UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___
Commission IRS Employer
File State of Identification
Number Registrant Incorporation Number
1-7810 Energen Corporation Alabama 63-0757759
2-38960 Alabama Gas Corporation Alabama 63-0022000
2101 Sixth Avenue North
Birmingham, Alabama 35203
Telephone Number 205/326-2700
http://www.energen.com
Alabama Gas Corporation, a wholly owned subsidiary of Energen Corporation,
meets the conditions set forth in General Instruction H(1)(a) and (b) of Form
10-Q and is therefore filing this Form with reduced disclosure format pursuant
to General Instruction H(2).
Indicate by a check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. YES X NO ____
Indicate the number of shares outstanding of each of the issuers' classes of
common stock, as of May 11, 1998:
Energen Corporation $0.01 par value 29,158,505 shares
Alabama Gas Corporation $0.01 par value 1,972,052 shares
ENERGEN CORPORATION AND ALABAMA GAS CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements
(a) Consolidated Statements of Income of Energen Corporation
3
(b) Consolidated Balance Sheets of Energen
Corporation 4
(c) Consolidated Statements of Cash Flows of
Energen Corporation 6
(d) Statements of Income of Alabama Gas
Corporation 7
(e) Balance Sheets of Alabama Gas Corporation 8
(e) Statements of Cash Flows of Alabama Gas
Corporation 10
(g) Notes to Unaudited Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Selected Business Segment Data of Energen
Corporation 19
PART II: OTHER INFORMATION
Item 2. Changes in Securities 20
Item 4. Submission of Matters to a Vote of Security
Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
ENERGEN CORPORATION
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
(in thousands, March 31, March 31,
except share data) 1998 1997 1998 1997
Operating Revenues
<S> <C> <C> <C> <C>
Natural gas
distribution $161,747 $160,151 $257,502 $243,456
Oil and gas production
activities 36,226 22,791 66,359 36,488
Total operating
Revenues 197,973 182,942 323,861 279,944
Operating Expenses
Cost of gas 80,299 83,912 131,046 125,372
Operations and
Maintenance 34,385 32,001 68,526 62,103
Depreciation, depletion,
and amortization 24,316 12,625 42,152 23,022
Taxes, other than
income taxes 14,547 12,806 24,569 19,894
Total operating
Expenses 153,547 141,344 266,293 230,391
Operating Income 44,426 41,598 57,568 49,553
Other Income (Expense)
Interest expense (7,666) (5,856) (14,901) (10,801)
Other, net 507 1,155 1,325 2,330
Total other
income (expense)(7,159) (4,701) (13,576) (8,471)
Income Before
Income Taxes 37,267 36,897 43,992 41,082
Income taxes (3,025) 6,366 (2,427) 7,374
Net Income $40,292 $30,531 $46,419 $33,708
Basic Earnings Per Avg.
Common Share* $1.39 $1.21 $1.60 $1.41
Diluted Earnings Per Avg.
Common Share* $1.37 $1.19 $1.59 $1.40
Dividends Per
Common Share* $0.155 $0.150 $0.310 0.300
Basic Avg. Common Shares
Outstanding* 29,027 25,311 28,956 23,874
*Share amounts reflect a 2-for-1 stock split effective March 2, 1998
The accompanying Notes are an integral part of these statements
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
ENERGEN CORPORATION
<TABLE>
<CAPTION>
March 31, 1998 September 30, 1997
(in thousands) (unaudited)
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 8,200 $105,402
Accounts receivable, net of
allowance for doubtful
accounts of $3,850 at
March 31, 1998, and
$3,185 at September 30, 1997 84,068 70,676
Inventories, at average cost
Storage gas 16,747 25,367
Materials and supplies 7,646 7,281
Liquified natural gas in
storage 3,616 3,630
Deferred gas cost 8,231 2,512
Deferred income taxes 12,559 7,438
Prepayments and other 18,458 19,859
Total current assets 159,525 242,165
Property, Plant and Equipment
Oil and gas properties, successful
efforts method 539,380 454,210
Less accumulated depreciation,
depletion and amortization 115,372 87,554
Oil and gas properties, net 424,008 366,656
Utility plant 603,284 583,630
Less accumulated depreciation 296,512 287,749
Utility plant, net 306,772 295,881
Other property, net 4,163 4,466
Total property, plant and
equipment, net 734,943 667,003
Other Assets
Deferred income taxes 11,065 1,144
Deferred charges and other 9,032 9,485
Total other assets 20,097 10,629
TOTAL ASSETS $914,565 $919,797
The accompanying Notes are an integral part of these financial statements.
