##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION  FORM 10-K x
    Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the fiscal year ended September 30, 2004  o
    Transition report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the transition period from ____ to ____ Commission File
Number 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 offices)
    
    (Zip Code)Registrants telephone number, including area code
    
    (251)450-4774
 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchangeTitle of each class
    
    on which registeredNone
    
    None
 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock ($.01 par value) 
  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 o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes x No o The aggregate market value of Common Stock (the only outstanding class of
voting or non-voting common equity), Par Value $.01 per share, held by
non-affiliates (based upon the average of the high and low closing price as
reported by NASDAQ) on March 31, 2004 was approximately $179,646,383. As of December 3, 2004, there were 7,835,006 shares of Common Stock, Par Value
$.01 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersItem 4a. Executive Officers of the RegistrantPART IIItem 5. Market for the Registrants Common Stock Equity and Related Stockholder MattersItem 6 - EnergySouth, Inc. - Selected Financial DataItem 7. Managements Discussion and Analysis of Results of Financial Condition and Results of OperationItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresPART IIIItem 10. Directors, Executive Officers, and Control Persons of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits, Financial Statement SchedulesSignaturesEXHIBIT INDEX4th Amendment to Cavity Development and Storage DevelopmentSubsidiaries of Registrant and PartnershipsConsent of Deloitte & Touche LLPCertifications Pursuant to Section 302 - CEOCertifications Pursuant to Section 302 - CFOCertification Pursuant to 18 U.S.C. Section 1350 - C.E.O.Certification Pursuant to 18 U.S.C. Section 1350 - C.F.O.    Table of Contents  
 PART I 
 Item 1. Business. General EnergySouth, Inc. (together with its subsidiaries, the Company or
Registrant, and exclusive of its subsidiaries, EnergySouth) was initially
incorporated under the laws of the State of Alabama on September 5, 1997 for
the primary purpose of becoming the holding company for Mobile Gas Service
Corporation (Mobile Gas), a natural gas utility, and its subsidiaries.
Effective February 2, 1998, Mobile Gas and its subsidiaries were reorganized
(the Reorganization) into a holding company structure whereby Mobile Gas
became a wholly-owned subsidiary of EnergySouth. Mobile Gas was incorporated under the laws of the State of Alabama in
1933. Mobile Gas is engaged in the purchase, distribution, sale and
transportation of natural gas to approximately 98,000 residential, commercial
and industrial customers in Southwest Alabama, including the City of Mobile.
Mobile Gas service territory covers approximately 300 square miles. Mobile
Gas is also involved in merchandise sales, specifically sales of natural gas
appliances. EnergySouth Services, Inc. (Services) was incorporated in March 1983.
Through Services, the Company provides contract and consulting work for
utilities and industrial customers. Services owns a 51% interest in Southern
Gas Transmission Company (SGT), an Alabama general partnership which was
formed in November 1991. SGT was established to provide transportation
services to the facilities of Alabama River Pulp Company, Inc (ARP). During
fiscal year 1992, SGT constructed and began operating a 50-mile pipeline from
the facilities of Gulf South Pipeline Company (Gulf South) near Flomaton,
Alabama to the facilities of ARP in Claiborne, Alabama. MGS Marketing Services, Inc. (Marketing) was incorporated on March 5,
1993 to assist existing and potential customers in the purchase of natural gas.
During fiscal year 2003, as existing contracts for marketing services expired,
such contracts were not renewed by Marketing. As of September 30, 2003 and
2004, the Company was not actively engaged in activities previously provided by
Marketing. In connection with the Reorganization, Services and Marketing became
wholly-owned subsidiaries of EnergySouth during fiscal year 1998. MGS Storage Services, Inc. (Storage) was incorporated on December 4,
1991 as a wholly-owned subsidiary of Mobile Gas. Effective December 19, 2000,
Storage became a wholly-owned subsidiary of EnergySouth. As of September 30,
2004 Storage held a general partnership interest of 90.9% in Bay Gas Storage
Company, Ltd. (Bay Gas), an Alabama limited partnership, and a 9.1% limited
partnership interest was held by Olin Corporation (Olin). Bay Gas owns and
operates underground gas storage and related pipeline facilities which are used
to provide storage and delivery of natural gas for Mobile Gas and other
customers. 1




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Business Segments The Companys operations are classified into the following business
segments:  
    
    Natural Gas Distribution  The Natural Gas Distribution segment is
actively engaged in the distribution and transportation of natural gas
to residential, commercial and industrial customers in Southwest
Alabama through Mobile Gas and SGT.  
    
    Natural Gas Storage  The Natural Gas Storage segment provides for the
underground storage of natural gas and transportation services through
the operations of Bay Gas and Storage. The storage operations are
located in Southwest Alabama.  
    
    Other  Includes merchandising, financing, and other energy-related
services which are provided through Mobile Gas, and Services,
respectively, and are aggregated with the corporate operations of
EnergySouth, the holding company. For financial information by business segment, including revenues by
segment, for the fiscal years ended September 30, 2004, 2003, and 2002, see
Note 10 to the Consolidated Financial Statements. Customers Of the approximately 98,000 customers of the Company, approximately 95%
are residential customers. In the fiscal year ended September 30, 2004,
approximately 58% of the Companys gas revenues were derived from residential
sales, 15% from small commercial and industrial sales, 8% from large commercial
and industrial sales, 9% from transportation services, and 10% from storage and
miscellaneous services. Residential sales in fiscal 2004 accounted for
approximately 6% of the total volume of gas delivered to the Companys
customers, with small commercial and industrial, large commercial and
industrial, and transportation deliveries accounting for approximately 2%, 1%
and 91%, respectively. The ten largest customers of the Company accounted for
approximately 23% of the Companys gross margin in fiscal 2004, with the
largest accounting for approximately 9%. (Gross margin refers to Gas Revenue
less Cost of Gas, as shown on the Consolidated Statements of Income on page
F-3.) For further information with respect to revenues from and deliveries to
the various categories of the Companys customers, see Item 6, Selected
Financial Data below. Gross margins by business segment are shown in Note 10
of the Notes to the Consolidated Financial Statements on page F-26. EnergySouth is located at the crossroads of the expanding offshore natural
gas production areas of the Central Gulf Coast and the developing gas-fired
electric generation markets in the lower Southeast region of the United States.
Mobile Gas provides transportation services to two electric generating
facilities which became operational in fiscal 2001. Bay Gas provides
transportation services to three gas-fired electric generating facilities.
During fiscal 1999 Bay Gas entered into storage contracts with electric
utilities which fully subscribed the remaining space in its first storage
cavern. During fiscal 2000 Bay Gas entered into a long term contract with
Southern Company Services, Inc., as agent for a number of electric utility
subsidiaries of Southern Company, to provide storage capacity of up to 3.2
million MMBtu of natural gas for those subsidiaries. To accommodate this
contract, Bay Gas constructed a second underground storage cavern as discussed
in Gas Storage below. While there are no
current reported plans 2




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for additional gas-fired electric generation facilities
in the Companys immediate service area, industry projections indicate Florida
utilities plan to add gas fueled power generation in the next decade.
Management believes that Bay Gas, with the possible construction of additional
caverns, is well positioned to serve the storage needs of that market. 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. There can be no assurances that additional caverns will be
constructed. Gas Supply The Company is directly connected to four natural gas processing plants in
south Mobile County. Mobile Gas has contracted for a portion of its firm
supply directly with two of these producers. For the fiscal year ended
September 30, 2004, the Company obtained approximately 54% of its gas supply
from sources located in the Mobile Bay area, with the balance being obtained
from interstate sources. Mobile Gas has a current peak day firm requirement of 117,000 MMBtus.
Firm supply needs of 80,000 MMBtu/day are expected to be met through the
withdrawal of gas from the storage facility owned by Bay Gas. The Company also
had firm supply contracts with gas suppliers for peak day needs of 13,000
MMBtu/day through October 31, 2004. The Company has contracted for firm
transportation and storage service (No-Notice Service) for 24,000 MMBtu/day
from Gulf South under an agreement effective through March 31,
2011. Gas supply for No-Notice Service is met through a
contract with BP Energy Company through March 31, 2005. The
Company also has firm supply contracts with Coral Energy for varying
monthly quantities through March 31, 2005 through the direct
connection with the Shell Yellowhammer processing plant. Gas Storage Construction of Bay Gas first storage cavern and facilities was completed
in 1994. At September 30, 2004, the cavern had the capacity to hold up to 3.2
million MMBtu of natural gas. Approximately .9 million MMBtu of the gas
injected into the storage cavern, called base gas, remains in the cavern to
provide sufficient pressure to maintain cavern integrity, and the remainder,
approximately 2.3 million MMBtu, represents working storage capacity. In 1994
Mobile Gas entered into a gas storage agreement with Bay Gas under which Bay
Gas agreed to provide storage of .8 million MMBtu of working storage capacity
of the first cavern for an initial period of 20 years. The construction of natural gas-fired electric generation facilities in
the Southeast has provided opportunities to provide gas storage and
transportation services. Construction of 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 the two existing storage caverns 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 development of the
existing storage caverns is currently projected to continue through fiscal 2007
without
interruption of storage operations. Bay Gas has pipeline interconnects
with Florida Gas Transmission Company and Gulf South which provide access to
interstate markets. 3




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Competition Gas Distribution Competition. The Company is not in significant direct
competition with respect to the retail distribution of natural gas to
residential, small commercial and small industrial customers within its service
area. Electricity competes with natural gas for such uses as cooking, water
heating and space heating. The Companys large commercial and industrial customers with requirements
of 200 MMBtu per day or more have the right to contract with the Company to
transport customer-owned gas while other commercial and industrial customers
buy natural gas from the Company. Some industrial customers have the
capability to use either fuel oil, coal, wood chips or natural gas, and choose
their fuel depending upon a number of factors, including the availability and
price of such fuels. In recent years, the Company has had adequate supplies so
that interruptible industrial customers that are capable of using alternative
fuels have not had supplies curtailed. The Companys rate tariffs include a
competitive fuel clause which allows the Company to adjust its rates to certain
large commercial and industrial customers in order to compete with alternative
energy sources. Even so, in recent periods of volatility in natural gas prices,
several customers who have the capability to use alternative fuels have
switched to such alternative fuel sources in periods of extremely high natural
gas prices. See Rates and Regulation below. Due to the close proximity of various pipelines and gas processing plants
to the Companys service area, there exists the possibility that current or
prospective customers could install their own facilities and connect directly
to a supply source and thereby bypass the Companys service. The Company
believes that because it has worked closely with major industrial customers to
meet those customers needs, and because of its ability to provide competitive
pricing under its rate tariffs, none of the Companys customers have bypassed
its facilities to date. Although there can be no assurance as to future
developments, the Company intends to continue its efforts to reduce the
likelihood of bypass by offering competitive rates and services to such
customers. Gas Storage Competition. A number of types of competitors may provide
services like or in competition with those of Bay Gas. These include, among
others, natural gas storage facilities, natural gas aggregators, and natural
gas pipelines. Bay Gas believes that its strategic geographic location and its
ability to charge market-based rates for interstate storage services will
enable it to effectively compete with such competitors. See Rates and
Regulation below. 4




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Rates and Regulation The natural gas distribution operations of Mobile Gas are under the
jurisdiction of the Alabama Public Service Commission (APSC). The APSC
approves rates which are intended to permit the recovery of the cost of service
including a return on investment. Rates have historically been determined by
reference to rate tariffs approved by the APSC in traditional rate proceedings
or, for certain large customers, on a case-by-case basis. In addition,
pursuant to APSC order, rates for a limited number of large industrial
customers are determined on a privately negotiated basis. Since December 1,
1995, Mobile Gas has also been allowed to recover costs associated with its
replacement of cast iron mains. This component of rates is adjusted annually
through a filing with the APSC. The rates for service rendered by Mobile Gas
are on file with the APSC. The APSC also approves the issuance of debt and
equity securities and has supervision and regulatory authority over service,
pipeline safety, accounting, and other matters. On June 10, 2002, the APSC approved Mobile Gas request for the Rate
Stabilization and Equalization (RSE) rate setting process to be effective
October 1, 2002 through September 30, 2005, and thereafter, unless modified or
discontinued by APSC order. Under RSE, the APSC conducts quarterly reviews to
determine, based on Mobile Gas projections and fiscal year-to-date
performance, whether Mobile Gas return on equity is expected to be within the
allowed range of 13.35% to 13.85%. Reductions in rates can be made quarterly
to bring the projected return within allowed range; increases, however, are
allowed only once each fiscal year, effective December 1, and cannot exceed
four percent of prior-year revenues. RSE limits the amount of Mobile Gas
equity upon which a return is permitted to 60 percent of its total
capitalization and provides for certain cost control measures designed to
monitor Mobile Gas operations and maintenance (O&M) expense. Under the
inflation-based cost control measurement established by the APSC, if a change
in Mobile Gas O&M expense per customer falls within 1.5 percentage points
above or below the change in the Consumer Price Index for All Urban Customers
(index range), no adjustment is required. If the change in O&M expense per
customer exceeds the index range, three-quarters of the difference is returned
to customers. To the extent the change is less than the index range, the
utility benefits by one-half of the difference through future rate adjustments.
A rate adjustment designed to increase annual revenues by $2.2 million became
effective December 1, 2002 under RSE. Effective December 1, 2003, rates were
adjusted under RSE which were designed to increase annual revenues by $2.8
million, resulting in a return on equity that exceeded the allowed range in
fiscal 2004. An adjustment of $343,000 was made to fiscal year 2004 earnings
such that the return on equity as calculated for RSE purposes equals 13.6%, the
midpoint of the allowed range, and a regulatory liability was recorded which
reflects the amount owed to customers. A corresponding reduction in rates will
be made in fiscal year 2005. 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 5




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of $1.0 million was recorded October 1, 2002 and is being recovered from
customers through rates beginning October 1, 2002. Subject to APSC approval,
additional funding, up to a maximum reserve balance of $1.5 million, may be
provided by any future non-recurring revenue should such revenue cause Mobile
Gas return on equity for the fiscal year to exceed 13.85%. During the year
ended September 30, 2003, Mobile Gas charged $146,000 against the ESR related
to revenue losses from a certain large industrial customer. Following a year
in which a charge against the ESR is made, the APSC allows for accruals to the
ESR of no more than $15,000 monthly until the maximum funding level is
achieved; however, no such accruals have been made during the year ended
September 30, 2004.. Mobile Gas is also authorized by the APSC to apply a temperature rate
adjustment to customers gas bills for the months of November through April.
The temperature rate adjustment helps to level out the effects of temperature
extremes on Company earnings by reducing high gas bills to customers in colder
than normal weather and increasing gas revenues received by the Company in
warmer than normal weather. The temperature rate adjustment has been reflected
in customers gas bills during the months of November through April since
November 1, 1996. The Mobile Gas tariffs include a purchased gas adjustment clause which
allows it to pass on to its sales customers increases or decreases in gas costs
from those reflected in its tariff charges. Adjustments under such clauses
require periodic filings with the APSC but do not require a general rate
proceeding. Under the purchased gas adjustment clause, Mobile Gas has a
competitive fuel clause which gives it the right to adjust its rates to certain
large customers in order to compete with alternative energy sources. Any
margin lost as a result of competitive fuel clause adjustments is recoverable
from its other customers. Gas deliveries to certain industrial customers are subject to regulation
by the APSC through contract approval. The operations of SGT, which consist
only of intrastate transportation of gas, are also regulated by the APSC. Bay Gas is a regulated utility governed under the jurisdiction of the
APSC. As a regulated utility, Bay Gas intrastate storage contracts are
subject to APSC approval. Operation of the storage cavern and well-head
equipment are subject to regulation by the Oil and Gas Board of the State of
Alabama. The APSC certificated Bay Gas as an Alabama gas storage public utility
in 1992. Bay Gas provides substantial, long-term services for Mobile Gas and
other customers that include storage and transportation of natural gas from
interstate and intrastate sources. The APSC does not regulate rates for Bay
Gas interstate gas storage and storage-related services. The Federal Energy
Regulatory Commission (FERC), which has jurisdiction over interstate services,
allows Bay Gas to charge market-based rates for such services. Market-based
rates minimize regulatory involvement in the setting of rates for storage
services and allow Bay Gas to respond to market conditions. Bay Gas also
provides interstate transportation-only services. The FERC 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. Mobile Gas has been granted nonexclusive franchises to construct, maintain
and operate a natural gas distribution system in the areas in which it
operates. Except for the franchise granted by Mobile County, Alabama, which
has no stated expiration date, the
franchises have 6




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various expiration dates, the earliest of which is in 2007.
The Company has no reason to believe that the franchises will not be renewed
upon expiration. Seasonal Nature of Business The nature of the Companys business is highly seasonal and
temperature-sensitive. As a result, the Companys operating results in any
given period have historically reflected, in addition to other matters, the
impact of weather, with colder temperatures resulting in increased sales by the
Company. The substantial impact of this sensitivity to seasonal conditions has
been reflected in the Companys results of operations. As discussed above
under Rates and Regulation, the application of a temperature rate adjustment
in customers bills beginning in November 1996 has helped to level out the
effects of temperature extremes on results of operations. Due to the seasonality of the Companys business, the generation of
working capital is impaired during the summer months because of reduced gas
sales. Cash needs during this period are met generally through short-term
financing arrangements or the reduction of temporary investments as is common
in the industry. Environmental Issues The Company is subject to various federal, state and local laws and
regulations relating to the environment, which have not had a material effect
on the Companys financial position or results of operations. Like many gas distribution companies, prior to the widespread availability of
natural gas, 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 Companys former gas plant site, the Alabama
Department of Environmental Management (ADEM) is conducting a Brownfields
evaluation of the property. Testing of the site has been completed by ADEM;
however, the Company is unable to predict when ADEMs final report will be
available. The Company engaged environmental consultants to evaluate the site
in connection with the plans for the site. Based on their review, the Company
has recorded its best estimate of $200,000 as an expense and a remediation
liability in fiscal 2004. The APSC has concurred with this treatment. However,
should further investigation or changes in environmental laws or regulations
require material expenditures for evaluation or remediation with regard to the
site, the Company would apply to the APSC for appropriate rate recovery of such
costs. However, there can be no assurances that the APSC would approve the
recovery of such costs or the amount and timing of any such recovery. 7




