##### 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 December 31, 2003

Commission File No. 0-29604

ENERGYSOUTH, INC.




(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Alabama                                                        |  | 58-2358943                          
|                                                               |  |                                     
|(State or other jurisdiction of
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 [X] No [   ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [   ]

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.

Common stock ($.01 par value) outstanding at February 04, 2004  5,145,055
shares.





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TABLE OF CONTENTS



|                                            |                                                                                              |                                                                |  |  |  |  |  | 
|------------------------------------------- | -------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|PART 1. FINANCIAL INFORMATION              
|                                            | ITEM 1: FINANCIAL STATEMENTS                                                                
|                                            |                                                                                              | CONSOLIDATED BALANCE SHEETS                                   
|                                            |                                                                                              | CONSOLIDATED BALANCE SHEETS                                   
|                                            |                                                                                              | CONSOLIDATED STATEMENTS OF INCOME                             
|                                            |                                                                                              | CONSOLIDATED STATEMENTS OF CASH FLOWS                         
|                                            |                                                                                              | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                            | Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                            | Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                            | Item 4 CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION                 
|                                            | Item 4. Submission of Matters to a Vote of Security Holders                                 
|                                            | Item 6. Exhibits and Reports on Form 8-K                                                    
|SIGNATURES                                 
|Certification Pursuant to Section 302 - CEO
|Certification Pursuant to Section 302 - CFO
|Certification Pursuant to Section 906 - CEO
|Certification Pursuant to Section 906 - CFO



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##### Table of Contents



ENERGYSOUTH, INC.
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2003

INDEX

|       |  |    |   |  |                                                                                       |  |  |       |          |  | 
|------ |  | -- | - |  | ------------------------------------------------------------------------------------- |  |  | ----- | -------- |  | 
|       |  |    |   |  |                                                                                       |  |  |       | Page No.
|       |  |    |   |  |                                                                                       |  |  |       |         
|       |  |    |   |  | PART I: FINANCIAL INFORMATION                                                         |  |  |       |         
|Item 1 |  |    |   |  | Financial Statements (Unaudited):                                                     |  |  |       |         
|       |  | (a | ) |  | Consolidated Balance Sheets - December 31, 2003 and 2002 and September 30, 2003       |  |  | 3-4   |         
|       |  | (b | ) |  | Consolidated Statements of Income - Three Months Ended December 31, 2003 and 2002     |  |  | 5     |         
|       |  | (c | ) |  | Consolidated Statements of Cash Flows - Three Months Ended December 31, 2003 and 2002 |  |  | 6     |         
|       |  | (d | ) |  | Notes to Consolidated Financial Statements                                            |  |  | 7-13  |         
|Item 2 |  |    |   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  |  | 14-20 |         
|Item 3 |  |    |   |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |  | 21    |         
|Item 4 |  |    |   |  | Controls and Procedures                                                               |  |  | 21    |         
|       |  |    |   |  | PART II: OTHER INFORMATION                                                            |  |  |       |         
|Item 4 |  |    |   |  | Submission of Matters to a Vote of Security Holders                                   |  |  | 22    |         
|Item 6 |  |    |   |  | Exhibits and Reports on Form 8-K                                                      |  |  | 23-27 |         

2



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##### Table of Contents






PART 1. FINANCIAL INFORMATION




ITEM 1: FINANCIAL STATEMENTS




CONSOLIDATED BALANCE SHEETS

|                               |                                                             |                                 |                                      |                                      |        |             |         |        |        |         |         |        |       |         |         | 
|------------------------------ | ----------------------------------------------------------- | ------------------------------- | ------------------------------------ | ------------------------------------ | ------ | ----------- | ------- | ------ | ------ | ------- | ------- | ------ | ----- | ------- | ------- | 
|EnergySouth, Inc.              |                                                             | December 31,                    |                                      | September 30,                       
|                               |                                                             |                                 |                                      |                                     
|In Thousands                   |                                                             | 2003                            |                                      | 2002                                 |        | 2003       
|                               |                                                             |                                 |                                      |                                      |        |            
|                               |                                                             |                                 |                                      |                                      |        | (Unaudited) |         |        |        |        
|ASSETS                         |                                                             |                                 |                                      |                                      |        |             |         |        |        |         |         |       
|Current Assets                 |                                                             |                                 |                                      |                                      |        |             |         |        |        |         |         |       
|                               | Cash and Cash Equivalents                                   |                                 | $                                    | 2,904                                |        |             | $       | 4,242  |        |         | $       | 4,082  |      
|                               | Receivables                                                 |                                 |                                      |                                      |        |             |         |        |        |         |         |        |      
|                               |                                                             | Gas                             |                                      |                                      | 11,519 |             |         |        | 11,308 |         |         |        | 6,652 |        
|                               |                                                             | Unbilled Revenue                |                                      |                                      | 6,896  |             |         |        | 2,742  |         |         |        | 1,335 |        
|                               |                                                             | Merchandise                     |                                      |                                      | 2,500  |             |         |        | 2,738  |         |         |        | 2,313 |        
|                               |                                                             | Other                           |                                      |                                      | 745    |             |         |        | 722    |         |         |        | 939   |        
|                               |                                                             | Allowance for Doubtful Accounts |                                      |                                      | (1,158 | )           |         |        | (1,218 | )       |         |        | (889  | )      
|                               | Materials, Supplies, and Merchandise, Net (At Average Cost) |                                 |                                      | 1,460                                |        |             |         | 1,424  |        |         |         | 1,457  |      
|                               | Gas Stored Underground (At Average Cost)                    |                                 |                                      | 2,899                                |        |             |         | 2,749  |        |         |         | 3,703  |      
|                               | Regulatory Assets (Note 4)                                  |                                 |                                      | 2,287                                |        |             |         | 412    |        |         |         | 2,945  |      
|                               | Deferred Income Taxes                                       |                                 |                                      | 766                                  |        |             |         | 2,118  |        |         |         | 406    |      
|                               | Prepayments                                                 |                                 |                                      | 996                                  |        |             |         | 756    |        |         |         | 1,166  |      
|                               |                                                             |                                 |                                      |                                      |        |             |         |        |        |         |         |       
|                               |                                                             |                                 |                                      | Total Current Assets                 |        |             | 31,814  |        |        |         | 27,993  |        |       |         | 24,109  | 
|                               |                                                             |                                 |                                      |                                      |        |             |         |        |        |         |         |       
|Property, Plant, and Equipment |                                                             |                                 | 267,705                              |                                      |        |             | 228,605 |        |        |         | 267,047 |       
|                               | Less: Accumulated Depreciation and Amortization             |                                 |                                      | 76,076                               |        |             |         | 68,852 |        |         |         | 73,888 |      
|                               |                                                             |                                 |                                      |                                      |        |             |         |        |        |         |         |       
|                               |                                                             |                                 | Property, Plant, and Equipment - Net |                                      |        | 191,629     |         |        |        | 159,753 |         |        |       | 193,159 |        
|                               | Construction Work in Progress                               |                                 |                                      | 2,805                                |        |             |         | 29,424 |        |         |         | 1,208  |      
|                               |                                                             |                                 |                                      |                                      |        |             |         |        |        |         |         |       
|                               |                                                             |                                 |                                      | Total Property, Plant, and Equipment |        |             | 194,434 |        |        |         | 189,177 |        |       |         | 194,367 | 
|                               |                                                             |                                 |                                      |                                      |        |             |         |        |        |         |         |       
|Other Assets                   |                                                             |                                 |                                      |                                      |        |             |         |        |        |         |         |       
|                               | Prepaid Pension Cost                                        |                                 |                                      | 938                                  |        |             |         | 449    |        |         |         | 856    |      
|                               | Deferred Charges                                            |                                 |                                      | 526                                  |        |             |         | 540    |        |         |         | 569    |      
|                               | Prepayments                                                 |                                 |                                      | 1,000                                |        |             |         | 1,053  |        |         |         | 1,015  |      
|                               | Regulatory Assets (Note 4)                                  |                                 |                                      | 906                                  |        |             |         | 1,306  |        |         |         | 996    |      
|                               | Merchandise Receivables Due After One Year                  |                                 |                                      | 3,749                                |        |             |         | 4,467  |        |         |         | 3,774  |      
|                               |                                                             |                                 |                                      |                                      |        |             |         |        |        |         |         |       
|                               |                                                             |                                 |                                      | Total Other Assets                   |        |             | 7,119   |        |        |         | 7,815   |        |       |         | 7,210   | 
|                               |                                                             |                                 |                                      |                                      |        |             |         |        |        |         |         |       
|                               |                                                             |                                 |                                      | Total                                |        | $           | 233,367 |        |        | $       | 224,985 |        |       | $       | 225,686 | 
|                               |                                                             |                                 |                                      |                                      |        |             |         |        |        |         |         |       

