##### 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, 2004 Commission File No. 0-29604 ENERGYSOUTH, INC. 
  Alabama
    
    58-2358943(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)2828 Dauphin Street, Mobile, Alabama
    
    36606(Address of principal executive office)
    
    (Zip Code)
 Registrants telephone number, including area code 251-450-4774 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. Common stock ($.01 par value) outstanding at January 31, 2005  7,839,555 shares.




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##### Table of Contents



ENERGYSOUTH, INC.
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2004 INDEX Page No.PART I:      FINANCIAL INFORMATIONItem 1
    
    
    
    Financial Statements:(a)
    
    Unaudited Condensed Consolidated Balance Sheets December 31, 2004 and 2003 and September 30, 2004
    
    3 - 4(b)
    
    Unaudited Condensed Consolidated Statements of Income Three Months Ended December 31, 2004 and 2003
    
    5(c)
    
    Unaudited Condensed Consolidated Statements of Cash Flows Three Months Ended December 31, 2004 and 2003
    
    6(d)
    
    Notes to Unaudited Condensed Consolidated Financial Statements
    
    7 - 14Item 2
    
    
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    15 - 21Item 3
    
    
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    22Item 4
    
    
    
    Controls and Procedures
    
    22PART II:      OTHER INFORMATIONItem 4
    
    
    
    Submission of Matters to a Vote of Security Holders
    
    23Item 5
    
    
    
    Other Information
    
    23Item 6
    
    
    
    Exhibits
    
    24 - 40Restated Article of Incorporation of the RegistrantCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906Press Release
 2




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##### Table of Contents



PART 1. FINANCIAL
INFORMATION 
 ITEM 1: FINANCIAL STATEMENTS 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS EnergySouth,
Inc.
    
    December 31,


    September 30,In Thousands
    
    2004
    
    
    2003


    2004(Unaudited)ASSETSCurrent AssetsCash and Cash Equivalents
    
    $
    8,981
    
    
    $
    2,904
    
    
    $
    9,464ReceivablesGas
    
    
    12,237
    
    
    
    11,519
    
    
    
    6,394Unbilled Revenue
    
    
    7,534
    
    
    
    6,896
    
    
    
    1,143Merchandise
    
    
    2,329
    
    
    
    2,500
    
    
    
    2,249Other
    
    
    878
    
    
    
    745
    
    
    
    1,273Allowance for Doubtful Accounts
    
    
    (1,143
    )
    
    
    (1,158
    )
    
    
    (856
    )Materials, Supplies, and Merchandise, net (At Average Cost)
    
    
    1,464
    
    
    
    1,460
    
    
    
    1,524Gas Stored Underground (At Average Cost)
    
    
    5,617
    
    
    
    2,899
    
    
    
    4,235Regulatory Assets
    
    
    1,803
    
    
    
    2,287
    
    
    
    3,606Deferred Income Taxes
    
    
    1,247
    
    
    
    766
    
    
    
    434Prepayments
    
    
    1,026
    
    
    
    996
    
    
    
    1,731Total Current Assets
    
    
    41,973
    
    
    
    31,814
    
    
    
    31,197Property, Plant, and Equipment
    
    
    276,270
    
    
    
    267,705
    
    
    
    274,789Less: Accumulated Depreciation and Amortization
    
    
    72,556
    
    
    
    65,027
    
    
    
    70,417Property, Plant, and Equipment  -  net
    
    
    203,714
    
    
    
    202,678
    
    
    
    204,372Construction Work in Progress
    
    
    243
    
    
    
    2,805
    
    
    
    225Total Property, Plant, and Equipment
    
    
    203,957
    
    
    
    205,483
    
    
    
    204,597Other AssetsPrepaid Pension Cost
    
    
    1,045
    
    
    
    938
    
    
    
    1,102Deferred Charges
    
    
    651
    
    
    
    526
    
    
    
    567Prepayments
    
    
    942
    
    
    
    1,000
    
    
    
    957Regulatory Assets
    
    
    579
    
    
    
    906
    
    
    
    660Merchandise Receivables Due After One Year
    
    
    3,494
    
    
    
    3,749
    
    
    
    3,374Total Other Assets
    
    
    6,711
    
    
    
    7,119
    
    
    
    6,660Total
    
    $
    252,641
    
    
    $
    244,416
    
    
    $
    242,454
 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements 3




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UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS EnergySouth,
Inc.
    
    December 31,
    
    
    September 30,In Thousands, Except Share Data
    
    2004
    
    
    2003
    
    
    2004(Unaudited)LIABILITIES AND CAPITALIZATIONCurrent LiabilitiesCurrent Maturities of Long-Term Debt
    
    $
    5,037
    
    
    $
    6,113
    
    
    $
    6,248Notes Payable
    
    
    6,175
    
    
    
    7,025Accounts Payable
    
    
    8,793
    
    
    
    6,930
    
    
    
    5,278Dividends Declared
    
    
    1,555
    
    
    
    1,465
    
    
    
    1,561Customer Deposits
    
    
    1,321
    
    
    
    1,504
    
    
    
    1,618Taxes Accrued
    
    
    3,430
    
    
    
    1,734
    
    
    
    2,312Interest Accrued
    
    
    559
    
    
    
    625
    
    
    
    1,122Regulatory Liabilities
    
    
    4,768
    
    
    
    3,843
    
    
    
    4,637Other
    
    
    1,014
    
    
    
    1,029
    
    
    
    998Total Current Liabilities
    
    
    32,652
    
    
    
    30,268
    
    
    
    23,774Other LiabilitiesAccrued Postretirement Benefit Cost
    
    
    570
    
    
    
    375
    
    
    

    513Deferred Income Taxes
    
    
    22,053
    
    
    
    19,314
    
    
    
    21,378Deferred Investment Tax Credits
    
    
    257
    
    
    
    284
    
    
    
    262Regulatory Liabilities
    
    
    12,031
    
    
    
