##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2005 Commission File No. 0-29604 ENERGYSOUTH, INC. 
  Alabama
    
    58-2358943(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)2828 Dauphin Street, Mobile, Alabama
    
    36606(Address of principal executive office)
    
    (Zip Code)
 Registrants telephone number, including area code 251-450-4774 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. Common stock ($.01 par value) outstanding at April 30, 2005  7,852,073 shares.




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ENERGYSOUTH, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005 INDEX  
 Page No.PART I: FINANCIAL INFORMATIONItem 1
    
    
    
    Financial Statements:(a)
    
    Unaudited Condensed Consolidated Balance Sheets March 31, 2005 and 2004 and September 30, 2004
    
    
    3 - 4(b)
    
    Unaudited Condensed Consolidated Statements of Income Three and Six Months Ended March 31, 2005 and 2004
    
    
    5(c)
    
    Unaudited Condensed Consolidated Statements of Cash Flows Six Months Ended March 31, 2005 and 2004
    
    
    6(d)
    
    Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7 - 16Item 2
    
    
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17 - 23Item 3
    
    
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4
    
    
    
    Controls and Procedures
    
    
    24 - 25PART II: OTHER INFORMATIONItem 5
    
    
    
    Other Information
    
    
    26 - 27Item 6
    
    
    
    Exhibits
    
    
    28Storage Service AgreementCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  2




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##### Table of Contents



PART 1. FINANCIAL INFORMATION 
 ITEM 1: FINANCIAL STATEMENTS 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS EnergySouth, Inc.
    
    March 31,
    
    
    September 30,In Thousands
    
    2005
    
    
    2004
    
    
    2004(Unaudited)ASSETSCurrent AssetsCash and Cash Equivalents
    
    $
    14,785
    
    
    $
    10,050
    
    
    $
    9,464Receivables
Gas
    
    
    13,358
    
    
    
    12,356
    
    
    
    6,394Unbilled Revenue
    
    
    3,162
    
    
    
    2,620
    
    
    
    1,143Merchandise
    
    
    2,297
    
    
    
    2,327
    
    
    
    2,249Other
    
    
    857
    
    
    
    978
    
    
    
    1,273Allowance for Doubtful Accounts
    
    
    (1,648
    )
    
    
    (1,708
    )
    
    
    (856
    )Materials, Supplies, and Merchandise, net (At Average Cost)
    
    
    1,394
    
    
    
    1,341
    
    
    
    1,524Gas Stored Underground (At Average Cost)
    
    
    4,088
    
    
    
    1,628
    
    
    
    4,235Regulatory Assets
    
    
    323
    
    
    
    2,248
    
    
    
    3,606Deferred Income Taxes
    
    
    2,539
    
    
    
    1,104
    
    
    
    434Prepayments
    
    
    2,317
    
    
    
    2,183
    
    
    
    1,731Total Current Assets
    
    
    43,472
    
    
    
    35,127
    
    
    
    31,197Property, Plant, and Equipment
    
    
    277,540
    
    
    
    271,206
    
    
    
    274,789Less: Accumulated Depreciation and Amortization
    
    
    74,583
    
    
    
    66,868
    
    
    
    70,417Property, Plant, and Equipment - net
    
    
    202,957
    
    
    
    204,338
    
    
    
    204,372Construction Work in Progress
    
    
    505
    
    
    
    343
    
    
    
    225Total Property, Plant, and Equipment
    
    
    203,462
    
    
    
    204,681
    
    
    
    204,597Other AssetsPrepaid Pension Cost
    
    
    989
    
    
    
    1,019
    
    
    
    1,102Deferred Charges
    
    
    641
    
    
    
    690
    
    
    
    567Prepayments
    
    
    928
    
    
    
    986
    
    
    
    957Regulatory Assets
    
    
    497
    
    
    
    824
    
    
    
    660Merchandise Receivables Due After One Year
    
    
    3,305
    
    
    
    3,639
    
    
    
    3,374Total Other Assets
    
    
    6,360
    
    
    
    7,158
    
    
    
    6,660Total
    
    $
    253,294
    
    
    $
    246,966
    
    
    $
    242,454
 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements 3




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##### Table of Contents



CONSOLIDATED BALANCE SHEETS EnergySouth, Inc.
    
    March 31,
    
    
    September 30,In Thousands, Except Share Data
    
    2005
    
    
    2004
    
    
    2004(Unaudited)LIABILITIES AND CAPITALIZATIONCurrent LiabilitiesCurrent Maturities of Long-Term Debt
    
    $
    5,089
    
    
    $
    6,152
    
    
    $
    6,248Accounts Payable
    
    
    6,014
    
    
    
    7,337
    
    
    
    5,278Dividends Declared
    
    
    1,557
    
    
    
    1,469
    
    
    
    1,561Customer Deposits
    
    
    1,352
    
    
    
    1,534
    
    
    
    1,618Taxes Accrued
    
    
    4,873
    
    
    
    3,595
    
    
    
    2,312Interest Accrued
    
    
    1,103
    
    
    
    1,251
    
    
    
    1,122Regulatory Liabilities
    
    
    6,312
    
    
    
    4,644
    
    
    
    4,637Other
    
    
    1,094
    
    
    
    1,002
    
    
    
    998Total Current Liabilities
    
    
    27,394
    
    
    
    26,984
    
    
    
    23,774Other LiabilitiesAccrued Postretirement Benefit Cost
    
    
    627
    
    
    
    356
    
    
    
    513Deferred Income Taxes
    
    
    22,843
    

    
    
    20,124
    
    
    
    21,378Deferred Investment Tax Credits
    
    
    252
    
    
    
    279
    
    
    
    262Regulatory Liabilities
    
    
    12,225
    
    
    
    11,400
    
    
    
    11,788Other
    
    
    1,426
    
    
    
    2,811
    
    
    
    1,413Total Other Liabilities
    
    
    37,373
    
    
    
    34,970
    
    
    
    35,35464,767
    
    
    
    61,954
    
    
    
    59,128CapitalizationStockholders EquityCommon
Stock, $.01 Par Value

(Authorized 20,000,000 Shares; Outstanding

March 2005 - 7,847,000;

March 2004 - 7,737,000;

September 2004 - 7,827,000 Shares)
    
    
    78
    
    
    
    78
    
    
    
    78Capital in Excess of Par Value
    
    
    26,637
    
    
    
    24,156
    
    
    
    26,162Retained Earnings
    
    
    75,608
    
    
    
    68,620
    
    
    
    67,625Grantor Trust, at cost
    
    
    (1,456
    )
    
    
    
    
    
    
    (1,355
    )Deferred Compensation Liability
    
    
    1,456
    
    
    
    
    
    
    
    1,355Total Stockholders Equity
    
    
    102,323
    
    
    
    92,854
    
    
    
    93,865Minority Interest
    
    
    4,890
    
    
    
    4,455
    
    
    
    4,769Long-Term Debt
    
    
    81,314
    
    
    
    87,703
    
    
    
    84,692Total Capitalization
    
    
    188,527
    
    
    
    185,012
    
    
    
    183,326Total
    
    $
    253,294
    
    
    $
    246,966
    
    
    $
    242,454
 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements 4




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##### Table of Contents



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months
    
    
    Six MonthsEnergySouth, Inc.
    
