt. Because of
recent changes in the applicable tax code, no such purchases were made in 2000.
Cash used in investing activities reflects the capital-intensive nature
of the Company's business. During 2000, 1999, and 1998, the Company used cash
for construction of distribution and storage facilities, purchases of equipment
and other general improvements of $11.6 million, $10.0 million and $7.6 million,
respectively.
The Company expects fiscal 2001 capital expenditures by Mobile Gas to
be approximately $13.9 million. These expenditures will be for normal
construction activity, expansion of its distribution system into higher growth
areas, pipeline and related equipment to serve a new gas-fired electric
generation facility, equipment purchases and other general improvements.
Bay Gas has entered into a contract to provide storage services to
Southern Company Services, Inc. as agent for certain Southern Company
subsidiaries. In order to provide the storage service under the terms of the
contract, Bay Gas is constructing a second salt dome cavern and installing
related equipment. Phase I of the development, which is expected to be completed
by December 2002, will provide sufficient working storage capacity so that Bay
Gas can begin providing storage services under the contract noted above. Further
expansion of the cavern in Phase II will provide additional working storage
capacity and is intended to be accomplished by fiscal year 2004 without
interruption of storage operations. Bay Gas expects fiscal 2001 costs relating
to the additional cavern and related equipment to be approximately $9.8 million.
The total cost of both phases of cavern construction will be approximately $35
million, including capitalized interest. In order to accommodate new
transportation customers, Bay Gas will also construct two new pipelines to
expand and/or extend its existing pipeline. Both pipelines are expected to be
completed by June 2001 and will cost a total of approximately $20 million,
including capitalized interest. The expansion of the storage facilities and the
construction of the new pipelines will be funded through the issuance of
long-term debt and from cash generated by Bay Gas' operations. In conjunction
with the expansion, Bay Gas expects to complete the sale of $55,000,000 of 8.45%
senior secured notes, to be guaranteed by EnergySouth, in December 2000. The
proceeds from the sale of the notes will be used toward the construction of the
new cavern, pipelines and related equipment; to refinance $18,670,000 of
existing debt incurred to construct the first salt dome cavern; to repay a
$2,650,000 note to Mobile Gas for the financing of base gas in the existing
storage cavern; and to pay a make-whole premium of approximately $2,000,000
18
<PAGE> 20
related to the refinancing of the existing debt, which will be expensed as debt
extinguishment costs.
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. At September 30, 2000 the Company had $13,670,000 available for
borrowing on its revolving credit agreement. Management believes it has adequate
financial flexibility to meet its expected cash needs in the foreseeable future.
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. Such forward-looking statements are
made as of the date of this report and involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of EnergySouth or its affiliates, or industry
results, to differ materially from any future results, performance or
achievement expressed or implied by such forward-looking statements. Such risks,
uncertainties and other important factors include, among others, risks
associated with fluctuations in natural gas prices, including changes in the
historical seasonal variances in natural gas prices; the prices of alternate
fuels; the relative pricing of natural gas versus other energy sources; the
availability of other natural gas storage capacity; failures or delays in
completing the planned cavity development project; disruption or interruption of
pipelines serving the Bay Gas storage facilities due to accidents or other
events; risks generally associated with the transportation and storage of highly
volatile natural gas; the possibility that contracts with storage customers
could be terminated under certain circumstances, or not renewed or extended upon
expiration; the prices or terms of any extended or new contracts; possible loss
or material change in the financial condition of one or more major customers;
liability for remedial actions under environmental regulations; liability
resulting from litigation; national and global economic and political
conditions; and changes in tax and other laws applicable to the business.
Additional factors that may impact forward-looking statements include, but are
not limited to, the Company's 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, specific conditions in the Company's service area, and the
Company's dependence on external suppliers, contractors, partners, operators,
service providers, and governmental agencies.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not have any derivative financial instruments such as
futures, forwards, swaps and options, or any other derivatives as defined by
Statement of Financial Accounting Standards No 133 "Accounting for Derivative
Instruments and Hedging Activities." Also, the Company has no market
risk-sensitive instruments held for trading purposes. At September 30, 2000 the
Company had approximately $58.0 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" under Item 7 above
for a discussion of the Company's risks related to regulation, weather, gas
supply, and the capital-intensive nature of the Company's business.
19
<PAGE> 21
Item 8. Financial Statements and Supplementary Data.
The financial statements and financial statement schedules and the
Independent Auditors' Report thereon filed as part of this report are listed in
the "EnergySouth, Inc. and Subsidiaries Index to Financial Statements and
Schedules" at Page F-1, which follows Part IV hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There has been no change in the Company's outside auditors as to which
disagreements on accounting and financial disclosure would be required to be
disclosed.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information under the captions "Election of Directors" and "Information
Regarding the Board of Directors" contained in the Company's definitive proxy
statement with respect to its 2001 Annual Meeting of Stockholders is
incorporated herein by reference.
For information with respect to executive officers of the Registrant,
see "Executive Officers of the Registrant" at the end of Part I of this Report.
Information under the caption "Reports Under Section 16 of the
Securities and Exchange Act" contained in the Company's definitive proxy
statement with respect to its 2001 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 11. Executive Compensation.
Information under the caption "Executive Compensation" contained in the
Company's definitive proxy statement with respect to its 2001 Annual Meeting of
Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information under the caption "Security Ownership of Certain Beneficial
Owners and Management" contained in the Company's definitive proxy statement
with respect to its 2001 Annual Meeting of Stockholders is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions.
There were no transactions required to be disclosed pursuant to this
item.
20
<PAGE> 22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a), (d) Financial Statements and Financial Statement Schedules
See "EnergySouth, Inc. and Subsidiaries Index to Financial
Statements and Schedules" at page F-1, which follows
Part IV hereof.
(3) Exhibits - See Exhibit Index on pages E-1 through E-5.
(b) No reports on Form 8-K were filed during the last quarter of
the fiscal year ended September 30, 2000.
(c) Exhibits filed with this report are attached hereto.
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<PAGE> 23
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ENERGYSOUTH, INC.
-------------------------------------
Registrant
December 29, 2000 By: /s/ Charles P. Huffman
-------------------------------------
Charles P. Huffman, Vice President,
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William J. Hearin Director, Chairman December 29, 2000
------------------------------------------
William J. Hearin
/s/ Walter L. Hovell Director, Vice-Chairman December 29, 2000
------------------------------------------
Walter L. Hovell
Director, President and
Chief Executive Officer
/s/ John S. Davis (Principal Executive Officer) December 29, 2000
------------------------------------------
John S. Davis
Vice President, Chief Financial
Officer and Treasurer (Principal
/s/ Charles P. Huffman Financial and Accounting Officer) December 29, 2000
------------------------------------------
Charles P. Huffman
/s/ John C. Hope Director December 29, 2000
------------------------------------------
John C. Hope
</TABLE>
<PAGE> 24
Signatures (Continued)