    11,212
    
    
    
    11,788Other
    
    
    1,371
    
    
    
    2,715
    
    
    
    1,413Total Other Liabilities
    
    
    36,282
    
    
    
    33,900
    
    
    
    35,354Total Liabilities
    
    
    68,934
    
    
    
    64,168
    
    
    
    59,128CapitalizationStockholders EquityCommon Stock, $.01 Par Value(Authorized
10,000,000 Shares; Outstanding December 2004
- 7,835,000; December 2003 - 7,710,000; September 2004 - 7,827,000 Shares)
    
    
    78
    
    
    
    77
    
    
    
    78Capital in Excess of Par Value
    
    
    26,364
    
    
    
    23,664
    
    
    
    26,162Retained Earnings
    
    
    70,382
    
    
    
    63,717
    
    
    
    67,625Grantor Trust, at cost
    
    
    (1,406
    )
    
    
    
    
    
    
    (1,355
    )Deferred Compensation Liability
    
    
    1,406
    
    
    
    
    
    
    
    1,355Total Stockholders Equity
    
    
    96,824
    
    
    
    87,458
    
    
    
    93,865Minority Interest
    
    
    4,733
    
    
    
    4,302
    
    
    
    4,769Long-Term Debt
    
    
    82,150
    
    
    
    88,488
    
    
    
    84,692Total Capitalization
    
    
    183,707
    
    
    
    180,248
    
    
    
    183,326Total
    
    $
    252,641
    
    
    $
    244,416
    
    
    $
    242,454
 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements 4




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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three MonthsEnergySouth,
Inc.
    
    Ended December 31,In Thousands, Except Per Share Data
    
    2004
    
    
    2003Operating RevenuesGas Revenues
    
    $
    34,802
    
    
    $
    31,289Merchandise Sales
    
    
    1,185
    
    
    
    1,031Other
    
    
    380
    
    
    
    396Total Operating Revenues
    
    
    36,367
    
    
    
    32,716Operating ExpensesCost of Gas
    
    
    14,922
    
    
    
    12,127Cost of Merchandise
    
    
    959
    
    
    
    734Operations and Maintenance
    
    
    6,496
    
    
    
    6,431Depreciation
    
    
    2,550
    
    
    
    2,434Taxes, Other Than Income Taxes
    
    
    2,452
    
    
    
    2,253Total Operating Expenses
    
    
    27,379
    
    
    
    23,979Operating Income
    
    
    8,988
    
    
    
    8,737Other Income and (Expense)Interest Expense
    
    
    (1,872
    )
    
    
    (2,030
    )Allowance for Borrowed Funds Used During Construction
    
    
    3
    
    
    
    9Interest Income
    
    
    32
    
    
    
    6Minority Interest
    
    
    (228
    )
    
    
    (196
    )Total Other Income (Expense)
    
    
    (2,065
    )
    
    
    (2,211
    )Income Before Income Taxes
    
    
    6,923
    
    
    
    6,526Income Taxes
    
    
    2,607
    
    
    
    2,458Net Income
    
    $
    4,316
    
    
    $
    4,068Earnings Per ShareBasic
    
    $
    0.55
    
    
    $
    0.53Diluted
    
    $
    0.54
    
    
    $
    0.52Average Common Shares OutstandingBasic
    
    
    7,833
    
    
    
    7,707Diluted
    
    
    7,938
    
    
    
    7,800
 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements 5




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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three MonthsEnergySouth, Inc.
    
    Ended December 31,In Thousands
    
    2004
    
    
    2003Cash Flows from Operating ActivitiesNet Income
    
    $
    4,316
    
    
    $
    4,068Adjustments to Reconcile Net Income to Net Cash
Provided by Operating ActivitiesDepreciation and Amortization
    
    
    2,646
    
    
    
    2,550Provision for Losses on Receivables and Inventory
    
    
    179
    
    
    
    243Provision for Deferred Income Taxes
    
    
    (127
    )
    
    
    484Minority Interest
    
    
    228
    
    
    
    196Changes in Operating Assets and Liabilities:Receivables
    
    
    (12,077
    )
    
    
    (10,368
    )Inventory
    
    
    (1,318
    )
    
    
    797Payables
    
    
    2,945
    
    
    
    (104
    )Taxes
    
    
    1,116
    
    
    
    546Deferred Purchased Gas Adjustment
    
    
    1,790
    
    
    
    647Other
    
    
    682
    
    
    
    944Net Cash Provided by Operating Activities
    
    
    380
    
    
    
    3Cash
Flows from Investing ActivitiesCapital Expenditures
    
    
    (1,590
    )
    
    
    (2,596
    )Net Cash Used in Investing Activities
    
    
    (1,590
    )
    
    
    (2,596
    )Cash
Flows from Financing ActivitiesRepayment of Long-Term Debt
    
    
    (3,752
    )
    
    
    (4,044
    )Short-Term Borrowings
    
    
    6,175
    
    
    
    6,775Payment of Dividends
    
    
    (1,559
    )
    
    
    (1,465
    )Dividend Reinvestment
    
    
    110
    
    
    
    87Exercise of Stock Options
    
    
    17
    
    
    
    98Partnership Distributions to Minority Interest Holders
    
    
    (264
    )
    
    
    (36
    )Net Cash Provided by Financing Activities
    
    
    727
    
    
    
    1,415Net Decrease in Cash and Cash Equivalents
    
    
    (483
    )
    
    
    (1,178
    )Cash and Cash Equivalents at Beginning of Period
    
    
    9,464
    
    
    
