SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1996
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
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 8, 1996:
Energen Corporation, $0.01 par value 11,113,090 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 JUNE 30, 1996
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements
(a)Consolidated Statements of Income of Energen Corporation. . . . . 4
(b)Consolidated Balance Sheets of Energen Corporation. . . . . . . . 5
(c)Consolidated Statements of Cash Flows of Energen Corporation. . . 7
(d)Statements of Income of Alabama Gas Corporation . . . . . . . . . 8
(e)Balance Sheets of Alabama Gas Corporation . . . . . . . . . . . . 9
(f)Statements of Cash Flows of Alabama Gas Corporation . . . . . . .11
(g)Notes to Unaudited Financial Statements . . . . . . . . . . . . .12
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 1. Legal Proceedings .20
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . .21
SIGNATURES 21
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) 1996 1995 1996 1995
Operating Revenues
Natural gas distribution $ 77,225 $ 55,865 $ 312,553 $ 257,232
Oil and gas production
activities 9,903 5,317 24,678 17,559
Other 579 580 1,677 1,757
Intercompany eliminations (577) (808) (1,968) (2,621)
Total operating revenues 87,130 60,954 336,940 273,927
Operating Expenses
Cost of gas 37,577 19,653 161,645 118,669
Operations 25,329 23,633 72,760 68,132
Maintenance 2,657 2,462 8,451 7,368
Depreciation, depletion,
and amortization 10,588 7,017 27,567 21,167
Taxes, other than income taxes 6,968 4,951 24,090 19,835
Total operating expenses 83,119 57,716 294,513 235,171
Operating Income 4,011 3,238 42,427 38,756
Other Income (Expense)
Interest expense, net of
amounts capitalized (3,240) (2,703) (9,926) (8,091)
Other, net 260 966 1,966 2,389
Total other income (expense) (2,980) (1,737) (7,960) (5,702)
Income Before Income Taxes 1,031 1,501 34,467 33,054
Income taxes (40) 372 7,688 7,475
Net Income $ 1,071 $ 1,129 $ 26,779 $ 25,579
Earnings Per Average
Common Share $ 0.10 $ 0.10 $ 2.44 $ 2.34
Dividends Per Common Share $ 0.29 $ 0.28 $ 0.87 $ 0.84
Average Common Shares
Outstanding 11,020 10,897 10,991 10,908
The accompanying Notes are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS
Energen Corporation and Subsidiaries
(Unaudited)
June 30, September 30,
(in thousands) 1996 1995
ASSETS
Property, Plant and Equipment
Utility plant $ 531,419 $ 504,371
Less accumulated depreciation 261,232 247,926
Utility plant, net 270,187 256,445
Oil and gas properties, successful
efforts method 154,406 117,339
Less accumulated depreciation,
depletion and amortization 60,795 51,170
Oil and gas properties, net 93,611 66,169
Other property, net 4,060 4,650
Total property, plant and
equipment, net 367,858 327,264
Current Assets
Cash and cash equivalents 12,051 36,695
Accounts receivable, net of
allowance for doubtful
accounts of $2,312 at June 30, 1996
and $2,533 at September 30, 1995 44,865 30,813
Inventories, at average cost
Storage gas 17,754 20,276
Materials and supplies 7,941 7,711
Liquefied natural gas in storage 1,741 3,539
Deferred gas costs 2,182 1,426
Regulatory asset 2,856 6,321
Deferred income taxes 6,843 9,667
Prepayments and other 9,542 2,583
Total current assets 105,775 119,031
Other Assets
Deferred income taxes 240 0
Deferred charges and other 13,716 12,789
Total other assets 13,956 12,789
TOTAL ASSETS $ 487,589 $ 459,084
The accompanying Notes are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS
Energen Corporation and Subsidiaries
(Unaudited)
June 30, September 30,
(in thousands, except share data) 1996 1995
CAPITAL AND LIABILITIES
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, 11,059,576 shares outstanding
