UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1999
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
605 21st Street 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 12, 1999:
Energen Corporation, $0.01 par value 29,714,856 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, 1999
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements
(a) Consolidated Statements of Income of
Energen Corporation 3
(b) Consolidated Balance Sheets of
Energen Corporation 4
(c) Consolidated Statements of Cash Flows
of Energen Corporation 6
(d) Statements of Income of Alabama
Gas Corporation 7
(e) Balance Sheets of Alabama Gas Corporation 8
(e) Statements of Cash Flows of
Alabama Gas Corporation 10
(g) Notes to Unaudited Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Selected Business Segment Data of
Energen Corporation 20
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 21
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
ENERGEN CORPORATION
(Unaudited)
Three months ended Six months ended
(in thousands, March 31, March 31,
except share data) 1999 1998 1999 1998
Operating Revenues
Natural gas distribution $144,692 $161,747 $216,249 $257,502
Oil and gas production
activities 43,698 36,226 86,109 66,359
Total operating
revenues 188,390 197,973 302,358 323,861
Operating Expenses
Cost of gas 59,915 80,299 86,578 131,046
Operations and
maintenance 42,611 35,765 85,458 70,047
Depreciation, depletion
and amortization 22,443 24,316 45,647 42,152
Taxes, other than
income taxes 12,642 13,167 20,935 23,048
Total operating
expenses 137,611 153,547 238,618 266,293
Operating Income 50,779 44,426 63,740 57,568
Other Income (Expense)
Interest expense (9,330) (7,666) (19,205) (14,901)
Other, net 36 507 514 1,325
Total other expense (9,294) (7,159) (18,691) (13,576)
Income Before Income
Taxes 41,485 37,267 45,049 43,992
Income tax benefit (884) (3,025) (1,162) (2,427)
Net Income $42,369 $40,292 $46,211 $46,419
Basic Earnings Per Avg.
Common Share $ 1.43 $ 1.39 $ 1.57 $ 1.60
Diluted Earnings Per Avg.
Common Share $ 1.42 $ 1.37 $ 1.55 $ 1.59
Dividends Per Common Share $ 0.16 $0.155 $ 0.32 $ 0.31
Basic Avg. Common Shares
Outstanding 29,589 29,027 29,511 28,956
The accompanying Notes are an integral part of these financial statements.
3
CONSOLIDATED BALANCE SHEETS
ENERGEN CORPORATION
March 31, 1999 September 30, 1998
(in thousands) (unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 10,963 $103,231
Accounts receivable,
net of allowance for doubtful
accounts of $3,546 at
March 31, 1999, and
$3,547 at September 30, 1998 89,452 64,173
Inventories, at average cost
Storage gas 15,701 21,237
Materials and supplies 7,802 8,670
Liquified natural gas
in storage 3,117 3,381
Deferred gas cost 4,933 1,774
Deferred income taxes 14,004 12,569
Prepayments and other 6,295 3,418
Total current assets 152,267 218,453
Property, Plant and Equipment
Oil and gas properties,
successful efforts method 680,560 516,040
Less accumulated depreciation,
depletion and amortization 125,853 88,306
Oil and gas properties, net 554,707 427,734
Utility plant 625,150 632,165
Less accumulated depreciation 320,980 307,488
Utility plant, net 304,170 324,677
Other property, net 3,546 3,933
Total property, plant
and equipment, net 862,423 756,344
Other Assets
Deferred income taxes 20,693 10,942
Deferred charges and other 7,443 7,716
Total other assets 28,136 18,658
TOTAL ASSETS $1,042,826 $993,455
The accompanying Notes are an integral part of these financial statements.
4
CONSOLIDATED BALANCE SHEETS
ENERGEN CORPORATION
(in thousands, March 31, 1999 September 30, 1998
except share data) (unaudited)
CAPITAL AND LIABILITIES
Current Liabilities
Long-term debt due
within one year $ 1,955 $ 7,209
Notes payable to banks 150,000 153,000
Accounts payable 31,060 33,533
Accrued taxes 23,825 21,255
Customers' deposits 17,582 16,344
Amounts due customers 10,143 12,070
Accrued wages and benefits 17,328 15,299
Other 39,043 25,531
Total current liabilities 290,936 284,241
Deferred Credits and
other Liabilities
Other 8,319 7,183
Total deferred credits
and other liabilities 8,319 7,183
Commitments and Contingencies -- --
Capitalization
Preferred stock, cumulative
$0.01 par value, 5,000,000
shares authorized -- --
Common shareholders' equity
Common stock, $0.01 par value;
75,000,000 shares authorized,
29,682,387 shares outstanding
at March 31, 1999, and
29,326,597 shares outstanding
at September 30, 1998 297 293
Premium on capital stock 201,892 195,874
Capital surplus 2,802 2,802
Retained earnings 167,048 130,280
Deferred compensation plan 743 873
Treasury stock, at cost
(69,270 shares at March 31, 1999,
and 49,096 shares at
September 30, 1998) (1,031) (873)
Total common shareholders' equity 371,751 329,249
Long-term debt 371,820 372,782
Total capitalization 743,571 702,031
TOTAL CAPITAL AND LIABILITIES $1,042,826 $ 993,455
The accompanying Notes are an integral part of these financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
ENERGEN CORPORATION
(Unaudited)
Six months ended March 31,
(in thousands) 1999 1998
Operating Activities
Net income $46,211 $46,419
Adjustments to reconcile net
income to net cash
provided by (used in)
operating activities:
Depreciation, depletion
and amortization 45,647 42,152
Deferred income taxes, net (11,450) (15,231)
Deferred investment tax
credits, net (224) (234)
Net change in:
Accounts receivable (22,948) (13,392)
Inventories 6,668 8,269
Deferred gas cost (3,159) (5,719)
Accounts payable - gas purchases 4,907 4,380
Accounts payable - trade (7,380) (4,467)
Other current assets
and liabilities 14,141 10,792
Other, net (388) 62
Net cash provided by
operating activities 72,025 73,031
Investing Activities
Additions to property,
plant and equipment (54,563) (110,612)
Acquisition, net of
cash acquired (123,816) --
Proceeds from sale of assets 27,000 --
Other, net 14 2,207
Net cash used in
investing activities (151,365) (108,405)
Financing Activities
Payment of dividends
on common stock (9,442) (8,980)
Issuance of common stock 6,021 5,481
Purchase of treasury stock (288) --
Reduction of long-term debt (6,219) (870)
Proceeds from issuance
of long-term debt -- 98,541
Payment of note payable issued to
purchase U.S. Treasury securities (100,571) (98,636)
Net change in short-term debt 97,571 (57,364)
Net cash used in
financing activities (12,928) (61,828)
Net change in cash and
cash equivalents (92,268) (97,202)
Cash and cash equivalents
at beginning of period 103,231 105,402
Cash and Cash Equivalents
at End of Period $10,963 $ 8,200
The accompanying Notes are an integral part of these financial statements.