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
ENERGEN CORPORATION
<TABLE>
<CAPTION>
(in thousands, March 31, 1998 September 30, 1997
except share data) (unaudited)
CAPITAL AND LIABILITIES
Current Liabilities
<S> <C> <C>
Long-term debt due
within one year $ 1,859 $ 1,855
Notes payable to banks 46,000 202,000
Accounts payable 49,109 49,196
Accrued taxes 22,892 18,300
Customers' deposits 17,778 16,399
Amounts due customers 8,692 7,347
Accrued wages and benefits 11,976 13,719
Other 25,753 21,935
Total current liabilities 184,059 330,751
Deferred Credits and Other Liabilities
Other 8,299 8,301
Total deferred credits and
other liabilities 8,299 8,301
Commitments and Contingencies -- --
Capitalization
Preferred stock, cumulative
$0.01 par value,
5,000,000 shares authorized -- --
Common shareholders' equity*
Common stock, $0.01 par value; 75,000,000
shares authorized, 29,090,378
shares outstanding at March 31, 1998, and
28,796,218 shares outstanding at
September 30, 1997 291 288
Premium on capital stock 191,325 185,841
Capital surplus 2,802 2,802
Retained earnings 149,645 112,212
Total common shareholders'
equity 344,063 301,143
Long-term debt 378,144 279,602
Total capitalization 722,207 580,745
TOTAL CAPITAL AND LIABILITIES $914,565 $919,797
*Share amounts reflect a 2-for-1 stock split effective March 2, 1998
The accompanying Notes are an integral part of these financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
ENERGEN CORPORATION
(Unaudited)
<TABLE>
<CAPTION>
Six months ended March 31,
(in thousands) 1998 1997
Operating Activities
<S> <C> <C>
Net income $46,419 $33,708
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation, depletion and
amortization 42,152 23,022
Deferred income taxes, net (15,231) (683)
Deferred investment tax
credits, net (235) (244)
Net change in:
Accounts receivable (13,392) (24,023)
Inventories 8,269 (1,107)
Deferred gas cost (5,719) (1,585)
Accounts payable
- gas purchases 4,380 5,580
Accounts payable - trade (4,467) (6,467)
Other current assets and
liabilities 10,792 (17,108)
Other, net 2,859 (3,116)
Net cash provided by
operating activities 75,827 7,977
Investing Activities
Additions to property,
plant and equipment (110,612) (119,565)
Payments on notes receivable 423 356
Other, net 1,784 627
Net cash used in investing activities (108,405) (118,582)
Financing Activities
Payment of dividends on common stock (8,980) (7,285)
Issuance of common stock 2,685 52,091
Reduction of long-term debt (870) (923)
Proceeds from issuance of
long-term debt 98,541 --
Payment of note payable issued to
purchase U.S. Treasury securities (98,636) --
Net change in short-term debt (57,364) 62,050
Net cash provided by
(used in) financing activities (64,624) 105,933
Net change in cash and cash equivalents (97,202) (4,672)
Cash and cash equivalents at
beginning of period 105,402 17,074
Cash and Cash Equivalents at
End of Period $ 8,200 $12,402
The accompanying Notes are an integral part of these financial statements.
</TABLE>
<PAGE>
STATEMENTS OF INCOME
ALABAMA GAS CORPORATION
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
(in thousands) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating Revenues $161,747 $160,151 $257,502 $243,456
Operating Expenses
Cost of gas 80,774 84,501 132,178 126,593
Operations and maintenance 23,493 24,588 48,494 48,793
Depreciation 6,232 5,798 12,429 11,557
Income taxes
Current 18,874 12,259 21,022 12,281
Deferred, net (4,820) (550) (5,747) 416
Deferred investment
tax credits, net (117) (121) (234) (243)
Taxes, other than
income taxes 10,918 10,712 18,170 17,040
Total operating expenses 135,354 137,187 226,312 216,437
Operating Income 26,393 22,964 31,190 27,019
Other Income
Allowance for funds used
during construction 99 165 184 301
Other, net 168 (86) 247 288
Total other income 267 79 431 589
Interest Charges
Interest on long-term debt 2,211 2,211 4,422 4,422
Other interest expense 503 669 1,071 1,216
Total interest charges 2,714 2,880 5,493 5,638
Net Income $23,946 $20,163 $26,128 $21,970
The accompanying Notes are an integral part of these financial statements.
</TABLE>
<PAGE>
BALANCE SHEETS
ALABAMA GAS CORPORATION
March 31, 1998 September 30,1997
(in thousands) (unaudited)
ASSETS
Property, Plant and Equipment
Utility plant $603,284 $583,630
Less accumulated
depreciation 296,512 287,749
Utility plant, net 306,772 295,881
Other property, net 337 347
Current Assets
Cash and cash equivalents 7,435 2,580
Accounts receivable
Gas 54,056 36,098
Merchandise 1,739 2,001
Other 3,764 1,442
Allowance for doubtful
accounts (3,815) (3,156)
Inventories, at average cost
Storage gas 16,747 25,367
Materials and supplies 5,781 5,391
Liquified natural gas in storage 3,616 3,630
Deferred gas cost 8,231 2,512
Deferred income taxes 10,761 5,675
Prepayments and other 6,868 6,696
Total current assets 115,183 88,236
Deferred Charges and Other Assets 4,654 5,917
TOTAL ASSETS $426,946 $390,381
The accompanying Notes are an integral part of these financial statements.