    Ended March 31,
    
    
    Ended March 31,In Thousands, Except Per Share Data
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Operating RevenuesGas Revenues
    
    $
    43,059
    
    
    $
    41,802
    
    
    $
    77,862
    
    
    $
    73,090Merchandise Sales
    
    
    701
    
    
    
    632
    
    
    
    1,886
    
    
    
    1,719Other
    
    
    339
    
    
    
    411
    
    
    
    719
    
    
    
    753Total Operating Revenues
    
    
    44,099
    
    
    
    42,845
    
    
    
    80,467
    
    
    
    75,562Operating ExpensesCost of Gas
    
    
    18,404
    
    
    
    17,635
    
    
    
    33,326
    
    
    
    29,762Cost of Merchandise
    
    
    610
    
    
    
    616
    
    
    
    1,569
    
    
    
    1,350Operations and Maintenance
    
    
    6,700
    
    
    
    6,914
    
    
    
    13,197
    
    
    
    13,346Depreciation
    
    
    2,545
    
    
    
    2,434
    
    
    
    5,095
    
    
    
    4,868Taxes, Other Than Income Taxes
    
    
    2,885
    
    
    
    2,797
    
    
    
    5,336
    
    
    
    5,050Total Operating Expenses
    
    
    31,144
    
    
    
    30,396
    
    
    
    58,523
    
    
    
    54,376Operating Income
    
    
    12,955
    
    
    
    12,449
    
    
    
    21,944
    
    
    
    21,186Other Income and (Expense)Interest Expense
    
    
    (1,842
    )
    
    
    (1,992
    )
    
    
    (3,713
    )
    
    
    (4,022
    )Allowance for Borrowed Funds Used During Construction
    
    
    11
    
    
    
    4
    
    
    
    13
    
    
    
    12Interest Income
    
    
    42
    
    
    
    8
    
    
    
    74
    
    
    
    14Minority Interest
    
    
    (218
    )
    
    
    (199
    )
    
    
    (446
    )
    
    
    (395
    )Total Other Income (Expense)
    
    
    (2,007
    )
    
    
    (2,179
    )
    
    
    (4,072
    )
    
    
    (4,391
    )Income Before Income Taxes
    
    
    10,948
    
    
    
    10,270
    
    
    
    17,872
    
    
    
    16,795Income Taxes
    
    
    4,153
    
    
    
    3,898
    
    
    
    6,761
    
    
    
    6,355Net Income
    
    $
    6,795
    
    
    $
    6,372
    
    
    $
    11,111
    
    
    $
    10,440Earnings Per ShareBasic
    
    $
    0.87
    
    
    $
    0.83
    
    
    $
    1.42
    
    
    $
    1.35Diluted
    
    $
    0.85
    
    
    $
    0.81
    
    
    $
    1.40
    
    
    $
    1.34Average Common Shares OutstandingBasic
    
    
    7,843
    
    
    
    7,724
    
    
    
    7,838
    
    
    
    7,715Diluted
    
    
    7,949
    
    
    
    7,818
    
    
    
    7,943
    
    
    
    7,809
 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements 5




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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six MonthsEnergySouth, Inc.
    
    Ended March 31,In Thousands
    
    2005
    
    
    2004Cash Flows from Operating ActivitiesNet Income
    
    $
    11,111
    
    
    $
    10,440Adjustments to Reconcile Net Income to Net Cash
Provided by Operating ActivitiesDepreciation and Amortization
    
    
    5,284
    
    
    
    5,073Provision for Losses on Receivables and Inventory
    
    
    673
    
    
    
    906Provision for Deferred Income Taxes
    
    
    (634
    )
    
    
    973Minority Interest
    
    
    446
    
    
    
    395Changes in Operating Assets and Liabilities:Receivables
    
    
    (8,590
    )
    
    
    (6,897
    )Inventory
    
    
    298
    
    
    
    2,093Payables
    
    
    712
    
    
    
    933Taxes
    
    
    2,560
    
    
    
    2,407Deferred Purchased Gas Adjustment
    
    
    4,446
    
    
    
    665Other
    
    
    204
    
    
    
    552Net Cash Provided by Operating Activities
    
    
    16,510
    
    
    
    17,540Cash
Flows from Investing ActivitiesCapital Expenditures
    
    
    (3,515
    )
    
    
    (4,104
    )Net Cash Used in Investing Activities
    
    
    (3,515
    )
    
    
    (4,104
    )Cash
Flows from Financing ActivitiesRepayment of Long-Term Debt
    
    
    (4,536
    )
    
    
    (4,791
    )Changes in Short-Term Borrowings
    
    
    
    
    
    
    (250
    )Payment of Dividends
    
    
    (3,128
    )
    
    
    (2,934
    )Dividend Reinvestment
    
    
    209
    
    
    
    191Exercise of Stock Options
    
    
    107
    
    
    
    396Partnership Distributions to Minority Interest Holders
    
    
    (326
    )
    
    
    (80
    )Net Cash Used by Financing Activities
    
    
    (7,674
    )
    
    
    (7,468
    )Net Increase in Cash and Cash Equivalents
    
    
    5,321
    
    
    
    5,968Cash and Cash Equivalents at Beginning of Period
    
    
    9,464
    
    
    
    4,082Cash and Cash Equivalents at End of Period
    
    $
    14,785
    
    
    $
    10,050
 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements 6




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##### Table of Contents



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. 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); a 90.9% owned limited
partnership, Bay Gas Storage Company, Ltd. (Bay Gas); and a 51% owned partnership, Southern Gas
Transmission Company (SGT). Minority interest represents the respective other owners
proportionate shares of the income and equity of Bay Gas and SGT. All significant intercompany
balances and transactions have been eliminated. Note 2. Basis of Presentation The accompanying unaudited consolidated condensed financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the information and
disclosures required by accounting principles generally accepted in the United States of America
for complete financial statements. All adjustments, consisting of normal and recurring accruals,
which are, in the opinion of management, necessary to present fairly the results for the interim
periods have been made. The statements should be read in conjunction with the summary of accounting
policies and notes to financial statements included in the Annual Report on Form 10-K of the
Company for the fiscal year ended September 30, 2004. Certain amounts in the prior-year financial
statements have been reclassified to conform with the current year financial statement
presentation. Due to the high percentage of customers using gas for heating, the Companys operations are
seasonal in nature. Therefore, the results of operations for the six-month periods ended March 31,
2005 and 2004 are not indicative of the results to be expected for the full year. 7




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##### Table of Contents



The table below summarizes operating results for the twelve months ended March 31, 2005 and 2004: Twelve MonthsEnergySouth, Inc.
    