6
STATEMENTS OF INCOME
ALABAMA GAS CORPORATION
(Unaudited)
Three months ended Six months ended
March 31, March 31,
(in thousands) 1999 1998 1999 1998
Operating Revenues $144,692 $161,747 $216,249 $257,502
Operating Expenses
Cost of gas 60,412 80,774 87,558 132,178
Operations and
maintenance 24,808 23,493 49,803 48,494
Depreciation 6,605 6,232 13,193 12,429
Income taxes
Current 17,371 18,874 18,393 21,022
Deferred, net (2,564) (4,820) (1,971) (5,747)
Deferred investment
tax credits, net (112) (117) (224) (234)
Taxes, other than
income taxes 10,014 10,918 15,760 18,170
Total operating
expenses 116,534 135,354 182,512 226,312
Operating Income 28,158 26,393 33,737 31,190
Other Income (Expense)
Allowance for funds
used during construction 102 99 168 184
Other, net (386) 168 (483) 247
Total other income
(expense) (284) 267 (315) 431
Interest Charges
Interest on
long-term debt 2,143 2,211 4,342 4,422
Other interest expense 533 503 1,027 1,071
Total interest
charges 2,676 2,714 5,369 5,493
Net Income $25,198 $23,946 $28,053 $26,128
The accompanying Notes are an integral part of these financial statements.
7
BALANCE SHEETS
ALABAMA GAS CORPORATION
March 31, 1999 September 30, 1998
(in thousands) (unaudited)
ASSETS
Property, Plant and Equipment
Utility plant $625,150 $632,165
Less accumulated depreciation 320,980 307,488
Utility plant, net 304,170 324,677
Other property, net 309 318
Current Assets
Cash and cash equivalents 5,939 1,222
Accounts receivable
Gas 48,642 32,191
Merchandise 1,967 2,362
Other 19,480 1,621
Allowance for doubtful accounts (3,482) (3,482)
Inventories, at average cost
Storage gas 15,701 21,237
Materials and supplies 5,476 5,533
Liquified natural
gas in storage 3,117 3,381
Deferred gas cost 4,933 1,774
Deferred income taxes 11,354 10,470
Prepayments and other 4,568 2,112
Total current assets 117,695 78,421
Deferred Charges and
Other Assets 4,275 4,733
TOTAL ASSETS $426,449 $408,149
The accompanying Notes are an integral part of these financial statements.
8
BALANCE SHEETS
ALABAMA GAS CORPORATION
(in thousands, March 31, 1999 September 30, 1998
except share data) (unaudited)
CAPITAL AND LIABILITIES
Capitalization
Common shareholder's equity
Common stock, $0.01 par value;
3,000,000 shares
authorized, 1,972,052
shares outstanding at
March 31, 1999, and
September 30, 1998 $ 20 $ 20
Premium on capital stock 31,682 31,682
Capital surplus 2,802 2,802
Retained earnings 148,257 120,205
Total common shareholder's
equity 182,761 154,709
Cumulative preferred stock,
$0.01 par value, 120,000 shares
authorized, issuable in series-
$4.70 Series -- --
Long-term debt 119,650 119,650
Total capitalization 302,411 274,359
Current Liabilities
Long-term debt due
within one year -- 5,350
Notes payable to banks -- 15,000
Accounts payable
Trade 24,644 23,217
Affiliated companies -- 2,738
Accrued taxes 28,737 19,428
Customers' deposits 17,582 16,344
Other amounts due customers 10,143 12,070
Accrued wages and benefits 8,600 4,217
Other 12,278 11,915
Total current liabilities 101,984 110,279
Deferred Credits and
Other Liabilities
Deferred income taxes 16,313 17,136
Accumulated deferred
investment tax credits 2,437 2,661
Regulatory liability 2,516 2,910
Customer advances for
construction and other 788 804
Total deferred credits
and other liabilities 22,054 23,511
Commitments and Contingencies -- --
TOTAL CAPITAL AND
LIABILITIES $426,449 $408,149
The accompanying Notes are an integral part of these financial statements.