at June 30, 1996 and 10,921,733 shares
outstanding at September 30, 1995 111 109
Premium on capital stock 84,512 81,243
Capital surplus 2,802 2,802
Retained earnings 107,232 90,020
Treasury stock at cost, 11,627 shares at
September 30, 1995 0 (250)
Total common shareholders' equity 194,657 173,924
Long-term debt 130,652 131,600
Total capitalization 325,309 305,524
Current Liabilities
Long-term debt due within one year 1,825 1,775
Notes payable to banks 19,000 32,300
Accounts payable 42,548 32,242
Accrued taxes 21,808 11,339
Customers' deposits 17,929 18,218
Amounts due customers (209) 13,231
Supplier refunds 16,860 3,315
Accrued wages and benefits 12,850 10,955
Other 16,679 14,923
Total current liabilities 149,290 138,298
Deferred Credits and Other Liabilities
Deferred income taxes 0 2,540
Accumulated deferred investment tax credits 3,738 4,103
Other 9,252 8,619
Total deferred credits and other liabilities 12,990 15,262
Commitments and Contingencies 0 0
TOTAL CAPITAL AND LIABILITIES $487,589 $459,084
The accompanying Notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOW
Energen Corporation and Subsidiaries
(Unaudited)
Nine months ended June 30, (in thousands) 1996 1995
Operating Activities
Net Income $ 26,779 $ 25,579
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and
amortization 27,567 21,182
Deferred income taxes, net (572) (4,593)
Deferred investment tax credits, net (365) (365)
Gain on sale of assets (670) 0
Net change in:
Accounts receivable (14,052) 1,777
Inventories 4,090 7,754
Deferred gas cost (756) (101)
Accounts payable gas purchases 6,696 7,391
Accounts payable other trade 3,610 (3,845)
Other current assets and liabilities 10,373 11,494
Other, net 1,240 (201)
Net cash provided by operating activities 63,940 66,072
Investing Activities
Additions to property, plant and equipment (68,941) (40,465)
Proceeds from sale of assets 2,478 0
Payments on notes receivable 1,179 632
Other, net (84) 101
Net cash used in investing activities (65,368) (39,732)
Financing Activities
Payment of dividends on common stock (9,567) (9,170)
Issuance of common stock 2,527 116
Purchase of treasury stock (1,978) (740)
Reduction of long-term debt and
preferred stock of subsidiary (898) (9,422)
Proceeds from issuance of medium-term notes 0 33,768
Net change in short-term debt (13,300) (6,000)
Net cash provided by (used in)
financing activities (23,216) 8,552
Net change in cash and cash equivalents (24,644) 34,892
Cash and cash equivalents at beginning of period 36,695 27,526
Cash and Cash Equivalents at End of Period $ 12,051 $ 62,418
The accompanying Notes are an integral part of these statements.
STATEMENTS OF INCOME
Alabama Gas Corporation
(Unaudited)
Three months ended Nine months ended
June 30, June 30,
(in thousands) 1996 1995 1996 1995
Operating Revenues $ 77,225 $ 55,865 $ 312,553 $ 257,232
Operating Expenses
Cost of gas 38,154 20,461 163,613 121,290
Operations 20,333 19,380 60,923 57,589
Maintenance 2,624 2,442 8,332 7,277
Depreciation 5,410 4,870 15,661 14,391
Income taxes
Current 1,760 (291) 11,722 15,339
Deferred, net (938) 1,033 820 (3,742)
Deferred investment tax
credits, net (122) (122) (365) (365)
Taxes, other than income taxes 6,366 4,709 22,814 19,098
Total operating
expenses 73,587 52,482 283,520 230,877
Operating Income 3,638 3,383 29,033 26,355
Other Income
Allowance for funds used
during construction 131 282 818 691
Other, net (88) 166 (528) 409
Total other income 43 448 290 1,100
Interest Charges
Interest on long-term debt 1,733 1,713 5,605 5,150
Other interest expense 568 346 1,706 1,515
Total interest charges 2,301 2,059 7,311 6,665
Net Income Available for Common $ 1,380 $ 1,772 $ 22,012 $ 20,790
The accompanying Notes are an integral part of these statements.