<PAGE>
BALANCE SHEETS
ALABAMA GAS CORPORATION
(in thousands, March 31, 1998 September 30, 1997
except share data) (unaudited)
CAPITAL AND LIABILITIES
Capitalization
Common shareholder's equity
Common stock, $0.01 par value;
3,000,000 shares
authorized, 1,972,052 shares
outstanding at March 31, 1998,
and September 30, 1997 $ 20 $ 20
Premium on capital stock 31,682 31,682
Capital surplus 2,802 2,802
Retained earnings 129,343 106,894
Total common shareholder's equity 163,847 141,398
Cumulative preferred stock,
$0.01 par value, 120,000 shares
authorized, issuable in series-
$4.70 Series -- --
Long-term debt 125,000 125,000
Total capitalization 288,847 266,398
Current Liabilities
Notes payable to banks 12,000 11,000
Accounts payable
Trade 32,488 28,923
Affiliated companies -- 4,984
Accrued taxes 28,562 16,745
Customers' deposits 17,778 16,399
Other amounts due customers 8,692 7,347
Accrued wages and benefits 3,651 3,879
Other 11,639 10,481
Total current liabilities 114,810 99,758
Deferred Credits and Other Liabilities
Deferred income taxes 16,342 16,739
Accumulated deferred investment
tax credits 2,895 3,130
Regulatory liability 3,283 3,651
Customer advances for construction
and other 769 705
Total deferred credits and
other liabilities 23,289 24,225
Commitments and Contingencies -- --
TOTAL CAPITAL AND LIABILITIES $426,946 $390,381
The accompanying Notes are an integral part of these financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
ALABAMA GAS CORPORATION
(Unaudited)
Six months ended March 31, (in thousands) 1998 1997
Operating Activities
Net income $ 26,128 $21,970
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 12,429 11,557
Deferred income taxes, net (5,747) 416
Deferred investment tax credits (234) (243)
Net change in:
Accounts receivable (17,567) (21,599)
Inventories 8,244 (720)
Deferred gas cost (5,719) (1,585)
Accounts payable - gas purchases 4,380 5,580
Accounts payable - other trade (815) (3,729)
Other current assets and liabilities 15,407 (18,919)
Other, net 930 (4,458)
Net cash provided by (used in)
operating activities 37,436 (11,730)
Investing Activities
Additions to property,
plant and equipment (23,455) (16,034)
Net advances from affiliates (6,776) 12,802
Other, net 330 629
Net cash used in investing
activities (29,901) (2,603)
Financing Activities
Payment of dividends on
common stock (3,680) (6,720)
Net change in short-term debt 1,000 24,000
Net cash provided by (used in)
financing activities (2,680) 17,280
Net change in cash and
cash equivalents 4,855 2,947
Cash and cash equivalents at
beginning of period 2,580 803
Cash and Cash Equivalents at
End of Period $ 7,435 $ 3,750
The accompanying Notes are an integral part of these financial statements.
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS
ENERGEN CORPORATION AND ALABAMA GAS CORPORATION
1. BASIS OF PRESENTATION
All adjustments to the unaudited financial statements which are, in the
opinion of management, necessary for a fair statement of the results of
operations for the interim periods have been recorded. Such adjustments
consisted of normal recurring items and immaterial adjustments. The
consolidated financial statements and notes thereto should be read in
conjunction with the financial statements and notes for the years ended
September 30, 1997, 1996, and 1995, included in the 1997 Annual Report of
Energen Corporation (the Company) on Form 10-K. Certain reclassifications
were made to conform prior years' financial statements to the current quarter
presentation. The Company's natural gas distribution business is seasonal in
character and influenced by weather conditions. Results of operations for the
interim periods are not necessarily indicative of the results which may be
expected for the fiscal year.
2. REGULATORY
As an Alabama utility, Alabama Gas Corporation (Alagasco) is subject to
regulation by the Alabama Public Service Commission (APSC) which, in 1983,
established the Rate Stabilization and Equalization (RSE) rate-setting
process. RSE was extended with modifications in 1985, 1987 and 1990. On
October 7, 1996, RSE was extended, without change, for a five-year period
through January 1, 2002. Under the terms of that extension, RSE will continue
after January 1, 2002, unless, after notice to the Company and a hearing, the
Commission votes to either modify or discontinue its operation.
Under RSE as extended, the APSC conducts quarterly reviews to determine, based
on Alagasco's projections and fiscal year-to-date performance, whether
Alagasco's return on equity for the fiscal year will be within the allowed
range of 13.15 percent to 13.65 percent. 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 4 percent of prior-year revenues. RSE limits the utility's
equity upon which a return is permitted to 60 percent of total capitalization
and provides for certain cost control measures designed to monitor Alagasco's
operations and maintenance (O&M) expense. If the change in O&M expense per
customer falls within 1.25 percentage points above or below the Consumer
Price Index For All Urban Customers (index range), no adjustment is required.