9
STATEMENTS OF CASH FLOWS
ALABAMA GAS CORPORATION
(Unaudited)
Six months ended March 31,
(in thousands) 1999 1998
Operating Activities
Net income $ 28,053 $26,128
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation and amortization 13,193 12,429
Deferred income taxes, net (1,971) (5,747)
Deferred investment tax credits (224) (234)
Net change in:
Accounts receivable (15,989) (17,567)
Inventories 5,857 8,244
Deferred gas cost (3,159) (5,719)
Accounts payable -
gas purchases 4,907 4,380
Accounts payable -
other trade (3,480) (815)
Other current assets
and liabilities 11,158 15,407
Other, net (104) 930
Net cash provided by
operating activities 38,241 37,436
Investing Activities
Additions to property,
plant and equipment (19,632) (23,455)
Net advances to affiliates (20,664) (6,776)
Proceeds from sale of assets 27,000 --
Other, net 122 330
Net cash used in
investing activities (13,174) (29,901)
Financing Activities
Payment of dividends
on common stock -- (3,680)
Net change in short-term debt (20,350) 1,000
Net cash used in
financing activities (20,350) (2,680)
Net change in cash and
cash equivalents 4,717 4,855
Cash and cash equivalents
at beginning of period 1,222 2,580
Cash and Cash Equivalents
at End of Period $ 5,939 $ 7,435
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, 1998, 1997, and 1996,
included in the 1998 Annual Report of Energen Corporation (the Company) on Form
10-K. Certain reclassifications were made to conform prior years' financial
statements to the current quarter presentation. The Company's natural gas
distribution business is seasonal in character and influenced by weather
conditions. Results of operations for the interim periods are not necessarily
indicative of the results which may be expected for the fiscal year.
2. REGULATORY
As an Alabama utility, Alabama Gas Corporation (Alagasco) is subject to
regulation by the Alabama Public Service Commission (APSC) which, in 1983,
established the Rate Stabilization and Equalization (RSE) rate-setting process.
RSE was extended with modifications in 1985, 1987 and 1990. On October 7, 1996,
RSE was extended, without change, for a five-year period through January 1,
2002. Under the terms of that extension, RSE will continue after January 1,
2002, unless, after notice to the Company and a hearing, the Commission votes to
either modify or discontinue its operation.
Under RSE as extended, the APSC conducts quarterly reviews to determine, based
on Alagasco's projections and fiscal year-to-date performance, whether
Alagasco's return on average 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; however,
increases 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, as
measured as of the fiscal year end, 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 $6.6 million annual increase in revenue became effective
December 1, 1998, an $11.8 million annual increase in revenue became effective
December 1, 1997, and a $2.5 million annual decrease in revenue became effective
July 1, 1998.
Alagasco calculates a temperature adjustment to customers' bills to remove the
effect of departures from normal temperatures on earnings The calculation is
performed monthly, and the adjustments to customers' bills are made in the same
billing cycle in which the weather variation occurs. Substantially all the
customers to whom the temperature adjustment applies are residential, small
commercial and small industrial. 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.
The APSC approved an Enhanced Stability Reserve (ESR), beginning fiscal year
1998, to which Alagasco may charge the full amount of: (1) extraordinary O&M
expenses resulting from force majeure events such as storms, severe weather, and
outages, when one or a combination of two such events results in more than
$200,000 of additional O&M expense during a fiscal year or (2) individual
industrial and commercial customer revenue losses that exceed $250,000 during
the fiscal year, if such losses cause Alagasco's return on equity to fall below
13.15 percent. The APSC approved the reserve on October 6, 1998, in the amount
of $3.9 million; the maximum approved funding level of the ESR is $4 million.
The APSC provides for accretions to the ESR in an amount of no more than $40,000
monthly following a year in which a charge against the ESR is made until the
maximum funding level is achieved. The APSC will re-evaluate the operation of
the ESR following the conclusion of Alagasco's fiscal year 2000.
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 $1.8
million are being returned to ratepayers over approximately 12 years. At March
31, 1999, and September 30, 1998, a regulatory liability related to income taxes
of $2.5 million and $2.9 million, respectively, was included in the consolidated
financial statements.
As of November 1, 1998, Alagasco offered a Voluntary Early Retirement Program to
certain eligible employees. At March 31, 1999, a regulatory asset of $3.0
million for costs associated with this early retirement program is included in
the consolidated financial statements. The APSC has allowed these costs to be
amortized over a three-year period.
3. DERIVATIVE COMMODITY INSTRUMENTS
Energen Resources 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 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 as current
liabilities or assets until the revenues from the related hedged volumes are
recognized in the income statement. Cash flows from derivative instruments are
recognized as incurred through changes in working capital. The Company had
deferred gains of $3.0 million and $0.6 million on the balance sheet at March
31, 1999, and September 30, 1998, respectively.
At March 31, 1999, Energen Resources had entered into contracts and swaps for
23.5 Bcf of its remaining estimated 1999 flowing gas production at an average
contract price of $2.18 per Mcf and for 1,180 MBbl of its remaining estimated
flowing oil production at an average contract price of $14.66 per barrel.