BALANCE SHEETS
Alabama Gas Corporation
(Unaudited)
June 30, September 30,
(in thousands) 1996 1995
ASSETS
Property, Plant and Equipment
Utility plant $ 531,419 $ 504,371
Less accumulated depreciation 261,232 247,926
Utility plant, net 270,187 256,445
Other property, net 398 193
Current Assets
Cash and cash equivalents 3,114 727
Accounts receivable
Gas 33,843 22,215
Merchandise 2,494 1,546
Other 1,047 1,399
Associated Companies 8,066 199
Allowance for doubtful accounts (2,298) (2,000)
Inventories, at average cost
Storage gas 17,754 20,276
Materials and supplies 6,089 5,860
Liquefied natural gas in storage 1,741 3,539
Deferred gas costs 2,182 1,426
Regulatory asset 2,856 6,321
Deferred income taxes 4,742 7,416
Prepayments and other 1,583 2,302
Total current assets 83,213 71,226
Deferred Charges and Other Assets 7,652 7,403
TOTAL ASSETS $ 361,450 $ 335,267
The accompanying Notes are an integral part of these statements.
BALANCE SHEETS
Alabama Gas Corporation
(Unaudited)
June 30, September 30,
(in thousands, except share data) 1996 1995
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, 1996 and
September 30, 1995 $ 20 $ 20
Premium on capital stock 31,682 31,682
Capital surplus 2,802 2,802
Retained earnings 100,095 87,638
Total common shareholder's equity 134,599 122,142
Cumulative preferred stock,
$0.01 par value, 120,000 shares authorized,
issuable in series $4.70 Series 0 0
Long-term debt 100,000 100,000
Total capitalization 234,599 222,142
Current Liabilities
Long-term debt due within one year 0 0
Notes payable to banks 0 0
Accounts payable 28,919 26,160
Accrued taxes 21,844 10,236
Customers' deposits 17,929 18,218
Supplier refunds due customers 16,860 3,315
Other amounts due customers (209) 13,231
Accrued wages and benefits 6,976 5,228
Other 9,653 9,444
Total current liabilities 101,972 85,832
Deferred Credits and Other Liabilities
Deferred income taxes 15,105 16,343
Accumulated deferred investment
tax credits 3,738 4,103
Regulatory liability 5,244 6,001
Customer advances for construction and other 792 846
Total deferred credits and other
liabilities 24,879 27,293
Commitments and Contingencies 0 0
TOTAL CAPITAL AND LIABILITIES $ 361,450 $ 335,267
The accompanying Notes are an integral part of these statements.
STATEMENTS OF CASH FLOW
Alabama Gas Corporation
(Unaudited)
Nine months ended June 30, (in thousands) 1996 1995
Operating Activities
Net Income $ 22,012 $20,790
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 15,661 14,391
Deferred income taxes, net 820 (3,742)
Deferred investment tax credits (365) (365)
Net change in:
Accounts receivable (11,826) (14)
Inventories 4,091 8,024
Deferred gas costs (756) (101)
Accounts payable gas purchases 6,696 7,391
Accounts payable other trade (3,937) (2,705)
Other current assets and liabilities 19,603 8,838
Other, net (3,245) (519)
Net cash provided by operating
activities 48,754 51,988
Investing Activities
Additions to property, plant and equipment (28,580) (27,992)
Net advances to affiliates (7,967) 0
Other, net (265) (275)
Net cash used in investing activities (36,812) (28,267)
Financing Activities
Payment of dividends on common stock (9,555) (9,170)
Reduction of long-term debt 0 (1,636)
Proceeds from issuance of medium-term notes 0 33,768
Net advances from affiliates 0 544
Net change in short-term debt 0 (4,000)
Net cash provided by (used in)
financing activities (9,555) 19,506
Net change in cash and cash equivalents 2,387 43,227
Cash and cash equivalents at beginning of period 727 156
Cash and Cash Equivalents at End of Period $ 3,114 $ 43,383
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 only of
normal recurring items. The consolidated financial statements and notes thereto
should be read in conjunction with the financial statements and notes for the
years ended September 30, 1995, 1994, and 1993 included in the 1995 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 primary 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, Alagasco is subject to regulation by the APSC which, in
1983, established the Rate Stabilization and Equalization (RSE) rate-setting
process. RSE was extended for the third time on December 3, 1990, for a
three-year period. Under the terms of that extension, RSE shall continue after
November 30, 1993, unless, after notice to the Company, the Commission votes to
either modify or discontinue its operation. On October 4, 1993, the Commission
unanimously voted to extend RSE until such time as certain hearings mandated by
the Energy Policy Act of 1992 (Energy Act) in connection with integrated
resource
planning and demand side management programs are completed. The Energy Act
proceedings are expected to conclude during fiscal 1996 or early 1997 at which
time it is expected that the Commission will begin reviewing Alagasco's RSE.
