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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 2002
Commission File No. 0-29604
ENERGYSOUTH, INC.
(Exact name of registrant as specified in its charter)
Alabama 58-2358943
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2828 Dauphin Street, Mobile, Alabama 36606
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 251-450-4774
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock ($.01 par value) outstanding at January 31, 2003 - 5,056,381
shares.
ENERGYSOUTH, INC.
INDEX
Page No.
--------
PART I. Financial Information (Unaudited):
Consolidated Balance Sheets - December 31,
2002 and 2001 and September 30, 2002 3 - 4
Consolidated Statements of Income - Three and
Twelve Months Ended December 31, 2002 and 2001 5
Consolidated Statements of Cash Flows - Three
Months Ended December 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7 - 11
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 21
Quantitative and Qualitative Disclosures About
Market Risk 21
PART II. Other Information 22 - 27
2
PART 1. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
ENERGYSOUTH, INC. December 31, September 30,
- -----------------------------------------------------------------------------------------------------------------------
In Thousands 2002 2001 2002
- -----------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 4,242 $ 16,206 $ 10,562
Receivables
Gas 11,313 8,651 4,755
Unbilled Revenue 2,742 4,485 956
Merchandise 2,738 2,897 2,621
Other 717 946 743
Allowance for Doubtful Accounts (1,218) (1,237) (951)
Materials, Supplies, and Merchandise, Net (At Average Cost) 1,424 2,568 1,598
Gas Stored Underground For Current Use (At Average Cost) 2,749 3,614 3,086
Deferred Income Taxes 2,118 3,203 2,583
Prepayments 757 827 777
- -----------------------------------------------------------------------------------------------------------------------
Total Current Assets 27,582 42,160 26,730
- -----------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT 228,605 219,268 227,740
Less: Accumulated Depreciation and Amortization 68,852 62,653 66,912
- -----------------------------------------------------------------------------------------------------------------------
Property, Plant, and Equipment - Net 159,753 156,615 160,828
Construction Work in Progress 29,424 16,798 26,995
- -----------------------------------------------------------------------------------------------------------------------
Total Property, Plant, and Equipment 189,177 173,413 187,823
- -----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Prepaid Pension Cost 449 318
Deferred Charges 540 640 566
Prepayments 1,053 1,110 1,067
Regulatory Assets 1,538 904 653
Merchandise Receivables Due After One Year 4,467 5,149 4,463
- -----------------------------------------------------------------------------------------------------------------------
Total Other Assets 8,047 7,803 7,067
- -----------------------------------------------------------------------------------------------------------------------
TOTAL $ 224,806 $ 223,376 $ 221,620
- -----------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements (Unaudited)
3
PART 1. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
ENERGYSOUTH, INC. December 31, September 30,
- -------------------------------------------------------------------------------------------
In Thousands, Except Share Data 2002 2001 2002
- -------------------------------------------------------------------------------------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Current Maturities of Long-Term Debt $ 4,437 $ 1,859 $ 3,909
Notes Payable 2,550 16,560
Accounts Payable 6,824 5,684 5,665
Dividends Declared 1,365 1,287 1,363
Customer Deposits 1,440 1,489 1,475
Taxes Accrued 3,805 5,071 3,933
Interest Accrued 682 688 1,342
Deferred Purchased Gas Adjustment 1,920 4,011 3,182
Unearned Revenue (Note 8) 872 2,046 1,397
Other 1,298 2,002 1,296
- -------------------------------------------------------------------------------------------
Total Current Liabilities 25,193 40,697 23,562
- -------------------------------------------------------------------------------------------
OTHER LIABILITIES
Unearned Revenue (Note 8) 74 862 36
Accrued Pension Cost 89
Accrued Postretirement Benefit Cost 541 688 570
Deferred Income Taxes 15,959 13,836 15,275
Deferred Investment Tax Credits 308 335 314
Other 3,220 1,772 2,290
- -------------------------------------------------------------------------------------------
Total Other Liabilities 20,102 17,582 18,485
- -------------------------------------------------------------------------------------------
Total Liabilities 45,295 58,279 42,047
- -------------------------------------------------------------------------------------------
CAPITALIZATION
Stockholders' Equity
Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares; Outstanding
December 2002 - 5,054,000;
December 2001 - 4,951,000;
September 2002 - 5,048,000 Shares) 51 50 50
Capital in Excess of Par Value 21,756 19,618 21,607
Retained Earnings 57,635 53,154 55,626
- -------------------------------------------------------------------------------------------
Total Stockholders' Equity 79,442 72,822 77,283
Minority Interest 3,768 3,383 3,645
Long-Term Debt 96,301 88,892 98,645
- -------------------------------------------------------------------------------------------
Total Capitalization 179,511 165,097 179,573
- -------------------------------------------------------------------------------------------
TOTAL $ 224,806 $ 223,376 $ 221,620
- -------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements (Unaudited)
4
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Twelve Months
ENERGYSOUTH, INC. Ended December 31, Ended December 31,
- ---------------------------------------------------------------------------------------------------- ----------------------------
In Thousands, Except Per Share Data 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------- ----------------------------
OPERATING REVENUES
Gas Revenues $ 24,242 $ 22,799 $ 83,006 $ 93,412
Merchandise Sales 1,107 982 3,624 2,967
Other 364 372 1,350 1,391
- ---------------------------------------------------------------------------------------------------- ----------------------------
Total Operating Revenues 25,713 24,153 87,980 97,770
- ---------------------------------------------------------------------------------------------------- ----------------------------
OPERATING EXPENSES
Cost of Gas 7,628 6,265 23,630 40,386
Cost of Merchandise 813 733 3,277 2,258
Operations and Maintenance 5,983 5,804 23,705 21,140
Depreciation 2,282 2,098 8,356 7,595