If, however, 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. Under RSE as extended, an $11.8
million annual increase in revenue became effective December 1, 1997.
Alagasco calculates a temperature adjustment to customers' bills to remove the
effect of departures from normal temperature on Alagasco's earnings. The
calculation is performed monthly, and the adjustments to customers' bills are
made in the same billing cycle the weather variation occurs.
Alagasco's rate schedules for natural gas distribution charges contain a Gas
Supply Adjustment (GSA) rider, established in 1993, which permits the pass-
through to customers of changes in the cost of gas supply, including Gas
Supply Realignment (GSR) surcharges imposed by Alagasco's suppliers resulting
from changes in gas supply purchases related to the implementation of Federal
Energy Regulatory Commission (FERC) Order 636. The APSC on October 7, 1996,
issued an order providing for the refund to customers prior to January 31,
1997, of approximately $17 million of supplier refunds, including interest.
The Company refunded these amounts to customers during January 1997. The
refunds were collected from a variety of sources and most relate to the
settlement of rate case and FERC Order 636 proceedings of Southern Natural Gas
Company.
In accordance with APSC-directed regulatory accounting procedures, Alagasco in
1989 began returning to customers excess utility deferred taxes which resulted
from a reduction in the federal statutory tax rate from 46 percent to 34
percent using the average rate assumption method. This method provides for the
return to ratepayers of excess deferred taxes over the lives of the related
assets. In 1993 those excess taxes were reduced as a result of a federal tax
rate increase from 34 percent to 35 percent. Remaining excess utility deferred
taxes of $2.1 million are being returned to ratepayers over approximately 13
years. At March 31, 1998, and September 30, 1997, a regulatory liability
related to income taxes of $3.3 million and $3.7 million, respectively, was
included in the consolidated financial statements.
3. CAPITAL STOCK
On January 28, 1998, Energen announced a 2-for-1 split of the Company's common
stock. The split was in the form of a 100 percent stock dividend and was
payable on March 2, 1998, to shareholders of record on February 13, 1998. All
per-share amounts and the number of shares of capital stock outstanding have
been adjusted to reflect the stock split. Effective January 30, 1998, the
Restated Certificate of Incorporation of Energen Corporation was amended to
increase Energen's authorized common stock, par value $0.01 per share, from
30,000,000 shares to 75,000,000 shares.
4. DERIVATIVE COMMODITY INSTRUMENTS
Taurus Exploration Inc. (Taurus) enters into derivative commodity instruments
to hedge its exposure to the impact of price fluctuations on oil and gas
production. Such instruments include regulated natural gas and crude oil
futures contracts traded on the New York Mercantile Exchange and over-the-
counter swaps and basis hedges with major energy derivative product
specialists. These transactions are accounted for under the hedge method of
accounting. Under this method, any unrealized gains and losses are recorded
as a current receivable/payable and a deferred gain/loss. Realized gains and
losses are deferred until the revenues from the related hedged volumes are
recognized in the income statement. These realized deferred gains and losses
are reflected in current liabilities or current assets, respectively. Cash
flows from derivative instruments are recognized as incurred through changes
in working capital. The Company had deferred losses of $10.8 million and
$12.9 million on the balance sheet at March 31,1998, and September 30, 1997,
respectively.
At March 31, 1998, Taurus had entered into contracts and swaps for 16.8 Bcf of
its remaining estimated 1998 flowing gas production at an average contract
price of $2.11 per Mcf and for 405 MBbl of its remaining estimated flowing oil
production at an average contract price of $18.47 per barrel. The program has
been extended into fiscal year 1999 with contracts and swaps in place for 25.8
Bcf of flowing gas production at an average contract price of $2.32 per Mcf.
Realized prices are anticipated to be lower than hedged prices due to basis
differences and other factors.
All hedge transactions are subject to the Company's risk management policy,
approved by the Board of Directors, which does not permit speculative
positions. To apply the hedge method of accounting, management must
demonstrate that a high correlation exists between the value of the derivative
commodity instrument and the value of the item hedged. Management uses the
historic relationships between the derivative instruments and the sales prices
of the hedged volumes to ensure that a high level of correlation exists.
5. ACCOUNTING FOR LONG-LIVED ASSETS
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
requires that an impairment loss be recognized when the carrying amount of an
asset exceeds the sum of the undiscounted estimated future cash flows of the
asset. Accordingly, during the second quarter of 1998, Taurus recorded a pre-
tax writedown of $4.7 million on certain oil and gas properties, adjusting the
carrying amount of the properties to their fair value based upon expected
future discounted cash flows. This writedown primarily reflects the impact of
the recent decline in crude oil prices. The expense was recorded as additional
depreciation, depletion and amortization.