<TABLE>
<S> <C> <C>
/s/ Gaylord C. Lyon Director December 29, 2000
------------------------------------------
Gaylord C. Lyon
/s/ Judy A. Marston Director December 29, 2000
------------------------------------------
Judy A. Marston
/s/ S. Felton Mitchell, Jr. Director December 29, 2000
------------------------------------------
S. Felton Mitchell, Jr.
/s/ G. Montgomery Mitchell Director December 29, 2000
------------------------------------------
G. Montgomery Mitchell
/s/ Harris V. Morrissette Director December 29, 2000
------------------------------------------
Harris V. Morrissette
/s/ F. B. Muhlfeld Director December 29, 2000
------------------------------------------
F. B. Muhlfeld
/s/ E. B. Peebles, Jr. Director December 29, 2000
------------------------------------------
E. B. Peebles, Jr.
/s/ Thomas B. Van Antwerp Director December 29, 2000
------------------------------------------
Thomas B. Van Antwerp
</TABLE>
<PAGE> 25
ENERGYSOUTH, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
Independent Auditors' Report F-2
Consolidated Statements of Income for the years ended
September 30, 2000, 1999 and 1998 F-3
Consolidated Balance Sheets, September 30, 2000 and 1999 F-4
Consolidated Statements of Common Stockholders' Equity
for the years ended September 30, 2000, 1999 and 1998 F-6
Consolidated Statements of Cash Flows for the years ended
September 30, 2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-8
Financial Statement Schedules
II Valuation and Qualifying Accounts and Reserves, Years
Ended September 30, 2000, 1999 and 1998 S-1
</TABLE>
Schedules other than that referred to above are omitted and are not applicable
or not required.
F-1
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
EnergySouth, Inc.
Mobile, Alabama
We have audited the accompanying consolidated balance sheets of
EnergySouth, Inc. and its subsidiaries (the "Company") as of September 30, 2000
and 1999, and the related consolidated statements of income, common
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 2000. Our audits also included the financial statement
schedule listed in the Index referred to in Item 14. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company at September 30,
2000 and 1999, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the financial statements, the Company changed
its method of accounting for unbilled revenue and organizational costs effective
October 1, 1998.
/s/ Deloitte & Touche LLP
--------------------------
Deloitte & Touche LLP
Atlanta, Georgia
November 2, 2000
(December 20, 2000 as to Note 10)
F-2
<PAGE> 27
CONSOLIDATED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended September 30, (in thousands, except per share data) 2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Operating Revenues
Gas Revenues $ 69,714 $ 63,889 $ 70,740
Merchandise Sales 2,913 2,827 2,920
Other 1,470 1,344 1,329
-------- -------- --------
Total Operating Revenues 74,097 68,060 74,989
-------- -------- --------
Operating Expenses
Cost of Gas 19,995 16,183 22,896
Cost of Merchandise 2,273 2,231 2,255
Operations and Maintenance 20,218 18,829 18,904
Depreciation 6,735 6,467 6,278
Taxes, Other Than Income Taxes 5,622 5,362 5,592
-------- -------- --------
Total Operating Expenses 54,843 49,072 55,925
-------- -------- --------
Operating Income 19,254 18,988 19,064
-------- -------- --------
Other Income and (Expense)
Interest Expense (5,043) (5,214) (5,533)
Allowance for Borrowed Funds Used During Construction 180 49 60
Interest Income 439 315 319
Minority Interest (768) (511) (526)
-------- -------- --------
Total Other Income (Expense) (5,192) (5,361) (5,680)
-------- -------- --------
Income Before Income Taxes 14,062 13,627 13,384
Income Taxes (Note 4) 5,270 5,003 4,967
-------- -------- --------
Income Before Cumulative Effect of Changes in Accounting Principles 8,792 8,624 8,417
Cumulative Effect on Prior Years of Change in Accounting Principles
(Net of Income Tax Benefit of $198)(Note 1) -- (349) --
-------- -------- --------
Net Income $ 8,792 $ 8,275 $ 8,417
======== ======== ========
Basic Earnings Per Share:
Income Before Cumulative Effect of Changes in Accounting Principles $ 1.79 $ 1.77 $ 1.73
Cumulative Effect of Accounting Changes -- (0.07) --
-------- -------- --------
Net Income $ 1.79 $ 1.70 $ 1.73
======== ======== ========
Diluted Earnings Per Share:
Income Before Cumulative Effect of Changes in Accounting Principles $ 1.78 $ 1.75 $ 1.71
Cumulative Effect of Accounting Changes -- (0.07) --
-------- -------- --------
Net Income $ 1.78 $ 1.68 $ 1.71
======== ======== ========
Pro Forma Amounts Assuming Retroactive Application
of Accounting Changes:
Net Income $ 8,624 $ 8,454
======== ========
Basic Earnings Per Share $ 1.77 $ 1.74
======== ========
Diluted Earnings Per Share $ 1.75 $ 1.72
======== ========
Average Common Shares Outstanding
Basic 4,904 4,884 4,865
Diluted 4,944 4,933 4,926
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-3
<PAGE> 28
CONSOLIDATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, (in thousands) 2000 1999
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 8,691 $ 22,875
Receivables
Gas 6,168 4,099
Unbilled Revenue (Note 1) 989 886
Merchandise 2,992 2,921
Other 767 609
Allowance for Doubtful Accounts (749) (652)
Materials, Supplies, and Merchandise (At Average Cost) 2,117 1,352
Gas Stored Underground For Current Use (At Average Cost) 1,870 1,180
Deferred Income Taxes 1,037 1,129
Prepayments 1,376 1,403
--------- ---------
Total Current Assets 25,258 35,802
--------- ---------
PROPERTY, PLANT, AND EQUIPMENT (NOTE 2) 185,846 175,768
Less: Accumulated Depreciation and Amortization 54,811 49,855
--------- ---------
Property, Plant, and Equipment - Net 131,035 125,913
Construction Work in Progress 3,316 3,763
--------- ---------
Total Property, Plant, and Equipment 134,351 129,676
--------- ---------
OTHER ASSETS
Regulatory Assets (Note 4) 460 738
Deferred Charges 792 530
Prepayments 962 1,219
Merchandise Receivables Due After One Year 5,557 5,670
--------- ---------
Total Other Assets 7,771 8,157
--------- ---------
TOTAL $ 167,380 $ 173,635
========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-4
<PAGE> 29
LIABILITIES AND CAPITALIZATION
<TABLE>
<CAPTION>
September 30, (in thousands, except share data) 2000 1999
-------- --------
<S> <C> <C>
CURRENT LIABILITIES
Current Maturities of Long-Term Debt (Note 3) $ 2,795 $ 962
Notes Payable 6,330 17,177
Accounts Payable 5,679 4,349
Dividends Declared 1,228 1,150
Customer Deposits 1,449 1,428
Taxes Accrued 3,546 3,182
Interest Accrued 1,551 1,612
Deferred Purchased Gas Adjustment 2 754
Other 1,128 1,723
-------- --------
Total Current Liabilities 23,708 32,337
-------- --------
OTHER LIABILITIES
Accrued Pension Cost (Note 6) 769 1,189
Accrued Postretirement Benefit Cost (Note 6) 932 1,112
Deferred Income Taxes 12,378 11,705
Deferred Investment Tax Credits 366 392
Other 1,485 1,147
-------- --------
Total Other Liabilities 15,930 15,545
-------- --------
Total Liabilities 39,638 47,882
-------- --------
Commitments and Contingencies (Note 7) -- --
-------- --------
CAPITALIZATION
Stockholders' Equity (Note 5)
Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares; Outstanding
2000 - 4,912,000; 1999 - 4,894,000 Shares) 49 49
Capital in Excess of Par Value 18,919 18,563
Retained Earnings 49,576 45,542
-------- --------
Total Stockholders' Equity 68,544 64,154
Minority Interest 3,976 3,582
Long-Term Debt (Less Current Maturities) (Note 3) 55,222 58,017
-------- --------
Total Capitalization 127,742 125,753
-------- --------