Taxes, Other Than Income Taxes 1,896 1,747 6,698 7,068
- ---------------------------------------------------------------------------------------------------- ----------------------------
Total Operating Expenses 18,602 16,647 65,666 78,447
- ---------------------------------------------------------------------------------------------------- ----------------------------
OPERATING INCOME 7,111 7,506 22,314 19,323
- ---------------------------------------------------------------------------------------------------- ----------------------------
OTHER INCOME AND (EXPENSE)
Interest Expense (2,099) (2,068) (8,111) (8,351)
Allowance for Borrowed Funds Used During Construction 571 554 2,061 2,227
Interest Income 19 193 106 1,238
Minority Interest (190) (186) (743) (603)
- ---------------------------------------------------------------------------------------------------- ----------------------------
TOTAL OTHER INCOME (EXPENSE) (1,699) (1,507) (6,687) (5,489)
- ---------------------------------------------------------------------------------------------------- ----------------------------
INCOME BEFORE INCOME TAXES 5,412 5,999 15,627 13,834
Income Taxes 2,038 2,246 5,775 5,261
- ---------------------------------------------------------------------------------------------------- ----------------------------
NET INCOME $ 3,374 $ 3,753 $ 9,852 $ 8,573
==================================================================================================== ============================
EARNINGS PER SHARE
- ---------------------------------------------------------------------------------------------------- ----------------------------
Basic $ 0.67 $ 0.76 $ 1.97 $ 1.74
Diluted $ 0.66 $ 0.75 $ 1.94 $ 1.72
- ---------------------------------------------------------------------------------------------------- ----------------------------
AVERAGE COMMON SHARES OUTSTANDING
- ---------------------------------------------------------------------------------------------------- ----------------------------
Basic 5,052 4,947 4,993 4,934
Diluted 5,113 5,017 5,070 4,997
- ---------------------------------------------------------------------------------------------------- ----------------------------
See Accompanying Notes to Consolidated Financial Statements (Unaudited)
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS
ENERGYSOUTH, INC. ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------
In Thousands 2002 2001
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 3,374 $ 3,753
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation and Amortization 2,377 2,207
Provision for Losses on Receivables and Inventory 160 273
Provision for Deferred Income Taxes 1,186 556
Minority Interest 190 186
Changes in Operating Assets and Liabilities:
Receivables (8,344) (4,269)
Inventory 509 251
Payables (902) (5,092)
Other (602) 1,778
- ------------------------------------------------------------------------------------------------------------------
Net Cash Used by Operating Activities $ (2,052) $ (357)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITES
Capital Expenditures (3,700) (4,986)
Changes in Temporary Investments 3,000
- ------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (3,700) (1,986)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITES
Repayment of Long-Term Debt (1,816) (1,700)
Changes in Short-Term Borrowings 2,550 3,325
Payment of Dividends (1,365) (1,287)
Dividend Reinvestment 85 87
Exercise of Stock Options 44 145
Partnership Distributions to Minority Interest Holders (66) (73)
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities (568) 497
- ------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,320) (1,846)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,562 18,052
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,242 $ 16,206
==================================================================================================================
See Accompanying Notes to Consolidated Financial Statements (Unaudited)
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. 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); a
90.9% 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 owners' proportionate shares of the income and
equity of Bay Gas and SGT. All significant intercompany balances and
transactions have been eliminated.
Note 2. The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. All
adjustments, consisting of normal and recurring accruals, which are, in the
opinion of management, necessary to present fairly the results for the interim
periods have been made. The statements should be read in conjunction with the
summary of accounting policies and notes to financial statements included in the
Annual Report on Form 10-K of the Company for the fiscal year ended September
30, 2002.
Note 3. Due to the high percentage of customers using gas for heating, the
Company's operations are seasonal in nature. Therefore, the results of
operations for the three-month period ended December 31, 2002 and 2001 are not
indicative of the results to be expected for the full year.
Note 4. On June 10, 2002, the Alabama Public Service Commission (APSC) approved
Mobile Gas' request for the Rate Stabilization and Equalization (RSE) rate
setting process to be effective October 1, 2002 through September 30, 2005, and
thereafter, unless modified or discontinued by APSC order. Under RSE, the APSC
conducts quarterly reviews to determine, based on Mobile Gas' projections and
fiscal year-to-date performance, whether Mobile Gas' return on equity is
expected to be within the allowed range of 13.35% to 13.85%.
In conjunction with the approval of RSE, the APSC approved an Enhanced Stability
Reserve (ESR), beginning October 1, 2002, to which Mobile Gas may charge the
full amount of: 1) extraordinary O&M expenses resulting from force majeure
events such as storms, severe weather, and outages, when one such event results
in more than $100,000 of additional O&M expense or a combination of two or more
such events results in more than $150,000 of additional O&M expense during a
fiscal year; or 2) losses of revenue from any individual industrial or
commercial customer in excess of $100,000 during the fiscal year, if such losses
cause Mobile Gas' return on equity to fall below 13.35%. An initial ESR balance
of $1.0 million (the "Initial Reserve Balance") has been recorded October 1,
2002 within Regulatory Assets and Other Long-Term Liabilities on the
accompanying balance sheet and is being recovered from customers up to an amount
in any one year not to exceed one-third of the
7
Initial Reserve Balance through rates beginning October 1, 2002.
