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UNITED STATES SECURITIES AND EXCHANGE COMMISSION  FORM 10-K/A  [X]
    
    Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the fiscal year ended September 30, 2003
 [   ]
    
    Transition report pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the transition period from ____ to ____
 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: Title of each class
    
    Name of each exchange
on which registeredNone
    
    None
 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock ($.01 par value)   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 (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [   ] The aggregate market value of Common Stock (the only outstanding class of
voting or non-voting common equity), Par Value $.01 per share, held by
non-affiliates (based upon the average of the high and low closing price as
reported by NASDAQ on March 31, 2003) was approximately $131,868,721. As of December 5, 2003, there were 5,139,721 shares of Common Stock, Par Value
$.01 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders on January 30, 2004 are incorporated by reference into Part III.




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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 Schedules, and Reports on Form 8-KSignaturesINDEPENDENT AUDITORS REPORTCONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSSCHEDULE IIEXHIBIT INDEXCode of Business Conduct and EthicsSubsidiaires of Registrant and PartnershipsConsent of Deloitte & Touche LLPCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to 18 U.S.C. Section 1350Certification Pursuant to 18 U.S.C. Section 1350    Table of Contents  EXPLANATORY NOTE This Amendment No. 1 to the Annual Report on Form 10-K of EnergySouth, Inc. and
Subsidiaries for the fiscal year ended September 30, 2003 is being filed for
the purpose of amending and revising Item 6. Selected Financial Data and Item
8. Financial Statements and Supplementary Data. In accordance with accounting
guidance issued subsequent to the original Form 10-K filing on December 17,
2003, the original Form 10-K is being amended to reflect the reclassification
of amounts recorded for the cost of removal of utility plant, previously
recognized within accumulated depreciation, as a regulatory liability for the
period ended September 30, 2003 and as a separate liability for the periods
ended September 30, 1994 through September 30, 2002. This amendment does not
reflect events occurring after the original filing of the Form 10-K or
substantively modify or update those disclosures except as stated in the
preceding sentence. 1




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PART I 
 Item 1. Business. General EnergySouth, Inc. (together with its subsidiaries, the Company or
Registrant, and exclusive of its subsidiaries, EnergySouth) was initially
incorporated under the laws of the State of Alabama on September 5, 1997 for
the primary purpose of becoming the holding company for Mobile Gas Service
Corporation (Mobile Gas), a natural gas utility, and its subsidiaries.
Effective February 2, 1998, Mobile Gas and its subsidiaries were reorganized
(the Reorganization) into a holding company structure whereby Mobile Gas
became a wholly-owned subsidiary of EnergySouth. Mobile Gas was incorporated under the laws of the State of Alabama in
1933. Mobile Gas is engaged in the purchase, distribution, sale and
transportation of natural gas to approximately 100,000 residential, commercial
and industrial customers in Southwest Alabama, including the City of Mobile.
Mobile Gas service territory covers approximately 300 square miles. Mobile
Gas is also involved in merchandise sales, specifically sales of natural gas
appliances. EnergySouth Services, Inc. (Services) was incorporated in March 1983.
Through Services, the Company provides contract and consulting work for
utilities and industrial customers. Services owns a 51% interest in Southern
Gas Transmission Company (SGT), an Alabama general partnership which was
formed in November 1991. SGT was established to provide transportation
services to the facilities of Alabama River Pulp Company, Inc (ARP). During
fiscal year 1992, SGT constructed and began operating a 50-mile pipeline from
the facilities of Gulf South Pipeline Company (Gulf South) near Flomaton,
Alabama to the facilities of ARP in Claiborne, Alabama. MGS Marketing Services, Inc. (Marketing) was incorporated on March 5,
1993 to assist existing and potential customers in the purchase of natural gas.
During fiscal year 2003, as existing contracts for marketing services expired,
such contracts were not renewed by Marketing. As of September 30, 2003, the
Company is not actively engaged in activities previously provided by Marketing. In connection with the Reorganization, Services and Marketing became
wholly-owned subsidiaries of EnergySouth during fiscal year 1998. MGS Storage Services, Inc. (Storage) was incorporated on December 4,
1991 as a wholly-owned subsidiary of Mobile Gas. Effective December 19, 2000,
Storage became a wholly-owned subsidiary of EnergySouth. As of September 30,
2003 Storage held a general partnership interest of 90.9% in Bay Gas Storage
Company, Ltd. (Bay Gas), an Alabama limited partnership, and a 9.1% limited
partnership interest was held by Olin Corporation (Olin). Bay Gas owns and
operates underground gas storage and related pipeline facilities which are used
to provide storage and delivery of natural gas for Mobile Gas and other
customers. 2




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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 marketing, merchandising, and other energy-related
services which are provided through Marketing, Mobile Gas, and
Services, respectively, and are aggregated with the corporate
operations of EnergySouth, the holding company. For financial information by business segment, including revenues by
segment, for the fiscal years ended September 30, 2003, 2002, and 2001, see
Note 10 to the Consolidated Financial Statements. Customers Of the approximately 100,000 customers of the Company, approximately 95%
are residential customers. In the fiscal year ended September 30, 2003,
approximately 57% of the Companys gas revenues were derived from residential
sales, 14% from small commercial and industrial sales, 9% from large commercial
and industrial sales, 11% from transportation services, and 9% from storage and
miscellaneous services. Residential sales in fiscal 2003 accounted for
approximately 5% of the total volume of gas delivered to the Companys
customers, with small commercial and industrial, large commercial and
industrial, and transportation deliveries accounting for approximately 2%, 1%
and 92%, respectively. The ten largest customers of the Company accounted for
approximately 19% of the Companys gross margin in fiscal 2003, with the
largest accounting for approximately 6%. (Gross margin refers to Gas Revenue
less Cost of Gas, as shown on the Consolidated Statements of Income on page
F-3.) For further information with respect to revenues from and deliveries to
the various categories of the Companys customers, see Item 6, Selected
Financial Data below. Gross margins by business segment are shown in Note 10
of the Notes to the Consolidated Financial Statements on page F-23. EnergySouth is located at the crossroads of the expanding offshore natural
gas production areas of the Central Gulf Coast and the developing gas-fired
electric generation markets in the lower Southeast region of the United States.
Mobile Gas provides transportation services to two electric generating
facilities which became operational in fiscal 2001. Bay Gas provides
transportation services to three gas-fired electric generating facilities, one
of which has been recently expanded. During fiscal 1999 Bay Gas entered into
storage contracts with electric utilities which fully subscribed the remaining
space in its first storage cavern. During fiscal 2000 Bay Gas entered into a
long term contract with Southern Company Services, Inc., as agent for a number
of electric utility subsidiaries of Southern Company, to provide storage
capacity of up to 3.2
million MMBtu of natural gas for those subsidiaries. To accommodate this
contract, Bay Gas constructed a second 3




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underground storage cavern as discussed
in Gas Storage below. While there are no current reported plans for
additional gas-fired electric generation facilities in the Companys immediate
service area, industry projections indicate Florida utilities plan to add gas
fueled power generation in the next decade. Management believes that Bay Gas,
with the construction of additional caverns, is well positioned to serve the
storage needs of that market. There can be no assurances that additional
caverns will be constructed. Gas Supply The Company is directly connected to four natural gas processing plants in
south Mobile County. Mobile Gas has contracted for a portion of its firm
supply directly with two of these producers. For the fiscal year ended
September 30, 2003, the Company obtained approximately 55% of its gas supply
from sources located in the Mobile Bay area, with the balance being obtained
from interstate sources. Mobile Gas has a current peak day firm requirement of 127,000 MMBtus.
Firm supply needs of 80,000 MMBtu/day are expected to be met through the
withdrawal of gas from the storage facility owned by Bay Gas. The Company also
had firm supply contracts with gas suppliers for peak day needs of 10,000
MMBtu/day and 13,000 MMBtu/day until October 31, 2003 through the direct
connections with the Duke and Shell processing plants. Additionally, the
Company has contracted for firm transportation and storage service (No-Notice
Service) for 24,000 MMBtu/day from Gulf South under an agreement effective
through March 31, 2011. Gas Storage Construction of Bay Gas first storage cavern and facilities was completed
in 1994. At September 30, 2003, the cavern had the capacity to hold up to 3.2
million MMBtu of natural gas. Approximately .9 million MMBtu of the gas
injected into the storage cavern, called base gas, remains in the cavern to
provide sufficient pressure to maintain cavern integrity, and the remainder,
approximately 2.3 million MMBtu, represents working storage capacity. In 1994
Mobile Gas entered into a gas storage agreement with Bay Gas under which Bay
Gas agreed to provide storage of .8 million MMBtu of working storage capacity
of the first cavern for an initial period of 20 years. The construction of natural gas-fired electric generation facilities in
the Southeast has provided opportunities to provide gas storage and
transportation services. Construction of Phase I of Bay Gas second storage
cavern was completed and the cavern was placed into service April 1, 2003. Bay
Gas has entered into a fifteen-year contract with Southern Company Services,
Inc. (Southern), an affiliate of Southern Company, for a substantial portion of
the second cavern capacity. Currently, the second salt-dome storage cavern has
a working capacity of 3.7 Bcf and will provide sufficient capacity to serve the
new long-term contract with Southern as well as other customers. Continuing
cavern development is planned to provide for an additional 1.0 Bcf of working
gas capacity. Together, the two caverns at Bay Gas hold 6.0 Bcf, with
injection and withdrawal capacity of 200 MMcf and 610 MMcf per day,
respectively, but are currently planned to hold 7.0 Bcf, with injection and
withdrawal capacity of 300 MMcf
and 700 MMcf per day, respectively. The additional cavern development is
projected to continue in fiscal 2004 without interruption of storage
operations. Bay Gas has pipeline 4




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interconnects with Florida Gas Transmission
Company and Gulf South which provide access to interstate markets. Competition Gas Distribution Competition. The Company is not in significant direct
competition with respect to the retail distribution of natural gas to
residential, small commercial and small industrial customers within its service
area. Electricity competes with natural gas for such uses as cooking, water
heating and space heating. The Companys large commercial and industrial customers with requirements
of 200 MMBtu per day or more have the right to contract with the Company to
transport customer-owned gas while other commercial and industrial customers
buy natural gas from the Company. Some industrial customers have the
capability to use either fuel oil, coal, wood chips or natural gas, and choose
their fuel depending upon a number of factors, including the availability and
price of such fuels. In recent years, the Company has had adequate supplies so
that interruptible industrial customers that are capable of using alternative
fuels have not had supplies curtailed. The Companys rate tariffs include a
competitive fuel clause which allows the Company to adjust its rates to certain
large commercial and industrial customers in order to compete with alternative
energy sources. Even so, in recent periods of volatility in natural gas prices,
several customers who have the capability to use alternative fuels have
switched to such alternative fuel sources in periods of extremely high natural
gas prices. While some of these customers have returned to using natural gas
as prices have stabilized, there can be no assurance that these or other
customers will continue to use natural gas in periods of sustained high natural
gas prices. See Rates and Regulation below. Due to the close proximity of various pipelines and gas processing plants
to the Companys service area, there exists the possibility that current or
prospective customers could install their own facilities and connect directly
to a supply source and thereby bypass the Companys service. The Company
believes that because it has worked closely with major industrial customers to
meet those customers needs, and because of its ability to provide competitive
pricing under its rate tariffs, none of the Companys customers have bypassed
its facilities to date. Although there can be no assurance as to future
developments, the Company intends to continue its efforts to reduce the
likelihood of bypass by offering competitive rates and services to such
customers. Gas Storage Competition. A number of types of competitors may provide
services like or in competition with those of Bay Gas. These include, among
others, natural gas storage facilities, natural gas aggregators, and natural
gas pipelines. Bay Gas believes that its strategic geographic location and its
ability to charge market-based rates for interstate storage services will
enable it to effectively compete with such competitors. See Rates and
Regulation below. 5




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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. In May 2001, Mobile Gas filed
a petition with the APSC to increase its base rates to customers for the first
time since 1995. A general rate increase covers such things as increased
operating expenses, taxes, depreciation, and financing costs of the gas
distribution system. The APSC approved new base rates, effective October 2,
2001, designed to increase annual gas revenues by approximately $7.8 million. On June 10, 2002, the APSC approved Mobile Gas request for the Rate
Stabilization and Equalization (RSE) rate setting process to be effective
October 1, 2002 through September 30, 2005, and thereafter, unless modified or
discontinued by APSC order. Under RSE, the APSC conducts quarterly reviews to
determine, based on Mobile Gas projections and fiscal year-to-date
performance, whether Mobile Gas return on equity is expected to be within the
allowed range of 13.35% to 13.85%. Reductions in rates can be made quarterly
to bring the projected return within allowed range; increases, however, are
allowed only once each fiscal year, effective December 1, and cannot exceed
four percent of prior-year revenues. RSE limits the amount of Mobile Gas
equity upon which a return is permitted to 60 percent of its total
capitalization and provides for certain cost control measures designed to
monitor Mobile Gas operations and maintenance (O&M) expense. Under the
inflation-based cost control measurement established by the APSC, if a change
in Mobile Gas O&M expense per customer falls within 1.5 percentage points
above or below the change in the Consumer Price Index for All Urban Customers
(index range), no adjustment is required. If the change in O&M expense per
customer exceeds the index range, three-quarters of the difference is returned
to customers. To the extent the change is less than the index range, the
utility benefits by one-half of the difference through future rate adjustments.
A rate adjustment designed to increase annual revenues by $2.2 million became
effective December 1, 2002 under RSE. Effective December 1, 2003, rates were
adjusted under RSE which are designed to increase annual revenues by $2.8
million. In conjunction with the approval of RSE, the APSC approved an Enhanced
Stability Reserve (ESR), beginning October 1, 2002, to which Mobile Gas may
charge the full amount of: 1) extraordinary O&M expenses resulting from force
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 6




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$100,000 during the fiscal year, if such losses cause Mobile Gas
return on equity to fall below 13.35%. An initial ESR balance of $1.0 million
was recorded October 1, 2002 and is being recovered from customers through
rates beginning October 1, 2002. Subject to APSC approval, additional funding,
up to a maximum reserve balance of $1.5 million, may be provided by any future
non-recurring revenue should such revenue cause Mobile Gas return on equity
for the fiscal year to exceed 13.85%. During the year ended September 30, 2003,
Mobile Gas charged $146,000 against the ESR related to revenue losses from a
certain large industrial customer. Following a year in which a charge against
the ESR is made, the APSC provides for accruals to the ESR of no more than
$15,000 monthly until the maximum funding level is achieved. Mobile Gas is also authorized by the APSC to apply a temperature rate
adjustment to customers gas bills for the months of November through April.
The temperature rate adjustment helps to level out the effects of temperature
extremes on Company earnings by reducing high gas bills to customers in colder
than normal weather and increasing gas revenues received by the Company in
warmer than normal weather. The temperature rate adjustment has been reflected
in customers gas bills during the months of November through April since
November 1, 1996. The Mobile Gas tariffs include a purchased gas adjustment clause which
allows it to pass on to its sales customers increases or decreases in gas costs
from those reflected in its tariff charges. Adjustments under such clauses
require periodic filings with the APSC but do not require a general rate
proceeding. Under the purchased gas adjustment clause, Mobile Gas has a
competitive fuel clause which gives it the right to adjust its rates to certain
large customers in order to compete with alternative energy sources. Any
margin lost as a result of competitive fuel clause adjustments is recoverable
from its other customers. Gas deliveries to certain industrial customers are subject to regulation
by the APSC through contract approval. The operations of SGT, which consist
only of intrastate transportation of gas, are also regulated by the APSC. Bay Gas is a regulated utility governed under the jurisdiction of the
APSC. As a regulated utility, Bay Gas intrastate storage contracts are
subject to APSC approval. Operation of the storage cavern and well-head
equipment are subject to regulation by the Oil and Gas Board of the State of
Alabama. The APSC certificated Bay Gas as an Alabama gas storage public utility
in 1992. Bay Gas provides substantial, long-term services for Mobile Gas and
other customers that include storage and transportation of natural gas from
interstate and intrastate sources. The APSC does not regulate rates for Bay
Gas interstate gas storage and storage-related services. The Federal Energy
Regulatory Commission (FERC), which has jurisdiction over interstate services,
allows Bay Gas to charge market-based rates for such services. Market-based
rates minimize regulatory involvement in the setting of rates for storage
services and allow Bay Gas to respond to market conditions. Bay Gas also
provides interstate transportation-only services. The FERC issued orders on
October 11, 2001 and June 3, 2002 approving rates for such services. 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 7




