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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934 for the fiscal year ended September 30, 2003
[ ] Transition report pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the transition period from to
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Commission File
Number 0-29604
EnergySouth, Inc.
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(Exact name of registrant as specified in its charter)
Alabama 58-2358943
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(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2828 Dauphin Street, Mobile, Alabama 36606
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (251) 450-4774
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock ($.01 par value)
-----------------------------
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of Common Stock (the only outstanding class of voting
or non-voting common equity), Par Value $.01 per share, held by non-affiliates
(based upon the average of the high and low closing price as reported by NASDAQ
on March 31, 2003) was approximately $131,868,721.
As of December 5, 2003, there were 5,139,721 shares of Common Stock, Par Value
$.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders on January 30, 2004 are incorporated by reference into Part III.
PART I
Item 1. Business.
GENERAL
EnergySouth, Inc. (together with its subsidiaries, the "Company" or
"Registrant", and exclusive of its subsidiaries, "EnergySouth") was initially
incorporated under the laws of the State of Alabama on September 5, 1997 for the
primary purpose of becoming the holding company for Mobile Gas Service
Corporation ("Mobile Gas"), a natural gas utility, and its subsidiaries.
Effective February 2, 1998, Mobile Gas and its subsidiaries were reorganized
(the "Reorganization") into a holding company structure whereby Mobile Gas
became a wholly-owned subsidiary of EnergySouth.
Mobile Gas was incorporated under the laws of the State of Alabama in
1933. Mobile Gas is engaged in the purchase, distribution, sale and
transportation of natural gas to approximately 100,000 residential, commercial
and industrial customers in Southwest Alabama, including the City of Mobile.
Mobile Gas' service territory covers approximately 300 square miles. Mobile Gas
is also involved in merchandise sales, specifically sales of natural gas
appliances.
EnergySouth Services, Inc. ("Services") was incorporated in March 1983.
Through Services, the Company provides contract and consulting work for
utilities and industrial customers. Services owns a 51% interest in Southern Gas
Transmission Company ("SGT"), an Alabama general partnership which was formed in
November 1991. SGT was established to provide transportation services to the
facilities of Alabama River Pulp Company, Inc ("ARP"). During fiscal year 1992,
SGT constructed and began operating a 50-mile pipeline from the facilities of
Gulf South Pipeline Company ("Gulf South") near Flomaton, Alabama to the
facilities of ARP in Claiborne, Alabama.
MGS Marketing Services, Inc. ("Marketing") was incorporated on March 5,
1993 to assist existing and potential customers in the purchase of natural gas.
During fiscal year 2003, as existing contracts for marketing services expired,
such contracts were not renewed by Marketing. As of September 30, 2003, the
Company is not actively engaged in activities previously provided by Marketing.
In connection with the Reorganization, Services and Marketing became
wholly-owned subsidiaries of EnergySouth during fiscal year 1998.
MGS Storage Services, Inc. ("Storage") was incorporated on December 4,
1991 as a wholly-owned subsidiary of Mobile Gas. Effective December 19, 2000,
Storage became a wholly-owned subsidiary of EnergySouth. As of September 30,
2003 Storage held a general partnership interest of 90.9% in Bay Gas Storage
Company, Ltd. ("Bay Gas"), an Alabama limited partnership, and a 9.1% limited
partnership interest was held by Olin Corporation ("Olin"). Bay Gas owns and
operates underground gas storage and related pipeline facilities which are used
to provide storage and delivery of natural gas for Mobile Gas and other
customers.
1
BUSINESS SEGMENTS
The Company's operations are classified into the following business
segments:
- - Natural Gas Distribution - The Natural Gas Distribution segment is
actively engaged in the distribution and transportation of natural gas
to residential, commercial and industrial customers in Southwest
Alabama through Mobile Gas and SGT.
- - Natural Gas Storage - The Natural Gas Storage segment provides for the
underground storage of natural gas and transportation services through
the operations of Bay Gas and Storage. The storage operations are
located in Southwest Alabama.
- - Other - Includes marketing, merchandising, and other energy-related
services which are provided through Marketing, Mobile Gas, and
Services, respectively, and are aggregated with the corporate
operations of EnergySouth, the holding company.
For financial information by business segment, including revenues by
segment, for the fiscal years ended September 30, 2003, 2002, and 2001, see Note
10 to the Consolidated Financial Statements.
CUSTOMERS
Of the approximately 100,000 customers of the Company, approximately
95% are residential customers. In the fiscal year ended September 30, 2003,
approximately 57% of the Company's gas revenues were derived from residential
sales, 14% from small commercial and industrial sales, 9% from large commercial
and industrial sales, 11% from transportation services, and 9% from storage and
miscellaneous services. Residential sales in fiscal 2003 accounted for
approximately 5% of the total volume of gas delivered to the Company's
customers, with small commercial and industrial, large commercial and
industrial, and transportation deliveries accounting for approximately 2%, 1%
and 92%, respectively. The ten largest customers of the Company accounted for
approximately 19% of the Company's gross margin in fiscal 2003, with the largest
accounting for approximately 6%. (Gross margin refers to Gas Revenue less Cost
of Gas, as shown on the Consolidated Statements of Income on page F-3.) For
further information with respect to revenues from and deliveries to the various
categories of the Company's customers, see Item 6, "Selected Financial Data"
below. Gross margins by business segment are shown in Note 10 of the Notes to
the Consolidated Financial Statements on page F-23.
EnergySouth is located at the crossroads of the expanding offshore
natural gas production areas of the Central Gulf Coast and the developing
gas-fired electric generation markets in the lower Southeast region of the
United States. Mobile Gas provides transportation services to two electric
generating facilities which became operational in fiscal 2001. Bay Gas provides
transportation services to three gas-fired electric generating facilities, one
of which has been recently expanded. During fiscal 1999 Bay Gas entered into
storage contracts with electric utilities which fully subscribed the remaining
space in its first storage cavern. During fiscal 2000 Bay Gas entered into a
long term contract with Southern Company Services, Inc., as agent for a number
of electric utility subsidiaries of Southern Company, to provide storage
capacity of up to 3.2
2
million MMBtu of natural gas for those subsidiaries. To accommodate this
contract, Bay Gas constructed a second underground storage cavern as discussed
in "Gas Storage" below. While there are no current reported plans for additional
gas-fired electric generation facilities in the Company's immediate service
area, industry projections indicate Florida utilities plan to add gas fueled
power generation in the next decade. Management believes that Bay Gas, with the
construction of additional caverns, is well positioned to serve the storage
needs of that market. There can be no assurances that additional caverns will be
constructed.
GAS SUPPLY
The Company is directly connected to four natural gas processing plants
in south Mobile County. Mobile Gas has contracted for a portion of its firm
supply directly with two of these producers. For the fiscal year ended September
30, 2003, the Company obtained approximately 55% of its gas supply from sources
located in the Mobile Bay area, with the balance being obtained from interstate
sources.
Mobile Gas has a current peak day firm requirement of 127,000 MMBtus.
Firm supply needs of 80,000 MMBtu/day are expected to be met through the
withdrawal of gas from the storage facility owned by Bay Gas. The Company also
had firm supply contracts with gas suppliers for peak day needs of 10,000
MMBtu/day and 13,000 MMBtu/day until October 31, 2003 through the direct
connections with the Duke and Shell processing plants. Additionally, the Company
has contracted for firm transportation and storage service ("No-Notice Service")
for 24,000 MMBtu/day from Gulf South under an agreement effective through March
31, 2011.
GAS STORAGE
Construction of Bay Gas' first storage cavern and facilities was
completed in 1994. At September 30, 2003, the cavern had the capacity to hold up
to 3.2 million MMBtu of natural gas. Approximately .9 million MMBtu of the gas
injected into the storage cavern, called "base gas," remains in the cavern to
provide sufficient pressure to maintain cavern integrity, and the remainder,
approximately 2.3 million MMBtu, represents working storage capacity. In 1994
Mobile Gas entered into a gas storage agreement with Bay Gas under which Bay Gas
agreed to provide storage of .8 million MMBtu of working storage capacity of the
first cavern for an initial period of 20 years.
The construction of natural gas-fired electric generation facilities in
the Southeast has provided opportunities to provide gas storage and
transportation services. Construction of Phase I of Bay Gas' second storage
cavern was completed and the cavern 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 3.7 Bcf and will provide sufficient capacity to serve the
new long-term contract with Southern as well as other customers. Continuing
cavern development is planned to provide for an additional 1.0 Bcf of working
gas capacity. Together, the two caverns at Bay Gas hold 6.0 Bcf, with injection
and withdrawal capacity of 200 MMcf and 610 MMcf per day, respectively, but are
currently planned to hold 7.0 Bcf, with injection and withdrawal capacity of 300
MMcf
3
and 700 MMcf per day, respectively. The additional cavern development is
projected to continue in fiscal 2004 without interruption of storage operations.
Bay Gas has pipeline interconnects with Florida Gas Transmission Company and
Gulf South which provide access to interstate markets.
COMPETITION
Gas Distribution Competition. The Company is not in significant direct
competition with respect to the retail distribution of natural gas to
residential, small commercial and small industrial customers within its service
area. Electricity competes with natural gas for such uses as cooking, water
heating and space heating.
The Company's large commercial and industrial customers with
requirements of 200 MMBtu per day or more have the right to contract with the
Company to transport customer-owned gas while other commercial and industrial
customers buy natural gas from the Company. Some industrial customers have the
capability to use either fuel oil, coal, wood chips or natural gas, and choose
their fuel depending upon a number of factors, including the availability and
price of such fuels. In recent years, the Company has had adequate supplies so
that interruptible industrial customers that are capable of using alternative
fuels have not had supplies curtailed. The Company's rate tariffs include a
competitive fuel clause which allows the Company to adjust its rates to certain
large commercial and industrial customers in order to compete with alternative
energy sources. Even so, in recent periods of volatility in natural gas prices,
several customers who have the capability to use alternative fuels have switched
to such alternative fuel sources in periods of extremely high natural gas
prices. While some of these customers have returned to using natural gas as
prices have stabilized, there can be no assurance that these or other customers
will continue to use natural gas in periods of sustained high natural gas
prices. See "Rates and Regulation" below.
Due to the close proximity of various pipelines and gas processing
plants to the Company's service area, there exists the possibility that current
or prospective customers could install their own facilities and connect directly
to a supply source and thereby "bypass" the Company's service. The Company
believes that because it has worked closely with major industrial customers to
meet those customers' needs, and because of its ability to provide competitive
pricing under its rate tariffs, none of the Company's customers have bypassed
its facilities to date. Although there can be no assurance as to future
developments, the Company intends to continue its efforts to reduce the
likelihood of bypass by offering competitive rates and services to such
customers.
Gas Storage Competition. A number of types of competitors may provide
services like or in competition with those of Bay Gas. These include, among
others, natural gas storage facilities, natural gas aggregators, and natural gas
pipelines. Bay Gas believes that its strategic geographic location and its
ability to charge market-based rates for interstate storage services will enable
it to effectively compete with such competitors. See "Rates and Regulation"
below.
4
RATES AND REGULATION
The natural gas distribution operations of Mobile Gas are under the
jurisdiction of the Alabama Public Service Commission ("APSC"). The APSC
approves rates which are intended to permit the recovery of the cost of service
including a return on investment. Rates have historically been determined by
reference to rate tariffs approved by the APSC in traditional rate proceedings
or, for certain large customers, on a case-by-case basis. In addition, pursuant
to APSC order, rates for a limited number of large industrial customers are
determined on a privately negotiated basis. Since December 1, 1995, Mobile Gas
has also been allowed to recover costs associated with its replacement of cast
iron mains. This component of rates is adjusted annually through a filing with
the APSC. The rates for service rendered by Mobile Gas are on file with the
APSC. The APSC also approves the issuance of debt and equity securities and has
supervision and regulatory authority over service, pipeline safety, accounting,
and other matters. In May 2001, Mobile Gas filed a petition with the APSC to
increase its base rates to customers for the first time since 1995. A general
rate increase covers such things as increased operating expenses, taxes,
depreciation, and financing costs of the gas distribution system. The APSC
approved new base rates, effective October 2, 2001, designed to increase annual
gas revenues by approximately $7.8 million.
On June 10, 2002, the 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 extent the change is less
than the index range, the utility benefits by one-half of the difference through
future rate adjustments. A rate adjustment designed to increase annual revenues
by $2.2 million became effective December 1, 2002 under RSE. Effective December
1, 2003, rates were adjusted under RSE which are designed to increase annual
revenues by $2.8 million.
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)
5
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
was recorded October 1, 2002 and is being recovered from customers through rates
beginning October 1, 2002. Subject to APSC approval, additional funding, up to a
maximum reserve balance of $1.5 million, may be provided by any future
non-recurring revenue should such revenue cause Mobile Gas' return on equity for
the fiscal year to exceed 13.85%. During the year ended September 30, 2003,
Mobile Gas charged $146,000 against the ESR related to revenue losses from a
certain large industrial customer. Following a year in which a charge against
the ESR is made, the APSC provides for accruals to the ESR of no more than
$15,000 monthly until the maximum funding level is achieved.
Mobile Gas is also authorized by the APSC to apply a temperature rate
adjustment to customers' gas bills for the months of November through April. The
temperature rate adjustment helps to level out the effects of temperature
extremes on Company earnings by reducing high gas bills to customers in colder
than normal weather and increasing gas revenues received by the Company in
warmer than normal weather. The temperature rate adjustment has been reflected
in customers' gas bills during the months of November through April since
November 1, 1996.
The Mobile Gas tariffs include a purchased gas adjustment clause which
allows it to pass on to its sales customers increases or decreases in gas costs
from those reflected in its tariff charges. Adjustments under such clauses
require periodic filings with the APSC but do not require a general rate
proceeding. Under the purchased gas adjustment clause, Mobile Gas has a
competitive fuel clause which gives it the right to adjust its rates to certain
large customers in order to compete with alternative energy sources. Any margin
lost as a result of competitive fuel clause adjustments is recoverable from its
other customers.
Gas deliveries to certain industrial customers are subject to
regulation by the APSC through contract approval. The operations of SGT, which
consist only of intrastate transportation of gas, are also regulated by the
APSC.
Bay Gas is a regulated utility governed under the jurisdiction of the
APSC. As a regulated utility, Bay Gas' intrastate storage contracts are subject
to APSC approval. Operation of the storage cavern and well-head equipment are
subject to regulation by the Oil and Gas Board of the State of Alabama. The APSC
certificated Bay Gas as an Alabama gas storage public utility in 1992. Bay Gas
provides 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 issued orders on October 11, 2001 and June 3, 2002 approving rates for such
services.
6
Mobile Gas has been granted nonexclusive franchises to construct,
maintain and operate a natural gas distribution system in the areas in which it
operates. Except for the franchise granted by Mobile County, Alabama, which has
no stated expiration date, the franchises have various expiration dates, the
earliest of which is in 2007. The Company has no reason to believe that the
franchises will not be renewed upon expiration.