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 for the months of November through
April 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.
Note 5. 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 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 has granted 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.
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.
FOR THE THREE MONTHS ENDED NATURAL GAS NATURAL GAS
DECEMBER 31, 2002 (IN THOUSANDS): DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 22,270 $ 3,030 $ 1,468 $ (1,055) $ 25,713
Cost of Gas 8,673 (1,045) 7,628
Cost of Merchandise 813 813
Operations and Maintenance Expense 5,081 465 447 (10) 5,983
Depreciation Expense 1,756 526 - 2,282
Taxes, Other Than Income Taxes 1,705 171 20 1,896
- --------------------------------------------------------------------------------------------------------------------
Operating Income 5,055 1,868 188 - 7,111
- --------------------------------------------------------------------------------------------------------------------
Interest Income (Expense) - Net (936) (1,144) - (2,080)
Allow. for Borrowed Funds Used
During Construction 7 564 571
Less: Minority Interest (73) (117) (190)
- --------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 4,053 $ 1,171 $ 188 $ 5,412
====================================================================================================================
8
FOR THE THREE MONTHS ENDED NATURAL GAS NATURAL GAS
DECEMBER 31, 2001 (IN THOUSANDS): DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 21,282 $ 2,562 $ 1,353 $ (1,044) $ 24,153
Cost of Gas 7,297 (1,032) 6,265
Cost of Merchandise & Jobbing 733 733
Operations and Maintenance Expense 4,848 453 515 (12) 5,804
Depreciation Expense 1,658 434 6 2,098
Taxes, Other Than Income Taxes 1,612 116 19 1,747
- --------------------------------------------------------------------------------------------------------------------
Operating Income 5,867 1,559 80 - 7,506
- --------------------------------------------------------------------------------------------------------------------
Interest Income (Expense) - Net (844) (1,039) 8 (1,875)
Allow. for Borrowed Funds Used
During Construction 11 543 554
Less: Minority Interest (90) (96) (186)
- --------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 4,944 $ 967 $ 88 $ 5,999
====================================================================================================================
FOR THE TWELVE MONTHS ENDED NATURAL GAS NATURAL GAS
DECEMBER 31, 2002 (IN THOUSANDS): DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 75,278 $ 11,985 $ 5,114 $ (4,397) $ 87,980
Cost of Gas 27,834 (4,204) 23,630
Cost of Merchandise & Jobbing 3,277 3,277
Operations and Maintenance Expense 20,108 2,081 1,709 (193) 23,705
Depreciation Expense 6,679 1,662 15 8,356
Taxes, Other Than Income Taxes 6,057 580 61 6,698
- --------------------------------------------------------------------------------------------------------------------
Operating Income 14,600 7,662 52 - 22,314
- --------------------------------------------------------------------------------------------------------------------
Interest Income (Expense) - Net (3,520) (4,491) 6 (8,005)
Allow. for Borrowed Funds Used
During Construction 39 2,022 2,061
Less: Minority Interest (273) (470) (743)
- --------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 10,846 $ 4,723 $ 58 $ 15,627
====================================================================================================================
FOR THE TWELVE MONTHS ENDED NATURAL GAS NATURAL GAS
DECEMBER 31, 2001 (IN THOUSANDS): DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 88,998 $ 8,614 $ 4,358 $ (4,200) $ 97,770
Cost of Gas 44,537 (4,151) 40,386
Cost of Merchandise & Jobbing 2,258 2,258
Operations and Maintenance Expense 17,722 1,796 1,671 (49) 21,140
Depreciation Expense 6,266 1,301 28 7,595
Taxes, Other Than Income Taxes 6,654 359 55 7,068
- --------------------------------------------------------------------------------------------------------------------
Operating Income 13,819 5,158 346 - 19,323
- --------------------------------------------------------------------------------------------------------------------
Interest Income (Expense) - Net (3,650) (3,500) 37 (7,113)
Allow. for Borrowed Funds Used
During Construction 251 1,976 2,227
Less: Minority Interest (274) (329) (603)
- --------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 10,146 $ 3,305 $ 383 $ 13,834
====================================================================================================================
Note 6. Basic earnings per share are computed based on the weighted average
number of common shares outstanding during each period. Diluted earnings per
share are computed
9
based on the weighted average number of common shares outstanding and diluted
potential common shares, using the treasury stock method, outstanding during
each period.
Average common shares used to compute basic earnings per share differed from
average common shares used to compute diluted earnings per share by equivalent
shares of 61,000 and 70,000 for the three months ended December 31, 2002 and
2001, respectively, and 77,000 and 63,000 for the twelve months ended December
31, 2002 and 2001, respectively. These differences in equivalent shares are from
outstanding stock options.