    4,082Cash and Cash Equivalents at End of Period
    
    $
    8,981
    
    
    $
    2,904
 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements 6




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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. Principles of Consolidation The consolidated financial statements of EnergySouth, Inc. (EnergySouth) and its subsidiaries
(collectively, the Company) include the accounts of Mobile Gas Service Corporation (Mobile Gas);
EnergySouth Services, Inc. (Services); MGS Storage Services, Inc. (Storage); a 90.9% owned limited
partnership, Bay Gas Storage Company, Ltd. (Bay Gas), and a 51% owned partnership, Southern Gas
Transmission Company (SGT). Minority interest represents the respective other owners
proportionate shares of the income and equity of Bay Gas and SGT. All significant intercompany
balances and transactions have been eliminated. Note 2. Basis of Presentation The accompanying unaudited consolidated condensed financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the information and
disclosures required by accounting principles generally accepted in the United States of America
for complete financial statements. All adjustments, consisting of normal and recurring accruals,
which are, in the opinion of management, necessary to present fairly the results for the interim
periods have been made. The statements should be read in conjunction with the summary of accounting
policies and notes to financial statements included in the Annual Report on Form 10-K of the
Company for the fiscal year ended September 30, 2004. 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, 2004 and 2003 are not indicative of the results to be expected for the full year. 7




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The table below summarizes operating results for the twelve months ended December 31, 2004 and
2003: Twelve MonthsEnergySouth, Inc.
    
    Ended December 31,In Thousands, Except Per Share Data
    
    2004
    
    
    2003Operating Revenues
    
    $
    119,623
    
    
    $
    106,619Cost of Gas
    
    
    44,199
    
    
    
    35,358Cost of Merchandise
    
    
    2,807
    
    
    
    2,394Operations and Maintenance Expense
    
    
    25,284
    
    
    
    24,873Depreciation Expense
    
    
    9,828
    
    
    
    9,088Taxes, Other Than Income Taxes
    
    
    8,457
    
    
    
    7,634Operating Income
    
    
    29,048
    
    
    
    27,272Interest Expense
    
    
    (7,739
    )
    
    
    (8,287
    )Allowance for Borrowed Funds Used
During Construction
    
    
    14
    
    
    
    669Interest Income
    
    
    86
    
    
    
    58Less: Minority Interest
    
    
    (837
    )
    
    
    (760
    )Income Before Income Taxes
    
    $
    20,572
    
    
    $
    18,952Income Taxes
    
    
    7,756
    
    
    
    7,122Net Income
    
    $
    12,816
    
    
    $
    11,830Earnings Per ShareBasic
    
    $
    1.64
    
    
    $
    1.55Diluted
    
    $
    1.62
    
    
    $
    1.53Average Common Shares OutstandingBasic
    
    
    7,795
    
    
    
    7,653Diluted
    
    
    7,893
    
    
    
    7,742
 Note 3. Stock-Based Compensation The Company currently accounts for its employee stock option plans under the intrinsic value
recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. As stock options have been issued
with exercise prices equal to the market value of the underlying shares on the grant date, no
compensation cost has been recognized. Had compensation cost for the plans been determined based on the fair value of the options on the
grant date, consistent with Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, the Companys net income and earnings per share would have been as
follows: 8




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##### Table of Contents



Three MonthsEnergySouth, Inc.
    
    Ended December 31,In Thousands, Except per Share Data
    
    2004
    
    
    2003Net Income, as reported
    
    $
    4,316
    
    
    $
    4,068Deduct:Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    45
    
    
    
    46Pro forma net income
    
    $
    4,271
    
    
    $
    4,022Earnings per share:Basic  -  as reported
    
    $
    0.55
    
    
    $
    0.53Basic  -  pro forma
    
    $
    0.55
    
    
    $
    0.52Diluted  -  as reported
    
    $
    0.54
    
    
    $
    0.52Diluted  -  pro forma
    
    $
    0.54
    
    
    $
    0.52
 Note 4. Retirement Plans and Other Benefits The Company has a noncontributory, defined benefit plan covering substantially all of its
employees. Benefits are based on the greater of amounts resulting from two different formulas:
years of service and average compensation during the last five years of employment, or years of
service and average compensation during the term of employment. The Company annually contributes
to the plan the amount deductible for federal income tax purposes. The Company also provides certain health care and life insurance benefits for retired employees.
Substantially all employees may become eligible for such benefits if they retire under the
provisions of the Companys retirement plan. The Company is accruing the costs of such benefits
over the expected service period of the employees. The projected unit credit actuarial method was used to determine service cost and actuarial
liability. Net periodic benefit cost for the periods indicated included the following components: Pension
    
    
    PostretirementBenefits
    
    
    BenefitsFor the three months ended December 31, (in thousands)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Service cost
    
    $
    227
    
    
    $
    211
    
    
    $
    43
    
    
    $
    29Interest cost
    
    
    448
    
    
    
    396
    
    
    
    79
    
    
    
    67Amortization of transition asset
    
    
    
    
    
    
    (32
    )Amortization of prior service cost
    
    
    24
    
    
    
    24
    
    
    
    (11
    )
    
    
    (11
    )Amortization of unrecognized gain/(loss)
    
    
    
    
    
    
    (22
    )
    
    
    15
    
    
    
    8Expected return on plan assets
    
    
    (643
    )
    
    
    (638
    )
    
    
    (68
    )
    
    
    (68
    )Net periodic benefit cost (credit)
    
    $
    56
    
    
    $
    (61
    )
    
    $
    58
    
    
    $
    25
 For fiscal year 2005, the Company does not anticipate making any contributions to its pension plan
due to the fact that the plan is currently fully funded and any contributions to the
Companys postretirement benefit plan are expected to be immaterial. 9




