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 JUNE
30,DECEMBER 31, 1997
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 August 12, 1997:February 10, 1998:
Energen Corporation, $0.01 par value 13,170,62414,506,601 shares
Alabama Gas Corporation, $0.01 par value 1,972,052 shares
1
ENERGEN CORPORATION AND ALABAMA GAS CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30,DECEMBER 31, 1997
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements
(a) Consolidated Statements of Income of
Energen Corporation. . . . . . . . . . . . . . . . . . . . . . . . .Corporation 3
(b) Consolidated Balance Sheets of
Energen Corporation . . . . . . 4
(c) Consolidated Statements of Cash Flows
of Energen Corporation. . . . . . . . . . . . . . . . . . . . . . . . .Corporation 6
(d) Statements of Income of
Alabama Gas Corporation. . . . . . . .Corporation 7
(e) Balance Sheets of Alabama Gas
Corporation. . . . . . . . . . .Corporation 8
(f) Statements of Cash Flows of
Alabama Gas Corporation. . . . . .10Corporation 10
(g) Notes to Unaudited Financial
Statements. . . . . . . . . . . .11Statements 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . . . . .14Operations 15
Selected Business Segment Data of
Energen Corporation . . . . . . .1818
PART II: OTHER INFORMATION
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . .192. Changes in Securities 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . .1919
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
220
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
ENERGEN CORPORATION
AND SUBSIDIARIES
(Unaudited)
Three months ended Nine months ended
June 30,June 30,
(in thousands,
except share data) 1997 1996 1997 1996
Operating Revenues
Natural gas
distribution $70,147 $77,225 $313,603 $312,553
Oil and gas production
activities 20,732 9,905 57,220 24,387
Total operating
revenues 90,879 87,130 370,823 336,940
Operating Expenses
Cost of gas 30,519 37,577 155,891 161,645
Operations 27,863 25,329 84,456 72,760
Maintenance 2,951 2,657 8,461 8,451
Depreciation, depletion
and amortization 14,413 10,588 37,435 27,567
Taxes, other than
income taxes 6,889 6,968 26,783 24,090
Total operating
expenses 82,635 83,119 313,026 294,513
Operating Income 8,244 4,011 57,797 42,427
Other Income (Expense)
Interest expense, net
of amounts capitalized (5,404) (3,240) (16,205) (9,926)
Other, net 348 260 2,678 1,966
Total other income
(expense) (5,056) (2,980) (13,527) (7,960)
Income Before
Income Taxes 3,188 1,031 44,270 34,467
Income taxes 181 (40) 7,555 7,688
Net Income $3,007 $1,071 $36,715 $26,779
Earnings Per Average
Common Share $0.23 $0.10 $2.98 $2.44
Dividends Per Common Share $0.30 $0.29 $0.90 $0.87
Average Common Shares
Outstanding 13,109 11,020 12,328 10,991
Three months ended December 31,
(in thousands, except share data) 1997 1996
Operating Revenues
Natural gas distribution $ 95,755 $ 83,305
Oil and gas production activities 30,133 13,697
Total operating revenues 125,888 97,002
Operating Expenses
Cost of gas 50,747 41,460
Operations and maintenance 34,141 30,102
Depreciation, depletion and
amortization 17,836 10,397
Taxes, other than income taxes 10,022 7,088
Total operating expenses 112,746 89,047
Operating Income 13,142 7,955
Other Income (Expense)
Interest expense (7,235) (4,945)
Other, net 818 1,175
Total other expense (6,417) (3,770)
Income Before Income Taxes 6,725 4,185
Income taxes 598 1,008
Net Income $ 6,127 $ 3,177
Basic Earnings Per Average
Common Share* $ 0.42 $ 0.28
Diluted Earnings Per Average
Common Share* $ 0.42 $ 0.28
Dividends Per Common Share* $ 0.31 $ 0.30
Average Common Shares
Outstanding* 14,443,610 11,234,471
*Share data has not been restated to reflect a 2-for-1 stock split
payable March 2, 1998 (see Note 3)
The accompanying Notes are an integral part of these
financial statements.
3
CONSOLIDATED BALANCE SHEETS
ENERGEN CORPORATION
AND SUBSIDIARIES
June 30, September 30,
1997 1996
(in thousands) (Unaudited)
ASSETS
Property, Plant and Equipment
Utility plant $ 569,307 $ 544,643
Less accumulated depreciation 282,413 268,110
Utility plant, net 286,894 276,533
Oil and gas properties,
successful efforts method 358,066 224,469
Less accumulated depreciation,
depletion and amortization 71,586 60,152
Oil and gas properties, net 286,480 164,317
Other property, net 4,157 4,066
Total property, plant
and equipment, net 577,531 444,916
Current Assets
Cash and cash equivalents 8,838 17,074
Accounts receivable, net of
allowance for doubtful
accounts of $3,989 at
June 30, 1997 and
$3,002 at September 30, 1996 50,932 42,353
Inventories, at average cost
Storage gas 24,499 28,214
Materials and supplies 7,280 7,704
Liquefied natural
gas in storage 3,426 2,417
Deferred gas costs 2,454 1,975
Amounts due from customers 5,043 (589)
Deferred income taxes 8,374 7,995
Prepayments and other 4,436 7,563
Total current assets 115,282 114,706
Other Assets
Deferred taxes 407 (972)
Deferred charges and other 11,101 10,760
Total other assets 11,508 9,788
TOTAL ASSETS $ 704,321 $ 569,410
The accompanying Notes are an integral part of these financial
statements.