Total $167,380 $173,635
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-5
<PAGE> 30
CONSOLIDATED
STATEMENTS OF
COMMON STOCKHOLDERS'
EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------- Capital in
Number of Par Excess of Retained
(In thousands, except per share data) Shares Value Par Value Earnings
--------- ------- ---------- --------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1997 4,854 $ 49 $17,746 $37,382
Net Income 8,417
Dividend Reinvestment Plan 16 369
Cash Paid in Lieu of Fractional Shares
for Stock Conversion (6)
Exercise of Stock Options 2 26
Cash Dividends Common Stock - $.84 per share (4,088)
------- ------- ------- -------
BALANCE AT SEPTEMBER 30, 1998 4,872 49 18,135 41,711
Net Income 8,275
Dividend Reinvestment Plan 19 386
Exercise of Stock Options 3 42
Cash Dividends Common Stock - $.91 per share (4,444)
------- ------- ------- -------
BALANCE AT SEPTEMBER 30, 1999 4,894 49 18,563 45,542
Net Income 8,792
Dividend Reinvestment Plan 18 356
Cash Dividends Common Stock - $.97 per share (4,758)
------- ------- ------- -------
BALANCE AT SEPTEMBER 30, 2000 4,912 $ 49 $18,919 $49,576
======= ======= ======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-6
<PAGE> 31
CONSOLIDATED
STATEMENTS OF
CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30, (in thousands) 2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 8,792 $ 8,275 $ 8,417
Depreciation and Amortization 7,079 6,795 6,596
Organization and Start-Up Costs Written Off -- 1,003 --
Provision for Losses on Accounts Receivable 431 396 534
Provision for Deferred Income Taxes 1,042 1,129 745
Provision for Deferred Gas Cost -- 176 55
Minority Interest 395 206 391
Changes in Operating Assets and Liabilities (4,126) 510 (2,177)
-------- -------- --------
Net Cash Provided by Operating Activities 13,613 18,490 14,561
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (11,586) (10,026) (7,642)
-------- -------- --------
Net Cash Used In Investing Activities (11,586) (10,026) (7,642)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Long-Term Debt (962) (4,600) (2,930)
Changes in Short-Term Borrowings (10,847) 4,512 1,965
Payment of Dividends, Net of Dividend Reinvestment (4,402) (4,016) (3,699)
-------- -------- --------
Net Cash Used by Financing Activities (16,211) (4,104) (4,664)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (14,184) 4,360 2,255
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,875 18,515 16,260
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,691 $ 22,875 $ 18,515
======== ======== ========
CASH PAID DURING THE YEAR FOR:
Interest $ 5,029 $ 5,216 $ 5,558
-------- -------- --------
Income Taxes $ 3,681 $ 4,153 $ 3,886
-------- -------- --------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-7
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of EnergySouth, Inc. (EnergySouth) and its
subsidiaries (collectively, the Company) include the accounts of Mobile Gas
Service Corporation (Mobile Gas); EnergySouth Services, Inc. (Services); MGS
Storage Services, Inc. (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). Minority interest
represents the respective other owner's proportionate shares of the income and
equity of Bay Gas and SGT. All significant intercompany balances and
transactions have been eliminated. All references to number of shares, per share
amounts, stock option data and market prices presented throughout the financial
statements have been restated to reflect the three-for-two conversion of Mobile
Gas common stock into EnergySouth common stock, effective February 2, 1998.
DESCRIPTION OF BUSINESS
The Company is principally engaged in the distribution and storage of natural
gas. Through Mobile Gas and SGT, the Company is engaged primarily in the
distribution and transportation of natural gas to residential, commercial and
industrial customers in Southwest Alabama. The Alabama Public Service Commission
(APSC) regulates the Company's gas distribution operations. For the major
portion of the Company's business, the APSC approves rates which are intended to
permit the recovery of the cost of service including a return on investment. Gas
deliveries to certain industrial customers are subject to regulation by the APSC
through contract approval.
Through Storage and Bay Gas, the Company provides for the underground storage of
natural gas and transportation services. The APSC regulates intrastate storage
operations through contract approval. 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. 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 services.
The Company also provides natural gas marketing, merchandising, and other
energy-related services through Marketing, Mobile Gas, and Services.
F-8
<PAGE> 33
REVENUES AND GAS COSTS
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 billed at month-end was deferred and classified as Deferred Gas Costs
within the Company's Balance Sheet. 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 fiscal
year ended September 30, 1999 was to increase net income by $268,000, or $.055
per share of which $235,000, or $.05 per share, the cumulative effect of the
change as of October 1, 1998, has been reclassified and reported as a separate
component of net income.
Increases or decreases in the cost of gas and certain other costs are passed
through to customers in accordance with provisions in the Company's rate
schedules. Any over or under recoveries of these costs are charged or credited
to cost of gas and included in current assets or liabilities as the Deferred
Purchased Gas Adjustment within the Company's Balance Sheet. Mobile Gas' rates
contain a temperature adjustment rider which is designed to offset the impact of
unusually cold or warm weather on the Company's operating margin. The adjustment
is calculated monthly and applied to customers' bills in the same billing cycle
in which the weather variation occurs. The temperature adjustment rider applies
to substantially all residential and small commercial customers.
PROPERTY, PLANT, AND EQUIPMENT
Substantially all property, plant, and equipment is considered utility plant.
Included in property, plant, and equipment are acquisition adjustments, net of
amortization, of $7,290,000 and $7,660,000 at September 30, 2000 and 1999,
respectively. Such acquisition adjustments are being amortized to cost of
service over the lives of the assets acquired.
The cost of additions includes direct labor and materials, allocable
administrative and general expenses, pension and payroll taxes, and an allowance
for funds used during construction. The cost of depreciable property retired,
plus cost of dismantling, less salvage, is charged to accumulated depreciation.
Estimated interest cost associated with property under construction, based upon
weighted average interest rates for short-term borrowings or the interest rate
on borrowings for specific projects, is capitalized as an allowance for borrowed
funds used during construction. Maintenance, repairs, and minor renewals and
betterment of property are charged to operations.
Provisions for depreciation are computed principally on straight-line rates for
financial statement purposes and on accelerated rates for income tax purposes.
Depreciation for financial statement purposes is provided over the estimated
useful lives of utility property at rates approved by the APSC. For the years
ended September 30, 2000 and 1999, approved depreciation rates averaged
approximately 4.0% of depreciable property, excluding the gas storage facility
which is depreciated at an annual rate averaging 2.7%.
