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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 March 31, 2003
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
---------------------------------------------------------
(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 April 28, 2003 - 5,065,187 shares.
ENERGYSOUTH, INC.
INDEX
Page No.
--------
PART I. Financial Information (Unaudited):
Consolidated Balance Sheets - March 31,
2003 and 2002 and September 30, 2002 3 - 4
Consolidated Statements of Income - Three and
Six Months Ended March 31, 2003 and 2002 5
Consolidated Statements of Cash Flows - Six
Months Ended March 31, 2003 and 2002 6
Notes to Consolidated Financial Statements 7 - 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations 14 - 22
Quantitative and Qualitative Disclosures About
Market Risk 22
Controls and Procedures 22 - 23
PART II. Other Information 24 - 28
2
PART 1. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
ENERGYSOUTH, INC. March 31, September 30,
====================================================================================== =============
In Thousands 2003 2002 2002
====================================================================================== =============
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 7,502 $ 13,901 $ 10,562
Receivables
Gas 13,428 10,634 4,742
Unbilled Revenue 2,855 1,547 956
Merchandise 2,509 2,727 2,621
Other 761 687 743
Allowance for Doubtful Accounts (1,506) (1,481) (951)
Materials, Supplies, and Merchandise, Net (At Average Cost) 1,395 2,591 1,598
Gas Stored Underground For Current Use (At Average Cost) 1,285 43 3,086
Deferred Purchased Gas Adjustment 1,632 -- --
Deferred Income Taxes 1,110 3,189 2,583
Prepayments 632 465 777
- -----------------------------------------------------------------------------------------------------
Total Current Assets 31,603 34,303 26,717
- -----------------------------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT 229,843 223,634 227,740
Less: Accumulated Depreciation and Amortization 70,878 64,305 66,912
- -----------------------------------------------------------------------------------------------------
Property, Plant, and Equipment - Net 158,965 159,329 160,828
Construction Work in Progress 32,020 18,673 26,995
- -----------------------------------------------------------------------------------------------------
Total Property, Plant, and Equipment 190,985 178,002 187,823
- -----------------------------------------------------------------------------------------------------
OTHER ASSETS
Prepaid Pension Cost 581 58 318
Deferred Charges 542 553 566
Prepayments 1,039 1,095 1,067
Regulatory Assets 1,439 813 653
Merchandise Receivables Due After One Year 4,271 4,848 4,463
- -----------------------------------------------------------------------------------------------------
Total Other Assets 7,872 7,367 7,067
- -----------------------------------------------------------------------------------------------------
TOTAL $230,460 $ 219,672 $ 221,607
- -----------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
3
CONSOLIDATED BALANCE SHEETS
ENERGYSOUTH, INC. March 31, September 30,
============================================================================================= =============
In Thousands, Except Share Data 2003 2002 2002
============================================================================================= =============
(Unaudited)
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Current Maturities of Long-Term Debt $ 4,545 $ 1,859 $ 3,909
Notes Payable -- 9,935 --
Accounts Payable 12,257 5,300 5,665
Dividends Declared 1,367 1,291 1,363
Customer Deposits 1,477 1,565 1,475
Taxes Accrued 3,660 4,863 3,933
Interest Accrued 1,382 1,426 1,342
Deferred Purchased Gas Adjustment -- 3,938 3,182
Unearned Revenue (Note 8) 355 2,068 1,384
Other 1,355 1,248 1,296
- -----------------------------------------------------------------------------------------------------------------
Total Current Liabilities 26,398 33,493 23,549
- -----------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES
Unearned Revenue (Note 8) 71 345 36
Accrued Postretirement Benefit Cost 503 651 570
Deferred Income Taxes 16,640 14,082 15,275
Deferred Investment Tax Credits 301 330 314
Other 3,265 1,954 2,290
- -----------------------------------------------------------------------------------------------------------------
Total Other Liabilities 20,780 17,362 18,485
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities 47,178 50,855 42,034
- -----------------------------------------------------------------------------------------------------------------
CAPITALIZATION
Stockholders' Equity
Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares; Outstanding
March 2003 - 5,062,000;
March 2002 - 4,966,000;
September 2002 - 5,048,000 Shares) 51 50 50
Capital in Excess of Par Value 21,946 19,878 21,607
Retained Earnings 61,827 56,562 55,626
- -----------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 83,824 76,490 77,283
Minority Interest 3,903 3,435 3,645
Long-Term Debt 95,555 88,892 98,645
- -----------------------------------------------------------------------------------------------------------------