4
CONSOLIDATED BALANCE SHEETS ENERGEN CORPORATION AND SUBSIDIARIES
June 30, September 30,
1997 1996
(in thousands, except share data) (Unaudited)
CAPITAL AND LIABILITIES
Capitalization
Preferred stock, cumulative
$0.01 par value, 5,000,000
shares authorized $ 0 $ 0
Common shareholders' equity
Common stock, $0.01 par value;
30,000,000 shares authorized,
13,139,031 shares outstanding at
June 30, 1997, and 11,162,634
shares outstanding at
September 30, 1996 131 112
Premium on capital stock 142,704 86,833
Capital surplus 2,802 2,802
Retained earnings 124,162 98,658
Total common shareholders' equity 269,799 188,405
Long-term debt 279,622 195,545
Total capitalization 549,421 383,950
Current Liabilities
Long-term debt due within one year 1,855 1,805
Notes payable to banks 34,000 59,000
Accounts payable 37,317 32,659
Accrued taxes 22,511 17,567
Customers' deposits 17,167 17,364
Amounts due customers 1,245 17,157
Accrued wages and benefits 13,599 11,584
Other 18,474 18,049
Total current liabilities 146,168 175,185
Deferred Credits and
Other Liabilities
Deferred credits and other 8,732 10,275
Total deferred credits
and other liabilities 8,732 10,275
Commitments and Contingencies 0 0
TOTAL CAPITAL AND LIABILITIES $704,321 $569,410
The accompanying Notes are an integral part of these financial
statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
ENERGEN CORPORATION AND SUBSIDIARIES
(Unaudited)
Nine months ended June 30,
(in thousands) 1997 1996
Operating Activities
Net income $ 36,715 $26,779
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation, depletion
and amortization 37,440 27,567
Deferred income taxes, net (2,312) (572)
Deferred investment tax
credits, net (366) (365)
Gain on sale of assets (898) (670)
Net change in:
Accounts receivable (8,579) (14,052)
Inventories 3,130 4,090
Deferred gas cost (479) (756)
Accounts payable
gas purchases 3,713 6,696
Accounts payable
other trade 945 3,610
Other current assets
and liabilities (11,230) 10,373
Other, net 1,292 1,240
Net cash provided by
operating activities 59,371 63,940
Investing Activities
Additions to property,
plant and equipment (171,541) (68,941)
Proceeds from sale of asset 1,688 2,478
Payments on notes receivable 428 1,179
Other, net 940 (84)
Net cash used in
investing activities (168,485) (65,368)
Financing Activities
Payment of dividends on
common stock (11,217) (9,567)
Issuance of common stock 52,968 2,527
Purchase of treasury stock 0 (1,978)
Issuance of long-term debt 84,416 0
Reduction of long-term debt (923) (898)
Net change in short-term debt (24,366) (13,300)
Net cash provided by
(used in) financing
activities 100,878 (23,216)
Net change in cash
and cash equivalents (8,236) (24,644)
Cash and cash equivalents
at beginning of period 17,074 36,695
Cash and Cash Equivalents
at End of Period $ 8,838 $12,051
December 31, 1997 September 30, 1997
(in thousands) (unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 8,729 $ 105,402
Accounts receivable, net of allowance
for doubtful accounts of $3,532 at
December 31, 1997, and
$3,185 at September 30, 1997 92,504 70,676
Inventories, at average cost
Storage gas 24,077 25,367
Materials and supplies 7,084 7,281
Liquified natural gas in storage 3,856 3,630
Deferred gas cost 16,677 2,512
Deferred income taxes 7,765 7,438
Prepayments and other 6,677 19,859
Total current assets 167,369 242,165
Property, Plant and Equipment
Oil and gas properties, successful
efforts method 513,361 454,210
Less accumulated depreciation,
depletion and amortization 97,870 87,554
Oil and gas properties, net 415,491 366,656
Utility plant 589,555 583,630
Less accumulated depreciation 291,606 287,749
Utility plant, net 297,949 295,881
Other property, net 4,351 4,466
Total property, plant and
equipment, net 717,791 667,003
Other Assets
Deferred income taxes 2,138 1,144
Deferred charges and other 8,603 9,485
Total other assets 10,741 10,629
TOTAL ASSETS $ 895,901 $ 919,797
The accompanying Notes are an integral part of these financial statements.
6
STATEMENTS OF INCOME
ALABAMA GASCONSOLIDATED BALANCE SHEETS
ENERGEN CORPORATION
(Unaudited)
Three months ended Nine months ended
June 30,June 30,
(in thousands) 1997 1996 1997 1996
Operating Revenues $70,147 $77,225 $313,603 $312,553
Operating Expenses
Cost of gas 31,074 38,154 157,667 163,613
Operations 19,742 20,333 63,040 60,923
Maintenance 2,942 2,624 8,437 8,332
Depreciation 5,906 5,410 17,463 15,661
Income taxes
Current 2,216 1,760 14,498 11,722
Deferred, net (1,249) (938) (833) 820
Deferred investment
tax credits, net (122) (122) (365) (365)
Taxes, other than
income taxes 5,356 6,366 22,396 22,814
Total operating
expenses 65,865 73,587 282,303 283,520
Operating Income 4,282 3,638 31,300 29,033
Other Income
Allowance for funds
used during construction 84 131 385 818
Other, net 38 (88) 327 (528)
Total other income 122 43 712 290
Interest Charges
Interest on long-term debt 2,210 1,733 6,632 5,605
Other interest expense 493 568 1,709 1,706
Total interest charges 2,703 2,301 8,341 7,311
Net Income $1,701 $1,380 $23,671 $22,012
(in thousands, December 31, 1997 September 30, 1997
except share data) (unaudited)
CAPITAL AND LIABILITIES
Current Liabilities
Long-term debt due within one year $ 1,855 $ 1,855
Notes payable to banks 168,000 202,000
Accounts payable 51,601 49,196
Accrued taxes 20,893 18,300
Customers' deposits 17,718 16,399
Amounts due customers 7,619 7,347
Accrued wages and benefits 11,685 13,719
Other 22,535 21,935
Total current liabilities 301,906 330,751
Deferred Credits and Other Liabilities
Other 8,621 8,301
Total deferred credits and
other liabilities 8,621 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;
30,000,000 shares authorized,
14,480,071 shares outstanding
at December 31, 1997, and
14,398,109 shares outstanding
at September 30, 1997 145 144
Premium on capital stock 188,822 185,841
Capital surplus 2,802 2,802
Retained earnings 114,003 112,356
Total common shareholders'
equity 305,772 301,143
Long-term debt 279,602 279,602
Total capitalization 585,374 580,745
TOTAL CAPITAL AND LIABILITIES $ 895,901 $ 919,797
*Share data has not been restated to reflect a 2-for-1 stock split
payable March 2, 1998 (see Note 3)
The accompanying Notes are an integral part of these financial statements.
7
BALANCE SHEETS
ALABAMA GASCONSOLIDATED STATEMENTS OF CASH FLOWS
ENERGEN CORPORATION
June 30, September 30,
1997 1996
(in thousands) (Unaudited)
ASSETS
Property, Plant and Equipment
Utility plant $569,307 $544,643
Less accumulated depreciation 282,413 268,110
Utility plant, net 286,894 276,533
Other property, net 342 394
Current Assets
Cash and cash equivalents 2,309 803
Accounts receivable
Gas 35,159 26,999
Merchandise 2,008 1,730
Other 419 2,955
Affiliated companies 2,691 10,582
Allowance for doubtful
accounts (3,963) (2,985)
Inventories, at average cost
Storage gas 24,499 28,214
Materials and supplies 5,473 5,828
Liquefied natural gas
in storage 3,426 2,417
Deferred gas costs 2,454 1,975
Amounts due from customers 5,043 (589)
Deferred income taxes 6,590 6,344
Prepayments and other 2,047 5,150
Total current assets 88,155 89,423
Deferred Charges and
Other Assets 7,926 7,467
TOTAL ASSETS $383,317 $373,817
(Unaudited)
Three months ended December 31,
(in thousands) 1997 1996
Operating Activities
Net income $ 6,127 $ 3,177
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation, depletion
and amortization 17,836 10,397
Deferred income taxes, net (1,375) 1,640
Deferred investment tax credits, net (117) (122)
Net change in:
Accounts receivable (21,828) (29,963)
Inventories 1,261 (14)
Deferred gas cost (14,165) (13,379)
Accounts payable
gas purchases 17,211 39,192
Accounts payable
trade (14,806) 601
Other current assets
and liabilities 15,932 1,191
Other, net 2,713 1,146
Net cash provided by
operating activities 8,789 13,866
Investing Activities
Additions to property, plant
and equipment (68,556) (14,792)
Payments on notes receivable 259 185
Other, net 174 470
Net cash used in investing
activities (68,123) (14,137)
Financing Activities
Payment of dividends on
common stock (4,480) (3,375)
Issuance of common stock 1,141 1,654
Reduction of long-term debt -- (53)
Payment of note payable issued
to purchase U.S. Treasury securities (98,636) --
Net change in short-term debt 64,636 8,000
Net cash provided by
(used in) financing
activities (37,339) 6,226
Net change in cash and cash equivalents (96,673) 5,955
Cash and cash equivalents at
beginning of period 105,402 17,074
Cash and Cash Equivalents at
End of Period $ 8,729 $ 23,029
The accompanying Notes are an integral part of these
financial statements.