SEASONAL NATURE OF BUSINESS
The nature of the Company's business is highly seasonal and
temperature-sensitive. As a result, the Company's operating results in any given
period have historically reflected, in addition to other matters, the impact of
weather, with colder temperatures resulting in increased sales by the Company.
The substantial impact of this sensitivity to seasonal conditions has been
reflected in the Company's results of operations. As discussed above under
"Rates and Regulation", the application of a temperature rate adjustment in
customers' bills beginning in November 1996 has helped to level out the effects
of temperature extremes on results of operations.
Due to the seasonality of the Company's business, the generation of
working capital is impaired during the summer months because of reduced gas
sales. Cash needs during this period are met generally through short-term
financing arrangements or the reduction of temporary investments as is common in
the industry.
ENVIRONMENTAL ISSUES
The Company is subject to various federal, state and local laws and
regulations relating to the environment, which have not had a material effect on
the Company's financial position or results of operations.
Like many gas distribution companies, prior to the widespread
availability of natural gas, Mobile Gas manufactured gas for sale to its
customers. In contrast to some other companies which operated multiple
manufactured gas plants, Mobile Gas and its predecessor operated only one such
plant, which discontinued operations in 1933. The process for manufacturing gas
produced by-products and residuals, such as coal tar, and certain remnants of
these residuals are sometimes found at former gas manufacturing sites.
The Company conducted a preliminary assessment in 1994 of its former
gas plant site and has tested certain waters in the vicinity of the site. The
Company developed and has implemented a plan for the site based on the advice of
environmental consultants, which involves securing and monitoring the site and
continued testing. In 2000, the Company commenced discussions with the City of
Mobile regarding the possible development of the property as a city park. As
part of this process, the Alabama Department of Environmental Management
("ADEM") is conducting a "Brownfields" evaluation of the property. It is
anticipated that this assessment will be completed by mid-2004. Preliminary data
received from ADEM has been reviewed by the Company's environmental consultants.
Based on information received to date, the Company does not believe that the
site currently poses any threat to human health or the environment. At this
time, the Company continues to believe that material remediation costs are
unlikely and has therefore established no reserve
7
for such costs in its financial statements. The Company intends that, should
further investigation or changes in environmental laws or regulations require
material expenditures for evaluation or remediation, with regard to the site, it
would apply to the APSC for appropriate rate recovery of such costs. However,
there can be no assurances that the APSC would approve the recovery of such
costs or the amount and timing of any such recovery.
EMPLOYEES
Mobile Gas employed 275 full-time employees as of September 30, 2003.
Of these, approximately 35% are represented by the Paper, Allied-Industrial,
Chemical and Energy Workers International Union, Local No. 3-0541. As of
September 30, 2003 Bay Gas employed 10 full-time employees. The Company believes
that it enjoys generally good labor relations.
AVAILABLE INFORMATION
The Company's internet address is www.energysouth.com. The Company
makes available free of charge on or through its Internet Web site its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports as soon as reasonably practicable after the
Company electronically files such material with, or furnishes it to, the
Securities and Exchange Commission.
8
Item 2. Properties.
The Company's physical properties consist of distribution, general,
transmission, and storage plant. The distribution plant is located in Mobile
County and Baldwin County, Alabama and is used in the distribution of natural
gas to the Company's customers. The distribution plant consists primarily of
mains, services, meters and regulating equipment, all of which are adequate to
serve the present customers. The distribution plant is located on property which
the Company is entitled to use as a result of franchises granted by municipal
corporations, or on easements or rights-of-way.
The general plant consists of land, structures (with aggregate floor
space of approximately 118,000 square feet), office equipment, transportation
equipment and miscellaneous equipment, all located in Mobile County, Alabama.
The transmission plant consists of a pipeline of approximately 50 miles
and related surface equipment which is used in the transmission of natural gas
by SGT and is located in Alabama's Monroe and Escambia Counties. Bay Gas'
transmission plant consists of two pipelines totaling approximately 51 miles and
related surface equipment which are located in Alabama's Mobile and Washington
Counties. The transmission plants are located on easements or rights-of-way.
The storage plant, consisting of two underground caverns for the
storage of natural gas and related pipelines and surface facilities, is located
primarily in Washington County, Alabama. The storage facilities are constructed
on a leasehold estate with an initial term of 50 years, which will expire in
2040, and which may be renewed at the Company's option for an additional term of
20 years.
Substantially all of the utility property of Mobile Gas is pledged as
collateral for its long-term debt as of September 30, 2003.
Item 3. Legal Proceedings.
The Company is involved in litigation arising in the normal course of
business. Management believes that the ultimate resolution of such litigation
will not have a material adverse effect on the consolidated financial statements
of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal year 2003.
9
Item 4a. Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following list
is included as an unnumbered Item in Part I of this Report in lieu of being
included in the proxy statement to be filed with the Securities and Exchange
Commission.
Information relating to executive officers who are also directors is
included under the caption "Election of Directors" contained in the Company's
definitive proxy statement with respect to its 2004 Annual Meeting of
Stockholders and is incorporated herein by reference.
The following is a list of names and ages of all of the executive
officers who are not also directors or nominees for election as directors of the
Registrant indicating all positions and offices with the Registrant held by each
such person and each such person's principal occupations or employment during
the past five years. Officers are appointed by the Board of Directors of the
Company for terms expiring in January 2004.
Business Experience
Name, Age, and Position During Past 5 Years
- ----------------------- -------------------
W. G. Coffeen, III, 57 Appointed in December 2000;
Senior Vice President of Operations Previously: Vice President of
and Marketing - EnergySouth, Inc. Corporate Development and
Planning - EnergySouth, Inc.
(1998 - 2000)
Senior Vice President of Operations and Appointed in December 2000;
Marketing - Mobile Gas Service Corporation; Previously: Vice President -
Director and President - EnergySouth Services, Corporate Development and
10
Inc.; Director and President - MGS Marketing Planning - Mobile Gas Service
Services, Inc. Corporation; Director/Vice President
- MGS Marketing Services, Inc.;
Vice President - MGS Storage
Services, Inc. (1998 - 2000)
Charles P. Huffman, 50 Appointed in December 2000;
Senior Vice President and Chief Financial Officer Previously: Vice President, Chief
- - EnergySouth, Inc. Financial Officer, and Treasurer -
EnergySouth, Inc. (1998 - 2001)
Senior Vice President and Chief Financial Officer Appointed in December 2000;
- - Mobile Gas Service Corporation; Vice Previously: Vice President, Chief
President and Chief Financial Officer - Financial Officer, Treasurer, and
EnergySouth Services, Inc.; Director, Vice Assistant Secretary - Mobile Gas
President and Chief Financial Officer - MGS Service Corporation; Vice
Marketing Services, Inc.; Director, Vice President President/Treasurer - EnergySouth
and Chief Financial Officer - MGS Storage Services, Inc.; Director/Vice
Services, Inc. President/Treasurer - MGS Storage
Services, Inc.; Director/Vice
President/Treasurer - MGS
Marketing Services, Inc. (1998 -
2001)
G. Edgar Downing, Jr., 47 * Appointed in 1998
Vice President, Secretary and General Counsel -
EnergySouth, Inc.;
Secretary, General Counsel and Vice President Appointed in 1998; Previously: Vice
of Administration - Mobile Gas Service President, Secretary and General
Corporation; Director, Vice President and Counsel - Mobile Gas Service
Secretary - EnergySouth Services, Inc,; Director, Corporation (1994 - 1998)
Vice President and Secretary - EnergySouth
Services, Inc.; Vice President and Secretary -
MGS Marketing Services, Inc.; Director, Vice
President and Secretary - MGS Storage
Services, Inc.
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Susan P. Stringer, 42 Appointed in December 2000
Vice President and Controller - EnergySouth,
Inc.
Vice President and Controller - Mobile Gas Appointed in December 2000;
Service Corporation Previously: Director - Financial
Reporting - Mobile Gas Service
Corporation (2000); Manager -
Financial Reporting - Mobile Gas
Service Corporation (1999 - 2000);
Accounting Manager - Mobile Gas
Service Corporation (1998 - 1999);
LaBarron N. McClendon, 39 Appointed in December 2001
Vice President Human Resources -
EnergySouth, Inc.
Vice President Human Resources - Mobile Gas Appointed December 2001;
Service Corporation Previously: Director Human
Resources - Mobile Gas Service
Corporation (1999 - 2001); Manager
Human Resources - Mobile Gas
Service Corporation (1998 - 1999);
Daniel T. Ford, 38 Appointed in June 2002
Treasurer - EnergySouth, Inc.
Treasurer - Mobile Gas Service Corporation; Appointed June 2002; Previously:
Treasurer - EnergySouth Services, Inc.; Director Rates and Analysis - Mobile
Treasurer - MGS Marketing Services, Inc.; Gas Service Corporation (2000 -
Treasurer - MGS Storage Services, Inc. 2002); Manager Rates and Analysis
- Mobile Gas Service Corporation
(1997 - 2000)
* Mr. Downing is the son-in-law of Gaylord C. Lyon, a Director of the Company.
12
PART II
Item 5. Market for the Registrant's Common Stock Equity and Related Stockholder
Matters.
The Registrant's Common Stock, $.01 par value, is traded on the
NASDAQ-AMEX National Market under the symbol "ENSI". As of December 5, 2003
there were 1,350 holders of record of the Company's Common Stock. Information
regarding Common Stock dividends and the bid price range for Common Stock during
the periods indicated is as follows:
Per Share
Dividends Declared Closing Price Range
------------------ ----------------------------------------
Fiscal Year
Quarter Ended 2003 2002 2003 2002
- ------------- ---- ---- ----------------- -------------------
High Low High Low
---- ---- ---- ---
December 31 $.270 $.260 $28.989 $24.280 $24.860 $21.050
March 31 .270 .260 28.500 25.260 28.250 22.050
June 30 .285 .270 32.450 25.990 33.750 24.750
September 30 .285 .270 33.960 30.560 33.950 22.760
Over-the-counter quotations reflect inter-dealer prices without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions.
While the Board of Directors intends to continue the practice of paying
dividends quarterly, amounts and dates of such dividends as may be declared will
be dependent upon the Registrant's future earnings, financial requirements, and
other factors.
The Registrant's long-term debt instruments contain certain debt to
equity ratio requirements and restrictions on the payment of cash dividends and
the purchase of shares of its capital stock. None of these requirements is
expected to have a significant impact on the Registrant's ability to pay
dividends in the future.
13
ITEM 6 - ENERGYSOUTH, INC. - SELECTED FINANCIAL DATA
FINANCIAL SUMMARY
YEARS ENDED SEPTEMBER 30, 2003 2002 2001
- -----------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
(in thousands, except per share data)
Gas Revenues $ 95,150 $ 81,560 $103,424
Merchandise Sales 3,259 3,499 2,966
Other 1,206 1,360 1,369
- -----------------------------------------------------------------------------------------
TOTAL OPERATING REVENUES $ 99,615 $ 86,419 $107,759
- -----------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES $ 11,135 $ 10,231 $ 6,138
IN ACCOUNTING PRINCIPLES
Cumulative Effect of Changes in Accounting
Principles -
- -----------------------------------------------------------------------------------------
NET INCOME $ 11,135 $ 10,231 $ 6,138
- -----------------------------------------------------------------------------------------
Preferred Stock Dividends
- -----------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 11,135 $ 10,231 $ 6,138
Cash Dividends Per Share of Common Stock (1) $ 1.11 $ 1.06 $ 1.02
- -----------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE OF COMMON STOCK (1):
- -----------------------------------------------------------------------------------------
Income Before Cumulative Effect of Changes in
Accounting Principles $ 2.20 $ 2.06 $ 1.25
Net Income (1) $ 2.20 $ 2.06 $ 1.25
- -----------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK (1):
Income Before Cumulative Effect of Changes in
Accounting Principles $ 2.17 $ 2.03 $ 1.23
Net Income (1) $ 2.17 $ 2.03 $ 1.23
- -----------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING (1):
- -----------------------------------------------------------------------------------------
Basic (1) 5,066 4,967 4,926
Diluted (1) 5,124 5,046 4,987
- -----------------------------------------------------------------------------------------
Total Assets $225,686 $ 221,791 $222,357
Long-Term Debt $ 92,640 $ 98,645 $ 90,592
- -----------------------------------------------------------------------------------------
STATISTICAL
GAS REVENUE (IN THOUSANDS):
- -----------------------------------------------------------------------------------------
Sales:
Residential $ 54,470 $ 47,839 $ 65,394
Commercial and Industrial - Small 13,795 11,105 15,499
Commercial and Industrial - Large 8,101 6,436 10,060
Transportation 10,405 10,834 9,594
Storage (other than intercompany) 7,401 4,383 2,134
Other 978 963 743
- -----------------------------------------------------------------------------------------
Total $ 95,150 $ 81,560 $103,424
- -----------------------------------------------------------------------------------------
DELIVERY TO CUSTOMERS (IN THOUSAND THERMS):
- -----------------------------------------------------------------------------------------
Gas Sales:
Residential 44,617 42,651 51,415
Commercial and Industrial - Small 13,664 12,717 14,318
Commercial and Industrial - Large 10,463 10,679 12,570
Transportation 759,936 947,515 790,741
- -----------------------------------------------------------------------------------------
Total 828,680 1,013,562 869,044
- -----------------------------------------------------------------------------------------
CUSTOMERS BILLED (PEAK MONTH):
- -----------------------------------------------------------------------------------------
Residential 93,318 93,563 94,948
Commercial and Industrial - Small 5,111 5,153 5,197
Commercial and Industrial - Large 78 80 89
Transportation 43 37 43
- -----------------------------------------------------------------------------------------
Total 98,550 98,833 100,277
- -----------------------------------------------------------------------------------------
Degree Days (2) 1,773 1,577 1,978
NUMBER OF EMPLOYEES (END OF PERIOD) 285 295 300
Note: (1) All references to number of shares and per share amounts have been
restated to reflect the three-for-two conversion of Mobile Gas common
stock into EnergySouth, Inc. common stock effective February 2, 1998.
Note: (2) The number of degrees that the daily mean temperature falls below
65 degrees F. The Company's rates were designed assuming annual normal
degree days of 1,640 beginning December 1, 1995 and an annual normal
of 1,695 for prior periods.
