UNITED STATES 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 MARCH 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 May 9, 1997: Energen Corporation, $0.01 par value 13,103,486 shares Alabama Gas Corporation, $0.01 par value 1,972,052 shares ENERGEN CORPORATION AND ALABAMA GAS CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997 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. . . . . . . . . . . . . . .14 Selected Business Segment Data of Energen Corporation.18 PART II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . .19 SIGNATURES . . .20 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME ENERGEN CORPORATION AND SUBSIDIARIES (Unaudited) Three months ended Six months ended March 31, March 31, (in thousands, except share data) 1997 1996 1997 1996 Operating Revenues Natural gas distribution $160,151 $162,143 $ 243,456 $ 235,328 Oil and gas production activities 22,791 8,844 36,488 14,482 Total operating revenues 182,942 170,987 279,944 249,810 Operating Expenses Cost of gas 83,912 89,984 125,372 124,068 Operations 29,057 23,862 56,593 47,431 Maintenance 2,944 3,191 5,510 5,794 Deprec., depletion, and amort 12,625 9,169 23,022 16,979 Taxes, other than income taxes 12,806 11,138 19,894 17,122 Total operating expenses 141,344 137,344 230,391 211,394 Operating Income 41,598 33,643 49,553 38,416 Other Income (Expense) Interest expense, net of amounts capitalized (5,856) (3,305) (10,801) (6,686) Other, net 1,155 163 2,330 1,706 Total other income (expense) (4,701) (3,142) (8,471) (4,980) Income Before Income Taxes 36,897 30,501 41,082 33,436 Income taxes 6,366 7,071 7,374 7,728 Net Income $30,531 $ 3,430 $ 33,708 $ 25,708 Earnings Per Average Common Share $ 2.41 $ 2.13 $ 2.82 $ 2.34 Dividends Per Common Share $ 0.30 $ 0.29 $ 0.60 $ 0.58 Average Common Shares Outstanding 12,656 11,005 11,937 10,977 The accompanying Notes are an integral part of these statements. CONSOLIDATED BALANCE SHEETS ENERGEN CORPORATION AND SUBSIDIARIES (Unaudited) March 31,September 30, (in thousands) 1997 1996 ASSETS Property, Plant and Equipment Utility plant $ 557,906 $ 544,643 Less accumulated depreciation 277,218 268,110 Utility plant, net 280,688 276,533 Oil and gas properties, successful efforts method 325,653 224,469 Less accumulated depreciation, depletion and amortization 69,249 60,152 Oil and gas properties, net 256,404 164,317 Other property, net 3,942 4,066 Total property, plant and equipment, net 541,034 444,916 Current Assets Cash and cash equivalents 12,402 17,074 Accounts receivable, net of allowance for doubtful accounts of $3,736 at March 31, 1997 and $3,002 at September 30, 1996 66,376 42,353 Inventories, at average cost Storage gas 28,793 28,214 Materials and supplies 7,780 7,704 Liquified natural gas in storage 2,869 2,417 Deferred gas costs 3,560 1,975 Amounts due from customers 14,730 (589) Deferred income taxes 6,834 7,995 Prepayments and other 3,304 7,563 Total current assets 146,648 114,706 Other Assets Deferred charges and other 14,689 10,760 Total other assets 14,689 10,760 TOTAL ASSETS $ 702,371 $ 570,382 The accompanying Notes are an integral part of these statements. CONSOLIDATED BALANCE SHEETS ENERGEN CORPORATION AND SUBSIDIARIES (Unaudited) March 31, September 30, (in thousands, except share data) 1997 1996 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, 13,065,633 shares outstanding at March 31, 1997, and 11,162,634 shares outstanding at September 30, 1996 131 112 Premium on capital stock 140,449 86,833 Capital surplus 2,802 2,802 Retained earnings 125,086 98,658 Total common shareholders' equity 268,468 188,405 Long-term debt 194,622 195,545 Total capitalization 463,090 383,950 Current Liabilities Long-term debt due within one year 1,855 1,805 Notes payable to banks 121,000 59,000 Accounts payable 31,772 32,659 Accrued taxes 19,539 17,567 Customers' deposits 17,840 17,364 Amounts due customers 2,410 17,157 Accrued wages and benefits 14,301 11,584 Other 21,583 18,049 Total current liabilities 230,300 175,185 Deferred Credits and Other Liabilities Deferred income taxes 0 972 Other 8,981 10,275 Total deferred credits and other liabilities 8,981 11,247 Commitments and Contingencies 0 0 TOTAL CAPITAL AND LIABILITIES $ 702,371 $ 570,382 The accompanying Notes are an integral part of these statements. CONSOLIDATED STATEMENTS OF CASH FLOWS ENERGEN CORPORATION AND SUBSIDIARIES (Unaudited) Six months ended March 31, (in thousands) 1997 1996 Operating Activities Net income $ 33,708 $ 25,708 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, depletion and amortization 23,022 16,979 Deferred income taxes, net (683) 1,352 Deferred investment tax credits, net (244) (243) Gain on sale of assets (647) Net change in: Accounts receivable (24,023) (36,846) Inventories (1,107) 12,891 Deferred gas cost (1,585) (9,589) Accounts payable gas