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Note 5. Rates and Regulatory Matters On June 10, 2002, the Alabama Public Service Commission (APSC) approved Mobile Gas request for the
Rate Stabilization and Equalization (RSE) rate setting process to be effective October 1, 2002
through September 30, 2005, and thereafter unless modified or discontinued by APSC order. RSE is a
ratemaking methodology used by the APSC to regulate certain other utilities. Rate adjustments,
designed to increase annual gas revenues by approximately $1.7 million, $2.8 million, and $2.2
million, were implemented under the RSE tariff effective December 1, 2004, 2003, and 2002,
respectively. Increases are allowed only once each fiscal year, effective December 1, and cannot
exceed four percent of prior-year revenues. Under RSE, the APSC conducts reviews using fiscal
year-to-date performance through January, April, and July plus Mobile Gas budget projections to
determine whether Mobile Gas return on equity is expected to be within the allowed range of 13.35%
to 13.85% at the end of the fiscal year. RSE limits the amount of Mobile Gas equity upon which a
return is permitted to 60 percent of its total capitalization and provides for certain cost control
measures designed to monitor Mobile Gas operations and maintenance (O&M) expense. Under the
inflation-based cost control measurement established by the APSC, if a change in Mobile Gas O&M
expense per customer falls within 1.5 percentage points above or below the change in the Consumer
Price Index for All Urban Customers (index range), no adjustment is required. If the change in O&M
expense per customer exceeds the index range, three-quarters of the difference is returned to
customers through future rate adjustments. To the extent the change is less than the index range,
the utility benefits by one-half of the difference through future rate adjustments. In conjunction with the approval of RSE, the APSC approved an Enhanced Stability Reserve (ESR),
beginning October 1, 2002, to which Mobile Gas may charge the full amount of: 1) extraordinary O&M
expenses resulting from force majeureevents such as storms, severe weather, and outages, when one
such event results in more than $100,000 of additional O&M expense or a combination of two or more
such events results in more than $150,000 of additional O&M expense during a fiscal year; or 2)
losses of revenue from any individual industrial or commercial customer in excess of $100,000
during the fiscal year, if such losses cause Mobile Gas return on equity to fall below 13.35%. An
initial ESR balance of $1.0 million was recorded October 1, 2002 and is being recovered from
customers through rates. Subject to APSC approval, additional funding, up to a maximum reserve
balance of $1.5 million, may be provided from any future non-recurring revenue should such revenue
cause Mobile Gas return on equity for the fiscal year to exceed 13.85%. During the year ended
September 30, 2003, Mobile Gas charged $146,000 against the ESR due to revenue losses from a large
industrial customer. Following a year in which a charge against the ESR is made, the APSC allows
for accruals to the ESR of no more than $15,000 monthly until the maximum funding level is
achieved. Effective October 1, 2004, Mobile Gas began recording a monthly accrual in the amount of
$10,000 to restore the reserve to its former balance of $1.0 million. The ESR balance of $884,000
at December 31, 2004 is included in the balance sheet of the Unaudited Condensed Consolidated
Financial Statements as part of Regulatory Liabilities. Mobile Gas rates contain a temperature adjustment rider which is designed to offset the impact of
unusually cold or warm weather on the Companys operating margins. The adjustment is calculated monthly for the months of November through April and applied to 10




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##### Table of Contents



customers bills in the same billing cycle in which the weather variation occurs. The temperature adjustment
rider applies to substantially all residential and small commercial customers. The Company is subject to the provisions of FASB Statement No. 71, Accounting for the Effects of
Certain Types of Regulation (SFAS 71). Regulatory assets represent probable future revenues
associated with certain costs that are expected to be recovered from customers through the
ratemaking process. Regulatory liabilities represent probable future reductions in revenues
associated with amounts that are expected to be credited to customers through the ratemaking
process. The following table presents the significant regulatory assets and liabilities as of the stated
dates (in thousands): December 31,
    
    
    December 31,
    
    
    September 30,2004
    
    
    2003
    
    
    2004Current
    
    
    Noncurrent
    
    
    Current
    
    
    Noncurrent
    
    
    Current
    
    
    NoncurrentAssetsDeferred Purchase Gas Adjustment
    
    $
    1,479
    
    
    
    
    
    
    $
    1,886
    
    
    
    
    
    
    $
    3,269ESR Fund
    
    
    167
    
    
    
    458
    
    
    
    167
    
    
    
    626
    
    
    
    167
    
    
    
    500Bad Debt Reserve
    
    
    133
    
    
    
    100
    
    
    
    133
    
    
    
    232
    
    
    
    133
    
    
    
    133Other
    
    
    24
    
    
    
    21
    
    
    
    101
    
    
    
    48
    
    
    
    37
    
    
    
    27Regulatory Assets
    
    $
    1,803
    
    
    $
    579
    
    
    $
    2,287
    
    
    $
    906
    
    
    $
    3,606
    
    
    $
    660LiabilitiesBad Debt Reserve
    
    $
    15
    
    
    
    
    
    
    $
    36
    
    
    $
    15
    
    
    $
    20ESR Fund
    
    
    884
    
    
    
    
    
    
    
    854
    
    
    
    
    
    
    
    854Deferred Investment Tax Credit
    
    
    16
    
    
    
    133
    
    
    
    15
    
    
    
    148
    
    
    
    15
    
    
    
    136RSE Adjustment
    
    
    258
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    343Gross Receipt Tax Collections
    
    
    3,595
    
    
    
    
    
    
    
    2,938
    
    
    
    
    
    
    
    3,405Asset Retirement Obligations
    
    
    
    
    
    
    11,898
    
    
    
    
    
    
    
    11,049
    
    
    
    
    
    
    
    11,652Regulatory Liabilities
    
    $
    4,768
    
    
    $
    12,031
    
    
    $
    3,843
    
    
    $
    11,212
    
    
    $
    4,637
    
    
    $
    11,788
 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 6. 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 105,000 and 93,000 for the three
months ended December 31, 2004 and 2003, respectively. These differences in equivalent shares are from outstanding stock options. 11




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##### Table of Contents



On July 30, 2004, the Board of Directors of EnergySouth declared a three-for-two split of
outstanding common stock whereby one additional share was issued for each two shares held as of the
record date of August 16, 2004. The new shares were issued to shareholders on September 1, 2004
with cash paid in lieu of fractional shares resulting from the split. Common stock began trading
on the post split basis on September 2, 2004. All references to number of shares and per share
amounts have been restated to reflect the three-for-two stock split. 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. 12