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Employees Mobile Gas employed 255 full-time employees as of September 30, 2004. Of
these, approximately 37% are represented by the Paper, Allied-Industrial,
Chemical and Energy Workers International Union, Local No. 3-0541. As of
September 30, 2004 Bay Gas employed 10 full-time employees. The Company
believes that it enjoys generally good labor relations. Available Information The Companys internet address is www.energysouth.com. The Company makes
available free of charge on or through its Internet Web site its annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the Securities and
Exchange Commission. 8




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Item 2. Properties. The Companys physical properties consist of distribution, general,
transmission, and storage plant. The distribution plant is located in Mobile
County and Baldwin County, Alabama and is used in the distribution of natural
gas to the Companys customers. The distribution plant consists primarily of
mains, services, meters and regulating equipment, all of which are adequate to
serve the present customers. The distribution plant is located on property
which the Company is entitled to use as a result of franchises granted by
municipal corporations, or on easements or rights-of-way. The general plant consists of land, structures (with aggregate floor space
of approximately 118,000 square feet), office equipment, transportation
equipment and miscellaneous equipment, all located in Mobile County, Alabama. The transmission plant consists of a pipeline of approximately 50 miles
and related surface equipment which is used in the transmission of natural gas
by SGT and is located in Alabamas Monroe and Escambia Counties. Bay Gas
transmission plant consists of pipelines totaling approximately 51 miles and
related surface equipment which are located in Alabamas Mobile and Washington
Counties. The transmission plants are located on easements or rights-of-way. The storage plant, consisting of two underground caverns for the storage
of natural gas and related pipelines and surface facilities, is located
primarily in Washington County, Alabama. The storage facilities are
constructed on a leasehold estate with an initial term of 50 years, which will
expire in 2040, and which may be renewed at the Companys option for an
additional term of 20 years. Substantially all of the utility property of Mobile Gas is pledged as
collateral for its long-term debt as of September 30, 2004. 
 Item 3. Legal Proceedings. The Company is involved in litigation arising in the normal course of
business. Management believes that the ultimate resolution of such litigation
will not have a material adverse effect on the consolidated financial
statements of the Company. 
 Item 4. Submission of Matters to a Vote of Security Holders. There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 2004. 9




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Item 4a. Executive Officers of the Registrant Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered Item in Part I of this Report in lieu of being
included in the proxy statement to be filed with the Securities and Exchange
Commission. Information relating to executive officers who are also directors is
included under the caption Election of Directors contained in the Companys
definitive proxy statement with respect to its 2005 Annual Meeting of
Stockholders and is incorporated herein by reference. The following is a list of names and ages of all of the executive officers
who are not also directors or nominees for election as directors of the
Registrant indicating all positions and offices with the Registrant held by
each such person and each such persons principal occupations or employment
during the past five years. Officers are appointed by the Board of Directors
of the Company for terms expiring in January 2005. Business ExperienceName, Age, and Position
    
    During Past 5 YearsW. G. Coffeen, III, 58
Senior Vice President of Corporate
Development  EnergySouth, Inc.
    
    Appointed in December 2000;
Previously: Senior Vice President of
Operations and Marketing -
EnergySouth, Inc. (2000 - 2004);
Vice President of Corporate
Development and Planning -
EnergySouth, Inc. (1998 -2000)Senior Vice President of Corporate Development
    
    Appointed in December 2000;
 10




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Business ExperienceName, Age, and Position
    
    During Past 5 Years Mobile Gas Service Corporation;
Director and President  EnergySouth Services,
Inc.; Director and President  MGS Marketing
Services, Inc.
    
    Previously: Senior Vice President of
Operations and Marketing - Mobile Gas
Service Corporation (2000 - 2004);
Vice President of Corporate Development
and Planning - Mobile Gas Service
Corporation (1998 -2000); Vice President
- MGS Marketing Services, Inc.;
Vice President - MGS Storage
Services, Inc. (1998 - 2000)Charles P. Huffman, 51
Senior Vice President and Chief Financial Officer
- EnergySouth, Inc.
    
    Appointed in December 2000;
Previously: Vice President, Chief
Financial Officer, and Treasurer -
EnergySouth, Inc. (1998 - 2001)Senior Vice President and Chief Financial Officer
- Mobile Gas Service Corporation; Vice
President and Chief Financial Officer -
EnergySouth Services, Inc.; Director, Vice
President and Chief Financial Officer - MGS
Marketing Services, Inc.; Director, Vice President
and Chief Financial Officer - MGS Storage
Services, Inc.
    
    Appointed in December 2000;
Previously: Vice President, Chief
Financial Officer, Treasurer, and
Assistant Secretary - Mobile Gas
Service Corporation; Vice
President/Treasurer - EnergySouth
Services, Inc.; Director/Vice
President/Treasurer - MGS Storage
Services, Inc.; Director/Vice
President/Treasurer - MGS
Marketing Services, Inc. (1998 -
2001)G. Edgar Downing, Jr., 48 *
Vice President, Secretary and General Counsel -
EnergySouth, Inc.;
    
    Appointed in 1998Secretary, General Counsel and Vice President
of Administration - Mobile Gas Service
Corporation; Director, Vice President and
Secretary - EnergySouth Services, Inc,; Director,
Vice President and Secretary - EnergySouth
Services, Inc.; Vice President and Secretary -
MGS Marketing Services, Inc.; Director, Vice
President and Secretary - MGS Storage
Services, Inc.
    
    Appointed in 1998; Previously: Vice
President, Secretary and General
Counsel - Mobile Gas Service
Corporation (1994 - 1998)
 11




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Business ExperienceName, Age, and Position
    
    During Past 5 YearsSusan P. Stringer, 43
Vice President and Controller - EnergySouth,
Inc.
    
    Appointed in December 2000Vice President and Controller - Mobile Gas
Service Corporation
    
    Appointed in December 2000;
Previously: Director - Financial
Reporting - Mobile Gas Service
Corporation (2000); Manager -
Financial Reporting - Mobile Gas
Service Corporation (1999 - 2000);
Accounting Manager - Mobile Gas
Service Corporation (1998 - 1999);LaBarron N. McClendon, 40
Vice President Human Resources -
EnergySouth, Inc.
    
    Appointed in December 2001Vice President Human Resources - Mobile Gas
Service Corporation
    
    Appointed December 2001;
Previously: Director Human
Resources - Mobile Gas Service
Corporation (1999 - 2001); Manager
Human Resources - Mobile Gas
Service Corporation (1998 - 1999);Daniel T. Ford, 39
Treasurer - EnergySouth, Inc.
    
    Appointed in June 2002Treasurer - Mobile Gas Service Corporation;
    
    Appointed June 2002; Previously:Treasurer - EnergySouth Services, Inc.;
Treasurer - MGS Marketing Services, Inc.;
Treasurer - MGS Storage Services, Inc.
    
    Director Rates and Analysis - Mobile
Gas Service Corporation (2000 -
2002); Manager Rates and Analysis
- Mobile Gas Service Corporation
(1997 - 2000)
 * Mr. Downing is the son-in-law of Gaylord C. Lyon, a Director of the Company. 12




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##### Table of Contents



PART II 
 Item 5. Market for the Registrants Common Stock Equity and Related Stockholder Matters. The Registrants Common Stock, $.01 par value, is traded on the NASDAQ
National Market under the symbol ENSI. As of December 3, 2004 there were
1,334 holders of record of the Companys Common Stock. Information regarding
Common Stock dividends and the bid price range, as adjusted for the
three-for-two stock split effective September 2, 2004, for Common Stock during
the periods indicated is as follows: Per ShareDividends Declared
    
    Closing Price RangeFiscal YearQuarter Ended
    
    2004
    
    2003
    
    2004
    
    2003High
    
    Low
    
    High
    
    LowDecember 31
    
    $
    .190
    
    
    $
    .180
    
    
    $
    23.680
    
    
    $
    20.850
    
    
    $
    19.326
    
    
    $
    16.187March 31
    
    
    .190
    
    
    
    .180
    
    
    
    23.900
    
    
    
    21.750
    
    
    
    19.000
    
    
    
    16.840June 30
    
    
    .200
    
    
    
    .190
    
    
    
    26.490
    
    
    
    22.580
    
    
    
    21.633
    
    
    
    17.327September 30
    
    
    .200
    
    
    
    .190
    
    
    
    28.750
    
    
    
    25.490
    
    
    
    22.640
    
    
    
    20.373
 While the Board of Directors intends to continue the practice of paying
dividends quarterly, amounts and dates of such dividends as may be declared
will be dependent upon the Registrants future earnings, financial
requirements, and other factors. The Registrants long-term debt instruments contain certain debt to equity
ratio requirements and restrictions on the payment of cash dividends and the
purchase of shares of its capital stock. None of these requirements is
expected to have a significant impact on the Registrants ability to pay
dividends in the future. 13




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##### Table of Contents



Item 6 - EnergySouth, Inc. - Selected Financial Data FINANCIAL SUMMARY Years Ended September 30,
    
    2004
    
    2003
    
    2002SELECTED FINANCIAL DATA(in thousands, except per share data)Gas Revenues
    
    $
    111,488
    
    
    $
    95,150
    
    
    $
    81,560Merchandise Sales
    
    
    3,029
    
    
    
    3,259
    
    
    
    3,499Other
    
    
    1,455
    
    
    
    1,206
    
    
    
    1,360Total Operating Revenues
    
    $
    115,972
    
    
    $
    99,615
    
    
    $
    86,419Income Before Cumulative Effect of Changes
in Accounting Principles
    
    $
    12,568
    
    
    $
    11,135
    
    
    $
    10,231Cumulative Effect of Changes in Accounting PrinciplesNet Income
    
    $
    12,568
    
    
    $
    11,135
    
    
    $
    10,231Preferred Stock DividendsEarnings Applicable to Common Stock
    
    $
    12,568
    
    
    $
    11,135
    
    
    $
    10,231Cash Dividends Per Share of Common Stock (1)
    
    $
    0.78
    
    
    $
    0.74
    
    
    $
    0.71Basic Earnings Per Share of Common Stock (1):Income Before Cumulative Effect of Changes in
Accounting Principles
    
    $
    1.62
    
    
    $
    1.47
    
    
    $
    1.37Net Income (1)
    
    $
    1.62
    
    
    $
    1.47
    
    
    $
    1.37Diluted Earnings Per Share of Common Stock (1):Income Before Cumulative Effect of Changes in
Accounting Principles
    
    $
    1.60
    
    
    $
    1.45
    
    
    $
    1.35Net Income (1)
    
    $
    1.60
    
    
    $
    1.45
    
    
    $
    1.35Average Common Shares Outstanding (1):Basic (1)
    
    
    7,764
    
    
    
    7,599
    
    
    
    7,451Diluted (1)
    
    
    7,860
    
    
    
    7,686
    
    
    
    7,569Total Assets
    
    $
    242,454
    
    
    $
    236,888
    
    
    $
    232,213Long-Term Debt
    
    $
    84,692
    
    
    $
    92,640
    
    
    $
    98,645STATISTICALGas Revenue (in thousands):Sales:Residential
    
    $
    64,283
    
    
    $
    54,470
    
    
    $
    47,839Commercial and Industrial - Small
    
    
    17,100
    
    
    
    13,795
    
    
    
    11,105Commercial and Industrial - Large
    
    
    8,696
    
    
    
    8,101
    
    
    
    6,436Transportation
    
    
    9,799
    
    
    
    10,405
    
    
    
    10,834Storage (other than intercompany)
    
    
    10,805
    
    
    
    7,401
    
    
    
    4,383Other
    
    
    805
    
    
    
    978
    
    
    
    963Total
    
    $
    111,488
    
    
    $
    95,150
    
    
    $
    81,560Delivery to Customers (in thousand therms):Gas Sales:Residential
    
    
    42,546
    
    
    
    44,617
    
    
    
    42,651Commercial and Industrial - Small
    
    
    13,709
    
    
    
    13,664
    
    
    
    12,717Commercial and Industrial - Large
    
    
    8,943
    
    
    
    10,463
    
    
    
    10,679Transportation
    
    
    695,561
    
    
    
    759,936
    
    
    
    947,515Total
    
    
    760,759
    
    
    
    828,680
    
    
    
    1,013,562Customers Billed (peak month):Residential
    
    
    92,537
    
    
    
    93,318
    
    
    
    93,563Commercial and Industrial - Small
    
    
    5,143
    
    
    
    5,111
    
    
    
    5,153Commercial and Industrial - Large
    
    
    77
    
    
    
    78
    
    
    
    80Transportation
    
    
    41
    
    
    
    43
    
    
    
    37Total
    
    
    97,798
    
    
    
    98,550
    
    
    
    98,833Degree Days (2)
    
    
    1,619
    
    
    
    1,773
    
    
    
    1,577NUMBER OF EMPLOYEES (END OF PERIOD)
    
    
    265
    
    
    
    285
    
    
    
    295
  Note: (1)
    All references to number of shares and per share amounts have been restated to reflect the three-for-two
conversion of Mobile Gas common stock into EnergySouth, Inc. common stock effective February 2, 1998
and the three-for-two stock split effective September 2, 2004.  Note: (2)
    The number of degrees that the daily mean temperature falls below 65 degrees F. The Companys rates
were designed assuming annual normal degree days of 1,640 beginning December 1, 1995 and an annual
normal of 1,695 for prior periods. 14




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##### Table of Contents



2001
    
    2000
    
    1999
    
    1998
    
    1997
    
    1996
    
    1995
    
    1994$
    103,424
    
    
    $
    69,714
    
    
    $
    63,889
    
    
    $
    70,740
    
    
    $
    69,622
    
    
    $
    68,334
    
    
    $
    56,204
    
    
    $
    60,4702,966
    
    
    
    2,913
    
    
    
    2,827
    
    
    
    2,920
    
    
    
    2,678
    
    
    
    2,674
    
    
    
    2,576
    
    
    
    2,5141,369
    
    
    
    1,470
    
    
    
    1,344
    
    
    
    1,329
    
    
    
    1,281
    
    
    
    1,224
    
    
    
    788
    
    
    
    774$
    107,759
    
    
    $
    74,097
    
    
    $
    68,060
    
    
    $
    74,989
    
    
    $
    73,581
    
    
    $
    72,232
    
    
    $
    59,568
    
    
    $
    63,758$
    6,138
    
    
    $
    8,792
    
    
    $
    8,624
    
    
    $
    8,417
    
    
    $
    8,126
    
    
    $
    8,631
    
    
    $
    4,028
    
    
    $
    4,893
    
    
    
    
    
    
    
    (349
    )
    
    
    
    
    
    
    $
    6,138
    
    
    $
    8,792
    
    
    $
    8,275
    
    
    $
    8,417
    
    
    $
    8,126
    
    
    $
    8,631
    
    
    $
    4,028
    
    
    $
    4,893$
    5$
    6,138
    
    
    $
    8,792
    
    
    $
    8,275
    
    
    $
    8,417
    
    
    $
    8,126
    
    
    $
    8,631
    
    
    $
    4,028
    
    
    $
    4,888$
    0.68
    
    
    $
    0.65
    
    
    $
    0.61
    
    
    $
    0.56
    
    
    $
    0.52
    
    
    $
    0.49
    
    
    $
    0.47
    
    
    $
    0.45$
    0.83
    
    
    $
    1.19
    
    
    $
    1.18
    
    
    $
    1.15
    
    
    $
    1.12
    
    
    $
    1.19
    
    
    $
    0.56
    
    
    $
    0.79$
    0.83
    
    
    $
    1.19
    
    
    $
    1.13
    
    
    $
    1.15
    
    
    $
    1.12
    
    
    $
    1.19
    
    
    $
    0.56
    
    
    $
    0.79$
    0.82
    
    
    $
    1.19
    
    
    $
    1.17
    
    
    $
    1.14
    
    
    $
    1.11
    
    
    $
    1.19
    
    
    $
    0.56
    
    
    $
    0.79$
    0.82
    
    
    $
    1.19
    
    
    $
    1.12
    
    
    $
    1.14
    
    
    $
    1.11
    
    
    $
    1.19
    
    
    $
    0.56
    
    
    $
    0.797,389
    
    
    
    7,356
    
    
    
    7,326
    
    
    
    7,298
    
    
    
    7,266
    
    
    
    7,239
    
    
    
    7,218
    
    
    
    6,1927,481
    
    
    
    7,416
    
    
    
    7,400
    
    
    
    7,389
    
    
    
    7,322
    
    
    
    7,257
    
    
    
    7,218
    
    
    
    6,192$
    232,014
    
    
    $
    175,902
    
    
    $
    181,518
    
    
    $
    173,862
    
    
    $
    168,667
    
    
    $
    157,038
    
    
    $
    142,369
    
    
    $
    139,948$
    90,592
    
    
    $
    55,222
    
    
    $
    58,017
    
    
    $
    58,979
    
    
    $
    63,580
    
    
    $
    54,509
    
    
    $
    57,328
    
    
    $
    59,047$
    65,394
    
    
    $
    41,750
    
    
    $
    39,575
    
    
    $
    44,725
    
    
    $
    44,330
    
    
    $
    43,929
    
    
    $
    36,106
    
    
    $
    40,53515,499
    
    
    
    9,433
    
    
    
    8,613
    
    
    
    9,208
    
    
    
    8,948
    
    
    
    8,348
    
    
    
    6,813
    
    
    
    7,20910,060
    
    
    
    6,316
    
    
    
    5,242
    
    
    
    6,784
    
    
    
    7,638
    
    
    
    7,914
    
    
    
    6,151
    
    
    
    6,1889,594
    
    
    
    9,336
    
    
    
    8,215
    
    
    
    8,210
    
    
    
    6,886
    
    
    
    6,571
    
    
    
    6,172
    
    
    