Total Capitalization 183,282 168,817 179,573
- -----------------------------------------------------------------------------------------------------------------
TOTAL $230,460 $219,672 $221,607
- -----------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Six Months
ENERGYSOUTH, INC. Ended March 31, Ended March 31,
============================================================================================== ======================
In Thousands, Except Per Share Data 2003 2002 2003 2002
============================================================================================== ======================
OPERATING REVENUES
Gas Revenues $ 34,574 $ 30,127 $ 58,817 $52,923
Merchandise Sales 732 801 1,839 1,783
Other 298 348 662 723
- ---------------------------------------------------------------------------------------------- ----------------------
Total Operating Revenues 35,604 31,276 61,318 55,429
- ---------------------------------------------------------------------------------------------- ----------------------
OPERATING EXPENSES
Cost of Gas 13,156 10,694 20,783 16,959
Cost of Merchandise 538 619 1,354 1,352
Operations and Maintenance 6,607 6,378 12,588 12,183
Depreciation 2,282 2,092 4,564 4,190
Taxes, Other Than Income Taxes 2,432 2,203 4,329 3,950
- ---------------------------------------------------------------------------------------------- ----------------------
Total Operating Expenses 25,015 21,986 43,618 38,634
- ---------------------------------------------------------------------------------------------- ----------------------
OPERATING INCOME 10,589 9,290 17,700 16,795
- ---------------------------------------------------------------------------------------------- ----------------------
OTHER INCOME AND (EXPENSE)
Interest Expense (2,090) (2,034) (4,189) (4,101)
Allowance for Borrowed Funds Used During Construction 595 426 1,166 979
Interest Income 20 72 38 265
Minority Interest (197) (205) (386) (390)
- ---------------------------------------------------------------------------------------------- ----------------------
TOTAL OTHER INCOME (EXPENSE) (1,672) (1,741) (3,371) (3,247)
- ---------------------------------------------------------------------------------------------- ----------------------
INCOME BEFORE INCOME TAXES 8,917 7,549 14,329 13,548
Income Taxes 3,358 2,850 5,396 5,096
- ---------------------------------------------------------------------------------------------- ----------------------
NET INCOME 5,559 4,699 8,933 8,452
============================================================================================== ======================
EARNINGS PER SHARE
Basic $ 1.10 $ 0.95 $ 1.77 $ 1.71
- ---------------------------------------------------------------------------------------------- ----------------------
Diluted $ 1.09 $ 0.93 $ 1.75 $ 1.68
- ---------------------------------------------------------------------------------------------- ----------------------
AVERAGE COMMON SHARES OUTSTANDING
- ---------------------------------------------------------------------------------------------- ----------------------
Basic 5,060 4,965 5,054 4,956
Diluted 5,119 5,047 5,114 5,041
- ---------------------------------------------------------------------------------------------- ----------------------
See Accompanying Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
SIX MONTHS
ENERGYSOUTH, INC. ENDED MARCH 31,
- --------------------------------------------------------------------------------------------------------
In Thousands 2003 2002
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 8,933 $ 8,452
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation and Amortization 4,754 4,410
Provision for Losses on Receivables and Inventory 413 468
Provision for Deferred Income Taxes 2,892 867
Minority Interest 386 390
Changes in Operating Assets and Liabilities:
Receivables (11,785) (2,513)
Inventory 2,002 3,779
Payables 6,359 (3,530)
Deferred Purchased Gas Adjustment (3,182) (770)
Other (982) 356
- --------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 9,790 $ 11,909
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITES
Capital Expenditures (7,849) (11,749)
Changes in Temporary Investments 3,000
- --------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (7,849) (8,749)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITES
Repayment of Long-Term Debt (2,454) (1,700)
Changes in Short-Term Borrowings -- (3,300)
Payment of Dividends (2,731) (2,578)
Dividend Reinvestment 171 168
Exercise of Stock Options 141 323
Partnership Distributions to Minority Interest Holders (128) (224)
- --------------------------------------------------------------------------------------------------------
Net Cash Provided Used by Financing Activities (5,001) (7,311)
- --------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,060) (4,151)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,562 18,052
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,502 $ 13,901
========================================================================================================
See Accompanying Notes to Consolidated Financial Statements
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.