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franchise granted by Mobile County, Alabama, which
has no stated expiration date, the franchises have various expiration dates,
the earliest of which is in 2007. The Company has no reason to believe that
the franchises will not be renewed upon expiration. Seasonal Nature of Business The nature of the Companys business is highly seasonal and
temperature-sensitive. As a result, the Companys operating results in any
given period have historically reflected, in addition to other matters, the
impact of weather, with colder temperatures resulting in increased sales by the
Company. The substantial impact of this sensitivity to seasonal conditions has
been reflected in the Companys results of operations. As discussed above
under Rates and Regulation, the application of a temperature rate adjustment
in customers bills beginning in November 1996 has helped to level out the
effects of temperature extremes on results of operations. Due to the seasonality of the Companys business, the generation of
working capital is impaired during the summer months because of reduced gas
sales. Cash needs during this period are met generally through short-term
financing arrangements or the reduction of temporary investments as is common
in the industry. Environmental Issues The Company is subject to various federal, state and local laws and
regulations relating to the environment, which have not had a material effect
on the Companys financial position or results of operations. Like many gas distribution companies, prior to the widespread availability
of natural gas, Mobile Gas manufactured gas for sale to its customers. In
contrast to some other companies which operated multiple manufactured gas
plants, Mobile Gas and its predecessor operated only one such plant, which
discontinued operations in 1933. The process for manufacturing gas produced
by-products and residuals, such as coal tar, and certain remnants of these
residuals are sometimes found at former gas manufacturing sites. The Company conducted a preliminary assessment in 1994 of its former gas
plant site and has tested certain waters in the vicinity of the site. The
Company developed and has implemented a plan for the site based on the advice
of environmental consultants, which involves securing and monitoring the site
and continued testing. In 2000, the Company commenced discussions with the
City of Mobile regarding the possible development of the property as a city
park. As part of this process, the Alabama Department of Environmental
Management (ADEM) is conducting a Brownfields evaluation of the property.
It is anticipated that this assessment will be completed by mid-2004.
Preliminary data received from ADEM has been reviewed by the Companys
environmental consultants. Based on information received to date, the Company
does not believe that the site currently poses any threat to human health or
the environment. At this time, the Company continues to believe that material
remediation costs are unlikely and has therefore established no reserve
for such costs in its financial statements. The Company intends that, should
further investigation or changes in environmental laws or regulations require
material 8




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expenditures for evaluation or remediation, with regard to the site,
it would apply to the APSC for appropriate rate recovery of such costs.
However, there can be no assurances that the APSC would approve the recovery of
such costs or the amount and timing of any such recovery. Employees Mobile Gas employed 275 full-time employees as of September 30, 2003. Of
these, approximately 35% are represented by the Paper, Allied-Industrial,
Chemical and Energy Workers International Union, Local No. 3-0541. As of
September 30, 2003 Bay Gas employed 10 full-time employees. The Company
believes that it enjoys generally good labor relations. Available Information The Companys internet address is www.energysouth.com. The Company makes
available free of charge on or through its Internet Web site its annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the Securities and
Exchange Commission. 9




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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 two pipelines totaling approximately 51 miles
and related surface equipment which are located in Alabamas Mobile and
Washington Counties. The transmission plants are located on easements or
rights-of-way. The storage plant, consisting of two underground caverns for the storage
of natural gas and related pipelines and surface facilities, is located
primarily in Washington County, Alabama. The storage facilities are
constructed on a leasehold estate with an initial term of 50 years, which will
expire in 2040, and which may be renewed at the Companys option for an
additional term of 20 years. Substantially all of the utility property of Mobile Gas is pledged as
collateral for its long-term debt as of September 30, 2003. 
 Item 3. Legal Proceedings. The Company is involved in litigation arising in the normal course of
business. Management believes that the ultimate resolution of such litigation
will not have a material adverse effect on the consolidated financial
statements of the Company. 
 Item 4. Submission of Matters to a Vote of Security Holders. There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 2003. 10




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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 2004 Annual Meeting of
Stockholders and is incorporated herein by reference. The following is a list of names and ages of all of the executive officers
who are not also directors or nominees for election as directors of the
Registrant indicating all positions and offices with the Registrant held by
each such person and each such persons principal occupations or employment
during the past five years. Officers are appointed by the Board of Directors
of the Company for terms expiring in January 2004. Business ExperienceName, Age, and Position
    
    During Past 5 YearsW. G. Coffeen, III, 57
    
    Appointed in December 2000;Senior Vice President of Operations
    
    Previously: Vice President ofand Marketing  EnergySouth, Inc.
    
    Corporate Development andPlanning  EnergySouth, Inc. (1998 2000)Senior Vice President of Operations and
    
    Appointed in December 2000;Marketing  Mobile Gas Service Corporation;
    
    Previously: Vice President Director and President  EnergySouth Services,
    
    Corporate Development and
 11




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Business ExperienceName, Age, and Position
    
    During Past 5 YearsInc.; Director and President  MGS Marketing
    
    Planning - Mobile Gas ServiceServices, Inc.
    
    Corporation; Director/Vice President- MGS Marketing Services, Inc.;Vice President - MGS StorageServices, Inc. (1998 - 2000)Charles P. Huffman, 50
    
    Appointed in December 2000;Senior Vice President and Chief Financial Officer
    
    Previously: Vice President, Chief- EnergySouth, Inc.
    
    Financial Officer, and Treasurer -EnergySouth, Inc. (1998 - 2001)Senior Vice President and Chief Financial Officer
    
    Appointed in December 2000;- Mobile Gas Service Corporation; Vice
    
    Previously: Vice President, ChiefPresident and Chief Financial Officer -
    
    Financial Officer, Treasurer, andEnergySouth Services, Inc.; Director, Vice
    
    Assistant Secretary - Mobile GasPresident and Chief Financial Officer  MGS
    
    Service Corporation; ViceMarketing Services, Inc.; Director, Vice President
    
    President/Treasurer - EnergySouthand Chief Financial Officer  MGS Storage
    
    Services, Inc.; Director/ViceServices, Inc.
    
    President/Treasurer - MGS StorageServices, Inc.; Director/VicePresident/Treasurer - MGSMarketing Services, Inc. (1998 -2001)G. Edgar Downing, Jr., 47 *
    
    Appointed in 1998Vice President, Secretary and General Counsel -EnergySouth, Inc.;Secretary, General Counsel and Vice President
    
    Appointed in 1998; Previously: Viceof Administration  Mobile Gas Service
    
    President, Secretary and GeneralCorporation; Director, Vice President and
    
    Counsel - Mobile Gas ServiceSecretary  EnergySouth Services, Inc,; Director,
    
    Corporation (1994 - 1998)Vice President and Secretary  EnergySouthServices, Inc.; Vice President and Secretary -MGS Marketing Services, Inc.; Director, VicePresident and Secretary  MGS StorageServices, Inc.
 12




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Business ExperienceName, Age, and Position
    
    During Past 5 YearsSusan P. Stringer, 42
    
    Appointed in December 2000Vice
President and Controller - EnergySouth,Inc.Vice
President and Controller - Mobile Gas
    
    Appointed in December 2000;Service Corporation
    
    Previously: Director - FinancialReporting - Mobile Gas ServiceCorporation (2000); Manager -Financial Reporting - Mobile GasService Corporation (1999 - 2000);Accounting Manager - Mobile GasService Corporation (1998 - 1999);LaBarron N. McClendon, 39
    
    Appointed in December 2001Vice President Human Resources -EnergySouth, Inc.Vice
President Human Resources - Mobile Gas
    
    Appointed December 2001;Service Corporation
    
    Previously: Director HumanResources - Mobile Gas ServiceCorporation (1999 - 2001); ManagerHuman Resources - Mobile GasService Corporation (1998 - 1999);Daniel T. Ford, 38
    
    Appointed in June 2002Treasurer - EnergySouth, Inc.Treasurer - Mobile Gas Service Corporation;
    
    Appointed June 2002; Previously:Treasurer - EnergySouth Services, Inc.;
    
    Director Rates and Analysis - MobileTreasurer - MGS Marketing Services, Inc.;
    
    Gas Service Corporation (2000 -Treasurer - MGS Storage Services, Inc.
    
    2002); Manager Rates and Analysis- Mobile Gas Service Corporation(1997 - 2000)
 * Mr. Downing is the son-in-law of Gaylord C. Lyon, a Director of the Company. 13




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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-AMEX National Market under the symbol ENSI. As of December 5, 2003
there were 1,350 holders of record of the Companys Common Stock. Information
regarding Common Stock dividends and the bid price range for Common Stock
during the periods indicated is as follows: Per ShareFiscal Year
    
    Dividends Declared
    
    Closing Price RangeQuarter Ended
    
    2003
    
    2002
    
    2003
    
    2002High
    
    Low
    
    High
    
    LowDecember 31
    
    $
    .270
    
    
    $
    .260
    
    
    $
    28.989
    
    
    $
    24.280
    
    
    $
    24.860
    
    
    $
    21.050March 31
    
    
    .270
    
    
    
    .260
    
    
    
    28.500
    
    
    
    25.260
    
    
    
    28.250
    
    
    
    22.050June 30
    
    
    .285
    
    
    
    .270
    
    
    
    32.450
    
    
    
    25.990
    
    
    
    33.750
    
    
    
    24.750September 30
    
    
    .285
    
    
    
    .270
    
    
    
    33.960
    
    
    
    30.560
    
    
    
    33.950
    
    
    
    22.760
 Over-the-counter quotations reflect inter-dealer prices without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions. While the Board of Directors intends to continue the practice of paying
dividends quarterly, amounts and dates of such dividends as may be declared
will be dependent upon the Registrants future earnings, financial
requirements, and other factors. The Registrants long-term debt instruments contain certain debt to equity
ratio requirements and restrictions on the payment of cash dividends and the
purchase of shares of its capital stock. None of these requirements is
expected to have a significant impact on the Registrants ability to pay
dividends in the future. 14




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##### Table of Contents



Item 6  EnergySouth, Inc.  Selected Financial Data FINANCIAL SUMMARY Years Ended September 30,
    
    2003
    
    2002
    
    2001SELECTED FINANCIAL DATA(in thousands, except per share data)Gas Revenues
    
    $
    95,150
    
    
    $
    81,560
    
    
    $
    103,424Merchandise Sales
    
    
    3,259
    
    
    
    3,499
    
    
    
    2,966Other
    
    
    1,206
    
    
    
    1,360
    
    
    
    1,369Total Operating Revenues
    
    $
    99,615
    
    
    $
    86,419
    
    
    $
    107,759Income Before Cumulative Effect of Changes
in Accounting Principles
    
    $
    11,135
    
    
    $
    10,231
    
    
    $
    6,138Cumulative Effect of Changes in Accounting Principles
    
    
    
    
    
    
    
    
    
    
    Net Income
    
    $
    11,135
    
    
    $
    10,231
    
    
    $
    6,138Preferred Stock DividendsEarnings Applicable to Common Stock
    
    $
    11,135
    
    
    $
    10,231
    
    
    $
    6,138Cash Dividends Per Share of Common Stock (1)
    
    $
    1.11
    
    
    $
    1.06
    
    
    $
    1.02Basic Earnings Per Share of Common Stock (1):Income Before Cumulative Effect of Changes in
Accounting Principles
    
    $
    2.20
    
    
    $
    2.06
    
    
    $
    1.25Net Income (1)
    
    $
    2.20
    
    
    $
    2.06
    
    
    $
    1.25Diluted Earnings Per Share of Common Stock (1):Income Before Cumulative Effect of Changes in
Accounting Principles
    
    $
    2.17
    
    
    $
    2.03
    
    
    $
    1.23Net Income (1)
    
    $
    2.17
    
    
    $
    2.03
    
    
    $
    1.23Average Common Shares Outstanding (1):Basic (1)
    
    
    5,066
    
    
    
    4,967
    
    
    
    4,926Diluted (1)
    
    
    5,124
    
    
    
    5,046
    
    
    
    4,987Total Assets *
    
    $
    236,511
    
    
    $
    231,779
    
    
    $
    231,610Long-Term Debt
    
    $
    92,640
    
    
    $
    98,645
    
    
    $
    90,592STATISTICALGas Revenue (in thousands):Sales:Residential
    
    $
    54,470
    
    
    $
    47,839
    
    
    $
    65,394Commercial and Industrial  Small
    
    
    13,795
    
    
    
    11,105
    
    
    
    15,499Commercial and Industrial  Large
    
    
    8,101
    
    
    
    6,436
    
    
    
    10,060Transportation
    
    
    10,405
    
    
    
    10,834
    
    
    
    9,594Storage (other than intercompany)
    
    
    7,401
    
    
    
    4,383
    
    
    
    2,134Other
    
    
    978
    
    
    
    963
    
    
    
    743Total
    
    $
    95,150
    
    
    $
    81,560
    
    
    $
    103,424Delivery to Customers (in thousand therms):Gas Sales:Residential
    
    
    44,617
    
    
    
    42,651
    
    
    
    51,415Commercial and Industrial  Small
    
    
    13,664
    
    
    
    12,717
    
    
    
    14,318Commercial and Industrial  Large
    
    
    10,463
    
    
    
    10,679
    
    
    
    12,570Transportation
    
    
    759,936
    
    
    
    947,515
    
    
    
    790,741Total
    
    
    828,680
    
    
    
    1,013,562
    
    
    
    869,044Customers Billed (peak month):Residential
    
    
    93,318
    
    
    
    93,563
    
    
    
    94,948Commercial and Industrial  Small
    
    
    5,111
    
    
    
    5,153
    
    
    
    5,197Commercial and Industrial  Large
    
    
    78
    
    
    
    80
    
    
    
    89Transportation
    
    
    43
    
    
    
    37
    
    
    
    43Total
    
    
    98,550
    
    
    
    98,833
    
    
    
    100,277Degree Days (2)
    
    
    1,773
    
    
    
    1,577
    
    
    
    1,978NUMBER OF EMPLOYEES (END OF PERIOD)
    
    
    285
    
    
    
    295
    
    
    
    300
 Note: (1)
    
    All references to number of shares and per share amounts have been restated to reflect the three-for-two
conversion of Mobile Gas common stock into EnergySouth, Inc. common stock effective February 2, 1998.Note: (2)
    
    The number of degrees that the daily mean temperature falls below 65 degrees F. The Companys rates
were designed assuming annual normal degree days of 1,640 beginning December 1, 1995 and an annual
normal of 1,695 for prior periods.
 * Reflects reclassification of estimated cost of removal of utility plant previously recognized in
accumulated depreciation as a regulatory liability for fiscal 2003
and a separate liability for the periods ended September 30, 1994
through September 30, 2002. 15




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##### Table of Contents



Years Ended September 30,
    
    2000
    
    1999
    
    1998
    
    1997
    
    1996
    
    1995
    
    1994SELECTED FINANCIAL DATA(in thousands, except per share data)Gas Revenues
    
    $
    69,714
    
    
    $
    63,889
    
    
    $
    70,740
    
    
    $
    69,622
    
    
    $
    68,334
    
    
    $
    56,204
    
    
    $
    60,470Merchandise Sales
    
    
    2,913
    
    
    
    2,827
    
    
    
    2,920
    
    
    
    2,678
    
    
    
    2,674
    
    
    
    2,576
    
    
    
    2,514Other
    
    
    1,470
    
    
    
    1,344
    
    
    
    1,329
    
    
    
    1,281
    
    
    
    1,224
    
    
    
    788
    
    
    
    774Total Operating Revenues
    
    $
    74,097
    
    
    $
    68,060
    
    
    $
    74,989
    
    
    $
    73,581
    
    
    $
    72,232
    
    
    $
    59,568
    
    
    $
    63,758Income Before Cumulative Effect of Changes
in Accounting Principles
    
    $
    8,792
    
    
    $
    8,624
    
    
    $
    8,417
    
    
    $
    8,126
    
    
    $
    8,631
    
    
    $
    4,028
    
    
    $
    4,893Cumulative Effect of Changes in Accounting Principles
    
    
    
    
    
    
    (349
    )
    
    
    
    
    
    
    Net Income
    
    $
    8,792
    
    
    $
    8,275
    
    
    $
    8,417
    
    
    $
    8,126
    
    
    $
    8,631
    
    
    $
    4,028
    
    
    $
    4,893Preferred Stock Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5Earnings Applicable to Common Stock
    
    $
    8,792
    
    
    $
    8,275
    
    
    $
    8,417
    
    
    $
    8,126
    
    
    $
    8,631
    
    
    $
    4,028
    
    
    $
    4,888Cash Dividends Per Share of Common Stock (1)
    
    $
    0.97
    
    
    $
    0.91
    
    
    $
    0.84
    
    
    $
    0.78
    
    
    $
    0.74
    
    
    $
    0.70
    
    
    $
    0.68Basic Earnings Per Share of Common Stock (1):Income Before Cumulative Effect of Changes in
Accounting Principles
    
    $
    1.79
    
    
    $
    1.77
    
    
    $
    1.73
    
    
    $
    1.68
    
    
    $
    1.79
    
    
    $
    0.84
    
    
    $
    1.18Net Income (1)
    
    $
    1.79
    
    
    $
    1.70
    
    
    $
    1.73
    
    
    $
    1.68
    
    
    $
    1.79
    
    
    $
    0.84
    
    
    $
    1.18Diluted Earnings Per Share of Common Stock (1):Income Before Cumulative Effect of Changes in
Accounting Principles
    
    $
    1.78
    
    
    $
    1.75
    
    
    $
    1.71
    
    
    $
    1.66
    
    
    $
    1.78
    
    
    $
    0.84
    
    
    $
    1.18Net Income (1)
    
    $
    1.78
    
    
    $
    1.68
    
    
    $
    1.71
    
    
    $
    1.66
    
    
    $
    1.78
    
    
    $
    0.84
    
    
    $
    1.18Average Common Shares Outstanding (1):Basic (1)
    
    
    4,904
    
    
    
    4,884
    
    
    
    4,865
    
    
    
    4,844
    
    
    
    4,826
    
    
    
    4,812
    
    
    
    4,128Diluted (1)
    
    
    4,944
    
    
    
    4,933
    
    
    
    4,926
    
    
    
    4,881
    
    
    
    4,838
    
    
    
    4,812
    
    
    
    4,128Total Assets *
    
    $
    175,902
    
    
    $
    181,518
    
    
    $
    173,862
    
    
    $
    168,667
    
    
    $
    157,038
    
    
    $
    142,369
    
    
    $
    139,948Long-Term Debt
    
    $
    55,222
    
    
    $
    58,017
    
    
    $
    58,979
    
    
    $
    63,580
    
    
    $
    54,509
    
    
    $
    57,328
    
    
    $
    59,047STATISTICALGas Revenue (in thousands):Sales:Residential
    
    $
    41,750
    
    
    $
    39,575
    
    
    $
    44,725
    
    
    $
    44,330
    
    
    $
    43,929
    
    
    $
    36,106
    
    
    $
    40,535Commercial and Industrial  Small
    
    
    9,433
    
    
    