While no time table for review has yet been established, on August 8, 1996,
Alagasco filed with the APSC an application to, among other things, extend RSE
and conclude the Energy Act review.
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 the Company'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 will be
returned to the customers. To the extent the change in O&M expense per customer
is less than the index range, the utility will benefit by one-half of the
difference through future rate adjustments. Under RSE as extended, an $8.2
million annual increase in revenue became effective December 1, 1995.
Effective December 15, 1990, the APSC approved 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 month the weather variation
occurs.
The Company's rate schedules for natural gas distribution charges contain a Gas
Supply Adjustment (GSA) rider, established in 1993. The rider permits the
pass through to customers of changes in the cost of gas supply, including Gas
Supply Realignment (GSR) surcharges imposed by the Company's suppliers resulting
from changes in gas supply purchases related to the implementation of FERC Order
636.
On June 12, 1995, the APSC approved Alagasco's application to issue $50 million
of new debt. A portion of the proceeds was used to redeem all of Alagasco's 9
percent debentures and 11 percent First Mortgage Bonds. In connection with the
early call of the redeemed debt, Alagasco paid an early call premium of
approximately $1.3 million during the fourth quarter of fiscal 1995. Because the
APSC Order authorized Alagasco to collect the early call premium through
customer
rates during the fiscal year ending September 30, 1996, Alagasco recorded a
regulatory asset of $1.3 million during the quarter ended September 30, 1995,
with approximately $.2 million remaining at June 30, 1996.
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. Approximately $2.9 million of the remaining excess
utility deferred taxes is being returned to ratepayers over approximately 15
years.
FERC Regulation: On March 15, 1995, Southern Natural Gas Company (Southern)
filed a comprehensive settlement with the FERC in the form of a Stipulation and
Agreement (the Settlement) to resolve all issues in Southern's six pending rate
cases, as well as to resolve all GSR and transition cost issues resulting from
the implementation of FERC Order 636. The Settlement is supported by parties
representing more than 90 percent of the firm transportation demand on
Southern's
system, including local distribution companies (including Alagasco), municipal
distribution systems, major gas producers, large industrial end users,
marketers,
and state commissions (including the APSC).
On September 29, 1995, the FERC issued its Order Accepting Settlement, Severing
Contesting Parties, and Issuing Certificates and Approving Abandonment
(Settlement Order). The Settlement Order approves the Settlement with minor
modifications. Contesting parties had 30 days from the date of the Settlement
Order to file motions for rehearing and several such motions were timely filed.
On April 11, 1996, the FERC issued its Order on Rehearing approving the
Settlement with minor modifications. Specifically, the Settlement provides for
the following: (1) the resolution of all cost of service and rate design issues
in Southern's six pending rate cases and the establishment of reduced rates for
the purpose of calculating rate case refunds; (2) the implementation of reduced
settlement rates on an interim basis for supporting parties commencing March 1,
1995 (by order dated April 4, 1995, FERC approved these interim rates
pending its
final review of the merits of the Settlement); (3) the resolution of all GSR and
other transition cost issues resulting from FERC Order 636; (4) lower GSR cost
recovery through the reduction and earlier payout of GSR costs; (5) a three-year
moratorium on general rate increases; and (6) the resolution and disposition of
all rate case and GSR refunds for supporting parties. With respect to this last
point, the Settlement provides that all rate case refunds will be used to offset
a portion of Southern's remaining GSR liability. In addition, as a result of the
recalculated GSR surcharges for the period January 1, 1994, to February 28,
1995,
Southern refunded over-collected GSR costs, Alagasco's share of which has been
determined to be $16.9 million. This amount is recorded in the accompanying
financial statements as supplier refunds due customers. The Settlement will
allow Southern and the supporting parties to resolve all issues relating to GSR
and other transition costs, the majority of which costs will be collected from
customers by the end of calendar 1996. Alagasco estimates that it has a
remaining
GSR liability of approximately $1.0 million to be paid through March 1997 and
approximately $1.7 million in other transition costs to be paid through June
1998. Such amounts have been recorded as a liability in the financial
statements.