In December 2002, FASB issued Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123" (SFAS 148). SFAS 148 amends FASB Statement
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based compensation and requires prominent
disclosure about the effects on reported net income with respect to stock based
employee compensation. SFAS 148 also amends APB Opinion No. 28, "Interim
Financial Reporting," to require disclosure about those effects in interim
financial information. SFAS 148 was adopted by the Company during the quarter
ending March 31, 2003, and the relevant interim information has been disclosed
in Note 9.
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 disclosures 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 six-month periods ended March 31, 2003 and 2002 are not
indicative of the results to be expected for the full year.
7
The table below represents net income for the twelve months ended March 31, 2003
and 2002:
Twelve Months
ENERGYSOUTH, INC. Ended March 31,
=========================================================================
IN THOUSANDS, EXCEPT PER SHARE DATA 2003 2002
=========================================================================
Operating Revenues $ 92,308 $ 86,678
Cost of Gas 26,091 26,644
Cost of Merchandise 2,665 2,387
Operations and Maintenance Expense 24,430 21,634
Depreciation Expense 8,546 7,865
Taxes, Other Than Income Taxes 6,927 6,605
- -------------------------------------------------------------------------
Operating Income 23,649 21,543
- -------------------------------------------------------------------------
Interest Income (Expense) - Net (8,150) (7,566)
Allow. for Borrowed Funds Used
During Construction 2,231 2,301
Less: Minority Interest (735) (665)
- -------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 16,995 $ 15,613
- -------------------------------------------------------------------------
Income Taxes 6,283 5,977
NET INCOME $ 10,712 $ 9,636
=========================================================================
EARNINGS PER SHARE
Basic $ 2.13 $ 1.95
- -------------------------------------------------------------------------
Diluted $ 2.10 $ 1.92
- -------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING
Basic 5,022 4,944
- -------------------------------------------------------------------------
Diluted 5,090 5,014
- -------------------------------------------------------------------------
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%. Reductions in rates
can be made quarterly to bring the projected return within allowed range;
increases, however, are allowed only once each fiscal year, effective December
1, and cannot exceed four percent of prior-year revenues. RSE limits the amount
of Mobile Gas' equity upon which a return is permitted to 60 percent of its
total capitalization and provides for certain cost control measures designed to
monitor Mobile Gas' operations and maintenance (O&M) expense. Under the
inflation-based cost control measurement established by the APSC, if a change in
Mobile Gas' O&M expense per customer falls within 1.5 percentage points above or
below the change in the Consumer Price Index for All Urban Customers (index
range), no adjustment is required. If the change in O&M expense per customer
exceeds the index range, three-quarters of the difference is returned to
customers. To the
8
extent the change is less than the index range, the utility benefits by one-half
of the difference through future rate adjustments.
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 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 two reportable business segments:
Natural Gas Distribution and Natural Gas Storage. The Natural Gas Distribution
segment is actively engaged in the distribution and transportation of natural
gas to residential, commercial and industrial customers through Mobile Gas and
SGT. The Natural Gas Storage segment provides for the underground storage of
natural gas and transportation services through the operations of Bay Gas and
Storage. Through Marketing, Mobile Gas, and Services, the Company also provides
marketing, merchandising, and other energy-related services which are aggregated
with EnergySouth, the holding company, and included in the Other category.
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.