    Ended March 31,In Thousands, Except Per Share Data
    
    2005
    
    
    2004Operating Revenues
    
    $
    120,877
    
    
    $
    113,860Cost of Gas
    
    
    44,968
    
    
    
    39,837Cost of Merchandise
    
    
    2,801
    
    
    
    2,467Operations and Maintenance Expense
    
    
    25,070
    
    
    
    25,185Depreciation Expense
    
    
    9,939
    
    
    
    9,253Taxes, Other Than Income Taxes
    
    
    8,545
    
    
    
    7,999Operating Income
    
    
    29,554
    
    
    
    29,119Interest Expense
    
    
    (7,589
    )
    
    
    (8,176
    )Allowance for Borrowed Funds Used
During Construction
    
    
    21
    
    
    
    78Interest Income
    
    
    120
    
    
    
    46Less: Minority Interest
    
    
    (856
    )
    
    
    (762
    )Income Before Income Taxes
    
    $
    21,250
    
    
    $
    20,305Income Taxes
    
    
    8,011
    
    
    
    7,662Net Income
    
    $
    13,239
    
    
    $
    12,643Earnings Per ShareBasic
    
    $
    1.69
    
    
    $
    1.64Diluted
    
    $
    1.67
    
    
    $
    1.63Average Common Shares OutstandingBasic
    
    
    7,825
    
    
    
    7,686Diluted
    
    
    7,922
    
    
    
    7,776
 Note 3. Stock-Based Compensation The Company currently 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: 8




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##### Table of Contents



Three Months
    
    
    Six MonthsEnergySouth, Inc.
    
    Ended March 31,
    
    
    Ended March 31,In Thousands, Except per Share Data
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net Income, as reported
    
    $
    6,795
    
    
    $
    6,372
    
    
    $
    11,111
    
    
    $
    10,440Deduct:Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    50
    
    
    
    41
    
    
    
    94
    
    
    
    88Pro forma net income
    
    $
    6,745
    
    
    $
    6,331
    
    
    $
    11,017
    
    
    $
    10,352Earnings per share:Basic - as reported
    
    $
    0.87
    
    
    $
    0.83
    
    
    $
    1.42
    
    
    $
    1.35Basic - pro forma
    
    $
    0.86
    
    
    $
    0.82
    
    
    $
    1.41
    
    
    $
    1.34Diluted - as reported
    
    $
    0.85
    
    
    $
    0.81
    
    
    $
    1.40
    
    
    $
    1.34Diluted - pro forma
    
    $
    0.85
    
    
    $
    0.81
    
    
    $
    1.39
    
    
    $
    1.33
 Note 4. Retirement Plans and Other Benefits The Company has a noncontributory, defined benefit plan covering substantially all of its
employees. Benefits are based on the greater of amounts resulting from two different formulas:
years of service and average compensation during the last five years of employment, or years of
service and average 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 of such
benefits over the expected service period of the employees. The projected unit credit actuarial method was used to determine service cost and actuarial
liability. Net periodic benefit cost for the periods indicated included the following components: Pension
    
    
    PostretirementBenefits
    
    
    BenefitsFor the three months ended March 31, (in thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    227
    
    
    $
    214
    
    
    $
    43
    
    
    $
    29Interest cost
    
    
    448
    
    
    
    391
    
    
    
    79
    
    
    
    62Amortization of transition asset
    
    
    
    
    
    
    (32
    )Amortization of prior service cost
    
    
    24
    
    
    
    24
    
    
    
    (11
    )
    
    
    (11
    )Amortization of unrecognized gain/(loss)
    
    
    
    
    
    
    (32
    )
    
    
    15
    
    
    
    3Expected return on plan assets
    
    
    (643
    )
    
    
    (645
    )
    
    
    (68
    )
    
    
    (71
    )Net periodic benefit cost (credit)
    
    $
    56
    
    
    $
    (80
    )
    
    $
    58
    
    
    $
    12
 9




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##### Table of Contents



Pension
    
    
    PostretirementBenefits
    
    
    BenefitsFor the six months ended March 31, (in thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    454
    
    
    $
    429
    
    
    $
    85
    
    
    $
    59Interest cost
    
    
    897
    
    
    
    782
    
    
    
    158
    
    
    
    125Amortization of transition asset
    
    
    
    
    
    
    (64
    )Amortization of prior service cost
    
    
    47
    
    
    
    47
    
    
    
    (22
    )
    
    
    (22
    )Amortization of unrecognized gain/(loss)
    
    
    
    
    
    
    (64
    )
    
    
    29
    
    
    
    6Expected return on plan assets
    
    
    (1,286
    )
    
    
    (1,289
    )
    
    
    (136
    )
    
    
    (141
    )Net periodic benefit cost (credit)
    
    $
    112
    
    
    $
    (159
    )
    
    $
    114
    
    
    $
    27
 For fiscal year 2005, the Company does not anticipate making any contributions to its pension
plan due to the fact that the plan is currently fully funded and any contributions to the Companys
postretirement benefit plan are expected to be immaterial. Note 5. Rates and Regulatory Matters On June 10, 2002, the Alabama Public Service Commission (APSC) approved Mobile Gas request for the
Rate Stabilization and Equalization (RSE) rate setting process to be effective October 1, 2002
through September 30, 2005, and thereafter unless modified or discontinued by APSC order. RSE is a
ratemaking methodology also used by the APSC to regulate certain other utilities. Rate
adjustments, designed to increase annual gas revenues by approximately $1.7 million, $2.8 million,
and $2.2 million, were implemented under the RSE tariff effective December 1, 2004, 2003, and 2002,
respectively. Increases are allowed only once each fiscal year, effective December 1, and cannot
exceed four percent of prior-year revenues. Under RSE, the APSC conducts reviews using fiscal
year-to-date performance through January, April, and July plus Mobile Gas budget projections to
determine whether Mobile GasL return on equity is expected to be within the allowed range of 13.35%
to 13.85% at the end of the fiscal year. 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 through future rate adjustments. To the extent the change is less than the index range,
the utility benefits by one-half of the difference through future rate adjustments. In conjunction with the approval of RSE, the APSC approved an Enhanced Stability Reserve (ESR),
beginning October 1, 2002, to which Mobile Gas may charge the full amount of: 1) extraordinary O&M
expenses resulting from force majeureevents such as storms, severe weather, and outages, when one
such event results in more than $100,000 of additional O&M expense or a combination of two or more
such events results in more than $150,000 of additional O&M expense during a fiscal year; or 2)
losses of revenue from any individual industrial or commercial customer in excess of $100,000
during the fiscal year, if such losses cause Mobile Gas return on equity to fall below 13.35%. An
initial ESR balance of $1.0 million was recorded October 1, 2002 and is being recovered from
customers through rates. Subject to APSC approval, additional funding, up to a maximum reserve
balance of $1.5 million, may be provided from any future non-recurring revenue should such revenue
cause 10