Because these costs will be recovered in full from Alagasco's customers in a
timely manner through the GSA rider of Alagasco's Tariff, the Company has
recorded a corresponding regulatory asset in the accompanying financial
statements.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Energen Corporation
Nine months ended June 30, (in thousands) 1996 1995
Interest paid, net of amounts capitalized $ 10,846 $ 10,101
Income taxes paid $ 1,745 $ 3,642
Noncash investing activities
(capitalized depreciation and
allowance for funds used during
construction) $ 944 $ 815
Alabama Gas Corporation
Nine months ended June 30, (in thousands) 1996 1995
Interest paid $ 8,866 $ 8,816
Income taxes paid $ 3,535 $ 8,154
Noncash investing activities
(capitalized depreciation
and allowance for funds used
during construction) $ 944 $ 815
4. CONTINGENCIES
Energen, Alagasco, and their affiliates are, from time to time, parties to
various pending or threatened legal proceedings. Certain of these lawsuits
include claims for punitive damages in addition to other specified relief.
Based
upon information presently available, and in light of available legal and other
defenses, contingent liabilities arising from threatened and pending litigation
are not considered material in relation to the respective financial positions of
Energen and Alagasco. It should be noted, however, that Energen, Alagasco and
their affiliates do business in Alabama and other jurisdictions in which the
magnitude and frequency of punitive damage awards bearing little or no relation
to culpability or actual damages continue to rise making it increasingly
difficult to predict litigation results.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results
of Operations
For the third quarter of fiscal 1996, Energen's net income totaled $1,071,000
(10 cents per share) which approximates the level earned in the prior
year's third
quarter of $1,129,000 (10 cents per share). Taurus Exploration, Energen's oil
and gas exploration and production subsidiary, reported modest gains in the
third
quarter largely due to increased production-related income and decreased
administrative expense. Partially offsetting these gains were increased
depreciation, depletion and amortization (DD&A) rates and higher exploration and
interest expenses. Energen's natural gas distribution company, Alabama Gas
Corporation (Alagasco), continued to earn its allowed return on a higher level
of utility investment but contributed slightly less to consolidated earnings for
the three months ended June 30 due to the timing of operation and maintenance
expenses.
For the 1996 fiscal year-to-date, Energen's net income totaled $26,779,000
($2.44 per share). This compares with income of $25,579,000 ($2.34 per share),
for the
first nine months of the prior fiscal year. Alagasco's increased contribution
to consolidated earnings primarily was due to the gas distribution company
earning its allowed return on a higher level of utility investment. Excluding
a $0.5 million gain from a contract buy out in the prior period, Taurus's
year-to-date earnings rose
modestly. Increases in production-related income and gas
prices and decreased administrative expenses were partially offset by increased
DD&A rates and higher exploration and interest expenses.
Natural gas revenues increased significantly in the current quarter and
year-to-date primarily
because of colder weather which resulted in residential sales
volumes rising 41 percent and 22 percent, respectively, and in higher natural
gas
prices. Neither temperature variances nor gas price fluctuations affect
Alagasco's residential operating margins; the APSC-approved 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 through the company's gas supply adjustment rider.