9
FOR THE THREE MONTHS ENDED NATURAL GAS NATURAL GAS
MARCH 31, 2003 (IN THOUSANDS): DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
=============================================================================================================================
Operating Revenues $ 32,459 $ 3,186 $1,030 $ (1,071) $ 35,604
Cost of Gas 14,215 (1,059) 13,156
Cost of Merchandise 538 538
Operations and Maintenance Expense 5,632 607 380 (12) 6,607
Depreciation Expense 1,756 526 2,282
Taxes, Other Than Income Taxes 2,253 171 8 2,432
- ---------------------------------------------------------------------------------------------------------------------------
Operating Income 8,603 1,882 104 -- 10,589
- ---------------------------------------------------------------------------------------------------------------------------
Interest Income (Expense) - Net (893) (1,147) (30) (2,070)
Allow. for Borrowed Funds Used
During Construction 11 584 595
Less: Minority Interest (74) (123) (197)
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 7,647 $ 1,196 $ 74 $ 8,917
===========================================================================================================================
FOR THE THREE MONTHS ENDED NATURAL GAS NATURAL GAS
MARCH 31, 2002 (IN THOUSANDS): DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
=============================================================================================================================
Operating Revenues $ 28,281 $ 2,957 $1,145 $ (1,107) $ 31,276
Cost of Gas 11,788 (1,094) 10,694
Cost of Merchandise & Jobbing 619 619
Operations and Maintenance Expense 5,356 584 451 (13) 6,378
Depreciation Expense 1,658 428 6 2,092
Taxes, Other Than Income Taxes 2,072 116 15 2,203
- ---------------------------------------------------------------------------------------------------------------------------
Operating Income 7,407 1,829 54 -- 9,290
- ---------------------------------------------------------------------------------------------------------------------------
Interest Income (Expense) - Net (832) (1,099) (31) (1,962)
Allow. for Borrowed Funds Used
During Construction 12 414 426
Less: Minority Interest (101) (104) (205)
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 6,486 $ 1,040 $ 23 $ 7,549
===========================================================================================================================
FOR THE SIX MONTHS ENDED NATURAL GAS NATURAL GAS
MARCH 31, 2003 (IN THOUSANDS): DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
=============================================================================================================================
Operating Revenues $ 54,730 $ 6,216 $2,498 $ (2,126) $ 61,318
Cost of Gas 22,887 (2,104) 20,783
Cost of Merchandise & Jobbing 1,354 1,354
Operations and Maintenance Expense 10,714 1,071 825 (22) 12,588
Depreciation Expense 3,512 1,052 4,564
Taxes, Other Than Income Taxes 3,959 341 29 4,329
- ---------------------------------------------------------------------------------------------------------------------------
Operating Income 13,658 3,752 290 -- 17,700
- ---------------------------------------------------------------------------------------------------------------------------
Interest Income (Expense) - Net (1,801) (2,292) (58) (4,151)
Allow. for Borrowed Funds Used
During Construction 18 1,148 1,166
Less: Minority Interest (147) (239) (386)
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 11,728 $ 2,369 $ 232 $ 14,329
===========================================================================================================================
10
FOR THE SIX MONTHS ENDED NATURAL GAS NATURAL GAS
MARCH 31, 2002 (IN THOUSANDS): DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
=============================================================================================================================
Operating Revenues $ 49,563 $ 5,519 $2,498 $ (2,151) $ 55,429
Cost of Gas 19,085 (2,126) 16,959
Cost of Merchandise & Jobbing 1,352 1,352
Operations and Maintenance Expense 10,204 1,039 965 (25) 12,183
Depreciation Expense 3,317 862 11 4,190
Taxes, Other Than Income Taxes 3,684 231 35 3,950
- ---------------------------------------------------------------------------------------------------------------------------
Operating Income 13,273 3,387 135 -- 16,795
- ---------------------------------------------------------------------------------------------------------------------------
Interest Income (Expense) - Net (1,629) (2,138) (69) (3,836)
Allow. for Borrowed Funds Used
During Construction 22 957 979
Less: Minority Interest (191) (199) (390)
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 11,475 $ 2,007 $ 66 $ 13,548
===========================================================================================================================
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 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 59,000 and 82,000 for the three months ended March 31, 2003 and 2002,
respectively, and 60,000 and 85,000 for the six months ended March 31, 2003 and
2002, 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 certain
other 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-
11
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. The
Company adopted SFAS 145 on October 1, 2002 and accordingly reclassified the
extraordinary loss on early extinguishment of debt which occurred in fiscal 2001
to ordinary income. The adoption of SFAS 145 does not have an impact on the
periods ended March 31, 2003.