8
STATEMENTS OF INCOME
ALABAMA GAS CORPORATION
(Unaudited)
Three months ended December 31,
(in thousands) 1997 1996
Operating Revenues $ 95,755 $ 83,305
Operating Expenses
Cost of gas 51,404 42,092
Operations and maintenance 25,000 24,205
Depreciation 6,197 5,759
Income taxes
Current 2,148 22
Deferred, net (927) 966
Deferred investment
tax credits, net (117) (122)
Taxes, other than income taxes 7,252 6,328
Total operating expenses 90,957 79,250
Operating Income 4,798 4,055
Other Income
Allowance for funds used
during construction 85 136
Other, net 79 374
Total other income 164 510
Interest Charges
Interest on long-term debt 2,210 2,211
Other interest expense 569 547
Total interest charges 2,779 2,758
Net Income $ 2,183 $ 1,807
The accompanying Notes are an integral part of these
financial statements.
BALANCE SHEETS
ALABAMA GAS CORPORATION
(Unaudited)
June 30,December 31, 1997 September 30, 1997
1996(in thousands) (unaudited)
ASSETS
Property, Plant and Equipment
Utility plant $ 589,555 $ 583,630
Less accumulated depreciation 291,606 287,749
Utility plant, net 297,949 295,881
Other property, net 343 347
Current Assets
Cash and cash equivalents 6,841 2,580
Accounts receivable
Gas 57,059 36,098
Merchandise 2,457 2,001
Other 1,810 1,442
Allowance for doubtful accounts (3,500) (3,156)
Inventories, at average cost
Storage gas 24,077 25,367
Materials and supplies 5,428 5,391
Liquified natural gas in storage 3,856 3,630
Deferred gas cost 16,677 2,512
Deferred income taxes 6,016 5,675
Prepayments and other 5,789 6,696
Total current assets 126,510 88,236
Deferred Charges and Other Assets 5,103 5,917
TOTAL ASSETS $ 429,905 $ 390,381
The accompanying Notes are an integral part of these
financial statements.
BALANCE SHEETS
ALABAMA GAS CORPORATION
December 31, 1997 September 30, 1997
(in thousands, (unaudited)
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
June 30,December 31, 1997, and
September 30, 19961997 $ 20 $ 20
Premium on capital stock 31,682 31,682
Capital surplus 2,802 2,802
Retained earnings 111,995 95,044109,077 106,894
Total common shareholder's
equity 146,499 129,548143,581 141,398
Cumulative preferred stock, $0.01
par value, 120,000 shares
authorized, issuable in series -
$4.70 Series 0 0-- --
Long-term debt 125,000 125,000
Total capitalization 271,499 254,548268,581 266,398
Current Liabilities
Notes payable to banks 8,000 025,000 11,000
Accounts payable
Trade 24,098 23,75845,575 28,923
Affiliated companies 0 1,5128,265 4,984
Accrued taxes 21,927 18,06720,202 16,745
Customers' deposits 17,167 17,364
Supplier refunds due customers 269 16,66817,718 16,399
Other amounts due customers 976 4897,619 7,347
Accrued wages and benefits 5,666 4,4594,299 3,879
Other 8,601 10,6119,109 10,481
Total current liabilities 86,704 92,928137,787 99,758
Deferred Credits and Other Liabilities
Deferred income taxes 17,287 16,88316,282 16,739
Accumulated deferred investment
tax credits 3,251 3,6173,012 3,130
Regulatory liability 3,864 5,0383,470 3,651
Customer advances for
construction and other 712 803773 705
Total deferred credits
and other liabilities 25,114 26,34123,537 24,225
Commitments and Contingencies 0 0
TOTAL CAPITAL AND LIABILITIES $383,317 $373,817$ 429,905 $ 390,381
The accompanying Notes are an integral part of these
financial statements.
9
STATEMENTS OF CASH FLOWS
ALABAMA GAS CORPORATION
(Unaudited)
NineThree months ended June 30,December 31, 1997 1996
(in thousands) 1997 1996
Operating Activities
Net Income $23,671 $22,012income $ 2,183 $ 1,807
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 17,463 15,6616,197 5,759
Deferred income taxes, net 158 820(927) 966
Deferred investment
tax credits (366) (365)(117) (122)
Net change in:
Accounts receivable (4,924) (11,826)(21,441) (28,714)
Inventories 3,061 4,0911,027 (309)
Deferred gas costs (479) (756)cost (14,165) (13,379)
Accounts payable -
gas purchases 3,713 6,69617,211 39,192
Accounts payable - other trade (3,373) (3,937)(559) (2,215)
Other current assets and liabilities (15,630) 19,6035,112 466
Other, net (1,796) (3,245)677 (6)
Net cash provided by (used in)
operating activities 21,498 48,754(4,802) 3,445
Investing Activities
Additions to property, plant and
equipment (28,663) (28,580)(8,197) (6,403)
Net advances from affiliates 6,379 (7,967)3,281 13,727
Other, net 1,012 (265)(21) 421
Net cash used inprovided by (used in)
investing activities (21,272) (36,812)(4,937) 7,745
Financing Activities
Payment of dividends on
common stock (6,720) (9,555)-- (3,350)
Net change in short-term debt 8,000 014,000 --
Net cash provided by (used in)
financing activities 1,280 (9,555)14,000 (3,350)
Net change in cash and cash equivalents 1,506 2,3874,261 7,840
Cash and cash equivalents at
beginning of period 2,580 803 727
Cash and Cash Equivalents at
End of Period $ 2,3096,841 $ 3,1148,643
The accompanying Notes are an integral part of these
financial statements.
10
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, 1995, and 1994,1995, included in the 19961997
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 primarynatural
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,
a $1.3an $11.8 million annual decreaseincrease in revenue became effective
October 1, 1996, a $7.7 million annual
increase became effective December 1, 1996, and a $1.5 million
annual decrease became effective April 1, 1997.
Alagasco calculates a temperature adjustment to customers'
monthly 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 (Southern) as described herein.
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 $2.2$2.1 million are being returned to
ratepayers over approximately 1413 years. At June 30,December 31, 1997,
and September 30, 1996,1997, a regulatory liability related to income taxes
of $3.9$3.5 million and $5$3.7 million, respectively, was included in the
consolidated financial statements.