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##### Table of Contents



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 due to revenue losses from a large
industrial customer. Following a year in which a charge against the ESR is made, the APSC allows
for accruals to the ESR of no more than $15,000 monthly until the maximum funding level is
achieved. Effective October 1, 2004, Mobile Gas began recording a monthly accrual in the amount of
$10,000 to restore the reserve to its former balance of $1.0 million. The ESR balance of $914,000
at March 31, 2005 is included in the balance sheet of the Unaudited Condensed 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 margins. The adjustment is
calculated monthly for the months of November through April and applied to customers bills in the
same billing cycle in which the weather variation occurs. The temperature adjustment rider applies
to substantially all residential and small commercial customers. The Company is subject to the provisions of 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. As described above, Mobile Gas rates are established under the RSE rate setting process
and are based on average equity for the period. Mobile Gas rates are not adjusted to exclude a
return on its investment in regulatory assets during the recovery period. The following table presents the significant regulatory assets and liabilities as of the stated
dates (in thousands): March 31,
    
    
    March 31,
    
    
    September 30,2005
    
    
    2004
    
    
    2004Current
    
    
    Noncurrent
    
    
    Current
    
    
    Noncurrent
    
    
    Current
    
    
    NoncurrentAssetsDeferred Purchase Gas Adjustment
    
    
    
    
    
    
    
    
    
    $
    1,868
    
    
    
    
    
    
    $
    3,269ESR Fund
    
    $
    167
    
    
    $
    417
    
    
    
    167
    
    
    $
    584
    
    
    
    167
    
    
    $
    500Bad Debt Reserve
    
    
    133
    
    
    
    66
    
    
    
    133
    
    
    
    199
    
    
    
    133
    
    
    
    133Other
    
    
    23
    
    
    
    14
    
    
    
    80
    
    
    
    41
    
    
    
    37
    
    
    
    27Regulatory Assets
    
    $
    323
    
    
    $
    497
    
    
    $
    2,248
    
    
    $
    824
    
    
    $
    3,606
    
    
    $
    660LiabilitiesBad Debt Reserve
    
    $
    10
    
    
    
    
    
    
    $
    31
    
    
    $
    10
    
    
    $
    20ESR Fund
    
    
    914
    
    
    
    
    
    
    
    854
    
    
    
    
    
    
    
    854Deferred Investment Tax Credit
    
    
    16
    
    
    $
    129
    
    
    
    15
    
    
    
    144
    
    
    
    15
    
    
    $
    136RSE Adjustment
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    343Gross Receipt Tax Collections
    
    
    4,117
    
    
    
    
    
    
    
    3,744
    
    
    
    
    
    
    
    3,405Deferred Purchase Gas Adjustment
    
    
    1,177Asset Retirement Obligations
    
    
    
    
    
    
    12,096
    
    
    
    
    
    
    
    11,246
    
    
    
    
    
    
    
    11,652Regulatory Liabilities
    
    $
    6,312
    
    
    $
    12,225
    
    
    $
    4,644
    
    
    $
    11,400
    
    
    $
    4,637
    
    
    $
    11,788
 11




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##### Table of Contents



In the event that a portion of the Companys operations should no longer be 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. The excess of total acquisition costs over book value of net assets of acquired municipal gas plant
distribution systems is included in utility plant and is being amortized through Mobile Gas
rate-setting mechanism on a straight-line basis over approximately 26 years. At March 31, 2005 and
2004, the net acquisition adjustments were $5,955,000 and $6,245,000, respectively, and the balance
at September 30, 2004 was $6,137,000. Note 6. Earnings Per Share Basic earnings per share and diluted earnings per share are calculated by dividing net
income by the weighted average common shares outstanding during the period and the weighted average
common shares outstanding during the period plus potential dilutive common shares. Dilutive
potential common shares are calculated in accordance with the treasury stock method, which assumes
that proceeds from the exercise of all options are used to repurchase common at market value. The
amount of shares remaining after the proceeds are exhausted represents the potentially dilutive
effect of the securities. A reconciliation of the weighted average common shares and the diluted
average common shares is provided below: Three Months
    
    
    Six MonthsEnergySouth, Inc.
    
    Ended March 31,
    
    
    Ended March 31,In Thousands
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Weighted Average Common Shares
    
    
    7,843
    
    
    
    7,724
    
    
    
    7,838
    
    
    
    7,715Effect of Dilutive Securities:Options to Purchase Common Stock
    
    
    106
    
    
    
    94
    
    
    
    105
    
    
    
    94Diluted Average Common Shares
    
    
    7,949
    
    
    
    7,818
    
    
    
    7,943
    
    
    
    7,809
 Stock options awards to purchase approximately 76,000 shares and 74,000 shares as of March 31,
2005 and 2004, respectively, were not included in the computation of diluted earnings per share
because inclusion of these shares would have been antidulitive as the option exercise prices were
greater than the shares market prices during these periods. On July 30, 2004, the Board of Directors of EnergySouth declared a three-for-two split of
outstanding common stock whereby one additional share was issued for each two shares held as of the
record date of August 16, 2004. The new shares were issued to shareholders on September 1, 2004

with cash paid in lieu of fractional shares resulting from the split. Common stock began trading
on the post split basis on September 2, 2004. All references to number of shares and per share
amounts have been restated to reflect the three-for-two stock split. 12




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##### Table of Contents



Note 7. Segment Information The Company is principally engaged in two reportable business segments: Natural Gas Distribution
and Natural Gas Storage. The Natural Gas Distribution segment is actively engaged in the
distribution and transportation of natural gas to residential, commercial and industrial customers
through Mobile Gas and SGT. The Natural Gas Storage segment provides for the underground storage
of natural gas and transportation services through the operations of Bay Gas and Storage. Through
Mobile Gas and Services, the Company also provides merchandising and other energy-related services
which are aggregated with EnergySouth, the holding company, and included in the Other segment. Segment earnings information presented in the table below includes intersegment revenues which are
eliminated in consolidation. Such intersegment revenues are primarily amounts paid by the Natural
Gas Distribution segment to the Natural Gas Storage segment. For the three months ended
    
    Natural Gas
    
    
    Natural GasMarch 31, 2005 (in thousands):
    
    Distribution
    
    
    Storage
    
    
    Other
    
    
    Eliminations
    
    
    ConsolidatedOperating Revenues
    
    $
    39,383
    
    
    $
    4,725
    
    
    $
    1,040
    
    
    $
    (1,049
    )
    
    $

    44,099Cost of Gas
    
    
    19,453
    
    
    
    
    
    
    