    8,613
    
    
    
    9,208
    
    
    
    8,948
    
    
    
    8,348
    
    
    
    6,813
    
    
    
    7,209Commercial and Industrial  Large
    
    
    6,316
    
    
    
    5,242
    
    
    
    6,784
    
    
    
    7,638
    
    
    
    7,914
    
    
    
    6,151
    
    
    
    6,188Transportation
    
    
    9,336
    
    
    
    8,215
    
    
    
    8,210
    
    
    
    6,886
    
    
    
    6,571
    
    
    
    6,172
    
    
    
    5,881Storage (other than intercompany)
    
    
    2,153
    
    
    
    1,689
    
    
    
    1,204
    
    
    
    1,176
    
    
    
    926
    
    
    
    245
    
    
    
    13Other
    
    
    726
    
    
    
    555
    
    
    
    609
    
    
    
    644
    
    
    
    646
    
    
    
    717
    
    
    
    644Total
    
    $
    69,714
    
    
    $
    63,889
    
    
    $
    70,740
    
    
    $
    69,622
    
    
    $
    68,334
    
    
    $
    56,204
    
    
    $
    60,470Delivery to Customers (in thousand therms):Gas Sales:Residential
    
    
    43,014
    
    
    
    39,866
    
    
    
    51,493
    
    
    
    48,099
    
    
    
    59,403
    
    
    
    47,992
    
    
    
    56,100Commercial and Industrial  Small
    
    
    12,590
    
    
    
    11,781
    
    
    
    13,231
    
    
    
    12,338
    
    
    
    14,148
    
    
    
    11,669
    
    
    
    12,463Commercial and Industrial  Large
    
    
    12,860
    
    
    
    11,683
    
    
    
    15,169
    
    
    
    16,975
    
    
    
    23,252
    
    
    
    19,536
    
    
    
    19,045Transportation
    
    
    611,541
    
    
    
    357,183
    
    
    
    335,905
    
    
    
    284,248
    
    
    
    279,798
    
    
    
    274,859
    
    
    
    253,702Total
    
    
    680,005
    
    
    
    420,513
    
    
    
    415,798
    
    
    
    361,660
    
    
    
    376,601
    
    
    

    354,056
    
    
    
    341,310Customers Billed (peak month):Residential
    
    
    95,131
    
    
    
    95,022
    
    
    
    95,443
    
    
    
    95,446
    
    
    
    95,338
    
    
    
    94,822
    
    
    
    94,424Commercial and Industrial  Small
    
    
    5,256
    
    
    
    5,282
    
    
    
    5,305
    
    
    
    5,267
    
    
    
    5,257
    
    
    
    5,235
    
    
    
    5,195Commercial and Industrial  Large
    
    
    95
    
    
    
    92
    
    
    
    97
    
    
    
    101
    
    
    
    105
    
    
    
    108
    
    
    
    106Transportation
    
    
    37
    
    
    
    37
    
    
    
    30
    
    
    
    30
    
    
    
    30
    
    
    
    29
    
    
    
    31Total
    
    
    100,519
    
    
    
    100,433
    
    
    
    100,875
    
    
    
    100,844
    
    
    
    100,730
    
    
    
    100,194
    
    
    
    99,756Degree Days (2)
    
    
    1,379
    
    
    
    1,196
    
    
    
    1,889
    
    
    
    1,487
    
    
    
    2,030
    
    
    
    1,331
    
    
    
    1,837NUMBER OF EMPLOYEES (END OF PERIOD)
    
    
    291
    
    
    
    280
    
    
    
    281
    
    
    
    276
    
    
    
    276
    
    
    
    275

    
    
    
    260
 16




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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. The Company is also engaged in gas marketing,
merchandising and other energy-related services. Results Of Operations Consolidated Net Income Diluted earnings per share increased $0.14, up 7% from fiscal year 2002.
Fiscal year 2002 earnings increased 65% as compared to fiscal 2001. Financial
information by business segment is shown in Note 10 to the Consolidated
Financial Statements. 2003 vs. 2002The Companys natural gas distribution business contributed
increased earnings of $0.03 per share during fiscal year 2003 from its Mobile
Gas subsidiary. Mobile Gas earnings were positively impacted by a rate
adjustment which became effective December 1, 2002 based upon the guidelines
established under the Rate Stabilization and Equalization (RSE) tariff. For
further information on RSE, see Natural Gas Distribution below and Note 2 to
the Consolidated Financial Statements. Because of the rate adjustment, margins
from temperature-sensitive customers and large commercial and industrial
customers increased during the fiscal year 2003; however, these increases were
offset by an increase in operating and depreciation expenses, lower industrial
transportation revenues, and a decline in residential usage after adjustment
for weather variations by the Companys temperature rate adjustment rider. The Companys natural gas storage business, operated by Bay Gas, contributed
increased earnings of $0.07 per share for the year ended September 30, 2003,
due primarily to increased storage revenues from its second storage cavern
placed in service on April 1, 2003 and revenues realized from short-term
interruptible storage contracts. Increased revenues were partially offset by
additional operations and maintenance costs (O&M), depreciation expense and
property taxes as major expansion projects were completed. Earnings from other business operations increased $0.04 during fiscal year
2003. Fiscal year 2003 did not include losses incurred in 2002 associated with
the exit from the natural gas generator sales business and the closing of a
retail specialty store. 17




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##### Table of Contents



2002 vs. 2001For fiscal year 2002, EnergySouths earnings per share increased
$0.80 from fiscal year 2001 due to increased earnings from both Mobile Gas
distribution and Bay Gas storage and transportation services. The Companys
natural gas distribution business contributed increased earnings of $0.39 per
share due to an increase in margins as a result of a general rate increase
effective October 1, 2001. The Companys natural gas storage business
contributed increased earnings of $0.46 per share. Increased transportation
revenues and the consideration received for an option agreement to transport
additional volumes, over and above contracted volumes, both contributed to the
increase. Also, in accordance with SFAS 145, Bay Gas extraordinary loss due
to the early payoff of existing debt was reclassified from extraordinary to
ordinary income. In conjunction with the early pay-off, Bay Gas incurred
additional interest related expenses in fiscal year 2001 of $2,454,000, a $0.29
impact in earnings per share. Increased depreciation expense and O&M expenses
partially offset increased earnings for both the distribution and storage
businesses. Also offsetting the gains made by both businesses, earnings from
other business operations declined $0.05 per share due primarily to the
liquidation of generator inventories and reserves for slow moving merchandise
inventory. Natural Gas Distribution The natural gas distribution segment of the Company is actively engaged in the
distribution and transportation of natural gas to residential, commercial and
industrial customers in southwest Alabama through Mobile Gas and SGT. The Alabama Public Service Commission (APSC) regulates the Companys gas
distribution operations. Mobile Gas rate tariffs for gas distribution allow a
pass-through to customers of the cost of gas, certain taxes, and incremental
costs associated with the replacement of cast iron mains. These costs,
therefore, have little direct impact on the Companys margins, which are
defined as natural gas distribution revenues less the cost of natural gas and
associated taxes. For fiscal year 2003, colder than normal weather during the
2002-2003 winter heating season, lower national storage levels after the
2002-2003 winter, and increased natural gas electric generation facilities have
combined to drive natural gas prices to levels well above historical norms.
Mobile Gas follows a gas purchasing strategy to secure prices for a portion of
its gas supply needs for the winter heating season by locking in gas prices at
fixed rates. Mobile Gas strategy for purchasing gas and the Companys use of
natural gas storage capacity helped to mitigate the impact of increased prices
on customers bills during the 2002-2003 winter. Effective March 1, 2003,
however, Mobile Gas adjusted its rates to reflect increased gas costs paid to
its suppliers. In fiscal 2002, the APSC approved Mobile Gas request for a Rate Stabilization
and Equalization (RSE) tariff, a ratemaking methodology already used by the
APSC to regulate certain other utilities. A rate adjustment, designed to
increase annual gas revenues by approximately $2.2 million, was implemented
under the RSE tariff effective December 1, 2002. See Note 2 to the
Consolidated Financial Statements for a more detailed explanation. In May 2001,
Mobile Gas filed a petition with the APSC to increase its base rates to
customers for the first time since 1995 to recover increases in costs,
including a return on investment. The APSC approved the new base rates,
effective October 2, 18




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##### Table of Contents



2001, which were designed to increase annual gas revenues by
approximately $7.8 million. The Companys distribution business is highly seasonal and
temperature-sensitive since residential and commercial customers use more gas
during colder weather for space heating. As a result, gas revenues, cost of gas
and related taxes in any given period reflect, in addition to other factors,
the impact of weather, through either increased or decreased sales volumes.
The Company utilizes a temperature rate adjustment rider during the months of
November through April to mitigate the impact that unusually cold or warm
weather has on operating margins by reducing the base rate portion of
customers bills in colder than normal weather and increasing the base rate
portion of customers bills in warmer than normal weather. Normal weather for
the Companys service territory is defined as the 30-year average temperature
as determined by the National Weather Service. The table below summarizes operating revenues, margins and volumes by customer
class for fiscal 2003, 2002 and 2001: Years Ended September 30, (in thousands)
    
    2003
    
    2002
    
    2001Revenue (before eliminations)Residential
    
    $
    54,470
    
    
    $
    47,839
    
    
    $
    65,395Commercial and Industrial  Small
    
    
    13,795
    
    
    
    11,105
    
    
    
    15,499Total Temperature-Sensitive Revenue
    
    $
    68,265
    
    
    $
    58,944
    
    
    $
    80,894Commercial and Industrial  Large
    
    
    8,101
    
    
    
    6,436
    
    
    
    10,060Transportation (includes SGT revenues)
    
    
    7,443
    
    
    
    7,930
    
    
    
    7,957Other
    
    
    981
    
    
    
    980
    
    
    
    717Total Natural Gas Distribution Revenue
    
    $
    84,790
    
    
    $
    74,290
    
    
    $
    99,628Cost of Natural Gas
    
    
    (35,061
    )
    
    
    (26,460
    )
    
    
    (56,296
    )Revenue Taxes
    
    
    (4,222
    )
    
    
    (3,703
    )
    
    
    (4,946
    )Natural Gas Distribution Sales
and Transportation Margins
    
    $
    45,507
    
    
    $
    44,127
    
    
    $
    38,386Deliveries (therms)Residential
    
    
    44,617
    
    
    
    42,651
    
    
    
    51,415Commercial and Industrial  Small
    
    
    13,664
    
    
    
    12,717
    
    
    
    14,318Total Temperature-Sensitive Deliveries
    
    
    58,281
    
    
    
    55,368
    
    
    
    65,733Commercial and Industrial  Large
    
    
    10,463
    
    
    
    10,679
    
    
    
    12,570Transportation (including SGT volumes)
    
    
    286,842
    
    
    
    382,884
    
    
    
    382,213Total Natural Gas Distribution Volumes
    
    
    355,586
    
    
    
    448,931
    
    
    
    460,516
 Natural Gas Distribution revenues increased $10,500,000 (14%) during fiscal
2003 as compared to fiscal 2002 due primarily to the increase in natural gas
prices as discussed above. Fluctuations in the actual cost of gas are passed
on to the customers through the purchased gas adjustment provision of Mobile
Gas rate tariffs and do not directly result in any increases or decreases in
margins. The 25% decline in distribution 19




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##### Table of Contents



revenue in fiscal 2002 versus 2001
was directly attributable to a decline in natural gas prices after the dramatic
rise of natural gas prices experienced in fiscal 2001. Another contributing factor to the fluctuations in revenues from
temperature-sensitive customers is the impact of weather on customers usage.
Temperatures during the fiscal 2003 winter heating season were 8% colder than
normal and 12% colder than the prior year. As a result, volumes delivered to
temperature-sensitive customers increased in fiscal 2003 compared to fiscal
2002 by 5%. Temperatures during the fiscal 2002 heating season were 20% warmer
than fiscal 2001 and 4% warmer than normal, which partially accounted for the
16% decline in volumes delivered to these customers. Revenues from the sale of natural gas to large commercial and industrial
customers increased 26% in fiscal 2003 and declined 36% in fiscal 2002 due
primarily to the respective increase and decrease in the price of natural gas.
Volumes delivered to these customers has declined 2% and 15%, respectively, for
fiscal years 2003 and 2002 due primarily to one industrial customers unique
operational needs, higher natural gas prices and general economic conditions. Revenues from the transportation of natural gas to commercial and industrial
customers by the distribution business decreased $487,000 in fiscal 2003 with a
corresponding decline in volumes of 25%, due primarily to increased gas prices
and general economic conditions. Mobile Gas service territory has experienced
the effects of plant closings, particularly in the pulp and paper industry,
during the last two years. In addition to two customers previous plant
closings, a chemical company which is a customer of the Company ceased
operations of its Mobile plant in June 2003, and some other industrial plants
have decreased production or switched to alternative fuels. As permitted by
the APSC, the lost margins associated with the closure of the chemical plant
were charged to the Enhanced Stability Reserve (ESR) with a corresponding
offset to transportation revenue. ESR charges due to known changes in margin
such as this, as well as other changes affecting net income, would generally be
reflected in the RSE adjustment on December 1, 2003. See Note 2 to the
Consolidated Financial Statements for information pertaining to ESR and RSE. Natural gas distribution margins increased $1,380,000 (3%) for fiscal year 2003
primarily as a result of the December 1, 2002 RSE rate adjustment. Margins
increased $5,741,000 (15%) for fiscal 2002 primarily as a result of the general
rate increase which became effective October 2, 2001. The increases in margins
in both years was partially offset by a decline in the number of residential
customers served. Also, residential customer consumption, when adjusted for
weather variations, declined 2.2% in 2003 and 4.0% in 2002, which were slightly
higher than historical declines in usage that Mobile Gas has experienced over
time as customers replace old appliances with new, more energy efficient models
and as new, more energy efficient homes are built. Management believes that
some of this decline is attributable to the high bills customers received in
the 2000-2001 winter due to the extremely cold weather and high
natural gas prices. The increases in margins realized were less than the
amounts anticipated from the rate increases due to the decline in volumes
delivered to customers as discussed above. 20




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##### Table of Contents



Operations and maintenance (O&M) expenses increased $534,000 (3%) for fiscal
year 2003 due to increases in insurance expense, advertising and promotional
payments, payroll, postage, and expenses related to the establishment of the
ESR reserve. The change in Mobile Gas O&M expense per customer for fiscal
year 2003 was within the inflation-based cost control range established by the
APSC; therefore, no adjustment is required as described in Note 2 to the
Consolidated Financial Statements. O&M expenses increased $2,051,000 (12%) for
fiscal 2002 due to an increase in payroll and payroll related costs, an
increase in outside contractor expenses associated with maintaining the
distribution system, an increase in insurance costs related to property and
liability coverages, and an increase in bad debt expense. Depreciation expense increased $377,000 (6%) and $458,000 (7%) for fiscal years
2003 and 2002, respectively, due to Mobile Gas capital expansion projects and
increased investment in property, plant and equipment. Taxes, other than income taxes (other taxes), primarily consist of property
taxes and business license taxes that are based on gross revenues and fluctuate
accordingly. Other taxes increased $651,000 for fiscal year 2003 and decreased
$1,202,000 in fiscal year 2002 due primarily to fluctuations in business
license taxes associated with gas revenue. Interest expense decreased $208,000 and $238,000, respectively, in fiscal years
2003 and 2002 due to a decrease in short-term borrowings and a decline in the
short-term borrowing rate. Over the course of fiscal 2002, the Company was
able to repay all short-term borrowings through increased cash flows generated
from operating activities and the issuance by Mobile Gas in August 2002 of
$12.0 million of its 6.9% First Mortgage Bonds. Natural Gas Storage The natural gas storage segment provides for the underground storage of natural
gas and transportation services, through the operations of Bay Gas. The APSC
certificated Bay Gas as an Alabama gas storage public utility in 1992. Through
its first storage cavern with 2.3 Bcf of working gas capacity and connected
21-mile pipeline, Bay Gas thereafter began providing substantial, long-term
services for Mobile Gas and other customers that include storage and
transportation of natural gas from interstate and intrastate sources. The APSC
does not regulate rates for Bay Gas interstate gas storage and storage-related
services. The Federal Energy Regulatory Commission (FERC), which has
jurisdiction over interstate services, allows Bay Gas to charge market-based
rates for such services. Market-based rates minimize regulatory involvement in
the setting of rates for storage services and allow Bay Gas to respond to
market conditions. Bay Gas also provides interstate transportation-only
services. The FERC last issued orders on October 11, 2001 and June 3, 2002
approving rates for such services. The construction of natural gas-fired electric generation facilities in the
Southeast has provided opportunities to provide gas storage and transportation
services. Construction of Phase I of Bay Gas second storage cavern was
completed and the cavern was placed into service April 1, 2003. Bay Gas has
entered into a fifteen-year contract with Southern Company Services, Inc.
(Southern), an affiliate of Southern Company, for a 21