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

3



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##### Table of Contents






CONSOLIDATED BALANCE SHEETS

|                                |                                      |                                                                                                                                                                      |                            |                           |        |             |         |        |        |        |         |        |        |        |         | 
|------------------------------- | ------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------- | ------ | ----------- | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | ------- | 
|EnergySouth, Inc.               |                                      | December 31,                                                                                                                                                         |                            | September 30,            
|                                |                                      |                                                                                                                                                                      |                            |                          
|In Thousands, Except Share Data |                                      | 2003                                                                                                                                                                 |                            | 2002                      |        | 2003       
|                                |                                      |                                                                                                                                                                      |                            |                           |        |            
|                                |                                      |                                                                                                                                                                      |                            |                           |        | (Unaudited) |         |        |        |       
|LIABILITIES AND CAPITALIZATION  |                                      |                                                                                                                                                                      |                            |                           |        |             |         |        |        |        |         |       
|Current Liabilities             |                                      |                                                                                                                                                                      |                            |                           |        |             |         |        |        |        |         |       
|                                | Current Maturities of Long-Term Debt |                                                                                                                                                                      | $                          | 6,113                     |        |             | $       | 4,437  |        |        | $       | 6,006  |       
|                                | Notes Payable                        |                                                                                                                                                                      |                            | 7,025                     |        |             |         | 2,550  |        |        |         | 250    |       
|                                | Accounts Payable                     |                                                                                                                                                                      |                            | 6,930                     |        |             |         | 6,863  |        |        |         | 6,389  |       
|                                | Dividends Declared                   |                                                                                                                                                                      |                            | 1,465                     |        |             |         | 1,365  |        |        |         | 1,463  |       
|                                | Customer Deposits                    |                                                                                                                                                                      |                            | 1,504                     |        |             |         | 1,440  |        |        |         | 1,469  |       
|                                | Taxes Accrued                        |                                                                                                                                                                      |                            | 4,672                     |        |             |         | 3,805  |        |        |         | 3,500  |       
|                                | Interest Accrued                     |                                                                                                                                                                      |                            | 625                       |        |             |         | 682    |        |        |         | 1,272  |       
|                                | Regulatory Liabilities (Note 4)      |                                                                                                                                                                      |                            | 905                       |        |             |         | 2,990  |        |        |         | 909    |       
|                                | Unearned Revenue (Note 8)            |                                                                                                                                                                      |                            |                           |        |             |         | 862    |        |        |         |        |       
|                                | Other                                |                                                                                                                                                                      |                            | 1,029                     |        |             |         | 1,164  |        |        |         | 1,012  |       
|                                |                                      |                                                                                                                                                                      |                            |                           |        |             |         |        |        |        |         |       
|                                |                                      |                                                                                                                                                                      |                            | Total Current Liabilities |        |             | 30,268  |        |        |        | 26,158  |        |        |        | 22,270  | 
|                                |                                      |                                                                                                                                                                      |                            |                           |        |             |         |        |        |        |         |       
|Other Liabilities               |                                      |                                                                                                                                                                      |                            |                           |        |             |         |        |        |        |         |       
|                                | Accrued Postretirement Benefit Cost  |                                                                                                                                                                      |                            | 375                       |        |             |         | 541    |        |        |         | 415    |       
|                                | Deferred Income Taxes                |                                                                                                                                                                      |                            | 19,314                    |        |             |         | 15,959 |        |        |         | 18,484 |       
|                                | Deferred Investment Tax Credits      |                                                                                                                                                                      |                            | 284                       |        |             |         | 308    |        |        |         | 288    |       
|                                | Regulatory Liabilities (Note 4)      |                                                                                                                                                                      |                            | 163                       |        |             |         | 214    |        |        |         | 173    |       
|                                | Other                                |                                                                                                                                                                      |                            | 2,715                     |        |             |         | 2,294  |        |        |         | 2,619  |       
|                                |                                      |                                                                                                                                                                      |                            |                           |        |             |         |        |        |        |         |       
|                                |                                      |                                                                                                                                                                      |                            | Total Other Liabilities   |        |             | 22,851  |        |        |        | 19,316  |        |        |        | 21,979  | 
|                                |                                      |                                                                                                                                                                      |                            |                           |        |             |         |        |        |        |         |       
|                                |                                      |                                                                                                                                                                      |                            | Total Liabilities         |        |             | 53,119  |        |        |        | 45,474  |        |        |        | 44,249  | 
|                                |                                      |                                                                                                                                                                      |                            |                           |        |             |         |        |        |        |         |       
|Capitalization                  |                                      |                                                                                                                                                                      |                            |                           |        |             |         |        |        |        |         |       
|                                | Stockholders Equity                 |                                                                                                                                                                      |                            |                           |        |             |         |        |        |        |         |        |       
|                                |                                      | Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares; Outstanding
  December 2003 - 5,140,000;
  December 2002 - 5,054,000;
September 2003 - 5,133,000 Shares) |                            |                           | 51     |             |         |        | 51     |        |         |        | 51     |       
|                                |                                      | Capital in Excess of Par Value                                                                                                                                       |                            |                           | 23,690 |             |         |        | 21,756 |        |         |        | 23,490 |       
|                                |                                      | Retained Earnings                                                                                                                                                    |                            |                           | 63,717 |             |         |        | 57,635 |        |         |        | 61,114 |       
|                                |                                      |                                                                                                                                                                      |                            |                           |        |             |         |        |        |        |         |       
|                                |                                      |                                                                                                                                                                      | Total Stockholders Equity |                           |        | 87,458      |         |        |        | 79,442 |         |        |        | 84,655 |        
|                                | Minority Interest                    |                                                                                                                                                                      |                            | 4,302                     |        |             |         | 3,768  |        |        |         | 4,142  |       
|                                | Long-Term Debt                       |                                                                                                                                                                      |                            | 88,488                    |        |             |         | 96,301 |        |        |         | 92,640 |       
|                                |                                      |                                                                                                                                                                      |                            |                           |        |             |         |        |        |        |         |       
|                                |                                      |                                                                                                                                                                      |                            | Total Capitalization      |        |             | 180,248 |        |        |        | 179,511 |        |        |        | 181,437 | 
|                                |                                      |                                                                                                                                                                      |                            |                           |        |             |         |        |        |        |         |       
|                                |                                      |                                                                                                                                                                      |                            | Total                     |        | $           | 233,367 |        |        | $      | 224,985 |        |        | $      | 225,686 | 
|                                |                                      |                                                                                                                                                                      |                            |                           |        |             |         |        |        |        |         |       