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##### Table of Contents



For the three months ended
    
    Natural Gas
    
    
    Natural GasDecember 31, 2004 (in thousands):
    
    Distribution
    
    
    Storage
    
    
    Other
    
    
    Eliminations
    
    
    ConsolidatedOperating Revenues
    
    $
    31,058
    
    
    $
    4,782
    
    
    $
    1,565
    
    
    $
    (1,038
    )
    
    $
    36,367Cost of Gas
    
    
    15,960
    
    
    
    
    
    
    
    
    
    
    
    (1,038
    )
    
    
    14,922Cost of Merchandise
    
    
    
    
    
    
    
    
    
    
    959
    
    
    
    
    
    
    
    959Operations and Maintenance Expense
    
    
    5,296
    
    
    
    779
    
    
    
    421
    
    
    
    
    
    
    
    6,496Depreciation Expense
    
    
    1,926
    
    
    
    624
    
    
    
    
    
    
    
    
    
    
    
    2,550Taxes, Other Than Income Taxes
    
    
    2,211
    
    
    
    222
    
    
    
    19
    
    
    
    
    
    
    
    2,452Operating Income
    
    
    5,665
    
    
    
    3,157
    
    
    
    166
    
    
    
    
    
    
    
    8,988Interest Income
    
    
    1
    
    
    
    29
    
    
    
    2
    
    
    
    
    
    
    
    32Interest Expense
    
    
    (728
    )
    
    
    (1,088
    )
    
    
    (56
    )
    
    
    
    
    
    
    (1,872
    )Allow. for Borrowed Funds Used
During Construction
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Less: Minority Interest
    
    
    (35
    )
    
    
    (193
    )
    
    
    
    
    
    
    
    
    
    
    (228
    )Income Before Income Taxes
    
    $
    4,906
    
    
    $
    1,905
    
    
    $
    112
    
    
    
    
    
    
    $
    6,923
 For the three months ended
    
    Natural Gas
    
    
    Natural GasDecember 31, 2003 (in thousands):
    
    Distribution
    
    
    Storage
    
    
    Other
    
    
    Eliminations
    
    
    ConsolidatedOperating Revenues
    
    $
    28,020
    
    
    $
    4,319
    
    
    $
    1,427
    
    
    $
    (1,050
    )
    
    $
    32,716Cost of Gas
    
    
    13,177
    
    
    
    
    
    
    
    
    
    
    
    (1,050
    )
    
    
    12,127Cost of Merchandise
    
    
    
    
    
    
    
    
    
    
    734
    
    
    
    
    
    
    
    734Operations and Maintenance Expense
    
    
    5,223
    
    
    
    730
    
    
    
    478
    
    
    
    
    
    
    
    6,431Depreciation Expense
    
    
    1,828
    
    
    
    606
    
    
    
    
    
    
    
    
    
    
    
    2,434Taxes, Other Than Income Taxes
    
    
    2,036
    
    
    
    198
    
    
    
    19
    
    
    
    
    
    
    
    2,253Operating Income
    
    
    5,756
    
    
    
    2,785
    
    
    
    196
    
    
    
    
    
    
    
    8,737Interest Income
    
    
    2
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    6Interest Expense
    
    
    (825
    )
    
    
    (1,138
    )
    
    
    (67
    )
    
    
    
    
    
    
    (2,030
    )Allow. for Borrowed Funds Used
During Construction
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9Less: Minority Interest
    
    
    (44
    )
    
    
    (152
    )
    
    
    
    
    
    
    
    
    
    
    (196
    )Income Before Income Taxes
    
    $
    4,898
    
    
    $
    1,499
    
    
    $
    129
    
    
    
    
    
    
    $
    6,526
 Note 8. Contingencies Like many gas distribution companies, prior to the widespread availability of natural gas, the
Company manufactured gas for sale to its customers. In contrast to some other companies which
operated multiple manufactured gas plants, the Company and its predecessor operated only one such
plant, which discontinued operations in 1933. The process for manufacturing gas produced
by-products and residuals, such as coal tar, and certain remnants of these residuals are sometimes
found at former gas manufacturing sites. Based on recent plans for the site, the Alabama Department of Environmental Management (ADEM) has
conducted a Brownfield evaluation of the property. On January 5, 2005, ADEM released a CERCLA
Targeted Brownfield Site Inspection report on the manufactured gas plant site. Mobile Gas has
begun discussions with ADEM to identify steps necessary to obtain ADEMs concurrence with Mobile
Gas plans for the site. The Company engaged environmental consultants to evaluate the site in
connection with the plans for the site. Based on their review, the Company recorded its best
estimate of $200,000 as an expense and a remediation liability in fiscal 2004. The Company intends
that, should further investigation or changes in environmental laws or regulations require material
expenditures for evaluation or remediation with regard to the site, it would apply to the APSC for 13




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appropriate rate recovery of such costs. However, there can be no assurances that the APSC would
approve the recovery of such costs or the amount and timing of any such recovery. The Company is involved in litigation arising in the normal course of business. Management
believes that the ultimate resolution of such litigation will not have a material adverse effect on
the consolidated financial statements of the Company. Note 9. New Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 153, Exchanges of Nonmonetary Assets - an amendment of APB Opinion No.
29 (SFAS 153). SFAS 153 eliminates the exception to fair value for exchanges of similar
productive assets and replaces it with a general exception for exchange transactions that do not
have commercial substance; that is, transactions that are not expected to result in significant
changes in the cash flows of the reporting entity. SFAS 153 will be effective for the Company
beginning July 1, 2005 and is not expected to have a material impact on the Companys financial
statements. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment (SFAS 123R) which eliminates the alternative to use APB Opinion 25s
intrinsic value method of accounting that was provided in Statement 123 as originally issued. SFAS
123R requires entities to recognize the cost of employee services received in exchange for awards
of equity instruments based on the grant-date fair value of those awards. The Company accounts for
its employee stock option plans under the intrinsic value recognition and measurement provisions of
Opinion 25 and discloses the effect on net income and earnings per share had compensation cost for
the plans been determined based on the fair value of the options on the grant date. See Note 3 to
the Unaudited Condensed Consolidated Financial Statements. The Company is currently evaluating the
effects of the transition to the fair value method as required in SFAS 123R, which will be
effective for the Company beginning July 1, 2005. 14