FERC Regulation: In 1995 Southern filed3. SUBSEQUENT EVENTS
On January 28, 1998, Energen announced a comprehensive settlement
with2-for-1 split of the
FERCCompany's common stock. The split will be in the form of a
Stipulation100 percent stock dividend and Agreement (the
Settlement)will be payable on March 2, 1998,
to resolve all issues in Southern s six then-pending
rate cases as well as to resolve all GSRshareholders of record on February 13, 1998. If the stock dividend
had been applied retroactively, basic earnings per average common
share would have been $.21 and transition cost issues
resulting from$.14 for the implementation of FERC Order 636. Alagasco was
a supporting party to the Settlement. The Settlement, as approved
by the FERC, resolves all issues relating to GSR and other
transition costs with respect to supporting parties. Alagasco
estimates that it has a remaining GSR liability of approximately
$0.1 million to be paid throughthree months ended
December 31, 1997 and approximately
$0.7 million in other transition costs to be paid through June
1998. Because these costs will be recovered in full from its
customers, Alagasco recorded a regulatory asset of $0.8 million and
$2.2 million at June 30, 1997, and September 30, 1996, respectively. 3. SUBSEQUENT EVENTSEffective
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.
On July 22, 1997,January 29, 1998, Taurus Exploration Inc. (Taurus) closed
on thea $17 million purchase of approximately 10Gulf of Mexico properties from
Chateau Oil and Gas Inc. The acquisition included an estimated
12.5 billion cubic feet equivalent (Bcfe)(Bcf) of domestic oil andnatural gas reserves from United Meridian Corporation (UMC) for $9.6 million.
These properties are located in Texas and the Rocky Mountains, and
are partGulf of
UMC's 1991 acquisition program in which Taurus already
owned a 14Mexico. Approximately 45 percent interest. Virtually allof the proved reserves are
proved
producing.
During July 1997,developed and producing, and Taurus plans to spend another $0.8
million over the Company issued an additional $85next several years to bring on-line the 55 percent
of behind-pipe reserves. Current net production is 7.1 million
aggregate principal amountcubic feet a day. Taurus expects to sell approximately 20 percent
of its Medium-Term Notes, Series A. The
terms ofshare to a third party who will serve as the notes ranged from 5 to 30 years at interest rates from
6.6 percent to 7.6 percent. Net proceeds from the sale are being
used to repay a portion of the short-term debt incurred by the
Company to fund the acquisition of various oil and gas properties
by Taurus. Short-term debt in the amount of $85 million has been
reclassified to long-term in the consolidated balance sheet at June
30, 1997 to reflect the issuance.
On August 1,1997, Taurus acquired Amoco Corporation's Black Warrior
Basin coalbed methane properties for $72 million. The properties
include more than 260 producing wells and estimated net reserves of
90 billion cubic feet (Bcf). Substantially all the reserves are
classified as proved producing. Net annual production from the
Amoco wells currently exceeds 7 Bcf. Through the year 2002,
production from all the wells qualifies for the nonconventional
fuels tax credit.operating partner.
4. DERIVATIVE COMMODITY INSTRUMENTS
Taurus periodically enters into derivative commodity instruments
to hedge its exposure to 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 deferral (hedging)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 gains of $1.6 million and deferred
losses of $12.9 million on the balance sheet at December 31,1997
and September 30, 1997, respectively.
At December 31, 1997, Taurus had entered into contracts and swaps
for 30.5 Bcf of its remaining estimated 1998 flowing gas production
at an average contract price of $2.24 per Mcf and 315 MBbl of its
remaining estimated flowing oil production at an average contract
price of $20.40 per barrel. The program has been extended into
fiscal year 1999 with contracts and swaps in place for 16.5 Bcf of
flowing gas production at an average contract price of $2.20 per Mcf.
Realized prices are anticipated to be lower than hedged prices due to
basis difference 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 deferralhedge 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. RECENT PRONOUNCEMENTS OF THE FASB
In fiscal 1997,During the first quarter, the Company is required to adoptadopted Statement of
Financial Accounting (SFAS) No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value-based method of
accounting for employee stock options. The Statement allows
companies to continue to follow the accounting treatment prescribed
by APB Opinion 25 with proper disclosure. The Company will
continue to record its employee stock options under APB Opinion 25
and will make the required disclosures under SFAS 123.
In the second quarter, the Company adopted SFAS No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, which provides accounting and reporting standards
for such transactions. The adoption did not have a material impact
on the financial statements.
In February 1997, the FASB issued 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 7).
The Company also is required to adopt during fiscal 1998,
SFAS No. 129, Disclosures of Information about Capital Structure,
which establishes standards for disclosing information about an
entity's capital structure.structure; interim disclosure is not required.
This adoption is not expected to have a material impact on the
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.
The Company is required to adopt these statements in fiscal
year 1999. The impact of these pronouncements on the Company
is currently being evaluated.
6. SUPPLEMENTAL CASH FLOW INFORMATION
ENERGEN CORPORATION
Three months ended December 31, 1997 1996
(in thousands)
Interest paid $ 9,274 $ 4,825
Income taxes paid $ 137 $ 253
Noncash investing activities
(capitalized depreciation
and allowance for funds used
during construction) $ 117 $ 182
ALABAMA GAS CORPORATION
Three months ended December 31, 1997 1996
(in thousands)
Interest paid $ 5,173 $ 3,986
Income taxes paid (refunded) $ (508) $ 1,954
Noncash investing activities
(capitalized depreciation
and allowance for funds used
during construction) $ 117 $ 182
7. RECONCILIATION OF EARNINGS PER SHARE
(in thousands, except Income Shares Per share*
per share amounts) (Numerator) (Denominator) Amount
3 months ended December 31, 1997
Basic EPS*
Income available to
common stockholders $ 6,127 14,444 $ 0.42
Effect of Dilutive Securities
Long-range performance shares 53
Non-qualified stock options 87
Diluted EPS*
Income available to common
stockholders $ 6,127 14,584 $ 0.42
plus assumed conversions
3 months ended December 31, 1996
Basic EPS*
Income available to common
stockholders $ 3,177 11,234 $ 0.28
Effect of Dilutive Securities
Long-range performance shares 44
Non-qualified stock options 46
Diluted EPS*
Income available to common
stockholders $ 3,177 11,324 $ 0.28
plus assumed conversions
*Share data has not been restated to reflect a 2-for-1 stock split payable
March 2, 1998 (see Note 3)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Energen's net income totaled $6.1 million ($0.42 per share) for the
three months ended December 31,1997, and compared favorably
with net income of $3.2 million ($0.28 per share) recorded in the
same period last year. Taurus Exploration Inc. (Taurus), Energen's
oil and gas exploration and production subsidiary, realized net income
of $3.8 million as compared to $1.5 million in the same period last
year, primarily due to a 136 percent increase in oil and gas production
volumes to 12.9 billion cubic feet equivalent (Bcfe). Taurus also
benefited from increased nonconventional fuels tax credits,
partially offset by increased interest expense. Alagasco, Energen's
natural gas utility, earned $2.2 million during the first fiscal quarter.