    
    
    
    
    (1,049
    )
    
    
    18,404Cost of Merchandise
    
    
    
    
    
    
    
    
    
    
    610
    
    
    
    
    
    
    
    610Operations and Maintenance Expense
    
    
    5,546
    
    
    
    810
    
    
    
    344
    
    
    
    
    
    
    
    6,700Depreciation Expense
    
    
    1,925
    
    
    
    620
    
    
    
    
    
    
    
    
    
    
    
    2,545Taxes, Other Than Income Taxes
    
    
    2,627
    
    
    
    236
    
    
    
    22
    
    
    
    
    
    
    
    2,885Operating Income
    
    
    9,832
    
    
    
    3,059
    
    
    
    64
    
    
    
    
    
    
    
    12,955Interest Income
    
    
    1
    
    
    
    38
    
    
    
    93
    
    
    
    (90
    )
    
    
    42Interest Expense
    
    
    (782
    )
    
    
    (1,074
    )
    
    
    (76
    )
    
    
    90
    
    
    
    (1,842
    )Allowance for Borrowed Funds
Used During Construction
    
    
    2
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    11Less: Minority Interest
    
    
    (30
    )
    
    
    (188
    )
    
    
    
    
    
    
    
    
    
    
    (218
    )Income Before Income Taxes
    
    $
    9,023
    
    
    $
    1,844
    
    
    $
    81
    
    
    
    
    
    
    $
    10,948
 For the three months ended
    
    Natural Gas
    
    
    Natural GasMarch 31, 2004 (in thousands):
    
    Distribution
    
    
    Storage
    
    
    Other
    
    
    Eliminations
    
    
    ConsolidatedOperating Revenues
    
    $
    38,466
    
    
    $
    4,397
    
    
    $
    1,043
    
    
    $
    (1,061
    )
    
    $
    42,845Cost of Gas
    
    
    18,696
    
    
    
    
    
    
    
    
    
    
    
    (1,061
    )
    
    
    17,635Cost of Merchandise
    
    
    
    
    
    
    
    
    
    
    616
    
    
    
    
    
    
    
    616Operations and Maintenance Expense
    
    
    5,667
    
    
    
    798
    
    
    
    449
    
    
    
    
    
    
    
    6,914Depreciation Expense
    
    
    1,828
    
    
    
    606
    
    
    
    
    
    
    
    
    
    
    
    2,434Taxes, Other Than Income Taxes
    
    
    2,577
    
    
    
    202
    
    
    
    18
    
    
    
    
    
    
    
    2,797Operating Income
    
    
    9,698
    
    
    
    2,791
    
    
    
    (40
    )
    
    
    
    
    
    
    12,449Interest Income
    
    
    3
    
    
    
    10
    
    
    
    
    
    
    
    (5
    )
    
    
    8Interest Expense
    
    
    (803
    )
    
    
    (1,126
    )
    
    
    (68
    )
    
    
    5
    
    
    
    (1,992
    )Allowance for Borrowed Funds
Used During Construction
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Less: Minority Interest
    
    
    (44
    )
    
    
    (155
    )
    
    
    
    
    
    
    
    
    
    
    (199
    )Income Before Income Taxes
    
    $
    8,858
    
    
    $
    1,520
    
    
    $
    (108
    )
    
    
    
    
    
    $
    10,270
 13




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##### Table of Contents



For the six months ended
    
    Natural Gas
    
    
    Natural GasMarch 31, 2005 (in thousands):
    
    Distribution
    
    
    Storage
    
    
    Other
    
    
    Eliminations
    
    
    ConsolidatedOperating Revenues
    
    $
    70,441
    
    
    $
    9,508
    
    
    $
    2,605
    
    
    $
    (2,087
    )
    
    $
    80,467Cost of Gas
    
    
    35,413
    
    
    
    
    
    
    
    
    
    
    
    (2,087
    )
    
    
    33,326Cost of Merchandise
    
    
    
    
    
    
    
    
    
    
    1,569
    
    
    
    
    
    
    
    1,569Operations and Maintenance Expense
    
    
    10,843
    
    
    
    1,588
    
    
    
    766
    
    
    
    
    
    
    
    13,197Depreciation Expense
    
    
    3,851
    
    
    
    1,244
    
    
    
    
    
    
    
    
    
    
    
    5,095Taxes, Other Than Income Taxes
    
    
    4,837
    
    
    
    458
    
    
    
    41
    
    
    
    
    
    
    
    5,336Operating Income
    
    
    15,497
    
    
    
    6,218
    
    
    
    229
    
    
    
    
    
    
    
    21,944Interest Income
    
    
    2
    
    
    
    67
    
    
    
    95
    
    
    
    (90
    )
    
    
    74Interest Expense
    
    
    (1,510
    )
    
    
    (2,162
    )
    
    
    (131
    )
    
    
    90
    
    
    
    (3,713
    )Allowance for Borrowed Funds
Used During Construction
    
    
    4
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    13Less: Minority Interest
    
    
    (65
    )
    
    
    (381
    )
    
    
    
    
    
    
    
    
    
    
    (446
    )Income Before Income Taxes
    
    $
    13,928
    
    
    $
    3,751
    
    
    $
    193
    
    
    
    
    
    
    $
    17,872
 For the six months ended
    
    Natural Gas
    
    
    Natural GasMarch 31, 2004 (in thousands):
    
    Distribution
    
    
    Storage
    
    
    Other
    
    
    Eliminations
    
    
    ConsolidatedOperating Revenues
    
    $
    66,486
    
    
    $
    8,716
    
    
    $
    2,471
    
    
    $
    (2,111
    )
    
    $
    75,562Cost of Gas
    
    
    31,873
    
    
    
    
    
    
    
    
    
    
    
    (2,111
    )
    
    
    29,762Cost of Merchandise
    
    
    
    
    
    
    
    
    
    
    1,350
    
    
    
    
    
    
    
    1,350Operations and Maintenance Expense
    
    
    10,890
    
    
    
    1,527
    
    
    
    929
    
    
    
    
    
    
    
    13,346Depreciation Expense
    
    
    3,656
    
    
    
    1,212
    
    
    
    
    
    
    
    
    
    
    
    4,868Taxes, Other Than Income Taxes
    
    
    4,613
    
    
    
    400
    
    
    
    37
    
    
    
    
    
    
    
    5,050Operating Income
    
    
    15,454
    
    
    
    5,577
    
    
    
    155
    
    
    
    
    
    
    
    21,186Interest Income
    
    
    5
    
    
    
    19
    
    
    
    
    
    
    
    (10
    )
    
    
    14Interest Expense
    
    
    (1,633
    )
    
    
    (2,265
    )
    
    
    (134
    )
    
    
    10
    
    
    
    (4,022
    )Allowance for Borrowed Funds
Used During Construction
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Less: Minority Interest
    
    
    (87
    )
    