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

4



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##### Table of Contents






CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

|                                    |                                                       |                              |       |                    |        |   |       |        |        |  
|----------------------------------- | ----------------------------------------------------- | ---------------------------- | ----- | ------------------ | ------ | - | ----- | ------ | ------ | -
|                                    |                                                       |                              |       | Three Months      
|                                    |                                                       |                              |       | Ended December 31,
|                                    |                                                       |                              |       |                   
|In Thousands, Except Per Share Data |                                                       | 2003                         |       | 2002              
|                                    |                                                       |                              |       |                   
|Operating Revenues                  |                                                       |                              |       |                    |        |   |       |       
|                                    | Gas Revenues                                          |                              | $     | 31,289             |        |   | $     | 24,242 |       
|                                    | Merchandise Sales                                     |                              |       | 1,086              |        |   |       | 1,107  |       
|                                    | Other                                                 |                              |       | 341                |        |   |       | 364    |       
|                                    |                                                       |                              |       |                    |        |   |       |       
|                                    |                                                       | Total Operating Revenues     |       |                    | 32,716 |   |       |        | 25,713 |  
|                                    |                                                       |                              |       |                    |        |   |       |       
|Operating Expenses                  |                                                       |                              |       |                    |        |   |       |       
|                                    | Cost of Gas                                           |                              |       | 12,127             |        |   |       | 7,628  |       
|                                    | Cost of Merchandise                                   |                              |       | 734                |        |   |       | 813    |       
|                                    | Operations and Maintenance                            |                              |       | 6,431              |        |   |       | 5,983  |       
|                                    | Depreciation                                          |                              |       | 2,434              |        |   |       | 2,269  |       
|                                    | Taxes, Other Than Income Taxes                        |                              |       | 2,253              |        |   |       | 1,896  |       
|                                    |                                                       |                              |       |                    |        |   |       |       
|                                    |                                                       | Total Operating Expenses     |       |                    | 23,979 |   |       |        | 18,589 |  
|                                    |                                                       |                              |       |                    |        |   |       |       
|Operating Income                    |                                                       |                              | 8,737 |                    |        |   | 7,124 |       
|                                    |                                                       |                              |       |                    |        |   |       |       
|Other Income and (Expense)          |                                                       |                              |       |                    |        |   |       |       
|                                    | Interest Expense                                      |                              |       | (2,030             | )      |   |       | (2,112 | )     
|                                    | Allowance for Borrowed Funds Used During Construction |                              |       | 9                  |        |   |       | 571    |       
|                                    | Interest Income                                       |                              |       | 6                  |        |   |       | 19     |       
|                                    | Minority Interest                                     |                              |       | (196               | )      |   |       | (190   | )     
|                                    |                                                       |                              |       |                    |        |   |       |       
|                                    |                                                       | Total Other Income (Expense) |       |                    | (2,211 | ) |       |        | (1,712 | )
|                                    |                                                       |                              |       |                    |        |   |       |       
|Income Before Income Taxes          |                                                       |                              | 6,526 |                    |        |   | 5,412 |       
|Income Taxes                        |                                                       |                              | 2,458 |                    |        |   | 2,038 |       
|                                    |                                                       |                              |       |                    |        |   |       |       
|Net Income                          |                                                       | $                            | 4,068 |                    |        | $ | 3,374 |       
|                                    |                                                       |                              |       |                    |        |   |       |       
|Earnings Per Share                  |                                                       |                              |       |                    |        |   |       |       
|                                    | Basic                                                 |                              | $     | 0.79               |        |   | $     | 0.67   |       
|                                    |                                                       |                              |       |                    |        |   |       |       
|                                    | Diluted                                               |                              | $     | 0.78               |        |   | $     | 0.66   |       
|                                    |                                                       |                              |       |                    |        |   |       |       
|Average Common Shares Outstanding   |                                                       |                              |       |                    |        |   |       |       
|                                    | Basic                                                 |                              |       | 5,138              |        |   |       | 5,052  |       
|                                    | Diluted                                               |                              |       | 5,200              |        |   |       | 5,114  |       
|                                    |                                                       |                              |       |                    |        |   |       |       