This $0.4 million increase from the same period last year primarily
was due to Alagasco's earning within its allowed range of return on
a higher level of equity representing investment in utility plant.
Natural Gas Distribution:
Natural gas distribution revenues increased $12.5 million
for the quarter primarily due to increased residential sales volumes
resulting from colder weather than in the prior year and an increase
in charges recovered through the Gas Supply Adjustment (GSA) rider.
Weather that was 10 percent colder than the same period last year
contributed to a 9 percent increase in residential sales volumes and a
22 percent increase in cost of gas. Gas price fluctuations are passed
through volumetrically to the customer via the Company's GSA 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 increased slightly in the
current year primarily to restore the bad debt reserve to a level
appropriate for current receivable balances.
A slight increase in depreciation expense primarily 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 to
extend the Company's 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 more than
doubled in the current quarter to $30.1 million, primarily
reflecting Taurus's prior-year property acquisitions. Total
production volumes rose 136 percent to 12.9 Bcfe for the quarter.
Natural gas production increased 127 percent to 10.3 Bcf. Oil
volumes increased 65 percent to 259 MBbl. During 1997 Taurus
acquired high BTU-content natural gas reserves in the San Juan
Basin which yielded 176 MBbl in natural gas liquids in the current
quarter. Taurus also benefited from higher realized gas prices. Gas
sales prices increased 7 percent to $2.21 per Mcf. Oil prices, on the
other hand, decreased 3 percent to $17.15 per barrel. Natural gas
liquids sold for an average price of $9.38 per barrel.
Taurus periodically enters into derivative commodity instruments to
hedge its exposure to 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 December 31, 1997, Taurus has entered into contracts and swaps
for 30.5 Bcf of its remaining estimated 1998 flowing gas production
at an average contract price of $2.24 per Mcf and 315 MBbl of its
remaining estimated flowing oil production at an average contract
price of $20.40 per barrel. The program has been extended into
fiscal year 1999 with contracts and swaps in place for 16.5 Bcf of
flowing gas production at an average contract price of $2.20 per Mcf.
Realized prices are anticipated to be lower than hedged prices
due to basis difference and other factors.
O&M expenses increased $3.7 million for the quarter primarily
due to significant growth in production and acquisition activity at
Taurus. Lease operating expenses rose by $4.7 million. Exploration
expense was lower by $0.5 million primarily due to the timing of
exploratory efforts in the current period.
Taurus's significantly higher production volumes generated the
majority of the $7 million increase in DD&A for the quarter.
In addition, the average depletion rate in the current year was
$0.87 compared to $0.81 for the same period last year.
Taurus's expense for taxes other than income primarily reflects
production-related taxes which were $2 million higher this
quarter due to increased production.
Non-Operating Items:
Interest expense for the Company increased $2.3 million in
the quarter primarily due to the issuance of $85 million of
Energen medium-term notes in July 1997 to fund growth at
Taurus. The Company also increased 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 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.
Like many companies, Energen is in the process of evaluating
its computer software to determine whether modifications will
be required for it to function properly in the year 2000. Costs
associated with evaluation and testing are being expensed as incurred.
The Company has not yet fully determined the total cost of the
project but does not anticipate any material impact on the
consolidated financial statements.
FINANCIAL POSITION AND LIQUIDITY
Operating cash flow was $8.8 million compared to $13.9
million in the prior year. The Company benefited from increased
net income caused by significantly higher oil and gas production;
however, that increase was more than offset by decreased cash
flows from other working capital items, which are highly influenced
by throughput and timing of payments.
The Company invested $68.1 million primarily to acquire oil
and gas properties. In the first quarter, Taurus added $60.4
million in capital expenditures. Utility capital expenditures
totaled $8.3 million and represented primarily normal system
distribution expansion and support facilities.
The Company used $37.3 million for financing activities in
the first quarter. 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. This repayment of debt was offset by increased
borrowings under Energen's short-term credit facilities incurred
mainly to finance Taurus's acquisition and development strategy.
FUTURE CAPITAL RESOURCES AND LIQUIDITY
The Company plans to continue to implement its diversified
growth strategy. Over the next five years, Taurus plans to
invest approximately $750 million to acquire and develop
producing activities and to participate in exploration and related
development. In fiscal 1998, Taurus plans to spend approximately
$165 million, including $100 million for property acquisitions.
During the first quarter, Taurus spent $50.9 million on property
acquisitions. 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
has historically 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. Current net production
is 5.9 MMcfd and 88 barrels of oil a day.
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 and
intends to issue long-term debt under that registration during the
second quarter. During the first quarter, Energen increased its
available short-term credit facilities to $228 million to
accommodate its growth plans. Depending upon the Company's
level of activity in acquiring oil and gas properties, Energen
may issue common equity during this fiscal year.
Utility capital expenditures for normal distribution system
renewal and expansion and support facilities could
approximate $60 million in fiscal 1998. Alagasco also
will maintain an investment in storage working gas which
is expected to average approximately $24 million in 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.
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 7).
The Company also is required to adopt during fiscal 1998, SFAS
No. 129, Disclosures of Information about Capital Structure, which
establishes standards for disclosing information about an entity's
capital structure; although interim disclosure is not required. This
adoption is not expected to have a material impact on the
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.
The Company is required to adopt these statements in fiscal year 1999.
The impact of these pronouncements on the Company is currently
being evaluated.
6. SUPPLEMENTAL CASH FLOW INFORMATION
ENERGEN CORPORATION
Nine months ended June 30,
(in thousands) 1997 1996
Interest paid, net of
amounts capitalized $14,844 $10,846
Income taxes paid $ 5,140 $ 1,745
Noncash investing
activities (capitalized
depreciation and allowance
for funds used during
construction) $ 508 $ 944
ALABAMA GAS CORPORATION
Nine months ended June 30,
(in thousands) 1997 1996
Interest paid $ 9,570 $ 8,866
Income taxes paid $10,016 $ 3,535
Noncash investing activities
(capitalized depreciation
and allowance for funds
used during construction) $ 508 $ 944
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Consolidated net income for the third quarter of fiscal 1997 was
$3.0 million ($.23 per share) and compared favorably with net
income of $1.1 million ($.10 per share) recorded in the same
period last year. Taurus Exploration Inc. (Taurus), Energen's
oil and gas exploration and production subsidiary, realized net
income of $1.2 million as compared to a net loss of $0.4 million
in the same period last year, primarily due to a 113 percent
increase in oil and gas production volumes to 9.3 billion cubic
feet equivalent (Bcfe). Taurus also benefited from increased
nonconventional fuels tax credits. Partially offsetting these
gains were increased depreciation, depletion and amortization
(DD&A) expense as well as increased interest expense. Alagasco,
Energen's natural gas utility, earned $1.7 million during the
third fiscal quarter. This $0.3 million increase from the same
period last year primarily was due to Alagasco's earning within
its allowed range of return on a higher level of equity
representing investment in utility plant.
For the 1997 fiscal year-to-date, Energen's net income totaled
$36.7 million ($2.98 per share) compared with $26.8 million
($2.44 per share) for the first nine months of fiscal 1996.