F-9
<PAGE> 34
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INCOME TAXES
The Company records deferred tax liabilities and assets, as measured by enacted
tax rates, for all temporary differences caused when the tax basis of an asset
or liability differs from that reported in the financial statements. Investment
tax credits realized after 1980 are deferred and amortized over the average life
of the related property in accordance with regulatory treatment.
EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during each period. Diluted earnings per share is
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 40,000, 49,000, and 61,000, for the years ended September 30, 2000,
1999, and 1998, respectively. These differences in equivalent shares are from
outstanding stock options.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
LONG-LIVED ASSETS
The Company reviews its long-lived assets whenever indications of impairment are
present. If any assets are determined to be impaired, such assets would be
written down to their estimated fair market values. The Company does not believe
it has any assets which are currently impaired.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 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
F-10
<PAGE> 35
137) was issued which defers the effective date of SFAS 133 for the Company
until the first quarter of fiscal 2001. The Company does not anticipate that
SFAS 133 will have a significant impact on the financial statements.
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 expense of $584,000, or $0.12
per share, net of tax, as a result of expensing organization and start-up costs
previously capitalized. The effect on current and future years operating income
as a result of not expensing the amortization of such costs is not material to
the financial statements.
RECLASSIFICATIONS
Certain amounts in the prior years financial statements have been reclassified
to conform with the 2000 financial statement presentation.
2. PROPERTY
The functional classifications for the cost of property, plant, and equipment
are as follows at September 30, (in thousands):
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Distribution plant $115,967 $107,714
General Plant 18,019 17,249
Storage plant 38,977 37,708
Transmission plant 3,485 3,485
Acquisition adjustment 9,398 9,612
-------- --------
Total property, plant, and equipment $185,846 $175,768
======== ========
</TABLE>
F-11
<PAGE> 36
3. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following at September 30, (in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Mobile Gas Service Corporation
First Mortgage Bonds
8.75% Series, due July 1, 2022 $12,000 $12,000
7.48% Series, due July 1, 2023 12,000 12,000
7.27% Series, due November 1, 2006 12,000 12,000
9% Note, due May 13, 2013 3,347 3,480
Bay Gas Storage Company, Ltd.
8.19% Guaranteed Senior Secured Notes,
due December 1, 2014 18,670 19,499
------- -------
Total 58,017 58,979
Less amounts due within one year 2,795 962
------- -------
Long-term debt $55,222 $58,017
======= =======
</TABLE>
Maturities and sinking fund requirements on long-term debt in each of the five
fiscal years subsequent to September 30, 2000 are as follows: 2001 - $2,795,000;
2002 - $2,834,000; 2003 - $2,931,000; 2004 - $4,267,000 and 2005 - $4,382,000.
The Company's long-term debt instruments contain certain debt to equity ratio
requirements and restrictions on the payment of cash dividends and the purchase
of shares of its capital stock. None of these requirements and restrictions are
expected to have a significant impact on the Company's ability to pay dividends
in the future. Substantially all of the property of the Company is pledged as
collateral for the long-term debt.
At September 30, 2000, the Company had a $20 million revolving credit agreement
with a group of banks. Borrowings under the agreement may be made as needed
provided that the Company is in compliance with certain covenants in the
revolving credit agreement and other loan agreements. The Company currently is
in compliance with all such covenants. The Company pays a fee for its committed
lines of credit rather than maintain compensating balances. The commitment fee
is 0.125% of the average daily unborrowed amount during the annual period of
calculation. Unused committed lines of credit at September 30, 2000 and 1999
were $13.7 million and $2.8 million, respectively. The interest rate on
short-term debt outstanding at September 30, 2000 and 1999 was 7.4% and 6.4%,
respectively.
F-12
<PAGE> 37
4. INCOME TAXES
The components of income tax expense are as follows for the years ended
September 30, (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Current
Federal $ 3,862 $ 3,473 $ 3,869
State 355 256 392
------- ------- -------
Total Current Taxes 4,217 3,729 4,261
------- ------- -------
Deferred
Federal 931 983 662
State 148 119 70
------- ------- -------
Total Deferred Taxes 1,079 1,102 732
------- ------- -------
Deferred investment tax credit
amortization (26) (26) (26)
------- ------- -------
Total income tax expense 5,270 4,805 4,967
------- ------- -------
Amounts reclassified on the income statement
to cumulative effect of accounting changes -- 198 --
------- ------- -------
Total income tax expense before cumulative
effect of accounting changes $ 5,270 $ 5,003 $ 4,967
======= ======= =======
</TABLE>
A reconciliation of income tax expense and the amount computed by multiplying
income before income taxes by the statutory federal income tax rate for the
periods indicated is as follows for the years ended September 30, (in
thousands):
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Income tax expense at federal
statutory rate $ 4,796 $ 4,478 $ 4,550
Excess of book over tax depreciation on
pre-1981 property additions 132 127 120
State income taxes 357 284 305
Other - net (15) (84) (8)
------- ------- -------
Total income tax expense $ 5,270 $ 4,805 $ 4,967
======= ======= =======
Effective tax rate 37.5% 36.7% 37.1%
======= ======= =======
</TABLE>
The tax effect of differences in book and tax depreciation related to pre-1981
property additions was recognized in income for accounting and ratemaking
purposes prior to 1981. With the adoption in fiscal 1994 of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," the
Company recorded deferred taxes related to this temporary difference and a
corresponding regulatory asset expected to be collected in customer rates when
such taxes become payable in accordance with the current ratemaking practices
followed by the APSC. Such future collections included in
F-13
<PAGE> 38
regulatory assets are $460,000 and $738,000 at September 30, 2000 and 1999,
respectively.
No valuation allowance is deemed necessary, as the Company anticipates
generating adequate future taxable income to realize the benefits of all
deferred tax assets on the balance sheet.