14
2000 1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------
$ 69,714 $ 63,889 $ 70,740 $ 69,622 $ 68,334 $ 56,204 $ 60,470
2,913 2,827 2,920 2,678 2,674 2,576 2,514
1,470 1,344 1,329 1,281 1,224 788 774
- -------------------------------------------------------------------------------------
$ 74,097 $ 68,060 $ 74,989 $ 73,581 $ 72,232 $ 59,568 $ 63,758
- -------------------------------------------------------------------------------------
$ 8,792 $ 8,624 $ 8,417 $ 8,126 $ 8,631 $ 4,028 $ 4,893
- (349) - -
- -------------------------------------------------------------------------------------
$ 8,792 $ 8,275 $ 8,417 $ 8,126 $ 8,631 $ 4,028 $ 4,893
- -------------------------------------------------------------------------------------
$ 5
- -------------------------------------------------------------------------------------
$ 8,792 $ 8,275 $ 8,417 $ 8,126 $ 8,631 $ 4,028 $ 4,888
$ 0.97 $ 0.91 $ 0.84 $ 0.78 $ 0.74 $ 0.70 $ 0.68
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
$ 1.79 $ 1.77 $ 1.73 $ 1.68 $ 1.79 $ 0.84 $ 1.18
$ 1.79 $ 1.70 $ 1.73 $ 1.68 $ 1.79 $ 0.84 $ 1.18
- -------------------------------------------------------------------------------------
$ 1.78 $ 1.75 $ 1.71 $ 1.66 $ 1.78 $ 0.84 $ 1.18
$ 1.78 $ 1.68 $ 1.71 $ 1.66 $ 1.78 $ 0.84 $ 1.18
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
4,904 4,884 4,865 4,844 4,826 4,812 4,128
4,944 4,933 4,926 4,881 4,838 4,812 4,128
- -------------------------------------------------------------------------------------
$ 167,380 $173,635 $166,541 $161,857 $150,779 $136,567 $134,529
$ 55,222 $ 58,017 $ 58,979 $ 63,580 $ 54,509 $ 57,328 $ 59,047
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
$ 41,750 $ 39,575 $ 44,725 $ 44,330 $ 43,929 $ 36,106 $ 40,535
9,433 8,613 9,208 8,948 8,348 6,813 7,209
6,316 5,242 6,784 7,638 7,914 6,151 6,188
9,336 8,215 8,210 6,886 6,571 6,172 5,881
2,153 1,689 1,204 1,176 926 245 13
726 555 609 644 646 717 644
- -------------------------------------------------------------------------------------
$ 69,714 $ 63,889 $ 70,740 $ 69,622 $ 68,334 $ 56,204 $ 60,470
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
43,014 39,866 51,493 48,099 59,403 47,992 56,100
12,590 11,781 13,231 12,338 14,148 11,669 12,463
12,860 11,683 15,169 16,975 23,252 19,536 19,045
611,541 357,183 335,905 284,248 279,798 274,859 253,702
- -------------------------------------------------------------------------------------
680,005 420,513 415,798 361,660 376,601 354,056 341,310
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
95,131 95,022 95,443 95,446 95,338 94,822 94,424
5,256 5,282 5,305 5,267 5,257 5,235 5,195
95 92 97 101 105 108 106
37 37 30 30 30 29 31
- -------------------------------------------------------------------------------------
100,519 100,433 100,875 100,844 100,730 100,194 99,756
- -------------------------------------------------------------------------------------
1,379 1,196 1,889 1,487 2,030 1,331 1,837
291 280 281 276 276 275 260
15
Item 7. Management's Discussion and Analysis of Results 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. The Company is also engaged in gas marketing, merchandising and other
energy-related services.
RESULTS OF OPERATIONS
CONSOLIDATED NET INCOME
Diluted earnings per share increased $0.14, up 7% from fiscal year 2002. Fiscal
year 2002 earnings increased 65% as compared to fiscal 2001. Financial
information by business segment is shown in Note 10 to the Consolidated
Financial Statements.
2003 VS. 2002 The Company's natural gas distribution business contributed
increased earnings of $0.03 per share during fiscal year 2003 from its Mobile
Gas subsidiary. 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 and Note 2 to
the Consolidated Financial Statements. Because of the rate adjustment, margins
from temperature-sensitive customers and large commercial and industrial
customers increased during the fiscal year 2003; however, these increases were
offset by an increase in operating and depreciation expenses, lower industrial
transportation revenues, and a decline in residential usage after adjustment for
weather variations by the Company's temperature rate adjustment rider.
The Company's natural gas storage business, operated by Bay Gas, contributed
increased earnings of $0.07 per share for the year ended September 30, 2003, due
primarily to increased storage revenues from its second storage cavern placed in
service on April 1, 2003 and revenues realized from short-term interruptible
storage contracts. Increased revenues were partially offset by additional
operations and maintenance costs (O&M), depreciation expense and property taxes
as major expansion projects were completed.
Earnings from other business operations increased $0.04 during fiscal year 2003.
Fiscal year 2003 did not include losses incurred in 2002 associated with the
exit from the natural gas generator sales business and the closing of a retail
specialty store.
16
2002 VS. 2001 For fiscal year 2002, EnergySouth's earnings per share increased
$0.80 from fiscal year 2001 due to increased earnings from both Mobile Gas'
distribution and Bay Gas' storage and transportation services. The Company's
natural gas distribution business contributed increased earnings of $0.39 per
share due to an increase in margins as a result of a general rate increase
effective October 1, 2001. The Company's natural gas storage business
contributed increased earnings of $0.46 per share. Increased transportation
revenues and the consideration received for an option agreement to transport
additional volumes, over and above contracted volumes, both contributed to the
increase. Also, in accordance with SFAS 145, Bay Gas' extraordinary loss due to
the early payoff of existing debt was reclassified from extraordinary to
ordinary income. In conjunction with the early pay-off, Bay Gas incurred
additional interest related expenses in fiscal year 2001 of $2,454,000, a $0.29
impact in earnings per share. Increased depreciation expense and O&M expenses
partially offset increased earnings for both the distribution and storage
businesses. Also offsetting the gains made by both businesses, earnings from
other business operations declined $0.05 per share due primarily to 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, which are defined
as natural gas distribution revenues less the cost of natural gas and associated
taxes. For fiscal year 2003, colder than normal weather during the 2002-2003
winter heating season, lower national storage levels after the 2002-2003 winter,
and increased natural gas electric generation facilities have combined to drive
natural gas prices to levels well above historical norms. Mobile Gas follows 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 helped to mitigate the impact of increased prices on customers' bills
during the 2002-2003 winter. Effective March 1, 2003, however, Mobile Gas
adjusted its rates to reflect increased gas costs paid to its suppliers.
In fiscal 2002, the APSC approved Mobile Gas' request for a Rate Stabilization
and Equalization (RSE) tariff, a ratemaking methodology already used by the APSC
to regulate certain other utilities. 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 2 to the Consolidated Financial
Statements for a more detailed explanation. 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 costs, including a return on investment.
The APSC approved the new base rates, effective
17
October 2, 2001, which were designed to increase annual gas revenues by
approximately $7.8 million.
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 fiscal 2003, 2002 and 2001:
YEARS ENDED SEPTEMBER 30, (IN THOUSANDS) 2003 2002 2001
- -------------------------------------------------------------------------------------------
REVENUE (BEFORE ELIMINATIONS)
Residential $ 54,470 $ 47,839 $ 65,395
Commercial and Industrial - Small 13,795 11,105 15,499
- -------------------------------------------------------------------------------------------
Total Temperature-Sensitive Revenue $ 68,265 $ 58,944 $ 80,894
- -------------------------------------------------------------------------------------------
Commercial and Industrial - Large 8,101 6,436 10,060
Transportation (includes SGT revenues) 7,443 7,930 7,957
Other 981 980 717
- -------------------------------------------------------------------------------------------
TOTAL NATURAL GAS DISTRIBUTION REVENUE $ 84,790 $ 74,290 $ 99,628
===========================================================================================
Cost of Natural Gas (35,061) (26,460) (56,296)
Revenue Taxes (4,222) (3,703) (4,946)
===========================================================================================
NATURAL GAS DISTRIBUTION SALES
AND TRANSPORTATION MARGINS $ 45,507 $ 44,127 $ 38,386
- -------------------------------------------------------------------------------------------
DELIVERIES (THERMS)
Residential 44,617 42,651 51,415
Commercial and Industrial - Small 13,664 12,717 14,318
- -------------------------------------------------------------------------------------------
Total Temperature-Sensitive Deliveries 58,281 55,368 65,733
- -------------------------------------------------------------------------------------------
Commercial and Industrial - Large 10,463 10,679 12,570
Transportation (including SGT volumes) 286,842 382,884 382,213
- -------------------------------------------------------------------------------------------
TOTAL NATURAL GAS DISTRIBUTION VOLUMES 355,586 448,931 460,516
===========================================================================================
Natural Gas Distribution revenues increased $10,500,000 (14%) during fiscal 2003
as compared to fiscal 2002 due primarily to the increase in natural gas prices
as discussed above. Fluctuations in the actual cost of gas are passed on to the
customers through the purchased gas adjustment provision of Mobile Gas' rate
tariffs and do not directly result in any increases or decreases in margins. The
25% decline in distribution
18
revenue in fiscal 2002 versus 2001 was directly attributable to a decline in
natural gas prices after the dramatic rise of natural gas prices experienced in
fiscal 2001.
Another contributing factor to the fluctuations in revenues from
temperature-sensitive customers is the impact of weather on customers' usage.
Temperatures during the fiscal 2003 winter heating season were 8% colder than
normal and 12% colder than the prior year. As a result, volumes delivered to
temperature-sensitive customers increased in fiscal 2003 compared to fiscal 2002
by 5%. Temperatures during the fiscal 2002 heating season were 20% warmer than
fiscal 2001 and 4% warmer than normal, which partially accounted for the 16%
decline in volumes delivered to these customers.
Revenues from the sale of natural gas to large commercial and industrial
customers increased 26% in fiscal 2003 and declined 36% in fiscal 2002 due
primarily to the respective increase and decrease in the price of natural gas.
Volumes delivered to these customers has declined 2% and 15%, respectively, for
fiscal years 2003 and 2002 due primarily to one industrial customer's unique
operational needs, higher natural gas prices and general economic conditions.
Revenues from the transportation of natural gas to commercial and industrial
customers by the distribution business decreased $487,000 in fiscal 2003 with a
corresponding decline in volumes of 25%, due primarily to increased gas prices
and 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 ceased
operations of its Mobile plant in June 2003, and some other industrial plants
have decreased production or switched to alternative fuels. As permitted by the
APSC, the lost margins associated with the closure of the chemical plant were
charged to the Enhanced Stability Reserve (ESR) with a corresponding offset to
transportation revenue. ESR charges due to known changes in margin such as this,
as well as other changes affecting net income, would generally be reflected in
the RSE adjustment on December 1, 2003. See Note 2 to the Consolidated Financial
Statements for information pertaining to ESR and RSE.
Natural gas distribution margins increased $1,380,000 (3%) for fiscal year 2003
primarily as a result of the December 1, 2002 RSE rate adjustment. Margins
increased $5,741,000 (15%) for fiscal 2002 primarily as a result of the general
rate increase which became effective October 2, 2001. The increases in margins
in both years was partially offset by a decline in the number of residential
customers served. Also, residential customer consumption, when adjusted for
weather variations, declined 2.2% in 2003 and 4.0% in 2002, which were slightly
higher than historical declines in usage that Mobile Gas has experienced over
time as customers replace old appliances with new, more energy efficient models
and as new, more energy efficient homes are built. Management believes that some
of this decline is attributable to the high bills customers received in the
2000-2001 winter due to the extremely cold weather and high natural gas prices.
The increases in margins realized were less than the amounts anticipated from
the rate increases due to the decline in volumes delivered to customers as
discussed above.
19
Operations and maintenance (O&M) expenses increased $534,000 (3%) for fiscal
year 2003 due to increases in insurance expense, advertising and promotional
payments, payroll, postage, and expenses related to the establishment of the ESR
reserve. The change in Mobile Gas' O&M expense per customer for fiscal year 2003
was within the inflation-based cost control range established by the APSC;
therefore, no adjustment is required as described in Note 2 to the Consolidated
Financial Statements. O&M expenses increased $2,051,000 (12%) for fiscal 2002
due to an increase in payroll and payroll related costs, an increase in outside
contractor expenses associated with maintaining the distribution system, an
increase in insurance costs related to property and liability coverages, and an
increase in bad debt expense.
Depreciation expense increased $377,000 (6%) and $458,000 (7%) for fiscal years
2003 and 2002, respectively, 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 $651,000 for fiscal year 2003 and decreased
$1,202,000 in fiscal year 2002 due primarily to fluctuations in business license
taxes associated with gas revenue.
Interest expense decreased $208,000 and $238,000, respectively, in fiscal years
2003 and 2002 due to a decrease in short-term borrowings and a decline in the
short-term borrowing rate. Over the course of fiscal 2002, the Company was able
to repay all short-term borrowings through increased cash flows generated from
operating activities and the issuance by Mobile Gas in August 2002 of $12.0
million of its 6.9% First Mortgage Bonds.
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 gas storage public utility in 1992. Through
its first storage cavern with 2.3 Bcf of working gas capacity and connected
21-mile pipeline, Bay Gas thereafter began providing 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 opportunities to provide gas storage and transportation
services. Construction of Phase I of Bay Gas' second storage cavern was
completed and the cavern was placed into service April 1, 2003. Bay Gas has
entered into a fifteen-year contract with
20
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 3.7 Bcf and will provide
sufficient capacity to serve the new long-term contract with Southern as well as
other customers. Continuing cavern development is planned to provide for an
additional 1.0 Bcf of working gas capacity. Together, the two caverns at Bay Gas
are currently planned to hold 7.0 Bcf, with injection and withdrawal capacity of
300 MMcf and 700 MMcf per day, respectively. The additional cavern development
is projected to continue in fiscal 2004 without interruption of storage
operations.
Bay Gas' storage and transportation revenues increased $3,074,000 (27%) and
$3,440,000 (43%) during fiscal 2003 and 2002, respectively. See Note 10 to the
Consolidated Financial Statements for segment disclosure. Fiscal year 2003
revenues increased due primarily to additional storage revenues associated with
the commencement of operations of the second storage cavern and short-term
storage agreements. 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. Increased storage revenues were partially offset by
the expiration in May 2003 of an option agreement for transportation services
over and above contracted volumes. Bay Gas 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 which was amortized
over the nineteen-month option period. In addition to the option agreement,
revenues during fiscal year 2002 were positively impacted by the increased
transportation of natural gas to Alabama Power's gas-powered generating facility
at Plant Barry with the completion of a new 24-inch, 18 mile pipeline that
connects Bay Gas to Gulf South Pipeline Company's high pressure pipeline.
Operations and maintenance (O&M) expenses increased $513,000 (25%) and $475,000
(30%) in fiscal 2003 and 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 in fiscal 2002 was a $145,000 repair to a compressor station.
Depreciation expense increased $445,000 (29%) and $405,000 (36%), respectively,
in fiscal years 2003 and 2002 due to additional property completed and placed in
service.
Other taxes consist primarily of property taxes, and those taxes increased as a
result of the new pipelines placed in service in June and November 2001 and Bay
Gas' second storage cavern which was placed in service April 1, 2003.
Interest expense decreased $43,000 (1%) in fiscal year 2003 and increased
$639,000 (16%) in fiscal year 2002, excluding the SFAS 145 reclassification. See
Note 1 to the Consolidated Financials Statements for additional information
pertaining to SFAS 145. The decrease in interest expense in fiscal year 2003 is
due to scheduled principal payments. The increase in interest expense in fiscal
year 2002 was due to the issuance in December 2000 of the senior secured notes.
21
Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs decreased $892,000 for fiscal year 2003 due to the completion of
Bay Gas' second storage cavern and increased $564,000 in fiscal year 2002 due to
Bay Gas' pipeline and second storage cavern projects.