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##### Table of Contents



substantial portion of the
second cavern capacity. Currently, the second salt-dome storage cavern has a
working capacity of 3.7 Bcf and will provide sufficient capacity to serve the
new long-term contract with Southern as well as other customers. Continuing
cavern development is planned to provide for an additional 1.0 Bcf of working
gas capacity. Together, the two caverns at Bay Gas are currently planned to
hold 7.0 Bcf, with injection and withdrawal capacity of 300 MMcf and 700 MMcf
per day, respectively. The additional cavern development is projected to
continue in fiscal 2004 without interruption of storage operations. Bay Gas storage and transportation revenues increased $3,074,000 (27%) and
$3,440,000 (43%) during fiscal 2003 and 2002, respectively. See Note 10 to the
Consolidated Financial Statements for segment disclosure. Fiscal year 2003
revenues increased due primarily to additional storage revenues associated with
the commencement of operations of the second storage cavern and short-term
storage agreements. Under these short-term agreements, available storage
capacity is leased to customers on a day-to-day basis, thereby optimizing the
use of the cavern capacity. Increased storage revenues were partially offset by
the expiration in May 2003 of an option agreement for transportation services
over and above contracted volumes. Bay Gas entered into an agreement in
November 2001 which granted to a customer an option to order transportation of
additional volumes in excess of the volumes currently under long-term contract.
Bay Gas received $3,274,000 in consideration of the option agreement which was
amortized over the nineteen-month option period. In addition to the option
agreement, revenues during fiscal year 2002 were positively impacted by the
increased transportation of natural gas to Alabama Powers gas-powered
generating facility at Plant Barry with the completion of a new 24-inch, 18
mile pipeline that connects Bay Gas to Gulf South Pipeline Companys high
pressure pipeline. Operations and maintenance (O&M) expenses increased $513,000 (25%) and $475,000
(30%) in fiscal 2003 and 2002, respectively, due to an increase in payroll and
payroll related costs, an increase in insurance costs related to property and
liability coverages, and a general increase in operating cost as a result of
the expansion activities of Bay Gas. Also contributing to the increase in O&M
expenses in fiscal 2002 was a $145,000 repair to a compressor station. Depreciation expense increased $445,000 (29%) and $405,000 (36%), respectively,
in fiscal years 2003 and 2002 due to additional property completed and placed
in service. Other taxes consist primarily of property taxes, and those taxes increased as a
result of the new pipelines placed in service in June and November 2001 and Bay
Gas second storage cavern which was placed in service April 1, 2003. Interest expense decreased $43,000 (1%) in fiscal year 2003 and increased
$639,000 (16%) in fiscal year 2002, excluding the SFAS 145 reclassification.
See Note 1 to the Consolidated Financials Statements for additional information
pertaining to SFAS 145.
The decrease in interest expense in fiscal year 2003 is due to scheduled
principal payments. The increase in interest expense in fiscal year 2002 was
due to the issuance in December 2000 of the senior secured notes. 22




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##### Table of Contents



Allowance for borrowed funds used during construction represents the
capitalization of interest costs to construction work-in-progress. Capitalized
interest costs decreased $892,000 for fiscal year 2003 due to the completion
of Bay Gas second storage cavern and increased $564,000 in fiscal year 2002
due to Bay Gas pipeline and second storage cavern projects. Interest income decreased $214,000 and $927,000 in fiscal year 2003 and 2002,
respectively, due to the expenditure of the proceeds from Bay Gas debt
issuance used to finance the construction of the second storage cavern and two
pipelines. Minority interest reflects the minority partners share of pre-tax earnings of
the Bay Gas partnership, of which EnergySouths subsidiary holds controlling
interests. Minority interest increased $95,000 (21%) and $316,000 (238%)
during fiscal year 2003 and 2002, respectively, due to increased pretax
earnings of the partnership. Included in natural gas storages 2001 minority
interest is a $223,000 reduction relating to the early payoff of existing debt. Other The Company provides marketing, merchandising and other energy-related services
through MGS Marketing Services, Inc., Mobile Gas, and EnergySouth Services,
Inc., which are aggregated with EnergySouth, the holding company, to comprise
the Other category. See Note 10 to the Consolidated Financial Statements for
segment disclosure. Other revenues decreased $601,000 (12%) in fiscal 2003 due primarily to the
closing of a specialty store in October 2002 and the exit from the natural gas
generator sales business in September 2002. Other revenues increased $537,000
(12%) in fiscal year 2002 due primarily to the liquidation of the natural gas
generator inventory. Cost of merchandise (COM) sold decreased $724,000 (23%) in fiscal year 2003 and
increased $895,000 (39%) in fiscal year 2002 due to the reasons discussed
above. Additional costs of $46,000 and $534,000, respectively, were recognized
in the respective fiscal years due to the establishment of reserves for
slow-moving merchandise inventory and natural gas generators. O&M expenses decreased $373,000 (20%) in fiscal year 2003 and increased $92,000
(5%) in fiscal year 2002 primarily due to expenses incurred in the prior-year
periods for the closed specialty store and natural gas generator sales. Income Taxes Income taxes fluctuate with the change in income before income taxes. The
Companys effective tax rate in 2003, 2002 and 2001 was 37.6%, 36.9%, and
37.8%. Included in
the Companys 2001 income tax is a $808,000 tax benefit which was reclassified
in accordance with SFAS 145 from extraordinary loss to income tax. The
components of income tax expense are reflected in Note 5 to the Consolidated
Financial Statements. 23




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##### Table of Contents



Effects of Inflation Inflation impacts the prices the Company must pay for labor and other goods and
services required for operation, maintenance and capital improvements. For
Mobile Gas, increases in these costs are recovered through the rate process.
See Note 2 to the Consolidated Financial Statements. Changes in purchased gas
costs are passed through to customers in accordance with the purchased gas
adjustment provision of the Companys rate schedules. Gas Supply A primary goal of the Company is to provide gas at the lowest possible cost
while maintaining a reliable long-term supply. To accomplish this goal the
Company has diversified its gas supply by constructing and purchasing pipelines
to access the vast gas reserves in its area, both offshore and onshore. The
Company has also contracted with certain of these sources for firm supply.
During fiscal year 2001, Mobile Gas implemented a gas supply strategy in which
it enters into forward purchases to lock in prices for a majority of its
expected gas sales during the upcoming winter heating season. Future minimum
payments under third-party contracts for firm gas supply, which expire at
various dates through the year 2011, are as follows: 2004  $18,851,000; 2005 -
$1,166,000; 2006  $1,170,000; 2007  $1,187,000; 2008  $1,187,000 and 2009
through 2011  $3,215,000. A portion of firm supply requirements is met
through the withdrawal of gas from the storage facility owned by Bay Gas.
Mobile Gas has a gas storage agreement with Bay Gas to receive storage services
for an initial period through 2014. The Companys purchased gas adjustment
provision in rate schedules filed with the APSC allows the recovery of demand
and commodity costs of purchased gas from customers. Should the Companys
customer base decline due to deregulation or other reasons, resulting in costs
related to firm gas supply in excess of requirements, the Company believes it
would be able to take one or more of the following actions: as part of the
regulatory decision allowing other suppliers to serve current customers, secure
the right to allocate firm gas supply costs to the new company supplying gas;
reduce some excess gas supply costs through a negotiated settlement with
suppliers; and/or pass-through excess gas supply costs to existing customers
through the purchased gas component of customers rates. Environmental The Company is subject to various federal, state and local laws and regulations
relating to the environment, which have not had a material effect on the
Companys financial position or results of operations. See Note 8 to the
Consolidated Financial Statements for a discussion of certain environmental
issues. 24




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##### Table of Contents



Liquidity and Capital Resources The Company generally relies on cash generated from operations and, on a
temporary basis, short-term borrowings, to meet working capital requirements
and to finance normal capital expenditures. The Company issues debt and equity
for longer term financing as needed. Impacts of operating, investing, and
financing activities are shown on the Consolidated Statements of Cash Flows.
Cash provided by operating activities was $17.2 million, $22.1 million and
$22.5 million in 2003, 2002 and 2001, respectively. Cash provided from
operating activities declined $4.9 million in 2003 as compared to 2002 due to
an increase in accounts receivable and inventory, the option payment Bay Gas
received in fiscal year 2002, and the under-collection of increased gas costs
from customers. Partially offsetting the decrease in operating cash for fiscal
2003 was a decline in payables and increases in deferred taxes and net income.
Cash flow from operating activities in 2002 approximated the prior year. Cash used in investing activities reflects the capital-intensive nature of the
Companys business. During 2003, 2002, and 2001, respectively, the Company used
cash of $15.7 million, $22.6 million, and $46.6 million for construction of
distribution and storage facilities, purchases of equipment and other general
improvements. In addition to the Companys regular construction program for the
distribution business, Mobile Gas completed expansion projects in fiscal 2001
which included providing transportation services to a gas-powered generation
facility and a 10-mile pipeline that expanded its system into Baldwin County.
In fiscal 2001, Bay Gas invested $28.0 million in the construction of its
second storage cavern and two pipeline projects. During fiscal 2002, Bay Gas
invested $17.3 million in the construction of the second cavern and completion
of an 18-mile, 24-inch pipeline. In fiscal 2003, $4.9 million was invested by
Bay Gas in the completion of the second cavern. In October 2002, Mobile Gas
entered into a thirty-year franchise agreement with the City of Spanish Fort.
As a result, Mobile Gas invested $1.5 million in the expansion of its
distribution system by running an 11-mile extension of the Highway 225 pipeline
into the City of Spanish Fort. Bay Gas temporary investments of $3.0 million,
representing a portion of the unused proceeds of its December 2000 debt
issuance, matured in December 2001 and were used in Bay Gas construction
projects. The Company expects fiscal 2004 capital expenditures by Mobile Gas to be
approximately $9.0 million and by Bay Gas to be approximately $2.8 million.
Mobile Gas projected 2004 expenditures include normal construction activity,
including equipment purchases and other general improvements, and the
acquisition of a natural gas distribution system located in Mt. Vernon, Alabama
located just north of its current service territory. The acquisition will add
approximately 300 customers. Bay Gas capital expenditures will be for the
ongoing expansion of its second cavern and will be funded by internal cash
generation and cash equivalents of $1.0 million. Financing activities used cash of $8.0 million and $7.0 million in fiscal 2003
and 2002, respectively; however, financing activities provided cash of $32.8
million in fiscal 2001.
Long-term debt payments and the payment of quarterly dividends primarily
account for the cash used during fiscal 2003 and 2002. Another contributing
factor in 2002 was the payoff of short-term borrowings which was partially
funded by the issuance of $12.0 million of 6.9% First Mortgage Bonds by Mobile
Gas. Receipts of $1.2 million and $1.6 25




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##### Table of Contents



million in fiscal 2003 and 2002,
respectively, from the exercise of stock options partially offset the cash used
in financing activities. The $49.3 million increase in cash provided by
financing activities during 2001 was primarily due to the financing activities
of Bay Gas. In December 2000, Bay Gas completed the sale of $55,000,000 of
senior secured notes. These notes, which are guaranteed by EnergySouth, are
due in 2017 and accrue interest at an annual rate of 8.45%. The proceeds from
the sale of the notes were used in part by Bay Gas to construct two pipelines
and were also used to construct a second natural gas storage cavern and related
equipment. Additionally, $2,650,000 of the proceeds was used to repay a note
to Mobile Gas for the financing of base gas in the first Bay Gas storage cavern
and $18,670,000 was used to pay the balance of the debt incurred to construct
that storage cavern. In connection with the early payoff of that debt, Bay Gas
incurred a loss on the early extinguishment of debt of $2,454,000, consisting
of a $2,026,000 make-whole premium and a write-off of $428,000 of unamortized
issuance costs relating to the financing of the first cavern. Funds for the Companys short-term cash needs are expected to come from cash
provided by operations and borrowings under the Companys revolving credit
agreement which extends through January 31, 2005. At September 30, 2003 the
Company had $19,750,000 available for borrowing on its revolving credit
agreement. The Company pays a fee for its committed lines of credit rather than
maintain compensating balances. The commitment fee is 0.125% of the average
daily unborrowed amount during the annual period of calculation. The Company
believes it has adequate financial flexibility to meet its expected cash needs
in the foreseeable future. The table below summarizes the Companys contractual obligations and commercial
commitments as of September 30, 2003: Fiscal YearsType of Contractual
    
    Fiscal Year
    
    Fiscal Year
    
    Fiscal Year
    
    Fiscal Year
    
    Fiscal Year
    
    2009 andObligations (in thousands):
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    thereafterLong-Term Debt
    
    $
    6,006
    
    
    $
    6,248
    
    
    $
    6,463
    
    
    $
    6,769
    
    
    $
    5,300
    
    
    $
    67,860Gas Supply Contracts
    
    
    18,851
    
    
    
    1,166
    
    
    
    1,170
    
    
    
    1,187
    
    
    
    1,187
    
    
    
    3,215
 Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements as such term is defined in
Item 303(a)(4) of Regulation S-K. Critical Accounting Policies Regulatory Accounting.The Natural Gas Distribution segment is subject to
regulation by the APSC and as such, accounts for its transactions according to
the provisions of 26




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##### Table of Contents



Statement of Financial Accounting Standards No. 71,
Accounting for the Effects of Certain Types of Regulation (SFAS 71). This
statement sets forth the application of accounting principles generally
accepted in the United States of America for those companies whose rates are
established by or are subject to approval by an independent third party
regulator. The provisions of SFAS 71 require, among other things, that
financial statements of a regulated enterprise reflect the actions of
regulators, where appropriate. The application of this accounting policy
allows the Company to defer expenses and income on the consolidated balance
sheet as regulatory assets and liabilities when it is probable that those
expenses and income will be allowed in the rate setting process in a period
different from the period in which they would have been reflected in the
consolidated statements of income of an unregulated company. These deferred
regulatory assets and liabilities are then recognized in the consolidated
statement of income in the period in which the same amounts are reflected in
rates. See Regulatory Assets and Deferred Purchased Gas Adjustment on the
consolidated balance sheet. If any portion of the Natural Gas Distribution segment ceased to continue to
meet the criteria for application of regulatory accounting treatment for all or
part of its operations, the regulatory assets and liabilities related to those
portions ceasing to meet such criteria would be eliminated from the
consolidated balance sheet and included in the consolidated statement of income
for the period in which the discontinuance of regulatory accounting treatment
occurred. Revenue Recognition.Mobile Gas recognizes revenues from the sales of natural
gas and transportation services in the same period in which it delivers the
related volumes to customers. Sales revenues from residential and certain
commercial and industrial customers are billed on the basis of scheduled meter
reading cycles throughout the month. Mobile Gas records revenues for estimated
deliveries of gas, not yet billed to these customers, from the meter reading
date to the end of the accounting period. These revenues are included on the
Companys consolidated balance sheet as Unbilled Revenue. Included in the
rates charged by Mobile Gas to temperature sensitive customers is a temperature
rate adjustment rider which offsets the impact of unusually cold or warm
weather on operating margin. Reserves.EnergySouth companies establish reserves for uncollectible accounts
receivable and slow moving merchandise, materials and supplies inventories.
Such reserves are generally calculated based on currently available facts and
on the application of a percentage to each aging category of receivables and
inventory based on collection and sales experience, respectively. On certain
specific receivables and inventory, the Company records an allowance based on
currently available facts to reduce the net balance of the specific receivable
or inventory item to the amount the Company reasonably expects to collect.
Reserves for receivables are reported as
Allowance for Doubtful Accounts on the balance sheet. Reserves for inventory
are netted against the related asset account and reported on the balance sheet
in Materials, Supplies, and Merchandise. The Company believes its reserves
are adequate. However, actual results may differ from estimates, and estimates
can be, and often are, revised either negatively or positively, depending upon
actual outcomes or expectations based on the facts surrounding each potential
exposure. 27




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##### Table of Contents



Employee Benefits.Employee benefits include a defined-benefit pension plan
and other post-employment benefits for the benefit of substantially all
full-time regular employees. Under the provisions of Statement of Financial
Accounting Standards No. 87, Employers Accounting for Pensions, and
Statement of Financial Accounting Standards No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions, measurement of the obligations
under the defined benefit pension plans and other post-retirement benefits
plans is subject to a number of statistical factors and assumptions which
attempt to anticipate future events. These factors include assumptions about
the discount rate, expected return on plan assets and rate of future
compensation increases as determined by the Company. In addition, the
Companys actuarial consultants also use subjective factors such as withdrawal
and mortality rates to estimate the projected benefits obligation. The
actuarial assumptions used may differ materially from actual results due to
changing market and economic conditions, higher or lower withdrawal rates or
longer or shorter life spans of participants. These differences may result in
a significant impact on the amount of pension expense recorded in future
periods. (See Note 7 to the Consolidated Financial Statements.) At September 30, 2003, the discount rate used for actuarial purposes was 6.0
percent. A hypothetical one percent decrease in the annual discount rate would
increase pension and post-retirement benefit expense by $348,000 and $30,000,
respectively. At September 30, 2003, the expected rate of return on assets for
actuarial purposes was 8.25 percent and 7.75 percent for pension and
post-retirement benefits, respectively. A hypothetical one percent decrease in
the expected rate of return on assets would increase pension and
post-retirement benefit expense by $308,000 and $33,000, respectively. At
September 30, 2003, the rate of compensation increase used for actuarial
purposes was 4.5 percent. A hypothetical one percent increase in the expected
rate of future compensation increases would increase pension expense by
$293,000. Forward-Looking Statements Statements contained in this report, which are not historical in nature, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are made as of
the date of this report and involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of EnergySouth or its affiliates, or industry results, to differ
materially from any future results, performance or achievement expressed or
implied by such forward-looking statements. Such risks, uncertainties and
other important factors include, among others, risks associated with
fluctuations in natural gas prices, including changes in the historical
seasonal variances in natural gas prices and changes in historical patterns of
collections of accounts receivable; the prices of alternative fuels; the
relative pricing of natural gas versus other
energy sources; the availability of other natural gas storage capacity;
failures or delays in completing planned Bay Gas cavern development; disruption
or interruption of pipelines serving the Bay Gas storage facilities due to
accidents or other events; risks generally associated with the transportation
and storage of natural gas; the possibility that contracts with storage
customers could be terminated under certain circumstances, or not renewed or
extended upon expiration; the prices or terms of any extended or new contracts;
possible loss or material change in the financial condition of one or more 28