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. SFAS 146 was adopted by the
Company in the second quarter of 2003 and did not have an impact on the
Company's financial statements.
Note 8. In November 2001, Bay Gas entered into an agreement which grants a
customer 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, $345,000, is classified as a
component of unearned revenue on the Company's consolidated balance sheet as of
March 31, 2003 and is being amortized over the remaining life of the option
agreement.
Note 9. At the Annual Meeting of the Stockholders of EnergySouth, Inc. on
January 31, 2003, the stockholders approved the 2003 Stock Option Plan of
EnergySouth, Inc (the 2003 Plan). As of March 31, 2003, no options have been
granted under the 2003 Plan. The Company's previous stock option plan, the
Amended and Restated Stock Option Plan of EnergySouth, Inc. (the Plan), which
expired on December 4, 2002, provided for the granting of incentive stock
options, non-qualified stock options, and stock appreciation rights to key
employees. Stock options granted under the Plan became 25% exercisable on the
first
12
anniversary of the grant date and an additional 25% became exercisable in each
of the next three succeeding years. No option granted under the Plan may be
exercised after the expiration of ten years from the grant date, and such
options were granted at option prices which represented the market price on the
grant date. The 2003 Plan provides for substantially similar option grants.
The Company accounts for the plans under the recognition and measurement
principles of APB Opinion 25, "Accounting for Stock Issued to Employees," and
related Interpretations. No stock-based compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation.
Three Months Six Months
ENERGYSOUTH, INC. Ended Mar 31, Ended Mar 31,
- ----------------------------------------------------------------------------------------------------------
In Thousands, Except per Share Data 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------
NET INCOME, AS REPORTED 5,559 4,699 8,933 8,452
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects 25 31 59 62
- ----------------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME $ 5,534 $4,668 $ 8,874 $8,390
- ----------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic - as reported $ 1.10 $ 0.95 $ 1.77 $ 1.71
- ----------------------------------------------------------------------------------------------------------
Basic - pro forma $ 1.09 $ 0.94 $ 1.76 $ 1.69
- ----------------------------------------------------------------------------------------------------------
Diluted - as reported $ 1.09 $ 0.93 $ 1.75 $ 1.68
- ----------------------------------------------------------------------------------------------------------
Diluted - pro forma $ 1.08 $ 0.92 $ 1.73 $ 1.66
- ----------------------------------------------------------------------------------------------------------
13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 and six months ended March 31,
2003 increased $0.16 and $0.07, increases of 17% and 4%, due to increased
earnings from both Mobile Gas' distribution business and Bay Gas' business.
Financial information by business segment is shown in Note 5 to the unaudited
Consolidated Financial Statements above.
Earnings from the Company's natural gas distribution business increased $0.14
and $0.01, respectively, for the three- and six-month periods ended March 31,
2003. Mobile Gas' earnings were positively impacted by a rate adjustment which
became effective December 1, 2002, based upon the guidelines established under
the Rate Stabilization and Equalization (RSE) tariff. For further information on
RSE, see "Natural Gas Distribution" below. While margins from residential
temperature-sensitive customers declined in the first quarter of fiscal 2003 due
to weather conditions and a decline in these customers' consumption per
degree-day, this was more than offset during the second quarter of fiscal 2003
by increased margins from the December 1, 2002 rate adjustment and increased
usage per degree-day from temperature-sensitive customers. Increased operations
expenses and depreciation expense partially offset the increased margins.
The Company's natural gas storage business, operated by Bay Gas, contributed
increased earnings per share of $0.02 and $0.04, respectively, for the three-
and six-month periods ended March 31, 2003 as compared to the same prior year
periods. The increases are due primarily to increased transportation revenues
and revenues from short-term interruptible storage contracts. Increased revenues
were partially offset by an increase in operations and maintenance costs,
depreciation expense and property taxes due to expansion projects completed and
placed into service.