Interest income decreased $214,000 and $927,000 in fiscal year 2003 and 2002,
respectively, due to the expenditure of the proceeds from Bay Gas' debt issuance
used to finance the construction of the second storage cavern and two pipelines.
Minority interest reflects the minority partner's share of pre-tax earnings of
the Bay Gas partnership, of which EnergySouth's subsidiary holds controlling
interests. Minority interest increased $95,000 (21%) and $316,000 (238%) during
fiscal year 2003 and 2002, respectively, due to increased pretax earnings of the
partnership. Included in natural gas storage's 2001 minority interest is a
$223,000 reduction relating to the early payoff of existing debt.
OTHER
The Company provides marketing, merchandising and other energy-related services
through MGS Marketing Services, Inc., Mobile Gas, and EnergySouth Services,
Inc., which are aggregated with EnergySouth, the holding company, to comprise
the Other category. See Note 10 to the Consolidated Financial Statements for
segment disclosure.
Other revenues decreased $601,000 (12%) in fiscal 2003 due primarily to the
closing of a specialty store in October 2002 and the exit from the natural gas
generator sales business in September 2002. Other revenues increased $537,000
(12%) in fiscal year 2002 due primarily to the liquidation of the natural gas
generator inventory.
Cost of merchandise (COM) sold decreased $724,000 (23%) in fiscal year 2003 and
increased $895,000 (39%) in fiscal year 2002 due to the reasons discussed above.
Additional costs of $46,000 and $534,000, respectively, were recognized in the
respective fiscal years due to the establishment of reserves for slow-moving
merchandise inventory and natural gas generators.
O&M expenses decreased $373,000 (20%) in fiscal year 2003 and increased $92,000
(5%) in fiscal year 2002 primarily due to expenses incurred in the prior-year
periods for the closed specialty store and natural gas generator sales.
INCOME TAXES
Income taxes fluctuate with the change in income before income taxes. The
Company's effective tax rate in 2003, 2002 and 2001 was 37.6%, 36.9%, and 37.8%.
Included in the Company's 2001 income tax is a $808,000 tax benefit which was
reclassified in accordance with SFAS 145 from extraordinary loss to income tax.
The components of income tax expense are reflected in Note 5 to the Consolidated
Financial Statements.
22
EFFECTS OF INFLATION
Inflation impacts the prices the Company must pay for labor and other goods and
services required for operation, maintenance and capital improvements. For
Mobile Gas, increases in these costs are recovered through the rate process. See
Note 2 to the Consolidated Financial Statements. Changes in purchased gas costs
are passed through to customers in accordance with the purchased gas adjustment
provision of the Company's rate schedules.
GAS SUPPLY
A primary goal of the Company is to provide gas at the lowest possible cost
while maintaining a reliable long-term supply. To accomplish this goal the
Company has diversified its gas supply by constructing and purchasing pipelines
to access the vast gas reserves in its area, both offshore and onshore. The
Company has also contracted with certain of these sources for firm supply.
During fiscal year 2001, Mobile Gas implemented a gas supply strategy in which
it enters into forward purchases to lock in prices for a majority of its
expected gas sales during the upcoming winter heating season. Future minimum
payments under third-party contracts for firm gas supply, which expire at
various dates through the year 2011, are as follows: 2004 - $18,851,000; 2005 -
$1,166,000; 2006 - $1,170,000; 2007 - $1,187,000; 2008 - $1,187,000 and 2009
through 2011 - $3,215,000. A portion of firm supply requirements is met through
the withdrawal of gas from the storage facility owned by Bay Gas. Mobile Gas has
a gas storage agreement with Bay Gas to receive storage services for an initial
period through 2014. The Company's purchased gas adjustment provision in rate
schedules filed with the APSC allows the recovery of demand and commodity costs
of purchased gas from customers. Should the Company's customer base decline due
to deregulation or other reasons, resulting in costs related to firm gas supply
in excess of requirements, the Company believes it would be able to take one or
more of the following actions: as part of the regulatory decision allowing other
suppliers to serve current customers, secure the right to allocate firm gas
supply costs to the new company supplying gas; reduce some excess gas supply
costs through a negotiated settlement with suppliers; and/or pass-through excess
gas supply costs to existing customers through the purchased gas component of
customers' rates.
ENVIRONMENTAL
The Company is subject to various federal, state and local laws and regulations
relating to the environment, which have not had a material effect on the
Company's financial position or results of operations. See Note 8 to the
Consolidated Financial Statements for a discussion of certain environmental
issues.
23
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. Cash provided
by operating activities was $17.2 million, $22.1 million and $22.5 million in
2003, 2002 and 2001, respectively. Cash provided from operating activities
declined $4.9 million in 2003 as compared to 2002 due to an increase in accounts
receivable and inventory, the option payment Bay Gas received in fiscal year
2002, and the under-collection of increased gas costs from customers. Partially
offsetting the decrease in operating cash for fiscal 2003 was a decline in
payables and increases in deferred taxes and net income. Cash flow from
operating activities in 2002 approximated the prior year.
Cash used in investing activities reflects the capital-intensive nature of the
Company's business. During 2003, 2002, and 2001, respectively, the Company used
cash of $15.7 million, $22.6 million, and $46.6 million for construction of
distribution and storage facilities, purchases of equipment and other general
improvements. In addition to the Company's regular construction program for the
distribution business, Mobile Gas completed expansion projects in fiscal 2001
which included providing transportation services to a gas-powered generation
facility and a 10-mile pipeline that expanded its system into Baldwin County. In
fiscal 2001, Bay Gas invested $28.0 million in the construction of its second
storage cavern and two pipeline projects. During fiscal 2002, Bay Gas invested
$17.3 million in the construction of the second cavern and completion of an
18-mile, 24-inch pipeline. In fiscal 2003, $4.9 million was invested by Bay Gas
in the completion of the second cavern. In October 2002, Mobile Gas entered into
a thirty-year franchise agreement with the City of Spanish Fort. As a result,
Mobile Gas invested $1.5 million in the expansion of its distribution system by
running an 11-mile extension of the Highway 225 pipeline into the City of
Spanish Fort. Bay Gas' temporary investments of $3.0 million, representing a
portion of the unused proceeds of its December 2000 debt issuance, matured in
December 2001 and were used in Bay Gas' construction projects.
The Company expects fiscal 2004 capital expenditures by Mobile Gas to be
approximately $9.0 million and by Bay Gas to be approximately $2.8 million.
Mobile Gas' projected 2004 expenditures include normal construction activity,
including equipment purchases and other general improvements, and the
acquisition of a natural gas distribution system located in Mt. Vernon, Alabama
located just north of its current service territory. The acquisition will add
approximately 300 customers. Bay Gas' capital expenditures will be for the
ongoing expansion of its second cavern and will be funded by internal cash
generation and cash equivalents of $1.0 million.
Financing activities used cash of $8.0 million and $7.0 million in fiscal 2003
and 2002, respectively; however, financing activities provided cash of $32.8
million in fiscal 2001. Long-term debt payments and the payment of quarterly
dividends primarily account for the cash used during fiscal 2003 and 2002.
Another contributing factor in 2002 was the payoff of short-term borrowings
which was partially funded by the issuance of $12.0 million of 6.9% First
Mortgage Bonds by Mobile Gas. Receipts of $1.2 million and $1.6
24
million in fiscal 2003 and 2002, respectively, from the exercise of stock
options partially offset the cash used in financing activities. The $49.3
million increase in cash provided by financing activities during 2001 was
primarily due to the financing activities of Bay Gas. In December 2000, Bay Gas
completed the sale of $55,000,000 of senior secured notes. These notes, which
are guaranteed by EnergySouth, are due in 2017 and accrue interest at an annual
rate of 8.45%. The proceeds from the sale of the notes were used in part by Bay
Gas to construct two pipelines and were also used to construct a second natural
gas storage cavern and related equipment. Additionally, $2,650,000 of the
proceeds was used to repay a note to Mobile Gas for the financing of base gas in
the first Bay Gas storage cavern and $18,670,000 was used to pay the balance of
the debt incurred to construct that storage cavern. In connection with the early
payoff of that debt, Bay Gas incurred a loss on the early extinguishment of debt
of $2,454,000, consisting of a $2,026,000 make-whole premium and a write-off of
$428,000 of unamortized issuance costs relating to the financing of the first
cavern.
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 which extends through January 31, 2005. At September 30, 2003 the
Company had $19,750,000 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 September 30, 2003:
- --------------------------------------------------------------------------------------------------------------------
FISCAL YEARS
TYPE OF CONTRACTUAL FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR 2009 AND
OBLIGATIONS (IN THOUSANDS): 2004 2005 2006 2007 2008 THEREAFTER
- --------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 6,006 $ 6,248 $ 6,463 $ 6,769 $ 5,300 $ 67,860
Gas Supply Contracts 18,851 1,166 1,170 1,187 1,187 3,215
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no "off-balance sheet arrangements" as such term is defined in
Item 303(a)(4) of Regulation S-K.
CRITICAL ACCOUNTING POLICIES
REGULATORY ACCOUNTING. The Natural Gas Distribution segment is subject to
regulation by the APSC and as such, accounts for its transactions according to
the provisions of
25
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" (SFAS 71). This statement sets forth the
application of accounting principles generally accepted in the United States of
America for those companies whose rates are established by or are subject to
approval by an independent third party regulator. The provisions of SFAS 71
require, among other things, that financial statements of a regulated enterprise
reflect the actions of regulators, where appropriate. The application of this
accounting policy allows the Company to defer expenses and income on the
consolidated balance sheet as regulatory assets and liabilities when it is
probable that those expenses and income will be allowed in the rate setting
process in a period different from the period in which they would have been
reflected in the consolidated statements of income of an unregulated company.
These deferred regulatory assets and liabilities are then recognized in the
consolidated statement of income in the period in which the same amounts are
reflected in rates. See "Regulatory Assets" and "Deferred Purchased Gas
Adjustment" on the consolidated balance sheet.
If any portion of the Natural Gas Distribution segment ceased to continue to
meet the criteria for application of regulatory accounting treatment for all or
part of its operations, the regulatory assets and liabilities related to those
portions ceasing to meet such criteria would be eliminated from the consolidated
balance sheet and included in the consolidated statement of income for the
period in which the discontinuance of regulatory accounting treatment occurred.
REVENUE RECOGNITION. Mobile Gas recognizes revenues from the sales of natural
gas and transportation services in the same period in which it delivers the
related volumes to customers. Sales revenues from residential and certain
commercial and industrial customers are billed on the basis of scheduled meter
reading cycles throughout the month. Mobile Gas records revenues for estimated
deliveries of gas, not yet billed to these customers, from the meter reading
date to the end of the accounting period. These revenues are included on the
Company's consolidated balance sheet as "Unbilled Revenue." Included in the
rates charged by Mobile Gas to temperature sensitive customers is a temperature
rate adjustment rider which offsets the impact of unusually cold or warm weather
on operating margin.
RESERVES. EnergySouth companies establish reserves for uncollectible accounts
receivable and slow moving merchandise, materials and supplies inventories. Such
reserves are generally calculated based on currently available facts and on the
application of a percentage to each aging category of receivables and inventory
based on collection and sales experience, respectively. On certain specific
receivables and inventory, the Company records an allowance based on currently
available facts to reduce the net balance of the specific receivable or
inventory item to the amount the Company reasonably expects to collect. Reserves
for receivables are reported as "Allowance for Doubtful Accounts" on the balance
sheet. Reserves for inventory are netted against the related asset account and
reported on the balance sheet in "Materials, Supplies, and Merchandise." The
Company believes its reserves are adequate. However, actual results may differ
from estimates, and estimates can be, and often are, revised either negatively
or positively, depending upon actual outcomes or expectations based on the facts
surrounding each potential exposure.
26
EMPLOYEE BENEFITS. Employee benefits include a defined-benefit pension plan and
other post-employment benefits for the benefit of substantially all full-time
regular employees. Under the provisions of Statement of Financial Accounting
Standards No. 87, "Employer's Accounting for Pensions," and Statement of
Financial Accounting Standards No. 106, "Employer's Accounting for
Postretirement Benefits Other Than Pensions," measurement of the obligations
under the defined benefit pension plans and other post-retirement benefits plans
is subject to a number of statistical factors and assumptions which attempt to
anticipate future events. These factors include assumptions about the discount
rate, expected return on plan assets and rate of future compensation increases
as determined by the Company. In addition, the Company's actuarial consultants
also use subjective factors such as withdrawal and mortality rates to estimate
the projected benefits obligation. The actuarial assumptions used may differ
materially from actual results due to changing market and economic conditions,
higher or lower withdrawal rates or longer or shorter life spans of
participants. These differences may result in a significant impact on the amount
of pension expense recorded in future periods. (See Note 7 to the Consolidated
Financial Statements.)
At September 30, 2003, the discount rate used for actuarial purposes was 6.0
percent. A hypothetical one percent decrease in the annual discount rate would
increase pension and post-retirement benefit expense by $348,000 and $30,000,
respectively. At September 30, 2003, the expected rate of return on assets for
actuarial purposes was 8.25 percent and 7.75 percent for pension and
post-retirement benefits, respectively. A hypothetical one percent decrease in
the expected rate of return on assets would increase pension and post-retirement
benefit expense by $308,000 and $33,000, respectively. At September 30, 2003,
the rate of compensation increase used for actuarial purposes was 4.5 percent. A
hypothetical one percent increase in the expected rate of future compensation
increases would increase pension expense by $293,000.
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 planned Bay Gas cavern development;
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
27
major customers; liability for remedial actions under environmental regulations;
liability resulting from litigation; national and global economic and political
conditions; and changes in tax and other laws applicable to the business.
Additional factors that may impact forward-looking statements include, but are
not limited to, the Company's ability to successfully achieve internal
performance goals, competition, the effects of state and federal regulation,
including rate relief to recover increased capital and operating costs, general
economic conditions, specific conditions in the Company's service area, and the
Company's dependence on external suppliers, contractors, partners, operators,
service providers, and governmental agencies.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
At September 30, 2003 the Company had approximately $98.6 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"
under Item 7 above for a discussion of the Company's risks related to
regulation, weather, gas supply, and the capital-intensive nature of the
Company's business.
Item 8. Financial Statements and Supplementary Data.
The financial statements and financial statement schedules and the Independent
Auditors' Report thereon filed as part of this report are listed in the
"EnergySouth, Inc. and Subsidiaries Index to Financial Statements and Schedules"
at Page F-1, which follows Part IV hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by 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.
28
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.
PART III
Item 10. Directors, Executive Officers, and Control Persons of the Registrant.
Information under the captions "Election of Directors" and "Information
Regarding the Board of Directors" contained in the Company's definitive proxy
statement with respect to its 2004 Annual Meeting of Stockholders is
incorporated herein by reference.
For information with respect to executive officers of the Registrant, see
"Executive Officers of the Registrant" at the end of Part I of this Report.
Information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" contained in the Company's definitive proxy statement with respect
to its 2004 Annual Meeting of Stockholders is incorporated herein by reference.