    
    (308
    )
    
    
    
    
    
    
    
    
    
    
    (395
    )Income Before Income Taxes
    
    $
    13,751
    
    
    $
    3,023
    
    
    $
    21
    
    
    
    
    
    
    $
    16,795
 Note 8. Contingencies Like many gas distribution companies, prior to the widespread availability of natural gas, the 14




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##### Table of Contents



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. Based on recent plans for the site, the Alabama Department of Environmental Management (ADEM) has
conducted a Brownfield evaluation of the property. On January 5, 2005, ADEM released a CERCLA
Targeted Brownfield Site Inspection report on the manufactured gas plant site. Mobile Gas has
begun discussions with ADEM to identify steps necessary to obtain ADEMs concurrence with Mobile
Gas plans for the site. The Company engaged environmental consultants to evaluate the site in
connection with the plans for the site. Based on their review, the Company recorded its best
estimate of $200,000 as an expense and a remediation liability in fiscal 2004. 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. Note 9. New Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 153, Exchanges of Nonmonetary Assets  an amendment of APB Opinion No.
29 (SFAS 153). SFAS 153 eliminates the exception to fair value for exchanges of similar
productive assets and replaces it with a general exception for exchange transactions that do not
have commercial substance; that is, transactions that are not expected to result in significant
changes in the cash flows of the reporting entity. SFAS 153 will be effective for the Company
beginning July 1, 2005 and is not expected to have a
material impact on the Companys financial statements. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment (SFAS 123R) which eliminates the alternative to use APB Opinion 25s
intrinsic value method of accounting that was provided in Statement 123 as originally issued.
SFAS 123R requires entities to recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards. The Company
accounts for its employee stock option plans under the intrinsic value recognition and measurement
provisions of Opinion 25 and discloses the effect on net income and earnings per share had
compensation cost for the plans been determined based on the fair value of the options on the grant
date. See Note 3 to the Unaudited Condensed Consolidated Financial Statements. The Company is
currently evaluating the effects of the transition to the fair value method as required in SFAS
123R, which will be effective for the Company beginning October 1, 2005 based on the Securities and
Exchange Commissions announcement dated April 14, 2005. 15




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##### Table of Contents



In March 2005, the FASB issued Financial Interpretation No. 47 to clarify the term conditional
asset retirement obligation as used in Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations. Conditional asset retirement obligation refers to a
legal obligation to perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and/or method of settlement. Accordingly, an entity is required
to recognize a liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably estimated. The fair value of a liability for the
conditional asset retirement obligation should be recognized when incurred  generally, upon
acquisition, construction, development and/or through the normal operation of the asset.
Uncertainty about the timing and/or method of settlement should be factored into the measurement of
the liability when sufficient information exists. FIN 47 also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset retirement obligation.
FIN 47 is effective for the Company no later than September 30, 2006. The adoption of FIN 47 will
not have an impact on the Companys financial statements . 16




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##### Table of Contents



Item 2
    
    Managements Discussion and Analysisof Financial Condition and Results of Operations
 The Company EnergySouth, Inc. is the holding company for a family of energy businesses. Mobile Gas purchases,
sells, and transports natural gas to residential, commercial, and industrial customers in Mobile,
Alabama and surrounding areas. The Company also provides merchandise sales, service, and
financing. MGS Storage Services is the general partner of Bay Gas Storage Company, a limited
partnership that provides underground storage and delivery of natural gas for Mobile Gas and other
customers. EnergySouth Services is the general partner of Southern Gas Transmission Company, which
is engaged in the intrastate transportation of natural gas. Results Of Operations Consolidated Earnings All earnings per share amounts referred to herein are computed on a diluted basis. Earnings per
share for the three and six months ended March 31, 2005 increased $0.04 and $0.06 per diluted share
as compared to the same prior-year periods. All segments contributed to the increase in earnings
per share during the three-month period ended March 31, 2005 and the increase for the six-month
period ended March 31, 2005 was due primarily to increased earnings from Bay Gas natural gas
storage business. Financial information by business segment is shown in Note 7 to the Unaudited
Condensed Consolidated Financial Statements above. Earnings from the Companys natural gas distribution business increased $0.01 per diluted share for
the three-month period ended March 31, 2005 as compared to the same prior-year period and remained
flat for the six month period ended March 31, 2005 as compared to the same prior-year period. The Companys natural gas storage business, operated by Bay Gas, contributed increased earnings per
share of $0.02 and $0.05 per diluted share for the three and six-month periods
ended March 31, 2005 as compared to the same prior-year periods. The positive earnings
contributions are due primarily to additional storage revenues associated with short-term storage
agreements. Earnings from other business operations increased $0.01 per diluted share for each of the three and
six-month periods ended March 31, 2005, as compared to the same prior-year periods, due primarily
to additional reserves for bad debt and slow moving inventory recorded during the second quarter of
fiscal 2004. 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. 17




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##### Table of Contents



The Alabama Public Service Commission (APSC) regulates the Companys gas distribution operations.
Mobile Gas rate tariffs for gas distribution allow rate adjustments to pass through to customers
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 gas and related taxes. In fiscal year 2002, the APSC approved Mobile Gas request for a Rate Stabilization and
Equalization (RSE) tariff, a ratemaking methodology also used by the APSC to regulate certain other
utilities. Rate adjustments, designed to increase annual gas revenues by approximately $1.7
million and $2.8 million, were implemented under the RSE tariff effective December 1, 2004 and
2003, respectively. Increases are allowed only once each fiscal year, effective December 1, and
cannot exceed four percent of prior-year revenues. See Note 5 to the Unaudited Condensed
Consolidated Financial Statements. 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. Natural gas distribution revenues increased $917,000 (2%) and $3,955,000 (6%), respectively, during
the three and six-month periods ended March 31, 2005 as compared to the same prior-year periods due
to the rate adjustments to recover increased gas costs paid to suppliers and the RSE rate
adjustments which went into effect on December 1, 2004 and 2003. The increase in revenues during
the three and six-month periods were partially offset
by declines of 18% and 15%, respectively, in volumes delivered to temperature-sensitive customers
due to temperatures that were 18% and 13% warmer than the same period last year. A decline in the
number of temperature-sensitive customers served during the current year periods also contributed
to the offset. Revenues from the sale of natural gas to large commercial and industrial customers increased
$754,000 (29%) and $1,472,000 (32%), respectively, for the three and six-month periods ended March
31, 2005 due to a 10% increase in volumes delivered to these customers in each of the three and
six-month periods and the rate adjustments noted above. Revenues from the transportation of natural gas to large commercial and industrial customers during
the three and six-month periods ended March 31, 2005 were approximately the same as in the
comparable prior-year periods. The cost of natural gas increased $757,000 (4%) and $3,540,000 (11%) for the three and six-month
periods ended March 31, 2005 as compared to the same prior-year periods due to higher natural gas
commodity prices. Natural gas distribution margins, defined as revenues less cost of gas and related taxes, 18