Note 7. In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill
and Other Intangible Assets" (SFAS 142). SFAS 141 eliminates the
pooling-of-interests method of accounting for all business combinations
initiated after June 30, 2001 and did not have a material impact on the
Company's financial statements. SFAS 142 requires that goodwill and other
certain intangible assets no longer be amortized, but instead tested for
impairment on an annual basis. SFAS 142 was adopted by the Company on October 1,
2002 and did not have a material impact on the Company's financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143
addresses the recognition and measurement of a liability for an asset retirement
obligation and the associated asset retirement costs. It requires that an
existing legal obligation associated with the retirement of a tangible
long-lived asset be recognized as a liability when incurred and outlines the
method of measuring that liability. The Company adopted SFAS 143 on October 1,
2002. The adoption of this standard did not have an impact on the Company's
financial statements.
In August 2001, FASB issued Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144),
which addresses accounting and reporting standards for long-lived assets. SFAS
144 applies to recognized long-lived assets of an entity to be held and used or
to be disposed of and develops a single accounting model for the disposal of
long-lived assets, whether previously held or newly acquired. SFAS 144 did not
have an impact on the Company's financial statements when adopted by the Company
on October 1, 2002.
In April 2002, FASB issued Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" (SFAS 145). SFAS 145 rescinds previous
statements including FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that Statement, FASB Statement No.
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS
145 requires entities to apply APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," to
determine whether gains and losses related to the extinguishment of debt should
be recorded and classified as part of an entity's recurring operations.
10
In June 2002, FASB issued Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146).
This Statement nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)," and addresses
the recognition and measurement of costs associated with an exit activity that
does not involve an entity newly acquired in a business combination or with a
disposal activity covered by SFAS 144. SFAS 146 applies to all disposal
activities initiated after December 31, 2002. Thus SFAS 146 will be effective
for the Company in the second quarter of fiscal 2003 and is not expected to have
a material impact on the Company's financial statements.
Note 8. In November 2001, Bay Gas entered into an agreement which grants a
nineteen month option to transport additional volumes in excess of the volumes
currently under long-term contract. During the first quarter of fiscal 2002, Bay
Gas received $3,274,000 in consideration of the option agreement, of which the
unamortized balance, $862,000, is classified as a component of unearned revenue
on the Company's consolidated balance sheet as of December 31, 2002 and is being
amortized over the remaining life of the option agreement.
11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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, through Mobile Gas Service
Corporation (Mobile Gas) and Southern Gas Transmission Company (SGT), is engaged
in the distribution of natural gas to residential, commercial and industrial
customers in southwest Alabama. Through Bay Gas Storage Company, Ltd. (Bay Gas),
the Company provides underground natural gas storage services and transportation
services. Other EnergySouth subsidiaries are engaged in gas marketing,
merchandising and other energy-related services.
RESULTS OF OPERATIONS
CONSOLIDATED NET INCOME
All earnings per share amounts referred to herein are computed on a diluted
basis. Earnings per share for the three months ended December 31, 2002 decreased
$0.09, down 12% from the three months ended December 31, 2001, due primarily to
decreased earnings from Mobile Gas' distribution business. For the twelve months
ended December 31, 2002, earnings per share increased $0.22, or 13%, from the
prior year twelve-month period due to increased earnings from Mobile Gas'
distribution business and natural gas storage and transportation operations at
Bay Gas. Financial information by business segment is shown in Note 5 to the
Consolidated Financial Statements above.
Earnings from the Company's natural gas distribution business declined $0.11 per
share for the three months ended December 31, 2002 when compared to the same
prior year period. Mobile Gas' earnings were negatively impacted by a decrease
in margins from temperature sensitive customers due to weather conditions and a
decline in these customers' gas consumption per heating degree-day. Increased
operations expenses and depreciation expense also contributed to the decline in
Mobile Gas' earnings. Mobile Gas' earnings contributed an increase in earnings
per share of $0.08 for the twelve month period ended December 31, 2002 as
compared to the prior year due primarily to the general rate increase which went
into effect October 2, 2001.
The Company's natural gas storage business, operated by Bay Gas, contributed
increased earnings per share of $0.02 (15%) and $0.19 (45%), respectively, for
the three and twelve-month periods ended December 31, 2002 as compared to the
same prior year periods. The increases are due primarily to increased
transportation revenues, revenues from short-term interruptible storage
contracts, and consideration received for an option agreement to transport
additional volumes over and above contracted volumes. Increased revenues were
12
partially offset by an increase in operations and maintenance costs,
depreciation expense due to expansion projects completed and placed into
service, and increased net interest expense.
Earnings from other business operations increased slightly for the three months
ended December 31, 2002 as compared to the same period in fiscal 2002 due
primarily to an increase in merchandise sales. Earnings declined $0.05 per share
during the twelve-month period ended December 31, 2002 as a result of the
liquidation of generator inventories and reserves for slow moving merchandise
inventory.
NATURAL GAS DISTRIBUTION
The natural gas distribution segment of the Company 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.
The Alabama Public Service Commission (APSC) regulates the Company's gas
distribution operations. Mobile Gas' rate tariffs for gas distribution allow a
pass-through to customers of the cost of gas, certain taxes, and incremental
costs associated with the replacement of cast iron mains. These costs,
therefore, have little direct impact on the Company's margins. Other costs,
including a return on investment, are recovered through rates approved by the
APSC. In May 2001, Mobile Gas filed a petition with the APSC to increase its
base rates to customers for the first time since 1995 to recover increases in
these other costs. The APSC approved new base rates, effective October 2, 2001,
which were designed to increase annual gas revenues by approximately $7.8
million.