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major customers; liability for remedial actions under environmental
regulations; liability resulting from litigation; national and global economic
and political conditions; and changes in tax and other laws applicable to the
business. Additional factors that may impact forward-looking statements
include, but are not limited to, the Companys ability to successfully achieve
internal performance goals, competition, the effects of state and federal
regulation, including rate relief to recover increased capital and operating
costs, general economic conditions, specific conditions in the Companys
service area, and the Companys dependence on external suppliers, contractors,
partners, operators, service providers, and governmental agencies. 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. At September 30, 2003 the Company had approximately $98.6 million of long-term
debt at fixed interest rates. Interest rates range from 6.9% to 9.00% and the
maturity dates of such debt extend to 2023. See the information provided under
the captions The Company, Gas Supply, and Liquidity and Capital Resources
under Item 7 above for a discussion of the Companys risks related to
regulation, weather, gas supply, and the capital-intensive nature of the
Companys business. 
 Item 8. Financial Statements and Supplementary Data. The financial statements and financial statement schedules and the Independent
Auditors Report thereon filed as part of this report are listed in the
EnergySouth, Inc. and Subsidiaries Index to Financial Statements and
Schedules at Page F-1, which follows Part IV hereof. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 
 Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, an evaluation (the
Evaluation) was carried out, under the supervision and with the participation
of the Companys President and Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the design and operation of
the Companys disclosure controls and procedures (Disclosure Controls).
Based on the Evaluation, the CEO and CFO concluded that the Companys Disclosure Controls are effective in timely
alerting them to material information required to be included in the Companys
periodic SEC reports. 29




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Changes in Internal Control Internal controls for financial reporting were also evaluated and there have
been no significant changes in internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation. Limitations on the Effectiveness of Controls A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. 
 PART III 
 Item 10. Directors, Executive Officers, and Control Persons of the Registrant. Information under the captions Election of Directors and Information
Regarding the Board of Directors contained in the Companys definitive proxy
statement with respect to its 2004 Annual Meeting of Stockholders is
incorporated herein by reference. For information with respect to executive officers of the Registrant, see
Executive Officers of the Registrant at the end of Part I of this Report. Information under the caption Section 16(a) Beneficial Ownership Reporting
Compliance contained in the Companys definitive proxy statement with respect
to its 2004 Annual Meeting of Stockholders is incorporated herein by reference. Code of Ethics The Company has adopted a Code of Business Conduct and Ethics (the Ethics
Code) that applies to the Companys directors, officers, and employees,
including its President and Chief Executive Officer, its Senior Vice President
and Chief Financial Officer, and its Controller. The Company has posted the
Ethics Code on its internet website at www.energysouth.com. Audit Committee Financial Expert The Board of Directors of the Company has determined that S. Felton Mitchell,
Jr., who currently serves as the Chairman of the Audit Committee of the
Companys Board of
Directors, and Walter L. Hovell are audit committee financial experts. Mr.
Mitchell and Mr. Hovell are independent as defined in the listing standards of
the National Association of Securities Dealers. 30




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##### Table of Contents



Item 11. Executive Compensation. Information under the caption Executive Compensation contained in the
Companys definitive proxy statement with respect to its 2004 Annual Meeting of
Stockholders is incorporated herein by reference. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management. Information under the captions Equity Compensation Plan Information and
Security Ownership of Certain Beneficial Owners and Management contained in
the Companys definitive proxy statement with respect to its 2004 Annual
Meeting of Stockholders is incorporated herein by reference. 
 Item 13. Certain Relationships and Related Transactions. There were no transactions required to be disclosed pursuant to this item. 
 Item 14. Principal Accountant Fees and Services Information under the Caption Relationship With Independent Public
Accountants contained in the Companys definitive proxy statement with respect
to its 2004 Annual Meeting of Stockholders is incorporated herein by reference. 
 PART IV 
 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.  (a), (d)
    
    Financial Statements and Financial Statement SchedulesSee EnergySouth, Inc. and Subsidiaries Index to Financial
Statements and Schedules at page F-1, which follows
Part IV hereof.(3)
    
    Exhibits  See Exhibit Index on pages E-1 through E-6.(b)
    
    On July 25, 2003, EnergySouth, Inc. filed its current report
on Form 8-K reporting earnings for the quarter ended June 30, 2003
and declaration of a dividend.(c)
    
    Exhibits filed with this report are attached hereto. 31




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##### Table of Contents



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.
RegistrantMay 17, 2004
    
    By:
    
    /s/ Charles P.
HuffmanCharles P. Huffman, Senior Vice
President and Chief Financial Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and in the
Capacities and on the dates indicated: Signature
    
    Title
    
    Date/s/ John C. Hope, III
    
    Director, Chairman
    
    May 17, 2004John C. Hope, III/s/ Walter L. Hovell
    
    Director, Vice-Chairman
    
    May 17, 2004Walter L. Hovell/s/ John S. Davis
John S. Davis
    
    Director, President and
Chief Executive Officer
(Principal Executive Officer)
    
    May 17, 2004/s/ Charles P. Huffman

Charles P. Huffman
    
    Senior Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
    
    May 17, 2004
 32




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##### Table of Contents



Signatures (Continued) Signature
    
    Title
    
    Date/s/ Walter A. Bell
    
    Director
    
    May 17, 2004Walter A. Bell/s/ Gaylord C. Lyon
    
    Director
    
    May 17, 2004Gaylord C. Lyon/s/ Judy A. Marston
    
    Director
    
    May 17, 2004Judy A. Marston/s/ G. Montgomery Mitchell
    
    Director
    
    May 17, 2004G. Montgomery Mitchell/s/ Harris V. Morrissette
    
    Director
    
    May 17, 2004Harris V. Morrissette/s/ S. Felton Mitchell
    
    Director
    
    May 17, 2004S. Felton Mitchell/s/ E. B. Peebles, Jr.
    
    Director
    
    May 17, 2004E. B. Peebles, Jr./s/ Robert H. Rouse
    
    Director
    
    May 17, 2004Robert H. Rouse/s/ Thomas B. Van Antwerp
    
    Director
    
    May 17, 2004Thomas B. Van Antwerp
 33




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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, 2003, 2002 and 2001
    
    
    F-3Consolidated Balance Sheets, September 30, 2003 and 2002
    
    
    F-4Consolidated Statements of Common Stockholders Equity
for the years ended September 30, 2003, 2002 and 2001
    
    
    F-6Consolidated Statements of Cash Flows for the years ended
September 30, 2003, 2002 and 2001
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8Financial Statement SchedulesII
      Valuation and Qualifying Accounts and Reserves, Years
Ended September 30, 2003, 2002 and 2001
    
    
    S-1
 Schedules other than that referred to above are omitted and are not applicable
or not required. F-1




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##### Table of Contents



INDEPENDENT AUDITORS REPORT Board of Directors and Stockholders of
EnergySouth, Inc.
Mobile, Alabama We have audited the accompanying consolidated balance sheets of EnergySouth,
Inc. and its subsidiaries (the Company) as of September 30, 2003 and 2002,
and the related consolidated statements of income, common stockholders equity,
and cash flows for each of the three years in the period ended September 30,
2003. Our audit also included the financial statement schedule of the Company,
listed in the index, referred to as Schedule II. These financial statements
and the financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30, 2003
and 2002, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 2003 in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein. As discussed in Note 1, the Company reclassified the extraordinary loss on
early extinguishment of debt which occurred in the year ended September 30,
2001 to ordinary income. /s/ Deloitte & Touche LLP  
 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)
    
    2003
    
    2002
    
    2001Operating RevenuesGas Revenues
    
    $
    95,150
    
    
    $
    81,560
    
    
    $
    103,424Merchandise Sales
    
    
    3,259
    
    
    
    3,499
    
    
    
    2,966Other
    
    
    1,206
    
    
    
    1,360
    
    
    
    1,369Total Operating Revenues
    
    
    99,615
    
    
    
    86,419
    
    
    
    107,759Operating ExpensesCost of Gas
    
    
    30,859
    
    
    
    22,267
    
    
    
    52,053Cost of Merchandise
    
    
    2,473
    
    
    
    3,197
    
    
    
    2,302Operations and Maintenance
    
    
    24,425
    
    
    
    23,491
    
    
    
    20,930Depreciation
    
    
    8,923
    
    
    
    8,122
    
    
    
    7,266Taxes, Other Than Income Taxes
    
    
    7,277
    
    
    
    6,548
    
    
    
    7,549Total Operating Expenses
    
    
    73,957
    
    
    
    63,625
    
    
    
    90,100Operating Income
    
    
    25,658
    
    
    
    22,794
    
    
    
    17,659Other Income and (Expense)Interest Expense
    
    
    (8,369
    )
    
    
    (8,150
    )
    
    
    (10,273
    )Allowance for Borrowed Funds Used During Construction
    
    
    1,231
    
    
    
    2,044
    
    
    
    1,721Interest Income
    
    
    71
    
    
    
    265
    
    
    
    1,255Minority Interest
    
    
    (754
    )
    
    
    (739
    )
    
    
    (428
    )Total Other Income (Expense)
    
    
    (7,821
    )
    
    
    (6,580
    )
    
    
    (7,725
    )Income Before Income Taxes
    
    
    17,837
    
    
    
    16,214
    
    
    
    9,934Income Taxes (Note 5)
    
    
    6,702
    
    
    
    5,983
    
    
    
    3,796Net Income
    
    $
    11,135
    
    
    $
    10,231
    
    
    $
    6,138Earnings Per ShareBasic
    
    $
    2.20
    
    
    $
    2.06
    
    
    $
    1.25Diluted
    
    $
    2.17
    
    
    $
    2.03
    
    
    $
    1.23Average Common Shares OutstandingBasic
    
    
    5,066
    
    
    
    4,967
    
    
    
    4,926Diluted
    
    
    5,124
    
    
    
    5,046
    
    
    
    4,987
 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):
    
    2003
    
    2002ASSETSCurrent AssetsCash and Cash Equivalents
    
    $
    4,082
    
    
    $
    10,562ReceivablesGas
    
    
    6,652
    
    
    
    4,733Unbilled Revenue (Note 1)
    
    
    1,335
    
    
    
    956Merchandise
    
    
    2,313
    
    
    
    2,621Other
    
    
    939
    
    
    
    752Allowance for Doubtful Accounts
    
    
    (889
    )
    
    
    (951
    )Materials, Supplies, and Merchandise (At Average Cost)
    
    
    1,457
    
    
    
    1,598Gas Stored Underground For Current Use (At Average Cost)
    
    
    3,703
    
    
    
    3,086Regulatory Assets (Note 1)
    
    
    2,945
    
    
    
    262Deferred Income Taxes
    
    
    406
    
    
    
    2,583Prepayments
    
    
    1,166
    
    
    
    777Total Current Assets
    
    
    24,109
    
    
    
    26,979Property, Plant, and Equipment (Note 3)
    
    
    267,047
    
    
    
    227,740Less: Accumulated Depreciation and Amortization
    
    
    63,063
    
    
    
    56,924Property, Plant, and Equipment  Net
    
    
    203,984
    
    
    
    170,816Construction Work in Progress
    
    
    1,208
    
    
    
    26,995Total Property, Plant, and Equipment
    
    
    205,192
    
    
    
    197,811Other AssetsPrepaid Pension Cost (Note 7)
    
    
    856
    
    
    
    318Deferred Charges
    
    
    569
    
    
    
    566Prepayments
    
    
    1,015
    
    
    
    1,067Regulatory Assets (Note 1)
    
    
    996
    
    
    
    575Merchandise Receivables Due After One Year
    
    
    3,774
    
    
    
    4,463Total Other Assets
    
    
    7,210
    
    
    
    6,989Total
    
    $
    236,511
    
    
    $
    231,779
 See Accompanying Notes to Consolidated Financial Statements F-4




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##### Table of Contents



September 30, (in thousands, except share data):
    
    2003
    
    2002LIABILITIES AND CAPITALIZATIONCurrent LiabilitiesCurrent Maturities of Long-Term Debt (Note 4)
    
    $
    6,006
    
    
    $
    3,909Notes Payable
    
    
    250Accounts Payable
    
    
    6,389
    
    
    
    5,844Dividends Declared
    
    
    1,463
    
    
    
    1,363Customer Deposits
    
    
    1,469
    
    
    
    1,475Taxes Accrued
    
    
    3,500
    
    
    
    3,930Interest Accrued
    
    
    1,272
    
    
    
    1,342Regulatory Liabilities (Note 1)
    
    
    909
    
    
    
    3,258Unearned Revenue (Note 1)
    
    
    
    
    
    
    1,378Other
    
    
    1,012
    
    
    
    1,006Total Current Liabilities
    
    
    22,270
    
    
    
    23,505Other LiabilitiesAccrued Postretirement Benefit Cost (Note 7)
    
    
    415
    
    
    
    570Deferred Income Taxes
    
    
    18,484
    
    
    
    15,275Deferred Investment Tax Credits
    
    
    288
    
    
    
    314Regulatory Liabilities (Note 1)
    
    
    10,998
    
    
    
    228Asset Retirement Obligations (Note 1 and 12)
    
    
    
    
    
    
    9,988Other
    
    
    2,619
    
    
    
    2,326Total Other Liabilities
    
    
    32,804
    
    
    
    28,701Total Liabilities
    
    
    55,074
    
    
    
    52,206Commitments and Contingencies (Note 8)CapitalizationStockholders Equity (Note 6)Common Stock, $.01 Par Value
(Authorized 10,000,000 Shares; Outstanding
2003 - 5,133,000; 2002 - 5,048,000 Shares)
    
    
    51
    
    
    
    50Capital in Excess of Par Value
    
    
    23,490
    
    
    
    21,607Retained Earnings
    
    
    61,114
    
    
    
    55,626Total Stockholders Equity
    
    
    84,655
    
    
    
    77,283Minority Interest
    
    
    4,142
    
    
    
    3,645Long-Term Debt (Note 4)
    
    
    92,640
    
    
    
    98,645Total Capitalization
    
    
    181,437
    
    
    
    179,573Total
    
    $
    236,511
    
    
    $
    231,779
 See Accompanying Notes to Consolidated Financial Statements F-5




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##### Table of Contents



CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS EQUITY EnergySouth, Inc. Common Stock
    
    Capital inNumber of
    
    Par
    
    Excess of
    
    Retained(In thousands, except per share data)
    
    Shares
    
    Value
    
    Par Value
    
    EarningsBalance at September 30, 2000
    
    
    4,912
    
    
    $
    49
    
    
    $
    18,919
    
    
    $
    49,576Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,138Dividend Reinvestment Plan
    
    
    16
    
    
    
    
    
    
    
    343Stock Options Exercised
    
    
    9
    
    
    
    
    
    
    
    125Cash Dividends  $1.02 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,026
    )Balance at September 30, 2001
    
    
    4,937
    
    
    
    49
    
    
    
    19,387
    
    
    
    50,688Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,231Dividend Reinvestment Plan
    
    
    13
    
    
    
    
    
    
    
    329Stock Options Exercised Including IncomeTax Benefits
    
    
    98
    
    
    
    1
    
    
    
    1,891Cash Dividends  $1.06 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,293
    )Balance at September 30, 2002
    
    
    5,048
    
    
    
    50
    
    
    
    21,607
    
    
    
    55,626Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,135Dividend Reinvestment Plan
    
    
    13
    
    
    
    
    
    
    
    351Stock Options Exercised Including IncomeTax Benefits
    
    
    72
    
    
    
    1
    
    
    
    1,532Cash Dividends  $1.11 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,647
    )Balance at September 30, 2003
    
    
    5,133
    
    
    $
    51
    
    
    $
    23,490
    
    
    $
    61,114
 See Accompanying Notes to Consolidated Financial Statements F-6




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CONSOLIDATED STATEMENTS OF CASH FLOWS EnergySouth, Inc. Years Ended September 30, (in thousands)
    
    2003
    
    2002
    
    2001Cash Flows from Operating ActivitiesNet Income
    
    $
    11,135
    
    
    $
    10,231
    
    
    $
    6,138Adjustments to Reconcile Net Income to Net Cash
Provided by Operating ActivitiesDepreciation and Amortization
    
    
    9,301
    
    
    
    8,568
    
    
    
    7,650Provision for Losses on Receivables
    
    
    576
    
    
    
    598
    
    
    
    580Provision for Losses on Inventory
    
    
    46
    
    
    
    469Provision for Deferred Income Taxes
    
    
    5,475
    
    
    
    2,745
    
    
    
    (946
    )Minority Interest
    
    
    754
    
    
    
    739
    
    
    
    428Changes in Operating Assets and Liabilities:Receivables
    
    
    (2,138
    )
    
    
    3,320
    
    
    
    (2,414
    )Inventory
    
    
    (521
    )
    
    
    1,672
    
    
    
    (2,447
    )Payables
    
    
    366
    
    
    
    (5,016
    )
    
    
    6,431Deferred Purchased Gas Adjustment
    
    
    (5,715
    )
    
    
    (1,526
    )
    
    
    4,705Other
    
    
    (2,067
    )
    
    
    322
    
    
    
    2,406Net Cash Provided by Operating Activities
    
    
    17,212
    
    
    
    22,122
    
    
    