purchases 5,580 17,691 Accounts payable other trade (6,467) 804 Other current assets and liabilities (17,108) 3,802 Other, net (3,116) 434 Net cash provided by operating activities 7,977 32,336 Investing Activities Additions to property, plant and equipment (119,565) (52,108) Proceeds from sale of assets 0 2,452 Payments on notes receivable 356 781 Other, net 627 25 Net cash used in investing activities (118,582) (48,850) Financing Activities Payment of dividends on common stock (7,285) (6,374) Issuance of common stock 52,091 1,355 Purchase of treasury stock 0 (1,503) Reduction of long-term debt (923) (898) Net change in short-term debt 62,050 1,700 Net cash provided by (used in) financing activities 105,933 (5,720) Net change in cash and cash equivalents (4,672) (22,234) Cash and cash equivalents at beginning of period 17,074 36,695 Cash and Cash Equivalents at End of Period $ 12,402 $ 14,461 The accompanying Notes are an integral part of these statements. STATEMENTS OF INCOME ALABAMA GAS CORPORATION (Unaudited) Three months ended Six months ended March 31,March 31, (in thousands) 1997 1996 1997 1996 Operating Revenues $160,152 $162,143 $ 243,457 $ 235,328 Operating Expenses Cost of gas 84,501 90,681 126,593 125,459 Operations 21,649 20,647 43,298 40,590 Maintenance 2,939 3,134 5,495 5,708 Depreciation 5,798 5,143 11,557 10,251 Income taxes Current 12,259 11,101 12,281 9,962 Deferred, net (550) (436) 416 1,758 Dfrd invest tax credits, net (121) (121) (243) (243) Taxes, other than income taxes 10,713 10,723 17,041 16,448 Total operating expenses 137,188 140,872 216,438 209,933 Operating Income 22,964 21,271 27,019 25,395 Other Income Allow for funds used during const 165 346 301 687 Other, net (86) (576) 288 (440) Total other income 79 (230) 589 247 Interest Charges Interest on long-term debt 2,211 1,734 4,422 3,872 Other interest expense 669 661 1,216 1,138 Total interest charges 2,880 2,395 5,638 5,010 Net Income $ 20,163 $ 18,646 $ 21,970 $20,632 The accompanying Notes are an integral part of these statements. BALANCE SHEETS ALABAMA GAS CORPORATION (Unaudited) March 31, September 30, (in thousands) 1997 1996 ASSETS Property, Plant and Equipment Utility plant $ 557,906 $ 544,643 Less accumulated depreciation 277,218 268,110 Utility plant, net 280,688 276,533 Other property, net 347 394 Current Assets Cash and cash equivalents 3,750 803 Accounts receivable Gas 48,869 26,999 Merchandise 1,784 1,730 Other 3,358 2,955 Affiliated companies 0 10,582 Allowance for doubtful accounts (3,713) (2,985) Inventories, at average cost Storage gas 28,793 28,214 Materials and supplies 5,517 5,828 Liquified natural gas in storage 2,869 2,417 Deferred gas costs 3,560 1,975 Amounts due from customers 14,730 (589) Deferred income taxes 5,120 6,344 Prepayments and other 3,001 5,150 Total current assets 117,638 89,423 Deferred Charges and Other Assets 11,250 7,467 TOTAL ASSETS $ 409,923 $ 373,817 The accompanying Notes are an integral part of these statements. BALANCE SHEETS ALABAMA GAS CORPORATION (Unaudited) March 31,September 30, (in thousands, except share data) 1997 1996 CAPITAL AND LIABILITIES Capitalization Common shareholder's equity Common stock, $0.01 par value; 3,000,000 shares authorized,1,972,052 shares outstanding at March 31, 1997, and September 30, 1996 $ 20 $ 20 Premium on capital stock 31,682 31,682 Capital surplus 2,802 2,802 Retained earnings 110,294 95,044 Total common shareholder's equity 144,798 129,548 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 269,798 254,548 Current Liabilities Notes payable to banks 24,000 0 Accounts payable Trade 25,609 23,758 Affiliated companies 3,732 1,512 Accrued taxes 21,347 18,067 Customers' deposits 17,840 17,364 Supplier refunds due customers 270 16,668 Other amounts due customers 2,140 489 Accrued wages and benefits 6,714 4,459 Other 13,305 10,611 Total current liabilities 114,957 92,928 Deferred Credits and Other Liabilities Deferred income taxes 16,922 16,883 Accumulated deferred investment tax credits 3,373 3,617 Regulatory liability 4,069 5,038 Customer advances for construction and other 804 803 Total deferred credits and other liabilities 25,168 26,341 Commitments and Contingencies 0 0 TOTAL CAPITAL AND LIABILITIES $ 409,923 $ 373,817 The accompanying Notes are an integral part of these statements. STATEMENTS OF CASH FLOWS ALABAMA GAS CORPORATION (Unaudited) Six months ended March 31, (in thousands) 1997 1996 Operating Activities Net Income $ 21,970 $20,632 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,557 10,251 Deferred income taxes, net 416 1,758 Deferred investment tax credits (243) (243) Net change in: Accounts receivable (21,599) (32,411) Inventories (720) 12,757 Deferred gas costs (1,585) (9,589) Accounts payable, gas purchases 5,580 17,691 Accounts payable, other trade (3,729) (2,913) Other current