CODE OF ETHICS
The Company has adopted a Code of Business Conduct and Ethics (the "Ethics
Code") that applies to the Company's directors, officers, and employees,
including its President and Chief Executive Officer, its Senior Vice President
and Chief Financial Officer, and its Controller. The Company has posted the
Ethics Code on its internet website at www.energysouth.com.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors of the Company has determined that S. Felton Mitchell,
Jr., who currently serves as the Chairman of the Audit Committee of the
Company's Board of Directors, and Walter L. Hovell are audit committee financial
experts. Mr. Mitchell and Mr. Hovell are independent as defined in the listing
standards of the National Association of Securities Dealers.
29
Item 11. Executive Compensation.
Information under the caption "Executive Compensation" contained in the
Company's definitive proxy statement with respect to its 2004 Annual Meeting of
Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information under the captions "Equity Compensation Plan Information" and
"Security Ownership of Certain Beneficial Owners and Management" contained in
the Company's definitive proxy statement with respect to its 2004 Annual Meeting
of Stockholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
There were no transactions required to be disclosed pursuant to this item.
Item 14. Principal Accountant Fees and Services
Information under the Caption "Relationship With Independent Public Accountants"
contained in the Company's definitive proxy statement with respect to its 2004
Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a), (d) Financial Statements and Financial Statement Schedules
See "EnergySouth, Inc. and Subsidiaries Index to Financial
Statements and Schedules" at page F-1, which follows Part IV
hereof.
(3) Exhibits - See Exhibit Index on pages E-1 through E-6.
(b) On July 25, 2003, EnergySouth, Inc. filed its current report
on Form 8-K reporting earnings for the quarter ended June 30,
2003 and declaration of a dividend.
(c) Exhibits filed with this report are attached hereto.
30
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the Undersigned, thereunto duly authorized.
ENERGYSOUTH, INC.
-----------------
Registrant
December 5, 2003 By: /s/ Charles P. Huffman
-------------------------------------
Charles P. Huffman, Senior Vice
President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the Capacities and on the dates indicated:
Signature Title Date
/s/ John C. Hope, III Director, Chairman December 5, 2003
- -----------------------
John C. Hope, III
/s/ Walter L. Hovell Director, Vice-Chairman December 5, 2003
- -----------------------
Walter L. Hovell
/s/ John S. Davis Director, President and December 5, 2003
- ----------------------- Chief Executive Officer
John S. Davis (Principal Executive Officer)
/s/ Charles P. Huffman Senior Vice President and December 5, 2003
- ----------------------- Chief Financial Officer (Principal
Charles P. Huffman Financial and Accounting Officer)
31
Signatures (Continued)
/s/ Walter A. Bell Director December 5, 2003
- -------------------
Walter A. Bell
/s/ Gaylord C. Lyon Director December 5, 2003
- ---------------------
Gaylord C. Lyon
/s/ Judy A. Marston Director December 5, 2003
- ---------------------
Judy A. Marston
/s/ G. Montgomery Mitchell Director December 5, 2003
- ---------------------------
G. Montgomery Mitchell
/s/ Harris V. Morrissette Director December 5, 2003
- --------------------------
Harris V. Morrissette
/s/ S. Felton Mitchell Director December 5, 2003
- -----------------------
S. Felton Mitchell
/s/ E. B. Peebles, Jr. Director December 5, 2003
- -----------------------
E. B. Peebles, Jr.
/s/ Robert H. Rouse Director December 5, 2003
- --------------------
Robert H. Rouse
/s/ Thomas B. Van Antwerp Director December 5, 2003
- ---------------------------
Thomas B. Van Antwerp
32
ENERGYSOUTH, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report F-2
Consolidated Statements of Income for the years ended
September 30, 2003, 2002 and 2001 F-3
Consolidated Balance Sheets, September 30, 2003 and 2002 F-4
Consolidated Statements of Common Stockholders' Equity
for the years ended September 30, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows for the years ended
September 30, 2003, 2002 and 2001 F-7
Notes to Consolidated Financial Statements F-8
Financial Statement Schedules
II Valuation and Qualifying Accounts and Reserves, Years
Ended September 30, 2003, 2002 and 2001 S-1
Schedules other than that referred to above are omitted and are not applicable
or not required.
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
EnergySouth, Inc.
Mobile, Alabama
We have audited the accompanying consolidated balance sheets of EnergySouth,
Inc. and its subsidiaries (the "Company") as of September 30, 2003 and 2002, and
the related consolidated statements of income, common stockholders' equity, and
cash flows for each of the three years in the period ended September 30, 2003.
Our audit also included the financial statement schedule of the Company, listed
in the index, referred to as schedule II. These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30, 2003
and 2002, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 2003 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 1, the Company reclassified the extraordinary loss on early
extinguishment of debt which occurred in the year ended September 30, 2001 to
ordinary income.
/s/ Deloitte & Touche LLP
- --------------------------
Deloitte & Touche LLP
Atlanta, Georgia
November 25, 2003
F-2
CONSOLIDATED STATEMENTS OF INCOME
ENERGYSOUTH, INC.
Years Ended September 30
(in thousands, except per share data) 2003 2002 2001
- ---------------------------------------------------------------------------------------------
OPERATING REVENUES
Gas Revenues $ 95,150 $ 81,560 $ 103,424
Merchandise Sales 3,259 3,499 2,966
Other 1,206 1,360 1,369
- ---------------------------------------------------------------------------------------------
Total Operating Revenues 99,615 86,419 107,759
- ---------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of Gas 30,859 22,267 52,053
Cost of Merchandise 2,473 3,197 2,302
Operations and Maintenance 24,425 23,491 20,930
Depreciation 8,923 8,122 7,266
Taxes, Other Than Income Taxes 7,277 6,548 7,549
- ---------------------------------------------------------------------------------------------
Total Operating Expenses 73,957 63,625 90,100
- ---------------------------------------------------------------------------------------------
OPERATING INCOME 25,658 22,794 17,659
- ---------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSE)
Interest Expense (8,369) (8,150) (10,273)
Allowance for Borrowed Funds Used During Construction 1,231 2,044 1,721
Interest Income 71 265 1,255
Minority Interest (754) (739) (428)
- ---------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (7,821) (6,580) (7,725)
- ---------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 17,837 16,214 9,934
Income Taxes (Note 5) 6,702 5,983 3,796
- ---------------------------------------------------------------------------------------------
NET INCOME $ 11,135 $ 10,231 $ 6,138
- ---------------------------------------------------------------------------------------------
EARNINGS PER SHARE
- ---------------------------------------------------------------------------------------------
Basic $ 2.20 $ 2.06 $ 1.25
Diluted $ 2.17 $ 2.03 $ 1.23
- ---------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING
- ---------------------------------------------------------------------------------------------
Basic 5,066 4,967 4,926
Diluted 5,124 5,046 4,987
- ---------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
F-3
CONSOLIDATED BALANCE SHEETS
ENERGYSOUTH, INC.
September 30, (in thousands): 2003 2002
- ------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 4,082 $ 10,562
Receivables
Gas 6,652 4,733
Unbilled Revenue (Note 1) 1,335 956
Merchandise 2,313 2,621
Other 939 752
Allowance for Doubtful Accounts (889) (951)
Materials, Supplies, and Merchandise (At Average Cost) 1,457 1,598
Gas Stored Underground For Current Use (At Average Cost) 3,703 3,086
Regulatory Assets 2,945 262
Deferred Income Taxes 406 2,583
Prepayments 1,166 777
- ------------------------------------------------------------------------------------
Total Current Assets 24,109 26,979
- ------------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT (NOTE 3) 267,047 227,740
Less: Accumulated Depreciation and Amortization 73,888 66,912
- ------------------------------------------------------------------------------------
Property, Plant, and Equipment - Net 193,159 160,828
Construction Work in Progress 1,208 26,995
- ------------------------------------------------------------------------------------
Total Property, Plant, and Equipment 194,367 187,823
- ------------------------------------------------------------------------------------
OTHER ASSETS
Prepaid Pension Cost (Note 7) 856 318
Deferred Charges 569 566
Prepayments 1,015 1,067
Regulatory Assets 996 575
Merchandise Receivables Due After One Year 3,774 4,463
- ------------------------------------------------------------------------------------
Total Other Assets 7,210 6,989
- ------------------------------------------------------------------------------------
TOTAL $ 225,686 $ 221,791
- ------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
F-4
September 30, (in thousands, except share data): 2003 2002
- ------------------------------------------------------------------------------------------------------------
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Current Maturities of Long-Term Debt (Note 4) $ 6,006 $ 3,909
Notes Payable 250
Accounts Payable 6,389 5,844
Dividends Declared 1,463 1,363
Customer Deposits 1,469 1,475
Taxes Accrued 3,500 3,930
Interest Accrued 1,272 1,342
Regulatory Liability 909 3,258
Unearned Revenue (Note 1) 1,378
Other 1,012 1,006
- ------------------------------------------------------------------------------------------------------------
Total Current Liabilities 22,270 23,505
- ------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES
Accrued Postretirement Benefit Cost (Note 7) 415 570
Deferred Income Taxes 18,484 15,275
Deferred Investment Tax Credits 288 314
Regulatory Liability 173 228
Other 2,619 2,326
- ------------------------------------------------------------------------------------------------------------
Total Other Liabilities 21,979 18,713
- ------------------------------------------------------------------------------------------------------------
Total Liabilities 44,249 42,218
- ------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 8)
- ------------------------------------------------------------------------------------------------------------
CAPITALIZATION
Stockholders' Equity (Note 6)
Common Stock, $.01 Par Value (Authorized 10,000,000 Shares; Outstanding
2003 - 5,133,000; 2002 - 5,048,000 Shares) 51 50
Capital in Excess of Par Value 23,490 21,607
Retained Earnings 61,114 55,626
- ------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 84,655 77,283
Minority Interest 4,142 3,645
Long-Term Debt (Note 4) 92,640 98,645
- ------------------------------------------------------------------------------------------------------------
Total Capitalization 181,437 179,573
- ------------------------------------------------------------------------------------------------------------
TOTAL $ 225,686 $ 221,791
- ------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
F-5
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
ENERGYSOUTH, INC.
Common Stock
----------------- Capital in
Number of Par Excess of Retained
(In thousands, except per share data) Shares Value Par Value Earnings
- --------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2000 $ 4,912 $ 49 $ 18,919 $ 49,576
Net Income 6,138
Dividend Reinvestment Plan 16 343
Stock Options Exercised 9 125
Cash Dividends - $1.02 per share (5,026)
- --------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2001 4,937 49 19,387 50,688
Net Income 10,231
Dividend Reinvestment Plan 13 329
Stock Options Exercised Including Income
Tax Benefits 98 1 1,891
Cash Dividends - $1.06 per share (5,293)
- --------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2002 5,048 50 21,607 55,626
Net Income 11,135
Dividend Reinvestment Plan 13 351
Stock Options Exercised Including Income
Tax Benefits 72 1 1,532
Cash Dividends - $1.11 per share (5,647)
- --------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2003 5,133 $ 51 $ 23,490 $ 61,114
========================================================================================================
See Accompanying Notes to Consolidated Financial Statements
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
ENERGYSOUTH, INC.
Years Ended September 30, (in thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 11,135 $ 10,231 $ 6,138
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation and Amortization 9,301 8,568 7,650
Provision for Losses on Receivables 576 598 580
Provision for Losses on Inventory 46 469
Provision for Deferred Income Taxes 5,475 2,745 (946)
Minority Interest 754 739 428
Changes in Operating Assets and Liabilities:
Receivables (2,138) 3,320 (2,414)
Inventory (521) 1,672 (2,447)
Payables 366 (5,016) 6,431
Deferred Purchased Gas Adjustment (5,715) (1,526) 4,705
Other (2,067) 322 2,406
- ----------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 17,212 22,122 22,531
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (15,674) (25,626) (43,567)
Changes in Temporary Investments 3,000 (3,000)
- ----------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (15,674) (22,626) (46,567)
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Long-Term Debt (3,909) (1,897) (20,566)
Proceeds from Issuance of Long-Term Debt 12,000 55,000
Make-Whole Premium on Long-Term Debt (2,026)
Debt Issuance Costs (84) (862)
Changes in Short-term Borrowings 250 (13,235) 6,905
Payment of Dividends (5,647) (5,293) (5,026)
Dividend Reinvestment 351 329 342
Exercise of Stock Options 1,193 1,558 126
Partnership Distributions (256) (364) (1,134)
- ----------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Financing Activities (8,018) (6,986) 32,759
- ----------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,480) (7,490) 8,723
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,562 18,052 9,329
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,082 $ 10,562 $ 18,052
==============================================================================================
CASH PAID DURING THE YEAR FOR:
Interest $ 8,416 $ 8,069 $ 7,775
- ----------------------------------------------------------------------------------------------
Income Taxes $ 1,883 $ 3,786 $ 4,102
- ----------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of EnergySouth, Inc. (EnergySouth) and its
subsidiaries (collectively, the Company) include the accounts of Mobile Gas
Service Corporation (Mobile Gas); EnergySouth Services, Inc. (Services); MGS
Storage Services, Inc. (Storage); MGS Marketing Services, Inc. (Marketing); 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.
REVENUES AND GAS COSTS
The Company's distribution segment reads meters on a monthly cycle basis and
records revenues based upon estimated consumption through the end of the month
for all customers regardless of the meter reading date.
Increases or decreases in the cost of gas and certain other costs are passed
through to customers in accordance with provisions in the Company's rate
schedules. Any over-or-under recoveries of these costs are charged or credited
to cost of gas and included in current assets or liabilities as the Deferred
Purchased Gas Adjustment within the Company's Balance Sheet.
The Company's natural gas storage segment recognizes revenues in accordance with
contractual agreements for storage and transportation services. The agreements
include fees for monthly storage of natural gas, fees for the injection and
withdrawal of natural gas, and transportation of natural gas through Bay Gas'
system. All revenues are based upon metered volumes except for the monthly
storage fee.
PROPERTY, PLANT, AND EQUIPMENT
Included in property, plant, and equipment are acquisition adjustments, net of
amortization, of $6,245,000 and $6,605,000 at September 30, 2003 and 2002,
respectively. Such acquisition adjustments are being amortized to cost of
service over the lives of the assets acquired.
The cost of additions includes direct labor and materials, allocable
administrative and general expenses, pension and payroll taxes, and an allowance
for funds used during construction. The cost of depreciable property retired,
plus cost of dismantling, less salvage, is charged to accumulated depreciation.
Estimated interest cost associated with property under construction, based upon
weighted average interest rates for short-term and long-term borrowings and, if
applicable, the actual interest rate on borrowings
F-8
for specific projects, is capitalized as an allowance for borrowed funds used
during construction. Maintenance, repairs, and minor renewals and betterment of
property are charged to operations.
Provisions for depreciation are computed principally on straight-line rates for
financial statement purposes and on accelerated rates for income tax purposes.