Fiscal year 2000 contracts and swaps were in place for 4.5 Bcf of flowing gas
production at an average contract price of $2.22 per Mcf and for 180 MBbl of
flowing oil production at an average contract price of $17.31 per barrel.
Realized prices are anticipated to be lower than hedged prices due to basis
differences and other factors. To help mitigate this variance, the Company has
hedged the basis difference on 5.4 Bcf of its remaining 1999 San Juan Basin
production. Subsequent to March 31, 1999, Energen Resources entered into
additional contracts and swaps for fiscal year 2000 resulting in a total of 34
Bcf of flowing gas production hedged at an average contract price of $2.38 per
Mcf and 860 MBbl of flowing oil production at an average contract price of
$16.74 per barrel.
All hedge transactions are subject to the Company's risk management policy,
approved by the Board of Directors, which does not permit speculative positions.
To apply the hedge method of accounting, management must demonstrate that a high
correlation exists between the value of the derivative commodity instrument and
the value of the item hedged. Management uses the historic relationships
between the derivative instruments and the sales prices of the hedged volumes to
ensure that a high level of correlation exists.
4. ACCOUNTING FOR LONG-LIVED ASSETS
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of, requires that an impairment loss be recognized
when the carrying amount of an asset exceeds the sum of the undiscounted
estimated future cash flow of the asset. The Statement also provides that all
long-lived assets to be disposed of be reported at the lower of the carrying
amount or fair value. Accordingly, during the second fiscal quarter of 1998,
Energen Resources recorded a pre-tax writedown of $4.7 million as additional
depreciation, depletion and amortization expense on certain oil and gas
properties, adjusting the carrying amount of the properties to their fair value
based upon expected future discounted cash flows. This writedown primarily
reflected the impact of declined crude oil prices.
5. RECENT PRONOUNCEMENTS OF THE FASB
The FASB issued SFAS No. 130, Reporting Comprehensive Income, in June 1997,
which requires the reporting and display of comprehensive income and its
components in an entity's financial statements. There currently are no
differences between the Company's net income and comprehensive income. In
February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which revises employers' disclosures
about pension and other postretirement benefit plans. As this pronouncement
relates solely to disclosure provisions, there will be no effect on the results
of operations or financial position of the Company. The Company is required to
adopt these statements in fiscal year 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments. The Company is required to adopt this
statement in fiscal year 2000. The impact of this pronouncement on the Company
currently is being evaluated.
6. ACQUISITION OF TOTAL MINATOME CORPORATION
On October 15, 1998, Energen Resources purchased the stock of the TOTAL Minatome
Corporation (TOTAL), a Houston-based unit of TOTAL American Holding Inc.
Immediately upon closing the transaction, Energen Resources sold a 31 percent
undivided interest in TOTAL's net assets to Westport Oil and Gas Company Inc.
Energen Resources' net adjusted price totaled approximately $134 million,
including the assumption of certain legal and financial obligations. Energen
Resources gained an estimated 200 Bcf equivalent of proved domestic oil and
natural gas reserves. The acquisition was accounted for as a purchase, and the
results of operations since the acquisition date are included in the
consolidated financial statements. A summary of net assets acquired is as
follows:
(in thousands)
Oil and gas properties $ 134,110
Less liabilities assumed (9,865)
Less cash acquired (429)
Acquisition cost,
net of cash acquired $ 123,816
Summarized below are the consolidated results of operations for the six months
ended March 31, 1999 and 1998, on an unaudited pro forma basis, as if the TOTAL
acquisition had been made on October 1, 1997. The pro forma financial
information is based on the Company's consolidated results of operations for the
six months ended March 31, 1999 and 1998, and on data provided by TOTAL after
giving effect to certain pro forma adjustments. The pro forma financial
information does not purport to be indicative of results of operations that
would have occurred had the transactions occurred on the basis assumed above nor
are they indicative of results of the future operations of the combined
enterprises.
Six months ended March 31,
(in thousands) (unaudited) 1999 1998
Operating revenues $302,358 $365,229
Net income $ 46,211 $ 48,053
Basic Earnings Per
Average Common Share $ 1.57 $ 1.66
Diluted Earnings Per
Average Common Share $ 1.55 $ 1.64
7. RECONCILIATION OF EARNINGS PER SHARE
(in thousands, Three months ended Three months ended
except per share amounts) March 31, 1999 March 31, 1998
Per Share Per Share
Income Shares Amount Income Shares Amount
Basic EPS $42,369 29,589 $1.43 $40,292 29,027 $1.39
Effect of Dilutive
Securities
Long-range performance
shares 150 121
Non-qualified stock
options 131 212
Diluted EPS $42,369 29,870 $1.42 $40,292 29,360 $1.37
(in thousands, Six months ended Six months ended
except per share amounts) March 31, 1999 March 31, 1998
Per Share Per Share
Income Shares Amount Income Shares Amount
Basic EPS $46,211 29,511 $1.57 $46,419 28,956 $1.60
Effect of Dilutive
Securities
Long-range performance
shares 155 115
Non-qualified
stock options 144 191
Diluted EPS $46,211 29,810 $1.55 $46,419 29,262 $1.59
8. SEGMENT INFORMATION
Effective September 30, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. The Company is
principally engaged in two business segments: the purchase, distribution and
sale of natural gas in central and north Alabama (natural gas distribution) and
the acquisition, development, exploration and production of oil and gas in the
continental United States (oil and gas activities).