In the third quarter, revenues from oil and gas production activities rose
significantly. Oil volumes more than tripled and natural gas volumes increased
more than 70 percent, the result of current-year acquisitions and prior-year
discoveries coming on line. The impact of higher production was magnified by
increased average sales prices for both gas and oil. In the third quarter,
after
giving effect to hedged volumes, the average sales price per Mcf of natural gas
was $1.81 compared to $1.79 in the prior year, and the average sales price per
barrel of oil was $16.92 compared to $14.37 in the prior year. Increased
production volumes and prices similarly influenced nine month results. Natural
gas and oil production increased 1.6 Bcf equivalent each and, after giving
effect
to hedged volumes, the average sales price per Mcf of natural gas was $1.90
compared to $1.79 in the prior year, and the average sales price per barrel of
oil was $16.09 compared to $15.13 in the prior year. Slightly offsetting the
impact of current year production and pricing increases was the inclusion in the
prior year of revenues associated with the buyout of a long-term sales contract
($0.8 million). Operating and consulting fees did not vary significantly for
the quarter or year-to-date.
To hedge its exposure to energy price fluctuations on oil and gas production
over
the remainder of this fiscal year, Taurus has entered into contracts for the
sale
of 3.1 Bcf of its gas production at an average contract price of $2.19 per Mcf
and for the sale of 139 MBbl of its oil production at an average contract price
of $18.15 per Bbl. At June 30, 1996, the Company's deferred losses related to
its futures contracts totaled $1.6 million. The program has been extended into
fiscal 1997. Hedges and contracts are in place for the sale of 15.3 Bcf of gas
production with an average contract price of $2.15 per Mcf and for the sale of
88 MBbl of oil at an average contract price of $18.76 per Bbl.
Increased utility volumes, primarily associated with colder weather, and
increased commodity cost of natural gas resulted in an increase in cost of gas
for both periods.
For the quarter, consolidated operations and maintenance expense (O&M)
increased
7.2 percent due primarily to increased marketing expenses at Alagasco and higher
lease operating and exploration expenses at Taurus. For the year-to-date,
increased distribution activities associated with colder weather at Alagasco
combined with the above to create a 7.6 percent increase in O&M.
The significant increase in depreciation expense for the quarter and nine months
is related primarily to increased production volumes, an increased DD&A rate
associated with prior year reserve revisions and the addition of production from
new wells with a higher average DD&A rate at Taurus, plus the effects of normal
plant growth at Alagasco.
The Company's expense for taxes other than income primarily reflects the various
state and local income and business taxes paid by Alagasco as well as various
payroll-related taxes. State and local business taxes are generally based on
gross receipts of Alagasco and fluctuate accordingly.
Higher average short-term debt outstanding related to the initial financing of
Taurus's multi-year acquisition and development strategy was primarily
responsible for the increase in interest expense for the quarter and
year-to-date.
The reduction in other income for the quarter was primarily due to the
amortization of the call premium associated with Alagasco's early redemption of
long-term debt during the fourth quarter of fiscal 1995. For the year-to-date,
the impact of this amortization was offset by income from the sale of Taurus
properties during the first quarter.
The variance in income tax expense for the quarter was due largely to the effect
of lower consolidated pretax income coupled with increased recognition of
nonconventional fuel tax credits on an interim basis. For the year-to-date,
higher consolidated pretax income was largely offset by increased recognition of
nonconventional fuel tax credits on an interim basis resulting in relatively
stable tax expense between years. 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.
As previously discussed, the Company's business is seasonal in character and
influenced by weather conditions. Results of operations for the interim periods
are not necessarily indicative of the results that may be expected for the
year.
As more fully discussed in Note 2, Alagasco is subject to regulation by the
APSC,
which is expected to consider renewal of the utility's rate-setting mechanism
following the completion of its review of certain mandates under the Energy
Policy Act of 1992. Changes, if any, to the utility's present rate-setting
assumptions or provisions could have an impact on its net income.
Liquidity and Capital Resources
Weather colder than that of the prior year has continued to impact cash provided
by operations due to its effect on the timing of payment and collection of
certain gas supply costs and its effect on Alagasco's need to utilize and
replenish its storage gas inventory. The impact of these items largely offset
each other for the nine months. Fluctuations in receivables and payables have
been influenced by greater throughput in the current year and are also the
result
of timing of payments.