Depreciation for financial statement purposes is provided over the estimated
useful lives of utility property at rates approved by the Alabama Public Service
Commission (APSC). For the years ended September 30, 2003, 2002, and 2001
approved depreciation rates averaged approximately 4.1% of depreciable property,
excluding the gas storage facility which is depreciated at an annual rate
averaging 2.7%.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INCOME TAXES
The Company records deferred tax liabilities and assets, as measured by enacted
tax rates, for all temporary differences caused when the tax basis of an asset
or liability differs from that reported in the financial statements. Investment
tax credits realized after 1980 are deferred and amortized over the average life
of the related property in accordance with regulatory treatment.
EARNINGS PER SHARE
The basic earnings per share computation is based on the weighted average number
of common shares outstanding during each period. The diluted earnings per share
computation is based on the weighted average number of common shares and diluted
potential common shares, using the treasury stock method, outstanding during
each period.
Average common shares used to compute basic earnings per share differed from
average common shares used to compute diluted earnings per share by equivalent
shares of 58,000, 79,000, and 61,000 for the years ended September 30, 2003,
2002, and 2001, respectively. These differences in equivalent shares are from
outstanding stock options.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements
F-9
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
LONG-LIVED ASSETS
The Company reviews its long-lived assets whenever indications of impairment are
present. If any assets are determined to be impaired, such assets would be
written down to their estimated fair market values. The Company does not believe
it has any assets which are currently impaired.
REGULATORY ASSETS AND LIABILITIES
The Company is subject to the provisions of Financial Accounting Standards Board
(FASB) Statement No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71). Regulatory assets represent probable future revenues
associated with certain costs that are expected to be recovered from customers
through the ratemaking process. Regulatory liabilities represent probable future
reductions in revenues associated with amounts that are expected to be credited
to customers through the ratemaking process. The significant regulatory assets
and liabilities as of September 30, are (in thousands):
2003 2002
Current Noncurrent Current Noncurrent
- ------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------
Property, Plant, and Equipment $ 85 $ 10 $ 101 $ 95
Deferred Purchase Gas Adjustment 2,533
ESR Fund 167 666
Bad Debt Reserve 133 265 133 398
Other 27 55 28 82
- ------------------------------------------------------------------------------------------
Regulatory Assets $ 2,945 $ 996 $ 262 $ 575
==========================================================================================
LIABILITIES
Bad Debt Reserve $ 40 $ 20 $ 60 $ 60
ESR Fund 854
Deferred Investment Tax Credit 15 153 16 168
Deferred Purchase Gas Adjustment 3,182
- ------------------------------------------------------------------------------------------
Regulatory Liabilities $ 909 $ 173 $ 3,258 $ 228
==========================================================================================
In the event that a portion of the Company's operations is no longer subject to
the provisions of SFAS No. 71, the Company would be required to write off
related regulatory assets and liabilities that are not specifically addressed
through regulated rates. In addition, the Company would be required to determine
if any impairment to other assets exists, including plant, and write down the
assets, if impaired, to their fair market value.
F-10
UNEARNED REVENUES
In November 2001, Bay Gas entered into an agreement which granted to a customer
an option to order transportation of additional volumes in excess of volumes
under long-term contract. During the first quarter of fiscal 2002, Bay Gas
received $3,274,000 in consideration of the option agreement which was
classified as unearned revenue on EnergySouth's consolidated balance sheet and
amortized over the life of the option agreement.
STOCK-BASED COMPENSATION
The Company has employee stock option plans, which are described more fully in
Note 6. The Company accounts for its employee stock option plans under the
intrinsic value recognition and measurement provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As stock options have been issued with exercise prices equal to
the market value of the underlying shares on the grant date, no compensation
cost has been recognized.
Had compensation cost for the plans been determined based on the fair value of
the options on the grant date, consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and earnings per share would have been as follows:
2003 2002 2001
- ---------------------------------------------------------------------------------------------
Net Income, as reported $ 11,135 $ 10,231 $ 6,138
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related
tax effects 160 129 134
- ---------------------------------------------------------------------------------------------
Pro forma net income $ 10,975 $ 10,102 $ 6,004
- ---------------------------------------------------------------------------------------------
EARNINGS PER SHARE
- ---------------------------------------------------------------------------------------------
Basic - as reported $ 2.20 $ 2.06 $ 1.25
Basic - pro forma $ 2.17 $ 2.03 $ 1.22
- ---------------------------------------------------------------------------------------------
Diluted - as reported $ 2.17 $ 2.03 $ 1.23
Diluted - pro forma $ 2.14 $ 2.00 $ 1.20
- ---------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING
- ---------------------------------------------------------------------------------------------
Shares - Basic 5,066 4,967 4,926
Shares - Diluted 5,124 5,046 4,987
- ---------------------------------------------------------------------------------------------
NEW ACCOUNTING STANDARDS
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-interest
method of accounting
F-11
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-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. Accordingly, $2,454,000 was reclassified from an
extraordinary item to interest expense on the Company's 2001 Consolidated Income
Statement. In December 2000, Bay Gas completed the sale of $55,000,000 of senior
secured notes, a portion of which was used to pay the balance of the existing
debt incurred to construct the first storage cavern. In connection with the
early payoff of the existing debt, Bay Gas expensed $428,000 of unamortized debt
issuance costs relating to the financing of the first cavern and $2,026,000
make-whole premium related to the early payoff of existing debt.
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
F-12
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 15, 2002. SFAS 146 was adopted by the Company in the second quarter of
fiscal 2003 and did not have an impact on the Company's financial statements.
In December 2002, FASB issued Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS
148). This Statement 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
employee compensation. In addition, SFAS 148 required additional disclosures
related to the effect of stock-based compensation on reported results. The
Company has adopted the disclosure provisions.
In November 2002, FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 addresses the disclosures
to be made by a guarantor in its financial statements about its obligations
under certain guarantees and clarifies the need for a guarantor to recognize, at
the inception of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Company does not have any
guarantees subject to the provisions of FIN 45, thus the adoption of FIN 45 on
October 1, 2003 did not have a material impact on the Company's financial
statements.
In January 2003, FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46) which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46
provides guidance on the identification and consolidation of variable interest
entities (VIEs), whereby control is achieved through means other than through
voting rights. Management has determined that the Company does not have VIEs as
defined in FIN 46.
In April 2003, FASB issued Statement of Financial Accounting Standards No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
(SFAS 149), which amends and clarifies financial accounting and reporting for
derivative instruments, including those embedded in other contracts and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 149 is effective for all contracts
entered into or modified after June 30, 2003. SFAS 149 did not have a material
impact on the Company's financial statements.
In May 2003, FASB issued Statement of Financial Accounting Standards No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" (SFAS 150). This Statement establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 was adopted on July 1,
2003 and did not have a material impact on the Company's financial statements.
F-13
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been reclassified
to conform with the 2003 financial statement presentation.
2. RATES AND REGULATIONS
The Company is principally engaged in the distribution and storage of natural
gas. Through Mobile Gas and SGT, the Company is engaged in the distribution and
transportation of natural gas to residential, commercial and industrial
customers in Southwest Alabama. The APSC regulates the gas distribution and
transportation operations of Mobile Gas and SGT. 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.
On June 10, 2002, the 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 the 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 extent the change is less
than the index range, the utility benefits by one-half of the difference through
future rate adjustments. The increase in O&M expenses per customer was within
the index range for the rate year ended September 30, 2003; therefore, no
adjustments are required. A rate adjustment designed to increase annual revenues
by approximately $2.2 million became effective December 1, 2002 under RSE.
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
F-14
below 13.35%. An initial ESR balance of $1.0 million was recorded October 1,
2002 and is being recovered from customers through rates beginning October 1,
2002. Subject to APSC approval, additional funding, up to a maximum reserve
balance of $1.5 million, may be provided by any future non-recurring revenue
should such revenue cause Mobile Gas' return on equity for the fiscal year to
exceed 13.85%. During the year ended September 30, 2003, Mobile Gas charged
$146,000 against the ESR related to revenue losses from a large industrial
customer. Following a year in which a charge against the ESR is made, the APSC
provides for accruals to the ESR of no more than $15,000 monthly until the
maximum funding level is achieved. The ESR balance of $854,000 at September 30,
2003 is included in the Consolidated Financial Statements as part of Regulatory
Liabilities.
Mobile Gas' rates contain a temperature adjustment rider which is designed to
offset the impact of unusually cold or warm weather on the Company's operating
margin. The adjustment is calculated monthly and applied to customers' bills in
the same billing cycle in which the weather variation occurs. The temperature
adjustment rider applies to substantially all residential and small commercial
customers.
Through Storage and Bay Gas, the Company provides 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 shippers and approved rates for such services.
3. PROPERTY, PLANT, AND EQUIPMENT
The functional classifications for the cost of property, plant, and equipment
are as follows at September 30, (in thousands):
2003 2002
- --------------------------------------------------------------------------------
Distribution Plant $141,231 $135,254
General Plant 22,050 21,107
Storage Plant 72,088 39,590
Transmission Plant 22,472 22,532
Acquisition Adjustment 9,206 9,257
- --------------------------------------------------------------------------------
Total Property, Plant, and Equipment $267,047 $227,740
================================================================================
F-15
4. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following at September 30, (in thousands):
2003 2002
- --------------------------------------------------------------------------------
MOBILE GAS SERVICE CORPORATION
First Mortgage Bonds
8.75% Series, due July 1, 2022 $ 12,000 $ 12,000
7.48% Series, due July 1, 2023 12,000 12,000
7.27% Series, due November 1, 2006 6,850 8,550
6.90% Series, due August 20, 2017 11,487 11,962
9% Note, due May 13, 2013 2,869 3,042
BAY GAS STORAGE COMPANY, LTD
8.45% Guaranteed Senior Secured Notes,
due December 1, 2017 53,440 55,000
- --------------------------------------------------------------------------------
Total 98,646 102,554
Less Amounts Due Within One Year 6,006 3,909
- --------------------------------------------------------------------------------
Long-Term Debt $ 92,640 $ 98,645
================================================================================
Maturities and sinking fund requirements on long-term debt in each of the five
fiscal years subsequent to September 30, 2003 are as follows: 2004 - $6,006,000;
2005 - $6,248,000; 2006 - $6,463,000; 2007 - $6,769,000 and 2008 - $5,300,000.
The Company's long-term debt instruments contain certain debt to equity ratio
requirements and restrictions on the payment of cash dividends and the purchase
of shares of its capital stock. None of these requirements and restrictions are
presently expected to have a significant impact on the Company's ability to pay
dividends in the future. Substantially all of the property of Mobile Gas is
pledged as collateral for its long-term debt and Bay Gas' material contracts
have been pledged as collateral for its long-term debt.
At September 30, 2003, the Company had a $20 million revolving credit agreement
with a group of banks. Borrowings under the agreement may be made as needed
provided that the Company is in compliance with certain covenants in the
revolving credit agreement and all other loan agreements. The Company currently
is in compliance with all such covenants. The Company pays a fee for its
committed lines of credit rather than maintaining compensating balances. The
commitment fee is 0.125% of the average daily unborrowed amount during the
annual period of calculation. In August 2002, Mobile Gas issued $12.0 million of
its 6.9% First Mortgage Bonds, of which a portion was used to pay-down
short-term borrowings. Unused committed lines of credit at September 30, 2003
and 2002 were $19.75 million and $20.0 million, respectively.
F-16
5. INCOME TAXES
The components of income tax expense are as follows for the years ended
September 30, (in thousands):
2003 2002 2001
- --------------------------------------------------------------------------------
Current
Federal $ 1,134 $ 2,822 $ 4,387
State 105 460 407
- -------------------------------------------------------------------------------
Total Current Taxes 1,239 3,282 4,794
- -------------------------------------------------------------------------------
Deferred
Federal 4,805 2,348 (916)
State 684 379 (56)
- -------------------------------------------------------------------------------
Total Deferred Taxes 5,489 2,727 (972)
- -------------------------------------------------------------------------------
Deferred investment tax credit
amortization (26) (26) (26)
- -------------------------------------------------------------------------------
Total Income Tax Expense $ 6,702 $ 5,983 $ 3,796
===============================================================================
A reconciliation of income tax expense and the amount computed by multiplying
income before income taxes by the statutory federal income tax rate for the
periods indicated is as follows for the years ended September 30, (in
thousands):
2003 2002 2001
- ------------------------------------------------------------------------------
Income Tax Expense at Federal
Statutory Rate $ 6,118 $ 5,532 $ 3,399
Excess of Book Over Tax Depreciation on
Pre-1981 Property Additions 52 142 168
Adjustments to Deferred Taxes
Prior Year (313)
Changes in State Tax Rate 159
State Income Taxes 476 474 231
Other - Net 56 (11) (2)
- ------------------------------------------------------------------------------
Total Income Tax Expense $ 6,702 $ 5,983 $ 3,796
==============================================================================
Effective tax rate 37.6% 36.9% 37.8%
==============================================================================
The tax effect of differences in book and tax depreciation related to pre-1981
property additions was recognized in income for accounting and ratemaking
purposes prior to 1981. With the adoption in fiscal 1994 of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," the
Company recorded deferred taxes related to this temporary difference and a
corresponding regulatory asset expected to be collected in customer rates when
such taxes become payable in accordance with the current ratemaking practices
followed by the APSC. Such future collections included in
F-17
regulatory assets are $95,000 and $196,000 at September 30, 2003 and 2002,
respectively. No valuation allowance is deemed necessary, as the Company
anticipates generating adequate future taxable income to realize the benefits of
all deferred tax assets on the balance sheet.