Mobile Gas also requested approval of a Rate Stabilization and Equalization
(RSE) tariff, a ratemaking methodology already used by the APSC to regulate
certain other utilities. The APSC conducted a hearing in May 2002 and
subsequently approved an RSE tariff for Mobile Gas. A rate adjustment, designed
to increase annual gas revenues by approximately $2.2 million, was implemented
under the RSE tariff effective December 1, 2002. See Note 4 to the Consolidated
Financial Statements above for a more detailed explanation.
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 during the months of November through April 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.
The table below summarizes operating revenues, margins and volumes by customer
class for
13
the three and twelve-month periods ended December 31, 2002 and 2001:
THREE MONTHS TWELVE MONTHS
NATURAL GAS DISTRIBUTION ENDED DEC 31, ENDED DEC 31,
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------
REVENUE (BEFORE ELIMINATIONS)
Residential $ 14,893 $ 14,486 $ 48,222 $ 57,928
Commercial and Industrial - Small 3,348 3,071 11,406 13,750
- ----------------------------------------------------------------------------------------------------------
Total Temperature Sensitive Revenue 18,241 17,557 59,628 71,678
- ----------------------------------------------------------------------------------------------------------
Commercial and Industrial - Large 1,922 1,488 6,870 8,907
Transportation (includes SGT revenues) 1,854 1,989 7,796 7,635
Other 250 248 966 778
- ----------------------------------------------------------------------------------------------------------
TOTAL NATURAL GAS DISTRIBUTION REVENUE $ 22,267 $ 21,282 $ 75,260 $ 88,998
- ----------------------------------------------------------------------------------------------------------
Cost of Natural Gas (8,673) (7,297) (27,834) (44,537)
Revenue Taxes (1,108) (1,032) (3,779) (4,409)
- ----------------------------------------------------------------------------------------------------------
NATURAL GAS DISTRIBUTION SALES
AND TRANSPORTATION MARGINS $ 12,486 $ 12,953 $ 43,647 $ 40,052
- ----------------------------------------------------------------------------------------------------------
DELIVERIES (THERMS)
Residential 14,431 12,469 44,573 44,479
Commercial and Industrial - Small 3,984 3,401 13,340 12,876
- ----------------------------------------------------------------------------------------------------------
Total Temperature Sensitive Deliveries 18,415 15,870 57,913 57,355
- ----------------------------------------------------------------------------------------------------------
Commercial and Industrial - Large 3,086 2,602 11,163 11,563
Transportation (including SGT volumes) 68,545 83,450 340,537 368,078
- ----------------------------------------------------------------------------------------------------------
TOTAL NATURAL GAS DISTRIBUTION VOLUMES 90,046 101,922 409,613 436,996
==========================================================================================================
Natural Gas Distribution revenues increased $985,000 (5%) during the first three
months of fiscal 2003 as compared to the same three-month period in fiscal 2002
due to increased volumes delivered to customers and a rate adjustment under RSE
which was effective December 1, 2002. Gas sales revenue from residential and
small commercial customers, commonly referred to as temperature-sensitive
customers, increased $684,000 (4%) for the three-month period ended December 31,
2002. This increase in revenues is due primarily to a 16% increase in gas
volumes sold to these customers as a result of weather that was 45% colder than
the prior year and 17% colder than normal in terms of heating degree-days.
Gas sales revenue from large commercial and industrial customers increased
$434,000 (29%) in the first quarter of fiscal 2003 due to a 19% increase in gas
volumes sold. While volumes sold to commercial customers increased in general, a
significant amount of the increase is due to one customer that switched from
transportation-only service to sales in January 2002. Additionally, one
industrial customer used more gas during the current year period due to the
unique operational needs of its business. Transportation revenues
14
decreased $135,000 (7%) due to a continued decline in volumes transported to
plants in the pulp and paper industry and one customer that switched from
transportation-only services to sales as mentioned above. Transportation volumes
also decreased during the current year three-month period as a result of one
transportation customer that experienced a chemical fire at its plant in
September 2002. Repairs have been made and the plant became fully operational in
January 2003.
Revenues for the twelve months ended December 31, 2002 decreased $13,738,000
(15%) compared to the twelve months ended December 31, 2001 due primarily to a
return to more normal pricing after the dramatic rise of natural gas prices
experienced during the winter heating season of fiscal 2001. During this time,
natural gas prices increased to levels which far exceeded their 10-year average.
Fluctuations in the actual cost of gas are passed on to customers through the
purchased gas adjustment provision of the rate tariffs and do not directly
result in any increase or decrease in margins. Gas sales revenue from
temperature sensitive customers decreased $12,050,000 (17%) for the twelve
months ended December 31, 2002. The fluctuations in natural gas prices discussed
above more than offset increased revenues from the general rate increase
effective October 2, 2001 and slightly higher volumes delivered to customers due
to colder weather.
Gas sales revenue from large commercial and industrial customers decreased as a
result of fluctuating gas prices and a 3% decline in volumes delivered. Volumes
decreased primarily due to one industrial customer that did not use a
significant amount of gas that it had used in the prior twelve-month period due
to unique operational needs that did not occur in the current year twelve-month
period. Transportation revenues increased $161,000 (2%) for the twelve months
ended December 31, 2002. International Paper (IP) closed its Mobile plant in
December 2000. Upon termination of the contract in July 2002, Mobile Gas
received consideration that was recognized as transportation revenue. Volumes
transported during the twelve months ended December 31, 2002 decreased 7% due to
the same factors discussed for the three-month period. Partially offsetting
these declines were increased volumes delivered to a gas-powered generation
facility, with which Mobile Gas has a long-term contract, that began operations
in June 2001.