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

5



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##### Table of Contents






CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                 |                                                                                  |                                   |                                                  |        |              |        |        |        |        |        |  
|------------------------------------------------ | -------------------------------------------------------------------------------- | --------------------------------- | ------------------------------------------------ | ------ | ------------ | ------ | ------ | ------ | ------ | ------ | -
|                                                 |                                                                                  |                                   |                                                  |        | Three Months
|EnergySouth, Inc.                                |                                                                                  | Ended December 31,               
|                                                 |                                                                                  |                                  
|In Thousands                                     |                                                                                  | 2003                              |                                                  | 2002  
|                                                 |                                                                                  |                                   |                                                  |       
|Cash Flows from Operating Activities             |                                                                                  |                                   |                                                  |        |              |        |        |       
|                                                 | Net Income                                                                       |                                   | $                                                | 4,068  |              |        | $      | 3,374  |       
|                                                 | Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities |                                   |                                                  |        |              |        |        |        |       
|                                                 | Depreciation and Amortization                                                    |                                   |                                                  | 2,550  |              |        |        | 2,377  |       
|                                                 | Provision for Losses on Receivables and Inventory                                |                                   |                                                  | 243    |              |        |        | 160    |       
|                                                 | Provision for Deferred Income Taxes                                              |                                   |                                                  | 484    |              |        |        | 1,186  |       
|                                                 | Minority Interest                                                                |                                   |                                                  | 196    |              |        |        | 190    |       
|                                                 | Changes in Operating Assets and Liabilities:                                     |                                   |                                                  |        |              |        |        |        |       
|                                                 |                                                                                  | Receivables                       |                                                  |        | (10,368      | )      |        |        | (8,344 | )     
|                                                 |                                                                                  | Inventory                         |                                                  |        | 797          |        |        |        | 509    |       
|                                                 |                                                                                  | Payables                          |                                                  |        | 1,069        |        |        |        | 359    |       
|                                                 |                                                                                  | Deferred Purchased Gas Adjustment |                                                  |        | 647          |        |        |        | (1,262 | )     
|                                                 |                                                                                  | Other                             |                                                  |        | 317          |        |        |        | (601   | )     
|                                                 |                                                                                  |                                   |                                                  |        |              |        |        |       
|                                                 |                                                                                  |                                   | Net Cash Provided (Used) by Operating Activities |        |              | 3      |        |        |        | (2,052 | )
|                                                 |                                                                                  |                                   |                                                  |        |              |        |        |       
|Cash Flows from Investing Activities             |                                                                                  |                                   |                                                  |        |              |        |        |       
|                                                 | Capital Expenditures                                                             |                                   |                                                  | (2,596 | )            |        |        | (3,700 | )     
|                                                 |                                                                                  |                                   |                                                  |        |              |        |        |       
|                                                 |                                                                                  |                                   | Net Cash Used by Investing Activities            |        |              | (2,596 | )      |        |        | (3,700 | )
|                                                 |                                                                                  |                                   |                                                  |        |              |        |        |       
|Cash Flows from Financing Activities             |                                                                                  |                                   |                                                  |        |              |        |        |       
|                                                 | Repayment of Long-Term Debt                                                      |                                   |                                                  | (4,044 | )            |        |        | (1,816 | )     
|                                                 | Changes in Short-Term Borrowings                                                 |                                   |                                                  | 6,775  |              |        |        | 2,550  |       
|                                                 | Payment of Dividends                                                             |                                   |                                                  | (1,465 | )            |        |        | (1,364 | )     
|                                                 | Dividend Reinvestment                                                            |                                   |                                                  | 87     |              |        |        | 85     |       
|                                                 | Exercise of Stock Options                                                        |                                   |                                                  | 98     |              |        |        | 43     |       
|                                                 | Partnership Distributions to Minority Interest Holders                           |                                   |                                                  | (36    | )            |        |        | (66    | )     
|                                                 |                                                                                  |                                   |                                                  |        |              |        |        |       
|                                                 |                                                                                  |                                   | Net Cash Provided (Used) by Financing Activities |        |              | 1,415  |        |        |        | (568   | )
|                                                 |                                                                                  |                                   |                                                  |        |              |        |        |       
|Net Decrease in Cash and Cash Equivalents        |                                                                                  |                                   | (1,178                                           | )      |              |        | (6,320 | )     
|Cash and Cash Equivalents at Beginning of Period |                                                                                  |                                   | 4,082                                            |        |              |        | 10,562 |       
|                                                 |                                                                                  |                                   |                                                  |        |              |        |        |       
|Cash and Cash Equivalents at End of Period       |                                                                                  | $                                 | 2,904                                            |        |              | $      | 4,242  |       
|                                                 |                                                                                  |                                   |                                                  |        |              |        |        |       

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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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 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 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, 2003.

Due to the high percentage of customers using gas for heating, the Companys
operations are seasonal in nature. Therefore, the results of operations for
the three-month periods ended December 31, 2003 and 2002 are not indicative of
the results to be expected for the full year.

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The table below summarizes operating results for the twelve months ended
December 31, 2003 and 2002:

|                                                      |  |                    |         |               |       |   |        |   |       | 
|----------------------------------------------------- |  | ------------------ | ------- | ------------- | ----- | - | ------ | - | ----- | 
|                                                      |  |                    |         | Twelve Months
|EnergySouth, Inc.                                     |  | Ended December 31,
|                                                      |  |                   
|In Thousands, Except Per Share Data                   |  | 2003               |         | 2002         
|                                                      |  |                    |         |              
|Operating Revenues                                    |  | $                  | 106,619 |               |       | $ | 87,980 |  
|Cost of Gas                                           |  |                    | 35,358  |               |       |   | 23,630 |  
|Cost of Merchandise                                   |  |                    | 2,394   |               |       |   | 3,277  |  
|Operations and Maintenance Expense                    |  |                    | 24,873  |               |       |   | 23,670 |  
|Depreciation Expense                                  |  |                    | 9,088   |               |       |   | 8,306  |  
|Taxes, Other Than Income Taxes                        |  |                    | 7,634   |               |       |   | 6,698  |  
|                                                      |  |                    |         |               |       |   |        |  
|Operating Income                                      |  |                    | 27,272  |               |       |   | 22,399 |  
|                                                      |  |                    |         |               |       |   |        |  
|Interest Expense                                      |  |                    | (8,287  | )             |       |   | (8,181 | )
|Allowance for Borrowed Funds Used During Construction |  |                    | 669     |               |       |   | 2,061  |  
|Interest Income                                       |  |                    | 58      |               |       |   | 91     |  
|Less: Minority Interest                               |  |                    | (760    | )             |       |   | (743   | )
|                                                      |  |                    |         |               |       |   |        |  
|Income Before Income Taxes                            |  | $                  | 18,952  |               |       | $ | 15,627 |  
|                                                      |  |                    |         |               |       |   |        |  
|Income Taxes                                          |  |                    | 7,122   |               |       |   | 5,775  |  
|Net Income                                            |  | $                  | 11,830  |               |       | $ | 9,852  |  
|                                                      |  |                    |         |               |       |   |        |  
|Earnings Per Share                                    |  |                    |         |               |       |   |        |  
|                                                      |  | Basic              |         | $             | 2.33  |   |        | $ | 1.97  | 
|                                                      |  |                    |         |               |       |   |        |  
|                                                      |  | Diluted            |         | $             | 2.30  |   |        | $ | 1.94  | 
|                                                      |  |                    |         |               |       |   |        |  
|Average Common Shares Outstanding                     |  |                    |         |               |       |   |        |  
|                                                      |  | Basic              |         |               | 5,102 |   |        |   | 5,011 | 
|                                                      |  |                    |         |               |       |   |        |  
|                                                      |  | Diluted            |         |               | 5,161 |   |        |   | 5,089 | 
|                                                      |  |                    |         |               |       |   |        |  

Note 3. Stock-Based Compensation

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:

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|                                    |                                                                                                                                     |                       |       |              |      |   |       |    |      | 
|----------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ----- | ------------ | ---- | - | ----- | -- | ---- | 
|                                    |                                                                                                                                     |                       |       | Three Months
|EnergySouth, Inc.                   |                                                                                                                                     | Ended December 31,   
|                                    |                                                                                                                                     |                      
|In Thousands, Except per Share Data |                                                                                                                                     | 2003                  |       | 2002        
|                                    |                                                                                                                                     |                       |       |             
|Net Income, as reported             |                                                                                                                                     | $                     | 4,068 |              |      | $ | 3,374 |   
|Deduct:                             |                                                                                                                                     |                       |       |              |      |   |       |   
|                                    | Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects |                       |       | 46           |      |   |       | 42 |     
|                                    |                                                                                                                                     |                       |       |              |      |   |       |   
|Pro forma net income                |                                                                                                                                     | $                     | 4,022 |              |      | $ | 3,332 |   
|                                    |                                                                                                                                     |                       |       |              |      |   |       |   
|Earnings per share:                 |                                                                                                                                     |                       |       |              |      |   |       |   
|                                    |                                                                                                                                     | Basic - as reported   |       | $            | 0.79 |   |       | $  | 0.67 | 
|                                    |                                                                                                                                     |                       |       |              |      |   |       |   
|                                    |                                                                                                                                     | Basic - pro forma     |       | $            | 0.78 |   |       | $  | 0.66 | 
|                                    |                                                                                                                                     |                       |       |              |      |   |       |   
|                                    |                                                                                                                                     | Diluted - as reported |       | $            | 0.78 |   |       | $  | 0.66 | 
|                                    |                                                                                                                                     |                       |       |              |      |   |       |   
|                                    |                                                                                                                                     | Diluted - pro forma   |       | $            | 0.77 |   |       | $  | 0.65 | 
|                                    |                                                                                                                                     |                       |       |              |      |   |       |   

Note 4. Rates and Regulatory Matters

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. Mobile Gas rate adjustments, which became
effective December 1, 2003 and 2002, were designed to increase annual revenues
by approximately $2.8 million and $2.2 million, respectively. 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.