The significant components of the Company's net deferred tax liability as of
September 30, are (in thousands):
2003 2002
- --------------------------------------------------------------------------------
Deferred Tax Liabilities
Differences Between Book and Tax
Basis of Property $19,456 $16,847
Prepaid Insurance 214 212
Purchased Gas Adjustment 942
Regulatory Assets 185 198
Pension 318 118
Postretirement Benefits 42
Other 74 75
- --------------------------------------------------------------------------------
Total Deferred Tax Liabilities 21,231 17,450
- --------------------------------------------------------------------------------
Deferred Tax Assets
Gross Receipts Taxes 903 754
Postretirement Benefits 15
Post Employment Benefits 232 219
Purchased Gas Adjustment 1,184
Bad Debts 452 449
Accrued Vacation 234 232
Uniform Capitalization 222 345
Unearned Revenue 466
Deferred Payments 637 518
State of Alabama Net Operating Loss 226 318
Other 247 258
- --------------------------------------------------------------------------------
Total Deferred Tax Assets 3,153 4,758
- --------------------------------------------------------------------------------
Net Deferred Tax Liability $18,078 $12,692
================================================================================
6. CAPITAL STOCK
The Amended and Restated Stock Option Plan of EnergySouth, Inc. (Prior Plan)
expired on December 4, 2002 and no option grants may be made thereunder. At the
expiration date, 55,750 shares remained unissued, of which 38,000 were never
granted and 17,750 shares were forfeited. On January 31, 2003, the stockholders
approved the 2003 Stock Option Plan of EnergySouth, Inc. (Plan) with terms and
conditions similar to the expired plan. The Plan provides for the granting of
incentive stock options and non-qualified stock options to key employees. Under
the Plan, an aggregate of 350,000 shares of the Company's authorized but
unissued Common Stock have been reserved for issuance. Stock options become 25%
exercisable on the first anniversary of the grant date and an additional 25%
become exercisable each succeeding year. No option may be exercised after the
expiration of ten years from the grant date. Options are granted at an option
price which represents the market price on the date of grant. Transactions under
the Prior Plan and the Plan are summarized below:
F-18
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE REMAINING LIFE
- ------------------------------------------------------------------------------------------
Outstanding at September 30, 2000 270,150 $ 16.676 6.73 years
Granted 29,000 21.094
Exercised (8,775) 14.309
Forfeited (5,125) 20.655
- ------------------------------------------------------------------------------------------
Outstanding at September 30, 2001 285,250 17.126 6.11 years
Granted 8,000 27.000
Exercised (98,050) 15.898
Forfeited (12,625) 20.068
- ------------------------------------------------------------------------------------------
Outstanding at September 30, 2002 182,575 18.015 5.65 years
Granted 65,500 26.758
Exercised (72,350) 16.498
Forfeited (875) 19.375
- ------------------------------------------------------------------------------------------
Outstanding at September 30, 2003 174,850 $ 21.912 6.93 years
==========================================================================================
Exercisable at September 30, 2001 179,500 $ 15.329 4.71 years
Exercisable at September 30, 2002 115,450 $ 16.301 4.41 years
Exercisable at September 30, 2003 74,850 $ 17.967 4.70 years
==========================================================================================
Remaining reserved for issuance
at September 30, 2003 305,000
==========================================================================================
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). Accordingly, no compensation expense has been recognized for its stock
options granted. For purposes of disclosing pro forma net income, the fair
market value of the options at the date of grant was estimated using a
Black-Scholes options pricing model. The weighted average fair value of options
granted was $8.02, $9.43 and $5.72 per option during 2003, 2002 and 2001,
respectively.
Weighted average assumptions used in the pricing model for the years ended
September 30, are:
2003 2002 2001
- -----------------------------------------------------------------------------
Risk Free Interest Rate 3.90% 5.09% 5.24%
Expected Life 10 Years 10 years 10 Years
Stock Price Volatility 38.80% 41.70% 36.00%
Dividend Yield 4.20% 3.96% 4.88%
At September 30, 2003, 203,000 shares of the Company's authorized but unissued
Common Stock were reserved for issuance under the Company's Dividend
Reinvestment and Stock Purchase Plan.
7. RETIREMENT PLANS AND OTHER BENEFITS
The Company has a noncontributory, defined benefit retirement plan covering
substantially all of its employees. Benefits are based on the greater of amounts
resulting
F-19
from two different formulas: years of service and average compensation during
the last five years of employment, or years of service and compensation during
the term of employment. The Company annually contributes to the plan the amount
deductible for federal income tax purposes.
The Company also provides certain health care and life insurance benefits for
retired employees. Substantially all employees may become eligible for such
benefits if they retire under the provisions of the Company's retirement plan.
The Company is accruing the costs over the expected service period of the
employees.
The "projected unit credit" actuarial method was used to determine service cost
and actuarial liability.
Effective April 1, 2002, the Company amended its retirement plan to increase the
benefits payable to, or on behalf of a member who, on or prior to April 1, 2001,
retired or died in service, by an amount equal to 1% per year for each year
since the member's retirement or date of death, to April 1, 2002. The salaried
retiree medical plan was amended to lower the plan's coinsurance percentage from
80% to 70%, resulting in a reduction in the accumulated postretirement benefit
obligation of $137,721.
The following tables set forth the funded status of the plans, the amounts
recorded in the financial statements at September 30, (in thousands) and certain
assumptions with respect to the plans:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
- -------------------------------------------------------------------------------------------------
Benefit Obligation at Beginning of the Period $ 23,210 $ 22,039 $ 3,909 $ 3,643
Service Cost 691 720 100 82
Interest Cost 1,526 1,632 255 258
Benefits Paid (1,314) (1,158) 262 (246)
(Gain)/Loss 2,573 (845) (240) 310
Amendments 822 (138)
- -------------------------------------------------------------------------------------------------
Benefit Obligation at the End of the Period $ 26,686 $ 23,210 $ 4,286 $ 3,909
- -------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
- -------------------------------------------------------------------------------------------------
Fair Value of Assets at Beginning of the Period $ 30,106 $ 32,321 $ 3,277 3,299
Benefits Paid (1,314) (1,158)
Contributions
Actual Return on Plan Assets 4,564 (1,057) 357 (22)
- -------------------------------------------------------------------------------------------------
Fair Value of Plan Assets at the End of the Period $ 33,356 $ 30,106 $ 3,634 $ 3,277
- -------------------------------------------------------------------------------------------------
FUNDED STATUS
- -------------------------------------------------------------------------------------------------
Plan Assets in Excess of Benefit Obligation $ 6,670 $ 6,896 $ (652) $ (632)
Unrecognized Net (Gain) Loss (6,620) (7,294) 631 500
Prior Service Cost Not Yet Recognized 934 1,028 (394) (438)
Remaining Unrecognized Transition Asset (128) (312)
- -------------------------------------------------------------------------------------------------
Prepaid (Accrued) Benefit Cost $ 856 $ 318 $ (415) $ (570)
=================================================================================================
F-20
WEIGHTED AVERAGE ASSUMPTIONS AS OF PENSION BENEFITS POSTRETIREMENT BENEFITS
SEPTEMBER 30, 2003 2002 2001 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------
Discount Rate 6.00% 6.75% 7.50% 6.00% 6.75% 7.50%
Rate of Compensation Increase 4.50% 4.50% 6.10%
Expected Rate of Return on Plan Assets 8.25% 7.50% 7.50% 7.75% 7.00% 7.00%
Expected Rate of Return on Plan Assets - 3.00% 3.00%
Non-Bargaining Health Trust
The accumulated postretirement benefit obligation at September 30, 2003 and 2002
was determined using an assumed health care cost trend rate of 10% in 2002 and
9% in 2003, gradually declining to 4.75% in fiscal year 2007 and thereafter. The
assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects (in thousands):
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------
Effect on total of service and
interest cost components $ 31 $ 26 $ (25) $ (22)
Effect on postretirement benefit obligations 247 208 (209) (177)
Net periodic benefit cost included the following components for the years ended
September 30, (in thousands):
PENSION BENEFITS POSTRETIREMENT BENEFITS
2003 2002 2001 2003 2002 2001
- ------------------------------------------------------------------------------------------------------
Service cost $ 691 $ 720 $ 754 $ 100 $ 82 $ 76
Interest cost 1,526 1,632 1,522 255 258 257
Amortization of transition asset (183) (184) (183)
Amortization of prior service cost 94 67 40 (44) (38) (38)
Amortization of unrecognized gain (355) (459) (448) 6 (5)
Expected return on plan assets (2,312) (2,329) (2,219) (211) (215) (227)
- ------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ (539) $ (553) $ (534) $ 106 $ 87 $ 63
======================================================================================================
The Company has formed two voluntary employees' beneficiary association (VEBA)
trusts to fund postretirement health and life insurance benefits. The Company
did not contribute to these trusts in 2003 and 2002 but made contributions of
$21,000 in 2001.
The Company's eligible employees may participate in the Employee Savings Plan or
the Bargaining Unit Employees Savings Plan, both of which are 401(k) plans. The
Company's contributions to these 401(k) plans for the years ended September 30,
2003, 2002, and 2001 were $240,000, $249,000, and $249,000, respectively.
F-21
8. COMMITMENTS AND CONTINGENCIES
The Company has third-party contracts, which expire at various dates through the
year 2011, for the purchase, storage and delivery of gas supplies. During fiscal
year 2001, the Company implemented a gas supply strategy in which it enters into
forward purchases to lock in prices for a majority of its expected gas sales
during the upcoming winter heating season. Minimum payments under gas supply
contracts, which are exempt in the ordinary course of business from Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), in the fiscal years subsequent to September
30, 2003 are as follows:
FISCAL MINIMUM
YEAR PAYMENTS
- -----------------------
2004 $18,851,000
2005 1,166,000
2006 1,170,000
2007 1,187,000
2008 1,187,000
2009-2011 3,215,000
- -----------------------
TOTAL $26,776,000
=======================
A portion of firm supply requirements is expected to be met through the
withdrawal of gas from the storage facility owned by Bay Gas. Mobile Gas has
entered into a Gas Storage Agreement under which Bay Gas is to provide storage
services for an initial period of 20 years which began in September 1994 with
the commencement of commercial operations of the storage facility. The purchased
gas adjustment provisions of the Company's rate schedules permit the recovery of
gas costs from customers.
The Company is subject to various federal, state and local laws and regulations
relating to the environment, which have not had a material effect on the
Company's financial position or results of operations.
Like many gas distribution companies, prior to the widespread availability of
natural gas, the Company manufactured gas for sale to its customers. In contrast
to some other companies which operated multiple manufactured gas plants, the
Company and its predecessor operated only one such plant, which discontinued
operations in 1933. The process for manufacturing gas produced by-products and
residuals, such as coal tar, and certain remnants of these residuals are
sometimes found at former gas manufacturing sites.
The Company conducted a preliminary assessment in 1994 of its former gas plant
site and has tested certain waters in the vicinity of the site. The Company
developed and has implemented a plan for the site based on the advice of
environmental consultants, which involves securing and monitoring the site, and
continued testing. In 2000, the Company commenced discussions with the City of
Mobile regarding the possible development of the property as a city park. As
part of this process, the Alabama
F-22
Department of Environmental Management ("ADEM") is conducting a "Brownfields"
evaluation of the property. It is anticipated that this assessment will be
completed by mid-2004. Preliminary data received from ADEM has been reviewed by
the Company's environmental consultants. Based on information received to date,
the Company does not believe that the site currently poses any threat to human
health or the environment. At this time, the Company continues to believe that
material remediation costs are unlikely and has therefore established no reserve
for such costs in its financial statements. The Company intends that, should
further investigation or changes in environmental laws or regulations require
material expenditures for evaluation or remediation, with regard to the site, it
would apply to the APSC for appropriate rate recovery of such costs. However,
there can be no assurances that the APSC would approve the recovery of such
costs or the amount and timing of any such recovery.
The Company is involved in litigation arising in the normal course of business.
Management believes that the ultimate resolution of such litigation will not
have a material adverse effect on the consolidated financial statements of the
Company.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of financial instruments have been reported to meet the disclosure
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Values of Financial Instruments," and are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.
The carrying amounts for cash and cash equivalents, gas and other receivables,
merchandise receivables, notes payable, accounts payable and other current
liabilities approximate fair value. The fair value of long-term debt is
estimated based on interest rates available to the Company at the end of each
respective year for the issuance of debt with similar terms and remaining
maturities.
The carrying amount and the estimated fair value of long-term debt is as follows
at September 30, (in thousands):
2003 2002
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------------
Long-term debt $ 98,646 $ 118,851 $ 102,554 $ 119,335
10. FINANCIAL INFORMATION BY BUSINESS SEGMENT
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of An Enterprise and Related Information," requires that companies disclose
segment information which reflects how management makes decisions about
allocating resources
F-23
to segments and measuring their performance. The reportable segments disclosed
herein were determined based on such factors as the regulatory environment and
the types of products and services offered.
The Company is principally engaged in two reportable business segments: Natural
Gas Distribution and Natural Gas Storage. The Natural Gas Distribution segment
is actively engaged in the distribution and transportation of natural gas to
residential, commercial and industrial customers through Mobile Gas and SGT. The
Natural Gas Storage segment provides for the underground storage of natural gas
and transportation services through the operations of Bay Gas and Storage. The
Company also provides marketing, merchandising, and other energy-related
services through Marketing, Mobile Gas, and Services which are aggregated with
EnergySouth, the holding company, and included in the Other category. For the
years ended September 30, 2003, 2002, and 2001, all segments were located in
Southwest Alabama.
Segment earnings information presented in the table below includes intersegment
revenues which are eliminated in consolidation. Such intersegment revenues are
primarily amounts paid by the Natural Gas Distribution segment to the Natural
Gas Storage segment. Segment assets are provided as additional information and
are net of intercompany advances, intercompany notes receivable and investments
in subsidiaries.
AS OF AND FOR THE YEAR ENDED NATURAL GAS NATURAL GAS
SEPTEMBER 30, 2003 (IN THOUSANDS): DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 84,790 $ 14,590 $ 4,463 $ (4,228) $ 99,615
Cost of Gas 35,061 (4,202) 30,859
Cost of Merchandise & Jobbing 2,473 2,473
Operations and Maintenance Expense 20,409 2,582 1,460 (26) 24,425
Depreciation Expense 6,958 1,965 8,923
Taxes, Other Than Income Taxes 6,614 610 53 7,277
- -------------------------------------------------------------------------------------------------------------------
Operating Income 15,748 9,433 477 - 25,658
- -------------------------------------------------------------------------------------------------------------------
Interest Income (Expense) - Net (3,467) (4,607) (224) (8,298)
Allow. for Borrowed Funds Used
During Construction 122 1,109 1,231
Less: Minority Interest (210) (544) (754)
- -------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 12,193 $ 5,391 $ 253 $ 17,837
===================================================================================================================
Capital Expenditures $ 9,108 $ 6,626 $ (60) $ 15,674
Property, Plant, and Equipment, Net $ 112,960 $ 81,407 $ 194,367
Total Assets $ 125,883 $ 86,819 $ 12,984 $ 225,686
F-24
AS OF AND FOR THE YEAR ENDED NATURAL GAS NATURAL GAS
SEPTEMBER 30, 2002 (IN THOUSANDS): DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 74,290 $ 11,516 $ 5,064 $ (4,451) $ 86,419
Cost of Gas 26,460 (4,193) 22,267
Cost of Merchandise & Jobbing 3,197 3,197
Operations and Maintenance Expense 19,875 2,069 1,833 (286) 23,491
Depreciation Expense 6,581 1,520 21 8,122
Taxes, Other Than Income Taxes 5,963 525 60 6,548
- -------------------------------------------------------------------------------------------------------------------
Operating Income 15,411 7,402 (47) 28 22,794
- -------------------------------------------------------------------------------------------------------------------
Interest Income (Expense) - Net (3,257) (4,435) (165) (28) (7,885)
Allow. for Borrowed Funds Used
During Construction 43 2,001 2,044
Less: Minority Interest (290) (449) (739)
- -------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 11,907 $ 4,519 $ (212) $ 16,214
===================================================================================================================
Capital Expenditures $ 8,316 $ 17,341 $ (31) $ 25,626
Property, Plant, and Equipment, Net $ 111,065 $ 76,698 $ 60 $ 187,823
Total Assets $ 124,054 $ 83,645 $ 14,092 $ 221,791
AS OF AND FOR THE YEAR ENDED NATURAL GAS NATURAL GAS
SEPTEMBER 30, 2001 (IN THOUSANDS): DISTRIBUTION STORAGE OTHER ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 99,628 $ 8,076 $ 4,527 $ (4,472) $ 107,759
Cost of Gas 56,296 (4,243) 52,053
Cost of Merchandise & Jobbing 2,302 2,302
Operations and Maintenance Expense 17,824 1,594 1,741 (229) 20,930
Depreciation Expense 6,123 1,115 28 7,266
Taxes, Other Than Income Taxes 7,165 336 48 7,549
- -------------------------------------------------------------------------------------------------------------------
Operating Income 12,220 5,031 408 17,659
- -------------------------------------------------------------------------------------------------------------------
Interest Income (Expense) - Net (3,431) (5,324) (263) (9,018)
Allow. for Borrowed Funds Used
During Construction 284 1,437 1,721
Less: Minority Interest (295) (133) (428)
- -------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 8,778 $ 1,011 $ 145 $ 9,934
===================================================================================================================
Capital Expenditures $ 15,497 $ 28,058 $ 12 $ 43,567
Property, Plant, and Equipment, Net $ 109,764 $ 60,749 $ 79 $ 170,592
Total Assets $ 127,741 $ 79,505 $ 15,111 $ 222,357
F-25
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for fiscal 2003 and 2002 is summarized as follows
(in thousands, except per share data):
THREE MONTHS ENDED DEC. 31 MAR. 31 JUN. 30 SEP. 30
- --------------------------------------------------------------------------
FISCAL 2003
- --------------------------------------------------------------------------
Total Operating Revenues $ 25,713 $ 35,604 $ 20,583 $ 17,715
Total Operating Income 7,111 10,589 3,836 4,122
Net Income 3,374 5,559 986 1,216
Basic Earnings Per Share $ 0.67 $ 1.10 $ 0.19 $ 0.24
Diluted Earnings Per Share $ 0.66 $ 1.09 $ 0.19 $ 0.23
- --------------------------------------------------------------------------
FISCAL 2002
- --------------------------------------------------------------------------
Total Operating Revenues $ 24,153 $ 31,276 $ 16,434 $ 14,556
Total Operating Income 7,506 9,290 2,785 3,213
Net Income 3,753 4,699 904 875
Basic Earnings Per Share $ 0.76 $ 0.95 $ 0.18 $ 0.17
Diluted Earnings Per Share $ 0.75 $ 0.93 $ 0.18 $ 0.17
The pattern of quarterly earnings reflects a seasonal nature because weather
conditions strongly influence operating results.