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##### Table of Contents



Item 2
    
    Managements Discussion and Analysisof Financial Condition and Results of Operations
 The Company EnergySouth, Inc. is the holding company for a family of energy businesses. Mobile Gas purchases,
sells, and transports natural gas to residential, commercial, and industrial customers in Mobile,
Alabama and surrounding areas. The company also provides merchandise sales, service, and
financing. MGS Storage Services is the general partner of Bay Gas Storage Company, a limited
partnership that provides underground storage and delivery of natural gas for Mobile Gas and other
customers. EnergySouth Services is the general partner of Southern Gas Transmission Company which
is engaged in the intrastate transportation of natural gas. Results Of Operations Consolidated Earnings All earnings per share amounts referred to herein are computed on a diluted basis. Earnings per
share for the three months ended December 31, 2004 increased $0.02 as compared to the same prior
year period due primarily to increased earnings from Bay Gas natural gas storage business.
Financial information by business segment is shown in Note 7 to the Unaudited Condensed
Consolidated Financial Statements above. Earnings from the Companys natural gas distribution business decreased $0.01 per share for the
three-month period ended December 31, 2004 as compared to the same prior year period. Although net
income for the first quarter of fiscal 2004 approximated the same prior year period, the $0.01
decrease in earnings per share resulted from an increase in the average number of common shares
outstanding as compared to the same prior year period. The Companys natural gas storage business, operated by Bay Gas, contributed increased earnings per
share of $0.03 for the three-month period ended December 31, 2004 as compared to the same prior
year period. The positive earnings contributions are due primarily to additional storage revenues
associated with short-term storage agreements. Natural Gas Distribution The Natural Gas Distribution segment is actively engaged in the distribution and transportation of
natural gas to residential, commercial and industrial customers in Southwest Alabama through Mobile
Gas and SGT. The Alabama Public Service Commission (APSC) regulates the Companys gas distribution operations.
Mobile Gas rate tariffs for gas distribution allow rate adjustments to pass through to customers
the cost of gas, certain taxes, and incremental costs associated with the replacement of cast iron
mains. These costs, therefore, have little direct impact on the Companys margins, which are
defined as natural gas distribution revenues less the cost of gas and related taxes. 15




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##### Table of Contents



In fiscal year 2002, the APSC approved Mobile Gas request for a Rate Stabilization and
Equalization (RSE) tariff, a ratemaking methodology used by the APSC to regulate certain other
utilities. Rate adjustments, designed to increase annual gas revenues by approximately $1.7
million and $2.8 million, were implemented under the RSE tariff effective December 1, 2004 and
2003, respectively. Increases are allowed only once each fiscal year, effective December 1, and
cannot exceed four percent of prior-year revenues. See Note 5 to the Unaudited Condensed
Consolidated Financial Statements. The Companys distribution business is highly seasonal and temperature-sensitive since residential
and commercial customers use more gas during colder weather for space heating. As a result, gas
revenues, cost of gas and related taxes in any given period reflect, in addition to other factors,
the impact of weather, through either increased or decreased sales volumes. The Company utilizes a
temperature rate adjustment rider during the months of November through April to mitigate the
impact that unusually cold or warm weather has on operating margins by reducing the base rate
portion of customers bills in colder than normal weather and increasing the base rate portion of
customers bills in warmer than normal weather. Normal weather for the Companys service territory
is defined as the 30-year average temperature as determined by the National Weather Service. Natural gas distribution revenues increased $3,038,000 (11%) during the three-month period ended
December 31, 2004 as compared to the same prior year period due primarily to the rate adjustments
to recover increased gas costs paid to suppliers. Revenues also increased during the current year
period as a result of the RSE rate adjustments which went into effect on December 1, 2004 and 2003.
The increase in revenues during the three-month period was offset by a 10% decline in volumes
delivered to temperature-sensitive customers due to temperatures that were 6% warmer than the same
period last year and a decrease in the number of temperature-sensitive customers served during the
current year period. Revenues from the sale of natural gas to large commercial and industrial customers increased
$717,000 (35%) for the three-month period ended December 31, 2004 due to a 9% increase in volumes
delivered to these customers in the current year period and the RSE adjustments. Revenues from transportation customers increased for the three-month period ended December 31, 2004
as compared to the same prior year period due primarily to a small increase in volumes delivered to
these customers. The cost of natural gas increased $2,783,000 (21%) for the three-month period ended December 31,
2004 as compared to the same prior year period due to higher commodity gas prices. Natural gas distribution margins, defined as revenues less cost of gas and related taxes, were
relatively flat for the three-month period ended December 31, 2004. Increased margins realized
from the rate adjustments effective December 1, 2003 and 2004 were largely offset by a decline in
the number of customers served during the current year period and a decline in usage per degree day
by temperature sensitive customers. Mobile Gas utilizes a temperature adjustment rider on gas
sales to residential and small commercial/industrial customers during the months of November
through April to mitigate the impact that warmer or colder than normal weather has on earnings.
The month of October 2004, which is not 16