The $25.6 million increase in cash used in investing activities is largely the
result of Taurus's initial acquisition investment of $26.4 million for producing
oil and gas properties adding approximately 18.6 Bcf of gas and 3.8 Mmbl of oil,
and an additional $13.2 million in offshore exploration and development.
Offsetting that impact was the receipt of proceeds from the sale of certain
proved producing properties at Taurus. Included in Alagasco's capital
expenditures for the nine months was $3.1 million for the acquisition of
two municipal gas systems adding 1,600 additional customers.
The $31.8 million increase in cash used in financing activities is largely the
result of activities in the prior year. During the nine months ended June 30,
1995, Alagasco issued $33.8 million in medium-term notes the proceeds of which
were used to redeem its 9 percent debentures and its 11 percent first mortgage
bonds.
Future Capital Expenditures and Liquidity
The most significant event influencing the Company's future capital expenditures
and liquidity is Taurus's plan to increase its level of investment in the
exploration and production business in order to generate desired earnings
growth,
increase shareholder return, and increase total market capitalization. In the
five year period beginning with the current fiscal year, Taurus plans to invest
in excess of $400 million for property acquisitions and related development and
an additional $100 million for offshore exploration and development. To this
end, in mid-1995, Taurus entered into a three-and-one-half year agreement with
Sonat Exploration Company committing to invest annually up to between
$25 million
and $50 million as its proportionate share of acquisitions in fiscal years
through 1998. Thus far this year, Taurus has invested $26 million for
conventional oil and gas reserves, including $21 million under terms of the
Sonat
agreement.
On July 31, with an effective date of July 1, Taurus acquired 100 percent
working
interest in the Black Warrior Basin coalbed methane properties of Houston-based
Burlington Resources Inc. for $61 million. The properties are part of
Burlington
Resources' recently announced accelerated divestiture program. In addition to
ownership, Taurus will operate the properties. Current production is located on
more than 19,000 gross acres adjacent to existing Taurus coalbed methane
interests in west central Alabama. The properties include more than 100 economic
wells and estimated net proved reserves of 100 billion cubic feet (Bcf).
Substantially all of the reserves are classified as proved producing, with net
annual production currently exceeding 4.5 Bcf. Through the year 2002,
production
from 43 of the wells qualifies for the Nonconventional Fuels Tax Credit, which
presently is valued at approximately $1 per thousand cubic feet of production
and
increases annually with inflation. Under its existing area of mutual interest
agreements (AMI), Taurus has offered proportionate participation in certain
portions of the acquired properties to two of its coalbed methane partners.
Participation was not exercised in the primary AMI; partners in the second AMI
have until August 20 to exercise their participation rights. If participation
were exercised, the partners' interest would represent less than 20 percent of
the total. Any exercising partner would incur significant operating and
administrative fees payable to Taurus.
The Company has short-term credit facilities of $116 million that it has used
and
will use to initially acquire properties, but long-term debt and equity will be
issued for permanent financing of these investments. The Company expects to
refinance a portion of its current year acquisitions through the issuance of
long-term debt during the fourth quarter of this fiscal year. The exact timing
of the permanent financing for future acquisitions is undeterminable at this
time
as the Company does not know the exact pace of acquisitions.
Consolidated capital and exploration expenditures could approximate $150 million
in fiscal 1996, excluding additional municipal gas system acquisitions. Of
that,
Taurus may invest in excess of $100 million for property acquisitions and
related development, as well as offshore exploration and development. Taurus's
ability to invest in property acquisitions will be significantly influenced by
industry trends as the producing property acquisition market has historically
been cyclical. Alagasco expects to invest $48 million in fiscal 1996, excluding
additional municipal gas system acquisition, and primarily represents additions
for normal distribution system expansion.
Recent Pronouncements of the FASB
In June 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company
is required to adopt this Statement in its 1997 fiscal year but, based on known
facts and circumstances, implementation is not expected to have a material
impact
on the Company's financial statements.
In October 1995, SFAS No. 123, Accounting for Stock-Based Compensation, was
issued and also requires adoption by the Company in its fiscal year 1997. The
implementation of SFAS No. 123 is not expected to have a material impact on the
Company's financial statements.