Taurus's net income totaled $12.6 million and compared favorably
with $4.7 million of net income in the first three fiscal
quarters of 1996. Alagasco's earnings increased $1.7 million to
$23.7 million. Major factors contributing to Taurus's and
Alagasco's financial success during the year-to-date period were
the same as those influencing each subsidiary during the third
quarter. In addition, Taurus benefited from higher realized oil
and gas prices.
Revenues:
Natural gas distribution revenues decreased 9.2 percent for the
quarter as significantly warmer-than-normal weather in Alagasco's
service territory contributed to a 32 percent decrease in
residential sales volumes. For the year-to-date, weather that
was 22 percent warmer than the prior year had the same negative
impact on volumes, but a higher commodity cost of gas which is
passed through rates to customers offset the impact of weather in
the nine-month period. Neither temperature variances nor gas
price fluctuations affect Alagasco's residential operating
margins, however, as the temperature adjustment provision allows
customer bills to be adjusted on a real-time basis to reflect
usage under normal temperature conditions and gas costs are
passed through to the customer via the company's Gas Supply
Adjustment rider.
Revenues from oil and gas production activities more than doubled
in both periods due largely to increased volumes and prices. Oil
and gas volumes increased 113 percent for the quarter and 121
percent for the year-to-date primarily due to the acquisition of
producing properties with development potential and to prior-year
discoveries coming on-line. Third quarter production of 9.3 Bcfe
compared to 4.4 Bcfe of production in the same period last year,
while production in the first nine months of the year totaled
22.7 Bcfe compared with 10.3 Bcfe in the first nine months of
fiscal 1996. After giving effect to hedged volumes, the average
sales price of natural gas in the third quarter was $1.96 per Mcf
as compared with $1.81 per Mcf in the prior-year period; in the
year-to-date, gas prices averaged $2.19 per Mcf as compared with
$1.90 per Mcf in the same period last year. Meanwhile, Taurus's
sales price per barrel of oil averaged $18.03 in the third
quarter versus $16.92 last year and $18.37 in the year-to-date
versus $16.09 in the prior-year period.
The Company utilizes several instruments as hedges to manage its
exposure to energy price fluctuations on the sale of oil and gas
production. These instruments consist mainly of natural gas and
crude oil futures contracts traded on the New York Mercantile
Exchange, over-the-counter swaps and basis hedges with major
energy derivative product specialists and fixed-price sales
contracts. 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 June 30, 1997, Taurus
has entered into contracts and swaps for 7.3 Bcf of its gas
production at an average contract price of $2.09 per Mcf and 153
MBbl of its oil production at an average contract price of $19.63
per barrel. The program has been extended into fiscal year 1998
with contracts and swaps in place for 26.5 Bcf of gas production
at an average contract price of $2.14 per Mcf, and 433 MBbl of
oil at an average contract price of $20.26 per barrel. For fiscal
year 1999, there are contracts and swaps in place for 2.2 Bcf of
gas production at an average contract price of $2.17 per Mcf.
Realized prices are anticipated to be lower than hedged prices
due to basis difference and other factors. To help mitigate this
variance, the Company recently hedged the basis difference on
11.2 Bcf of its 1998 and 1999 San Juan Basin production.
Operating Expenses:
As with natural gas revenues, cost of gas is typically influenced
by weather and gas prices. In the quarter, weather-related
decreases in residential sales volumes coupled with a relatively
stable commodity cost of gas resulted in an 18.8 percent overall
decrease in cost of gas for the quarter. For the year-to-date,
cost of gas decreased 3.6 percent, as the effect of warmer
weather was partially offset by increased commodity cost of gas.
Operations and maintenance expense (O&M) increased $2.8 million
for the quarter and $11.7 million in the current year-to-date
primarily due to the significant growth in production and
acquisition activity at Taurus. In the quarter, lease operating
expenses (LOE) increased $2.8 million, while utility O&M remained
relatively stable. For the year-to-date, Taurus's LOE rose $7.4
million and, at the utility, labor and related expenses and
marketing costs increased.
Taurus's significantly higher production volumes generated the
majority of the $3.8 million increase in DD&A for the quarter and
the $9.9 million increase for the year-to-date. However, that
increase was somewhat offset by lower DD&A rates due to the
addition of long-lived assets in the current year. Included in
the year-to-date was a $0.5 million increase in DD&A at Taurus
related to a 10 Bcf anticipated reserve revision. Some of these
properties have undeveloped reserves, the remaining development
of which could impact the final adjustment; accordingly future
DD&A rates could be higher than currently anticipated. Normal
plant growth at Alagasco contributed $0.5 million of the increase
for the quarter and $1.8 million for the year-to-date.
The Company's expense for taxes other than income primarily
reflects various state and local business taxes at Alagasco, and
various payroll-related taxes and severance taxes at Taurus.
State and local business taxes are generally based on gross
receipts of Alagasco and fluctuate accordingly, while severance
taxes are based on the value of production.
The Company has been examining the possibility of disposing of
certain of its oil and gas properties which have 8 Bcf of proved
reserves and had previously disclosed the possibility of a
potential write-down to fair market value under SFAS No. 121 if
the Company decided to dispose of the assets. Management has
since determined that the properties may have development
potential for Taurus and is actively pursuing options for
development, either alone or with partners. Therefore, no
write-down under SFAS 121 was required for these properties and,
based on known facts and circumstances, no other properties are
currently impaired.
Non-Operating Items:
Interest expense increased by $2.2 million in the quarter and
$6.3 million for the year-to-date primarily due to interest
recorded in conjunction with the acquisition of oil and gas
properties in the San Juan Basin. The Company also has increased
borrowings under its short-term credit facilities and, in the
fourth quarter of the prior year, issued $40 million in Energen
medium-term notes (MTNs) to fund the aggressive growth strategy
currently under way at Taurus. In addition, Alagasco issued $25
million in MTNs in the fourth quarter of the prior year to repay
short-term debt used to fund customer refunds, gas storage
inventory replacement and facilities upgrade and acquisition.
The Company's effective tax rates are lower than statutory
federal tax rates primarily due to the recognition of
nonconventional fuel 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 remained virtually the same in both periods as
the impact of higher consolidated pretax income was offset by
significantly greater recognition of nonconventional fuel tax
credits on an interim basis in the current year.
FINANCIAL POSITION AND LIQUIDITY
Operating cash flow was $59.4 million compared to $63.9 million
in the prior year. As previously discussed, the Company
benefited from significantly higher oil and gas production
volumes and higher realized oil and gas prices in the current
year; however, the January 1997 payout to utility customers of
approximately $17 million in supplier refunds (see Note 2)
combined with other working capital items, which are highly
influenced by throughput and timing of payments, to more than
offset that increase.