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##### Table of Contents



subject to temperature adjustment, was 38% warmer than October 2003 and 80% warmer than normal.
Since October billings are not subject to temperature adjustment, the full impact of reduced
volumes sold due to the warmer weather is reflected through lower margins. The months of November
and December were warmer and colder, respectively, than the prior year and normal weather but the
temperature adjustment rider which applies to customer bills during these months mitigated the
impact of the weather on margins. Margins realized during these months were, in fact, lower than
the prior year due to a decrease in residential customers gas consumption per heating degree-day
which determines the recovery of margins through the temperature adjustment rider. Consistent with
other natural gas distribution companies in the United States, Mobile Gas has over time experienced
slight declines in residential customer usage per degree-day as customers replace old appliances
with new, more energy efficient models and as new, more energy efficient homes are built. During
the first quarter of the prior year, residential customers usage deviated from this pattern and
was unusually high. However, during the three months ended December 31, 2004 the decline in
consumption by these customers reflected the declining trend in customer consumption as experienced
in recent years. Usages per degree-day can and do vary between periods due to several factors
including humidity, wind speed, cloud cover, and duration of cold weather. Margins from sales to large commercial and industrial customers increased for the three months
ended December 31, 2004 due to the increase in related revenues discussed previously. Because
transportation revenues do not have an associated cost of gas, the margin change on these revenues
approximates the change in revenues discussed above. Operations and maintenance (O&M) expenses increased $73,000 (1%) for the three-month period ended
December 31, 2004 due to an increase in promotional campaigns and the reestablishment of the ESR
reserve discussed above in Note 5 to the Unaudited Condensed Consolidated Financial Statements. Depreciation expense increased $98,000 (5%) for the three-month period ended December 31, 2004 as
compared to the same prior year period due to Mobile Gas increased investment in property, plant
and equipment. Other taxes primarily consist of property taxes and business license taxes that are based on gross
revenues and fluctuate accordingly. Other taxes increased $175,000 (9%) for the three-month period
ended December 31, 2004 due primarily to the increased revenues. Interest expense decreased $97,000 (12%) for the three-month period ended December 31, 2004 as
compared to the same prior year period due to principal payments on long-term debt. Minority interest reflects the minority partners share of pre-tax earnings of the SGT partnership,
of which EnergySouths subsidiary holds a controlling interest. Minority interest decreased
slightly during the three-month period ended December 31, 2004 as compared to the same prior year
period 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 17




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##### Table of Contents



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 firm and interruptible services. The FERC last issued
orders on October 11, 2001 and June 3, 2002 approving rates for such services. On March 9, 2004, in
accordance with FERC filing requirements, Bay Gas filed a petition with the FERC requesting
approval of new rates for transportation-only service. The construction of natural gas-fired electric generation facilities in the Southeast has provided
opportunities to provide gas storage and transportation services. Construction of Bay Gas second
storage cavern was completed and the cavern was placed into service April 1, 2003. Bay Gas entered
into a fifteen-year contract with Southern Company Services, Inc. (Southern), an affiliate of
Southern Company, for most of the second cavern capacity. During fiscal year 2004, the remaining
capacity of the second cavern was fully subscribed on a firm basis. Currently, the second storage
cavern has a working capacity of 3.7 Bcf. Together, the two caverns at Bay Gas currently hold 6.0
Bcf, with injection and withdrawal capacity of 200 MMcf and 610 MMcf per day, respectively, but are
currently planned to ultimately 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
through fiscal 2007 without interruption of storage operations. With the current working capacity of both caverns fully subscribed, Bay Gas recently began a
process that could lead to additional cavern development. During fiscal 2004, Bay Gas concluded a
non-binding open season to assess interest for up to 5.0 Bcf of additional working gas capacity.
Bay Gas is currently following up with the respondents in an effort to secure agreements for firm
storage services. Bay Gas plans to move forward with development of a third storage cavern subject
to its ability to execute sufficient firm storage agreements with the interested parties. Bay Gas revenues increased $463,000 (11%) during the three-month period ended December 31, 2004 as
compared to the same prior year period due primarily to short-term storage agreements entered into
during the first quarter of fiscal 2005. Under these short-term agreements, available storage
capacity is leased to customers on an interruptible basis, thereby optimizing the use of cavern
capacity. Operations and maintenance (O&M) expenses increased $49,000 (7%) during the three-month period
ended December 31, 2004 as compared to the same prior year period due to a general increase in
operating costs as a result of the recent expansion activities of Bay Gas. Other taxes consist primarily of property taxes and those taxes increased as a combined result of
the increased revenues associated with the expanded operations of Bay Gas second storage cavern
and the increase in the assessed value of Bay Gas property, plant, and equipment due to the
completion of the second storage cavern. 18




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##### Table of Contents



Minority interest reflects the minority partners share of pre-tax earnings of the Bay Gas limited
partnership, of which EnergySouths subsidiary holds a controlling interest. Minority interest
increased $41,000 (27%) during the three-month period ended December 31, 2004 as compared to the
same prior year period due to increased pretax earnings of the limited partnership as discussed
above. 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. Income before income taxes from Other business activities decreased $17,000 for the three-month
period ended December 31, 2004 as compared to the same prior year period due to increases in the
cost of merchandise sold and the associated costs of installing the merchandise, which more than
offset the increase in merchandise sales. Income Taxes Income taxes fluctuate with the change in income before income taxes. Income tax expense increased
$149,000 (6%) for the three-month period ended December 31, 2004 as compared to the same prior year
period. Liquidity and Capital Resources The Company generally relies on cash generated from operations and, on a temporary basis,
short-term borrowings, to meet working capital requirements and to finance normal capital
expenditures. The Company issues debt and equity for longer term financing as needed. Impacts of
operating, investing, and financing activities are shown on the Unaudited Condensed Consolidated
Statements of Cash Flows. Cash provided by operating activities increased $377,000 during the
three-month period ended December 31, 2004 as compared to the same period last fiscal year due to
an increase in net income, an increase in collections of gas costs from customers, and an increase
in payables. Partially offsetting these positive impacts on cash flow from operating activities
was an increase in the Companys inventory of stored natural gas and an increase in accounts
receivable. Cash used in investing activities reflects the capital-intensive nature of the Companys business.
During the three months ended December 31, 2004 and 2003, the Company used cash of $1,590,000 and
$2,596,000, respectively, for the construction of distribution and storage facilities, purchases of
equipment and other general improvements. Financing activities provided cash of $727,000 and $1,415,000 during the three-months ended
December 31, 2004 and 2003, respectively. The $688,000 decrease in financing activities is due
primarily to a decrease in the Companys short-term borrowings. 19