assets and liabilities (18,919) 4,533 Other, net (4,458) (815) Net cash provided by (used in) operating activities (11,730) 21,651 Investing Activities Additions to property, plant and equipment (16,034) (17,774) Net advances from affiliates 12,802 2,967 Other, net 629 (92) Net cash used in investing activities (2,603) (14,899) Financing Activities Payment of dividends on common stock (6,720) (6,360) Net change in short-term debt 24,000 0 Net cash provided by (used in) financing activities 17,280 (6,360) Net change in cash and cash equivalents 2,947 392 Cash and cash equivalents at beginning of period 803 727 Cash and Cash Equivalents at End of Period $ 3,750 $ 1,119 The accompanying Notes are an integral part of these statements. 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, 1996, 1995, and 1994, included in the 1996 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, 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 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 O&M expense per customer exceeds the index range, three-quarters of the difference is returned to customers. To the extent O&M per customer is less than the index range, the utility benefits by one-half of the difference through future rate adjustments. Under RSE as extended, a $1.3 million annual decrease in revenue became effective October 1, 1996, and a $7.7 million annual increase became effective December 1, 1996. 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 $2.3 million are being returned to ratepayers over approximately 14 years. At March 31, 1997, and September 30, 1996, a regulatory liability related to income taxes of $4.1 million and $5 million, respectively, was included in the consolidated financial statements. FERC Regulation: In 1995 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 then-pending rate cases as well as to resolve all GSR and transition cost issues resulting from 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 through December 1997 and approximately $0.8 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 $0.9 million and $2.2 million at March 31, 1997, and September 30, 1996, respectively. 3. 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 specifics computation, presentation, and disclosure requirements for EPS. The Company is required to adopt the statement in its 1998 fiscal year, but management has not yet determined the impact on the financial statements. 4. SUPPLEMENTAL CASH FLOW INFORMATION ENERGEN CORPORATION Six months ended March 31, (in thousands) 1997 1996 Interest paid, net of amounts capitalized $ 7,242 $ 6,646 Income taxes paid $ 3,124 $ 1,089 Noncash investing activities (capitalized depreciation and allowance for funds used during construction) $ 385 $ 773 ALABAMA GAS CORPORATION Six months ended March 31, (in thousands) 1997 1996 Interest paid $ 4,623 $ 5,025 Income taxes paid $ 5,827 $ 2,258 Noncash investing activities (capitalized depreciation and allowance for funds used during construction) $ 385 $ 773 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated net income for the second quarter of fiscal 1997 was $30.5 million ($2.41 per share) and compared favorably with net income of $23.4 million ($2.13 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 $9.9 million which included a $1.7 million net benefit from the acquisition of San Juan Basin oil and gas properties. This doubling of income from the same period last year was primarily due to a 133 percent increase in oil and gas production volumes to 8 billion cubic feet (Bcf) equivalent, a 15 percent rise in the average sales price for oil and gas production, and a significant increase in tax credits on coalbed methane production. Partially offsetting these gains were increases in depreciation, depletion and amortization (DD&A), interest and exploration expenses. Alagasco, Energen's natural gas utility, earned $20.2 million during the quarter. This $1.5 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. Although weather in Alagasco's service area during the winter heating season was warmer than normal, a temperature adjustment mechanism in place since fiscal 1991 negated the impact of temperature variances on Alagasco's earnings. For the 1997 fiscal year-to-date, Energen's net income totaled $33.7 million ($2.82 per share) compared with $25.7 million ($2.34 per share) for the first six months of fiscal 1996. Taurus's net income totaled $11.4 million and compared favorably with $5 million of net income in the first half of fiscal 1996. Alagasco's earnings increased $1.3 million to $22 million. Major factors contributing to Taurus's and Alagasco's financial success during the current period were the same as those influencing each subsidiary during the second quarter. Revenues: Natural gas distribution revenues varied only slightly in quarter and