14
Earnings from other business operations were relatively flat during the three
months ended March 31, 2003 and increased $0.02 for the six months ended March
31, 2003. The prior year periods included losses from natural gas generator
sales and a retail specialty store.
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. Wholesale natural
gas prices during the first and second fiscal quarters this year have doubled as
compared to the same periods last year. During the month of March 2003, gas
prices more than tripled as compared to March 2002. Mobile Gas has followed a
gas purchasing strategy to secure prices for a portion of its gas supply needs
for the winter heating season by locking in gas prices at fixed rates. Mobile
Gas' strategy for purchasing gas and the Company's use of natural gas storage
capacity has helped to mitigate the impact of increased prices on customers'
bills; however, a portion of the increased gas costs were passed through.
Effective March 1, 2003, Mobile Gas adjusted its rates to recover increased gas
costs paid to its suppliers.
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 the three- and six-month periods ended March 31, 2003 and 2002:
15
THREE MONTHS SIX MONTHS
NATURAL GAS DISTRIBUTION ENDED MAR 31, ENDED MAR 31,
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
REVENUE (BEFORE ELIMINATIONS)
Residential $ 22,907 $ 19,849 $ 37,800 $ 34,334
Commercial and Industrial - Small 5,091 4,193 8,439 7,265
- ----------------------------------------------------------------------------------------------------------------------
Total Temperature Sensitive Revenue 27,998 24,042 46,239 41,599
- ----------------------------------------------------------------------------------------------------------------------
Commercial and Industrial - Large 2,256 1,840 4,177 3,328
Transportation (includes SGT revenues) 1,954 2,082 3,809 4,071
Other 252 314 502 558
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NATURAL GAS DISTRIBUTION REVENUE $ 32,460 $ 28,278 $ 54,727 $ 49,556
======================================================================================================================
Cost of Natural Gas (before eliminations) (14,215) (11,788) (22,887) (19,085)
Revenue Taxes (1,629) (1,427) (2,737) (2,459)
- ----------------------------------------------------------------------------------------------------------------------
NATURAL GAS DISTRIBUTION SALES
AND TRANSPORTATION MARGINS $ 16,616 $ 15,063 $ 29,103 $ 28,012
======================================================================================================================
DELIVERIES (THERMS)
Residential 20,513 20,596 34,944 33,065
Commercial and Industrial - Small 5,302 5,130 9,286 8,531
- ----------------------------------------------------------------------------------------------------------------------
Total Temperature Sensitive Deliveries 25,815 25,726 44,230 41,596
- ----------------------------------------------------------------------------------------------------------------------
Commercial and Industrial - Large 3,023 3,011 6,109 5,613
Transportation (including SGT volumes) 78,049 100,455 146,593 183,904
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NATURAL GAS DISTRIBUTION VOLUMES 106,887 129,192 196,932 231,113
======================================================================================================================
Natural Gas Distribution revenues increased $4,182,000 (15%) and $5,171,000
(10%), respectively, during the three- and six-month periods ended March 31,
2003 due to increased volumes delivered to customers and the RSE rate adjustment
which went into effect on December 1, 2002.
Natural gas distribution margins increased $1,553,000 (10%) and $1,091,000 (4%),
respectively, for the three and six months ended March 31, 2003 primarily as a
result of the RSE rate adjustment. In addition to the impact of the rate
adjustment, margins from temperature sensitive customers also increased during
the second quarter of fiscal 2003 due to an increase in consumption per
degree-day by these customers. This increase partially mitigated lower usages
experienced during the first quarter of fiscal 2003, such that usage
16
per degree-day for the current year six-month period remained slightly below the
same period last year. Usage per degree-day can, and does, vary between periods
due to several factors including humidity, wind speed, cloud cover, and duration
of cold weather. Increased margins realized from the rate adjustment for the six
months ended March 31, 2003 were partially offset by the lower usage per
degree-day experienced during the first quarter of fiscal 2003. 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.
Commercial and Industrial margins, which are not subject to weather
normalization, increased 9% and 20%, respectively, for the three and six month
periods ended March 31, 2003 due to the rate adjustment and increased usage.