    5,8812,134
    
    
    
    2,153
    
    
    
    1,689
    
    
    
    1,204
    
    
    
    1,176
    
    
    
    926
    
    
    
    245
    
    
    
    13743
    
    
    
    726
    
    
    
    555
    
    
    
    609
    
    
    
    644
    
    
    
    646
    
    
    
    717
    
    
    
    644$
    103,424
    
    
    $
    69,714
    
    
    $
    63,889
    
    
    $
    70,740
    
    
    $
    69,622
    
    
    $
    68,334
    
    
    $
    56,204
    
    
    $
    60,47051,415
    
    
    
    43,014
    
    
    
    39,866
    
    
    
    51,493
    
    
    
    48,099
    
    
    
    59,403
    
    
    
    47,992
    
    
    
    56,10014,318
    
    
    
    12,590
    
    
    
    11,781
    
    
    
    13,231
    
    
    
    12,338
    
    
    
    14,148
    
    
    
    11,669
    
    
    
    12,46312,570
    
    
    
    12,860
    
    
    
    11,683
    
    
    
    15,169
    
    
    
    16,975
    
    
    
    23,252
    
    
    
    19,536
    
    
    
    19,045790,741
    
    
    
    611,541
    
    
    
    357,183
    
    
    
    335,905
    
    
    
    284,248
    
    
    
    279,798
    
    
    
    274,859
    
    
    
    253,702869,044
    
    
    
    680,005
    
    
    
    420,513
    
    
    
    415,798
    
    
    
    361,660
    
    
    
    376,601
    
    
    
    354,056
    
    
    
    341,31094,948
    
    
    
    95,131
    
    
    
    95,022
    
    
    
    95,443
    
    
    
    95,446
    
    
    
    95,338
    
    
    
    94,822
    
    
    
    94,4245,197
    
    
    
    5,256
    
    
    
    5,282
    
    
    
    5,305
    
    
    
    5,267
    
    
    
    5,257
    
    
    
    5,235
    
    
    
    5,19589
    
    
    
    95
    
    
    
    92
    
    
    
    97
    
    
    
    101
    
    
    
    105
    
    
    
    108
    
    
    
    10643
    
    
    
    37
    
    
    
    37
    
    
    
    30
    
    
    
    30
    
    
    
    30
    
    
    
    29
    
    
    
    31100,277
    
    
    
    100,519
    
    
    
    100,433
    
    
    
    100,875
    
    
    
    100,844
    
    
    
    100,730
    
    
    
    100,194
    
    
    
    99,7561,978
    
    
    
    1,379
    
    
    
    1,196
    
    
    
    1,889
    
    
    
    1,487
    
    
    
    2,030
    
    
    
    1,331
    
    
    
    1,837300
    
    
    
    291
    
    
    
    280
    
    
    
    281
    
    
    
    276
    
    
    
    276
    
    
    
    275
    
    
    
    260
 15




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Results of Financial Condition and Results of Operation. The Company EnergySouth, Inc. (EnergySouth) is a holding company for a family of energy
businesses. EnergySouth and its consolidated subsidiaries are collectively
referred to herein as the Company. The Company, through Mobile Gas Service
Corporation (Mobile Gas) and Southern Gas Transmission Company (SGT), is
engaged in the distribution of natural gas to residential, commercial and
industrial customers in southwest Alabama. Through Bay Gas Storage Company,
Ltd. (Bay Gas), the Company provides underground natural gas storage services
and transportation services. Other EnergySouth subsidiaries are engaged in
merchandising, financing, and other energy-related services. Summary Consolidated Net Income Diluted earnings per share increased $0.15, up 10% from fiscal 2003. Fiscal
year 2003 earnings per share increased 7% as compared to fiscal 2002.
Financial information by business segment is shown in Note 10 to the
Consolidated Financial Statements. 2004 vs 2003Earnings from the Companys natural gas distribution business
increased $0.09 per diluted share during fiscal year 2004, primarily from its
Mobile Gas subsidiary. 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
and Note 2 to the Consolidated Financial Statements. Earnings were also
positively impacted by an increase in temperature-sensitive customers gas
consumption, when adjusted for weather, during the winter heating season of
fiscal year 2004. These increases were partially offset by an increase in
operating and depreciation expenses and a decline in volumes delivered to
industrial customers. The Companys natural gas storage business, operated by Bay Gas, contributed
increased earnings of $0.07 per diluted share during fiscal 2004. This positive
earnings contribution was due primarily to increased storage revenues from its
second storage cavern which was placed in service on April 1, 2003. The
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. Earnings from other business operations decreased $0.01 per diluted share
during fiscal 2004 due primarily to a decrease in interest income from
financing activities, additional provisions for bad debts and increased
operating expenses related to merchandise sales. 2003 vs 2002For fiscal year 2003, EnergySouths earnings per diluted share
increased $.10 from fiscal year 2002 due to increased earnings in all business
segments. The Companys natural gas distribution business contributed
increased earnings of $0.02 per 16




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##### Table of Contents



diluted share due to a rate adjustment which became effective December 1, 2002
based upon the guidelines established under the RSE tariff. Because of the
rate adjustment, margins from temperature-sensitive customers and large
commercial and industrial customers increased during fiscal year 2003; however,
these increases were offset by lower industrial transportation revenues and a
decline in residential usage as adjusted for weather. The Companys natural
gas storage business contributed increased earnings of $0.04 per diluted share
due primarily to increased storage revenues realized from its second storage
cavern, placed in service on April 1, 2003, and revenues realized from
short-term interruptible storage contracts. Increased depreciation expense and
operating expenses partially offset the increased earnings for both the
distribution and storage businesses. Earnings per diluted share from other
business operations increased $0.04 during fiscal year 2003, which did not
include losses incurred in 2002 associated with the exit from the natural gas
generator sales business and the closing of a retail specialty store. Results Of Operations 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
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 unit margins,
which are defined as natural gas distribution revenues less the cost of natural
gas and related taxes. For fiscal year 2003, colder than normal weather during
the 2002-2003 winter heating season, lower national storage levels after the
2002-2003 winter, and increased natural gas electric generation facilities
combined to drive natural gas prices to levels well above historical norms.
During fiscal year 2004, natural gas prices have continued to increase. Should
gas prices rise to exceptional levels or continue to remain at high levels for
an extended period of time, the Companys margins, in aggregate dollars, could
be negatively impacted by changes in customers behavior through 1) energy
conservation efforts that reduce consumption or 2) converting from natural gas
to an alternative heating source. Since the winter of 2000-2001, when the
commodity price of natural gas first rose to unprecedented levels, Mobile Gas
has experienced negative net growth in customers served. Customer counts as of
the end of the fiscal year declined approximately 1.4% in fiscal 2004 and 0.3%
in fiscal 2003. While Mobile Gas continues to expand its service territory by
adding new mains and services, these additions have been more than offset by
the number of customers who have left our system. Mobile Gas is focused on
improving net customer growth through strategies that are directed at 1)
increasing appliances in new and existing customers homes, 2) seeking
high-value commercial customers that use natural gas for purposes other than
space heating, 3) retaining customers by marketing the benefits of gas
appliances and identifying and targeting those customers who may be at risk for
leaving our system or converting to alternative fuels, and 4) minimizing the
volatility of natural gas prices in customers bills. 17




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Mobile Gas follows a gas purchasing strategy to secure prices for a portion of
its gas supply needs for the winter heating season by locking in gas prices at
fixed rates. Mobile Gas strategy for purchasing gas and the Companys use of
natural gas storage capacity help to mitigate the impact of increased prices on
customers bills. However, effective June 1, 2004 and March 1, 2003, Mobile
Gas adjusted its rates to reflect the increased gas costs paid to its
suppliers. In fiscal year 2002, the APSC approved Mobile Gas request for an 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 million and $2.2 million, were implemented under the RSE
tariff effective December 1, 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 has conducted 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 was expected to be within the allowed range of 13.35% to 13.85% at the
end of the fiscal year. No such adjustments were required through the July
2004 test period. Mobile Gas financial results for fiscal year 2004 did,
however, result in a return on equity above the allowed range. As a result, an
adjustment of $343,000 was made to fiscal year 2004 earnings such that the
return on average equity as calculated for RSE purposes equals 13.6%, the
midpoint of the allowed range, and a regulatory liability in that amount was
recorded which reflects the amount owed to customers. A corresponding
reduction in rates will be made in fiscal year 2005. See Notes 1 and 2 to the
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 $13,120,000 (15%) and $10,500,000
(14%), respectively, during fiscal 2004 and 2003 due primarily to the rate
adjustments to recover increased gas costs paid to suppliers. Revenues also
increased during the current year periods as a result of the RSE rate
adjustments which went into effect on December 1, 2003 and 2002. Revenues from the sale of natural gas to residential and small commercial
customers, referred to as temperature-sensitive customers since their gas usage
is affected to a large degree by temperatures during the heating season,
increased $13,119,000 (19%) and $9,311,000 (16%), respectively, during fiscal
2004 and 2003 due to the rate adjustments discussed above. During fiscal 2004,
the increase in revenues from rate adjustments was partially offset by a
decline in customers served and the impact of weather. Temperatures during the
fiscal 2004 winter heating season were 2% warmer than normal and 9% warmer that
the prior year. As a result, volumes delivered to temperature-sensitive
customers 18




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##### Table of Contents



declined 4% in fiscal 2004 when compared to fiscal 2003. Temperatures during
the fiscal 2003 heating season were 8% colder than normal and 12% colder than
fiscal 2002, which partially accounted for a 5% increase in volumes delivered
to these customers. Revenues from the sale of natural gas to large commercial and industrial
customers increased 7% and 26% during fiscal 2004 and 2003, respectively, due
to increases in the price of natural gas and the RSE adjustments. Volumes
delivered to these customers declined 15% and 2%, respectively, for fiscal
years 2004 and 2003 due primarily to the higher natural gas prices. Revenues from the transportation of natural gas to commercial and industrial
customers by the distribution business decreased $417,000 (6%) and $487,000
(6%), respectively, for fiscal 2004 and 2003 with a corresponding decline in
volumes of 8% and 25%, respectively, due primarily to increased gas prices and
general economic conditions. Mobile Gas service territory has experienced the
effects of plant closings during the last three years. In addition to two
customers previous plant closings in fiscal year 2001, a chemical company
which is a customer of the Company ceased operations of its Mobile plant in
June 2003, and some other industrial plants have decreased production or
switched to alternative fuels. As permitted by the APSC, the lost margins in
fiscal 2003 associated with the closure of the chemical plant were charged to
the Enhanced Stability Reserve (ESR) with a corresponding offset to
transportation revenue. Lost margins subsequent to fiscal 2003, as well as
other changes affecting net income, were reflected in the RSE adjustment on
December 1, 2003. See Note 2 to the Consolidated Financial Statements for
information pertaining to ESR and RSE. The cost of natural gas increased $10,532,000 (30%) and $8,601,000 (33%),
respectively, for fiscal years 2004 and 2003. Natural gas distribution margins
increased 5% and 3% for fiscal years 2004 and 2003, respectively, primarily as
a result of the RSE rate adjustments. The increases in margin from rate
adjustments in both years were partially offset by the decrease in volumes
transported to industrial customers and a decline in the number of residential
customers served. Even though volumes delivered to residential customers
decreased in fiscal 2004 and increased in fiscal 2003 as a result of warmer and
colder weather conditions, respectively, Mobile Gas temperature adjustment
rider mitigates the impact on margins of weather that is warmer or colder than
normal winter weather. In recent years, Mobile Gas has experienced declines in
consumption from its residential customers, when adjusted for the impact of
warmer or colder weather, as these customers replace old appliances with new,
more energy efficient models and as new, more energy efficient homes are built.
In more recent years, Management believes that some of this decline has been
attributable to the high bills customers have received due to the high natural
gas prices and colder weather conditions. This was the case in fiscal 2003 as
customer consumption, when adjusted to take out usage related to colder than
normal weather, declined 2.2%. Although this decline in weather adjusted usage
has been the overall trend, usages per degree-day can and do vary between
periods due to several factors including humidity, wind speed, cloud cover, and
duration of cold spells. Contrary to the general trend, consumption by
residential customers in fiscal 2004, when adjusted for weather, trended up
from prior periods, increasing 1.3% from fiscal 2003. The increase in fiscal
2004 margins was partially offset by the declines in volumes delivered to large
commercial and industrial customers who are not subject to the temperature
adjustment rider. 19




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Operations and maintenance (O&M) expenses increased $285,000 (1%) during fiscal
2004. O&M expenses for bad debt provisions increased $299,000 as compared to
fiscal 2003 due to a rise in gas revenues associated with the increase in
natural gas prices discussed above. Mobile Gas O&M expenses also reflect
increases in insurance, employee benefit costs and an unusually high level of
repairs and maintenance on mains. As discussed in Note 8 to the Consolidated
Financial Statements, Mobile Gas also recorded a $200,000 remediation liability
related to a manufactured gas plant. These increased expenses were partially
offset by a decrease in payroll costs and associated benefits related to the
elimination of sixteen positions during fiscal 2004 and a decrease in
advertising and promotional expenses. O&M expenses increased $534,000 (3%) for fiscal 2003 due to increases in
insurance expense, advertising and promotional payments, payroll, postage and
expenses related to the establishment of the ESR reserve. The change in Mobile
Gas O&M expense per customer for fiscal 2004 and 2003 was within the
inflation-based cost control range established by the APSC for RSE purposes;
therefore, no adjustment is required as described in Note 2 to the Consolidated
Financial Statements. Depreciation expense increased $351,000 (5%) and $377,000 (6%), respectively,
for fiscal 2004 and 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
$723,000 and $651,000, respectively, for fiscal year 2004 and 2003 due
primarily to the increased gas revenues discussed above. Interest expense decreased $219,000 and $208,000, respectively, for fiscal 2004
and 2003 due to principal payments on long-term debt. 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 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. 20




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##### Table of Contents



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 $3,177,000 (22%) and $3,074,000 (27%) during fiscal
2004 and 2003, respectively. See Note 10 to the Consolidated Financial
Statements for segment disclosure. Revenues for both years were positively
impacted by additional storage revenues associated with the commencement of
operations of the second cavern. Fiscal 2004 revenues were also increased due
to a new storage agreement which was signed during the first quarter of fiscal
year 2004. Storage revenues for both years were partially offset by the
expiration in May 2003 of an option agreement for transportation services over
and above contracted volumes. Bay Gas entered into an agreement in November
2001 which granted to a customer an option to order transportation of
additional volumes in excess of the volumes currently under long-term contract.
Bay Gas received $3,274,000 in consideration of the option agreement which was
amortized over the nineteen-month option period. Operations and maintenance (O&M) expenses increased $401,000 (16%) and $513,000
(25%) during fiscal 2004 and 2003, respectively, due to increases in payroll
and payroll related expenses, an increase in insurance costs related to
property and liability coverages, and a general increase in operating cost as a
result of the expansion activities of Bay Gas. Depreciation expense increased $438,000 (22%) and $445,000 (29%), respectively,
in fiscal years 2004 and 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
$249,000 (41%) and $85,000 (16%), respectively, as a result of the commencement
of operations of Bay Gas second storage cavern. Interest expense decreased $173,000 (4%) and $43,000 (1%), respectively, in
fiscal years 2004 and 2003 due to scheduled principal payments. 21




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Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs decreased $1,109,000 for the 2004 fiscal year due to the
completion of Bay Gas second storage cavern on April 1, 2003. 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 $109,000 (20%) and $95,000
(21%), respectively, during fiscal 2004 and 2003 due to increased pretax
earnings of the limited 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 10 to the Consolidated Financial Statements for segment disclosure. Income before income taxes from Other business activities decreased $97,000
(38%) in fiscal 2004 due primarily to a decline in interest income earned from
financing activities, the establishment of additional bad debt provisions
associated with financing activities and increases in operating expenses
related to merchandising activities. Income before income taxes from Other
business activities was $465,000 higher in fiscal 2003 due primarily to losses
incurred during fiscal 2002 relating to the exit from the natural gas generator
sales business and the closing of a specialty store. Income Taxes Income taxes fluctuate with the change in income before income taxes. The
Companys effective tax rate in 2004, 2003, and 2001 was 37.7%, 37.6%, and
36.9%, respectively. The components of income tax expense are reflected in
Note 5 to the Consolidated Financial Statements. Effects of Inflation Inflation impacts the prices the Company must pay for labor and other goods and
services required for operation, maintenance and capital improvements. For
Mobile Gas, increases in these costs are recovered through the rate process.
See Note 2 to the Consolidated Financial Statements. Changes in purchased gas
costs are passed through to customers in accordance with the purchased gas
adjustment provision of Mobile Gas rate tariffs. Gas Supply A primary goal of the Company is to provide gas at the lowest possible cost
while maintaining a reliable long-term supply. To accomplish this goal the
Company has diversified its gas supply by constructing and purchasing pipelines
to access the vast gas reserves in its area, 22