year-to-date comparisons. Significantly warmer than normal weather in Alagasco's service territory caused 21 and 17 percent decreases in residential sales volumes for the quarter and year-to-date, respectively; meanwhile, a higher commodity cost of gas, which is passed through rates to customers, largely offset the impact of weather in the quarter and more than offset the impact of weather in the six- months 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. Oil and gas volumes increased 133 percent for the quarter and 127 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. Second quarter production of 8 Bcf equivalent (Bcfe) compared to 3.4 Bcfe of production in the same period last year, while production in the first half of the year totaled 13.5 Bcfe compared with 5.9 Bcfe in the first six months of fiscal 1996. The impact of higher production was magnified by increased average sales prices for gas and oil. After giving effect to hedged volumes, the average sales price of natural gas in the second quarter was $2.53 per MMcf and compared with $2.15 per MMcf in the prior-year period; in the year-to-date, gas prices averaged $2.35 per MMcf as compared with $1.97 per MMcf in the same period last year. Meanwhile, Taurus's sales price per barrel of oil averaged $19.39 in the second quarter vs $16.04 last year and $18.61 in the year-to-date vs $15.42 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 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. For the remainder of the fiscal year, Taurus has entered into contracts and swaps for 12.3 Bcf of its gas production at an average contract price of $2.09 per Mcf and 262 MBbl of its oil production at an average contract price of $19.94 per barrel. The program has been extended into next fiscal year with contracts and swaps in place for 20.5 Bcf of gas production at an average contract price of $2.09 per Mcf and 33 MBbl of oil at an average contract price of $18.71per barrel. Hedged prices do not reflect any basis difference which may occur when open contracts are closed. Realized prices are anticipated to be lower than hedged prices due to basis difference and other factors. Although the Company is presently reviewing strategies to hedge basis differences for its San Juan properties, it has not hedged such difference to date. Operating Expenses: As with natural gas revenues, cost of gas was most influenced by weather and gas prices. In the quarter, weather-related decreases in residential sales volumes were partly offset by higher commodity cost of gas, resulting in a 7 percent overall decrease in cost of gas. For the year-to-date, cost of gas remained virtually the same, as the effect of warmer weather on purchased volumes was more than offset by increased commodity cost of gas. Operations and maintenance expense (O&M) increased $4.9 million for the quarter and $8.9 million in the current year-to-date primarily due to the significant growth in production and acquisition activity at Taurus. Lease operating expenses increased $4.6 million and $6.9 million for the quarter and year-to-date, respectively. Utility O&M increases for the year-to-date largely were due to higher labor-related and marketing expenses. Taurus's significantly higher production volumes generated the majority of the $3.5 million increase in DD&A for the quarter and the $6 million increase for the year-to-date. Included in the quarter 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. Absent offsetting positive adjustments on these properties, DD&A rates could be higher than originally anticipated in future periods. Normal plant growth at Alagasco also contributed to the year-to-date increase. The Company's expense for taxes other than income primarily reflects various state and local business taxes at Alagasco, 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 production-based. During the past quarter, 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 presently 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 was greater by $2.6 million in the quarter and $4.1 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 Current year operating cash flows decreased $24 million primarily due to the payout of approximately $17 million in supplier refunds to utility customers in January of 1997 (see Note 2). Generally, other changes in operating cash flows are the result of fluctuations in payables and receivables which are highly influenced by throughput and timing of payments. Net cash used in financing activities rose to $118.6 million as Taurus continued its aggressive growth strategy. Taurus has added $103.5 million in capital acquisitions in the current year-to-date including the $77.8 million San Juan Basin acquisition during the second quarter. Financing activities provided a source of $105.9 million in the current year-to-date