The significant components of the Company's net deferred tax liability as of
September 30, are (in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Deferred tax liabilities
Differences between book and tax
basis of property $13,527 $12,834
Prepaid insurance 259 348
Regulatory assets 167 267
Other 20 20
------- -------
Total deferred tax liabilities 13,973 13,469
------- -------
Deferred tax assets
Pension 278 430
Gross receipts taxes 577 526
Postretirement benefits 138 193
Purchased gas adjustment 1 272
Bad debts 314 262
Accrued vacation 211 201
Other 1,113 1,009
------- -------
Total deferred tax assets 2,632 2,893
------- -------
Net deferred tax liability $11,341 $10,576
======= =======
</TABLE>
5. CAPITAL STOCK
The Amended and Restated Stock Option Plan of EnergySouth, Inc. (the Plan)
provides for the granting of incentive stock options, non-qualified stock
options, and stock appreciation rights to key employees. Under the Plan, an
aggregate of 350,000 shares of the Company's authorized but unissued Common
Stock have been reserved for issuance. Stock options become 25% exercisable on
the first anniversary of the grant date and an additional 25% become exercisable
each succeeding year. No option may be exercised after the expiration of ten
years from the grant date. Options are granted at an option price which
represents the market price on the date of grant. Transactions under the Plan
are summarized on the following page:
F-14
<PAGE> 39
<TABLE>
<CAPTION>
For the years ended September 30, 2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Outstanding at beginning of year 184,150 155,650 157,500
Exercised (at $14.083) -- (3,000) (1,850)
Granted (at $18.344 - $22.00) 86,000 31,500 --
-------- -------- --------
Outstanding at end of year ($14.083 - $22.00) 270,150 184,150 155,650
-------- -------- --------
Weighted Average Exercise Price $ 16.676 $ 15.438 $ 14.083
-------- -------- --------
Weighted Average Remaining Life (in years) 6.730 6.500 6.920
-------- -------- --------
Exercisable at end of year 160,525 152,650 116,275
-------- -------- --------
Weighted Average Exercise Price $ 14.470 $ 14.083 $ 14.083
-------- -------- --------
Remaining reserved for issuance at end of year 75,000 161,000 67,500
-------- -------- --------
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). Accordingly, no compensation expense has been recognized for its stock
options granted. For purposes of disclosing pro forma net income, the fair
market value of the options at the date of grant was estimated using a
Black-Scholes options pricing model. The weighted average fair value of options
granted was $5.78 and $7.71 per option during 2000 and 1999, respectively. There
were no options granted during 1998.
<TABLE>
<CAPTION>
Weighted average assumptions used in the pricing model for the years ended
September 30,
2000 1999
--------- ---------
<S> <C> <C>
Risk free interest rate 6.60% 4.65%
Expected life 10 years 10 years
Stock price volatility 38.34% 45.00%
Dividend yield 5.09% 4.20%
</TABLE>
Had compensation cost been determined in accordance with SFAS 123, the Company's
net income and diluted earnings per share would have been $8,702,000, or $1.76
per share and $8,249,000, or $1.67 per share for the years ended September 30,
2000 and 1999, respectively.
At September 30, 2000, 245,000 shares of the Company's authorized but unissued
Common Stock were reserved for issuance under the Company's Dividend
Reinvestment and Stock Purchase Plan.
6. RETIREMENT PLANS AND OTHER BENEFITS
The Company has a noncontributory, defined benefit retirement plan covering
substantially all of its employees. Benefits are based on the greater of amounts
resulting from two different formulas: years of service and average compensation
during the last five years of employment, or years of service and compensation
during the term of employment. The Company annually contributes to the plan the
amount deductible for federal income tax purposes.
F-15
<PAGE> 40
The Company also provides certain health care and life insurance benefits for
retired employees. Substantially all employees may become eligible for such
benefits if they retire under the provisions of the Company's retirement plan.
The Company is accruing the costs over the expected service period of the
employees.
The "projected unit credit" actuarial method was used to determine service cost
and actuarial liability.
The following table sets forth the funded status of the plans and the amounts
recorded in the financial statements at September 30, (in thousands):
<TABLE>
<CAPTION>
Pension Postretirement
Benefits Benefits
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of the period $ 20,126 $ 18,729 $ 3,674 $ 3,543
Service cost 724 696 71 85
Interest cost 1,461 1,390 251 258
Benefits paid (1,078) (1,030) (230) (212)
(Gain)/loss (107) 341 (210) --
-------- -------- -------- --------
Benefit obligation at the end of the period $ 21,126 $ 20,126 $ 3,556 $ 3,674
-------- -------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of assets at beginning of the period $ 32,043 $ 30,263 $ 3,108 $ 2,687
Benefits paid (1,078) (1,030) -- --
Contributions -- -- 28 137
Actual return on plan assets 1,510 2,810 309 284
-------- -------- -------- --------
Fair value of plan assets at the end of the period $ 32,475 $ 32,043 $ 3,445 $ 3,108
-------- -------- -------- --------
FUNDED STATUS
Plan assets in excess of benefit obligation $ 11,349 $ 11,917 $ (111) $ (566)
Unrecognized net gain (11,752) (12,596) (445) (131)
Prior service cost not yet recognized 312 351 (376) (415)
Remaining unrecognized transition asset (678) (861) -- --
-------- -------- -------- --------
Accrued benefit cost $ (769) $ (1,189) $ (932) $ (1,112)
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Pension Postretirement
Benefits Benefits
-------------------------- --------------------------
Weighted average assumptions as of
September 30, 2000 1999 1998 2000 1999 1998
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Average discount rate 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%
Expected rate of return on plan assets 7.5% 7.5% 7.5% 7.0% 7.0% 7.0%
Rate of compensation increase 6.1% 6.1% 6.1%
</TABLE>
The accumulated postretirement benefit obligation at September 30, 2000 and 1999
was determined using an assumed health care cost trend rate of 7.4% in 2000 and
8.0% in 1999, gradually declining to 5.0% in the fiscal year 2004 and
thereafter. The assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. A one-percentage-point change
in assumed health care cost trend rates would have the following effects (in
thousands):
F-16
<PAGE> 41
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Point Increase Point Decrease
------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Effect on total of service and
interest cost components $ 24 $ 30 $ (20) $ (25)
Effect on postretirement benefit obligations 186 228 (158) (194)
</TABLE>
Net periodic benefit cost included the following components for the years ended
September 30, (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
-------------------------------- --------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 724 $ 696 $ 599 $ 71 $ 85 $ 82
Interest cost 1,461 1,390 1,299 251 258 249
Amortization of transition asset (183) (183) (183) -- -- --
Amortization of prior service cost 40 40 40 (38) (38) (38)
Amortization of unrecognized gain (394) (320) (291) -- -- --
Expected return on plan assets (2,068) (1,886) (1,731) (205) (177) (156)
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ (420) $ (263) $ (267) $ 79 $ 128 $ 137
======== ======== ======== ======== ======== ========
</TABLE>
The Company has formed two voluntary employees' beneficiary association (VEBA)
trusts to fund postretirement health and life insurance benefits. The Company's
contributions to these trusts in 2000, 1999, and 1998 were $28,000, $137,000,
and $70,000, respectively.
The Company's eligible employees may participate in the Employee Savings Plan or
the Bargaining Unit Employees Savings Plan, both of which are 401(k) plans. The
Company's contributions for the years ended September 30, 2000, 1999, and 1998
were $240,000, $239,000, and $248,000, respectively.
7. COMMITMENTS AND CONTINGENCIES
The Company has third-party contracts, which expire at various dates through the
year 2003, for the purchase, storage and delivery of gas supplies. Minimum
payments under these contracts in the fiscal years subsequent to September 30,
2000 are as follows: 2001 - $1,287,000; 2002 - $917,000 and 2003 - $3,000. A
portion of firm supply requirements is expected to be met through the withdrawal
of gas from the storage facility owned by Bay Gas. Mobile Gas has entered into a
Gas Storage Agreement under which Bay Gas is to provide storage services for an
initial period of 20 years which began in September 1994 with the commencement
of commercial operations of the storage facility. The purchased gas adjustment
provisions of the Company's rate schedules permit the recovery of gas costs from
customers.
The Company is subject to various federal, state and local laws and regulations
relating to the environment, which have not had a material effect on the
Company's financial position or results of operations.