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##### Table of Contents



both offshore and onshore. The Company has also contracted with certain of
these sources for firm supply. To minimize the volatility of natural gas
prices to its customers, Mobile Gas has implemented a gas supply strategy in
which it enters into forward purchases to lock in prices for a majority of its
expected gas sales during the upcoming winter heating season. Future minimum
payments under third-party contracts for firm gas supply, which expire at
various dates through the year 2011, are as follows: 2005 - $17,966,000; 2006
- $1,170,000; 2007 - $1,187,000; 2008 - $1,187,000; 2009 - $1,187,000; and 2010
through 2011 - $2,028,000. A portion of firm supply requirements is met
through the withdrawal of gas from the storage facility owned by Bay Gas.
Mobile Gas has a gas storage agreement with Bay Gas to receive storage services
for an initial period through 2014. Mobile Gas purchased gas adjustment
provision in rate tariffs filed with the APSC allows a recovery of demand and
commodity costs of purchased gas from customers. Should Mobile Gas customer
base decline due to deregulation or other reasons, resulting in costs related
to firm gas supply in excess of requirements, Mobile Gas believes it would be
able to take one or more of the following actions: as part of the regulatory
decision allowing other suppliers to serve current customers, secure the right
to allocate firm gas supply costs to the new company supplying gas; reduce some
excess gas supply costs through a negotiated settlement with suppliers; and/or
pass-through excess gas supply costs to existing customers through the
purchased gas component of customers rates. Environmental The Company is subject to various federal, state and local laws and regulations
relating to the environment, which have not had a material effect on the
Companys financial position or results of operations. See Note 8 to the
Consolidated Financial Statements for a discussion of certain environmental
issues. Liquidity and Capital Resources The Company generally relies on cash generated from operations and, on a
temporary basis, short-term borrowings, to meet working capital requirements
and to finance normal capital expenditures. The Company issues debt and equity
for longer term financing as needed. Impacts of operating, investing, and
financing activities are shown on the Consolidated Statements of Cash Flows.
Cash provided by operating activities was $27.0 million, $17.2 million and
$22.1 million in 2004, 2003, and 2002, respectively. Cash provided from
operating activities increased $10 million in 2004 as compared to 2003 due to
an increase in net income, an increase in taxes payable, and an
under-collection of increased gas costs from customers in the prior year. Cash
provided from operating activities declined $4.9 million in 2003 as compared to
2002 due to an increase in accounts receivable and inventory, the option
payment Bay Gas received in fiscal year 2002, and the under-collection of
increased gas costs from customers. Partially offsetting the decrease in
operating cash for fiscal 2003 was an increase in payables, deferred taxes, and
net income. Cash used in investing activities reflects the capital-intensive nature of the
Companys business. During 2004, 2003, and 2002, the Company used cash of $8.7
million, $15.7 million and $22.6 million, respectively, for construction of
distribution and storage facilities, purchases of equipment and other general
improvements. During fiscal 2002, Bay Gas 23




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invested $17.3 million in the construction of the second cavern and completion
of an 18-mile, 24-inch pipeline. In fiscal 2003, $4.9 million was invested by
Bay Gas in the completion of the second cavern. In October 2002, Mobile Gas
entered into a thirty-year franchise agreement with the City of Spanish Fort,
and invested $1.5 million in the expansion of its distribution system into the
City of Spanish Fort. The Company expects fiscal 2005 capital expenditures by Mobile Gas to be
approximately $9.5 million and by Bay Gas to be approximately $15.5 million.
Mobile Gas projected 2005 expenditures include normal construction activity,
including equipment purchases and other general improvements and will be funded
by internal cash generation and short-term borrowings. Bay Gas anticipated
capital expenditures include, subject to its ability to execute sufficient firm
storage agreements for the additional cavern capacity, beginning construction
and development of a third salt-dome storage cavern for storing 5 Bcf of
natural gas, expanding injection and withdrawal capabilities and upgrading
interstate pipeline interconnects. The expansion of storage facilities is
expected to be funded through internal cash generation and the issuance of
long-term debt. Financing activities used cash of $13.1 million, $8.0 million and $7.0 million
in fiscal 2004, 2003 and 2002, respectively. Long term debt payments and the
payment of quarterly dividends primarily account for the cash used in each
year. Dividend payments of $6.1 million, $5.6 million, and $5.3 million were
offset by dividend reinvestment of $0.4 million, $0.4 million, and $0.3 million
in 2004, 2003, and 2002, respectively. Fiscal 2004 included an additional
optional principal payment of $1.7 million on Mobile Gas 7.27% Bonds. Another
contributing factor in 2002 was the payoff of short-term borrowings which was
partially funded by the issuance of $12.0 million of 6.9% First Mortgage Bonds
by Mobile Gas. Receipts of $0.7 million, $1.2 million and $1.6 million in
fiscal 2004, 2003 and 2002, respectively, from the exercise of stock options
partially offset the cash used in financing activities. Funds for the Companys short-term cash needs are expected to come from cash
provided by operations and borrowings under the Companys revolving credit
agreement which extends through January 31, 2005. At September 30, 2004 the
Company had $20.0 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. 24




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The table below summarizes the Companys contractual obligations and commercial
commitments as of September 30, 2004: FiscalType of Contractual
    
    Fiscal
    
    Fiscal
    
    Fiscal
    
    Fiscal
    
    Fiscal
    
    2010 andObligations (in thousands):
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    thereafterLong-Term Debt
    
    $
    6,248
    
    
    $
    6,463
    
    
    $
    6,769
    
    
    $
    5,300
    
    
    $
    5,454
    
    
    $
    60,706Interest Payments
    
    
    7,253
    
    
    
    6,750
    
    
    
    6,289
    
    
    
    5,867
    
    
    
    5,427
    
    
    
    26,968Gas Supply Contracts
    
    
    17,966
    
    
    
    1,170
    
    
    
    1,187
    
    
    
    1,187
    
    
    
    1,187
    
    
    
    2,028Total
    
    $
    31,467
    
    
    $
    14,383
    
    
    $
    14,245
    
    
    $
    12,354
    
    
    $
    12,068
    
    
    $
    89,702
 Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements as such term is defined in
Item 303(a)(4) of Regulation S-K. Critical Accounting Policies Regulatory Accounting.The Natural Gas Distribution segment is subject to
regulation by the APSC and as such, accounts for its transactions according to
the provisions of Statement of Financial Accounting Standards No. 71,
Accounting for the Effects of Certain Types of Regulation (SFAS 71). This
statement sets forth the application of accounting principles generally
accepted in the United States of America for those companies whose rates are
established by or are subject to approval by an independent third party
regulator. The provisions of SFAS 71 require, among other things, that
financial statements of a regulated enterprise reflect the actions of
regulators, where appropriate. The application of this accounting policy
allows the Company to defer expenses and income on the consolidated balance
sheet as regulatory assets and liabilities when it is probable that those
expenses and income will be allowed in the rate setting process in a period
different from the period in which they would have been reflected in the
consolidated statements of income of an unregulated company. These deferred
regulatory assets and liabilities are then recognized in the consolidated
statement of income in the period in which the same amounts are reflected in
rates. See Note 1 to the Consolidated Financial Statements. If any portion of the Natural Gas Distribution segment ceased to continue to
meet the criteria for application of regulatory accounting treatment for all or
part of its operations, the regulatory assets and liabilities related to those
portions ceasing to meet such criteria would be eliminated from the
consolidated balance sheet and included in the consolidated statement of income
for the period in which the discontinuance of regulatory accounting treatment
occurred. Revenue Recognition.Mobile Gas recognizes revenues from the sales of natural
gas and transportation services in the same period in which it delivers the
related volumes to customers. Sales revenues from residential and certain
commercial and industrial customers 25




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are billed on the basis of scheduled meter reading cycles throughout the month.
Mobile Gas records revenues for estimated deliveries of gas, not yet billed to
these customers, from the meter reading date to the end of the accounting
period. These revenues are included on the Companys consolidated balance
sheet as Unbilled Revenue. Included in the rates charged by Mobile Gas to
temperature sensitive customers is a temperature rate adjustment rider which
offsets the impact of unusually cold or warm weather on operating margin. Reserves.EnergySouth companies establish reserves for uncollectible accounts
receivable and slow moving merchandise, materials and supplies inventories.
Such reserves are generally calculated based on currently available facts and
on the application of a percentage to each aging category of receivables and
inventory based on collection and sales experience, respectively. On certain
specific receivables and inventory, the Company records an allowance based on
currently available facts to reduce the net balance of the specific receivable
or inventory item to the amount the Company reasonably expects to collect.
Reserves for receivables are reported as Allowance for Doubtful Accounts on
the balance sheet. Reserves for inventory are netted against the related asset
account and reported on the balance sheet in Materials, Supplies, and
Merchandise. The Company believes its reserves are adequate. However, actual
results may differ from estimates, and estimates can be, and often are, revised
either negatively or positively, depending upon actual outcomes or expectations
based on the facts surrounding each potential exposure. Employee Benefits.Employee benefits include a defined-benefit pension plan
and other post-employment benefits for the benefit of substantially all
full-time regular employees. Under the provisions of Statement of Financial
Accounting Standards No. 87, Employers Accounting for Pensions, and
Statement of Financial Accounting Standards No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions, measurement of the obligations
under the defined benefit pension plans and other post-retirement benefit plans
is subject to a number of statistical factors and assumptions which attempt to
anticipate future events. These factors include assumptions about the discount
rate, expected return on plan assets and rate of future compensation increases
as determined by the Company. In addition, the Companys actuarial consultants
also use subjective factors such as withdrawal and mortality rates to estimate
the projected benefits obligation. The actuarial assumptions used may differ
materially from actual results due to changing market and economic conditions,
higher or lower withdrawal rates or longer or shorter life spans of
participants. These differences may result in a significant impact on the
amount of pension expense recorded in future periods. (See Note 7 to the
Consolidated Financial Statements.) At September 30, 2004, the discount rate used for pension and postretirement
purposes was 6.0 percent. A hypothetical 25 basis point decrease in the annual
discount rate would increase pension and postretirement benefit expense by
$40,000 and $12,000, respectively. At September 30, 2004, the expected rate of
return on assets for actuarial purposes was 8.25 percent and 7.75 percent for
pension and post-retirement benefits, respectively. A hypothetical 25 basis
point decrease in the expected rate of return on assets would increase pension
and postretirement expense by $78,000 and $9,000, respectively. At September
30, 2004, the rate of compensation increase used for actuarial purposes was 4.5
percent. A hypothetical 25 basis point increase in the expected rate of future
compensation increases would increase pension expense by $31,000. 26




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Forward-Looking Statements Statements contained in this report, which are not historical in nature, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are made as of
the date of this report and involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of EnergySouth or its affiliates, or industry results, to differ
materially from any future results, performance or achievement expressed or
implied by such forward-looking statements. Such risks, uncertainties and
other important factors include, among others, risks associated with
fluctuations in natural gas prices, including changes in the historical
seasonal variances in natural gas prices and changes in historical patterns of
collections of accounts receivable; the prices of alternative fuels; the
relative pricing of natural gas versus other energy sources; the availability
of other natural gas storage capacity; failures or delays in completing planned
Bay Gas cavern development; disruption or interruption of pipelines serving the
Bay Gas storage facilities due to accidents or other events; risks generally
associated with the transportation and storage of natural gas; the possibility
that contracts with storage customers could be terminated under certain
circumstances, or not renewed or extended upon expiration; the prices or terms
of any extended or new contracts; possible loss or material change in the
financial condition of one or more major customers; liability for remedial
actions under environmental regulations; liability resulting from litigation;
national and global economic and political conditions; and changes in tax and
other laws applicable to the business. Additional factors that may impact
forward-looking statements include, but are not limited to, the Companys
ability to successfully achieve internal performance goals, competition, the
effects of state and federal regulation, including rate relief to recover
increased capital and operating costs, general economic conditions, specific
conditions in the Companys service area, and the Companys dependence on
external suppliers, contractors, partners, operators, service providers, and
governmental agencies. 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. At September 30, 2004 the Company had approximately $90.9 million of long-term
debt at fixed interest rates. Interest rates range from 6.9% to 9.00% and the
maturity dates of such debt extend to 2023. See the information provided under
the captions The Company, Gas Supply, and Liquidity and Capital Resources
under Item 7 above for a discussion of the Companys risks related to
regulation, weather, gas supply, and the capital-intensive nature of the
Companys business. 
 Item 8. Financial Statements and Supplementary Data. The financial statements and financial statement schedules and the Independent
Auditors Report thereon filed as part of this report are listed in the
EnergySouth, Inc. and Subsidiaries Index to Financial Statements and
Schedules at Page F-1, which follows Part IV hereof. 27




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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 
 Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, an evaluation (the
Evaluation) was carried out, under the supervision and with the participation
of the Companys President and Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the design and operation of
the Companys disclosure controls and procedures (Disclosure Controls).
Based on the Evaluation, the CEO and CFO concluded that the Companys
Disclosure Controls are effective in timely alerting them to material
information required to be included in the Companys periodic SEC reports. Changes in Internal Control Internal controls for financial reporting were also evaluated and there have
been no significant changes in internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation. Limitations on the Effectiveness of Controls A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. 
 PART III 
 Item 10. Directors, Executive Officers, and Control Persons of the Registrant. Information under the captions Election of Directors and Information
Regarding the Board of Directors contained in the Companys definitive proxy
statement with respect to its 2005 Annual Meeting of Stockholders is
incorporated herein by reference. For information with respect to executive officers of the Registrant, see
Executive Officers of the Registrant at the end of Part I of this Report. Information under the caption Section 16(a) Beneficial Ownership Reporting
Compliance contained in the Companys definitive proxy statement with respect
to its 2005 Annual Meeting of Stockholders is incorporated herein by reference. 28




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Code of Ethics The Company has adopted a Code of Business Conduct and Ethics (the Ethics
Code) that applies to the Companys directors, officers, and employees,
including its President and Chief Executive Officer, its Senior Vice President
and Chief Financial Officer, and its Controller. The Company has posted the
Ethics Code on its internet website at www.energysouth.com. Audit Committee Financial Expert The Board of Directors of the Company has determined that S. Felton Mitchell,
Jr., who currently serves as the Chairman of the Audit Committee of the
Companys Board of Directors, and Walter L. Hovell are audit committee
financial experts. Mr. Mitchell and Mr. Hovell are independent as defined in
the listing standards of the National Association of Securities Dealers. 
 Item 11. Executive Compensation. Information under the captions Executive Compensation, Option Grants in Last
Fiscal Year, Aggregated Option Exercises in Last Fiscal Year and 2004
Year-End Option Values, Compensation Committee Report, Compensation
Committee Interlocks and Insider Participation in Compensation Decisions and
EnergySouth, Inc. Stock Performance Graph and under the headings Employees
Retirement Plan, Employee Savings Plan, Agreements with Mr. Davis, Change
of Control Agreements, Insurance and Other Compensation contained in the
Companys definitive proxy statement with respect to its 2005 Annual Meeting of
Stockholders is incorporated herein by reference. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management. Information under the captions Equity Compensation Plan Information and
Security Ownership of Certain Beneficial Owners and Management contained in
the Companys definitive proxy statement with respect to its 2005 Annual
Meeting of Stockholders is incorporated herein by reference. 
 Item 13. Certain Relationships and Related Transactions. There were no transactions required to be disclosed pursuant to this item. 
 Item 14. Principal Accountant Fees and Services Information under the Caption Relationship With Independent Public
Accountants contained in the Companys definitive proxy statement with respect
to its 2005 Annual Meeting of Stockholders is incorporated herein by reference. 
 PART IV 
 Item 15. Exhibits, Financial Statement Schedules. 29




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(a), (c) Financial Statements and Financial Statement Schedules See EnergySouth, Inc. and Subsidiaries Index to Financial
Statements and Schedules at page F-1, which follows
Part IV hereof. (3) Exhibits - See Exhibit Index on pages E-1 through E-6. (b) Exhibits filed with this report are attached hereto. 30




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Signatures Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf by the
Undersigned, thereunto duly authorized. ENERGYSOUTH, INC.RegistrantDecember 3, 2004
    
    By:
    
    /s/ Charles P. HuffmanCharles P. Huffman, Senior VicePresident and Chief Financial Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and in the
Capacities and on the dates indicated: Signature
    
    Title
    
    Date/s/ John C. Hope, III
John C. Hope, III
    
    Director, Chairman
    
    December 3, 2004/s/ Walter L. Hovell
Walter L. Hovell
    
    Director, Vice-Chairman
    
    December 3, 2004/s/ John S. Davis
John S. Davis
    
    Director, President and
Chief Executive Officer
(Principal Executive Officer)
    
    December 3, 2004/s/ Charles P. Huffman
Charles P. Huffman
    
    Senior Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
    
    December 3, 2004
 31




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Signatures (Continued) /s/ Walter A. Bell
Walter A. Bell
    
    Director
    
    December 3, 2004/s/ Gaylord C. Lyon
Gaylord C. Lyon
    
    Director
    
    December 3, 2004/s/ Judy A. Marston
Judy A. Marston
    
    Director
    
    December 3, 2004/s/ G. Montgomery Mitchell
G. Montgomery Mitchell
    
    Director
    
    December 3, 2004/s/ Harris V. Morrissette
Harris V. Morrissette
    
    Director
    
    December 3, 2004/s/ S. Felton Mitchell
S. Felton Mitchell
    
    Director
    
    December 3, 2004/s/ E. B. Peebles, Jr.
E. B. Peebles, Jr.
    