Other revenues increased $2,000 (1%) and $188,000 (24%) for the three and twelve
month periods ending December 31, 2002 due primarily to increases in charges for
connection, collection, and bad debt fees which went into effect October 2,
2001.
Natural gas distribution margins declined $467,000 (4%) for the three-month
period ended December 31, 2002 due primarily to temperature sensitive customers.
The Company utilizes a temperature adjustment rider on gas sales to residential
and small commercial/industrial customers during the months of November through
April to mitigate the impact that warmer or colder than normal weather has on
earnings. The month of October 2002, which is not subject to temperature
adjustment, was 81% warmer than October 2001 and 64% warmer than normal. Since
October billings are not subject to temperature adjustment, the full impact of
reduced volumes sold due to the warmer weather is reflected through lower
margins. The months of November and December were much colder than the prior
year and normal weather but the temperature
15
adjustment rider, which applies to customer bills during these months, mitigated
the impact of the colder weather on margins. Margins realized during these
months were, in fact, lower than the prior year due to a decrease in residential
customers' gas consumption per heating degree-day which determines the recovery
of margins through the temperature adjustment rider. Consistent with other
natural gas distribution companies in the United States, Mobile Gas has over
time experienced slight declines in residential customer usage per degree-day as
customers replace old appliances with new, more energy efficient models and as
new, more energy efficient homes are built. The decline in usage per degree-day
in November and December exceeded historical averages. Usages per degree-day can
and do vary between periods due to several factors including humidity, wind
speed, cloud cover, and duration of cold weather. Partially offsetting these
lower margins were increased margins realized from a rate adjustment effective
December 1, 2002 under the RSE ratemaking methodology now in effect for Mobile
Gas. Margins from sales to large commercial and industrial customers increased
for the three months ended December 31, 2002 due to the increase in related
revenues discussed previously. Because transportation revenues do not have an
associated cost of gas, the margin change on these revenues approximates the
change in revenues discussed above.
Natural gas distribution margins increased $3,595,000 (9%) for the twelve-month
period ended December 31, 2002 primarily as a result of the general rate
increase which became effective October 2, 2001. The increase in margins
realized in the twelve months ended December 31, 2002 was less than the amount
anticipated from the rate increase due to the decline in temperature sensitive
customers' gas consumption per heating degree-day and a decrease in volumes sold
and transported to commercial and industrial customers as discussed in gas
revenues above.
Operations and maintenance (O&M) expenses increased $233,000 (5%) for the three
months ended December 31, 2002 due to an increase in payroll, health and other
insurance costs, pension costs and expenses related to the establishment of the
ESR reserves as discussed in Note 4 to the Consolidated Financial Statements
above. O&M expenses increased $2,386,000 (13%) for the twelve months ended
December 31, 2002 due to an increase in payroll and benefits, bad debt expense
and advertising expenses.
Depreciation expense increased $98,000 (6%) and $413,000 (7%), respectively, for
the three and twelve month periods ended December 31, 2002 due to Mobile Gas'
capital expansion projects and increased investment in property, plant and
equipment.
Taxes, other than income taxes (other taxes), primarily consist of property
taxes and business license taxes that are based on gross revenues and fluctuate
accordingly. Other taxes increased $93,000 (6%) for the three-month period ended
December 31, 2002 and decreased $597,000 (9%) for the twelve-month period
primarily as a result of fluctuating revenues.
Interest expense increased $37,000 (4%) for the three months ended December 31,
2002 and decreased $250,000 (7%) for the twelve-month period. The increase
during the first three months of fiscal 2003 is due primarily to interest on
long-term debt. In August 2002, Mobile Gas issued $12,000,000 in 6.9% First
Mortgage Bonds. A portion of the proceeds
16
from the issuance was used to repay the remaining short-term borrowings under
the line of credit. The decrease in interest expense for the twelve months ended
December 31, 2002 is due to a decrease in short-term borrowings and a decline in
short-term borrowing rates.
NATURAL GAS STORAGE
The natural gas storage segment provides for the underground storage of natural
gas and transportation services primarily through the operations of Bay Gas. The
APSC certificated Bay Gas as an Alabama gas storage public utility in 1992. With
its first storage cavern with 2.0 Bcf of working gas capacity and connected
21-mile pipeline, Bay Gas has provided substantial, long-term services for
Mobile Gas and other customers that include storage and transportation of
natural gas from interstate and intrastate sources. The APSC does not regulate
rates for Bay Gas interstate gas storage and storage-related services. The
Federal Energy Regulatory Commission (FERC), which has jurisdiction over
interstate services, allows Bay Gas to charge market-based rates for such
services. Market-based rates minimize regulatory involvement in the setting of
rates for storage services and allow Bay Gas to respond to market conditions.
Bay Gas also provides interstate transportation-only services. The FERC last
issued orders on October 11, 2001 and June 3, 2002 approving rates for such
services.