Three months ended Six months ended
March 31, March 31,
(in thousands) 1999 1998 1999 1998
Operating revenues
Natural gas distribution $144,692 $161,747 $216,249 $257,502
Oil and gas activities 43,698 36,226 86,109 66,359
Total $188,390 $197,973 $302,358 $323,861
Operating income (loss)
Natural gas distribution $ 42,853 $ 40,330 $ 49,935 $ 46,231
Oil and gas activities 7,875 4,343 14,071 11,884
Eliminations
and corporate expenses 51 (247) (266) (547)
Total $ 50,779 $ 44,426 $ 63,740 $ 57,568
Identifiable assets
Natural gas distribution $426,449 $426,946 $426,449 $426,946
Oil and gas activities 642,466 501,480 642,466 501,480
Eliminations and other (26,089) (13,861) (26,089) (13,861)
Total $1,042,826 $914,565 $1,042,826 $914,565
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Energen's net income for the three months ended March 31, 1999, totaled $42.4
million ($1.42 per diluted share) and compared favorably to net income of $40.3
million ($1.37 per diluted share) recorded in the same period last year. Energen
Resources Corporation, Energen's oil and gas subsidiary, realized net income of
$16.9 million in the second fiscal quarter as compared with $16.4 million in the
same period last year. Increased production-related income largely was offset by
significantly lower realized oil and natural gas liquids prices and moderately
lower realized gas prices. Adversely affecting income were increased interest
expense as well as increased administrative expense associated with the first
quarter acquisition of TOTAL Minatome Corporation (TOTAL). In the prior-year
period, Energen Resources recorded a $3.0 million after-tax writedown on certain
oil and gas properties. Alagasco, Energen's natural gas utility, reported net
income of $25.2 million in the current quarter; this $1.25 million increase
from the same period last year primarily reflects the utility's ability to earn
within its allowed range of return on an increased level of equity representing
investment in utility plant.
For the 1999 fiscal year-to-date, Energen's net income totaled $46.2 million
($1.55 per diluted share) compared with $46.4 million ($1.59 per diluted share)
for the same period in the prior year. Energen Resources' net income totaled
$17.9 million as compared with $20.2 million for the first six months of fiscal
1998. Alagasco's earnings increased $1.9 million to $28.1 million. Major
factors contributing to Energen Resources' and Alagasco's financial results were
the same as those for the second fiscal quarter.
Natural Gas Distribution
Natural gas distribution revenues decreased $17.1 million in a quarter-to-
quarter comparison and $41.3 million on a year-to-date basis. This primarily
was due to decreased sales volumes resulting from weather which was
significantly warmer than in the prior periods as well as decreased gas prices.
Alagasco's rate schedules for natural gas distribution charges contain a Gas
Supply Adjustment rider, established in 1993, which permits the pass-through to
customers of changes in the cost of gas supply. For the quarter, weather that
was 16.5 percent warmer than the same period last year contributed to a 15.6
percent decrease in residential sales volumes and a 5.2 percent decrease in
commercial and industrial sales volumes. For the year-to-date, weather that was
28.7 percent warmer than the same period last year contributed to a 23.7 percent
decrease in residential sales volumes and an 8.8 percent decrease in commercial
and industrial sales volumes. Decreased gas purchase volumes and prices also
contributed to a 25.2 percent decrease in cost of gas for the quarter and a 33.8
percent decrease year-to-date. Alagasco calculates a temperature adjustment to
certain customers' bills on a real-time basis to substantially remove the effect
of departures from normal temperature on Alagasco's earnings. The customers to
whom the temperature adjustment applies are primarily residential, small
commercial and small industrial.
As discussed more fully in Note 2, Alagasco is subject to regulation by the
APSC. On October 7, 1996, the APSC issued an order extending the Company's
current rate-setting mechanism through January 1, 2002. Under the terms of that
extension, RSE will continue after January 1, 2002, unless, after notice to the
Company and a hearing, the Commission votes to either modify or discontinue its
operation.
Operations and maintenance expense increased slightly in both the current
quarter and year-to-date periods. Increases in labor and related costs,
primarily due to a one-time, prior-year change in the salaried employee vacation
policy, and increases due to Year 2000 related costs were substantially offset
by decreased general liability insurance expense. The labor savings in the
quarter and year-to-date comparisons from the Voluntary Early Retirement Program
effective November 1, 1998, primarily were offset by the amortization of the
costs associated with this program.
A slight increase in depreciation expense for the quarter and year-to-date
comparisons 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.
Oil and Gas Activities
Revenues from oil and gas production activities rose 20.6 percent to $43.7
million for the three months ended March 31, 1999, and 29.8 percent to $86.1
million for the year-to-date, primarily reflecting Energen Resources' current-
and prior-year property acquisitions. Natural gas comprised approximately 71
percent of Energen Resources' production for both the current quarter and the
year-to-date. In the second fiscal quarter, natural gas production increased
29.6 percent to 14.2 Bcf and oil volumes more than doubled to 853 MBbl. For the
year-to-date, natural gas production increased 34.9 percent to 28.7 Bcf and oil
volumes increased 163.5 percent to 1,634 MBbl. In addition, Energen Resources'
high BTU-content natural gas reserves in the San Juan Basin yielded 130 MBbl and
288 MBbl in natural gas liquids in the current quarter and in the year-to-date,
respectively.