F-17
<PAGE> 42
Like many gas distribution companies, prior to the widespread availability of
natural gas, the Company manufactured gas for sale to its customers. In contrast
to some other companies which operated multiple manufactured gas plants, the
Company and its predecessor operated only one such plant, which discontinued
operations in 1933. The process for manufacturing gas produced by-products and
residuals, such as coal tar, and certain remnants of these residuals are
sometimes found at former gas manufacturing sites.
The Company conducted a preliminary assessment in 1994 of its former gas plant
site and has tested certain waters in the vicinity of the site. The Company
developed and has implemented a plan for the site based on the advice of
environmental consultants, which involves securing and monitoring the site, and
continued testing. Based on the results of tests to date, the Company does not
believe that the site currently poses any threat to human health or the
environment. While no conclusion can be reached at this time as to whether any
further remedial action might ultimately be required, based on currently
available information, it is believed that any costs with respect to the site
are likely to be immaterial, and the Company has, therefore, established no
reserve for such costs in its financial statements. The Company intends that,
should further investigation or changes in environmental laws or regulations
require material expenditures for investigation, remediation, or clean-up with
regard to the site, it would apply to the APSC for appropriate rate recovery of
such costs. However, there can be no assurance that the APSC would approve the
recovery of such costs or the amount and timing of any such recovery.
The Company is involved in litigation arising in the normal course of business.
Management believes that the ultimate resolution of such litigation will not
have a material adverse effect on the consolidated financial statements of the
Company.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of financial instruments have been reported to meet the disclosure
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Values of Financial Instruments" and are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange.
The carrying amounts for cash and cash equivalents, gas and other receivables,
notes payable, accounts payable and other current liabilities approximate fair
value. The fair value of merchandise receivables is estimated based on market
interest rates for similar receivables at the end of each respective year. The
carrying amount of merchandise receivables, as shown below, is net of the
reserve for uncollectible merchandise receivables of $676,000 and $581,000 for
the years ended September 30, 2000 and 1999, respectively. The fair value of
long-term debt is estimated based on interest rates available to the Company at
the end of each respective year for the issuance of debt with similar terms and
remaining maturities.
F-18
<PAGE> 43
The carrying amount and the estimated fair value of such financial instruments
are as follows at September 30, (in thousands):
<TABLE>
<CAPTION>
2000 1999
------------------------ -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Merchandise receivables $ 7,873 $ 7,881 $ 8,010 $ 8,068
Long-term debt 58,017 59,673 58,979 61,627
</TABLE>
9. FINANCIAL INFORMATION BY BUSINESS SEGMENT
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of An Enterprise and Related Information", requires that companies disclose
segment information based on how management makes decisions about allocating
resources to segments and measuring their performance. The reportable segments
disclosed herein were determined based on such factors as the regulatory
environment and the types of products and services offered.
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. The
Company also provides marketing, merchandising, and other energy-related
services through Marketing, Mobile Gas, and Services which are aggregated with
EnergySouth, the holding company, and included in the Other category. For the
years ended September 30, 2000, 1999, and 1998, all segments were located in
Southwest Alabama.
The accounting policies of the segments are the same as those described in Note
1. 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. Segment assets are provided as additional
information and are net of intercompany advances, intercompany notes receivable
and investments in subsidiaries.
F-19
<PAGE> 44
<TABLE>
<CAPTION>
As of and for the year ended Natural Gas Natural Gas
September 30, 2000 (in thousands): Distribution Storage Other Eliminations Consolidated
---------------------------------- ------------ ----------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 66,793 $ 7,052 $ 4,435 $ (4,183) $ 74,097
Operating expenses 53,101 2,426 3,499 (4,183) 54,843
Operating income 13,692 4,626 936 -- 19,254
Depreciation expense 5,676 1,048 11 -- 6,735
Capital expenditures 10,995 522 69 -- 11,586
Property, plant, and equipment, net 100,491 33,769 91 -- 134,351
Total assets 112,744 42,630 12,006 -- 167,380
</TABLE>
<TABLE>
<CAPTION>
As of and for the year ended Natural Gas Natural Gas
September 30, 1999 (in thousands): Distribution Storage Other Eliminations Consolidated
---------------------------------- ------------ ----------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 62,208 $ 5,842 $ 4,171 $ (4,161) $ 68,060
Operating expenses 47,872 2,203 3,158 (4,161) 49,072
Operating income 14,336 3,639 1,013 -- 18,988
Cumulative effect of accounting changes 176 (399) (126) -- (349)
Depreciation expense 5,446 1,019 2 -- 6,467
Capital expenditures 8,836 1,153 37 -- 10,026
Property, plant, and equipment, net 95,424 34,217 35 -- 129,676
Total assets 107,959 53,882 11,794 -- 173,635
</TABLE>
<TABLE>
<CAPTION>
As of and for the year ended Natural Gas Natural Gas
September 30, 1998 (in thousands): Distribution Storage Other Eliminations Consolidated
---------------------------------- ------------ ----------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 69,430 $ 5,339 $ 4,354 $ (4,134) $ 74,989
Operating expenses 54,504 2,215 3,340 (4,134) 55,925
Operating income 14,926 3,124 1,014 -- 19,064
Depreciation expense 5,284 994 -- -- 6,278
Capital expenditures 7,354 288 -- -- 7,642
Property, plant, and equipment, net 92,402 34,726 -- -- 127,128
Total assets 104,643 52,200 9,698 -- 166,541
</TABLE>
10. SUBSEQUENT EVENTS
Bay Gas has entered into a contract to provide storage services to Southern
Company Services, Inc., as agent for certain Southern Company subsidiaries. In
order to provide the storage service under the terms of the contract, Bay Gas is
constructing a second salt dome cavern and installing related equipment at a
cost of approximately $35 million. In order to accommodate new transportation
customers, Bay Gas will also construct two new pipelines to expand and/or extend
its existing pipeline at a cost of approximately $20 million. The expansion of
the storage facilities and the construction of the new pipelines will be funded
through the issuance of long-term debt and from cash generated by Bay Gas'
operations. In conjunction with the expansion, Bay Gas completed the sale of
$55,000,000 of senior secured notes in December 2000. The notes, which are
guaranteed by EnergySouth, are due in 2017 and accrue interest at an annual rate
of 8.45%. The proceeds from the sale of the notes are being used to construct
the cavern, pipelines and related equipment; to refinance $18,670,000 of
existing debt incurred to construct the first salt dome cavern; to repay a
$2,650,000 note to Mobile Gas for the financing of base gas in the existing
storage cavern; and to
F-20
<PAGE> 45
pay a make-whole premium of approximately $2,000,000 related to the refinancing
of the existing debt, which will be expensed as debt extinguishment costs. As a
result of the financing, Bay Gas' real property is no longer pledged as
collateral for its long-term debt. On December 19, 2000 Bay Gas made its first
partnership distribution of approximately $6,400,000. Effective December 20,
2000, Olin elected not to participate in a capital call by Bay Gas, thus
reducing their limited interest from 12.5% to 9.1%.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 2000 and 1999 is summarized as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Dec. 31 Mar. 31 Jun. 30 Sep. 30
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
2000
Total operating revenues $ 20,904 $ 24,558 $ 14,434 $ 14,201
Total operating income 5,623 7,911 2,877 2,843
Net income 2,696 4,170 1,029 897
Basic earnings per share $ 0.55 $ 0.85 $ 0.21 $ 0.18
Diluted earnings per share(1) $ 0.54 $ 0.84 $ 0.21 $ 0.18
1999
Total operating revenues $ 19,859 $ 23,327 $ 13,266 $ 11,608
Total operating income 6,130 7,325 3,043 2,490
Income before cumulative effect 2,898 3,759 1,097 870
Cumulative effect of accounting changes (381) -- 32 --
Net income 2,517 3,759 1,129 870
Basic earnings per share
Income before cumulative effect $ 0.60 $ 0.77 $ 0.22 $ 0.18
Cumulative effect of accounting changes (0.08) -- 0.01 --
Net income 0.52 0.77 0.23 0.18
Diluted earnings per share
Income before cumulative effect $ 0.59 $ 0.76 $ 0.22 $ 0.18
Cumulative effect of accounting changes (0.08) -- 0.01 --
Net income 0.51 0.76 0.23 0.18
</TABLE>
The pattern of quarterly earnings reflects a seasonal nature because weather
conditions strongly influence operating results.