6. RECENT PRONOUNCEMENTS OF THE FASB
During the first quarter, the Company adopted SFAS No. 128, Earnings Per Share
(EPS), which specifies computation, presentation, and disclosure requirements
for EPS. SFAS No. 128 requires dual presentation of basic and diluted EPS on
the face of the income statement and requires a reconciliation of the
numerator and denominator of the basic EPS computation to that of the diluted
computation (see Note 8).
The Company also is required to adopt during fiscal 1998, SFAS No. 129,
Disclosures of Information about Capital Structure. It contains no change in
disclosure requirements for public entities that were previously subject to
the requirements of Accounting Principles Board No. 10 and No. 15 and SFAS No.
47. As a result, SFAS No. 129 will have no impact on the Company's
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which requires the reporting and display of comprehensive income and its
components in an entity's financial statements, and SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, which specifies
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be required. In February 1998, the FASB
issued SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, which revises employers' disclosures about pension
and other postretirement benefit plans. The Company is required to adopt
these statements in fiscal year 1999. The impact of these pronouncements on
the Company currently is being evaluated and is not expected to be material.
<PAGE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
ENERGEN CORPORATION
Six months ended March 31, (in thousands) 1998 1997
Interest paid $13,195 $ 7,242
Income taxes paid $ 6,568 $ 3,124
Noncash investing activities
(capitalized depreciation
and allowance for funds used
during construction) $ 267 $ 385
ALABAMA GAS CORPORATION
Six months ended March 31, (in thousands) 1998 1997
Interest paid $ 5,871 $ 4,623
Income taxes paid $ 7,570 $ 5,827
Noncash investing activities
(capitalized depreciation
and allowance for funds used
during construction) $ 267 $ 385
<PAGE>8. RECONCILIATION OF EARNINGS PER SHARE*
(in thousands,except per share amounts)
Per share Per Share
Income Shares Amount Income Shares Amount
Three months ended Three months ended
March 31, 1998 March 31, 1997
Basic EPS
Income available to common
stockholders $40,292 29,027 $ 1.39 $ 30,531 25,311 $1.21
Effect of Dilutive Securities
Long-range
performance shares 121 121
Non-qualified stock options 212 117
Diluted EPS
Income available to
common stockholders plus
assumed conversions $40,292 29,360 $1.37 $ 30,531 25,549 $1.19
Six months ended Six months ended
March 31, 1998 March 31,1997
Basic EPS
Income available to
common stockholders $46,419 28,956 $ 1.60 $ 33,708 23,874 $1.41
Effect of Dilutive Securities
Long-range
performance shares 115 112
Non-qualified
stock options 191 103
Diluted EPS
Income available to
common stockholders
plus assumed
conversions $46,419 29,262 $ 1.59 $ 33,708 24,089 $1.40
Share amounts reflect a 2-for-1 stock split effective March 2, 1998 (see
Note 3)
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Energen's net income totaled $40.3 million ($1.39 per share) for the three
months ended March 31,1998, and compared favorably with net income of $30.5
million ($1.21 per share) recorded in the same period last year. Taurus
Exploration Inc. (Taurus), Energen's oil and gas exploration and production
subsidiary, realized a 65 percent increase in net income to $16.4 million.
Gains resulting from production-related income and increased nonconventional
fuels tax credits were partially offset by a $3 million after-tax writedown
of certain oil and gas properties under Statement of Financial Accounting
Standards (SFAS) No. 121 and increased interest expense. Alagasco, Energen's
natural gas utility, earned an allowed return on a higher level of equity
representing investment in utility plant. Alagasco's net income totaled $23.9
million in the current quarter and compared with $20.2 in the same quarter
last year.
For the 1998 fiscal year-to-date, Energen's net income totaled $46.4 million
($1.60 per share) compared with $33.7 ($1.41 per share) for the same period
last year. Taurus's net income totaled $20.2 million and compared favorably
with $11.4 million of net income in the first half of fiscal 1997. Alagasco's
earnings increased $4.2 million to $26.1 million. Major factors contributing
to Taurus's and Alagasco's financial success during the current period were
the same as those influencing each subsidiary during the second quarter.
Natural Gas Distribution:
Natural gas distribution revenues varied only slightly in quarter comparisons
and increased $14 million for the year-to-date. For the quarter, residential
sales volumes increased due to weather that was 11.2 percent colder than in
the prior year but were largely offset by decreased gas costs. A decrease in
the commodity cost of gas which was offset partially by increased gas purchase
volumes also contributed to a 4.4 percent decrease in cost of gas. For the
year-to-date, weather that was 10.7 percent colder than the same period last
year contributed to a 10.6 percent increase in residential sales volumes.
Increased gas purchase volumes were offset partially by a decrease in the
commodity cost of gas, resulting in a 4.4 percent increase in cost of gas. Gas
price fluctuations are passed through volumetrically to the customer via the
Company's Gas Supply Adjustment rider. The temperature adjustment provision
allows customer bills to be adjusted on a real-time basis so that temperature
variances from normal do not affect Alagasco's operating margins.
Operations and maintenance expenses in the current quarter and in the year-to-
date comparisons remained relatively stable due to low inflation and customer
growth during the period.