In conjunction with the approval of RSE, the APSC approved an Enhanced
Stability Reserve

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(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 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 due 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
December 31, 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
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 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 following table
presents the significant regulatory assets and liabilities as of the stated
dates (in thousands):

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|                                 |  |                   |       |                   |  |                    |     |            |  |         |       |            |  |   |       |  |  |   |       |  |  |   |     | 
|-------------------------------- |  | ----------------- | ----- | ----------------- |  | ------------------ | --- | ---------- |  | ------- | ----- | ---------- |  | - | ----- |  |  | - | ----- |  |  | - | --- | 
|                                 |  | December 31, 2003 |       | December 31, 2002 |  | September 30, 2003
|                                 |  | Current           |       | Noncurrent        |  | Current            |     | Noncurrent |  | Current |       | Noncurrent
|                                 |  |                   |       |                   |  |                    |     |            |  |         |       |           
|Assets                           |  |                   |       |                   |  |                    |     |            |  |         |       |            |  |   |       |  |  |   |       |  |  |   |     | 
|Property, Plant, and Equipment   |  | $                 | 73    |                   |  |                    |     |            |  | $       | 85    |            |  | $ | 74    |  |  | $ | 85    |  |  | $ | 10  | 
|Deferred Purchase Gas Adjustment |  |                   | 1,886 |                   |  |                    |     |            |  |         |       |            |  |   |       |  |  |   | 2,533 |  |  |   |     | 
|ESR Fund                         |  |                   | 167   |                   |  |                    | 626 |            |  |         | 167   |            |  |   | 792   |  |  |   | 167   |  |  |   | 666 | 
|Bad Debt Reserve                 |  |                   | 133   |                   |  |                    | 232 |            |  |         | 133   |            |  |   | 365   |  |  |   | 133   |  |  |   | 265 | 
|Other                            |  |                   | 28    |                   |  |                    | 48  |            |  |         | 27    |            |  |   | 75    |  |  |   | 27    |  |  |   | 55  | 
|                                 |  |                   |       |                   |  |                    |     |            |  |         |       |            |  |   |       |  |  |   |       |  |  |   |     | 
|Regulatory Assets                |  | $                 | 2,287 |                   |  | $                  | 906 |            |  | $       | 412   |            |  | $ | 1,306 |  |  | $ | 2,945 |  |  | $ | 996 | 
|                                 |  |                   |       |                   |  |                    |     |            |  |         |       |            |  |   |       |  |  |   |       |  |  |   |     | 
|Liabilities                      |  |                   |       |                   |  |                    |     |            |  |         |       |            |  |   |       |  |  |   |       |  |  |   |     | 
|Bad Debt Reserve                 |  | $                 | 36    |                   |  | $                  | 15  |            |  | $       | 55    |            |  | $ | 50    |  |  | $ | 40    |  |  | $ | 20  | 
|ESR Fund                         |  |                   | 854   |                   |  |                    |     |            |  |         | 1,000 |            |  |   |       |  |  |   | 854   |  |  |   |     | 
|Deferred Investment Tax Credit   |  |                   | 15    |                   |  |                    | 148 |            |  |         | 15    |            |  |   | 164   |  |  |   | 15    |  |  |   | 153 | 
|Deferred Purchase Gas Adjustment |  |                   |       |                   |  |                    |     |            |  |         | 1,920 |            |  |   |       |  |  |   |       |  |  |   |     | 
|                                 |  |                   |       |                   |  |                    |     |            |  |         |       |            |  |   |       |  |  |   |       |  |  |   |     | 
|Regulatory Liabilities           |  | $                 | 905   |                   |  | $                  | 163 |            |  | $       | 2,990 |            |  | $ | 214   |  |  | $ | 909   |  |  | $ | 173 | 
|                                 |  |                   |       |                   |  |                    |     |            |  |         |       |            |  |   |       |  |  |   |       |  |  |   |     | 

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.

Note 5. Earnings Per Share

Basic earnings per share are computed based on the weighted average number of
common shares outstanding during each period. Diluted earnings per share are
computed based on the weighted average number of common shares outstanding and
diluted potential common shares, using the treasury stock method, outstanding
during each period.

Average common shares used to compute basic earnings per share differed from
average common shares used to compute diluted earnings per share by equivalent
shares of 62,000 and 62,000 for the three months ended December 31, 2003 and
2002, respectively. These differences in equivalent shares are from outstanding
stock options.

Note 6. Accounting Principles

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,

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2003 did not have a material impact on the Companys financial statements.

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 Gas |  |       |        |              |  |              |       |   |  |   |        |  
|December 31, 2003 (in thousands):                  |  | Distribution |        | Storage     |  | Other |        | Eliminations |  | Consolidated
|                                                   |  |              |        |             |  |       |        |              |  |             
|Operating Revenues                                 |  | $            | 28,020 |             |  | $     | 4,319  |              |  | $            | 1,427 |   |  | $ | (1,050 | ) |  | $ | 32,716 |  
|Cost of Gas                                        |  |              | 13,177 |             |  |       |        |              |  |              |       |   |  |   | (1,050 | ) |  |   | 12,127 |  
|Cost of Merchandise                                |  |              |        |             |  |       |        |              |  |              | 734   |   |  |   |        |   |  |   | 734    |  
|Operations and Maintenance Expense                 |  |              | 5,223  |             |  |       | 730    |              |  |              | 478   |   |  |   |        |   |  |   | 6,431  |  
|Depreciation Expense                               |  |              | 1,828  |             |  |       | 606    |              |  |              |       |   |  |   |        |   |  |   | 2,434  |  
|Taxes, Other Than Income Taxes                     |  |              | 2,036  |             |  |       | 198    |              |  |              | 19    |   |  |   |        |   |  |   | 2,253  |  
|                                                   |  |              |        |             |  |       |        |              |  |              |       |   |  |   |        |   |  |   |        |  
|Operating Income                                   |  |              | 5,756  |             |  |       | 2,785  |              |  |              | 196   |   |  |   |       |   |  |   | 8,737  |  
|                                                   |  |              |        |             |  |       |        |              |  |              |       |   |  |   |        |   |  |   |        |  
|Interest Income                                    |  |              | 2      |             |  |       | 9      |              |  |              |       |   |  |   | (5     | ) |  |   | 6      |  
|Interest Expense                                   |  |              | (830   | )           |  |       | (1,138 | )            |  |              | (67   | ) |  |   | 5      |   |  |   | (2,030 | )
|Allow. for Borrowed Funds Used During Construction |  |              | 9      |             |  |       |        |              |  |              |       |   |  |   |        |   |  |   | 9      |  
|Less: Minority Interest                            |  |              | (44    | )           |  |       | (152   | )            |  |              |       |   |  |   |        |   |  |   | (196   | )
|                                                   |  |              |        |             |  |       |        |              |  |              |       |   |  |   |        |   |  |   |        |  
|Income Before Income Taxes                         |  | $            | 4,893  |             |  | $     | 1,504  |              |  | $            | 129   |   |  |   |        |   |  | $ | 6,526  |  
|                                                   |  |              |        |             |  |       |        |              |  |              |       |   |  |   |        |   |  |   |        |  