(1) The sum of the quarterly amounts does not equal the year's amount due to
rounding of the quarterly amounts or a changing number of average shares.
F-21
<PAGE> 46
SCHEDULE II
ENERGYSOUTH, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
(in thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
-------------------------
CHARGED CHARGED
BALANCE AT TO COSTS TO OTHER BALANCE
BEGINNING AND ACCOUNTS DEDUCTIONS AT END
DESCRIPTION OF YEAR EXPENSES AMOUNT AMOUNT OF YEAR
----------- ---------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Reserves deducted from assets
to which they apply - Allowance
for doubtful accounts:
September 30, 2000 $652 $431 $334(1) $749
September 30, 1999 $610 $396 $354(1) $652
September 30, 1998 $522 $533 $445(1) $610
</TABLE>
NOTES:
(1) Amounts written off - net of recoveries.
S-1
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION (Exhibits prior to February 2, 1998 filed by Mobile Gas)
------- -----------
<S> <C>
2 Articles of Merger of MBLE Merger Co., Inc. into Mobile Gas
Service Corporation (incorporated by reference to Exhibit 2 to
Form 10-Q Quarterly Report dated February 13, 1998)
3(i) Articles of Restatement of the Articles of Incorporation of
EnergySouth, Inc. (incorporated by reference to Exhibit 3(i)
to Form 10-Q Quarterly Report dated February 13, 1998)
3(ii) By-laws of EnergySouth, Inc., adopted January 31, 1998
(incorporated by reference to Exhibit 3.2 to Registration
Statement 333-42057)
4(a)-1 Indenture of Mortgage and Deed of Trust of Mobile Gas Service
Corporation dated as of December 1, 1941 (incorporated by
reference to Exhibit B-a to Mobile Gas Registration Statement
No. 2-4887)
</TABLE>
<TABLE>
<CAPTION>
Sup. Ind.
Dated as of File Reference Exhibit
----------- -------------- -------
<S> <C> <C> <C>
4(a)-2 10/1/44 Reg. No. 2-5493 7-6
4(a)-3 7/1/52 Form 10-K for fiscal year ended 4(a)-3
September 30, 1985
4(a)-4 6/1/54 " 4(a)-4
4(a)-5 4/1/57 " 4(a)-5
4(a)-6 7/1/61 " 4(a)-6
4(a)-7 6/1/63 " 4(a)-7
4(a)-8 10/1/64 " 4(a)-8
4(a)-9 7/1/72 " 4(a)-9
4(a)-10 8/1/75 " 4(a)-10
4(a)-11 7/1/79 " 4(a)-11
4(a)-12 7/1/82 " 4(a)-12
4(a)-13 7/1/86 Form 10-K for fiscal year ended 4(a)-13
September 30, 1986
4(a)-14 10/1/88 Form 10-K for fiscal year ended 4(a)-14
September 30, 1989
4(a)-15 7/1/92 Form 10-K for fiscal year 4(a)-15
ended September 30, 1992
4(a)-16 7/1/93 Form 10-K for fiscal year 4(a)-16
ended September 30, 1993
</TABLE>
E-1
<PAGE> 48
<TABLE>
<CAPTION>
Sup. Ind.
Dated as of File Reference Exhibit
----------- -------------- -------
<S> <C> <C> <C>
4(a)-17 12/3/93 Form 10-K for fiscal year 4(a)-17
ended September 30, 1993
4(a)-18 11/1/96 Form 10-K for fiscal year 4(a)-18
ended September 30, 1997
4(c)-1 Bay Gas Indenture dated as of October 1, 1992 (incorporated by
reference to Exhibit 4(c) to Form 10-K for fiscal year ended
September 30, 1992)
4(c)-2 First Supplemental Indenture dated as of October 1, 1994
supplemental to Bay Gas Indenture (incorporated by reference
to Exhibit 4(c)-2 to Form 10-K for fiscal year ended September
30, 1995)
4(d) Promissory Note to the Utilities Board of the Town of
Citronelle dated May 13, 1993 (incorporated by reference to
Exhibit 4(d) to Form 10-K for fiscal year ended September 30,
1993)
10(a) Transportation agreement between Mobile Gas Service
Corporation and Alabama Power Company dated February 18, 1999
(incorporated by reference to Exhibit 10(a) to Form 10-Q for
the quarter ended March 31, 1999)(3)
10(b) Agreement for Firm and Interruptible Storage Service between
Bay Gas Storage Company, Ltd. and Southern Company Services,
Inc., as agent, dated April 1, 1999 (incorporated by reference
to Exhibit 10(b) to Form 10-Q for the quarter ended March 31,
1999)(3)
10(b)-1 Letter agreement dated July 19, 2000, modifying Agreement for
Firm and Interruptible Storage Services between Bay Gas
Storage Company, Ltd. and Southern Company Services, Inc., as
agent, dated April 1, 1999(1)(3)
10(b)-2 Storage Service Agreement between Bay Gas Storage Company,
Ltd. and Southern Company Services, Inc., as agent, dated as
of August 1, 2000(1)(3)
10(c) Agreement for Firm Intrastate Transportation Services between
Bay Gas Storage Company, Ltd. and Alabama Power Company dated
April 8, 1999 (incorporated by reference to Exhibit 10(c) to
Form 10-Q for the quarter ended March 31, 1999)(3)
10(c)-1 Letter agreement dated July 19, 2000, modifying Agreement for
Firm Intrastate Transportation Services between Bay Gas
Storage Company, Ltd. and Alabama Power Company dated April 8,
1999(1)(3)
</TABLE>
E-2
<PAGE> 49
<TABLE>
<S> <C>
10(d)-5 NNS Settlement Agreement between Koch Gateway Pipeline Company
and Mobile Gas Service Corporation dated March 26, 1998
(incorporated by reference to Exhibit 10(d)-5 to Form 10-K for
fiscal year ended September 30, 1998)
10(e)-4 Gas Sale and Purchase Contract between Coral Energy Resources,
L.P. as Seller and Mobile Gas Service Corporation as Buyer
dated as of July 1, 2000(1)(3)
10(f)-1 Agreement for Sale and Purchase of Gas - Mobile Plant dated
August 10, 1995 between Mobil Natural Gas Inc. and Mobile Gas
Service (incorporated by reference to Exhibit 10(f) to Form
10-K for fiscal year ended September 30, 1995)(3)
10(f)-2 Letter dated June 26, 1996 with consent dated July 31, 1996 to
assignment of Agreement for Sale and Purchase of Gas - Mobile
Plant to PanEnergy Trading and Market Services, L.L.C.