A slight increase in depreciation expense for the quarter and year-to-date
comparisons was due to normal growth of the utility's distribution system.
Taxes other than income primarily reflect various state and local business
taxes as well as payroll-related taxes. State and local business taxes are
generally based on gross receipts and fluctuate accordingly.
As discussed more fully in Note 2, Alagasco is subject to regulation by the
APSC. On October 7,1996, the APSC issued an order extending the Company's
current rate-setting mechanism through January 1, 2002. Under the terms of
that extension, RSE will continue after January 1, 2002, unless, after notice
to the Company and a hearing, the Commission votes to either modify or
discontinue its operation.
Oil and Gas Exploration and Production:
Revenues from oil and gas production activities rose 58.9 percent to $36.2
million for the three months ended March 31, 1998, and 81.9 percent to $66.4
million for the year-to-date, primarily reflecting Taurus's current and prior-
year property acquisitions. Natural gas production, for the quarter,
increased 59.6 percent to 11 Bcf and oil volumes increased 97.4 percent to
361 MBbl. For the year-to-date, natural gas production increased 86.5 percent
to 21.3 Bcf and oil volumes increased 82.3 percent to 620 MBbl. During 1997
Taurus acquired high BTU-content natural gas reserves in the San Juan Basin
which yielded 194 MBbl in natural gas liquids in the current quarter and 370
MBbl for the year-to-date.
The impact of higher production was slightly offset by lower realized gas and
oil prices. For the quarter, gas sales prices decreased 4 percent to $2.43 per
Mcf. Oil prices decreased 15.4 percent to $16.41 per barrel. For the year-to-
date gas sales prices decreased slightly to $2.32 while oil prices decreased
10.2 percent to $16.72 per barrel. Natural gas liquids sold for an average
price of $10.06 per barrel for the quarter and $9.74 per barrel for the year-
to-date.
Taurus enters into derivative commodity instruments to hedge its exposure to
the impact of price fluctuations on oil and gas production. Such instruments
include regulated natural gas and crude oil futures contracts traded on the
New York Mercantile Exchange and over-the-counter swaps and basis hedges with
major energy derivative product specialists. All hedge transactions are
subject to the Company's risk management policy, approved by the Board of
Directors, which does not permit speculative positions. At March 31, 1998,
Taurus had entered into contracts and swaps for 16.8 Bcf of its remaining
estimated 1998 flowing gas production at an average contract price of $2.11
per Mcf and for 405 MBbl of its remaining estimated flowing oil production at
an average contract price of $18.47 per barrel. The program has been extended
into fiscal year 1999 with contracts and swaps in place for 25.8 Bcf of
flowing gas production at an average contract price of $2.32 per Mcf.
Realized prices are anticipated to be lower than hedged prices due to basis
differences and other factors.
O&M expense increased $3.5 million for the quarter and $7.3 million in the
current year-to-date primarily due to significant growth in production and
acquisition activity at Taurus. Lease operating expenses rose by $3.8 million
and $8.5 million for the quarter and year-to-date, respectively. Exploration
expense increased slightly for the quarter but was lower by $0.5 million for
the year-to-date primarily due to less-than-anticipated drilling activity.
Taurus's significantly higher production volumes generated the majority of the
$11.3 million increase in depreciation, depletion and amortization (DD&A) for
the quarter and the $18.3 million increase for the year-to-date. Also under
SFAS No. 121, Taurus recorded additional DD&A expense of $4.7 million (pretax)
to writedown certain oil and gas properties. The average depletion rate in the
current quarter was $0.91, excluding the effect of the writedown, compared to
$0.83 for the same period last year and was $0.89 in the year-to-date compared
to $0.83 in the prior-year period.
Taurus's expense for taxes other than income primarily reflects production-
related taxes which were $1.5 million higher this quarter and $3.6 higher for
the year-to-date due to increased production.
Non-Operating Items:
Interest expense for the Company increased $1.8 million in the quarter and
$4.1 in the year-to-date. To help fund growth at Taurus, Energen issued $85
million of medium-term notes (MTNs) in July 1997 and $100 million of MTNs in
February 1998. The Company also increased its average borrowings under its
short-term credit facilities for the same purpose.
The Company's effective tax rates are lower than statutory federal tax rates
primarily due to the recognition of nonconventional fuels tax credits and the
amortization of investment tax credits. The Company's effective tax rates are
expected to remain lower than statutory federal rates through December 31,
2002, as tax credits generated each year are expected to be fully recognized
in the financial statements. Income tax expense decreased in the current
quarter and in the year-to-date as the impact of higher consolidated pretax
income was more than offset by significantly greater recognition of
nonconventional fuels tax credits on an interim basis in the current year.
FINANCIAL POSITION AND LIQUIDITY
Current year operating cash flow was $75.8 million compared to $8 million in
the prior year. The Company benefited from increased net income resulting
from significantly higher oil and gas production. Other working capital
items, which are highly influenced by throughput and timing of payments,
combined to create the remaining increase. Negatively affecting cashflow in
the prior year was the payout of $17 million of supplier refunds to customers
in January 1997.