The construction of natural gas-fired electric generation facilities in the
southeast has provided new opportunities to provide gas storage and
transportation services. Construction of Phase I of Bay Gas' second storage
cavern is nearing completion and is expected to commence operations no later
than April 1, 2003. Although Phase I was originally targeted to begin operations
December 1, 2002, the Company does not expect the delayed commencement of
operations to have a material effect on its financial condition or results of
operations. Bay Gas has entered into a fifteen-year contract with Southern
Company Services, Inc. (Southern), an affiliate of Southern Company, for a
substantial portion of the second cavern capacity. Phase I will have working gas
capacity of approximately 2.5 Bcf and will provide sufficient capacity to serve
the new long-term contract with Southern. Phase II is planned to provide for an
additional 1.5 Bcf of working gas capacity. Cavern development under Phase II is
projected to begin in April 2003 and will be done without interruption of
storage operations.
In order to provide additional pipeline capacity to serve existing customers'
transportation needs and provide the infrastructure for anticipated growth in
the area, Bay Gas completed construction of two additional pipelines.
Construction was completed in June 2001 of an 11-mile, 20-inch pipeline that
parallels the northern portion of the existing Bay Gas pipeline. Construction
was completed in November 2001 of a new 18-mile, 24-inch pipeline that connects
Bay Gas' existing line with Gulf South Pipeline Company's (Gulf South)
high-pressure pipeline and provides a second connection with Mobile Gas'
distribution system.
Bay Gas' revenues increased $468,000 (18%) and $3,371,000 (39%) during the three
and twelve month periods ended December 31, 2002, respectively. See Note 5 to
the Consolidated Financial Statements above for segment disclosure. Revenues
from the transportation of
17
natural gas increased due to additional customers for the three and twelve-month
periods. Revenues for the twelve months ended December 31, 2002 were also
impacted by increased transportation to Phase II of Alabama Power's gas-powered
generating facility at Plant Barry which became operational in June 2001.
Additionally, in November 2001, Bay Gas began transporting gas under another
long-term contract upon completion of the new 24-inch, 18-mile pipeline that
connects Bay Gas to Gulf South's high pressure pipeline. Bay Gas also entered
into an agreement in November 2001 which granted to a customer an option to
order transportation of additional volumes in excess of the volumes currently
under long-term contract. Bay Gas received $3,274,000 in consideration of the
option agreement that is being amortized over the nineteen-month option period.
Short term storage agreements also contributed to the increased revenues during
the three and twelve-month periods ended December 31, 2002. Under these
short-term agreements, available storage capacity is leased to customers on a
day-to-day basis thereby optimizing the cavern capacity.
Operations and maintenance (O&M) expenses increased $12,000 (3%) and $285,000
(16%) during the three and twelve months ended December 31, 2002, respectively,
due to an increase in payroll and payroll related costs, an increase in
insurance costs related to property and liability coverages, and a general
increase in operating cost as a result of the expansion activities of Bay Gas.
Also contributing to the increase in O&M expenses during the twelve-month period
was a $145,000 repair to a compressor.
Depreciation expense increased $92,000 (21%) and $361,000 (28%), respectively,
for the three and twelve-month periods ended December 31, 2002 due primarily to
the two pipelines completed and placed in service in June 2001 and November
2001.
Taxes, other than income taxes, increased as a result of the new pipelines since
these taxes consist primarily of property taxes.
Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs increased $21,000 and $46,000 for the three-month and
twelve-month periods ended December 31, 2002 due to the continued development of
Bay Gas' second storage cavern.
Interest income declined $105,000 (86%) and $978,000 (86%), respectively, during
the three and twelve month periods ended December 31, 2002 due to a decrease in
the unused proceeds from Bay Gas' debt issuance as construction of the second
storage cavern nears completion.
Minority interest reflects the minority partners' share of pre-tax earnings of
the Bay Gas partnership, of which EnergySouth's subsidiary holds a controlling
interest. Minority interest increased $21,000 (22%) and $141,000 (43%) during
the three and twelve month periods ended December 31, 2002 due to increased
pretax earnings of the partnership.
18
OTHER
The Company provides marketing, merchandising and other energy-related services
through Marketing, Mobile Gas, and Services, which are aggregated with
EnergySouth, the holding company, to comprise the Other category. See Note 5 to
the Consolidated Financial Statements above for segment disclosure.
Other revenues increased $115,000 (8%) during the three-months ended December
31, 2002 due to an increase in merchandise sales. Revenues for the twelve month
period ended December 31, 2002 rose $756,000 (17%) over the same period last
year as a result of the liquidation of generator inventory which occurred during
the quarter ended September 30, 2002.
Cost of merchandise (COM) sold increased $80,000 (11%) and $1,019,000 (45%),
respectively, during the three and twelve month periods ended December 31, 2002.
COM generally fluctuates in accordance with merchandise revenues; however,
during the twelve-month period, an additional $534,000 of costs were recognized
due to losses associated with the write-down and liquidation of its generator
inventory and the establishment of reserves for other slow-moving merchandise
inventory.
In addition to the liquidation of its generator inventory, the Company closed
one of its two specialty stores due to losses incurred in these operations
during the last two years. The store closing helped to reduce O&M expenses for
the three months ended December 31, 2002 by $68,000 (13%).
INCOME TAXES
Income taxes fluctuate with the change in income before income taxes. Income tax
expense decreased $208,000 (9%) and increased $514,000 (10%), respectively, for
the three and twelve months ended December 31, 2002.