|                                                   |  |              |        |             |  |       |        |              |  |              |       |   |  |   |        |   |  |   |        |   | 
|-------------------------------------------------- |  | ------------ | ------ | ----------- |  | ----- | ------ | ------------ |  | ------------ | ----- | - |  | - | ------ | - |  | - | ------ | - | 
|For the three months ended                         |  | Natural Gas  |        | Natural Gas |  |       |        |              |  |              |       |   |  |   |        |  
|December 31, 2002 (in thousands):                  |  | Distribution |        | Storage     |  | Other |        | Eliminations |  | Consolidated
|                                                   |  |              |        |             |  |       |        |              |  |             
|Operating Revenues                                 |  | $            | 22,270 |             |  | $     | 3,030  |              |  | $            | 1,468 |   |  | $ | (1,055 | ) |  | $ | 25,713 |  
|Cost of Gas                                        |  |              | 8,673  |             |  |       |        |              |  |              |       |   |  |   | (1,045 | ) |  |   | 7,628  |  
|Cost of Merchandise & Jobbing                      |  |              |        |             |  |       |        |              |  |              | 813   |   |  |   |        |   |  |   | 813    |  
|Operations and Maintenance Expense                 |  |              | 5,081  |             |  |       | 465    |              |  |              | 447   |   |  |   | (10    | ) |  |   | 5,983  |  
|Depreciation Expense                               |  |              | 1,756  |             |  |       | 513    |              |  |              |       |   |  |   |        |   |  |   | 2,269  |  
|Taxes, Other Than Income Taxes                     |  |              | 1,705  |             |  |       | 171    |              |  |              | 20    |   |  |   |        |   |  |   | 1,896  |  
|                                                   |  |              |        |             |  |       |        |              |  |              |       |   |  |   |        |   |  |   |        |  
|Operating Income                                   |  |              | 5,055  |             |  |       | 1,881  |              |  |              | 188   |   |  |   |       |   |  |   | 7,124  |  
|                                                   |  |              |        |             |  |       |        |              |  |              |       |   |  |   |        |   |  |   |        |  
|Interest Income                                    |  |              | 7      |             |  |       | 18     |              |  |              |       |   |  |   | (6     | ) |  |   | 19     |  
|Interest Expense                                   |  |              | (915   | )           |  |       | (1,175 | )            |  |              | (28   | ) |  |   | 6      |   |  |   | (2,112 | )
|Allow. for Borrowed Funds Used During Construction |  |              | 7      |             |  |       | 564    |              |  |              |       |   |  |   |        |   |  |   | 571    |  
|Less: Minority Interest                            |  |              | (73    | )           |  |       | (117   | )            |  |              |       |   |  |   |        |   |  |   | (190   | )
|                                                   |  |              |        |             |  |       |        |              |  |              |       |   |  |   |        |   |  |   |        |  
|Income Before Income Taxes                         |  | $            | 4,081  |             |  | $     | 1,171  |              |  | $            | 160   |   |  |   |        |   |  | $ | 5,412  |  
|                                                   |  |              |        |             |  |       |        |              |  |              |       |   |  |   |        |   |  |   |        |  

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Note 8. Unearned Revenue

In November 2001, Bay Gas entered into an agreement which granted a customer a
nineteen-month option to transport additional volumes in excess of the 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 fully
amortized as of the end of May 2003.

Note 9. Subsequent Event

As part of a process to continuously evaluate operations in an effort to
increase operational efficiencies and competitiveness, on January 16, 2004,
Mobile Gas eliminated sixteen positions, primarily in its marketing and
operations division. Termination benefits were offered to those employees that
include a lump sum payment based upon their years of service with Mobile Gas,
outplacement services, one-on-one counseling and job search assistance. In
accordance with Statement of Financial Accounting Standards No. 88, Employers
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits, Mobile Gas estimates that it will recognize
expenses during the quarter ended March 31, 2004 of approximately $280,000
related to the special termination benefits.

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|       |  |                                                                                      
|------ |  | -------------------------------------------------------------------------------------
|Item 2 |  | Managements Discussion and Analysis
of Financial Condition and Results of Operations

The Company

EnergySouth, Inc. (EnergySouth) is a holding company for a family of energy
businesses. EnergySouth and its consolidated subsidiaries are collectively
referred to herein as the Company. The Company, through Mobile Gas Service
Corporation (Mobile Gas) and Southern Gas Transmission Company (SGT), is
engaged in the distribution of natural gas to residential, commercial and
industrial customers in southwest Alabama. Through Bay Gas Storage Company,
Ltd. (Bay Gas), the Company provides underground natural gas storage services
and transportation services. Other EnergySouth subsidiaries are engaged in
merchandising, financing, and other energy-related services.

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 months ended December 31, 2003
increased $0.12, or 18%, as compared to the same prior year period due to
increased earnings from Mobile Gas natural gas distribution system and Bay
Gas natural gas storage business. Financial information by business segment is
shown in Note 7 to the unaudited Consolidated Financial Statements above.

Earnings from the Companys natural gas distribution business increased $0.08
per share for the three-month period ended December 31, 2003 as compared to the
same prior year period. Mobile Gas earnings were positively impacted by rate
adjustments which became effective December 1, 2003 and 2002 based upon the
guidelines established under the Rate Stabilization and Equalization (RSE)
tariff. For further information on RSE, see Natural Gas Distribution below.
Earnings were also positively impacted by an increase in temperature-sensitive
customers gas consumption, when adjusted for weather, during the first quarter
of fiscal year 2004 as compared to unusually low usages experienced in the
first quarter of fiscal year 2003. Increased margins during the current year
three-month period were partially offset by an increase in operating expenses.

The Companys natural gas storage business, operated by Bay Gas, contributed
increased earnings per share of $0.04 for the three-month period ended December
31, 2003 as compared to the same prior year period. The positive earnings
contribution is due primarily to increased storage revenues from its second
storage cavern placed in service on April 1, 2003. Increased revenues were
partially offset by additional operations and maintenance costs, depreciation
expense and property taxes due to the completion of the second storage cavern.

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Earnings from other business operations remained flat for the three-month
period ended December 31, 2003.

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.

In fiscal year 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. Rate adjustments,
designed to increase annual gas revenues by approximately $2.8 and $2.2
million, were implemented under the RSE tariff effective December 1, 2003 and
2002, respectively. See Note 4 to the Unaudited Condensed Consolidated
Financial Statements for a more detailed explanation.