The Company invested $168.5 million primarily to fund Taurus's
continued aggressive growth strategy. In the current year,
Taurus has added $143 million in capital expenditures including
the $77 million San Juan Basin acquisition of approximately 225
Bcfe of proved reserves, the $8.2 million acquisition of an
estimated 10.7 Bcfe of reserves in southwest Mississippi from
Griffin and Griffin Oil Company, and the $16 million investment
for a 9 percent interest in a joint venture in the Cotton Valley
Pinnacle Reef area. Utility expenditures year-to-date totaled
$28.3 million.
Financing activities provided a source of $100.9 million in the
current year primarily due to the issuance of $85 million of
medium-term notes in July 1997. The $84.4 million in proceeds
were used to repay short-term debt incurred mainly to finance
Taurus's acquisition and development strategy. In addition,
Energen issued 1,725,000 shares of common stock in January 1997,
generating net proceeds of $49.1 million.
FUTURE CAPITAL RESOURCES AND LIQUIDITY
The Company's previously-announced strategy to grow its oil and
gas exploration and production subsidiary involves investing more
than $400 million in the acquisition of producing properties with
development potential and more than $100 million in exploration
and related development in the five-year period ending September
30, 2000. In the second quarter, Taurus acquired approximately
225 Bcfe of oil and gas reserves in the San Juan Basin for $77
million and plans to spend an additional $18.5 million over
several years to fully develop these long-lived reserves. In the
third quarter, Taurus spent $8.2 million to purchase
approximately 10.7 Bcfe of proved reserves in southwest
Mississippi from Griffin and Griffin Oil Company. Approximately
85 percent of the estimated proved reserves are gas and almost 60
percent are developed and producing. Taurus plans to spend an
additional $1.2 million to develop the remaining 4.5 Bcfe of
behind-pipe and proved undeveloped reserves. In three smaller
transactions, Taurus acquired 5.6 Bcfe of predominantly natural
gas reserves in Texas and Louisiana for $3.3 million.
Approximately 40 percent of the proved reserves are developed and
producing, and the Company expects to spend an additional $3.2
million to fully develop the remaining behind-pipe and proved
undeveloped reserves. Also in June, Taurus invested $16 million
for a 9 percent interest in a joint venture with Sonat
Exploration and United Meridian Corporation for future
exploration of the Cotton Valley Pinnacle Reef trend.
Since third quarter end, Taurus has made another major
acquisition. On August 1st, the Company completed its purchase
of Amoco Corporation's Black Warrior Basin coalbed methane
properties for $72 million. The transaction included over 260
producing wells and estimated net proved reserves of 90 Bcf.
Substantially all of the reserves are classified as proved
producing. (For additional information, see Part II, Item 5).
In addition, Taurus spent $9.6 million in July to purchase
approximately 10 Bcfe of domestic oil and natural gas reserves
located in Texas and the Rocky Mountains from United Meridian
Corporation.
During the remainder of 1997, exclusive of new acquisitions,
Taurus could spend another $9 million related to the drilling of
exploratory wells. It should be noted that Taurus's continued
ability to invest in property acquisitions over the five-year
period ending September 30, 2000 will be significantly influenced
by industry trends as the producing property acquisition market
has historically been cyclical.
To finance Taurus's investment program, the Company will continue
to utilize its total available short-term credit facilities to
supplement internally generated cash flow, with long-term debt
and equity providing permanent financing. To that end, in
September 1996, Energen filed a $250 million shelf registration
for debt and common stock. Under that registration, Energen
issued $40 million aggregate principal amount of its Medium-Term
Notes, Series A (Series A MTNs) in September 1996 and, in January
1997, issued 1.7 million shares of common stock generating $49.1
million in proceeds. During July 1997, Energen issued an
additional $85 million of Series A MTNs, the proceeds from which
were used to repay short-term debt. Short-term debt in the
amount of $85 million has been reclassified to long-term in the
consolidated balance sheet at June 30, 1997 to reflect the
issuance. During the current year, Energen has increased its
available short-term credit facilities by $10 million to $166
million to accommodate the Taurus strategy.
Utility capital expenditures could approximate $43.2 million in
1997 and primarily represent additions for normal distribution
system expansion. Alagasco also will maintain an investment in
storage working gas which is expected to average approximately
$24 million in 1997. The utility anticipates funding these
capital requirements through internally generated capital and the
utilization of short-term credit facilities.
As referred to in Note 1, Alagasco received amounts from
Southern Natural Gas Company and other suppliers in settlement of
matters before FERC. During January 1997, the Company refunded
to its customers these amounts, including interest, for a total
of approximately $17 million.
Forward-Looking Statements and Risks: Certain statements in this
report, including statements of the Company's and management's
expectations, intentions, plans and beliefs, are forward-looking
statements that are dependent on certain events, risks and
uncertainties that may be outside the Company's control. Some of
these include, but are not limited to, economic and competitive
conditions, inflation rates, regulatory changes, financial market
conditions, future business decisions, and other uncertainties,
all of which are difficult to predict and most of which are
beyond the control of the Company. 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, including many factors beyond
the control of the Company. The total amount or timing of actual
future production may vary significantly from the amount of
reserves previously disclosed. In the event Taurus is unable to
fully invest 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, outcome and
cost overrun. These risks can be impacted by lease and rig
availability, complex geology and other factors. The Company's
results of operations and cash flows also could be affected by
changing oil and gas prices. Although Taurus makes use of futures
contracts to mitigate risk, fluctuations in oil and gas prices
may affect the Company's financial position and results of
operation.
Recent Pronouncements of the FASB
In fiscal 1997, the Company is required to adopt Statement of
Financial Accounting (SFAS) No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value-based method of
accounting for employee stock options. The Statement allows
companies to continue to follow the accounting treatment
prescribed by APB Opinion 25 with proper disclosure. The Company
will continue to record its employee stock options under APB
Opinion 25 and will make the required disclosures under SFAS 123.
In the second quarter, the Company adopted SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which provides accounting and
reporting standards for such transactions. The adoption did not
have a material impact on the financial statements.
In February 1997, the FASB issued SFAS No. 128, Earnings Per
Share, which specifies computation, presentation, and disclosure
requirements for EPS, and SFAS No. 129, Disclosures of
Information about Capital Structure, which establishes standards
for disclosing information about an entity's capital structure.
The Company is required to adopt these statements in its 1998
fiscal year. 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. The Company is required to adopt
these statements in fiscal year 1999. The impact of these
pronouncements on the Company is currently being evaluated.