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##### Table of Contents



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, 2004, the Company
had $13,800,000 available for borrowing on its revolving credit agreement. The Company pays a fee
for its committed lines of credit rather than maintain compensating balances. The commitment fee
is 0.125% of the average daily unborrowed amount during the annual period of calculation. The
Company believes it has adequate financial flexibility to meet its expected cash needs in the
foreseeable future. Under its gas supply strategy, Mobile Gas enters into forward purchases of natural gas to lock in
prices for a majority of its expected gas sales for the upcoming winter heating season. See Gas
Supply under Managements Discussion and Analysis of Financial Condition and Results of
Operation included in the Annual Report on Form 10-K of the Company for the fiscal year ended
September 30, 2004 for further information. The table below summarizes the Companys contractual obligations and commercial commitments as of
December 31, 2004: Remaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fiscal YearsType of Contractual
    
    Fiscal Year
    
    
    Fiscal Year
    
    
    Fiscal Year
    
    
    Fiscal Year
    
    
    2009 andObligations (in thousands):
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    thereafterLong-Term Debt
    
    $
    3,796
    
    
    $
    5,213
    
    
    $
    5,019
    
    
    $
    5,300
    
    
    $
    67,859Interest Payments
    
    
    5,813
    
    
    
    6,701
    
    
    
    6,287
    
    
    
    5,867
    
    
    
    32,395Gas Supply Contracts
    
    
    11,578
    
    
    
    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, 2004. Forward-Looking Statements Statements contained in this report, which are not historical in nature, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are made as of the date of this report and involve known and unknown
risks, uncertainties and other important factors that could cause the actual results, performance
or achievements of EnergySouth or its affiliates, or industry results, to differ materially from
any future results, performance or achievement expressed or implied by such forward-looking
statements. Such risks, uncertainties and other important factors include, among others, risks
associated with fluctuations in natural gas prices, including changes in the historical seasonal
variances in natural gas prices and changes in historical patterns of collections of accounts
receivable; the prices of alternative fuels; the relative pricing of natural gas versus other
energy sources; the availability of other natural gas storage capacity; failures or delays in
completing planned Bay Gas cavern development; disruption or interruption of pipelines serving the
Bay Gas storage facilities due to accidents or other events; risks generally associated with the
transportation and storage of natural gas; the 20




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##### Table of Contents



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. 21




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##### Table of Contents



Item 3
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK
 At December 31, 2004 the Company had approximately $87.2 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, 2004 for a discussion of the Companys risks related to regulation, weather,
gas supply and prices, and the capital-intensive nature of the Companys business. 
 Item 4
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, an evaluation (the Evaluation) was carried
out, under the supervision and with the participation of the Companys President and Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design
and operation of the Companys disclosure controls and procedures (Disclosure Controls). Based
on the Evaluation, the CEO and CFO concluded that the Companys Disclosure Controls are effective
in timely alerting them to material information required to be included in the Companys periodic
SEC reports. 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. 22




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##### Table of Contents



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 28, 2005.(b)
    The following nominees were elected as Directors of the Company, to serve until
the 2008 Annual Meeting of Stockholders, by the votes indicated: Nominee
    
    For
    
    
    WithheldWalter A. Bell
    
    
    6,643,066
    
    
    
    31,924Gaylord C. Lyon
    
    
    6,424,464
    
    
    
    250,526Harris V. Morrisette
    
    
    6,618,925
    
    
    
    56,065E.B. Peebles, Jr.
    
    
    6,614,763
    
    
    
    60,227
 The other
Directors of the Company whose terms of office continued after the 2005 Annual Meeting are as indicated below: To Serve Until the AnnualDirector
    
    Meeting of Stockholders in the yearJohn S. Davis
    
    
    2007Walter L. Hovell
    
    
    2007G. Montgomery Mitchell
    
    
    2007Robert H. Rouse
    
    
    2007John C. Hope, III
    
    
    2006Judy A. Marston
    
    
    2006S. Felton Mitchell, Jr.
    
    
    2006Thomas B. Van Antwerp
    
    
    2006
  (c)
    At the 2005 Annual Meeting, the stockholders of the Company approved an
amendment of the Restated Articles of Incorporation of the Company to increase the
authorized shares of the Companys common stock, $.01 par value per share, from 10
million shares to 20 million shares, by the following vote: For
    
    Against
    
    
    Abstain6,381,386
    
    
    245,578
    
    
    
    48,026
 A copy of the form of the Restated Articles of Incorporation of the Company, as
amended through January 28, 2005, is attached hereto as Exhibit 3(i). 
 Item 5. Other Information On January 28, 2005, EnergySouth, Inc. (the Company) issued a press release announcing
earnings for the fiscal quarter ended December 31, 2004 and the declaration of a dividend on
outstanding Common Stock. The full text of the press release is set forth in Exhibit 99.1
hereto. The exhibit is furnished under this Item 5 in lieu of its being furnished under
cover of and pursuant to the instructions for Form 8-K. 23




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##### Table of Contents



Item 6. Exhibits Exhibit No.
    
    Description3(i)
    
    Restated Article of Incorporation of the Registrant as
amended through January 28, 200531.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Chief Executive
Officer31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Chief Financial
Officer32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief Executive
Officer32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief Financial
Officer99.1
    
    Press release dated January 28, 2005
 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 2, 2005
    
    /s/ John S. DavisJohn S. Davis
President and
Chief Executive Officer
 Date:
February 2, 2005
    
    /s/ Charles P. HuffmanCharles P. Huffman
Senior Vice President and
Chief Financial Officer
   24