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increased for the three and six-month periods ended March 31, 2005 as compared to the same prior-year periods
due primarily to the increased sales to large commercial and industrial customers discussed above. Increased margins realized from the rate adjustments effective December 1, 2003 and 2004 were
largely offset by a decline in the number of temperature-sensitive customers served and a decline
in usage per degree day by temperature-sensitive customers during the current year periods. Mobile
Gas utilizes a temperature adjustment rider on gas sales to residential and small
commercial/industrial customers during the months of November through April to mitigate the impact
that warmer or colder than normal weather has on earnings. Temperature-sensitive margins realized
during the current year periods were, in fact, lower than the prior-year due to a decrease in
residential customers gas consumption per heating degree-day. Consistent with other natural gas
distribution companies in the United States, Mobile Gas has over time experienced declines in
residential customer usage per degree-day as customers replace old appliances with new, more energy
efficient models and as new, more energy efficient homes are built. During the prior-year periods,
residential customers usage deviated from this pattern and was unusually high. However, during
the three and six months ended March 31, 2005, the decline in consumption by these customers
reflected the declining trend in customer consumption as experienced in recent years. Usages per
degree-day can and do vary between periods due to several factors including humidity, wind speed,
cloud cover, and duration of cold weather. Operations and maintenance (O&M) expenses decreased $121,000 (2%) for the three-months ended March
31, 2005 due to a decrease in payroll and payroll related costs. On January 16, 2004, Mobile Gas
eliminated sixteen positions. Termination benefits were paid, and in accordance with Statement of
Financial Accounting Standards No. 88, Employers Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for
Termination Benefits, Mobile Gas expensed $270,000 during the second quarter of fiscal year 2004
related to the special termination benefits. Partially offsetting the payroll savings in fiscal
2005 was an increase in insurance and promotional costs and accruals to restore the ESR reserve to
its former balance. O&M expenses for the six-months ended March 31, 2005 were approximately the
same as in the comparable prior-year periods. Depreciation expense increased $97,000 (5%) and $195,000 (5%), respectively, for the three and
six-month periods ended March 31, 2005 as compared to the same prior-year periods due to Mobile
Gas increased investment in property, plant and equipment. Other taxes primarily consist of property taxes and business license taxes that are based on gross
revenues and fluctuate accordingly. Other taxes increased $50,000 (2%) and $224,000 (5%),
respectively, for the three and six-month periods ended March 31, 2005 due primarily to the
increased revenues. Interest expense decreased $21,000 (7%) and $123,000 (8%) for the three and six-month periods ended
March 31, 2005 as compared to the same prior-year periods due to principal payments on long-term
debt. Minority interest reflects the minority partners share of pre-tax earnings of the SGT partnership,
of which EnergySouths subsidiary holds a controlling interest. Minority interest decreased
slightly during the three and six-month periods ended March 31, 2005 as compared to the same
prior-year periods due to a decline in pretax earnings of the 19




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partnership. Natural Gas Storage The natural gas storage segment provides for the underground storage of natural gas and
transportation services, through the operations of Bay Gas. The APSC certificated Bay Gas as an
Alabama natural gas storage public utility in 1992. Through its first storage cavern with 2.3 Bcf
of working gas capacity and connected pipeline, Bay Gas thereafter began providing for Mobile Gas
and other customers substantial, long-term services 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 firm and interruptible interstate transportation-only services. The FERC last issued
orders on October 11, 2001 and June 3, 2002 approving rates for such services. On March 9, 2004, in
accordance with FERC filing requirements, Bay Gas filed a petition with the FERC requesting
approval of new rates for transportation-only service, which remains pending. The construction of natural gas-fired electric generation facilities in the Southeast has provided
opportunities to provide gas storage and transportation services. Construction of Bay Gas second
storage cavern was completed and the cavern was placed into service
April 1, 2003. Bay Gas entered into a fifteen-year contract with Southern Company Services, Inc.
(Southern), an affiliate of Southern Company, for most of the second cavern capacity. During
fiscal year 2004, the remaining capacity of the second cavern was fully subscribed on a firm basis.
Currently, the second storage cavern has a working capacity of approximately 3.7 Bcf. Together,
the two caverns at Bay Gas currently hold approximately 6.0 Bcf, with injection and withdrawal
capacity of 200 MMcf and 610 MMcf per day, respectively, and expansion of these caverns is
currently planned to enable them to ultimately hold 7.0 Bcf. Such development will occur pending
certain operational considerations. With the current working capacity of both caverns fully subscribed, Bay Gas held a non-binding
open season in fiscal 2004 to assess interest for up to 5.0 Bcf of additional working capacity.
Based on the response to the open season, Bay Gas recently completed design and engineering work on
a third storage cavern and related facilities and, in April 2005, entered into a multi-year
contract agreement with BP Energy Company. With the agreement and design work now in place,
construction of the third cavern is expected to begin in May 2005. The new cavern is designed to
add 5.0 Bcf of working gas capacity and is anticipated to be in service by the summer of 2007. The
addition of the third cavern and additional capacity development of the second cavern is currently
planned to ultimately increase the total storage capacity of Bay Gas to 12.0 Bcf and injection and
withdrawal capacities to 450 MMcf per day and 1.2 Bcf per day, respectively. Bay Gas revenues increased $328,000 (7%) and $792,000 (9%), respectively, during the three and
six-month periods ended March 31, 2005 as compared to the same prior-year periods due primarily to
short-term storage agreements entered into during fiscal 2005. Under these short-term agreements,
available storage capacity is leased to customers on an interruptible basis, thereby optimizing the
use of cavern capacity. 20




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Operations and maintenance (O&M) expenses increased $12,000 (2%) and $61,000 (4%), respectively,
during the three and six-month periods ended March 31, 2005 as compared to the same prior-year
periods due to a general increase in operating costs as a result of the recent expansion activities
of Bay Gas. Other taxes consist primarily of property taxes and those taxes increased $34,000 (17%) and $58,000
(15%) for the three and six-month periods as a combined result of the increased revenues associated
with the expanded operations of Bay Gas second storage cavern and the increase in the assessed
value of Bay Gas property, plant, and equipment due to the completion of the second storage
cavern. Minority interest reflects the minority partners share of pre-tax earnings of the Bay Gas limited
partnership, of which EnergySouths subsidiary holds a controlling interest. Minority interest
increased $33,000 (21%) and $73,000 (24%), respectively, during the three and six-month periods
ended March 31, 2005 as compared to the same prior-year periods due to increased pretax earnings of
the limited partnership as discussed above. Other Through Mobile Gas and EnergySouth Services, Inc., the Company provides merchandising, financing,
and other energy-related services, which are aggregated with EnergySouth, the holding company, to
comprise the Other category. See Note 7 to the Unaudited Condensed Consolidated Financial
Statements above for segment disclosure. Income before income taxes from Other business activities increased $189,000 and $172,000 for the
three and six-month periods ended March 31, 2005 as compared to the same prior-year periods due
primarily to the establishment of additional reserves during the second quarter of fiscal year 2004
for slow-moving merchandise inventory and bad debt reserves associated with financing activities. Income Taxes Income taxes fluctuate with the change in income before income taxes. Income tax expense increased
$255,000 (7%) and $406,000 (6%), respectively, for the three and six-month periods ended March 31,
2005 as compared to the same prior-year period. 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 Unaudited Condensed Consolidated
Statements of Cash Flows. Cash provided by operating activities decreased $1,030,000 during the
six-month period ended March 31, 2005 as compared to the same period last fiscal year due to a
decrease in deferred income tax expense, an increase in accounts receivable, and an increase in gas
inventory stored underground. Partially offsetting the above negative impacts on cash flow from
operating activities was an 21