    22,531Cash Flows from Investing ActivitiesCapital Expenditures
    
    
    (15,674
    )
    
    
    (25,626
    )
    
    
    (43,567
    )Changes in Temporary Investments
    
    
    
    
    
    
    3,000
    
    
    
    (3,000
    )Net Cash Used In Investing Activities
    
    
    (15,674
    )
    
    
    (22,626
    )
    
    
    (46,567
    )Cash Flows from Financing ActivitiesRepayment of Long-Term Debt
    
    
    (3,909
    )
    
    
    (1,897
    )
    
    
    (20,566
    )Proceeds from Issuance of Long-Term Debt
    
    
    
    
    
    
    12,000
    
    
    
    55,000Make-Whole Premium on Long-Term Debt
    
    
    
    
    
    
    
    
    
    
    (2,026
    )Debt Issuance Costs
    
    
    
    
    
    
    (84
    )
    
    
    (862
    )Changes in Short-term Borrowings
    
    
    250
    
    
    
    (13,235
    )
    
    
    6,905Payment of Dividends
    
    
    (5,647
    )
    
    
    (5,293
    )
    
    
    (5,026
    )Dividend Reinvestment
    
    
    351
    
    
    
    329
    
    
    
    342Exercise of Stock Options
    
    
    1,193
    
    
    
    1,558
    
    
    
    126Partnership Distributions
    
    
    (256
    )
    
    
    (364
    )
    
    
    (1,134
    )Net Cash Provided By (Used In) Financing Activities
    
    
    (8,018
    )
    
    
    (6,986
    )
    
    
    32,759Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (6,480
    )
    
    
    (7,490
    )
    
    
    8,723Cash and Cash Equivalents at Beginning of Year
    
    
    10,562
    
    
    
    18,052
    
    
    
    9,329Cash and Cash Equivalents at End of Year
    
    $
    4,082
    
    
    $
    10,562
    
    
    $
    18,052Cash Paid During the Year for:Interest
    
    $
    8,416
    
    
    $
    8,069
    
    
    $
    7,775Income Taxes
    
    $
    1,883
    
    
    $
    3,786
    
    
    $
    4,102
 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); MGS Marketing Services, Inc. (Marketing); a
90.9% owned partnership, Bay Gas Storage Company, Ltd. (Bay Gas), and a 51%
owned partnership, Southern Gas Transmission Company (SGT). Minority interest
represents the respective other owners proportionate shares of the income and
equity of Bay Gas and SGT. All significant intercompany balances and
transactions have been eliminated. Revenues and Gas Costs The Companys distribution segment reads meters on a monthly cycle basis and
records revenues based upon estimated consumption through the end of the month
for all customers regardless of the meter reading date. Increases or decreases in the cost of gas and certain other costs are passed
through to customers in accordance with provisions in the Companys rate
schedules. Any over-or-under recoveries of these costs are charged or credited
to cost of gas and included in current assets or liabilities as the Deferred
Purchased Gas Adjustment within the Companys Balance Sheet. The Companys natural gas storage segment recognizes revenues in accordance
with contractual agreements for storage and transportation services. The
agreements include fees for monthly storage of natural gas, fees for the
injection and withdrawal of natural gas, and transportation of natural gas
through Bay Gas system. All revenues are based upon metered volumes except
for the monthly storage fee. Property, Plant, and Equipment Included in property, plant, and equipment are acquisition adjustments, net of
amortization, of $6,245,000 and $6,605,000 at September 30, 2003 and 2002,
respectively. Such acquisition adjustments are being amortized to cost of
service over the lives of the assets acquired. The cost of additions includes direct labor and materials, allocable
administrative and general expenses, pension and payroll taxes, and an
allowance for funds used during construction. The cost of depreciable property
retired, plus cost of dismantling, less salvage, is charged to accumulated
depreciation. In accordance with the adoption by the Company of SFAS No. 143
(see New Accounting Standards) on October 1, 2002, the estimated costs of
dismantling retired property, which is a component of Mobile Gas F-8




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##### Table of Contents



depreciation rates, have been reclassified to a regulatory liability for
the period ended September 30, 2003 and as a separate liability for the period
ended September 30, 2002. 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 SFAS No. 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 Alabama Public
Service Commission (APSC). For the years ended September 30, 2003, 2002, and
2001 approved depreciation rates averaged approximately 4.1% of depreciable
property, excluding the gas storage facility which is depreciated at an annual
rate averaging 2.7%. Cash Equivalents The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Income Taxes The Company records deferred tax liabilities and assets, as measured by enacted
tax rates, for all temporary differences caused when the tax basis of an asset
or liability differs from that reported in the financial statements.
Investment tax credits realized after 1980 are deferred and amortized over the
average life of the related property in accordance with regulatory treatment. Earnings Per Share The basic earnings per share computation is based on the weighted average
number of common shares outstanding during each period. The diluted earnings
per share computation is based on the weighted average number of common shares
and diluted potential common shares, using the treasury stock method,
outstanding during each period. Average common shares used to compute basic earnings per share differed from
average common shares used to compute diluted earnings per share by equivalent
shares of 58,000, 79,000, and 61,000 for the years ended September 30, 2003,
2002, and 2001, respectively. These differences in equivalent shares are from
outstanding stock options. F-9




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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 are determined to be impaired, such assets would be
written down to their estimated fair market values. The Company does not
believe it has any assets which are currently impaired. Regulatory Assets and Liabilities The Company is subject to the provisions of Financial Accounting Standards
Board (FASB) Statement No. 71, Accounting for the Effects of Certain Types of
Regulation (SFAS 71). Regulatory assets represent probable future revenues
associated with certain costs that are expected to be recovered from customers
through the ratemaking process. Regulatory liabilities represent probable
future reductions in revenues associated with amounts that are expected to be
credited to customers through the ratemaking process. The significant
regulatory assets and liabilities as of September 30, are (in thousands): 2003
    
    2002Current
    
    Noncurrent
    
    Current
    
    NoncurrentAssetsProperty, Plant, and Equipment
    
    $
    85
    
    
    $
    10
    
    
    $
    101
    
    
    $
    95Deferred Purchase Gas Adjustment
    
    
    2,533ESR Fund
    
    
    167
    
    
    
    666Bad Debt Reserve
    
    
    133
    
    
    
    265
    
    
    
    133
    
    
    
    398Other
    
    
    27
    
    
    
    55
    
    
    
    28
    
    
    
    82Regulatory Assets
    
    $
    2,945
    
    
    $
    996
    
    
    $
    262
    
    
    $
    575LiabilitiesBad Debt Reserve
    
    $
    40
    
    
    $
    20
    
    
    $
    60
    
    
    $
    60ESR Fund
    
    
    854Asset Retirement Obligations
    
    
    
    
    
    
    10,825Deferred Investment Tax Credit
    
    
    15
    
    
    
    153
    
    
    
    16
    
    
    
    168Deferred Purchase Gas Adjustment
    
    
    
    
    
    
    
    
    
    
    3,182Regulatory Liabilities
    
    $
    909
    
    
    $
    10,998
    
    
    $
    3,258
    
    
    $
    228
 On October 1, 2002, the Company adopted SFAS No. 143 and reflected non-legal
asset retirement obligations as a regulatory liability for the period ended
September 30, F-10




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##### Table of Contents



2003 and as a separate liability for the period ended September 30, 2002. (See
New Accounting Standards) 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 life of the option agreement. Stock-Based Compensation The Company has employee stock option plans, which are described more fully in
Note 6. The Company accounts for its employee stock option plans under the
intrinsic value recognition and measurement provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As stock options have been issued with exercise prices equal
to the market value of the underlying shares on the grant date, no compensation
cost has been recognized. Had compensation cost for the plans been determined based on the fair value of
the options on the grant date, consistent with Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, the
Companys net income and earnings per share would have been as follows:  F-11




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##### Table of Contents



2003
    
    2002
    
    2001Net Income, as reported
    
    $
    11,135
    
    
    $
    10,231
    
    
    $
    6,138Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related
tax effects
    
    
    160
    
    
    
    129
    
    
    
    134Pro forma net income
    
    $
    10,975
    
    
    $
    10,102
    
    
    $
    6,004Earnings per shareBasic  as reported
    
    $
    2.20
    
    
    $
    2.06
    
    
    $
    1.25Basic  pro forma
    
    $
    2.17
    
    
    $
    2.03
    
    
    $
    1.22Diluted  as reported
    
    $
    2.17
    
    
    $
    2.03
    
    
    $
    1.23Diluted  pro forma
    
    $
    2.14
    
    
    $
    2.00
    
    
    $
    1.20Average Common Shares OutstandingShares  Basic
    
    
    5,066
    
    
    
    4,967
    
    
    
    4,926Shares  Diluted
    
    
    5,124
    
    
    
    5,046
    
    
    
    4,987
 New Accounting Standards In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 eliminates the pooling-of-interest
method of accounting for all business combinations initiated after June 30,
2001 and did not have a material impact on the Companys financial statements.
SFAS 142 requires that goodwill and certain other intangible assets no longer
be amortized, but instead tested for impairment on an annual basis. SFAS 142
was adopted by the Company on October 1, 2002 and did not have a material
impact on the Companys financial statements. In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, Accounting for Asset Retirement Obligations (SFAS 143). SFAS 143
addresses the recognition and measurement of a liability for an asset
retirement obligation and the associated asset retirement costs. It requires
that an existing legal obligation associated with the retirement of a tangible
long-lived asset be recognized as a liability when incurred and outlines the
method of measuring that liability. Management has determined that the
Company has no material legal obligations for the retirement of its assets.
However, the Company provides a provision, as part of its depreciation expense,
for the ultimate cost of certain asset retirements and removal. Removal costs
are not a legal obligation as defined by SFAS No. 143 but rather the result of
cost-based regulation and therefore are accounted for under the provisions of
SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. Upon
adoption of SFAS No. 143 on October 1, 2002, the Company classified removal
costs that do not have an associated legal retirement obligation as a
regulatory liability which included the period ended September 30, 2003, in
accordance with regulatory treatment, and as a separate liability for the
period ended September 30, 2002. The adoption of this standard did not have an
impact on net income. F-12




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##### Table of Contents



In August 2001, FASB issued Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144), which addresses accounting and reporting standards for long-lived assets.
SFAS 144 applies to recognized long-lived assets of an entity to be held and
used or to be disposed of and develops a single accounting model for the
disposal of long-lived assets, whether previously held or newly acquired. SFAS
144 did not have an impact on the Companys financial statements when adopted
by the Company on October 1, 2002. In April 2002, FASB issued Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections (SFAS 145). SFAS 145 rescinds previous
statements including FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FASB Statement No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS
145 requires entities to apply APB Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, to
determine whether gains and losses related to the extinguishment of debt should
be recorded and classified as part of an entitys recurring operations. The
Company adopted SFAS 145 on October 1, 2002 and accordingly reclassified the
extraordinary loss on early extinguishment of debt which occurred in fiscal
2001 to ordinary income. Accordingly, $2,454,000 was reclassified from an
extraordinary item to interest expense on the Companys 2001 Consolidated
Income Statement. In December 2000, Bay Gas completed the sale of $55,000,000
of senior secured notes, a portion of which was used to pay the balance of the
existing debt incurred to construct the first storage cavern. In connection
with the early payoff of the existing debt, Bay Gas expensed $428,000 of
unamortized debt issuance costs relating to the financing of the first cavern
and $2,026,000 make-whole premium related to the early payoff of existing debt. In June 2002, FASB issued Statement of Financial Accounting Standards No. 146,
Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146).
This Statement nullifies Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring), and
addresses the recognition and measurement of costs associated with an exit
activity that does not involve an entity newly acquired in a business
combination or with a disposal activity covered by SFAS 144. SFAS 146 applies
to all disposal activities initiated after December 15, 2002. SFAS 146 was
adopted by the Company in the second quarter of fiscal 2003 and did not have an
impact on the Companys financial statements.. In December 2002, FASB issued Statement of Financial Accounting Standards No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure
(SFAS 148). This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 required
additional disclosures related to the effect of stock-based compensation on
reported results. The Company has adopted the disclosure provisions. F-13




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##### Table of Contents



In November 2002, FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 addresses the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and clarifies the need for a guarantor to
recognize, at the inception of certain guarantees, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The Company does
not have any guarantees subject to the provisions of FIN 45, thus the adoption
of FIN 45 on October 1, 2003 did not have a material impact on the Companys
financial statements. In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46) which clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements. FIN
46 provides guidance on the identification and consolidation of variable
interest entities (VIEs), whereby control is achieved through means other than
through voting rights. Management has determined that the Company does not
have VIEs as defined in FIN 46. In April 2003, FASB issued Statement of Financial Accounting Standards No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
(SFAS 149), which amends and clarifies financial accounting and reporting for
derivative instruments, including those embedded in other contracts and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 149 is effective for all contracts
entered into or modified after June 30, 2003. SFAS 149 did not have a material
impact on the Companys financial statements. In May 2003, FASB issued Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150). This Statement establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 was adopted on July
1, 2003 and did not have a material impact on the Companys financial
statements. Reclassifications Certain amounts in the prior years financial statements have been reclassified
to conform with the 2003 financial statement presentation. 2. RATES AND REGULATIONS The Company is principally engaged in the distribution and storage of natural
gas. Through Mobile Gas and SGT, the Company is engaged in the distribution
and transportation of natural gas to residential, commercial and industrial
customers in Southwest Alabama. The APSC regulates the gas distribution and
transportation operations of Mobile Gas and SGT. For the major portion of the
Companys business, the APSC approves rates which are intended to permit the
recovery of the cost of service F-14




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##### Table of Contents



including a return on investment. Gas deliveries to certain industrial
customers are subject to regulation by the APSC through contract approval. On June 10, 2002, the APSC approved Mobile Gas request for the Rate
Stabilization and Equalization (RSE) rate setting process to be effective
October 1, 2002 through September 30, 2005, and thereafter, unless modified or
discontinued by APSC order. Under RSE, the APSC conducts quarterly reviews to
determine, based on Mobile Gas projections and fiscal year-to-date
performance, whether Mobile Gas return on equity is expected to be within the
allowed range of 13.35% to 13.85%. Reductions in rates can be made quarterly
to bring the projected return within the allowed range; increases, however, are
allowed only once each fiscal year, effective December 1, and cannot exceed
four percent of prior-year revenues. RSE limits the amount of Mobile Gas
equity upon which a return is permitted to 60 percent of its total
capitalization and provides for certain cost control measures designed to
monitor Mobile Gas operations and maintenance (O&M) expense. Under the
inflation-based cost control measurement established by the APSC, if a change
in Mobile Gas O&M expense per customer falls within 1.5 percentage points
above or below the change in the Consumer Price Index for All Urban Customers
(index range), no adjustment is required. If the change in O&M expense per
customer exceeds the index range, three-quarters of the difference is returned
to customers. To the extent the change is less than the index range, the
utility benefits by one-half of the difference through future rate adjustments.
The increase in O&M expenses per customer was within the index range for the
rate year ended September 30, 2003; therefore, no adjustments are required. A
rate adjustment designed to increase annual revenues by approximately $2.2
million became effective December 1, 2002 under RSE. In conjunction with the approval of RSE, the APSC approved an Enhanced
Stability Reserve (ESR), beginning October 1, 2002, to which Mobile Gas may
charge the full amount of: 1) extraordinary O&M expenses resulting from force
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 beginning October 1, 2002. Subject to APSC
approval, additional funding, up to a maximum reserve balance of $1.5 million,
may be provided by any future non-recurring revenue should such revenue cause
Mobile Gas return on equity for the fiscal year to exceed 13.85%. During the
year ended September 30, 2003, Mobile Gas charged $146,000 against the ESR
related to revenue losses from a large industrial customer. Following a year
in which a charge against the ESR is made, the APSC provides for accruals to
the ESR of no more than $15,000 monthly until the maximum funding level is
achieved. The ESR balance of $854,000 at September 30, 2003 is included in the
Consolidated Financial Statements as part of Regulatory Liabilities. Mobile Gas rates contain a temperature adjustment rider which is designed to
offset the impact of unusually cold or warm weather on the Companys operating
margin. The adjustment is calculated monthly and applied to customers bills
in the same billing cycle F-15




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##### Table of Contents



in which the weather variation occurs. The temperature adjustment rider
applies to substantially all residential and small commercial customers. Through Storage and Bay Gas, the Company provides underground storage of
natural gas and transportation services. The APSC regulates intrastate storage
operations through contract approval. Interstate gas storage contracts do not
require APSC approval since the Federal Energy Regulatory Commission (FERC),
which has jurisdiction over such contracts, allows them to have market-based
rates. The FERC has granted authority to Bay Gas to provide
transportation-only services to interstate shippers and approved rates for such
services. 3. PROPERTY, PLANT, AND EQUIPMENT The functional classifications for the cost of property, plant, and equipment
are as follows at September 30, (in thousands): 2003
    
    2002Distribution Plant
    
    $
    141,231
    
    
    $
    135,254General Plant
    
    
    22,050
    
    
    
    21,107Storage Plant
    
    
    72,088
    
    
    
    39,590Transmission Plant
    
    
    22,472
    
    
    
    22,532Acquisition Adjustment
    
    
    9,206
    
    
    
    9,257Total Property, Plant, and Equipment
    
    $
    267,047
    
    
    $
    227,740
 4. NOTES PAYABLE AND LONG-TERM DEBT Long-term debt consists of the following at September 30, (in thousands): 2003
    
    2002Mobile Gas Service CorporationFirst Mortgage Bonds8.75% Series, due July 1, 2022
    
    $
    12,000
    
    
    $
    12,0007.48% Series, due July 1, 2023
    
    
    12,000
    
    
    