The impact of higher production largely was offset by slightly lower realized
natural gas prices and significantly lower realized oil prices than in the same
periods last year. For the quarter, realized gas prices decreased 4.5 percent
to $2.32 per Mcf. Realized oil prices decreased 36.4 percent to $10.43 per
barrel. For the year-to-date, realized gas prices decreased 3.4 percent to $2.24
per Mcf, while realized oil prices decreased 33.4 percent to $11.13 per barrel.
Natural gas liquids prices decreased 25 percent to an average price of $7.54 per
barrel for the quarter and 24.6 percent to an average price of $7.34 per barrel
for the year-to-date.
Energen Resources enters into derivative commodity instruments to hedge its
exposure to the impact of price fluctuations on oil and gas production. Such
instruments include regulated natural gas and crude oil futures contracts traded
on the New York Mercantile Exchange and over-the-counter swaps and basis hedges
with major energy derivative product specialists. All hedge transactions are
subject to the Company's risk management policy, approved by the Board of
Directors, which does not permit speculative positions. At March 31, 1999,
Energen Resources had entered into contracts and swaps for 23.5 Bcf of its
remaining estimated 1999 flowing gas production at an average contract price of
$2.18 per Mcf and for 1,180 MBbl of its remaining estimated flowing oil
production at an average contract price of $14.66 per barrel. Fiscal year 2000
contracts and swaps were in place for 4.5 Bcf of flowing gas production at an
average contract price of $2.22 per Mcf and for 180 MBbl of flowing oil
production at an average contract price of $17.31 per barrel. Realized prices
are anticipated to be lower than hedged prices due to basis differences and
other factors. To help mitigate this variance, the Company has hedged the basis
difference on 5.4 Bcf of its remaining 1999 San Juan Basin production.
Subsequent to March 31, 1999, Energen Resources entered into additional
contracts and swaps for fiscal year 2000 resulting in a total of 34 Bcf of
flowing gas production hedged at an average contract price of $2.38 per Mcf and
860 MBbl of flowing oil production at an average contract price of $16.74 per
barrel.
O&M expense increased $5.8 million for the quarter and $14.4 million in the
current year-to-date primarily due to significant production growth and
acquisition activity at Energen Resources. Lease operating expenses rose by
$5.3 million for the quarter and $10.9 million for the year-to-date due to the
acquisition of oil and gas properties. Exploration expense decreased $0.7
million for the quarter but was higher by $0.6 million for the year-to-date
primarily due to the timing of exploratory efforts and drilling activity
associated with certain properties.
A $2.1 million decrease in depreciation, depletion and amortization (DD&A) for
the quarter resulted primarily from a SFAS No. 121 pre-tax writedown of $4.7
million on certain oil and gas properties in the second quarter of the prior-
year, partially offset by increases due to higher production volumes in the
current quarter. For the year-to-date, Energen Resources' significantly higher
production volumes more than offset the effect of the prior-year writedown
resulting in a $2.9 million increase in DD&A. The average depletion rate for the
quarter decreased to $0.78 as compared to $0.91, excluding the effect of the
writedown, for the same period last year, due primarily to trading certain
offshore properties in the fourth quarter of fiscal 1998 for onshore properties
which had lower depletion rates. For the year-to-date, the average depletion
rate was $0.79 as compared to $0.89 in the prior fiscal period.
Energen Resources' expense for taxes other than income taxes primarily reflects
production-related taxes which were $0.5 million higher this quarter and $1.6
million for the year-to-date as a result of increased production.
Non-Operating Items
Interest expense for the Company increased $1.7 million in the quarter and $4.3
million year-to-date. Influencing the increase in interest expense for the
current period is $100 million of medium-term notes (MTNs) issued in February
1998 in connection with the growth at Energen Resources. The Company also
significantly increased its average borrowings under its short-term credit
facilities for the same purpose.
The Company's effective tax rates are lower than statutory federal tax rates
primarily due to the recognition of nonconventional fuels tax credits and the
amortization of investment tax credits. Nonconventional fuels tax credits are
generated annually on qualified production through December 31, 2002. These
credits are expected to be recognized fully in the financial statements, and
effective tax rates are expected to continue to remain lower than statutory
federal rates through fiscal year 2003. Income tax expense increased in the
current quarter and year-to-date as a result of higher consolidated pretax
income and slightly decreased recognition of nonconventional fuels tax credits
on an interim basis.
FINANCIAL POSITION AND LIQUIDITY
Cash flow from operations for the current year-to-date was $72 million and
remained relatively stable compared to the same period in the prior year.
Changes in working capital items, which are highly influenced by throughput, oil
and gas production volumes and timing of payments offset each other in the
current period.
The Company had a net investment of $151.4 million through the six months ended
March 31, 1999, primarily in the addition of property, plant and equipment
slightly offset by the proceeds from the sale and leaseback of the headquarters
building. Energen Resources invested $158.7 million in capital expenditures
year-to-date related to the acquisition and development of oil and gas
properties. In October 1998, Energen Resources acquired the stock of TOTAL
and, immediately upon closing, sold a 31 percent interest in TOTAL's net assets
to Westport Oil and Gas Company Inc. Energen Resources' net adjusted purchase
price totaled approximately $134 million, including the assumption of certain
legal and financial obligations. Utility capital expenditures totaled $19.6
million and represented primarily normal system distribution expansion and
support facilities.
The Company used $12.9 million for financing activities in the first half of
fiscal 1999. For tax planning purposes, the Company borrowed $100.6 million in
September 1998 to invest in short-term federal obligations. The Treasuries
matured in early October 1998 and the proceeds were used to repay the debt.