(incorporated by reference to Exhibit 10(f)-2 to Form 10-K for
fiscal year ended September 30, 1996)
10(g) Deferred Compensation Agreement with John S. Davis dated
January 26, 1996 (incorporated by reference to Exhibit 10(g)
to Form 8-K Current Report dated February 7, 1996)
10(g)-1 Supplemental Deferred Compensation Agreement with John S.
Davis dated December 10, 1999 (incorporated by reference to
Exhibit 10(g)-1 to Form 10-K for fiscal year ended September
30, 1999)(2)
10(h) Transportation Agreement between Mobile Gas and Mobile Energy
LLC dated November 12, 1999 (incorporated by reference to
Exhibit 10(h) to Form 10-K for fiscal year ended September 30,
1999)(3)
10(i) Mobile Gas Service Corporation/Bay Gas Storage Company, Ltd.
Gas Storage Agreement dated February 26, 1992 (incorporated by
reference to Exhibit 10(i) to Form 10-K for fiscal year ended
September 30, 1992)
10(j) Directors/Officers Indemnification Agreement (incorporated by
reference to Exhibit 10(j) to Form 10-K for fiscal year ended
September 30, 1992)
10(j)-1 Form of Change of Control Agreement entered into as of
December 8, 1999 by and between EnergySouth, Inc. and the
Executive Officers of EnergySouth, Inc. and/or one or more of
its subsidiaries (incorporated by reference to Exhibit 10(j)-1
to Form 10-K for fiscal year ended September 30, 1999)(2)
10(k)-1 Amended and Restated Supplemental Deferred Compensation
Agreement with Walter L. Hovell, dated December 11, 1992
(incorporated by reference to Exhibit 10(k) to Form 10-K for
fiscal year ended September 30, 1992)(2)
</TABLE>
E-3
<PAGE> 50
<TABLE>
<S> <C>
10(k)-2 Amendment to Amended and Restated Supplemental Deferred
Compensation Agreement dated January 27, 1995 between the
Company and Walter L. Hovell (incorporated by reference to
Exhibit 10(k)-2 to Form 8-K Current Report dated January 27,
1995)(2)
10(l)-1 Bay Gas Agreement by and among Mobile Gas Service Corporation,
MGS Storage Services, Inc., MGS Energy Services, Inc. and Olin
Corporation, dated December 5, 1991 (incorporated by reference
to Exhibit 10(l) to Form 10-K for fiscal year ended September
30, 1992)
10(m)-1 Limited Partnership Agreement between MGS Storage Services,
Inc., as General Partner, and MGS Energy Services, Inc., as
Limited Partner (forming Bay Gas Storage Company, Ltd.), dated
December 5, 1991 (incorporated by reference to Exhibit 10(m)
to Form 10-K for fiscal year ended September 30, 1992)
10(m)-2 First Amendment to Limited Partnership Agreement dated as of
April 6, 1992 and Second Amendment to Limited Partnership
Agreement dated as of September 12, 1994 (incorporated by
reference to Exhibit 10(m)-2 to Form 10-K for fiscal year
ended September 30, 1994)
10(n) Cavity Development and Storage Agreement between Olin
Corporation and Bay Gas Storage Company, Ltd., dated January
14, 1992 (incorporated by reference to Exhibit 10(n) to Form
10-K for fiscal year ended September 30, 1992)
10(o)-1 Transportation Agreement between Mobile Gas Service
Corporation and Tuscaloosa Steel Corporation dated as of May
15, 1995 (incorporated by reference to Exhibit 10(o) to Form
10-K for fiscal year ended September 30, 1995)(3)
10(o)-2 Amendment dated August 23, 1996 to Transportation Agreement
between Mobile Gas Service Corporation and Tuscaloosa Steel
Corporation (incorporated by reference to Exhibit 10(o)-2 to
Form 10-K for fiscal year ended September 30, 1996)(3)
10(q) Guaranty Agreement by Mobile Gas Service Corporation, dated as
of October 1, 1992, relating to Indenture of Bay Gas Storage
Company, Ltd. (incorporated by reference to Exhibit 10(q) to
Form 10-K for fiscal year ended September 30, 1992)
10(r) Amended and Restated Stock Option Plan of EnergySouth, Inc.
(incorporated by reference to Appendix A to definitive proxy
statement dated December 17, 1998)(2)
10(s) Mobile Gas Service Corporation Incentive Compensation Plan
(incorporated by reference to Exhibit B to definitive proxy
statement dated December 21, 1992)(2)(4)
</TABLE>
E-4
<PAGE> 51
<TABLE>
<S> <C>
10(t) Agreement for Purchase and Sale of Assets by and between The
Utilities Board of the Town of Citronelle and Mobile Gas
Service Corporation dated January 28, 1993 (incorporated by
reference to Exhibit 10(t) to Form 10-K for fiscal year ended
September 30, 1993)
10(u) Revolving Credit Agreement dated September 30, 1999 by and
among EnergySouth, Inc. as Borrower, AmSouth Bank, N.A. as
Agent, and AmSouth Bank, N.A., Regions Bank, Whitney National
Bank, South Alabama Bank, Southtrust Bank, N.A., and
Commonwealth National Bank as Lenders (incorporated by
reference to Exhibit 10(u) to Form 10-K for fiscal year ended
September 30, 1999)
10(x) Letter dated October 7, 1994 from Mobile Gas Service
Corporation to John S. Davis confirming terms of employment
(incorporated by reference to Exhibit A to Form 8-K current
report filed November 2, 1994)(2)
10(z)-1 Amended and Restated EnergySouth, Inc. Non-Employee Directors
Deferred Fee Plan(1)(2)
18 Letter regarding change in Accounting Principle (incorporated
by reference to Exhibit 18 to Form 10-Q Quarterly Report dated
February 12, 1999)
21 Subsidiaries of Registrant and Partnerships in which
Registrant Owns an Interest(1)
23 Consent of Deloitte & Touche LLP(1)
27 Financial Data Schedule(1)
</TABLE>
(1) Filed herewith.
(2) Management contract or compensatory plan or arrangement.
(3) Confidential portions of this exhibit have been omitted and previously
filed separately with the Securities and Exchange Commission pursuant to
a request for confidential treatment made in accordance with Rule 24b-2
promulgated under the Securities Exchange Act of 1934, as amended.
E-5