The Company invested $108.4 million in the current year-to-date primarily in
the addition of property, plant and equipment. Taurus added $87.5 million in
capital expenditures for the year-to-date to acquire and develop oil and gas
properties. Utility capital expenditures totaled $23.1 million and
represented primarily normal system distribution expansion and support
facilities.
The Company used $64.6 million for financing activities in the year-to-date.
The Company issued $100 million of long-term debt redeemable February 15,
2028. The 7.125 percent MTNs were priced at 99.416 percent to yield 7.173
percent. The $98.5 million in proceeds were used to repay borrowings under
Energen's short-term credit facilities incurred to finance Taurus's growth
activity. For Alabama shares tax planning purposes, the Company borrowed
$98.6 million in September 1997 to invest in short-term federal obligations.
The Treasuries matured in early October and the proceeds were used to repay
the debt.
FUTURE CAPITAL RESOURCES AND LIQUIDITY
The Company plans to continue to implement its diversified growth strategy.
Over the five-year period ending September 30, 2002, Taurus plans to invest
approximately $750 million to $800 million to acquire and develop producing
properties and to participate in exploration and related development. In
fiscal 1998, Taurus plans to spend in excess of $120 million, including $64.5
million spent on property acquisitions year-to-date. It should be noted that
Taurus's continued ability to invest in property acquisitions will be
significantly influenced by industry trends as the producing property
acquisition market historically has been cyclical. From time to time, Taurus
also may be engaged in negotiations to sell, trade or otherwise dispose of
previously acquired property.
During the first quarter of 1998, Taurus acquired approximately 79 Bcfe of
proved oil and natural gas reserves in the Permian Basin of west Texas from
B.C. Oil and Gas Ltd. and certain affiliated companies for $43.3 million.
More than half of the proved reserves are behind-pipe and undeveloped, and
Taurus plans to spend an additional $17 million over the next two to three
years to fully develop the behind-pipe, water flood and undeveloped reserve
potential. Oil accounts for 70 percent of the estimated proved reserves. The
properties include approximately 350 producing wells, of which Taurus will
operate 248. Taurus also purchased an estimated 4.5 Bcfe of predominantly
natural gas reserves in southwest Mississippi from Oxy USA Inc. for $7.1
million. In the second quarter, Taurus closed on a $17 million purchase of
Gulf of Mexico properties from Chateau Oil and Gas Inc. In April 1998, Taurus
subsequently sold approximately 20 percent of its share to a third party who
will serve as the operating partner . Taurus's retained portion of the
acquisition includes an estimated 9.8 Bcf of natural gas reserves in the Gulf
of Mexico. Approximately 45 percent of the proved reserves are developed and
producing, and Taurus plans to spend another $0.7 million over the next
several years to bring on-line the 55 percent of behind-pipe reserves.
To finance Taurus's investment program, the Company will continue to utilize
its short-term credit facilities to supplement internally generated cash
flow, with long-term debt and equity providing permanent financing. In
December 1997, Energen filed a $400 million shelf registration for debt and
common stock. Under that registration, in February 1998 Energen issued $100
million of Series B MTNs, the proceeds from which were used to repay short-
term debt. During the first quarter, Energen increased its available short-
term credit facilities to $228 million to accommodate its growth plans.
Utility capital expenditures for normal distribution system renewal and
expansion plus support facilities could approximate $60 million in fiscal
1998. Alagasco also will maintain an investment in storage working gas which
is expected to approximate $24 million at the end of fiscal 1998. The utility
anticipates funding these capital requirements through internally generated
capital and the utilization of short-term credit facilities.
Forward-Looking Statements and Risks: Certain statements in this report,
including statements of future plans, objectives, and expected performance of
the Company and its subsidiaries, are forward-looking statements that are
dependent on certain events, risks and uncertainties that may be outside their
control which could cause actual results to differ materially from those
anticipated. Some of these include, but are not limited to, economic and
competitive conditions, inflation rates, legislative and regulatory changes,
financial market conditions, future business decisions, and other
uncertainties, all of which are difficult to predict. There are numerous
uncertainties inherent in estimating quantities of proved oil and gas reserves
and in projecting future rates of production and timing of development
expenditures. The total amount or timing of actual future production may vary
significantly from reserves and production estimates. In the event Taurus is
unable to invest fully its planned acquisition expenditures, future operating
revenues and proved reserves could be negatively affected. The drilling of
exploratory wells can involve significant risk including that related to
timing, success rates and cost overruns. These risks can be impacted by lease
and rig availability, complex geology and other factors. Results of operations
and cash flows also could be affected by future oil and gas prices. Although
Taurus makes use of futures, swaps and fixed price contracts to mitigate
risk, fluctuations in oil and gas prices may affect the Company's financial
position and results of operations.