The Companys distribution business is highly seasonal and
temperature-sensitive since residential and commercial customers use more gas
during colder weather for space heating. As a result, gas revenues, cost of gas
and related taxes in any given period reflect, in addition to other factors,
the impact of weather, through either increased or decreased sales volumes.
The Company utilizes a temperature rate adjustment rider during the months of
November through April to mitigate the impact that unusually cold or warm
weather has on operating margins by reducing the base rate portion of
customers bills in colder than normal weather and increasing the base rate
portion of customers bills in warmer than normal weather. Normal weather for
the Companys service territory is defined as the 30-year average temperature
as determined by the National Weather Service.

Natural gas distribution revenues increased $5,753,000 (26%) during the
three-month period ended December 31, 2003 due primarily to the rate
adjustments to recover increased gas costs paid to suppliers. Fluctuations in
the actual cost of gas are passed on to customers through the purchased gas
adjustment provision of the rate tariffs and do not directly result in any
increases or decreases in margins. Revenues were also increased during the
current year period as a result of the RSE rate adjustments which went into
effect on December 1, 2003 and 2002. These increases in revenues were slightly
offset by a 5% decline in volumes delivered to temperature-sensitive customers
due to temperatures that were 14% warmer than the same period last year.

Revenues from the sale of natural gas to large commercial and industrial
customers increased $102,000 (6%) for the three months ended December 31, 2003
due to the increase in the price of natural gas and the RSE adjustments. This
increase was partially
offset by a

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29% decline in volumes delivered to these customers due to higher
natural gas prices and general economic conditions.

The cost of natural gas increased $4,504,000 (52%) for the three-month period
ended December 31, 2003 as compared to the same prior year period due to higher
commodity gas prices. Natural gas distribution margins, defined as natural gas
distribution revenues less the cost of natural gas and related taxes, increased
8% for the three-month period ended December 31, 2003 primarily as a result of
the RSE rate adjustments. Also, consumption by temperature-sensitive customers,
when adjusted for weather, increased during the first quarter of fiscal year
2004 compared to the same prior year period in which usages were unusually low.
Increased margins were partially offset by a slight decline in the number of
temperature-sensitive customers served during the current year period and the
decline in volumes delivered to large commercial and industrial customers
discussed above which are not subject to weather normalization.

Revenues from transportation customers declined $78,000 for the three-month
period ended December 31, 2003 with a corresponding decline in volumes of 4%
due primarily to increased gas prices and general economic conditions. In
addition to plant closings in recent years, a chemical company, which was a
customer of the Company, ceased operations of its Mobile plant in June 2003,
and some industrial plants have decreased production or switched to alternative
fuels. As permitted by the APSC, the lost margins for fiscal year 2003
associated with the closure of the chemical plant were charged to the Enhanced
Stability Reserve (ESR) in September 2003 with a corresponding charge to
transportation revenue. Known changes in margin such as this that occur
subsequent to fiscal year 2003, as well as other changes affecting net income,
are reflected in the RSE adjustment on December 1, 2003. See Note 4 to the
Consolidated Financial Statements for information pertaining to ESR and RSE.

Operations and maintenance (O&M) expenses increased $142,000 (3%) for the three
months ended December 31, 2003 due to an increase in insurance and benefits
expense and a $91,000 increase in bad debt expense for anticipated
uncollectible gas account balances. Gas receivables at December 31, 2003
increased approximately 31% as compared to the balance at December 31, 2002 as
a result of the increase in natural gas prices. In response to the increase in
gas accounts receivable, Mobile Gas has established additional reserves for
anticipated uncollectible account balances for gas delivered during the
current-year quarter.

Depreciation expense increased $72,000 (4%) for the three-month period ended
December 31, 2003 due to Mobile Gas capital expansion projects and 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
$331,000 (19%) for the three-month period ended December 31, 2003 due primarily
to the increased revenues discussed above.

Interest expense decreased $85,000 (9%) for the three-month period ended
December 31,

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2003 due to a slight decline in short-term borrowing rates.

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 $29,000 (40%) during the three-month
period ended December 31, 2003 due to a decline in pretax earnings of the
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 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 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 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 and 700 MMcf per day, respectively. The additional cavern development
is projected to continue in fiscal 2004 without interruption of storage
operations.

Bay Gas revenues increased $1,288,000 (43%) during the three-month period
ended December 31, 2003 due primarily to additional storage revenues associated
with the commencement of operations of the second cavern and a new storage
agreement which was signed during the first quarter of fiscal year 2004.
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

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of the option agreement which was amortized over the
nineteen-month option period.

Operations and maintenance (O&M) expenses increased $265,000 (57%) during the
three months ended December 31, 2003 primarily due to a general increase in
operating costs as a result of the expansion activities of Bay Gas.

Depreciation expense increased $93,000 (18%) for the three-month period ended
December 31, 2003 due primarily to the second storage cavern which was placed
in service in April 2003.

Other taxes consist primarily of property taxes and those taxes increased
primarily as a result of Bay Gas second storage cavern which was placed in
service April 1, 2003.

Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs decreased $564,000 for the three-month period ended December 31,
2003 due to the completion of Bay Gas second storage cavern in April 2003.

Interest income declined $9,000 during the three-month period ended December
31, 2003 due to the expenditure of the proceeds from Bay Gas debt issuance
used to finance the second 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 a controlling
interest. Minority interest increased $35,000 (30%) during the three-month
period ended December 31, 2003 due to increased pretax earnings of the
partnership.

Other

Through Mobile Gas and EnergySouth Services, Inc., which are aggregated with
EnergySouth, the holding company, the Company provides merchandising,
financing, and other energy-related services to comprise the Other category.
See Note 7 to the Unaudited Condensed Consolidated Financial Statements above
for segment disclosure.

Other revenues decreased $41,000 due primarily to a decrease in merchandise and
financing activities, which were partially offset by a decrease in O&M and
other expenses of $9,000.

Income Taxes

Income taxes fluctuate with the change in income before income taxes. Income
tax expense increased $420,000 (21%) for the three months ended December 31,
2003.

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Liquidity and Capital Resources

The Company generally relies on cash generated from operations and, on a
temporary basis, short-term borrowings, to meet working capital requirements
and to finance normal capital expenditures. The Company issues debt and equity
for longer term financing as needed. Impacts of operating, investing, and
financing activities are shown on the Consolidated Statements of Cash Flows
above. Cash provided by operating activities increased $2.0 million during the
three-month period ended December 31, 2003 as compared to the same period last
year due primarily to collections of increased gas costs from customers. See
the Natural Gas Distribution section above for additional information regarding
the pass-through to customers of the cost of gas.

Cash used in investing activities reflects the capital-intensive nature of the
Companys business. During the three months ended December 31, 2003 and 2002,
the Company used cash of $2.6 million and $3.7 million, respectively, for the
construction of distribution and storage facilities, purchases of equipment and
other general improvements. Also included in the $2.6 million is Mobile Gas
acquisition of a natural gas distribution system located in Mt. Vernon, Alabama
located just north of its service territory and costs associated with the
expansion of Bay Gas second cavern.

Financing activities provided cash of $1.4 million during the three months
ended December 31, 2003 and used cash of $0.6 million during the first quarter
of fiscal year 2003. The $2.0 million change in financing activities is due
primarily to an increase in short-term borrowings of $4.2 million under the
Companys revolving credit agreement due, in part, to the increased prices of
natural gas supply. Partially offsetting the funds available from short-term
borrowings were repayments of long-term debt, including an additional principal
payment of $1.7 million allowed under Mobile Gas 7.27% Series First Mortgage
Bond Agreement.