18
SELECTED BUSINESS SEGMENT DATA
ENERGEN CORPORATION
Three months ended Nine months ended
June 30, June 30,
(in thousands,
except share data) 1997 1996 1997 1996
Natural Gas Distribution
Operating revenues
(in thousands)
Residential $42,218 $51,250 $210,113 $211,315
Commercial and
industrial - small 15,769 19,091 75,310 76,520
Commercial and
industrial - large 144 27 236 758
Transportation 7,805 6,706 25,648 23,652
Other 4,211 151 2,296 308
Total $70,147 $77,225 $313,603 $312,553
Volumes sold and
transported(thousands
of Mcf)
Residential 4,528 6,695 26,079 32,672
Commercial and
industrial - small 2,217 3,028 10,953 13,410
Commercial and
industrial -large 4 5 21 24
Transportation 15,432 14,758 46,962 45,932
Total 22,181 24,486 84,015 92,038
Other data
Depreciation and
amortization $5,906 $5,410 $17,463 $15,661
Capital expenditures $12,629 $10,977 $29,048 $29,524
Operating income $5,121 $4,338 $44,592 $41,210
Oil and Gas Exploration
and Production
Operating revenues
Natural gas $15,321 $5,774 $42,131 $14,620
Oil 4,372 3,266 10,703 6,973
Other 1,039 865 4,386 2,794
Total $20,732 $9,905 $57,220 $24,387
Sales volume -
natural gas
(thousands of Mcf) 7,831 3,192 19,240 7,676
Sales volume - oil
(thousands of barrels) 243 193 583 433
Average sales price -
natural gas (per Mcf) $ 1.96 $ 1.81 $ 2.19 $ 1.90
Average sales price -
oil (per barrel) $ 18.03 $ 16.92 $18.37 $16.09
Other data
Depreciation, depletion
and amortization $ 8,427 $5,050 $19,727 $11,516
Capital expenditures $39,472 $6,016 $143,003 $40,316
Exploration
expenditures $ 1,716 $1,771 $ 3,662 $ 2,999
Operating income $ 3,286 $ (197) $14,244 $ 1,920
Other Business
Depreciation and
amortization $ 80 $ 128 $ 245 $ 390
Capital expenditures $ 0 $ 27 $ 0 $ 45
Operating income $ 67 $ 99 $ 205 $ 245
Eliminations and
Corporate Expenses
Operating loss $ (230) $(229) $ (1,244) $(948)
18(Unaudited)
Three months ended December 31,
(dollars in thousand,
except sales price data) 1997 1996
Natural Gas Distribution
Operating revenues
Residential $ 62,377 $ 55,524
Commercial and
industrial - small 23,494 19,454
Transportation 9,357 8,554
Other 527 (227)
Total $ 95,755 $ 83,305
Gas delivery volumes (Mmcf)
Residential 7,833 7,182
Commercial and
industrial - small 3,456 3,036
Transportation 16,374 16,336
Total 27,663 26,554
Other data
Depreciation and
amortization $ 6,197 $ 5,759
Capital expenditures $ 8,314 $ 6,585
Operating income $ 5,902 $ 4,921
Oil and Gas Exploration and Production
Operating revenues
Natural gas $ 22,789 $ 9,386
Oil 4,445 2,785
Natural gas liquids 1,649 --
Other 1,250 1,526
Total $ 30,133 $ 13,697
Sales volume
Natural gas (Mmcf) 10,304 4,534
Oil (Mbbl) 259 157
Natural gas liquids (Mbbl) 176 --
Average sales price
Natural gas (Mmcf) $ 2.21 $ 2.07
Oil (barrel) $ 17.15 $ 17.70
Natural gas liquids (barrel) $ 9.38 $ --
Other data
Depreciation, depletion
and amortization $ 11,639 $ 4,638
Capital expenditures $ 60,359 $ 8,389
Exploration expenditures $ 123 $ 645
Operating income $ 7,541 $ 3,824
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On August 1,2. 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 shares.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
a. At the annual meeting of shareholders held on
January 28, 1998, the Energen shareholders elected the
following Directors to serve for three year terms expiring
in 2001;
Director Votes cast for Votes withheld
Dr. Stephen D. Ban 12,008,837 546,064
Julian W. Banton 12,001,773 553,128
Wm. Michael Warren, Jr. 12,020,255 534,646
b. A proposed amendment to the Restated Certificate of
Incorporation of Energen Corporation was submitted to
a vote of the shareholders. The proposed amendment, which
became effective January 30, 1998, increased Energen's authorized
common stock, par value $0.01 per share, from 30,000,000
shares to 75,000,000 shares. The amendment passed with
10,275,233 shares of common stock voting in favor of the
proposal, 2,153,431 shares voting against the proposal, and
126,237 shares abstaining.
c. The shareholders approved the Energen Corporation 1997 Taurus acquired Amoco Corporation's Black
Warrior Basin coalbed methane properties for $72 million.Stock
Incentive Plan. The properties include more than 260 producing wellsPlan was approved with 9,466,573 shares
of common stock voted in favor of the proposal, 1,824,034
shares voted against the proposal, 211,147 shares abstained,
and estimated
net proved reserves1,053,148 broker non-votes.
d. The shareholders approved certain issuances of 90 Bcf. Substantially allcommon
stock under the reserves
are classified as proved producing. Net annual production fromEnergen Corporation 1997 Deferred
Compensation Plan. The proposal was approved with
10,663,055 shares of common stock voted in favor of the
Amoco wells currently exceeds 7 Bcf. Throughproposal, 600,754 shares voted against the year 2002,
production from all the wells qualifies for the nonconventional
fuels tax credit. The Company used funds from its short-term
credit facilities to finance this acquisition. (For additional
information regarding the funding of Taurus's investment program,
see Part I, Item 2, Future Capital Resourcesproposal, 237,942
shares abstained, and Liquidity.) The
Company previously announced this acquisition on Form 8-K filed
with the Securities and Exchange Commission on July 9, 1997.1,053,151 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3(a) Articles of Amendment to the Restated Certificate of Incorporation,
dated January 30, 1998.
3(b) Restated Certificate of Incorporation, as amended through January
30, 1998.
4(a) First Supplemental Indenture, dated as of September 5, 1997, between
Energen Corporation and The Bank of New York Trustee, to Indenture
dated as of January 1, 1992.
4(b) First Supplemental Indenture, dated as of September 5, 1997, between
Energen Corporation and The Bank of New York Trustee, to Indenture
dated as of March 1, 1993.
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)
b. Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended June 30, 1997.
A report on Form 8-K dated July 9, 1997 was filed with the
Commission to report Taurus's acquisition of the properties
referred to in Part II, Item 5.
A report on Form 8-K dated August 11, 1997 was filed with the
Commission to report the commencement of a solicitation of
consents to certain proposed amendments (i) to the Indenture
dated as of January 1, 1992 among Energen and Boatmen's Trust
Company, as trustee (the Trustee), pursuant to which Energen's 8%
Debentures due February 1, 2007 were issued and (ii) to the
Indenture dated as of March 1, 1993 among Energen and the
Trustee, pursuant to which Energen's Series 1993 Notes were
issued.
19December
31,1997.
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
August 14, 1997February 11, 1998 By/s/ Wm. Michael Warren, Jr.
Wm. Michael Warren, Jr.
Chairman, President and
Chief Executive Officer of
Energen, Chairman and all subsidiaries,
PresidentChief
Executive Officer of Energen
August 14, 1997Alagasco
February 11, 1998 By/s/ G. C. Ketcham
G. C. Ketcham
Executive Vice President, Chief
Financial Officer and Treasurer
August 14, 1997of Energen and Alagasco
February 11, 1998 By/s/ Grace B. Carr
Grace B. Carr
Controller of Energen
February 11, 1998 By/s/ Paula H. Rushing
Paula H. Rushing
ControllerVice President-Finance of
Alagasco
20