Energen is evaluating its computer software to assess modifications needed
for the year 2000. The Company also is communicating with its significant
suppliers, customers, and other constituencies to determine the extent to
which the Company's operations may be vulnerable to those third parties'
failure to prepare for the year 2000 change. Costs associated with evaluation
and testing are being expensed as incurred. The Company has not yet determined
fully the total cost of the project but does not anticipate a material impact
on the consolidated financial statements.
OTHER
Recent Pronouncements of the FASB
During the first quarter, the Company adopted SFAS No. 128, Earnings Per
Share, which specifies computation, presentation, and disclosure requirements
for EPS. SFAS No. 128 requires dual presentation of basic and diluted EPS on
the face of the income statement and requires a reconciliation of the
numerator and denominator of the basic EPS computation to that of the diluted
computation (see Note 8).
The Company also is required to adopt during fiscal 1998, SFAS No. 129,
Disclosures of Information about Capital Structure. It contains no change in
disclosure requirements for public entities that were previously subject to
the requirements of Accounting Principles Board No. 10 and No. 15 and SFAS No.
47. As a result, SFAS No. 129 will have no impact on the Company's
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which requires the reporting and display of comprehensive income and its
components in an entity's financial statements, and SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, which specifies
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be required. In February 1998, the FASB
issued SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, which revises employers' disclosures about pension
and other postretirement benefit plans. The Company is required to adopt
these statements in fiscal year 1999. The impact of these pronouncements on
the Company currently is being evaluated and is not expected to be material.
<PAGE>
SELECTED BUSINESS SEGMENT DATA
ENERGEN CORPORATION
(Unaudited)
Three months ended Six months ended
(in thousands, except March 31, March 31,
sales price data) 1998 1997 1998 1997
Natural Gas Distribution
Operating revenues
Residential $113,197 $112,372 $175,575 $167,895
Commercial and industrial
- small 39,713 40,180 63,207 59,633
Transportation 10,495 9,290 19,852 17,843
Other (1,658) (1,691) (1,132) (1,915)
Total $161,747 $160,151 $257,502 $243,456
Gas delivery volumes (MMcf)
Residential 16,023 14,369 23,856 21,551
Commercial and industrial
- small 6,219 5,718 9,675 8,753
Transportation 16,143 15,194 32,518 31,530
Total 38,385 35,281 66,049 61,834
Other data
Depreciation and
amortization $6,232 $ 5,798 $12,429 $11,557
Capital expenditures $15,066 $ 9,709 $23,380 $16,159
Operating income $40,330 $34,552 $46,231 $39,473
Oil and Gas Exploration and Production
Operating revenues
Natural gas $26,652 $17,424 $49,441 $26,810
Oil 5,922 3,546 10,367 6,331
Natural gas liquids 1,953 -- 3,602 --
Other 1,699 1,821 2,949 3,347
Total $36,226 $22,791 $66,359 $36,488
Sales volume
Natural gas (MMcf) 10,973 6,875 21,277 11,409
Oil (MBbl) 361 183 620 340
Natural gas liquids (MBbl) 194 -- 370 --
Average sales price
Natural gas (MMcf) $ 2.43 $ 2.53 $ 2.32 $ 2.35
Oil (barrel) $16.41 $ 19.39 $ 16.72 $18.61
Natural gas liquids
(barrel) $10.06 -- $ 9.74 --
Other data
Depreciation, depletion
and amortization $18,084 $ 6,827 $29,723 $11,465
Capital expenditures $27,135 $95,142 $87,494 $103,531
Exploration expenditures $1,367 $ 1,301 $ 1,490 $1,946
Operating income $4,343 $ 7,282 $11,884 $11,106
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Effective January 30, 1998, the Restated Certificate of Incorporation of
Energen Corporation was amended to increase Energen's authorized common stock,
par value $0.01 per share, from 30,000,000 shares to 75,000,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information with respect to the annual meeting of Shareholders held January
28, 1998, is reported in Item 4 of Energen Corporation Form 10-Q for the three
months ended December 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial data schedule of Energen Corporation (for SEC purposes
only)
27.2 Financial data schedule of Alabama Gas Corporation (for SEC
purposes only)
27.3 Restated financial data schedule of Energen Corporation (for SEC
purposes only)
b. Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended March 31,1998.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENERGEN CORPORATION
ALABAMA GAS CORPORATION
May 11, 1998 By/s/ Wm. Michael Warren, Jr.
Wm. Michael Warren, Jr.
Chairman, President and
Chief Executive Officer of
Energen, Chairman and
Chief Executive Officer of
Alagasco
May 11, 1998 By/s/ G. C. Ketcham
G. C. Ketcham
Executive Vice President,
Chief Financial Officer and
Treasurer of Energen and Alagasco
May 11, 1998 By/s/ Grace B. Carr
Grace B. Carr
Controller of Energen
May 11, 1998 By/s/ Paula H. Rushing
Paula H. Rushing
Vice President-Finance
of Alagasco
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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