Funds for the Companys short-term cash needs are expected to come from cash
provided by operations and borrowings under the Companys revolving credit
agreement. At December 31, 2003 the Company had $13.0 million available for
borrowing on its revolving credit agreement. The Company pays a fee for its
committed lines of credit rather than maintain compensating balances. The
commitment fee is 0.125% of the average daily unborrowed amount during the
annual period of calculation. The Company believes it has adequate financial
flexibility to meet its expected cash needs in the foreseeable future.

The table below summarizes the Companys contractual obligations and commercial
commitments as of December 31, 2003:

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|                            |  |             |        |             |  |             |       |             |  |             |       |            |  |   |       |  |  |   |       |              |  |   |        | 
|--------------------------- |  | ----------- | ------ | ----------- |  | ----------- | ----- | ----------- |  | ----------- | ----- | ---------- |  | - | ----- |  |  | - | ----- | ------------ |  | - | ------ | 
|                            |  | Remaining   |        |             |  |             |       |             |  |             |       |            |  |   |       |  |  |   |       | 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              |  | $           | 3,661  |             |  | $           | 6,248 |             |  | $           | 6,463 |            |  | $ | 6,769 |  |  | $ | 5,300 |              |  | $ | 66,160 | 
|Gas Supply Contracts        |  |             | 18,876 |             |  |             | 1,169 |             |  |             | 1,170 |            |  |   | 1,187 |  |  |   | 1,187 |              |  |   | 3,215  | 

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, 2003.

Forward-Looking Statements

Statements contained in this report, which are not historical in nature, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are made as of
the date of this report and involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of EnergySouth or its affiliates, or industry results, to differ
materially from any future results, performance or achievement expressed or
implied by such forward-looking statements. Such risks, uncertainties and
other important factors include, among others, risks associated with
fluctuations in natural gas prices, including changes in the historical
seasonal variances in natural gas prices and changes in historical patterns of
collections of accounts receivable; the prices of alternative fuels; the
relative pricing of natural gas versus other energy sources; the availability
of other natural gas storage capacity; failures or delays in completing the
planned cavern development project; disruption or interruption of pipelines
serving the Bay Gas storage facilities due to accidents or other events; risks
generally associated with the transportation and storage of natural gas; the
possibility that contracts with storage customers could be terminated under
certain circumstances, or not renewed or extended upon expiration; the prices
or terms of any extended or new contracts; possible loss or material change in
the financial condition of one or more major customers; liability for remedial
actions under environmental regulations; liability resulting from litigation;
national and global economic and political conditions; and changes in tax and
other laws applicable to the business. Additional factors that may impact
forward-looking statements include, but are not limited to, the Companys
ability to successfully achieve internal performance goals, competition, the
effects of state and federal
regulation, including rate relief to recover increased capital and operating
costs, general economic conditions, specific conditions in the Companys
service area, and the Companys dependence on external suppliers, contractors,
partners, operators, service providers, and governmental agencies.

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|       |  |                                                           
|------ |  | ----------------------------------------------------------
|Item 3 |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

At December 31, 2003 the Company had approximately $94.6 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
in the Companys Annual Report on Form 10-K for the fiscal year ended September
30, 2003 for a discussion of the Companys risks related to regulation,
weather, gas supply, and the capital-intensive nature of the Companys
business.




|       |  |                        
|------ |  | -----------------------
|Item 4 |  | CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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.

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.

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PART II. OTHER INFORMATION




Item 4. Submission of Matters to a Vote of Security Holders



| | (a) |  | The Annual Meeting of Stockholders of EnergySouth, Inc. was
held on January 30, 2004.                                                           
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | The following nominees were elected as Directors of the
Company, to serve until the 2007 Annual Meeting of Stockholders, by
the votes indicated:

|                       |  |     |           |          |  |  |         | 
|---------------------- |  | --- | --------- | -------- |  |  | ------- | 
|Nominee                |  | For |           | Withheld
|                       |  |     |           |         
|John S. Davis          |  |     | 4,338,698 |          |  |  | 326,124 | 
|Walter L. Hovell       |  |     | 4,633,722 |          |  |  | 31,100  | 
|G. Montgomery Mitchell |  |     | 4,632,609 |          |  |  | 32,213  | 
|Robert H. Rouse        |  |     | 4,643,310 |          |  |  | 21,512  | 



| |  |  | The other Directors of the Company whose terms of office continued after
the 2004 Annual Meeting are as indicated below:
| |  |  | ------------------------------------------------------------------------------------------------------------------------

|                        |  |                                     |      | 
|----------------------- |  | ----------------------------------- | ---- | 
|                        |  | To Serve Until the Annual          
|Director                |  | Meeting of Stockholders in the year
|                        |  |                                    
|Walter A. Bell          |  |                                     | 2005 | 
|Gaylord C. Lyon         |  |                                     | 2005 | 
|Harris V. Morrisette    |  |                                     | 2005 | 
|E.B. Peebles, Jr.       |  |                                     | 2005 | 
|John C. Hope, III       |  |                                     | 2006 | 
|Judy A. Marston         |  |                                     | 2006 | 
|S. Felton Mitchell, Jr. |  |                                     | 2006 | 
|Thomas B. Van Antwerp   |  |                                     | 2006 | 



| | (c) |  | The stockholders of the Company approved the proposed amendment
to the restated Articles of Incorporation of the Company to make the
mandatory retirement age applicable to all directors by the following
vote:
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|          |  |         |         |         |  |  |        | 
|--------- |  | ------- | ------- | ------- |  |  | ------ | 
|For       |  | Against |         | Abstain
|          |  |         |         |        
|4,514,846 |  |         | 127,132 |         |  |  | 22,844 | 

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Item 6. Exhibits and Reports on Form 8-K

|    |  |             |      |             |  |                                                                                                                                                 
|--- |  | ----------- | ---- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Exhibit No. |      | Description
|    |  |             |      |            
|    |  |             | 31.1 |             |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - Chief Executive Officer                                               
|    |  |             |      |             |  |                                                                                                                                                 
|    |  |             | 31.2 |             |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - Chief Financial Officer                                               
|    |  |             |      |             |  |                                                                                                                                                 
|    |  |             | 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
|    |  |             |      |             |  |                                                                                                                                                 
|    |  |             | 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



| | (b) |  | Reports on Form 8-K                                                                                                                                                    
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | On November 12, 2003, EnergySouth, Inc. filed its current report on
Form 8-K reporting earnings for the quarter ended September 30, 2003
and declaration of a dividend.




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                        |  |                                                                     
|----------------------- |  | --------------------------------------------------------------------
|                        |  | ENERGYSOUTH, INC.
(Registrant)                                      
|                        |  |                                                                     
|                        |  |                                                                     
|Date: February 13, 2003 |  | /s/ John S. Davis                                                   
|                        |  |                                                                     
|                        |  | John S. Davis
President and
Chief Executive Officer                 
|                        |  |                                                                     
|Date: February 13, 2003 |  | /s/ Charles P. Huffman                                              
|                        |  |                                                                     
|                        |  | Charles P. Huffman
Senior Vice President and
Chief Financial Officer

23