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increase in net income and an increase in collections of gas costs from customers. Cash used in investing activities reflects the capital-intensive nature of the Companys business.
During the six months ended March 31, 2005 and 2004, the Company used cash of $3,515,000 and
$4,104,000, respectively, for the construction of distribution and storage facilities, purchases of
equipment and other general improvements. The expansion of Bay Gas third natural gas storage
cavern, which is scheduled to commence in May 2005 at a total cost of up to $58,000,000, will be
funded through the issuance of long-term debt and from internal cash. Financing activities used cash of $7,674,000 and $7,468,000 during the six months ended March 31,
2005 and 2004, respectively. The $206,000 change in financing activities is due to an increase in
dividends and partnership distributions and a decline in the number of stock options exercised,
which were partially offset by a reduction in principal payments on long-term debt and short-term
borrowings. Funds for the Companys short-term cash needs are expected to come from cash provided by operations
and borrowings under the Companys revolving credit agreement. At March 31, 2005, the Company had
$20,000,000 available for borrowing on its revolving credit agreement. The Company pays a fee for
its committed lines of credit rather than maintain compensating balances. The commitment fee is
0.125% of the average daily unborrowed amount during the annual period of calculation. The Company
believes it has adequate financial flexibility to meet its expected cash needs in the foreseeable
future. Under its gas supply strategy, Mobile Gas enters into forward purchases of natural gas to lock in
prices for a majority of its expected gas sales for the upcoming winter heating season. The
commitments for future purchases of natural gas at fixed prices are deemed to be purchases in the
normal course of business and are not subject to derivative accounting treatment. See Gas Supply
under Managements Discussion and Analysis of Financial Condition and Results of Operation
included in the Annual Report on Form 10-K of the Company for the fiscal year ended September 30,
2004 and Item 3 below for further information. The table below summarizes the Companys contractual obligations and commercial commitments as of
March 31, 2005: Remaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fiscal YearsType of Contractual
    
    Fiscal Year
    
    
    Fiscal Year
    
    
    Fiscal Year
    
    
    Fiscal Year
    
    
    2009 andObligations (in thousands):
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    thereafterLong-Term Debt
    
    $
    3,012
    
    
    $
    4,763
    
    
    $
    5,019
    
    
    $
    5,300
    
    
    $
    68,309Interest Payments
    
    
    3,637
    
    
    
    6,685
    
    
    
    6,287
    
    
    
    5,867
    
    
    
    32,411Gas Supply Contracts
    
    
    2,387
    
    
    
    1,170
    
    
    
    1,187
    
    
    
    1,187
    
    
    
    3,215
 22




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Critical Accounting Policies See Critical Accounting Policies under Managements Discussion and Analysis of Financial
Condition and Results of Operation included in the Annual Report on Form 10-K of the Company for
the fiscal year ended September 30, 2004. 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; changes in historical patterns of consumption by temperature-sensitive customers;
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 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. 23




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Item 3
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK
 Mobile Gas is exposed to market risks associated with commodity prices of natural gas. Mobile Gas
ameliorates the price risk associated with purchases of natural gas by using a combination of
natural gas storage services, fixed price contracts and spot market purchases. As part of Mobile
Gas gas supply strategy, it has adopted a policy under which management is authorized to commit to
future gas purchases at fixed prices up to a specified percentage of the normalized degree-day
usage for any corresponding month as outlined within the policy. All commitments for future gas
purchases at fixed prices meet the requirements of paragraph 10.b, Normal purchases and Normal
sales,of Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 149. Thus, the commitments for future
purchases of natural gas at fixed prices are deemed to be purchases in the normal course of
business and are not subject to derivative accounting treatment. At March 31, 2005, Mobile Gas had not entered into derivative instruments for the purpose of
hedging the price of natural gas. If Mobile Gas had entered into such derivative instruments, any
cost incurred or benefit received from the derivative or other hedging arrangements would be
recoverable or refunded through the purchased gas adjustment mechanism. As discussed in Results
of Operations under Natural Gas Distribution within Item 2 above, the APSC currently allows for
full recovery of all costs associated with natural gas purchases; therefore, costs associated with
the forward purchases of natural gas will be passed through to customers when realized and will not
affect future earnings or cash flows. At March 31, 2005 the Company had approximately $86.4 million of long-term debt at fixed interest
rates. Interest rates range from 6.9% to 9.0% and the maturity dates of such debt extend to 2023. See also the information provided under the captions The Company, Gas Supply, and Liquidity
and Capital Resources in the Companys Annual Report on Form 10-K for the fiscal year ended
September 30, 2004 for a discussion of the Companys risks related to regulation, weather, gas
supply and prices, and the capital-intensive nature of the Companys business. 
 Item 4
    
    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. 24




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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. 25




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 5. Other Information  The Company announced that the Board of Directors of the Company had approved the planned
retirement at age 65 in July of 2007 of John S. Davis, President and Chief Executive
Officer. The Board of Directors of the Company has appointed a special committee of the
Board to evaluate possible internal and external candidates to succeed Mr. Davis as Chief
Executive Officer, with the intent of completing the process sufficiently in advance of Mr.
Davis retirement to allow him to work with his successor to assure a smooth transition. 
 Item 6. Exhibits Exhibit No.
    
    Description10(e)
    
    Storage Service Agreement by and between Bay Gas Storage
Company, Ltd. and BP Energy Company made as of the 31st day of March,
2005 and executed on April 19, 2005(1)31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Chief Executive Officer31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Chief Financial Officer32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief Executive
Officer32.2
    
    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) 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. 26




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ENERGYSOUTH, INC.(Registrant)Date: May 9, 2005
    
    /s/ John S. DavisJohn S. DavisPresident andChief Executive OfficerDate: May 9, 2005
    
    /s/ Charles P. HuffmanCharles P. HuffmanSenior Vice President andChief Financial Officer
 27