    Director
    
    December 3, 2004/s/ Robert H. Rouse
Robert H. Rouse
    
    Director
    
    December 3, 2004/s/ Thomas B. Van Antwerp
Thomas B. Van Antwerp
    
    Director
    
    December 3, 2004
 32




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##### Table of Contents



ENERGYSOUTH, INC.
AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Independent Auditors Report
    
    F-2Consolidated Statements of Income for the years ended
September 30, 2004, 2003 and 2002
    
    F-3Consolidated Balance Sheets, September 30, 2004 and 2003
    
    F-4Consolidated Statements of Common Stockholders Equity
for the years ended September 30, 2004, 2003 and 2002
    
    F-6Consolidated Statements of Cash Flows for the years ended
September 30, 2004, 2003 and 2002
    
    F-7Notes to Consolidated Financial Statements
    
    F-8Financial Statement SchedulesSchedule II Valuation and Qualifying Accounts and Reserves, Years
Ended September 30, 2004, 2003 and 2002
    
    S-1
 Schedules other than that referred to above are omitted and are not applicable
or not required. F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
EnergySouth, Inc.
Mobile, Alabama We have audited the accompanying consolidated balance sheets of EnergySouth,
Inc. and subsidiaries (the Company) as of September 30, 2004 and 2003, and
the related consolidated statements of income, stockholders equity, and cash
flows for each of the three years in the period ended September 30, 2004. Our
audits also included the financial statement schedule listed in the Index as
schedule II. These financial statements and financial statement schedule are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at September 30, 2004 and 2003, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 2004,
in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein. /s/ Deloitte & Touche LLP  
 F-2




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##### Table of Contents



CONSOLIDATED STATEMENTS OF INCOME EnergySouth, Inc. Years Ended September 30, (in thousands, except per share data)
    
    2004
    
    2003
    
    2002Operating RevenuesGas Revenues
    
    $
    111,488
    
    
    $
    95,150
    
    
    $
    81,560Merchandise Sales
    
    
    3,029
    
    
    
    3,259
    
    
    
    3,499Other
    
    
    1,455
    
    
    
    1,206
    
    
    
    1,360Total Operating Revenues
    
    
    115,972
    
    
    
    99,615
    
    
    
    86,419Operating ExpensesCost of Gas
    
    
    41,404
    
    
    
    30,859
    
    
    
    22,267Cost of Merchandise
    
    
    2,582
    
    
    
    2,473
    
    
    
    3,197Operations and Maintenance
    
    
    25,219
    
    
    
    24,425
    
    
    
    23,491Depreciation
    
    
    9,712
    
    
    
    8,923
    
    
    
    8,122Taxes, Other Than Income Taxes
    
    
    8,258
    
    
    
    7,277
    
    
    
    6,548Total Operating Expenses
    
    
    87,175
    
    
    
    73,957
    
    
    
    63,625Operating Income
    
    
    28,797
    
    
    
    25,658
    
    
    
    22,794Other Income and (Expense)Interest Expense
    
    
    (7,897
    )
    
    
    (8,369
    )
    
    
    (8,150
    )Allowance for Borrowed Funds Used During Construction
    
    
    20
    
    
    
    1,231
    
    
    
    2,044Interest Income
    
    
    60
    
    
    
    71
    
    
    
    265Minority Interest
    
    
    (805
    )
    
    
    (754
    )
    
    
    (739
    )Total Other Income (Expense)
    
    
    (8,622
    )
    
    
    (7,821
    )
    
    
    (6,580
    )Income Before Income Taxes
    
    
    20,175
    
    
    
    17,837
    
    
    
    16,214Income Taxes
    
    
    7,607
    
    
    
    6,702
    
    
    
    5,983Net Income
    
    $
    12,568
    
    
    $
    11,135
    
    
    $
    10,231Earnings Per ShareBasic
    
    $
    1.62
    
    
    $
    1.47
    
    
    $
    1.37Diluted
    
    $
    1.60
    
    
    $
    1.45
    
    
    $
    1.35Average Common Shares OutstandingBasic
    
    
    7,764
    
    
    
    7,599
    
    
    
    7,451Diluted
    
    
    7,860
    
    
    
    7,686
    
    
    
    7,569
 See Accompanying Notes to Consolidated Financial Statements F-3




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##### Table of Contents



CONSOLIDATED BALANCE SHEETS EnergySouth, Inc. September 30, (in thousands):
    
    2004
    
    2003ASSETSCurrent AssetsCash and Cash Equivalents
    
    $
    9,464
    
    
    $
    4,082ReceivablesGas
    
    
    6,394
    
    
    
    6,652Unbilled Revenue
    
    
    1,143
    
    
    
    1,335Merchandise
    
    
    2,249
    
    
    
    2,313Other
    
    
    1,273
    
    
    
    939Allowance for Doubtful Accounts
    
    
    (856
    )
    
    
    (889
    )Materials, Supplies, and Merchandise, net (At Average Cost)
    
    
    1,524
    
    
    
    1,457Gas Stored Underground For Current Use (At Average Cost)
    
    
    4,235
    
    
    
    3,703Regulatory Assets
    
    
    3,606
    
    
    
    2,945Deferred Income Taxes
    
    
    434
    
    
    
    406Prepayments
    
    
    1,731
    
    
    
    1,543Total Current Assets
    
    
    31,197
    
    
    
    24,486Property, Plant, and Equipment
    
    
    274,789
    
    
    
    267,047Less: Accumulated Depreciation and Amortization
    
    
    70,417
    
    
    
    63,063Property,
Plant, and Equipment - Net
    
    
    204,372
    
    
    
    203,984Construction Work in Progress
    
    
    225
    
    
    
    1,208Total Property, Plant, and Equipment
    
    
    204,597
    
    
    
    205,192Other AssetsPrepaid Pension Cost
    
    
    1,102
    
    
    
    856Deferred Charges
    
    
    567
    
    
    
    569Prepayments
    
    
    957
    
    
    
    1,015Regulatory Assets
    
    
    660
    
    
    
    996Merchandise Receivables Due After One Year
    
    
    3,374
    
    
    
    3,774Total Other Assets
    
    
    6,660
    
    
    
    7,210Total
    
    $
    242,454
    
    
    $
    236,888
 See Accompanying Notes to Consolidated Financial Statements F-4




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##### Table of Contents



September 30, (in thousands, except share data):
    
    2004
    
    2003LIABILITIES AND CAPITALIZATIONCurrent LiabilitiesCurrent Maturities of Long-Term Debt
    
    $
    6,248
    
    
    $
    6,006Notes Payable
    
    
    
    
    
    
    250Accounts Payable
    
    
    5,278
    
    
    
    6,389Dividends Declared
    
    
    1,561
    
    
    
    1,463Customer Deposits
    
    
    1,618
    
    
    
    1,469Taxes Accrued
    
    
    2,312
    
    
    
    1,189Interest Accrued
    
    
    1,122
    
    
    
    1,272Regulatory Liabilities
    
    
    4,637
    
    
    
    3,597Other
    
    
    998
    
    
    
    1,012Total Current Liabilities
    
    
    23,774
    
    
    
    22,647Other LiabilitiesAccrued Postretirement Benefit Cost
    
    
    513
    
    
    
    415Deferred Income Taxes
    
    
    21,378
    
    
    
    18,484Deferred Investment Tax Credits
    
    
    262
    
    
    
    288Regulatory Liabilities
    
    
    11,788
    
    
    
    10,998Other
    
    
    1,413
    
    
    
    2,619Total Other Liabilities
    
    
    35,354
    
    
    
    32,80459,128
    
    
    
    55,451CapitalizationStockholders EquityCommon Stock, $.01 Par Value
(Authorized 10,000,000 Shares; Outstanding
2004 - 7,827,000; 2003 - 7,699,000 Shares)
    
    
    78
    
    
    
    77Capital in Excess of Par Value
    
    
    26,162
    
    
    
    23,464Retained Earnings
    
    
    67,625
    
    
    
    61,114Grantor Trust, at cost
    
    
    (1,355
    )Deferred Compensation Liability
    
    
    1,355Total Stockholders Equity
    
    
    93,865
    
    
    
    84,655Minority Interest
    
    
    4,769
    
    
    
    4,142Long-Term Debt
    
    
    84,692
    
    
    
    92,640Total Capitalization
    
    
    183,326
    
    
    
    181,437Total
    
    $
    242,454
    
    
    $
    236,888
 See Accompanying Notes to Consolidated Financial Statements F-5




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##### Table of Contents



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY EnergySouth, Inc. Common Stock
    
    Capital inNumber of
    
    Par
    
    Excess of
    
    Retained
    
    Grantor
    
    Deferred(In thousands, except per share data)
    
    Shares
    
    Value
    
    Par Value
    
    Earnings
    
    Trust
    
    Compensation
    
    TotalBalance at September 30, 2001
    
    
    7,405
    
    
    $
    75
    
    
    $
    19,361
    
    
    $
    50,688
    
    
    
    
    
    
    
    
    
    
    $
    70,124Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,231
    
    
    
    
    
    
    
    
    
    
    
    10,231Dividend Reinvestment Plan
    
    
    19
    
    
    
    
    
    
    
    329
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    329Stock Options Exercised Including Income
Tax Benefits
    
    
    147
    
    
    
    1
    
    
    
    1,891
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,892Cash
Dividends - $0.71 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,293
    )
    
    
    
    
    
    
    
    
    
    
    (5,293
    )Balance at September 30, 2002
    
    
    7,571
    
    
    
    76
    
    
    
    21,581
    
    
    
    55,626
    
    
    
    
    
    
    
    
    
    
    
    77,283Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,135
    
    
    
    
    
    
    
    
    
    
    
    11,135Dividend Reinvestment Plan
    
    
    20
    
    
    
    
    
    
    
    351
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    351Stock Options Exercised Including Income
Tax Benefits
    
    
    108
    
    
    
    1
    
    
    
    1,531
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,532Cash
Dividends - $0.74 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,647
    )
    
    
    
    
    
    
    
    
    
    
    (5,647
    )Balance at September 30, 2003
    
    
    7,699
    
    
    
    77
    
    
    
    23,463
    
    
    
    61,114
    
    
    
    
    
    
    
    
    
    
    
    84,654Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,568
    
    
    
    
    
    
    
    
    
    
    
    12,568Dividend Reinvestment Plan
    
    
    16
    
    
    
    
    
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370Stock Options Exercised Including Income
Tax Benefits
    
    
    54
    
    
    
    1
    
    
    
    940
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    941Shares issued to Grantor Trust to fund
Deferred Compensation Liability
    
    
    58
    
    
    
    
    
    
    
    1,389
    
    
    
    
    
    
    
    (1,389
    )
    
    
    1,389
    
    
    
    1,389Distributions from Grantor Trust
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    (34
    )Cash
Dividends - $0.78 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,057
    )
    
    
    
    
    
    
    
    
    
    
    (6,057
    )Balance at September 30, 2004
    
    
    7,827
    
    
    $
    78
    
    
    $
    26,162
    
    
    $
    67,625
    
    
    
    ($1,355
    )
    
    $
    1,355
    
    
    $
    93,865
 See Accompanying Notes to Consolidated Financial Statements F-6




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CONSOLIDATED STATEMENTS OF
CASH FLOWSEnergySouth, Inc. Years Ended September 30, (in thousands)
    
    2004
    
    2003
    
    2002Cash Flows from Operating ActivitiesNet Income
    
    $
    12,568
    
    
    $
    11,135
    
    
    $
    10,231Depreciation and Amortization
    
    
    10,079
    
    
    
    9,301
    
    
    
    8,568Provision for Losses on Receivables
    
    
    1,129
    
    
    
    576
    
    
    
    598Provision for Losses on Inventory
    
    
    72
    
    
    
    46
    
    
    
    469Provision for Deferred Income Taxes
    
    
    2,931
    
    
    
    5,475
    
    
    
    2,745Minority Interest
    
    
    805
    
    
    
    754
    
    
    
    739Changes in Operating Assets and Liabilities:Receivables
    
    
    (604
    )
    
    
    (2,138
    )
    
    
    3,320Inventory
    
    
    (651
    )
    
    
    (521
    )
    
    
    1,672Payables
    
    
    (1,162
    )
    
    
    799
    
    
    
    (7,064
    )Taxes Payable
    
    
    1,123
    
    
    
    (813
    )
    
    
    3,258Deferred Purchased Gas Adjustment
    
    
    (736
    )
    
    
    (5,715
    )
    
    
    (1,526
    )Other
    
    
    1,470
    
    
    
    (1,687
    )
    
    
    (888
    )Net Cash Provided by Operating Activities
    
    
    27,024
    
    
    
    17,212
    
    
    
    22,122Cash Flows from Investing ActivitiesCapital Expenditures
    
    
    (8,570
    )
    
    
    (15,674
    )
    
    
    (25,626
    )Increase in Temporary Investments
    
    
    
    
    
    
    
    
    
    
    3,000Net Cash Used In Investing Activities
    
    
    (8,570
    )
    
    
    (15,674
    )
    
    
    (22,626
    )Cash Flows from Financing ActivitiesRepayment of Long-Term Debt
    
    
    (7,706
    )
    
    
    (3,909
    )
    
    
    (1,897
    )Proceeds from Issuance of Long-Term Debt
    
    
    
    
    
    
    
    
    
    
    12,000Debt Issuance Costs
    
    
    
    
    
    
    
    
    
    
    (84
    )Changes in Short-term Borrowings
    
    
    (250
    )
    
    
    250
    
    
    
    (13,235
    )Payment of Dividends
    
    
    (6,057
    )
    
    
    (5,647
    )
    
    
    (5,293
    )Dividend Reinvestment
    
    
    370
    
    
    
    351
    

    
    
    329Exercise of Stock Options
    
    
    748
    
    
    
    1,193
    
    
    
    1,558Partnership Distributions
    
    
    (177
    )
    
    
    (256
    )
    
    
    (364
    )Net Cash Used In Financing Activities
    
    
    (13,072
    )
    
    
    (8,018
    )
    
    
    (6,986
    )Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    5,382
    
    
    
    (6,480
    )
    
    
    (7,490
    )Cash and Cash Equivalents at Beginning of Year
    
    
    4,082
    
    
    
    10,562
    
    
    
    18,052Cash and Cash Equivalents at End of Year
    
    $
    9,464
    
    
    $
    4,082
    
    
    $
    10,562Cash Paid During the Year for:Interest
    
    $
    7,932
    
    
    $
    8,416
    
    
    $
    8,069Income Taxes
    
    $
    3,549
    
    
    $
    1,883
    
    
    $
    3,786
 See Accompanying Notes to Consolidated Financial Statements F-7




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements of EnergySouth, Inc. (EnergySouth) and
its subsidiaries (collectively, the Company) include the accounts of Mobile Gas
Service Corporation (Mobile Gas); EnergySouth Services, Inc. (Services); MGS
Storage Services, Inc. (Storage); a 90.9% owned partnership, Bay Gas Storage
Company, Ltd. (Bay Gas), and a 51% owned partnership, Southern Gas Transmission
Company (SGT). Minority interest represents the respective other owners
proportionate shares of the income and equity of Bay Gas and SGT. All
significant intercompany balances and transactions have been eliminated. Revenues and Gas Costs Revenues are recorded when distribution services are provided to customers.
Those revenues are based on rates approved by the Alabama Public Service
Commission (APSC). The Companys distribution segment reads meters on a
monthly cycle basis and records revenues based upon estimated consumption
through the end of the month for all customers regardless of the meter reading
date. Increases or decreases in the cost of gas and certain other costs are passed
through to customers in accordance with provisions in the Companys rate
tariffs. Any over-or-under recoveries of these costs are charged or credited
to cost of gas and included in the Deferred Purchased Gas Adjustment which is
classified as part of Regulatory Assets and/or Liabilities within the Companys
Balance Sheet. See Regulatory Assets and Liabilities below. The Companys natural gas storage segment recognizes revenues when services are
provided in accordance with contractual agreements for storage and
transportation services. The agreements include fees for monthly storage of
natural gas, fees for the injection and withdrawal of natural gas, and
transportation of natural gas through Bay Gas system. All revenues are based
upon metered volumes except for the monthly storage fee. Property, Plant, and Equipment Included in property, plant, and equipment are acquisition adjustments, net of
amortization, of $6,137,000 and $6,245,000 at September 30, 2004 and 2003,
respectively. Such acquisition adjustments are being amortized to cost of
service over the lives of the assets acquired. The cost of additions includes direct labor and materials, allocable
administrative and general expenses, pension and payroll taxes, and an
allowance for funds used during construction. The cost of depreciable property
retired, less salvage, is charged to accumulated depreciation. In accordance
with the provisions of Financial Accounting F-8




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Standards Board (FASB) Statement No. 143, Accounting for Asset Retirement
Obligations (SFAS 143), estimated dismantling costs, which are a component of
Mobile Gas depreciation rates, are classified as a regulatory liability.
Dismantling costs are not a legal obligation as defined by SFAS No. 143 but
rather the result of cost-based regulation and are accounted for under the
provisions of FASB Statement No. 71, Accounting for the Effects of Certain
Types of Regulation (SFAS 71). Estimated interest cost associated with
property under construction, based upon weighted average interest rates for
short-term and long-term borrowings and, if applicable, the actual interest
rate on borrowings for specific projects, is capitalized as an allowance for
borrowed funds used during construction. Maintenance, repairs, and minor
renewals and betterment of property are charged to operations. Provisions for depreciation are computed principally on straight-line rates for
financial statement purposes and on accelerated rates for income tax purposes.
Depreciation for financial statement purposes is provided over the estimated
useful lives of utility property at rates approved by the APSC. For the years
ended September 30, 2004, 2003, and 2002 approved depreciation rates averaged
approximately 4.1% of depreciable property, excluding the gas storage facility
which is depreciated at an annual rate averaging 2.7%. Cash Equivalents The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Income Taxes The Company records deferred tax liabilities and assets, as measured by enacted
tax rates, for all temporary differences caused when the tax basis of an asset
or liability differs from that reported in the financial statements.
Investment tax credits realized after 1980 are deferred and amortized over the
average life of the related property in accordance with regulatory treatment. Stock Split 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. Earnings Per Share The basic earnings per share computation is based on the weighted average
number of common shares outstanding during each period. The diluted earnings
per share computation is based on the weighted average number of common shares
and diluted F-9




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##### Table of Contents



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 96,000, 87,000, and 118,000 for the years ended September 30, 2004,
2003, and 2002, respectively. These differences in equivalent shares are from
outstanding stock options. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Long-lived Assets The Company reviews its long-lived assets whenever indications of impairment
are present. If any assets were determined to be impaired, such assets would
be written down to their estimated fair market values. The Company does not
believe it has any assets which are currently impaired. Regulatory Assets and Liabilities Mobile Gas and certain cost based operations of Bay Gas meet the criteria for
application of 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. F-10




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##### Table of Contents



The significant regulatory assets and liabilities as of September 30, are (in
thousands): 2004
    
    2003Current
    
    Noncurrent
    
    Current
    
    NoncurrentAssetsDeferred Purchase Gas Adjustment
    
    $
    3,269
    
    
    
    
    
    
    $
    2,533ESR Fund
    
    
    167
    
    
    
    500
    
    
    
    167
    
    
    
    666Bad Debt Reserve
    
    
    133
    
    
    
    133
    
    
    
    133
    
    
    
    265Other
    
    
    37
    
    
    
    27
    
    
    
    112
    
    
    
    65Regulatory Assets
    
    $
    3,606
    
    
    $
    660
    
    
    $
    2,945
    
    
    $
    996LiabilitiesBad Debt Reserve
    
    $
    20
    
    
    