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. Impacts of operating, investing, and financing
activities are shown on the Consolidated Statements of Cash Flows above. The
decrease in cash flow from operating activities of $1,695,000 was due primarily
to the option payment received by Bay Gas in the three months ended December 31,
2001, which was classified as unearned revenue, and reduced collection of gas
costs from customers. These decreases in cash were somewhat offset by an
increase in non-cash components of net income such as depreciation and deferred
taxes.
19
Cash used in investing activities reflects the capital-intensive nature of the
Company's business. During the three months ended December 31, 2002 and 2001,
the Company used cash of $3,700,000 and $4,986,000, respectively, for the
construction of distribution and storage facilities, purchases of equipment and
other general improvements. Bay Gas' temporary investments of $3,000,000, which
represented a portion of the unused proceeds of the December 2000 debt issuance,
matured in December 2001 and were used in Bay Gas' construction projects.
Financing activities used cash of $568,000 during the three months ended
December 31, 2002 and provided $497,000 during the three months ended December
31, 2001. Financing activities used an additional $1,065,000 cash during the
current year three month period when compared to the same prior year period due
primarily to a decline in short term borrowings. Mobile Gas issued $12,000,000
of 6.9% First Mortgage Bonds in August 2002 of which a portion of the proceeds
were used to pay off short-term borrowings. Other factors impacting the use of
cash were increased payments on long-term debt, increased payment of dividends
and a decrease in the number of stock options exercised in the current year
quarter.
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 December 31, 2002 the Company had $17,450,000 available for
borrowing on its revolving credit agreement. 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. The Company believes it has adequate financial
flexibility to meet its expected cash needs in the foreseeable future.
The table below summarizes the Company's contractual obligations and commercial
commitments as of December 31, 2002:
- -------------------------------------------------------------------------------------------------------------------------
REMAINING FISCAL YEARS
TYPE OF CONTRACTUAL FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR 2008 AND
OBLIGATIONS (IN THOUSANDS): 2003 2004 2005 2006 2007 THEREAFTER
- -------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 2,093 $ 6,006 $ 6,248 $ 6,463 $ 6,769 $ 73,159
Gas Supply Contracts 5,653 1,172 1,166 1,170 1,187 4,402
CRITICAL ACCOUNTING POLICIES
See "Critical Accounting Policies" under "Management's Discussion and Analysis
of Financial Condition and Results of Operation" included in the Annual Report
on Form 10-K of the Company for the fiscal year ended September 30, 2002.
20
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 and changes in historical patterns of collections of accounts
receivable; the prices of alternative 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 cavern 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 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 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2002 the Company had approximately $96.3 million of long-term
debt at fixed interest rates. Interest rates range from 6.9% to 9.00% and the
maturity dates of such debt extend to 2023. See the information provided under
the captions "The Company", "Gas Supply", and "Liquidity and Capital Resources"
in the Company's Form 10-K for the fiscal year ended September 30, 2002 for a
discussion of the Company's risks related to regulation, weather, gas supply,
and the capital-intensive nature of the Company's business.
21
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of EnergySouth, Inc. was
held on January 31, 2003.
(b) The following nominees were elected as Directors of the
Company, to serve until the 2006 Annual Meeting of
Stockholders, by the votes indicated:
Nominee For Against
- ----------------------- --------- -------
John C. Hope III 4,624,265 32,063
Judy A. Marston 4,609,806 46,523
S. Felton Mitchell, Jr. 4,620,446 35,883
Thomas B. Van Antwerp 4,623,062 33,266
The other Directors of the Company whose terms of office
continued after the 2002 Annual Meeting are as indicated
below:
To Serve Until the Annual
Director Meeting of Stockholders in the year
- ---------------------- -----------------------------------
John S. Davis 2004
Walter L. Hovell 2004
G. Montgomery Mitchell 2004
Walter A. Bell 2005
Gaylord C. Lyon 2005
Harris V. Morrisette 2005
E.B. Peebles, Jr. 2005
(c) The stockholders of the Company approved the 2003 Stock Option
Plan of EnergySouth, Inc. by the following vote:
For Against Abstain
- -------------- ------- -------
2,954,578 280,962 141,470
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description
10 (r)-2 2003 Stock Option Plan of EnergySouth, Inc. (incorporated
by reference to Appendix A to the definitive proxy
statement dated December 23, 2002)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chief Executice Officer
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chief Financial Officer
(b) Reports on Form 8-K
During the quarter for which this report is filed, the
Company filed no reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENERGYSOUTH, INC.
----------------
(Registrant)
Date: February 5, 2003 /s/ John S. Davis
-------------------------------
John S. Davis
President and
Chief Executive Officer
Date: February 5, 2003 /s/ Charles P. Huffman
-------------------------------
Charles P. Huffman
Senior Vice President and
Chief Financial Officer
23
Certification
I, John S. Davis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of EnergySouth, Inc.
(the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of date within 90 days prior to filing this quarterly report
(the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 5, 2003 /s/ John S. Davis
-----------------------
John S. Davis
President and
Chief Executive Officer
24
Certification
I, Charles P. Huffman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of EnergySouth, Inc.
(the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of date within 90 days prior to filing this quarterly report
(the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 5, 2003 /s/ Charles P. Huffman
---------------------------
Charles P. Huffman
Senior Vice President and
Chief Financial Officer
25
Exhibit Index
10 (r)-2 2003 Stock Option Plan of EnergySouth, Inc. (incorporated by
reference to Appendix A to the definitive proxy statement dated
December 23, 2002)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief
Executice Officer
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief
Financial Officer
26