primarily due to increased borrowings under Energen's short-term credit facilities used 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. During 1997 Taurus had anticipated investing approximately $100 million in property acquisitions and in the development of existing reserves and $20 million in exploration and development. Toward that end, during the second quarter, Taurus acquired approximately 225 Bcfe of oil and high BTU content natural gas reserves in the San Juan Basin from Burlington Resources Inc. for $77.8 million. An estimated 80 percent of the total proved reserves are developed and producing. Taurus plans to spend an additional $18.5 million over several years to fully develop these long-lived predominately natural gas reserves. For the remainder of 1997, Taurus intends to continue to actively grow its oil and gas properties. Exclusive of new acquisitions, Taurus could invest up to $30 million in exploration and other development costs, approximately $11 million of which relates 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 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 has and will continue to utilize its total available short-term credit facilities of $156 million to supplement internally generated cash flow, but long-term debt and equity will provide permanent financing. To that end, during fiscal 1996, Energen filed a $250 million shelf registration for debt and common stock. Under that registration, Energen issued $40 million of MTNs in September of 1996 and, in January 1997, issued 1,725,000 million shares of common stock generating $49.1 million. The Company plans to issue additional long-term debt during the remainder of fiscal 1997. 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. Alagasco 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. Other: Energen and its subsidiaries are engaged in businesses that involve risks and uncertainties as well as significant estimates. 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 would 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 specifics computation, presentation, and disclosure requirements for EPS. The Company is required to adopt the statement in its 1998 fiscal year, but management has not yet determined the impact on the financial statements. SELECTED BUSINESS SEGMENT DATA ENERGEN CORPORATION Three months ended Six months ended March 31, March 31, (in thousands, except share data) 1997 1996 1997 1996 Natural Gas Distribution Operating revenues (in thousands) Residential $112,372 $ 112,329 $ 167,895 $160,065 Commercial and industrial - small 40,126 40,560 59,541 57,429 Commercial and industrial - large 54 675 92 731 Transportation 9,290 8,788 17,843 16,945 Other (1,691) (209) (1,915) 158 Total $160,151 $ 162,143 $ 243,456 $235,328 Volumes sold and transported (thousands of Mcf) Residential 14,369 18,187 21,551 25,977 Commercial and industrial - small 5,708 7,003 8,736 10,382 Commercial and industrial - large 10 9 17 18 Transportation 15,194 14,927 31,530 31,174 Total 35,281 40,126 61,834 67,551 Other data Depreciation and amortization $ 5,798 $ 5,143 $11,557 $10,251 Capital expenditures $ 9,834 $ 11,110 $16,419 $18,547 Operating income $ 34,552 $ 31,815 $39,473 $36,872 Oil and Gas Exploration and Production Operating revenues Natural gas $ 17,424 $ 5,428 $ 26,810 $ 8,846 Oil 3,546 2,404 6,331 3,707 Other 1,821 1,012 3,347 1,929 Total $ 22,791 $ 8,844 $ 36,488 $ 14,482 Sales volume, natural gas (thous of Mcf) 6,875 2,519 11,409 4,484 Sales volume, oil (thousands of barrels) 183 150 340 240 Avg sales price, natural gas (per Mcf) $2.53 $ 2.15 $ 2.35 $1.97 Avg sales price - oil (per barrel) $ 19.39 $ 16.04 $ 18.61 $15.42 Other data Deprec, depletion and amortization $ 6,747 $ 3,895 $ 11,300 $6,466 Capital expenditures $ 95,142 $14,685 $ 103,531 $34,300 Exploration expenditures $ 1,301 $ 175 $ 1,946 $ 1,228 Operating income $ 7,197 $ 2,255 $ 10,958 $ 2,117 Other Business Depreciation and amortization $ 80 $ 131 $165 $ 262 Capital expenditures $ 0 $ 34 $ 0 $ 34 Operating income $ 77 $ 51 $136 $ 146 Eliminations and Corporate Expenses Operating loss $ (228) $ (478) $(1,014) $ (719) PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 27.1 Financial data schedule of Energen Corporation (for SEC purposes only) 27.2 Financial data schedule of Alabama Gas Corporation (for SEC purposes only) b. Reports on Form 8-K No reports on Form 8-K were filed for the three months ended March 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 May 15, 1997 By/s/ Wm. Michael Warren, Jr. Wm. Michael Warren, Jr. Chief Executive Officer of Energen and all subsidiaries, President of Energen May 15, 1997 By/s/ G. C. Ketcham G. C. Ketcham Executive Vice President, Chief Financial Officer and Treasurer May 15, 1997 By/s/ Paula H. Rushing Paula H. Rushing Controller of Alagasco