Increased borrowings under Energen's short-term credit facilities were used to
finance Energen Resources' acquisition strategy.
FUTURE CAPITAL RESOURCES AND LIQUIDITY
The Company plans to continue to implement its diversified growth strategy which
calls for Energen Resources to invest approximately $1 billion in the
acquisition and development of producing properties and in exploration and
related development over the five-year period ending September 30, 2003. In
fiscal year 1999, Energen Resources plans to spend approximately $197 million,
including an approximate $134 million net adjusted purchase price for the TOTAL
property acquisition and $63 million for development of current- and prior-year
property acquisitions. Energen Resources' continued ability to invest in
property acquisitions will be influenced significantly by industry trends as the
producing property acquisition market has historically been cyclical. From time
to time, Energen Resources also may be engaged in negotiations to sell, trade or
otherwise dispose of previously acquired property. For the current year,
Energen Resources may divest of certain non-strategic properties.
To finance Energen Resources' investment program, the Company will continue to
utilize its short-term credit facilities to supplement internally generated cash
flow, with long-term debt and equity providing permanent financing. In December
1997, Energen filed a $400 million shelf registration for debt and common stock.
Under that registration, Energen issued $100 million of Series B MTNs in
February 1998, the proceeds from which were used to repay short-term debt.
During this fiscal quarter, Energen increased its available short-term credit
facilities to $249 million to accommodate its growth plans. Energen plans to
issue common equity in fiscal year 2000 to assist in financing investing
activity.
Utility capital expenditures for normal distribution system renewals and
expansion plus support facilities could approximate $47 million in fiscal 1999.
Alagasco also will maintain an investment in storage working gas which is
expected to average approximately $21 million in 1999. The utility anticipates
funding these capital requirements through internally generated capital and the
utilization of short-term credit facilities. The Company completed the sale and
leaseback of its new headquarters building in January 1999; the proceeds
approximated the investment in the facility.
Year 2000 Readiness Disclosures
Year 2000 issues result from computer applications that use only two-digit
representations to refer to a year. Many computer applications could fail or
create erroneous results if Year 2000 issues are not properly addressed.
Energen has evaluated and continues to evaluate its computer software and
hardware to assess the need for modifications for the Year 2000. Over the past
three years, the Company has made a substantial investment in software and
computer infrastructure and non-information technology systems that either
comply with Year 2000 requirements or can be upgraded. A full-time senior
management-level position was established and a primary contractor was selected
in 1996 to address the Year 2000 issue. The plan of work established involves
the following phases: inventory, assessment, testing, certification and change
control. A number of inventory reviews have been completed and will continue to
be updated in the future. Tools to test, age and evaluate data software and
hardware have been purchased and installed and are being utilized for Year 2000
compliance. Test plans for items identified as critical systems either are being
deployed or currently developed. Testing and remediating high priority systems
and devices are scheduled for completion by September 30, 1999.
A third-party assessment of Year 2000 readiness was conducted by an outside
entity for both information technology and non-information technology systems as
of December 1, 1998, and indicated that mission-critical functions including the
flow of gas into homes and commercial accounts are not likely to be impacted by
the Year 2000 changeover. In response to the independent assessment, several
program changes have been implemented. A steering committee of the Company's
executive management has and will continue to review the millennium project
progress on a regular basis. With respect to material third-party
relationships, the Company, in addition to responding to questions concerning
Year 2000 issues from customers and regulators, is requesting information from
certain vendors and partners designed to determine their ability to continue
uninterrupted supply of materials or services to the Company. This process is
scheduled for completion during the third fiscal quarter of 1999.
As of March 31, 1999, the Company has incurred approximately $1.1million of Year
2000 related costs to date, which are being expensed as incurred. The Company's
Year 2000 remediation is expected to be completed by the end of calendar year
1999 with an estimated total cost of $2.3 million.
The Company is developing and implementing Year 2000 readiness procedures to
minimize the risks identified to date, including what it believes are worst case
scenarios of reduced gas deliverability into the Alagasco distribution system,
production failures on Energen Resources properties, or failures of gathering
and pipeline systems to accept Energen Resources production. Specific Year 2000
contingency plans are scheduled to be incorporated into the previously
established Energen Business Resumption Plan during fiscal year 1999. The
Company's contingency plan identifies alternate recovery locations and contact
lists, as well as special resource requirements.
The Company's goal is that Year 2000 issues will be addressed on a schedule and
in a manner that will prevent such issues from having a material effect on the
Company's results of operations, liquidity or financial condition. While the
Company has and will be pursuing Year 2000 compliance, there can be no assurance
that the Company and its vendors will be successful in identifying and
addressing all material Year 2000 issues.
This document contains Year 2000 Readiness Disclosures as defined in the Year
2000 Information and Readiness Disclosure Act, P.L.105-271 (October 19, 1998).
Accordingly, this disclosure, in whole or in part, is not, to the extent
provided in the act, admissible in any state or federal civil action to prove
the accuracy or truth of any Year 2000 statements contained herein.