    
    
    
    $
    40
    
    
    $
    20ESR Fund
    
    
    854
    
    
    
    
    
    
    
    854Deferred Investment Tax Credit
    
    
    15
    
    
    
    136
    
    
    
    15
    
    
    
    153RSE Adjustment
    
    
    343Gross Receipt Tax Collections
    
    
    3,405
    
    
    
    
    
    
    
    2,688Asset Retirement Obligations
    
    
    
    
    
    
    11,652
    
    
    
    
    
    
    
    10,825Regulatory Liabilities
    
    $
    4,637
    
    
    $
    11,788
    
    
    $
    3,597
    
    
    $
    10,998
 In the event that a portion of the Companys operations is no longer subject to
the provisions of SFAS No. 71, the Company would be required to write off
related regulatory assets and liabilities that are not specifically addressed
through regulated rates. In addition, the Company would be required to
determine if any impairment to other assets exists, including plant, and write
down the assets, if impaired, to their fair market value. Unearned Revenues In November 2001, Bay Gas entered into an agreement which granted to a customer
an option to order transportation of additional volumes in excess of volumes
under long-term contract. During the first quarter of fiscal 2002, Bay Gas
received $3,274,000 in consideration of the option agreement which was
classified as unearned revenue on EnergySouths consolidated balance sheet and
amortized over the nineteen-month option period. Stock-Based Compensation The Company has employee stock option plans, which are described more fully in
Note 6. The Company accounts for its employee stock option plans under the
intrinsic value recognition and measurement provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As stock options have been issued with exercise prices equal
to the market value of the underlying shares on the grant date, no compensation
cost has been recognized. F-11




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##### Table of Contents



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: 2004
    
    2003
    
    2002Net Income, as reported
    
    $
    12,568
    
    
    $
    11,135
    
    
    $
    10,231Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related
tax effects
    
    
    178
    
    
    
    160
    
    
    
    129Pro forma net income
    
    $
    12,390
    
    
    $
    10,975
    
    
    $
    10,102Earnings per shareBasic - as reported
    
    $
    1.62
    
    
    $
    1.47
    
    
    $
    1.37Basic - pro forma
    
    $
    1.60
    
    
    $
    1.44
    
    
    $
    1.36Diluted - as reported
    
    $
    1.60
    
    
    $
    1.45
    
    
    $
    1.35Diluted - pro forma
    
    $
    1.58
    
    
    $
    1.43
    
    
    $
    1.33Average Common Shares OutstandingShares - Basic
    
    
    7,764
    
    
    
    7,599
    
    
    
    7,451Shares - Diluted
    
    
    7,860
    
    
    
    7,686
    
    
    
    7,569
 New Accounting Standards In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46) which clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements. FIN
46 provides guidance on the identification and consolidation of variable
interest entities (VIEs), whereby control is achieved through means other than
through voting rights. In December 2003, the FASB issued FIN 46 (Revised
December 2003) (FIN 46R), Consolidation of Variable Interest Entities  An
Interpretation of ARB No. 51, which supersedes and amends the provision of FIN
46. While FIN 46R retains many of the concepts and provision of FIN 46, it also
provides additional guidance and additional scope exceptions, and incorporates
FASB Staff Positions related to the application of FIN 46. Management has
determined that the Company does not have VIEs as defined in FIN 46R, thus the
adoption of FIN 46R does not have a material impact on the Companys financial
statements. In December 2003, the FASB revised Statement of Financial Accounting Standards
No. 132, Employers Disclosures about Pensions and Other Postretirement
Benefits  an amendment of FASB Statements No. 87, 88, and 106. The revised
Statement added
additional disclosures relating to the assets, obligations, cash flows, net
periodic benefit cost, and estimated future benefit payments of defined benefit
pension plans and other postretirement plans and is effective for financial
statements with fiscal years ending after December 15, 2003. The Company has
incorporated within this report the additional required disclosures in Note 7. F-12




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##### Table of Contents



On December 8, 2003, President Bush signed into law a bill that expands
Medicare, adding a prescription drug benefit for Medicare-eligible retirees
starting in 2006. On May 19, 2004, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position FAS 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (FAS 106-2) which provides guidance on the
accounting and disclosures related to the subsidy for an employer that sponsors
a postretirement health care benefit plan that provides prescription drug
coverage for retirees past 65 years of age. The Company does not provide
health insurance coverage to retirees past 65 years of age; therefore, FAS
106-2 did not have an impact on the Companys financial statements. Reclassifications Certain amounts in the prior years financial statements have been reclassified
to conform with the 2004 financial statement presentation. 2. RATES AND REGULATIONS 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. RSE is 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 million and $2.2 million,
were implemented under the RSE tariff effective December 1, 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. No such adjustments were
required through the July 2004 test period. Mobile Gas financial results for
fiscal year 2004 did, however, result in a return on equity above the allowed
range. As a result, an adjustment of $343,000 was made to fiscal year 2004
earnings such that the return on equity as calculated for RSE purposes equals
13.6%, the midpoint of the allowed range, and a regulatory liability was
recorded which reflects the amount owed to customers. A corresponding
reduction in rates will be made in fiscal year 2005. 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. The
increase in O&M expenses per F-13




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##### Table of Contents



customer was within the index range for the rate
year ended September 30, 2004; therefore, no adjustments were required. 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 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 allows for accruals to the ESR of no more than $15,000 monthly
until the maximum funding level is achieved; however, no such accruals have
been made during the year ended September 30, 2004. The ESR balance of
$854,000 at September 30, 2004 is included in the Consolidated Financial
Statements as part of Regulatory Liabilities. Mobile Gas rate tariffs 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. Through Storage and Bay Gas, the Company provides underground storage of
natural gas and transportation services. The APSC regulates intrastate storage
operations through contract approval. Interstate gas storage contracts do not
require APSC approval since the Federal Energy Regulatory Commission (FERC),
which has jurisdiction over such contracts, allows them to have market-based
rates. The FERC has granted authority to Bay Gas to provide
transportation-only services to interstate shippers and approved rates for such
services. F-14




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##### Table of Contents



3. PROPERTY, PLANT, AND EQUIPMENT The functional classifications for the cost of property, plant, and equipment
are as follows at September 30, (in thousands): 2004
    
    2003Distribution Plant
    
    $
    146,869
    
    
    $
    141,231General Plant
    
    
    23,289
    
    
    
    22,050Storage Plant
    
    
    72,791
    
    
    
    72,088Transmission Plant
    
    
    22,507
    
    
    
    22,472Acquisition Adjustment
    
    
    9,333
    
    
    
    9,206Total Property, Plant, and Equipment
    
    $
    274,789
    
    
    $
    267,047
 4. NOTES PAYABLE AND LONG-TERM DEBT Long-term debt consists of the following at September 30, (in thousands): 2004
    
    2003Mobile Gas Service CorporationFirst Mortgage Bonds8.75% Series, due July 1, 2022
    
    $
    11,370
    
    
    $
    12,0007.48% Series, due July 1, 2023
    
    
    11,400
    
    
    
    12,0007.27% Series, due November 1, 2006
    
    
    3,450
    
    
    
    6,8506.90% Series, due August 20, 2017
    
    
    10,977
    
    
    
    11,4879% Note, due May 13, 2013
    
    
    2,680
    
    
    
    2,869Bay Gas Storage Company, Ltd.8.45% Guaranteed Senior Secured Notes,
due December 1, 2017
    
    
    51,063
    
    
    
    53,440Total
    
    
    90,940
    
    
    
    98,646Less Amounts Due Within One Year
    
    
    6,248
    
    
    
    6,006Long-Term Debt
    
    $
    84,692
    
    
    $
    92,640
 Maturities and sinking fund requirements on long-term debt in each of the five
fiscal years subsequent to September 30, 2004 are as follows: 2005 -
$6,248,000; 2006  $6,463,000; 2007  $6,769,000; 2008  $5,300,000 and 2009 -
$5,454,000 . The Companys long-term debt instruments contain certain debt to
equity ratio requirements and restrictions on the payment of cash dividends and
the purchase of shares of its capital stock. None of these requirements and
restrictions are presently expected to have a significant impact on the
Companys ability to pay dividends in the future. Substantially all of the
property of Mobile Gas is pledged as collateral for its long-term debt and Bay
Gas material contracts have been pledged as collateral for its long-term debt. At September 30, 2004, the Company had a $20 million revolving credit agreement
with a group of banks. Borrowings under the agreement may be made as needed
provided that the Company is in compliance with certain covenants in the
revolving credit agreement and all other loan agreements. The Company currently
is in compliance with all such covenants. The Company pays a fee for its
committed lines of credit rather than maintaining compensating balances. The
commitment fee is 0.125% of the average daily unborrowed amount during the
annual period of calculation. Unused F-15




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##### Table of Contents



committed lines of credit at September 30,
2004 and 2003 were $20.0 million and $19.75 million, respectively. 5. INCOME TAXES The components of income tax expense are as follows for the years ended
September 30, (in thousands): 2004
    
    2003
    
    2002CurrentFederal
    
    $
    4,294
    
    
    $
    1,134
    
    
    $
    2,822State
    
    
    473
    
    
    
    105
    
    
    
    460Total Current Taxes
    
    
    4,767
    
    
    
    1,239
    
    
    
    3,282DeferredFederal
    
    
    2,425
    
    
    
    4,805
    
    
    
    2,348State
    
    
    441
    
    
    
    684
    
    
    
    379Total Deferred Taxes
    
    
    2,866
    
    
    
    5,489
    
    
    
    2,727Deferred investment tax credit
amortization
    
    
    (26
    )
    
    
    (26
    )
    
    
    (26
    )Total Income Tax Expense
    
    $
    7,607
    
    
    $
    6,702
    
    
    $
    5,983
 A reconciliation of income tax expense and the amount computed by multiplying
income before income taxes by the statutory federal income tax rate for the
periods indicated is as follows for the years ended September 30, (in
thousands): 2004
    
    2003
    
    2002Income Tax Expense at Federal
Statutory Rate
    
    $
    7,061
    
    
    $
    6,118
    
    
    $
    5,532Adjustments to Deferred Taxes
Prior Year
    
    
    
    
    
    
    
    
    
    
    (313
    )Changes in State Tax Rate
    
    
    
    
    
    
    
    
    
    
    159State Income Taxes
    
    
    644
    
    
    
    476
    
    
    
    474Other - Net
    
    
    (98
    )
    
    
    108
    
    
    
    131Total Income Tax Expense
    
    $
    7,607
    
    
    $
    6,702
    
    
    $
    5,983Effective tax rate
    
    
    37.7
    %
    
    
    37.6
    %
    
    
    36.9
    %
 F-16




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##### Table of Contents



The significant components of the Companys net deferred tax liability as of
September 30, are (in thousands): 2004
    
    2003Deferred Tax LiabilitiesDifferences Between Book and TaxBasis of Property
    
    $
    22,577
    
    
    $
    19,456Prepaid Insurance
    
    
    234
    
    
    
    214Purchased Gas Adjustment
    
    
    1,216
    
    
    
    942Regulatory Assets
    
    
    
    
    
    
    185Pension
    
    
    410
    
    
    
    318Other
    
    
    80
    
    
    
    116Total Deferred Tax Liabilities
    
    
    24,517
    
    
    
    21,231Deferred Tax AssetsGross Receipts Taxes
    
    
    1,133
    
    
    
    903Regulatory Liabilities
    
    
    183Post Employment Benefits
    
    
    190
    
    
    
    232Bad Debts
    
    
    457
    
    
    
    452Accrued Vacation
    
    
    230
    
    
    
    234Uniform Capitalization
    
    
    238
    
    
    
    222Deferred Payments
    
    
    814
    
    
    
    637State of Alabama Net Operating Loss
    
    
    113
    
    
    
    226Other
    
    
    215
    
    
    
    247Total Deferred Tax Assets
    
    
    3,573
    
    
    
    3,153Net Deferred Tax Liability
    
    $
    20,944
    
    
    $
    18,078
 6. CAPITAL STOCK The Amended and Restated Stock Option Plan of EnergySouth, Inc. (Prior Plan)
expired on December 4, 2002 and no option grants may be made thereunder. On
January 31, 2003, the stockholders approved the 2003 Stock Option Plan of
EnergySouth, Inc. (Plan) with terms and conditions similar to the Prior Plan.
The Plan provides for the granting of incentive stock options and non-qualified
stock options to key employees. Under the Plan, an aggregate of 525,000 shares
of the Companys authorized but unissued Common Stock has been reserved for
issuance. Stock options become 25% exercisable on the first anniversary of the
grant date and an additional 25% become exercisable each succeeding year. No
option may be exercised after the expiration of ten years from the grant date.
Options are granted at an option price which represents the market price on the
date of grant. F-17




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##### Table of Contents



Transactions under the Prior Plan and the Plan are summarized below: WeightedAverage
    
    Weighted AverageShares
    
    Exercise Price
    
    Remaining LifeOutstanding at September 30, 2001
    
    
    427,874
    
    
    $
    11.417
    
    
    6.11 yearsGranted
    
    
    12,000
    
    
    
    18.000Exercised
    
    
    (147,075
    )
    
    
    10.599Forfeited
    
    
    (18,938
    )
    
    
    13.379Outstanding at September 30, 2002
    
    
    273,862
    
    
    
    12.010
    
    
    5.65 yearsGranted
    
    
    98,250
    
    
    
    17.839Exercised
    
    
    (108,525
    )
    
    
    10.999Forfeited
    
    
    (1,313
    )
    
    
    12.917Outstanding at September 30, 2003
    
    
    262,274
    
    
    
    14.608
    
    
    6.93 yearsGranted
    
    
    76,950
    
    
    
    24.170Exercised
    
    
    (53,613
    )
    
    
    13.946Forfeited
    
    
    (9,712
    )
    
    
    17.315Outstanding at September 30, 2004
    
    
    275,899
    
    
    $
    17.308
    
    
    6.95 yearsExercisable at September 30, 2002
    
    
    173,175
    
    
    $
    10.867
    
    
    4.41 yearsExercisable at September 30, 2003
    
    
    112,275
    
    
    $
    11.978
    
    
    4.70 yearsExercisable at September 30, 2004
    
    
    117,725
    
    
    $
    12.788
    
    
    4.57 yearsRemaining reserved for grant
at September 30, 2004
    
    
    380,550
 The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123). Accordingly, no compensation expense has been
recognized for its stock options granted. For purposes of disclosing pro forma
net income, the fair market value of the options at the date of grant was
estimated using a Black-Scholes options pricing model. The weighted average
fair value of options granted was $5.46, $5.35, and $6.29 per option during
2004, 2003 and 2002, respectively. Weighted average assumptions used in the pricing model for the years ended
September 30, are: 2004
    
    2003
    
    2002Risk Free Interest Rate
    
    
    4.20
    %
    
    
    3.90
    %
    
    
    5.09
    %Expected Life
    
    
    6.16
    years
    
    
    10
    years
    
    
    10
    yearsStock Price Volatility
    
    
    25.60
    %
    
    
    38.80
    %
    
    
    41.70
    %Dividend Yield
    
    
    3.10
    %
    
    
    4.20
    %
    
    
    3.96
    %
 At September 30, 2004, 289,000 shares of the Companys authorized but unissued
Common Stock were reserved for issuance under the Companys Dividend
Reinvestment and Stock Purchase Plan. The Company maintains The Second Amended and Restated EnergySouth, Inc.
Non-Employee Directors Deferred Fee Plan (the Plan) which is a nonqualified
deferred F-18




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##### Table of Contents



compensation plan available to each director of the Company who is not
an employee of the Company. Under the Plan, the Company provides each such
director with the opportunity to defer receipt of fees to be paid to such
director as a member of the
Board of Directors of the Company. A director who enrolls in the Plan may
elect to have the deferred compensation credited in the form of phantom stock
and any payments from the Plan to satisfy the deferred compensation obligations
of such director will be made in shares of common stock. On April 1, 2004, the
Company established a non-qualified grantor trust (the Trust) to assist in
meeting obligations under the Plan which are funded through the issuance of
Company stock. The assets held in the Trust are intended to be used to pay
benefits payable under the Plan, but are subject to, among other things, the
claims of general creditors of the Company. At September 30, 2004,
approximately 58,000 shares had been issued to the Trust. There are 32,000
shares of the Companys authorized but unissued Common Stock that are reserved
for issuance to fund the deferred compensation obligations under the Plan. 7. RETIREMENT PLANS AND OTHER BENEFITS The Company has a noncontributory, defined benefit retirement plan covering
substantially all of its employees. Benefits are based on the greater of
amounts resulting from two different formulas: years of service and average
compensation during the last five years of employment, or years of service and
compensation during the term of employment. The Company annually contributes
to the plan the amount deductible for federal income tax purposes. The Company also provides certain health care and life insurance benefits for
retired employees 65 years of age. Substantially all employees may become
eligible for such benefits if they retire under the provisions of the Companys
retirement plan. The Company is accruing the costs over the expected service
period of the employees. The projected unit credit actuarial method was used to determine service cost
and actuarial liability. The Company uses a September 30 measurement date. F-19




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##### Table of Contents



The status of the plans was as follows at September 30 (in thousands): Pension
    
    PostretirementBenefits
    
    Benefits2004
    
    2003
    
    2004
    
    2003Change in Benefit ObligationBenefit Obligation at Beginning of the Period
    
    $
    26,686
    
    
    $
    23,210
    
    
    $
    4,286
    
    
    $
    3,909Service Cost
    
    
    844
    
    
    
    691
    
    
    
    115
    
    
    
    100Interest Cost
    
    
    1,583
    
    
    
    1,526
    
    
    
    268
    
    
    
    255Participant Contributions
    
    
    
    
    
    
    
    
    
    
    34Benefits Paid
    
    
    (1,529
    )
    
    
    (1,314
    )
    
    
    (111
    )
    
    
    262(Gain)/Loss
    
    
    2,975
    
    
    
    2,573
    
    
    
    804
    
    
    