    12,0007.27% Series, due November 1, 2006
    
    
    6,850
    
    
    
    8,5506.90% Series, due August 20, 2017
    
    
    11,487
    
    
    
    11,9629% Note, due May 13, 2013
    
    
    2,869
    
    
    
    3,042Bay Gas Storage Company, Ltd.8.45%
Guaranteed Senior Secured Notes, due December 1, 2017
    
    
    53,440
    
    
    
    55,000Total
    
    
    98,646
    
    
    
    102,554Less Amounts Due Within One Year
    
    
    6,006
    
    
    
    3,909Long-Term Debt
    
    $
    92,640
    
    
    $
    98,645
 Maturities and sinking fund requirements on long-term debt in each of the five
fiscal years subsequent to September 30, 2003 are as follows: 2004 -
$6,006,000; 2005  $6,248,000; 2006  $6,463,000; 2007  $6,769,000 and 2008 -
$5,300,000. The Companys long-term debt instruments contain certain debt to
equity ratio requirements and restrictions on the payment of cash dividends and
the purchase of shares of its capital stock. None of these requirements and
restrictions are presently expected to have a significant impact on the
Companys ability to pay dividends in the future. F-16




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##### Table of Contents



Substantially all of the
property of Mobile Gas is pledged as collateral for its long-term debt and Bay
Gas material contracts have been pledged as collateral for its long-term debt. At September 30, 2003, the Company had a $20 million revolving credit agreement
with a group of banks. Borrowings under the agreement may be made as needed
provided that the Company is in compliance with certain covenants in the
revolving credit agreement and all other loan agreements. The Company currently
is in compliance with all such covenants. The Company pays a fee for its
committed lines of credit rather than maintaining compensating balances. The
commitment fee is 0.125% of the average daily unborrowed amount during the
annual period of calculation. In August 2002, Mobile Gas issued $12.0 million
of its 6.9% First Mortgage Bonds, of which a portion was used to pay-down
short-term borrowings. Unused committed lines of credit at September 30, 2003
and 2002 were $19.75 million and $20.0 million, respectively. 5. INCOME TAXES The components of income tax expense are as follows for the years ended
September 30, (in thousands): 2003
    
    2002
    
    2001CurrentFederal
    
    $
    1,134
    
    
    $
    2,822
    
    
    $
    4,387State
    
    
    105
    
    
    
    460
    
    
    
    407Total Current Taxes
    
    
    1,239
    
    
    
    3,282
    
    
    
    4,794DeferredFederal
    
    
    4,805
    
    
    
    2,348
    
    
    
    (916
    )State
    
    
    684
    
    
    
    379
    
    
    
    (56
    )Total Deferred Taxes
    
    
    5,489
    
    
    
    2,727
    
    
    
    (972
    )Deferred investment tax credit
amortization
    
    
    (26
    )
    
    
    (26
    )
    
    
    (26
    )Total Income Tax Expense
    
    $
    6,702
    
    
    $
    5,983
    
    
    $
    3,796
 A reconciliation of income tax expense and the amount computed by multiplying
income before income taxes by the statutory federal income tax rate for the
periods indicated is as follows for the years ended September 30, (in
thousands): F-17




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##### Table of Contents



2003
    
    2002
    
    2001Income Tax Expense at Federal
Statutory Rate
    
    $
    6,118
    
    
    $
    5,532
    
    
    $
    3,399Excess of Book Over Tax Depreciation on
Pre-1981 Property Additions
    
    
    52
    
    
    
    142
    
    
    
    168Adjustments to Deferred TaxesPrior Year
    
    
    
    
    
    
    (313
    )Changes in State Tax Rate
    
    
    
    
    
    
    159State Income Taxes
    
    
    476
    
    
    
    474
    
    
    
    231Other  Net
    
    
    56
    
    
    
    (11
    )
    
    
    (2
    )Total Income Tax Expense
    
    $
    6,702
    
    
    $
    5,983
    
    
    $
    3,796Effective tax rate
    
    
    37.6
    %
    
    
    36.9
    %
    
    
    37.8
    %
 The tax effect of differences in book and tax depreciation related to pre-1981
property additions was recognized in income for accounting and ratemaking
purposes prior to 1981. With the adoption in fiscal 1994 of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, the
Company recorded deferred taxes related to this temporary difference and a
corresponding regulatory asset expected to be collected in customer rates when
such taxes become payable in accordance with the current ratemaking practices
followed by the APSC. Such future collections included in regulatory assets
are $95,000 and $196,000 at September 30, 2003 and 2002, respectively. No
valuation allowance is deemed necessary, as the Company anticipates generating
adequate future taxable income to realize the benefits of all deferred tax
assets on the balance sheet. The significant components of the Companys net deferred tax liability as of
September 30, are (in thousands): F-18




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##### Table of Contents



2003
    
    2002Deferred Tax LiabilitiesDifferences Between Book and Tax
Basis of Property
    
    $
    19,456
    
    
    $
    16,847Prepaid Insurance
    
    
    214
    
    
    
    212Purchased Gas Adjustment
    
    
    942Regulatory Assets
    
    
    185
    
    
    
    198Pension
    
    
    318
    
    
    
    118Postretirement Benefits
    
    
    42Other
    
    
    74
    
    
    
    75Total Deferred Tax Liabilities
    
    
    21,231
    
    
    
    17,450Deferred Tax AssetsGross Receipts Taxes
    
    
    903
    
    
    
    754Postretirement Benefits
    
    
    
    
    
    
    15Post Employment Benefits
    
    
    232
    
    
    
    219Purchased Gas Adjustment
    
    
    
    
    
    
    1,184Bad Debts
    
    
    452
    
    
    
    449Accrued Vacation
    
    
    234
    
    
    
    232Uniform Capitalization
    
    
    222
    
    
    
    345Unearned Revenue
    
    
    
    
    
    
    466Deferred Payments
    
    
    637
    
    
    
    518State of Alabama Net Operating Loss
    
    
    226
    
    
    
    318Other
    
    
    247
    
    
    
    258Total Deferred Tax Assets
    
    
    3,153
    
    
    
    4,758Net Deferred Tax Liability
    
    $
    18,078
    
    
    $
    12,692
 6. CAPITAL STOCK The Amended and Restated Stock Option Plan of EnergySouth, Inc. (Prior Plan)
expired on December 4, 2002 and no option grants may be made thereunder. At
the expiration date, 55,750 shares remained unissued, of which 38,000 were
never granted and 17,750 shares were forfeited. On January 31, 2003, the
stockholders approved the 2003 Stock Option Plan of EnergySouth, Inc. (Plan)
with terms and conditions similar to the expired plan. The Plan provides for
the granting of incentive stock options and non-qualified stock options to key
employees. Under the Plan, an aggregate of 350,000 shares of the Companys
authorized but unissued Common Stock have been reserved for issuance. Stock
options become 25% exercisable on the first anniversary of the grant date and
an additional 25% become exercisable each succeeding year. No option may be
exercised after the expiration of ten years from the grant date. Options are
granted at an option price which represents the market price on the date of
grant. Transactions under the Prior Plan and the Plan are summarized below: F-19




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##### Table of Contents



Weighted Average
    
    Weighted AverageShares
    
    Exercise Price
    
    Remaining LifeOutstanding at September 30, 2000
    
    
    270,150
    
    
    $
    16.676
    
    
    6.73 yearsGranted
    
    
    29,000
    
    
    
    21.094Exercised
    
    
    (8,775
    )
    
    
    14.309Forfeited
    
    
    (5,125
    )
    
    
    20.655Outstanding at September 30, 2001
    
    
    285,250
    
    
    
    17.126
    
    
    6.11 yearsGranted
    
    
    8,000
    
    
    
    27.000Exercised
    
    
    (98,050
    )
    
    
    15.898Forfeited
    
    
    (12,625
    )
    
    
    20.068Outstanding at September 30, 2002
    
    
    182,575
    
    
    
    18.015
    
    
    5.65 yearsGranted
    
    
    65,500
    
    
    
    26.758Exercised
    
    
    (72,350
    )
    
    
    16.498Forfeited
    
    
    (875
    )
    
    
    19.375Outstanding at September 30, 2003
    
    
    174,850
    
    
    $
    21.912
    
    
    6.93 yearsExercisable at September 30, 2001
    
    
    179,500
    
    
    $
    15.329
    
    
    4.71 yearsExercisable at September 30, 2002
    
    
    115,450
    
    
    $
    16.301
    
    
    4.41 yearsExercisable at September 30, 2003
    
    
    74,850
    
    
    $
    17.967
    
    
    4.70 yearsRemaining reserved for issuance
at September 30, 2003
    
    
    305,000
 The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation (SFAS 123). Accordingly, no compensation expense has been
recognized for its stock options granted. For purposes of disclosing pro forma
net income, the fair market value of the options at the date of grant was
estimated using a Black-Scholes options pricing model. The weighted average
fair value of options granted was $8.02, $9.43 and $5.72 per option during
2003, 2002 and 2001, respectively. Weighted average assumptions used in the pricing model for the years ended
September 30, are: 2003
    
    2002
    
    2001Risk Free Interest Rate
    
    
    3.90
    %
    
    
    5.09
    %
    
    
    5.24
    %Expected Life
    
    10 years
    
    10 years
    
    10 yearsStock Price Volatility
    
    
    38.80
    %
    
    
    41.70
    %
    
    
    36.00
    %Dividend Yield
    
    
    4.20
    %
    
    
    3.96
    %
    
    
    4.88
    %
 At September 30, 2003, 203,000 shares of the Companys authorized but unissued
Common Stock were reserved for issuance under the Companys Dividend
Reinvestment and Stock Purchase Plan. 7. RETIREMENT PLANS AND OTHER BENEFITS The Company has a noncontributory, defined benefit retirement plan covering
substantially all of its employees. Benefits are based on the greater of
amounts resulting from two different formulas: years of service and average
compensation during the last F-20




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##### Table of Contents



five years of employment, or years of service and
compensation during the term of employment. The Company annually contributes
to the plan the amount deductible for federal income tax purposes. The Company also provides certain health care and life insurance benefits for
retired employees. Substantially all employees may become eligible for such
benefits if they retire under the provisions of the Companys retirement plan.
The Company is accruing the costs over the expected service period of the
employees. The projected unit credit actuarial method was used to determine service cost
and actuarial liability. Effective April 1, 2002, the Company amended its retirement plan to increase
the benefits payable to, or on behalf of a member who, on or prior to April 1,
2001, retired or died in service, by an amount equal to 1% per year for each
year since the members retirement or date of death, to April 1, 2002. The
salaried retiree medical plan was amended to lower the plans coinsurance
percentage from 80% to 70%, resulting in a reduction in the accumulated
postretirement benefit obligation of $137,721. The following tables set forth the funded status of the plans, the amounts
recorded in the financial statements at September 30, (in thousands) and
certain assumptions with respect to the plans: Pension
    
    PostretirementBenefits
    
    Benefits2003
    
    2002
    
    2003
    
    2002Change in benefit obligationBenefit Obligation at Beginning of the Period
    
    $
    23,210
    
    
    $
    22,039
    
    
    $
    3,909
    
    
    $
    3,643Service Cost
    
    
    691
    
    
    
    720
    
    
    
    100
    
    
    
    82Interest Cost
    
    
    1,526
    
    
    
    1,632
    
    
    
    255
    
    
    
    258Benefits Paid
    
    
    (1,314
    )
    
    
    (1,158
    )
    
    
    262
    
    
    
    (246
    )(Gain)/Loss
    
    
    2,573
    
    
    
    (845
    )
    
    
    (240
    )
    
    
    310Amendments
    
    
    
    
    
    
    822
    
    
    
    
    
    
    
    (138
    )Benefit Obligation at the End of the Period
    
    $
    26,686
    
    
    $
    23,210
    
    
    $
    4,286
    
    
    $
    3,909Change in plan assetsFair Value of Assets at Beginning of the Period
    
    $
    30,106
    
    
    $
    32,321
    
    
    $
    3,277
    
    
    $
    3,299Benefits Paid
    
    
    (1,314
    )
    
    
    (1,158
    )ContributionsActual Return on Plan Assets
    
    
    4,564
    
    
    
    (1,057
    )
    
    
    357
    
    
    
    (22
    )Fair Value of Plan Assets at the End of the Period
    
    $
    33,356
    
    
    $
    30,106
    
    
    $
    3,634
    
    
    $
    3,277Funded statusPlan Assets in Excess of Benefit Obligation
    
    $
    6,670
    
    
    $
    6,896
    
    
    $
    (652
    )
    
    $
    (632
    )Unrecognized Net (Gain) Loss
    
    
    (6,620
    )
    
    
    (7,294
    )
    
    
    631
    
    
    
    500Prior Service Cost Not Yet Recognized
    
    
    934
    
    
    
    1,028
    
    
    
    (394
    )
    
    
    (438
    )Remaining Unrecognized Transition Asset
    
    
    (128
    )
    
    
    (312
    )Prepaid (Accrued) Benefit Cost
    
    $
    856
    
    
    $
    318
    
    
    $
    (415
    )
    
    $
    (570
    )
 F-21




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Pension
    
    PostretirementWeighted average assumptions as of
    
    Benefits
    
    BenefitsSeptember 30,
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Discount Rate
    
    
    6.00
    %
    
    
    6.75
    %
    
    
    7.50
    %
    
    
    6.00
    %
    
    
    6.75
    %
    
    
    7.50
    %Rate of Compensation Increase
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    6.10
    %Expected Rate of Return on Plan Assets
    
    
    8.25
    %
    
    
    7.50
    %
    
    
    7.50
    %
    
    
    7.75
    %
    
    
    7.00
    %
    
    
    7.00
    %Expected Rate of Return on Plan Assets -
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.00
    %
    
    
    3.00
    %Non-Bargaining Health Trust
 The accumulated postretirement benefit obligation at September 30, 2003 and
2002 was determined using an assumed health care cost trend rate of 10% in 2002
and 9% in 2003, gradually declining to 4.75% in fiscal year 2007 and
thereafter. The assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. A one-percentage-point
change in assumed health care cost trend rates would have the following effects
(in thousands): 1-Percentage-
    
    1-Percentage-Point Increase
    
    Point Decrease2003
    
    2002
    
    2003
    
    2002Effect on total of service and
interest cost components
    
    $
    31
    
    
    $
    26
    
    
    $
    (25
    )
    
    $
    (22
    )Effect on postretirement benefit obligations
    
    
    247
    
    
    
    208
    
    
    
    (209
    )
    
    
    (177
    )
 Net periodic benefit cost included the following components for the years ended
September 30, (in thousands): Pension Benefits
    
    Postretirement Benefits2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Service cost
    
    $
    691
    
    
    $
    720
    
    
    $
    754
    
    
    $
    100
    
    
    $
    82
    
    
    $
    76Interest cost
    
    
    1,526
    
    
    
    1,632
    
    
    
    1,522
    
    
    
    255
    
    
    
    258
    
    
    
    257Amortization of transition asset
    
    
    (183
    )
    
    
    (184
    )
    
    
    (183
    )Amortization of prior service cost
    
    
    94
    
    
    
    67
    
    
    
    40
    
    
    
    (44
    )
    
    
    (38
    )
    
    
    (38
    )Amortization of unrecognized gain
    
    
    (355
    )
    
    
    (459
    )
    
    
    (448
    )
    
    
    6
    
    
    
    
    
    
    
    (5
    )Expected return on plan assets
    
    
    (2,312
    )
    
    
    (2,329
    )
    
    
    (2,219
    )
    
    
    (211
    )
    
    
    (215
    )
    
    
    (227
    )Net periodic benefit cost
    
    $
    (539
    )
    
    $
    (553
    )
    
    $
    (534
    )
    
    $
    106
    
    
    $
    87
    
    
    $
    63
 The Company has formed two voluntary employees beneficiary association (VEBA)
trusts to fund postretirement health and life insurance benefits. The Company
did not contribute to these trusts in 2003 and 2002 but made contributions of
$21,000 in 2001. The Companys eligible employees may participate in the Employee Savings Plan
or the Bargaining Unit Employees Savings Plan, both of which are 401(k) plans.
The Companys contributions to these 401(k) plans for the years ended September
30, 2003, 2002, and 2001 were $240,000, $249,000, and $249,000, respectively. F-22




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8. COMMITMENTS AND CONTINGENCIES The Company has third-party contracts, which expire at various dates through
the year 2011, for the purchase, storage and delivery of gas supplies. During
fiscal year 2001, the Company implemented a gas supply strategy in which it
enters into forward purchases to lock in prices for a majority of its expected
gas sales during the upcoming winter heating season. Minimum payments under gas
supply contracts, which are exempt in the ordinary course of business from
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), in the fiscal years subsequent
to September 30, 2003 are as follows: Fiscal
    
    MinimumYear
    
    Payments2004
    
    $
    18,851,0002005
    
    
    1,166,0002006
    
    
    1,170,0002007
    
    
    1,187,0002008
    
    
    1,187,0002009-2011
    
    
    3,215,000Total
    
    $
    26,776,000
 A portion of firm supply requirements is expected to be met through the
withdrawal of gas from the storage facility owned by Bay Gas. Mobile Gas has
entered into a Gas Storage Agreement under which Bay Gas is to provide storage
services for an initial period of 20 years which began in September 1994 with
the commencement of commercial operations of the storage facility. The
purchased gas adjustment provisions of the Companys rate schedules permit the
recovery of gas costs from customers. The Company is subject to various federal, state and local laws and regulations
relating to the environment, which have not had a material effect on the
Companys financial position or results of operations. Like many gas distribution companies, prior to the widespread availability of
natural gas, the Company manufactured gas for sale to its customers. In
contrast to some other companies which operated multiple manufactured gas
plants, the Company and its predecessor operated only one such plant, which
discontinued operations in 1933. The process for manufacturing gas produced
by-products and residuals, such as coal tar, and certain remnants of these
residuals are sometimes found at former gas manufacturing sites. The Company conducted a preliminary assessment in 1994 of its former gas plant
site and has tested certain waters in the vicinity of the site. The Company
developed and has implemented a plan for the site based on the advice of
environmental consultants, which involves securing and monitoring the site, and
continued testing. In 2000, the Company commenced discussions with the City of
Mobile regarding the possible development of the property as a city park. As
part of this process, the Alabama Department of Environmental Management
(ADEM) is conducting a Brownfields F-23