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 the Company's 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, Year 2000 issues, 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 Energen Resources is unable to invest fully its planned acquisition,
development and exploratory expenditures, future operating revenues, production
and proved reserves could be negatively affected. The drilling of development
and exploratory wells can involve significant risk including that related to
timing, success rates and cost overruns. These risks can be affected by lease
and rig availability, complex geology and other factors. Although Energen
Resources makes use of futures, swaps and fixed price contracts to mitigate
risk, fluctuations in future oil and gas prices could materially affect the
Company's financial position and results of operations and, furthermore, such
risk mitigation activities may cause the Company's financial position and
results of operations to be materially different from results which would have
been obtained had such risk mitigation activities not occurred.
OTHER
Recent Pronouncements of the FASB
The FASB issued SFAS No. 130, Reporting Comprehensive Income, in June 1997,
which requires the reporting and display of comprehensive income and its
components in an entity's financial statements. There currently are no
differences between the Company's net income and comprehensive income. In
February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which revises employers' disclosures
about pension and other postretirement benefit plans. As this pronouncement
relates solely to disclosure provisions, there will be no effect on the results
of operations or financial position of the Company. The Company is required to
adopt these statements in fiscal year 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments. The Company is required to adopt this
statement in fiscal year 2000. The impact of this pronouncement on the Company
currently is being evaluated.
19
SELECTED BUSINESS SEGMENT DATA
ENERGEN CORPORATION
(Unaudited)
Three months ended Six months ended
(in thousands, March 31, March 31,
except sales price data) 1999 1998 1999 1998
Natural Gas Distribution
Operating revenues
Residential $99,217 $113,197 $144,564 $175,575
Commercial and
industrial - small 34,184 39,713 50,837 63,207
Transportation 10,533 10,495 19,086 19,852
Other 758 (1,658) 1,762 (1,132)
Total $144,692 $161,747 $216,249 $257,502
Gas delivery volumes (MMcf)
Residential 13,526 16,023 18,204 23,856
Commercial and
industrial - small 5,317 6,219 7,733 9,675
Transportation 15,879 16,143 30,759 32,518
Total 34,722 38,385 56,696 66,049
Other data
Depreciation
and amortization $6,605 $ 6,232 $ 13,193 $ 12,429
Capital expenditures $9,325 $15,066 $ 19,632 $ 23,380
Operating income $42,853 $40,330 $ 49,935 $ 46,231
Oil and Gas Activities
Operating revenues
Natural gas $33,050 $26,652 $64,427 $49,441
Oil 8,889 5,922 18,195 10,367
Natural gas liquids 980 1,953 2,116 3,602
Other 779 1,699 1,371 2,949
Total $43,698 $36,226 $86,109 $66,359
Sales volume
Natural gas (MMcf) 14,220 10,973 28,713 21,277
Oil (MBbl) 853 361 1,634 620
Natural gas liquids (MBbl) 130 194 288 370
Average sales price
Natural gas (Mcf) $2.32 $2.43 $2.24 $ 2.32
Oil (barrel) $10.43 $16.41 $11.13 $16.72
Natural gas liquids
(barrel) $ 7.54 10.06 $ 7.34 9.74
Other data
Depreciation, depletion
and amortization $15,838 $18,084 $ 32,454 $29,723
Capital expenditures $10,757 $27,135 $158,747 $87,494
Exploration expenditures $ 713 $ 1,367 $ 2,089 $ 1,490
Operating income $ 7,875 $ 4,343 $ 14,071 $11,884
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Energen Resources' major market risk exposure is in the pricing applicable to
its oil and gas production. Historically, prices received for oil and gas
production have been volatile because of seasonal weather patterns, world and
national supply-and-demand factors and general economic conditions. Crude oil
prices also are affected by quality differentials, by worldwide political
developments and by actions of the Organization of Petroleum Exporting
Countries. Basis differentials, like the underlying commodity prices, can be
volatile because of regional supply-and-demand factors, including seasonal
factors and the availability and price of transportation to consuming areas.
Energen Resources enters into derivative commodity instruments to hedge its
exposure to the impact of price fluctuations on oil and gas production. Such
instruments include regulated natural gas and crude oil futures contracts traded
on the New York Mercantile Exchange and over-the-counter swaps and basis hedges
with major energy derivative product specialists. All hedge transactions are
subject to the Company's risk management policy, approved by the Board of
Directors, which does not permit speculative positions. These transactions are
accounted for under the hedge method of accounting. Under this method, any
unrealized gains and losses are recorded as a current receivable/payable and a
deferred gain/loss. Realized gains and losses are deferred as current
liabilities or assets until the revenues from the related hedged volumes are
recognized in the income statement. Cash flows from derivative instruments are
recognized as incurred through changes in working capital. The Company had
deferred gains of $3.0 million and $0.6 million on the balance sheet at March
31, 1999, and September 30, 1998, respectively.
21
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information with respect to the annual meeting of Shareholders held January 27,
1999, is reported in Item 4 of Energen Corporation 10-Q for the three months
ended December 31, 1998.
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, 1999.
22
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 12, 1999 By /s/ Wm. Michael Warren, Jr.
Wm. Michael Warren, Jr.
Chairman, President and Chief Executive
Officer of Energen, Chairman and Chief
Executive Officer of Alabama Gas
Corporation
May 12, 1999 By /s/ G. C. Ketcham
G. C. Ketcham
Executive Vice President, Chief
Financial Officer and Treasurer of
Energen and Alabama Gas Corporation
May 12, 1999 By /s/ Grace B. Carr
Grace B. Carr
Controller of Energen
May 12, 1999 By /s/ Paula H. Rushing
Paula H. Rushing
Vice President-Finance of Alabama Gas
Corporation
23