In June 1996, SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, was issued and requires adoption by
the Company in its fiscal year 1998. The implementation of SFAS No. 125 is not
expected to have a material impact on the Company's financial statements.
SELECTED BUSINESS SEGMENT DATA
Energen Corporation
Three months ended Nine months ended
June 30, June 30,
(in thousands, except share data) 1996 1995 1996 1995
Natural Gas Distribution
Operating revenues
Residential $ 51,250 $ 36,311 $ 211,315 $ 172,763
Commercial and industrial - small 19,091 12,790 76,520 60,222
Commercial and industrial - large 27 23 758 271
Transportation 6,706 6,981 23,652 23,814
Other 151 (240) 308 162
Total $ 77,225 $ 55,865 $ 312,553 $ 257,232
Volumes sold and transported (Mcf)
Residential 6,695 4,626 32,672 25,132
Commercial and industrial - small 3,028 2,341 13,410 10,679
Commercial and industrial - large 5 7 24 23
Transportation 14,758 14,930 45,932 45,016
Total 24,486 21,904 92,038 80,850
Other data
Depreciation and amortization $ 5,410 $ 4,870 $ 15,661 $ 14,391
Capital expenditures $ 10,977 $ 11,591 $ 29,524 $ 28,807
Operating income $ 4,338 $ 4,003 $ 41,210 $ 37,587
Oil and Gas Exploration and Production
Operating revenues
Natural gas $ 5,774 $ 3,347 $ 14,620 $ 10,859
Oil 3,266 862 6,973 2,557
Other 863 1,108 3,085 4,143
Total $ 9,903 $ 5,317 $ 24,678 $ 17,559
Sales volume - natural gas (Mcf) 3,192 1,866 7,676 6,075
Sales (barrels) 193 60 433 169
Average sales price
- natural gas (per Mcf) $ 1.81 $ 1.79 $ 1.90 $ 1.79
Average sales price
- oil (per barrel) $ 16.92 $ 14.37 $ 16.09 $ 15.13
Other data
Depreciation, depletion
and amortization $ 5,050 $ 2,048 $ 11,516 $ 6,470
Capital expenditures $ 6,016 $ 2,713 $ 40,316 $ 12,450
Exploration expenditures $ 1,771 $ 1,251 $ 2,999 $ 1,867
Operating income $ (197) $ (637) $ 1,920 $ 1,982
Other Businesses
Operating revenues $ 579 $ 580 $ 1,677 $ 1,757
Depreciation and amortization $ 128 $ 99 $ 390 $ 306
Capital expenditures $ 27 $ 5 $ 45 $ 23
Operating income $ 99 $ 108 $ 245 $ 135
Eliminations and Corporate Expenses
Operating loss $ (229) $ (236) $ (948) $ (948)
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Energen, Alagasco, and their affiliates are, from time to time, parties to
various pending or threatened legal proceedings. Certain of these lawsuits
include claims for punitive damages in addition to other specified relief.
Based
upon information presently available, and in light of available legal and other
defenses, contingent liabilities arising from threatened and pending litigation
are not considered material in relation to the respective financial positions of
Energen and Alagasco. It should be noted, however, that Energen, Alagasco and
their affiliates do business in Alabama and other jurisdictions in which the
magnitude and frequency of punitive damage awards bearing little or no relation
to culpability or actual damages continue to rise making it increasingly
difficult to predict litigation results.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10 (a) Form of Restated Executive Retirement
Supplement Agreement between Energen
Corporation and Certain Executive Officers
10 (b) Form of Severance Compensation Agreement
between Energen Corporation and Certain
Executive Officers
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,
1996.
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, 1996 By/s/ Rex J. Lysinger
Rex J. Lysinger
Chairman of the Board of
Directors of
Energen and all
subsidiaries, Chief
Executive Officer of Energen
August 14, 1996 By/s/ G. C. Ketcham
G. C. Ketcham
Executive Vice President, Chief
Financial Officer and
Treasurer
August 14, 1996 By/s/ Paula H. Rushing
Paula H. Rushing
Controller of Alagasco