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##### Table of Contents



evaluation of the property. It is
anticipated that this assessment will be completed by mid-2004. Preliminary
data received from ADEM has been reviewed by the Companys environmental
consultants. Based on information received to date, the Company does not
believe that the site currently poses any threat to human health or the
environment. At this time, the Company continues to believe that material
remediation costs are unlikely and has therefore established no reserve for
such costs in its financial statements. The Company intends that, should
further investigation or changes in environmental laws or regulations require
material expenditures for evaluation or remediation, with regard to the site,
it would apply to the APSC for appropriate rate recovery of such costs.
However, there can be no assurances that the APSC would approve the recovery of
such costs or the amount and timing of any such recovery. The Company is involved in litigation arising in the normal course of business.
Management believes that the ultimate resolution of such litigation will not
have a material adverse effect on the consolidated financial statements of the
Company. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values of financial instruments have been reported to meet the disclosure
requirements of Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Values of Financial Instruments, and are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The carrying amounts for cash and cash equivalents, gas and other receivables,
merchandise receivables, notes payable, accounts payable and other current
liabilities approximate fair value. The fair value of long-term debt is
estimated based on interest rates available to the Company at the end of each
respective year for the issuance of debt with similar terms and remaining
maturities. The carrying amount and the estimated fair value of long-term debt is as
follows at September 30, (in thousands): 2003
    
    2002Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueLong-term debt
    
    $
    98,646
    
    
    $
    118,851
    
    
    $
    102,554
    
    
    $
    119,335
 10. FINANCIAL INFORMATION BY BUSINESS SEGMENT Statement of Financial Accounting Standards No. 131, Disclosures About
Segments of An Enterprise and Related Information, requires that companies
disclose segment information which reflects how management makes decisions
about allocating resources to segments and measuring their performance. The
reportable segments disclosed F-24




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##### Table of Contents



herein were determined based on such factors as the regulatory environment and the types of products
and services offered. The Company is principally engaged in two reportable business segments: Natural
Gas Distribution and Natural Gas Storage. The Natural Gas Distribution segment
is actively engaged in the distribution and transportation of natural gas to
residential, commercial and industrial customers through Mobile Gas and SGT.
The Natural Gas Storage segment provides for the underground storage of natural
gas and transportation services through the operations of Bay Gas and Storage.
The Company also provides marketing, merchandising, and other energy-related
services through Marketing, Mobile Gas, and Services which are aggregated with
EnergySouth, the holding company, and included in the Other category. For the
years ended September 30, 2003, 2002, and 2001, all segments were located in
Southwest Alabama. Segment earnings information presented in the table below includes intersegment
revenues which are eliminated in consolidation. Such intersegment revenues are
primarily amounts paid by the Natural Gas Distribution segment to the Natural
Gas Storage segment. Segment assets are provided as additional information and
are net of intercompany advances, intercompany notes receivable and investments
in subsidiaries. As of and for the year ended
    
    Natural Gas
    
    Natural 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
    
    $
    112,960
    
    
    $
    81,407
    
    
    
    
    
    
    
    
    
    
    $
    194,367Total Assets
    
    $
    136,708
    
    
    $
    86,819
    
    
    $
    12,984
    
    
    
    
    
    
    $
    236,511
 F-25




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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
    
    $
    111,065
    
    
    $
    76,698
    
    
    $
    60
    
    
    
    
    
    
    $
    187,823Total Assets
    
    $
    134,042
    
    
    $
    83,645
    
    
    $
    14,092
    
    
    
    
    
    
    $
    231,779
 As of and for the year ended
    
    Natural Gas
    
    Natural GasSeptember 30, 2001 (in thousands):
    
    Distribution
    
    Storage
    
    Other
    
    Eliminations
    
    ConsolidatedOperating Revenues
    
    $
    99,628
    
    
    $
    8,076
    
    
    $
    4,527
    
    
    $
    (4,472
    )
    
    $
    107,759Cost of Gas
    
    
    56,296
    
    
    
    
    
    
    
    
    
    
    
    (4,243
    )
    
    
    52,053Cost of Merchandise & Jobbing
    
    
    
    
    
    
    
    
    
    
    2,302
    
    
    
    
    
    
    
    2,302Operations and Maintenance Expense
    
    
    17,824
    
    
    
    1,594
    
    
    
    1,741
    
    
    
    (229
    )
    
    
    20,930Depreciation Expense
    
    
    6,123
    
    
    
    1,115
    
    
    
    28
    
    
    
    
    
    
    
    7,266Taxes, Other Than Income Taxes
    
    
    7,165
    
    
    
    336
    
    
    
    48
    
    
    
    
    
    
    
    7,549Operating Income
    
    
    12,220
    
    
    
    5,031
    
    
    
    408
    
    
    
    
    
    
    
    17,659Interest Income (Expense)  Net
    
    
    (3,431
    )
    
    
    (5,324
    )
    
    
    (263
    )
    
    
    
    
    
    
    (9,018
    )Allow. for Borrowed Funds Used
During Construction
    
    
    284
    
    
    
    1,437
    
    
    
    
    
    
    
    
    
    
    
    1,721Less: Minority Interest
    
    
    (295
    )
    
    
    (133
    )
    
    
    
    
    
    
    
    
    
    
    (428
    )Income Before Income Taxes
    
    $
    8,778
    
    
    $
    1,011
    
    
    $
    145
    
    
    
    
    
    
    $
    9,934Capital Expenditures
    
    $
    15,497
    
    
    $
    28,058
    
    
    $
    12
    
    
    
    
    
    
    $
    43,567Property, Plant, and Equipment, Net
    
    $
    109,764
    
    
    $
    60,749
    
    
    $
    79
    
    
    
    
    
    
    $
    170,592Total Assets
    
    $
    136,994
    
    
    $
    79,505
    
    
    $
    15,111
    
    
    
    
    
    
    $
    231,610
 F-26




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11. QUARTERLY FINANCIAL DATA (Unaudited) Quarterly financial data for fiscal 2003 and 2002 is summarized as follows
(in thousands, except per share data): Three Months Ended
    
    Dec. 31
    
    Mar. 31
    
    Jun. 30
    
    Sep. 30Fiscal 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
    
    $
    0.67
    
    
    $
    1.10
    
    
    $
    0.19
    
    
    $
    0.24Diluted Earnings Per Share
    
    $
    0.66
    
    
    $
    1.09
    
    
    $
    0.19
    
    
    $
    0.23Fiscal 2002Total Operating Revenues
    
    $
    24,153
    
    
    $
    31,276
    
    
    $
    16,434
    
    
    $
    14,556Total Operating Income
    
    
    7,506
    
    
    
    9,290
    
    
    
    2,785
    
    
    
    3,213Net Income
    
    
    3,753
    
    
    
    4,699
    
    
    
    904
    
    
    
    875Basic Earnings Per Share
    
    $
    0.76
    
    
    $
    0.95
    
    
    $
    0.18
    
    
    $
    0.17Diluted Earnings Per Share
    
    $
    0.75
    
    
    $
    0.93
    
    
    $
    0.18
    
    
    $
    0.17
 The pattern of quarterly earnings reflects a seasonal nature because weather
conditions strongly influence operating results. 12. RECLASSIFICATION OF ASSET RETIREMENT OBLIGATIONS In accordance with accounting guidance that became available in February 2004,
the Company has reclassified the estimated costs of removal of utility plant
previously recognized in accumulated depreciation as a separate liability for
the year ended September 30, 2002. As a result of the adoption of SFAS 143 on
October 1, 2002, the liability for the estimated costs of removal of utility
plant has been reported as a regulatory liability for the year ended September
30, 2003. The following table shows how consolidated total property, plant and equipment
and other liabilities on the balance sheet have been revised. In Thousands
    
    2003
    
    2002Total Property, Plant, and Equipment  as reported
    
    
    194,367
    
    
    
    187,823Property, Plant, and Equipment  reclassified
    
    
    10,825
    
    
    
    9,988Total Property, Plant, and Equipment  as revised
    
    
    205,192
    
    
    
    197,811Total Other Liabilities  as reported
    
    
    21,979
    
    
    
    18,713Total Other Liabilities  reclassified
    
    
    10,825
    
    
    
    9,988Total Other Liabilities  as revised
    
    
    32,804
    
    
    
    28,701
 F-27




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This reclassification has no impact on the Companys reported result of
operations or cash flows. F-28




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SCHEDULE II ENERGYSOUTH, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED SEPTEMBER 30, 2003, 2002, AND 2001
(in thousands) COLUMN A
    
    COLUMN B
    
    COLUMN C
    
    COLUMN D
    
    COLUMN 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:(a) Inventory ReservesSeptember 30, 2003
    
    $
    83
    
    
    $
    46
    
    
    
    
    
    
    $
    1
    
    
    $
    128September 30, 2002
    
    $
    6
    
    
    $
    469
    
    
    
    
    
    
    $
    392
    
    
    $
    83September 30, 2001
    
    $
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6(b) Allowance for
Doubtful AccountsSeptember 30, 2003
    
    $
    951
    
    
    $
    576
    
    
    
    
    
    
    $
    638
    (1)
    
    $
    889September 30, 2002
    
    $
    849
    
    
    $
    598
    
    
    
    
    
    
    $
    496
    (1)
    
    $
    951September 30, 2001
    
    $
    749
    
    
    $
    580
    
    
    $
    664
    (2)
    
    $
    1,144
    (1)
    
    $
    849
 Notes: (1)Amounts written off  net of recoveries. (2)Consistent with regulatory treatment allowed by the APSC
October 2001 rate order, approximately $664,000 of bad debt expense was
reclassified as a regulatory asset and is being amortized to expense over the
subsequent five years. S-1




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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
 E-1




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##### Table of Contents



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
 E-2




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##### Table of Contents



reference to Exhibit 10(c)-1 to Form 10-K for fiscal year ended
September 30, 2000)(3)10(d)-5
    
    NNS Settlement Agreement between Koch Gateway Pipeline Company and
Mobile Gas Service Corporation dated March 26, 1998 (incorporated by
reference to Exhibit 10(d)-5 to Form 10-K for fiscal year ended September
30, 1998)10(g)
    
    Deferred Compensation Agreement with John S. Davis dated January 26,
1996 (incorporated by reference to Exhibit 10(g) to Form 8-K Current
Report dated February 7, 1996)10(g)-1
    
    Supplemental Deferred Compensation Agreement with John S. Davis dated
December 10, 1999 (incorporated by reference to Exhibit 10(g)-1 to Form
10-K for fiscal year ended September 30, 1999) (2)10(h)
    
    Transportation Agreement between Mobile Gas and Mobile Energy LLC
dated November 12, 1999 (incorporated by reference to Exhibit 10(h) to
Form 10-K for fiscal year ended September 30, 1999)
(3)10(i)
    
    Mobile Gas Service Corporation/Bay Gas Storage Company, Ltd. Gas
Storage Agreement dated February 26, 1992 (incorporated by reference to
Exhibit 10(i) to Form 10-K for fiscal year ended September 30, 1992)10(j)
    
    Directors/Officers Indemnification Agreement (incorporated by
reference to Exhibit 10(j) to Form 10-K for fiscal year ended September
30, 1992)10(j)-1
    
    Form of Change of Control Agreement entered into as of December 8,
1999 by and between EnergySouth, Inc. and the Executive Officers of
EnergySouth, Inc. and/or one or more of its subsidiaries (incorporated by
reference to Exhibit 10(j)-1 to Form 10-K for fiscal year ended September
30, 1999) (2)10(k)-1
    
    Amended and Restated Supplemental Deferred Compensation Agreement with
Walter L. Hovell, dated December 11, 1992 (incorporated by reference to
Exhibit 10(k) to Form 10-K for fiscal year ended September 30,
1992)(2)10(k)-2
    
    Amendment to Amended and Restated Supplemental Deferred Compensation
Agreement dated January 27, 1995 between the Company and Walter L. Hovell
(incorporated by reference to Exhibit 10(k)-2 to Form 8-K Current
Report dated January 27, 1995)(2)10(l)-1
    
    Bay Gas Agreement by and among Mobile Gas Service Corporation, MGS
Storage Services, Inc., MGS Energy Services, Inc. and Olin Corporation,
dated December 5, 1991 (incorporated by reference to Exhibit 10(l) to
Form 10-K for fiscal year ended September 30, 1992)10(m)-1
    
    Limited Partnership Agreement between MGS Storage Services, Inc., as
General Partner, and MGS Energy Services, Inc., as Limited Partner
 E-3




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##### Table of Contents



(forming Bay Gas Storage Company, Ltd.), dated December 5, 1991
(incorporated by reference to Exhibit 10(m) to Form 10-K for fiscal
year ended September 30, 1992)10(m)-2
    
    First Amendment to Limited Partnership Agreement dated as of April 6,
1992 and Second Amendment to Limited Partnership Agreement dated as of
September 12, 1994 (incorporated by reference to Exhibit 10(m)-2 to Form
10-K for fiscal year ended September 30, 1994)10(n)
    
    Cavity Development and Storage Agreement between Olin Corporation and
Bay Gas Storage Company, Ltd., dated January 14, 1992 (incorporated by
reference to Exhibit 10(n) to Form 10-K for fiscal year ended September
30, 1992)10(o)-1
    
    Transportation Agreement between Mobile Gas Service Corporation and
Tuscaloosa Steel Corporation dated as of May 15, 1995 (incorporated by
reference to Exhibit 10(o) to Form 10-K for fiscal year ended September
30, 1995)(3)10(o)-2
    
    Amendment dated August 23, 1996 to Transportation Agreement between
Mobile Gas Service Corporation and Tuscaloosa Steel Corporation
(incorporated by reference to Exhibit 10(o)-2 to Form 10-K for fiscal
year ended September 30, 1996) (3)10(q)-1
    
    Guaranty Agreement dated as of December 1, 2000 made by EnergySouth,
Inc., relating to Trust Indenture and Security Agreement made by Bay Gas
Storage Company, Ltd. (incorporated by reference to Exhibit 10(q)-1 to
Form 10-Q for the quarter ended December 31, 2000)10(r)
    
    Amended and Restated Stock Option Plan of EnergySouth, Inc.
(incorporated by reference to Appendix A to definitive proxy statement
dated December 17, 1998)(2)10(r)-2
    
    2003 Stock Option Plan of EnergySouth, Inc. (incorporated by reference
to Appendix A to definitive proxy statement dated December 23, 2003)
(2)10(s)
    
    Mobile Gas Service Corporation Incentive Compensation Plan
(incorporated by reference to Exhibit B to definitive proxy statement
dated December 21, 1992)(2)(4)10(t)
    
    Agreement for Purchase and Sale of Assets by and between The Utilities
Board of the Town of Citronelle and Mobile Gas Service Corporation dated
January 28, 1993 (incorporated by reference to Exhibit 10(t) to Form 10-K
for fiscal year ended September 30, 1993)10(v)
    
    Revolving Credit Agreement dated March 28, 2001 by and among
EnergySouth, Inc. as Borrower, Regions Bank as Agent and Regions Bank,
AmSouth Bank, and SouthTrust Bank as Lenders (incorporated by
reference to Exhibit 10(v) to Form 10-K for fiscal year ended
September 30, 2003)
 E-4




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10(x)
    
    Letter dated October 7, 1994 from Mobile Gas Service Corporation to
John S. Davis confirming terms of employment (incorporated by reference
to Exhibit A to Form 8-K current report filed November 2, 1994)(2)10(z)-1
    
    Amended and Restated EnergySouth, Inc. Non-Employee Directors Deferred
Fee Plan (incorporated by reference to Exhibit 10(z)-1 to Form 10-K for
fiscal year ended September 30, 2000)(2)14
    
    Code of Business Conduct and Ethics (1)18
    
    Letter regarding change in Accounting Principle (incorporated by
reference to Exhibit 18 to Form 10-Q Quarterly Report dated February 12,
1999)21
    
    Subsidiaries of Registrant and Partnerships in which Registrant Owns an
Interest(1)23
    
    Consent of Deloitte & Touche LLP(1)31.1
    
    Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
- Chief Executive Officer (1)31.2
    
    Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
- Chief Financial Officer (1)32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002  Chief Executive Officer
(1)32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002  Chief Financial Officer
(1)99(a)
    
    Report and Order of Alabama Public Service Commission dated October 3,
2001 (incorporated by reference to Exhibit 99(a) to Form 8-K current
report filed October 18, 2001)
  (1)
    
    Filed herewith.(2)
    
    Management contract or compensatory plan or arrangement.(3)
    
    Confidential portions of this exhibit have been omitted and previously
filed separately with the Securities and Exchange Commission pursuant to
a request for confidential
treatment made in accordance with Rule 24b-2 promulgated under the
Securities Exchange Act of 1934, as amended.(4)
    
    Amended to use Company Common Stock instead of Mobile Gas common stock
effective February 2, 1998. E-5