F-26
SCHEDULE II
ENERGYSOUTH, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED SEPTEMBER 30, 2003, 2002, AND 2001
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
----------------------
CHARGED CHARGED
BALANCE AT TO COSTS TO OTHER BALANCE
BEGINNING AND ACCOUNTS DEDUCTIONS AT END
DESCRIPTION OF YEAR EXPENSES AMOUNT AMOUNT OF YEAR
----------- ---------- -------- -------- ---------- -------
Reserves deducted from assets to which they apply:
(a) Inventory Reserves
September 30, 2003 $ 83 $ 46 $ 1 $ 128
September 30, 2002 $ 6 $ 469 $ 392 $ 83
September 30, 2001 $ 6 $ 6
(b) Allowance for Doubtful Accounts
September 30, 2003 $ 951 $ 576 $ 638 (1) $ 889
September 30, 2002 $ 849 $ 598 $ 496 (1) $ 951
September 30, 2001 $ 749 $ 580 $664 (2) $1,144 (1) $ 849
Notes:
(1) Amounts written off - net of recoveries.
(2) Consistent with regulatory treatment allowed by the APSC October 2001 rate
order, approximately $664,000 of bad debt expense was reclassified as a
regulatory asset and is being amortized to expense over the subsequent five
years.
S-1
EXHIBIT INDEX
Exhibit No. Description (Exhibits prior to February 2, 1998 filed by Mobile
Gas)
2 Articles of Merger of MBLE Merger Co., Inc. into Mobile Gas
Service Corporation (incorporated by reference to Exhibit 2 to
Form 10-Q Quarterly Report dated February 13, 1998)
3(i) Articles of Restatement of the Articles of Incorporation of
EnergySouth, Inc. (incorporated by reference to Exhibit 3(i) to
Form 10-Q Quarterly Report dated February 13, 1998)
3(ii) By-laws of EnergySouth, Inc., adopted January 31, 1998
(incorporated by reference to Exhibit 3.2 to Registration
Statement 333-42057)
4(a)-1 Indenture of Mortgage and Deed of Trust of Mobile Gas Service
Corporation dated as of December 1, 1941 (incorporated by
reference to Exhibit B-a to Mobile Gas Registration Statement No.
2-4887)
Sup. Ind.
Dated as of File Reference Exhibit
----------- -------------- -------
4(a)-2 10/1/44 Reg. No. 2-5493 7-6
4(a)-3 7/1/52 Form 10-K for fiscal year ended 4(a)-3
September 30, 1985
4(a)-4 6/1/54 " 4(a)-4
4(a)-5 4/1/57 " 4(a)-5
4(a)-6 7/1/61 " 4(a)-6
4(a)-7 6/1/63 " 4(a)-7
4(a)-8 10/1/64 " 4(a)-8
4(a)-9 7/1/72 " 4(a)-9
4(a)-10 8/1/75 " 4(a)-10
4(a)-11 7/1/79 " 4(a)-11
4(a)-12 7/1/82 " 4(a)-12
4(a)-13 7/1/86 Form 10-K for fiscal year ended 4(a)-13
September 30, 1986
4(a)-14 10/1/88 Form 10-K for fiscal year ended 4(a)-14
September 30, 1989
4(a)-15 7/1/92 Form 10-K for fiscal year ended 4(a)-15
September 30, 1992
4(a)-16 7/1/93 Form 10-K for fiscal year ended 4(a)-16
September 30, 1993
E-1
Sup. Ind.
Dated as of File Reference Exhibit
----------- -------------- -------
4(a)-17 12/3/93 Form 10-K for fiscal year ended 4(a)-17
ended September 30, 1993
4(a)-18 11/1/96 Form 10-K for fiscal year ended 4(a)-18
September 30, 1997
4(a)-19 8/1/02 Form 10-K for fiscal year ended 4(a)-19
September 30, 2002
4(c)-3 Trust Indenture and Security Agreement dated as of December 1,
2000 made by Bay Gas Storage Company, Ltd. (incorporated by
reference to Exhibit 4(c)-3 to Form 10-Q for the quarter ended
December 31, 2000)
4(d) Promissory Note to the Utilities Board of the Town of Citronelle
dated May 13, 1993 (incorporated by reference to Exhibit 4(d) to
Form 10-K for fiscal year ended September 30, 1993)
10(a) Transportation agreement between Mobile Gas Service Corporation
and Alabama Power Company dated February 18, 1999 (incorporated
by reference to Exhibit 10(a) to Form 10-Q for the quarter ended
March 31, 1999) (3)
10(b) Agreement for Firm and Interruptible Storage Service between Bay
Gas Storage Company, Ltd. and Southern Company Services, Inc., as
agent, dated April 1, 1999 (incorporated by reference to Exhibit
10(b) to Form 10-Q for the quarter ended March 31, 1999) (3)
10(b)-1 Letter agreement dated July 19, 2000, modifying Agreement for
Firm and Interruptible Storage Services between Bay Gas Storage
Company, Ltd. and Southern Company Services, Inc., as agent,
dated April 1, 1999 (incorporated by reference to Exhibit 10(b)-1
to Form 10-K for fiscal year ended September 30, 2000) (3)
10(b)-2 Storage Service Agreement between Bay Gas Storage Company, Ltd.
and Southern Company Services, Inc., as agent, dated as of August
1, 2000 (incorporated by reference to Exhibit 10(b)-2 to Form
10-K for fiscal year ended September 30, 2000) (3)
10(c) Agreement for Firm Intrastate Transportation Services between Bay
Gas Storage Company, Ltd. and Alabama Power Company dated April
8, 1999 (incorporated by reference to Exhibit 10(c) to Form 10-Q
for the quarter ended March 31, 1999) (3)
10(c)-1 Letter agreement dated July 19, 2000, modifying Agreement for
Firm Intrastate Transportation Services between Bay Gas Storage
Company, Ltd. and Alabama Power Company dated April 8, 1999
(incorporated by
E-2
reference to Exhibit 10(c)-1 to Form 10-K for fiscal year ended
September 30, 2000) (3)
10(d)-5 NNS Settlement Agreement between Koch Gateway Pipeline Company
and Mobile Gas Service Corporation dated March 26, 1998
(incorporated by reference to Exhibit 10(d)-5 to Form 10-K for
fiscal year ended September 30, 1998)
10(g) Deferred Compensation Agreement with John S. Davis dated January
26, 1996 (incorporated by reference to Exhibit 10(g) to Form 8-K
Current Report dated February 7, 1996)
10(g)-1 Supplemental Deferred Compensation Agreement with John S. Davis
dated December 10, 1999 (incorporated by reference to Exhibit
10(g)-1 to Form 10-K for fiscal year ended September 30, 1999)
(2)
10(h) Transportation Agreement between Mobile Gas and Mobile Energy LLC
dated November 12, 1999 (incorporated by reference to Exhibit
10(h) to Form 10-K for fiscal year ended September 30, 1999) (3)
10(i) Mobile Gas Service Corporation/Bay Gas Storage Company, Ltd. Gas
Storage Agreement dated February 26, 1992 (incorporated by
reference to Exhibit 10(i) to Form 10-K for fiscal year ended
September 30, 1992)
10(j) Directors/Officers Indemnification Agreement (incorporated by
reference to Exhibit 10(j) to Form 10-K for fiscal year ended
September 30, 1992)
10(j)-1 Form of Change of Control Agreement entered into as of December
8, 1999 by and between EnergySouth, Inc. and the Executive
Officers of EnergySouth, Inc. and/or one or more of its
subsidiaries (incorporated by reference to Exhibit 10(j)-1 to
Form 10-K for fiscal year ended September 30, 1999) (2)
10(k)-1 Amended and Restated Supplemental Deferred Compensation Agreement
with Walter L. Hovell, dated December 11, 1992 (incorporated by
reference to Exhibit 10(k) to Form 10-K for fiscal year ended
September 30, 1992) (2)
10(k)-2 Amendment to Amended and Restated Supplemental Deferred
Compensation Agreement dated January 27, 1995 between the Company
and Walter L. Hovell (incorporated by reference to Exhibit
10(k)-2 to Form 8-K Current Report dated January 27, 1995) (2)
10(l)-1 Bay Gas Agreement by and among Mobile Gas Service Corporation,
MGS Storage Services, Inc., MGS Energy Services, Inc. and Olin
Corporation, dated December 5, 1991 (incorporated by reference to
Exhibit 10(l) to Form 10-K for fiscal year ended September 30,
1992)
10(m)-1 Limited Partnership Agreement between MGS Storage Services, Inc.,
as General Partner, and MGS Energy Services, Inc., as Limited
Partner
E-3
(forming Bay Gas Storage Company, Ltd.), dated December 5, 1991
(incorporated by reference to Exhibit 10(m) to Form 10-K for
fiscal year ended September 30, 1992)
10(m)-2 First Amendment to Limited Partnership Agreement dated as of
April 6, 1992 and Second Amendment to Limited Partnership
Agreement dated as of September 12, 1994 (incorporated by
reference to Exhibit 10(m)-2 to Form 10-K for fiscal year ended
September 30, 1994)
10(n) Cavity Development and Storage Agreement between Olin Corporation
and Bay Gas Storage Company, Ltd., dated January 14, 1992
(incorporated by reference to Exhibit 10(n) to Form 10-K for
fiscal year ended September 30, 1992)
10(o)-1 Transportation Agreement between Mobile Gas Service Corporation
and Tuscaloosa Steel Corporation dated as of May 15, 1995
(incorporated by reference to Exhibit 10(o) to Form 10-K for
fiscal year ended September 30, 1995) (3)
10(o)-2 Amendment dated August 23, 1996 to Transportation Agreement
between Mobile Gas Service Corporation and Tuscaloosa Steel
Corporation (incorporated by reference to Exhibit 10(o)-2 to Form
10-K for fiscal year ended September 30, 1996) (3)
10(q)-1 Guaranty Agreement dated as of December 1, 2000 made by
EnergySouth, Inc., relating to Trust Indenture and Security
Agreement made by Bay Gas Storage Company, Ltd. (incorporated by
reference to Exhibit 10(q)-1 to Form 10-Q for the quarter ended
December 31, 2000)
10(r) Amended and Restated Stock Option Plan of EnergySouth, Inc.
(incorporated by reference to Appendix A to definitive proxy
statement dated December 17, 1998) (2)
10(r)-2 2003 Stock Option Plan of EnergySouth, Inc. (incorporated by
reference to Appendix A to definitive proxy statement dated
December 23, 2003) (2)
10(s) Mobile Gas Service Corporation Incentive Compensation Plan
(incorporated by reference to Exhibit B to definitive proxy
statement dated December 21, 1992) (2)(4)
10(t) Agreement for Purchase and Sale of Assets by and between The
Utilities Board of the Town of Citronelle and Mobile Gas Service
Corporation dated January 28, 1993 (incorporated by reference to
Exhibit 10(t) to Form 10-K for fiscal year ended September 30,
1993)
10(v) Revolving Credit Agreement dated March 28, 2001 by and among
EnergySouth, Inc. as Borrower, Regions Bank as Agent and Regions
Bank, AmSouth Bank, and SouthTrust Bank as Lenders (incorporated
by
E-4
reference to Exhibit 10(v) to Form 10-K for fiscal year ended
September 30, 2003)
10(x) Letter dated October 7, 1994 from Mobile Gas Service Corporation
to John S. Davis confirming terms of employment (incorporated by
reference to Exhibit A to Form 8-K current report filed November
2, 1994) (2)
10(z)-1 Amended and Restated EnergySouth, Inc. Non-Employee Directors
Deferred Fee Plan (incorporated by reference to Exhibit 10(z)-1
to Form 10-K for fiscal year ended September 30, 2000) (2)
14 Code of Business Conduct and Ethics (1)
18 Letter regarding change in Accounting Principle (incorporated by
reference to Exhibit 18 to Form 10-Q Quarterly Report dated
February 12, 1999)
21 Subsidiaries of Registrant and Partnerships in which Registrant
Owns an Interest(1)
23 Consent of Deloitte & Touche LLP(1)
31.1 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 - Chief Executive Officer (1)
31.2 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 - Chief Financial Officer (1)
32.1 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 (1)
32.2 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 (1)
99(a) Report and Order of Alabama Public Service Commission dated
October 3, 2001 (incorporated by reference to Exhibit 99(a) to
Form 8-K current report filed October 18, 2001)
(1) Filed herewith.
(2) Management contract or compensatory plan or arrangement.
(3) Confidential portions of this exhibit have been omitted and previously filed
separately with the Securities and Exchange Commission pursuant to a request
for confidential treatment made in accordance with Rule 24b-2 promulgated
under the Securities Exchange Act of 1934, as amended.
(4) Amended to use Company Common Stock instead of Mobile Gas common stock
effective February 2, 1998.
E-5