    (240
    )Benefit Obligation at the End of the Period
    
    $
    30,559
    
    
    $
    26,686
    
    
    $
    5,396
    
    
    $
    4,286Change in Plan AssetsFair Value of Assets at Beginning of the Period
    
    $
    33,356
    
    
    $
    30,106
    
    
    $
    3,634
    
    
    $
    3,277Benefits Paid
    

    
    (1,529
    )
    
    
    (1,314
    )
    
    
    (111
    )Employer Contributions
    
    
    
    
    
    
    
    
    
    
    2Participant Contributions
    
    
    
    
    
    
    
    
    
    
    34Actual Return on Plan Assets
    
    
    3,833
    
    
    
    4,564
    
    
    
    92
    
    
    
    357Fair Value of Plan Assets at the End of the Period
    
    $
    35,660
    
    
    $
    33,356
    
    
    $
    3,651
    
    
    $
    3,634Reconciliation of Funded StatusPlan Assets in Excess of (Less Than) Benefit Obligation
    
    $
    5,102
    
    
    $
    6,670
    
    
    $
    (1,745
    )
    
    $
    (652
    )Unrecognized Net (Gain) Loss
    
    
    (4,840
    )
    
    
    (6,620
    )
    
    
    1,581
    
    
    
    631Prior Service Cost Not Yet Recognized
    
    
    840
    
    
    
    934
    
    
    
    
    
    
    
    (394
    )Remaining Unrecognized Transition Asset
    
    
    
    
    
    
    (128
    )
    
    
    (349
    )Accrued Benefit Asset (Liability)
    
    $
    1,102
    
    
    $
    856
    
    
    $
    (513
    )
    
    $
    (415
    )Accumulated Benefit Obligation
    
    $
    27,206
 Net periodic benefit cost included the following components for the years ended
September 30, (in thousands): Pension BenefitsComponents of Net Periodic Benefit Cost
    
    2004
    
    2003
    
    2002Service Cost
    
    $
    844
    
    
    $
    691
    
    
    $
    720Interest Cost
    
    
    1,583
    
    
    
    1,526
    
    
    
    1,632Amortization of Transition Asset
    
    
    (128
    )
    
    
    (183
    )
    
    
    (184
    )Amortization of Prior Service Cost
    
    
    94
    
    
    
    94
    
    
    
    67Amortization of Unrecognized Gain
    
    
    (87
    )
    
    
    (355
    )
    
    
    (459
    )Expected return on Plan Assets
    
    
    (2,551
    )
    
    
    (2,312
    )
    
    
    (2,329
    )Net Periodic Benefit Cost (Income)
    
    $
    (245
    )
    
    $
    (539
    )
    
    $
    (553
    )
 Postretirement BenefitsComponents of Net Periodic Benefit Cost
    
    2004
    
    2003
    
    2002Service Cost
    
    $
    115
    
    
    $
    100
    
    
    $
    82Interest Cost
    
    
    268
    
    
    
    255
    
    
    
    258Amortization of Prior Service Cost
    
    
    (44
    )
    
    
    (44
    )
    
    
    (38
    )Amortization of Unrecognized Gain
    
    
    30
    
    
    
    6Expected return on Plan Assets
    
    
    (271
    )
    
    
    (211
    )
    
    
    (215
    )Net Periodic Benefit Cost
    
    $
    98
    
    
    $
    106
    
    
    $
    87
 F-20




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##### Table of Contents



The expected return on plan assets for the benefit plans is determined using
the expected allocation of plan assets and the historical returns of that asset
mix. Assumptions used to determine benefit obligations and periodic benefit
costs are as follows: Pension
    
    PostretirementBenefits
    
    Benefits2004
    
    2003
    
    2004
    
    2003Weighted-Average Assumptions to Determine Benefits ObligationsDiscount Rate
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    6.00
    %Rate of Compensation Increase
    
    
    4.50
    %
    
    
    4.50
    %Measurement Date
    
    
    9/30/2004
    
    
    
    9/30/2003
    
    
    
    9/30/2004
    
    
    
    9/30/2003Weighted-Average Assumptions to Determine Net Periodic Benefit CostDiscount Rate
    
    
    6.00
    %
    
    
    6.75
    %
    
    
    6.00
    %
    
    
    6.00
    %Expected Long-Term Rate of Return on Plan Assets
    
    
    8.25
    %
    
    
    7.50
    %
    
    
    7.75
    %
    
    
    7.00
    %Expected Long-Term Rate of Return on Plan Assets-Non Bargaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.00
    %Rate of Compensation Increase
    
    
    4.50
    %
    
    
    4.50
    %Assumed Health Care Cost Trend Rates at September 30Health Care Cost Trend Rate Assumed for Next Year
    
    
    
    
    
    
    
    
    
    
    10.00
    %
    
    
    8.00
    %Rate to Which the Cost Trend Rate is Assumed to Decline
(the ultimate trend rate)
    
    
    
    
    
    
    
    
    
    
    5.00
    %
    
    
    4.75
    %Year that the Rate Reaches the Ultimate Trend Rate
    
    
    
    
    
    
    
    
    
    
    2009
    
    
    
    2007
 Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects (in thousands): Postretirement BenefitsOne Percentage-Point Increase
    
    2004
    
    2003Effect on Total of Service and Interest Components
    
    $
    40
    
    
    $
    31Effect on Postretirement Benefit Obligations
    
    
    322
    
    
    
    247
 Postretirement BenefitsOne Percentage-Point Decrease
    
    2004
    
    2003Effect on Total of Service and Interest Components
    
    $
    (33
    )
    
    $
    (25
    )Effect on Postretirement Benefit Obligations
    
    
    (273
    )
    
    
    (209
    )
 The Company has a Retirement Committee composed of outside Directors that
oversees the investments of the pension plan. The Committee has adopted an
Investment Policy with the investment objective of meeting the Plans benefit
obligations and which employs a total return on investment approach whereby a
mix of equities and fixed income investments are used to maximize the long-term
return on plan assets within reasonable and prudent levels of risk in order to
minimize contributions. All investments are expected to satisfy the
requirements of the rule of prudent investments F-21




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##### Table of Contents



as set forth under the Employee
Retirement Security Act of 1974 (ERISA). The Committee has retained investment
managers who invest assets in accordance with the guidelines of the Investment
Policy. Comparative market and peer group benchmarks are utilized to ensure
that investment managers are performing satisfactorily. Approved asset classes
are cash and cash equivalents, fixed income, and domestic and non-U.S.
equities. Target ranges for asset allocations are determined by matching the
actuarial
projections of the Plans future liabilities and benefit payments with expected
long-term rates of return on the assets taking into account investment return
volatility. The Companys pension plan and postretirement benefit plan asset allocation at
September 30, 2004 and 2003 and the current target allocation range are as
follows: Pension BenefitsCurrent
    
    Percentage ofTarget
    
    Plan AssetsAllocation
    
    September 30,Asset Category
    
    Range
    
    2004
    
    2003Equity
    
    
    60%-65
    %
    
    
    64
    %
    
    
    63
    %Fixed income
    
    
    35%-40
    %
    
    
    35
    %
    
    
    36
    %Cash and Cash Equivalents
    
    0% to 2%
    
    
    1
    %
    
    
    1
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Postretirement BenefitsCurrent
    
    Percentage ofTarget
    
    Plan AssetsAllocation
    
    September 30,Asset Category
    
    Range
    
    2004
    
    2003Equity
    
    
    57%-67
    %
    
    
    63
    %
    
    
    48
    %Fixed income
    
    
    33%-43
    %
    
    
    34
    %
    
    
    49
    %Cash and Cash Equivalents
    
    as needed
    
    
    3
    %
    
    
    3
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Pension plan equity securities include the Companys common stock of 6.8% and
7.5% of plan assets at September 30, 2004 and 2003 respectively. The
Postretirement benefits plan does not invest in the Companys common stock. The Company does not anticipate contributing to its pension plan in fiscal year
2005 but expects to contribute $2,000 to its postretirement benefit plan. F-22




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##### Table of Contents



The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid in the following fiscal years (in
thousands): Pension
    
    PostretirementExpected Benefit Payments
    
    Benefits
    
    Benefits
    
    TotalFiscal Year Ending9/30/2005
    
    $
    1,345
    
    
    $
    282
    
    
    $
    1,6279/30/2006
    
    
    1,393
    
    
    
    315
    
    
    
    1,7089/30/2007
    
    
    1,462
    
    
    
    339
    
    
    
    1,8019/30/2008
    
    
    1,562
    
    
    
    374
    
    
    
    1,9369/30/2009
    
    
    1,645
    
    
    
    405
    
    
    
    2,050Next Five Years
    
    
    9,553
    
    
    
    2,089
    
    
    
    11,642
 The Company has formed two voluntary employees beneficiary association (VEBA)
trusts to fund postretirement health and life insurance benefits. The Company
did not contribute to these trusts in 2003 and 2002, but contributed $2,000 in
2004. The Companys eligible employees may participate in the Employee Savings Plan
or the Bargaining Unit Employees Savings Plan, both of which are 401(k) plans.
The Companys contributions to these 401(k) plans for the years ended September
30, 2004, 2003, and 2002 were $230,000, $240,000, and $249,000, respectively.  8.
    
    COMMITMENTS AND CONTINGENCIES The Company has third-party contracts, which expire at various dates through
the year 2011, for the purchase, storage and delivery of gas supplies. During
fiscal year 2001, the Company implemented a gas supply strategy in which it
enters into forward purchases to lock in prices for a majority of its expected
gas sales during the upcoming winter heating season. These gas supply contracts
are exempt from the fair value accounting requirements of Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), as these contracts qualify for and have
been designated as normal purchases as defined in the standard. Minimum
payments under these contracts in the fiscal years subsequent to September 30,
2004 are as follows: Fiscal
    
    MinimumYear
    
    Payments2005
    
    $
    17,966,0002006
    
    
    1,170,0002007
    
    
    1,187,0002008
    
    
    1,187,0002009
    
    
    1,187,0002010-2011
    
    
    2,028,000Total
    
    $
    24,725,000
 F-23




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##### Table of Contents



A portion of firm supply requirements is expected to be met through the
withdrawal of gas from the storage facility owned by Bay Gas. Mobile Gas has
entered into a Gas Storage Agreement under which Bay Gas is to provide storage
services for an initial period of 20 years which began in September 1994 with
the commencement of commercial operations of the storage facility. The
purchased gas adjustment provisions of the Companys rate schedules permit the
recovery of gas costs from customers. The Company is subject to various federal, state and local laws and regulations
relating to the environment, which have not had a material effect on the
Companys financial position or results of operations. Like many gas distribution companies, prior to the widespread availability of
natural gas, the Company manufactured gas for sale to its customers. In
contrast to some other companies which operated multiple manufactured gas
plants, the Company and its predecessor operated only one such plant, which
discontinued operations in 1933. The process for manufacturing gas produced
by-products and residuals, such as coal tar, and certain remnants of these
residuals are sometimes found at former gas manufacturing sites. Based on recent plans for the site, the Alabama Department of Environmental
Management (ADEM) is conducting a Brownfields evaluation of the property.
Testing of the site has been completed by ADEM; however, the Company is unable
to predict when ADEMs final report will be available. The Company engaged its
own environmental consultants to evaluate the site in connection with the plans
for the site. Based on their review, the Company has recorded its best
estimate of $200,000 as an expense and a remediation liability in fiscal 2004.
The Company sought and was allowed by the APSC to record this amount in expense
in fiscal 2004. The Company intends that, should further investigation or
changes in environmental laws or regulations require material expenditures for
evaluation or remediation with regard to the site, it would apply to the APSC
for appropriate rate recovery of such costs. However, there can be no
assurances that the APSC would approve the recovery of such costs or the amount
and timing of any such recovery. The Company is involved in litigation arising in the normal course of business.
Management believes that the ultimate resolution of such litigation will not
have a material adverse effect on the consolidated financial statements of the
Company.  9.
    
    FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values of financial instruments have been reported to meet the disclosure
requirements of Statement of Financial Accounting Standards No. 107,
Disclosures
About Fair Values of Financial Instruments, and are not necessarily indicative
of the amounts that the Company could realize in a current market exchange. The carrying amounts for cash and cash equivalents, gas and other receivables,
merchandise receivables, notes payable, accounts payable and other current
liabilities approximate fair value. The fair value of long-term debt is
estimated based on interest F-24




---



##### Table of Contents



rates available to the Company at the end of each
respective year for the issuance of debt with similar terms and remaining
maturities. The carrying amount and the estimated fair value of long-term debt is as
follows at September 30, (in thousands): 2004
    
    2003Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueLong-term debt
    
    $
    90,940
    
    
    $
    107,519
    
    
    $
    98,646
    
    
    $
    118,851
  10.
    
    FINANCIAL INFORMATION BY BUSINESS SEGMENT Statement of Financial Accounting Standards No. 131, Disclosures About
Segments of An Enterprise and Related Information, requires that companies
disclose segment information which reflects how management makes decisions
about allocating resources to segments and measuring their performance. The
reportable segments disclosed herein were determined based on such factors as
the regulatory environment and the types of products and services offered. The Company is principally engaged in two reportable business segments: Natural
Gas Distribution and Natural Gas Storage. The Natural Gas Distribution segment
is actively engaged in the distribution and transportation of natural gas to
residential, commercial and industrial customers through Mobile Gas and SGT.
The Natural Gas Storage segment provides for the underground storage of natural
gas and transportation services through the operations of Bay Gas and Storage.
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. For the years ended
September 30, 2004, 2003, and 2002, all segments were located in Southwest
Alabama. Segment earnings information presented in the table below includes intersegment
revenues, interest income, and interest expense which are eliminated in
consolidation. Such intersegment revenues are primarily amounts paid by the
Natural Gas Distribution segment to the Natural Gas Storage segment. Segment
assets are provided as additional information and are net of intercompany
advances, intercompany notes receivable and investments in subsidiaries.  F-25




---



##### Table of Contents



As of and for the year ended
    
    Natural Gas
    
    Natural GasSeptember 30, 2004 (in thousands):
    
    Distribution
    
    Storage
    
    Other
    
    Eliminations
    
    ConsolidatedOperating Revenues
    
    $
    97,910
    
    
    $
    17,767
    
    
    $
    4,484
    
    
    $
    (4,189
    )
    
    $
    115,972Cost of Gas
    
    
    45,593
    
    
    
    
    
    
    
    
    
    
    
    (4,189
    )
    
    
    41,404Cost of Merchandise & Jobbing
    
    
    
    
    
    
    
    
    
    
    2,582
    
    
    
    
    
    
    
    2,582Operations and Maintenance Expense
    
    
    20,694
    
    
    
    2,983
    
    
    
    1,542
    
    
    
    
    
    
    
    25,219Depreciation Expense
    
    
    7,309
    
    
    
    2,403
    
    
    
    
    
    
    
    
    
    
    
    9,712Taxes, Other Than Income Taxes
    
    
    7,337
    
    
    
    859
    
    
    
    62
    
    
    
    
    
    
    
    8,258Operating Income
    
    
    16,977
    
    
    
    11,522
    
    
    
    298
    
    
    
    
    
    
    
    28,797Interest
Income (Expense) - Net
    
    
    (3,261
    )
    
    
    (4,434
    )
    
    
    (142
    )
    
    
    
    
    
    
    (7,837
    )Allow. for Borrowed Funds Used
During Construction
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20Less: Minority Interest
    
    
    (152
    )
    
    
    (653
    )
    
    
    
    
    
    
    
    
    
    
    (805
    )Income Before Income Taxes
    
    $
    13,584
    
    
    $
    6,435
    
    
    $
    156
    
    
    
    
    
    
    $
    20,175Capital Expenditures
    
    $
    7,663
    
    
    $
    907
    
    
    
    
    
    
    
    
    
    
    $
    8,570Property, Plant, and Equipment, Net
    
    $
    124,618
    
    
    $
    79,979
    
    
    
    
    
    
    
    
    
    
    $
    204,597Total Assets
    
    $
    141,481
    
    
    $
    91,599
    
    
    $
    9,374
    
    
    
    
    
    
    $
    242,454
 As of and for the year ended
    
    Natural Gas
    
    Natural GasSeptember 30, 2003 (in thousands):
    
    Distribution
    
    Storage
    
    Other
    
    Eliminations
    
    ConsolidatedOperating Revenues
    
    $
    84,790
    
    
    $
    14,590
    
    
    $
    4,463
    
    
    $
    (4,228
    )
    
    $
    99,615Cost of Gas
    
    
    35,061
    
    
    
    
    
    
    
    
    
    
    
    (4,202
    )
    
    
    30,859Cost of Merchandise & Jobbing
    
    
    
    
    
    
    
    
    
    
    2,473
    
    
    
    
    
    
    
    2,473Operations and Maintenance Expense
    
    
    20,409
    
    
    
    2,582
    
    
    
    1,460
    
    
    
    (26
    )
    
    
    24,425Depreciation Expense
    
    
    6,958
    
    
    
    1,965
    
    
    
    
    
    
    
    
    
    
    
    8,923Taxes, Other Than Income Taxes
    
    
    6,614
    
    
    
    610
    
    
    
    53
    
    
    
    
    
    
    
    7,277Operating Income
    
    
    15,748
    
    
    
    9,433
    
    
    
    477
    
    
    
    
    
    
    
    25,658Interest
Income (Expense) - Net
    
    
    (3,467
    )
    
    
    (4,607
    )
    
    
    (224
    )
    
    
    
    
    
    
    (8,298
    )Allow. for Borrowed Funds Used
During Construction
    
    
    122
    
    
    
    1,109
    
    
    
    
    
    
    
    
    
    
    
    1,231Less: Minority Interest
    
    
    (210
    )
    
    
    (544
    )
    
    
    
    
    
    
    
    
    
    
    (754
    )Income Before Income Taxes
    
    $
    12,193
    
    
    $
    5,391
    
    
    $
    253
    
    
    
    
    
    
    $
    17,837Capital Expenditures
    
    $
    9,108
    
    
    $
    6,626
    
    
    $
    (60
    )
    