Margins from transportation customers declined 6% for the three and six-month
periods due to a decrease in volumes transported due to general economic
conditions. Mobile Gas' service territory has experienced the effects of plant
closings, particularly in the pulp and paper industry, during the last two
years. In addition to two customers' previous plant closings, a chemical
company, which is a customer of the Company, has recently announced that it will
cease operations in the Company's first quarter of fiscal 2004. Known changes in
margin such as this, as well as other changes affecting net income, would
generally be reflected in the next RSE adjustment.
Operations and maintenance (O&M) expenses increased $276,000 (5%) for the three
months ended March 31, 2003 due to an increase in property insurance, bad debt
reserves, and maintenance expenses. Bad debt reserves increased during the three
months ended March 31, 2003 due to a rise in gas receivables associated with an
increase in natural gas prices discussed above. In response to the corresponding
increase in accounts receivable, Mobile Gas has established additional reserves
for anticipated uncollectible account balances for gas delivered during the
current year winter heating season.
For the six months ended March 31, 2003, O&M expenses increased $510,000 (5%)
due to an increase in health and other insurance costs and $83,000 in expenses
related to the establishment of the ESR reserve as discussed in Note 4 to the
unaudited Consolidated Financial Statements above. Management currently expects
that the change in Mobile Gas' O & M expense per customer for the 2003 fiscal
year will be within the cost control measurement formula established by the
APSC and described in Note 4.
Depreciation expense increased $98,000 (6%) and $195,000 (6%), respectively, for
the three- and six-month periods ended March 31, 2003 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 $181,000 (9%) and $275,000 (7%) for the
three- and six-month periods ended March 31, 2003.
17
Interest expense decreased $66,000 (8%) and $122,000 (7%) for the three-month
and six-month periods ended March 31, 2003 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 through the operations of Bay Gas. The APSC
certificated Bay Gas as an Alabama natural 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 Bay Gas' second storage cavern has been
completed and it was placed into service April 1, 2003. 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. Currently, the second salt-dome storage cavern has a working capacity
of 3.5 Bcf and will provide sufficient capacity to serve the new long-term
contract with Southern. Additional cavern development is planned to provide for
an extra 1.0 Bcf of working gas capacity. Together, the two caverns at Bay Gas
Storage will hold 6.5 Bcf., with injection and withdrawal capacity of 225 MMcf
and 610 MMcf per day, respectively. The additional cavern development is
projected to be complete in fiscal 2004 and will be done without interruption of
storage operations.
Bay Gas' revenues increased $229,000 (8%) and $697,000 (13%) during the three-
and six-month periods ended March 31, 2003, respectively, due to short-term
storage agreements and increased transportation volumes. Under these short-term
agreements, available storage capacity is leased to customers on a day-to-day
basis, thereby optimizing the use of the cavern capacity. Also contributing to
the six-month increase were revenues from transportation services provided under
a long-term contract that began in November 2001 with the completion of a new 24
inch pipeline, and consideration received in November 2001 for an option
agreement to transport additional volumes over and above contracted volumes. See
Note 5 to the unaudited Consolidated Financial Statements above for information
about the Natural Gas Storage segment.
18
Operations and maintenance (O&M) expenses increased $23,000 (4%) and $32,000
(3%) during the three and six months ended March 31, 2003, respectively,
primarily due to an increase in payroll and payroll related costs and an
increase in insurance costs related to property and liability coverages.
Depreciation expense increased $98,000 (23%) and $190,000 (22%), respectively,
for the three and six-month periods ended March 31, 2003 due primarily to the
pipeline completed and placed in service November 2001.
Taxes, other than income taxes, consist primarily of property taxes and
increased as a result of new pipelines placed in service June 2001 and November
2001.
Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs increased $170,000 and $191,000 for the three-month and six-month
periods ended March 31, 2003 due to the continued development of Bay Gas' second
storage cavern.
Interest income declined $52,000 (83%) and $158,000 (85%), respectively, during
the three and six month periods ended March 31, 2003 due to a decrease in the
unused proceeds from Bay Gas' debt issuance as construction of the second
storage cavern was substantially completed.
Minority interest reflects the minority partner's share of pre-tax earnings of
the Bay Gas partnership, of which EnergySouth's subsidiary holds a controlling
interest. Minority interest increased $19,000 (18%) and $40,000 (20%) during the
three- and six-month periods ended March 31, 2003 due to increased pretax
earnings of the partnership.
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 unaudited Consolidated Financial Statements above for segment disclosure.
Other revenues remained constant for the six-month period but decreased $115,000
(10%) during the three-months ended March 31, 2003 due to the closing of a
specialty store in October 2002 and the exit from the natural gas generator
sales business in September 2002.
Cost of merchandise (COM) sold decreased $81,000 (13%) for the three months
ended March 31, 2003 and increased $2,000 for the six month period ended March
31, 2003. COM generally fluctuates in accordance with merchandise revenues.
Also, during the six-month period of last year, additional costs were recognized
due to the establishment of reserves for slow-moving merchandise inventory.
19
O&M expenses decreased $71,000 (16%) and $140,000 (15%) for three and six months
ended March 31, 2003 primarily due to expenses incurred in the prior year
periods for the closed specialty store, natural gas generator sales, and bad
debt expenses associated with financed merchandise contracts.
INCOME TAXES
Income taxes fluctuate with the change in income before income taxes. Income tax
expense increased $508,000 (18%) and $300,000 (6%), respectively, for the three
and six months ended March 31, 2003.
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 $2,119,000 was due primarily
to the option payment received by Bay Gas in November 2001, reduced collection
of gas costs from customers, and an increase in gas inventory stored
underground. These decreases in cash were somewhat offset by an increase in
non-cash components of net income such as depreciation and deferred taxes.
Cash used in investing activities reflects the capital-intensive nature of the
Company's business. During the six months ended March 31, 2003 and 2002, the
Company used cash of $7,849,000 and $11,749,000, 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. Bay
Gas' second natural gas storage cavern has been completed and placed in service
on April 1, 2003. Injections of base gas into the second cavern will continue
for several months at an estimated cost of $5,000,000. Additional expansion of
the second cavern is currently planned and is projected to be complete in fiscal
2004 at an estimated cost of $2,600,000 million. Mobile Gas is expanding its
presence in Baldwin County, Alabama by extending its gas main by 11 miles at an
estimated cost of $1.7 million. Upon completion of the project, which is
expected to occur in fiscal 2003, Mobile Gas will provide natural gas services
to customers in the City of Spanish Fort in addition to its service area along
Highway 225 in Baldwin County.
Financing activities used cash of $5,001,000 and $7,311,000 during the six
months ended March 31, 2003 and 2002, respectively, due primarily to repayments
of long and 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.
20
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 March 31, 2003 the Company had $20,000,000 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 March 31, 2003:
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 $ 1,455 $ 6,006 $ 6,248 $ 6,463 $ 6,769 $ 73,159
Gas Supply Contracts 368 1,159 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.
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;
21
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 March 31, 2003 the Company had approximately $95.5 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.
ITEM 4 CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, an evaluation (the
"Evaluation") was carried out, under the supervision and with the participation
of the Company's President and Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of the design and operation of
the Company's disclosure controls and procedures ("Disclosure Controls"). Based
on the Evaluation, the CEO and CFO concluded that the Company's Disclosure
Controls are effective in timely alerting them to material information required
to be included in the Company's periodic SEC reports.
22
CHANGES IN INTERNAL CONTROL
Internal controls for financial reporting were also evaluated and there have
been no significant changes in internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected.
23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
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 Executive
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: May 15, 2003 /s/ John S. Davis
-----------------------------
John S. Davis
President and
Chief Executive Officer
Date: May 15, 2003 /s/ Charles P. Huffman
-----------------------------
Charles P. Huffman
Senior Vice President and
Chief Financial Officer
24
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: May 15, 2003 /s/ John S. Davis
-------------------------
John S. Davis
President and
Chief Executive Officer
25
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: May 15, 2003 /s/ Charles P. Huffman
-------------------------------
Charles P. Huffman
Senior Vice President and
Chief Financial Officer
26
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
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