    
    
    
    
    $
    15,674Property, Plant, and Equipment, Net
    
    $
    123,785
    
    
    $
    81,407
    
    
    
    
    
    
    
    
    
    
    $
    205,192Total Assets
    
    $
    137,085
    
    
    $
    86,819
    
    
    $
    12,984
    
    
    
    
    
    
    $
    236,888
 F-26




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##### Table of Contents



As of and for the year ended
    
    Natural Gas
    
    Natural GasSeptember 30, 2002 (in thousands):
    
    Distribution
    
    Storage
    
    Other
    
    Eliminations
    
    ConsolidatedOperating Revenues
    
    $
    74,290
    
    
    $
    11,516
    
    
    $
    5,064
    
    
    $
    (4,451
    )
    
    $
    86,419Cost of Gas
    
    
    26,460
    
    
    
    
    
    
    
    
    
    
    
    (4,193
    )
    
    
    22,267Cost of Merchandise & Jobbing
    
    
    
    
    
    
    
    
    
    
    3,197
    
    
    
    
    
    
    
    3,197Operations and Maintenance Expense
    
    
    19,875
    
    
    
    2,069
    
    
    
    1,833
    
    
    
    (286
    )
    
    
    23,491Depreciation Expense
    
    
    6,581
    
    
    
    1,520
    
    
    
    21
    
    
    
    
    
    
    
    8,122Taxes, Other Than Income Taxes
    
    
    5,963
    
    
    
    525
    
    
    
    60
    
    
    
    
    
    
    
    6,548Operating Income
    
    
    15,411
    
    
    
    7,402
    
    
    
    (47
    )
    
    
    28
    
    
    
    22,794Interest Income (Expense)  Net
    
    
    (3,257
    )
    
    
    (4,435
    )
    
    
    (165
    )
    
    
    (28
    )
    
    
    (7,885
    )Allow. for Borrowed Funds Used
During Construction
    
    
    43
    
    
    
    2,001
    
    
    
    
    
    
    
    
    
    
    
    2,044Less: Minority Interest
    
    
    (290
    )
    
    
    (449
    )
    
    
    
    
    
    
    
    
    
    
    (739
    )Income Before Income Taxes
    
    $
    11,907
    
    
    $
    4,519
    
    
    $
    (212
    )
    
    
    
    
    
    $
    16,214Capital Expenditures
    
    $
    8,316
    
    
    $
    17,341
    
    
    $
    (31
    )
    
    
    
    
    
    $
    25,626Property, Plant, and Equipment, Net
    
    $
    121,053
    
    
    $
    76,698
    
    
    $
    60
    
    
    
    
    
    
    $
    197,811Total Assets
    
    $
    134,476
    
    
    $
    83,645
    
    
    $
    14,092
    
    
    
    
    
    
    $
    232,213
 F-27




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##### Table of Contents



11.
    
    QUARTERLY FINANCIAL DATA (Unaudited) Quarterly financial data for fiscal 2004 and 2003 is summarized as follows
     (in thousands, except per share data): Three Months Ended
    
    Dec. 31
    
    Mar. 31
    
    Jun. 30
    
    Sep. 30Fiscal 2004Total Operating Revenues
    
    $
    32,716
    
    
    $
    42,845
    
    
    $
    20,996
    
    
    $
    19,415Total Operating Income
    
    
    8,737
    
    
    
    12,449
    
    
    
    4,203
    
    
    
    3,408Net Income
    
    
    4,068
    
    
    
    6,372
    
    
    
    1,298
    
    
    
    830Basic Earnings Per Share
    
    $
    0.53
    
    
    $
    0.82
    
    
    $
    0.17
    
    
    $
    0.10Diluted Earnings Per Share
    
    $
    0.52
    
    
    $
    0.81
    
    
    $
    0.17
    
    
    $
    0.10Fiscal 2003Total Operating Revenues
    
    $
    25,713
    
    
    $
    35,604
    
    
    $
    20,583
    
    
    $
    17,715Total Operating Income
    
    
    7,111
    
    
    
    10,589
    
    
    
    3,836
    
    
    
    4,122Net Income
    
    
    3,374
    
    
    
    5,559
    
    
    
    986
    
    
    
    1,216Basic Earnings Per Share
    
    $
    0.45
    
    
    $
    0.73
    
    
    $
    0.13
    
    
    $
    0.16Diluted Earnings Per Share
    
    $
    0.44
    
    
    $
    0.73
    
    
    $
    0.13
    
    
    $
    0.15
 The pattern of quarterly earnings reflects a seasonal nature because weather
conditions strongly influence operating results. F-28




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##### Table of Contents



SCHEDULE II ENERGYSOUTH, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED SEPTEMBER 30, 2004, 2003, AND 2002
(in thousands) COLUMN A
    
    COLUMN B
    
    COLUMN C
    
    COLUMN D
    
    COLUMN EADDITIONSCHARGED
    
    CHARGEDBALANCE AT
    
    TO COSTS
    
    TO OTHER
    
    
    
    
    
    BALANCEBEGINNING
    
    AND
    
    ACCOUNTS
    
    DEDUCTIONS
    
    AT ENDDESCRIPTION
    
    OF YEAR
    
    EXPENSES
    
    AMOUNT
    
    AMOUNT
    
    OF YEARReserves deducted from assets
to which they apply:Allowance for Doubtful AccountsSeptember 30, 2004
    
    $
    889
    
    
    $
    924
    
    
    
    
    
    
    $
    957
    (1)
    
    $
    856September 30, 2003
    
    $
    951
    
    
    $
    576
    
    
    
    
    
    
    $
    638
    (1)
    
    $
    889September 30, 2002
    
    $
    849
    
    
    $
    598
    
    
    
    
    
    
    $
    496
    (1)
    
    $
    951
 Notes:  (1)
    
    Amounts written off - net of recoveries. S-1




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EXHIBIT INDEX Exhibit No.
    
    Description (Exhibits prior to February 2, 1998 filed by Mobile Gas)2
    
    Articles of Merger of MBLE Merger Co., Inc. into Mobile
Gas Service Corporation (incorporated by reference to Exhibit
2 to Form 10-Q Quarterly Report dated February 13, 1998)3(i)
    
    Articles of Restatement of the Articles of
Incorporation of EnergySouth, Inc. (incorporated by reference
to Exhibit 3(i) to Form 10-Q Quarterly Report dated February
13, 1998)3(ii)
    
    By-laws of EnergySouth, Inc., adopted January 31, 1998
(incorporated by reference to Exhibit 3.2 to Registration
Statement 333-42057)4(a)-1
    
    Indenture of Mortgage and Deed of Trust of Mobile Gas Service
Corporation dated as of December 1, 1941 (incorporated by reference to
Exhibit B-a to Mobile Gas Registration Statement No. 2-4887)
 Sup. Ind.Dated as of
    
    File Reference
    
    Exhibit4(a)-2
    
    10/1/44
    
    Reg. No. 2-5493
    
    7-64(a)-3
    
    7/1/52
    
    Form 10-K for fiscal year ended
September 30, 1985
    
    4(a)-34(a)-4
    
    6/1/54
    
    
    
    4(a)-44(a)-5
    
    4/1/57
    
    
    
    4(a)-54(a)-6
    
    7/1/61
    
    
    
    4(a)-64(a)-7
    
    6/1/63
    
    
    
    4(a)-74(a)-8
    
    10/1/64
    
    
    
    4(a)-84(a)-9
    
    7/1/72
    
    
    
    4(a)-94(a)-10
    
    8/1/75
    
    
    
    4(a)-104(a)-11
    
    7/1/79
    
    
    
    4(a)-114(a)-12
    
    7/1/82
    
    
    
    4(a)-124(a)-13
    
    7/1/86
    
    Form 10-K for fiscal year ended
September 30, 1986
    
    4(a)-134(a)-14
    
    10/1/88
    
    Form 10-K for fiscal year ended
September 30, 1989
    
    4(a)-144(a)-15
    
    7/1/92
    
    Form 10-K for fiscal year
ended September 30, 1992
    
    4(a)-154(a)-16
    
    7/1/93
    
    Form 10-K for fiscal year
ended September 30, 1993
    
    4(a)-16
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Sup. Ind.Dated as of
    
    File Reference
    
    Exhibit4(a)-17
    
    12/3/93
    
    Form 10-K for fiscal year
ended September 30, 1993
    
    4(a)-174(a)-18
    
    11/1/96
    
    Form 10-K for fiscal year
ended September 30, 1997
    
    4(a)-184(a)-19
    
    8/1/02
    
    Form 10-K for fiscal year
ended September 30, 2002
    
    4(a)-19
 4(c)-3
    
    Trust Indenture and Security Agreement dated as of December 1, 2000
made by Bay Gas Storage Company, Ltd. (incorporated by reference to
Exhibit 4(c)-3 to Form 10-Q for the quarter ended December 31, 2000)4(d)
    
    Promissory Note to the Utilities Board of the Town of Citronelle dated
May 13, 1993 (incorporated by reference to Exhibit 4(d) to Form 10-K for
fiscal year ended September 30, 1993)10(a)
    
    Transportation agreement between Mobile Gas Service Corporation and
Alabama Power Company dated February 18, 1999 (incorporated by reference
to Exhibit 10(a) to Form 10-Q for the quarter ended March 31, 1999) (3)10(b)
    
    Agreement for Firm and Interruptible Storage Service between Bay Gas
Storage Company, Ltd. and Southern Company Services, Inc., as agent, dated
April 1, 1999 (incorporated by reference to Exhibit 10(b) to Form 10-Q for
the quarter ended March 31, 1999) (3)10(b)-1
    
    Letter agreement dated July 19, 2000, modifying Agreement for Firm and
Interruptible Storage Services between Bay Gas Storage Company, Ltd. and
Southern Company Services, Inc., as agent, dated April 1, 1999
(incorporated by reference to Exhibit 10(b)-1 to Form 10-K for fiscal year
ended September 30, 2000) (3)10(b)-2
    
    Storage Service Agreement between Bay Gas Storage Company, Ltd. and
Southern Company Services, Inc., as agent, dated as of August 1, 2000
(incorporated by reference to Exhibit 10(b)-2 to Form 10-K for fiscal year
ended September 30, 2000) (3)10(c)
    
    Agreement for Firm Intrastate Transportation Services between Bay Gas
Storage Company, Ltd. and Alabama Power Company dated April 8, 1999
(incorporated by reference to Exhibit 10(c) to Form 10-Q for the quarter
ended March 31, 1999) (3)10(c)-1
    
    Letter agreement dated July 19, 2000, modifying Agreement for Firm
Intrastate Transportation Services between Bay Gas Storage Company, Ltd.
and Alabama Power Company dated April 8, 1999 (incorporated by
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reference to Exhibit 10(c)-1 to Form 10-K for fiscal year ended
September 30, 2000) (3)10(d)-5
    
    NNS Settlement Agreement between Koch Gateway Pipeline Company and
Mobile Gas Service Corporation dated March 26, 1998 (incorporated by
reference to Exhibit 10(d)-5 to Form 10-K for fiscal year ended September
30, 1998)10(g)
    
    Deferred Compensation Agreement with John S. Davis dated January 26,
1996 (incorporated by reference to Exhibit 10(g) to Form 8-K Current
Report dated February 7, 1996)10(g)-1
    
    Supplemental Deferred Compensation Agreement with John S. Davis dated
December 10, 1999 (incorporated by reference to Exhibit 10(g)-1 to Form
10-K for fiscal year ended September 30, 1999) (2)10(h)
    
    Transportation Agreement between Mobile Gas and Mobile Energy LLC
dated November 12, 1999 (incorporated by reference to Exhibit 10(h) to
Form 10-K for fiscal year ended September 30, 1999) (3)10(i)
    
    Mobile Gas Service Corporation/Bay Gas Storage Company, Ltd. Gas
Storage Agreement dated February 26, 1992 (incorporated by reference to
Exhibit 10(i) to Form 10-K for fiscal year ended September 30, 1992)10(j)
    
    Directors/Officers Indemnification Agreement (incorporated by
reference to Exhibit 10(j) to Form 10-K for fiscal year ended September
30, 1992)10(j)-1
    
    Form of Change of Control Agreement entered into as of December 8,
1999 by and between EnergySouth, Inc. and the Executive Officers of
EnergySouth, Inc. and/or one or more of its subsidiaries (incorporated by
reference to Exhibit 10(j)-1 to Form 10-K for fiscal year ended September
30, 1999) (2)10(k)-1
    
    Amended and Restated Supplemental Deferred Compensation Agreement with
Walter L. Hovell, dated December 11, 1992 (incorporated by reference to
Exhibit 10(k) to Form 10-K for fiscal year ended September 30, 1992) (2)10(k)-2
    
    Amendment to Amended and Restated Supplemental Deferred Compensation
Agreement dated January 27, 1995 between the Company and Walter L. Hovell
(incorporated by reference to Exhibit 10(k)-2 to Form 8-K Current
Report dated January 27, 1995) (2)10(l)-1
    
    Bay Gas Agreement by and among Mobile Gas Service Corporation, MGS
Storage Services, Inc., MGS Energy Services, Inc. and Olin Corporation,
dated December 5, 1991 (incorporated by reference to Exhibit 10(l) to
Form 10-K for fiscal year ended September 30, 1992)10(m)-1
    
    Limited Partnership Agreement between MGS Storage Services, Inc., as
General Partner, and MGS Energy Services, Inc., as Limited Partner
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(forming Bay Gas Storage Company, Ltd.), dated December 5, 1991
(incorporated by reference to Exhibit 10(m) to Form 10-K for fiscal
year ended September 30, 1992)10(m)-2
    

    First Amendment to Limited Partnership Agreement dated as of April 6,
1992 and Second Amendment to Limited Partnership Agreement dated as of
September 12, 1994 (incorporated by reference to Exhibit 10(m)-2 to Form
10-K for fiscal year ended September 30, 1994)10(n)-1
    
    Cavity Development and Storage Agreement between Olin Corporation and
Bay Gas Storage Company, Ltd., dated January 14, 1992 (incorporated by
reference to Exhibit 10(n) to Form 10-K for fiscal year ended September
30, 1992)10(n)-2
    
    Fourth Amendment to Cavity Development and Storage Agreement between
Olin Corporation and Bay Gas Storage Company, Ltd., dated July 30,
2004(1)(3)10(o)-1
    
    Transportation Agreement between Mobile Gas Service Corporation and
Tuscaloosa Steel Corporation dated as of May 15, 1995 (incorporated by
reference to Exhibit 10(o) to Form 10-K for fiscal year ended September
30, 1995) (3)10(o)-2
    
    Amendment dated August 23, 1996 to Transportation Agreement between
Mobile Gas Service Corporation and Tuscaloosa Steel Corporation
(incorporated by reference to Exhibit 10(o)-2 to Form 10-K for fiscal
year ended September 30, 1996)(3)10(q)-1
    
    Guaranty Agreement dated as of December 1, 2000 made by EnergySouth,
Inc., relating to Trust Indenture and Security Agreement made by Bay Gas
Storage Company, Ltd. (incorporated by reference to Exhibit 10(q)-1 to
Form 10-Q for the quarter ended December 31, 2000)10(r)
    
    Amended and Restated Stock Option Plan of EnergySouth, Inc.
(incorporated by reference to Appendix A to definitive proxy statement
dated December 17, 1998) (2)10(r)-2
    
    2003 Stock Option Plan of EnergySouth, Inc. (incorporated by reference
to Appendix A to definitive proxy statement dated December 23, 2003) (2)10(s)
    
    Mobile Gas Service Corporation Incentive Compensation Plan
(incorporated by reference to Exhibit B to definitive proxy statement
dated December 21, 1992) (2)(4)10(t)
    
    Agreement for Purchase and Sale of Assets by and between The Utilities
Board of the Town of Citronelle and Mobile Gas Service Corporation dated
January 28, 1993 (incorporated by reference to Exhibit 10(t) to Form 10-K
for fiscal year ended September 30, 1993)
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##### Table of Contents



10(v)
    
    Revolving Credit Agreement dated March 28, 2001 by and among
EnergySouth, Inc. as Borrower, Regions Bank as Agent and Regions Bank,
AmSouth Bank, and SouthTrust Bank as Lenders (incorporated by reference
to Exhibit 10(v) to Form 10-K for fiscal year ended September 30, 2003)10(x)
    
    Letter dated October 7, 1994 from Mobile Gas Service Corporation to
John S. Davis confirming terms of employment (incorporated by reference
to Exhibit A to Form 8-K current report filed
November 2, 1994) (2)10(z)-2
    
    2nd Amended and Restated EnergySouth, Inc. Non-Employee Directors Deferred
Fee Plan (incorporated by reference to Exhibit 99.1 to
Form S-8 filed April 14, 2004)(2)14
    
    Code of Business Conduct and Ethics (incorporated by reference to
Exhibit 14 to Form 10-K for fiscal year ended September 30, 2003)18
    
    Letter regarding change in Accounting Principle (incorporated by
reference to Exhibit 18 to Form 10-Q Quarterly Report dated February 12,
1999)21
    
    Subsidiaries of Registrant and Partnerships in which Registrant Owns an
Interest(1)23
    
    Consent of Deloitte & Touche LLP(1)31.1
    
    Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
- Chief Executive Officer (1)31.2
    
    Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
- Chief Financial Officer (1)32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002  Chief Executive Officer
(1)32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002  Chief Financial Officer
(1)99(a)
    
    Report and Order of Alabama Public Service Commission dated October 3,
2001 (incorporated by reference to Exhibit 99(a) to Form 8-K current
report filed October 18, 2001)
  (1)
    
    Filed herewith.(2)
    
    Management contract or compensatory plan or arrangement.(3)
    
    Confidential portions of this exhibit have been omitted and previously
filed separately with the Securities and Exchange Commission pursuant to
a request for confidential treatment made in accordance with Rule 24b-2
promulgated under the Securities Exchange Act of 1934, as amended.(4)
    
    Amended to use Company Common Stock instead of Mobile Gas common stock
effective February 2, 1998. E-5